<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
ACTV, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-2907258
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1270 Avenue of the Americas
New York, New York 10020
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 217-1600 (Registrant's telephone number, including area code)
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of August 11, 2000, there were 50,591,501 shares of the registrant's common
stock outstanding.
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1999 2000
(UNAUDITED)
------------ --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................ $ 8,816,368 $ 135,863,898
Accounts receivable-net .......................... 1,160,036 1,386,262
Other .......................................... 1,589,430 6,946,910
------------ -------------
Total current assets ......................... 11,565,834 144,197,070
------------ -------------
Property and equipment-net ............................ 3,392,219 4,501,660
------------ -------------
Other assets:
Patents and patents pending ...................... 8,142,928 8,078,185
Software development costs ....................... 2,183,950 2,297,303
Goodwill ......................................... 1,788,444 1,575,258
Investments ...................................... 250,000 4,000,000
Other ............................................ 828,683 1,655,428
------------ -------------
Total other assets ........................... 13,194,005 17,606,174
------------ -------------
Total ................................... $ 28,152,058 $ 166,304,904
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............ $ 1,708,611 $ 1,790,135
Long-term notes payable ............................... 4,803,342 --
Minority interest ..................................... 2,000,593 3,072,596
Stockholders' equity:
Common stock, $0.10 par value, 200,000,000 shares
authorized: issued and outstanding 42,167,997 at
December 31, 1999, 50,551,169 at June 30, 2000 .. 4,216,800 5,055,117
Additional paid-in capital ....................... 110,692,842 267,105,450
Accumulated deficit .............................. (95,270,130) (110,718,394)
------------- -------------
Total stockholders' equity ................... 19,639,512 161,442,173
------------- -------------
Total ................................... $ 28,152,058 $ 166,304,904
============= =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues .................................... $ 854,507 $ 1,902,656 $ 453,713 $ 1,062,419
------------ ------------ ----------- -----------
Costs and expenses:
Cost of sales ............................ 80,512 694,712 25,732 370,998
Operating expenses ....................... 802,501 3,737,113 441,033 1,821,003
Selling and administrative ............... 6,622,575 10,800,797 3,802,727 7,236,123
Depreciation and amortization ............ 670,174 1,365,607 299,860 703,038
Amortization of goodwill ................. 213,186 213,186 106,593 106,593
Stock appreciation rights ................ 4,555,649 -- 1,144,825 --
------------ ------------ ----------- -----------
Total expenses ........................ 12,944,597 16,811,485 5,820,770 10,237,755
Interest income ............................. 123,849 3,376,405 72,827 2,213,145
Interest (expense) .......................... (521,617) (270,015) (290,936) (8,710)
------------ ------------ ----------- -----------
Interest (expense)/income - net .......... (397,768) 3,106,390 (218,109) 2,204,435
------------ ------------ ----------- -----------
(Loss) before minority interest, preferred
stock dividend and accretion and
extraordinary items ......................... (12,487,858) (11,802,369) (5,585,166) (6,970,901)
------------ ------------ ----------- -----------
Minority interest - subsidiary .............. -- 477,897 -- 307,446
Preferred stock dividend and accretion ...... 494,431 -- 16,655 --
------------ ------------ ----------- -----------
(Loss) before extraordinary item ............ $(12,982,289) $(11,324,472) $(5,601,821) $(6,663,455)
Extraordinary loss on early extinguishment of
debt ........................................ -- (1,411,139) -- (1,411,139)
------------ ------------ ----------- -----------
Net (loss) .................................. $(12,982,289) $(12,735,611) $(5,601,821) $(8,074,594)
============ ============ =========== ==========
Basic and diluted (loss) per common share
before extraordinary item ................... $ (0.36) $ (0.25) $ (0.14) $ (0.15)
Basic and diluted (loss) per common share
after extraordinary item .................... $ (0.36) $ (0.28) $ (0.14) $ (0.18)
Weighted average number of common
shares outstanding ......................... 35,859,875 44,915,893 39,711,671 45,771,909
------------ ------------ ------------ -----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $(12,982,289) $(12,735,611) $ (5,601,821) $ (8,074,594)
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization ....................... 883,360 1,578,793 406,454 809,631
Deferred compensation from stock appreciation rights -- 306,000 -- 306,000
Stock appreciation rights ........................... 4,555,649 -- 2,384,886 --
Amortization and accretion of deferred
expenses related to debt financing .............. 489,325 -- 293,847 (246,757)
Common stock issued for services .................... 4,278,636 -- 2,799,676 --
Common stock issued for preferred
dividends and accretion ......................... 241,513 -- 165,593 --
Common stock issued in lieu of cash payment ....... -- 2,300,000 -- 2,231,781
Changes in assets and liabilities:
Accounts receivable ................................. (262,167) (226,226) (210,087) (157,720)
Educational equipment inventory ..................... 33,175 -- -- --
Other assets ........................................ (1,437,598) (1,427,468) (1,882,652) (695,271)
Accounts payable and accrued expenses ............... 114,507 81,523 (421,843) 677,897
Minority interest ................................... -- 1,072,003 -- 1,242,453
------------ ------------ ------------ ------------
Net cash used in operating activities ........... (4,085,889) (9,050,986) (2,065,947) (3,906,580)
Cash flows from investing activities:
Investment in patents ............................... (1,493,501) (228,201) (1,470,324) (159,932)
Investment in property and equipment ................ (507,176) (1,842,726) (94,480) (1,356,315)
Investment in software development costs ............ (498,800) (452,733) (246,658) (182,045)
Investments ......................................... -- (3,750,000) -- (3,750,000)
------------ ------------ ------------ ------------
Net cash used in investing activities ........... (2,499,477) (6,273,660) (1,811,462) (5,448,292)
Cash flows from financing activities:
Retirement of debt ................................. -- (4,566,095) -- (4,566,095)
Preferred stock dividends payable .................. 115,660 -- (286,198) --
Redemption from sale of common stock ............... (5,792,538) -- (5,792,538) --
Proceeds from sale of preferred stock .............. 19,428,783 -- 18,604,516 --
Net proceeds from subsidiary equity
transactions .................................... 19,428,783 -- 18,604,516 --
Net proceeds from equity financing and transactions -- 146,938,271 -- (3,318,109)
------------ ------------ ------------ ------------
Net cash provided by financing activities ..... 13,751,905 142,372,176 12,525,780 (7,884,204)
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ..... 7,166,539 127,047,530 8,648,371 (17,239,076)
Cash and cash equivalents, beginning of period ... 5,188,770 8,816,368 3,706,938 153,102,974
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ......... $ 12,355,309 $135,863,898 $ 12,355,309 $135,863,898
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statement
3
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Paid-
------------------------------ -------------------------
Shares Amount Shares Amount in Capital Deficit Total
------------------ ------------- ------------- --------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances
December 31,
1999 42,167,997 $4,216,800 -- -- $110,692,842 $ (95,270,130) $ 19,639,512
------------------ ---------- ---------- --------- ------------- ------------ ------------- ------------
Issuance of shares
in connection with
public offering 4,600,000 460,000 -- -- 128,917,268 -- 129,377,268
Issuance of shares
for services 947,000 94,700 -- -- 7,295,019 -- 7,389,719
Issuance of shares
in connection
with exercise of
stock options &
warrants 2,894,648 289,465 -- -- 20,507,957 -- 20,797,422
Retirement of
common stock (58,476) (5,848) -- -- (307,636) (2,712,653) (3,026,137)
Net loss before
extraordinary item -- -- -- -- -- (11,324,472) (11,324,472)
Extraordinary loss -- -- -- -- -- (1,411,139) (1,411,139)
---------- ---------- --------- ------------- ------------ ------------- ------------
Balances June 30,
2000 50,551,169 $5,055,117 -- -- $267,105,450 $(110,718,394) $161,442,173
========== ========== ========= ============= ============ ============= ============
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX AND THREE MONTHS ENDED JUNE 30, 1999 AND 2000
1. BASIS OF PRESENTATION
The results of operations for the six and three months ended June 30, 2000
and 1999 are not necessarily indicative of a full year's operations. In the
opinion of our management, the accompanying financial statements include all
adjustments of a normal recurring nature, which are necessary to present
fairly such financial statements.
All significant intercompany balances and transactions have been eliminated
in consolidation. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
These consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto included in our annual
report on Form 10-K for the year ended December 31, 1999.
We consider all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2000 presentation.
2. FINANCING ACTIVITIES
On February 3, 2000, we completed a follow-on offering of 4.6 million common
shares, including 0.6 million common shares to cover the over-allotments of
our underwriters, Credit Suisse First Boston, Bear Stearns & Co. Inc.,
Lehman Brothers, and Salomon Smith Barney. The 4.6 million total common
shares were priced to the public at $30 per share, for total gross proceeds
of $138 million. We paid underwriting discounts and commissions of $1.80 per
share or $8.28 million, resulting in net proceeds of $28.20 per share, or
$129.7 million.
On March 27, 2000 Liberty Digital, Inc. invested an additional $20
million in us, increasing its investment to 16% by exercising a warrant
granted in March 1999.
3. EXTINGUISHMENT OF LONG TERM DEBT
On April 3, 2000, we repaid certain notes in full, thereby incurring a loss
on extinguishment of debt that we recorded as an extraordinary item for the
six and three months ended June 30, 2000. The extraordinary loss includes a
prepayment premium of $369,632, and the unamortized original issue discount
and deferred issue costs of $819,294 and $222,213, respectively, for a total
loss of $1,411,139, or $0.03 per share. We incurred the debt in January
1998, when subsidiaries of ours entered into a note purchase agreement with
certain private investors. Pursuant to the agreement, the purchasers
purchased $5.0 million aggregate principal amount notes from our
subsidiaries. The notes bore interest at a rate of 13.0% per annum, payable
semi-annually. During the term of the note, the issuer had the 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.
5
<PAGE>
4. INVESTMENTS
We entered into various strategic equity investments in privately held
companies that operate in our industry. The investments are stated at cost,
amounting to $4,000,000. We do not exercise effective control over
operations for any of the strategic equity investments.
5. MINORITY INTEREST
We record minority interest resulting from the formation in November 1999 of
Digital ADCO, of which we own 51% and Motorola Broadband owns 49%. Digital
ADCO develops applications for the delivery of addressable advertising.
Under the terms of our agreement with Motorola Broadband, we licensed five
of our patents to Digital ADCO and Motorola Broadband has licensed six of
its patents and made a $5.0 million capital commitment to Digital ADCO. Any
capital contribution after Motorola Broadband has fulfilled its initial $5.0
million commitment will be made pro rata based on ownership interests. In
November 1999, Motorola contributed to Digital ADCO the first $2.0 million
of the $5.0 million total and another $1.5 million in June 2000, with the
final payment of $1.5 million to be made in the fourth quarter of 2000.
For the six and three months ended June 30, 2000, we allocated losses in the
amount of $432,383 and $261,932 from Digital ADCO to Motorola Broadband.
In May 2000, Thomas R. Wolzien exercised his option to acquire a 49.9%
interest in Media Online Services. We record minority interest resulting
from this exercise and allocated losses in the amount of $45,514 for the six
and three months ended June 30, 2000.
6. SEGMENT INFORMATION
We have two principal business segments that develop and market proprietary
technologies for individualized television programming and for
television/Internet convergence. Since our inception, we have been engaged
in the development of individualized programming, the production of programs
that use individualized television programming and marketing and sales of
the various products and services incorporating individualized television
programming. During 1995, we developed HyperTV for the enhanced television
convergence market.
6
<PAGE>
Information concerning the our business segments for the six and three-month
periods ending June 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
-------------------------------- --------------------------------
JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Individualized Television $ -- $ -- $ -- $ --
HyperTV 854,507 1,896,656 453,713 1,056,419
Unallocated corporate -- 6,000 -- 6,000
------------- ------------- ------------- -------------
Total $ 854,507 $ 1,902,656 $ 453,713 $ 1,062,419
============= ============= ============= =============
DEPRECIATION & AMORTIZATION
Individualized Television $ 404,538 $ 657,154 $ 214,557 $ 339,369
HyperTV 182,782 417,920 38,662 218,211
Unallocated Corporate 296,040 503,719 153,234 252,051
------------- ------------- ------------- -------------
Total $ 883,360 $ 1,578,793 $ 406,453 $ 809,631
============= ============= ============= =============
INTEREST (EXPENSE) INCOME
Individualized Television $ (498,747) $ (241,803) $ (282,021) $ 8,078
HyperTV (2,084) 2,626 197 2,104
Unallocated corporate 103,063 3,345,567 63,714 2,194,253
------------- ------------- ------------- -------------
Total $ (397,768) $ 3,106,390 $ (218,110) $ 2,204,435
============= ============= ============= =============
NET (LOSS)
Individualized Television $ (2,526,401) $ (5,001,023) $ (1,350,169) $ (3,218,004)
HyperTV (1,275,872) (4,304,277) (599,548) (2,295,267)
Unallocated corporate (9,180,016) (3,430,311) (3,652,104) (2,561,323)
------------- ------------- ------------- -------------
Total $ (12,982,289) $ (12,735,611) $ (5,601,821) $ (8,074,594)
============= ============= ============= =============
CAPITAL EXPENDITURES
Individualized Television $ 581,213 $ 1,297,471 $ 277,089 $ 981,906
HyperTV 1,870,690 1,032,791 1,520,562 542,413
Unallocated corporate 47,574 193,398 13,812 173,975
------------- ------------- ------------- -------------
Total $ 2,499,477 $ 2,523,660 $ 1,811,463 $ 1,698,294
============= ============= ============= =============
Balance Sheet Accounts as of June 30, 1999 & 2000
CURRENT ASSETS
Individualized Television $ 655,369 $ 2,293,994
HyperTV 954,472 1,739,495
Unallocated corporate 18,815,542 140,163,581
------------- -------------
Total $ 20,425,383 $ 144,197,070
============= =============
TOTAL ASSETS
Individualized Television $ 4,060,028 $ 6,927,428
HyperTV 3,061,521 5,804,341
Unallocated corporate 21,933,739 153,573,135
------------- -------------
Total $ 29,055,288 $ 166,304,904
============= =============
</TABLE>
7
<PAGE>
7. STOCK APPRECIATION RIGHTS PLAN
The stock appreciation rights expense for the six and three months ended
June 30, 2000 was $0 and the six and three months ended June 30, 1999 was
$4,555,649 and $1,144,825, respectively. In September 1999, all remaining
SARs were converted into options under our 1999 option plan. Deferred
expenses were booked related to SARs that had not yet vested. In May 2000 we
recognized $306,000 of those deferred expenses as period costs.
8. EXECUTIVE COMPENSATION
For both the six and three months ended June 30, 2000 we incurred executive
incentive compensation expense of $2,300,000. For both the six and three
months ended June 30, 1999 we incurred executive incentive compensation
expense of $780,844. This expense is related to an incentive compensation
provision that is based on changes in the market value of our common stock
and paid in unregistered securities. The future compensation to be
recognized is contingent on continued employment of the executive and
subject to forfeiture.
9. SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
For both the six and three months ended June 30, 2000 we recorded a deferred
expense of $7,600,000 for stock-based compensation. We also paid $270,015 in
interest costs for the period January 1, 2000 through April 3, 2000 and no
other interest payments for the period ending June 30, 2000, and we made no
cash payments of interest or income taxes during the six months ended June
30, 1999.
10. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
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" ("SFAS 133"). This
Statement requires that all derivative instruments be measured at fair value
and recognized in the Consolidated Balance Sheets as either assets or
liabilities. In addition, the accounting for changes in the fair value of a
derivative (gains and losses) depends on the intended use of the derivative
and the resulting designation. For a derivative designated as a hedge, the
change in fair value will be recognized as a component of other
comprehensive income; for a derivative not designated as a hedge, the change
in the fair value will be recognized in the Consolidated Statements of
Operations.
In June 1999, the FASB issued SFAS No. 137, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133" which delayed the adoption of SFAS 133 to fiscal years
beginning after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, "ACCOUNTING FOR CERTAIN
DERIVATIVE FINANCIAL INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES - AN
AMENDMENT OF FASB STATEMENT NO. 133." This Statement amends the accounting
and reporting standards of SFAS 133 for certain derivative instruments, for
certain hedging activities and for decisions made by the FASB relating to
the Derivatives Implementation Group ("DIG") process. Certain decisions
arising from the DIG process that required specific amendments to SFAS 133
were incorporated into this Statement. We plan to adopt SFAS 133 and SFAS
138 in the first quarter of 2001.
8
<PAGE>
We do no expect the adoption of SFAS No. 133 to have an impact on our
results of operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS" ("SAB 101"). SAB 101 was issued to provide guidance in applying
generally accepted accounting principles to the large number of revenue
recognition issues that registrants encounter, including nonrefundable,
up-front fees and the disclosure of judgments as to the appropriateness of
the principles relating to revenue recognition accounting policies. Revenue
is recognized as products are shipped or services are rendered. Since the
issuance of SAB 101, the Staff has received requests from a number of groups
asking for additional time to determine the effects if any, on registrants'
revenue recognition practices and such, the SEC has delayed the
implementation date of SAB 101 until no later than the fourth quarter of
fiscal years beginning after December 15, 1999. The Company has evaluated
the impact of this Staff Accounting Bulletin and has concluded that it will
have no effect on the Consolidated Financial Statements.
In March 2000, FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), and
interpretation of APB Opinion No. 25 "Accounting for Stock Issued to
Employees". FIN 44 is effective July 1, 2000 and effects the way certain
stock options granted to non-employees will be accounted for. We do not
expect the adoption of FIN 44 to have a material impact on our results of
operations.
11. SUBSEQUENT EVENT
On July 14, 2000 we signed a Memorandum of Understanding to acquire all of
the outstanding common stock of a privately held company for consideration
to be paid in our common stock. We expect to complete the acquisition in
August 2000. The transaction will be accounted for as a pooling of
interests.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since our inception, the primary focus of our operating activities has
been to develop patented, proprietary technologies that enable programmers and
advertisers to create individualized programming and programming enhancements--
first for television and later also for the emerging area of "enhanced TV," or
television/Internet convergence. We call our technologies for the individualized
television and enhanced TV markets One to One TV and HyperTV-TM-, respectively.
One to One TV enables television programmers and advertisers to create
customized "one-to-one" programming and ads, and allows viewers to instantly and
seamlessly customize their viewing experiences. HyperTV has pioneered the
delivery of synchronized Internet content with standard programming and
advertising.
We derived all of our revenues for 1999 and for the six and three months
ended June 30, 2000 from HyperTV, which is targeted at the entertainment and
education markets. We subsequently entered into HyperTV programming alliances
for this market. Sources of revenue from the entertainment market include
software licensing, data management services, Internet advertising and commerce
and program hosting and content creation fees.
In April 2000, we and Liberty Livewire, a unit of Liberty Media Group,
created a joint marketing venture, HyperTV with Livewire. Liberty Livewire,
which is the U.S. leader in audio and video post-production and location
services, will jointly offer with ACTV, HyperTV with Livewire to clients in the
feature film, television and music video production businesses. In addition,
Liberty Livewire will provide content creation services and--through AT&T IP
Services--a scaleable hosting infrastructure for HyperTV with Livewire. Pursuant
to the agreement creating HyperTV with Livewire, we received warrants to
purchase 2.5 million shares of Liberty Livewire common stock.
In November 1999, we formed a company, Digital ADCO, Inc., with Motorola
Broadband to develop applications for the delivery of targeted television
advertising. Digital ADCO's principal product, SpotOn-TM-, will permit
advertisers to deliver targeted messages to individual viewers based on
demographic information stored in their digital set-top boxes. In addition,
SpotOn will offer accountability to advertisers by reporting which households
viewed a given commercial, along with the aggregate demographic profiles of
those households.
In May 2000, Digital ADCO, Inc. entered into a memorandum of understanding
with OpenTV. OpenTV will invest in Digital ADCO, Inc. In addition, ACTV,
Motorola and OpenTV will together form a new subsidiary Digital ADCO
International, to market and deploy SpotOn outside the United States. Like ACTV
and Motorola, OpenTV plans to license certain system technologies to Digital
ADCO that will enhance SpotOn's functionality.
In April 1999, we acquired a patent from Thomas R. Wolzien for on-line
media applications, which we call the Wolzien Process, that expands the
functionality of HyperTV. The terms of the patent acquisition agreements provide
that when the Wolzien patent and the HyperTV patents are jointly licensed the
revenue from such joint licenses will be shared equally between our subsidiary,
Media Online Services, and us. Media Online Services has granted us a worldwide,
royalty-free license to use the Wolzien patent in our individualized television
and eSchool products and services. As consideration for the Wolzien patent,
Thomas R. Wolzien received, among other considerations, an option exercisable at
any time to acquire a 49.9% interest in Media Online Services. In May 2000 he
exercised this option.
With respect to Individualized Television, our business plan is to
generate future revenues from subscription fees, advertising and fees related to
advertising services. For
10
<PAGE>
national distribution of Individualized Television, we have formed a joint
venture, LMC IATV Events, LLC, with Liberty Digital, a subsidiary of Liberty
Media Corporation. LMC expects to license the rights to produce individualized
telecasts of marquee sports and other events. In November 1999, LMC IATV Events
entered into an agreement with iN DEMAND, LLC to distribute individualized event
programming on a pay-per-view basis to a national audience. iN DEMAND is the
premier distributor of pay-per-view programming in the United States.
ACTV's policy is and has been, as set forth in the prospectus related
to our initial public offering in May 1990, "to license ACTV's technology and
arrange joint ventures for its use in a number of different industries" and
such policy has been restated annually since 1996. Our board of directors
has adopted a Preferred Stock Rights Agreement, which gives the board of
directors certain options if a potential acquirer of 20% or more of ACTV's
common stock is deemed unlikely to further such policy or if such potential
acquirer acts inconsistently with the best interests of our stockholders. The
Preferred Stock Rights Agreement does not apply to existing holders of 20% or
more of our common stock.
Pursuant to the Preferred Stock Rights Agreement, we could distribute
certain preferred stock purchase rights to our current stockholders. These
rights would become exercisable by the stockholders if an outside party
became the beneficial owner of 20% or more of our issued and outstanding
common stock, unless the board of directors determined to defer their
exercise or redeem such rights. The potential acquirer's rights under the
Preferred Stock Rights Agreement will be null and void. Once exercisable,
each right would entitle the holder to purchase .001 of a share of the
Company's Series C Preferred Stock at an exercise price of $0.00001 per
share. Each share of Series C Preferred Stock shall entitle the holder to
1,000 votes on all matters submitted to a vote of the stockholders of ACTV.
Once issued, the board of directors could vote to exchange the preferred
stock rights for shares of common stock of the Company.
In addition, the Board of Directors approved certain amendments to the
bylaws. The first amendment provides that only a majority of the Board of
Directors or the Chairman of the Board may call a special meeting of the
Stockholders. The second amendment provides that our stockholders be required to
provide advance notice of any proposal to nominate or elect any member of the
board of directors and/or any stockholder proposal of other business to be voted
upon at an annual meeting of the stockholders.
We have had minimal revenues to date and have incurred significant
operating losses, net losses and negative cash flows from operations since our
inception. At June 30, 2000, we had an accumulated deficit of approximately $111
million. We expect to continue to incur significant operating losses on a
quarterly and annual basis for the foreseeable future.
We were incorporated in Delaware in July 1989, as the successor, by merger
to ACTV, Inc., a California corporation, organized in July 1983.
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RESULTS OF OPERATIONS
COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUES. During the six month period ended June 30, 2000, our revenues
increased 123%, to $1,902,656, from $854,507 in the six month period ended June
30, 1999. All of our revenues in the in both periods were derived from sales of
HyperTV software and services.
TOTAL COSTS AND EXPENSES. Cost of sales in the six months ended June 30,
2000 was $694,712 compared to $80,512 in the six months ended June 30, 1999, and
the cost of sales, as a percentage of sales revenue, in the more recent quarter
was 37%, compared to 9% in the corresponding 1999 quarter. Total costs and
expenses, excluding cost of sales, interest expense, and minority interest
increased approximately 25% in the period ending June 30, 2000, to $16,116,773,
from $12,864,085 in the same period of 1999. The increase was principally the
result of higher selling and administrative expenses due to our growing number
of employees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $695,433 in the period ended June 30, 2000, to $1,578,793, from
$883,360 during the same period of 1999, due primarily to higher amortization
and depreciation related to a greater investment in patents, software
development, and equipment.
INTEREST (EXPENSE)/INCOME. Interest income in six month period ended June
30, 2000 was $3,376,405, compared with $123,849 in the six month period ended
June 30, 1999. The increase was the result of significantly higher cash balances
resulting from our February 2000 follow-on offering. We incurred interest
expense in the period ending June 30, 2000 of $270,015, compared to $521,617 in
the same period of 1999. The interest expense for both periods relates to the $5
million original face value notes issued by a subsidiary of ours in January
1998, and is lower during the period ending June 30, 2000 due to retirement of
the notes on April 3, 2000.
PREFERRED STOCK DIVIDENDS. For the six month period ended June 30, 2000,
we accrued $0 for preferred stock dividends and accretion. For the six month
period ended June 30, 1999, we paid $494,431 in preferred stock dividends,
related to our Series B preferred stock. We redeemed all of our outstanding
preferred stock in the second quarter of 1999.
NET LOSS BEFORE EXTRAORDINARY ITEM. For the six months ended June 30,
2000, our net loss applicable to common stockholders before extraordinary item
was $11,324,472 or $0.25 per basic and diluted share, a decrease of 13% compared
to the net loss of $12,982,289 or $0.36 per basic and diluted share for the six
months ended June 30, 1999. The decrease was primarily the result of the
elimination of SARs valuation expense and higher interest income in the more
recent quarter.
NET LOSS. For the six months ended June 30, 2000, our net loss applicable
to common stockholders after extraordinary loss was $12,735,611 or $0.28 per
basic and diluted share. The extraordinary loss was the result of early
retirement of long term debt on April 3, 2000. The extraordinary loss includes a
prepayment premium of $369,632, and the unamortized original issue discount and
deferred issue costs of $819,294 and $222,213, respectively, for a total loss of
$1,411,139 or $0.03 per share.
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COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUES. During the three month period ended June 30, 2000, our revenues
increased 134%, to $1,062,419, from $453,713 in the three month period ended
June 30, 1999. All of our revenues in the in both periods were derived from
sales of HyperTV software and services.
TOTAL COSTS AND EXPENSES. Cost of sales in the three months ended June 30,
2000 was $370,998 compared to $25,732 in the three months ended June 30, 1999,
and the cost of sales, as a percentage of sales revenue, in the more recent
quarter was 35%, compared to 6% in the corresponding 1999 quarter. Total costs
and expenses, excluding cost of sales, interest expense, and minority interest
increased approximately 70% in the period ending June 30, 2000, to $9,866,757,
from $5,795,038 in the same period of 1999. The increase was principally the
result of higher selling and administrative expenses due to our growing number
of employees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $403,178 in the three month period ended June 30, 2000, to $809,631,
from $406,453 during the same period of 1999, due primarily to higher
amortization and depreciation related to a greater investment in patents,
software development, and equipment.
INTEREST (EXPENSE)/INCOME. Interest income in the three month period ended
June 30, 2000 was $2,213,145, compared with $72,827 in the three month period
ended June 30, 1999. The increase was the result of significantly higher cash
balances resulting from our February 2000 follow-on offering. We incurred
interest expense in the three month period ending June 30, 2000 of $8,710,
compared to $290,936 in the same period of 1999. The interest expense for both
periods relates to the $5 million original face value note issued by a
subsidiary of ours in January 1998, and is lower during the period ending June
30, 2000 due to retirement of the note on April 3, 2000.
PREFERRED STOCK DIVIDENDS. For the three month period ended June 30, 2000,
we accrued $0 for preferred stock dividends and accretion. For the three month
period ended June 30, 1999, we had a subsidiary preferred stock dividend of
$16,655. We redeemed all of our outstanding preferred stock in the second
quarter of 1999.
NET LOSS BEFORE EXTRAORDINARY ITEM. For the three months ended June 30,
2000, our net loss applicable to common stockholders before extraordinary item
was $6,663,455 or $0.15 per basic and diluted share, an increase of 19% compared
to the net loss of $5,601,821 or $0.14 per basic and diluted share for the three
months ended June 30, 1999. The increase was primarily the result of higher
interest income in the more recent quarter.
NET LOSS. For the three months ended June 30, 2000, our net loss
applicable to common stockholders after extraordinary loss was $8,074,594 or
$0.18 per basic and diluted share. The extraordinary loss was the result of
early retirement of long term debt on April 3, 2000. The extraordinary loss
includes a prepayment premium of $369,632, and the unamortized original issue
discount and deferred issue costs of $819,294 and $222,213, respectively, for a
total loss of $1,411,139 or $0.03 per share.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we (including our operating subsidiaries) have not
generated revenues sufficient to fund our operations, and have incurred
operating losses. Through June 30, 2000, we had an accumulated deficit of
approximately $111 million. Our cash position on June 30, 2000 was $135,863,898,
compared to $8,816,368 on December 31, 1999.
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
During the six and three months ended June 30, 2000, we used $15,239,848
and 10,095,442 respectively in cash for operations, compared with $4,085,889 and
$2,065,947 for the six and three months ended June 30, 1999. The increase in net
cash used by operating activities in both the six and three month periods ended
June 30, 2000, as compared to the same periods the previous year, was
principally due to increased selling, general and administrative as well as a
decrease in accounts payable and an increase in other assets.
NET CASH USED IN INVESTING ACTIVITIES AND CAPITAL EXPENDITURES
With regard to investing activities, in the six and three months ended
June 30, 2000, we used cash of $6,273,660 and $5,448,292, respectively. In the
six and three months ended June 30, 1999, we used cash of $2,499,477 and
$1,811,462, respectively. The increase in cash used in investing activities is
primarily due to $3,750,000 in strategic equity investments.
NET CASH PROVIDED BY FINANCING ACTIVITIES
We met our cash needs in the six month period ended June 30, 2000
primarily from the net-proceeds of a public, follow-on offering completed on
February 3, 2000. Through a group of underwriters we sold total of 4.6 million
common shares, resulting in net proceeds of $129.7 million. In addition, on
March 27, 2000, Liberty Digital, Inc. invested an additional $20 million in us
by exercising a warrant granted in March 1999. With this warrant exercise,
Liberty Digital increased its investment in us to 16%.
We formed Digital ADCO in November 1999, of which we own 51% and Motorola
Broadband owns 49%. Digital ADCO develops applications for the delivery of
addressable advertising. Under the terms of our agreement with Motorola
Broadband, we licensed five of our patents to Digital ADCO and Motorola
Broadband has licensed six of its patents and made a $5.0 million capital
commitment to Digital ADCO. Any capital contribution after Motorola Broadband
has fulfilled its initial $5.0 million commitment will be made pro rata based on
ownership interests. In November 1999, Motorola contributed to Digital ADCO the
first $2.0 million of the $5.0 million total and another $1.5 million in June
2000, with the final payment of $1.5 million to be made in the fourth quarter of
2000.
IMPACT OF INFLATION
Inflation has not had any significant effect on the Company's operating costs.
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PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company is a party.
ITEM 2 CHANGES IN SECURITIES
At the Annual Meeting of Shareholders, mentioned in ITEM 4, it was put to vote
and approved to amend the Restated Certificate of Incorporation to increase the
authorized number of shares of common stock from 65,000,000 to 200,000,000.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On May 19, 2000 the Company held an Annual Meeting of Shareholders for which it
solicited votes by proxy. The following is a brief description of the matters
voted upon at the meeting and a statement of the number of votes cast for and
against, and the number of abstentions as to each matter.
1. Election of directors For Withheld
Bruce Crowley 39,675,468 211,851
Melvyn N. Klein 39,675,468 211,851
2. Amendment to the Restated Certificate of Incorporation to increase the
Authorized number of shares of common stock from 65,000,000 to
200,000,000.
For Against Abstain
37,549,838 2,297,598 39,883
3. To approve the adoption of the Company's 2000 Stock Incentive Plan.
For Against Abstain
15,763,184 3,432,422 100,943
4. To ratify the appointment of Deloitte & Touche, LLP as independent
auditors of the Company.
For Against Abstain
39,648,705 214,494 24,120
ITEM 5 OTHER INFORMATION
None.
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Loss per Share
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTV, Inc.
Registrant
Date: August 11, 2000 /s/ William C. Samuels
------------------------------
William C. Samuels
Chairman, Chief Executive Officer
and Director
Date: August 11, 2000 /s/ Christopher C. Cline
------------------------------
Christopher C. Cline
Senior Vice President (principal financial
and accounting officer)
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