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 March 31, 1998
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 May 15, 1998, there were 18,164,668 shares of the registrant's common
stock outstanding.
<PAGE>
INTRODUCTORY NOTE
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This amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q as filed by the Registrant on May 15, 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
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31,
1998
December 31, (as restated,
1997 see Note 7)
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................. $ 554,077 $ 3,071,619
Accounts receivable-net ................... 303,044 517,756
Education equipment inventory ............. 237,757 237,757
Other ..................................... 308,653 398,423
------------ ------------
Total current assets 1,403,531 4,225,555
------------ ------------
Property and equipment-net ..................... 2,596,785 2,593,080
------------ ------------
Other Assets:
Patents and patents pending ............... 279,356 321,520
Software development costs ................ 669,852 688,486
Goodwill .................................. 2,641,188 2,534,595
Other ..................................... 311,206 612,961
------------ ------------
Total other assets 3,901,602 4,157,562
------------ ------------
Total ............................ $ 7,901,918 $ 10,976,197
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued expenses ..... $ 1,882,159 $ 1,354,830
Deferred stock appreciation rights ........ -- 63,594
Preferred dividends payable ............... 603,469 669,939
------------ ------------
Total current liabilities ............. 2,485,628 2,088,363
Long-Term Notes Payable ................. -- 3,679,877
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, 281,823 at March 31, 1998 ........... 7,029,708 6,138,514
Shareholders' equity (deficiency):
Preferred stock, $.10 par value,
1,000,000 shares authorized, issued and
outstanding 86,200 at December 31, 1997,
and March 31, 1998 ........................ 8,620 8,620
Common stock, $.10 par value, 65,000,000
shares authorized: issued and outstanding
14,614,611 at December 31, 1997,
16,980,581 at March 31, 1998 .............. 1,461,461 1,698,058
Additional paid-in capital ................ 48,140,596 50,953,787
Loans receivable from stock sales ......... (199,900) (1,166,314)
Accumulated deficit ....................... (51,024,195) (53,796,332)
------------ ------------
Total shareholders' equity (deficiency) (1,613,418) (2,302,181)
------------ ------------
------------ ------------
Total ............................ $ 7,901,918 $ 10,976,197
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997 1998
(as restated, (as restated,
see Note 7) see Note 7)
------------ ------------
<S> <C> <C>
Revenues:
Revenues .................................. $ 907,944 $ 361,247
------------ ------------
Total revenues ......................... 907,944 361,247
Cost of Sales ............................. 279,491 47,603
------------ ------------
Gross profit ........................... 628,453 313,644
Expenses:
Operating expenses ........................ 346,290 362,714
Selling and administrative ................ 1,984,845 2,043,516
Depreciation and amortization ............. 47,980 212,501
Amortization of goodwill .................. 106,593 106,593
Stock appreciation rights ................. (277,037) 63,594
------------ ------------
Total expenses ......................... 2,208,671 2,788,918
Interest (income) ............................ (58,137) (39,840)
Interest expense ............................. -- 200,044
------------ ------------
Interest expense (income) - net ........... (58,137) 160,204
Minority interest - subsidiary preferred
stock dividends and accretion ............... 749,221 136,659
------------ ------------
Net loss ..................................... $ 2,271,302 $ 2,772,137
============ ============
Basic and diluted loss per common share ...... $ .19 $ .17
------------ ------------
Weighted average number of common
shares outstanding .......................... 11,829,110 16,088,087
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
4
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997 1998
(as restated,
see Note 7)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................ $(2,271,302) $(2,772,137)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization ........... 207,535 319,094
Stock appreciation rights ............... (631,662) 63,594
Amortization of stock warrants .......... -- 52,362
Stock issued in lieu of cash
Compensation ............................ -- 295,139
Common stock issued or reserved for
preferred dividends and accretion ....... 627,679 70,189
Changes in assets and liabilities:
Accounts receivable ..................... (523,151) (214,712)
Education equipment inventory ........... 9,093
Other assets ............................ (40,445) (69,339)
Accounts payable and accrued expenses ... 214,507 (527,329)
----------- -----------
Net cash used in operating
activities .......................... (2,407,746) (2,783,139)
Cash flows from investing activities:
Investment in patents pending ........... -- (50,000)
Investment in property and equipment .... (90,787) (166,027)
Investment in systems ................... -- (53,566)
----------- -----------
Net cash used in investing activities ........ (90,787) (269,593)
Cash flows from financing activities:
Net proceeds from debt issuance ......... -- 3,306,190
Preferred stock dividends payable ....... 121,542 66,470
Net proceeds from put warrant ........... -- 1,371,624
Redemption of preferred stock ........... (9,565) (565,759)
Proceeds from equity financing .......... -- 1,391,749
----------- -----------
Net cash provided by financing activities .... 111,977 5,570,274
----------- -----------
Net (decrease) increase in cash and cash
equivalents .................................. (2,386,556) 2,517,542
Cash and cash equivalents,
beginning of period ..................... 6,520,756 554,077
----------- -----------
Cash and cash equivalents,
end of period ........................... 4,134,200 3,071,619
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Supplemental disclosure of cash flow information: See Note 6
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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 will enable the
Company to finance its entertainment and corporate operations at their
present level for at least the next twelve months. Such belief is based on
assumptions that may not materialize, in which case the Company may
require additional capital to finance such operations during this period.
In addition, if the Company is not successful at raising additional funds,
it may be required to significantly reduce its education operations. While
the Company believes that it has adequate funds to launch and operate its
planned Southwest Regional Network, it will need additional funding for
Regional Network expansion. While the Company has engaged an investment
bank for assistance in securing such financing, the Company has no
commitments from lenders or investors at this time and there is no
assurance that it will be able to raise the necessary capital to effect
additional Regional Network launches or to maintain its education
operations at current levels.
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 March 31, 1998 and December
31, 1997 reflect capitalized software production costs of $688,486 and
$669,852, respectively, classified as a component of "Other" non-current
assets.
3. The Company's balance sheets at March 31, 1998 and December 31, 1997 also
reflect a contra shareholders' equity (deficiency) amount of $1,166,314
related to (a) a loan made by the Company to an employee in August 1995
(March 31, 1998 and December 31, 1997 balance of $199,900) and (b) loans
made to three employees in the first three months of 1998 (March 31, 1998
balance of $966,414). 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 isfrom the issuance of the
loan to January 1, 1999. Such compensation expense recorded for the three
months ended March 31, 1998 was $260,638.
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
6
<PAGE>
the Issuer and Texas Network. The notes bear interest at a rate of 13.0%
per annum, payable semi-annually, with principal repayment in one
installment on June 30, 2003. During the term of the note, the Issuer may,
at its option, pay any four semi-annual interest payments in kind rather
than in cash, with an increase in the rate applicable to such payments in
kind to 13.75% per annum. The Note is secured by the assets of the Texas
Network, and is guaranteed by ACTV, Inc.
In connection with the purchase of such note, the Purchasers received on
January 14, 1998 a 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, should the Company form and capitalize an entity
with the intent to commence operations for a second Regional Network in
one of the ten FOX Sports Net owned and operated regions, the Purchasers
have a one time option to purchase notes from such entity on the same
terms and conditions as the Texas Network financing.
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 Notes.
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
Exchangeable Preferred Stock is convertible into Common Stock of ACTV,
Inc., beginning January 1, 1997, at varying discounts to the market price
of Common Stock. After September 1, 1997, holders of the 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
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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 $625,000 was recorded and
included as minority interest for the three months ended March 31, 1997.
6. The consolidated balance sheet at March 31, 1998, reflects non-cash
activity during the three month period ended March 31, 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 and an increase in common stock and additional paid-in capital of a
total of $1,227,053. The Company made no cash payments of interest or
income taxes during the three months ended March 31, 1997 and 1998.
7. 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.
<TABLE>
<CAPTION>
Three Months Ended March 31,
- --------------------------------------------------------------------------------------------------------------------------
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 $ -- $ 749,221 $ -- $ 136,659
Net Loss $1,522,081 $2,271,302 $2,635,478 $2,772,137
March 31,
- --------------------------------------------------------------------------------------------------------------------------
1998
-----------------------------------------
As Previously
Reported As Restated
----------------- -----------------
Convertible preferred stock
of subsidiary $ -- $ 6,138,514
Put Warrant $ -- $ 1,371,624
Shareholders' equity
(deficiency) $5,207,957 $(2,302,181)
</TABLE>
8
<PAGE>
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 May 15, 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
Internet learning systems ("eSchool"). The Company's products, in general, are
tools for the creation of programming that allows viewer participation for both
television and Internet platforms. The chief market presently targeted by the
Company for its Individualized Programming is in-home entertainment,
particularly sports programming, while for the Internet the market focus is
education, with an emphasis on schools and universities in the United States.
For entertainment applications, the Company's Individualized Programming
gives the viewer the ability to make instant and seamless changes within the
live or pre-recorded television programming being viewed. Individualized
Programming is a multi-path broadcast of several elements of programming
material, such as instant replay, isolation cameras, statistical data, or
additional features. There is no limit to the number of viewers who can interact
simultaneously with a program enhanced with the Company's Individualized
Programming ("ACTV Program" or "ACTV Programming").
For education applications, the Company has developed eSchool Online(TM)
("eSchool"), a Java-based software suite that permits a teacher to use the
Internet as an accompanying instructional tool during a lesson. (Java is a
programming language developed for the Internet by Sun Microsystems.) eSchool
integrates Web content and a chat application with educational video effectively
to create a "virtual" classroom. In addition, the Company markets analog and
digital systems for televised distance learning applications that permit
point-to-multi-point
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telecasts that can deliver pre-recorded individualized lessons as well as
integrate individualized lessons into live distance learning class sessions.
Since its inception, the Company has incurred operating losses
approximating $54 million related directly to the development and marketing of
the Individualized Programming and eSchool.
The Company is seeking to exploit the entertainment market, principally in
the U.S., through the launch of regionally based entertainment networks
("Regional Networks") Programming for the Regional Networks is provided through
the Company's strategic alliance with FOX Sports Net. The Company has the rights
to license FOX Sports Net programming from each of FOX Sports Net's regional
sports affiliates and to offer enhanced FOX Sports Net programming to any
distributor that carries the corresponding regional FOX Sports Net channel. The
FOX Sports Net agreement extends through June 2003.
FOX Sports Net is a service of "National Sports Partners," a joint venture
between Cablevision's Rainbow Media Holdings, Inc. and FOX/Liberty Networks,
which is a 50/50 partnership between News Corp. and Tele-Communications Inc.'s
Liberty Media Corporation. Equally owned by FOX/Liberty Networks and
Cablevision's Rainbow Media Holdings, Inc., the new venture now reaches more
than 58 million homes nationwide.
The Company's business plan is to develop Regional Networks in regions
served by Fox Sports Net, with distribution to be provided by cable operators
that are currently upgrading their service from analog to digital transmission.
Initially, the Regional Networks will feature sports programming, with the
possible introduction of other types of programming in the future. The Company
believes that the differentiation afforded by the Company's Individualized
Programming will allow distributors to offer their customers Individualized
Programming on a subscription basis.
The Company plans to launch its first Regional Network in 1998 in the
regions served by FOX Sports Southwest (the "Southwest Regional Network"). FOX
Sports Southwest distributes programming to 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.
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<PAGE>
In August 1997, General Instrument Corp. ("GI") invested $1 million in
common stock of ACTV, Inc. (the "Common Stock") and agreed to market, jointly
with the Company, Individualized Programming applications. GI is the leading
supplier of digital television headend systems and digital set-top terminals.
The Company and GI had previously announced that the Company's Individualized
Programming would be incorporated into GI's new MPEG-2 digital set-top cable and
wireless terminals.
It is the Company's belief that it has adequate funding to launch the
Southwest Regional Network in 1998. However, there is no assurance that it will
secure the funding necessary to effect additional launches in other regions, or
that other factors might not delay or prohibit the successful implementation of
the Company's Regional Network strategy.
The projected Southwest Regional Network and additional network expansion
are part of the Company's plan to develop the entertainment division of its
business, which to date, does not generate any revenue for the Company. There
can be no assurance that the Southwest Regional Network or other Regional
Networks, if launched, will generate significant revenues for the Company.
The target market for the Company's education products includes schools,
state and local agencies, universities and private business. eSchool consists of
a suite of integrated software products, including content creation software,
student and teacher user software, and database assessment software. In
addition, the Company provides Internet content development assistance, hosting
of eSchool programs on its computer servers, and consulting to schools and
universities.
To date, nearly all of the Company's revenues have been derived from sales
to the education market of eSchool and individualized educational programs and
products. There is no assurance that the Company will be able to successfully
compete in this market, where many of its current and potential competitors are
companies with significantly greater resources than those of the Company.
RESULTS OF OPERATIONS
Comparison of Three Month Periods Ended March 31, 1998 and March 31, 1997
During the three month period ended March 31, 1998 ("First Quarter 1998"), the
Company's revenues decreased 60.2%, to $361,247, from $907,944 in the three
month period ended March 31, 1997 ("First Quarter 1997"). All but 2% of the
Company's revenues in First Quarter 1998 were derived from Internet sales,
compared to First Quarter 1997, when all revenues were related to
television-based education hardware and content.
The cost of sales, as a percentage of sales revenue, decreased to 13% in the
more recent quarter as compared to 31% in the corresponding 1997 quarter. The
decrease was the result of the shift in the more recent quarter, as noted above,
to the sale of Internet products and services, which carry a higher profit
margin than the Company's television-based education revenue sources.
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<PAGE>
Total expenses excluding cost of sales, interest expense, and minority interest
- - preferred stock dividends and accretion increased approximately 26%, by
$580,247 in First Quarter 1998, to $2,788,918, from $2,208,671 in First Quarter
1997. The increase was due principally to increases in stock appreciation rights
(SARs) expense and depreciation expense. The Company recognized an expense
related to SARs of $63,594 in the more recent quarter, compared to income in the
amount of $277,037 in First Quarter 1997. The difference of $340,631 was the
result of an increase in the price of ACTV, Inc.'s common stock during First
Quarter 1998, compared to a price decrease during First Quarter 1997.
Depreciation and amortization expense increased $164,521 in First Quarter 1998
to $319,094, from $154,573 in First Quarter 1997, due to higher depreciation in
the more recent quarter related primarily to the Company's master control
facility in Texas, which was completed in the last quarter of 1997.
The Company incurred interest expense and accretion in the First Quarter of 1998
of $200,204, compared to $0 interest expense and accretion in First Quarter
1997. The increase was the result of the issuance of debt and associated
warrants in January 1998 by a wholly-owned subsidiary of the Company. Interest
income in First Quarter 1998 was $39,840, a decrease of 31%, compared with
$58,137 in First Quarter 1997. The decrease resulted from lower available cash
balances and prevailing market interest rates in the more recent period.
For First Quarter 1998 and First Quarter 1997, the Company accrued $66,470 for
dividends and $746,542 for dividends and accretions, respectively, 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 paid
$70,189 and $2,679 in preferred dividends during First Quarter 1998 and First
Quarter 1997, respectively, by issuing shares of common stock of ACTV, Inc.
For First Quarter 1998, the Company's net loss was $2,772,137 or $.17 per basic
and diluted share, an increase of 22% compared to the net loss of $2,271,302 or
$.19 per basic and diluted share in First Quarter 1997. The increase in loss
applicable to common shareholders during the more recent quarter was the result
of lower gross revenues and higher depreciation expense, stock appreciation
rights expense and interest and accretion expense in the more recent quarter.
Comparison of Three Month Periods Ended March 31, 1997 and March 31, 1996
During the three month period ended March 31, 1997 ("First Quarter 1997"), the
Company's revenues increased approximately 2.6 times, to $907,944, from $350,674
in the three month period ended March 31, 1996 ("First Quarter 1996"). In the
more recent quarter, most of the Company's revenues were derived from distance
learning education sales. Revenues in First Quarter 1995 were derived from sales
to the education market as well as from license and executive producer fees.
The cost of sales, as a percentage of sales revenue, decreased to 31% in the
more recent quarter as compared to 59%, in the corresponding 1996 quarter. The
decrease was the result of a
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<PAGE>
preponderance of distance learning sales in more recent quarter, which carry a
higher profit margin than much of the Company's other revenue sources.
Total expenses excluding cost of sales, interest expense, and minority interest
- - subsidiary preferred stock dividends and accretion decreased approximately
19%, by $528,113 in First Quarter 1997, to $2,208,671, from $2,736,784 in First
Quarter 1996. The decrease was due principally to lower stock appreciation
rights (SARs) expense, and depreciation expense. The Company recognized net
income related to SARs, in the amount of $277,037, in the more recent quarter,
as compared to an expense of $393,591 in the corresponding period last year. The
difference was the result of a decrease in the price of ACTV, Inc.'s common
stock during the First Quarter 1997. The Company also incurred higher research
and development costs in First Quarter 1997 related principally to digital
set-top terminal software and Internet product development.
Depreciation and amortization expense decreased $139,899 in First Quarter 1997
to $154,573, from $294,472 in First Quarter 1996, due to the full depreciation
of video program inventory in 1996.
The Company incurred no interest expense in the First Quarter of 1997, or the
First Quarter of 1996. Interest income in First Quarter 1997 was $58,137, an
increase of over 75%, compared with $33,237 in First Quarter 1996. The increase
resulted from higher available cash balances and prevailing market interest
rates in the more recent period.
For the quarter ended March 31, 1997, the Company accrued $746,542 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 paid $2,679 in preferred dividends during First Quarter
1997 by issuing shares of common stock of ACTV, Inc.
For First Quarter 1997, the Company's net loss was $2,271,302 or $.19 per basic
and diluted share, a decrease of 11.3%, compared to the loss of $2,560,883, or
$.22 per basic and diluted share, in First Quarter 1996. The decrease in net
loss during the more recent quarter was the result of significantly higher
revenues combined with an overall reduction in total expenses.
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 March 31, 1998, the Company had an accumulated deficit of
approximately $54 million. The Company's cash position on March 31, 1998 was
$3,071,619, compared to $554,077 on December 31, 1997.
During First Quarter 1998 the Company used $2,716,669 in cash for its
operations, compared with $2,286,204 in First Quarter 1997. The increase in
First Quarter 1998 was due principally to a greater use of cash related to
changes in assets and liabilities. The Company met its cash needs in First
Quarter 1997 from a series of private placements of the Company's common stock
(net proceeds of $1.4 million) with an institutional investor during the first
three months of 1997 and from the issuance of debt by a wholly-owned subsidiary
(net proceeds of $4.7). The Company met its cash needs in First Quarter 1997
from the remaining proceeds from the private sale of exchangeable preferred
stock effected in August 1996.
13
<PAGE>
With respect to investing activities, in First Quarter 1998 and 1997 the Company
used cash of $269,593 and $90,787, respectively. Investing activities, in the
more recent quarter, were related to television and computer equipment, patents
and systems, while such activities in the 1997 Quarter related to leasehold
improvements.
The Company's balance sheets at March 31, 1998 and December 31, 1997 reflect
expense accruals of $63,594 and $0, respectively, related to the Company's stock
appreciation rights plan.
During April 1998, the Company raised approximately $200,000 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.
In connection with the purchase of such note, the Purchasers received on
January 14, 1998 a common stock purchase warrant (the "Warrant") of Texas
Network that grants the Purchasers the right to purchase up to 17.5% of the
fully-diluted shares of common stock of Texas Network. The Warrant expires on
June 30, 2003. The Warrant also grants the Purchasers the right, through July
14, 1999, to exchange the Warrant for such number of shares of the Company's
Common Stock, at the time of and giving effect to such exchange, equal to 5.5%
of the fully diluted number of shares of Common Stock outstanding, after giving
effect to the exercise or conversion of all then outstanding options, warrants
and other rights to purchase or acquire shares of Common Stock. After five years
from the date of issuance, the Purchasers have the right to put the warrants to
the Texas Network for a value based on a multiple of its operating income.
Prior to June 30, 1998, should the Company form and capitalize an entity
with the intent to commence operations for a second Regional Network in one of
the ten FOX Sports Net owned and operated regions, the Purchasers have a one
time option to purchase notes from such entity on the same terms and conditions
as the Texas Network financing.
In January 1998, the Company entered into an agreement with certain
holders of 5% Cumulative Convertible Preferred Stock ("Preferred Shares") of
ACTV Holdings, Inc., a wholly owned subsidiary of ACTV, Inc. The agreement
provides that the Company, at its sole discretion, may purchase from certain
holders of the Preferred Shares up to an aggregate of 150,000 Preferred Shares
based on a predetermined schedule through June 30, 1998. If the Company chooses
to purchase the Preferred Shares, the Company may, at its sole discretion, pay
in cash or a combination of cash, the Company's Common Stock, and warrants to
purchase the Common Stock.
14
<PAGE>
Management of the Company believes that its current funds will enable the
Company to finance its entertainment and corporate operations at their present
level for at least the next twelve months. Such belief is based on assumptions
that may not materialize, in which case the Company may require additional
capital to finance such operations during this period. In addition, if the
Company is not successful at raising additional funds, it may be required to
significantly reduce its education operations. While the Company believes that
it has adequate funds to launch and operate its planned Southwest Regional
Network, it will need additional funding for Regional Network expansion. While
the Company has engaged an investment bank for assistance in securing such
financing, the Company has no commitments from lenders or investors at this time
and there is no assurance that it will be able to raise the necessary capital to
effect additional Regional Network launches or to maintain its education
operations at current levels.
The Company does not have any material contractual commitments for capital
expenditures, although the Company believes that the Southwest Regional Network
may need to acquire approximately $750,000 in equipment for a second master
control facility.
Impact of Inflation
Inflation has not had any significant effect on the Company's operating
costs.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company is a party.
ITEM 2 CHANGES IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Loss per Share
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTV, Inc.
Registrant
Date: 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)
17
EXHIBIT 11
ACTV, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997 1998
(as restated,
see Note 7)
----------- -----------
<S> <C> <C>
Weighted average shares outstanding .......... 11,829,110 16,088,087
Common stock equivalents ..................... -- --
----------- -----------
Total ............................... 11,829,110 16,088,087
=========== ===========
Net loss ..................................... $ 2,271,302 $ 2,772,137
=========== ===========
Basic and diluted loss per common share ...... $.19 $.17
</TABLE>
18
<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
MARCH 31, 1997, AND MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 4,134,200 3,071,619
<SECURITIES> 0 0
<RECEIVABLES> 933,344 560,944
<ALLOWANCES> 0 43,188
<INVENTORY> 328,411 237,757
<CURRENT-ASSETS> 5,632,400 4,225,555
<PP&E> 1,542,739 3,599,145
<DEPRECIATION> 769,928 1,006,065
<TOTAL-ASSETS> 9,743,823 10,976,197
<CURRENT-LIABILITIES> 2,195,943 2,088,363
<BONDS> 0 3,679,877
0 0
0 8,620
<COMMON> 1,183,874 1,698,058
<OTHER-SE> (2,612,710) (2,637,235)
<TOTAL-LIABILITY-AND-EQUITY> 9,743,823 10,976,197
<SALES> 907,944 361,247
<TOTAL-REVENUES> 907,944 361,247
<CGS> 279,491 47,603
<TOTAL-COSTS> 2,208,671 2,406,230
<OTHER-EXPENSES> 124,221 479,507
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 200,044
<INCOME-PRETAX> (2,271,302) (2,772,137)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,271,302) (2,772,137)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,271,302) (2,772,137)
<EPS-PRIMARY> 0.19 (0.17)
<EPS-DILUTED> 0.19 (0.17)
</TABLE>
