<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
ACTV, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(212) 217-1600 (Registrant's telephone number, including area code)
- --------------
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of Exchange on which registered
- ------------------- ------------------------------------
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 November 12, 1999, there were 41,971,330 shares of the registrant's common
stock outstanding.
1
<PAGE>1
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998* 1999
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .......................... $5,188,770 $12,865,033
Receivable from sale of common stock ............... -- --
Accounts receivable-net ............................ 501,768 948,549
Education equipment inventory ...................... 110,405 77,231
Other .............................................. 773,613 2,191,580
------------- -------------
Total current assets ........................... 6,574,556 16,082,393
------------- -------------
Property and equipment-net ............................... 2,365,775 2,770,173
------------- -------------
Other Assets:
Patents and patents pending ........................ 832,336 2,242,677
Software development costs ......................... 1,098,756 1,730,839
Goodwill ........................................... 2,214,816 1,895,037
Other .............................................. 519,802 403,852
------------- -------------
Total other assets ............................. 4,665,710 6,272,405
------------- -------------
Total ..................................... $ 13,606,041 $ 25,124,971
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses .............. $ 955,686 $ 1,041,352
Deferred stock appreciation rights ................. 2,000,062 --
Preferred dividends payable ........................ 200,305 --
------------- -------------
Total current liabilities ...................... 3,156,053 1,041,352
Long-term notes payable ............................ 4,315,016 4,741,402
Put warrant ........................................ 1,371,624 --
Shareholders' equity :
Preferred stock, $.10 par value, 873,890
shares authorized, issued and outstanding none at
December 31, 1998, and none at September 30, 1999 .. -- --
Preferred series A stock, $.10 par value, 120,000
shares authorized, issued and outstanding 56,300 at
December 31, 1998, and none at September 30, 1999 .. 5,630 --
Preferred series B stock, $.10 par value, 6,110
shares authorized, issued and outstanding 5,018 at
December 31, 1998, and none September 30, 1999 ..... 2,805,961 --
Common stock, $.10 par value, 65,000,000 shares
Authorized: issued and outstanding 29,759,459 at
December 31, 1998, 41,546,996 at September 30, 1999 2,975,946 4,154,700
Additional paid-in capital ......................... 71,068,230 103,487,127
Loans receivable from stock sales .................. (199,900) --
Accumulated deficit ................................ (71,892,519) (88,299,610)
------------- -------------
Total shareholders' equity ..................... 4,763,348 19,342,217
------------- -------------
Total ..................................... 13,606,041 25,124,971
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
* Derived from the Audited Financial Statements
2
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS THREE MONTH PERIODS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1999 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales revenues ................... $ 1,058,560 $ 1,328,961 $ 301,900 $ 474,454
------------ ------------ ------------ ------------
Total revenues ................ 1,058,560 1,328,961 301,900 474,454
Costs and expenses:
Cost of sales .................... 168,934 161,754 45,545 81,240
Operating expenses ............... 1,718,627 1,418,087 738,000 615,588
Selling and administrative ....... 6,462,024 11,874,979 2,558,176 5,252,404
Depreciation and amortization .... 810,984 1,038,449 296,721 368,275
Amortization of goodwill ......... 319,779 319,779 106,593 106,593
Stock appreciation rights ........ 455,251 1,950,330 58,972 (2,605,319)
------------ ------------ ------------ ------------
Total costs and expenses ....... 9,935,599 16,763,378 3,804,007 3,818,781
------------ ------------ ------------ ------------
Loss from operations ................ (8,877,039) (15,434,417) (3,502,107) (3,344,327)
------------ ------------ ------------ ------------
Interest (income) ................ (105,398) (304,679) (40,077) (180,830)
Interest expense ................. 718,220 782,922 254,243 261,305
------------ ------------ ------------ ------------
Interest expense (income) - net 612,822 478,243 214,166 80,475
Minority interest - subsidiary
preferred stock dividends 379,161 -- 117,211 --
------------ ------------ ------------ ------------
Net loss ............................ (9,869,022) (15,912,660) (3,833,484) (3,424,802)
Preferred stock dividends ........ -- 494,431 -- --
------------ ------------ ------------ ------------
Net loss applicable to common
shareholders ........................ $ (9,869,022) $(16,407,091) $ (3,833,484) $ (3,424,802)
============ ============ ============ ============
Basic and diluted loss per common
share ............................... $(.51) $(.47) $(.16) $(.08)
Weighted average number of common
shares outstanding .................. 19,309,832 35,154,248 23,422,018 41,430,091
</TABLE>
See Notes to Consolidated Financial Statements
3
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS THREE MONTH PERIODS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss applicable to common
shareholders ............................................. $ (9,869,022) $(16,407,091) $ (3,833,484) $ (3,424,802)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization .............................. 1,130,763 1,358,227 403,314 474,867
Stock appreciation rights .................................. 455,251 1,950,330 58,972 (2,605,319)
Amortization and accretion of deferred
expenses related to debt financing ....................... 673,069 740,267 212,071 250,942
Common stock issued for services ........................... 2,016,023 6,313,480 870,971 2,034,844
Common stock issued or reserved for
preferred dividends ........................................ 67,034 241,513 10,174 --
Changes in operating assets and liabilities:
Accounts receivable ........................................ (275,797) (446,781) 202,072 (184,614)
Education equipment inventory .............................. 61,209 33,175 28,171 --
Other assets ............................................... (327,329) (1,443,002) 392,313 (5,404)
Accounts payable and accrued expenses ...................... (1,055,245) (103,339) (133,962) (217,846)
------------ ------------ ------------ ------------
Net cash (used in) operating activities ......................... (7,124,044) (7,763,221) (1,789,388) (3,677,332)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Investment in patent & patents pending ..................... (534,561) (1,506,988) (307,160) (13,487)
Investment in property and equipment ....................... (360,180) (1,032,514) (127,494) (525,338)
Investment in systems ...................................... (573,734) (857,080) (356,888) (358,280)
------------ ------------ ------------ ------------
Net cash (used in) investing activities ......................... (1,468,475) (3,396,582) (791,542) (897,105)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from debt issuance ............................ 3,318,080 -- 11,890 --
Preferred stock dividends payable .......................... 312,137 115,660 107,047 --
Net proceeds from put warrant .............................. 1,371,624 -- -- --
Redemption of preferred stock .............................. (565,759) (5,792,538) -- --
Proceeds from sale of common stock ......................... 10,680,214 24,512,944 7,729,451 5,084,161
------------ ------------ ------------ ------------
Net cash provided by financing activities ....................... 15,116,296 18,836,066 7,848,388 5,084,161
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ..................................................... 6,523,777 7,676,263 5,267,458 509,724
Cash and cash equivalents,
beginning of period ........................................ 554,077 5,188,770 1,810,396 12,355,309
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ................... $ 7,077,084 $ 12,865,033 $ 7,077,854 $ 12,865,033
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
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ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Preferred Series A Preferred Series B Additional paid-
Shares Amount Shares Amount Shares Amount in-capital Deficit
- ------------------- ------------- -------------- ----------- ------------ ---------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances January 1,
1999 29,759,459 $2,975,946 56,300 $5,630 5,018 $2,805,961 $71,068,230 $(71,892,519)
- ------------------- ------------- -------------- ----------- ------------ ---------- ------------- ---------------- ----------------
Issuance of
common shares 4,059,783 405,978 18,593,996
Issuance of
shares for
services provided 556,294 55,629 4,023,107
Issuance of
shares in
connection
with exchange of
preferred stock 1,061,690 106,169 (56,300) (5,630)
Issuance of
shares in
connection
with exercise of
stock options,
stock
appreciation
rights & warrants 6,109,770 610,978 12,284,173
Preferred stock
redemption (5,018) (2,805,961) (2,392,379)
Net loss (15,912,660)
Preferred stock
dividends &
accretions (494,431)
------------- -------------- ----------- ------------ ---------- ------------- ---------------- ----------------
Balances
September 30, 1999 41,546,996 $4,154,700 - $ - - $ - $103,487,127 $(88,299,610)
============= ============== =========== ============ ========== ============= ================ ================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
1. The results of operations for the three and nine months ended
September 30, 1999 and 1998 are not necessarily indicative of a full
year's operations. In the opinion of our management, the accompanying
financial statements include all adjustments of a normal recurring
nature, which are necessary to present fairly such financial
statements. Significant intercompany balances and transactions have
been eliminated in consolidation. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been
omitted. These consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto
included in our annual report on Form 10-K for the year ended
December 31, 1998.
2. Our balance sheets at September 30, 1999 and December 31, 1998
reflect expense accruals of $0 and $2,000,062, respectively, related to
our stock appreciation rights, or SARs, plan. No SARs were
exercised for cash during the first three quarters of 1999. In May 1999,
Messrs. Samuels, Reese and Crowley agreed to retroactively exercise their
vested SARs for unregistered shares of our common stock, based
upon the closing price of $3 15/16 on January 4, 1999. As a result the
SARs expense for the first nine months of 1999 is approximately
$3.2 million less than it would have been otherwise. In September 1999 all
remaining SARs were converted into options that will become apart of our
1999 option plan. This conversion resulted in a current period expense of
$1,254,000 with an additional charge of $381,000 to future periods when
the corresponding options vest.
3. In November 1998, we issued 5,018 shares of Series B Convertible
Preferred Stock, common stock, and warrants to purchase approximately 1.95
million shares of common stock at $2.00 per share as a partial exchange
for approximately 179,000 shares of exchangeable preferred stock, which
had been issued by a subsidiary of ours. The excess of the fair value of
this consideration over the carrying value of the convertible preferred
stock for which it was issued is included in Minority Interest -
Subsidiary Preferred stock dividend and accretion in the accompanying
statement of operations. The Series B Preferred had a liquidation
preference of $1,000.00 per share and paid a dividend of 10% per annum, in
cash or accumulated and paid in common stock upon conversion.
During May 1999, we redeemed all of the outstanding Series B
Preferred Stock for a total of approximately $5.8 million. The preferred
stock was convertible into our common stock at $2.00 per share
beginning in November 1998. We effectively redeemed the preferred
stock at an equivalent of $2.20 per common stock share, a price
significantly less than the market price at the time of the redemption.
The redemption avoided the possible future issuance of more than 2.8
million shares of common stock.
4. In January 1998, our subsidiaries, ACTV Entertainment, Inc.,
and The Texas Individualized Television Network, Inc., a wholly-owned
subsidiary of the ACTV Entertainment, entered into a Note Purchase
Agreement, dated as of January 13, 1998 with certain private investors.
Pursuant to this agreement, the investors purchased $5.0 million
aggregate principal amount notes from the ACTV Entertainment and Texas
Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal repayment in one installment on June 30,
2003. During the term of the notes, we may, at our option, pay any four
semi-annual interest payments in kind rather than in cash, with an
increase in the rate applicable to such payments in kind to 13.75% per
annum. The notes are secured by the assets of the Texas Network, and is
guaranteed by us.
In connection with the purchase of such notes, the investors received on
January 14, 1998 a warrant which allowed them, among other rights, to
exchange the warrant for such number of shares of the our 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
6
<PAGE>
outstanding, after giving effect to the exercise or conversion of all then
outstanding options, warrants and other rights to purchase or acquire
shares of common stock.
For accounting purposes, we allocated approximately $1.4 million
to the value of the warrant, based on a valuation by an investment banker.
The warrant was included outside of Consolidated Shareholders' Equity, due
to its cash put feature and the notes were recorded at a value of proceeds
received less the value attributed to the warrant. The difference between
the recorded value of the notes and the principal is being amortized as
additional interest expense over the life of the notes. The warrant was
exchanged and exercised for our common stock during the first quarter of
1999.
5. Our balance sheet at December 31, 1998 also reflects a contra
shareholders' equity amount of $199,900, related to a loan made by
us to a shareholder in August 1995 that was paid during the first
quarter of 1999.
6. We made no cash payments of interest or income taxes during the
six months ended June 30, 1999 and 1998. However, we made cash
interest payments in July 1999 of $369,632, related to the $5 million
original fair value notes.
7. For the three and nine months ended September 30, 1999, we incurred
executive compensation expense of $2.1 million and $3.6 million,
respectively. Approximately $1.3 million of both the three and nine
month totals was non-cash compensation attributable to the exchange
of stock options for stock appreciation rights, as described above. An
additional component of total compensation expense was approximately
$780,000 and $2.3 million for the three and nine month periods,
respectively, related to an incentive compensation provision that
is based on changes in the market value of our common stock during
the twelve-month period ended March 31, 1999. We are accruing the total
value of the award in four equal quarterly amounts, beginning March 31,
1999, since it is payable in quarterly installments that are contingent
on continued employment of the executive with ACTV. We have paid
approximately $1.7 million, or 75% of this award in the form of our
unregistered common stock.
8. We have developed proprietary and patented software technologies
for two principal business segments, Individualized Television and
HyperTV. Individualized Television software provides the tools needed to
create live or pre-recorded television programming that individualizes
what the viewer sees and hears. We have recorded revenues related to
Individualized Television, applications of which we expect to distribute
both nationally and regionally in the U.S. HyperTV software enables the
simultaneous delivery of television video and complementary web content.
HyperTV is targeted at both the entertaiment and education markets. Our
presentation of the operating segments, Individualized Television and
HyperTV, is based on the way we manage our business.
Information concerning our business segments for the nine and
three-month periods ending September 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES
Individualized Television $ - $ - $ - $ -
HyperTV 1,058,560 1,328,961 301,900 474,454
Unallocated corporate
------------------ ------------------ -- ------------------ ------------------
Total $ 1,058,560 $ 1,328,961 $301,900 $ 474,454
================== ================== == ================== ==================
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
DEPRECIATION & AMORTIZATION
Individualized Television ............................ $ 550,345 $ 636,275 $ 150,563 $ 214,557
HyperTV .............................................. 172,139 280,994 117,104 98,212
Unallocated Corporate ................................ 408,280 440,959 135,648 144,919
------------ ------------ ------------ ------------
Total ................................................ $ 1,130,764 $ 1,358,228 $ 403,315 $ 474,868
============ ============ ============ ============
INTEREST EXPENSE (INCOME)
Individualized Television ............................ $ 642,750 $ 756,011 $ 243,394 $ 257,264
HyperTV .............................................. (3,681) 1,502 (2,544) (582)
Unallocated corporate ................................ (26,247) (279,270) (26,684) (176,207)
------------ ------------ ------------ ------------
Total ................................................ $ 612,822 $ 478,243 $ 214,166 $ 80,475
============ ============ ============ ============
NET LOSS
Individualized Television ............................ $ (3,899,877) $ (4,389,478) $ (1,484,229) $ (1,863,077)
HyperTV .............................................. (1,348,185) (2,280,182) (535,103) (1,004,310)
Unallocated corporate ................................ (4,620,961) (9,737,431) (1,814,153) (557,415)
------------ ------------ ------------ ------------
Total ................................................ $ (9,869,022) $(16,407,091) $ (3,833,484) $ (3,424,802)
============ ============ ============ ============
CAPITAL EXPENDITURES
Individualized Television ............................ $ 597,115 $ 1,014,606 $ 398,435 $ 433,393
HyperTV .............................................. 308,355 2,313,755 67,909 443,065
Unallocated corporate ................................ 563,005 68,220 325,198 20,646
------------ ------------ ------------ ------------
Total ................................................ $ 1,468,475 $ 3,396,581 $ 791,542 $ 897,104
============ ============ ============ ============
Balance Sheet Accounts as of September 30, 1999 & 1998
CURRENT ASSETS
Individualized Television ............................ $ 608,911 $ 404,949
HyperTV .............................................. 882,390 1,370,749
Unallocated corporate ................................ 7,010,108 14,306,696
------------ ------------
Total ................................................ $ 8,501,409 $ 16,082,393
============ ============
TOTAL ASSETS
ACTV Entertainment, Inc. ............................. $ 3,755,066 $ 3,996,715
HyperTV .............................................. 1,269,369 3,822,650
Unallocated corporate ................................ 10,591,185 17,305,606
------------ ------------
Total ................................................ $ 15,615,619 $ 25,124,971
============ ============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since our inception, the primary focus of our operating activities has
been to develop patented, proprietary technologies that enable programmers and
advertisers to create individualized programming and programming enhancements --
first for television and later also for the emerging area of television/Internet
convergence. We call our technologies for the television and television/Internet
convergence markets Individualized Television and HyperTV(TM), respectively.
We derived all of our revenues for 1998 and for the nine months
ended September 30, 1999 from although substantially all of our HyperTV
revenues to date have come from the education market we anticipate, that the
most significant portion of future HyperTV revenues will come from the
entertainment market, for which we introduced a HyperTV application earlier
this year. We subsequently entered into HyperTV programming alliances for
this market with The Box Music Network, Showtime, and New Line Television. We
expect the sources of revenue from the entertainment market to be software
licensing and program hosting fees, Internet advertising and commerce,
content creation fees, and data management services.
With respect to Individualized Television, our business plan is to
generate future revenues from subscription fees, advertising and fees related
to advertising services. For national distribution of Individualized
Television, we have formed a joint venture, LMC IATV Events, LLC, with
Liberty Digital, a subsidiary of Liberty Media Corporation. LMC expects to
license the rights to produce individualized telecasts of marquee sports and
other events. LMC IATV Events entered into an agreement in November 1999 with
Viewer's Choice, LLC to distribute individualized event programming on a
pay-per-view basis to a national audience. Viewers Choice is the premier
distributor of pay-per-view programming in the United States.
8
<PAGE>
For regional applications of Individualized Television, we intend to
launch a series of sports television networks in different regions of the
United States. Programming for our networks will be provided by FOX Sports
Net, which reaches 72 million homes through 19 regional networks across the
country. FOX Sports Net will supply us with its professional and college
sports programming, to which we will add Individualized Television
enhancements produced by us. Our license agreement with FOX Sports Net
provides that we pay FOX a portion of the net subscriber revenue we receive
from cable operators. In addition, we must bear the production costs of
additional elements to produce an individualized telecast.
Having performed tests of Individualized Television during 1998 and
1999 through the Dallas cable system of AT&T Broadband & Internet Services
(formerly TCI Cable), we intend to launch our first network in the region served
by FOX Sports Net Southwest. FOX Sports Net Southwest programming reaches over 6
million subscriber homes in Texas, Arkansas, Louisiana, Oklahoma and parts of
New Mexico. We have an agreement with AT&T Broadband to distribute our southwest
regional network and to share subscription fee revenues with us. Since
individualized programming relies on software incorporated into digital cable
set-top terminals, AT&T Broadband will offer our network to those subscribers
who receive its digital cable service. We intend to enter into similar
distribution agreements with other cable operators who are deploying digital
service in their systems.
We have had minimal revenues to date and have incurred significant
operating losses, net losses and negative cash flows from operations since our
inception. At September 30, 1999, we had an accumulated deficit of approximately
$88 million. We expect to continue to incur significant operating losses on a
quarterly and annual basis for the foreseeable future.
We were incorporated in Delaware in July 1989, as the successor, by
merger to ACTV, Inc., a California corporation, organized in July 1983.
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
REVENUES. During the nine month period ended September 30, 1999, our
revenues increased 26% to $1,328,961, from $1,058,560 in the nine month period
ended September 30, 1998, due to an increase in sales of HyperTV services.
Substantially all of our revenues in both periods were derived from sales to the
education market of HyperTV software and related services and computer hardware.
TOTAL COSTS AND EXPENSES. Cost of sales in the nine months ended
September 30, 1999, was $161,754, a decrease of 4% over cost of sales of
$168,934 in the nine months ended September 30, 1998. The decrease was the
result of a higher proportion of revenues in the more recent period that were
derived from service fees. Total costs and expenses, excluding cost of sales, in
the nine months ended September 30, 1999, increased 67%, to $16,601,624, from
$9,766,665 in the comparable period in 1998. The increase was due principally to
higher selling and administrative and stock
9
<PAGE>
appreciation rights, or SARs, expenses. Selling and administrative expense
increased in the more recent nine months, to $11,874,979, from $6,462,024, due
chiefly to an increase in non-cash employee compensation. The SARs expense for
the nine months ended September 30, 1999 was $1,950,330, compared to $455,251
for the nine months ended September 30, 1998. The increase in SARs expense
resulted from the exercises of SARs during 1999 at higher market prices for
ACTV's common stock than the market price used to calculate SARs expense for the
nine months ended September 30, 1998. In September 1999, we exchanged all of our
outstanding SARs for stock options with the same exercise prices and vesting
dates. To account for this exchange, we simultaneously incurred non-cash
compensation expense of $1,254,000 as a component of selling and administrative
expense and non-cash income of $2,605,319 from the elimination of our liability
related to SARs. Additionally the Company incurred a $254,000 non-cash charge to
Deferred Expenses for those SARs that have not vested. Depreciation and
amortization expense increased 20% in the nine months ended September 30, 1999,
to $1,358,228, from $1,130,763 in the comparable 1998 period. The increase was
due to computer server hardware and patent asset acquisitions during the nine
months ended September 30, 1999, resulting in higher depreciable and amortizable
bases as compared to the 1998 nine-month period.
INTEREST EXPENSE (INCOME) -- NET. Interest income in the nine months
ended September 30, 1999, increase 289%, to $304,679, compared with $105,398 in
the nine months ended September 30, 1998. The increase was due to higher average
cash balances during the more recent period. We incurred interest expense of
$782,922 in the nine months ended September 30, 1999, compared to interest
expense of $718,220 in the nine months ended September 30, 1998. Interest
expense is related to the $5 million notes issued in January 1998 by a
subsidiary of ours. We chose to pay the interest due September 30, 1998 and
December 31, 1998 in kind rather than in cash.
MINORITY INTEREST -- SUBSIDIARY PREFERRED STOCK DIVIDENDS. For the
nine-month period ended September 30, 1999, we had no accrual for or payments of
subsidiary preferred stock dividends, compared to accruals of $379,161 for the
nine months ended September 30, 1998, related to preferred stock issued by a
subsidiary of ours, which was accounted for as minority interest. In addition,
we paid $312,137 in preferred dividends during the nine-month period ending
September 30, 1998 in the form of our common stock. The subsidiary preferred
stock was retired in November 1998 in exchange for a combination of our new
preferred stock, common stock and warrants.
PREFERRED STOCK DIVIDENDS. For the nine-month period ended September
30, 1999, we paid $494,431 in preferred stock dividends, related to our Series B
preferred stock, compared to no such preferred dividend payments during the
comparable 1998 period. The Series B preferred stock, which was issued in
November 1998, was redeemed in full in May 1999.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. For the nine months ended
September 30, 1999, our net loss applicable to common shareholders was
$16,407,091 or $.47 per basic and diluted share, an increase of 66% over the net
loss of $9,869,022, or $.51 per basic and diluted share, incurred in the prior
year's comparable period. The increase during the more recent nine-month period
was the result of higher overall expenses, led by higher selling and
administrative and stock appreciation rights expenses, as described above.
COMPARISON OF NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
REVENUES. During the nine-month period ended September 30, 1998, our
revenues decreased 31% to $1,058,560, from $1,534,295 in the nine-month period
ended September 30, 1997. Nearly all of our revenues in the more recent
nine-month period were derived from educational sales of HyperTV software,
computer servers, and related services, compared to the comparable 1997
nine-month period, when the majority of revenues were related to
television-based education hardware and content.
TOTAL COSTS AND EXPENSES. Cost of sales in the nine months ended
September 30, 1998, was $168,934, a decrease of 61% over cost of sales of
$434,287 in the nine months ended September 30, 1997. The decrease was the
result of the change in the composition of products sold during the nine
10
<PAGE>
months ended September 30, 1998, as noted above, in favor of Internet products
and services, which carry a higher profit margin than our television-based
education revenue sources. Total costs and expenses, excluding cost of sales, in
the nine months ended September 30, 1998, increased 63%, to $9,766,665, from
$6,000,435 in the comparable period in 1997. The increase was due to higher
operating and selling and administrative expenses associated with our regional
network testing in Dallas; higher depreciation and amortization expenses; and
higher stock appreciation rights expenses, the result of an increase in the
market price of our common stock. Depreciation and amortization expense for the
nine months ended September 30, 1998, increased 440% to $810,984, from $150,210
for the nine months ended September 30, 1997. This increase was due principally
to higher depreciation expenses related to our regional network's master control
production facility and to the amortization of software development costs in the
more recent period.
INTEREST EXPENSE (INCOME) -- NET. Interest income in the nine months
ended September 30, 1998, was $105,398, compared with $103,239 in the nine
months ended September 30, 1997. We incurred interest expense and accretions of
$718,220 in the nine months ended September 30, 1998, compared to no interest
expense during the comparable 1997 period. Interest expense is related to the $5
million principal value notes issued in January 1998 by a subsidiary of ours. We
chose to pay the interest due September 30, 1998 in kind rather than in cash.
MINORITY INTEREST -- SUBSIDIARY PREFERRED STOCK DIVIDENDS. For the
nine-month periods ending September 30, 1998 and September 30, 1997, we accrued
$379,161 for dividends and $2,245,435 for dividends and accretion, respectively,
related to preferred stock issued by our subsidiary, which was accounted for as
minority interest. We paid $379,161 and $2,245,435 in preferred dividends during
the nine-month periods ending September 30, 1998 and September 30, 1997,
respectively, by issuing shares of common stock of ACTV, Inc.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. For the nine months ended
September 30, 1998, our net loss was $9,869,022, or $.51 per basic and diluted
share, an increase of 40% over the net loss of $7,042,623, or $.57 per basic and
diluted share, incurred in the prior year's comparable period. The increase
during the more recent nine-month period was the result of higher overall
expenses, led by higher stock appreciation rights and depreciation and
amortization expenses, coupled with lower total revenues.
COMPARISON OF THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30,
1998
REVENUES. During the three-month period ended September 30, 1999, our
revenues increased approximately 57%, to $474,454, from $301,900 in the
three-month period ended September 30, 1998. All of our revenues for both
quarterly periods were derived from HyperTV sales.
TOTAL COSTS AND EXPENSES. Cost of sales in the three months ended
September 30, 1999 was $81,240, compared to the corresponding 1998 quarter's
cost of sales of $45,545. A much higher proportion of revenues in the more
recent quarter derived from service fees, resulting in the cost of sales
decrease. Total costs and expenses, excluding cost of sales remained
approximately the same for the three months ended September 30, 1999, at
$3,737,541, compared to $3,758,462 for the three months ended September 30,
1998. In the more recent quarter, much higher selling and administrative
expenses were offset by SARs income. During the 1999 quarter, we exchanged all
of our outstanding SARs for stock options with the same exercise prices and
vesting dates. To account for this exchange, we simultaneously incurred non-cash
compensation expense of $1,254,000 as a component of selling and administrative
expense and non-cash income of $2,605,319 from the elimination of our liability
related to SARs. Additionally the Company incurred a $254,000 non-cash charge to
Deferred Expenses for those SARs that have not vested. Depreciation and
amortization expense increased 18% for the three months ended September 30,
1999, to $474,868, compared to $403,314 in the comparable 1998 quarter. The
increase was due to computer server hardware and patent asset acquisitions
during 1999, resulting in higher depreciable and amortizable bases for the 1999
quarter.
11
<PAGE>
INTEREST EXPENSE (INCOME) -- NET. Interest income for the three months
ended September 30, 1999 was $180,830, an increase of 451% compared to $40,077
for the three months ended September 30, 1998. The increase was due to higher
average cash balances during the more recent period. We incurred interest
expense and accretion of $261,305 in the 1999 quarterly period, compared to
interest expense and accretion of $254,243 during the comparable 1998 period.
Interest expense is related to the $5 million Notes issued in January 1998 by a
subsidiary of ours. We chose to pay the interest due September 30, 1998 in kind
rather than in cash.
MINORITY INTEREST -- SUBSIDIARY PREFERRED STOCK DIVIDENDS. For the
three months ended September 30, 1999, we had no accrual for or payment of
subsidiary preferred stock dividends, compared to an accrual of $117,211 for
subsidiary preferred dividends in the comparable 1998 quarter. In addition, we
paid $107,047 in preferred dividends during the three-month period ended
September 30, 1998 by issuing shares of our common stock. The dividends were
related to outstanding preferred stock issued by our subsidiary, which was
accounted for as minority interest. The subsidiary preferred stock was retired
in November 1998 in exchange for a combination of new ACTV, Inc. preferred
stock, common stock, and warrants.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. Our net loss applicable to
common shareholders for the three months ended September 30, 1999 decreased
approximately 11%, to $3,424,802, or $.08 per share, from $3,833,484, or $.16
per share, in the comparable 1998 period, principally due to higher sales, SARs
income and interest income that more than offset an increase in selling and
administrative expenses.
COMPARISON OF THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30,
1997
REVENUES. During the three-month period ended September 30, 1998, our
revenues increased approximately 58%, to $301,900, from $191,400 in the
three-month period ended September 30, 1997. In the 1998 quarter, all of our
revenues derived from HyperTV sales, compared to the 1997 quarter, in which we
recorded revenues from both HyperTV sales and from television-based education
hardware and content.
TOTAL COSTS AND EXPENSES Cost of sales in the three months ended September 30,
1998 was $45,545, compared to corresponding 1997 quarter's cost of sales of
$78,847. The difference was due to the relatively higher gross margins of our
HyperTV products. Total costs and expenses, excluding cost of sales, increased
approximately 124% for the three months ended September 30, 1998, to $3,758,462,
from $1,681,306 for the three months ended September 30, 1997. The increase was
due principally to higher operating, selling and administrative expenses and
depreciation and amortization expense in the more recent period. The increases
were principally related to our Southwest regional network. Depreciation and
amortization expense increased 474% for the three months ended September 30,
1998 to $296,721, from $51,722 in the comparable 1997 quarter. This increase was
due principally to higher depreciation expenses related to the regional
network's master control production facility.
INTEREST EXPENSE (INCOME) -- NET. Interest income for the three months
ended September 30, 1998 was $40,077, compared with $11,156 for the three months
ended September 30, 1997. The increase was due to higher average cash balances
during the more recent period. We incurred interest expense and accretions of
$254,243 in the 1998 quarterly period, compared to no interest expense during
the comparable 1997 period. Interest expense is related to the Notes issued in
January 1998 by a subsidiary of ours. We chose to pay the interest due September
30, 1998 in kind rather than in cash.
MINORITY INTEREST -- SUBSIDIARY PREFERRED STOCK DIVIDENDS. For the
three months ended September 30, 1998 and the three months ended September 30,
1997, respectively, we accrued $117,211 for dividends and $746,041 for dividends
and accretions, respectively, related to outstanding preferred stock issued by
our subsidiary, which was accounted for as minority interest. We paid $117,211
and $746,041 in preferred dividends during the three-month periods ending
September 30, 1998 and September 30, 1997, respectively, by issuing shares of
our common stock.
12
<PAGE>
NET LOSS. Our net loss for the three months ended September 30, 1998
increased approximately 66%, to $3,833,484, or $.16 per share, from $2,303,598,
or $.17 per share, in the comparable 1997 period, principally due to higher
expenses associated with our regional network, as noted above.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we (including our operating subsidiaries) have not
generated revenues sufficient to fund our operations, and have incurred
operating losses. Through September 30, 1999, we had an accumulated deficit of
approximately $88 million. Our cash position on September 30, 1999 was
$12,865,033, compared to $5,188,770 on December 31, 1998.
During the nine-month period ended September 30, 1999, we used
$7,763,221 in cash for our operations, compared with $7,124,044 in the nine
months ended September 30, 1998. Despite the increase in net loss in the more
recent period, a higher percentage of this loss was the result of non-cash
charges.
With respect to investing activities, during the nine-month period
ended September 30, 1999 and 1998, we used cash of $3,396,582 and $1,468,475,
respectively. Investing activities in the more recent nine-month period were
related to the acquisition of a patent and investments in patents pending,
computer hardware, and software developments. Investing activities in the 1998
period related to equipment purchases, software development and patents.
We met our cash needs in the nine-month period ended September 30, 1999
from sales of common stock to private investors, totaling approximately $14
million, and from the exercise of stock options and warrants, totaling
approximately $10.4 million. We met our cash needs in the nine-month period
ended September 30, 1998 from the proceeds of a $5.0 million principal note
financing as well as from private sales of common stock to an institutional
investor.
With respect to other financing activities, in May 1999 we redeemed all
of the outstanding Series B preferred stock by paying a total of approximately
$5.8 million, which represents a 10% premium above the stock's face value plus
accrued dividends. Because the preferred stock was convertible into our common
stock at $2.00 per share beginning in November 1999, we effectively redeemed the
preferred stock by buying it at an equivalent of $2.20 per common stock share, a
price significantly less than the market price of a common stock share at the
time of the redemption. The redemption avoided the possible future issuance of
more than 2.8 million shares of common stock.
During the three months ended September 30, 1999, we used $3,677,332 in
cash for our operations, compared with $1,789,388 in the comparable 1998
quarter.
With respect to investing activities, for the three-month periods ended
September 30, 1999 and 1998, we used cash of $897,105 and $791,542,
respectively. Investing activities in the more recent quarter related to
investments in patents pending, software development and equipment purchases.
Investing activities in the 1998 quarter were related to patents pending,
software development and equipment purchases.
We believe that our current funds will enable us to finance our
operations for at least the next twelve months. While we believe that we have
adequate funds to launch our first planned regional network, we will need
additional funding to launch networks in other regions. We currently have no
commitments from lenders or investors at this time, and there is no assurance
that we will be able to raise the necessary capital to effect additional
regional network launches.
YEAR 2000 COMPLIANCE
13
<PAGE>
The year 2000 issue is the result of computer software that was written
with only two digits rather than four digits to represent the year in a date
field. Computer hardware and software applications that are date-sensitive may
interpret a date represented as "00" to be the year 1900 rather than the year
2000. The result could be system failure or miscalculations causing the
disruption of operations.
We believe that our internal systems, relating to both computer
hardware and software, will function properly with respect to dates in the year
2000 and beyond. In addition, we believe that our proprietary software either
sold directly to third parties or incorporated in products sold to third parties
is year 2000 compliant. Having performed an assessment of the potential year
2000 problem, we do not expect to incur significant costs related to year 2000
issues.
However, there is general uncertainty regarding the year 2000 problem
and its effect on the overall business environment. We cannot determine at this
time whether the year 2000 problem will have a material impact on our operations
or financial condition as the result of significant disruptions to the U.S.
economy and/or business infrastructure.
14
<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.
15
<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.
<TABLE>
<S> <C>
ACTV, Inc.
Registrant
Date: November 12, 1999 /s/ William C. Samuels
----------------- -----------------------------
William C. Samuels
Chairman, Chief Executive Officer
and Director
Date: November 12, 1999 /s/ Christopher C. Cline
----------------- -----------------------------
Christopher C. Cline
Senior Vice President (principal financial
and accounting officer)
</TABLE>
16
<PAGE>
EXHIBIT 11
ACTV, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
NINE MONTH PERIOD THREE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding ...... 19,309,832 35,154,248 23,422,018 41,430,091
Common stock equivalents ................. -- -- -- --
---------- ------------ ------------ ------------
Total ........................... 19,309,832 35,154,248 23,422,018 41,430,091
========== ============ ============ ============
Net loss applicable to common shareholders $(9,869,022) $(16,407,091) $ (3,833,484) $ (3,424,802)
============ ============ ============ ============
Basic and diluted loss per share.......... $(.51) $(.47) $(.16) $(.08)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIODS ENDED JUNE
30, 1998 AND 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-Mos 9-Mos
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 7,077,854 12,865,033
<SECURITIES> 0 0
<RECEIVABLES> 578,841 948,549
<ALLOWANCES> 0 0
<INVENTORY> 176,548 77,231
<CURRENT-ASSETS> 8,501,409 16,082,393
<PP&E> 3,793,297 4,997,203
<DEPRECIATION> 1,393,016 2,227,030
<TOTAL-ASSETS> 15,615,619 25,124,971
<CURRENT-LIABILITIES> 1,952,668 1,041,352
<BONDS> 0 0
0 0
7,260 0
<COMMON> 2,621,000 4,154,700
<OTHER-SE> 1,620,172 15,187,517
<TOTAL-LIABILITY-AND-EQUITY> 15,615,619 25,124,971
<SALES> 1,058,560 1,328,961
<TOTAL-REVENUES> 1,058,560 1,328,961
<CGS> 168,934 161,754
<TOTAL-COSTS> 9,766,665 16,601,624
<OTHER-EXPENSES> 379,161 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 612,822 478,243
<INCOME-PRETAX> (9,869,022) (16,407,091)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (9,869,022) (16,407,091)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,869,022) (16,407,091)
<EPS-BASIC> $(.51) $(.47)
<EPS-DILUTED> $(.51) $(.47)
</TABLE>
