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 June 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:
<TABLE>
<CAPTION>
Title of each class Name of exchange on which registered
- ------------------- ------------------------------------
<S> <C>
Common Stock, Par Value $0.10 Boston Stock Exchange
</TABLE>
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, 1998, there were 23,645,527 shares of the registrant's common
stock outstanding.
<PAGE>
INTRODUCTORY NOTE
This amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q as filed by the Registrant on August 14, 1998 and is being filed to reflect
the restatement of the Registrant's Consolidated Financial Statements (the
Restatement). The Restatement reflects the presentation of Convertible Preferred
Stock of Subsidiary as minority interest outside of Consolidated Shareholders
Equity (Deficiency), the recording of dividends and accretion of this Preferred
Stock as minority interest and the presentation of the Warrant issued in January
1998 outside of Consolidated Shareholders Equity (Deficiency).
2
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
1997 1998
(as restated)
(unaudited)
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $554,077 $1,810,396
Accounts receivable-net........................... 303,044 780,913
Education equipment inventory..................... 237,757 204,719
Other............................................. 308,653 939,700
-------------- --------------
Total current assets.......................... 1,403,531 3,735,728
-------------- --------------
Property and equipment-net............................. 2,596,785 2,430,606
-------------- --------------
Other Assets:
Patents and patents pending....................... 279,356 491,641
Software development costs........................ 669,852 856,933
Goodwill 2,641,188 2,428,002
Other............................................. 311,206 624,459
-------------- --------------
Total other assets............................ 3,901,602 4,401,035
-------------- --------------
Total ................................... $7,901,918 $10,567,369
============== ==============
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued expenses.............. $1,882,159 $1,279,800
Deferred stock appreciation rights................. -- 396,279
Preferred dividends payable........................ 603,469 660,329
-------------- --------------
Total current liabilities...................... 2,485,628 2,336,408
Long-Term Notes Payable -- 3,742,576
Put warrant 1,371,624
Preferred stock of a subsidiary, convertible into
common shares of the parent, no par value, 436,000
shares authorized: issued and outstanding 316,944 at
December 31, 1997, 222,297 at June 30, 1998...... 7,029,708 4,663,514
Shareholders' equity (deficiency):
Preferred stock, $.10 par value, 1,000,000 shares
authorized, issued and outstanding 86,200 at
December 31, 1997, 84,600 at June 30, 1998......... 8,620 8,460
Common stock, $.10 par value, 65,000,000 shares
authorized: issued and outstanding 14,614,611 at
December 31, 1997, 19,946,860 at June 30, 1998.... 1,461,461 1,994,686
Additional paid-in capital......................... 48,140,596 54,395,677
Loans receivable from stock sales.................. (199,900) (885,843)
Accumulated deficit................................ (51,024,195) (57,059,733)
-------------- --------------
Total shareholders' equity (deficiency)........ (1,613,418) (1,546,753)
-------------- --------------
Total..................................... $7,901,918 $10,567,369
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Periods Three Month Periods
Ended June 30, Ended June 30,
1997 1998 1997 1998
(as restated) (as restated) (as restated) (as restated)
<S> <C> <C> <C> <C>
Revenues:
Sales revenues.................... $1,342,855 $756,660 $434,911 $395,413
-------------- --------------- --------------- ---------------
Total revenues................. 1,342,855 756,660 434,911 395,413
Cost of Sales..................... 355,440 123,389 75,949 75,786
-------------- --------------- --------------- ---------------
Gross profit................... 987,415 633,271 358,962 319,627
Expenses:
Operating expenses................ 711,440 980,627 365,150 617,913
Selling and administrative........ 3,613,256 3,903,848 1,628,411 1,860,332
Depreciation and amortization..... 98,488 514,263 50,508 301,762
Amortization of goodwill.......... 213,186 213,186 106,593 106,593
Stock appreciation rights......... (317,241) 396,279 (40,204) 332,685
-------------- --------------- --------------- ---------------
Total expense................... 4,319,129 6,008,203 2,110,458 3,219,285
Interest (income)................. (92,083) (65,321) (33,946) (25,481)
Interest expense.................. -- 463,977 -- 263,933
-------------- --------------- --------------- ---------------
Interest expense (income) - net (92,083) 398,656 (33,946) 238,452
Minority interest - subsidiary
accretion........................ 1,499,394 261,950 750,173 125,291
-------------- --------------- --------------- ---------------
Net loss............................. $4,739,025 $6,035,538 $2,467,723 $3,263,401
============== =============== =============== ===============
Basic and diluted Loss per common
share............................... $.40 $.35 $.21 $.18
Weighted average number of common
shares outstanding................... 11,916,823 17,219,660 12,003,573 18,371,395
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Periods Three Month Periods
Ended June 30, Ended June 30,
1997 1998 1997 1998
(as restated) (as restated)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $4,739,025 $6,035,538 $2,467,723 $3,263,401
--------------- --------------- --------------- ---------------
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization............. 311,674 727,449 157,101 408,355
Stock appreciation rights................. (671,866) 396,279 (40,204) 332,685
Amortization of warrants and deferred
expenses related to debt financing...... -- 142,074 -- 89,712
Common stock issued for services.......... 15,000 1,145,052 15,000 849,913
Common stock issued or reserved for
preferred dividends and accretions........ 1,271,408 205,090 643,729 134,901
Changes in operating assets and liabilities:
Accounts receivable....................... (450,945) (477,869) 72,206 (263,157)
Education equipment inventory............. 25,235 33,038 16,142 33,038
Other assets.............................. (146,903) (719,642) (159,420) (650,303)
Accounts payable and accrued expenses..... (40,193) (602,359) (254,700) (75,030)
--------------- --------------- --------------- ---------------
Net cash (used) in operating
activities....................... (4,425,615) (5,186,426) (2,017,869) (2,403,287)
--------------- --------------- --------------- ---------------
Cash flows from investing activities:
Investment in patents pending............. -- (227,401) -- (177,401)
Investment in property and equipment...... (223,267) (232,686) (132,480) (66,659)
Investment in systems..................... (399,460) (216,846) (399,460) (163,280)
--------------- --------------- --------------- ---------------
Net cash used in investing
activities.............................. (622,727) (676,933) (531,940) (407,340)
--------------- --------------- --------------- ---------------
Cash flows from financing activities:
Net proceeds from debt issuance........... -- 3,306,190 -- --
Preferred stock dividends payable......... 227,985 56,860 106,443 (9,610)
Net Proceeds from Put Warrant............. -- 1,371,624 -- --
Redemption of preferred stock............. -- (565,759) -- --
Proceeds from sale of common stock........ -- 2,950,763 -- 1,559,014
Expense related to convertible preferred
stock issuance.......................... (9,565) -- -- --
--------------- --------------- --------------- ---------------
Net cash provided by (used in) financing
activities..................................... 218,420 7,119,678 106,443 1,559,014
--------------- --------------- --------------- ---------------
Net increase (decrease) in cash and cash
equivalents ................................. (4,829,922) 1,256,319 (2,443,366) (1,261,223)
Cash and cash equivalents,
beginning of period....................... 6,520,756 554,077 4,134,200 3,071,619
--------------- --------------- --------------- ---------------
Cash and cash equivalents, end of period.. 1,690,834 1,810,396 1,690,834 1,810,396
=============== =============== =============== ===============
</TABLE>
5
<PAGE>
ACTV, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements for the Six Months Ended June 30,
1998
1(a) The consolidated financial statements are unaudited. 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, taking into
account approximately $2.75 million dollars in equity financing completed in
July 1998, will enable the Company to finance its operations for at least the
next twelve months. Such belief is based on assumptions that may not
materialize, 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 has
engaged an investment bank for assistance in securing such financing, the
Company has no commitments from lenders or investors at this time and there is
no assurance that it will be able to raise the necessary capital to effect
additional Regional Network launches or to 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/A2 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 June 30, 1998 and December 31, 1997 reflect
capitalized software production costs of $856,933 and $669,852, respectively,
classified as a component of "Other" non-current assets.
3. The Company's balance sheets at June 30, 1998 and December 31, 1997 also
reflect a contra shareholders' equity (deficiency ) amount of $885,843 related
to (a) a loan made by the Company to an employee in August 1995 (June 30, 1998
and December 31, 1997 balance of $199,900) and (b) loans made to four employees
in the first six months of 1998 (June 30, 1998 balance of $685,943). All of the
loans were non-interest bearing and 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 will 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
employee's service period, which is from the issuance of the loan to January 1,
1999. Such compensation expense recorded for the six months ended June 30, 1998
was $603,610.
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 from the Issuer and
Texas Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal
6
<PAGE>
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 warrant (the "Warrant"), which allows the holder to
purchase up to 17.5% of the fully-diluted shares of common stock of Texas
Network or 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 holder of the
Warrant has the right to put the warrant to Texas Network for a value based on a
multiple of its operating income.
Prior to June 30, 1998, had the Company formed and capitalized an
entity with the intent to commence operations for a second Regional Network in
one of the ten FOX Sports Net owned and operated regions, the Purchasers had a
one-time option to purchase notes from such entity on the same terms and
conditions as the Texas Network financing. This option expired unexercised on
June 30, 1998.
For accounting purposes, the Company has allocated approximately $1.4
million to the value of the Warrant, based on a valuation by an investment
banker. The Warrant is included outside of Consolidated Shareholders' Equity
(Deficiency) due to its cash Put Feature and is being amortized as additional
interest expense over the life of the Note.
5. During 1996, the Company raised approximately $11.0 million net from the
proceeds of a private placement of common stock ($1.9 million in net proceeds)
and of 5% exchangeable preferred stock (the "Exchangeable Preferred Stock")
issued by its wholly-owned subsidiary and convertible into shares of the Company
($9.1 million in net proceeds). 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 only if the closing price of the Company's Common Stock is above
$9.00 for thirty consecutive trading days prior to redemption.
7
<PAGE>
The Exchangeable Preferred Stock is convertible into shares of common
stock at a discounted conversion price. The discount ranged from 14% to a
maximum of 30.375%. The extent of the beneficial conversion feature was
approximately $4.0 million, representing the maximum difference between the
discounted conversion price and the prevailing market price of the Common Stock.
A preferred stock accretion of $1,250,000 was recorded and included as minority
interest for the six months ended June 30, 1997
6. The consolidated balance sheet at June 30, 1998, reflects non-cash activity
during the six month period ended June 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 $685,943 (net of
compensation expense of $603,610 and an increase in common stock and additional
paid-in capital of a total of $1,289,553. The Company made no cash payments of
interest or income taxes during the three months ended June 30, 1997, or June
30, 1998.
7. Subsequent to the issuance of the Company's financial statements as of and
for the six months ended June 30, 1997 and 1998, management determined that
these financial statements for years 1996 and 1997, should be restated.
The significant effects of the restatement are to present Convertible
Preferred Stock of the Subsidiary as minority interest outside of Consolidated
Shareholders' Equity (Deficiency), to record dividends and accretion of this
Preferred Stock as minority interest, and to present the warrant issued in
January 1998 (See Note 4) outside of Shareholders' Equity (Deficiency) due to
its cash put feature.
8
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------------------------------
1997 1998
------------------------------------- -------------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
---------------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Minority Interest - Subsidiary
Preferred stock dividends and
Accretion $ -- $1,499,394 $ -- $ 261,950
Net Loss $3,239,631 $4,739,025 $5,773,588 $6,035,538
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------------------------------------
1997 1998
------------------------------------- -------------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
---------------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Minority Interest - Subsidiary
Preferred stock dividends and
Accretion $ - $ 750,173 $ - $ 125,291
Net Loss $1,717,550 $2,467,723 $3,138,110 $3,263,401
<CAPTION>
June 30,
-------------------------------------
1998
-------------------------------------
As Previously
Reported As Restated
---------------- -------------
<S> <C> <C>
Convertible preferred stock
of subsidiary $ - $4,663,514
Put Warrant $ - $1,371,624
Shareholders' equity
(deficiency) $4,488,385 $(1,546,753)
</TABLE>
The restatement had no effect on revenues, total assets and net loss per basic
and diluted common share.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTORY NOTE
This amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q as filed by the Registrant on August 14, 1998 and is being filed to reflect
the restatement of the Registrant's Consolidated Financial Statements (the
Restatement). The Restatement reflects the presentation of Convertible Preferred
Stock of Subsidiary as minority interest outside of Consolidated Shareholders
Equity (Deficiency), the recording of dividends and accretion of this Preferred
Stock as minority interest and the presentation of the Warrant issued in January
1998 outside of Consolidated Shareholders Equity (Deficiency).
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. ("the Company") has developed proprietary technologies for
individualized television programming ("Individualized Programming") and for the
Internet. The Company's products, in general, are tools for the creation of
programming that allows viewer participation for both television and Internet
platforms. The chief market presently targeted by the Company for its
Individualized Programming is in-home entertainment, particularly sports
programming, while for the Internet the market focus is education, with an
emphasis on schools and universities in the United States.
For entertainment applications, the Company's Individualized
Programming gives the viewer the ability to make instant and seamless changes
within the live or pre-recorded television programming being viewed.
Individualized Programming is a multi-path broadcast of several elements of
programming material, such as instant replay, isolation cameras, statistical
data, or additional features. There is no limit to the number of viewers who can
interact simultaneously with a program enhanced with the Company's
Individualized Programming ("ACTV Program" or "ACTV Programming").
For education applications, the Company has developed eSchool
Online(TM) ("eSchool"), a Java-based software suite that creates "virtual
communities" for education. (Java is a programming language developed for the
Internet by Sun Microsystems.) eSchool integrates Web content and other media
with collaborative groupware functionality to create interactive environments
for students and instructors. In addition, the Company markets analog and
digital systems for televised distance learning applications that permit
point-to-multi-point telecasts that can deliver pre-recorded individualized
lessons as well as integrate individualized lessons into live distance learning
class sessions.
10
<PAGE>
Since its inception, the Company has incurred operating losses
approximating $57.1 million related directly to the development and marketing of
the Individualized Programming and eSchool.
The Company is seeking to exploit the entertainment market, principally
in the U.S., through the launch of regionally-based, individualized television
networks ("Regional Networks"). Programming for the Regional Networks is
provided through the Company's strategic alliance with FOX Sports Net. The
Company has the rights to license FOX Sports Net programming from each of FOX
Sports Net's regional sports affiliates and to offer enhanced FOX Sports Net
programming to any distributor that carries the corresponding regional FOX
Sports Net channel. The FOX Sports Net agreement extends through June 2003.
FOX Sports Net is a service of "National Sports Partners," a joint
venture between Cablevision's Rainbow Media Holdings, Inc. and FOX/Liberty
Networks, which is a 50/50 partnership between News Corp. and
Tele-Communications Inc.'s Liberty Media Corporation. Equally owned by
FOX/Liberty Networks and Cablevision's Rainbow Media Holdings, Inc., the new
venture now reaches more than 58 million homes nationwide.
The Company's business plan is to develop Regional Networks in regions
served by Fox Sports Net, with distribution to be provided by cable operators
that are currently upgrading their service from analog to digital transmission.
Initially, the Regional Networks will feature sports programming, with the
possible introduction of other types of programming in the future. The Company
believes that the differentiation afforded by the Company's Individualized
Programming will allow distributors to offer their customers Individualized
Programming on a subscription basis.
The Company plans to launch its first Regional Network in 1998 in the
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 August 1997, General Instrument Corp. ("GI") invested $1 million in
common stock of ACTV, Inc. (the "Common Stock") and agreed to market, jointly
with the Company, Individualized Programming applications. GI is the leading
supplier of digital television headend systems and
11
<PAGE>
digital set-top terminals. The Company and GI had previously announced that the
Company's Individualized Programming would be incorporated into GI's new MPEG-2
digital set-top cable and wireless terminals.
It is the Company's belief that it has adequate funding to launch the
Southwest Regional Network in 1998. However, there is no assurance that it will
secure the funding necessary to effect additional launches in other regions, or
that other factors might not delay or prohibit the successful implementation of
the Company's Regional Network strategy.
The projected Southwest Regional Network and additional network
expansion are part of the Company's plan to develop the entertainment division
of its business, which to date, does not generate any revenue for the Company.
There can be no assurance that the Southwest Regional Network or other Regional
Networks, if launched, will generate significant revenues for the Company.
The target market for the Company's Internet products includes schools,
state and local agencies, universities and private business. eSchool consists of
a suite of integrated software products, including content creation software,
student and teacher user software, and database assessment software. In
addition, the Company provides Internet content development assistance, hosting
of eSchool programs on its computer servers, and consulting to schools and
universities.
To date, nearly all of the Company's revenues have been derived from
sales to the education market of Internet software and related services and of
individualized educational programs and products. There is no assurance that the
Company will be able to successfully compete in this market, where many of its
current and potential competitors are companies with significantly greater
resources than those of the Company.
12
<PAGE>
RESULTS OF OPERATIONS
Comparison of Six Month Periods Ended June 30, 1998 and June 30, 1997
During the six month period ended June 30, 1998, the Company's revenues
decreased 44% to $756,660, from $1,342,855 in the six month period ended June
30, 1997. Nearly all of the Company's revenues in the more recent six-month
period were derived from Internet sales, compared to the comparable 1997
six-month period, when the majority of revenues were related to television-based
education hardware and content.
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
Company's gross margin increased to 84% in the more recent period, from 74% in
the corresponding 1997 period. The increase 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 the Company's television-based education revenue sources.
Total expenses excluding cost of sales, interest expense and minority interest
preferred stock dividends and accretion 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 (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 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 the Southwest Regional Network's master control production facility.
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. The Company incurred
interest expense and accretions of $398,656 in the six months ended June 30,
1997, 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 six month periods ending June 30, 1998 and June 30, 1997, the Company
accrued $261,950 for dividends and $1,499,394 for dividends and accretions,
respectively, related to its outstanding preferred stock, which was accounted
for as minority interest. The Company paid $205,090 and $21,408 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.
For the six months ended June 30, 1998, the Company's 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
13
<PAGE>
higher stock appreciation rights and depreciation and amortization expenses,
coupled with lower total revenues.
Comparison of Six Month Periods Ended June 30, 1997 and June 30, 1996
During the six month period ended June 30, 1997, the Company's revenues
increased 74% to $1,342,855 from $773,596 in the six month period ended June 30,
1996. All revenues in the six month period ended June 30, 1997 were derived from
the education market, while in the 1996 six-month period, the Company's revenues
were derived from education sales as well as from license and executive producer
fees. The revenue increase in the more recent period was the result of
significantly higher sales of distance learning products and services.
Cost of sales in the six months ended June 30, 1997, was $355,440, an increase
of 13% over cost of sales of $314,610 in the six months ended June 30, 1996. The
Company's gross margin increased to 74% in the more recent period, from 59% 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, interest expense, and minority interest
- - preferred stock dividends and accretion in the six months ended June 30, 1997,
declined slightly, to $4,319,129, from $4,567,875 in the comparable period in
1996. The decrease was due to lower 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 six months ended June 30, 1997,
decreased 42% to $311,674, from $538,422 for the six months ended June 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 six months ended June 30, 1997, was $92,083, compared
with $55,870 in the six months ended June 30, 1996. The increase was due to
higher average cash balances during the more recent period. The Company incurred
no interest expense during either six-month period.
For the six months ended June 30, 1997, the Company accrued $1,499,394 for
dividends and accretions related to exchangeable preferred stock issued in
August 1996 by one of its wholly-owned subsidiaries, which was accounted for as
minority interest.
For the six months ended June 30, 1997, the Company's net loss was $4,739,025,
or $.40 per basic and diluted share, an increase of 17% over the net loss of
$4,053,019, or $.35 per basic and diluted share, incurred in the prior year's
comparable period. The increase was the result principally of higher dividends
and accretions in the six months ended June 30, 1997, which more than
compensated for greater total revenues and higher gross profit during the more
recent period.
14
<PAGE>
Comparison of Three Month Periods Ended June 30, 1998 and June 30, 1997
During the three month period ended June 30, 1998 ("Second Quarter 1998"), the
Company's revenues decreased approximately 9%, to $395,413, from $434,911 in the
three month period ended June 30, 1997 ("Second Quarter 1997"). In the more
recent quarter, all of the Company's revenues derived from Internet sales, while
in Second Quarter 1997 the Company recorded revenues from both Internet sales
and from television-based education hardware and content.
Cost of sales in Second Quarter 1998 was $75,786, compared to Second Quarter
1997's cost of sales of $75,949. The Company's gross margin decreased slightly
to 81% in the more recent quarter, from 82% in the corresponding 1997 quarter.
Total expenses excluding cost of sales and interest expense increased
approximately 53% in Second Quarter 1998, to $3,219,285, from $2,110,458 in
Second Quarter 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 the Company's common stock at June 30, 1998, while 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 160% in Second Quarter 1998 to
$408,355, from $157,101 in Second Quarter 1997. This increase was due
principally to higher depreciation expenses related to the Southwest Regional
Network's master control production facility.
Interest income in Second Quarter 1998 was $25,481, compared with $33,946 in
Second Quarter 1997. The decrease was due to lower average cash balances during
the more recent period. The Company incurred interest expense and accretions of
$263,933 in Second 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. The Company
chose to pay the interest due June 30, 1998 in kind rather than in cash.
For Second Quarter 1998 and Second Quarter 1997, respectively, the Company
accrued $125,291 for dividends and $750,173 for dividends and accretions,
respectively, related to its outstanding preferred stock, which was accounted
for as minority interest. The Company paid $133,141 and $18,729 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.
The Company's net loss in Second Quarter 1998 increased approximately 32%, to
$3,263,401, or $.18 per share, from $2,467,723, or $.21 per share, in Second
Quarter 1997, principally due to higher expenses associated with the Southwest
Regional Network, as noted above.
Comparison of Three Month Periods Ended June 30, 1997 and June 30, 1996
During the three month period ended June 30, 1997 ("Second Quarter 1997"), the
Company's revenues increased approximately 3%, to $434,911, from $422,922 in the
three month period ended June 30, 1996 ("Second Quarter 1996"). In the more
recent quarter, all of the Company's revenues
15
<PAGE>
derived from education sales, while in Second Quarter 1996 the Company recorded
revenues from both education sales and from license and executive producer fees.
Cost of sales in Second Quarter 1997 was $75,949, a 29% decrease compared to
Second Quarter 1996's cost of sales of $106,600. The Company's gross margin
increased to 82% in the more recent quarter, from 75% 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 increased
approximately 15% in Second Quarter 1997, to $2,110,458, from $1,831,091 in
Second Quarter 1996. The increase was due principally to a difference in stock
appreciation rights expenses between the two periods.
Depreciation and amortization expense decreased in Second Quarter 1997 to
$157,101, from $243,950 in Second Quarter 1996. This decrease was due to the
recognition during the 1996 quarter of amortization expense for certain
programming assets that were fully amortized during 1996.
Interest income in Second Quarter 1997, was $33,946, compared with $22,633 in
Second 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 months ended June 30, 1997, the Company accrued $750,173 for
dividends and accretions related to exchangeable preferred stock issued in
August 1996 by one of its wholly-owned subsidiaries, which was accounted for as
minority interest.
The Company's net loss in Second Quarter 1997 increased approximately 65%, to
$2,467,723, or $.21 per share, from $1,492,136, or $.13 per share, in Second
Quarter 1996, principally the result preferred stock dividends and accretions
and the noted difference in stock appreciation rights expense.
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 June 30, 1998, the Company had an accumulated deficit of
approximately $57.1 million. The Company's cash position on June 30, 1998 was
$1,810,396, compared to $554,077 on December 31, 1997.
During the six month period ended June 30, 1998 the Company used $5,129,566 in
cash for its operations, compared with $4,197,630 in the six months ended June
30, 1997.
With respect to investing activities, during the six month period ended June 30,
1998 and 1997 the Company used cash of $676,933 and $622,727, respectively.
Investing activities, in the more recent six-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.
16
<PAGE>
The Company met its cash needs in the six month period ended June 30, 1998 from
the proceeds of the $5.0 million principal value note financing as well as from
private sales of common stock to an institutional investor. The Company met its
cash needs in the six month period ended June 30, 1997 from the remaining
proceeds from the private sale of exchangeable preferred stock effected in
August 1996.
During Second Quarter 1998 the Company used $2,442,897 in cash for its
operations, compared with $1,911,426 in Second Quarter 1997.
With respect to investing activities, in Second Quarter 1998 and 1997 the
Company used cash of $407,340 and $531,940, 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 June 30, 1998 and December 31, 1997 reflect
expense accruals of $396,279 and $0, respectively, related to the Company's
stock appreciation rights plan.
During July 1998, the Company raised approximately $2.75 million in net proceeds
from the private sale of common stock to an institutional investor.
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 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,
17
<PAGE>
1999, to exchange the Warrant for such number of shares of the Company's
Common Stock, at the time of and giving effect to such exchange, equal to 5.5%
of the fully diluted number of shares of Common Stock outstanding, after giving
effect to the exercise or conversion of all then outstanding options, warrants
and other rights to purchase or acquire shares of Common Stock. After five years
from the date of issuance, the Purchasers have the right to put the warrants to
the Texas Network for a value based on a multiple of its operating income.
Prior to June 30, 1998, had the Company formed and capitalized an
entity with the intent to commence operations for a second Regional Network in
one of the ten FOX Sports Net owned and operated regions, the Purchasers had a
one-time option to purchase notes from such entity on the same terms and
conditions as the Texas Network financing. This option expired unexercised on
June 30, 1998.
Management of the Company believes that its current funds, taking into account
approximately $2.75 million dollars in equity financing completed in July 1998,
will enable the Company to finance its operations for at least the next twelve
months. Such belief is based on assumptions thatmay not materialize, 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 has engaged an
investment bank for assistance in securing such financing, the Company has no
commitments from lenders or investors at this time and there is no assurance
that it will be able to raise the necessary capital to effect additional
Regional Network launches or to operate the Southwest Regional Network at
planned levels.
Impact of Inflation
Inflation has not had any significant effect on the Company's operating costs.
18
<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 June 29, 1998 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
David Reese 13,112,912 130,895
Steven W. Schuster 13,113,872 129,935
2. To approve the adoption of the Company's 1998 Stock Option Plan.
For Against Abstain
5,374,163 454,889 76,260
3. To ratify the appointment of Deloitte & Touche, LLP as independent auditors
of the Company.
For Against Abstain
13,135,792 49,045 58,970
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.
19
<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: February 10, 1999 /s/ William C. Samuels
----------------- -----------------------------
William C. Samuels
Chairman, Chief Executive Officer
and Director
Date: February 10, 1999 /s/ Christopher C. Cline
----------------- -----------------------------
Christopher C. Cline
Senior Vice President (principal
financial and accounting officer)
20
EXHIBIT 11
ACTV, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Six Month Period Three Month Period
Ended June 30, Ended June 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding.......... 11,916,823 17,219,660 12,003,573 18,371,395
Common stock equivalents..................... -- -- -- --
------------ ------------- ------------ ------------
Total............................... 11,916,823 17,219,660 12,003,573 18,371,395
============ ============ ============ ============
Net loss..................................... $4,739,025 $6,035,538 $2,467,723 $3,263,401
============ ============ ============ ============
Basic and diluted loss per share............. $.40 $.35 $.21 $.18
============ ============ ============ ============
</TABLE>
21
<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 JUNE
30, 1998, 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-31-1997 DEC-31-1998
<PERIOD-END> JUN-30-1997 JUN-30-1998
<CASH> 1,690,834 1,810,396
<SECURITIES> 0 0
<RECEIVABLES> 861,138 780,913
<ALLOWANCES> 0 0
<INVENTORY> 312,269 204,719
<CURRENT-ASSETS> 3,120,189 3,735,728
<PP&E> 1,675,220 3,665,803
<DEPRECIATION> 814,267 1,235,197
<TOTAL-ASSETS> 7,746,368 10,567,369
<CURRENT-LIABILITIES> 2,007,482 2,336,408
<BONDS> 0 3,742,576
0 0
0 8,460
<COMMON> 1,220,302 1,994,686
<OTHER-SE> 6,526,061 (3,549,899)
<TOTAL-LIABILITY-AND-EQUITY> 7,746,368 10,567,369
<SALES> 1,342,855 756,660
<TOTAL-REVENUES> 1,342,855 756,660
<CGS> 355,440 123,389
<TOTAL-COSTS> 4,324,696 4,884,475
<OTHER-EXPENSES> 243,827 1,123,728
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 463,977
<INCOME-PRETAX> (3,489,025) (6,035,538)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,489,025) (6,035,538)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,489,025) (6,035,538)
<EPS-PRIMARY> .29 .35
<EPS-DILUTED> .29 .35
</TABLE>
