UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
ACTV, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 94-2907258
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1270 Avenue of the Americas
New York, New York 10020
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(Address of principal executive offices) (Zip Code)
(212) 217-1700 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of exchange on which registered
- ------------------- ------------------------------------
Common Stock, Par Value $0.10 Boston Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive
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proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of April 15, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on The Nasdaq Stock Market closing price
on April 15, 1998) was $18,868,268.
As of April 15, 1998, there were 16,980,581 shares of the registrant's common
stock outstanding.
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The Company's Annual Report on Form 10-K filed March 31, 1998, as amended by the
Company's Form 10-K/A1 filed April 20, 1998, is being amended to reflect changes
to:
* Part I: Item 1 - "Business -- Business Strategies"; and
"-- Individualized Programming";
* Part II: Item 5 - "Market for the Registrant's Common Equity and
Related Stockholder Matters";
* Part II: Item 6. - "Selected Financial Data";
* Part II: Item 7. - "Management's Discussion and Analysis of
Financial Condition and Results of Operations"; and
* Part IV, Item 14. - "Financial Statements".
PART I
Item 1. BUSINESS
Business Strategies
Cable television is currently available for purchase by more than 90%
of the approximately 98 million U.S. television households. The cable television
industry is an established provider of multi-channel programming, with
subscriptions from approximately 65% of total U.S. television households. Cable
systems typically offer 25 to 78 channels of programming at an average monthly
subscription price of $35.
The development of digital transmission and compression allows for the
transmission of a greater number of channels with better audio and video
quality. With digital compression technology, each 6MHz of bandwidth (the amount
required for an analog channel) can be converted on average into five or more
channels of programming, thereby enabling the distributor to offer a broader
variety of programming choices than analog systems.
Once a cable operator has upgraded its headend for digital
distribution, a cable home needs only a digital set-top terminal with ACTV
software to receive Individualized Programming. GI has announced orders for
approximately 15 million digital set-top terminals to date. While the Company
receives no royalty payments from GI when it sells a digital set top box to a
distributor of programming, the number of digital set top boxes deployed is
crucial to the Company since it can not sell its digital programming services
unless there is a digital set top box in a home that is compatible with our
downloadable software.
The Company's business strategies for the U.S. entertainment market
are as follows:
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Target regions where the cable operators' headends are being
upgraded to digital. For the launch of Regional Networks, the
Company has specifically targeted certain regions of the
United States where the Company believes a greater proportion
of cable operators are upgrading their headends and are
currently offering or have indicated they will soon be
offering digital converter boxes to their cable subscribers.
The Southwest Regional Network is the Company's first planned
Regional Network.
Negotiate and sign affiliate agreements with cable operators
to offer Regional Network programming to their subscribers.
The Company has entered into an agreement with TCI, under
which TCI will initially distribute Southwest Regional Network
programming to its digital subscribers in the Dallas area. The
agreement also contemplates distribution throughout the region
served by FOX Sports Southwest, with the potential for
nationwide distribution by TCI of the Company's future
Regional Networks. The Company is in discussions with a number
of other cable operators to sign affiliate agreements to carry
the Southwest Regional Network. The Company believes that its
Regional Networks will provide cable operators with uniquely
differentiated programming that can help them attract
customers to their new digital services, as well as offer a
potentially significant source of new revenues.
Through a focused marketing effort, educate both cable
operators and potential subscribers about the benefits of
Individualized Programming. The Company believes that as cable
operators become better educated about the benefits of
Individualized Programming and understand the additional
revenues that can be earned by providing it to their
subscribers, the Company's revenues and penetration rates will
increase. As consumers and cable operators understand that the
Company can provide a significantly better way of viewing a
sporting event (as well as other types of traditional
programming), the Company believes its penetration rates will
grow. Key marketing efforts will include: (1) possibly
offering Individualized Programming on a free trial basis to
potential new subscribers; (2) cross-promotional activities
with FOX Sports Net; (3) cross-promotional activities with
cable operators and (4) traditional print media, television
advertising, and other marketing strategies.
Keep programming costs low during the Company's first few
years of operation and expand its penetration, through sports
programming. The Company believes that sports is the most
popular programming genre for attracting new subscribers to
the Southwest Regional Network and to Individualized
Programming in general. In addition, a focus on sports
programming by the Company is more cost-efficient than a
programming line-up with greater variety. Therefore, it is
Company's intention initially to keep programming costs low by
primarily focusing on just sports programming.
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Individualized Programming
The Company's process of creating Individualized Programming involves
viewer selection from a multiple number of frame-synchronized video, graphics,
and/or audio signals delivered at one time. Viewers see and/or hear only one of
the signals at a given moment; the others remain transparent. Each viewer
interacts with the programming individually by making selections or decisions
using a remote control device. In response to these keyed inputs, the
Individualized Programming seamlessly switches from one signal to another,
giving each viewer his or her appropriate response. The viewer cannot detect
when such a switch takes place because it occurs with frame accuracy.
The results appear seamless and uninterrupted -- for the viewer the
programming is completely individualized. Although an individualized program and
its associated branches are taped in a normal linear fashion, the program, when
shown, has thousands of possible variations available for each viewer to
experience. The particular version seen is based on each viewer's individually
selected preferences and inputs. An unlimited number of independent viewers can
interact with an ACTV Program simultaneously.
Individualized Programming can also be effectively employed for live
telecasts, particularly sports events such as those to be produced by the
Southwest Regional Network. For live events, Individualized Programming allows a
viewer to have a choice of simultaneous options like instant replay on demand,
feature packages that are created and made available as the event progresses,
alternative camera angles and in-depth statistics.
Individualized Programming allows a television set-top terminal to
receive information from codes either embedded into the video program material
or delivered in a data packet. It maintains "memory" on the progress of the
viewer and provides automatic branching. In other words, what the viewer sees
and hears changes without the viewer first entering a selection. The switch from
one digital program to a different one occurred based on the viewer?s earlier
input. At appropriate times during the program, the set-top will make branch
switches automatically, accumulate data, recall information, create graphics
and/or implement a pre-programmed set of instructions.
In digital systems, multiple video, audio and graphics can be
individualized in 6MHz of band-width. The Company's software enables the
implementation of Individualized Programming into digital television systems.
Individualized Programming can be delivered through any digital video system and
received by a standard digital set-top terminal, such as GI's DCT 1000. The
Company's software application can be installed during the manufacturing process
or can be later downloaded into each set-top terminal. There is no additional
memory or hardware necessary to upgrade a digital set-top terminal to deliver
the Company's Individualized Programming to subscribers.
Individualized Programming can be transmitted through any service
provider's channel, and can even be broadcast under the new digital television
standard recently approved by the FCC.
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Individualized Programming uses one 6MHz channel with 64 OAM, or 8VSB
modulation techniques providing adequate data rates to support the Company's
programming. Individualized Programming is channel independent and can be
transmitted over any 6MHz channel using any practical modulation scheme. The
content will be created in each of the Company's regional production facilities
and then distributed to operators throughout the region via a number of
different delivery options, including land lines and satellite. The distribution
method will be determined by the geographical nature of the region and the
economic viability of the different delivery techniques available in each
specific region. The Company delivers to the service provider a complete MPEG-2
compatible transport stream containing all of the necessary information for the
application to run properly in its system.
The Company's signal is received at the cable operator's distribution
facility by an appropriate receiver. The service provider will simply have to
pass the signal through its CA (Conditional Access) system and send the signal
out to its customers. Utilizing standard MPEG-2 compression techniques at a 4:1
compression ratio, the Company will provide its service through a single 6MHz
channel. The Company does not require any back channel capability to support the
programming. Individualized Programming creates an individualized look and feel
by using relational database management and a very small amount of local memory
in order to create millions of possible variations.
The Company's application software uses approximately 25 Kilobytes of
code space, either ROM (Read Only Memory), PROM (Programmable Read Only Memory)
or EEPROM (Electrical Erasable PROM). The application requires a small amount of
scratch pad memory, RAM (Random Access Memory) up to 2KB. While the application
does not require any NVRAM (Non-Volatile RAM), up to 1KB of NVRAM is desirable
for future back channel applications.
Individualized Programming seamlessly switches the user through
multiple channels of video and audio in response to the user's inputs throughout
the program. The switch may be delayed as long as the producer/writer chooses.
The seamless switch is accomplished by utilizing a subset of the MPEG-2 syntax
for splicing. Individualized Programming switching is much simpler than creating
a seamless splice between two unrelated video streams because the video and
audio encoders are co-located.
The Company's Individualized Programming employs a command language
that is used to configure the set-top converter and control the information that
the user sees under specific conditions. The command language requires a small
amount of additional bandwidth in the channel and approximately 2 Kilobytes/sec
of additional data must be sent in a digital system. When commands are received
by the application software running in the set-top converter, they are processed
by the software and the correct information is presented.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market
("Nasdaq") and the Boston Stock Exchange under the symbols "IATV" and "IAT",
respectively. The following table sets forth the high and low bid prices for
Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
Common Stock
<S> <C> <C>
1997 Quarter High Low
First 3.750 2.000
Second 2.188 1.281
Third 1.906 1.375
Fourth 2.081 1.281
1996 Quarter High Low
First 5.063 3.688
Second 4.625 2.063
Third 4.250 2.813
Fourth 4.000 2.500
</TABLE>
On March 25, 1998, there were approximately 300 holders of record of th
Company's 16,904,024 outstanding shares of Common Stock.
On March 24, 1998, the high and low bid prices of the Common Stock as
reported by Nasdaq were $1.688 and $1.594, respectively.
The Company has not paid cash dividends since its organization. The Company
plans to use earnings, if any, to fund growth and does not anticipate the
declaration or the payment of cash dividends in the foreseeable future.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1994 1995 1996 (5) 1997 (5)
---- ---- ---- -------- --------
Statement of Operations:
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<PAGE>
<S> <C> <C> <C> <C> <C>
Revenues (1) $164,602 $938,416 $1,311,860 $1,476,329 $1,650,955
Operating Expenses (1) 3,443,513 5,734,132 8,272,884 10,240,158 9,120,267
Equity in Net Loss of
ACTV Interactive (2) 506,303 143,500 -- -- --
Loss Before Extraordinary
Item (3) (5) 4,156,955 5,122,010 6,920,906 10,300,481 10,358,683
Net Loss (3) (5) 4,156,955 4,465,240 6,826,789 10,300,481 10,358,683
Weighted Average Shares
Outstanding 5,800,134 7,897,278 10,162,128 11,739,768 12,883,848
Loss per basic and diluted common
share before
extraordinary item (3) .72 .65 .68 .88 .80
Loss per basic and diluted common
share (3) .72 .57 .67 .88 .80
Balance Sheet Data: 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- --------
Working Capital 2,263,225 1,503,703 2,397,027 5,093,859 (1,082,097)
Total Assets 5,920,720 7,733,314 8,551,128 11,692,624 7,901,918
Long Term Obligations 2,220,794 2,325,061 -- -- --
Convertible Preferred Stock of -- -- -- 6,615,664 7,029,708
Subsidiary
Stockholders' Equity (4) 1,910,603 3,972,543 6,893,853 2,585,404 (1,613,418)
Total Capitalization including
Minority Interest 4,131,397 6,297,604 6,893,853 9,201,068 5,416,290
</TABLE>
(1) For the period between January 1, 1993, and March 11, 1994, all
education sales and expenses were reported separately by the Company's
49% affiliate, ACTV Interactive, and were not consolidated with the
Company's statements of operations. For the remainder of 1994,
operational results related to education were included with those of
the Company, as a result of the Company's March 11, 1994 purchase of
the Washington Post Company's 51% interest in ACTV Interactive.
(2) The results of ACTV Interactive are accounted for under the equity
method of accounting for 1993 and for the period January 1, 1994 to
March 11, 1994.
(3) Includes for the year ended 12/31/94 an extraordinary gain of $656,770,
($.08 per share) related to the extinguishment of debt and equipment
lease obligations. Includes for the year ended 12/31/95 an
extraordinary gain of $94,117 ($.01 per share) related to the
extinguishment of debt obligations.
(4) No cash or non-cash dividends on Common Stock have been paid or granted
and the Company does not anticipate the declaration or payment of
dividends on Common Stock in the foreseeable future.
(5) Restated for years ended December 31, 1996 and 1997; see note 16 to
consolidated financial statements.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTATEMENT
The Company's consolidated financial statements for the years ended December 31,
1996 and 1997, have been restated to present the convertible preferred stock of
subsidiary outside of shareholders' equity and to present the dividends and
accretion of the convertible preferred stock of a subsidiary as an expense in
determining net loss. The significant effects of the restatement are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1997
------ ------
---------------- ---------------- ----------------- ---------------
As Previously As Previously
Reported As Restated Reported As Restated
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Minority Interest - Subsidiary
Preferred stock dividend and
Accretion $- $1,695,384 $- $3,006,242
Net Loss 8,605,097 10,300,481 7,352,441 10,358,683
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1997
------ ------
---------------- ---------------- ----------------- ---------------
As Previously As Previously
Reported As Restated Reported As Restated
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Convertible preferred stock
of subsidiary $- $6,615,664 $- $7,029,708
Shareholders' equity
(deficiency) 9,201,068 2,585,404 5,416,290 (1,613,418)
</TABLE>
The restatement had no effect on revenues, total assets and net loss per basic
and diluted common share.
THE COMPANY
To the extent that the information presented in this Form 10-K
discusses financial projections, information or expectations about the Company's
products or markets, or otherwise makes statements about future events, such
statements are forward-looking and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from the
statements made. These include, among others, the successful and timely
development and acceptance of new products and markets and the availability of
sufficient funding to effect such product and/or market development.
Since its inception, the Company has incurred operating losses
approximating $47 million related directly to the development and marketing of
the Individualized Programming and eSchool.
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The Company is seeking to exploit the entertainment market, principally
in the U.S., through the Regional Networks. Programming for the Regional
Networks is provided through the Company's strategic alliance with FOX Sports
Net. The contribution of Fox Sports Net of its programming rights, production
elements for each sporting event, and brand name is extremely valuable to the
Company since the cost for the Company to do this on its own would be
prohibitive. The Company?s obligation is to pay Fox Sports Net a percentage of
its net subscriber revenue from the cable operators and in addition the Company
bears the production cost of all extra or new elements (for example an extra
camera to focus on a particular star). In addition, the Company must build and
pay for the production facility where the enhanced programming is produced.
The Company plans to launch its Southwest Regional Network in 1998. The
Southwest Regional Network is projected to break even after two full years of
operation. Even if the Company achieves its break even goals for its first
region, given the Company?s plan to launch multiple other regions it is highly
unlikely that the Company will be profitable for the foreseeable future.
The Company has entered into an agreement with TCI to distribute and
market the Southwest Regional Network to its digital subscribers in Texas. The
agreement also contemplates potential nationwide distribution by TCI of the
Company's regional sports networks. TCI is the largest distributor of Fox Sports
Southwest programming representing 25% of the market. In addition, TCI is
prioritizing Texas for the role out of digital set top boxes. TCI takes a
percentage of subscribers revenue and remits the balance to the Company.
The Company and GI, the leading manufacturer of digital set top boxes
and the supplier of such converters to TCI in Texas, had previously announced
that the Company's Individualized Programming would be incorporated into GI's
new MPEG-2 digital set-top cable and wireless terminals. The Company receives no
royalty from GI and bears its own expenses related to the integration of its
software with the GI digital systems.
It is the Company's belief that it has adequate funding to launch the
Southwest Regional Network in 1998, but not the full funding to carry the
network to break-even. In addition, there is no assurance that it will secure
the funding necessary to effect the additional launches in other regions, or
that other factors might not delay or prohibit the successful implementation of
the Company's Regional Network strategy.
The projected Southwest Regional Network and additional network
expansion are part of the Company's plan to develop the entertainment division
of its business, which to date, does not generate any revenue for the Company.
There can be no assurance that the Southwest Regional Network or other Regional
Networks, if launched, will generate significant revenues for the Company.
To date, nearly all of the Company's revenues have been derived from
sales to the education market of eSchool and individualized educational programs
and products. There is no assurance that the Company will be able to
successfully compete in this market, where many of its current and
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<PAGE>
potential competitors are companies with significantly greater resources than
those of the Company.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1996 and December 31, 1997
During the year ended December 31, 1997 ("Fiscal 1997"), the Company's
revenues increased 12%, to $1,650,955, from $1,476,329 for the year ended
December 31, 1996 ("Fiscal 1996"). All revenues during Fiscal 1997 were derived
from the education market, while in Fiscal 1996, the Company's 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 Fiscal 1996.
Cost of sales decreased 27% in Fiscal 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 Fiscal 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 the Company's other
sources of revenue.
Total expenses excluding cost of sales, interest expense, and minority
interest - subsidiary preferred stock dividends and accretion in Fiscal 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, the Company
recorded a gain of $346,892 in Fiscal 1997, compared to an expense of $183,634
related to stock appreciation rights. The difference was the result of a lower
market price for the Company's Common Stock at the end of Fiscal 1997, when
compared to the end of Fiscal 1996. Finally, during Fiscal 1996 the Company
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 Fiscal 1997, the Company incurred no valuation
allowance.
In Fiscal 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 Fiscal 1997 decreased 11%, to
$754,053, from $846,351 for Fiscal 1996. This decrease was due primarily to the
recognition during Fiscal 1996 of amortization expense for programming assets
that were fully amortized during that year.
The Company's had no interest expense for either Fiscal 1997 or Fiscal
1996. Interest income for Fiscal 1997 decreased 26%, to $116,870, compared with
$158,732 in Fiscal 1996. The decrease resulted from lower available average cash
balances in the more recent year.
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<PAGE>
For Fiscal 1997 and 1996, the Company recorded $3,006,242 and
$1,695,384, respectively, for dividends and accretion on subsidiary convertible
preferred stock issuance, which were accounted for as minority interest. All
dividend payments were made in the Company's Common Stock. The increase during
Fiscal 1997 is the result of the Company's having subsidairy convertible
preferred stock outstanding for less than half of the year during Fiscal 1996.
For Fiscal 1997, the Company's net loss was $10,358,683, or $.80 per
basic and diluted share, an increase of less than 1% over the loss of
$10,300,481 or $.88 per basic and diluted share, incurred in Fiscal 1996. The
increase in net loss was due principally to higher dividends and accretion, in
Fiscal 1997, which more than offset the positive effects of higher gross
margins, lower operating expenses, lower depreciation, amortization, and stock
appreciation rights expenses during the more recent year.
Comparison of the Years Ended December 31, 1995 and December 31, 1996
During the year ended December 31, 1996 ("Fiscal 1996"), the Company's
revenues increased 13%, to $1,476,329, from $1,311,860 for the year ended
December 31, 1995 ("Fiscal 1995"). The increase was the result of significantly
higher education revenues from distance learning and the recognition of
production revenues in the more recent period (compared to no production
revenues in 1995), which more than offset a small decline in non-distance
learning education sales.
Cost of sales increased 94% in Fiscal 1996, to $647,488 , from $334,136
in Fiscal 1995, and cost of sales as a percentage of sales revenue increased to
44% in the more recent year, from 25% in 1995. The relatively higher cost of
sales in Fiscal 1996 was due to a greater proportion of total revenues generated
from lower margin equipment products and production services, as compared to
Fiscal 1995's sales mix.
Total expenses excluding cost of sales, interest expense, and minority
interest - subsidiary preferred stock dividends and accretion in Fiscal 1996
increased 21%, to $9,592,670, from $7,938,748 in the comparable period in 1995.
The increase was attributable to higher operating expenses (principally
resulting from the Company's regional individualized network trial in Southern
California), greater research and development expenditures, higher selling and
administrative expenses, and a valuation allowance of $274,325 for the full
amount of the Company's investment in The Greenwich Group. As a component of
Fiscal 1996 selling and administrative expenses the Company also reserved
$82,746 against license fee and production service receivables from The
Greenwich Group. The Greenwich Group has experienced difficulty in raising
sufficient capital to fund its operations and growth and has been unable to pay
the Company for its services and license.
In Fiscal 1996, direct expenses related to the entertainment and
education markets were approximately $2.5 million and $2.6 million,
respectively.
Depreciation and amortization expense for Fiscal 1996, decreased 24%,
to $846,351, from $1,113,278 for Fiscal 1995. This decrease was due primarily to
the relatively higher depreciation
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<PAGE>
expense incurred in Fiscal 1995 that related to set-top converters purchased for
the California trial.
The Company's interest expense for Fiscal 1996, decreased to zero,
compared to $98,392 in the prior year. The decrease was due to the repayment of
in full of the Company's debt obligations during 1995. Interest income for
Fiscal 1996 increased 15%, to $158,732, compared with $138,510 in Fiscal 1995.
The increase resulted from higher available average cash balances in the more
recent year.
For the year ended December 31, 1996, the Company recorded $1,695,384
for dividends and accretion to holders of subsidiary convertible preferred stock
issued in August 1996 by one of its wholly-owned subsidiaries, which were
accounted for as minority interest.
For Fiscal 1996, the Company's net loss was $10,300,481 or $.88 per
basic and diluted share, an increase of 50% over the loss of $6,826,789 or $.67
per basic and diluted share, incurred in Fiscal 1995. Included in the Fiscal
1995 net loss is an extraordinary gain of $94,117, or $.01 per basic and diluted
share as the result of the extinguishment of certain obligations for value that
was less than the amounts recorded on the Company's books for such obligations.
The increase in net loss was due to higher dividends and accretion, increased
operating, selling and administrative expenses and lower operating margins
during the more recent year, as noted above.
Liquidity and Capital Resources
Since its inception, the Company (including its operating subsidiaries)
has not generated revenues sufficient to fund its operations, and has incurred
operating losses. Through December 31, 1997, the Company had an accumulated
deficit of approximately $51 million. The Company's cash position on December
31, 1997, was $554,077, compared to $6,520,756 on December 31, 1996.
During the year ended December 31, 1997, the Company used $6,603,499 in
cash for its operations, compared with $7,560,486 for the year ended December
31, 1996. The decrease in the more recent year was due to lower operating
expenses and higher gross margins, which more than offset higher selling and
administrative expenses. The Company met its cash needs in the year ended
December 31, 1997 from a series of private placements of Common Stock
(approximately $1.5 million in net proceeds, including the $1 million placement
with GI) and Series A Convertible Preferred Stock (approximately $2.0 million in
net proceeds). The Company met its cash needs in the year ended December 31,
1996 from the proceeds of a private placement of Common Stock ($1.9 million in
net proceeds) and of convertible preferred stock issued by its wholly-owned
subsidiary ($9.1 million in net proceeds).
With respect to investing activities in the year ended December 31,
1997, the Company used cash of $2,895,803, related principally to 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 and to eSchool. During the year
ended December 31, 1996, the Company used cash of $444,189 related to the
purchase of television production equipment and office improvements.
13
<PAGE>
All of the Company's operating subsidiaries have been dependent on
advances from the Company to meet their obligations. The Company's subsidiary,
The Texas Individualized Television Network, Inc., raised funds directly for its
operations in January 1998 and expects to fund its operations for the
foreseeable future from the proceeds of this financing (see description below).
During the year ended December 31, 1997, the Company advanced approximately $2.6
million to ACTV Net, $3 million to The Texas Individualized Television Network,
Inc., and $2 million to ACTV Entertainment, Inc. and its other subsidiaries.
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 the Company's balance sheet as of December 31, 1996, the
Company's balance sheet as of December 31, 1997, reflects an increase of
$408,085 in preferred dividends payable, resulting from the issuance of
additional convertible preferred stock during 1997 and the payment of dividends
in kind rather than in cash.
In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc.,
(the "Issuer") and The Texas Individualized Television Network, Inc., a
wholly-owned subsidiary of the Issuer ("Texas Network"), entered into a Note
Purchase Agreement, dated as of January 13, 1998 (the "Agreement") with certain
private investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers
purchased $5.0 million aggregate principal amount notes from the Issuer and
Texas Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal repayment in one installment on June 30, 2003.
During the term of the note, the Issuer may, at its option, pay any four
semi-annual interest payments in kind rather than in cash, with an increase in
the rate applicable to such payments in kind to 13.75% per annum. The Note is
secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc.
In connection with the purchase of such note, the Purchasers received
on January 14, 1998 a common stock purchase warrant (the "Warrant") of Texas
Network that grants the Purchasers the right to purchase up to 17.5% of the
fully-diluted shares of common stock of Texas Network. The Warrant expires on
June 30, 2003. The Warrant also grants the Purchasers the right, through July
14, 1999, to exchange the Warrant for such number of shares of the Company's
Common Stock, at the time of and giving effect to such exchange, equal to 5.5%
of the fully diluted number of shares of Common Stock outstanding, after giving
effect to the exercise or conversion of all then outstanding options, warrants
and other rights to purchase or acquire shares of Common Stock. After five years
from the date of issuance, the Purchasers have the right to put the warrants to
the Texas Network for a value based on a multiple of its operating income.
Prior to June 30, 1998, should the Company form and capitalize an
entity with the intent to commence operations for a second Regional Network in
one of the ten FOX Sports Net owned and operated regions, the Purchasers have a
one time option to purchase notes from such entity on the same terms and
conditions as the Texas Network financing.
14
<PAGE>
During the first three months of 1998, the Company has raised a total
of $1.4 million from a series of private placements of its Common Stock.
In January 1998, the Company entered into an agreement with certain
holders of 5% Cumulative Convertible Preferred Stock ("Preferred Shares") of
ACTV Holdings, Inc., a wholly owned subsidiary of ACTV, Inc. The agreement
provides that the Company, at its sole discretion, may purchase from certain
holders of the Preferred Shares up to an aggregate of 150,000 Preferred Shares
based on a predetermined schedule through June 30, 1998. If the Company chooses
to purchase the Preferred Shares, the Company may, at its sole discretion, pay
in cash or a combination of cash, the Company's Common Stock, and warrants to
purchase the Common Stock.
Management of the Company believes that its current funds (taking into
account the approximately $6.4 million raised during the first three months of
1998) will enable the Company to finance its entertainment and corporate
operations at their present level for at least the next twelve months. Such
belief is based on assumptions that could prove to be incorrect, in which case
the Company may require additional capital to finance such operations during
this period. In addition, if the Company is not successful at raising additional
funds, it may be required to significantly reduce its education operations.
While the Company believes that it has adequate funds to launch and operate its
planned Southwest Regional Network, it will need additional funding for Regional
Network expansion. While the Company has engaged an investment bank for
assistance in securing such financing, the Company has no commitments from
lenders or investors at this time and there is no assurance that it will be able
to raise the necessary capital to effect additional Regional Network launches or
to maintain its education operations at current levels. Such belief is based on
assumptions that could prove to be incorrect, in which case the Company may
require additional financing during this period.
The Company does not have any material contractual commitments for
capital expenditures, although the Company believes that the Southwest Regional
Network may need to acquire approximately $750,000 in equipment for a second
master control facility.
Impact of Inflation
Inflation has not had any significant effect on the Company's operating
costs.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130.
SFAS No. 130, Reporting Comprehensive Income establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial
15
<PAGE>
statements. This statement is effective for fiscal years beginning after
December 15, 1997. The Company has determined that the adoption of this
statement will have no effect on the financial statements.
Statement of Financial Accounting Standards No. 131.
The Company is required to adopt 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 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.
The Company has not yet determined what effect the adoption of this statement
will have on the financial statements.
16
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are listed under Item 14 in this report.
PART IV
Item 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K:
(a)1. FINANCIAL STATEMENTS:
See the Consolidated Financial Statements beginning on Page F-1 hereafter, which
is incorporated by reference.
(a)2. FINANCIAL STATEMENT SCHEDULE
The following Financial Statement Schedule for the years ended December 31, 1997
and December 31, 1996 is filed as part of this Annual Report. The Company had no
activity reportable on this schedule for the year ended December 31, 1995.
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
- ----------- --------- -------- -------- --------- ---------
Year ended 12/31/96:
<S> <C> <C> <C> <C>
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 --
</TABLE>
17
<PAGE>
During 1997, the balances of $82,746 for accounts receivable allowance and
$274,325 for investment loss reserve were written off as uncorrectable and
unrecoverable, respectively.
18
<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, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 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.
As discussed in Note 16, the accompanying 1996 and 1997 consolidated financial
statements have been restated.
Deloitte & Touche LLP
New York, New York
March 18, 1998, (February 10, 1999 as to Note 16)
F-1
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, December 31,
1996 1997
(as Restated (As Restated
see Note 16) see Note 16)
--------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................. $6,520,756 $554,077
Accounts receivable-net................... 410,193 303,044
Education equipment inventory............. 337,504 237,757
Other..................................... 316,962 308,653
Total current assets.................. 7,585,415 1,403,531
Property and equipment-net..................... 724,089 2,596,785
Other Assets:
Patents and patents pending............... 253,779 279,356
Software development costs................ -- 669,852
Goodwill.................................. 3,067,560 2,641,188
Other..................................... 61,781 311,206
--------------- ----------------
Total other assets.................... 3,383,120 3,901,602
--------------- ----------------
Total ........................... $11,692,624 $7,901,918
=============== ================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..... $1,594,655 $1,882,159
Deferred stock appreciation rights........ 701,517 --
Preferred dividends payable............... 195,384 603,469
-------------- --------------
Total current liabilities............. 2,491,556 2,485,628
Convertible preferred stock of subsidiary , no par
value, 436,000 shares authorized: issued and
outstanding 400,000 at December 31,
1996, 316,944 at December 31, 1997........ 6,615,664 7,029,708
Shareholders' equity (deficiency):
Preferred stock, $.10 par value, 1,000,000
shares authorized, issued and out-
standing none at December 31, 1996,
86,200 at December 31, 1997 -- 8,620
Common stock, $.10 par value, 35,000,000
shares authorized: issued and outstand-
ing 11,787,106 at December 31, 1996,
14,614,611 at December 31, 1997....... 1,178,711 1,461,461
Additional paid-in capital................ 42,272,205 48,140,596
Notes receivable from stock sales......... (200,000) (199,900)
F-2
<PAGE>
Accumulated deficit....................... (40,665,512) (51,024,195)
-------------- --------------
Total shareholders' equity (deficiency) 2,585,404 (1,613,418)
-------------- --------------
Total............................ $11,692,624 $7,901,918
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
(as Restated (as Restated
see Note 16) see Note 16)
--------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Revenues.................................. $1,311,130 $1,459,540 $1,650,955
License fees from related party........... 730 16,789 --
--------------- ---------------- ----------------
Total revenues......................... 1,311,860 1,476,329 $1,650,955
Cost of Sales............................. 334,136 647,488 471,956
--------------- ---------------- ----------------
Gross profit........................... 977,724 828,841 1,178,999
Expenses:
Operating expenses........................ 1,260,134 1,955,601 1,360,838
Selling and administrative................ 4,998,020 6,332,759 6,880,311
Depreciation and amortization............. 686,906 419,979 327,681
Amortization of goodwill.................. 426,372 426,372 426,372
Loss on investment........................ -- 274,325 --
Stock appreciation rights................. 567,316 183,634 (346,892)
--------------- ---------------- ----------------
Total expenses......................... 7,938,748 9,592,670 8,648,310
Interest (income)............................ (138,510) (158,732) (116,870)
Interest expense-- related parties........... 98,392 -- --
--------------- ---------------- ----------------
Interest expense (income) - net........... (40,118) (158,732) (116,870)
Minority interest - subsidiary preferred stock
dividend and accretion....................... -- 1,695,384 3,006,242
--------------- ---------------- ----------------
Loss before extraordinary gain............... 6,920,906 10,300,481 10,358,683
--------------- ---------------- ----------------
Gain on extinguishment of debt............... 94,117 -- --
--------------- ---------------- ----------------
Net loss..................................... $6,826,789 $10,300,481 $10,358,683
=============== ================ ================
Basic and diluted loss per common share before
extraordinary gain........................... $.68 $.88 $.80
Basic and diluted loss per common share after
extraordinary gain........................... $.67 $.88 $.80
Weighted average number of common shares
outstanding.................................. 10,162,128 11,739,768 12,883,848
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
------------ --------------- ----------
Paid-In
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances January 1, 1995 9,019,550 $901,955 $32,608,830 $(23,538,242)
Issuance of shares in connection
with financings 1,990,293 199,029 8,730,627
Issuance of shares in connection
with exercise of stock options 308,247 30,825 1,129,924
Issuance of shares for services 78,329 7,833 217,361
Net loss -- -- -- -- -- (6,826,789)
----------- ----------- ---------- ---------- ----------- -------------
Balances December 31, 1995 11,396,419 1,139,642 42,686,742 (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 -- -- -- -- -- (10,300,481)
----------- ----------- ---------- ---------- ----------- -------------
Balances December 31, 1996 11,787,106 $1,178,711 $42,272,205 $(40,665,512)
=========== =========== ========== ========== =========== =============
(as restated see note 16)
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 -- -- -- -- -- (10,358,683)
----------- ----------- ---------- ---------- ----------- -------------
Balances December 31, 1997 14,614,611 $1,461,461 86,200 $8,620 $48,140,596 $(51,024,195)
=========== =========== ========== ========== =========== =============
(as restated see note 16)
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $(6,826,789) $(10,300,481) $(10,358,683)
---------------- ---------------- ----------------
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization............. 1,220,873 846,354 754,053
Stock appreciation rights................. (183,309) 134,634 (701,517)
Gain on extinguishment of debt
obligation................................ (94,717) -- --
Stock issued in lieu of cash
compensation.............................. 563,430 114,047 443,125
Common stock issued or reserved for
preferred dividends and accretion......... -- 1,500,000 2,598,156
Loss on investment........................ -- 274,325 --
Bad debt reserve.......................... -- 82,746 43,188
Changes in assets and liabilities:
Accounts receivable....................... (150,938) (143,648) 63,960
Education equipment inventory............. 34,065 (225,286) 99,747
Other assets.............................. 80,552 (542,824) (241,117)
Accounts payable and accrued expenses..... 165,023 504,263 287,504
Preferred stock dividends payable......... 93,333 195,384 408,085
---------------- ---------------- ----------------
Net cash used in operating
activities............................ (5,098,477) (7,560,486) (6,603,499)
---------------- ---------------- ----------------
Cash flows from investing activities:
Investment in patents pending............. -- -- (50,000)
Investment in property and equipment...... (575,323) (444,189) (2,159,576)
Investment in systems..................... -- -- (686,227)
---------------- ---------------- ----------------
Net cash used in investing activities.......... (575,323) (444,189) (2,895,803)
Cash flows from financing activities:
Proceeds from exercise of warrants
and options............................... 122,810 -- 12,360
Proceeds from preferred stock
issuances................................. -- 9,115,664 2,045,163
Proceeds from equity financing............ 8,951,859 1,877,985 1,475,000
Discounted note prepayment................ (101,458) -- --
Note repayment............................ (2,247,469) -- 100
---------------- ---------------- ----------------
Net cash provided by financing activities...... 6,725,742 10,993,649 3,532,623
---------------- ---------------- ----------------
Net (decrease) increase in cash and cash
equivalents ................................. 1,051,942 2,988,974 (5,966,679)
Cash and cash equivalents,
beginning of period....................... 2,479,840 3,531,782 6,520,756
---------------- ---------------- ----------------
Cash and cash equivalents,
end of period............................. $3,531,782 $6,520,756 $554,077
================ ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
Supplemental disclosure of cash flow information: See Note 15
F-6
<PAGE>
ACTV, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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 and markets proprietary
technologies for individualized television programming (the "Individualized
Programming") and for Internet learning systems. Individualized Programming
permits 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 Company's Individualized Programming. In 1997, the Company introduced to the
education market eSchool Online ("eSchool"), 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,
1995, 1996 and 1997 aggregated $70,790, $189,957 and $286,883, 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, and 1997, are net of accumulated amortization of $116,371 and
$141,072, 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, is net of accumulated amortization of $16,376.
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 and services
are rendered.
Research and Development - Research and development costs, which represent
primarily refinements to Individualized Programming, were $616,455 for the year
ended December 31, 1995, $1,221,362 for the year ended December 31, 1996, and
$551,328 for the year ended December 31, 1997.
Earnings/(Loss) Per Share - The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 128,
F-7
<PAGE>
Earnings Per Share, for the period ended December 31, 1997, which establishes
standards for computing and presenting 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 basic and diluted 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,
1995, and 1996, financial statements to conform to the December 31, 1997,
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. On a quarterly basis, 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 and December 31, 1997 reflect balances of $343,962 and $224,712,
respectively, related to cash advances made to executive officers.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130.
SFAS No. 130, Reporting Comprehensive Income establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. The Company has determined that the adoption of this
statement will have no effect on the financial statements.
Statement of Financial Accounting Standards No. 131.
The Company is required to adopt 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 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.
The Company has not yet determined what effect the adoption of this statement
will have on the financial statements.
2. NATURE OF OPERATIONS
The principal markets for the Company's products are in-home entertainment and
education within the United States. 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. The Company sells eSchool and individualized distance learning
programming and related hardware to schools, colleges, and private education
networks. No single client
F-8
<PAGE>
accounted for more than 10% of the Company's revenues during the year ended
December 31, 1997, except for Georgia Public Television, which accounted for
approximately 17% and 24% of total revenues in 1996 and 1997, respectively and
the Texas Workforce Commission, which accounted for 24% of total revenues in
1997. During 1996, 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, and 1997, consisted of the
following (at cost):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Machinery and equipment $636,845 2,931,682
Office furniture and fixtures 357,373 501,435
-------- ---------
Total 994,218 3,433,117
Less accumulated depreciation 270,129 836,332
-------- ---------
Total $724,089 2,596,785
======== =========
</TABLE>
5. EXTRAORDINARY ITEM
During 1995, the Company realized an extraordinary gain of $94,117 related to
the repayment of an obligation to a former affiliate of the Company at an amount
below the value of which such obligation was carried on the books of the
Company.
6. FINANCING ACTIVITIES
In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc., (the
"Issuer") and The Texas Individualized Television Network, Inc., a wholly-owned
subsidiary of the Issuer ("Texas Network"), entered into a Note Purchase
Agreement, dated as of January 13, 1998 (the "Agreement") with certain private
investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers
purchased $5.0 million aggregate principal amount notes from the Issuer and
Texas Network. The notes bear interest at a rate of 13.0% per annum, payable
semi-annually, with principal repayment in one installment on June 30, 2003.
During the term of the note, the Issuer may, at its option, pay any four
semi-annual interest payments in kind rather than in cash, with an increase in
the rate applicable to such payments in kind to 13.75% per annum. The Note is
secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc.
In connection with the purchase of such note, the Purchasers received on January
14, 1998 a common stock purchase warrant (the "Warrant") of Texas Network that
grants the Purchasers the right to purchase up to 17.5% of the fully-diluted
shares of common stock of Texas Network. The Warrant expires on June 30, 2003.
The Warrant also grants the Purchasers the right, through July 14, 1999, to
exchange the Warrant for such number of shares of the Company's Common Stock, at
the time of and giving effect to such exchange, equal to 5.5% of the fully
diluted number of shares of Common Stock outstanding, after giving effect to the
exercise or conversion of all then outstanding options, warrants
F-9
<PAGE>
and other rights to purchase or acquire shares of Common Stock. After five years
from the date of issuance, the Purchasers have the right to put the warrants to
the Texas Network for a value based on a multiple of its operating income.
Prior to June 30, 1998, should the Company form and capitalize an entity with
the intent to commence operations for a second Regional Network in one of the
ten FOX Sports Net owned and operated regions, the Purchasers have a one time
option to purchase notes from such entity on the same terms and conditions as
the Texas Network financing.
During the first three months of 1998, the Company has raised a total of
$1.4 million from a series of private placements of its Common Stock.
During 1997, the Company raised approximately $3.5 million from the proceeds of
a series of private placements of Common Stock (approximately $1.5 million in
net proceeds) and Series A Convertible Preferred Stock (approximately $2.0
million in net proceeds).
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.
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.
Management of the Company believes that its current funds (taking into account
the approximately $6.4 million raised during the first three months of 1998)
will enable the Company to finance its entertainment and corporate operations at
their present level for at least the next twelve months. Such belief is based on
assumptions that could prove to be incorrect, in which case the Company may
require additional capital to finance such operations during this period. In
addition, if the Company is not successful at raising additional funds, it may
be required to significantly reduce its education operations. While the Company
believes that it has adequate funds to launch and operate its planned Southwest
Regional Network, it will need additional funding for Regional Network
expansion. While the Company has engaged an investment bank for assistance in
securing such financing, the Company has no commitments from lenders or
investors at this time and there is no assurance that it will be able to raise
the necessary capital to effect additional Regional Network launches or to
maintain its education operations at current levels.
7. SHAREHOLDERS' EQUITY (DEFICIENCY)
F-10
<PAGE>
At December 31, 1997, the Company had reserved shares of Common Stock for
issuance as follows:
1989 Qualified Stock Option Plan 49,567
1989 Non-Qualified Stock Option Plan 47,250
1996 Qualified Stock Option Plan 380,000
Options granted outside of formal plans 3,062,401
---------
Total 3,539,218
=========
Convertible Preferred Stock At December 31, 1997, 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. At December 31, 1997, 86,200 shares of Series A Convertible
Preferred Stock were issued and outstanding.
8. 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, 1997, 97,500 options had been granted
under this plan, of which 19,000 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, 1997, 97,000 options had been granted
under this plan, of which 22,250 had been exercised and 27,500 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, 1997, the Company had issued
430,000 options under the plan, of which none had been exercised and 50,000 had
been canceled.
At December 31, 1997, the Company also had outstanding options that were issued
to Directors, certain employees and consultants for the purchase of 3,062,401
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 1998 through 2003. 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, 1997,
1996 and 1995 is as follows:
F-11
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
Wgtd. Wgtd. Wgtd.
Avg. Avg. Avg.
1997 Exer 1996 Exer 1995 Exer
Shares Price Shares Price Shares Price
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period 3,328,718 2,747,082
Options granted 339,683 $1.91 887,500 $3.73 1,706,087 $3.41
Options exercised 17,000 $0.73 -- -- 141,833 $2.33
Options terminated 112,183 $4.06 305,864 $3.76 422,276 $5.27
Outstanding at end
of period 3,539,218 $1.81 3,328,718 $2.99 2,747,082 $3.27
Options exercisable at end
of period 2,363,134 $1.87 1,719,134 $3.19 1,091,083 $3.04
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Number Average Weighted Weighted
Outstanding Remaining Average Number Average
Range of at Contractual Exercise Exercisable at Exercise
Exercise Prices 12/31/97 Life Price 12/31/97 Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0 to 1.50 2,822,718 5.0 Years $1.50 1,757,053 $1.50
1.51 to 3.50 474,000 1.7 Years $2.52 446,915 $2.52
3.51 to 5.50 242,500 1.7 Years $4.05 159,166 $4.18
</TABLE>
The weighted average fair value of options granted during 1996 and 1997 was
$1.21 and $.64 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, 1995, 1996 and 1997 would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Net loss to common shareholders 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
As reported $6,826,789 $8,800,481 $7,858,683
Pro forma $9,506,556 $9,685,735 $8,074,807
Net loss per basic and diluted
common share 1996 1996 1997
---- ---- ----
F-12
<PAGE>
As reported $0.67 $0.75 $0.61
Pro forma $0.94 $0.83 $0.63
</TABLE>
The Company estimated the fair value of options issued during 1995, 1996 and
1997 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 1995 and 1996 of 61.5%, expected volatility for 1997 of 57.3%,
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.
9. 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 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 value
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, 1997, 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, 1997, 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 1997, a total of 203,000 SARs were
exercised under both plans.
F-13
<PAGE>
10. 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, and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
Deferred tax assets:
<S> <C> <C>
Operating loss carryforwards $13,365,772 $16,131,213
Differences between book and tax basis of property 34,019 56,148
------------ ------------
13,399,791 16,187,361
Deferred tax liabilities:
Differences between book and tax basis of property (106,819) (181,104)
--------- ---------
13,292,972 16,000,257
Valuation Allowance (13,292,972) (16,000,257)
------------ ------------
Net deferred tax asset $ 0 $ 0
============ ============
</TABLE>
The increase in the valuation allowance for the year ended December 31, 1997,
was approximately $2.7 million. There was no provision or benefit for federal
income taxes as a result of the net operating loss in the current year.
At December 31, 1997, the Company has Federal net operating loss carryovers of
approximately $45.7 million. These carryovers may be subject to certain
limitations and will expire between the years 1998 and 2012.
11. COMMITMENTS
At December 31, 1997, future aggregate minimum lease commitments under
non-cancelable operating leases, which expire in 1999 and 2001, were
approximately $980,000. The leases contain customary escalation clauses, based
principally on real estate taxes. Rent expense related to these leases for the
years ended December 31, 1995, 1996 and 1997 aggregated $176,264, $129,600, and
$330,430 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, the Company is committed to
expend a total of approximately $2.7 million under these agreements.
12. 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
F-14
<PAGE>
concentrations of credit risks by requiring partial advance payments for the
products provided.
13. 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.
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.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The consolidated balance sheet 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 Company made no cash payments of interest or income taxes during the years
ended December 31, 1996 and 1997.
16. RESTATMENT
The Company's consolidated financial statements for the years ended December 31,
1996 and 1997, have been restated to present the convertible preferred stock of
subsidiary outside of shareholders' equity and to present the dividends and
accretion of the convertible preferred stock of a subsidiary as an expense in
determining net loss. The significant effects of the restatement are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1997
------ ------
---------------- ---------------- ----------------- ---------------
As Previously As Previously
Reported As Restated Reported As Restated
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Minority Interest - Subsidiary
Preferred stock dividend and
Accretion $- $1,695,384 $- $3,006,242
Net Loss 8,605,097 10,300,481 7,352,441 10,358,683
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1997
------ ------
---------------- ---------------- ----------------- ---------------
As Previously As Previously
F-15
<PAGE>
Reported As Restated Reported As Restated
---------------- ---------------- ----------------- ---------------
Convertible preferred stock
of subsidiary $- $6,615,664 $- $7,029,708
Shareholders' equity
(deficiency) 9,201,068 2,585,404 5,416,290 (1,613,418)
</TABLE>
The restatement had no effect on revenues, total assets and net loss per basic
and diluted common share.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Annual Report on
Form 10-K/A2 to be signed on its behalf by the undersigned thereunto duly
authorized in the City of New York and State of New York on the 10th day of
February, 1999.
ACTV, Inc.
By: /s/ William C. Samuels
----------------------
William C. Samuels
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William C. Samuels Chairman of the Board, Chief February 10, 1999
- ------------------------ Executive Officer, President
William C. Samuels and Director
/s/ David Reese Executive Vice President, February 10, 1999
- ------------------------ President - ACTV Entertainment,
David Reese Inc., and Director
/s/ Bruce Crowley Executive Vice President, February 10, 1999
- ------------------------ President - ACTV Net Inc.,
Bruce Crowley and Director
/s/ Christopher C. Cline Senior Vice President, Chief February 10, 1999
- ------------------------ Financial Officer and Secretary
Christopher C. Cline
Director February 10, 1999
<PAGE>
- ------------------------
William A. Frank
Director February 10, 1999
- ------------------------
Steven W. Schuster
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-K/A2 FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 554,077
<SECURITIES> 0
<RECEIVABLES> 346,232
<ALLOWANCES> 43,188
<INVENTORY> 237,757
<CURRENT-ASSETS> 1,403,531
<PP&E> 3,433,117
<DEPRECIATION> 836,332
<TOTAL-ASSETS> 7,901,918
<CURRENT-LIABILITIES> 2,458,628
<BONDS> 0
0
8,620
<COMMON> 1,461,461
<OTHER-SE> 3,946,206
<TOTAL-LIABILITY-AND-EQUITY> 7,901,918
<SALES> 1,650,955
<TOTAL-REVENUES> 1,650,955
<CGS> 471,956
<TOTAL-COSTS> 8,648,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,358,683)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,358,683)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,358,683)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
