UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
ACTV, Inc
(Exact name of registrant as specified in its charter)
Delaware 94-2907258
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1270 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 217-1600 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of exchange on which registered
- ------------------- ------------------------------------
Common Stock, Par Value $0.10 Boston Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.10 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of November 18, 1998, there were 28,400,282 shares of the registrant's common
stock outstanding.
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, September 30,
1997 1998
(as restated) (unaudited)
------------ ------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents ............................. $ 554,077 $ 7,077,854
Accounts receivable-net ............................... 303,044 578,841
Education equipment inventory ......................... 237,757 176,548
Other ................................................. 308,653 668,166
------------ ------------
Total current assets .............................. 1,403,531 8,501,409
------------ ------------
Property and equipment-net ................................. 2,596,785 2,400,281
------------ ------------
Other Assets:
Patents and patents pending ........................... 279,356 792,941
Software development costs ............................ 669,852 989,252
Goodwill .............................................. 2,641,188 2,321,409
Other ................................................. 311,206 610,327
------------ ------------
Total other assets ................................ 3,901,602 4,713,929
------------ ------------
Total ........................................ $ 7,901,918 $ 15,615,619
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ................. $ 1,882,159 $ 826,914
Deferred stock appreciation rights .................... -- 455,251
Preferred dividends payable ........................... 603,469 670,503
------------ ------------
Total current liabilities ......................... 2,485,628 1,952,668
Long-Term Liabilities:
Notes Payable ...................................... -- 4,300,581
Shareholders' equity:
Preferred stock, $.10 par value, 1,000,000 shares
authorized, issued and outstanding 86,200 at
December 31, 1997, 72,600 at September 30, 1998 ....... 8,620 7,260
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 316,944 at
December 31, 1997, 185,449 at September 30, 1998 ... 7,029,708 3,742,314
Common stock, $.10 par value, 65,000,000 shares
authorized: issued and outstanding 14,614,611 at
December 31, 1997, 26,210,003 at September 30, 1998 .. 1,461,461 2,621,000
Additional paid-in capital ............................ 48,140,596 64,955,885
Notes receivable from stock sales ..................... (199,900) (1,070,872)
Accumulated deficit ................................... (51,024,195) (60,893,217)
----------- -----------
Total shareholders' equity ........................ 5,416,290 9,362,370
------------ ------------
Total ........................................ $ 7,901,918 15,615,619
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Periods Three Month Periods
Ended September 30, Ended September 30,
1997 1998 1997 1998
(as restated) (as restated)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales revenues ...................... $ 1,534,295 $ 1,058,560 $ 191,440 $ 301,900
----------- ----------- ----------- -----------
Total revenues ................... 1,534,295 1,058,560 191,440 301,900
Cost of Sales ....................... 434,287 168,934 78,847 45,545
----------- ----------- ----------- -----------
Gross profit ..................... 1,100,008 889,626 112,593 256,355
Expenses:
Operating expenses .................. 957,516 1,718,627 246,076 738,000
Selling and administrative .......... 4,919,822 6,462,024 1,306,566 2,558,176
Depreciation and amortization ....... 150,210 810,984 51,722 296,721
Amortization of goodwill ............ 319,779 319,779 106,593 106,593
Stock appreciation rights ........... (346,892) 455,251 (29,651) 58,972
----------- ----------- ----------- -----------
Total expense ..................... 6,000,435 9,766,665 1,681,306 3,758,462
Interest (income) ................... (103,239) (105,398) (11,156) (40,077)
Interest expense .................... -- 718,220 -- 254,243
----------- ----------- ----------- -----------
Interest expense (income) - net .. (103,239) 612,822 (11,156) 214,166
----------- ----------- ----------- -----------
Net loss ............................... 4,797,188 9,489,861 1,557,557 3,716,273
Preferred stock dividends and accretions
2,245,435 379,161 746,041 117,211
----------- ----------- ----------- -----------
Net loss applicable to common stock
shareholders ........................... $ 7,042,623 $ 9,869,022 $ 2,303,598 $ 3,833,484
=========== =========== =========== ===========
Loss per common share .................. $.57 $.51 $.17 $.16
Weighted average number of common
shares outstanding ..................... 12,338,339 19,309,832 13,171,584 23,422,018
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Periods Three Month Periods
Ended September 30, Ended September 30,
1997 1998 1997 1998
(as restated) (as restated)
----------- ------------ ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss applicable to Common
Shareholders ....................... $(7,042,623) $(9,869,022) $(2,303,598) $(3,833,484)
----------- ----------- ----------- -----------
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization .......... 469,989 1,130,763 158,315 403,314
Stock appreciation rights .............. (701,517) 455,251 (29,651) 58,972
Amortization of warrants and deferred
expenses related to debt financing ... -- 178,451 -- 36,377
Notes issued in lieu of cash ........ -- 494,618 -- 175,694
Common stock issued for services ....... 165,000 2,016,023 150,000 870,971
Common stock issued or reserved for
preferred dividends and accretions ..... 1,970,167 67,034 698,759 10,174
Changes in operating assets and liabilities:
Accounts receivable .................... (178,304) (275,797) 272,641 202,072
Education equipment inventory .......... (9,168) 61,209 (34,403) 28,171
Other assets ........................... (185,189) (327,329) (38,286) 392,313
Accounts payable and accrued expenses .. (51,405) (1,055,245) (11,212) (133,962)
Preferred stock dividends payable ...... 275,269 312,137 47,284 107,047
----------- ------------ ----------- -----------
Net cash (used) in operating
activities .................... (5,287,781) (6,811,907) (1,090,151) (1,682,341)
----------- ------------ ----------- -----------
Cash flows from investing activities:
Investment in patents pending .......... -- (534,561) -- (307,160)
Investment in property and equipment ... (1,404,482) (360,180) (1,181,215) (127,494)
Investment in systems .................. (531,948) (573,734) (132,488) (356,888)
----------- ------------ ----------- -----------
Net cash used in investing
activities ................... (1,936,430) (1,468,475) (1,313,703) (791,542)
----------- ------------ ----------- -----------
Cash flows from financing activities:
Net proceeds from debt issuance ........ -- 4,689,704 -- 11,890
Redemption of preferred stock .......... -- (565,759) -- --
Proceeds from sale of common stock ..... 2,718,435 10,680,214 2,728,000 7,729,451
Expense related to convertible preferred
stock issuance ....................... -- -- -- --
----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities .................................. 2,718,435 14,804,159 2,728,000 7,741,341
----------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents ................................. (4,505,776) 6,523,777 324,146 5,267,458
Cash and cash equivalents,
beginning of period .................... 6,520,756 554,077 1,690,834 1,810,396
----------- ------------ ----------- -----------
Cash and cash equivalents,
end of period .......................... 2,014,980 7,077,854 2,014,980 7,077,854
=========== ============ =========== ===========
</TABLE>
4
<PAGE>
ACTV, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements for the Nine Months Ended September
30, 1998
1(a) The consolidated financial statements are unaudited, except as indicated.
In the opinion of management, these consolidated financial statements reflect
all normal, recurring adjustments necessary for a fair presentation of the
results for all periods. The financial results for the interim periods presented
are not necessarily indicative of the results to be expected for either
succeeding quarters or the full fiscal year.
1(b) Management of the Company believes that its current funds will enable the
Company to finance its operations 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. While the Company believes that it has adequate funds to launch its
planned Southwest Regional Network, it (i) may need additional funding to
operate the network at planned levels and (ii) will need additional funding to
launch networks in other regions. While the Company may engage 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 operate the Southwest Regional Network at planned levels.
2. For a summary of significant accounting policies and additional financial
information, see the Company's Annual Report on Form 10-K/A1 for the year ended
December 31, 1997. The Company's policy is to capitalize the cost of computer
software production once technological feasibility is established upon
completion of a detailed program design or upon completion of a working model.
The Company's balance sheets at September 30, 1998 and December 31, 1997 reflect
capitalized software production costs of $989,252 and $669,852, respectively,
classified as a component of "Other" non-current assets.
3. 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. The
Issuer elected to pay the semi-annual interest payment due September 30, 1998 in
kind rather than in cash.
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
5
<PAGE>
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.
For accounting purposes the Company has allocated approximately $1.2
million to the Warrant, which is reflected as a credit to additional paid-in
capital. The $1.2 million is being charged as additional interest expense over
the life of the Note.
4. During 1996, the Company raised approximately $9.1 million in net proceeds
from the private placement of 5% exchangeable preferred stock (the "Exchangeable
Preferred Stock") issued by its wholly owned subsidiary and convertible into
shares of the Company. The private placement agreement provided for the
Exchangeable Preferred Stock to be 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 Exchangeable 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 Exchangeable 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 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 Exchangeable Preferred Stock
will elect to convert their stock into Common Stock of the Company and,
accordingly, has included the Exchangeable Preferred Stock in its consolidated
statement of shareholders' equity.
The Exchangeable Preferred Stock is convertible into shares of common
stock at a discounted conversion price. 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. A preferred stock accretion of $2,245,000 was recorded for the
nine months ended September 30, 1997, as restated (see Note 7 below).
In November 1998, the holders of approximately 179,000 of the remaining
approximately 184,000 shares of Exchangeable Preferred Stock surrendered all of
their Exchangeable Preferred shares against receipt of a new ACTV, Inc. Series B
10% Convertible Preferred Stock (the "Series B Preferred") with a face value of
$5,017,000 and shares of Common Stock. In addition, the holders received
warrants to purchase approximately 1.94 million shares of Common Stock at $2.00
per share. The total value received in Common Stock and Series B Preferred by
the holders was less than the market value of the Exchangeable Preferred shares
surrendered by such holders on the date of the transaction.
The Series B Preferred is fully redeemable by the Company at any time
at a 10% premium above face value plus accrued dividends. The holders of Series
B Preferred are prohibited from converting any shares into Common Stock during
the period from the present through November 13, 1999, whether or not the
Company gives a notice of redemption during this period. Unlike the Exchangeable
Preferred Stock, which is exchangeable at varying prices based on market
conditions, the Series B Preferred shares
6
<PAGE>
are convertible at a fixed price, subject to a single adjustment. From November
13, 1999 to February 13, 2000, the Series B Preferred is convertible at a price
of $2.00 per share. If not redeemed by February 13, 2000, the Series B Preferred
conversion price will be adjusted to a fixed price of $1.33 per share for the
remainder of its life.
The Company has the right to redeem the warrants in full at a price of $.01 per
warrant share in the event that the Company's Common Stock trades at or above an
average of $4.50 per share during a period of 20 consecutive trading days.
5. The Company's balance sheets at September 30, 1998 and December 31, 1997
reflect a debit to shareholders' equity of $1,070,872 and 199,900, respectively,
related to (a) a loan made by the Company to an employee in August 1995
(September 30, 1998 and December 31, 1997 balance of $199,900) and (b) loans
made to four employees in the first nine months of 1998 (September 30, 1998
balance of $870,972). All of the loans were made to enable the employees to
purchase the Company's common stock by exercising options. The loans have due
dates that correspond to the respective expiration dates of the options
exercised. Pursuant to the employment contracts of the employees to whom the
1998 loans were made, each loan may be forgiven if the respective employee
remains employed by the Company on January 1, 1999. Therefore, the Company is
recognizing compensation expense for the total amount of each 1998 loan on a
pro-rata basis over the period from the issuance of the loan through January 1,
1999. Such compensation expense recorded for the nine months ended September 30,
1998 was $1,474,581.
6. The consolidated balance sheet at September 30, 1998, reflects non-cash
activity during the nine month period ended September 30, 1998, that relates to
a the option exercises and resulting non-recourse loan transactions described in
Note 3 above: an increase in notes receivable from stock sales of $870,972 (net
of compensation expense of $1,474,581 and an increase in common stock and
additional paid-in capital of a total of $2,345,553. The Company made no cash
payments of interest or income taxes during the three and nine month periods
ended September 30, 1997, or September 30, 1998.
7. Subsequent to the issuance of the Company's 1996 and 1997 financial
statements, management determined that the Company's consolidated financial
statements for years 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 for the six months ended September 30, 1997 increased by
$1,875,000 ($.15 per share). Revenues, expenses, net loss, total assets and
total shareholders' equity are not affected by this restatement.
7
<PAGE>
ITEM 2. 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-Q
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., including its two principal wholly-owned subsidiaries, ACTV
Entertainment, Inc. and ACTV Net, Inc. ("the Company") has developed proprietary
technologies for individualized television programming ("Individualized
Programming" or "Individualized Television") and for the Internet. For
television, the Company's products, in general, are tools for the creation of
programming that allows viewer participation. For the Internet, the Company uses
a proprietary software technology, called HyperTV, to create virtual communities
around state-of-the-art educational and entertainment programming. The chief
market presently targeted by the Company for its Individualized Programming is
in-home entertainment, particularly sports programming, while the first market
application of HyperTV is in education, with an emphasis on schools and
universities in the United States.
The Company's Individualized Programming for television 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").
HyperTV is a patented Java-based software technology that permits the
simultaneous delivery of streamed video and Web URLs directly to users. (Java is
a programming language developed for the Internet by Sun Microsystems.) HyperTV
enables the practical convergence of video and Web technologies. For education
applications, the Company has developed eSchool Online(TM), which uses HyperTV
technology to create virtual learning communities that seamlessly integrate
streamed educational video, relevant Web content, and collaboration and
assessment resources for students and educators.
Since its inception, the Company has incurred operating losses
approximating $60.9 million related directly to the development and marketing of
the Individualized Programming and HyperTV.
The Company is seeking to exploit the U.S. entertainment market on both
a regional and national basis. The Company is launching regionally based,
Individualized Television networks ("Regional Networks"), with programming
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.
The Company's national Individualized Programming will initially be
done through a joint venture formed in September 1998 with Liberty Media
Corporation, called LMC IATV Events,
8
<PAGE>
LLC. ("LMC IATV"). LMC IATV, through an exclusive license from the Company, has
the right to produce and distribute Individualized Programming consisting of
major events. As consideration for granting such a license, the Company received
a fixed one-third equity interest in the joint venture, with no obligation to
make additional capital contributions.
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 venture
now reaches more than 58 million homes nationwide.
The Company plans 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 The Company
believes that the differentiation afforded by the Company's Individualized
Programming will allow distributors to offer their customers a unique
programming service that will enhance their customer's acceptance of digital
television.
The Company plans to launch its first Regional Network in 1999 in the
region served by FOX Sports Southwest (the "Southwest Regional Network"). FOX
Sports Southwest distributes programming to more than 5 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 September 1998, Liberty Media Corporation invested $5 million in
Common Stock of the Company (the "Common Stock"), with an option to invest an
additional $5 million. Simultaneous with this strategic investment, as noted
above, the Company and Liberty Media Corporation created a joint venture, LMC
IATV Events, LLC, to explore national applications of Individualized Programming
for major events.
In August 1997, General Instrument Corp. ("GI") invested $1 million in
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 1999. However, there is no assurance that it will
secure the funding necessary to effect
9
<PAGE>
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, additional network expansion,
and planned activities of LMC IATV Events, LLC are part of the Company's plan to
develop the entertainment division of its business. There can be no assurance
that the Southwest Regional Network, other Regional Networks, if launched, or
LMC IATV Events, LLC will generate significant revenues for the Company.
The Company's target markets for HyperTV are K-12 classrooms,
universities, distance learning programs, corporate training programs and
consumer homes. 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. 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.
10
<PAGE>
RESULTS OF OPERATIONS
Comparison of Nine Month Periods Ended September 30, 1998 and September 30, 1997
During the nine month period ended September 30, 1998, the Company's revenues
decreased 31% to $1,058,560, from $1,534,295 in the nine month period ended
September 30, 1997. Nearly all of the Company's revenues in the more recent
nine-month period were derived from Internet sales, compared to the comparable
1997 nine-month period, when the majority of revenues were related to
television-based education hardware and content.
Cost of sales in the nine months ended September 30, 1998, was $168,934, a
decrease of 61% compared to cost of sales of $434,287 in the nine months ended
September 30, 1997. The Company's gross margin increased to 84% in the more
recent period, from 72% in the corresponding 1997 period. The increase was the
result of the change in the composition of products sold during the nine months
ended September 30, 1998, as noted above, in favor of Internet products and
services, which carry a higher profit margin than the Company's television-based
education revenue sources.
Total expenses excluding cost of sales and interest expense in the nine months
ended September 30, 1998, increased 63%, to $9,766,665, from $6,000,435 in the
comparable period in 1997. The increase was due to (i) higher operating and
selling and administrative expenses associated with the Southwest Regional
Network; (ii) higher depreciation and amortization expenses; and (iii) higher
stock appreciation rights expenses, the result of an increase in the market
price of the Company's common stock.
Depreciation and amortization expense for the nine months ended September 30,
1998, increased 440% to $810,984, from $150,210 for the nine months ended
September 30, 1997. This increase was due principally to higher depreciation
expenses related to the Southwest Regional Network's master control production
facility and to the amortization of software development costs in the more
recent period.
Interest income in the nine months ended September 30, 1998, was $105,398,
compared with $103,239 in the nine months ended September 30, 1997. The increase
was due to higher average cash balances during the more recent period. The
Company incurred interest expense and accretions of $718,220 in the nine months
ended September 30, 1998, compared to no interest expense during the comparable
1997 period. Interest expense is related to the $5 million principal value notes
issued in January 1998 by a subsidiary of the Company. The Company chose to pay
the interest due June 30, 1998 in kind rather than in cash.
For the nine-month periods ending September 30, 1998 and September 30, 1997, the
Company accrued $379,161 for dividends and $2,245,435 for dividends and
accretions, respectively, related to its outstanding preferred stock.
For the nine months ended September 30, 1998, the Company's net loss applicable
to common shareholders was $9,869,022, or $.51 per share, an increase of 40%
over the net loss of $7,042,623, or $.57 per share, incurred in the prior year's
comparable period. The increase during the more recent nine-month period was the
result of higher overall expenses, led by higher stock appreciation rights and
depreciation and amortization expenses, coupled with lower total revenues.
Comparison of Nine Month Periods Ended September 30, 1997 and September 30, 1996
During the nine month period ended September 30, 1997, the Company's
revenues increased 39% to $1,534,295 from $1,105,816 in the nine-month period
ended September 30, 1996. All revenues in the nine-month period ended September
30, 1997 were derived from the education market, while in the 1996 nine-month
period, the Company's revenues derived from education sales
11
<PAGE>
as well as from license and executive producer fees. The revenue increase in the
more recent period was the result of significantly higher sales of distance
learning products and services, including the Company's first revenues from its
new Internet software product.
Cost of sales in the nine months ended September 30, 1997, decreased
10% to $434,287, compared with cost of sales of $480,321 in the nine months
ended September 30, 1996. The Company's gross profit increased to 72% in the
more recent period, from 57% in the corresponding 1996 period. The increase was
due to a greater proportion of total revenues from higher margin products such
as programs and software fees during the more recent period. In addition, the
Company recorded no executive production fee revenues in the more recent period,
unlike the 1996 period in which these lower margin services were a component of
total revenues.
Total expenses excluding cost of sales and interest expense in the nine
months ended September 30, 1997, decreased 8% to $6,000,435, from $6,542,210 in
the comparable period in 1996. The decrease was due to lower operating,
amortization, and stock appreciation rights expenses, which more than offset
moderately higher selling and administrative costs during the 1997 period.
Depreciation and amortization expense for the nine months ended
September 30, 1997, decreased 31% to $469,989, from $682,342 for the nine months
ended September 30, 1996. This decrease was due to the recognition during the
1996 period of amortization expense for certain programming assets that were
fully amortized during 1996.
Interest income in the nine months ended September 30, 1997, increased
55% to $103,239, compared with $66,403 in the nine months ended September 30,
1996. The increase was due to higher average cash balances during the more
recent period. The Company incurred no interest expense during either nine-month
period.
For the nine-month periods ending September 30, 1997 and September 30,
1996, the Company accrued $2,245,435 and $528,493, respectively, for dividends
and accretions, related to its outstanding preferred stock.
The Company's net loss applicable to common shareholders for the nine
months ended September 30, 1997 increased 10% to $7,042,623, or $.57 per share,
compared with the net loss of $6,378,805, or $.54 per share, incurred in the
prior year's comparable period. The increase was the result principally of
significantly higher dividends and accretions related to the Company's preferred
stock in the more recent period, which more than offset greater total revenues
and higher gross profit during the nine months ended September 30, 1997.
Comparison of Three Month Periods Ended September 30, 1998 and September 30,
1997
During the three month period ended September 30, 1998 ("Third Quarter 1998"),
the Company's revenues increase approximately 58%, to $301,900, from $191,440 in
the three month period ended September 30, 1997 ("Third Quarter 1997"). In the
more recent quarter, all of the Company's revenues derived from Internet sales,
while in Third Quarter 1997 the Company recorded revenues from both Internet
sales and from television-based education hardware and content.
Cost of sales in Third Quarter 1998 was $45,545, compared to Third Quarter
1997's cost of sales of $78,847. The Company's gross margin increased to 85% in
the more recent quarter, from 59% in the corresponding 1997 quarter. The
Company's Internet products have higher gross margins than those of
television-based education hardware and content.
Total expenses excluding cost of sales and interest expense increased
approximately 124% in Third Quarter 1998, to $3,758,462, from $1,681,306 in
Third Quarter 1997. The increase was due
12
<PAGE>
principally to higher operating, selling and administrative expenses and
depreciation and amortization expense in the more recent period. The increase in
depreciation, amortization, operating, selling and administrative expenses was
principally attributable to the Company's Southwest Regional Network.
Depreciation and amortization expense increased 474% in Third Quarter 1998 to
$296,721, from $51,722 in Third Quarter 1997. This increase was due principally
to higher depreciation expenses related to the Southwest Regional Network's
master control production facility and to the amortization of software
development costs in the more recent period.
Interest income in Third Quarter 1998 was $40,077, compared with $11,156 in
Third Quarter 1997. The increase was due to higher average cash balances during
the more recent period. The Company incurred interest expense and accretions of
$254,243 in Third Quarter 1998, compared to no interest expense during the
comparable 1997 period. Interest expense is related to the $5 million principal
value notes issued in January 1998 by a subsidiary of the Company.
For Third Quarter 1998 and Third Quarter 1997, respectively, the Company accrued
$117,211 for dividends and $746,041 for dividends and accretions, respectively,
related to its outstanding preferred stock.
The Company's net loss applicable to common shareholders in Third Quarter 1998
increased approximately 66%, to $3,833,484, or $.16 per share, from $2,303,598,
or $.17 per share, in Third Quarter 1997, principally due to higher expenses
associated with the Southwest Regional Network, as noted above.
Comparison of Three Month Periods Ended September 30, 1997 and September 30,
1996
During the three month period ended September 30, 1997 ("Third Quarter
1997"), the Company's revenues decreased approximately 42%, to $191,440, from
$332,220 in the three month period ended September 30, 1996 ("Third Quarter
1996"). In the more recent quarter, all of the Company's revenues derived from
education sales, while in Third Quarter 1996 the Company recorded revenues from
both education sales and from license and executive producer fees. The decline
in sales resulted from the repositioning and upgrade of the Company's education
product line from standalone classroom programs to Internet and other distance
learning software and programming. Management expects the Company's new
state-of-the-art software for individualizing Internet and television distance
learning applications to provide higher revenues, along with increased gross
margins.
Cost of sales in Third Quarter 1997 decreased 52% to $78,847, compared
to Third Quarter 1996's cost of sales of $165,711. The Company's gross margin
increased to 59% in the more recent quarter, from 50% in the corresponding 1996
quarter. The gross margin increase was due principally to a greater percentage
of higher margin education software sales in the revenue mix for the more recent
quarter.
Total expenses excluding cost of sales and interest expense decreased
approximately 15% in Third Quarter 1997, to $1,681,306, from $1,974,335 in Third
Quarter 1996. The decrease was due to lower operating and selling and
administrative expenses, and a difference in stock appreciation rights expenses
between the two periods.
Depreciation and amortization expense in Third Quarter 1997 increased
10% to $158,315, from $143,920 in Third Quarter 1996. This increase was due to
the retirement during the 1996 quarter of certain programming assets that were
fully amortized.
13
<PAGE>
Interest income in Third Quarter 1997, increased 6% to $11,156,
compared with $10,533 in Third Quarter 1996. The increase was due to higher
average cash balances during the more recent period. The Company incurred no
interest expense during either quarter.
For the three month periods ending September 30, 1997 and September 30,
1996, the Company accrued $746,041 and $528,493, respectively, for dividends and
accretions, related to its outstanding preferred stock.
The Company's net loss applicable to common shareholders in Third
Quarter 1997 decreased slightly, to $2,303,598, or $.17 per share, from
$2,325,786, or $.20 per share, in Third Quarter 1996, principally the result of
the noted difference in operating, selling and administrative, and stock
appreciation rights expense, which more than offset the increase, in the more
recent period, of a higher dividend and accretion expense related to the
Company's outstanding convertible preferred stock.
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 September 30, 1998, the Company had an accumulated deficit of
approximately $60.9 million. The Company's cash position on September 30, 1998
was $7,077,854, compared to $554,077 on December 31, 1997.
During the nine month period ended September 30, 1998 the Company used
$6,811,907 in cash for its operations, compared with $5,287,781 in the nine
months ended September 30, 1997.
With respect to investing activities, during the nine month period ended
September 30, 1998 and 1997 the Company used cash of $1,468,475 and $1,936,430,
respectively. Investing activities, in the more recent nine-month period, were
related to equipment purchases, software development and patents, while such
activities in the 1997 period related to equipment purchases, leasehold
improvements and software development costs.
The Company met its cash needs in the nine month period ended September 30, 1998
from the proceeds of the $5.0 million principal value note financing, from
private sales of Common Stock to an institutional investor, and from the private
sale of Common Stock to Liberty Media Corporation. The Company met its cash
needs in the nine month period ended September 30, 1997 from the remaining
proceeds from the private sale of exchangeable preferred stock effected in
August 1996.
During Third Quarter 1998 the Company used $1,682,341 in cash for its
operations, compared with $1,090,151 in Third Quarter 1997.
With respect to investing activities, in Third Quarter 1998 and 1997 the Company
used cash of $791,542 and $1,313,703, respectively. Investing activities, in the
more recent quarter, were related to patents, software development, and
equipment purchases, while such activities in the 1997 quarter related were
related to master control facility and other equipment purchased, leasehold
improvements, and computer software production costs.
The Company's balance sheets at September 30, 1998 and December 31, 1997 reflect
expense accruals of $455,251 and $0, respectively, related to the Company's
stock appreciation rights plan.
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
14
<PAGE>
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. The
Issuer elected to pay the semi-annual interest payment due June 30, 1998 in kind
rather than in cash.
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.
Management of the Company believes that its current funds will enable
the Company to finance its operations 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. While the Company believes that it has adequate funds to launch its
planned Southwest Regional Network, it (i) may need additional funding to
operate the network at planned levels and (ii) will need additional funding to
launch networks in other regions. While the Company may engage 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 operate the Southwest Regional Network at planned levels.
Impact of Inflation
Inflation has not had any significant effect on the Company's operating costs.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company is a party.
ITEM 2 CHANGES IN SECURITIES None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS None
ITEM 5 OTHER INFORMATION None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Loss per Share
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTV, Inc.
Registrant
Date: November 13, 1998 /s/ William C. Samuels
----------------- -----------------------------
William C. Samuels
Chairman, Chief Executive Officer
and Director
Date: November 13, 1998 /s/ Christopher C. Cline
----------------- -----------------------------
Christopher C. Cline
Senior Vice President (principal financial
and accounting officer)
17
EXHIBIT 11
ACTV, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Nine Month Period Three Month Period
Ended September 30, Ended September 30,
1997 1998 1997 1998
(as restated) (as restated)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding ...... 12,338,339 19,309,832 13,171,584 23,422,018
---------- ---------- ---------- ----------
Common stock equivalents ................. -- -- -- --
---------- ---------- ---------- ----------
Total ........................... 12,338,339 19,309,832 13,171,584 23,422,018
========== ========== ========== ==========
Net loss applicable to common shareholders $(7,042,623) $(9,869,022) $(2,303,598) $(3,833,484)
========== ========== ========== ==========
Loss per share applicable to common
Shareholders ............................. $ (.57) $ (.51) $ (.17) $ (.16)
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> SEP-30-1997 SEP-30-1998
<CASH> 2,014,980 7,077,854
<SECURITIES> 0 0
<RECEIVABLES> 588,497 578,841
<ALLOWANCES> 0 0
<INVENTORY> 346,672 176,548
<CURRENT-ASSETS> 3,219,785 8,501,409
<PP&E> 2,856,434 3,793,297
<DEPRECIATION> 859,818 1,393,016
<TOTAL-ASSETS> 9,025,950 15,615,619
<CURRENT-LIABILITIES> 3,888,903 1,952,668
<BONDS> 0 4,300,581
0 0
7,079,552 3,749,574
<COMMON> 1,437,493 2,621,000
<OTHER-SE> (3,379,998) 2,991,796
<TOTAL-LIABILITY-AND-EQUITY> 9,025,950 15,615,619
<SALES> 1,534,295 1,058,560
<TOTAL-REVENUES> 1,534,295 1,058,560
<CGS> 434,287 168,934
<TOTAL-COSTS> 6,000,435 9,766,665
<OTHER-EXPENSES> 2,245,435 379,161
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (103,239) 612,822
<INCOME-PRETAX> (7,042,623) (9,869,022)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,042,623) (9,869,022)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,042,623) (9,869,022)
<EPS-PRIMARY> (.57) (.51)
<EPS-DILUTED> 0 0
</TABLE>
