SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
ACTV, INC.
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Name of Registrant as Specified in its Charter
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Name of Person(s) Filing Proxy Statement if other than the Registrant
Payment of Filing Fee (Check Appropriate Box):
[X] No fee required
[ ] Fee computed on table below per exchange Act Rules 14a-6 (i) (1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
- -------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a) (2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date File:
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<PAGE>
ACTV, INC.
1270 Avenue of the Americas
New York, New York 10020
-----------
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 20, 1999
-----------
TO THE STOCKHOLDERS OF ACTV, INC.:
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders (the
"Meeting") of ACTV, Inc. (the "Company") will be held at the Warwick Hotel, 65
West 54th Street, New York, New York 10019 on May 20, 1999, at 9:30 a.m., local
time for the following purposes:
1. To elect two Class III directors to hold office for a term of three
years;
2. To approve the adoption of the Company's 1999 Stock Option Plan;
3. To ratify the appointment of Deloitte & Touche LLP, as the Company's
independent certified public accountants for the ensuing year; and
4. To act upon such other business as may properly come before the
Meeting or any adjournment thereof.
Only stockholders of record at the close of business on April 15, 1999 are
entitled to notice of and to vote at the Meeting and any adjournments thereof.
In order to ensure the presence of a quorum at the Meeting, it is important
that Stockholders representing a majority of the voting power of all stock
outstanding be present in person or represented by their proxies. Therefore,
whether you expect to attend the Meeting in person or not, please vote your
shares by proxy over the Internet (see the enclosed proxy card for instructions)
or sign, fill out, date and promptly return the enclosed proxy card in the
enclosed self-addressed, postage-paid envelope. If you attend the Meeting and
prefer to vote in person, you can revoke your proxy.
In addition, please note that abstentions and broker non-votes are each
included in the determination of the number of shares present and voting, for
purposes of determining the presence or absence of a quorum for the transaction
of business. Neither abstentions nor broker non-votes are counted as voted
either for or against a proposal.
Dated: April 23, 1999 By Order of the Board of Directors
William C. Samuels
Chairman and Chief Executive
Officer
<PAGE>
ACTV, INC.
1270 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
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PROXY STATEMENT
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1999 ANNUAL MEETING OF STOCKHOLDERS
To Be Held at 9:30 a.m., at the Warwick Hotel,
65 West 54th Street, New York, New York 10019
on May 20, 1999
This Proxy Statement is furnished in connection with a solicitation of
proxies by the Board of Directors of ACTV, Inc. (the "Company") for use at the
1999 Annual Meeting of Stockholders of the Company (the "Meeting") to be held at
9:30 a.m. at the Warwick Hotel, 65 West 54th Street, New York, New York 10019 on
May 20, 1999, and at any adjournments thereof. Anyone giving a proxy may revoke
it at any time before it is exercised by giving the Chairman of the Board of
Directors of the Company written notice of the revocation, by submitting a proxy
bearing a later date, or by attending the Meeting and voting. This Proxy
Statement, the accompanying Notice of Meeting and form of proxy have been first
sent to the stockholders on or about April 23, 1999.
All properly executed, unrevoked proxies on the enclosed form, if returned
prior to the Meeting, will be voted in the manner specified by the Stockholder.
If no specific instruction is given, the shares represented by the proxy will be
voted in accordance with the Board of Directors' recommendations.
In addition, please note that abstentions and broker non-votes are each
included in the determination of the number of shares present and voting, for
purposes of determining the presence or absence of a quorum for the transaction
of business. Neither abstentions nor broker non-votes are counted as voted
either for or against a proposal.
OWNERSHIP OF SECURITIES
Only stockholders of record at the close of business on April 15, 1999, the
date fixed by the Board of Directors in accordance with the Company's By-Laws,
are entitled to vote at the Meeting. As of March 26, 1999, there were issued and
outstanding 33,290,063 shares of common stock, $.10 par value per share (the
"Common Stock").
<PAGE>
Each outstanding share is entitled to one vote on all matters properly
coming before the Meeting. A majority of the shares of the outstanding Common
Stock is necessary to constitute a quorum for the Meeting.
The following table sets forth certain information as of March 26, 1999
with respect to each beneficial owner of five percent (5%) or more of the
outstanding shares of Common Stock of the Company, each officer and director of
the Company and all officers and directors as a group. The table does not
include stock appreciation rights ("SARs"), nor does it include options that
have not yet vested or are not exercisable within 60 days of the date hereof:
Name and Address Number of Percent
of Beneficial Owner Shares of Class
- ------------------- --------- --------
Liberty Media Corporation(1) 5,000,000 13.97%
Westgate International(2) 2,227,665 6.32%
Elliott Associates(3) 2,159,476 6.13%
Banca del Gottardo(4) 4,692,404 13.80%
William Samuels(5) 3,553,631 10.19%
David Reese(6) 1,185,648 3.47%
Christopher Cline(7) 60,342 *
Steve Schuster(8) 25,834 *
William Frank(9) 25,000 *
Bruce Crowley(10) 760,689 2.25%
All officers and directors as
a group (6 persons)(5-10) 5,611,144 15.46%
* Indicates less than 1% of total shares outstanding
(1) Includes options to purchase 2,500,000 shares which are presently
exercisable or which become exercisable within 60 days of March 26, 1999.
(2) Includes options to purchase 1,944,710 shares which are presently
exercisable or which become exercisable within 60 days of March 26, 1999.
(3) Includes options to purchase 1,955,478 shares which are presently
exercisable or which become exercisable within 60 days of March 26, 1999.
(4) Includes options to purchase 715,627 shares which are presently
exercisable or which become exercisable within 60 days of March 26, 1999.
(5) Includes options to purchase 1,598,000 shares which are presently
exercisable or which become exercisable within 60 days of March 26, 1999
and 901,598 shares subject to a voting trust in favor of Mr. Samuels. See
"Certain Relationships and Related Transactions."
(6) Includes options to purchase 847,000 shares which are presently
exercisable or which become exercisable within 60 days of March 26, 1999.
(7) Includes options to purchase 8,334 shares which are presently exercisable
or which become exercisable within 60 days of March 26, 1999.
(8) Includes options to purchase 20,834 shares which are presently exercisable
or which become exercisable within 60 days of March 26, 1999.
(9) Includes options to purchase 25,000 shares which are presently exercisable
or which become exercisable within 60 days of March 26, 1999.
(10) Includes options to purchase 516,000 shares which are presently
exercisable or which become exercisable within 60 days of March 26, 1999.
This Proxy Statement contains certain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in the forward-looking statements as a
result of certain factors, including those set forth below and
elsewhere in this Proxy Statement.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
The By-Laws of the Company provide that the Board of Directors shall be
divided into three classes, designated Class I, Class II and Class III. At any
annual meeting of stockholders held after the initial election of all Classes of
directors, successors to the class of directors whose term expires at that
annual meeting shall be elected for a three year term.
Two Class III directors are proposed to be elected at the Meeting, each to
hold office for a period three years, or until such director's successor shall
be elected and shall qualify, subject, however to prior death, resignation,
retirement, disqualification or removal from office. Unless such authority is
withheld, it is intended that the accompanying proxy will be voted in favor of
the two persons named below, each of whom are now serving as Class III
Directors, unless the stockholder indicates to the contrary on the proxy. The
Company expects that each of the nominees will be available for election, but if
neither of them is a candidate at the time the election occurs, it is intended
that such proxy will be voted for the election of another nominee to be
designated by the Board of Directors to fill any such vacancy or the number of
directors to be elected at this time may be reduced by the Board of Directors.
3
<PAGE>
Class III Director Nominees - Term Expiring 2002.
William Samuels, (56), Director since August 1, 1989. Chairman of the Board
since November 1994, and Chief Executive Officer since 1993. President from
August 1, 1989 to February 1999. Mr. Samuels also serves as Chairman of Board of
both HyperTV Networks and ACTV Entertainment, each subsidiaries of the Company.
Mr. Samuels is a trustee of Howard J. Samuels Institute at City College. Mr.
Samuels also serves on the Board of Directors of the Council of Economic
Priorities. Mr. Samuels has a JD from Harvard Law School (1968) and a BS in
Economics and Engineering from the Massachusetts Institute of Technology (1965).
William Frank, (50), Director since April 1996. He currently serves as the
Chief Operating Officer of Cognitive Arts Corp., a position he has held since
June 1997. Mr. Frank was formerly the Chief Executive Officer of Greenwich
Entertainment Group ("Greenwich"). In May 1997, an involuntary bankruptcy
petition was filed with the U.S. Bankruptcy Court against Greenwich pursuant to
which Greenwich was liquidated. From 1991 to 1996 Mr. Frank also served as
Chairman of the Board of Directors of Corsearch, a data research company. From
October 1993 to July 1994, Mr. Frank was employed by the Company as President of
Private Networks. Mr. Frank has a B.S. from the University of Missouri (1970).
Class II Incumbent Directors - Term Expiring 2001.
David Reese, (43), Director since 1992. President and Chief Operating
Officer since February 1999. Executive Vice President from November 1992 to
February 1999 and President of ACTV Entertainment, Inc., a subsidiary of the
Company ("ACTV Entertainment"), since November 1994. He has been employed by the
Company since December 1988, and served as the Company's Vice President of
Finance from September 1989 through November 1992. Mr. Reese has a B.S. from
Pennsylvania State University (1978).
Steven W. Schuster, (44), Director since May 1996. Mr. Schuster has been
engaged in the practice of law for more than 16 years, since January 1996, as a
partner with the law firm of McLaughlin & Stern LLP. From June 1993 to December
1995 he was a member of the law firm of Shane & Paolillo, P.C.; Mr. Schuster
received his BA from Harvard University (1976) and his JD from New York
University School of Law (1980).
Class I Incumbent Directors - Term Expiring 2000.
Bruce Crowley, (41), Director since December 1995. Executive Vice President
of the Company since October 1995 and President of HyperTV Networks, Inc.
("HyperTV Networks") (previously ACTV Net, Inc.) since December 1995. Mr.
Crowley joined the Company as President - Distance Learning in October 1994. He
had previously been
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<PAGE>
employed by KDI Corporation. Mr. Crowley has a B.A. from Colgate University
(1979) and an M.B.A. from Columbia University (1984).
Stockholder Vote Required
Election of each director requires the affirmative vote of the holders of a
plurality of the shares of Common Stock present in person or represented by
proxy at the Annual Meeting of Stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ELECTION TO THE BOARD OF
DIRECTORS OF THE COMPANY OF EACH OF THE NOMINEES.
Executive Compensation
Employment and Consulting Agreements
The Company and Mr. Samuels entered into an employment agreement in August
1995, as amended in February 1999. Mr. Samuels serves as Chairman of the Board
and Chief Executive Officer of the Company. Under the amended agreement, Mr.
Samuels will be paid a minimum annual salary of $295,000 and a bonus paid in
cash and/or in unregistered securities equal to 2% of the increase over a twelve
month period in the total market capitalization of the Company over the highest
base upon which a bonus has been paid. Mr. Samuels*s employment agreement
contains non-competition provisions pursuant to which he agreed not to engage in
a business that is competitive with the Company during the term of his
employment agreement and for one year thereafter.
Mr. Samuels currently holds fully vested options to purchase an aggregate
of 1,423,000 shares of Common Stock at an exercise price of $1.50 per share. Mr.
Samuels also holds options to purchase an aggregate of 525,000 shares of Common
Stock at an exercise price of $1.60 per share, none of which are currently
exercisable. Under certain circumstances, a portion of such option shares may be
adjusted to avoid dilution. The Company has also issued to Mr. Samuels 246,000
outstanding stock appreciation rights ("SARs") and options to purchase Class B
common shares of certain of its subsidiaries.
The Company and Mr. Reese entered into an employment agreement in August
1995, as amended in February 1999. Under the amended agreement, Mr. Reese will
be paid a minimum annual base salary of $250,000. Mr. Reese*s employment
agreement contains non-competition provisions pursuant to which he agreed not to
engage in a business that is
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<PAGE>
competitive with the Company during the term of his employment agreement and for
one year thereafter.
Mr. Reese currently holds fully vested options to purchase 847,000 shares
of Common Stock at an exercise price of $1.50 per share, and options to purchase
330,000 shares at $1.60 per share, none of which are currently vested. Under
certain circumstances, a portion of such option shares may be adjusted to avoid
dilution. The Company has also issued to Mr. Reese 186,000 currently outstanding
SARs and options to purchase Class B common shares of certain of its
subsidiaries.
The Company and Bruce Crowley entered into an employment agreement in
December 1995, as amended in February 1999. Mr. Crowley has agreed to serve as
President of HyperTV Networks at an annual base salary of $250,000. Mr.
Crowley*s employment agreement contains non-competition provisions pursuant to
which he agreed not to engage in a business that is competitive with the Company
during the term of his employment agreement and for one year thereafter.
Mr. Crowley currently holds fully vested options to purchase 516,000 shares
of common stock at an exercise price of $1.50 and options to purchase 201,000
shares of common stock at $1.60 per share, none of which are currently vested.
Under certain circumstances, a portion of such option shares may be adjusted to
avoid dilution. The Company has also issued to Mr. Crowley 160,000 currently
outstanding SARs and options to purchase Class B common shares of certain of its
subsidiaries.
Each of Mr. Samuels's, Mr. Reese's and Mr. Crowley's employment contracts
contain a change of control provision whereby, in certain circumstances,
including the possibility that a person becomes the owner of 30% or more of the
outstanding securities of the employer, the exercise price of all SARs is
reduced to $.10 and the employee, at his option, shall receive a special
compensation payment for the exercise cost of all vested options upon exercising
those options any time within twelve months after the effective date of the
change of control. Additionally, if any of Messrs. Samuels, Reese or Crowley is
not retained upon the occurrence of such event, he will receive a bonus not to
exceed 2.7 times his then current base salary.
At the time of issuance, all options to the Company's employees were
granted at an exercise price equal to or greater than the prevailing market
price for the Company's Common Stock.
6
<PAGE>
Summary Compensation Table
The following table sets forth all cash compensation for services rendered
in all capacities to the Company and its subsidiaries for the fiscal years ended
December 31, 1998, December 31, 1997, and December 31, 1996, paid to the
Company's Chief Executive Officer, the four other most highly compensated
executive officers (the "Named Executive Officers") at the end of the above
fiscal years whose total compensation exceeded $100,000 per annum, and up to two
persons whose compensation exceeded $100,000 during the above fiscal years,
although they were not executive officers at the end of such years.
<TABLE>
<CAPTION>
Restricted All Other
Name and Principal Stock Compen-
Position Year Salary Bonus Awards Options/SARs sation
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William C. Samuels 1998 $293,269 $75,000 525,000/0 $10,248
Chairman, Chief 1997 $250,000 $75,000 0/100,000 $220,917
Executive Officer (1) 1996 $197,600 $151,955 0/70,000 $4,176
David Reese 1998 $243,269 $42,500 330,000/0 $3,170
President, Chief 1997 $200,000 $20,000 0/50,000 $75,095
Operating Officer (3) 1996 $156,000 $45,000 0/60,000 $50,253
Bruce Crowley 1998 $243,269 $35,000 201,000/0
President, HyperTV 1997 $200,000 $25,000 0/10,000
Networks, Inc. (4) 1996 $150,000 $25,000 0/50,000
Christopher Cline 1998 $135,000 $35,000 25,000/0
Senior Vice President, 1997 $133,461 0/20,000
Chief Financial
Officer (5) 1996 $100,000 0/10,000
Michael J. Freeman 1998 $181,580 $2,270
Ph. D. (2) 1997 $178,890 $74,045
1996 $173,680 $50,000 100,000/0 $3,238
</TABLE>
- --------------
(1) Mr. Samuels has served as Chief Executive Officer of the Company since
1993, Chairman of the Board since 1994, and a Director of the Company since
August 1, 1989. Mr. Samuels' "other compensation" for 1996 and 1998 relates
to life insurance premiums paid by the Company. His other compensation for
1997 relates to life insurance premiums paid by the Company ($10,292.50)
and to the exercise of SARs ($210,625)
(2) Dr. Freeman currently serves as Advanced Product Development Liaison, and
was previously Chairman of the Board until November 1994. Dr. Freeman's
"other compensation" for 1996 and 1998 relates to lifeinsurance premiums
paid by the Company. His "other compensation" for 1997 relates to life
insurance premiums paid by the Company ($2,045) and to the exercise of SARs
($72,000).
(3) Mr. Reese has been the Company's President and Chief Operating Officer
since February 1999 and previously its Executive Vice President from
November 1992. Mr. Reese has been President of ACTV
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<PAGE>
Entertainment, Inc. ("ACTV Entertainment") since 1994. Prior thereto he was
the Company's Vice President of Finance from September 1989 through
November 1992. Mr. Reese's "other compensation" for 1996 relates to life
insurance premiums paid by the Company ($1,253) and to the exercise of SARs
($49,000). His "other compensation" for 1997 relates to life insurance
premiums paid by the Company ($3,095) and to the exercise of SARs
($72,000). His other compensation for 1998 relates to life insurance
premiums paid by the Company.
(4) Mr. Crowley has been President of HyperTV Networks, Inc. since December
1995, and prior thereto, the Company's President, Distance Learning since
October 1994. During the period January to September 1994, Mr. Crowley
performed consulting services for the Company for which he was paid
$55,000.
(5) Mr. Cline is the Company's Senior Vice President - Finance. He has been the
Company's Chief Financial Officer since November 1993.
Options and Stock Appreciation Rights to Named Executive Officers
The following tables set forth certain information with respect to all
outstanding stock options issued during 1998 to the Company's Named Executive
Officers. The Company did not grant SARs to any Named Executive Officers in
1998.
Option Grants
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
% of Total Annual Rates of
Number of Options Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term
Options in Fiscal Price Expiration -------------------
Name of Holder Granted Year ($/Share) Date 5%($) 10%($)
- -------------- ---------- ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William Samuels 525,000 36% $1.60 12/31/06 206,950 481,121
David Reese 330,000 23% $1.60 12/31/06 130,083 302,419
Bruce Crowley 201,000 14% $1.60 12/31/06 79,232 184,201
Christopher Cline 25,000 2% $1.60 07/01/03 7,861 20,394
</TABLE>
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<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Option/SAR Year End
Values (1)
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
SAR/Options SAR/Options
Shares at FY-End at FY-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William Samuels 963,035 $21,875 224,400/21,600 SARs $496,485/$47,790
0/700,000 Options $0/$1,566,250
Michael Freeman, Ph.D. 0 0 32,000/0 SARs $74,000/$0
100,000/0 Options $231,250/$0
David Reese 325,000 $20,313 168,000/18,000 SARs $371,700/$39,825
0/110,000 Options $0/$984,500
Bruce Crowley 234,000 $20,875 140,000/20,000 SARs $312,750/$44,250
0/268,000 Options $0/$599,650
Christopher Cline 41,666 0 42,000/8,000 SARs $92,925/$17,700
8,334/25,000 Options $19,272/$55,313
</TABLE>
(1) The closing bid price of a share of the Company's Common Stock at December
31, 1998, was $3 13/16. The base price of the SARs was $1.50 and the
exercise prices of the options were $1.50 and $1.60.
Board Compensation Report
Executive Compensation Policy
The Company's executive compensation policy is designed to attract,
motivate, reward and retain the key executive talent necessary to achieve the
Company's business objectives and contribute to the long-term success of the
Company. In order to meet these goals, the Company's compensation policy for its
executive officers focuses primarily on determining appropriate salary levels
and providing long-term stock-based incentives. To a lesser extent, the
Company's compensation policy also contemplates performance-based cash bonuses.
The Company's compensation principles for the Chief Executive Officer are
identical to those of the Company's other executive officers.
Cash Compensation. In determining its recommendations for adjustments to
officers' base salaries for fiscal 1998 the Company focused primarily on the
scope of each officer's responsibilities, each officer's contributions to the
Company's success in moving toward its
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long-term goals during the fiscal year, the accomplishment of goals set by the
officer and approved by the Board for that year, the Company's assessment of the
quality of services rendered by the officer, comparison with compensation for
officers of comparable companies and an appraisal of the Company's financial
position. In certain situations, relating primarily to the completion of
important transactions or developments, the Company may also pay cash bonuses,
the amount of which will be determined based on the contribution of the officer
and the benefit to the Company of the transaction or development.
Equity Compensation. The grant of stock options and stock appreciation
rights to executive officers constitutes an important element of long-term
compensation for the executive officers. The grant of stock options and stock
appreciation rights increases management's equity ownership in the Company with
the goal of ensuring that the interests of management remain closely aligned
with those of the Company's stockholders. The Board believes that stock options
and stock appreciation rights in the Company provide a direct link between
executive compensation and stockholder value. By attaching vesting requirements,
stock options and stock appreciation rights also create an incentive for
executive officers to remain with the Company for the long term. See "Stock
Option Plans," "1992 Stock Appreciation Rights Plan," and "1996 Stock
Appreciation Rights Plan."
SAR/Compensation Committee Interlocks and Insider Participation
The SAR/Compensation Committee of the Board of Directors ("Committee") is
responsible for making all compensation decisions with respect to the executive
officers of the Company. The Committee consists of William Frank and Steven
Schuster, both of whom were elected to the Committee in June 1996.
Chief Executive Officer Compensation
As indicated above, the factors and criteria upon which the compensation of
William C. Samuels, the Chief Executive Officer, is based are identical to the
criteria used in evaluating the compensation packages of the other executive
officers of the Company. The Chief Executive Officer's individual contributions
to the Company included his leadership role in establishing and retaining a
strong management team, developing and implementing the Company's business plans
and attracting investment capital to the Company. In addition, the Company
reviewed compensation levels of chief executive officers at comparable companies
with the Company's industry.
Respectfully submitted,
William Samuels, Chairman
David Reese, Bruce Crowley, William Frank, Steven Schuster.
10
<PAGE>
SAR/Corporate Performance Graph
The following graph shows a comparison of cumulative total stockholder
returns from December 31, 1993 through December 31, 1998 for the Company, the
Nasdaq Stock Market-U.S. Index ("Nasdaq") and the Hambrecht & Quist Technology
Index ("H&Q").
<Graphic Omitted>
<TABLE>
<CAPTION>
Nasdaq Stock
DATES ACTV, Inc. H&Q Technology Market-U.S.
- ----- ---------- -------------- -----------
<S> <C> <C> <C>
Dec-93 100.00 100.00 100.00
Jan-94 113.21 106.17 103.03
Feb-94 94.34 109.68 102.07
Mar-94 92.45 103.69 95.80
Apr-94 92.45 101.02 94.55
May-94 83.02 101.31 94.79
Jun-94 84.91 94.85 91.32
Jul-94 82.07 98.39 93.19
Aug-94 75.47 108.52 99.13
Sep-94 81.13 108.17 98.88
Oct-94 79.25 118.08 100.82
Nov-94 71.70 117.06 97.48
Dec-94 54.72 120.12 97.75
Jan-95 88.68 118.37 98.31
Feb-95 79.25 128.63 103.51
Mar-95 75.47 134.52 106.58
Apr-95 75.47 144.59 109.94
May-95 73.58 149.77 112.77
Jun-95 66.04 167.80 121.91
Jul-95 56.60 183.12 130.87
Aug-95 81.13 185.22 133.53
Sep-95 84.91 189.64 136.60
Oct-95 54.72 192.30 135.81
Nov-95 49.06 189.94 139.00
Dec-95 56.60 179.61 138.26
Jan-96 72.63 182.27 138.94
Feb-96 69.34 191.40 144.22
Mar-96 67.92 183.07 144.70
Apr-96 64.15 208.38 156.70
May-96 58.49 211.52 163.90
Jun-96 55.65 196.11 156.51
Jul-96 65.09 175.95 142.55
Aug-96 55.65 186.60 150.54
Sep-96 47.17 208.18 162.05
Oct-96 41.51 205.20 160.26
Nov-96 49.06 229.39 170.17
Dec-96 49.06 223.23 170.01
Jan-97 45.28 247.14 182.10
Feb-97 41.51 226.96 172.03
Mar-97 31.12 212.78 160.79
Apr-97 30.19 220.66 165.82
May-97 27.35 253.86 184.61
Jun-97 25.95 256.11 190.27
Jul-97 22.64 297.31 210.35
Aug-97 26.88 298.16 210.03
Sep-97 22.17 310.39 222.44
Oct-97 27.35 277.23 210.92
Nov-97 25.95 274.34 211.98
Dec-97 24.53 261.72 208.58
Jan-98 25.95 278.50 215.16
Feb-98 25.46 311.62 235.36
Mar-98 24.53 316.89 244.05
Apr-98 22.64 329.22 248.20
May-98 28.30 305.20 234.57
Jun-98 29.72 324.43 251.12
Jul-98 36.79 320.33 248.47
Aug-98 28.30 251.93 199.75
Sep-98 30.66 288.39 227.34
Oct-98 25.47 312.71 236.63
Nov-98 54.72 349.89 259.94
Dec-98 57.55 407.08 293.21
</TABLE>
The graph assumes that the value of the investment in the Company's Common
Stock, Nasdaq and H&Q was $100 on December 31, 1993 and that all dividends were
reinvested. No dividends have been declared or paid on the Company's Common
Stock.
11
<PAGE>
Other Compensation
Outside directors may be paid an honorarium for attending meetings of the
Board of Directors of the Company, in an amount that management anticipates will
not exceed $500 per meeting.
Stock Options and Stock Appreciation Rights
Stock Option Plans
On August 9, 1989, the Board of Directors approved a 1989 Employee
Incentive Stock Option Plan and a 1989 Non-Qualified Stock Option Plan
(collectively, the "Plans") and on October 20, 1989, the stockholders authorized
and approved the adoption of the Plans. Michael J. Freeman is not eligible to
participate in either Plan. The 1989 Employee Incentive Stock Option Plan, which
is administered by the Board of Directors, provides for the issuance of up to an
aggregate of 100,000 shares of Common Stock upon exercise of options granted to
key employees. This Plan stipulates that the option price may not be less than
the fair market value on the date of the grant and, from May 4, 1990, through
May 4, 1992, could not be less than $5.50 per share. Options granted under this
Plan shall not be exercisable for a period longer than ten (10) years from the
date of the grant. The Plan generally provides that at the time of exercise of
any option the purchase price must be delivered in cash, or at the option of the
Board of Directors, or a committee designated by the Board to administer the
Plan (the "Committee"), through delivery of the Company's Common Stock equal in
value to the option exercise price, or by a combination thereof. Options under
this Plan may be issued as "Incentive Stock Options" under federal tax laws. As
of December 31, 1998, 58,933 options were outstanding under this Option Plan at
an exercise price of $1.50 per share, which options expire between the years
1999 and 2003. During 1998 18,567 options granted under the Plan were exercised
and no options granted under the Plan had either expired or were canceled.
The 1989 Non-qualified Stock Option Plan, which is administered by the
Board of Directors, provides for the issuance of up to an aggregate of 100,000
shares of Common Stock upon exercise of options granted to employees, officers,
directors, consultants and independent contractors. This Plan provides that the
Board has the discretion to establish the option exercise price, and that the
option exercise price may be less than fair market value at the time of the
grant of the option. Options granted under this Plan shall expire on a date
determined by the Board or the Committee, but in no event later than three
months after the termination of employment or retainer. This Plan generally
provides that the purchase price must be delivered in cash, or if permitted by
the Board or the Committee, services rendered or by a combination thereof. As of
December 31, 1998, 61,000 options were outstanding under this Plan at an
exercise price of $1.50 per share, which options expire between the years 1998
and 2002. During 1998 3,000 options
12
<PAGE>
granted under the Plan were exercised and 5,000 options granted under the Plan
had either expired or were canceled.
The Company's 1996 Stock Option Plan (the "1996 Stock Option Plan") was
adopted by the Board of Directors in April 1996 and approved by the shareholders
in July 1996. The purpose of the 1996 Stock Option Plan is to grant officers,
employees and others who provide significant services to the Company a favorable
opportunity to acquire Common Stock so that they have an incentive to contribute
to its success and remain in its employ. Under the 1996 Stock Option Plan, the
Company is authorized to issue options for a total of 500,000 shares of Common
Stock. As of December 31, 1998, 478,484 options were outstanding under the plan.
During 1998, no options granted under the 1996 Stock Option Plan were exercised,
and 8,333 options granted under the 1996 Stock Option Plan were canceled.
The Company's 1998 Stock Option Plan (the "1998 Stock Option Plan") was
adopted by the Board of Directors in April 1998 and approved by the shareholders
in June 1998. The purpose of the 1998 Stock Option Plan is to grant officers,
employees and others who provide significant services to the Company a favorable
opportunity to acquire Common Stock so that they have an incentive to contribute
to its success and remain in its employ. Under the 1998 Stock Option Plan, the
Company is authorized to issue options for a total of 900,000 shares of Common
Stock. As of December 31, 1998, 307,500 options were outstanding under the plan.
During 1998, no options under the 1998 Stock Option Plan were exercised or
canceled.
As of December 31, 1998, the Company has also issued options to purchase
shares of Common Stock at varying prices, expiring at dates from 1999 to 2006,
that are not part of the Plans. These include options to (i) Mr. Samuels for
175,000 shares at $1.50 per share and options for 525,000 shares at $1.60 per
share; (ii) Mr. Reese for 110,000 shares at $1.50 per share and 330,000 shares
at $1.60 per share; (iii) Mr. Crowley for 67,000 shares at $1.50 per share and
201,000 shares at $1.60 per share; and (iv) Mr. Cline for 8,334 shares at $1.50
per share. During the year ended December 31, 1998, these executive officers
exercised 1,548,384 options that are not part of the Plans.
1992 Stock Appreciation Rights Plan
The Company's 1992 Stock Appreciation Rights Plan (the "1992 SAR Plan") was
approved by the Company's stockholders in December 1992. The 1992 SAR Plan
provides a means whereby employees, officers, directors, consultants and
independent contractors may acquire the right to participate in the appreciation
of the Common Stock of the Company pursuant to stock appreciation rights
("SARs"). The 1992 SAR Plan is designed to promote the long-term interest of the
Company and its stockholders by providing the recipients with an additional
incentive to promote the financial success of the Company and its subsidiaries.
Subject to adjustment as set forth in the 1992 SAR Plan, the aggregate number of
SARs that may be granted shall not exceed 900,000. The 1992 SAR Plan is
administered by the Stock Appreciation Rights Committee (the "SAR Committee").
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<PAGE>
SARs may not be exercised until the expiration of six months from the date
of grant. One-fifth of the SARs awarded to a recipient vest at the end of each
12-month period following the date of grant. If a holder of an SAR ceases to be
an employee, director or consultant of the Company, or one of its subsidiaries
or an affiliate, other than by reason of the holder's death or disability, any
SARs that have not vested shall become void. Exercise of SARs also will be
subject to such further restrictions (including limits on the time of exercise)
as may be required to satisfy the requirements of Rule 16b-3 promulgated by the
Securities and Exchange Commission and any other applicable law or regulation
(including, without limitation, federal and state securities laws and
regulations). SARs are not transferable, except by will or under the laws of
descent and distribution or pursuant to a domestic relations order as defined in
the Internal Revenue Code of 1986, as amended.
Upon exercise of an SAR, the holder will receive for each share for which
an SAR is exercised, as determined by the SAR Committee in its discretion, (a)
shares of the Company's Common Stock, (b) cash, or (c) cash and shares of Common
Stock, equal to the difference between (i) the fair market value per share of
the Common Stock on the date of exercise of the SAR and (ii) the value of an
SAR, which amount shall be no less than the fair market value per share of
Common Stock on the date of grant of the SAR.
A grant of SARs has no federal income tax consequences at the time of such
grant. Upon the exercise of SARs, the amount of any cash and, generally, the
fair market value of any shares of Common Stock received, is taxable to the
holder as ordinary income; the Company will have a corresponding deduction. Upon
the sale of any Common Stock acquired by the exercise of SARs, holders will
realize long-term or short-term capital gains or losses, depending upon their
holding period for such Common Stock.
Under the Company's 1992 SAR Plan, as of December 31, 1998, the Company had
granted a total of 516,000 outstanding SARs at an exercise price of $1.50 per
share, including 116,000 SARs to William Samuels, 100,000 SARs to Bruce Crowley,
76,000 SARs to David Reese and 20,000 SARs to Christopher Cline. The initial
prices of all the SARs granted were equal to the fair market values of a share
of Common Stock on the dates of grant. The SARs expire between 2001 and 2006.
1996 Stock Appreciation Rights Plan
The Company's 1996 Stock Appreciation Rights Plan (the "1996 SAR Plan") was
adopted by the Board of Directors in April 1996 and approved by the shareholders
in July 1996. The 1996 SAR Plan will provide a means whereby employees,
officers, directors, consultants and independent contractors may acquire the
right to participate in the appreciation of the Common Stock of the Company
pursuant to "Stock Appreciation Rights" ("SARs"). The 1996 SAR Plan is designed
to promote the long-term interest of the Company and its stockholders by
providing these individuals with an additional incentive to promote the
financial success of the
14
<PAGE>
Company and its subsidiary corporations. Subject to adjustment as set forth in
the 1996 SAR Plan, the aggregate number of SARs that may be granted pursuant to
the 1996 SAR Plan shall not exceed 500,000; provided, however that at no time
shall there be more than an aggregate of 900,000 outstanding, unexercised SARs
granted pursuant to both the 1996 SAR Plan and the Company's 1992 Stock
Appreciation Rights Plan. (See "1992 Stock Appreciation Rights Plan"). The 1996
SAR Plan is administered by the Stock Appreciation Rights Committee (the "SAR
Committee"). The 1996 SAR Plan imposes no limit on the number of recipients to
whom awards may be made.
SARs may not be exercised until the expiration of six months from the date
of grant. If a holder of an SAR ceases to be an employee, director or consultant
of the Company, or one of its subsidiaries or an affiliate, other than by reason
of the holder's death or disability, any SARs that have not vested shall become
void. Exercise of SARs also will be subject to such further restrictions
(including limits on the time of exercise) as may be required to satisfy the
requirements of Rule 16b-3 promulgated by the Securities and Exchange Commission
and any other applicable law or regulation (including, without limitation,
federal and state securities laws and regulations). SARs are not transferable,
except by will or under the laws of descent and distribution or pursuant to a
domestic relations order as defined in the Internal Revenue Code of 1986, as
amended.
Upon exercise of an SAR, the holder will receive for each share for which
an SAR is exercised, as determined by the SAR Committee in its discretion, (a)
shares of the Company's Common Stock, (b) cash, or (c) cash and shares of the
Company's Common Stock, equal to the difference between (i) the fair market
value per share of the Common Stock on the date of exercise of the SAR and (ii)
the value of an SAR, which amount shall be no less than the fair market value
per share of Common Stock on the date of grant of the SAR.
The terms of the SARs will be set forth in a certificate of grant issued to
the holder, which certificate will contain the provisions referred to above and
such other provisions as the SAR Committee may determine.
A grant of SARs has no federal income tax consequences at the time of such
grant. Upon the exercise of such SARs, the amount of any cash and, generally,
the fair market value of any shares of Common Stock of the Company received, is
taxable to the holder as ordinary income; the Company will have a corresponding
deduction. Upon the sale of the Company's Common Stock acquired by the exercise
of SARs, holders will realize long-term or short-term capital gains or losses,
depending upon their holding period for such Common Stock.
Under the Company's 1996 SAR Plan, as of December 31, 1998, the Company had
granted a total of 380,000 outstanding SARs at an exercise price of $1.50 per
share, including 130,000 SARs to William Samuels, 110,000 SARs to David Reese,
60,000 SARs to Bruce Crowley and 30,000 SARs to Christopher Cline.
15
<PAGE>
Section 401(k) Plan
During 1996, the Company adopted a Savings and Retirement Plan (the "401(k)
Plan") covering the Company's full-time employees, the 401(k) Plan is intended
to qualify under Section 401(k) of the Internal Revenue Code, so that
contributions to the 401(k) Plan by employees or by the Company, and the
investment earnings on such contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by the Company, if
any, will be deductible by the Company when made. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit ($9,500 in 1997) and to have the amount of
such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does
not require, additional matching contributions to the 401(k) Plan by the Company
on behalf of all participants in the 401(k) Plan.
Options Grants in Subsidiaries
During 1997, the Company issued to certain employees options to acquire
Class B Common Stock of its subsidiaries. The options generally vest in
increments and are exercisable over a ten-year option period. Class B Common
Shares in total represent not more than 20% of all authorized common stock of
each subsidiary. Each Class B Common Share carries "super-voting" rights,
entitling the holder to 25 votes.
To date, with respect to its operating subsidiaries, the Company has issued
a total of 1,000,000, 960,000 and 500,000 Class B options for HyperTV Networks,
Inc., ACTV Entertainment, Inc., and the Texas Individualized Television Network,
Inc., respectively. Included in these totals are options for 350,000, 350,000,
100,000, and 20,000 issued to Messrs. Samuels, Crowley, Reese and Cline with
respect to HyperTV Networks, Inc.; 350,000, 350,000, 100,000 and 20,000 issued
to Messrs. Samuels, Reese, Crowley and Cline with respect to ACTV Entertainment,
Inc.; and 250,000 issued to Mr. Reese with respect to the Texas Individualized
Television Network, Inc.
Each of the Class B options has been issued with an exercise price at or
above the fair market value per share upon issuance, based on an independent,
outside appraisal obtained by the Company.
The Class B option holders have also entered into shareholders' agreements
that limit their ability to sell shares acquired upon option exercise and that
grant a right of first refusal to the other option holders prior to any
contemplated sale of shares so acquired.
Each holder of Class B options of the Texas Individualized Television
Network, Inc. and of certain currently non-operating subsidiaries (assuming that
any of such subsidiaries is capitalized with at least $5 million) has the right
to exchange such options into options of the Company's Common Stock.
16
<PAGE>
SECTION 16(a) REPORTING
As under the securities laws of the United States, the Company's directors,
its executive (and certain other) officers, and any persons holding ten percent
or more of the Company's Common Stock must report on their ownership of the
Company's Common Stock and any changes in that ownership to the Securities and
Exchange Commission and to the National Association of Securities Dealers,
Inc.'s Automated Quotation System. Specific due dates for these reports have
been established. During the year ended December 31, 1998 the Company believes
all reports on behalf of its executive officers and directors for all
transactions were filed on a timely basis. The Company does not believe that
Banca del Gottardo, a principal shareholder, filed all reports on its ownership
of the Company's Common Stock, on a timely basis, if at all.
MEETINGS OF THE BOARD OF DIRECTORS
There were six meetings of the Company's Board of Directors during 1998
held on January 14, 1998, April 16, 1998, June 11, 1998, July 22, 198, September
14, 1998 and November 13, 1998. All of the Directors were either present or
participated by telephone conference call at such meetings, except Jesse Ravich
who was not present at, nor did he participate in the January 14, 1998 and June
11, 1998 meetings, except Richard Hyman who was not present at, nor did he
participate in the April 16, 1998 meeting, except Bruce Crowley who was not
present at, nor did he participate in the June 11, 1998 meeting and except David
Reese who was not present at, nor did he participate in the November 13, 1998
meeting. There were two unanimous written consent of the Company's Board of
Directors, pursuant to Section 141 of the General Corporation Law of Delaware,
during 1998 dated January 27, 1998, and August 24, 1998. The Company has a
Compensation Committee, consisting of Steven Schuster and William A. Frank.
During 1998, the Compensation Committee met three times on January 14, 1998,
February 20, 1998 and November 13, 1998. The Compensation Committee decides
issues relating to compensation, stock appreciation rights and stock options
that are not part of an incentive stock option plan. The Company has a 1996
Incentive Stock Option Committee, which consists of William Samuels and David
Reese. There were four meetings of the Company's 1996 Incentive Stock Option
Committee during 1998 held on January 14, 1998, March 8, 1998, April 21, 1998,
and July 13, 1998. The Company also has a 1998 Incentive Stock Options Committee
which consist of William Frank and Steve Schuster. There were three meetings of
the Company's 1998 Stock option Committee during 1998 held on July 13, 1998,
October 24, 1998 and November 24, 1998. The Company also has an Audit Committee,
consisting of Steven Schuster and Richard Hyman. There were no formal meetings
of the Company's Audit Committee during 1998. The Company does not currently
have a Nominating Committee.
17
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 11, 1994, the Post Company, an affiliate of the Company, entered
into a voting agreement with the Company and William C. Samuels, Chief Executive
Officer of the Company, as voting trustee ("Voting Trustee"), pursuant to which
the Post Company has as of March 26, 1999 assigned to Mr. Samuels its voting
rights with respect to 20,000 shares of the Company's Common Stock that it
holds. This voting trust remains in effect for 10 years. The Post Company also
regains the right to vote its shares of Common Stock under certain
circumstances, including the proposal of any amendment to the Company's
certificate of incorporation requiring stockholder approval; in case of any
reclassification or change of the outstanding Common Stock of the Company, any
consolidation of the Company with, or merger of the Company into, another
corporation, or in the case of a sale or conveyance to another corporation or
other entity of all or substantially all of the property, assets or business of
the Company; upon the commencement of a proxy contest regarding the Company's
Board of Directors; if a person or entity acquires 20% or more of the
outstanding Common Stock of the Company; or if a conflict of interest (as
determined by the Post Company in its sole discretion) involving the Voting
Trustee or any successor Voting Trustee should arise.
William A. Frank is a director of the Company and was formerly the Chief
Executive Officer of Greenwich Entertainment Group (the "Greenwich Group"), a
position he held from 1994 to 1997. In January 1995, the Company granted an
exclusive license to the Greenwich Group for the use of the Company's
programming technology in shopping malls, museums and entertainment centers. In
addition, the Company invested approximately $274,000 in 1996, in the Greenwich
Group, in exchange for approximately 15% of the Greenwich Group's outstanding
common stock. During 1997, an involuntary bankruptcy petition was filed against
the Greenwich Group and was liquidated.
During 1998, under the 1998 Stock Option Plan, the Company granted 25,000
options at an exercise price of $1.60 per share to Christopher Cline and 12,500
options at $3.10 each to William Frank and Steven Schuster. During February
1998, the Company granted outside of formal plans at an exercise price of $1.60
per share 525,000 options to William Samuels, 330,000 options to David Reese and
201,000 options to Bruce Crowley.
In September 1998, Liberty Media Corporation invested $5 million in the
Company's common stock with an option to invest an additional $5 million.
Simultaneously with this strategic investment, the Company and Liberty Media
Corporation created a joint venture, LMC IATV Events, LLC, to develop national
applications of individualized programming for major events.
All current transactions between the Company, and its officers, directors
and principal stockholders or any affiliates thereof are, and in the future such
transactions will be, on terms no less favorable to the Company than could be
obtained from unaffiliated third-parties.
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<PAGE>
PROPOSAL NO. 2
ADOPTION OF THE COMPANY'S
1999 STOCK OPTION PLAN
The Company's 1999 Stock Option Plan (the "1999 Option Plan" or the "Plan")
was adopted by the Board of Directors on March 8, 1999. The 1999 Option Plan is
intended to benefit the stockholders of (the "Company") by providing a means to
attract, retain and reward individuals who can and do contribute to the
longer-term financial success of the Company. Further, the recipients of
stock-based awards under the Plan should identify their success with that of the
Company's shareholders and therefore will be encouraged to increase their
proprietary interest in the Company. Under the 1999 Option Plan, the Company is
authorized to issue options for a total of 1,500,000 additional shares of Common
Stock.
Description of 1998 Stock Option Plan
All directors, executive officers, employees, consultants and other persons
who perform significant services for or on behalf of the Company are eligible to
participate in the 1999 Option Plan. The Company currently has approximately 40
full-time employees.
The Company may grant under the 1999 Option Plan both incentive stock
options ("Incentive Stock Options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and stock options that
do not qualify for incentive treatment under the Code ("Nonstatutory Options").
A copy of the 1999 Option Plan is attached hereto as Appendix B. The
following summary of the 1999 Option Plan does not purport to be complete and is
qualified in its entirety by reference to the complete text of the 1999 Option
Plan.
Administration.
The Plan shall be administered by a committee (the "Committee") of two or
more directors of the Board of Directors of ACTV (the "Board"), all of whom
shall not be employees of the Company; provided, however, that from time to time
with the Board may assume, at its sole discretion, administration of the Plan.
Except with regard to awards to employees subject to Section 16 of the
Securities Exchange Act of 1934, the Committee may delegate certain
responsibilities and powers to any executive officer or officers selected by it.
Any such delegation may be revoked by the Committee at any time.
Subject to the express provisions of the Plan, the Committee shall have the
authority to construe and interpret the Plan and all stock options, stock
appreciation rights, stock awards and cash awards entered into pursuant to the
Plan and to define the terms used
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<PAGE>
therein, to prescribe, adopt, amend and rescind rules and regulations relating
to the administration of the Plan and to make all other determinations necessary
or advisable for the administration of the Plan. Subject to the express
limitations of the Plan, the Committee shall designate the individuals from
among the class of persons eligible to participate in the 1999 Stock Option
Plan, who shall receive options and other awards, whether an optionee will
receive incentive stock options or nonstatutory options, or both, and the
amount, price, restrictions and all other terms and provisions of such options
(which need not be identical).
Stock Subject to the Plan.
Subject to adjustment as provided in Section 3(d) of the 1999 Stock Option
Plan, the stock to be offered under the Plan shall not exceed the sum of (i)
1,500,000; (ii) any shares available for future awards under the Company's 1996
and 1998 Stock Option Plan as of the effective date of the 1999 Stock Option
Plan; and (iii) any shares that are represented by awards previously granted
whether under a prior plan of the Company or otherwise, which are forfeited,
expire or are canceled without the delivery of shares or which result in the
forfeiture of shares back to the Company.
Any shares delivered under the 1999 Stock Option Plan or any prior plan of
the Company which are forfeited back to the Company because of the failure to
meet an award contingency or condition shall again be available for delivery
pursuant to new awards granted under the Plan. Any shares covered by an award
(or portion of an award) granted under the Plan or any prior plan of the
Company, which is forfeited or canceled, expires or is settled in cash,
including the settlement of tax withholding obligations using shares, shall be
deemed not to have been delivered for purposes of determining the maximum number
of shares available for delivery under the Plan. Likewise, if any stock option
is exercised by tendering shares, either actually or by attestation, to the
Company as full or partial payment for such exercise under this Plan or any
prior plan of the Company, only the number of shares issued net of the shares
tendered shall be deemed delivered for purposes of determining the maximum
number of shares available for delivery under the Plan. Further, Shares issued
under the Plan through the settlement, assumption or substitution of outstanding
awards or obligations to grant future awards as a condition of the Company
acquiring another entity shall not reduce the maximum number of Shares available
for delivery under the Plan. In addition, shares available for delivery in
settlement of Awards under the Plan may be increased by the Board by the number
of shares purchased or acquired by the Company using amounts equivalent to the
cash proceeds received by the company from the exercise of stock options,
granted under any plan of the Company, occurring after January 1, 1999.
Option and Award Prices
All options and awards denominated or made in shares shall use as the per
share price or exercise price the last sale price of a share of the Common Stock
of the Company as reported by the principal exchange on which the shares are
traded or listed for trading, on the applicable date as determined by the
Committee, or if shares are not traded on such date, the last sale price on
20
<PAGE>
the next preceding day on which such shares are traded. The applicable date
shall be the day on which the award is granted (or other Plan transaction
occurs), except that the Committee may provide that the applicable date may be
(i) the day on which an award recipient was hired, promoted or such similar
singular event occurred, provided that the grant of such award occurs within 90
days following such applicable date; or (ii) in the case of a stock option or
stock appreciation right granted retroactively in tandem with or as a
substitution for another previously granted stock option or stock appreciation
right, the applicable date for such prior award..
Types of Awards
The types of awards that may be granted under the Plan include:
1) Stock Options. A stock option may be in the form of an incentive
stock option or in another form that may or may not qualify for favorable
federal income tax treatment. The shares covered by a stock option may be
purchased by means of a cash payment or such other means as the Committee
may from time-to-time permit, including (i) tendering (either actually or
by attestation) shares valued using the market price at the time of
exercise, (ii) authorizing a third party to sell shares (or a sufficient
portion thereof) acquired upon exercise of a stock option and to remit to
the Company a sufficient portion of the sale proceeds to pay for all the
shares acquired through such exercise and any tax withholding obligations
resulting from such exercise; (iii) by converting shares subject to options
granted pursuant to the 1999 Stock Option Plan having a value equal to the
exercise price of the options being exercised on such terms and conditions
as the Committee determines; or (iv) any combination of the above. The
exercise price on all options shall be the one hundred percent (100%) of
the option and award price described above.
2) Stock Appreciation Right. A stock appreciation right is a right to
receive a payment in cash, shares or a combination, equal to the excess of
the aggregate market price at time of exercise of a specified number of
shares over the aggregate exercise price of the stock appreciation right
being exercised. The longest term a stock appreciation right may be
outstanding shall be 11 years. Such exercise price shall be based on one
hundred percent (100%) of the per share option and award prices described
above.
3) Stock Award. A stock award is a grant of shares or of a right to
receive shares (or their cash equivalent or a combination of both) in the
future. Except in cases of certain terminations of employment or an
extraordinary event, each stock award shall be earned and vest over at
least three years and shall be governed by such conditions, restrictions
and contingencies as the Committee shall determine. These may include
continuous service and/or the achievement of performance goals. The
performance goals that may be used by the Committee for such awards shall
consist of: operating profits (including EBITDA), net profits, earnings per
share, profit returns and margins, revenues, shareholder return and/or
value, stock price and working capital. Performance goals may be measured
solely on a corporate, subsidiary or business unit basis, or a combination
thereof. Further, performance criteria may reflect absolute entity
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<PAGE>
performance or a relative comparison of entity performance to the
performance of a peer group of entities or other external measure of the
selected performance criteria. Profit, earnings and revenues used for any
performance goal measurement shall exclude: gains or losses on operating
asset sales or dispositions; asset write-downs; litigation or claim
judgments or settlements; effect of changes in tax law or rate on deferred
tax liabilities; accruals for reorganization and restructuring programs;
uninsured catastrophic property losses; the cumulative effect of changes in
accounting principles; and any extraordinary non-recurring items as
described in Accounting Principles Board Opinion No. 30 and/or in
management's discussion and analysis of financial performance appearing in
the Company's annual report to shareholders for the applicable year.
4) Cash Award. A cash award is a right denominated in cash or cash
units to receive a cash payment, based on the attainment of pre-established
performance goals and, subject to a three-year minimum vesting period
similar to the one described for stock awards above, such other conditions,
restrictions and contingencies as the Committee shall determine. The
performance goals that may be used by the Committee for such awards shall
be those set forth for stock awards above.
Amendment & Termination.
The Plan may be amended as the Board deems necessary and appropriate to
achieve the Plans purpose provided the share and other award limitations cannot
be increased or improved without approval by the Company's shareholders. The
Board may suspend or terminate the Plan at any time.
Stockholder Vote Required
Approval of the Company's 1998 Stock Option Plan requires the
affirmative vote of the holders of a majority of the shares of Common Stock
present in person or represented by proxy at the Annual Meeting of Stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF
THE COMPANY'S 1998 STOCK OPTION PLAN
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF DELOITTE & TOUCHE LLP
AS THE COMPANY'S INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Board of Directors of the Company has adopted resolutions appointing
Deloitte & Touche LLP as the Company's independent certified public accountants
for the ensuing year. Deloitte & Touche LLP, which has served as the Company's
independent certified public
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accountants since 1989, is familiar with the Company's operations, accounting
policies and procedures and is, in the Company's opinion, well-qualified to act
in this capacity. A member of Deloitte & Touche LLP will be available to answer
questions and will have the opportunity to make a statement if he or she so
desires at the Annual Meeting of Stockholders.
Stockholder Vote Required
Ratification of the appointment of Deloitte & Touche LLP as independent
certified public accountants requires the affirmative vote of the holders of a
majority of the shares of Common Stock present in person or represented by proxy
at the Annual Meeting of Stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF
THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY'S
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
OTHER MATTERS
The Board of Directors does not know of any matters other than those
referred to in the notice of meeting that will be presented for consideration at
the Meeting. However, it is possible that certain proposals may be raised at the
Meeting by one or more stockholders. In such case, or if any other matter should
properly come before the Meeting, it is the intention of the person named in the
accompanying proxy to vote such proxy in accordance with his best judgment.
SOLICITATION OF PROXIES
The cost of soliciting proxies will be borne by the Company. Solicitations
may be made by mail, personal interview, telephone, and telegram by directors,
officers and employees of the Company. The Company will reimburse banks,
brokerage firms, other custodians, nominees and fiduciaries for reasonable
expenses incurred in sending proxy material to beneficial owners of the
Company's capital stock.
STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be presented
by such stockholders at the Company's 1999 Annual Meeting of Stockholders must
be received by the Company no later than January 1, 1999 in order that they may
be considered for inclusion in the Proxy Statement and form of proxy relating to
that Meeting.
23
<PAGE>
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION
Copies of the annual report (Form 10-K) of the Company for the year ended
December 31, 1998, as filed with the Securities and Exchange Commission (without
exhibits), and any amendments thereto, are available to stockholders free of
charge by writing to ACTV, Inc., 1270 Avenue of the Americas, New York, New York
10020.
FINANCIAL STATEMENTS
The audited consolidated financial statements of the Company and its
subsidiaries for the fiscal year ended December 31, 1998, and Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
annexed hereto as Appendix A.
By Order of the Board of
Directors of ACTV, Inc.
William C. Samuels
Chairman and Chief Executive Officer
April 23, 1999
24
<PAGE>
APPENDIX A
Audited Financial Statements for Fiscal year ended December 31, 1998 and
Management's Discussion and Analysis of Financial Condition
and Result of Operations
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of ACTV, Inc.:
We have audited the accompanying consolidated balance sheets of ACTV, Inc. and
subsidiaries ("the Company") as of December 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the index at Item 14 (a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
the financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
March 11, 1999
New York, New York
2
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................. $554,077 $5,188,770
Accounts receivable-net ............................... 303,044 501,768
Education equipment inventory ......................... 237,757 110,405
Other ................................................. 308,653 773,613
---------- -----------
Total current assets ......................... 1,403,531 6,574,556
---------- -----------
Property and equipment-net ..................................... 2,596,785 2,365,775
---------- -----------
Other Assets:
Patents and patents pending............................ 279,356 832,336
Software development costs............................. 669,852 1,098,756
Goodwill .............................................. 2,641,188 2,214,816
Other ................................................. 311,206 519,802
---------- -----------
Total other assets ........................... 3,901,602 4,665,710
---------- -----------
Total ............................... $7,901,918 $13,606,041
========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued expenses.................. $1,882,159 $955,686
Deferred stock appreciation rights..................... -- 2,000,062
Preferred dividends payable ........................... 603,469 200,305
---------- -----------
Total Current Liabilities 2,485,628 3,156,053
Long-Term Note Payable................................. -- 4,315,016
Put Warrant............................................ -- 1,371,624
Preferred stock of a subsidiary, convertible into
common shares of parent, no par value, 436,000
shares authorized: issued and outstanding
316,944 at December 31, 1997, none at
December 31, 1998 ................................... 7,029,708 --
Shareholders' equity (deficiency):
Preferred series A stock, $.10 par value, 1,000,000
shares authorized, issued and outstanding; none at
December 31, 1997, 56,300 at December 31, 1998 ...... 8,620 5,630
Preferred series B stock, $.10 par value,
1,000,000 shares authorized, issued and outstanding;
none at December 31, 1997, 5,018 at
December 31, 1998 ................................... -- 2,805,961
Common stock, $.10 par value, 35,000,000 shares
authorized: issued and outstanding 14,614,611 at
December 31, 1997, 29,759,459 at December 31, 1998... 1,461,461 2,975,946
Additional paid-in capital............................. 48,140,596 71,068,230
Notes receivable from stock sales...................... (199,900) (199,900)
Accumulated deficit.................................... (51,024,195) (71,892,519)
----------- -----------
Total shareholders' equity (deficiency) ...... (1,613,418) 4,763,348
----------- -----------
Total................................... $7,901,918 $13,606,041
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
- ------------------------------------------------------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Revenues........................................................... $1,459,540 $1,650,955 $ 1,405,838
License fees from related party.................................... 16,789 -- --
---------- ----------- -----------
Total revenues............................................... 1,476,329 1,650,955 1,405,838
Cost of Sales...................................................... 647,488 471,956 218,514
---------- ----------- -----------
Gross profit................................................. 828,841 1,178,999 1,187,324
Expenses:
Operating expenses................................................. 1,955,601 1,360,838 2,004,996
Selling and administrative......................................... 6,332,759 6,880,311 9,862,086
Depreciation and amortization...................................... 419,979 327,681 1,106,359
Amortization of goodwill........................................... 426,372 426,372 426,372
Loss on investment................................................. 274,325 -- --
Stock appreciation rights.......................................... 183,634 (346,892) 2,000,062
---------- ---------- -----------
Total expenses............................................... 9,592,670 8,648,310 15,399,875
Interest (income)....................................................... (158,732) (116,870) (184,285)
Interest expense........................................................ -- -- 932,247
---------- ---------- -----------
Interest expense (income) - net.................................... (158,732) (116,870) 747,962
Minority Interest - Subsidiary preferred stock dividend and accretion...
1,695,384 3,006,242 5,428,638
---------- ----------- -----------
Net loss ............................................................... 10,300,481 10,358,683 20,389,151
Preferred Stock Dividend and Accretion ................................. -- -- 479,173
---------- ------------ -----------
Net loss applicable to common stock
shareholders............................................................ $10,300,481 $10,358,683 $20,868,324
=========== =========== ===========
Loss per basic and diluted common share................................. $.88 $.80 $.98
Weighted average number of common shares outstanding.................... 11,739,768 12,883,848 21,399,041
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss applicable to common shareholders ................................ $(10,300,481) $(10,358,683) $(20,868,324)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization...................................... 846,354 754,053 1,532,731
Stock appreciation rights.......................................... 134,634 (701,517) 2,000,062
Stock issued in lieu of cash compensation.......................... 114,047 443,125 2,016,023
Note issued in lieu of cash ....................................... -- -- 686,641
Subsidiary preferred stock preferred dividends and accretions...... 1,500,000 2,598,156 5,749,309
Preferred Stock Accretion.......................................... -- -- 315,965
Amortization of the Put Warrant.................................... -- -- 241,565
Loss on investment................................................. 274,325 -- --
Other ............................................................. 82,746 43,188 --
Changes in assets and liabilities:
Accounts receivable................................................ (143,648) 63,960 (198,724)
Education equipment inventory...................................... (225,286) 99,747 127,352
Other assets ...................................................... (542,824) (241,117) (307,426)
Accounts payable and accrued expenses.............................. 504,263 287,504 (926,471)
Preferred stock dividends payable.................................. 195,384 408,085 (403,164)
------------ ------------ ------------
Net cash used in operating Activities..................... (7,560,486) (6,603,499) (10,034,461)
------------ ------------ ------------
Cash flows from investing activities:
Investment in patents pending...................................... -- (50,000) (598,671)
Investment in property and equipment............................... (444,189) (2,159,576) (531,573)
Investment in systems.............................................. -- (686,227) (797,677)
------------ ------------ ------------
Net cash used in investing activities....................................... (444,189) (2,895,803) (1,927,921)
Cash flows from financing activities:
Net proceeds from debt issuance.................................... -- -- 4,462,990
Net proceeds from put warrant issuance............................. -- -- 1,371,624
Net Proceeds from preferred stock transactions 9,115,664 2,045,163 --
Proceeds from equity financing..................................... 1,877,985 1,487,460 10,762,461
------------ ------------ -------------
Net cash provided by financing activities................................... 10,993,649 3,532,623 16,597,075
------------ ------------ -------------
Net (decrease) increase in cash and cash equivalents ....................... 2,988,974 (5,966,679) 4,634,693
Cash and cash equivalents,
Beginning of period................................................ 3,531,782 6,520,756 554,077
------------ ------------ -------------
Cash and cash equivalents,
End of period ..................................................... $6,520,756 $554,077 $5,188,770
============ ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Preferred Series A Preferred Series B Additional
Shares Amount Shares Amount Shares Amount Paid-in-Capital Deficit
- --------------------- ---------- ---------- ---------- ---------- ---------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances
December 31, 1995 11,396,419 $1,139,642 -- $ -- -- $ -- $36,686,742 $(30,365,031)
Issuance of shares
in connection
with financings 450,000 45,000 5,832,985
Issuance of shares
for services 45,687 4,569 109,478
Reversal of option
exercise (105,000) (10,500) (357,000)
Net loss Applicable
to Common
Shareholders (10,300,481)
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
Balances
December 31, 1996 11,787,106 $1,178,711 -- $ -- -- $ -- $42,272,205 $(40,665,512)
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
Issuance of shares
in connection with
Financings 733,333 73,333 86,200 8,620 3,447,778
Issuance of shares for
services 286,511 28,651 414,473
Issuance of shares
in connection with
exchange of
preferred stock 1,795,661 179,566 1,994,980
Issuance of shares
in connection with
exercise of stock
options 12,000 1,200 11,160
Net loss Applicable
to Common
Shareholders (10,358,683)
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
Balances
December 31, 1997 14,614,611 $1,461,461 86,200 8,620 -- $ -- $48,140,596 $(51,024,195)
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Common Stock Preferred Series A Preferred Series B Additional
Shares Amount Shares Amount Shares Amount Paid-in-Capital Deficit
- --------------------- ---------- ---------- ---------- ---------- ---------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances
December 31, 1997 14,614,611 $1,461,461 86,200 8,620 -- $ -- $48,140,596 $(51,024,195)
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
Issuance of shares
in connection with
Financings 6,458,332 645,833 9,987,692
Issuance of
Preferred Series B
Stock 5,018 2,805,961 2,527,723
Issuance of shares
for services 373,592 37,359 508,083
Issuance of shares
in connection with
exchange of
preferred stock 5,857,406 585,741 (29,900) (2,990) 2,535,660
Issuance of shares
in connection with
exercise of stock
options 1,662,452 166,245 2,282,323
Issuance of
warrants and shares
in connection with
financing activities 793,066 79,307 5,086,153
Net loss (20,389,151)
Preferred Dividends (479,173)
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
Balances
December 31, 1998 29,759,459 $2,975,946 56,300 $5,630 5,018 $2,805,961 $71,068,230 $(71,892,519)
========== ========== ========== ========== ========== ========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
ACTV, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, and 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - ACTV, Inc. was incorporated July 8, 1983. ACTV, Inc. and its
subsidiaries (the "Company" or "ACTV"), has developed patented and proprietary
technologies that allow content providers to create unique interactive
programming for digital television ("Individualized Television") and for
television/Internet convergence applications ("HyperTV"). Individualized
Programming software technology provides the tools needed to create and view
live or pre-recorded television programming that individualizes what the viewer
sees and hears. HyperTV(TM) is a patented process for the delivery of Internet
web information that relates to and enhances a simultaneous videocast. Since its
inception, the Company has been engaged in the development of Individualized
Programming, the production of programs that use its Individualized Programming
and the marketing and sales of the various products and services incorporating
Individualized Programming. In 1997, the Company introduced HyperTV and its
first commercial application, eSchool Online ("eSchool") for the education
market. eSchool consists of a suite of software products that permit a teacher
to use the Internet as an accompanying instructional tool during a live or
pre-recorded video lesson.
Principles of Consolidation - The Company's consolidated financial statements
include the balances of its wholly owned operating subsidiaries. In
consolidation, all intercompany account balances are eliminated.
Property and Equipment - Property and equipment are recorded at cost and
depreciated on the straight-line method over their estimated useful lives
(generally five years). Depreciation expense for the years ended December
31,1996, 1997, and 1998 aggregated $189,957, $286,883, and
$782,990,respectively.
Education Equipment - Education equipment consists of standard personal
computers adapted to provide individualized programming functionality,
videocassette recorders, television monitors and computer printers that the
Company holds in inventory. This inventory is carried on the Company's books at
the lower of first-in, first-out cost or market.
Patents and Patents Pending - The cost of patents, which for patents issued
represents the consideration paid for the assignment of patent rights to the
Company by an employee and for patents pending represents legal costs related
directly to such patents pending, is being amortized on a straight-line basis
over the estimated economic lives of the respective patents (averaging 10
years), which is less than the statutory life of each patent. The balances at
December 31, 1996, 1997, and 1998, are net of accumulated amortization of
$116,371, $141,072, and $186,485, respectively.
Software Development Costs - The Company capitalizes costs incurred for product
software where economic and technological feasibility has been established.
Capitalized software costs are amortized on a straight-line basis over the
estimated useful lives of the respective products (5 years). The balance at
December 31, 1997 and 1998, is net of accumulated amortization of $16,376 and
$145,553, respectively.
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Revenue Recognition - Sales are recorded as products are shipped or services are
rendered.
Research and Development - Research and development costs, which represent
primarily refinements to Individualized Programming, were $1,221,362 for the
year ended December 31, 1996, $551,328 for the year ended December 31, 1997, and
$820,475 for the year ended December 31, 1998.
Earnings/(Loss) Per Share - The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share, for the period ended
December 31, 1998, which establishes standards for computing and presenting
8
<PAGE>
earnings per share ("EPS") and simplifies the standards for computing EPS
currently found in Accounting Principles Board ("APB") Opinion No. 15 ("Earnings
Per Share"). Common stock equivalents under APB No. 15 are no longer included in
the calculation of primary, or basic, EPS. Loss per common share equals net loss
divided by the weighted average number of shares of the Company's common stock
("Common Stock") outstanding during the period. The Company did not consider the
effect of stock options or convertible preferred stock upon the calculation of
the loss per common share, as it would be anti-dilutive.
Reclassifications - Certain reclassifications have been made in the December 31,
1996, and 1997 financial statements to conform to the December 31, 1998
presentation.
Intangibles - The excess of the purchase cost over the fair value of net assets
acquired in an acquisition (goodwill) is being amortized on a straight-line
basis over a period of 10 years. The Company evaluates the realizability of
goodwill based upon the expected undiscounted cash flows of the acquired
business. Impairments, if any, will be recognized through a charge to operation,
in the period in which the impairment is deemed to exist. Based on such
analysis, the Company does not believe that goodwill has been impaired.
Other Current Assets - The Company's consolidated balance sheets at December 31,
1996, December 31, 1997, and December 31, 1998 reflect balances of $343,962,
$224,712, and $434,575, respectively, related to cash advances made to executive
officers.
New Accounting Pronouncements
Newly Adopted Accounting Standards
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
131, Disclosures about Segments of an Enterprise and Related Information during
the year ending December 31, 1998. The Statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
Statement supersedes Financial Accounting Standards Board ("FASB") Statement No.
14, Financial Reporting for Segments of a Business Enterprise, but retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
Management has determined that the Company operates in two segments the
Individualized Television and HyperTV, see Note 13.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at fair value. The statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15,1999; however, it may be adopted earlier. It cannot be applied
retroactively to financial statements of prior periods. The Company has not yet
determined the impact, if any, the adoption of SFAS No. 133 will have on its
financial statements.
9
<PAGE>
2. NATURE OF OPERATIONS
The principal market for the Individualized Television is entertainment
programming distributed over digital television systems. The Company plans to
sell individualized entertainment programming (initially professional and
college sports programming) to the end user through cable television systems on
a subscription basis.
Our target markets for HyperTV(TM) are entertainment applications for consumers
and online learning for schools, universities and corporations. The Company
sells eSchool online learning programming and related hardware to schools,
colleges, and private education networks. The following clients accounted for
more than 10% of the Company's revenues during the year ended December 31, 1998,
Georgia Public Television, which accounted for approximately 17%, 24%, and 40%
of total revenues in 1996, 1997, and 1998, respectively, School District of
Philadelphia, which accounted for approximately 14% in 1998, and the Texas
Workforce Commission, which accounted for 24% of total revenues in 1997. During
1996 and 1998, the Company generated no revenues from the Texas Workforce
Commission.
3. ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
4. PROPERTY AND EQUIPMENT - NET
Property and equipment - net at December 31, 1996, 1997, and 1998 consisted of
the following (at cost):
1996 1997 1998
---- ---- ----
Machinery and equipment $636,845 $2,931,682 $3,297,160
Office furniture and fixtures 357,373 501,435 667,508
--------- ----------- -----------
Total 994,218 3,433,117 3,964,688
Less accumulated depreciation 270,129 836,332 1,598,913
--------- ----------- -----------
Total $724,089 $2,596,785 $2,365,775
========= =========== ===========
5. FINANCING ACTIVITIES
In January 1998, the ACTV, Inc. subsidiaries ACTV Entertainment, Inc. and
The Texas Individualized Television Network, Inc. entered into a note purchase
agreement, dated as of January 13, 1998 with certain private investors. Pursuant
to the agreement, the investors purchased $5.0 million aggregate principal
amount notes from our subsidiaries. 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, 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. We have chosen
to make the first two semi-annual interest payments (June 30, 1998 and December
31, 1998) in kind. 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 investors received on
January 14, 1998 a common stock purchase warrant of Texas Network that granted
the investors either the right to purchase up to 17.5% of the fully-diluted
shares of common stock of Texas Network or, through July 14, 1999, to exchange
the warrant for such number
10
<PAGE>
of shares of our common stock, at the time of and giving effect to such
exchange, that were equal to 5.5% of the fully diluted number of shares of
common stock outstanding. In January 1999, the investors exchanged the warrant
in full into shares of our common stock. This conversion has not been reflected
in the accompanying financial statements as it occurred in 1999.
For accounting purposes, the Company has allocated approximately $1.4
million to the value of the warrant, based on the market value of ACTV, Inc.
common stock into which the warrant was convertible at issuance. 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.
In November 1998, ACTV issued 5,018 shares of Series B Convertible
Preferred Stock, common stock, and warrants to purchase approximately 1.95
million shares of common stock at $2.00 per share as a partial exchange for
approximately 179,000 shares of exchangeable preferred stock, which had been
issued by a subsidiary of ACTV. The excess of the fair value of this
consideration over the carrying value of the convertible preferred stock for
which it was issued is included in Minority Interest - Subsidiary Preferred
stock dividend and accretion in the accompanying statement of operations. The
Series B Preferred has a liquidation preference $1,000.00 per share and pays a
dividend, in cash or accumulated and paid in common stock upon conversion, of
10% per annum.
The Series B Preferred is fully redeemable by ACTV at any time at a 10%
premium above face value plus accrued dividends. The holders of Series B
Preferred are prohibited from converting any shares into common stock through
November 13, 1999, whether or not ACTV gives a notice of redemption during this
period. Beginning November 13, 1999, the number of shares issued upon conversion
is determined by dividing the liquidation value of $1,000.00 plus accrued
dividends by the conversion price of $2.00 per common share. Beginning February
13, 2000, the number of shares issued upon conversion is determined by dividing
the liquidation value of $1,000.00 plus accrued dividends by the conversion
price of $1.33 per common share. Such preferred shares are currently not
convertible into common stock and will be convertible into common stock only
after November 13, 1999. The beneficial conversion attributable to the possible
conversion of the Series B Preferred at $1.33/share, which equaled $2,527,723 at
the issuance date has been attributed to additional paid-in-capital and will be
accounted for as a charge to net loss applicable to common stock shareholders
over the period from issuance through February 13, 2000.
During the year ended December 31, 1998 we raised approximately $10.8 from
sales of common stock to private institutional investors, including $5 million
invested by Liberty Media Corporation.
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% convertible preferred stock (the "Convertible Preferred Stock") issued
by its wholly-owned subsidiary ($9.1 million in net proceeds). The Convertible
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 Convertible 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 Convertible 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.
The Convertible 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. Preferred stock
accretion of $1.5 million and $2.5 million, respectively, were recorded and
included as minority interest for the years ended December 31, 1996 and 1997. As
of December 31, 1998, all of the Exchangeable Preferred Stock issued by the
Company's wholly-owned subsidiary, ACTV Holdings, Inc. had been converted.
During 1999, we have raised approximately $540,000 from the exercise of
options and warrants.
11
<PAGE>
We believe that we have adequate funding to launch the southwest regional
network in 1999 and to fund our present operations for the next 12-month period,
assuming that we are able to raise approximately $3.9 million from forcing the
exercise of approximately 1.95 million warrants. We can effectively force such
warrant exercise if the average closing price of our common stock is above $4.50
per share for a twenty consecutive trading day period and the shares to be
issued pursuant to the warrants are registered for sale by the SEC. Currently,
the share price requirement has been met and we have filed a registration
statement for registration of the warrant shares. Approval by the SEC is still
pending.
Should we raise such funds from warrant exercises, we will still need
additional funding to operate the southwest regional network at planned levels,
to fund the commercialization of HyperTV(TM) for entertainment applications, and
to fund our other operations prior to breakeven. We will need additional funding
as well to launch networks in other regions. We currently do not have any
arrangements for additional financing and cannot assure you that additional
financing will be available on acceptable terms, or at all. As a result, there
is no assurance that we 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 our regional network strategy or for the
planned commercialization of HyperTV(TM) for entertainment applications.
If we are not successful at raising funds from warrant exercises or other funds,
we will be required to significantly reduce our overall level of operations. If
necessary, we believe that we could continue to operate at this significantly
reduced level.
6. SHAREHOLDERS' EQUITY (DEFICIENCY)
At December 31, 1998, the Company had reserved shares of Common Stock for
issuance as follows:
1989 Qualified Stock Option Plan 31,000
1989 Non-Qualified Stock Option Plan 39,250
1996 Qualified Stock Option Plan 478,484
1998 Qualified Stock Option Plan 307,500
Options granted outside of formal plans 6,933,773
---------
Total 7,850,007
=========
In addition, the conversion of Series A Convertible Preferred and Series B
Convertible Preferred Shares could result in the issuance of 4,850,411 shares of
common stock.
Convertible Preferred Stock - At December 31, 1998, the Company was authorized
to issue 1,000,000 shares of blank check preferred stock, par value $0.10 per
share, of which 120,00 shares have been designated Series A Convertible
Preferred Stock and 6,110 shares have been designated Series B Convertible
Preferred Stock. At December 31, 1998, 56,300 shares of Series A Convertible
Preferred Stock and 5,018 shares of Series B Convertible Preferred Stock were
issued and outstanding.
Exchangeable Preferred Stock - As of December 31, 1998, all of the Exchangeable
Preferred Stock issued by the Company's wholly-owned subsidiary, ACTV Holdings,
Inc. had been converted.
Exchangeable Preferred Stock - At December 31, 1997, the Company's wholly-owned
subsidiary, ACTV Holdings, Inc. was authorized to issue 436,000 shares of
Convertible Preferred Stock, no par value, of which 316,944 shares were issued
and outstanding.
12
<PAGE>
7. STOCK OPTIONS
During 1989, the Board of Directors approved an Employee Incentive Stock Option
Plan (the "Employee Plan"). The Employee Plan provides for the granting of up to
100,000 options to purchase Common Stock to key employees. The Employee Plan
stipulates that the option price be not less than fair market value on the date
of grant. Options granted will have an expiration date not to exceed ten years
from the date of grant. At December 31, 1998, 97,500 options had been granted
under this plan, of which 37,567 had been exercised and 28,933 had expired or
been canceled.
In addition, in August 1989, the Board of Directors approved a Non-Qualified
Stock Option Plan (the "Non-Qualified Plan"), to be administered by the Board or
a committee appointed by the Board. The Non-Qualified Plan provides for the
granting of up to 100,000 options to purchase shares of Common Stock to
employees, officers, directors, consultants and independent contractors. The
Non-Qualified Plan stipulates that the option price be not less than fair market
value at the date of grant, or such other price as the Board may determine.
Options granted under this Plan shall expire on a date determined by the
committee but in no event later than three months after the termination of
employment or retainer. At December 31, 1998, 97,000 options had been granted
under this plan, of which 30,500 had been exercised and 27,250 had expired or
been canceled.
During 1996, the Board of Directors approved the Company's 1996 Stock Option
Plan (the "1996 Option Plan"). The 1996 Option Plan provides for option grants
to employees and others who provide significant services to the Company. Under
the 1996 Option Plan, the Company is authorized to issue options for a total of
500,000 shares of Common Stock. As of December 31, 1998, the Company had issued
478,484 outstanding options under the plan, including 93,333 that had been
canceled. No options had been exercised under the 1996 Option Plan as of
December 31, 1998.
During 1998, the Board of Directors approved the Company's 1998 Stock Option
Plan (the "1998 Option Plan"). The 1998 Option Plan provides for option grants
to employees and others who provide significant services to the Company. Under
the 1998 Option Plan, the Company is authorized to issue options for a total of
900,000 shares of Common Stock. As of December 31, 1998, the Company had issued
307,500 outstanding options under the plan, including 27,500 that had been
canceled. No options had been exercised under the 1998 Option Plan as of
December 31, 1998.
At December 31, 1998, the Company also had outstanding options and warrants that
were issued to Directors, certain employees, and consultants and pursuant to
financing transactions for the purchase of 6,993,773 shares of Common Stock that
were not issued pursuant to a formal plan. The prices of these options range
from $1.50 to $5.50 per share; they have expiration dates in the years 1999
through 2008. The options granted are not part of the Employee Incentive Stock
Option Plan or the Non-Qualified Stock Option Plan discussed above.
A summary of the status of the Company's stock options as of December 31, 1998,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Wgtd. Wgtd. Wgtd.
Avg. Avg. Avg.
1998 Exer 1997 Exer 1996 Exer
Shares Price Shares Price Shares Price
---------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
Of period 3,539,218 3,328,718 2,747,082
Options and warrants granted 6,376,073 $1.91 339,683 $1.91 887,500 $3.73
Options and warrants exercised 1,844,951 $1.64 17,000 $0.73 -- --
Options and warrants terminated 220,333 $2.86 112,183 $4.06 305,864 $3.76
Outstanding at end of period 7,850,007 $1.90 3,539,218 $1.81 3,328,718 $2.99
Options and warrants exercisable at end of period 5,782,275 $1.99 2,363,134 $1.87 1,719,134 $3.19
</TABLE>
13
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted Average Number
Range of Number Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- ---------------- ------------------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0 to 1.50 1,363,751 3.5 Years $1.50 680,353 $1.50
1.51 to 3.50 6,333,756 6.4 Years $1.94 4,957,756 $2.00
3.51 to 5.50 152,000 1.6 Years $4.02 144,166 $4.03
</TABLE>
The weighted average fair value of options granted during 1997 and 1998 was $.64
and $.97 per share, respectively, excluding the value of options granted and
terminated within the year. In the case of each issuance, options were issued at
an exercise price that was higher than the fair market value of the Company's
Common Stock on the date of grant. The Company applies Accounting Principles
Board Opinion No. 25 and related Interpretations in accounting for its stock
option and purchase plans. Accordingly, no compensation cost has been recognized
for option issuances. Had compensation cost for the Company's option issuances
been determined based on the fair value at the grant dates consistent with the
method of FASB Statement 123, the Company's net loss and loss per basic and
diluted share for the years ended December 31, 1996, 1997 and 1998 would have
been increased to the pro forma amounts indicated below:
Net loss to common shareholders 1996 1997 1998
---- ---- ----
As reported $10,300,481 $10,358,683 $20,552,359
Pro forma $11,185,735 $10,574,807 $21,987,835
Net loss per basic and diluted
common share 1996 1997 1998
---- ---- ----
As reported $0.88 $0.80 $0.96
Pro forma $0.95 $0.82 $1.02
The Company estimated the fair value of options issued during 1996, 1997 and
1998 on the date of each grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used: no dividend yield, expected
volatility for 1996 of 61.5%, expected volatility for 1997 of 57.3%, expected
volatility for 1998 of 49.53%, and a risk free interest rate of 6% for all
years.
Certain employees, including the executive officers Samuels, Reese, Crowley and
Cline, have been granted options to purchase Class B Common Stock, at fair value
as of the date of grant, of certain of the Company's subsidiaries; such common
stock, if issued, will have majority voting rights in such subsidiaries.
8. STOCK APPRECIATION RIGHTS PLANS
The Company's 1992 Stock Appreciation Rights Plan (the "1992 SAR Plan") was
approved by the Company's stockholders in December 1992. Subject to adjustment
as set forth in the 1992 SAR Plan, the aggregate number of Stock Appreciation
Rights ("SARs") that may be granted shall not exceed 900,000.
The Company's 1996 Stock Appreciation Rights Plan (the "1996 SAR Plan") was
adopted by the Board of Directors in April 1996 and approved by the shareholders
in July 1996. Subject to adjustment as set forth in the 1996 SAR Plan, the
aggregate number of SARs that may be granted pursuant to the 1996 SAR Plan shall
not exceed 500,000; provided, however, that at no time shall there be more than
an aggregate of 900,000 outstanding, unexercised SARs granted pursuant to both
the 1996 SAR Plan and the 1992 SAR Plan. The 1996 SAR Plan imposes no limit on
the number of recipients to whom awards
14
<PAGE>
may be made. Both the 1992 and 1996 SAR Plans are administered by the Stock
Appreciation Rights Committee (the "SAR Committee").
SARs may not be exercised until the six months from the date of grant. SARs
issued pursuant to the 1992 SAR Plan vest in five equal annual installments
beginning twelve months from the date of grant. SARs issued pursuant to the 1996
SAR Plan vest either in a lump sum or in such installments, which need not be
equal, as the Committee shall determine. If a holder of a SAR ceases to be an
employee, director or consultant of the Company or one of its subsidiaries or an
affiliate, other than by reason of the holder's death or disability, any SARs
that have not vested shall become void. Exercise of SARs also will be subject to
such further restrictions (including limits on the time of exercise) as may be
required to satisfy the requirements of Rule 16b-3 promulgated by the Securities
and Exchange Commission and any other applicable law or regulation (including,
without limitation, federal and state securities laws and regulations). SARs are
not transferable except by will or under the laws of descent and distribution or
pursuant to a domestic relations order as defined in the Internal Revenue Code
of 1986, as amended.
Upon exercise of a SAR, the holder will receive for each share for which a SAR
is exercised, as determined by the SAR Committee in its discretion, (a) shares
of the Company's Common Stock, (b) cash, or (c) cash and shares of the Company's
Common Stock, equal to the difference between (i) the fair market value per
share of the Common Stock on the date of exercise of the SAR and (ii) the
exercise price of a SAR, which amount shall be no less than the fair market
value per share of Common Stock on the date of grant of the SAR.
Under the Company's 1992 SAR Plan, as of December 31, 1998, the Company has
granted 516,000 outstanding SARs (with an exercise price of $1.50 per share) to
ten employees. The SARs expire between 2001 and 2006. Under the Company's 1996
SAR Plan, as of December 31, 1998, the Company has granted 380,000 outstanding
SARs (with an exercise price of $1.50 per share) to six employees. The SARs
expire between 2002 and 2006. During 1998, no SARs were exercised.
9. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes".
Deferred income taxes reflect the net tax effects at an effective tax rate of
35.33% of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The tax effects
of significant items comprising the Company's net deferred tax asset as of
December 31, 1996, December 31, 1997, and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 13,365,772 $ 16,131,213 $ 20,254,782
Differences between book and tax basis of property 34,019 56,148 852,587
------------ ------------ ------------
13,399,791 16,187,361 21,107,369
Deferred tax liabilities:
Differences between book and tax basis of property (106,819) (181,104) (454,618)
------------ ------------ ------------
13,292,972 16,000,257 (20,652,751)
Valuation Allowance (13,292,972) (16,000,257) (20,652,751)
------------ ------------ ------------
Net deferred tax asset $ 0 $ 0 $ 0
============ ============ ============
</TABLE>
The increase in the valuation allowance for the year ended December 31, 1997 and
1998, was approximately $2.7 and $4.7 million, respectively. There was no
provision or benefit for federal income taxes as a result of the net operating
loss in the current year.
15
<PAGE>
At December 31, 1997 and 1998, the Company has Federal net operating loss
carryovers of approximately $45.7 and $57.3 million, respectively. These
carryovers may be subject to certain limitations and will expire between the
years 1999 and 2013.
10. COMMITMENTS
At December 31, 1998, future aggregate minimum lease commitments under
non-cancelable operating leases, which expire in 1999 and 2001, were
approximately $670,000. The leases contain customary escalation clauses, based
principally on real estate taxes. Rent expense related to these leases for the
years ended December 31, 1996, 1997, and 1998 aggregated $129,600, $330,430,
$422,729 respectively.
The Company has employment agreements with certain key employees. These
agreements extend for a period of a maximum of five years and contain
non-competition provisions, which extend two years after termination of
employment with the Company. At December 31, 1997 and 1998, the Company is
committed to expend a total of approximately $2.7 and $2.3 million, respectively
under these agreements.
11. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and receivables.
The Company attempts to mitigate cash investment risks by placing such
investments in insured depository accounts and with financial institutions that
have high credit ratings. Concentrations of risk with respect to trade
receivables exist because of the relatively few companies or other organizations
(primarily educational or government bodies) with which the Company currently
does business. The Company attempts to limit these risks by closely monitoring
the credit of those to whom it is contemplating providing its products, and
continuing such credit monitoring activities and other collection activities
throughout the payment period. In certain instances, the Company further
minimizes concentrations of credit risks by requiring partial advance payments
for the products provided.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments, including cash and cash equivalents, accounts
receivable and payable, and accruals, the carrying amounts approximated fair
value because of their short maturity. The Notes Payable of the Texas
Individualized Television Network, Inc. were issued in 1998 and management
believes that its carrying value is representative of its fair value.
13. SEGMENT REPORTING
ACTV, Inc. and its segments Individualized Television and HyperTV Networks,
Inc., has developed and markets proprietary technologies for individualized
television programming (the "Individualized Programming") and for Internet
learning systems. ACTV Entertainment, Inc.'s primary product will give the
consumer Individualized Programming and will allow a viewer to experience
instantly responsive television. Since its inception, the Company has been
engaged in the development of Individualized Programming, the production of
programs that use its Individualized Programming and the marketing and sales of
the various products and services incorporating the ACTV Entertainment, Inc.'s
Individualized Programming. During 1996 HyperTV Networks, Inc. conceptualized
and developed HyperTV. In 1997, HyperTV Networks, Inc. introduced to the
education market eSchool Online ("eSchool"), which is the first commercial
application of HyperTV. Please refer to Note 2 to the financial statements that
specifically addresses the revenue breakout by major customer. The operating
segments (Individualized Television and HyperTV Networks, Inc.) have been
determined by the way the overall business is managed.
16
<PAGE>
Information concerning the Company's business segments in 1996, 1997 and 1998 is
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ---- ----
<S> <C> <C> <C>
Revenues
Individualized Television $ -- $ -- $ --
HyperTV Networks, Inc. 1,476,329 1,650,955 1,405,838
Unallocated corporate -- -- --
-------------- -------------- --------------
Total $ 1,476,329 $ 1,650,955 $ 1,405,838
-------------- -------------- --------------
Depreciation & Amortization
Individualized Television $ 381,135 $ 172,123 $ 763,241
HyperTV Networks, Inc. 1,086 29,622 206,338
Unallocated Corporate 464,130 552,309 563,151
-------------- -------------- --------------
Total $ 846,351 $ 754,053 $ 1,532,731
-------------- -------------- --------------
Interest Expense (Income)
Individualized Television $ -- $ (9,391) $ 850,770
HyperTV Networks, Inc. (152,040) (8,128) (8,405)
Unallocated corporate (6,692) (99,351) 94,403
-------------- -------------- --------------
Total $ (158,732) $ (116,870) $ 747,963
-------------- -------------- --------------
Net Loss
Individualized Television $ 2,459,965 $ 2,678,832 $ 5,273,173
HyperTV Networks, Inc. 1,196,767 1,771,671 2,020,228
Unallocated corporate 6,643,749 5,908,180 13,574,923
-------------- -------------- --------------
Total $ 10,300,481 $10,358,683 $ 20,868,324
-------------- -------------- --------------
Capital Expenditures
Individualized Television $ 411,212 $ 139,897 $ 947,710
HyperTV Networks, Inc. -- 273,778 361,716
Unallocated corporate 32,977 2,482,128 618,495
-------------- -------------- --------------
Total $ 444,189 $ 2,895,803 $ 1,927,921
-------------- -------------- --------------
Current Assets
Individualized Television $ 39,759 $ 290,421 $ 1,449,763
HyperTV Networks, Inc. 862,473 775,855 844,683
Unallocated corporate 6,683,183 337,255 4,280,110
-------------- -------------- --------------
Total $ 7,585,415 $ 1,403,531 $ 6,574,556
-------------- -------------- --------------
Total Assets
ACTV Entertainment, Inc. $ 488,081 $ 3,105,174 $ 4,708,444
HyperTV Networks, Inc. 865,629 1,023,170 1,250,825
Unallocated corporate 10,338,914 3,773,575 7,646,773
-------------- -------------- --------------
Total $ 11,692,624 $ 7,901,918 $ 13,606,041
-------------- -------------- --------------
</TABLE>
14. INVESTMENT AND ADJUSTMENTS
In January 1995, the Company invested $274,325 in the common stock
(approximately 15% of ownership interest) of a company (the "Licensee"), which
had licensed the Company's Individualized Programming for commercialization in
special-purpose theaters.
The Company also performed executive production services for the Licensee on a
fee basis. During 1996, the Company recorded license fee and production service
revenue from the Licensee of $16,789 and $199,666, respectively. At December 31,
1996, the Company had unpaid receivables pursuant to such revenues of $82,746.
During 1997, the Licensee filed for liquidation under United States Bankruptcy
laws. In anticipation of such filing, at December 31, 1996 the Company provided
a reserve for the full amount of the receivables outstanding of $82,746 and a
valuation allowance for its full investment in the Licensee of $274,325.
17
<PAGE>
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The consolidated financial statements at December 31, 1996, reflects non-cash
activity during the year ended December 31, 1996, that relates to a reversal of
certain of the option exercises and resulting non-recourse loan transactions
described above: a credit to shareholders' equity of $367,500.
The consolidated financial statements at December 31, 1997 and 1998, reflect
non-cash activity during the year ended December 31, 1997 and 1998, that relate
to stock appreciation rights, notes and stock issued in lieu of cash
compensation, subsidiary preferred stock dividends and accretions, and preferred
stock dividends payable. The non-cash stock appreciation rights activity for the
years ended December 31, 1997 and 1998 decreased by $701,517 and increased by
$2,000,062, respectively. The stock issued in lieu of cash compensation for the
years ended December 31, 1997 and 1998 was $443,125 and $2,016,023,
respectively. The notes issued in lieu of cash compensation for the years ended
December 31, 1998 was $686, 641. The subsidiary preferred stock dividends and
accretions for the years ended December 31, 1997 and 1998 was $2,598,156 and
$5,749,309, respectively and the preferred stock dividends payable for the years
ended December 31, 1997 and 1998 increased by $408,085 and decreased by
$403,164, respectively.
The Company made no cash payments of interest or income taxes during the years
ended December 31, 1996, 1997 and 1998.
18
<PAGE>
(a)2. FINANCIAL STATEMENT SCHEDULE
The following Financial Statement Schedule for the years ended December 31, 1998
and December 31, 1997 is filed as part of this Annual Report. We had no activity
reportable on this schedule for the year ended December 31, 1996. Schedule II -
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Column B Column C Column D Column E
---------- ----------------------- ---------- ----------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions End
Description of Period Expenses Accounts -Describe of Period
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended 12/31/96:
Accounts receivable
allowance for doubtful
accounts ....................................... -- $ 82,746 -- -- $ 82,746
Reserve for investment
losses ......................................... -- $274,325 -- -- $274,325
Year ended 12/31/97:
Accounts receivable
allowance for doubtful
accounts ....................................... $ 82,746 $ 43,188 -- $ 82,746 $ 43,188
Reserve for investment
losses ......................................... $274,325 -- $274,325 -- --
Year ended 12/31/98:
Accounts receivable
allowance for doubtful
accounts ....................................... $ 43,188 -- -- $ 43,188 --
Reserve for investment
losses ......................................... -- -- -- -- --
</TABLE>
During 1997, the balances of $82,746 of accounts receivable and $274,325 of
investments were written off as uncollectable or unrecoverable, respectively.
During 1998, there were no changes to either the accounts receivable allowance
or investment loss reserve. Uncollectable accounts receivables in the amount of
$43,188 were written off in 1998.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
To the extent that the information presented in this Form 10-K discusses
financial projections, information or expectations about our 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.
Since its inception, we have incurred operating losses approximating $72
million related directly to the development and marketing of Individualized
Television and HyperTV(TM).
We are seeking to exploit the entertainment market for individualized
television programming, principally in the U.S., through our planned regional
networks. Programming for the regional networks is provided through our
strategic alliance with FOX Sports Net. The contribution of FOX Sports Net's
programming rights, production elements for each sporting event, and brand name
is extremely valuable to us, since the cost for us to secure the rights to and
produce such events, as well as build a brand identity on our own, would be
prohibitive. Our obligation is to pay FOX Sports Net a percentage of our net
subscriber revenue we receive from cable operators. In addition, we must bear
the production cost of all extra or new elements, like an extra camera to focus
on a particular star, that are used in our programming. We must also build and
maintain the production facility where we produce our enhanced programming.
We have entered into an agreement with TCI to distribute and market our
first regional network to TCI's digital subscribers in Texas. The agreement also
contemplates potential nationwide distribution by TCI of our regional sports
networks. TCI is the largest distributor of Fox Sports Southwest programming,
representing 25% of the market. In addition, TCI is prioritizing Texas for the
roll-out of digital set-top boxes. TCI takes a percentage of revenue from the
fees paid by subscribers to our network and remits the balance to us.
We plan to launch our first regional network in the southwestern United
States during 1999. Our projection, based on assumptions that could prove to be
incorrect, is that this network will break even after two full years of
operation. Even if we achieve this break-even goal for our first region, given
our plan to launch similar networks in many other regions, it is highly unlikely
that we will be profitable for the foreseeable future.
To date, nearly all of our revenues have been derived from sales to the
education market. There is no assurance that we will be able to successfully
compete in this market, where many of our current and potential competitors are
companies with significantly greater resources than we do.
20
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1997 and December 31, 1998
During the year ended December 31, 1998, our revenues decreased 15%, to
$1,405,838, from $1,650,955 for the year ended December 31, 1997. The decrease
was the result of our product shift toward online learning software and services
in 1998 and away from video programming and related equipment. All of our
revenues during 1998 were derived from the online learning market, compared to
only 20% of 1997 revenues.
Cost of sales decreased 54% in 1998, to $218,514 from $471,956 in 1997, and
cost of sales as a percentage of sales revenue decreased to 16% in the more
recent year, from 29% in 1997. The relatively lower cost of sales in 1998 was
due to eSchool's higher gross margins than those of video programming and
related equipment, which represented the majority of revenues in 1997.
Total expenses excluding cost of sales, net interest expense, and minority
interest -- subsidiary preferred stock dividends and accretion in 1998 increased
78%, to $15,399,875, from $8,648,310 in the comparable period in 1997. The
increase was attributable to a number of factors, including a large change in
stock appreciation rights expense due a higher common stock price at December
31, 1998, a rise in both operating and selling and administrative expenses
principally from increased activity of our Texas-based regional network
operation, and to higher depreciation and amortization expense.
Depreciation and amortization expense for 1998 increased 103%, to
$1,532,731, from $754,053 for 1997. This increase was due principally to
depreciation for the full year in 1998 of television production equipment
installed in our Texas subsidiary's facility, compared to several months during
1997, and to greater amortization of software development costs in the more
recent year.
We incurred interest expense of $932,247 for 1998, compared to no interest
expense for 1997. Interest expense is related to a $5 million face value note
issued by a subsidiary ACTV, Inc. in January 1998. Interest income for 1998
increased 58%, to $184,285, compared with $116,870 in 1997. The increase
resulted from higher available average cash balances in the more recent year.
For 1998 and 1997, we recorded $5,591,846 and $3,006,242, respectively, for
dividends and accretion on subsidiary convertible preferred stock issuances,
which were accounted for as minority interest. All dividend payments were made
in common stock. The increase during 1998 is the result principally of our
redemption in full of the subsidiary convertible preferred stock.
For the year ended December 31, 1998, our net loss applicable to common
shareholders was $20,868,324, or $.98 per basic and diluted share, an increase
of 101% over the net loss of $10,358,683 or $.80 per basic and diluted share,
incurred in 1997. The increase in net loss was due both to higher operating
expenses and depreciation and amortization, as well as an increase in charges
from stock appreciation rights and subsidiary preferred stock dividends,
accretion and redemption.
21
<PAGE>
Comparison of the Years Ended December 31, 1996 and December 31, 1997
During the year ended December 31, 1997, our revenues increased 12%, to
$1,650,955, from $1,476,329 for the year ended December 31, 1996. All revenues
during 1997 were derived from the education market, while in 1996, our revenues
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 the
inclusion of sales from eSchool, which was introduced during Fiscal 1997, and
higher sales of distance learning products and services when compared to 1996.
Cost of sales decreased 27% in 1997, to $471,956 , from $647,488 in Fiscal
1996, and cost of sales as a percentage of sales revenue decreased to 29% in the
more recent year, from 44% in 1996. The relatively lower cost of sales in 1997
was due to a greater proportion of educational programming revenues and the
inclusion of eSchool sales in 1997. Both eSchool and educational programming
have higher gross margins than our other sources of revenue.
Total expenses excluding cost of sales, interest expense, and minority
interest -- subsidiary preferred stock dividends and accretion in 1997 decreased
10%, to $8,648,310, from $9,592,670 in the comparable period in 1996. The
decrease was partially attributable to lower operating expenses and depreciation
and amortization expense in the more recent period, which more than offset an
increase in selling and administrative expense. Also, we recorded a gain of
$346,892 in 1997, compared to an expense of $183,634 related to stock
appreciation rights. The difference was the result of a lower market price for
our common stock at the end of 1997, when compared to the end of 1996. Finally,
during Fiscal 1996 we incurred a valuation allowance of $274,325 related to an
investment in an affiliated company and, as a component of Fiscal 1996 selling
and administrative expense, reserved $82,746 against license fee and production
service receivables from this affiliate. During 1997, we incurred no valuation
allowance.
For 1997, direct expenses related to the entertainment and education
markets were approximately $2.7 million and $2.9 million, respectively.
Depreciation and amortization expense for 1997 decreased 11%, to $754,053,
from $846,351 for 1996. This decrease was due primarily to the recognition
during 1996 of amortization expense for programming assets that were fully
amortized during that year.
We had no interest expense for either 1997 or 1996. Interest income for
1997 decreased 26%, to $116,870, compared with $158,732 in 1996. The decrease
resulted from lower available average cash balances in the more recent year.
For the years ended December 31, 1997 and 1996, we recorded $3,006,242 and
$1,695,384, respectively, for dividends and accretion on subsidiary convertible
preferred stock issuances, which were accounted for as minority interest. All
dividend payments were made in our common stock. The increase during 1997 is the
result of our having subsidiary convertible preferred stock outstanding for less
than half of the year during 1996.
For year ended December 31, 1997, our net loss was $10,358,683, or $.80 per
basic and diluted share, an increase of less than 1% over the net loss of
$10,300,481 or $.88 per basic and diluted share, incurred in 1996. The decrease
in net loss was due principally to higher gross margins, lower operating
expenses, and lower depreciation and amortization and stock appreciation rights
expenses during the more recent year.
Liquidity and Capital Resources
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<PAGE>
Since its inception, ACTV, Inc. (including its operating subsidiaries) has
not generated revenues sufficient to fund its operations, and has incurred
operating losses. Through December 31, 1998, we had an accumulated deficit of
approximately $72 million. Our cash position on December 31, 1998, was
$5,188,170, compared to $554,077 on December 31, 1997.
During the year ended December 31, 1998, we used $10,034,461 in cash for
our operations, compared with $6,603,499 for the year ended December 31, 1997.
The increase in the more recent year was due to both a higher operating deficit
in the more recent year, as well as a net use of cash related to asset and
liability changes. We met our cash needs in the year ended December 31, 1998
from sales of common stock totaling approximately $10.8 to private investors,
including $5 million invested by Liberty Media Corporation. Liberty also
received an option to invest an additional $5 million for the same price per
share. We met our cash needs in the year ended December 31, 1997 from the
proceeds of a series of private placements during 1997 of common stock totaling
$1.5 million, convertible preferred stock totaling $2.0 million, and from the
remainder of funds received from the sale in 1996 of exchangeable preferred
stock issued by a wholly-owned subsidiary totaling $9.1 million.
With respect to investing activities in the year ended December 31, 1998,
we used cash of $1,927,921 for patents, property and equipment, and systems and
software development. During the year ended December 31, 1997, we used cash of
$2,895,803, related principally to the development of HyperTV(TM), the purchase
of equipment for a television master control facility in Dallas, Texas and for
the systems development related to the incorporation of individualized
programming into the GI cable set-top terminal.
All of ACTV, Inc.'s subsidiaries have been dependent on advances from the
parent company to meet their obligations. ACTV, Inc.'s, The Texas Individualized
Television Network, Inc., in January 1998 raised funds directly for its
operations and also received funding from ACTV, Inc. during 1998. During the
year ended December 31, 1998, ACTV, Inc. advanced approximately $2.6 million to
HyperTV Networks, Inc., $1.5 million to The Texas Individualized Television
Network, Inc., and $200,000 to ACTV Entertainment, Inc.
Advances are based upon budgeted expenses and revenues for each respective
subsidiary. Adjustments are made during the course of the year based upon the
subsidiary's performance versus the projections made in the budget.
As compared to our balance sheet as of December 31, 1997, our balance sheet
as of December 31, 1998, reflects a decrease of $403,164 in preferred dividends
payable, resulting principally from the redemption in late 1998 of convertible
preferred stock of issued by a subsidiary of ACTV, Inc.
In January 1998, the ACTV, Inc. subsidiaries ACTV Entertainment, Inc. and
The Texas Individualized Television Network, Inc. entered into a note purchase
agreement, dated as of January 13, 1998 with certain private investors. Pursuant
to the agreement, the investors purchased $5.0 million aggregate principal
amount notes from our subsidiaries. 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, 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. We have chosen
to make the first two semi-annual interest payments (June 30, 1998 and December
31, 1998) in kind. The note is secured by the assets of the Texas Network, and
is guaranteed by ACTV, Inc.
23
<PAGE>
In connection with the purchase of such note, the investors received on
January 14, 1998 a common stock purchase warrant of Texas Network that granted
the investors the either the right to purchase up to 17.5% of the fully-diluted
shares of common stock of Texas Network or, through July 14, 1999, to exchange
the warrant for such number of shares of our common stock, at the time of and
giving effect to such exchange, that were equal to 5.5% of the fully diluted
number of shares of common stock outstanding. In January 1999, the investors
exchanged the warrant in full into shares of our common stock.
For accounting purposes, the Company has allocated approximately $1.4
million to the value of the warrant, based on the market value of ACTV, Inc.
common stock into which the warrant was convertible at issuance. 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.
In the first three months of 1999, we have raised approximately $540,000
from the exercise of options and warrants.
We believe that we have adequate funding to launch the southwest regional
network in 1999 and to fund our present operations for the next 12-month period,
assuming that we are able to raise approximately $3.9 million from forcing the
exercise of approximately 1.95 million warrants. We can effectively force such
warrant exercise if the average closing price of our common stock is above $4.50
per share for a twenty consecutive trading day period and the shares to be
issued pursuant to the warrants are registered for sale by the SEC. Currently,
the share price requirement has been met and we have filed a registration
statement for registration of the warrant shares. Approval by the SEC is still
pending.
Should we raise such funds from warrant exercises, we will still need
additional funding to operate the southwest regional network at planned levels,
to fund the commercialization of HyperTV(TM) for entertainment applications, and
to fund our other operations prior to breakeven. We will need additional funding
as well to launch networks in other regions. We currently do not have any
arrangements for additional financing and cannot assure you that additional
financing will be available on acceptable terms, or at all. As a result, there
is no assurance that we 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 our regional network strategy or for the
planned commercialization of HyperTV(TM) for entertainment applications.
If we are not successful at raising additional funds, we may be required to
significantly reduce our overall level of operations.
We do not have any material contractual commitments for capital
expenditures, although we believe that we may need to acquire computers and
network equipment of $500,000 to build our planned first HyperTV(TM) server farm
as well as for digital television and production equipment of approximately
$400,000.
Year 2000 compliance
The year 2000 issue is the result of computer software that was written
with only two digits rather than four digits to represent the year in a date
field. Computer hardware and software applications that are date-sensitive may
interpret a date 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.
24
<PAGE>
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.
Impact of Inflation
Inflation has not had any significant effect on our operating costs.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at fair value. The statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15,1999; however, it may be adopted earlier. It cannot be applied
retroactively to financial statements of prior periods. The Company has not yet
determined the impact, if any, the adoption of SFAS No. 133 will have on its
financial statements.
25
<PAGE>
___
Please mark | |
your votes | X |
like this |___|
PROXY BY MAIL
Every properly signed proxy will be voted in accordance with the specifications
made thereon. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2 AND 3.
This Proxy is solicited on behalf of ACTV, Inc.'s Board of Directors.
FOR WITHHELD ABSTAIN
1. To elect two Class III directors ALL FOR ALL
to hold office for a term of --- --- ---
three years. | | | | | |
--- --- ---
Nominees:
01 William Samuels
02 William Frank
INSTRUCTION: To withold authority to vote for any individual, write that
nominee's name in the space provided below
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FOR AGAINST ABSTAIN
2. To adopt the Company's 1999 --- --- ---
Stock Option Plan. | | | | | |
--- --- ---
3. To ratify the appointment of --- --- ---
Deloitte & Touche, LLP as | | | | | |
the Company's independent --- --- ---
certified public accountants.
4. In their discretion, upon such other matter or matters that
may properly come before the meeting, or any adjounments thereof.
The undersigned hereby acknowledges receipt of a copy of
the accompanying Notice of Meeting and Proxy Statement
and hereby revokes any proxy or proxies heretofore given.
Please mark, sign and mail your proxy promptly in the envelope provided.
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| IF YOU WISH TO VOTE ELECTRONICALLY PLEASE READ THE INSTRUCTIONS BELOW. |
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| |
| COMPANY NUMBER: |
| |
| PROXY NUMBER: |
| |
| ACCOUNT NUMBER: |
| |
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Signaturee_______________________Signature_______________________ Date_________
Note: Please sign exactly as name appears in the Company's records. Joint owners
should each sign. When signing as attorney, executor or trustee, please give
title as such.
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| ^FOLD AND DETACH HERE AND READ THE REVERSE SIDE^ |
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LOGO VOTE BY INTERNET LOGO
ACTV, INC.
|_| You can now vote your shares electronically through the Internet.
|_| This eliminates the need to return the proxy card.
|_| Your electronic vote authorizes the named proxies to vote your shares in the
same manner as if you marked, signed, dated and returned the proxy card.
TO VOTE YOUR PROXY BY INTERNET
www.actv.com
Have your proxy card in hand when you access the above website. You will
be prompted to enter the company number, proxy number and account number
to create an electronic ballot. Follow the prompts to vote your shares.
TO VOTE YOUR PROXY BY MAIL
Mark, sign and date your proxy card above, detach it and return it in the
postage-paid envelope provided.
PLEASE DO NOT RETURN THE ABOVE CARD IF VOTED
ELECTRONICALLY
<PAGE>
GENERAL PROXY - ANNUAL MEETING OF STOCKHOLDERS OF ACTV, INC.
The undersigned hereby appoints William C. Samuels, with full power of
substitution, proxy to vote all of the shares of Common Stock of the undersigned
and with all of the powers the undersigned would possess if personally present,
at the Annual Meeting of Stockholders of ACTV, Inc., to be held at the Warwick
Hotel, 65 West 54th Street, New York, New York on May 20, 1999 at 9:30 a.m., and
at all adjournments thereof, upon the matters specified on the reverse side, all
as more fully described in the Proxy Statement dated April 23, 1999 and with the
discretionary powers upon all other matters which come before the meeting or any
adjournment thereof.
(Continued, and to be marked, dated and signed, on the other side)
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^ FOLD AND DETACH HERE ^
