SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ACTV, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
(X) No fee required.
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
( ) Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
( ) Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
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<PAGE>
ACTV, INC.
1270 Avenue of the Americas
New York, New York 10020
-----------
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 18, 1998
-----------
TO THE STOCKHOLDERS OF ACTV, INC.:
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of
Stockholders (the "Meeting") of ACTV, Inc. (the "Company") will be held at ACTV,
Inc., 1270 Avenue of the Americas, Suite 2401, New York, New York 10020 on June
18, 1998, at 9:30 a.m., local time for the following purposes:
1. To elect two Class II directors to hold office for a term of
three years;
2. To approve the adoption of the Company's 1998 Stock Option Plan;
3. To ratify the appointment of Deloitte & Touche LLP, as the
Company's independent certified public accountants for the
ensuing year; and
4. To act upon such other business as may properly come before the
Meeting or any adjournment thereof.
Only stockholders of record at the close of business on April 30,
1998 are entitled to notice of and to vote at the Meeting and any adjournments
thereof.
In order to ensure the presence of a quorum at the Meeting, it is
important that Stockholders representing a majority of the voting power of all
stock outstanding be present in person or represented by their proxies.
Therefore, whether you expect to attend the Meeting in person or not, please
sign, fill out, date and promptly return the enclosed proxy card in the enclosed
self-addressed, postage-paid envelope. If you attend the Meeting and prefer to
vote in person, you can revoke your proxy.
In addition, please note that abstentions and broker non-votes
are each included in the determination of the number of shares present and
voting, for purposes of determining the presence or absence of a quorum for the
transaction of business. Neither abstentions nor broker non-votes are counted as
voted either for or against a proposal.
Dated: April 28, 1998 By Order of the Board of Directors
William C. Samuels
Chairman and Chief Executive
Officer
<PAGE>
ACTV, INC.
1270 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
---------------------------
PROXY STATEMENT
---------------------------
1998 ANNUAL MEETING OF STOCKHOLDERS
To Be Held at 9:30 a.m., at ACTV, Inc.,
1270 Avenue of the Americas, Suite 2401, New
York, New York 10020 on June 18, 1998
This Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Directors of ACTV, Inc. (the "Company")
for use at the 1998 Annual Meeting of Stockholders of the Company (the
"Meeting") to be held at 9:30 a.m. at ACTV, Inc., 1270 Avenue of the Americas,
Suite 2401, New York, New York 10020 on June 18, 1998, and at any adjournments
thereof. Anyone giving a proxy may revoke it at any time before it is exercised
by giving the Chairman of the Board of Directors of the Company written notice
of the revocation, by submitting a proxy bearing a later date, or by attending
the Meeting and voting. This Proxy Statement, the accompanying Notice of Meeting
and form of proxy have been first sent to the stockholders on or about May 28,
1998.
All properly executed, unrevoked proxies on the enclosed form, if
returned prior to the Meeting, will be voted in the manner specified by the
Stockholder. If no specific instruction is given, the shares represented by the
proxy will be voted in accordance with the Board of Directors' recommendations.
In addition, please note that abstentions and broker non-votes
are each included in the determination of the number of shares present and
voting, for purposes of determining the presence or absence of a quorum for the
transaction of business. Neither abstentions nor broker non-votes are counted as
voted either for or against a proposal.
OWNERSHIP OF SECURITIES
Only stockholders of record at the close of business on April 30,
1998, the date fixed by the Board of Directors in accordance with the Company's
By-Laws, are entitled to vote at the Meeting. As of April 23, 1998, there were
issued and outstanding 16,980,581 shares of common stock, $.10 par value per
share (the "Common Stock").
Each outstanding share is entitled to one vote on all matters
properly coming before the Meeting. A majority of the shares of the outstanding
Common Stock is necessary to constitute a quorum for the Meeting.
<PAGE>
The following table sets forth certain information as of April
23, 1998 with respect to each beneficial owner of five percent (5%) or more of
the outstanding shares of Common Stock of the Company, each officer and director
of the Company and all officers and directors as a group. The table does not
include stock appreciation rights ("SARs"), nor does it include options that
have not yet vested or are not exercisable within 60 days of the date hereof:
<TABLE>
<CAPTION>
Name and Address Number of Percent
of Beneficial Owner Shares of Class
- ------------------- ------ --------
<S> <C> <C>
William C. Samuels (1) 3,595,817 20.75%
c/o ACTV, Inc.
1270 Avenue of the Americas
New York, NY 10020
David Reese (2) 327,500 1.9%
c/o ACTV, Inc.
1270 Avenue of the Americas
New York, NY 10020
Bruce Crowley (3) 238,000 1.39%
c/o ACTV, Inc.
1270 Avenue of the Americas
New York, NY 10020
Christopher Cline (4) 44,151 *
c/o ACTV, Inc.
1270 Avenue of the Americas
New York, NY 10020
The Washington Post Company (5) 2,341,334 13.79%
1150 15th Street, N.W.
Washington, D.C. 20071
Banca del Gottardo (6) 3,042,271 16.26%
Viale S. Franscini 8
6900 Lugano, Switzerland
Richard Hyman (7) 25,000 *
c/o Triquest Financial Services, Corp.
505 Park Avenue
New York, NY 10022
William A. Frank (8) 16,668 *
c/o Learning Sciences Corp
120 South Riverside Plaza, suite 1520
Chicago, IL 60606
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
Steven Schuster (9) 19,334 *
c/o McLaughlin & Stern
260 Madison Avenue
New York, NY 10016
Jess Ravich (10) 1,922,598 10.31%
c/o Libra Investments, Inc.
11766 Wilshire Blvd., Suite 870
Los Angeles, CA 90025
All Directors and Officers 6,189,068 31.88%
as a Group (8 persons)
(1)(2)(3)(4)(7)(8)(9)(10)(11)
</TABLE>
- -----------
* Indicates less than 1% of shares of Common Stock outstanding.
(1) Includes (a) 697,885 shares of Common Stock owned by Mr. Samuels, (b)
350,000 shares of Common Stock issuable to Mr. Samuels upon the exercise of
stock options, and (c) 2,341,334 shares of Common Stock owned by The
Washington Post Company (the "Post Company") and 206,598 shares owned by
Dr. Michael J. Freeman, which are subject to voting agreements with Mr.
Samuels.
(2) Consists of: (a) 107,500 shares of Common Stock owned by Mr. Reese, and (b)
220,000 shares of Common Stock issuable to Mr. Reese upon the exercise of
stock options.
(3) Consists of: (a) 104,000 shares of Common Stock owned by Mr. Crowley, and
(b) 134,000 shares of Common Stock issuable to Mr. Crowley upon the
exercise of stock options.
(4) Consists of 44,151 shares of Common Stock owned by Mr. Cline.
(5) All of the Post Company's shares are subject to a voting agreement with Mr.
Samuels.
(6) Consists of: (a) 1,310,000 shares of Common Stock, (b) 350,000 shares
issuable upon the exercise of stock options, and (c) 1,382,271 shares
issuable upon conversion of Series A Preferred Stock.
(7) Consists of 25,000 shares issuable upon the exercise of stock options.
(8) Consists of 16,668 shares issuable upon the exercise of stock options.
(9) Consists of: (a) 5,000 shares of Common Stock owned by Mr. Schuster, and
(b) 14,334 shares issuable upon the exercise of stock options.
3
<PAGE>
(10) Consists of: (i) 45,000 shares issuable upon the exercise of stock
options, (ii) 798,917 shares issuable upon the exchange of Exchangeable
Preferred shares, and (iii) 159,979 shares issuable upon the exercise of
warrants held by Mr. Ravich. Also consists of: (i) 250,000 common shares,
(ii) 30,000 shares issuable upon the exercise of stock options, and (iii)
638,707 shares issuable upon the exchange of Exchangeable Preferred shares
held by Libra Investments, Inc., of which Mr. Ravich is the controlling
shareholder.
(11) Includes 2,432,600 shares issuable upon the exercise of options and other
derivative securities that have vested or vest within 60 days of the date
of this Proxy Statement.
This Proxy Statement contains certain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in the forward-looking statements as a
result of certain factors, including those set forth below and elsewhere
in this Proxy Statement.
4
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The By-Laws of the Company provide that the Board of Directors
shall be divided into three classes, designated Class I, Class II and Class III.
At any annual meeting of stockholders held after the initial election of all
Classes of directors, successors to the class of directors whose term expires at
that annual meeting shall be elected for a three year term.
Two Class II directors are proposed to be elected at the Meeting,
each to hold office for a period three years, or until such director's successor
shall be elected and shall qualify, subject, however to prior death,
resignation, retirement, disqualification or removal from office. Unless such
authority is withheld, it is intended that the accompanying proxy will be voted
in favor of the two persons named below, each of whom are now serving as Class
II Directors, unless the stockholder indicates to the contrary on the proxy. The
Company expects that each of the nominees will be available for election, but if
neither of them is a candidate at the time the election occurs, it is intended
that such proxy will be voted for the election of another nominee to be
designated by the Board of Directors to fill any such vacancy or the number of
directors to be elected at this time may be reduced by the Board of Directors.
5
<PAGE>
Class I Director Nominees - Term Expiring 2000.
Bruce Crowley, 40, Director since December 1995 and became
Executive Vice President of the Company in October 1995 and President of ACTV
Net, Inc. ("ACTV Net") (previously ACTV Interactive, Inc.) since December 1995,
and joined the Company as President - Distance Learning in October 1994. Prior
thereto, he had been employed by KDI Corporation since 1988, and was most
recently responsible for KDI Corporation's education division. Mr. Crowley has a
B.A. from Colgate University (1979) and an M.B.A. from Columbia University
(1984).
Richard Hyman, 46, Director since December 1994. For more than
the past five years, he has been the President of Triquest Financial Services,
Corp. Mr. Hyman received a BA from the University of Wisconsin (1974).
Jess Ravich, 40, Director since 1996. He has been the Chief
Executive Officer and the majority shareholder of Libra Investments, Inc.
("Libra Investments"), a registered broker-dealer, since its inception in 1991.
He is also a director of Cherokee, Inc., an apparel company..
Class II Incumbent Directors - Term Expiring 2001.
David Reese, 42, Director since 1992. Executive Vice President
since November 1992 and President of ACTV Entertainment, Inc., a subsidiary of
the Company ("ACTV Entertainment"), since November 1994. He has been employed by
the Company since December 1988, and served as the Company's Vice President of
Finance from September 1989 through November 1992. Mr. Reese has a B.S. from
Pennsylvania State University (1978).
Steven W. Schuster, 43, Director since May 1996. Mr. Schuster has
been engaged in the practice of law for more than 16 years, since January 1996,
with the law firm of McLaughlin & Stern LLP. From June 1993 to December 1995 he
was a member of the law firm of Shane & Paolillo, P.C., and from January 1991 to
May 1993 he was a member of the law firm of Gersten, Savage, Kaplowitz &
Fredericks, LLP, counsel to the Company. Mr. Schuster received his BA from
Harvard University (1976) and his JD from New York University School of Law
(1980).
Class III Incumbent Directors - Term Expiring 1999.
William Samuels, 55, Director and President since August 1, 1989.
Chairman of the Board since November 1994, and Chief Executive Officer since
1993. Mr. Samuels also serves as Chairman of Board of both ACTV Net and ACTV
Entertainment, each subsidiaries of the Company. Mr. Samuels is a trustee of
Howard J. Samuels Institute at City College. Mr. Samuels also serves on the
Board of Directors of the Council of Economic Priorities. Mr. Samuels has a JD
from Harvard Law School (1968) and a BS in Economics and Engineering from the
Massachusetts Institute of Technology (1965).
6
<PAGE>
William Frank, 49, Director since April 1996. He currently serves
as the Chief Operating Officer of Learning Sciences Corp., a position he has
held since June 1997. Mr. Frank was formerly the Chief Executive Officer of
Greenwich Entertainment Group ("Greenwich") which was a licensee of the Company.
In May 1997, an involuntary bankruptcy petition was filed with the U.S.
Bankruptcy Court against Greenwich pursuant to which Greenwich is presently
being liquidated. From 1991 to 1996 Mr. Frank also served as Chairman of the
Board of Directors of Corsearch, a data research company. From October 1993 to
July 1994, Mr. Frank was employed by the Company as President of Private
Networks. Prior thereto, he was employed for a period of eighteen years at the
Alexander Proudfoot Company, a strategic management consulting company. Mr.
Frank has a B.S. from the University of Missouri (1970).
Stockholder Vote Required
Election of each director requires the affirmative vote of the
holders of a plurality of the shares of Common Stock present in person or
represented by proxy at the Annual Meeting of Stockholders.
The Board of Directors recommends a vote for election to the
Board of Directors of the Company of each of the nominees.
Executive Compensation
Employment and Consulting Agreements
The Company and Mr. Samuels entered into an employment agreement
in August 1995, as amended in January 1997. Mr. Samuels serves as Chairman of
the Board, President and Chief Executive Officer of the Company. Under the
amended agreement, Mr. Samuels will be paid a minimum annual salary of $295,000
and a bonus paid in cash and/or in registered securities equal to 2% of the
increase over a twelve month period in the total market capitalization of the
Company over fifty million dollars. Mr. Samuels s employment agreement contains
non-competition provisions pursuant to which he agreed not to engage in a
business that is competitive with the Company during the term of his employment
agreement and for one year thereafter.
Mr. Samuels currently holds fully vested options to purchase an
aggregate of 350,000 shares of Common Stock at an exercise price of $1.50 per
share. Under certain circumstances, a portion of such option shares may be
adjusted to avoid dilution. Mr. Samuels also holds options to purchase an
aggregate of 700,000 shares of Common Stock at an exercise price of $1.50 per
share, none of which are currently exercisable. The Company has also issued to
Mr. Samuels 246,000 outstanding stock appreciation rights ("SARs") and options
to purchase Class B common shares of certain of its subsidiaries.
7
<PAGE>
The Company and Mr. Reese entered into an employment agreement in
August 1995, as amended in January 1997. Under the amended agreement, Mr. Reese
will be paid a minimum annual base salary of $250,000. Mr. Reese s employment
agreement contains non-competition provisions pursuant to which he agreed not to
engage in a business that is competitive with the Company during the term of his
employment agreement and for one year thereafter.
The Company has granted Mr. Reese fully vested options to
purchase 220,000 shares of Common Stock at an exercise price of $1.50 per share,
and 440,000 options at $1.50 per share, none of which are currently vested. The
Company has also issued to Mr. Reese 186,000 currently outstanding SARs and
options to purchase Class B common shares of certain of its subsidiaries.
The Company and Bruce Crowley entered into an employment
agreement in December 1995, as amended in January 1997. Mr. Crowley has agreed
to serve as President of ACTV Net at an annual base salary of $250,000. Mr.
Crowley s employment agreement contains non-competition provisions pursuant to
which he agreed not to engage in a business that is competitive with the Company
during the term of his employment agreement and for one year thereafter.
The Company has granted to Mr. Crowley options to purchase
134,000 shares of common stock at an exercise price of $1.50 that are vested and
268,000 options at $1.50 per share, none of which are vested. The Company has
also issued to Mr. Crowley 160,000 currently outstanding SARs and options to
purchase Class B common shares of certain of its subsidiaries.
Each of Mr. Samuels's, Mr. Reese's and Mr. Crowley's employment
contracts contain a change of control provision whereby, in certain
circumstances, including the possibility that a person becomes the owner of 30%
or more of the outstanding securities of the employer, the exercise price of all
SARs is reduced to $.10 and the employee, at his option, shall receive a special
compensation payment for the exercise cost of all vested options upon exercising
those options any time within twelve months after the effective date of the
change of control. Additionally, if any of Messrs. Samuels, Reese or Crowley is
not retained upon the occurrence of such event, he will receive a bonus not to
exceed 2.7 times his then current base salary.
At the time of issuance, all options to the Company's employees
were granted at an exercise price equal to or greater than the prevailing market
price for the Company's Common Stock.
8
<PAGE>
Summary Compensation Table
The following table sets forth all cash compensation for services
rendered in all capacities to the Company and its subsidiaries for the fiscal
years ended December 31, 1997, December 31, 1996, and December 31, 1995, paid to
the Company's Chief Executive Officer, the four other most highly compensated
executive officers (the "Named Executive Officers") at the end of the above
fiscal years whose total compensation exceeded $100,000 per annum, and up to two
persons whose compensation exceeded $100,000 during the above fiscal years,
although they were not executive officers at the end of such years.
<TABLE>
<CAPTION>
Restricted All Other
Name and Principal Stock Compen-
Position Year Salary Bonus Awards Options/SARs(6) sation
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William C. Samuels 1997 $250,000 $ 75,000 0/100,000 $220,917
Chairman, Chief 1996 $197,600 $151,955 0/70,000 $ 4,176
Executive Officer (1) 1995 $196,597 $ 52,000 625,087/30,000 $185,551
David Reese 1997 $200,000 $ 20,000 0/50,000 $ 75,095
President, ACTV 1996 $156,000 $ 45,000 0/60,000 $ 50,253
Entertainment, Inc. (3) 1995 $149,022 330,000/30,000 $ 86,957
Bruce Crowley 1997 $200,000 $ 25,000 0/10,000
President, ACTV 1996 $150,000 $ 25,000 0/50,000
Net (4) 1995 $147,990 $ 10,000 201,000/0
Christopher Cline 1997 $133,461 0/20,000
Vice President, Chief 1996 $100,000 0/10,000
Financial Officer (5) 1995
Michael J. Freeman 1997 $178,890 $ 74,045
Ph. D. (2) 1996 $173,680 $ 50,000 100,000/0 $ 3,238
1995 $160,409 $197,652
</TABLE>
- ------------
(1) Mr. Samuels has served as Chief Executive Officer of the Company since
1993, Chairman of the Board since 1994, and President and a Director of the
Company since August 1, 1989. Mr. Samuels' "other compensation" for 1995
relates to life insurance premiums paid by the Company ($4,176) and to the
exercise of SARs ($181,375). His "other compensation" for 1996 relates to
life insurance premiums paid by the Company. His "other compensation" for
1997 relates to life insurance premiums paid by the Company ($10,292.50)
and to the exercise of SARs ($210,625).
(2) Mr. Reese has been the Company's Executive Vice President since November
1992 and the President of ACTV Entertainment, Inc. ("ACTV Entertainment")
since 1994. Prior thereto he was the Company's Vice President of Finance
from September 1989 through November 1992. Mr. Reese's "other compensation"
for 1995 relates to life insurance premiums paid by the Company ($957) and
to the exercise of SARs ($86,000). His "other compensation" for 1996
relates to life insurance premiums paid by the Company ($1,253) and to the
exercise of SARs ($49,000). His "other
9
<PAGE>
compensation" for 1997 relates to life insurance premiums paid by the
Company ($3,095) and to the exercise of SARs ($72,000).
(3) Mr. Crowley has been President of ACTV Net since December 1995, and prior
thereto, the Company's President, Distance Learning since October 1994.
During the period January to September 1994, Mr. Crowley performed
consulting services for the Company for which he was paid $55,000.
(4) Mr. Cline is the Company's Senior Vice President - Finance. He has been the
Company's Chief Financial Officer since November 1993.
(5) Dr. Freeman currently serves as Advanced Product Development Liaison, and
was previously Chairman of the Board of Directors until November 1994, and
was Chief Executive Officer of the Company from 1985 to 1993. Dr. Freeman's
"other compensation" for 1995 relates to life insurance premiums paid by
the Company ($2,523) and to the exercise of SARs ($195,129). His "other
compensation" for 1996 relates to life insurance premiums paid by the
Company. His "other compensation" for 1997 relates to life insurance
premiums paid by the Company ($2,045) and to the exercise of SARs
($72,000).
(6) Does not include options issued in 1997 to purchase Class B common shares
of Company subsidiaries.
10
<PAGE>
Options and Stock Appreciation Rights to Named Executive Officers
The following tables set forth certain information with respect
to all outstanding SARs issued during 1997 to the Company's Named Executive
Officers. The Company did not grant options to any Named Executive Officers in
1997.
<TABLE>
<CAPTION>
SAR Grants
Potential
Realizable
% of Value at
Total Assumed
SARs Annual Rates
Number Granted of
of to Stock Price
Securities Employees Appreciation
Underly- in Exercise for
ing SARs Fiscal Price Expiration Option Term
Name of Holder Granted Year ($/Share) Date 5%($) 10%($)
- -------------- ------- ---- --------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
William Samuels 100,000 49.0% $1.50 5/1/02 25,489 71,445
David Reese 50,000 24.0% $1.50 5/1/02 12,744 35,723
Bruce Crowley 10,000 5.0% $1.50 5/1/02 2,549 7,145
Christopher Cline 20,000 10.0% $1.50 5/1/02 5,089 14,289
</TABLE>
11
<PAGE>
Ten-Year Option Repricing
The following table sets forth certain information with respect
to option repricings during the past ten years for the Company's Named Executive
Officers. The purpose of the option repricings in fiscal 1997 was to provide
additional incentives to certain employees, officers and directors of the
Company in a manner consistent with industry practices. The option repricings
were approved by the Compensation Committee of the Company's Board of Directors.
<TABLE>
<CAPTION>
Length of
Market Original
Number of Price of Exercise Option
Securities Stock at Price at Term
Underlying Time of Time of Re-maining
Options/SARs Repricing Repricing New at Date of
Repriced or or Amend- or Amend- Exercise Re-
Amended ment ment Price pricing or
Name of Holder Date (#) ($) ($) ($) Amendment
- -------------- ---- ------------ --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
William Samuels 11/19/92 120,000 2.00 6.00 2.50 3.2 Yrs
David Reese 11/19/92 54,683 2.00 4.09 2.50 1.3 Yrs
William Samuels 1/13/95 80,000 3.44 5.00 3.50 7.0 Yrs
David Reese 1/13/95 40,000 3.44 5.00 3.50 7.0 Yrs
David Reese 1/13/95 15,317 3.44 5.50 3.50 3.9 Yrs
Bruce Crowley 1/13/95 100,000 3.44 5.50 3.50 4.5 Yrs
Christopher Cline 1/13/95 25,000 3.38 5.50 3.50 5.0 Yrs
Christopher Cline 1/13/95 25,000 3.38 5.50 3.50 4.5 Yrs
William Samuels 11/4/96 80,000 2.69 3.50 2.69 5.2 Yrs
William Samuels 11/4/96 525,000 2.69 3.25 2.69 7.2 Yrs
David Reese 11/4/96 40,000 2.69 3.50 2.69 5.2 Yrs
David Reese 11/4/96 15,317 2.69 3.50 2.69 2.0 Yrs
David Reese 11/4/96 330,000 2.69 3.25 2.69 7.2 Yrs
Bruce Crowley 11/4/96 100,000 2.69 3.50 2.69 2.7 Yrs
Bruce Crowley 11/4/96 201,000 2.69 3.25 2.69 7.2 Yrs
Christopher Cline 11/4/96 25,000 2.69 3.50 2.69 2.7 Yrs
Christopher Cline 11/4/96 25,000 2.69 3.50 2.69 3.2 Yrs
Christopher Cline 7/29/97 50,000 1.38 2.69 1.50 5.4 Yrs
Bruce Crowley 7/29/97 100,000 1.38 2.69 1.50 5.4 Yrs
David Reese 7/29/97 15,317 1.38 2.69 1.50 5.4 Yrs
David Reese 7/29/97 330,000 1.38 2.69 1.50 6.4 Yrs
David Reese 7/29/97 89,683 1.38 2.50 1.50 5.4 Yrs
Michael Freeman 7/29/97 100,000 1.38 2.10 1.50 4.3 Yrs
Bruce Crowley 7/29/97 201,000 1.38 2.69 1.50 6.4 Yrs
William Samuels 7/29/97 525,000 1.38 2.69 1.50 6.4 Yrs
William Samuels 7/29/97 613,035 1.38 2.50 1.50 5.4 Yrs
</TABLE>
12
<PAGE>
Ten-Year SAR Repricing
The following table sets forth certain information with respect
to stock appreciation right repricings during the past ten years for the
Company's Named Executive Officers. The purpose of the stock appreciation right
repricings in fiscal 1997 was to provide additional incentives to certain
employees, officers and directors of the Company in a manner consistent with
industry practices and in accordance with the terms of the Company's 1996 Stock
Appreciation Rights Plan. The stock appreciation rights repricings were approved
by the Company's SAR Committee.
<TABLE>
<CAPTION>
Market
Number of Price of Exercise Length of
Securities Stock at Price at Original
Underlying time of Time of Option Term
Options/SARs Repricing Repricing New Remaining
Repriced or or Amend- or Exercise at Date of
Amended ment Amendment Price Repricing
Name of Holder Date (#) (#) (#) ($) or Amendment
- -------------- ---- ------------ --------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
William Samuels 1/13/95 100,000 3.44 5.50 3.50 9.6 Yrs
William Samuels 11/17/95 30,000 3.44 4.50 3.50 9.5 Yrs
David Reese 1/13/95 30,000 3.44 5.50 3.50 9.6 Yrs
David Reese 11/17/95 30,000 3.44 4.50 3.50 9.5 Yrs
Bruce Crowley 1/13/95 100,000 3.44 5.50 3.50 9.6 Yrs
Christopher Cline 11/17/95 20,000 3.38 4.50 3.50 9.5 Yrs
William Samuels 11/4/96 100,000 2.69 3.50 2.69 7.7 Yrs
William Samuels 11/4/96 30,000 2.69 3.50 2.69 8.5 Yrs
William Samuels 11/4/96 40,000 2.69 3.75 2.69 9.6 Yrs
David Reese 11/4/96 30,000 2.69 3.50 2.69 7.7 Yrs
David Reese 11/4/96 30,000 2.69 3.50 2.69 8.5 Yrs
David Reese 11/4/96 30,000 2.69 3.75 2.69 9.6 Yrs
Bruce Crowley 11/4/96 100,000 2.69 3.50 2.69 7.7 Yrs
Bruce Crowley 11/4/96 20,000 2.69 3.75 2.69 9.6 Yrs
Christopher Cline 11/4/96 20,000 2.69 3.50 2.69 8.5 Yrs
Christopher Cline 11/4/96 10,000 2.69 3.75 2.69 9.6 Yrs
William Samuels 7/29/97 114,000 1.38 2.69 1.50 4.8 Yrs
David Reese 7/29/97 120,000 1.38 2.69 1.50 4.8 Yrs
Bruce Crowley 7/29/97 150,000 1.38 2.69 1.50 4.8 Yrs
Christopher Cline 7/29/97 30,000 1.38 2.69 1.50 4.8 Yrs
</TABLE>
13
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Option/SAR Year End
Values (1)
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End at FY-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William Samuels 139,000 $210,625 207,600/$38,400 SARs $25,950/$4,800
788,035/350,000 Options $98,504/$43,750
Michael Freeman, Ph.D. 32,000 $ 72,000 32,000/0 SARs $4,000/$0
50,000/50,000 Options $6,250/$6,250
David Reese 32,000 $ 72,000 156,000/30,000 SARs $19,500/$3,750
215,000/220,000 Options $26,875/$27,500
Bruce Crowley 120,000/40,000 SARs $15,000/$5,000
167,000/134,000 Options $20,875/$16,750
Christopher Cline 28,000/22,000 SARs $3,500/$2,750
41,666/8,334 Options $5,208/$1,042
</TABLE>
(1) The closing bid price of a share of the Company's Common Stock at December
31, 1997, was $1 5/8. The base price of the SARs and the exercise price of
the options was $1.50.
Board Compensation Report
Executive Compensation Policy
The Company's executive compensation policy is designed to
attract, motivate, reward and retain the key executive talent necessary to
achieve the Company's business objectives and contribute to the long-term
success of the Company. In order to meet these goals, the Company's compensation
policy for its executive officers focuses primarily on determining appropriate
salary levels and providing long-term stock-based incentives. To a lesser
extent, the Company's compensation policy also contemplates
14
<PAGE>
performance-based cash bonuses. The Company's compensation principles for the
Chief Executive Officer are identical to those of the Company's other executive
officers.
Cash Compensation. In determining its recommendations for
adjustments to officers' base salaries for fiscal 1997 the Company focused
primarily on the scope of each officer's responsibilities, each officer's
contributions to the Company's success in moving toward its long-term goals
during the fiscal year, the accomplishment of goals set by the officer and
approved by the Board for that year, the Company's assessment of the quality of
services rendered by the officer, comparison with compensation for officers of
comparable companies and an appraisal of the Company's financial position. In
certain situations, relating primarily to the completion of important
transactions or developments, the Company may also pay cash bonuses, the amount
of which will be determined based on the contribution of the officer and the
benefit to the Company of the transaction or development.
Equity Compensation. The grant of stock options and stock
appreciation rights to executive officers constitutes an important element of
long-term compensation for the executive officers. The grant of stock options
and stock appreciation rights increases management's equity ownership in the
Company with the goal of ensuring that the interests of management remain
closely aligned with those of the Company's stockholders. The Board believes
that stock options and stock appreciation rights in the Company provide a direct
link between executive compensation and stockholder value. By attaching vesting
requirements, stock options and stock appreciation rights also create an
incentive for executive officers to remain with the Company for the long term.
See "Stock Option Plans" and "1992 Stock Appreciation Rights Plan."
SAR/Compensation Committee Interlocks and Insider Participation
The SAR/Compensation Committee of the Board of Directors
("Committee") is responsible for making all compensation decisions with respect
to the executive officers of the Company. The Committee consists of William
Frank and Steven Schuster, both of whom were elected to the Committee in June
1996.
Chief Executive Officer Compensation
As indicated above, the factors and criteria upon which the
compensation of William C. Samuels, the Chief Executive Officer, is based are
identical to the criteria used in evaluating the compensation packages of the
other executive officers of the Company. The Chief Executive Officer's
individual contributions to the Company included his leadership role in
establishing and retaining a strong management team, developing and implementing
the Company's business plans and attracting investment capital to the
15
<PAGE>
Company. In addition, the Company reviewed compensation levels of chief
executive officers at comparable companies with the Company's industry.
Respectfully submitted,
William Samuels, Chairman
David Reese, Bruce Crowley, Richard Hyman, William Frank, Steven Schuster and
Jess Ravich
SAR/Corporate Performance Graph
The following graph shows a comparison of cumulative total
stockholder returns from December 31, 1992 through December 31, 1997 for the
Company, the Nasdaq Stock Market-U.S. Index ("Nasdaq") and the Hambrecht & Quist
Technology Index ("H&Q").
[Graphic Omitted}
<TABLE>
<CAPTION>
ACTV, Inc. H&Q NASDAQ
---------- --- ------
<S> <C> <C> <C>
Dec-92 100.00 100.00 100.00
Mar-93 341.18 106.25 101.88
Jun-93 282.35 108.96 103.83
Sep-93 285.27 111.27 112.58
Dec-93 311.76 117.41 114.80
Mar-94 288.24 121.74 109.97
Jun-94 264.71 111.37 104.83
Sep-94 252.94 127.00 113.51
Dec-94 170.59 141.04 112.21
Mar-95 235.29 157.94 122.33
Jun-95 205.88 197.02 139.93
Sep-95 264.71 222.66 156.79
Dec-95 176.47 210.89 158.70
Mar-96 211.76 214.95 166.10
Jun-96 173.51 230.25 179.66
Sep-96 147.06 244.43 186.05
Dec-96 152.94 262.10 195.19
Mar-97 97.04 249.83 184.61
Jun-97 80.89 300.71 218.45
Sep-97 69.13 364.43 255.40
Dec-97 76.47 307.29 239.53
</TABLE>
The graph assumes that the value of the investment in the
Company's Common Stock, Nasdaq and H&Q was $100 on December 31, 1992 and that
all dividends were reinvested. No dividends have been declared or paid on the
Company's Common Stock.
16
<PAGE>
Other Compensation
Outside directors may be paid an honorarium for attending
meetings of the Board of Directors of the Company, in an amount that management
anticipates will not exceed $500 per meeting.
Stock Options and Stock Appreciation Rights
Stock Option Plans
On August 9, 1989, the Board of Directors approved a 1989
Employee Incentive Stock Option Plan and a 1989 Non-Qualified Stock Option Plan
(collectively, the "Plans") and on October 20, 1989, the stockholders authorized
and approved the adoption of the Plans. Michael J. Freeman is not eligible to
participate in either Plan. The 1989 Employee Incentive Stock Option Plan, which
is administered by the Board of Directors, provides for the issuance of up to an
aggregate of 100,000 shares of Common Stock upon exercise of options granted to
key employees. This Plan stipulates that the option price may not be less than
the fair market value on the date of the grant and, from May 4, 1990, through
May 4, 1992, could not be less than $5.50 per share. Options granted under this
Plan shall not be exercisable for a period longer than ten (10) years from the
date of the grant. The Plan generally provides that at the time of exercise of
any option the purchase price must be delivered in cash, or at the option of the
Board of Directors, or a committee designated by the Board to administer the
Plan (the "Committee"), through delivery of the Company's Common Stock equal in
value to the option exercise price, or by a combination thereof. Options under
this Plan may be issued as "Incentive Stock Options" under federal tax laws. As
of December 31, 1997, 49,567 options were outstanding under this Option Plan at
an exercise price of $1.50 per share, which options expire between the years
2000 and 2002. During 1997 no options granted under the Plan were exercised and
6,933 options granted under the Plan had either expired or were canceled.
The 1989 Non-qualified Stock Option Plan, which is administered
by the Board of Directors, provides for the issuance of up to an aggregate of
100,000 shares of Common Stock upon exercise of options granted to employees,
officers, directors, consultants and independent contractors. This Plan provides
that the Board has the discretion to establish the option exercise price, and
that the option exercise price may be less than fair market value at the time of
the grant of the option. Options granted under this Plan shall expire on a date
determined by the Board or the Committee, but in no event later than three
months after the termination of employment or retainer. This Plan generally
provides that the purchase price must be delivered in cash, or if permitted by
the Board or the Committee, services rendered or by a combination thereof. As of
December 31, 1997, 47,250 options were outstanding under this Plan at an
exercise price of $1.50
17
<PAGE>
per share, which options expire between the years 1998 and 2002. During 1997 no
options granted under the Plan were exercised and 250 options granted under the
Plan had either expired or were canceled.
The Company's 1996 Stock Option Plan (the "1996 Stock Option
Plan") was adopted by the Board of Directors in April 1996 and approved by the
shareholders in July 1996. The purpose of the 1996 Stock Option Plan is to grant
officers, employees and others who provide significant services to the Company a
favorable opportunity to acquire Common Stock so that they have an incentive to
contribute to its success and remain in its employ. Under the 1996 Stock Option
Plan, the Company is authorized to issue options for a total of 500,000 shares
of Common Stock. As of December 31, 1997, 430,000 options were issued under the
plan, 50,000 of which had been canceled.
As of December 31, 1997, the Company has also issued options to
purchase shares of Common Stock at varying prices, expiring at dates from 1998
to 2003, that are not part of the Plans. These include options to (i) Mr.
Samuels for 1,138,035 shares at $1.50 per share; (ii) Mr. Reese for 435,000
shares at $1.50 per share; (iii) Mr. Crowley for 301,000 shares at $1.50 per
share; and (iv) Mr. Cline for 50,000 shares at $1.50 per share. During the year
ended December 31, 1997, no executive officer exercised options.
1992 Stock Appreciation Rights Plan
The Company's 1992 Stock Appreciation Rights Plan (the "1992 SAR
Plan") was approved by the Company's stockholders in December 1992. The 1992 SAR
Plan provides a means whereby employees, officers, directors, consultants and
independent contractors may acquire the right to participate in the appreciation
of the Common Stock of the Company pursuant to stock appreciation rights
("SARs"). The 1992 SAR Plan is designed to promote the long-term interest of the
Company and its stockholders by providing the recipients with an additional
incentive to promote the financial success of the Company and its subsidiaries.
Subject to adjustment as set forth in the 1992 SAR Plan, the aggregate number of
SARs that may be granted shall not exceed 900,000. The 1992 SAR Plan is
administered by the Stock Appreciation Rights Committee (the "SAR Committee").
SARs may not be exercised until the expiration of six months from
the date of grant, and could in no event be exercised earlier than May 1, 1994.
One-fifth of the SARs awarded to a recipient vest at the end of each 12-month
period following the date of grant. If a holder of an SAR ceases to be an
employee, director or consultant of the Company, or one of its subsidiaries or
an affiliate, other than by reason of the holder's death or disability, any SARs
that have not vested shall become void. Exercise of SARs also will be subject to
such further restrictions (including limits on the time of exercise) as may be
required to satisfy the requirements of Rule 16b-3 promulgated by the Securities
and Exchange Commission and any other applicable law or regulation (including,
without limitation, federal and state securities laws and regulations). SARs are
not transferable,
18
<PAGE>
except by will or under the laws of descent and distribution or pursuant to a
domestic relations order as defined in the Internal Revenue Code of 1986, as
amended.
Upon exercise of an SAR, the holder will receive for each share
for which an SAR is exercised, as determined by the SAR Committee in its
discretion, (a) shares of the Company's Common Stock, (b) cash, or (c) cash and
shares of Common Stock, equal to the difference between (i) the fair market
value per share of the Common Stock on the date of exercise of the SAR and (ii)
the value of an SAR, which amount shall be no less than the fair market value
per share of Common Stock on the date of grant of the SAR.
A grant of SARs has no federal income tax consequences at the
time of such grant. Upon the exercise of SARs, the amount of any cash and,
generally, the fair market value of any shares of Common Stock received, is
taxable to the holder as ordinary income; the Company will have a corresponding
deduction. Upon the sale of any Common Stock acquired by the exercise of SARs,
holders will realize long-term or short-term capital gains or losses, depending
upon their holding period for such Common Stock.
Under the Company's 1992 SAR Plan, as of December 31, 1997, the
Company had granted a total of 516,000 outstanding SARs at an exercise price of
$1.50 per share, including 116,000 SARs to William Samuels, 100,000 SARs to
Bruce Crowley, 76,000 SARs to David Reese and 20,000 SARs to Christopher Cline.
The initial prices of all the SARs granted were equal to the fair market values
of a share of Common Stock on the dates of grant. The SARs expire between 2001
and 2006.
1996 Stock Appreciation Rights Plan
The Company's 1996 Stock Appreciation Rights Plan (the "1996 SAR
Plan") was adopted by the Board of Directors in April 1996 and approved by the
shareholders in July 1996. The 1996 SAR Plan will provide a means whereby
employees, officers, directors, consultants and independent contractors may
acquire the right to participate in the appreciation of the Common Stock of the
Company pursuant to "Stock Appreciation Rights" ("SARs"). The 1996 SAR Plan is
designed to promote the long-term interest of the Company and its stockholders
by providing these individuals with an additional incentive to promote the
financial success of the Company and its subsidiary corporations. Subject to
adjustment as set forth in the 1996 SAR Plan, the aggregate number of SARs that
may be granted pursuant to the 1996 SAR Plan shall not exceed 500,000; provided,
however that at no time shall there be more than an aggregate of 900,000
outstanding, unexercised SARs granted pursuant to both the 1996 SAR Plan and the
Company's 1992 Stock Appreciation Rights Plan. (See "1992 Stock Appreciation
Rights Plan"). The 1996 SAR Plan is administered by the Stock Appreciation
Rights Committee (the "SAR Committee"). The 1996 SAR Plan imposes no limit on
the number of recipients to whom awards may be made.
19
<PAGE>
SARs may not be exercised until the expiration of six months from
the date of grant. If a holder of an SAR ceases to be an employee, director or
consultant of the Company, or one of its subsidiaries or an affiliate, other
than by reason of the holder's death or disability, any SARs that have not
vested shall become void. Exercise of SARs also will be subject to such further
restrictions (including limits on the time of exercise) as may be required to
satisfy the requirements of Rule 16b-3 promulgated by the Securities and
Exchange Commission and any other applicable law or regulation (including,
without limitation, federal and state securities laws and regulations). SARs are
not transferable, except by will or under the laws of descent and distribution
or pursuant to a domestic relations order as defined in the Internal Revenue
Code of 1986, as amended.
Upon exercise of an SAR, the holder will receive for each share
for which an SAR is exercised, as determined by the SAR Committee in its
discretion, (a) shares of the Company's Common Stock, (b) cash, or (c) cash and
shares of the Company's Common Stock, equal to the difference between (i) the
fair market value per share of the Common Stock on the date of exercise of the
SAR and (ii) the value of an SAR, which amount shall be no less than the fair
market value per share of Common Stock on the date of grant of the SAR.
The terms of the SARs will be set forth in a certificate of grant
issued to the holder, which certificate will contain the provisions referred to
above and such other provisions as the SAR Committee may determine.
A grant of SARs has no federal income tax consequences at the
time of such grant. Upon the exercise of such SARs, the amount of any cash and,
generally, the fair market value of any shares of Common Stock of the Company
received, is taxable to the holder as ordinary income; the Company will have a
corresponding deduction. Upon the sale of the Company's Common Stock acquired by
the exercise of SARs, holders will realize long-term or short-term capital gains
or losses, depending upon their holding period for such Common Stock.
Under the Company's 1996 SAR Plan, as of December 31, 1997, the
Company had granted a total of 380,000 outstanding SARs at an exercise price of
$1.50 per share, including 130,000 SARs to William Samuels, 110,000 SARs to
David Reese, 60,000 SARs to Bruce Crowley and 30,000 SARs to Christopher Cline.
Section 401(k) Plan
During 1996, the Company adopted a Savings and Retirement Plan
(the "401(k) Plan") covering the Company's full-time employees, the 401(k) Plan
is intended to qualify under Section 401(k) of the Internal Revenue Code, so
that contributions to the 401(k) Plan by employees or by the Company, and the
investment earnings on such contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that
20
<PAGE>
contributions by the Company, if any, will be deductible by the Company when
made. Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($9,500 in 1997)
and to have the amount of such reduction contributed to the 401(k) Plan. The
401(k) Plan permits, but does not require, additional matching contributions to
the 401(k) Plan by the Company on behalf of all participants in the 401(k) Plan.
Options Grants in Subsidiaries
During 1997, the Company issued to certain employees options to
acquire Class B Common Stock of its subsidiaries. The options generally vest in
increments and are exercisable over a ten-year option period. Class B Common
Shares in total represent not more than 20% of all authorized common stock of
each subsidiary. Each Class B Common Share carries "super-voting" rights,
entitling the holder to 25 votes.
To date, with respect to its operating subsidiaries, the Company
has issued a total of 1,000,000, 960,000 and 500,000 Class B options for ACTV
Net, Inc., ACTV Entertainment, Inc., and the Texas Individualized Television
Network, Inc., respectively. Included in these totals are options for 350,000,
350,000, 100,000, and 20,000 issued to Messrs. Samuels, Crowley, Reese and Cline
with respect to ACTV Net, Inc.; 350,000, 350,000, 100,000 and 20,000 issued to
Messrs. Samuels, Reese, Crowley and Cline with respect to ACTV Entertainment,
Inc.; and 250,000 issued to each of Messrs. Samuels and Reese with respect to
the Texas Individualized Television Network, Inc.
Each of the Class B options has been issued with an exercise
price at or above the fair market value per share upon issuance, based on an
independent, outside appraisal obtained by the Company.
The Class B option holders have also entered into shareholders'
agreements that limit their ability to sell shares acquired upon option exercise
and that grant a right of first refusal to the other option holders prior to any
contemplated sale of shares so acquired.
Each holder of Class B options of the Texas Individualized
Television Network, Inc. and of certain currently non-operating subsidiaries
(assuming that any of such subsidiaries is capitalized with at least $5 million)
has the right to exchange such options into options of the Company's Common
Stock. Such exchange may not be made prior to January 1, 1999.
21
<PAGE>
SECTION 16(a) REPORTING
As under the securities laws of the United States, the Company's
directors, its executive (and certain other) officers, and any persons holding
ten percent or more of the Company's Common Stock must report on their ownership
of the Company's Common Stock and any changes in that ownership to the
Securities and Exchange Commission and to the National Association of Securities
Dealers, Inc.'s Automated Quotation System. Specific due dates for these reports
have been established. During the year ended December 31, 1997 the Company
believes all reports on behalf of its executive officers and directors for all
transactions were filed on a timely basis. The Company does not believe that
Banca del Gottardo, a principal shareholder, filed all reports on its ownership
of the Company's Common Stock, on a timely basis, if at all.
MEETINGS OF THE BOARD OF DIRECTORS
There were seven meetings of the Company's Board of Directors
during 1997 held on January 9, 1997, March 13, 1997, May 16, 1997, September 2,
1997, October 13, 1997, November 21, 1997 and December 24, 1997. All of the
Directors were either present or participated by telephone conference call at
such meetings, except David Reese who was not present at, nor did he participate
in the November 21, 1997 meeting, except Steven Schuster who was not present at,
nor did he participate in the November 21, 1997 meeting, Richard Hyman who was
not present at, nor did he participate in the January 9, 1997 and September 2,
1997 meetings, William Frank who was not present at, nor did he participate at
in the October 13, 1997 meeting and Jess Ravich, who was not present at, nor did
he participate at the May 16, 1997 and December 24, 1997 meetings. There was one
unanimous written consent of the Company's Board of Directors, pursuant to
Section 141 of the General Corporation Law of Delaware, during 1997 dated
November 15, 1997. The Company has a Compensation Committee, consisting of
Steven Schuster and William A. Frank. During 1997, the Compensation Committee
22
<PAGE>
met two times on July 29, 1997 and October 31, 1997. The Compensation Committee
decides issues related to compensation, stock appreciation rights and stock
options that are not part of an incentive stock option plan. The Company also
has an Incentive Stock Option Committee, which consists of William Samuels and
David Reese. There were two meetings of the Company's Incentive Stock Option
Committee during 1997 held on March 24, 1997 and September 23, 1997. The
Company's Audit Committee, consisting of Steven Schuster and Richard Hyman, was
formed in January 1998. The Company does not currently have a Nominating
Committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 11, 1994, the Post Company, an affiliate of the Company,
entered into a voting agreement with the Company and William C. Samuels, Chief
Executive Officer of the Company, as voting trustee ("Voting Trustee"), pursuant
to which the Post Company has assigned to Mr. Samuels its voting rights with
respect to the Company's Common Stock that it holds. This voting trust remains
in effect for 10 years, or as long as the Post Company's shareholdings in the
Company are less than 51% of outstanding Common Stock. The Post Company also
regains the right to vote its shares of Common Stock under certain
circumstances, including the proposal of any amendment to the Company's
certificate of incorporation requiring stockholder approval; in case of any
reclassification or change of the outstanding Common Stock of the Company, any
consolidation of the Company with, or merger of the Company into, another
corporation, or in the case of a sale or conveyance to another corporation or
other entity of all or substantially all of the property, assets or business of
the Company; upon the commencement of a proxy contest regarding the Company's
Board of Directors; if a person or entity acquires 20% or more of the
outstanding Common Stock of the Company; or if a conflict of interest (as
determined by the Post Company in its sole discretion) involving the Voting
Trustee or any successor Voting Trustee should arise.
23
<PAGE>
In connection with a 1992 option agreement that was entered into
pursuant to an investment by the Post Company at that time, the Post Company
also received the right to purchase, from the Company, at a fair market exercise
price to be determined, an amount of shares of Common Stock necessary to
increase the Post Company's percentage ownership of the total then outstanding
shares of Common Stock to 51%. Such right was exercisable through March 17,
1997, and expired unexercised.
William A. Frank is a director of the Company and was formerly
the Chief Executive Officer of Greenwich Entertainment Group (the "Greenwich
Group"), a position he held from 1994 to 1997. In January 1995, the Company
granted an exclusive license to the Greenwich Group for the use of the Company's
programming technology in shopping malls, museums and entertainment centers. The
Company was to receive an 8% to 10% royalty of annual ticket sales per theater.
In addition, the Company invested approximately $274,000 in 1996, in the
Greenwich Group, in exchange for approximately 15% of the Greenwich Group's
outstanding common stock. During 1997, an involuntary bankruptcy petition was
filed against the Greenwich Group and it is currently in liquidation.
Jess Ravich is a director of the Company and the Chief Executive
Officer and majority stockholder of Libra Investments ("Libra"). Libra has acted
as financial advisor or placement agent to the Company from time to time and has
been paid fees in cash and/or equity securities of the Company. Libra acted as
placement agent in the August 1996 placement of cumulative exchangeable
preferred stock of ACTV Holdings, Inc. (the "Exchangeable Preferred") and was
paid a fee of $750,000 and issued warrants to purchase an aggregate of 36,000
shares of Exchangeable Preferred at an exercise price of $25.00 per share
(15,750 of such warrants were subsequently assigned by Libra to Mr. Ravich). In
December 1996, in consideration for the performance of financial advisory
services, the Company issued to Libra warrants to purchase 100,000 shares of the
Company's Common Stock currently exercisable at $1.50 per share (45,000 of which
were subsequently assigned by Libra to Mr. Ravich). Libra acted as placement
agent in connection with a placement of $5,000,000 principal amount of debt
securities along with warrants to purchase equity of either the Company or its
subsidiary, The Texas Individualized Network, Inc., and Libra was paid a fee
$150,000 in connection with such placement. Mr. Ravich purchased $480,000
principal amount of such securities in the placement. Libra also received a fee
of $25,000 for advisory services rendered during the fourth quarter of 1997, and
has been retained to continue to perform such services in 1998 for a fee of
$25,000 per quarter.
During 1997, under the 1996 Stock Appreciation Rights Plan, the
Company granted Stock Appreciation Rights ("SARs"), at an exercise price of
$1.50 per share to William Samuels, 100,000 SARs, David Reese, 50,000 SARs,
Bruce Crowley, 10,000 SARs and Christopher Cline 20,000 SARs. The SARs were
granted pursuant to the 1996 Stock
24
<PAGE>
Appreciation Rights Plan, to provide an additional incentive to the grantees to
promote the financial success of the Company and its Subsidiaries.
All current transactions between the Company, and its officers,
directors and principal stockholders or any affiliates thereof are, and in the
future such transactions will be, on terms no less favorable to the Company than
could be obtained from unaffiliated third-parties.
25
<PAGE>
PROPOSAL NO. 2
ADOPTION OF THE COMPANY'S
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Option Plan") was
adopted by the Board of Directors in April 1998. The purpose of the 1998 Option
Plan is to grant directors, executive officers, employees, consultants and
others who provide significant services to the Company a favorable opportunity
to acquire Common Stock so that they have an incentive to contribute to its
success and remain in its employ. Under the 1998 Option Plan, the Company is
authorized to issue options for a total of 900,000 shares of Common Stock.
Description of 1998 Stock Option Plan
All directors, executive officers, employees, consultants and
other persons who perform significant services for or on behalf of the Company
are eligible to participate in the 1998 Option Plan. The Company currently has
approximately 40 full-time employees.
The Company may grant under the 1998 Option Plan both incentive
stock options ("Incentive Stock Options") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and stock options
that do not qualify for incentive treatment under the Code ("Nonstatutory
Options").
A copy of the 1998 Option Plan is attached hereto as Appendix B.
The following summary of the 1998 Option Plan does not purport to be complete
and is qualified in its entirety by reference to the complete text of the 1998
Option Plan.
Administration.
The Plan shall be administered by the Board of Directors of ACTV
(the "Board"), if each member is a "disinterested person" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"),
or a committee (the "Committee") of two or more directors, each of whom is a
disinterested person. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be filled
by the Board.
A majority of the members of the Committee shall constitute a
quorum for the purposes of the Plan. Provided a quorum is present, the Committee
may take action by affirmative vote or consent of a majority of its members
present at a meeting. Meetings may be held telephonically as long as all members
are able to hear one another, and a
26
<PAGE>
member of the Committee shall be deemed to be present for this purpose if he or
she is in simultaneous communication by telephone with the other members who are
able to hear one another. In lieu of action at a meeting, the Committee may act
by written consent of a majority of its members.
Subject to the express provisions of the Plan, the Committee
shall have the authority to construe and interpret the Plan and all Stock Option
Agreements (as defined in Section 3.4 of the 1998 Stock Option Plan) entered
into pursuant hereto and to define the terms used therein, to prescribe, adopt,
amend and rescind rules and regulations relating to the administration of the
Plan and to make all other determinations necessary or advisable for the
administration of the Plan; provided, however, that the Committee may delegate
nondiscretionary administrative duties to such employees of the Company as it
deems proper; and, provided, further, in its absolute discretion, the Board may
at any time and from time to time exercise any and all rights and duties of the
Committee under the Plan. Subject to the express limitations of the Plan, the
Committee shall designate the individuals from among the class of persons
eligible to participate as provided in Section 1.3 of the 1998 Stock Option
Plan, who shall receive options, whether an optionee will receive Incentive
Stock Options or Nonstatutory Options, or both, and the amount, price,
restrictions and all other terms and provisions of such options (which need not
be identical).
Members of the Committee shall receive such compensation for
their services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and the
Company's officers and directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No members of the Committee or Board
shall be personally liable for any action, determination or interpretation made
in good faith with respect to the Plan, and all members of the Committee shall
be fully protected by the Company in respect of any such action, determination
or interpretation.
Stock Subject to the Plan.
Subject to adjustment as provided in Section 3.5 of the 1998
Stock Option Plan, the stock to be offered under the Plan shall be shares of
authorized but unissued Common Stock, including any shares repurchased under the
terms of the Plan or any Stock Option Agreement entered into pursuant hereto.
The cumulative aggregate number of shares of Common Stock to be issued under the
Plan shall not exceed 900,000, subject to adjustment as set forth in Section 3.5
of the 1998 Stock Option Plan.
27
<PAGE>
If any option granted hereunder shall expire or terminate for any
reason without having been fully exercised, the unpurchased shares subject
thereto shall again be available for the purposes of the Plan. For purposes of
Section 1.4 of the 1998 Stock Option Plan, where the exercise price of options
is paid by means of the grantee's surrender of previously owned shares of Common
Stock, only the net number of additional shares issued and which remain
outstanding in connection with such exercise shall be deemed "issued" for
purposes of the Plan.
Option Price.
The exercise price of each incentive Stock option granted under
the Plan shall be determined by the Committee, but shall not be less than 100%
of the "Fair Market Value" (as defined below) of Common Stock on the date of
grant. If an Incentive Stock Option is granted to an employee who at the time
such option is granted owns (within the meaning of section 424(d) of the Code)
more than 10% of the total combined voting power of all classes of capital stock
of the Company, the option exercise price shall be at least 110% of the Fair
Market Value of Common Stock on the date of grant and the option by its terms
shall not be exercisable after the expiration of 5 years from the date such
option is granted. The exercise price of each Nonstatutory Option also shall be
determined by the Committee, but shall not be less than 85% of the Fair Market
Value of Common Stock on the date of grant. The status of each option granted
under the Plan as either an Incentive Stock Option or a Nonstatutory Stock
Option shall be determined by the Committee at the time the Committee acts to
grant the option, and shall be clearly identified as such in the Stock Option
Agreement relating thereto.
"Fair Market Value" for purposes of the Plan shall mean: (i) the
closing price of a share of Common Stock on the principal exchange on which
shares of Common Stock are then trading, if any, on the day previous to such
date, or, if shares were not traded on the day previous to such date, then on
the next preceding trading day during which a sale occurred; or (ii) if Common
Stock is not traded on an exchange but is quoted on Nasdaq or a successor
quotation system, (1) the last sales price (if Common Stock is then listed on
the Nasdaq Stock Market) or (2) the mean between the closing representative bid
and asked price (in all other cases) for Common Stock on the day prior to such
date as reported by Nasdaq or such successor quotation system; or (iii) if there
is no listing or trading of Common Stock either on a national exchange or
over-the-counter, that price determined in good faith by the Committee to be the
fair value per share of Common Stock, based upon such evidence as it deems
necessary or advisable.
In the discretion of the Committee exercised at the time the
option is exercised, the exercise price of any option granted under the Plan
shall be paid in full in cash, by check or by the optionee's interest-bearing
promissory note (subject to any limitations of applicable state corporations
law) delivered at the time of exercise; provided, however, that subject to the
timing requirements of Section 2.7 of the 1998 Stock Option
28
<PAGE>
Plan, in the discretion of the Committee and upon receipt of all regulatory
approvals, the person exercising the option may deliver as payment in whole or
in part of such exercise price certificates for Common Stock of the Company
(duly endorsed or with duly executed stock powers attached), which shall be
valued at its Fair Market Value on the day of exercise of the option, or other
property deemed appropriate by the Committee; and, provided further, that
subject to Section 422 of the Code so-called cashless exercises as permitted
under applicable rules and regulations of the Securities and Exchange Commission
and the Federal Reserve Board shall be permitted in the discretion of the
Committee. Without limiting the Committee's discretion in this regard,
consecutive book entry stock-for-stock exercises of options (or "pyramiding")
also are permitted in the Committee's discretion.
Irrespective of the form of payment, the delivery of shares
pursuant to the exercise of an option shall be conditioned upon payment by the
optionee to the Company of amounts sufficient to enable the Company to pay all
federal, state, and local withholding taxes applicable, in the Company's
judgment, to the exercise. In the discretion of the Committee, such payment to
the Company may be effected through (i) the Company's withholding from the
number of shares of Common Stock that would otherwise be delivered to the
optionee by the Company on exercise of the option a number of shares of Common
Stock equal in value (as determined by the Fair Market Value of Common Stock on
the date of exercise) to the aggregate withholding taxes, (ii) payment by the
optionee to the Company of the aggregate withholding taxes in cash, (iii)
withholding by the Company from other amounts contemporaneously owed by the
Company to the optionee, or (iv) any combination of these three methods, as
determined by the Committee in its discretion.
Option Period.
(a) The Committee shall provide, in the terms of each Stock
Option Agreement, when the option subject to such agreement expires and becomes
unexercisable, but in no event will an Incentive Stock Option granted under the
Plan be exercisable after the expiration of ten years from the date it is
granted. Without limiting the generality of the foregoing, the Committee may
provide in the Stock Option Agreement that the option subject thereto expires 30
days following a Termination of Employment for any reason other than death or
disability or six months following a Termination of Employment for disability or
following an optionee's death.
(b) Outside Date for Exercise. Notwithstanding any provision of
this Section 2.2 of the 1998 Stock Option Plan, in no event shall any option
granted under the Plan be exercised after the expiration date of such option set
forth in the applicable Stock Option Agreement.
29
<PAGE>
Exercise of Options.
Each option granted under the Plan shall become exercisable and
the total number of shares subject thereto shall be purchasable, in a lump sum
or in such installments, which need not be equal, as the Committee shall
determine; provided, however, that each option shall become exercisable in full
no later than ten years after such option is granted, and each option shall
become exercisable as to at least 10% of the shares of Common Stock covered
thereby on each anniversary of the date such option is granted; and provided,
further, that if the holder of an option shall not in any given installment
period purchase all of the shares which such holder is entitled to purchase in
such installment period, such holder's right to purchase any shares not
purchased in such installment period shall continue until the expiration or
sooner termination of such holder's option. The Committee may, at any time after
grant of the option and from time to time, increase the number of shares
purchasable in any installment, subject to the total number of shares subject to
the option and the limitations set forth in Section 2.5 of the 1998 Stock Option
Plan. At any time and from time to time prior to the time when any exercisable
option or exercisable portion thereof becomes unexercisable under the Plan or
the applicable Stock Option Agreement, such option or portion thereof may be
exercised in whole or in part; provided, however, that the Committee may, by the
terms of the option, require any partial exercise to be with respect to a
specified minimum number of shares. No option or installment thereof shall be
exercisable except with respect to whole shares. Fractional share interests
shall be disregarded, except that they may be accumulated as provided above and
except that if such a fractional share interest constitutes the total shares of
Common Stock remaining available for purchase under an option at the time of
exercise, the optionee shall be entitled to receive on exercise a certified or
bank cashier's check in an amount equal to the Fair Market Value of such
fractional share of stock.
Transferability of Options.
Except as the Committee may determine as aforesaid, an option
granted under the Plan shall, by its terms, be nontransferable by the optionee
other than by will or the laws of descent and distribution, or pursuant to a
qualified domestic relations order (as defined by the Code), and shall be
exercisable during the optionee's lifetime only by the optionee or by his or her
guardian or legal representative. More particularly, but without limiting the
generality of the immediately preceding sentence, an option may not be assigned,
transferred (except as provided in the preceding sentence), pledged or
hypothecated (whether by operation of law or otherwise), and shall not be
subject to execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of any option contrary to
the provisions of the Plan and the applicable Stock Option Agreement, and any
levy of any attachment or similar process upon an option, shall be null and
void, and otherwise without effect, and the Committee may, in its sole
discretion, upon the happening of any such event, terminate such option
forthwith.
30
<PAGE>
Issuance of Stock Certificates.
Upon exercise of an option, the Company shall deliver to the
person exercising such option a stock certificate evidencing the shares of
Common Stock acquired upon exercise. Notwithstanding the foregoing, the
Committee in its discretion may require the Company to retain possession of any
certificate evidencing stock acquired upon exercise of an option which remains
subject to repurchase under the provisions of the Stock Option Agreement or any
other agreement signed by the optionee in order to facilitate such repurchase
provisions.
Adjustments Upon Changes in Capitalization; Merger and Consolidation.
If the outstanding shares of Common Stock are changed into, or
exchanged for cash or a different number or kind of shares or securities of the
Company or of another corporation through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment shall be made by the Committee in
the number and kind of shares as to which options and restricted stock may be
granted. In the event of such a change or exchange, other than for shares or
securities of another corporation or by reason of reorganization, the Committee
shall also make a corresponding adjustment changing the number or kind of shares
and the exercise price per share allocated to unexercised options or portions
thereof, which shall have been granted prior to any such change, shall likewise
be made. Any such adjustment, however, shall be made without change in the total
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for each share (except for any change in
the aggregate price resulting from rounding-off of share quantities or prices).
In the event of a "spin-off" or other substantial distribution of
assets of the Company which has a material diminutive effect upon the Fair
Market Value of the Common Stock, the Committee in its discretion shall make an
appropriate and equitable adjustment to the exercise prices of options then
outstanding under the Plan.
Where an adjustment under Section 3.5 of the 1998 Stock Option
Plan, of the type described above is made to an Incentive Stock Option, the
adjustment will be made in a manner which will not be considered a
"modification" under the provisions of subsection 424(b)(3) of the Code.
In connection with the dissolution or liquidation of ACTV or a
partial liquidation involving 50% or more of the assets of ACTV, a
reorganization of ACTV in which another entity is the survivor, a merger or
reorganization of ACTV under which more than 50% of the Common Stock outstanding
prior to the merger or reorganization is converted into cash or into another
security, a sale of more than 50% of the Company's assets, or a similar event
that the Committee determines, in its discretion, would materially
31
<PAGE>
alter the structure of ACTV or its ownership, the Committee, upon 30 days prior
written notice to the option holders, may, in its discretion, do one or more of
the following: (i) shorten the period during which options are exercisable
(provided they remain exercisable for at least 30 days after the date the notice
is given); (ii) accelerate any vesting schedule to which an option is subject;
(iii) arrange to have the surviving or successor entity grant replacement
options with appropriate adjustments in the number and kind of securities and
option prices, or (iv) cancel options upon payment to the option holders in
cash, with respect to each option to the extent then exercisable (including any
options as to which the exercise has been accelerated as contemplated in clause
(ii) above), of any amount that is the equivalent of the Fair Market Value of
the Common Stock (at the effective time of the dissolution, liquidation, merger,
reorganization, sale or other event) or the fair market value of the option. In
the case of a change in corporate control, the Committee may, in considering the
advisability or the terms and conditions of any acceleration of the
exercisability of any option pursuant to Section 3.5 of the 1998 Stock Option
Plan, take into account the penalties that may result directly or indirectly
from such acceleration to either the Company or the option holder, or both,
under Section 280G of the Code, and may decide to limit such acceleration to the
extent necessary to avoid or mitigate such penalties or their effects.
No fractional share of Common Stock shall be issued under the
Plan on account of any adjustment under Section 3.5 of the 1998 Stock Option
Plan.
Amendment and Termination.
The Board or the Committee may at any time suspend, amend or
terminate the Plan and may, with the consent of the option holder, make such
modifications of the terms and conditions of such option holder's option as it
shall deem advisable, provided, however, that, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or the Committee may, (A) materially
increase the benefits accruing to participants under the Plan; (B) materially
increase the number of securities which may be issued under the Plan; or (C)
materially modify the requirements as to eligibility for participation in the
Plan. No option may be granted during any suspension of the Plan or after such
termination. The amendment, suspension or termination of the Plan shall not,
without the consent of the option holder affected thereby, alter or impair any
rights or obligations under any option theretofore granted under the Plan. No
option way be granted during any period of suspension nor after termination of
the Plan, and in no event may any option be granted under the Plan after the
expiration of ten years from the date the Plan is adopted by the Board.
32
<PAGE>
Privileges of Stock Ownership; Non-Distributive Intent;
Reports to Option Holders.
A participant in the Plan shall not be entitled to the privilege
of stock ownership as to any shares of Common Stock not actually issued to the
optionee. Upon exercise of an option at a time when there is not in effect under
the Securities Act of 1933, as amended, a Registration Statement relating to the
Common Stock issuable upon exercise or payment therefor and available for
delivery a Prospectus meeting the requirements of Section 10(a)(3) of said Act,
the optionee shall represent and warrant in writing to the Company that the
shares purchased are being acquired for investment and not with a view to the
distribution thereof.
The Company shall furnish to each optionee under the Plan the
Company's annual report and such other periodic reports, if any, as are
disseminated by the Company in the ordinary course to its stockholders.
Legending Share Certificates.
In order to enforce any restrictions imposed upon Common Stock
issued upon exercise of an option granted under the Plan or to which such Common
Stock may be subject, the Committee may cause a legend or legends to be placed
on any share certificates representing such Common Stock, which legend or
legends shall make appropriate reference to such restrictions, including, but
not limited to, a restriction against sale of such Common Stock for any period
of time as may be required by applicable laws or regulations. If any restriction
with respect to which a legend was placed on any certificate ceases to apply to
Common Stock represented by such certificate, the owner of the Common Stock
represented by such certificate may require the Company to cause the issuance of
a new certificate not bearing the legend.
Additionally, and not by way of limitation, the Committee may
impose such restrictions on any Common Stock issued pursuant to the Plan as it
may deem advisable, including, without limitation, restrictions under the
requirements of any stock exchange or market upon which Common Stock is then
traded.
Termination.
The Plan shall terminate automatically as of the close of
business on the day preceding the tenth anniversary date of its adoption by the
Board or earlier as provided in Section 3.8. Unless otherwise provided herein,
the termination of the Plan shall not affect the validity of any option
agreement outstanding at the date of such termination.
33
<PAGE>
Federal Income Tax Treatment
Under the Code, neither the grant nor the exercise of Incentive
Stock Options is a taxable event to the optionee (except to the extent an
optionee may be subject to alternative minimum tax); rather, the optionee is
subject to tax only upon the sale of the common stock acquired upon exercise of
the Incentive Stock Option. Upon such a sale, the entire difference between the
amount realized upon the sale and the exercise price of the option will be
taxable to the optionee. Subject to certain holding period requirements, such
difference will be taxed as a capital gain rather than as ordinary income.
Optionees who receive Nonstatutory Options will be subject to
taxation upon exercise of such options on the spread between the Fair Market
Value of the Common Stock on the date of exercise and the exercise price of such
options. This spread is treated as ordinary income to the optionee, and the
Company is permitted to deduct as an employee expense a corresponding amount.
Nonstatutory Options do not give rise to a tax preference item subject to the
alternative minimum tax.
Stockholder Vote Required
Approval of the Company's 1998 Stock Option Plan requires the
affirmative vote of the holders of a majority of the shares of Common Stock
present in person or represented by proxy at the Annual Meeting of Stockholders.
The Board of Directors recommends a vote for approval of
the Company's 1998 Stock Option Plan.
34
<PAGE>
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF DELOITTE & TOUCHE LLP
AS THE COMPANY'S INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Board of Directors of the Company has adopted resolutions
appointing Deloitte & Touche LLP as the Company's independent certified public
accountants for the ensuing year. Deloitte & Touche LLP, which has served as the
Company's independent certified public accountants since 1989, is familiar with
the Company's operations, accounting policies and procedures and is, in the
Company's opinion, well-qualified to act in this capacity. A member of Deloitte
& Touche LLP will be available to answer questions and will have the opportunity
to make a statement if he or she so desires at the Annual Meeting of
Stockholders.
Stockholder Vote Required
Ratification of the appointment of Deloitte & Touche LLP as
independent certified public accountants requires the affirmative vote of the
holders of a majority of the shares of Common Stock present in person or
represented by proxy at the Annual Meeting of Stockholders.
The Board of Directors recommends a vote for ratification of the
appointment of Deloitte & Touche LLP as the Company's
independent certified public accountants.
OTHER MATTERS
The Board of Directors does not know of any matters other than
those referred to in the notice of meeting that will be presented for
consideration at the Meeting. However, it is possible that certain proposals may
be raised at the Meeting by one or more stockholders. In such case, or if any
other matter should properly come before the Meeting, it is the intention of the
person named in the accompanying proxy to vote such proxy in accordance with his
best judgment.
35
<PAGE>
SOLICITATION OF PROXIES
The cost of soliciting proxies will be borne by the Company.
Solicitations may be made by mail, personal interview, telephone, and telegram
by directors, officers and employees of the Company. The Company will reimburse
banks, brokerage firms, other custodians, nominees and fiduciaries for
reasonable expenses incurred in sending proxy material to beneficial owners of
the Company's capital stock.
STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's 1998 Annual Meeting of
Stockholders must be received by the Company no later than January 1, 1998 in
order that they may be considered for inclusion in the Proxy Statement and form
of proxy relating to that Meeting.
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION
Copies of the annual report (Form 10-K) of the Company for the
year ended December 31, 1997, as filed with the Securities and Exchange
Commission (without exhibits), and any amendments thereto, are available to
stockholders free of charge by writing to ACTV, Inc., 1270 Avenue of the
Americas, New York, New York 10020.
FINANCIAL STATEMENTS
The audited consolidated financial statements of the Company and
its subsidiaries for the fiscal year ended December 31, 1997, and Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
annexed hereto as Appendix A.
By Order of the Board of
Directors of ACTV, Inc.
William C. Samuels
Chairman and Chief Executive Officer
April 28, 1998
36
<PAGE>
Appendix A
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of ACTV, Inc.:
We have audited the accompanying consolidated balance sheets of ACTV, Inc. and
subsidiaries ("the Company") as of December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14 (a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles. Also, in our opinion, the
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 16, the accompanying 1996 and 1997 consolidated financial
statements have been restated.
Deloitte & Touche LLP
New York, New York
March 18, 1998, (April 17, 1998 as to Note 16)
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
(as restated (as restated
see Note 16) see Note 16)
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..................... $ 6,520,756 $ 554,077
Accounts receivable-net ....................... 410,193 303,044
Education equipment inventory ................. 337,504 237,757
Other ......................................... 316,962 308,653
------------ ------------
Total current assets ....................... 7,585,415 1,403,531
------------ ------------
Property and equipment-net ....................... 724,089 2,596,785
------------ ------------
Other Assets:
Patents and patents pending ................... 253,779 279,356
Software development costs .................... -- 669,852
Goodwill ...................................... 3,067,560 2,641,188
Other ......................................... 61,781 311,206
------------ ------------
Total other assets ......................... 3,383,120 3,901,602
------------ ------------
Total ................................... $ 11,692,624 $ 7,901,918
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ......... $ 1,594,655 $ 1,882,159
Deferred stock appreciation rights ............ 701,517 --
Preferred dividends payable ................... 195,384 603,469
------------ ------------
Total current liabilities .................. 2,491,556 2,485,628
Shareholders' equity:
Preferred stock, $.10 par value, 1,000,000
shares authorized, issued and out-
standing none at December 31, 1996,
86,200 at December 31, 1997 ................ -- 8,620
Preferred stock of a subsidiary holding
solely parent company obligations and
convertible into common shares of
the parent, no par value,
436,000 shares authorized: issued and
outstanding 400,000 at December 31,
1996, 316,944 at December 31, 1997 ........ 6,615,664 7,029,708
Common stock, $.10 par value, 35,000,000
shares authorized: issued and outstand-
ing 11,787,106 at December 31, 1996,
14,614,611 at December 31, 1997 ............ 1,178,711 1,461,461
Additional paid-in capital .................... 42,272,205 48,140,596
Notes receivable from stock sales ............. (200,000) (199,900)
Accumulated deficit ........................... (40,665,512) (51,024,195)
------------ ------------
Total shareholders' equity ................. 9,201,068 5,416,290
------------ ------------
Total ................................... $ 11,692,624 $ 7,901,918
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1996 1997
(as restated (as restated
see Note 16) see Note 16)
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Revenues ............................ $1,311,130 $1,459,540 $1,650,955
License fees from related party ..... 730 16,789 --
---------- ----------- -----------
Total revenues .................... 1,311,860 1,476,329 $1,650,955
Cost of Sales ....................... 334,136 647,488 471,956
---------- ----------- -----------
Gross profit ...................... 977,724 828,841 1,178,999
Expenses:
Operating expenses .................. 1,260,134 1,955,601 1,360,838
Selling and administrative .......... 4,998,020 6,332,759 6,880,311
Depreciation and amortization ....... 686,906 419,979 327,681
Amortization of goodwill ............ 426,372 426,372 426,372
Loss on investment .................. -- 274,325 --
Stock appreciation rights ........... 567,316 183,634 (346,892)
---------- ----------- -----------
Total expenses .................... 7,938,748 9,592,670 8,648,310
Interest (income) ..................... (138,510) (158,732) (116,870)
Interest expense--related parties ..... 98,392 -- --
---------- ----------- -----------
Interest expense (income) - net ..... (40,118) (158,732) (116,870)
---------- ----------- -----------
Net loss before extraordinary
gain .................................. 6,920,906 8,605,097 7,352,441
Gain on extinguishment of debt ........ 94,117 -- --
---------- ----------- -----------
Net loss .............................. 6,826,789 8,605,097 7,352,441
Preferred stock dividends and
accretions............................. -- 1,695,384 3,006,242
Loss applicable to common stock
shareholders .......................... $6,826,789 $10,300,481 $10,358,683
========== =========== ===========
Basic loss per common share before
extraordinary gain .................... $.68 $.88 $.80
Basic loss per common share after
extraordinary gain .................... $.67 $.88 $.80
Weighted average number of common
shares outstanding .................... 10,162,128 11,739,768 12,883,848
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
-------------------------- ----------------------- Paid-In
------------
Shares Amount Shares Amount Capital Deficit
----------- ----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances January 1, 1995 9,019,550 $ 901,955 $ 26,608,830 $(23,538,242)
Issuance of shares in connection
with financings 1,990,293 199,029 -- -- 8,730,627 --
Issuance of shares in connection
with exercise of stock options 308,247 30,825 -- -- 1,129,924 --
Issuance of shares for services 78,329 7,833 -- -- 217,361 --
Net loss -- -- -- -- -- (6,826,789)
----------- ----------- ------- ---------- ------------ ------------
Balances December 31, 1995 11,396,419 $ 1,139,642 $ 42,686,742 $(30,365,031)
=========== =========== ======= ========== ============ ============
Issuance of shares in connection
with financings 450,000 45,000 400,000 5,115,664 5,832,985
Accretion of subsidiary
preferred stock beneficial feature 1,500,000
Issuance of shares for services 45,687 4,569 109,478
Reversal of option exercise (105,000) (10,500) (357,000)
Net loss (8,605,097)
Preferred stock dividend and
accretion (1,695,384)
----------- ----------- ------- ---------- ------------ ------------
Balances December 31, 1996 (as restated,
see Note 16) 11,787,106 $ 1,178,711 400,000 $6,615,664 $ 42,272,205 $(40,665,512)
=========== =========== ======= ========== ============ ============
Issuance of shares in connection
with financings 733,333 73,333 86,200 8,620 3,447,778
Accretion of subsidiary
preferred stock beneficial feature 2,500,000
Issuance of shares for services 286,511 28,651 414,473
Issuance of shares in connection
with exchange of preferred stock 1,795,661 179,566 (83,056) (2,085,956) 1,994,980
Issuance of shares in connection
with exercise of stock options 12,000 1,200 11,160
Net loss (7,352,441)
Preferred stock dividend and
accretion (3,006,242)
----------- ----------- ------- ---------- ------------ ------------
December 31, 1997 (as restated,
see Note 16) 14,614,611 1,461,461 403,144 7,038,328 48,140,596 $(51,024,195)
=========== =========== ======= ========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss applicable to common shareholders ......... $(6,826,789) $(10,300,481) $(10,358,683)
----------- ------------ ------------
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization ...................... 1,220,873 846,354 754,053
Stock appreciation rights .......................... (183,309) 134,634 (701,517)
Gain on extinguishment of debt obligation .......... (94,717) -- --
Stock issued in lieu of cash compensation .......... 563,430 114,047 443,125
Common stock issued or reserved for
preferred dividends and accretions ................. -- 1,500,000 2,598,156
Loss on investment ................................. -- 274,325 --
Bad debt reserve ................................... -- 82,746 43,188
Changes in assets and liabilities:
Accounts receivable ................................ (150,938) (143,648) 63,960
Education equipment inventory ...................... 34,065 (225,286) 99,747
Other assets ....................................... 80,552 (542,824) (241,117)
Accounts payable and accrued expenses .............. 165,023 504,263 287,504
Preferred stock dividends payable .................. 93,333 195,384 408,085
----------- ------------ ------------
Net cash used in operating
activities ..................................... (5,098,477) (7,560,486) (6,603,499)
----------- ------------ ------------
Cash flows from investing activities:
Investment in patents pending ...................... -- -- (50,000)
Investment in property and equipment ............... (575,323) (444,189) (2,159,576)
Investment in systems .............................. -- -- (686,227)
----------- ------------ ------------
Net cash used in investing activities ................... (575,323) (444,189) (2,895,803)
Cash flows from financing activities:
Proceeds from exercise of warrants
and options ........................................ 122,810 -- 12,360
Proceeds from preferred stock issuances ............ -- 9,115,664 2,045,163
Proceeds from equity financing ..................... 8,951,859 1,877,985 1,475,000
Discounted note prepayment ......................... (101,458) -- --
Note repayment ..................................... (2,247,469) -- 100
----------- ------------ ------------
Net cash provided by financing activities ............... 6,725,742 10,993,649 3,532,623
----------- ------------ ------------
Net (decrease) increase in cash and
cash equivalents ................................... 1,051,942 2,988,974 (5,966,679)
Cash and cash equivalents,
beginning of period ................................ 2,479,840 3,531,782 6,520,756
----------- ------------ ------------
Cash and cash equivalents,
end of period ...................................... 3,531,782 6,520,756 554,077
=========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
Supplemental disclosure of cash flow information: See Note 15
<PAGE>
ACTV, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization ACTV, Inc. was incorporated July 8, 1983. ACTV, Inc. and its
subsidiaries (the "Company" or "ACTV"), has developed and markets proprietary
technologies for individualized television programming (the "Individualized
Programming") and for Internet learning systems. Individualized Programming
permits a viewer to experience instantly responsive television. Since its
inception, the Company has been engaged in the development of Individualized
Programming, the production of programs that use its Individualized Programming
and the marketing and sales of the various products and services incorporating
the Company's Individualized Programming. In 1997, the Company introduced to the
education market eSchool Online ("eSchool"), a suite of software products that
permit a teacher to use the Internet as an accompanying instructional tool
during a live or pre-recorded video lesson.
Principles of Consolidation - The Company's consolidated financial statements
include the balances of its wholly-owned operating subsidiaries. In
consolidation, all intercompany account balances are eliminated.
Property and Equipment - Property and equipment are recorded at cost and
depreciated on the straight-line method over their estimated useful lives
(generally five years). Depreciation expense for the years ended December 31,
1995, 1996 and 1997 aggregated $70,790, $189,957 and $286,883, respectively.
Education Equipment - Education equipment consists of standard personal
computers adapted to provide individualized programming functionality,
videocassette recorders, television monitors and computer printers that the
Company holds in inventory. This inventory is carried on the Company's books at
the lower of first-in, first-out cost or market.
Patents and Patents Pending - The cost of patents, which for patents issued
represents the consideration paid for the assignment of patent rights to the
Company by an employee and for patents pending represents legal costs related
directly to such patents pending, is being amortized on a straight-line basis
over the estimated economic lives of the respective patents (averaging 10
years), which is less than the statutory life of each patent. The balances at
December 31, 1996, and 1997, are net of accumulated amortization of $116,371 and
$141,072, respectively.
Software Development Costs - The Company capitalizes costs incurred for product
software where economic and technological feasibility has been established.
Capitalized software costs are amortized on a straight-line basis over the
estimated useful lives of the respective products (5 years). The balance at
December 31, 1997, is net of accumulated amortization of $16,376.
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Revenue Recognition - Sales are primarily recorded as products are shipped and
services are rendered, using the completed contract method of accounting.
Research and Development - Research and development costs, which represent
primarily refinements to Individualized Programming, were $616,455 for the year
ended December 31, 1995, $1,221,362 for the year ended December 31, 1996, and
$551,328 for the year ended December 31, 1997.
Earnings/(Loss) Per Share - The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share, for the period ended
December 31, 1997, which establishes standards for computing and presenting
earnings per share ("EPS") and simplifies the standards for computing EPS
currently found in Accounting Principles Board ("APB") Opinion No. 15 ("Earnings
Per Share"). Common stock equivalents under APB No. 15 are no longer included in
the
<PAGE>
calculation of primary, or basic, EPS. Loss per common share equals net loss
divided by the weighted average number of shares of the Company's common stock
("Common Stock") outstanding during the period. The Company did not consider the
effect of stock options or convertible preferred stock upon the calculation of
the loss per common share, as it would be anti-dilutive.
Reclassifications - Certain reclassifications have been made in the December 31,
1995, and 1996, financial statements to conform to the December 31, 1997,
presentation.
Intangibles - The excess of the purchase cost over the fair value of net assets
acquired in an acquisition (goodwill) is being amortized on a straight-line
basis over a period of 10 years. On a quarterly basis, the Company evaluates the
realizability of goodwill based upon the expected undiscounted cash flows of the
acquired business. Impairments, if any, will be recognized through a charge to
operation in the period in which the impairment is deemed to exist. Based on
such analysis, the Company does not believe that goodwill has been impaired.
Other Current Assets - The Company's consolidated balance sheets at December 31,
1996 and December 31, 1997 reflect balances of $343,962 and $224,712,
respectively, related to cash advances made to executive officers.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 130.
SFAS No. 130, Reporting Comprehensive Income establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. The Company has determined that the adoption of this
statement will have no effect on the financial statements.
Statement of Financial Accounting Standards No. 131.
The Company is required to adopt SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the year ending December 31, 1998. The
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
The Company has not yet determined what effect the adoption of this statement
will have on the financial statements.
2. NATURE OF OPERATIONS
The principal markets for the Company's products are in-home entertainment and
education within the United States. The Company plans to sell individualized
entertainment programming (initially professional and college sports
programming) to the end user through cable television systems on a subscription
basis. The Company sells eSchool and individualized distance learning
programming and related hardware to schools, colleges, and private education
networks. No single client accounted for more than 10% of the Company's revenues
during the year ended December 31, 1997, except for Georgia Public Television,
which accounted for approximately 17% and 24% of total revenues in 1996 and
1997, respectively and the Texas Workforce Commission, which accounted for 24%
of total revenues in 1997. During 1996, the Company generated no revenues from
the Texas Workforce Commission.
3. ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS
<PAGE>
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
4. PROPERTY AND EQUIPMENT - NET
Property and equipment - net at December 31, 1996, and 1997, consisted of the
following (at cost):
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Machinery and equipment $636,845 2,931,682
Office furniture and fixtures 357,373 501,435
-------- ---------
Total 994,218 3,433,117
Less accumulated depreciation 270,129 836,332
-------- ---------
Total $724,089 2,596,785
======== =========
</TABLE>
5. EXTRAORDINARY ITEM
During 1995, the Company realized an extraordinary gain of $94,117 related to
the repayment of an obligation to a former affiliate of the Company at an amount
below the value of which such obligation was carried on the books of the
Company.
6. FINANCING ACTIVITIES
In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc., (the
"Issuer") and The Texas Individualized Television Network, Inc., a wholly-owned
subsidiary of the Issuer ("Texas Network"), entered into a Note Purchase
Agreement, dated as of January 13, 1998 (the "Agreement") with certain private
investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers
purchased $5.0 million aggregate principal amount notes from the Issuer and
Texas Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal repayment in one installment on June 30, 2003.
During the term of the note, the Issuer may, at its option, pay any four
semi-annual interest payments in kind rather than in cash, with an increase in
the rate applicable to such payments in kind to 13.75% per annum. The Note is
secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc.
In connection with the purchase of such note, the Purchasers received on January
14, 1998 a common stock purchase warrant (the "Warrant") of Texas Network that
grants the Purchasers the right to purchase up to 17.5% of the fully-diluted
shares of common stock of Texas Network. The Warrant expires on June 30, 2003.
The Warrant also grants the Purchasers the right, through July 14, 1999, to
exchange the Warrant for such number of shares of the Company's Common Stock, at
the time of and giving effect to such exchange, equal to 5.5% of the fully
diluted number of shares of Common Stock outstanding, after giving effect to the
exercise or conversion of all then outstanding options, warrants and other
rights to purchase or acquire shares of Common Stock. After five years from the
date of issuance, the Purchasers have the right to put the warrants to the Texas
Network for a value based on a multiple of its operating income.
Prior to June 30, 1998, should the Company form and capitalize an entity with
the intent to commence operations for a second Regional Network in one of the
ten FOX Sports Net owned and operated regions, the Purchasers have a one time
option to purchase notes from such entity on the same terms and conditions as
the Texas Network financing.
During the first three months of 1998, the Company has raised a total of $1.4
million from a series of private placements of its Common Stock.
<PAGE>
During 1997, the Company raised approximately $3.5 million from the proceeds of
a series of private placements of Common Stock (approximately $1.5 million in
net proceeds) and Series A Convertible Preferred Stock (approximately $2.0
million in net proceeds).
During 1996, the Company raised approximately $11.0 million net from the
proceeds of a private placement of common stock ($1.9 million in net proceeds)
and of 5% convertible preferred stock (the "Convertible Preferred Stock") issued
by its wholly-owned subsidiary and convertible into shares of the Company ($9.1
million in net proceeds). The Convertible Preferred Stock is convertible into
Common Stock of ACTV, Inc., beginning January 1, 1997, at varying discounts to
the market price of Common Stock. After September 1, 1997, holders of the
Convertible Preferred Stock have been able to use the lesser of (i) the then
current market price of the Company's Common Stock, or (ii) an average market
price during the month of August 1997 as the price to which the discount is
applied for conversions. In addition, the Company has the right to redeem the
Convertible Preferred Stock at a price equal to $25 times the number of shares
being purchased, plus accrued and unpaid dividends (the "Redemption Price").
This right may be exercised by the Company only if the closing price of the
Company's Common Stock is above $9.00 for thirty consecutive trading days prior
to redemption. The Company believes that it is highly likely that the holders of
the Convertible Preferred Stock will elect to convert their stock into Common
Stock of the Company and, accordingly, has included the Convertible Preferred
Stock in its consolidated statement of shareholders' equity.
The Convertible Preferred Stock is convertible into shares of common stock at a
discounted conversion price. The discount ranged from 14% to a maximum of
30.375%. The extent of the beneficial conversion feature was approximately $4.0
million, representing the maximum difference between the discounted conversion
price and the prevailing market price of the Common Stock. Preferred stock
accretions of $1.5 million and $2.5 million, respectively, were recorded for the
years ended December 31, 1996 and 1997.
Management of the Company believes that its current funds (taking into account
the approximately $6.4 million raised during the first three months of 1998)
will enable the Company to finance its entertainment and corporate operations at
their present level for at least the next twelve months. Such belief is based on
assumptions that could prove to be incorrect, in which case the Company may
require additional capital to finance such operations during this period. In
addition, if the Company is not successful at raising additional funds, it may
be required to significantly reduce its education operations. While the Company
believes that it has adequate funds to launch and operate its planned Southwest
Regional Network, it will need additional funding for Regional Network
expansion. While the Company has engaged an investment bank for assistance in
securing such financing, the Company has no commitments from lenders or
investors at this time and there is no assurance that it will be able to raise
the necessary capital to effect additional Regional Network launches or to
maintain its education operations at current levels.
7. SHAREHOLDERS' EQUITY
At December 31, 1997, the Company had reserved shares of Common Stock for
issuance as follows:
<TABLE>
<CAPTION>
<S> <C>
1989 Qualified Stock Option Plan 49,567
1989 Non-Qualified Stock Option Plan 47,250
1996 Qualified Stock Option Plan 380,000
Options granted outside of formal plans 3,062,401
---------
Total 3,539,218
=========
</TABLE>
Convertible Preferred Stock At December 31, 1997, the Company was authorized to
issue 1,000,000 shares of blank check Preferred Stock, par value $0.10 per
share, of which 120,00 shares have been designated Series A Convertible
Preferred Stock. At December 31, 1997, 86,200 shares of Series A Convertible
Preferred Stock were issued and outstanding. Dividends, which are payable in
cash or in kind, are payable semi-annually at a rate of 7% per annum.
<PAGE>
Exchangeable Preferred Stock At December 31, 1997, the Company's wholly-owned
subsidiary, ACTV Holdings, Inc. was authorized to issue 436,000 shares of
Convertible Preferred Stock, no par value, of which 316,944 shares were issued
and outstanding. Dividends, which are payable in cash or in kind, compound
quarterly and are payable semi-annually at a rate of 5% per annum.
8. STOCK OPTIONS
During 1989, the Board of Directors approved an Employee Incentive Stock Option
Plan (the "Employee Plan"). The Employee Plan provides for the granting of up to
100,000 options to purchase Common Stock to key employees. The Employee Plan
stipulates that the option price be not less than fair market value on the date
of grant. Options granted will have an expiration date not to exceed ten years
from the date of grant. At December 31, 1997, 97,500 options had been granted
under this plan, of which 19,000 had been exercised and 28,933 had expired or
been canceled.
In addition, in August 1989, the Board of Directors approved a Non-Qualified
Stock Option Plan (the "Non-Qualified Plan"), to be administered by the Board or
a committee appointed by the Board. The Non-Qualified Plan provides for the
granting of up to 100,000 options to purchase shares of Common Stock to
employees, officers, directors, consultants and independent contractors. The
Non-Qualified Plan stipulates that the option price be not less than fair market
value at the date of grant, or such other price as the Board may determine.
Options granted under this Plan shall expire on a date determined by the
committee but in no event later than three months after the termination of
employment or retainer. At December 31, 1997, 97,000 options had been granted
under this plan, of which 22,250 had been exercised and 27,500 had expired or
been canceled.
During 1996, the Board of Directors approved the Company's 1996 Stock Option
Plan (the "1996 Option Plan"). The 1996 Option Plan provides for option grants
to employees and others who provide significant services to the Company. Under
the 1996 Option Plan, the Company is authorized to issue options for a total of
500,000 shares of Common Stock. As of December 31, 1997, the Company had issued
430,000 options under the plan, of which none had been exercised and 50,000 had
been canceled.
At December 31, 1997, the Company also had outstanding options that were issued
to Directors, certain employees and consultants for the purchase of 3,062,401
shares of Common Stock that were not issued pursuant to a formal plan. The
prices of these options range from $1.50 to $5.50 per share; they have
expiration dates in the years 1998 through 2003. The options granted are not
part of the Employee Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan discussed above.
A summary of the status of the Company's stock options as of December 31, 1997,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Wgtd. Wgtd. Wgtd.
Avg. Avg. Avg.
1997 Exer 1996 Exer 1995 Exer
Shares Price Shares Price Shares Price
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 3,328,718 2,747,082
Options granted 339,683 $1.91 887,500 $3.73 1,706,087 $3.41
Options exercised 17,000 $0.73 -- -- 141,833 $2.33
Options terminated 112,183 $4.06 305,864 $3.76 422,276 $5.27
Outstanding at end
of period 3,539,218 $1.81 3,328,718 $2.99 2,747,082 $3.27
Options exercisable
at end of period 2,363,134 $1.87 1,719,134 $3.19 1,091,083 $3.04
</TABLE>
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Number Average Weighted Weighted
Outstanding Remaining Average Number Average
Range of at Contractual Exercise Exercisable at Exercise
Exercise Prices 12/31/97 Life Price 12/31/97 Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0 to 1.50 2,822,718 5.0 Years $1.50 1,757,053 $1.50
1.51 to 3.50 474,000 1.7 Years $2.52 446,915 $2.52
3.51 to 5.50 242,500 1.7 Years $4.05 159,166 $4.18
</TABLE>
The weighted average fair value of options granted during 1996 and 1997 was
$1.21 and $.64 per share, respectively, excluding the value of options granted
and terminated within the year. In the case of each issuance, options were
issued at an exercise price that was higher than the fair market value of the
Company's Common Stock on the date of grant. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock option and purchase plans. Accordingly, no compensation cost has been
recognized for option issuances. Had compensation cost for the Company's option
issuances been determined based on the fair value at the grant dates consistent
with the method of FASB Statement 123, the Company's net loss and loss per share
for the years ended December 31, 1995, 1996 and 1997 would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Loss to common shareholders 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
As reported $6,826,789 $10,300,481 $10,358,683
Pro forma $9,506,556 $11,185,735 $10,574,807
Net loss per common share 1995 1996 1997
---- ---- ----
As reported $0.67 $0.88 $0.80
Pro forma $0.94 $0.95 $0.82
</TABLE>
The Company estimated the fair value of options issued during 1995, 1996 and
1997 on the date of each grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used: no dividend yield, expected
volatility for 1995 and 1996 of 61.5%, expected volatility for 1997 of 57.3%,
and a risk free interest rate of 6% for all years.
Certain employees, including the executive officers Samuels, Reese, Crowley and
Cline, have been granted options to purchase Class B Common Stock, at fair value
as of the date of grant, of certain of the Company's subsidiaries; such common
stock, if issued, will have majority voting rights in such subsidiaries.
9. STOCK APPRECIATION RIGHTS PLANS
The Company's 1992 Stock Appreciation Rights Plan (the "1992 SAR Plan") was
approved by the Company's stockholders in December 1992. Subject to adjustment
as set forth in the 1992 SAR Plan, the aggregate number of Stock Appreciation
Rights ("SARs") that may be granted shall not exceed 900,000.
The Company's 1996 Stock Appreciation Rights Plan (the "1996 SAR Plan") was
adopted by the Board of Directors in April 1996 and approved by the shareholders
in July 1996. Subject to adjustment as set forth in the 1996 SAR Plan, the
aggregate number of SARs that may be granted pursuant to the 1996 SAR Plan shall
not exceed 500,000; provided, however, that at no time shall there be more than
an aggregate of 900,000 outstanding, unexercised SARs granted pursuant to both
the 1996 SAR Plan and the 1992 SAR Plan. The 1996 SAR Plan imposes no limit on
the number of recipients to whom awards may be made.
<PAGE>
Both the 1992 and 1996 SAR Plans are administered by the Stock Appreciation
Rights Committee (the "SAR Committee").
SARs may not be exercised until the six months from the date of grant. SARs
issued pursuant to the 1992 SAR Plan vest in five equal annual installments
beginning twelve months from the date of grant. SARs issued pursuant to the 1996
SAR Plan vest either in a lump sum or in such installments, which need not be
equal, as the Committee shall determine. If a holder of a SAR ceases to be an
employee, director or consultant of the Company or one of its subsidiaries or an
affiliate, other than by reason of the holder's death or disability, any SARs
that have not vested shall become void. Exercise of SARs also will be subject to
such further restrictions (including limits on the time of exercise) as may be
required to satisfy the requirements of Rule 16b-3 promulgated by the Securities
and Exchange Commission and any other applicable law or regulation (including,
without limitation, federal and state securities laws and regulations). SARs are
not transferable except by will or under the laws of descent and distribution or
pursuant to a domestic relations order as defined in the Internal Revenue Code
of 1986, as amended.
Upon exercise of a SAR, the holder will receive for each share for which a SAR
is exercised, as determined by the SAR Committee in its discretion, (a) shares
of the Company's Common Stock, (b) cash, or (c) cash and shares of the Company's
Common Stock, equal to the difference between (i) the fair market value per
share of the Common Stock on the date of exercise of the SAR and (ii) the value
of a SAR, which amount shall be no less than the fair market value per share of
Common Stock on the date of grant of the SAR.
Under the Company's 1992 SAR Plan, as of December 31, 1997, the Company has
granted 516,000 outstanding SARs (with an exercise price of $1.50 per share) to
ten employees. The SARs expire between 2001 and 2006. Under the Company's 1996
SAR Plan, as of December 31, 1997, the Company has granted 380,000 outstanding
SARs (with an exercise price of $1.50 per share) to six employees. The SARs
expire between 2002 and 2006. During 1997, a total of 203,000 SARs were
exercised under both plans.
10. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes".
Deferred income taxes reflect the net tax effects at an effective tax rate of
35.33% of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The tax effects
of significant items comprising the Company's net deferred tax asset as of
December 31, 1996, and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 13,365,772 $ 16,131,213
Differences between book and tax basis of property 34,019 56,148
------------ ------------
13,399,791 16,187,361
Deferred tax liabilities:
Differences between book and tax basis of property (106,819) (181,104)
------------ ------------
13,292,972 16,000,257
Valuation Allowance (13,292,972) (16,000,257)
------------ ------------
Net deferred tax asset $ 0 $ 0
============ ============
</TABLE>
The increase in the valuation allowance for the year ended December 31, 1996 and
1997, was approximately $3.3 million and $2.7 million respectively. There was no
provision or benefit for federal income taxes as a result of the net operating
loss in the current year.
<PAGE>
At December 31, 1997, the Company has Federal net operating loss carryovers of
approximately $45.7 million. These carryovers may be subject to certain
limitations and will expire between the years 1998 and 2012.
11. COMMITMENTS
At December 31, 1997, future aggregate minimum lease commitments under
non-cancelable operating leases, which expire in 1999 and 2001, were
approximately $980,000. The leases contain customary escalation clauses, based
principally on real estate taxes. Rent expense related to these leases for the
years ended December 31, 1995, 1996 and 1997 aggregated $176,264, $129,600, and
$330,430 respectively. The Company has employment agreements with certain key
employees. These agreements extend for a period of a maximum of five years and
contain non-competition provisions which extend two years after termination of
employment with the Company. At December 31, 1997, the Company is committed to
expend a total of approximately $2.7 million under these agreements.
12. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and receivables.
The Company attempts to mitigate cash investment risks by placing such
investments in insured depository accounts and with financial institutions that
have high credit ratings. Concentrations of risk with respect to trade
receivables exist because of the relatively few companies or other organizations
(primarily educational or government bodies) with which the Company currently
does business. The Company attempts to limit these risks by closely monitoring
the credit of those to whom it is contemplating providing its products, and
continuing such credit monitoring activities and other collection activities
throughout the payment period. In certain instances, the Company further
minimizes concentrations of credit risks by requiring partial advance payments
for the products provided.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments, including cash and cash equivalents, accounts
receivable and payable, and accruals, the carrying amounts approximated fair
value because of their short maturity.
14. INVESTMENT AND ADJUSTMENTS
In January 1995, the Company invested $274,325 in the common stock
(approximately 15% of ownership interest) of a company (the "Licensee"), which
had licensed the Company's Individualized Programming for commercialization in
special-purpose theaters.
The Company also performed executive production services for the Licensee on a
fee basis. During 1996, the Company recorded license fee and production service
revenue from the Licensee of $16,789 and $199,666, respectively. At December 31,
1996, the Company had unpaid receivables pursuant to such revenues of $82,746.
During 1997, the Licensee filed for liquidation under United States Bankruptcy
laws. In anticipation of such filing, at December 31, 1996 the Company provided
a reserve for the full amount of the receivables outstanding of $82,746 and a
valuation allowance for its full investment in the Licensee of $274,325.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the year ended December 31, 1995, the Company made non-recourse loans to
certain employees to purchase the Company's common stock by exercising options.
The consolidated balance sheet at December 31, 1996, reflects non-cash activity
during the year ended December 31, 1996, that relates to a reversal of certain
of these option exercises and resulting non-recourse loan transactions: a
decrease in notes receivable from stock sales and a decrease in common stock and
additional paid-in capital of $367,500.
The Company made no cash payments of interest or income taxes during the years
ended December 31, 1996 and 1997.
16. RESTATMENT
<PAGE>
Subsequent to the issuance of the 1996 and 1997 financial statements, management
determined that the Company's consolidated financial statements for the years
ended December 31, 1996 and 1997, should be restated to conform with the
Financial Accounting Standards Board's Emerging Issues Task Force - Topic D60
["Accounting for the Issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature"] issued March 13, 1997, which formally
announced the SEC staff's position that any discounts resulting from an
allocation of proceeds to the beneficial conversion feature is analogous to a
dividend and should be recognized as a return to the preferred shareholders over
the minimum conversion period. As a result of this restatement, loss applicable
to common shareholders increased by $1,500,000 ($.13 per share) and $2,500,000
($.19 per share), respectively, for the years ended December 31, 1996 and 1997.
Revenues, expenses, net loss, total assets and total shareholders' equity are
not affected by this restatement.
<PAGE>
FINANCIAL STATEMENT SCHEDULE
The Company had no activity reportable on this schedule for the year ended
December 31, 1995.
Schedule II - Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Column B Column C Column D Column E
---------- ---------------------- ---------- ----------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions End
Description of Period Expenses Accounts -Describe of Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended 12/31/96:
Accounts receivable
allowance for doubtful
accounts .............. $ 82,746 $ 82,746
Reserve for investment
losses ................ $274,325 $274,325
Year ended 12/31/97:
Accounts receivable
allowance for doubtful
accounts .............. $ 82,746 $ 43,188 $ 82,746 $ 43,188
Reserve for investment
losses ................ $274,325 $274,325 --
</TABLE>
During 1997, the balances of $82,746 for accounts receivable allowance and
$274,325 for investment loss reserve were written off as uncorrectable and
unrecoverable, respectively.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
To the extent that the information presented in this Form 10-K discusses
financial projections, information or expectations about the Company's products
or markets, or otherwise makes statements about future events, such statements
are forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. These
include, among others, the successful and timely development and acceptance of
new products and markets and the availability of sufficient funding to effect
such product and/or market development.
ACTV, Inc. ("the Company") has developed proprietary technologies for
individualized television programming ("Individualized Programming") and for
Internet learning systems ("eSchool"). The Company's products, in general, are
tools for the creation of programming that allows viewer participation for both
television and Internet platforms. The chief market presently targeted by the
Company for its Individualized Programming is in-home entertainment,
particularly sports programming, while for the Internet the market focus is
education, with an emphasis on schools and universities in the United States.
For entertainment applications, the Company's Individualized Programming
gives the viewer the ability to make instant and seamless changes within the
live or pre-recorded television programming being viewed. Individualized
Programming is a multi-path broadcast of several elements of programming
material, such as instant replay, isolation cameras, statistical data, or
additional features. There is no limit to the number of viewers who can interact
simultaneously with a program enhanced with the Company's Individualized
Programming ("ACTV Program" or "ACTV Programming").
For education applications, the Company has developed eSchool Online(TM)
("eSchool"), a Java-based software suite that permits a teacher to use the
Internet as an accompanying instructional tool during a lesson. (Java is a
programming language developed for the Internet by Sun Microsystems.) eSchool
integrates Web content and a chat application with educational video effectively
to create a "virtual" classroom. In addition, the Company markets analog and
digital systems for televised distance learning applications that permit
point-to-multi-point telecasts that can deliver pre-recorded individualized
lessons as well as integrate individualized lessons into live distance learning
class sessions.
Since its inception, the Company has incurred operating losses
approximating $47 million related directly to the development and marketing of
the Individualized Programming and eSchool.
The Company is seeking to exploit the entertainment market, principally in
the U.S., through the launch of regionally based entertainment networks
("Regional Networks") Programming for the Regional Networks is provided through
the Company's strategic alliance with FOX Sports Net. The Company has the rights
to license FOX Sports Net programming from each of FOX Sports Net's regional
sports affiliates and to offer enhanced FOX Sports Net programming to any
distributor that carries the corresponding regional FOX Sports Net channel. The
FOX Sports Net agreement extends through June 2003.
<PAGE>
FOX Sports Net is a service of "National Sports Partners," a joint venture
between Cablevision's Rainbow Media Holdings, Inc. and FOX/Liberty Networks,
which is a 50/50 partnership between News Corp. and Tele-Communications Inc.'s
Liberty Media Corporation. Equally owned by FOX/Liberty Networks and
Cablevision's Rainbow Media Holdings, Inc., the new venture now reaches more
than 58 million homes nationwide.
The Company's business plan is to develop Regional Networks in regions
served by Fox Sports Net, with distribution to be provided by cable operators
that are currently upgrading their service from analog to digital transmission.
Initially, the Regional Networks will feature sports programming, with the
possible introduction of other types of programming in the future. The Company
believes that the differentiation afforded by the Company's Individualized
Programming will allow distributors to offer their customers Individualized
Programming on a subscription basis.
The Company plans to launch its first Regional Network in 1998 in the
regions served by FOX Sports Southwest (the "Southwest Regional Network"). FOX
Sports Southwest distributes programming to 5.1 million households in Texas,
Louisiana, Arkansas, Oklahoma and nine New Mexico counties. The Southwest
Regional Network will feature individualized telecasts of professional
basketball (Houston Rockets, Dallas Mavericks, San Antonio Spurs), hockey
(Dallas Stars), and baseball (Texas Rangers, Houston Astros), along with college
sports events from the Southeastern, Southland and Western Athletic conferences.
The Company has entered into an agreement with Tele-Communications Inc.
("TCI") under which TCI will distribute and market the Southwest Regional
Network to its digital subscribers in Texas. The agreement also contemplates
potential nationwide distribution by TCI of the Company's regional sports
networks.
The Company also plans to launch additional individualized networks in
regions served by FOX Sports Net. The planned Regional Networks will feature FOX
Sports Net regional programming enhanced by the Company's Individualized
Programming. The Company will be responsible for the incremental content,
transmission, delivery and master control costs incurred in connection with the
product enhancement of the Individualized Programming to be presented through
its Regional Networks.
In August 1997, General Instrument Corp. ("GI") invested $1 million in
common stock of ACTV, Inc. (the "Common Stock") and agreed to market, jointly
with the Company, Individualized Programming applications. GI is the leading
supplier of digital television headend systems and digital set-top terminals.
The Company and GI had previously announced that the Company's Individualized
Programming would be incorporated into GI's new MPEG-2 digital set-top cable and
wireless terminals.
It is the Company's belief that it has adequate funding to launch the
Southwest Regional Network in 1998. However, there is no assurance that it will
secure the funding necessary to effect additional launches in other regions, or
that other factors might not delay or prohibit the successful implementation of
the Company's Regional Network strategy.
The projected Southwest Regional Network and additional network expansion
are part of the Company's plan to develop the entertainment division of its
business, which to date, does not generate any revenue for the Company. There
can be no assurance that the Southwest Regional
<PAGE>
Network or other Regional Networks, if launched, will generate significant
revenues for the Company.
The target market for the Company's education products includes schools,
state and local agencies, universities and private business. eSchool consists of
a suite of integrated software products, including content creation software,
student and teacher user software, and database assessment software. In
addition, the Company provides Internet content development assistance, hosting
of eSchool programs on its computer servers, and consulting to schools and
universities.
To date, nearly all of the Company's revenues have been derived from sales
to the education market of eSchool and individualized educational programs and
products. There is no assurance that the Company will be able to successfully
compete in this market, where many of its current and potential competitors are
companies with significantly greater resources than those of the Company.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1996 and December 31, 1997
During the year ended December 31, 1997 ("Fiscal 1997"), the Company's
revenues increased 12%, to $1,650,955, from $1,476,329 for the year ended
December 31, 1996 ("Fiscal 1996"). All revenues during Fiscal 1997 were derived
from the education market, while in Fiscal 1996, the Company's revenues derived
from education sales as well as from license and executive producer fees. The
revenue increase in the more recent period was the result of the inclusion of
sales from eSchool, which was introduced during Fiscal 1997, and higher sales of
distance learning products and services when compared to Fiscal 1996.
Cost of sales decreased 27% in Fiscal 1997, to $471,956 , from $647,488 in
Fiscal 1996, and cost of sales as a percentage of sales revenue decreased to 29%
in the more recent year, from 44% in 1996. The relatively lower cost of sales in
Fiscal 1997 was due to a greater proportion of educational programming revenues
and the inclusion of eSchool sales in 1997. Both eSchool and educational
programming have higher gross margins than the Company's other sources of
revenue.
Total expenses excluding cost of sales and interest expense in Fiscal 1997
decreased 10%, to $8,648,310, from $9,592,670 in the comparable period in 1996.
The decrease was partially attributable to lower operating expenses and
depreciation and amortization expense in the more recent period, which more than
offset an increase in selling and administrative expense. Also, the Company
recorded a gain of $346,892 in Fiscal 1997, compared to an expense of $183,634
related to stock appreciation rights. The difference was the result of a lower
market price for the Company's Common Stock at the end of Fiscal 1997, when
compared to the end of Fiscal 1996. Finally, during Fiscal 1996 the Company
incurred a valuation allowance of $274,325 related to an investment in an
affiliated company and, as a component of Fiscal 1996 selling and administrative
expense, reserved $82,746 against license fee and production service receivables
from this affiliate. During Fiscal 1997, the Company incurred no valuation
allowance.
In Fiscal 1997, direct expenses related to the entertainment and education
markets were approximately $2.7 million and $2.9 million, respectively.
<PAGE>
Depreciation and amortization expense for Fiscal 1997 decreased 11%, to
$754,053, from $846,351 for Fiscal 1996. This decrease was due primarily to the
recognition during Fiscal 1996 of amortization expense for programming assets
that were fully amortized during that year.
The Company's had no interest expense for either Fiscal 1997 or Fiscal
1996. Interest income for Fiscal 1997 decreased 26%, to $116,870, compared with
$158,732 in Fiscal 1996. The decrease resulted from lower available average cash
balances in the more recent year.
For the Fiscal 1997 and 1996, the Company recorded $3,006,242 and
$1,695,384, respectively, for dividends or accretions on convertible preferred
stock issuances. All dividend payments were made in the Company's Common Stock.
The increase during Fiscal 1997 is the result of the Company's having preferred
stock outstanding for less than half of the year during Fiscal 1996.
For Fiscal 1997, the Company's loss applicable to common shareholders was
$10,358,683, or $.80 per share, an increase of less than 1% over the loss of
$10,300,481 or $.88 per share, incurred in Fiscal 1996. The increase in net loss
was due principally to higher dividends and accretion, in Fiscal 1997, which
more than offset the positive effects of higher gross margins, lower operating
expenses, lower depreciation, amortization, and stock appreciation rights
expenses during the more recent year.
Comparison of the Years Ended December 31, 1995 and December 31, 1996
During the year ended December 31, 1996 ("Fiscal 1996"), the Company's
revenues increased 13%, to $1,476,329, from $1,311,860 for the year ended
December 31, 1995 ("Fiscal 1995"). The increase was the result of significantly
higher education revenues from distance learning and the recognition of
production revenues in the more recent period (compared to no production
revenues in 1995), which more than offset a small decline in non-distance
learning education sales.
Cost of sales increased 94% in Fiscal 1996, to $647,488 , from $334,136 in
Fiscal 1995, and cost of sales as a percentage of sales revenue increased to 44%
in the more recent year, from 25% in 1995. The relatively higher cost of sales
in Fiscal 1996 was due to a greater proportion of total revenues generated from
lower margin equipment products and production services, as compared to Fiscal
1995's sales mix.
Total expenses excluding cost of sales and interest expense in Fiscal 1996
increased 21%, to $9,592,670, from $7,938,748 in the comparable period in 1995.
The increase was attributable to higher operating expenses (principally
resulting from the Company's regional individualized network trial in Southern
California), greater research and development expenditures, higher selling and
administrative expenses, and a valuation allowance of $274,325 for the full
amount of the Company's investment in The Greenwich Group. As a component of
Fiscal 1996 selling and administrative expenses the Company also reserved
$82,746 against license fee and production service receivables from The
Greenwich Group. The Greenwich Group has experienced difficulty in raising
sufficient capital to fund its operations and growth and has been unable to pay
the Company for its services and license.
In Fiscal 1996, direct expenses related to the entertainment and education
markets were approximately $2.5 million and $2.6 million, respectively.
<PAGE>
Depreciation and amortization expense for Fiscal 1996, decreased 24%, to
$846,351, from $1,113,278 for Fiscal 1995. This decrease was due primarily to
the relatively higher depreciation expense incurred in Fiscal 1995 that related
to set-top converters purchased for the California trial.
The Company's interest expense for Fiscal 1996, decreased to zero,
compared to $98,392 in the prior year. The decrease was due to the repayment of
in full of the Company's debt obligations during 1995. Interest income for
Fiscal 1996 increased 15%, to $158,732, compared with $138,510 in Fiscal 1995.
The increase resulted from higher available average cash balances in the more
recent year.
For the year ended December 31, 1996, the Company recorded $1,695,384 for
dividends or accretions to holders of convertible preferred stock issued in
August 1996 by one of its wholly-owned subsidiaries.
For Fiscal 1996, the Company's loss applicable to common shareholders was
$10,300,481 or $.88 per share, an increase of 51% over the loss of $6,826,789 or
$.67 per share, incurred in Fiscal 1995. Included in the Fiscal 1995 net loss is
an extraordinary gain of $94,117, or $.01 per share as the result of the
extinguishment of certain obligations for value that was less than the amounts
recorded on the Company's books for such obligations. The increase in loss
applicable to common shareholders was due to higher dividends and accretions,
increased operating, selling and administrative expenses and lower operating
margins during the more recent year, as noted above.
Liquidity and Capital Resources
Since its inception, the Company (including its operating subsidiaries)
has not generated revenues sufficient to fund its operations, and has incurred
operating losses. Through December 31, 1997, the Company had an accumulated
deficit of approximately $51 million. The Company's cash position on December
31, 1997, was $554,077, compared to $6,520,756 on December 31, 1996.
During the year ended December 31, 1997, the Company used $6,603,499 in
cash for its operations, compared with $7,560,486 for the year ended December
31, 1996. The decrease in the more recent year was due to lower operating
expenses and higher gross margins, which more than offset higher selling and
administrative expenses. The Company met its cash needs in the year ended
December 31, 1997 from a series of private placements of Common Stock
(approximately $1.5 million in net proceeds, including the $1 million placement
with GI) and Series A Convertible Preferred Stock (approximately $2.0 million in
net proceeds). The Company met its cash needs in the year ended December 31,
1996 from the proceeds of a private placement of Common Stock ($1.9 million in
net proceeds) and of convertible preferred stock issued by its wholly-owned
subsidiary and convertible into shares of the Company ($9.1 million in net
proceeds).
With respect to investing activities in the year ended December 31, 1997,
the Company used cash of $2,895,803, related principally to the purchase of
equipment for a television master control facility in Dallas, Texas and for the
systems development related to the incorporation of Individualized Programming
into the GI cable set-top terminal and to eSchool. During the year ended
December 31, 1996, the Company used cash of $444,189 related to the purchase of
television production equipment and office improvements.
All of the Company's operating subsidiaries have been dependent on
advances from the Company to meet their obligations. The Company's subsidiary,
The Texas Individualized Television
<PAGE>
Network, Inc., raised funds directly for its operations in January 1998 and
expects to fund its operations for the foreseeable future from the proceeds of
this financing (see description below). During the year ended December 31, 1997,
the Company advanced approximately $2.6 million to ACTV Net, $3 million to The
Texas Individualized Television Network, Inc., and $2 million to ACTV
Entertainment, Inc. and its other subsidiaries.
Advances are based upon budgeted expenses and revenues for each respective
subsidiary. Adjustments are made during the course of the year based upon the
subsidiary's performance versus the projections made in the budget.
As compared to the Company's balance sheet as of December 31, 1996, the
Company's balance sheet as of December 31, 1997, reflects an increase of
$408,085 in preferred dividends payable, resulting from the issuance of
additional convertible preferred stock during 1997 and the payment of dividends
in kind rather than in cash.
In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc.,
(the "Issuer") and The Texas Individualized Television Network, Inc., a
wholly-owned subsidiary of the Issuer ("Texas Network"), entered into a Note
Purchase Agreement, dated as of January 13, 1998 (the "Agreement") with certain
private investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers
purchased $5.0 million aggregate principal amount notes from the Issuer and
Texas Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal repayment in one installment on June 30, 2003.
During the term of the note, the Issuer may, at its option, pay any four
semi-annual interest payments in kind rather than in cash, with an increase in
the rate applicable to such payments in kind to 13.75% per annum. The Note is
secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc.
In connection with the purchase of such note, the Purchasers received on
January 14, 1998 a common stock purchase warrant (the "Warrant") of Texas
Network that grants the Purchasers the right to purchase up to 17.5% of the
fully-diluted shares of common stock of Texas Network. The Warrant expires on
June 30, 2003. The Warrant also grants the Purchasers the right, through July
14, 1999, to exchange the Warrant for such number of shares of the Company's
Common Stock, at the time of and giving effect to such exchange, equal to 5.5%
of the fully diluted number of shares of Common Stock outstanding, after giving
effect to the exercise or conversion of all then outstanding options, warrants
and other rights to purchase or acquire shares of Common Stock. After five years
from the date of issuance, the Purchasers have the right to put the warrants to
the Texas Network for a value based on a multiple of its operating income.
Prior to June 30, 1998, should the Company form and capitalize an entity
with the intent to commence operations for a second Regional Network in one of
the ten FOX Sports Net owned and operated regions, the Purchasers have a one
time option to purchase notes from such entity on the same terms and conditions
as the Texas Network financing.
During the first three months of 1998, the Company has raised a total of
$1.4 million from a series of private placements of its Common Stock.
In January 1998, the Company entered into an agreement with certain
holders of 5% Cumulative Convertible Preferred Stock ("Preferred Shares") of
ACTV Holdings, Inc., a wholly owned subsidiary of ACTV, Inc. The agreement
provides that the Company, at its sole discretion, may purchase from certain
holders of the Preferred Shares up to an aggregate of 150,000 Preferred
<PAGE>
Shares based on a predetermined schedule through June 30, 1998. If the Company
chooses to purchase the Preferred Shares, the Company may, at its sole
discretion, pay in cash or a combination of cash, the Company's Common Stock,
and warrants to purchase the Common Stock.
Management of the Company believes that its current funds (taking into
account the approximately $6.4 million raised during the first three months of
1998) will enable the Company to finance its entertainment and corporate
operations at their present level for at least the next twelve months. Such
belief is based on assumptions that could prove to be incorrect, in which case
the Company may require additional capital to finance such operations during
this period. In addition, if the Company is not successful at raising additional
funds, it may be required to significantly reduce its education operations.
While the Company believes that it has adequate funds to launch and operate its
planned Southwest Regional Network, it will need additional funding for Regional
Network expansion. While the Company has engaged an investment bank for
assistance in securing such financing, the Company has no commitments from
lenders or investors at this time and there is no assurance that it will be able
to raise the necessary capital to effect additional Regional Network launches or
to maintain its education operations at current levels. Such belief is based on
assumptions that could prove to be incorrect, in which case the Company may
require additional financing during this period.
The Company does not have any material contractual commitments for capital
expenditures, although the Company believes that the Southwest Regional Network
may need to acquire approximately $750,000 in equipment for a second master
control facility.
Impact of Inflation
Inflation has not had any significant effect on the Company's operating
costs.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130.
SFAS No. 130, Reporting Comprehensive Income establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. The Company has determined that the adoption
of this statement will have no effect on the financial statements.
Statement of Financial Accounting Standards No. 131.
The Company is required to adopt SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the year ending December 31, 1998. The
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No.
<PAGE>
94, Consolidation of All Majority-Owned Subsidiaries, to remove the special
disclosure requirements for previously unconsolidated subsidiaries. The Company
has not yet determined what effect the adoption of this statement will have on
the financial statements.
<PAGE>
Appendix B.
ACTV, INC.
1998 STOCK OPTION PLAN
As adopted April 28, 1998
<PAGE>
1. PURPOSE OF PLAN; ADMINISTRATION
1.1 Purpose.
The ACTV, Inc. 1998 Stock Option Plan (hereinafter, the "Plan") is
hereby established to grant to officers and other employees of ACTV, Inc.
("ACTV") or of its parents or subsidiaries (as defined in Sections 424(e) and
(f), respectively, of the Internal Revenue Code of 1986, as amended (the
"Code")), if any (individually and collectively, the Company"), and to
non-employee consultants and advisors and other persons who may perform
significant services for or on behalf of the Company, a favorable opportunity to
acquire common stock, $.10 par value ("Common Stock"), of ACTV and, thereby, to
create an incentive for such persons to remain in the employ of or provide
services to the Company and to contribute to its success.
The Company may grant under the Plan both incentive stock options within
the meaning of Section 422 of the Code ("Incentive Stock Options") and stock
options that do not qualify for treatment as Incentive Stock Options
("Nonstatutory Options"). Unless expressly provided to the contrary herein, all
references herein to "options," shall include both incentive Stock Options and
Nonstatutory Options.
1.2 Administration.
The Plan shall be administered by the Board of Directors of ACTV (the
"Board"), if each member is a "disinterested person" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"), or a
committee (the "Committee") of two or more directors, each of whom is a
disinterested person. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be filled
by the Board.
A majority of the members of the Committee shall constitute a quorum for
the purposes of the Plan. Provided a quorum is present, the Committee may take
action by affirmative vote or consent of a majority of its members present at a
meeting. Meetings may be held telephonically as long as all members are able to
hear one another, and a member of the Committee shall be deemed to be present
for this purpose if he or she is in simultaneous communication by telephone with
the other members who are able to hear one another. In lieu of action at a
meeting, the Committee may act by written consent of a majority of its members.
Subject to the express provisions of the Plan, the Committee shall have
the authority to construe and interpret the Plan and all Stock Option Agreements
(as defined in Section 3.4) entered into pursuant hereto and to define the terms
used therein, to prescribe, adopt, amend and rescind rules and regulations
relating to the administration of the Plan and to make all other determinations
necessary or advisable for the administration of the Plan; provided, however,
that
2
<PAGE>
the Committee may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper; and, provided, further, in its
absolute discretion, the Board may at any time and from time to time exercise
any and all rights and duties of the Committee under the Plan. Subject to the
express limitations of the Plan, the Committee shall designate the individuals
from among the class of persons eligible to participate as provided in Section
1.3 who shall receive options, whether an optionee will receive Incentive Stock
Options or Nonstatutory Options, or both, and the amount, price, restrictions
and all other terms and provisions of such options (which need not be
identical).
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and the
Company's officers and directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No members of the Committee or Board
shall be personally liable for any action, determination or interpretation made
in good faith with respect to the Plan, and all members of the Committee shall
be fully protected by the Company in respect of any such action, determination
or interpretation.
1.3 Participation.
Officers and other employees of the Company shall be eligible for
selection to participate in the Plan upon approval by the Committee; provided,
however, that only "employees" (within the meaning of Section 3401(c) of the
Code) of the Company shall be eligible for the grant of Incentive Stock Options.
An individual who has been granted an option may, if otherwise eligible, be
granted additional options if the Committee shall so determine. No person is
eligible to participate in the Plan by matter of right; only those eligible
persons who are selected by the Committee in its discretion shall participate in
the Plan.
1.4 Stock Subject to the Plan.
Subject to adjustment as provided in Section 3.5, the stock to be
offered under the Plan shall be shares of authorized but unissued Common Stock,
including any shares repurchased under the terms of the Plan or any Stock Option
Agreement entered into pursuant hereto. The cumulative aggregate number of
shares of Common Stock to be issued under the Plan shall not exceed 900,000,
subject to adjustment as set forth in Section 3.5.
If any option granted hereunder shall expire or terminate for any reason
without having been fully exercised, the unpurchased shares subject thereto
shall again be available for the purposes of the Plan. For purposes of this
Section 1.4, where the exercise price of options is paid by means of the
grantee's surrender of previously owned shares of Common Stock, only the net
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number of additional shares issued and which remain outstanding in connection
with such exercise shall be deemed "issued" for purposes of the Plan.
2. STOCK OPTIONS
2.1 Option Price.
The exercise price of each incentive Stock option granted under the Plan
shall be determined by the Committee, but shall not be less than 100% of the
"Fair Market Value" (as defined below) of Common Stock on the date of grant. If
an Incentive Stock Option is granted to an employee who at the time such option
is granted owns (within the meaning of section 424(d) of the Code) more than 10%
of the total combined voting power of all classes of capital stock of the
Company, the option exercise price shall be at least 110% of the Fair Market
Value of Common Stock on the date of grant and the option by its terms shall not
be exercisable after the expiration of 5 years from the date such option is
granted. The exercise price of each Nonstatutory Option also shall be determined
by the Committee, but shall not be less than 85% of the Fair Market Value of
Common Stock on the date of grant. The status of each option granted under the
Plan as either an Incentive Stock Option or a Nonstatutory Stock Option shall be
determined by the Committee at the time the Committee acts to grant the option,
and shall be clearly identified as such in the Stock Option Agreement relating
thereto.
"Fair Market Value" for purposes of the Plan shall mean: (i) the closing
price of a share of Common Stock on the principal exchange on which shares of
Common Stock are then trading, if any, on the day previous to such date, or, if
shares were not traded on the day previous to such date, then on the next
preceding trading day during which a sale occurred; or (ii) if Common Stock is
not traded on an exchange but is quoted on Nasdaq or a successor quotation
system, (1) the last sales price (if Common Stock is then listed on the Nasdaq
Stock Market) or (2) the mean between the closing representative bid and asked
price (in all other cases) for Common Stock on the day prior to such date as
reported by Nasdaq or such successor quotation system; or (iii) if there is no
listing or trading of Common Stock either on a national exchange or
over-the-counter, that price determined in good faith by the Committee to be the
fair value per share of Common Stock, based upon such evidence as it deems
necessary or advisable.
In the discretion of the Committee exercised at the time the option is
exercised, the exercise price of any option granted under the Plan shall be paid
in full in cash, by check or by the optionee's interest-bearing promissory note
(subject to any limitations of applicable state corporations law) delivered at
the time of exercise; provided, however, that subject to the timing requirements
of Section 2.7, in the discretion of the Committee and upon receipt of all
regulatory approvals, the person exercising the option may deliver as payment in
whole or in part of such exercise price certificates for Common Stock of the
Company (duly endorsed or with duly executed stock powers attached), which shall
be valued at its Fair Market Value on the day of exercise of the option, or
other property deemed appropriate by the Committee; and, provided
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further, that subject to Section 422 of the Code so-called cashless exercises as
permitted under applicable rules and regulations of the Securities and Exchange
Commission and the Federal Reserve Board shall be permitted in the discretion of
the Committee. Without limiting the Committee's discretion in this regard,
consecutive book entry stock-for-stock exercises of options (or "pyramiding")
also are permitted in the Committee's discretion.
Irrespective of the form of payment, the delivery of shares pursuant to
the exercise of an option shall be conditioned upon payment by the optionee to
the Company of amounts sufficient to enable the Company to pay all federal,
state, and local withholding taxes applicable, in the Company's judgment, to the
exercise. In the discretion of the Committee, such payment to the Company may be
effected through (i) the Company's withholding from the number of shares of
Common Stock that would otherwise be delivered to the optionee by the Company on
exercise of the option a number of shares of Common Stock equal in value (as
determined by the Fair Market Value of Common Stock on the date of exercise) to
the aggregate withholding taxes, (ii) payment by the optionee to the Company of
the aggregate withholding taxes in cash, (iii) withholding by the Company from
other amounts contemporaneously owed by the Company to the optionee, or (iv) any
combination of these three methods, as determined by the Committee in its
discretion.
2.2 Option Period.
(a) The Committee shall provide, in the terms of each Stock Option
Agreement, when the option subject to such agreement expires and becomes
unexercisable, but in no event will an Incentive Stock Option granted under the
Plan be exercisable after the expiration of ten years from the date it is
granted. Without limiting the generality of the foregoing, the Committee may
provide in the Stock Option Agreement that the option subject thereto expires 30
days following a Termination of Employment for any reason other than death or
disability or six months following a Termination of Employment for disability or
following an optionee's death.
(b) Outside Date for Exercise. Notwithstanding any provision of this
Section 2.2, in no event shall any option granted under the Plan be exercised
after the expiration date of such option set forth in the applicable Stock
Option Agreement.
2.3 Exercise of Options.
Each option granted under the Plan shall become exercisable and the
total number of shares subject thereto shall be purchasable, in a lump sum or in
such installments, which need not be equal, as the Committee shall determine;
provided, however, that each option shall become exercisable in full no later
than ten years after such option is granted, and each option shall become
exercisable as to at least 10% of the shares of Common Stock covered thereby on
each anniversary of the date such option is granted; and provided, further, that
if the holder of an option shall not in any given installment period purchase
all of the shares which such holder is entitled to purchase in such installment
period, such holder's right to purchase any shares not purchased
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in such installment period shall continue until the expiration or sooner
termination of such holder's option. The Committee may, at any time after grant
of the option and from time to time, increase the number of shares purchasable
in any installment, subject to the total number of shares subject to the option
and the limitations set forth in Section 2.5. At any time and from time to time
prior to the time when any exercisable option or exercisable portion thereof
becomes unexercisable under the Plan or the applicable Stock Option Agreement,
such option or portion thereof may be exercised in whole or in part; provided,
however, that the Committee may, by the terms of the option, require any partial
exercise to be with respect to a specified minimum number of shares. No option
or installment thereof shall be exercisable except with respect to whole shares.
Fractional share interests shall be disregarded, except that they may be
accumulated as provided above and except that if such a fractional share
interest constitutes the total shares of Common Stock remaining available for
purchase under an option at the time of exercise, the optionee shall be entitled
to receive on exercise a certified or bank cashier's check in an amount equal to
the Fair Market Value of such fractional share of stock.
2.4 Transferability of Options.
Except as the Committee may determine as aforesaid, an option granted
under the Plan shall, by its terms, be nontransferable by the optionee other
than by will or the laws of descent and distribution, or pursuant to a qualified
domestic relations order (as defined by the Code), and shall be exercisable
during the optionee's lifetime only by the optionee or by his or her guardian or
legal representative. More particularly, but without limiting the generality of
the immediately preceding sentence, an option may not be assigned, transferred
(except as provided in the preceding sentence), pledged or hypothecated (whether
by operation of law or otherwise), and shall not be subject to execution,
attachment or similar process. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of any option contrary to the provisions of
the Plan and the applicable Stock Option Agreement, and any levy of any
attachment or similar process upon an option, shall be null and void, and
otherwise without effect, and the Committee may, in its sole discretion, upon
the happening of any such event, terminate such option forthwith.
2.5 Limitation on Exercise of Incentive Stock Options.
To the extent that the aggregate Fair Market Value (determined on the
date of grant) of the Common Stock with respect to which Incentive Stock Options
granted hereunder (together with all other Incentive Stock Option plans of the
Company) are exercisable for the first time by an optionee in any calendar year
under the Plan exceeds $100,000, such options granted hereunder shall be treated
as Nonstatutory Options to the extent required by Section 422 of the Code. The
rule set forth in the preceding sentence shall be applied by taking options into
account in the order in which they were granted.
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2.6 Disqualifying Dispositions of Incentive Stock Options.
If Common Stock acquired upon exercise of any Incentive Stock Option is
disposed of in a disposition that, under Section 422 of the Code, disqualifies
the option holder from the application of Section 421(a) of the Code, the holder
of the Common Stock immediately before the disposition shall comply with any
requirements imposed by the Company in order to enable the Company to secure the
related income tax deduction to which it is entitled in such event.
2.7 Certain Timing Requirements.
At the discretion of the Committee, shares of Common Stock issuable to
the optionee upon exercise of an option may be used to satisfy the option
exercise price or the tax withholding consequences of such exercise, in the case
of persons subject to Section 16 of the Securities Exchange Act of 1934, as
amended, only (i) during the period beginning on the third business day
following the date of release of the quarterly or annual summary statement of
sales and earnings of the Company and ending on the twelfth business day
following such date or (ii) pursuant to an irrevocable written election by the
optionee to use shares of Common Stock issuable to the optionee upon exercise of
the option to pay all or part of the option price or the withholding taxes made
at least six months prior to the payment of such option price or withholding
taxes.
2.8 No Affect on Employment.
Nothing in the Plan or in any Stock Option Agreement hereunder shall
confer upon any optionee any right to continue in the employ of the Company, any
Parent Corporation or any subsidiary or shall interfere with or restrict in any
way the rights of the Company, its Parent Corporation and its Subsidiaries,
which are hereby expressly reserved, to discharge any optionee at any time for
any reason whatsoever, with or without cause.
For purposes of the Plan, "Parent Corporation" shall mean any
corporation in an unbroken chain of corporations ending with the Company if each
of the corporations other than the Company then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain. For purposes of the Plan, "Subsidiary" shall
mean any corporation in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
3. OTHER PROVISIONS
3.1 Sick Leave and Leaves of Absence.
Unless otherwise provided in the Stock Option Agreement, and to the
extent permitted by
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Section 422 of the Code, an optionee's employment shall not be deemed to
terminate by reason of sick leave, military leave or other leave of absence
approved by the Company if the period of any such leave does not exceed a period
approved by the Company, or, if longer, if the optionee's right to reemployment
by the Company is guaranteed either contractually or by statute. A Stock Option
Agreement may contain such additional or different provisions with respect to
leave of absence as the Committee may approve, either at the time of grant of an
option or at a later time.
3.2 Termination of Employment.
For purposes of the Plan "Termination of Employment," shall mean the
time when the employee-employer relationship between the optionee and the
Company, any Subsidiary or any Parent Corporation is terminated for any reason,
including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) terminations where
there is a simultaneous reemployment or continuing employment of an optionee by
the Company, any Subsidiary or any Parent Corporation, (ii) at the discretion of
the Committee, terminations which result in a temporary severance of the
employee-employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company, a Subsidiary or any Parent Corporation
with the former employee. Subject to Section 3.1, the Committee, in its absolute
discretion, shall determine the affect of all matters and questions relating to
Termination of Employment; provided, however, that, with respect to Incentive
Stock Options, a leave of absence or other change in the employee-employer
relationship shall constitute a Termination of Employment if, and to the extent
that such leave of absence or other change interrupts employment for the
purposes of Section 422(a)(2) of the Code and the then-applicable regulations
and revenue rulings under said Section.
3.3 Issuance of Stock Certificates.
Upon exercise of an option, the Company shall deliver to the person
exercising such option a stock certificate evidencing the shares of Common Stock
acquired upon exercise. Notwithstanding the foregoing, the Committee in its
discretion may require the Company to retain possession of any certificate
evidencing stock acquired upon exercise of an option which remains subject to
repurchase under the provisions of the Stock Option Agreement or any other
agreement signed by the optionee in order to facilitate such repurchase
provisions.
3.4 Terms and Conditions of Options.
Each option granted under the Plan shall be evidenced by a written Stock
Option Agreement ("Stock Option Agreement") between the option holder and the
Company providing that the option is subject to the terms and conditions of the
Plan and to such other terms and conditions not inconsistent therewith as the
Committee may deem appropriate in each case.
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3.5 Adjustments Upon Changes in Capitalization; Merger
and Consolidation.
If the outstanding shares of Common Stock are changed into, or exchanged
for cash or a different number or kind of shares or securities of the Company or
of another corporation through reorganization, merger, recapitalization,
reclassification, stock split-up, reverse stock split, stock dividend, stock
consolidation, stock combination, stock reclassification or similar transaction,
an appropriate adjustment shall be made by the Committee in the number and kind
of shares as to which options and restricted stock may be granted. In the event
of such a change or exchange, other than for shares or securities of another
corporation or by reason of reorganization, the Committee shall also make a
corresponding adjustment changing the number or kind of shares and the exercise
price per share allocated to unexercised options or portions thereof, which
shall have been granted prior to any such change, shall likewise be made. Any
such adjustment, however, shall be made without change in the total price
applicable to the unexercised portion of the option but with a corresponding
adjustment in the price for each share (except for any change in the aggregate
price resulting from rounding-off of share quantities or prices).
In the event of a "spin-off" or other substantial distribution of assets
of the Company which has a material diminutive effect upon the Fair Market Value
of the Common Stock, the Committee in its discretion shall make an appropriate
and equitable adjustment to the exercise prices of options then outstanding
under the Plan.
Where an adjustment under this Section 3.5 of the type described above
is made to an Incentive Stock Option, the adjustment will be made in a manner
which will not be considered a "modification" under the provisions of subsection
424(b)(3) of the Code.
In connection with the dissolution or liquidation of ACTV or a partial
liquidation involving 50% or more of the assets of ACTV, a reorganization of
ACTV in which another entity is the survivor, a merger or reorganization of ACTV
under which more than 50% of the Common Stock outstanding prior to the merger or
reorganization is converted into cash or into another security, a sale of more
than 50% of the Company's assets, or a similar event that the Committee
determines, in its discretion, would materially alter the structure of ACTV or
its ownership, the Committee, upon 30 days prior written notice to the option
holders, may, in its discretion, do one or more of the following: (i) shorten
the period during which options are exercisable (provided they remain
exercisable for at least 30 days after the date the notice is given); (ii)
accelerate any vesting schedule to which an option is subject; (iii) arrange to
have the surviving or successor entity grant replacement options with
appropriate adjustments in the number and kind of securities and option prices,
or (iv) cancel options upon payment to the option holders in cash, with respect
to each option to the extent then exercisable (including any options as to which
the exercise has been accelerated as contemplated in clause (ii) above), of any
amount that is the equivalent of the Fair Market Value of the Common Stock (at
the effective time of the dissolution, liquidation, merger, reorganization, sale
or other event) or the fair market value of the option. In the case of a change
in corporate control, the Committee may, in considering the advisability or the
terms and
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conditions of any acceleration of the exercisability of any option pursuant to
this Section 3.5, take into account the penalties that may result directly or
indirectly from such acceleration to either the Company or the option holder, or
both, under Section 280G of the Code, and may decide to limit such acceleration
to the extent necessary to avoid or mitigate such penalties or their effects.
No fractional share of Common Stock shall be issued under the Plan on
account of any adjustment under this Section 3.5.
3.6 Rights of Participants and Beneficiaries.
The Company shall pay all amounts payable hereunder only to the option
holder or beneficiaries entitled thereto pursuant to the Plan. The Company shall
not be liable for the debts, contracts or engagements of any optionee or his or
her beneficiaries, and rights to cash payments under the Plan may not be taken
in execution by attachment or garnishment, or by any other legal or equitable
proceeding while in the hands of the Company.
3.7 Government Regulations.
The Plan, and the grant and exercise of options and the issuance and
delivery of shares of Common Stock under options granted hereunder, shall be
subject to compliance with all applicable federal and state laws, rules and
regulations including but not limited to state and federal securities law) and
federal margin requirements and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
the Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and options granted hereunder shall be
deemed amended to the extent necessary to conform to such laws, rules and
regulations.
3.8 Amendment and Termination.
The Board or the Committee may at any time suspend, amend or terminate
the Plan and may, with the consent of the option holder, make such modifications
of the terms and conditions of such option holder's option as it shall deem
advisable, provided, however, that, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or the Committee may, (A) materially
increase the benefits accruing to participants under the Plan; (B) materially
increase the number of securities which may be issued under the Plan; or (C)
materially modify the requirements as to eligibility for participation in the
Plan. No option may be granted during any suspension of the Plan or after such
termination. The amendment, suspension or termination of the Plan shall not,
without the consent of the option holder affected thereby, alter or impair any
rights or obligations under any option theretofore granted under the Plan. No
option way be granted during any period of suspension nor after termination of
the Plan, and in no event may any option be granted under
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the Plan after the expiration of ten years from the date the Plan is adopted by
the Board.
3.9 Time of Grant and Exercise of Option.
An option shall be deemed to be exercised when the Secretary of the
Company receives written notice from an option holder of such exercise, payment
of the purchase price determined pursuant to Section 2.1 of the Plan and set
forth in the Stock Option Agreement, and all representations, indemnifications
and documents reasonably requested by the Committee.
3.10 Privileges of Stock Ownership; Non-Distributive Intent; Reports
to Option Holders.
A participant in the Plan shall not be entitled to the privilege of
stock ownership as to any shares of Common Stock not actually issued to the
optionee. Upon exercise of an option at a time when there is not in effect under
the Securities Act of 1933, as amended, a Registration Statement relating to the
Common Stock issuable upon exercise or payment therefor and available for
delivery a Prospectus meeting the requirements of Section 10(a)(3) of said Act,
the optionee shall represent and warrant in writing to the Company that the
shares purchased are being acquired for investment and not with a view to the
distribution thereof.
The Company shall furnish to each optionee under the Plan the Company's
annual report and such other periodic reports, if any, as are disseminated by
the Company in the ordinary course to its stockholders.
3.11 Legending Share Certificates.
In order to enforce any restrictions imposed upon Common Stock issued
upon exercise of an option granted under the Plan or to which such Common Stock
may be subject, the Committee may cause a legend or legends to be placed on any
share certificates representing such Common Stock, which legend or legends shall
make appropriate reference to such restrictions, including, but not limited to,
a restriction against sale of such Common Stock for any period of time as may be
required by applicable laws or regulations. If any restriction with respect to
which a legend was placed on any certificate ceases to apply to Common Stock
represented by such certificate, the owner of the Common Stock represented by
such certificate may require the Company to cause the issuance of a new
certificate not bearing the legend.
Additionally, and not by way of limitation, the Committee may impose
such restrictions on any Common Stock issued pursuant to the Plan as it may deem
advisable, including, without limitation, restrictions under the requirements of
any stock exchange or market upon which Common Stock is then traded.
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3.12 Use of Proceeds.
Proceeds realized pursuant to the exercise of options under the Plan
shall constitute general funds of the Company.
3.13 Changes in Capital Structure; No Impediment to Corporate
Transactions.
The existence of outstanding options under the Plan shall not affect the
Company's right to effect adjustments, recapitalizations, reorganizations or
other changes in its or any other corporation's capital structure or business,
any merger or consolidation, any issuance of bonds, debentures, preferred or
prior preference stock ahead of or affecting Common Stock, the dissolution or
liquidation of the Company's or any other corporation's assets or business, or
any other corporate act, whether similar to the events described above or
otherwise.
3.14 Effective Date of the Plan.
The Plan shall be effective as of the date of its approval by the
stockholders of ACTV within twelve months after the date of the Board's initial
adoption of the Plan. Options may be granted but not exercised prior to
stockholder approval of the Plan. If any options are so granted and stockholder
approval shall not have been obtained within twelve months of the date of
adoption of this Plan by the Board of Directors, such options shall terminate
retroactively as of the date they were granted.
3.15 Termination.
The Plan shall terminate automatically as of the close of business on
the day preceding the tenth anniversary date of its adoption by the Board or
earlier as provided in Section 3.8. Unless otherwise provided herein, the
termination of the Plan shall not affect the validity of any option agreement
outstanding at the date of such termination.
3.16 Effective Date of the Plan.
The adoption of the Plan shall not affect any other compensation or
incentive plans in effect for the Company, any Subsidiary or any Parent
Corporation. Nothing in the Plan shall be construed to limit the right of the
Company (i) to establish any other forms of incentives or compensation for
employees of the Company, any Subsidiary or any Parent Corporation or (ii) to
grant or assume options or other rights otherwise than under the Plan in
connection with any proper corporate purpose including but not by way of
limitation, the grant or assumption of options in connection with the
acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or association.
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GENERAL PROXY - ANNUAL MEETING OF STOCKHOLDERS OF ACTV, INC.
The undersigned hereby appoints William C. Samuels, with full power
of substitution, proxy to vote all of the shares of Common Stock of the
undersigned and with all of the powers the undersigned would possess if
personally present, at the Annual Meeting of Stockholders of ACTV, Inc., to be
held at ACTV, Inc., 1270 Avenue of the Americas, New York, New York on June 18,
1998 at 9:30 a.m. and at all adjournments thereof, upon the matters specified
below, all as more fully described in the Proxy Statement dated April 28, 1998
and with the discretionary powers upon all other matters which come before the
meeting or any adjournment thereof.
This Proxy is solicited on behalf of ACTV, Inc.'s Board of Directors.
1. To elect two Class II directors to hold office for a term of three years.
[ ] FOR ALL NOMINEES [ ] WITHHELD FOR ALL NOMINEES
INSTRUCTION: To withhold authority to vote for any individual, write that
nominee's name in the space provided below:
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2. To adopt the Company's 1998 Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. To ratify the appointment of Deloitte & Touche, LLP as the Company
independent certified public accountants.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, upon such other matter or matters that may properly
come before the meeting, or any adjournments thereof.
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(Continued and to be signed on the other side)
<PAGE>
(Continued from other side)
Every properly signed proxy will be voted in accordance with the specifications
made thereon. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSALS
1, 2 AND 3.
The undersigned hereby acknowledges receipt of a copy of the accompanying Notice
of Meeting and Proxy Statement and hereby revokes any proxy or proxies
heretofore given.
Please mark, date, sign and mail your proxy promptly in the envelope provided.
Date:____________________________,1998
--------------------------------------
(Print name of Stockholder)
--------------------------------------
(Print name of Stockholder)
--------------------------------------
Signature
--------------------------------------
Signature
Number of Shares______________________
Note: Please sign exactly as name
appears in the Company's
records. Joint owners should
each sign. When signing as
attorney, executor or trustee,
please give title as such.
