UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
ACTV, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-2907258
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1270 Avenue of the Americas
New York, New York 10020
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(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 August 13, 1999, there were 41,401,033 shares of the registrant's common
stock outstanding.
1
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1998* 1999
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................ $ 5,188,770 $ 12,355,309
Receivable from sale of common stock ................. -- 5,000,000
Accounts receivable-net .............................. 501,768 763,935
Education equipment inventory ........................ 110,405 77,231
Other ................................................ 773,613 2,228,908
------------- -------------
Total current assets ........................... 6,574,556 20,425,383
------------- -------------
Property and equipment-net ................................. 2,365,775 2,533,769
------------- -------------
Other Assets:
Patents and patents pending .......................... 832,336 2,267,135
Software development costs ........................... 1,098,756 1,413,954
Goodwill ............................................. 2,214,816 2,001,630
Other ................................................ 519,802 413,417
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Total other assets ............................. 4,665,710 6,096,136
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Total .................................... $ 13,606,041 $ 29,055,288
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ................ $ 955,686 $ 1,070,198
Deferred stock appreciation rights ................... 2,000,062 2,843,333
Preferred dividends payable .......................... 200,305 --
------------- -------------
Total current liabilities ...................... 3,156,053 3,913,531
Long-term notes payable .............................. 4,315,016 4,679,462
Put warrant .......................................... 1,371,624 --
Shareholders' equity :
Preferred stock, $.10 par value, 873,890
shares authorized, issued and outstanding none at
December 31, 1998, and none at June 30, 1999 ........ -- --
Preferred series A stock, $.10 par value, 120,000
shares authorized, issued and outstanding 56,300 at
December 31, 1998, and none at June 30, 1999 ........ 5,630 --
Preferred series B stock, $.10 par value, 6,110
shares authorized, issued and outstanding 5,018 at
December 31, 1998, and none June 30, 1999 ........... 2,805,961 --
Common stock, $.10 par value, 65,000,000 shares
Authorized: issued and outstanding 29,759,459 at
December 31, 1998, 41,280,454 at June 30, 1999 ....... 2,975,946 4,128,045
Additional paid-in capital ........................... 71,068,230 101,209,058
Loans receivable from stock sales .................... (199,900) --
Accumulated deficit .................................. (71,892,519) (84,874,808)
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Total shareholders' equity ..................... 4,763,348 20,462,295
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Total .................................... 13,606,041 29,055,288
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
* Derived from the Audited Financial Statements
2
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Month Periods Three Month Periods
Ended June 30, Ended June 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales revenues ........................... $ 756,660 $ 854,507 $ 395,413 $ 453,713
------------ ------------ ------------ ------------
Total revenues ...................... 756,660 854,507 395,413 453,713
Costs and expenses:
Cost of sales ............................ 123,389 80,512 75,786 25,732
Operating expenses ....................... 980,627 802,501 617,913 441,033
Selling and administrative ............... 3,903,848 6,622,575 1,860,332 3,802,727
Depreciation and amortization ............ 514,263 670,174 301,762 299,860
Amortization of goodwill ................. 213,186 213,186 106,593 106,593
Stock appreciation rights ................ 396,279 4,555,649 332,685 1,144,825
------------ ------------ ------------ ------------
Total costs and expenses ............... 6,131,592 12,944,597 3,295,071 5,820,770
------------ ------------ ------------ ------------
Loss from operations ........................ (5,374,932) (12,090,090) (2,899,658) (5,367,057)
------------ ------------ ------------ ------------
Interest (income) ........................ (65,321) (123,849) (25,481) (72,827)
Interest expense ......................... 463,977 521,617 263,933 290,936
------------ ------------ ------------ ------------
Interest expense (income) - net ....... 398,656 397,768 238,452 218,109
Minority interest - subsidiary
preferred stock dividends ................ 261,950 -- 125,291 --
------------ ------------ ------------ ------------
Net loss .................................... (6,035,538) (12,487,858) (3,263,401) (5,585,166)
Preferred stock dividends ................ -- 494,431 -- 16,655
------------ ------------ ------------ ------------
Net loss applicable to common shareholders .. $ (6,035,538) $(12,982,289) $ (3,263,401) $ (5,601,821)
============ ============ ============ ============
Basic and diluted loss per common share ..... $ (.35) $ (.36) $ (.18) $ (.14)
Weighted average number of common shares
outstanding ................................. 17,219,660 35,859,875 18,371,395 39,711,671
</TABLE>
See Notes to Consolidated Financial Statements
3
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Month Periods Three Month Periods
Ended June 30, Ended June 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss applicable to common
shareholders ............................... $ (6,035,538) $(12,982,289) $ (3,263,401) $ (5,601,821)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization .............. 727,449 883,360 408,355 406,454
Stock appreciation rights .................. 396,279 4,555,649 332,685 2,384,886
Amortization and accretion of deferred
expenses related to debt financing ....... 142,074 489,325 89,712 293,847
Common stock issued for services ........... 1,145,052 4,278,636 849,913 2,799,676
Common stock issued or reserved for
preferred dividends ........................ 205,090 241,513 134,901 165,593
Changes in operating assets and liabilities:
Accounts receivable ........................ (477,869) (262,167) (263,157) (210,087)
Education equipment inventory .............. 33,038 33,175 33,038 --
Other assets ............................... (719,642) (1,437,598) (650,303) (1,882,652)
Accounts payable and accrued expenses ...... (602,359) 114,507 (75,030) (421,843)
------------ ------------ ------------ ------------
Net cash (used in) operating activities .......... (5,186,426) (4,085,889) (2,403,287) (2,065,946)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Investment in patent & patents pending ..... (227,401) (1,493,501) (177,401) (1,470,324)
Investment in property and equipment ....... (232,686) (507,176) (66,659) (94,480)
Investment in systems ...................... (216,846) (498,800) (163,280) (246,658)
------------ ------------ ------------ ------------
Net cash (used in) investing activities .......... (676,933) (2,499,477) (407,340) (1,811,462)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from debt issuance ............ 3,306,190 -- -- --
Preferred stock dividends payable .......... 56,860 115,660 (9,610) (286,198)
Net proceeds from put warrant .............. 1,371,624 -- -- --
Redemption of preferred stock .............. (565,759) (5,792,538) -- (5,792,538)
Proceeds from sale of common stock ......... 2,950,763 19,428,783 1,559,014 18,604,516
------------ ------------ ------------ ------------
Net cash provided by financing activities ........ 7,119,678 13,751,905 1,549,404 12,525,780
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ...................................... 1,256,319 7,166,539 (1,261,223) 8,648,371
Cash and cash equivalents,
beginning of period ........................ 554,077 5,188,770 3,071,619 3,706,938
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ... $ 1,810,396 $ 12,355,309 $ 1,810,396 $ 12,355,309
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Preferred Series A Preferred Series B Additional paid-
Shares Amount Shares Amount Shares Amount in-capital Deficit
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances
January 1,
1999 29,759,459 $2,975,946 56,300 $5,630 5,018 $2,805,961 $71,068,230 $(71,892,519)
- ------------------------------------------------------------------------------------------------------------------------------
Issuance of
common
shares 4,059,783 405,978 18,593,996
Issuance of
shares for
services
provided 556,294 55,629 4,023,107
Issuance of
shares in
connection
with
exchange of
preferred
stock 1,061,690 106,169 (56,300) (5,630) (2,392,379)
Issuance of
shares in
connection
with
exercise of
stock
options,
stock
appreciation
rights &
warrants 5,843,228 584,323 9,916,105
Preferred
stock
redemption (5,018) (2,805,961) (2,392,379)
Net loss (12,487,858)
Preferred
stock
dividends &
accretions (494,431)
=================================================================================================================
Balances
June 30,
1999 41,280,454 $4,128,045 -- $ -- -- $ -- $101,209,058 $(84,874,808)
=================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 and 1999 (UNAUDITED)
1. The results of operations for the three and six months ended June 30, 1999
and 1998 are not necessarily indicative of a full year's operations. In
the opinion of management, the accompanying financial statements include
all adjustments of a normal recurring nature, which are necessary to
present fairly such financial statements. Significant intercompany
balances and transactions have been eliminated in consolidation. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These consolidated financial statements
should be read in conjunction with the audited financial statements and
notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
2. ACTV, Inc.'s balance sheets at June 30, 1999 and December 31, 1998 reflect
expense accruals of $2,843,333 and $2,000,062, respectively, related to
the company's stock appreciation rights ("SARs") plan. No SARs were
exercised for cash during the first half of 1999. The accrual at June 30,
1999 is based on a closing market price of $13 7/8 on that date for all
outstanding SARs. In May 1999, Messrs. Samuels, Reese and Crowley agreed
to retroactively exercise their vested SARs for unregistered shares of the
Company's common stock, based upon the closing price of $3 15/16 on
January 4, 1999. As a result the SARs expense for the first half on 1999
is approximately $3.2 million less than it would have been otherwise.
3. In November 1998, ACTV issued 5,018 shares of Series B Convertible
Preferred Stock, common stock, and warrants to purchase approximately 1.95
million shares of common stock at $2.00 per share as a partial exchange
for approximately 179,000 shares of exchangeable preferred stock, which
had been issued by a subsidiary of ACTV. The excess of the fair value of
this consideration over the carrying value of the convertible preferred
stock for which it was issued is included in Minority Interest -
Subsidiary Preferred stock dividend and accretion in the accompanying
statement of operations. The Series B Preferred had a liquidation
preference of $1,000.00 per share and paid a dividend of 10% per annum, in
cash or accumulated and paid in common stock upon conversion.
During May 1999, the Company redeemed all of the outstanding Series B
Preferred Stock for a total of approximately $5.8 million. The preferred
stock was convertible into the Company's common stock at $2.00 per share
beginning in November 1998. The Company effectively redeemed the preferred
stock at an equivalent of $2.20 per common stock share, a price
significantly less than the market price at the time of the redemption.
The redemption avoided the possible future issuance of more than 2.8
million shares of common stock.
4. 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 ("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 Notes, 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 Notes
are secured by the assets of the Texas Network, and is guaranteed by ACTV,
Inc.
In connection with the purchase of such Notes, the Purchasers received on
January 14, 1998 a warrant (the "Warrant") which allowed them, among other
rights, to exchange the Warrant for such number of shares of the Company's
Common Stock, at the time of and giving effect to
6
<PAGE>
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.
For accounting purposes, the Company allocated approximately $1.4 million
to the value of the Warrant, based on a valuation by an investment banker.
The Warrant was included outside of Consolidated Shareholders' Equity, due
to its cash put feature and the notes were recorded at a value of proceeds
received less the value attributed to the warrant. The difference between
the recorded value of the Notes and the principal is being amortized as
additional interest expense over the life of the Notes. The Warrant was
exchanged and exercised for our common stock during the first quarter of
1999.
5. The Company's balance sheet at December 31, 1998 also reflects a contra
shareholders' equity amount of $199,900, related to a loan made by the
Company to a shareholder in August 1995 that was paid during the first
quarter of 1999.
6. The Company made no cash payments of interest or income taxes during the
six months ended June 30, 1999 and 1998. However, the Company made cash
interest payments in July 1999 of $369,632, related to the $5 million
original fair value Notes.
7. ACTV, Inc. has developed proprietary and patented software technologies
for two principal business segments, Individualized Television and
HyperTV. Individualized Television software provides the tools needed to
create live or pre-recorded television programming that individualizes
what the viewer sees and hears. The first commercial digital application
of Individualized Television will be a subscription television network
that features individualized regional telecasts of professional and
college sporting events. HyperTV software enables the simultaneous
delivery of television video and complementary web content. The first
commercial application of HyperTV was eSchool Online, which is designed
for the educational market. The company's presentation of the operating
segments, Individualized Television and HyperTV, is based on the way the
Company manages its business.
Information concerning the Company's business segments for the six and
three-month periods ending June 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
For the Six months ended For the Three months ended
June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999
<S> <C> <C> <C> <C>
Revenues
Individualized Television $ -- $ -- $ -- $ --
HyperTV 756,660 854,507 395,413 453,713
Unallocated corporate
------------- ------------- ------------- -------------
Total $ 756,660 $ 854,507 $ 395,413 $ 453,713
============= ============= ============= =============
Depreciation & Amortization
Individualized Television $ 399,782 $ 404,538 $ 234,852 $ 214,557
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
HyperTV 55,035 182,782 37,181 38,662
Unallocated Corporate 272,632 296,040 136,322 153,234
------------- ------------- ------------- -------------
Total $ 727,449 $ 883,360 $ 408,355 $ 406,453
============= ============= ============= =============
Interest Expense (Income)
Individualized Television $ 399,356 $ 498,747 $ 236,339 $ 282,021
HyperTV (1,137) 2,084 (273) (197)
Unallocated corporate 437 (103,063) 2,386 (63,714)
------------- ------------- ------------- -------------
Total $ 398,656 $ 397,768 $ 238,452 $ 218,110
============= ============= ============= =============
Net Loss
Individualized Television $ (2,415,648) $ (2,526,401) $ (1,339,527) $ (1,350,169)
HyperTV (813,082) (1,275,872) (403,812) (599,548)
Unallocated corporate (2,806,808) (9,180,016) (1,520,062) (3,652,104)
------------- ------------- ------------- -------------
Total $ (6,035,538) $ (12,982,289) $ (3,263,401) $ (5,601,821)
============= ============= ============= =============
Capital Expenditures
Individualized Television $ 198,680 $ 581,213 $ 182,390 $ 277,089
HyperTV 240,446 1,870,690 78,698 1,520,562
Unallocated corporate 237,807 47,574 146,252 13,812
------------- ------------- ------------- -------------
Total $ 676,933 $ 2,499,477 $ 407,340 $ 1,811,463
============= ============= ============= =============
Balance Sheet Accounts as of June 30, 1999 & 1998
Current Assets
Individualized Television $ 1,687,473 $ 655,369
HyperTV 996,617 954,472
Unallocated corporate 1,051,638 18,815,542
------------- -------------
Total $ 3,735,728 $ 20,425,383
============= =============
Total Assets
ACTV Entertainment, Inc. $ 4,684,895 $ 4,060,028
HyperTV 1,429,341 3,061,521
Unallocated corporate 4,453,133 21,933,738
------------- -------------
Total $ 10,567,369 $ 29,055,287
============= =============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Since our inception, the primary focus of our operating activities has
been to develop patented, proprietary technologies that enable programmers and
advertisers to create individualized programming and programming enhancements --
first for television and later also for the emerging area of television/Internet
convergence. We call our technologies for the television and television/Internet
convergence markets Individualized Television and HyperTV(TM), respectively.
With respect to Individualized Television, our business plan is to
generate future revenues from subscription fees, advertising and fees related to
advertising services. We intend to launch in the United States a series of
subscription-based, regional, sports television networks. Programming
8
<PAGE>
for our networks will be provided by FOX Sports Net, which reaches 72 million
homes through 19 regional networks throughout the country. FOX Sports Net will
supply us with all of its professional and college sports programming, to which
we will add Individualized Television enhancements produced by us. Our license
agreement with FOX Sports Net provides that we pay FOX a portion of the net
subscriber revenue we receive from cable operators. In addition, we must bear
the production costs of additional elements to produce an individualized
telecast.
Having performed tests of Individualized Television during 1998 and 1999
through AT&T Broadband's Dallas cable system, we intend to launch our first
network in the region served by FOX Sports Southwest. FOX Sports Southwest
programming reaches over 6 million subscriber homes in Texas, Arkansas,
Louisiana, Oklahoma and parts of New Mexico. We have an agreement with AT&T
Broadband & Internet Services to distribute our southwest regional network and
to share subscription fee revenues with us. Since individualized programming
relies on software incorporated into digital cable set-top terminals, AT&T
Broadband will offer our network to those subscribers who receive its digital
cable service.
With respect to HyperTV(TM), in mid-1997 we launched its first
application, for the education market, from which we derived all of our revenues
for 1998 and for the six months ended June 30, 1999. We anticipate, however,
that the most significant portion of future HyperTV(TM) revenues will come from
the entertainment market, where the sources of revenue will be software
licensing and program hosting fees, Internet advertising and commerce, and
content creation fees. In March 1999, we introduced HyperTV(TM) for
entertainment applications. Two months later, we announced our first HyperTV(TM)
programming alliance for the consumer market with The Box Music Network, a
24-hour-a-day interactive music television programming network. The Box Music
Network is a subsidiary of Viacom Inc.
We have had minimal revenues to date and have incurred significant
operating losses, net losses and negative cash flows from operations since our
inception. At June 30, 1999, we had an accumulated deficit of approximately $85
million. We expect to continue to incur significant operating losses on a
quarterly and annual basis for the foreseeable future.
We were incorporated in Delaware in July 1989, as the successor, by merger
to ACTV, Inc., a California corporation, organized in July 1983.
Comparison of Six Month Periods Ended June 30, 1999 and June 30, 1998
Revenues. During the six month period ended June 30, 1999, our revenues
increased 13% to $854,507, from $756,660 in the six month period ended June 30,
1998, due to an increase in sales of HyperTV services. Substantially all of our
revenues in both periods were derived from sales to the education market of
HyperTV software and related services and computer hardware.
Total Costs and Expenses. Cost of sales in the six months ended June 30,
1999, was $80,512, a decrease of 35% over cost of sales of $123,389 in the six
months ended June 30, 1998. The decrease was the result of a higher proportion
of revenues in the more recent period resulting from service fees. Total costs
and expenses, excluding cost of sales, in the six months ended June 30, 1999,
increased 114%, to $12,864,085, from $6,008,203 in the comparable period in
1998. The increase was due principally to significantly higher stock
appreciation rights, which we refer to as SARs expense, which resulted from a
large increase in the market price of our common stock in the first six months
of 1999. The SARs expense for the six months ended June 30, 1999 was $4,555,649,
compared to $396,279 for the six months ended June 30, 1998. Selling and
administrative expense also increased in the more recent six months, to
$6,622,575, from $3,903,848, due chiefly to an increase in non-cash employee
compensation, paid in the form of common stock.
9
<PAGE>
Interest Expense (Income) -- Net. Interest income in the six months ended
June 30, 1999, was $123,849, compared with $65,321 in the six months ended June
30, 1998. The increase was due to higher average cash balances during the more
recent period. We incurred interest expense of $521,617 in the six months ended
June 30, 1999, compared to interest expense of $463,977 in the six months ended
June 30, 1998. Interest expense is related to the $5 million notes issued in
January 1998 by a subsidiary of ours. We chose to pay the interest due June 30,
1998 and December 31, 1998 in kind rather than in cash.
Minority Interest -- Subsidiary Preferred Stock Dividends. For the six
month period ended June 30, 1999, we had no accrual for or payments of
subsidiary preferred stock dividends, compared to accruals of $261,950 for the
six months ended June 30, 1998, related to preferred stock issued by a
subsidiary of ours, which was accounted for as minority interest. In addition,
we paid $205,090 in preferred dividends during the six month period ending June
30, 1998 in the form of our common stock. The subsidiary preferred stock was
retired in November 1998 in exchange for a combination of our new preferred
stock, common stock and warrants.
Preferred Stock Dividends. For the six month period ended June 30, 1999,
we paid $494,431 in preferred stock dividends, related to our Series B preferred
stock, compared to no such preferred dividend payments during the comparable
1998 period. The Series B preferred stock was issued in November 1998.
Net Loss Applicable to Common Shareholders. For the six months ended June
30, 1999, our net loss applicable to common shareholders was $12,982,289, or
$.36 per basic and diluted share, an increase of 115% over the net loss of
$6,035,538, or $.35 per basic and diluted share, incurred in the prior year's
comparable period. The increase during the more recent six-month period was the
result of higher overall expenses, led by higher stock appreciation rights and
selling and administrative costs, as described above
Comparison of Six Month Periods Ended June 30, 1998 and June 30, 1997
Revenues. During the six month period ended June 30, 1998, our revenues
decreased 44% to $756,660, from $1,342,855 in the six month period ended June
30, 1997. Nearly all of our revenues in the more recent six-month period were
derived from educational sales of HyperTV software, computer servers, and
related services, compared to the comparable 1997 six-month period, when the
majority of revenues were related to television-based education hardware and
content.
Total Costs and Expenses. Cost of sales in the six months ended June 30,
1998, was $123,389, a decrease of 65% over cost of sales of $355,440 in the six
months ended June 30, 1997. The decrease was the result of the change in the
composition of products sold during the six months ended June 30, 1998, as noted
above, in favor of Internet products and services, which carry a higher profit
margin than our television-based education revenue sources. Total costs and
expenses, excluding cost of sales, in the six months ended June 30, 1998,
increased 39%, to $6,008,203, from $4,319,129 in the comparable period in 1997.
The increase was due to higher operating and selling and administrative expenses
associated with our regional network testing in Dallas; higher depreciation and
amortization expenses; and higher stock appreciation rights expenses, the result
of an increase in the market price of our common stock. Depreciation and
amortization expense for the six months ended June 30, 1998, increased 133% to
$727,449, from $311,674 for the six months ended June 30, 1997. This increase
was due principally to higher depreciation expenses related to our regional
network's master control production facility.
Interest Expense (Income) -- Net. Interest income in the six months ended
June 30, 1998, was $65,321, compared with $92,083 in the six months ended June
30, 1997. The decrease was due to lower average cash balances during the more
recent period. We incurred interest expense and accretions of $463,977 in the
six months ended June 30, 1998, compared to no interest expense
10
<PAGE>
during the comparable 1997 period. Interest expense is related to the $5 million
principal value notes issued in January 1998 by a subsidiary of ours. We chose
to pay the interest due June 30, 1998 in kind rather than in cash.
Minority Interest -- Subsidiary Preferred Stock Dividends. For the six
month periods ending June 30, 1998 and June 30, 1997, we accrued $261,950 for
dividends and $1,499,394 for dividends and accretion, respectively, related to
preferred stock issued by our subsidiary, which was accounted for as minority
interest. We paid $205,090 and $1,271,408 in preferred dividends during the six
month periods ending June 30, 1998 and June 30, 1997, respectively, by issuing
shares of common stock of ACTV, Inc.
Net Loss Applicable to Common Shareholders. For the six months ended June
30, 1998, our net loss was $6,035,538, or $.35 per basic and diluted share, an
increase of 27% over the net loss of $4,739,025, or $.40 per basic and diluted
share, incurred in the prior year's comparable period. The increase during the
more recent six-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 Three Month Periods Ended June 30, 1999 and June 30, 1998
Revenues. During the three month period ended June 30, 1999, our revenues
increased approximately 15%, to $453,713, from $395,413 in the three month
period ended June 30, 1998. In the more recent quarter, all of our revenues were
derived from HyperTV sales, while in the 1998 quarter, we recorded revenues from
both HyperTV sales and from television-based education hardware and content.
Total Costs and Expenses. Cost of sales in the three months ended June 30,
1999 was $25,732, compared to the corresponding 1998 quarter's cost of sales of
$75,786. A much higher proportion of revenues in the more recent quarter derived
from service fees, resulting in the significant cost of sales decrease. Total
costs and expenses, excluding cost of sales, increased approximately 80% for the
three months ended June 30, 1999, to $5,795,038, from $3,219,285 for the three
months ended June 30, 1998. The increase was due principally to both higher
stock appreciation rights, or SARs, expense and selling and administrative
expenses in the more recent period. The higher stock appreciation rights expense
was related to a proportionately greater increase in the market price for the
Company's common stock during the quarter ended June 30, 1999, while the
increase in selling and administrative expenses was principally attributable to
higher non-cash compensation expense. Depreciation and amortization expense was
little changed for the three months ended June 30, 1999, at $406,453, compared
to $408,355 in the comparable 1998 quarter.
Interest Expense (Income) -- Net. Interest income for the three months
ended June 30, 1999 was $72,827, compared with $25,481 for the three months
ended June 30, 1998. The increase was due to higher average cash balances during
the more recent period. We incurred interest expense and accretion of $290,936
in the 1999 quarterly period, compared to interest expense and accretion of
$263,933 during the comparable 1998 period. Interest expense is related to the
$5 million Notes issued in January 1998 by a subsidiary of ours. We chose to pay
the interest due June 30, 1998 in kind rather than in cash.
Minority Interest -- Subsidiary Preferred Stock Dividends. For the three
months ended June 30, 1999, we had no accrual for or payment of subsidiary
preferred stock dividends, compared to an accrual of $125,291 for subsidiary
preferred dividends in the comparable 1998 quarter. In addition, we paid
$134,901 in preferred dividends during the three month period ended June 30,
1998 by issuing shares of our common stock. The dividends were related to
outstanding preferred stock
11
<PAGE>
issued by our subsidiary, which was accounted for as minority interest. The
subsidiary preferred stock was retired in November 1998 in exchange for a
combination of new ACTV, Inc. preferred stock, common stock, and warrants.
Net Loss Applicable to Common Shareholders. Our net loss applicable to
common shareholders for the three months ended June 30, 1999 increased
approximately 72%, to $5,601,821, or $.14 per share, from $3,263,401, or $.18
per share, in the comparable 1998 period, principally due to higher expenses
associated with SARs and selling and administrative costs.
Comparison of Three Month Periods Ended June 30, 1998 and June 30, 1997
Revenues. During the three month period ended June 30, 1998, our revenues
decreased approximately 9%, to $395,413, from $434,911 in the three month period
ended June 30, 1997. In the more recent quarter, all of our revenues derived
from Internet sales, while in the 1997 quarter, we recorded revenues from both
HyperTV sales and from television-based education hardware and content.
Total Costs and Expenses Cost of sales in the three months ended June 30,
1998 was $75,786, compared to corresponding 1997 quarter's cost of sales of
$75,949. Our gross margin decreased slightly to 81% in the more recent quarter,
from 82% in the corresponding 1997 quarter. Total costs and expenses, excluding
cost of sales, increased approximately 53% for the three months ended June 30,
1998, to $3,219,285, from $2,110,458 for the three months ended June 30, 1997.
The increase was due principally to higher stock appreciation rights expense,
depreciation and amortization expense, and operating, selling and administrative
expenses in the more recent period. The higher stock appreciation rights expense
was related to a higher market price for our common stock at June 30, 1998,
while the increase in depreciation, amortization, operating, selling and
administrative expenses was principally attributable to our regional network
testing. Depreciation and amortization expense increased 160% for the three
months ended June 30, 1998 to $408,355, from $157,101 in the comparable 1997
quarter. This increase was due principally to higher depreciation expenses
related to the regional network's master control production facility.
Interest Expense (Income) -- Net. Interest income for the three months
ended June 30, 1998 was $25,481, compared with $33,946 for the three months
ended June 30, 1997. The decrease was due to lower average cash balances during
the more recent period. We incurred interest expense and accretions of $263,933
in the 1998 quarterly period, compared to no interest expense during the
comparable 1997 period. Interest expense is related to the Notes issued in
January 1998 by a subsidiary of ours. We chose to pay the interest due June 30,
1998 in kind rather than in cash.
Minority Interest -- Subsidiary Preferred Stock Dividends. For the three
months ended June 30, 1998 and the three months ended June 30, 1997,
respectively, we accrued $125,291 for dividends and $750,173 for dividends and
accretions, respectively, related to outstanding preferred stock issued by our
subsidiary, which was accounted for as minority interest. We paid $134,901 and
$18,729 in preferred dividends during the three month periods ending June 30,
1998 and June 30, 1997, respectively, by issuing shares of our common stock.
Net Loss. Our net loss for the three months ended June 30, 1998 increased
approximately 32%, to $3,263,401, or $.18 per share, from $2,467,723, or $.21
per share, in the comparable 1997 period, principally due to higher expenses
associated with our regional network test, as noted above.
Liquidity and Capital Resources
Since our inception, we (including our operating subsidiaries) have not
generated revenues sufficient to fund our operations, and have incurred
operating losses. Through June 30, 1999, we had
12
<PAGE>
an accumulated deficit of approximately $85 million. Our cash position on June
30, 1999 was $12,355,309, compared to $5,188,770 on December 31, 1998.
Additionally, the Company received $5 million in cash in July 1999 from common
stock sales to a private investor.
During the six month period ended June 30, 1999, we used $4,085,889 in
cash for our operations, compared with $5,186,426 in the six months ended June
30, 1998. Despite the increase in net loss in the more recent period, a higher
percentage of this loss was the result of non-cash charges.
With respect to investing activities, during the six month period ended
June 30, 1999 and 1998, we used cash of $2,499,477 and $676,933, respectively.
Investing activities in the more recent six-month period were related to the
acquisition of a patent and investments in patents pending, computer hardware,
and software developments. Investing activities in the 1998 period related to
equipment purchases, software development and patents.
We met our cash needs in the six month period ended June 30, 1999 from
sales of common stock to private investors, totaling approximately $9 million,
and from the exercise of stock options and warrants, totaling approximately
$10.4 million. We met our cash needs in the six-month period ended June 30, 1998
from the proceeds of a $5.0 million principal note financing as well as from
private sales of common stock to an institutional investor.
With respect to other financing activities, for the three and six month
periods ended June 30, 1999, we redeemed all of the outstanding Series B
preferred stock by paying a total of approximately $5.8 million, which
represents a 10% premium above the stock's face value plus accrued dividends.
Because the preferred stock was convertible into our common stock at $2.00 per
share beginning in November 1999, we effectively redeemed the preferred stock by
buying it at an equivalent of $2.20 per common stock share, a price
significantly less than the market price of a common stock share at the time of
the redemption. The redemption avoided the possible future issuance of more than
2.8 million shares of common stock.
During the three months ended June 30, 1999, we used $2,065,946 in cash
for our operations, compared with $2,403,287 in the comparable 1998 quarter.
With respect to investing activities, for the three month periods ended
June 30, 1999 and 1998, we used cash of $1,811,462 and $407,340, respectively.
Investing activities in the more recent quarter related to a patent acquisition,
investments in patents pending, software development and equipment purchases.
Investing activities in the 1998 quarter were related to patents pending,
software development and equipment purchases.
Our balance sheets at June 30, 1999 and December 31, 1998 reflect expense
accruals of $2,843,333 and $396,279, respectively, related to our stock
appreciation rights plan.
In July 1999, we received net proceeds of $5 million from the sale of
common stock to a private investor.
We believe that our current funds, taking into account approximately $5
million dollars in proceeds from an equity financing received in July 1999, will
enable us to finance our operations for at least the next twelve months. While
we believe that we have adequate funds to launch our first planned regional
network, we will need additional funding to launch networks in other regions. We
currently have no commitments from lenders or investors at this time, and there
is no assurance that we will be able to raise the necessary capital to effect
additional regional network launches.
Year 2000 compliance
The year 2000 issue is the result of computer software that was written
with only two digits rather than four digits to represent the year in a date
field. Computer hardware and software applications that are date-sensitive may
interpret a date presented as "00" to be the year 1900 rather than the year
2000. The result could be system failure or miscalculations causing the
disruption of operations.
We believe that our internal systems, relating to both computer hardware
and software, will function properly with respect to dates in the year 2000 and
beyond. In addition, we believe that our proprietary software either sold
directly to third parties or incorporated in products sold to third parties is
year 2000 compliant. Having performed an assessment of the potential year 2000
problem, we do not expect to incur significant costs related to year 2000
issues.
However, there is general uncertainty regarding the year 2000 problem and
its effect on the overall business environment. We cannot determine at this time
whether the year 2000 problem will have a material impact on our operations or
financial condition as the result of significant disruptions to the U.S. economy
and/or business infrastructure.
13
<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
On May 20, 1999 the Company held an Annual Meeting of Shareholders for which it
solicited votes by proxy. The following is a brief description of the matters
voted upon at the meeting and a statement of the number of votes cast for and
against, and the number of abstentions as to each matter.
1. Election of directors:
For Withheld
William Samuels 26,926,845 44,863
William Frank 26,915,170 56,538
2. To approve the adoption of the Company's 1999 Stock Option Plan.
For Against Abstain
25,325,428 994,092 652,188
3. To ratify the appointment of Deloitte & Touche, LLP as independent
auditors of the Company.
For Against Abstain
26,922,888 21,658 27,162
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.
14
<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: August 13, 1999 /s/ William C. Samuels
--------------- ----------------------
William C. Samuels
Chairman, Chief Executive Officer
and Director
Date: August 13, 1999 /s/ Christopher C. Cline
--------------- ------------------------
Christopher C. Cline
Senior Vice President (principal financial
and accounting officer)
15
ACTV, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Six Month Period Three Month Period
Ended June 30, Ended June 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding .......... 17,219,660 35,859,875 18,371,395 39,711,671
Common stock equivalents ..................... -- -- -- --
------------ ------------ ------------ ------------
Total ............................... 17,219,660 35,859,875 18,371,395 39,711,671
============ ============ ============ ============
Net loss applicable to common shareholders ... $ (6,035,538) $(12,982,289) $ (3,263,401) $ (5,601,821)
============ ============ ============ ============
Basic and diluted loss per share ............. $ (.35) $ (.36) $ (.18) $ (.14)
============ ============ ============ ============
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIODS ENDED JUNE
30, 1998 AND 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> JUN-30-1998 JUN-30-1999
<CASH> 1,810,396 12,355,309
<SECURITIES> 0 0
<RECEIVABLES> 780,913 5,763,935
<ALLOWANCES> 0 0
<INVENTORY> 204,719 77,231
<CURRENT-ASSETS> 3,735,728 20,425,383
<PP&E> 3,665,803 4,471,865
<DEPRECIATION> 1,235,197 1,938,096
<TOTAL-ASSETS> 10,567,369 29,055,288
<CURRENT-LIABILITIES> 2,336,408 3,913,531
<BONDS> 3,742,576 4,679,462
<COMMON> 1,994,686 4,128,045
0 0
8,460 0
<OTHER-SE> (3,549,899) 16,334,250
<TOTAL-LIABILITY-AND-EQUITY> 10,567,369 29,055,288
<SALES> 756,660 854,507
<TOTAL-REVENUES> 756,660 854,507
<CGS> 123,389 80,512
<TOTAL-COSTS> 4,884,475 7,425,076
<OTHER-EXPENSES> 1,123,728 5,439,009
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 463,977 521,617
<INCOME-PRETAX> (5,773,588) 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,773,588) (12,487,858)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,035,538) (12,982,289)
<EPS-BASIC> .35 .36
<EPS-DILUTED> .35 .36
</TABLE>
