<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 2000
REGISTRATION STATEMENT NO. 333-92129
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ACTV, INC.
(Exact Name of Registrant as Specified in its Charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7812 94-2907258
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer I.D. No.)
incorporation or organization) Classification Code Number)
</TABLE>
------------------------------
ACTV, INC.
1270 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(212) 217-1600
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
DAY L. PATTERSON, ESQ.
GENERAL COUNSEL
ACTV, INC.
1270 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(212) 217-1600
(Name, Address, Including Zip Code and Telephone Number, Including Area Code, of
Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JAY M. KAPLOWITZ, ESQ. KRIS F. HEINZELMAN, ESQ.
GERSTEN, SAVAGE & KAPLOWITZ, LLP CRAVATH, SWAINE & MOORE
101 EAST 52ND STREET, 9TH FLOOR WORLDWIDE PLAZA
NEW YORK, NEW YORK 10022 825 EIGHTH AVENUE
(212) 752-9700 NEW YORK, NEW YORK 10019
(212) 474-1000
</TABLE>
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM OFFERING MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.10 par value per share....... 4,600,000 $34.375 $158,125,000 $41,745*
</TABLE>
(1) Includes 600,000 shares of Common Stock which may be sold pursuant to the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee under
Rule 457(c) of the Securities Act. The proposed maximum offering price per
share is based upon the average of the high and low prices of the
Registrant's Common Stock reported in the consolidated reporting system on
January 13, 2000.
* A registration fee of $30,360 was previously paid by the registrant with
respect to the Common Stock.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 18, 2000
4,000,000 Shares
[LOGO]
ACTV, Inc.
Common Stock
---------
Our common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "IATV." On January 14, 2000, the last reported sale price of
our common stock on The Nasdaq National Market was $35.44.
The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions ACTV
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Bear, Stearns & Co. Inc.
Lehman Brothers
Salomon Smith Barney
The date of this prospectus is , .
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
PROSPECTUS SUMMARY..................... 1
RISK FACTORS........................... 6
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS........... 15
USE OF PROCEEDS........................ 16
DIVIDEND POLICY........................ 16
PRICE RANGE OF COMMON STOCK............ 17
CAPITALIZATION......................... 18
DILUTION............................... 19
SELECTED HISTORICAL FINANCIAL AND
OTHER DATA........................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 21
BUSINESS............................... 27
MANAGEMENT............................. 40
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
PRINCIPAL STOCKHOLDERS................. 43
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................... 44
DESCRIPTION OF CAPITAL STOCK........... 45
CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS....................... 48
SHARES ELIGIBLE FOR FUTURE SALE........ 51
UNDERWRITING........................... 53
NOTICE TO CANADIAN RESIDENTS........... 55
LEGAL MATTERS.......................... 56
EXPERTS................................ 56
WHERE YOU CAN FIND MORE INFORMATION.... 56
INCORPORATION BY REFERENCE............. 56
INDEX TO FINANCIAL STATEMENTS.......... F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
ACTV-Registered Trademark-, HyperTV-Registered Trademark- and
eSchool-Registered Trademark- are registered trademarks of ACTV, Inc.
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SOME OF THE INFORMATION IN THIS PROSPECTUS. IT MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
RISK FACTORS, THE FINANCIAL STATEMENTS AND THE DOCUMENTS INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. UNLESS WE TELL YOU OTHERWISE, THE INFORMATION IN
THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR
OVER-ALLOTMENT OPTION. WHEN WE REFER TO LIBERTY MEDIA CORPORATION, WE ARE
REFERRING TO LIBERTY MEDIA CORPORATION AND CERTAIN OF ITS CONSOLIDATED
SUBSIDIARIES, INCLUDING LIBERTY DIGITAL, INC.
ACTV
We are a digital media company that has developed proprietary technologies,
called Individualized Television and HyperTV-Registered Trademark-.
Individualized Television enables television programmers and advertisers to
create individualized programming for digital television. HyperTV enhances
standard television content with information and interactivity delivered through
the Internet. We believe that Individualized Television is the only technology
that enables viewers to instantly and seamlessly customize their viewing
experiences. HyperTV is one of the first technologies to provide synchronized
delivery of television programming and Internet content.
We anticipate that the expansion of digital television transmission systems,
together with the new applications they enable, will revolutionize television as
we know it by turning passive viewing into an interactive experience. Digital
technology will allow telecasters, advertisers and digital media companies to
bring interactivity and Internet content to a mass audience. We believe that our
proprietary technologies uniquely position us to capitalize on this anticipated
digital television revolution.
Our goal is to establish Individualized Television and HyperTV as industry
standards. To this end, we have built key strategic relationships with industry
leaders, including:
- Liberty Media Corporation, our largest shareholder and a co-venturer;
- General Instrument Corporation, a shareholder and a co-investor;
- iN DEMAND LLC (formerly known as Viewer's Choice, LLC), the nation's
leading pay-per-view network;
- FOX Sports Net, the first national supplier of regional sports
programming; and
- The Box Music Network, part of Viacom's MTV Networks.
INDIVIDUALIZED TELEVISION
Individualized Television is a patented process for creating interactive and
instantly customized television content and advertising in response to viewer
remote control entries or to stored demographic information. Individualized
Television remembers a viewer's inputs throughout a program and can later
deliver tailored content to the viewer based on those inputs. We create
individualized programming by simultaneously sending the viewer multiple
television signals, related in time and content, and switching among those
signals without a visually perceptible delay. With Individualized Television,
the viewer experiences the video, audio and graphics of a single fluid
programming stream, while the programming on the other signals remains
transparent. We expect Individualized Television to generate revenues from
subscriber fees, advertising sales and sales of software and services related to
targeted advertising.
We believe that Individualized Television is a core breakthrough for
television programming and advertising. For example
- the viewer of a national or international pay-per-view sporting event or
of a regional sports telecast can select from features such as a different
view of the action, highlight packages, statistics or instant replays;
1
<PAGE>
- a car commercial can ask viewers to identify the models that most interest
them and, based upon their answers, provide individualized information
about the identified models;
- neighbors watching the same television program can see entirely different
advertisements based upon demographic information stored in their
respective set-top boxes; and
- a child viewing a program can engage a favorite television character in
what seems to be a
one-on-one dialogue.
We are initially targeting Individualized Television, which is
software-based, for distribution through digital cable systems. To receive
Individualized Television, all the cable subscriber needs is a digital set-top
box with our software download. We have agreements with leading manufacturers of
digital set-top terminals--General Instrument, Scientific-Atlanta and
Pioneer--to achieve compatibility of our software with their equipment.
We intend to develop the market for Individualized Television on a national
basis through our joint venture with Liberty Media and our co-investment with
General Instrument and on a regional basis through our licensing of FOX Sports
Net programming. Our joint venture with Liberty Media, called LMC IATV Events,
LLC, will license and produce individualized national or international marquee
pay-per-view events, including sports, musical, theatrical and news events. iN
DEMAND LLC, a co-venturer with LMC IATV Events, will provide nationwide
marketing and distribution for LMC IATV Event's programming.
We have created a company with General Instrument, called Digital ADCO,
Inc., to develop and introduce a comprehensive end-to-end system to allow
digital cable, satellite and broadcast systems to offer targeted advertising. By
allowing advertisers to send commercials that reach target audiences, we believe
that Digital ADCO will improve dramatically the efficiency of television
advertising.
We have entered into a master license agreement that sets forth the
framework for negotiating with each of FOX Sports Net's 19 owned or affiliated
regional sports networks to provide content for our planned individualized
sports programming service. To date, we have entered into licensing agreements
with five regional sports networks and expect to launch our first regional
service in the area served by FOX Sports Net Southwest, which distributes
programming to more than six million subscribers in Texas and four bordering
states.
HYPERTV
HyperTV is a patented process that enhances a television program or
advertisement with related and synchronized content delivered through the
Internet. HyperTV works by embedding a stream of Web page addresses into the
video or audio signal or by transmitting the addresses directly over the
Internet to the user's computer. The Web content is synchronized to what is
being shown on a particular television channel. HyperTV generates revenues from
software licensing and program hosting fees, on-line advertising sales,
e-commerce applications, event sponsorship, data management and content creation
fees.
We believe that HyperTV has potential applications for virtually all forms
of television programming and advertising. For instance:
- a music video network can send its viewers song lyrics, band member
biographies or trivia through the Internet in sync with its television
content;
- a network, televising a movie, can sell banner advertisements on the
Internet and generate revenues from the sale of movie-related merchandise;
and
- a HyperTV-enhanced automobile advertisement can deliver detailed
information from the manufacturer's website or link to local dealer
websites where viewers can schedule test drives.
2
<PAGE>
Initially, HyperTV will serve the growing number of TV viewers who
simultaneously use the Internet to complement and enhance their TV viewing
experiences. Over half of all PCs in US households, or 22.6 million, are in the
same room as a television and of those, nearly all, or 21.8 million, use the
television and PC simultaneously at least some of the time, according to Media
Metrix. As digital set-top box technology becomes more sophisticated and
powerful and as more cable operators offer high-speed Internet access, we
anticipate that TV viewers will be able to experience both video and Internet
content delivered simultaneously to their television. We believe that our
proprietary HyperTV technology uniquely positions us to capitalize on this
anticipated convergence of television and Internet content.
Like Individualized Television, HyperTV is a software-based system. We offer
free HyperTV software through downloads from our HYPERTV.COM website. We market
HyperTV to television networks and other television content and advertising
producers as a turnkey system consisting of user software, Web content creation
software and creative services, database management and analysis and program
hosting. We have already built our first program hosting facility capable of
delivering HyperTV-enhanced content to mass audiences and will scale up our
capacity as demand increases.
We have recently entered into an agreement with The Box Music Network, which
reaches over 40 million households worldwide, to create programming that will
integrate HyperTV with The Box's 24-hour-a-day interactive music television
programming. We have also entered into HyperTV programming agreements with
SHOWTIME Online Inc. for SHOWTIME Network's STARGATE telecasts; New Line
Television, Inc. for pay-per-view exhibitions of AUSTIN POWERS, THE SPY WHO
SHAGGED ME; and Turner Entertainment Group, Inc. for the CYBERBOND: 15 DAYS OF
007 movie festival on its TBS Superstation and for a filmed concert tribute to
Bob Marley on its TNT network.
OUR BUSINESS STRATEGY
INDIVIDUALIZED TELEVISION
To make Individualized Television a leading application for digital
television, we expect to:
- Focus initially on marquee event programming and regional sports;
- Develop targeted advertising services through Digital ADCO;
- Gain broad distribution through cable, DBS and eventually broadcast
television; and
- Later expand into other types of television programming.
HYPERTV
To become a leading provider of software, hosting and creative services for
enhancing TV programming through the Internet, we expect to:
- Develop early awareness and adoption of HyperTV products and services;
- Offer television content providers a turnkey solution for
television/Internet convergence;
- Form relationships with, or acquire, content and software providers to
create HyperTV-enhanced telecasts;
- Expand our HYPERTV.COM website to serve as a HyperTV portal and
programming guide; and
- Establish a data warehouse for the benefit of programming partners and
advertisers.
Our long-term objective is to be a leader in the market for the integration
of television and Internet content delivered to viewers through a single device
by providing powerful programming tools for television networks, advertisers,
cable networks and DBS through the integration of Individualized Television with
HyperTV products and services.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 4,000,000 shares
Common stock to be outstanding after the
offering................................... 46,373,496 shares
Use of proceeds.............................. We intend to use the net proceeds from our
sale of shares in the offering:
- to repay approximately $6 million of
outstanding indebtedness; and
- for general corporate purposes, including
working capital requirements, potential
minority investments in strategic alliances
and potential acquisitions.
Nasdaq National Market symbol................ IATV
</TABLE>
The number of shares of common stock to be outstanding after the offering is
as of January 14, 2000. That number does not include (a) 8,125,000 shares of
common stock issuable upon the exercise of warrants outstanding; (b) 9,089,254
shares of common stock issuable upon the exercise of stock options outstanding
and (c) 600,000 shares of common stock that we will offer if the underwriters
exercise their option to purchase additional shares of common stock to cover
over-allotments.
OUR ADDRESS
Our principal executive offices are located at 1270 Avenue of the Americas,
New York, New York 10020, and our telephone number is (212) 217-1600. Our
corporate website is located at WWW.ACTV.COM. Information contained at our
website is not a part of this prospectus.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents our summary consolidated financial and other
data and has been derived from our audited financial statements for the
three-year period ended December 31, 1998 and from our unaudited interim
financial statements for the nine months ended September 30, 1998 and 1999, all
of which are included in another section of this prospectus. The Consolidated
Balance Sheet Data at September 30, 1999 is also presented as adjusted to
reflect the sale of shares of common stock offered hereby and the application of
the net proceeds therefrom. The information below should be read in conjunction
with "Selected Historical Financial and Other Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the notes to our consolidated financial
statements, each of which is included in another section of this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues........................... $ 1,476 $ 1,651 $ 1,406 $ 1,059 $ 1,329
Total costs and expenses........... 10,240 9,120 15,618 9,936 16,763
---------- ---------- ---------- ---------- ----------
Loss from operations............... (8,764) (7,469) (14,212) (8,877) (15,434)
Interest (expense) income--net..... 159 116 (748) (613) (478)
---------- ---------- ---------- ---------- ----------
Minority interest--subsidiary
preferred stock dividend and
accretion........................ 1,695 3,006 5,429 379 --
---------- ---------- ---------- ---------- ----------
Net (loss)......................... (10,300) (10,359) (20,389) (9,869) (15,912)
Preferred stock dividend and
accretion........................ -- -- 479 -- 495
---------- ---------- ---------- ---------- ----------
Net (loss) applicable to common
stockholders..................... $ (10,300) $ (10,359) $ (20,868) $ (9,869) $ (16,407)
========== ========== ========== ========== ==========
Basic and diluted (loss) per common
share............................ $ (0.88) $ (0.80) $ (0.98) $ (0.51) $ (0.47)
========== ========== ========== ========== ==========
Weighted average number of common
shares outstanding............... 11,739,768 12,883,848 21,399,041 19,309,832 35,154,248
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
-----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $12,865 $145,777
Working capital............................................. 15,041 147,953
Total assets................................................ 25,125 158,037
Long-term debt (including current portion).................. 4,741 --
Total stockholders' equity.................................. 19,342 152,254
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING SHARES
OF OUR COMMON STOCK IN THIS OFFERING. THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW ARE NOT THE ONLY RISKS WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT
CURRENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY IMPAIR OUR
BUSINESS OPERATIONS. IF ANY OF THE ADVERSE EVENTS DESCRIBED IN THIS RISK FACTORS
SECTION ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT.
WE HAVE HAD OPERATING LOSSES AND LIMITED REVENUES TO DATE AND DO NOT EXPECT TO
BE PROFITABLE IN THE FORESEEABLE FUTURE.
We have been operating at a loss each year since our inception, and we
expect to continue to incur substantial losses for at least the foreseeable
future. Net (loss) applicable to common stockholders for the years ended
December 31, 1996, 1997 and 1998 was approximately $10.3 million, $10.4 million
and $20.9 million, respectively. Through September 30, 1999, we had an
accumulated deficit of approximately $88.3 million. We also have had limited
revenues. Revenues for the years ended December 31, 1996, 1997 and 1998 were
$1.5 million, $1.7 million and $1.4 million, respectively. Further, we may not
be able to generate significant revenues in the future. In addition, we expect
to incur substantial operating expenses in order to fund the expansion of our
Individualized Television and HyperTV businesses. As a result, we expect to
continue to experience substantial negative cash flow for at least the
foreseeable future and cannot predict when, or even if, we might become
profitable.
APPLICATIONS OF INDIVIDUALIZED TELEVISION HAVE NOT BEEN COMMERCIALLY INTRODUCED
AND MAY NOT BE SUCCESSFUL.
We have not generated any revenues from sales of our digital Individualized
Television applications. Our Individualized Television applications are new, the
demand for and market acceptance of which are uncertain. While we plan to
commercialize our digital individualized programming and advertising through our
affiliations with LMC IATV Events, iN DEMAND, General Instrument and FOX Sports
Net and have conducted test marketing, we have not yet introduced Individualized
Television on a commercial basis. Individualized Television may not appeal to a
sufficient number of consumers for it to become commercially viable. Consumers
also may be concerned about security or privacy issues relating to the
electronic transmission of their personal information. We cannot assure you that
applications of Individualized Television will generate sufficient revenues to
achieve profitability. As a result of these uncertainties, applications of
Individualized Television may not be successful.
COMMERCIAL ACCEPTANCE OF HYPERTV IS UNCERTAIN, AND RECENT SALES IN THE
ENTERTAINMENT MARKET MAY NOT BE AN INDICATOR OF FUTURE SALES.
HyperTV is new, and the demand for, and the market acceptance of it, are
uncertain. HyperTV may not appeal to a sufficient number of consumers for it to
become commercially viable. We have had a limited number of sales of HyperTV in
the entertainment and on-line education markets, and we cannot assure you that
our marketing or development efforts will significantly increase our sales in
these markets. As a result of these uncertainties, HyperTV may not be
successful.
DELIVERY OF OUR DIGITAL PROGRAMMING IS DEPENDENT UPON THE TIMELY UPGRADE OF
ANALOG CABLE DISTRIBUTION SYSTEMS AND DEPLOYMENT OF DIGITAL SET-TOP BOXES.
The success of Individualized Television depends upon the evolving digital
television market. The speed with which cable operators both upgrade their
current programming distribution systems for digital distribution and deploy
digital set-top boxes directly affects the number of potential subscribers
6
<PAGE>
to our Individualized Television services. To have access to Individualized
Television, subscribers must have digital set-top boxes that have been activated
with our software. We cannot assure you that there will be a sufficient number
of potential subscribers with digital set-top boxes in the near future to
justify the deployment of our individualized programming.
WE DEPEND ON THIRD PARTY DISTRIBUTORS TO OFFER AND MARKET APPLICATIONS OF
INDIVIDUALIZED TELEVISION TO THEIR SUBSCRIBERS.
Because we will use third party cable or satellite operators' systems to
offer applications of Individualized Television, our growth and future success
depends substantially upon our ability to convince these distributors to offer
their subscribers Individualized Television. If operators determine that
Individualized Television is not viable as a business proposition or if they
determine that it does not meet their business or operational expectations or
strategies, they will not offer applications of Individualized Television to
their subscribers. Factors that could affect such a determination include:
- the availability of alternative programming which offers greater financial
benefits to the operators;
- government regulations which require the operators to carry certain
programming; and
- constraints on available channel capacity.
Most distributors of television programming have channel capacity
limitations. Traditional analog cable systems transmit significantly fewer
channels of programming than digital cable systems. Digital compression
technology can convert the bandwidth required for one analog channel into as
many as twelve digital channels of programming. Our individualized programming
applications currently require the bandwidth necessary for one analog channel
through which we will transmit four digital signals. We cannot assure you that
distributors of television programming will devote sufficient bandwidth to our
individualized programming in the future, even if they do increase channel
capacity. In addition, we have limited control over the manner in which cable
operators market and price our products to their subscribers, which may have a
significant impact on the overall consumer acceptance of Individualized
Television.
WE DEPEND ON TELEVISION PROGRAMMERS AND ADVERTISERS ENHANCING THEIR PROGRAMMING
AND ADVERTISEMENTS WITH OUR TECHNOLOGY.
No television programmer or advertiser is obligated to use our
Individualized Television or HyperTV technology in its programs or
advertisements. Our future growth and long-term success depend on our ability to
convince television programmers and advertisers to enhance their programs and
advertisements with our Individualized Television or HyperTV technology. If our
technology does not appeal to television programmers, advertisers or consumers,
or if they find our competitors' technology more appealing, our business may not
succeed. We have entered into a limited number of agreements with television
programmers to incorporate our technologies. Ultimately, we depend on such
programmers to maintain satisfactory relationships and to negotiate favorable
licensing agreements with the owners of the programming rights, which are
typically the sports teams, leagues, conferences or networks responsible for the
licensed event.
WE ARE SUBJECT TO INTENSE COMPETITION FROM COMPANIES OFFERING PRODUCTS AND
SERVICES SIMILAR TO OURS.
The markets for digital television applications and television/Internet
convergence programming are extremely competitive, and we expect competition to
intensify in the future. In addition, these markets are new and quickly evolving
and are characterized by untested consumer demand and a lack of industry
standards. These markets are therefore subject to significant changes in the
products and services offered by existing market participants and the emergence
of new market participants. As a
7
<PAGE>
result, it is difficult to identify all of the companies and technologies that
compete with us or may compete with us in the future in one or more of our lines
of business. In addition, any one of these competitors or future competitors may
have significantly greater financial, technical and marketing resources as well
as better brand recognition than we do.
A number of companies offer products and services that contain comparable
features to certain discrete elements of Individualized Television. For example,
certain competitors offer products that allow viewers to switch among different
camera angles or to replay portions of a program. HyperTV's competitors in the
television/Internet convergence programming and services markets include
companies that offer, or may soon offer, products and services that are
competitive with some or all of HyperTV's current or proposed products and
services. We expect to face future competition from computer and software
companies, one or more of which may extend the scope of their products to
include functionality similar to that of HyperTV. In addition, we also face
competition from traditional broadcast and cable television networks.
COMPETITION WITH HIGH DEFINITION TELEVISION AND MULTICASTING MAY LIMIT THE
AVAILABILITY OF INDIVIDUALIZED TELEVISION.
High definition television and multicasting are two major digital television
applications that will directly compete with us for use of the new digital
broadcast distribution capacity. High definition television provides better
color quality and sharper pictures than traditional television. Multicasting is
the transmission of multiple television programs through what was a single
analog television channel and is only available through digital transmissions.
It is too early to determine to what extent third party distributors who can
control access to their distribution system will prefer to distribute high
definition television or multicast programs to the exclusion of our services.
Also, it is too early to determine consumers' relative demand for the improved
color and sharper pictures offered by high definition television, greater
programming quantity offered by multicasting or the individualization of content
offered by Individualized Television. In addition, consumers may resist the
extra cost of subscribing to services that offer our individualized programming.
As a result, there is a risk that other digital television applications will be
employed to the detriment of Individualized Television.
WE DEPEND ON EQUIPMENT MANUFACTURERS TO INCORPORATE OUR TECHNOLOGY.
The success of our products depends upon our relationships with digital
set-top box manufacturers, such as General Instrument, Scientific-Atlanta and
Pioneer, for distribution of digital set-top boxes compatible with our software.
In addition, General Instrument and Scientific-Atlanta, the two largest
suppliers of set-top boxes, also have arrangements with other providers of
similar products or products that may compete with our products. A supplier may
decide in the future to discontinue production of digital set-top boxes
compatible with our technology or to devote its attention to developing similar
technology with our competitors.
WE MAY BE UNABLE TO RESPOND TO RAPID CHANGES IN TECHNOLOGY.
The markets for digital television applications and television/Internet
convergence programming and services are characterized by rapid technological
developments, frequent new product introductions and evolving industry
standards. The emerging nature of these products and services and their rapid
evolution require us to continually improve the performance, features and
reliability of our present and proposed products and services, particularly in
response to our competitors' product offerings. We cannot assure you that we
will have the resources or the ability to quickly, cost effectively or
adequately respond to these developments. There may be a limited time-frame for
consumer adoption of Individualized Television and HyperTV applications, and we
cannot assure you that we will be successful in achieving widespread acceptance
of our products and services before competitors offer products and services with
features and performance similar to ours. In addition, the widespread
8
<PAGE>
adoption of new Internet or television technologies or standards could require
substantial expenditures by us to modify or adapt our services and could
fundamentally affect the character and viability of our business model.
OUR SOFTWARE PRODUCTS AND SERVICES MAY CONTAIN UNKNOWN DEFECTS.
Individualized Television, HyperTV or other applications offered by us may
contain design flaws or other defects. Design flaws and other defects--which may
include defects that make our products and services incompatible with the
technology employed in digital distribution systems, set-top boxes or the
Internet--may lead to delays in deployment of our products, additional costs,
delayed or lost revenues, loss of market share, failure to achieve market
acceptance, diversion of development resources and harm to our reputation.
WE MAY EXPERIENCE CAPACITY CONSTRAINTS AND SYSTEM FAILURES AS WE DEPLOY OUR
HYPERTV POINTS OF PRESENCE.
Our first HyperTV point of presence, or POP, is at an early stage of
development. We cannot assure you that we will be able to handle anticipated
traffic at our initial POP or increase the scale of our POP system to handle
significant commercial traffic and provide high quality performance. Any of
these problems in our systems could reduce consumer demand for our products and
have a material adverse effect on our business, financial condition and results
of operations.
WE MAY HAVE DIFFICULTY SUCCESSFULLY MANAGING OUR GROWTH.
Our development activities and operations are expanding rapidly, and
significant further expansion will be necessary to meet our growing demands and
to take advantage of market opportunities. Expansion has placed and will
continue to place substantial strain on our managerial, operational and
financial resources and systems. To manage our growth, we must successfully
implement, improve and effectively utilize our operational and financial systems
while aggressively expanding our workforce. Some of our key personnel have been
with us for less than one year, and we will have to successfully hire and
integrate additional key personnel in the future. We must also maintain and
strengthen the breadth and depth of current strategic relationships while
rapidly developing new relationships. Our existing or anticipated operational
and financial systems may not be sufficient to support our growth, and our
management may not be able to effectively identify, manage and develop existing
and emerging market opportunities. If potential growth is not adequately
managed, our business will suffer.
WE DEPEND UPON OUR KEY MANAGEMENT AND TECHNICAL PERSONNEL, AND THEIR LOSS COULD
PUT US AT A COMPETITIVE DISADVANTAGE.
We largely depend upon the efforts of William C. Samuels, our Chairman of
the Board and Chief Executive Officer, David Reese, our President, Chief
Operating Officer and Director and the President of ACTV Entertainment, Inc. and
Bruce Crowley, our Executive Vice President and Director and the President of
HyperTV Networks, Inc. We have entered into employment agreements with each of
Messrs. Samuels, Reese and Crowley, but these agreements do not ensure their
continued employment with our company. We do not maintain "key employee"
insurance on the lives of Messrs. Samuels, Reese or Crowley.
Our success also depends on our ability to attract, train and retain
qualified personnel, specifically those with product development skills. In
particular, we must hire additional skilled software engineers to further our
research and development efforts. There is currently a shortage of qualified
senior technical personnel in the software development field, and this shortage
will likely continue. Consequently, competition for such personnel is intense.
We cannot assure you that we will attract a sufficient number of qualified
employees in the future to sustain and grow our business, or that we will
9
<PAGE>
successfully motivate and retain the employees we attract. If we cannot attract,
motivate and retain qualified professionals, our business may suffer.
GOVERNMENT LEGISLATION AND REGULATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
The media, telecommunications, broadcast and cable television industries are
subject to extensive regulation by federal, state and local governments and
governmental agencies. Federal, state and local governments and governmental
agencies continue to adopt legislation and regulations affecting these
industries which may affect our business, market participants with which we have
relationships or the acceptance of our products in general. Existing regulations
were substantially affected by the passage of the Telecommunications Act of
1996. For example, competition for channel space has increased as cable
operators have utilized available channel space to comply with "must-carry"
provisions, mandated retransmission consent agreements and "leased access"
provisions. The outcome of pending federal and state administrative proceedings
may also affect the nature and extent of competition that we will encounter.
Increased regulation of the Internet might slow the growth of Internet use,
which could decrease demand for our services, increase our cost of doing
business or otherwise have a material adverse effect on our business, financial
condition and results of operations. Congress has recently passed legislation
regulating certain aspects of the Internet, including on-line content,
children's protection, copyright infringement, user privacy, taxation, access
charges, liability for third-party activities and jurisdiction. In addition,
federal, state and local governmental organizations as well as foreign
governments are considering other legislative and regulatory proposals that
would regulate the Internet. Areas of potential regulation include libel,
pricing, quality of goods and services, intellectual property ownership and
personal privacy.
We collect and store personal information from users of our Individualized
Television and HyperTV applications and plan to use such information to develop
our businesses and generate revenues, particularly with respect to targeted
advertising. Storage and use of such information is subject to state and federal
regulation. Storage and use of such information may also subject us to privacy
claims relating to our use and dissemination of personal information. We do not
know how courts will interpret laws governing the Internet or the extent to
which they will apply existing laws regulating issues such as property
ownership, libel and personal privacy to the Internet. Therefore, we are not
certain how new laws governing the Internet or other existing laws will affect
our business.
WE FACE CERTAIN SECURITY AND PRIVACY RISKS.
A significant concern associated with communications and commerce through
our HyperTV applications is the need for secure transmission of confidential
information, such as credit card numbers, over public networks. A party who
gains unauthorized access to our system could misappropriate proprietary
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against these security
breaches or to alleviate problems caused by these breaches.
In addition, the information gathered during the Individualized Television
experience and stored in the digital set-top boxes may be subject to personal
privacy rights. A breach of these rights by ourselves, cable operators or other
third parties could expose us to liability. We have no direct control over the
confidentiality or security measures of cable operators or other third parties.
Any compromise of security or misuse of private information could materially
adversely affect our reputation, business, operating results and financial
condition and expose us to a risk of loss or litigation and potential liability.
Our insurance may not cover claims of this type or may not be adequate to
indemnify us for all liability to which we may be exposed. Moreover, concerns
over the security of e-commerce
10
<PAGE>
transactions and the potential misuse of personal information may inhibit the
growth of HyperTV and Individualized Television.
WE MAY HAVE LIABILITY FOR INFORMATION RETRIEVED AND REPLICATED ON THE INTERNET.
Because HyperTV users can download and redistribute materials that we may
not create ourselves and this material could be replicated by us or other
content providers, negligence, copyright or trademark infringement or other
legal claims could be made against us. Copyright and trademark laws are evolving
both domestically and internationally, and we are uncertain as to their
applicability to the HyperTV service and our possible role as both a technology
and content provider. The imposition of liability for information carried by us
would have a material adverse effect on our business, operating results and
financial condition.
OUR EFFORTS TO PROTECT OUR PATENTS AND PROPRIETARY INFORMATION FROM COMPETITORS
MAY NOT BE ADEQUATE.
We have obtained 18 patents covering certain aspects of Individualized
Television and HyperTV, including a patent for the Wolzien Process (which we
describe later in this prospectus under "Business--Patents and Other
Intellectual Property") and have patents pending with respect to other
developments or enhancements. However:
- the patents we own or have rights to, or that may be granted or obtained
in the future, may not be enforceable, may not provide us with meaningful
protection from competition or may be revoked entirely;
- patents applied for may not be granted;
- products developed by us may infringe upon patents or rights of others;
and
- we may not possess the financial resources necessary to enforce patent
rights that we hold.
It is very difficult for us to police the unauthorized use of our products
and intellectual property rights. It may be possible for a third party to copy
or otherwise obtain and use our products or technology without our authorization
or to develop similar technology independently. Furthermore, our confidentiality
and invention rights agreements with our full-time employees, consultants and
advisors may not provide effective protection of our proprietary information in
the event of unauthorized use or disclosure of such information. In addition,
laws in many countries other than the United States do not afford us the same
protection of our intellectual property as do our United States patents.
Currently, there are companies offering competitive products that we believe may
be in violation of our patents and expect that companies in the future will
infringe on our intellectual property rights. We intend to aggressively defend
our intellectual property rights, which may involve both litigation and
extensive negotiations with companies we believe are infringing on such rights.
It is possible that we will commence legal action against one or more infringers
in the future to protect our intellectual property rights. If we commence
litigation to protect these rights, we expect the litigation will be extensive,
time-consuming and costly, and we cannot assure you that we will be successful.
Any licensing negotiations we pursue will also be extensive and costly because
the issues are very complex and subjective. We cannot assure you that these
negotiations will result in agreements that will be beneficial to our business
or provide us adequate protection of our rights.
OUR BUSINESS MAY BE RESTRICTED OR MAY BE SUBJECT TO LITIGATION IN THE FUTURE AS
A RESULT OF THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
We may be unable to implement our current business plan or expand the
commercial uses of our products if other companies have already acquired or in
the future acquire patents or other intellectual property on which our
technology infringes. The patent application process is not public, and we
cannot assure you that another company has not applied for and will not obtain a
patent that blocks any
11
<PAGE>
patents we have pending. Furthermore, because many companies might choose not to
publicize their patents until they have a viable commercial product or until
they believe another company is infringing on their patents, we cannot assure
you that another company has not already obtained patents that we are violating.
As a result, as we expand our business and begin the commercial deployment of
our products, we may receive notices of claims of infringement of other parties'
property rights or claims for indemnification resulting from infringement
claims. Irrespective of the validity or the successful assertion of such claims,
we would incur significant costs and a diversion of resources with respect to
the defense of any claims brought. The assertion of such infringement claims
could result in injunctions preventing us from distributing certain products,
which could materially adversely affect our business. If any claims or actions
are asserted against us, we may seek to obtain a license under a third party's
intellectual property rights. However, a license under such circumstances may
not be available on reasonable terms, if at all.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE.
Our quarterly revenues and operating results have varied in the past and
will likely continue to vary from quarter to quarter as a result of a number of
factors including:
- the rate of deployment of our Individualized Television service in any
given quarter by cable operators;
- the number of television programmers and advertisers using our HyperTV
products;
- the degree of positive or negative consumer response and publicity to our
initial product launches or any high profile offerings in a quarter;
- the timing of significant expenses we must incur in order to expand our
businesses; and
- our ability to maintain our current relationships with Liberty Media,
Viewer's Choice, General Instrument, FOX Sports Net and set-top box
manufacturers and to develop other strategic relationships.
Because we currently have relationships with only a few other companies that
we rely on for manufacturing, programming and distribution, and because we plan
to initially launch our products in narrow markets, any one of these factors
could have a significant effect on our revenues and earnings in a quarter. Any
decline in revenues or earnings or a greater than expected loss for any quarter
could materially adversely affect the price of our common stock, even if not
reflective of any long-term problems with our business.
EXTERNAL FACTORS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
The market price of our common stock has been and may continue to be
volatile and could fluctuate significantly as a result of:
- general economic and stock market conditions;
- changes in financial estimates by securities analysts;
- earnings and other announcements by, and changes in market evaluations of,
providers of digital television products and convergent media;
- changes in business or regulatory conditions affecting us;
- announcements by our competitors of technological innovations or new
products or services;
- sales, or the anticipation of sales, of substantial amounts of our common
stock in the public market after completion of this offering; and
- trading volume of our common stock.
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<PAGE>
The securities of many companies have experienced extreme price and volume
fluctuations in recent years, often unrelated to the companies' operating
performances. For example, market prices for securities of Internet-related
companies and interactive technology companies have frequently reached elevated
levels. These levels may not be sustainable and may not bear any relationship to
these companies' operating performances. If the market price of our common stock
reaches an elevated level following this offering, it is likely to materially
decline. In the past, following periods of volatility in the market price of a
company's securities, that company's stockholders have often instituted
securities class action litigation against that company.
WE MAY BE UNABLE TO OBTAIN ADDITIONAL FINANCING NECESSARY FOR OUR BUSINESS.
We believe that upon completion of this offering we will have the necessary
resources to execute our current business plan. However, to the extent that we
enter new markets or digital set-top box deliveries are delayed, we will require
additional capital. We currently do not have any arrangements for additional
financing and cannot assure you that additional financing will be available on
acceptable terms, if at all. Additional equity financing may substantially
dilute your investment in our common stock, and debt financing, if available,
may involve significant restrictions on our financing and operating activities.
OUR BUSINESS COULD BE DISRUPTED IF ANY OF THE COMPUTER SYSTEMS OR SOFTWARE WE
RELY ON EXPERIENCE YEAR 2000 PROBLEMS.
Although we have not experienced any year 2000 problems, it is possible
that, even after January 1, 2000, year 2000-related issues may cause problems or
disruptions. While we believe that all of our systems are year 2000 compliant,
we cannot assure you that we will not discover a problem during 2000 that will
require upgrading, modifying or replacing our systems. In addition, we depend on
a number of third-party vendors to provide both information and non-information
technology systems and services. While we believe that our material third-party
systems and services are year 2000 compliant, we cannot be sure that we will not
experience any problems during 2000. We also cannot provide any assurance that
governmental agencies, utility companies, Internet access companies and others
outside of our control will not experience any future year 2000 problems.
WE HAVE A LIMITED NUMBER OF SHARES AVAILABLE FOR FINANCING, ACQUISITIONS AND
JOINT VENTURES.
Upon completion of this offering, our authorized but unissued shares will be
insufficient to effect a major financing, joint venture or acquisition.
Historically, we have had to issue our common stock in order to complete certain
joint ventures, strategic alliances and acquisitions, and we may be required to
issue our stock in the future to complete similar transactions. We will need
approval by a majority of our stockholders to increase the number of our
authorized shares. We cannot assure you that we will receive such authorization
in a timely manner or at all. Failure to receive authorization to issue
additional shares may cause us to forego business and financing opportunities
and could therefore adversely affect our business.
YOUR INVESTMENT MAY BE SUBSTANTIALLY DILUTED UPON EXERCISE OF OUTSTANDING
OPTIONS AND WARRANTS.
As of January 14, 2000, we have granted options and warrants to purchase an
aggregate of 17,214,254 shares of common stock that have not been exercised. The
following table shows the number
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<PAGE>
of shares subject to these unexercised options and warrants and the price ranges
at which they are exercisable.
<TABLE>
<CAPTION>
PRICE RANGE NUMBER OF SHARES
- ------------- ----------------
<S> <C>
$0.00-$4.00 7,209,754
$4.01-$8.00 3,082,500
$8.01-$12.00 1,842,500
$12.01-$15.00 5,043,500
>$15.00 36,000
----------
Total: 17,214,254
</TABLE>
To the extent that the outstanding stock options and warrants are exercised,
our stockholders' interest in us will be diluted. Moreover, the terms upon which
we will be able to obtain additional equity capital may be adversely affected,
since the holders of the outstanding options and warrants can be expected to
exercise them at a time when we would, in all likelihood, be able to obtain any
needed capital on more favorable terms than those provided for in the
outstanding options and warrants. In addition, we have issued to certain of our
officers and other employees options to purchase up to 20% of the capital stock
of our material subsidiaries exercisable in the event of a change of control
under certain circumstances. The aggregate exercise price of these options is
not material. See "Description of Capital Stock" for a more detailed description
of these options.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
You will incur immediate and substantial dilution in the net tangible book
value per share of the shares you purchase in this offering. See "Dilution" for
a more detailed description of the dilution investors will suffer.
THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT ITS MARKET PRICE.
Sales of substantial amounts of our common stock in the public market after
the completion of this offering, or the perception that such sales could occur,
could adversely affect the market price of our common stock and could materially
impair our future ability to raise capital through offerings of our common
stock. In connection with this offering, we, our officers, our directors and our
principal stockholder have agreed, pursuant to lock-up agreements, not to offer
or transfer any shares of common stock for a period of 90 days after the date of
this prospectus without the prior written consent of Credit Suisse First Boston.
We cannot predict what effect, if any, market sales of shares held by any other
stockholder or the availability of these shares for future sale will have on the
market price of our common stock. See "Shares Eligible for Future Sale" and
"Underwriting" for a more detailed description of the restrictions on selling
shares of our common stock after this offering.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
We have issued to certain of our officers and other employees options,
substantially all of which have vested, to acquire class B common stock of our
material subsidiaries, HyperTV Networks, Inc. and ACTV Entertainment, Inc.
exercisable in the event of a change of control under certain circumstances. The
holders have entered into agreements giving the voting rights of the shares
underlying such class B options to William C. Samuels, our Chief Executive
Officer. If all the issued options are exercised, the options will result in
Mr. Samuels having approximately 86% of the voting power of each material
subsidiary and such officers owning 20% of each material subsidiary. As a
result, Mr. Samuels would have the right to elect the Board of Directors of the
subsidiary and otherwise control its business and affairs. In addition, the
exercise of these options would create a significant minority interest in our
14
<PAGE>
material subsidiaries and would affect the value of our common stock. A
potential acquirer may be discouraged from completing an acquisition if it could
not be assured of having control of us and our material subsidiaries through us.
Our Board of Directors has also adopted a resolution which authorizes them to
take all necessary actions to use and exploit our proprietary and patented
technologies in the event a person or entity seeks to acquire or acquires 20% or
more of our common stock and the Board determines that the acquirer is likely to
act inconsistently with the best interests of our stockholders. For more
information on these provisions, see "Description of Capital Stock--
Antitakeover Provisions Affecting the Common Stock". In addition, our
certificate of incorporation permits our Board of Directors to have us designate
and issue, without stockholder approval, preferred stock with voting, conversion
and other rights and preferences that could differentially and adversely affect
the voting power or other rights of the holders of our common stock. Our
issuance of preferred stock or of rights to purchase preferred stock could also
be used to discourage an unsolicited acquisition proposal. The exercise of the
options, our policy relating to suitable acquirers or the issuance of the
preferred stock could each make it more difficult and therefore discourage an
unsolicited takeover proposal such as a tender offer, proxy contest or removal
of incumbent management, even if such actions would be in the best interest of
our stockholders.
THE TAX BENEFITS FROM OUR NET OPERATING LOSSES MAY BE SUBJECT TO CERTAIN
LIMITATIONS.
Section 382 of the Internal Revenue Code of 1986, as amended, limits the
ability of a corporation that undergoes an "ownership change" to use its net
operating losses to reduce its tax liability. It is possible that this offering
of our common stock will trigger such an ownership change. In that event, we
would not be able to use our pre-ownership-change net operating losses in excess
of the limitation imposed by Section 382. This limitation generally would be
calculated by multiplying the value of our stock immediately before the
ownership change by a specified rate, which currently is 5.72% for ownership
changes that take place during January 2000.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information both included and incorporated by reference in this prospectus
may contain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. This information may involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology. This
prospectus also contains forward-looking statements regarding the media and
Internet industries. These forward-looking statements are based on assumptions
that may be incorrect, and we cannot assure you that these projections included
in these forward-looking statements will come to pass. Our actual results could
differ materially from those expressed or implied by the forward-looking
statements as a result of various factors, including the risk factors described
above and elsewhere in this prospectus. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
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<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of our common stock, after
deducting the estimated discounts, commissions and offering expenses payable by
us, will be approximately $132.9 million. We estimate that, if the underwriters
exercise in full their over-allotment option, the net proceeds from the sale of
our common stock, after similar deductions, will be approximately
$153.0 million. We intend to use
- approximately $6 million of the net proceeds to repay our debt to U.S.
Bancorp, which matures on June 30, 2003; and
- the remainder for general corporate purposes, including working capital
requirements.
We reserve the right to reallocate proceeds to different uses if, in
management's view, the needs of the business so require. In addition, a large
portion of the proceeds is allocated to discretionary purposes.
We may use a portion of the net proceeds to acquire or invest in
complementary technologies, products or businesses, although we currently have
no commitments with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never paid or declared a dividend on our common stock. We intend,
for the foreseeable future, to retain all future earnings for use in our
business. The amount of dividends we pay in the future, if any, is within the
discretion of our Board of Directors and will depend upon our earnings, capital
requirements, financial condition and other relevant factors.
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<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is listed under the symbol "IATV" on the Nasdaq National
Market.
Prior to November 11, 1999, our common stock was listed on The Nasdaq
SmallCap Market. The following table shows, for the quarters indicated, the
reported high and low sale prices of our common stock as quoted on Nasdaq:
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
1997
Quarter ended March 31, 1997.............................. $ 3.81 $2.03
Quarter ended June 30, 1997............................... 2.25 1.28
Quarter ended September 30, 1997.......................... 1.97 1.34
Quarter ended December 31, 1997........................... 2.06 1.28
1998
Quarter ended March 31, 1998.............................. 2.13 1.50
Quarter ended June 30, 1998............................... 2.50 1.38
Quarter ended September 30, 1998.......................... 2.97 1.50
Quarter ended December 31, 1998........................... 4.50 1.56
1999
Quarter ended March 31, 1999.............................. 11.44 3.81
Quarter ended June 30, 1999............................... 25.25 9.25
Quarter ended September 30, 1999.......................... 16.44 8.88
Quarter ended December 31, 1999........................... 51.75 13.25
2000
Quarter ended March 31, 2000
(through January 14, 2000).............................. 46.25 33.25
</TABLE>
On January 14, 2000, the last reported sale price of our common stock on The
Nasdaq National Market was $35.44.
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<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1999 the historical
consolidated capitalization of ACTV and the consolidated capitalization of ACTV
as adjusted to give effect to this offering. The table should be read in
conjunction with our consolidated financial statements and related notes and
other financial data included elsewhere or incorporated by reference in this
prospectus. See "Selected Historical Financial and Other Data."
The number of shares of common stock issued and outstanding excludes
14,760,421 shares of common stock issuable upon the exercise of outstanding
options and warrants at a weighted average exercise price of $8.06 per share.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term notes payable................................ $ 4,741 $ --
-------- --------
Shareholders' equity (deficiency):
Preferred stock, $0.10 par value, 1,000,000 shares
authorized and none issued and outstanding......... -- --
Common stock, $0.10 par value, 65,000,000 shares
authorized and 41,546,996 shares issued and
outstanding and 45,546,996 shares as adjusted...... 4,155 4,555
Additional paid-in capital........................... 103,487 235,999
Accumulated deficit.................................. (88,300) (88,300)
-------- --------
Total shareholders' equity (deficiency)............ 19,342 152,254
-------- --------
Total capitalization............................. $ 24,083 $152,254
======== ========
</TABLE>
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DILUTION
Our net tangible book value as of September 30, 1999 was approximately
$13.1 million, or $0.31 per share. Net tangible book value per share represents
the amount of our total tangible assets less total liabilities divided by the
total number of shares of common stock outstanding. After giving effect to the
sale by us of 4,000,000 shares of common stock offered hereby (assuming an
offering price equal to the last reported share price on January 14, 2000) and
after deducting estimated underwriting discounts and offering expenses, our net
tangible book value at September 30, 1999 would have been approximately
$146.0 million, or $3.21 per share. This represents an immediate increase in net
tangible book value of $2.90 per share to existing stockholders and an immediate
dilution of $32.23 per share to new investors in this offering, as illustrated
by the following table:
<TABLE>
<S> <C> <C>
Public offering price per share......................... $35.44
Net tangible book value per share before the
offering.......................................... $ .31
Increase per share attributable to new investors.... 2.90
-----
Net tangible book value per share after the offering.... 3.21
------
Net tangible book value dilution per share to new
investors............................................. $32.23
======
</TABLE>
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SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and related notes included elsewhere or
incorporated by reference in this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
statement of operations data shown below for the years ended December 31, 1996,
1997 and 1998, and the balance sheet data as of December 31, 1997 and 1998, are
derived from our audited consolidated financial statements included elsewhere in
this prospectus. The selected statement of operations data for the years ended
December 31, 1994 and 1995, and the balance sheet data as of December 31, 1994,
1995 and 1996, are derived from our audited financial statements which are not
included in this prospectus. The selected statement of operations data for nine
months ended September 30, 1998 and 1999, and the balance sheet data as of
September 30, 1998 and 1999, are derived from our unaudited financial statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
--------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 939 $ 1,312 $ 1,476 $ 1,651 $ 1,406 $ 1,059 $ 1,329
--------- ---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses
Cost of sales......................... 297 334 647 472 219 169 162
Operating expenses.................... 891 1,261 1,956 1,361 2,005 1,719 1,418
Selling and administrative............ 4,194 4,998 6,333 6,880 9,862 6,462 11,875
Depreciation and amortization......... 446 687 420 328 1,106 811 1,038
Amortization of goodwill.............. 343 426 426 426 426 320 320
Loss on investment.................... -- -- 274 -- -- -- --
Stock appreciation rights............. (437) 567 184 (347) 2,000 455 1,950
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses............ 5,734 8,273 10,240 9,120 15,618 9,936 16,763
--------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations.................... (4,795) (6,961) (8,764) (7,469) (14,212) (8,877) (15,434)
Interest (expense) income--net.......... (183) 40 159 116 (748) (613) (478)
Minority interest--subsidiary preferred
stock dividend and accretion.......... (144) -- 1,695 3,006 5,429 379 --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net (loss) before extraordinary item.... (5,122) (6,921) (10,300) (10,359) (20,389) (9,869) (15,912)
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net (loss).............................. (4,465) (6,827) (10,300) (10,359) (20,389) (9,869) (15,912)
Preferred stock dividend and
accretion............................. -- -- -- --........ 479 -- 495
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net (loss) applicable to common
stockholders.......................... $ (4,465) $ (6,827) $ (10,300) $ (10,359) $ (20,868) $ (9,869) $ (16,407)
========= ========== ========== ========== ========== ========== ==========
Loss per common share before
extraordinary item.................... $ (0.65) $ (0.68) $ (0.88) $ (0.80) $ (0.98) $ (0.51) $ (0.47)
========= ========== ========== ========== ========== ========== ==========
Basic and diluted (loss) per common
share................................. $ (0.57) $ (0.67) $ (0.88) $ (0.80) $ (0.98) $ (0.51) $ (0.47)
========= ========== ========== ========== ========== ========== ==========
Weighted average number of common shares
outstanding........................... 7,897,278 10,162,128 11,739,768 12,883,848 21,399,041 19,309,832 35,154,248
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............... $ 2,480 $ 3,532 $ 6,521 $ 554 $ 5,189 $ 7,078 $ 12,865
Working capital (deficiency)............ 1,504 2,397 5,094 (1,082) 3,419 6,549 15,041
Total assets............................ 7,733 8,551 11,693 7,902 13,606 15,616 25,125
Long-term debt (including current
portion).............................. 2,350 -- -- -- 4,315 4,301 4,741
Preferred stock of a subsidiary(1)...... -- -- 1,675 3,006 5,429 3,742 --
Total stockholders' equity
(deficiency).......................... 3,973 6,894 9,201 (1,613) 4,763 4,248 19,342
</TABLE>
- ------------------------------
(1) In 1998, we converted the preferred stock into equity. See Note 5 to our
consolidated financial statements for the year ended December 31, 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE AND INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE RESULTS DISCUSSED BELOW ARE NOT NECESSARILY
INDICATIVE OF THE RESULTS TO BE EXPECTED IN ANY FUTURE PERIODS. TO THE EXTENT
THAT THE INFORMATION PRESENTED IN THIS DISCUSSION ADDRESSES FINANCIAL
PROJECTIONS, INFORMATION OR EXPECTATIONS ABOUT OUR PRODUCTS OR MARKETS OR
OTHERWISE MAKES STATEMENTS ABOUT FUTURE EVENTS, SUCH STATEMENTS ARE FORWARD-
LOOKING AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE STATEMENTS MADE. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS" FOR FURTHER INFORMATION ABOUT
FORWARD-LOOKING STATEMENTS.
OVERVIEW
Since our inception, the primary focus of our operating activities has been
to develop proprietary technologies that enable programmers and advertisers to
create individualized programming and programming enhancements--first for
television and later for the emerging area of television/Internet convergence.
We call our technologies for the television and television/Internet convergence
markets Individualized Television and HyperTV, respectively.
RESULTS OF OPERATIONS
Since we have engaged principally in the research and development of
Individualized Television and HyperTV, our historical results of operations are
not indicative of, and should not be relied upon as an indicator of, our future
performance.
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30,
1998
REVENUES. Revenues increased 26% to $1.3 million for the nine month period
ended September 30, 1999, from $1.0 million for the nine month period ended
September 30, 1998, due to an increase in HyperTV sales. Substantially all of
our revenues in both periods were derived from sales of software and computer
hardware to the education market of HyperTV.
TOTAL COSTS AND EXPENSES. Total costs and expenses increased 69% to
$16.8 million for the nine month period ended September 30, 1999, from
$9.9 million for the nine month period ended September 30, 1998. Cost of sales
decreased 4% to $161,754 for the nine months ended September 30, 1999, from
$168,934 for the nine months ended September 30, 1998, and cost of sales as a
percentage of revenues decreased to 12% for the nine months ended September 30,
1999 from 16% for the nine months ended September 30, 1998. The decrease as a
percentage of revenues was the result of a higher proportion of revenues in the
more recent period resulting from service fees. Total costs and expenses,
excluding cost of sales, increased 67% to $16.6 million for the nine months
ended September 30, 1999, from $9.8 million for the nine months ended
September 30, 1998. The increase was due principally to significantly higher
stock appreciation rights, which we refer to as SARs, which resulted from a
large increase in the market price of our common stock in the first nine months
of 1999. The SAR expense for the nine months ended September 30, 1999 was
$2.0 million, compared to $455,251 for the nine months ended September 30, 1998.
In September 1999, we exchanged all of our outstanding SARs for stock options
with the same exercise prices and vesting dates. To account for this exchange,
we simultaneously incurred non-cash compensation expense of $1.2 million as a
component of selling and administrative expense and non-cash income of
$2.6 million from the elimination of our liability related to SARs.
Additionally, we incurred a $254,000 non-cash charge to deferred expenses for
those SARs that have not vested. We also incurred a $2.3 million charge related
to an incentive compensation provision that is based on changes in the market
value of our common stock during the twelve-month period ended March 31, 1999.
We are accruing the total value of the award in four equal quarterly amounts,
beginning March 31, 1999, since it is payable in quarterly installments that are
contingent on
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continued employment by us of the executive receiving this compensation. We have
paid approximately $1.7 million, or 75%, of the award in the form of our
unregistered common stock. Selling and administrative expense increased 84% to
$11.9 million for the nine months ended September 30, 1999, from $6.5 million
for the nine month period ended September 30, 1998, due chiefly to non-cash
employee compensation, paid in the form of stock.
INTEREST (EXPENSE) INCOME-NET. Interest expense increased 9% to $782,922
for the nine months ended September 30, 1999, from $718,220 for the nine months
ended September 30, 1998. Interest expense is related to the $5.0 million notes
issued in January 1998 by one of our subsidiaries. We chose to pay the interest
due on their notes on June 30, 1998 and December 31, 1998 in kind rather than in
cash. Interest income increased 289% to $304,679 for the nine months ended
September 30, 1999, from $105,398 for the nine months ended September 30, 1998.
The increase was due to higher average cash balances in the more recent period.
MINORITY INTEREST--SUBSIDIARY PREFERRED STOCK DIVIDEND AND ACCRETION. For
the nine month period ending September 30, 1999, we had no accrual for or
payments of subsidiary preferred stock dividends, compared to accruals of
$379,161 for the nine months ended September 30, 1998, related to preferred
stock issued by a subsidiary of ours, which was accounted for as a minority
interest. The subsidiary preferred stock was retired in November 1998 in
exchange for a combination of our new Series B preferred stock, which was
subsequently redeemed in full in May 1999, common stock and warrants. In
addition, we paid $312,137 in preferred dividends during the nine month period
ending September 30, 1998 in the form of our common stock.
PREFERRED STOCK DIVIDEND AND ACCRETION. For the nine month period ending
September 30, 1999, we paid $494,431 in preferred stock dividends, related to
our Series B preferred stock, compared to no such preferred dividend payments
during the comparable 1998 period. The Series B preferred stock was issued in
November 1998 and was redeemed in full in May 1999.
NET (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net (loss) applicable to
common stockholders increased 66% to $16.4 million, or $0.47 per basic and
diluted share, for the nine months ended September 30, 1999, from $9.9 million,
or $0.51 per basic per basic and diluted share, for the nine months ended
September 30, 1998.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
REVENUES. Revenues decreased 15% to $1.4 million for the year ended
December 31, 1998, from $1.7 million for the year ended December 31, 1997. The
decrease was the result of our product shift toward on-line learning software
and services in 1998 and away from video programming and related equipment. All
of our revenues during 1998 were derived from the on-line learning market,
compared to 20% in 1997.
TOTAL COSTS AND EXPENSES. Total costs and expenses increased 71% to
$15.6 million for the year ended December 31, 1998, from $9.1 million for the
year ended December 31, 1997. Cost of sales decreased 54% to $218,574 for the
year ended December 31, 1998, from $471,956 for the year ended December 31,
1997, and cost of sales as a percentage of revenues decreased to 16% in 1998
from 29% in 1997. The decrease as a percentage of revenues was due to a shift in
revenue mix from video programming and related equipment, which represented the
majority of revenues in 1997, to eSchool which has higher gross margins. Total
costs and expenses, excluding costs of sales, increased 78% to $15.3 million for
the year ended December 31, 1998, from $8.6 million for the year ended
December 31, 1997. The increase was attributable to a number of factors,
including a large change in stock appreciation rights due to a higher common
stock price at December 31, 1998, a rise in both operating expenses and selling
and administrative expense principally from increased activity of our
Texas-based regional network operation and to higher depreciation and
amortization expense. Depreciation and amortization expense increased 103% to
$1.5 million from $754,053 for 1997. This
22
<PAGE>
increase was due principally to depreciation for the full year in 1998 of
television production equipment installed in our Texas subsidiary's facility,
compared to several months during 1997, and to greater amortization of software
development costs in the more recent year.
INTEREST (EXPENSE) INCOME-NET. We incurred interest expense of $932,247 for
the year ended December 31, 1998, compared to no interest expense for the year
ended December 31, 1997. Interest expense is related to the $5.0 million notes
issued in January 1998 by one of our subsidiaries. Interest income increased 58%
to $184,285 for the year ended December 31, 1998, from $116,870 for the year
ended December 31, 1997. The increase resulted from higher available average
cash balances in the more recent year.
MINORITY INTEREST--SUBSIDIARY PREFERRED STOCK DIVIDEND AND ACCRETION. For
the years ended December 31, 1998 and 1997, we recorded $5.6 million and
$3.0 million, respectively, for dividends and accretion on subsidiary
convertible preferred stock issuances, which were accounted for as a minority
interest. All dividend payments were made in our common stock. The increase
during 1998 is the result principally of our redemption in full of the
subsidiary convertible preferred stock.
NET (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net (loss) applicable to
common stockholders increased 101% to $20.9 million, or $0.98 per basic and
diluted share, for the year ended December 31, 1998, from $10.3 million, or
$0.80 per basic and diluted share, for the year ended December 31, 1997.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
REVENUES. Revenues increased 12% to $1.7 million for the year ended
December 31, 1997, from $1.5 million for the year ended December 31, 1996. The
increase was the result of the inclusion of 20% of sales from the on-line
learning market, which was introduced during fiscal 1997, and higher sales of
distance learning products and services when compared to 1996. All of our
revenues during 1997 were derived from the education market, while in 1996, our
revenues were derived from education sales as well as from license and executive
producer fees.
TOTAL COSTS AND EXPENSES. Total costs and expenses decreased 11% to
$9.1 million for the year ended December 31, 1997, from $10.2 million for the
year ended December 31, 1996. Cost of sales decreased 27% to $471,956 for the
year ended December 31, 1997 from $647,488 for the year ended December 31, 1996,
and cost of sales as a percentage of revenues decreased to 29% in 1997, from 44%
in 1996. The decrease as a percentage of revenues was due to a greater
proportion of educational programming revenues and the inclusion of the on-line
learning market sales in 1997. Both the on-line learning market and educational
programming have higher gross margins than our other sources of revenue. Total
costs and expenses, excluding cost of sales, decreased 10% to $8.6 million for
the year ended December 31, 1997, from $9.6 million for the year ended
December 31, 1996. The decrease was partially attributable to lower operating
expenses and depreciation and amortization expense in the more recent period,
which more than offset an increase in selling and administrative expense. Also,
we recorded a gain of $346,892 in 1997, compared to an expense of $183,634
related to stock appreciation rights. The difference resulted from a lower
market price for our common stock at the end of 1997, when compared to the end
of 1996, and a higher market price at the end of 1996, as compared to the end of
1995. Finally, during 1996 we recorded a valuation allowance of $274,325 related
to an investment in an affiliated company and, as a component of 1996 selling
and administrative expense, reserved $82,746 against license fee and production
service receivables from this affiliate. During 1997, we incurred no valuation
allowance. For 1997, direct expenses related to the entertainment and education
markets were approximately $2.7 million and $2.9 million, respectively.
Depreciation and amortization expense decreased 11% to $754,053 for 1997 from
$846,351 for 1996. This decrease was due primarily to the recognition during
1996 of amortization expense for programming assets that were fully amortized
during that year.
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<PAGE>
INTEREST (EXPENSE) INCOME-NET. We had no interest expense for either the
fiscal year ended December 31, 1997 or 1996. Interest income decreased 26% to
$116,870 for the fiscal year ended December 31, 1997, from $184,285 for the
fiscal year ended December 31, 1996. The decrease resulted from lower available
average cash balances in the more recent year.
MINORITY INTEREST--SUBSIDIARY PREFERRED STOCK DIVIDEND AND ACCRETION. For
the years ended December 31, 1997 and 1996, we recorded $3.0 million and
$1.7 million, respectively, for dividends and accretion on subsidiary
convertible preferred stock issuances, which were accounted for as a minority
interest. All dividend payments were made in our common stock. The increase
during 1997 is the result of our having subsidiary convertible preferred stock
outstanding for less than half of the year during 1996.
NET (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net (loss) applicable to
common stockholders was unchanged at $10.3 million, but decreased on a per share
basis to $0.80 per basic and diluted share, for year ended December 31, 1997,
from $0.88 per basic and diluted share, for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have not generated revenues sufficient to fund our
operations, and we have incurred operating losses. Through September 30, 1999,
we had an accumulated deficit of approximately $88.3 million. Our cash position
on September 30, 1999 was $12.9 million, compared to $5.2 million on
December 31, 1998.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
During the nine month periods ended September 30, 1999 and 1998, we used
$7.8 million and $7.1 million, respectively, in cash for our operations. Despite
the increase in net loss in the more recent period, a higher percentage of this
loss was the result of non-cash charges. During the year ended December 31,
1998, we used $10.0 million in cash for our operations, compared with
$6.6 million for the year ended December 31, 1997. The increase was due to both
a higher operating deficit as well as a net use of cash related to asset and
liability changes. During the years ended December 31, 1997 and 1996, we used
$6.6 million and $7.6 million, respectively, in cash for our operations. The
decrease was due to lower operating expenses and higher gross margins, which
more than offset higher selling and administrative expenses.
NET CASH USED IN INVESTING ACTIVITIES AND CAPITAL EXPENDITURES
With respect to investing activities, during the nine month period ended
September 30, 1999, we used cash of $3.4 million. These activities were related
to the acquisition of patents and investments in patents pending, computer
hardware and software development. During the nine-month period ended
September 30, 1998, we used cash of $1.5 million. These activities were related
to equipment purchases, software development and patents. With respect to
investing activities during the year ended December 31, 1998, we used cash of
$1.9 million for patents, property and equipment, and systems and software
development. With respect to investing activities during the year ended
December 31, 1997, we used cash of $2.8 million, 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
Television into the General Instrument cable set-top box and to eSchool. During
the year ended December 31, 1996, we used cash of $444,189 related to the
purchase of television production equipment and office improvements.
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<PAGE>
NET CASH PROVIDED BY FINANCING ACTIVITIES
We met our cash needs in the nine month period ended September 30, 1999 from
sales of our common stock to private investors, totaling approximately
$14.4 million, and from the exercise of stock options and warrants, totaling
approximately $10.1 million. We met our cash needs in the nine month period
ended September 30, 1998 from the proceeds of a $5.0 million principal note
financing as well as from private sales of our common stock to an institutional
investor. We met our cash needs in the year ended December 31, 1998 from sales
of our common stock totaling approximately $10.8 million to private investors,
including $5.0 million invested by Liberty Media. Liberty Media also received an
option to invest an additional $5.0 million for the same price per share. We met
our cash needs in the year ended December 31, 1997 from the proceeds of a series
of private placements during 1997 of our common stock totaling $1.5 million,
convertible preferred stock totaling $2.0 million, and from the remainder of
funds received from the sale in 1996 of exchangeable preferred stock issued by a
wholly-owned subsidiary totaling $9.1 million. We met our cash needs for the
year ended December 31, 1996 from sales of our common stock to private investors
totaling approximately $1.9 million in net proceeds, and from the sale of
convertible preferred stock issued by our wholly-owned subsidiary totaling
approximately $9.1 million in net proceeds.
With respect to other financing activities, for the nine month period ended
September 30, 1999, we redeemed all of our outstanding Series B preferred stock
by paying a total of approximately $5.8 million, which represents a 10% premium
above the stock's face value plus accrued dividends. Because the Series B
preferred stock was convertible into our common stock at $2.00 per share
beginning in November 1999, we effectively redeemed the preferred stock by
buying it at an equivalent of $2.20 per common stock share, a price
significantly less than the market price of a share of our common stock at the
time of the redemption. The redemption avoided the possible future issuance of
more than 2.8 million shares of our common stock.
We believe that our current funds, not including proceeds, if any, to be
received by us pursuant to this offering, will enable us to finance our
operations for at least the next twelve months. While we believe that we have
adequate funds to launch our first planned regional network, we will need
additional funding to launch networks in other regions. We can not assure you
that we will be able to raise the capital necessary to fund our expansion.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer software that was written with
only two digits rather than four digits to represent the year in a date field.
Computer hardware and software applications that are date-sensitive may
interpret a date represented as "00" to be the year 1900 rather than the year
2000. The result could be system failure or miscalculations causing the
disruption of operations.
We believe that our internal systems, relating to both computer hardware and
software, have functioned and will continue to function properly with respect to
dates throughout the year 2000 and beyond. In addition, we believe that our
proprietary software either sold directly to third parties or incorporated in
products sold to third parties is year 2000 compliant. Having performed an
assessment of the potential year 2000 problem, we do not expect to incur
significant costs related to year 2000 issues. We cannot determine at this time
whether the year 2000 problem will have a material impact on our operations or
financial condition as the result of significant disruptions to the U.S. economy
or business infrastructure.
IMPACT OF INFLATION
Inflation has not had any significant effect on our operating costs.
25
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, called SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or a liability measured at fair value. The statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000; however, it may be adopted earlier. It cannot be applied
retroactively to financial statements of prior periods. We have not yet
determined the impact, if any, the adoption of SFAS No. 133 will have on its
financial statements.
26
<PAGE>
BUSINESS
OVERVIEW
We are a digital media company that has developed proprietary technologies,
called Individualized Television and HyperTV. Individualized Television enables
television programmers and advertisers to create individualized programming for
digital television. HyperTV enhances standard television content with
information and interactivity delivered through the Internet. We believe that
Individualized Television is the only technology that enables viewers to
instantly and seamlessly customize their viewing experiences. HyperTV is one of
the first technologies to provide synchronized delivery of television
programming and Internet content.
INDUSTRY BACKGROUND
INDIVIDUALIZED TELEVISION
Although television programming is produced for national, regional and local
audiences, it has not been commercially exploited as an individualized services
medium. According to Paul Kagan Associates, Inc., Carmel, CA, over 97% of U.S.
households have televisions and approximately 69% of those households subscribe
to cable television services. We do not believe that there is currently any
television service, widely available to consumers, providing individualized
programming. Historically, two factors have limited development of
individualized programming: (1) the shortage of channel capacity in a typical
cable system and (2) the lack of digital technology available to provide such
individualized services. However, advances in digital transmission and set-top
box technology have begun to eliminate these barriers to providing
individualized programming.
The development of compression technology and the digital transmission of
television signals allows for the transmission of a greater number of channels
with better audio and video quality. The resulting expansion of channel capacity
allows a cable or DBS broadcaster to offer a wider variety of programming
choices, including individualized programming. Traditional analog cable systems
typically offer a limited number of programming channels. Current digital
compression technology, however, allows the conversion of each analog channel
into as many as twelve digital channels of programming. Many major U.S. cable
operators are therefore converting significant portions of their systems from
analog to digital.
The technology necessary to provide individualized services will become
increasingly available as cable subscribers have increased access to digital
set-top boxes. Kagan estimates that nearly 5.1 million U.S. cable subscribers
will have digital set-top boxes by year-end 1999, growing to almost
28.6 million in 2003 and rising to 47.6 million in 2008. General Instrument has
announced orders to date for approximately 15 million digital set-top boxes, and
in the first half of 1999, shipped about 1.6 million of such set-top boxes, an
increase of 130% over the prior-year. In addition, we believe sales of digital
set-top boxes will increase rapidly as prices decrease. Forrester
Research, Inc. estimates that prices for digital set-top boxes will decline from
$400 to $200 by 2001 as chip vendors reduce the cost of the decoders and tuners
that are the main components of the set-top boxes.
DBS can also transmit digital television. We believe that in the future our
Individualized Television service may expand to DBS platforms. Currently,
according to Kagan, DBS had 11.8 million subscribers as of May 31, 1999, and
that number is expected to increase to 15.1 million subscribers in 2003, and
17.9 million subscribers in 2008.
Advertising represents a critical application of Individualized Television
programming. According to Veronis Suhler & Associates, advertisers spent
approximately $48.5 billion on television advertising in the United States in
1998. In addition, Kagan estimates that advertisers in the United States will
increase their sports-related broadcast and cable television advertising from
$5.4 billion in 1998 to $7.2 billion in 2003. Although traditional television
broadcasting, cable and DBS systems do not provide an integrated means for
viewers to respond to programs and advertisements, the Direct Marketing
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Association, Inc. ("DMA") estimates that approximately $105.8 billion of goods
and services were purchased through direct response television programming and
advertising in 1999. The DMA predicts that this amount will grow to
approximately $159.8 billion in 2004. (Reprinted from Economic Impact: US Direct
& Interactive Marketing Today 1999 with permission from the Direct Marketing
Association, Inc.) Many advertisers are using television advertisements to
generate requests for product information, which in turn serve as sales leads
for their products and services. Today, most direct response television
purchases and requests for information require a telephone call, causing
advertisers to incur a significant cost per transaction. We believe that
television viewers, advertisers and merchants will respond favorably to a
simple, immediate, inexpensive and automated method enabling them to participate
in television commerce.
We believe that sports programming also represents a compelling application
of Individualized Television. Participatory and spectator sports are among the
leading pastimes in the United States, as evidenced by the popularity of sports
media and the amount of money consumers spend on sports events, products and
related services. Further, according to industry sources, sports television
programming in the United States consistently draws large audiences, with sports
broadcasts comprising five of the top ten most widely viewed broadcasts since
1960. According to Kagan, in 1998, broadcast network sports television
programming attracted $3.7 billion in advertising. In addition, the Sporting
Goods Manufacturers Association estimates that sales (wholesale value) in the
United States of sports equipment, athletic footwear and sports apparel reached
$45.6 billion in 1998.
HYPERTV
The Internet has grown rapidly over the past several years and is now a
medium used by millions of people for entertainment, education, e-commerce and
multimedia content. Jupiter Communications projects that by 2001, the Internet
will pass 50 million U.S. households, and by 2002, the on-line population will
rival that of U.S. consumers of cable television and newspapers at 62 million.
In addition, The National Center for Education Statistics estimates that over
80% of public schools have access to the Internet. We believe such rapid growth
is attributable mainly to the increasing number of personal computers,
technological innovations providing easier, faster and cheaper access to the
Internet and the proliferation of content and services available on the
Internet. Growing use of the Internet and the World Wide Web has created
opportunities for television content providers and their advertising customers
to reach and interact with millions of Internet users.
The increasing popularity of the Internet and the established popularity of
television have led a growing number of home computer users to simultaneously
access Internet content while they watch television. Over half of all PCs in US
households, or 22.6 million, are in the same room as a television and of those,
nearly all, or 21.8 million, use the television and PC simultaneously at least
some of the time, according to Media Metrix.
Due to its interactive nature, the Internet is an emerging medium that
competes with traditional television because of its ability to provide
customized, targeted programming and advertising to consumers and to generate
cost-effective results for certain advertisers. According to Jupiter
Communications, approximately 45% of Internet users maintain that they watch
less television because of time spent on-line. To combat this migration and gain
on-line market share, broadcasters and cable programmers have begun and are
expected to continue promoting companion on-line programming during shows and
using commercial airtime to drive viewers to far more lucrative on-line
programming. We believe we are well positioned to take advantage of this shift
in consumer media consumption and that the convergence of television and
Internet content promises significant opportunities for enhanced entertainment
programming.
We believe that the opportunities for television programmers to generate
additional advertising revenues are increasing due to the growing recognition by
advertisers of the potential advantages of Internet-based advertising over
advertising in traditional media. Unlike radio, television and print, the
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Internet is highly interactive, creating enhanced opportunities for advertisers
to focus their marketing efforts on specific user groups to directly distribute
targeted information to consumers on an individualized basis and to receive
timely feedback from customers and potential customers. Forrester Research
estimates that the amount of Web advertising worldwide will grow from
$3.3 billion in 1999 to over $33.1 billion by the year 2003. Additionally, as
merchants take advantage of the Internet to deliver a guided selling experience
on-line, integrating intelligent product recommendations, real-time customer
service and simplified buying procedures, more consumers are expected to engage
in e-commerce. International Data Corporation estimates that the number of
consumers making purchases on the Web will grow from 30.8 million in 1998 to
182.6 million in 2003 and that the total value of consumer goods and services
purchased over the Web will increase from $14.9 billion to $177.7 billion over
the same five-year period. The combination of growth in on-line advertising and
e-commerce enhances the Internet's value as a commerce medium.
OUR BUSINESS STRATEGY
INDIVIDUALIZED TELEVISION
One of our business objectives is to make Individualized Television a
leading application for digital television by achieving widespread use of
Individualized Television programming in all programming genres and advertising.
Our strategies for accomplishing this objective include:
- PROMOTE NATIONAL AWARENESS OF INDIVIDUALIZED TELEVISION THROUGH OUR
LIBERTY MEDIA AND
IN DEMAND JOINT VENTURES. LMC IATV Events LLC, our joint venture with
Liberty Media, plans to license and produce individualized national or
international marquee pay-per-view events, including sports, musical,
theatrical and news events. Through LMC IATV's venture with
iN DEMAND, we expect to showcase Individualized Television to a national
audience leveraging
iN DEMAND's marketing and distribution capabilities.
- DEVELOP TARGETED ADVERTISING SERVICES THROUGH DIGITAL ADCO. We believe
that advertisers are looking for more efficient ways to reach their
targeted audiences. We have created a company with General Instrument,
called Digital ADCO, Inc., to develop applications that will enable the
digital television industry to provide this efficiency to advertisers.
Specifically, the company will provide the means for television
distributers to insert advertisements into a digital programming stream
without noticeable interruption and deliver to their viewers targeted
commercial messages based on demographic or geographic information or on
the viewers' purchase behavior. Both we and General Instrument have
licensed certain of our intellectual property to the company, and have
contributed management personnel and technical knowledge to launch the
business. In addition, General Instrument has made a $5 million capital
commitment to the company.
- FOCUS INITIALLY ON REGIONAL SPORTS PROGRAMMING. We believe the intensity
of sports programming, combined with features available through
Individualized Television such as a different view of the action,
highlight packages, statistics or instant replays will lead viewers to
associate Individualized Television with a distinctive experience and
result in rapid consumer acceptance of our service, products and
technology. In addition, focusing on sports programming is more
cost-efficient than a more diverse programming line-up, enabling us to
attain profitability in a region with a relatively smaller subscriber
base.
- GAIN BROAD DISTRIBUTION OF INDIVIDUALIZED TELEVISION. We intend to gain
broad distribution of Individualized Television through digital
distribution systems, including cable, DBS and eventually broadcast
television, by concentrating our efforts on the following activities:
/ / TARGETING CABLE OPERATORS WITH SIGNIFICANT DIGITAL SYSTEMS.
Initially, we plan to distribute our regional sports network through
cable systems in targeted regions of the United States where a
greater proportion of the cable systems currently offer, or have
indicated they will soon be offering, digital set-top boxes to their
subscribers.
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/ / DEVELOPING SOFTWARE COMPATIBLE WITH DBS SET-TOP BOXES. To increase
the potential market for Individual Television subscribers, we
intend to expand the compatibility of our Individualized Television
software to the greatest number of digital set-top boxes, including
those deployed in DBS.
- EXPAND INDIVIDUALIZED TELEVISION PROGRAMMING INTO OTHER TYPES OF
TELEVISION PROGRAMMING. Once we have developed programming for marquee
events, advertising and regional sports, we intend to expand into other
types of individualized programming, such as music, game shows, news and
children's programming and into international markets. We may license
content from producers of such programming or enter into ventures with
such entities when opportunities arise, either telecasting individualized
versions of this new programming across all of our existing regional
networks or creating networks tailored to such new programming.
Additionally, we may license our technology to programmers to allow them
to create individualized versions of their content.
HYPERTV
One of our business objectives is to be a leading provider of software,
hosting and creative services for enhancing television programming with
information and interactivity available through the Internet. Our strategies for
accomplishing this objective include:
- DEVELOP EARLY AWARENESS AND ADOPTION OF HYPERTV PRODUCTS AND SERVICES. By
aggressively rolling out our HyperTV products and services, we intend to
establish a leading position in the existing market of U.S. households
that simultaneously use a television set and computer located in the same
room. We believe that our ability to address the existing convergent
market provides us with a unique opportunity to develop awareness and
adoption of HyperTV products and services, in contrast to some of our
competitors that are focused solely on the future market for
television/Internet convergence programming that can be received on a
single device. We expect to leverage the HyperTV brand, installed user
base and content we develop in the current market to the future
single-device market.
- OFFER TELEVISION CONTENT PROVIDERS A TURNKEY SOLUTION FOR
TELEVISION/INTERNET CONVERGENCE. We plan to offer television networks and
other television content providers a turnkey solution for television/
Internet convergence. We intend to supply television programmers with the
elements needed to enhance their television programming with
simultaneously delivered Web content, including user software, Web content
creation software and creative services, database management and analysis
and program hosting, much of which program hosting function we intend to
contract out to third party vendors of network and technical services.
- FORM RELATIONSHIPS WITH, OR ACQUIRE, CONTENT OR SOFTWARE PROVIDERS TO
CREATE HYPERTV-ENHANCED TELECASTS. We intend to make equity investments
in, or enter into joint ventures and license agreements with, content and
software providers to create and offer HyperTV programming that enhances
standard telecasts. Through such alliances and acquisitions, we expect to
broaden the experience of the viewer and generate new revenue streams for
us and our partners, co-venturers and licensors.
- EXPAND OUR HYPERTV.COM WEBSITE. We intend to expand the HYPERTV.COM
website to serve as an Internet portal that will provide a guide and
connections to all available HyperTV programming and a central source for
downloading HyperTV software.
- ESTABLISH A DATA WAREHOUSE. We intend to establish a data warehouse to
compile, aggregate and analyze user information. We will make such data
available to our programming partners and advertisers as a fee-based
service. We expect this enhanced data to be of significant value to
HyperTV licensees and programming partners in gaining feedback on their
television viewing audience. This information will also provide us with a
unique measure of the market for enhanced television programming and may
help us to attract new licensees and programming partners.
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- EXPAND HYPERTV INTO OTHER FORMS OF MEDIA. We intend to use our HyperTV
products and services to enhance other video delivery systems, including
video streamed over the Internet for broadband applications and video
delivered from DVDs or CD-ROMs. In addition, we will seek to form
relationships with radio stations and other providers of streamed audio on
the Internet to enhance their content using HyperTV.
With increases in digital broadband capacity and the deployment of the next
generation of digital set-top boxes, we expect that the market for the
integration of television programming and Internet content delivered to viewers
through a single device will begin to grow significantly. Our long-term
objective is to be a leader in this market by providing powerful programming
tools for television networks, advertisers, cable networks and DBS through the
integration of Individualized Television with HyperTV products and services.
INDIVIDUALIZED TELEVISION
OVERVIEW
Individualized Television is a patented process for creating interactive and
instantly customized television content and advertising in response to viewer
remote control entries or to stored demographic information. Individualized
Television remembers a viewer's inputs throughout a program and can later
deliver tailored content to the viewer based on those inputs. We create
individualized programming by simultaneously sending the viewer multiple
television signals, related in time and content, and switching among those
signals without a visually perceptible delay. With Individualized Television,
the viewer experiences the video, audio and graphics of a single fluid
programming stream, while the programming on the other signals remains
transparent.
In addition, Individualized Television offers advertisers the opportunity to
convey more effectively their messages. Advertisers can use Individualized
Television to target viewers based on demographic information stored in digital
set-top boxes or on viewers' inputs in response to basic questions about
themselves or the products advertised. We expect Individualized Television to
generate revenues from subscriber fees, advertising sales and sales of software
and services related to targeted advertising.
We believe that Individualized Television is a core breakthrough for
television programming and advertising. For example
- the viewer of a national or international pay-per-view sporting event or a
regional sports telecast can select from features such as a different view
of the action, highlight packages, statistics or instant replays;
- a car commercial can ask viewers to identify the models that most interest
them and, based upon their answers, provide individualized information
about the identified models;
- neighbors watching the same television program can see entirely different
advertisements based upon demographic information stored in their
respective set-top boxes; and
- a child viewing a program can engage a favorite television character in
what seems to be a one-on-one dialogue.
TECHNOLOGY
We create individualized programming by allowing the viewer to select from a
number of frame-synchronized video, graphics and/or audio signals delivered
simultaneously to their digital set-top box. The viewer sees and hears only one
of the signals at a given moment while the others remain transparent. Each
viewer interacts with the programming individually by making selections using
the standard cable remote control that comes with a digital set-top box. An
unlimited number of viewers can make selections simultaneously. In response to
the viewer's keyed inputs, the individualized programming seamlessly switches
from one signal to another, providing each viewer with programming appropriate
to the input. The individualized programming signal is not interrupted when a
viewer
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switches between programming elements because, unlike channel switches on the
television, the switch occurs with frame accuracy and no perceptible delay. Our
Individualized Television software in the digital set-top box maintains a
"memory" of the viewer's choices and can automatically switch from one digital
video, audio and graphics stream to another based on the viewer's earlier input.
At appropriate points during an Individualized Television program, the set-top
box will make these automatic switches, recall information, create graphics
and/or implement other pre-programmed instructions. The viewer's individually
selected preferences, inputs, or information maintained in the set-top box's
memory determine the particular program seen by each viewer.
CONTENT
We intend to develop applications of Individualized Television for both
national and regional markets. For national distribution of Individualized
Television, we formed a joint venture with Liberty Media, called LMC IATV
Events, LLC, to license and produce individualized marquee pay-per-view events,
including sports, musical, theatrical and news events national or international.
We have granted LMC IATV Events an exclusive license to produce and distribute
these pay-per-view events incorporating our individualized programming
enhancements. In exchange for granting this license, we received a one-third
equity interest in the joint venture and have no obligation to make capital
contributions.
Subsequently LMC IATV Events entered into a joint venture with iN DEMAND,
LLC (formerly known as Viewer's Choice, LLC), to create a cable and satellite
pay-per-view programming venture. Through this venture, with iN DEMAND's
marketing and distribution capabilities, we expect to showcase Individualized
Television to a national audience. iN DEMAND, the nation's leading pay-per-view
network, serves over 1,700 affiliated systems with approximately 27 million
addressable households and 112 million channel subscribers nationwide. Its five
shareholders include AT&T/TCI Communications, Inc., Time Warner
Entertainment--Advance/Newhouse Partnership, Comcast Programming Ventures, Inc.,
MediaOne of Delaware, Inc. and Cox Communications Holdings, Inc. Viewer's Choice
will be renamed iN DEMAND on January 1, 2000. The joint venture is founded on a
long-term agreement between the parties, which plan to produce and distribute a
minimum of four marquee events each year, beginning in early 2000, depending on
the licensing of suitable initial events. The events will be available for
viewers to purchase and watch, as long as they have digital cable boxes or
satellite receivers that support our Individualized Television technology. The
pay-per-view events could include U.S. professional team championships and
all-star competitions, international sporting events and large-scale rock
concerts.
Advertisers can use Individualized Television in several ways to reach a
targeted audience. During an individualized program, we can ask viewers to
respond to basic questions about themselves or to choose among alternative
product models. Based on these responses or choices, we can send the most
appropriate advertisement to each viewer. For instance, an Individualized
Television enhanced car commercial could "ask" viewers to identify specific
models that most interest them and based on their answers, the car commercial
would "respond" with detailed information about that specific model. Viewers who
make no selection will receive an advertisement selected by the advertiser.
Viewers' responses are stored in their digital set-top box's memory. Based on
this information, the advertiser can subsequently provide appropriate follow-up
content such as premium offers, additional information or more targeted
commercial messages. Alternatively, relying on demographic information about the
digital television household stored in the set-top box, the advertiser can
deliver to each household, among a set of alternative advertisements, the
commercial that best targets its customers. In this case, what viewers see is
determined not by their selections or responses but by demographic information.
In November 1999, we formed a company with General Instrument called Digital
ADCO, Inc., to develop applications for the delivery of addressable advertising
to cable subscribers regardless of whether they have subscribed to
Individualized Television service. The applications developed through Digital
ADCO would permit advertisers to deliver targeted messages to individual viewers
based on
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demographic information stored in their digital set-top boxes. The Digital ADCO
system would allow different advertisements to go to different households
watching the same television show.
Under the terms of our agreement with General Instrument, we have licensed
five of our patents to Digital ADCO in exchange for 51% of the common stock of
Digital ADCO, and General Instrument has licensed six of its patents plus made a
$5 million capital commitment for 49% of Digital ADCO's common stock. Any
capital contribution after General Instrument has fulfilled its initial
$5 million commitment will be made pro rata based on ownership interests. We
anticipate that Digital ADCO will generate revenues from three major sources:
subscription fees for software, advertisement handling fees and an advertisement
encoding fee for digital insertion, a process called "striping."
We have entered into a master license agreement that sets forth the
framework for negotiating with each of FOX Sports Net's 19 owned or affiliated
regional sports networks to provide content for our planned individualized
sports programming service. FOX Sports Net, which reaches more than 72 million
homes nationwide, features professional basketball, hockey and baseball games,
as well as college sports events. To date, we have entered into licensing
agreements with the following five regional sports networks FOX Sports Net
Southwest, FOX Sports Net West, FOX Sports Net Northwest, Sunshine Network and
FOX Sports Net Bay Area.
We expect to launch our first regional service in the area served by FOX
Sports Net Southwest, which distributes programming to more than 6 million
subscribers in Texas, Louisiana, Arkansas, Oklahoma and New Mexico. We have
produced over 100 individualized live sporting events and have tested
distributing the programs through AT&T Broadband & Internet Services (formerly
Tele-Communications, Inc.). We plan to systematically expand Individualized
Television into the other regions served by FOX Sports Net. We expect to launch
our second regional sports network in the area served by FOX Sports Net West,
which distributes programming to approximately 4.8 million subscribers in
Southern California.
Although we chose to focus our initial commercialization efforts on marquee
events, advertising and regional sports, we believe that our Individualized
Television system will have universal applications. It is our objective to
expand our Individualized Television to include many other genres of television
programming. We believe that Individualized Television can become a standard for
interactive digital television programming distributed through cable systems,
DBS, and digital broadcast television.
PRODUCTION
The master license agreement that allows us to negotiate with FOX Sports
Net's regional networks provides that we must bear the incremental content,
transmission, delivery and master control costs incurred in connection with the
production and distribution of individualized programming for our regional
networks. Currently, we have a state-of-the-art master control facility in a
building we share with FOX Sports Net Southwest in Irving, Texas. Our master
control receives multiple video/audio feeds from FOX Sports Net Southwest via
fiber lines. We intend to construct or lease similar facilities for creating and
distributing individualized programming for each of our future regional sports
networks.
We expect to lease a master control facility from National Digital
Television Center, a leading digital television creation facility, to produce
and distribute individualized programming for our planned regional network in
Southern California. The National Digital Television Center has production,
post-production, digital compression and network origination services and is the
largest production facility on Los Angeles' west side. This facility enables us
to work closely with Liberty Media's Liberty Digital division and with other
major entertainment and advertising content creators on the development of
Individualized Television programming. Our Los Angeles office is currently
located in this center.
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DISTRIBUTION
We are initially targeting Individualized Television, which is
software-based, for distribution through digital cable systems. To offer
Individualized Television, a cable operator needs only to have our software
downloaded to the set-top boxes of its digital subscribers. All the cable
subscriber needs to receive our service is a digital set-top box with our
software download. We have agreements with the leading manufacturers of digital
set-top terminals--General Instrument, Scientific-Atlanta and Pioneer--to
achieve compatibility of our software with their equipment. General Instrument
and Scientific-Atlanta shipped 98.3% of the digital set-top boxes delivered in
1998 and are projected to ship 95.9% of the digital set-top boxes in 2000,
according to Kagan. All of General Instrument's digital terminals are compatible
with our software. By the time Scientific-Atlanta's digital set-top boxes are
deployed in the United States in any significant quantity, we expect that our
software will be compatible with these terminals as well.
The initial distribution of our regional sports programming will be provided
by cable operators that are currently upgrading their service from analog to
digital transmission and deploying digital set-top boxes. AT&T Broadband, the
largest distributor of FOX Sports Net Southwest programming, has the
non-exclusive right but not the obligation, to exhibit, distribute and authorize
the reception of Individualized Television on any or all of its systems. The
service may be carried part-time or full-time and may be carried as a single
service or in any tier or package of services. As of this date, neither the
final pricing nor launch date have been agreed upon. In addition, we are
discussing possible affiliate agreements with a number of other cable operators
to carry our southwest regional network on their systems.
To support Individualized Television, we do not require any communication
capability from the set-top box back to the cable operator's system, also known
as a "back channel." There is no additional memory or hardware necessary to
upgrade a digital set-top terminal for delivering the individualized programming
to subscribers.
We will transmit programming created for our regional networks to cable
operators throughout a region via a number of different delivery options,
including fiber lines and satellite. We will determine the most appropriate
distribution method for each region based on geography and on the economic
viability of alternative delivery methods available in the specific region.
HYPERTV
OVERVIEW
HyperTV is a patented process that enhances a television program or
advertisement with related and synchronized content delivered through the
Internet. We believe that HyperTV has potential applications for virtually all
forms of television programming and advertising. For instance:
- a music video network can send its viewers song lyrics, band member
biographies or trivia through the Internet in sync with its television
content;
- a network, televising a movie, can sell banner advertisements on the
Internet and generate revenues from the sale of movie-related merchandise;
and
- a HyperTV-enhanced automobile advertisement can deliver detailed
information from the manufacturer's website or link to local dealer
websites where viewers can schedule test drives.
Initially, HyperTV will serve the growing number of TV viewers who
simultaneously use the Internet to complement and enhance their TV viewing
experiences. As digital set-top box technology becomes more sophisticated and
powerful and as more cable operators offer high speed Internet access, we
anticipate that subscribers will be able to experience both video and Internet
content delivered simultaneously to their televisions. We believe that our
proprietary HyperTV technology uniquely positions us to capitalize on this
anticipated covergence of television and Internet content.
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TECHNOLOGY
Like Individualized Television, HyperTV is a software-based system. We offer
free HyperTV software through direct or indirect downloads from our HYPERTV.COM
website. HyperTV works either by embedding a stream of Web page addresses into
the video or audio signal or by transmitting the addresses directly over the
Internet to the user's computer. The Web content is synchronized to what is
being shown on a particular television channel.
Because HyperTV is software-based and platform independent, it can operate
on any of today's most popular computer operating systems, including, Windows,
Macintosh or UNIX. HyperTV supports both analog and digital television systems,
so programmers and users do not have to upgrade their existing systems to use
HyperTV enhanced television content.
ENTERTAINMENT
We believe that the most significant portion of HyperTV's future revenues
will come from the entertainment market, where we believe the sources of revenue
will be software licensing and program hosting fees, on-line advertising sales,
e-commerce applications, event sponsorship, data management and content creation
fees.
We have recently entered into an agreement with The Box Music Network, which
reaches more than 40 million households worldwide, to create programming that
will integrate HyperTV with their 24-hour-a-day interactive music television
programming. The network uniquely tailors programming for each of its 200
markets. Viewers within each market have the option to call in or go on-line to
request a video for that market from a menu of up to 200 selections. HyperTV
will enable The Box to extend brand identity by synchronizing the delivery of
relevant Web material, Web-based advertising, messages, e-commerce and chat to
broaden the viewer experience and generate new revenue streams. We will share
the incremental on-line revenues and expenses equally with The Box. We commenced
distribution of The Box's enhanced programming in December 1999.
We have also entered into an agreement with SHOWTIME Online, Inc. to
collaborate on the development and delivery of unique television/Internet
convergence programming content for viewers of SHOWTIME Network's STARGATE
science fiction program. In addition, pursuant to an agreement with New Line
Television, Inc., we are producing and distributing via the Internet HyperTV
content in conjunction with pay-per-view exhibitions of AUSTIN POWERS, THE SPY
WHO SHAGGED ME, which HyperTV content we will continue to distribute throughout
January and February 2000. Previously, we tested and transmitted HyperTV content
in connection with TBS Superstation's CYBERBOND: 15 DAYS OF 007 movie festival
in November and December, 1999. In December 1999, we also produced and
distributed HyperTV content for Turner Network Television's exhibition of a
filmed concert tribute to Bob Marley.
DATA MANAGEMENT
In order to receive HyperTV events, viewers must register for the free
download of the HyperTV plug-in. This registration requires viewers to provide
their names, addresses, birthdates, e-mail addresses and other demographic and
personal interests information. As our servers deliver HyperTV content through
the Internet, we can capture and store information about the users' interactions
with such content in a relational database. This captured information can
include the user's viewing time, click-stream, survey and advertisement
responses, chat participation and e-commerce activities. Analysis of the
resulting database allows programmers, advertisers and other businesses to
understand and profile their viewer base and to build a one-to-one relationship
with each end-user, subject to the user's consent.
We market HyperTV to television networks and other television content and
advertising producers as a turnkey system consisting of user software, Web
content creation software and creative services, database management and
analysis and program hosting. For program hosting, we intend to create multiple
Internet access facilities, called points of presence or POPs, each consisting
of large-scale
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computer servers and related equipment, whose architecture and software are
optimized to deliver HyperTV to mass audiences. We have built our first POP,
which is located at the Northeast data center of Exodus Communications, Inc. As
the demand for HyperTV program hosting increases, we plan to scale up our
delivery capacity either by building additional POPs or, more likely, by
contracting for the requisite network capacity and technical services from third
party vendors. We also plan to create a Web portal site at WWW.HYPERTV.COM which
will, among other things, provide a guide and connections to all available
HyperTV programming and a central source for downloading HyperTV software and
software tools.
EDUCATION
In mid-1997, we launched the first application of HyperTV, called
eSchool-Registered Trademark-, designed for the education market. eSchool uses
HyperTV technology to integrate educational video with relevant Internet content
and chat functionality. In addition, eSchool gives educators tools to assess a
student's performance and record the results of the assessment. We derived
substantially all of our revenues for 1998 and the nine months ended
September 30, 1999 from the sale of HyperTV software and related services to
educational institutions.
Using eSchool software, students can receive traditional video lessons
through frames in their Web browsers or from a television in the classroom.
Simultaneously, eSchool provides separate frames in the Web browser that display
websites with supporting information, a dialogue with a teacher or other
students during a live lesson and a "playlist" of websites received to permit
navigation from one to another. eSchool content creation software allows an
instructor to easily select and order the addresses of the websites and related
questions to be included in the playlist. The website addresses and questions
can be assigned times and sent automatically to students during a pre-recorded
program or in a live lesson. The instructor can have any website address or
question sent to the students at any time.
EQUIPMENT SUPPLIERS
We do not intend to manufacture set-top converters, terminals, video servers
or other devices in connection with Individualized Television or HyperTV. In
addition, we do not intend to manufacture any computer or networking equipment
needed to build our planned HyperTV POPs. This equipment will be supplied to us
or to third parties pursuant to agreements with third party equipment suppliers.
In 1996, we signed a non-exclusive, royalty-free manufacturing agreement
with General Instrument for General Instrument's MPEG-2 digital set-top
terminals. Working with us and with General Instrument, Sarnoff Corporation
effected the integration of individualized programming into these terminals. We
and General Instrument also agreed to jointly market our Individualized
Television application, which operates with General Instrument's digital systems
and consumer set-top terminals.
We have also entered into a non-exclusive, royalty free joint marketing and
development agreement with Scientific-Atlanta to integrate our Individualized
Television programming software with Scientific-Atlanta's advanced digital
set-top boxes, including the Explorer 2000. In addition, we and Pioneer agreed
to integrate our Individualized Television programming software into Pioneer's
digital set-top box software applications to enable reception of Individual
Television through digital set-top boxes that operate using systems developed by
Pioneer. We may grant licenses similar to those granted to General Instrument,
Scientific-Atlanta and Pioneer to other manufacturers that are selected by the
future distributors of Individualized Programming.
PATENTS AND OTHER INTELLECTUAL PROPERTY
We have sought to protect the proprietary features of our individualized
programming technologies and HyperTV technologies through patents, copyrights,
confidentiality agreements and trade secrets both in the United States and
overseas. As of the present time, the United States Patent and Trademark Office
has issued 18 patents to us that are currently in force. We also have additional
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patents pending. The patents expire at various dates from 2003 to 2016.
Corresponding patents for some of the above U.S. patents have been granted or
are pending in Canada, Japan, Australia and the European Patent Office. We
believe such patents will strengthen our competitive position in these
countries.
There can be no assurance that our patents are enforceable, or, if
challenged, that we can successfully defend them, particularly in view of the
high cost of patent litigation, nor can there be any assurance that we will
derive any competitive advantages from them. To the extent that patents are not
issued for any other products developed by us, we would be subject to more
competition. The issuance of patents may be insufficient to prevent competitors
from essentially duplicating our products by designing around the patented
aspects. In addition, we cannot assure you that our products will not infringe
on patents owned by others, licenses to which may not be available to us, nor
that competitors will not develop functionally similar products outside the
protection of any patents we have or may obtain.
The inventors named on all of our issued patents have assigned to us all
right, title and interest in and to the above U.S. patents and any corresponding
foreign patents or applications based thereon. We require that each of our full
time employees, consultants and advisors execute a confidentiality and
assignment of proprietary rights agreement upon the commencement of employment
or a consulting relationship. These arrangements generally provide that all
inventions, ideas and improvements made or conceived by the individual arising
out of the employment or consulting relationship are our exclusive property.
These agreements generally also require all such information be kept
confidential and not disclosed to third parties, except with our consent or in
specified circumstances. We cannot assure, however, that these agreements will
provide effective protection for our proprietary information in the event of
unauthorized use or disclosure of such information.
WOLZIEN PROCESS
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. While HyperTV enables content producers and advertisers to "push"
synchronized Internet content to television viewers, the Wolzien Process
provides the means, based on prompts from television or radio programming, for
users to "pull" relevant content from the Internet to augment that programming
or to communicate directly with an on-line provider. We intend to develop the
Wolzien Process both on a stand-alone basis and in conjunction with the HyperTV
Process. Other applications for the Wolzien Process include real time radio
broadcasting, both analog and digital, and recorded video programming on VCR's,
CD-ROM or DVD players.
The terms of the patent acquisition agreements provide that the Wolzien
patent and the HyperTV patents will be jointly licensed and all revenue from
such joint licenses will be shared equally between our subsidiary, Media Online
Services, and us. However, 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 for a nominal exercise price to acquire a 49% interest in Media Online
Services.
RESEARCH AND DEVELOPMENT
We devote a substantial portion of our resources to developing new products,
enhancing existing products, expanding and improving our Individualized
Television and HyperTV technologies and strengthening our technological
expertise. During the years ended December 31, 1996, 1997, 1998, and the nine
months ended September 30, 1999, we expended approximately $1.2 million,
$551,328, $820,475, and $811,364, respectively, on outside research and
development. We intend to continue to devote substantial resources to research
and development for the next several years. As of October 31,
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1999, approximately 14 employees, or 16% of our work force, were primarily
engaged in research and development activities.
COMPETITION
The markets for digital television applications and television/Internet
convergence programming is extremely competitive, and we expect competition to
intensify in the future. The markets for digital television applications and
television/Internet convergence programming are new and quickly evolving and are
characterized by untested consumer demand and a lack of industry standards.
These markets are therefore subject to significant changes in the products and
services offered by existing market participants and the emergence of new market
participants. As a result, it is difficult to determine what companies and
technologies are competing with us or may compete with us in the future in one
or more of our businesses.
We believe our competitors in the television/Internet convergence
programming and services markets include RespondTV, Liberate Technologies, Mixed
Signals, More.com, NTN, OpenTV, Inc., Spiderdance, Inc., Starwave's Enhanced TV,
Wink Communications, Inc. and Worldgate Communications, Inc. We also face
competition from other traditional broadcast and cable television networks. Many
of these competitors are currently offering (or may soon offer) services that
will compete with some or all of our current and proposed HyperTV products and
services. In addition, we compete with companies such as Apple, Microsoft
Corporation's WebTV, Motorola, RealNetworks, Inc., Source Media, Inc. and Veon
that provide applications which enable video content to be "streamed" over the
Internet. Many of these applications could be extended and compete with some or
all of our existing or proposed HyperTV applications.
We do not believe that there are currently any competitors offering products
comparable to Individualized Television. But there are a number of companies,
including NDS Group plc, who are offering products and services that are similar
to different portions of our Individualized Television service. Furthermore, we
expect to face competition in the future from traditional television and cable
broadcasters such as ABC, CBS, CNN, FOX and NBC. Some of these broadcasters have
in the past and may in future develop and broadcast their own
television/Internet convergence programming or programming that is similar to
Individualized Television.
GOVERNMENT REGULATION
We believe that neither our present or future implementation of
Individualized Television is subject to any direct substantial government
regulation. However, the broadcast industry in general, and cable television,
DBS and wireless communication in particular, are subject to substantial
government regulation.
TELEVISION Pursuant to federal legislation enacted in 1992, which we call
the 1992 Cable Act, the Federal Communications Commission substantially
re-regulated the cable television industry in various areas including rate
regulation, competitive access to programming, "must carry" and retransmission
consent for broadcast stations. These rules, among other things, restrict the
extent to which a cable system may profit from, or recover costs associated
with, adding new program channels, impose certain carriage requirements with
respect to television broadcast stations, limit exclusivity provisions in
programming contracts and require prior notice for channel additions, deletions
and changes. The United States Congress and the FCC also have under
consideration, and may in the future adopt, new laws, regulations and policies
regarding a wide variety of matters which could, directly or indirectly,
materially adversely affect our operations.
INTERNET Increased regulation of the Internet might slow the growth in use
of the Internet, which could decrease demand for our services, increase our cost
of doing business or otherwise have a material adverse effect on our business,
financial condition and results of operations. Congress has recently passed
legislation regulating certain aspects regarding the use of the Internet,
including
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children's protection, copyright infringement, user privacy, taxation, access
charges and liability for third-party activities. In addition, federal, state
and local governmental organizations as well as foreign governments are
considering other legislative and regulatory proposals that would regulate the
Internet. Areas of potential regulation include libel, pricing, quality of
products and services, intellectual property ownership and personal privacy. We
collect and store significant personal information from users of our
Individualized Television and HyperTV applications and plan to use such
information to develop our businesses, particularly with respect to targeted
advertising, or otherwise generate revenues. Storage and use of such information
is subject to state and federal regulation. Storage and use of such information
may also subject us to privacy claims relating to our use and dissemination of
personal information. We do not know how courts will interpret laws governing
the Internet or the extent to which they will apply existing laws regulating
issues such as property ownership, libel and personal privacy to the Internet.
Therefore, we are not certain how new laws governing the Internet or other
existing laws will affect our business.
We are unable to predict the outcome of future federal legislation or
regulatory proposals or the impact of any current or future laws or regulations
on our operations. There can be no assurance that we will be able to comply with
any future laws or regulations that may be imposed on our operations.
EMPLOYEES
At December 31, 1999, we employed 87 full-time employees. We are not subject
to any collective bargaining agreements. We believe our relationships with our
employees are generally satisfactory.
FACILITIES
We maintain our principal and executive offices at Rockefeller Center, 1270
Avenue of the Americas, New York, New York, where we lease approximately 10,600
square feet. Our lease for 8,000 square feet and for 2,600 square feet of this
space extends through February 2000 and January 2001 respectively. We also lease
office and technical space in four other facilities, one each in New York, New
York, Dallas, Texas, Houston, Texas and Los Angeles, California. None of these
leases extends beyond December 31, 1999. We lease approximately 12,000 square
feet at 233 Park Avenue South, New York, New York, where most of our HyperTV
operations are located, and we have committed to lease 20,000 square feet next
door at 225 Park Avenue South. This lease commitment extends through 2015. Our
lease at 233 Park Avenue South terminates at such time as we occupy the space at
225 Park Avenue South. We expect to be able to move into 225 Park Avenue South
early in 2001. We have also committed to lease approximately 8,000 square feet
of office space in Branchburg, New Jersey for ACTV's and Digital ADCO's
technical and research facilities. That lease commitment extends into 2005.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which we are a party.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table shows information regarding our executive officers and
directors at January 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William C. Samuels........................ 56 Chairman of the Board and Chief Executive
Officer; Chairman of the Board of ACTV
Entertainment, Inc. and HyperTV Networks,
Inc.
David Reese............................... 43 President, Chief Operating Officer and
Director; President of ACTV Entertainment,
Inc.
Bruce J. Crowley.......................... 41 Executive Vice President and Director;
President of HyperTV Networks, Inc.
Christopher C. Cline...................... 48 Senior Vice President--New Business
Development and Finance and Chief
Financial Officer
Day L. Patterson.......................... 56 Senior Vice President, General Counsel and
Secretary
William A. Frank.......................... 50 Director
Steven W. Schuster........................ 44 Director
Melvyn N. Klein........................... 57 Director
</TABLE>
WILLIAM C. SAMUELS has served as Chairman of the Board since November 1994,
Chief Executive Officer since August 1993 and Director since August 1989. In
addition, he is Chairman of the Board of both ACTV Entertainment and HyperTV
Networks, each subsidiaries of ours. From August 1989 to February 1999,
Mr. Samuels also served as our President. He is a trustee of Howard J. Samuels
Institute at City College in New York, New York and is on the Board of Directors
of the Council of Economic Priorities. Mr. Samuels received a J.D. from Harvard
Law School and a B.S. from the Massachusetts Institute of Technology.
DAVID REESE has served as President and Chief Operating Officer since
February 1999 and Director since November 1992, as well as President of ACTV
Entertainment since November 1994. He has been employed by us since
December 1988, serving as Executive Vice President from November 1992 to
February 1999 and Vice President of Finance from September 1989 through
November 1992. Mr. Reese is the chair of the advisory board of Pennsylvania
State University's School of Information Sciences and Technology. He received a
B.S. from Pennsylvania State University.
BRUCE J. CROWLEY has served as Executive Vice President since October 1995
and Director since December 1995, as well as President of HyperTV Networks since
December 1995. He joined us in October 1994 and served as President--Distance
Learning from that date to October 1995. Previously, Mr. Crowley had been
employed by KDI Corporation. He received a B.A. from Colgate University and an
M.B.A. from Columbia University.
CHRISTOPHER C. CLINE has served as Senior Vice President--New Business
Development since December 1999 and Senior Vice President--Finance and Chief
Financial Officer since November 1993. From July 1995 to September 1999, he also
served as our Secretary. Mr. Cline was formerly the Vice President of
International Trade and Finance Corp., a cross-border financial trading and
consulting company, and prior to that, Vice President of Citicorp Investment
Bank. He received a B.A. from Haverford College and an M.B.A. from Stanford
University.
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DAY L. PATTERSON has served as Senior Vice President, General Counsel and
Secretary since September 1999. He was formerly Senior Vice President, General
Counsel and Secretary of Simmons Communications and its successor, American
Cable Entertainment, and of American Cable Entertainment of
Kentucky-Indiana, Inc. and Scott Cable Communications, Inc., two affiliates of
American Cable Entertainment which filed voluntary petitions in bankruptcy with
the U.S. Bankruptcy Court in August and February 1996, respectively. Prior to
joining Simmons Communications, Mr. Patterson was Vice President and Chief
Counsel at Group W Cable, the cable television subsidiary of Westinghouse
Electric Company. He received a B.A. from Yale College and a J.D. from Columbia
University School of Law.
WILLIAM A. FRANK has served as Director since April 1996. He currently
serves as the Chief Operating Officer of Cognitive Arts Corp., a position he has
held since June 1997. Mr. Frank was formerly the Chief Executive Officer of
Greenwich Entertainment Group, against which an involuntary bankruptcy petition
was filed with the U.S. Bankruptcy Court in May 1997 and pursuant to which
Greenwich was liquidated. From 1991 to 1996, he also served as Chairman of the
Board of Directors of Corsearch, a data research company. Mr. Frank received a
B.S. from the University of Missouri.
STEVEN W. SCHUSTER has served as Director since May 1996. He has been
engaged in the practice of law for more than 16 years. Since January 1996,
Mr. Schuster has been a partner with the law firm of McLaughlin & Stern LLP. We
retain McLaughlin & Stern LLP to act as outside counsel on various corporate
matters. From June 1993 to December 1995, he was a member of the law firm of
Shane & Paolillo, P.C. Mr. Schuster received a B.A. from Harvard University and
a J.D. from New York University School of Law.
MELVYN N. KLEIN has served as Director since December 1999. He currently is
the sole stockholder of a general partner of GKH Partners, L.P., an investment
partnership. Mr. Klein is also a principal of Questor Management Company and
director of Anixter International, Bayou Steel Corporation and Hanover
Compressor Corporation. He received a B.A. from Colgate University and a J.D.
from Columbia University.
KEY EMPLOYEES
Although they are not executive officers, we consider the following
individuals to be key employees (their listed ages and positions are as of
January 1, 2000):
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David Alworth.................. 45 Senior Vice President, New Business Development and Chief
Operating Officer of ACTV Entertainment, Inc.
Richard D. Barron.............. 64 Senior Vice President of The Texas Individualized Network,
Inc.
Art Cohen...................... 61 Senior Vice President Advertising and E-commerce
James Crook.................... 55 Executive Vice President of HyperTV Networks, Inc. for
Education
Frank P. Deo................... 36 Vice President of Digital Technology
Brent W. Imai.................. 40 Vice President--Programming
Kevin M. Liga.................. 37 Senior Vice President and Chief Technology Officer
Kevin Sheridan................. 44 Chief Information Officer
Craig Ullman................... 39 Chief Creative Officer of HyperTV Networks, Inc.
Richard Yelen.................. 40 Senior Vice President Marketing
</TABLE>
DAVID ALWORTH is Senior Vice President, New Business Development and Chief
Operating Officer of ACTV Entertainment and joined us in June 1996. Prior to
that, he worked for Major League Baseball for 11 years where he served as
Executive Director of Broadcast and Vice President of
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Broadcasting and Production Management for The Baseball Network. Mr. Alworth
received a B.A. from Ithaca College and an M.B.A. from Fordham University.
RICHARD D. BARRON is Senior Vice President of The Texas Individualized
Network, Inc. He also serves as General Manager of our regional sports networks
and joined us in July 1997. In 1983, Mr. Barron helped launch Home Sports
Entertainment which later became FOX Sports Net Southwest. In the late 1980s, he
assisted in the startup of six regional sports networks. In 1994, Liberty Media
hired Mr. Barron to operate Prime Ticket Network which later became FOX Sports
Net West. He received a B.A. from the University of Washington.
ART COHEN is our Senior Vice President Advertising and E-commerce and joined
us in March 1999. He was previously Vice President of Advertising for Your
Choice TV, an innovator in time-shifted programming and addressable advertising.
Prior to that, Mr. Cohen was involved with the introduction of AT&T's Worldnet
Service and with the launch and publication of Interactive Age, the first
convergence and Internet publication. He received a B.S.B.A. from New York
University.
JAMES CROOK is Executive Vice President of HyperTV Networks, Inc. for
Education and joined us in August 1990. Previously, he was President of MIND,
Inc., a company founded by our Chairman, William C. Samuels, in 1970. Mr. Crook
received his B.A. from Muskington College and a Masters from Kent State
University.
FRANK P. DEO is our Vice President of Digital Technology and joined us in
May 1998. Previously, in June 1992, he joined Sarnoff Corporation as head of DTV
Consumer Systems, where he helped develop DirecTV and HDTV systems. Mr. Deo
received a B.E.E.E. (Bachelor of Engineering in Electrical Engineering) from the
City College of New York.
BRENT W. IMAI is our Vice President--Programming and joined us in
April 1995. He was previously Executive Producer of Prime Ticket Network (now
FOX Sports Net West) from the network's inception in 1985 to 1994. Mr. Imai
received a B.A. from University of California at Los Angeles.
KEVIN M. LIGA is our Senior Vice President and Chief Technology Officer and
joined us in January 1998. Previously, he was the Vice President of Research and
Development for CAI Wireless Systems, Inc. and President of CAI Wireless
Internet, where he acted as the company's head of strategic technical planning
and pioneered the use of Internet over broadband wireless systems. Mr. Liga
earlier worked for Bell Atlantic and TCI.
KEVIN SHERIDAN is our Chief Information Officer and joined us in
August 1999. Previously, he was Vice President in charge of the Market Research
Division of American Business Information, Inc., where he oversaw development
and sale of data extraction and processing services. Prior to that,
Mr. Sheridan was president of Marketing Data Systems, Inc., a company he
founded. He received a B.A. from Lafayette College and an M.B.A from Fairleigh
Dickinson University.
CRAIG ULLMAN is our Chief Creative Officer of HyperTV Networks, Inc. and
joined us in April 1993. Previously, he was Vice President of Palladin
Productions, an independent production company. Mr. Ullman received a B.A. from
Bucknell University and a M.F.A. (Master of Fine Arts) from Brown University.
RICHARD YELEN is our Senior Vice President Marketing and joined us in
August 1999. Previously, he was responsible for cable television marketing at
Cox Communications. Prior to that, Mr. Yelen was Director of Marketing in
Southern California for Western Communications. He received a B.A. from Ithaca
College and an M.B.A. from Tulane University.
Our board of directors is divided into three classes with each class serving
for a term of three years or until their successors are elected. William Samuels
and William Frank are class III directors, David Reese and Steven Schuster are
class II directors and Bruce Crowley and Mel Klein are class I directors.
You may obtain information regarding the compensation of our officers and
directors by referring to our most recent annual report filed with the
Securities and Exchange Commission.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table shows information about the beneficial ownership of our
common stock as of January 14, 2000 with respect to (1) each beneficial owner of
5% or more of our outstanding common stock, based upon information filed by such
owners with the Securities and Exchange Commission; (2) each of our directors;
(3) each of our named executive officers as defined under the Securities
Exchange Act of 1934; and (4) all directors and executive officers as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
Liberty Media Corporation(1)...................... 13,000,000 26.1% 24.1%
William C. Samuels(2)............................. 3,331,475 7.5 6.9
David Reese(3).................................... 1,650,667 3.8 3.4
Bruce J. Crowley(4)............................... 929,133 2.2 2.0
Christopher C. Cline(5)........................... 177,279 * *
Steven W. Schuster(6)............................. 24,000 * *
William Frank(7).................................. 10,000 * *
All officers and directors as a group (6 persons)
(2-7)........................................... 6,122,554 13.1% 12.0%
</TABLE>
- ------------------------
* Indicates less than 1% of the total shares outstanding.
(1) Includes options to purchase 7,500,000 shares which are presently
exercisable or which become exercisable within 60 days of January 14, 2000.
The address of Liberty Media Corporation is 8101 E. Prentice Avenue, Suite
500, Englewood, Colorado 80111.
(2) Includes options to purchase 2,203,000 shares which are presently
exercisable or which become exercisable within 60 days of January 14, 2000.
The address of Mr. Samuels is 1270 Avenue of the Americas, Rockefeller
Center, Suite 2401, New York, New York 10020.
(3) Includes options to purchase 1,473,334 shares which are presently
exercisable or which become exercisable within 60 days of January 14, 2000.
(4) Includes options to purchase 757,666 shares which are presently exercisable
or which become exercisable within 60 days of January 14, 2000.
(5) Includes options to purchase 12,334 shares which are presently exercisable
or which become exercisable within 60 days of January 14, 2000.
(6) Includes options to purchase 16,000 shares which are presently exercisable
or which become exercisable within 60 days of January 14, 2000.
(7) Includes options to purchase 10,000 shares which are presently exercisable
or which become exercisable within 60 days of January 14, 2000.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1998, Liberty Media invested $5 million in us by purchasing our
common stock. As part of this transaction, Liberty Media also acquired a warrant
to invest an additional $5 million in our common stock. Also in September 1998,
we and Liberty Media created LMC IATV Events, LLC to license and produce
individualized marquee national or international pay-per-view events. In
connection with this venture, we granted LMC IATV Events an exclusive license to
produce and distribute pay-per-view events that incorporate our individualized
programming enhancements.
In March 1999, Liberty Media exercised its option to purchase our common
stock for $5 million and purchased additional common stock at $8.00 per share
for $4 million. We also issued warrants to Liberty Media which, if fully
exercised, would require Liberty Media to invest an additional $90 million in
us. These warrants are fully exercisable, have a weighted average exercise price
of $12.00 and expire in three equal tranches in March 2000, 2001 and 2004. In
addition, Liberty Media has demand registration rights with respect to the
common stock (and common stock issuable on exercise of warrants) it acquired in
these transactions. Liberty Media has not expressed a desire to exercise its
demand registration rights.
In connection with its purchases of our common stock in 1998 and 1999,
Liberty Media acquired the right to nominate members to our Board based on the
number of our shares it actually owns. We have agreed to use our reasonable best
efforts to have Liberty Media's nominees elected to our Board. To date, Liberty
Media has not exercised this right.
William A. Frank is a director of ACTV and was formerly the Chief Executive
Officer of Greenwich Entertainment Group, a position he held from 1994 to 1997.
In January 1995, we granted an exclusive license to Greenwich Entertainment for
the use of our programming technology in shopping malls, museums and
entertainment centers. In addition, we invested approximately $274,000 in
Greenwich Entertainment in 1996, in exchange for approximately 15% of Greenwich
Entertainment's outstanding common stock. During 1997, an involuntary bankruptcy
petition was filed against Greenwich Entertainment, and the company was
liquidated.
Steven W. Schuster is a director of ACTV and a partner at the law firm of
McLaughlin & Stern LLP. We retain McLaughlin & Stern LLP to act as outside
counsel on various corporate matters.
All current transactions between us and our officers, directors and
principal stockholders or any affiliates thereof are, and in the future such
transactions will be, on terms no less favorable to us than could be obtained
from unaffiliated third-parties.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our total authorized capital stock consists of 65,000,000 shares of common
stock, par value $0.10 per share, and 1,000,000 shares of preferred stock, par
value $0.10 per share. The following descriptions of capital stock are qualified
in all respects by reference to our Restated Certificate of Incorporation and
By-laws, which are incorporated by reference as exhibits to the Registration
Statement of which this prospectus is a part.
COMMON STOCK
The holders of common stock elect all directors and are entitled to one vote
for each share held of record on all matters to be voted upon by stockholders.
Upon successful completion of this offering, 46,373,496 shares of common stock
will be issued and outstanding. Subject to preferences that may be applicable to
any outstanding preferred stock, all shares of common stock participate equally
in dividends, when and as declared by the Board of Directors, and in net assets
on liquidation. The shares of common stock have no preference, conversion,
exchange, preemptive or cumulative voting rights.
PREFERRED STOCK
Our Certificate of Incorporation authorizes the issuance of shares of
preferred stock in one or more series. The Board of Directors has the authority,
without any vote or action by the shareholders, to create one or more series of
preferred stock up to the limit of our authorized but unissued shares of
preferred stock and to fix the number of shares constituting such series and the
designation of such series, the voting powers (if any) of the shares of such
series and the relative, participating, option or other rights (if any), and any
qualifications, preferences, limitations or restrictions thereof, including,
without limitation, the dividend rate (and whether dividends are cumulative),
conversion rights, rights and terms of redemption (including sinking fund
provisions), and redemption price and liquidation preferences, and any other
rights, preferences and limitations pertaining to such series which may be fixed
by the Board of Directors pursuant to the General Corporation Law of the State
of Delaware. Upon completion of this offering, there will be no shares of
preferred stock outstanding.
ANTI-TAKEOVER PROVISIONS AFFECTING THE COMMON STOCK
STAGGERED BOARD
Our Board of Directors is divided into three classes, each class serving a
staggered three-year term. As a result, only one class of directors is elected
at our annual meeting, with the other classes continuing for the remainder of
their respective terms.
SPECIAL MEETINGS
Our Bylaws provide that a special meeting of stockholders may be called only
by the Chairman of the Board of Directors or upon the request of holders of 40%
of the shares entitled to vote at such meeting.
OPTIONS IN SUBSIDIARIES
Our Board of Directors has authorized that certain of our direct and
indirect subsidiaries have two classes of common stock, designated as class A
and class B, and one class of preferred stock. In each subsidiary, the
authorized number of shares of class B common stock is equivalent to 20% of the
total common stock authorized of that subsidiary. Options have been issued for
the full 20%. Each share of class B common stock has 25 votes, compared to one
vote for each share of the class A common stock.
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Certain employees, including Messrs. 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 our subsidiaries. These options are only
exercisable in the following two circumstances:
- If a person, other than one of our officers or directors, or an entity
becomes the beneficial owner of 20% or more of the combined voting power
of our common stock, and the independent members of the Board determine
that the person or entity will act in a manner inconsistent with the best
interests of our stockholders, or
- If a majority of the candidates nominated by management to our Board is
not elected.
The class B common stock, if issued, will have majority voting rights in
such subsidiaries. No class B common stock has been issued to date. If these
options are exercised, such officers, directors and employees will have majority
voting rights in our subsidiaries and, therefore, the ability to elect the Board
of Directors of each subsidiary and to control the business and affairs of each
subsidiary. The holders of the options to purchase class B common stock have
entered into shareholder agreements that grant Mr. Samuels the power to vote the
class B common stock when and if the options are exercised. Holders of the
options of class B common stock of certain subsidiaries also have the rights in
certain circumstances to exchange these options for options of shares of ACTV
common stock with an exercise price equal to the close of ACTV's common stock on
the conversion date. See "Risk Factors--We have anti-takeover defenses that
could delay or prevent an acquisition and could adversely affect the price of
our common stock" for a discussion of the potential risks to your investment in
our common stock.
BLANK CHECK PREFERRED STOCK
The existence of authorized but unissued preferred stock may enable our
Board of Directors to render more difficult or discourage an attempt to obtain
control of us by means of a merger, tender offer, proxy contest or otherwise.
For example, if in the due exercise of its fiduciary obligations, our Board of
Directors were to determine that a takeover proposal is not in our best
interests, our Board of Directors could cause us to issue shares of preferred
stock without stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed
acquirer or insurgent stockholder or stockholder group. In this regard, our
Certificate of Incorporation grants the Board of Directors broad power to
establish the rights and preferences of authorized and unissued preferred stock.
The issuance of shares of preferred stock pursuant to the Board of Directors'
authority described above could decrease the amount of earnings and assets
available for distribution to holders of our common stock and adversely affect
the enjoyment of rights of such holders, including voting rights in the event a
particular series of preferred stock is given a disproportionately large number
of votes per share, and may have the effect of delaying, deferring or preventing
a change in control of us that may be favored by certain stockholders.
BOARD POLICY OF ACTV, INC.
Our policy is and has been "to license ACTV's technology and arrange joint
ventures for its use in a number of different industries." Our Board of
Directors has previously adopted, and has reaffirmed in 1999, a resolution which
authorizes them to take all necessary actions to use and exploit our proprietary
and potential technologies in the event a person or entity seeks to acquire or
acquires 20% or more of our common stock and the Board determines that the
acquirer is likely to act inconsistently with the best interests of our
stockholders. The text of the Board Resolution is the following:
"Resolved, that it being in the best interests of ACTV, Inc. and its
shareholders, the Board of Directors hereby approves and adopts a plan that, in
the event that a majority of the Board of Directors determines that an acquirer
has acquired, or seeks to acquire, 20% or more of ACTV, Inc. and that such
acquirer is not a suitable acquirer in the opinion of the majority of the Board
of Directors since such acquirer will not further our policy of acting as a
broad licensor and joint venturer
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<PAGE>
of our proprietary and patented technologies, or is otherwise likely to act
inconsistently with the best interests of all of our shareholders, the Board is
authorized to take all necessary action to offer, by invitation, stock, joint
ventures or licenses to use and exploit ACTV's proprietary and patented
technologies. The Board is authorized, in its discretion, to employ an
independent investment banking firm for the purpose of evaluating various
business alternatives."
Our Board of Directors determined that Liberty Media was a suitable investor
pursuant to this policy. The Board of Directors determination was made in
connection with Liberty Media's investment of $9 million in us. Pursuant to this
investment, Liberty Media agreed not to purchase securities that would increase
its interest in us above 26% of our outstanding common stock.
Both the Board of Directors' policy noted above and the voting power of our
class B common stock in our subsidiaries may have an anti-takeover effect and
may be used to delay, discourage or prevent a change in control or management of
ACTV, Inc.
REGISTRATION RIGHTS
In October 1999, we acquired intellectual property rights from CatchTV
Acquisition Corp. in return for 375,000 shares of our unregistered common stock.
CatchTV has the right to demand registration of these shares. We have agreed
that, upon CatchTV's written demand given after February 15, 2000, we will
register these shares and cause that registration statement to be effective on
or before April 15, 2000 (or such later date as shall be within 50 days of
CatchTV's demand). We anticipate CatchTV will make such a demand on or soon
after February 15, 2000.
In January 1999, we issued warrants to several individuals and one
institution to purchase, in the aggregate, up to 100,000 shares of our common
stock. Each warrant grants the holder demand registration rights. The demand
registration rights are only exercisable if we elect not to grant a cashless
exercise of the warrants. We have agreed with the underwriters of this offering
that for a period of 90 days after the commencement of this offering, we will
allow a cashless exercise of these warrants. These warrants also grant the
holders piggyback registration rights that allows them to join in any future
registration of any securities we file with the Securities and Exchange
Commission, including any registration filed in connection with CatchTV's
shares. These warrant holders have expressed a desire not to participate in this
offering but have not waived their right to join in any future offerings. To the
extent that these warrants have been exercised, the resulting shares may be sold
without registration pursuant to Rule 144 under the Securities Act. On
January 4, 2000, these warrantholders exercised a portion of their warrants,
resulting in the purchase of approximately 53,000 shares. See "Shares Eligible
for Future Sale" for a description of Rule 144.
Through two transactions, one in 1998 and one in 1999, we issued to Liberty
Media 3 million shares of unregistered common stock and warrants to purchase
10 million shares of unregistered common stock. Liberty Media has demand
registration rights that would require us to register any shares held by it and
any shares issuable to them upon exercise of the warrants. In April 1999,
Liberty Media exercised one of it warrants, described above, and acquired
2.5 million shares of our unregistered common stock. Liberty Media has agreed
not to exercise its demand rights for a period of 90 days after the public
offering date.
Through two transactions, one in 1997 and one in 1999, we issued to General
Instrument a total of 1 million shares of our unregistered common stock and a
warrant to purchase 625,000 shares of our unregistered common stock. General
Instrument has piggyback registration rights that allows it to join in any
registration of any securities we file with the Securities and Exchange
Commission. However, the underwriters of any offering of our securities can
delay the exercise of this right until completion of that offering.
TRANSFER AGENT
The transfer agent for our common stock is Continental Stock Transfer &
Trust Company, New York, New York.
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<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
GENERAL
This section summarizes the material U.S. Federal tax consequences to
holders of common stock that are "non-U.S. holders." In general, you are a
non-U.S. holder if you are:
- an individual that is a nonresident alien of the U.S.;
- a corporation organized or created under non-U.S. law; or
- an estate or trust that is not taxable in the U.S. on its worldwide
income.
If a partnership holds common stock, the tax treatment of a partner
generally will depend upon the status of the partner and upon the activities of
the partnership. If you are a partner of a partnership holding common stock, we
suggest that you consult your tax advisor.
This discussion does not address all aspects of U.S. Federal taxation, and
in particular is limited in the following ways:
- The discussion only covers you if you hold your common stock as a capital
asset (that is, for investment purposes), and if you do not have a special
tax status.
- The discussion does not cover tax consequences that depend upon your
particular tax situation in addition to your ownership of common stock.
- The discussion is based on current law. Changes in the law may change the
tax treatment of holders of common stock.
- The discussion does not cover state, local or foreign law.
- We have not requested a ruling from the IRS on the tax consequences of
owning the common stock. As a result, the IRS could disagree with portions
of this discussion.
IF YOU ARE CONSIDERING BUYING COMMON STOCK, WE SUGGEST THAT YOU CONSULT YOUR
TAX ADVISORS ABOUT THE TAX CONSEQUENCES OF HOLDING THE COMMON STOCK IN YOUR
PARTICULAR SITUATION.
DISTRIBUTIONS
Distributions paid on the shares of common stock generally will constitute
dividends for U.S. Federal income tax purposes to the extent paid from our
current or accumulated earnings and profits, as determined under U.S. Federal
income tax principles. We intend, for the foreseeable future, to retain all
future earnings for use in our business (see "Dividend Policy"). Any dividends
paid to you generally will be subject to United States withholding tax at a 30%
rate or, if a tax treaty applies, a lower rate specified by the treaty, unless
you receive the dividends in connection with a trade or business you conduct in
the United States. To receive a reduced treaty rate, you must furnish to us or
our paying agent a duly completed Form 1001 or Form W-8BEN (or substitute form)
certifying your qualification for the reduced rate.
Currently, withholding generally is imposed on the gross amount of a
distribution, regardless of whether we have sufficient earnings and profits to
cause the distribution to be a dividend for U.S. Federal income tax purposes.
However, withholding on distributions made after December 31, 2000, may be on
less than the gross amount of the distribution if the distribution exceeds a
reasonable estimate of our accumulated and current earnings and profits.
In order to claim an exemption from withholding on the ground that the
dividends are effectively connected with a U.S. trade or business, you must
provide to us or our paying agent a duly completed Form 4224 or Form W-8ECI (or
substitute form) certifying your exemption. However, dividends exempt
48
<PAGE>
from U.S. withholding because they are effectively connected generally are
subject to U.S. Federal income tax on a net income basis at the regular
graduated tax rates. These rules might be altered by an applicable tax treaty.
If you are a corporation, any effectively connected dividends received by you
may, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate or a lower rate specified by an applicable income tax treaty.
Under current U.S. Treasury regulations, dividends paid before January 1,
2001, to an address outside the United States are presumed to be paid to a
resident of the country of address for purposes of the withholding discussed
above and for purposes of determining the applicability of a tax treaty rate.
However, U.S. Treasury regulations applicable to dividends declared after
December 31, 2000, eliminate this presumption, subject to certain transition
rules.
For dividends paid after December 31, 2000, you generally will be subject to
U.S. backup withholding tax at a 31% rate under the backup withholding rules
described below, rather than at the 30% or reduced tax treaty rate, as described
above, unless you comply with certain IRS certification or documentary evidence
procedures. Certain changes to these rules apply to dividend payments made after
December 31, 2000, to certain non-U.S. holders or foreign intermediaries. You
should consult your own tax advisor concerning the effect, if any, of the rules
affecting post-December 31, 2000, dividends on your possible investment in
common stock.
You may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund along with the required information with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
You generally will not be subject to U.S. Federal income tax on a sale or
other disposition of the Common Stock unless one of the following applies:
- If the gain is effectively connected with a trade or business you conduct
in the U.S. you will, unless an applicable treaty provides otherwise, be
taxed on your net gain on the sale under regular graduated U.S. Federal
income tax rates. If you are a foreign corporation, you may be subject to
an additional branch profits tax at a 30% rate, unless an applicable
income tax treaty provides for a lower rate.
- If you are an individual and are present in the United States for 183 or
more days in the taxable year of the disposition and certain other
conditions are met, you will be subject to a flat 30% tax on your gain
from the sale, which may be offset by certain U.S. capital losses.
- If we are or have been a "U.S. real property holding corporation" for U.S.
Federal income tax purposes at any time during the shorter of the
five-year period ending, on the date of the disposition or the period
during which you held the common stock, and certain other conditions
apply, you may be taxable in the U.S. on your gain from a sale of the
Common Stock pursuant to the effectively connected rules, above. We
believe that we never have been, are not currently and are not likely in
the future to become a U.S. real property holding corporation for U.S.
Federal income tax purposes.
FEDERAL ESTATE TAX
If you are an individual, common stock held by you at the time of your death
will be included in your gross estate for U.S. Federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
49
<PAGE>
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the IRS the amount of dividends paid to you and
the tax withheld with respect to the dividends. These requirements apply even if
withholding was not required on payments to you. Pursuant to an applicable tax
treaty, that information may also be made available to the tax authorities in
your country of residence.
Backup withholding tax generally may be imposed at the rate of 31% on
certain payments to persons that fail to furnish certain required information.
Backup withholding generally will not apply to dividends paid before January 1,
2001, to non-U.S. holders. See the discussion under "Distributions" above for
rules regarding reporting requirements to avoid backup withholding on dividends
paid after December 31, 2000.
As a general matter, information reporting and backup withholding will not
apply to a payment to you by or through a foreign office of a foreign broker of
the proceeds of a sale of common stock effected outside the U.S. However,
information reporting requirements, but not backup withholding, will apply to
such a payment if the broker:
- is a U.S. person,
- is a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the U.S.,
- is a "controlled foreign corporation" as defined in the Code, or
- is a foreign partnership with certain U.S. connections (for payments made
after December 31, 2000).
Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that you are a non-U.S. holder
and certain conditions are met or you otherwise establish an exemption.
Payment of the proceeds of a sale of common stock by or through a U.S.
office of a broker is subject to both backup withholding and information
reporting unless you certify to the payor in the manner required as to your
non-U.S. status under penalties of perjury or otherwise establish an exemption.
Amounts withheld under the backup withholding rules do not constitute a
separate U.S. Federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against your U.S.
Federal income tax liability, if any, provided the required information or
appropriate claim for refund is filed with the IRS.
The foregoing discussion is only a summary of certain U.S. Federal income
and estate tax consequences of the ownership, sale or other disposition of
common stock by non-U.S. holders. You are urged to consult your own tax advisor
with respect to the particular tax consequences to you of ownership and
disposition of common stock, including the effect of any state, local, foreign
or other tax laws and any applicable income or estate tax treaties.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, 46,373,496 shares of common stock will be
outstanding, assuming no exercise of outstanding options. Of these shares,
4,000,000 sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, unless held by an "affiliate" of
ours as that term is defined in Rule 144 under the Securities Act. Approximately
7,000,000 shares of common stock outstanding prior to this offering are
"restricted securities," as such term is defined under Rule 144, and an
approximate total of an additional 8,200,000 shares would be restricted
securities should all of our warrantholders exercise their warrants. These
shares are restricted securities because they were issued in private
transactions not involving a public offering and may not be sold in the absence
of registration other than in accordance with Rule 144 or Rule 701 under the
Securities Act or another exemption from registration. This prospectus may not
be used in connection with any resale of shares of common stock acquired in this
offering by our affiliates.
We, our directors and executive officers, and our principle stockholder have
agreed not to offer, sell, contract to sell, announce our intention to sell,
pledge or otherwise dispose of, directly or indirectly, any additional shares of
our common stock or securities convertible into, exchangeable with or
exercisable for any shares of our common stock without the prior written consent
of Credit Suisse First Boston Corporation for a period of 90 days after the date
of this prospectus. These contractual restrictions will apply even if the
provisions of Rules 144, 144(k) and 701 of the Securities Act would permit
earlier sales. Accordingly, shares subject to the lock-up agreements will not be
salable until the agreements expire or early waiver of the lock-up agreements by
the underwriters, which, if granted, could permit sales of a substantial number
of shares and could adversely affect the trading price of our shares. Such an
early waiver may not be accompanied by any advance public announcement by us.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of common stock are aggregated), including persons who may
be deemed our affiliates, would be entitled to sell within any three-month
period a number of shares of common stock that does not exceed the greater of
(1) one percent of the then-outstanding shares of common stock, which equals
463,735 shares immediately after this offering, and
(2) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
Sales under Rule 144 are also subject to certain restrictions as to the
manner of sale, notice requirements and the availability of current information
about us. In addition, under Rule 144(k), if a period of at least two years has
elapsed since the later of the date restricted securities were acquired from us
or the date they were acquired from an affiliate of ours, a stockholder who is
not an affiliate of ours at the time of sale and who has not been an affiliate
of ours for at least three months prior to the sale would be entitled to sell
shares of common stock in the public market without compliance with the
foregoing requirements under Rule 144. Rule 144 does not require the same person
to have held the securities for the applicable periods. The foregoing
description of Rule 144 is not intended to be a complete description.
In addition, any employee, director or officer of, or consultant to us who
acquired shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144, and permits our affiliates to sell their Rule 701 shares without
having to comply with the holding period restrictions of Rule 144, in each case,
commencing 90 days after the date of this prospectus.
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<PAGE>
A number of our stockholders and warrantholders are parties to agreements
with us that provide them with the right to require us to register the sale of
their shares or the shares issuable upon the exercise of their warrants,
respectively. The stockholders' rights cover approximately 7,000,000 shares of
our issued and outstanding common stock and the warrantholders' rights cover
approximately 8,200,000 of our authorized shares of common stock. Registration
of these shares of our common stock would permit the sale of these shares
without regard to the restrictions of Rule 144. See "Description of Capital
Stock--Registration Rights" for a more detailed description of these
registration rights.
52
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Bear, Stearns &
Co. Inc., Lehman Brothers Inc. and Salomon Smith Barney Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Bear, Stearns & Co. Inc.....................................
Lehman Brothers Inc.........................................
Salomon Smith Barney Inc....................................
---------
Total............................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the offering price less the
underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock at the offering
price on the cover page of this prospectus and to selling group members at that
price less a concession of $ per share. The underwriters and selling group
members may allow a discount of $ per share on sales to other
broker/dealers. After the offering, the offering price and concession and
discount to broker/dealers may be changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------ ------------------------
WITHOUT WITH WITHOUT WITH
OVER- OVER- OVER- OVER-
ALLOTMENT ALLOTMENT ALLOTMENT ALLOTMENT
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us..................... $ $ $ $
Expenses payable by us........................ $ $ $ $
</TABLE>
We and all of our directors and executive officers have agreed that we will
not offer, sell, contract to sell, announce our intention to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock without the prior
written consent of Credit Suisse First Boston Corporation for a
53
<PAGE>
period of 90 days after the date of this prospectus, except in our case
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof. Liberty Media Corporation has also agreed to similar restrictions
for a period of 90 days after the date of this prospectus.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions.
- In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as agent,
and (iii) the purchaser has reviewed the text above under "Resale Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser pursuant to this offering. The report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
55
<PAGE>
LEGAL MATTERS
Gersten, Savage & Kaplowitz, LLP, New York, New York will pass upon the
validity of the shares of common stock for us in connection with this offering.
The underwriters have been represented by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
The consolidated financial statements of ACTV, Inc., as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998
included in this prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement, and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement on Form S-3 regarding this offering
with the SEC. This prospectus, which is a part of the registration statement,
does not contain all of the information included in the registration statement,
and you should refer to the registration statement and its exhibits to read that
information. References in this prospectus to any of our contracts or other
documents are not necessarily complete, and you should refer to the exhibits
attached to the registration statement for copies of the actual contract or
document. You may read and copy the registration statement, the related exhibits
and the other materials we file with the SEC at the SEC's public reference room
in Washington, D.C. and at the SEC's regional offices in Chicago, Illinois and
New York, New York. You can also request copies of those documents, upon payment
of a duplicating fee, by writing to the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. The SEC also maintains an Internet site that contains reports,
proxy and information statements and other information regarding issuers that
file with the SEC; the site's address is www.sec.gov. You may also request a
copy of these filings, at no cost, by writing or telephoning us as follows: The
Controller, ACTV, Inc., 1270 Avenue of the Americas, New York, NY 10020,
(212) 217-1600.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" in this prospectus other
information we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus; however, the
information presented in this prospectus will be deemed to supersede any earlier
information contained in incorporated documents filed with the SEC before the
date of this prospectus. Information that we file with the SEC after the date of
this prospectus will automatically update and supersede the information in this
prospectus and any earlier filed or incorporated information. Specifically we
incorporate by reference our Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (as amended on Form 10-K405/A filed with the SEC on
April 20, 1999), our Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1999, June 30, 1999 and September 30, 1999, and any future
filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the
Exchange Act until we sell all of the securities offered by this prospectus.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets--December 31, 1997 and 1998 and
September 30, 1999 (unaudited)............................ F-3
Consolidated Statements of Operations--Fiscal Years Ended
December 31, 1996, 1997 and 1998 and nine-month period
ended September 30, 1998 and 1999 (unaudited)............. F-4
Consolidated Statements of Cash Flows--Fiscal Years Ended
December 31, 1996, 1997 and 1998 and nine-month period
ended September 30, 1998 and 1999 (unaudited)............. F-5
Consolidated Statements of Shareholders' Equity--Fiscal
Years Ended December 31, 1996, 1997 and 1998 and
nine-month period ended September 30, 1998 and 1999
(unaudited)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of ACTV, Inc.:
We have audited the accompanying consolidated balance sheets of ACTV, Inc. and
subsidiaries ("the Company") as of December 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 11, 1999
New York, New York
F-2
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 554,077 $ 5,188,770 $ 12,865,033
Accounts receivable--net.................................. 303,044 501,768 948,549
Education equipment inventory............................. 237,757 110,405 77,231
Other..................................................... 308,653 773,613 2,191,580
------------ ------------ ------------
Total current assets.................................... 1,403,531 6,574,556 16,082,393
------------ ------------ ------------
Property and equipment--net................................. 2,596,785 2,365,775 2,770,173
------------ ------------ ------------
Other assets:
Patents and patents pending............................... 279,356 832,336 2,242,677
Software development costs................................ 669,852 1,098,756 1,730,839
Goodwill.................................................. 2,641,188 2,214,816 1,895,037
Other..................................................... 311,206 519,802 403,852
------------ ------------ ------------
Total other assets...................................... 3,901,602 4,665,710 6,272,405
------------ ------------ ------------
Total................................................. $ 7,901,918 $13,606,041 $ 25,124,971
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses..................... $ 1,882,159 $ 955,686 $ 1,041,352
Deferred stock appreciation rights........................ -- 2,000,062 --
Preferred dividends payable............................... 603,469 200,305 --
------------ ------------ ------------
Total current liabilities............................... 2,485,628 3,156,053 1,041,352
Long-term note payable.................................... -- 4,315,016 4,741,402
Put warrant............................................... -- 1,371,624 --
Preferred stock of a subsidiary, convertible into common
shares of parent, no par value, 436,000 shares
authorized: issued and outstanding 316,944 at Dec. 31,
1997, none at Dec. 31, 1998 and Sep. 30, 1999........... 7,029,708 -- --
Shareholders' deficit:
Preferred stock, $.10 par value, 1,000,000 shares
authorized
Series A 120,000 shares authorized, issued and
outstanding 86,200 at Dec. 31, 1997, 56,300 at
Dec. 31, 1998, none at Sep. 30, 1999.................. 8,620 5,630 --
Series B stock, $.10 par value, 6,110 shares authorized
issued and outstanding none at Dec. 31, 1997, 5,018 at
Dec. 31, 1998, none at Sep. 30, 1999.................. -- 2,805,961 --
Common stock, $.10 par value, 65,000,000 shares
authorized: issued and outstanding 14,614,611 at
Dec. 31, 1997, 29,759,459 at Dec. 31, 1998, 41,546,996
at Sep. 30, 1999........................................ 1,461,461 2,975,946 4,154,700
Additional paid-in capital................................ 48,140,596 71,068,230 103,487,127
Loans receivable from stock sales......................... (199,900) (199,900) --
Accumulated deficit....................................... (51,024,195) (71,892,519) (88,299,610)
------------ ------------ ------------
Total shareholders' equity (deficiency)................. (1,613,418) 4,763,348 19,342,217
------------ ------------ ------------
Total................................................. $ 7,901,918 $13,606,041 $ 25,124,971
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------ --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................... $ 1,476,329 $ 1,650,955 $ 1,405,838 $ 1,058,560 $ 1,328,961
------------ ------------ ------------ ----------- ------------
Costs and expenses:
Cost of sales............ 647,488 471,956 218,514 168,934 161,754
Operating expenses....... 1,955,601 1,360,838 2,004,996 1,718,627 1,418,087
Selling and
administrative......... 6,332,759 6,880,311 9,862,086 6,462,024 11,874,979
Depreciation and
amortization........... 419,979 327,681 1,106,359 810,984 1,038,449
Amortization of
goodwill............... 426,372 426,372 426,372 319,779 319,779
Loss on investment....... 274,325 -- -- -- --
Stock appreciation
rights................. 183,634 (346,892) 2,000,062 455,251 1,950,330
------------ ------------ ------------ ----------- ------------
Total costs and
expenses........... 10,240,158 9,120,266 15,618,389 9,935,599 16,763,378
------------ ------------ ------------ ----------- ------------
Loss from operations....... (8,763,829) (7,469,311) (14,212,551) (8,877,039) (15,434,417)
------------ ------------ ------------ ----------- ------------
Interest income............ 158,732 116,870 184,285 105,398 304,679
Interest (expense)......... -- -- (932,247) (718,220) (782,922)
------------ ------------ ------------ ----------- ------------
Interest (expense)
income--net............ 158,732 116,870 (747,962) (612,822) (478,243)
Minority
interest--subsidiary
preferred stock dividend
and accretion............ 1,695,384 3,006,242 5,428,638 379,161 --
------------ ------------ ------------ ----------- ------------
Net (loss)................. (10,300,481) (10,358,683) (20,389,151) (9,869,022) (15,912,660)
Preferred stock dividends
and accretion............ -- -- 479,173 -- 494,431
------------ ------------ ------------ ----------- ------------
Net (loss) applicable to
common shareholders...... $(10,300,481) $(10,358,683) $(20,868,324) $(9,869,022) $(16,407,091)
============ ============ ============ =========== ============
Basic and diluted (loss)
per common share......... $ (.88) $ (.80) $ (.98) $ (.51) $ (.47)
============ ============ ============ =========== ============
Weighted average number
of common shares
outstanding.............. 11,739,768 12,883,848 21,399,041 19,309,382 35,154,248
============ ============ ============ =========== ============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------ --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss applicable to common
shareholders...................... $(10,300,481) $(10,358,683) $(20,868,324) $(9,869,022) $(16,407,091)
------------ ------------ ------------ ----------- ------------
Adjustments to reconcile net loss to
net cash used in operations:
Depreciation and amortization..... 846,354 754,053 1,532,731 1,130,763 1,358,227
Stock appreciation rights......... 134,634 (701,517) 2,000,062 455,251 1,950,330
Amortization and accretion of
deferred expenses related to
debt financing.................. -- -- 241,565 673,069 740,267
Common stock issued for
services........................ 114,047 443,125 2,016,023 2,016,023 6,313,480
Common issued for preferred
dividends....................... 195,384 408,085 162,595 67,034 241,513
Note issued in lieu of cash
interest payment................ -- -- 686,641 -- --
Subsidiary preferred stock
dividends and accretion......... 1,500,000 2,598,156 5,749,309 -- --
Preferred stock accretion......... -- -- 315,965 -- --
Loss on investment................ 274,325 -- -- -- --
Other............................. 82,746 43,188 -- -- --
Changes in assets and liabilities:
Accounts receivable............... (143,648) 63,960 (198,724) (275,797) (446,781)
Education equipment inventory..... (225,286) 99,747 127,352 61,209 33,175
Other assets...................... (542,824) (241,117) (307,426) (327,329) (1,443,002)
Accounts payable and accrued
expenses........................ 504,263 287,504 (926,471) (1,055,245) (103,339)
------------ ------------ ------------ ----------- ------------
Net cash used in operating
activities.................. (7,560,486) (6,603,499) (9,468,702) (7,124,044) (7,763,221)
Cash flows from investing
activities:
Investment in patents and patents
pending......................... -- (50,000) (598,671) (534,561) (1,506,988)
Investment in property and
equipment....................... (444,189) (2,159,576) (531,573) (360,180) (1,032,514)
Investment in systems............. -- (686,227) (797,677) (573,734) (857,080)
------------ ------------ ------------ ----------- ------------
Net cash used in investing
activities.................. (444,189) (2,895,803) (1,927,921) (1,468,475) (3,396,582)
Cash flows from financing
activities:
Net proceeds from debt issuance... -- -- 4,462,990 3,318,080 --
Preferred stock dividends
payable......................... -- -- -- 312,137 115,660
Net proceeds from put warrant
issuance........................ -- -- 1,371,624 1,371,624 --
Redemption of preferred stock..... -- -- (565,759) (565,759) (5,792,538)
Net proceeds from preferred stock
transactions.................... 9,115,664 2,045,163 -- -- --
Net proceeds from equity
financing....................... 1,877,985 1,487,460 10,762,461 10,680,214 24,512,944
------------ ------------ ------------ ----------- ------------
Net cash provided by financing
activities.................. 10,993,649 3,532,623 16,031,316 15,116,296 18,836,066
------------ ------------ ------------ ----------- ------------
Net (decrease) increase in cash and
cash equivalents.................. 2,988,974 (5,966,679) 4,634,693 6,523,777 7,676,263
Cash and cash equivalents,
beginning of period............. 3,531,782 6,520,756 554,077 554,077 5,188,770
------------ ------------ ------------ ----------- ------------
Cash and cash equivalents,
end of period................... $ 6,520,756 $ 554,077 $ 5,188,770 $ 7,077,854 $ 12,865,033
============ ============ ============ =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
PREFERRED SERIES
COMMON STOCK A PREFERRED SERIES B
----------------------- ------------------- ---------------------- ADDITIONAL PAID
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT IN-CAPITAL
---------- ---------- -------- -------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances January 1, 1996...... 11,396,419 $1,139,642 -- $ -- -- $ -- $ 36,686,742
---------- ---------- ------- ------- ------ ----------- ------------
Issuance of shares in
connection with
financings.................. 450,000 45,000 5,832,985
Issuance of shares for
services.................... 45,687 4,569 109,478
Reversal of option exercise... (105,000) (10,500) (357,000)
Net loss applicable to common
shareholders................
---------- ---------- ------- ------- ------ ----------- ------------
Balances December 31, 1996.... 11,787,106 $1,178,711 -- $ -- -- $ -- $ 42,272,205
---------- ---------- ------- ------- ------ ----------- ------------
Issuance of shares in
connection with
financings.................. 733,333 73,333 86,200 8,620 3,447,778
Issuance of shares for
services.................... 286,511 28,651 414,473
Issuance of shares in
connection with exchange of
preferred stock............. 1,795,661 179,566 1,994,980
Issuance of shares in
connection with exercise of
stock
options..................... 12,000 1,200 11,160
Net loss applicable to common
shareholders................
---------- ---------- ------- ------- ------ ----------- ------------
Balances December 31, 1997.... 14,614,611 $1,461,461 86,200 $ 8,620 -- $ -- $ 48,140,596
---------- ---------- ------- ------- ------ ----------- ------------
Issuance of shares in
connection with
financings.................. 6,458,332 645,833 9,987,692
Issuance of Series B preferred
stock....................... 5,018 2,805,961 2,527,723
Issuance of shares for
services.................... 373,592 37,359 508,083
Issuance of shares in
connection with exchange of
preferred stock............. 5,857,406 585,741 (29,900) (2,990) 2,535,660
Issuance of shares in
connection with exercise of
stock
options..................... 1,662,452 166,245 2,282,323
Issuance of warrants and
shares in connection with
financing activities........ 793,066 79,307 5,086,153
Net loss......................
Preferred dividends...........
---------- ---------- ------- ------- ------ ----------- ------------
Balances December 31, 1998.... 29,759,459 $2,975,946 56,300 $ 5,630 5,018 $ 2,805,961 $ 71,068,230
---------- ---------- ------- ------- ------ ----------- ------------
Issuance of common shares..... 4,059,783 405,978 18,593,996
Issuance of shares for
services provided........... 556,294 55,629 4,023,107
Issuance of shares in
connection with exchange of
preferred stock............. 1,061,690 106,169 (56,300) (5,630)
Issuance of shares in
connection with exercise of
stock options, stock
appreciation rights and
warrants.................... 6,109,770 610,978 12,284,173
Preferred stock redemption.... (5,018) (2,805,961) (2,392,379)
Net loss......................
Preferred stock dividends and
accretion...................
---------- ---------- ------- ------- ------ ----------- ------------
Balances (unaudited)
September 30, 1999.......... 41,546,996 $4,154,700 -- $ -- -- $ -- $103,487,127
========== ========== ======= ======= ====== =========== ============
<CAPTION>
DEFICIT
------------
<S> <C>
Balances January 1, 1996...... $(30,365,031)
------------
Issuance of shares in
connection with
financings..................
Issuance of shares for
services....................
Reversal of option exercise...
Net loss applicable to common
shareholders................ (10,300,481)
------------
Balances December 31, 1996.... $(40,665,512)
------------
Issuance of shares in
connection with
financings..................
Issuance of shares for
services....................
Issuance of shares in
connection with exchange of
preferred stock.............
Issuance of shares in
connection with exercise of
stock
options.....................
Net loss applicable to common
shareholders................ (10,358,683)
------------
Balances December 31, 1997.... $(51,024,195)
------------
Issuance of shares in
connection with
financings..................
Issuance of Series B preferred
stock.......................
Issuance of shares for
services....................
Issuance of shares in
connection with exchange of
preferred stock.............
Issuance of shares in
connection with exercise of
stock
options.....................
Issuance of warrants and
shares in connection with
financing activities........
Net loss...................... (20,389,151)
Preferred dividends........... (479,173)
------------
Balances December 31, 1998.... $(71,892,519)
------------
Issuance of common shares.....
Issuance of shares for
services provided...........
Issuance of shares in
connection with exchange of
preferred stock.............
Issuance of shares in
connection with exercise of
stock options, stock
appreciation rights and
warrants....................
Preferred stock redemption....
Net loss...................... (15,912,660)
Preferred stock dividends and
accretion................... (494,431)
------------
Balances (unaudited)
September 30, 1999.......... $(88,299,610)
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--ACTV, Inc. was incorporated on July 8, 1983. ACTV, Inc.,
including its subsidiaries (the "Company" or "ACTV"), is a digital media company
that has developed proprietary technologies, called Individualized Television
and HyperTV-TM-. Individualized Television enables television programmers and
advertisers to create individualized programming for digital television, and
HyperTV-TM- enhances regular television content with information and
interactivity available through the Internet.
PRINCIPLES OF CONSOLIDATION--The Company's consolidated financial statements
include the balances of its wholly owned operating subsidiaries. In
consolidation, significant intercompany account balances are eliminated. The
interim financial information is unaudited, and, in the opinion of management,
includes all adjustments of a recurring nature, which are necessary to present
fairly such information. The results of operations for the interim periods are
not necessarily indicative of the results for a full year.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost and
depreciated on the straight-line method over their estimated useful lives
(generally five years). Depreciation expense for the years ended December 31,
1996, 1997, and 1998 and the nine months ended September 30, 1998 and 1999,
aggregated $189,957, $286,883, $762,581, $556,685 and $628,118 respectively.
EDUCATION EQUIPMENT--Education equipment consists of standard personal
computers adapted to provide individualized programming functionality,
videocassette recorders, television monitors and computer printers that we hold
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 assignments of patent rights to the
Company 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, 1997, and
1998, and September 30, 1998 and 1999 are net of accumulated amortization of
$186,485, $161,770 and $283,132, respectively.
SOFTWARE DEVELOPMENT COSTS--The Company capitalizes costs incurred for the
development of software products where economic and technological feasibility of
such products 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 balances at December 31, 1997 and 1998, and September 30, 1998
and 1999 are net of accumulated amortization of $16,376, $145,553, $136,725, and
$231,719 respectively.
CASH EQUIVALENTS--The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
REVENUE RECOGNITION--Sales are recorded as products are shipped or services
are rendered.
RESEARCH AND DEVELOPMENT--Research and development costs, which represent
primarily refinements to Individualized Programming, were $1.2 million for the
year ended December 31, 1996,
F-7
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$551,328 for the year ended December 31, 1997, $820,475 for the year ended
December 31, 1998, and $295,453 and $811,364 for the nine months ended
September 30, 1998 and 1999.
EARNINGS/(LOSS) PER SHARE--The Company has adopted Statement of Financial
Accounting Standards, called SFAS, No. 128, EARNINGS PER SHARE, which
establishes standards for computing and presenting earnings per share, called
EPS, and simplifies the standards for computing EPS found in Accounting
Principles Board, called APB, Opinion No. 15, "Earnings Per Share". Common stock
equivalents under APB No. 15 are no longer included in the calculation of
primary, or basic, EPS. Loss per common share equals net loss divided by the
weighted average number of shares of our 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 prior
period financial statements to conform to the September 30, 1999 presentation.
INTANGIBLES--The excess of the purchase cost over the fair value of net
assets acquired in an acquisition (goodwill) is being amortized on a
straight-line basis over a period of 10 years. The Company evaluates the
realizability of goodwill based upon the expected undiscounted cash flows of the
acquired business. Impairments, if any, will be recognized through a charge to
operations, 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, 1997, December 31, 1998, and September 30, 1999, reflect balances
of $224,712, $434,575, and $18,810, respectively, related to cash advances made
to executive officers.
NEW ACCOUNTING PRONOUNCEMENTS
NEWLY ADOPTED ACCOUNTING STANDARDS
The Company has adopted 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 stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes Financial
Accounting Standards Board, called FASB, Statement No. 14, FINANCIAL REPORTING
FOR SEGMENTS OF A BUSINESS ENTERPRISE, but retains the requirement to report
information about major customers. Management has determined that the Company
operates in two segments: Individualized Television and HyperTV, see Note 13.
F-8
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The statement
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at fair value. The statement requires that changes in a derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company formally document, designate, and assess
the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000; however, it may be
adopted earlier. It cannot be applied retroactively to financial statements of
prior periods. The Company has not yet determined the impact, if any, the
adoption of SFAS No. 133 will have on its financial statements.
2. NATURE OF OPERATIONS
The principal market for the Individualized Television is entertainment
programming distributed over digital television systems. The Company expects
Individualized Television to derive revenues from subscriber fees, advertising
sales, and software and services related to targeted advertising.
The Company derived all of its revenues for 1998 and for the nine months
ended September 30, 1999 from HyperTV, which is targeted at the entertainment
and education markets. The Company anticipates that the most significant portion
of future HyperTV revenues will be derived from the entertainment market, for
which we introduced a HyperTV application earlier this year. The Company
subsequently entered into HyperTV programming alliances for this market with The
Box Music Network, Showtime, New Line Television, and Turner Entertainment
Group. The Company expects the sources of revenue from the entertainment market
to be software licensing and program hosting fees, Internet advertising and
commerce, content creation fees, and data management services.
The following clients accounted for more than 10% of the Company's revenues
during the year ended December 31, 1998: Georgia Public Television, which
accounted for approximately 17%, 24% and 40% of total revenues in 1996, 1997 and
1998, respectively. School District of Philadelphia, which accounted for
approximately 14% in 1998 and the Texas Workforce Commission, which accounted
for 24% of total revenues in 1997. During 1996 and 1998, the Company generated
no revenues from the Texas Workforce Commission.
3. ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-9
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
4. PROPERTY AND EQUIPMENT--NET
Property and equipment--net at December 31, 1997, 1998 and September 30,
1999 consisted of the following (at cost):
<TABLE>
<CAPTION>
12/31/97 12/31/98 9/30/99
---------- ---------- ----------
<S> <C> <C> <C>
Machinery and equipment.................. $2,931,682 $3,250,720 $3,998,809
Office furniture and fixtures............ 501,435 713,968 998,395
---------- ---------- ----------
Total.................................. 3,433,117 3,964,688 4,997,204
Less accumulated depreciation............ 836,332 1,598,913 2,227,031
---------- ---------- ----------
Total.................................. $2,596,785 $2,365,775 $2,770,173
========== ========== ==========
</TABLE>
5. FINANCING ACTIVITIES
COMMON STOCK FINANCING
During the nine-month period ended September 30, 1999, the Company raised
approximately $14.4 million from sales of common stock to private investors and
from the exercise of stock options and warrants, totaling approximately
$10.1 million.
During the year ended December 31, 1998 the Company raised approximately
$10.8 from sales of common stock to private institutional investors.
PREFERRED STOCK FINANCING
During 1996, the Company raised approximately $11.0 million net from the
proceeds of a private placement of common stock ($1.9 million in net proceeds)
and of 5% exchangeable preferred stock issued by our wholly-owned subsidiary
($9.1 million in net proceeds). This exchangeable preferred stock was
convertible into common stock of ACTV, Inc., beginning January 1, 1997, at
varying discounts to the market price of common stock. After September 1, 1997,
holders of the exchangeable preferred stock were able to use the lesser of
(i) the then current market price of our common stock, or (ii) an average market
price during the month of August 1997 as the price to which the discount was
applied for conversions. In addition, we had the right to redeem the
exchangeable preferred stock at a price equal to $25 times the number of shares
being purchased, plus accrued and unpaid dividends (the "Redemption Price").
This right was exercisable by the Company only if the closing price of our
common stock was above $9.00 for thirty consecutive trading days prior to
redemption.
The exchangeable preferred stock was convertible into shares of common stock
at a discounted conversion price. The discount ranged from 14% to a maximum of
30.375%. The extent of the beneficial conversion feature was approximately
$4.0 million, representing the maximum difference between the discounted
conversion price and the prevailing market price of the common stock. Preferred
stock accretion of $1.5 million and $2.5 million, respectively, were recorded
and included as minority interest for the years ended December 31, 1996 and
1997. As of December 31, 1998, all of the exchangeable preferred stock had been
converted.
F-10
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
5. FINANCING ACTIVITIES (CONTINUED)
In November 1998, ACTV issued 5,018 shares of Series B convertible preferred
stock ("Series B Stock"), common stock, and warrants to purchase approximately
1.95 million shares of common stock at $2.00 per share as a partial exchange for
approximately 179,000 shares of the subsidiary exchangeable preferred stock. The
excess of the fair value of this consideration over the carrying value of the
exchangeable preferred stock for which the Series B Stock was issued is included
in Minority Interest--Subsidiary Preferred stock dividend and accretion in the
accompanying statement of operations. The Series B Stock had a liquidation
preference $1,000 per share and paid a dividend, in cash or accumulated and paid
in common stock upon conversion, of 10% per annum.
The Series B Stock was fully redeemable by ACTV at any time at a 10% premium
above face value plus accrued dividends. The holders of the Series B Stock were
prohibited from converting any shares into common stock through November 13,
1999. Beginning November 13, 1999, the number of shares issued upon conversion
was to be determined by dividing the liquidation value of $1,000 plus accrued
dividends by the conversion price of $2.00 per common share. Beginning
February 13, 2000, the number of shares issued upon conversion was to be
determined by dividing the liquidation value of $1,000 plus accrued dividends by
the conversion price of $1.33 per common share. The beneficial conversion
feature related to the possible conversion of the Series B Stock at $1.33 per
share, which equaled $2,527,723 at the issuance date, was attributed to
additional paid-in-capital and was being accounted for as a charge to net loss
applicable to common stockholders over the period from issuance through
February 13, 2000.
During May 1999, ACTV redeemed all of the outstanding Series B Stock for a
total of approximately $5.8 million. The Series B Stock had been convertible
into common stock at $2.00 per share beginning in November 1998. ACTV
effectively redeemed the Series B Stock at an equivalent of $2.20 per common
stock share, a price significantly less than the market price at the time of the
redemption. The redemption avoided the possible future issuance of more than
2.8 million shares of common stock.
DEBT FINANCING
In January 1998, the ACTV subsidiaries, ACTV Entertainment, Inc. and The
Texas Individualized Television Network, Inc. ("Texas Network") entered into a
note purchase agreement, dated as of January 13, 1998 with certain private
investors. Pursuant to the agreement, the investors purchased $5.0 million
aggregate principal amount notes from our subsidiaries. The notes bear interest
at a rate of 13.0% per annum, payable semi-annually, with principal repayment in
one installment on June 30, 2003. During the term of the notes, the Company may
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 Company chose to make the first two semi-annual interest payments (June 30,
1998 and December 31, 1998) in kind. The note is secured by the assets of the
Texas Network, and is guaranteed by ACTV, Inc.
In connection with the purchase of such note, the investors received on
January 14, 1998 a common stock purchase warrant (The "Warrant") of Texas
Network that granted the investors either
F-11
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
5. FINANCING ACTIVITIES (CONTINUED)
the right to purchase up to 17.5% of the fully-diluted shares of common stock of
Texas Network or, through July 14, 1999, to exchange the Warrant for such number
of shares of the Company's common stock, at the time of and giving effect to
such exchange, that were equal to 5.5% of the fully diluted number of shares of
common stock outstanding.
For accounting purposes, the Company allocated approximately $1.4 million to
the value of the Warrant, based on the market value of the Company's common
stock into which the Warrant was convertible at issuance. The Warrant was
included outside of Consolidated Shareholders' Equity (Deficiency) due to its
cash put feature and the notes were recorded at a value of proceeds received
less the value attributed to the Warrant. The difference between the recorded
value of the notes and their principal value was being amortized as additional
interest expense over the life of the notes. The Warrant was exchanged and
exercised for our common stock during the first quarter of 1999.
6. STOCKHOLDERS' EQUITY (DEFICIENCY)
At September 30, 1999, we had reserved shares of common stock for issuance
as follows:
<TABLE>
<S> <C>
1989 Qualified Stock Option Plan............................ 13,683
1989 Non-Qualified Stock Option Plan........................ 25,334
1996 Qualified Stock Option Plan............................ 307,483
1998 Qualified Stock Option Plan............................ 744,667
1999 Qualified Stock Option Plan............................ 1,281,000
Options granted outside of formal plans..................... 12,388,254
----------
Total..................................................... 14,760,421
==========
</TABLE>
CONVERTIBLE PREFERRED STOCK At September 30, 1999, the Company was
authorized to issue 1,000,000 shares of blank check preferred stock, par value
$0.10 per share, of which 120,000 shares were designated Series A Convertible
Preferred Stock and 6,110 shares were designated Series B Stock. There were
86,200 and 56,300 shares of Series A Preferred outstanding at December 31, 1997
and 1998, respectively. Prior to September 30, 1999, the holders converted all
of the outstanding shares of Series A preferred stock and the Company cancelled
the Series A designation. There were 0 and 5,018 shares of Series B Stock issued
and outstanding as of December 31, 1997 and 1998, respectively. The Company
redeemed all of the Series B Stock in May 1999 and cancelled the Series B Stock
designation.
EXCHANGEABLE PREFERRED STOCK At December 31, 1997, our wholly-owned
subsidiary, ACTV Holdings, Inc. was authorized to issue 436,000 shares of
exchangeable preferred stock, no par value, of which 316,944 shares were issued
and outstanding. Prior to December 31, 1998 the holders had exchanged and
converted all of the outstanding exchangeable preferred stock.
F-12
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
7. STOCK OPTIONS
During 1989, the Board of Directors approved an employee incentive stock
option plan. This plan provides for the granting to key employees of options to
purchase up to 100,000 shares of common stock. The 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 September 30, 1999, 95,500 options had been granted under this plan
(net of cancellations), of which 82,817 had been exercised.
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 of
Directors or a committee appointed by the Board. The Non-Qualified Plan provides
for the granting to employees, officers, directors, consultants and independent
contractors of options to purchase up to 100,000 shares of common stock. 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 expire on a date determined by the committee but
in no event later than three months after the termination of employment or
retainer. At September 30, 1999, 91,500 options had been granted under this plan
(net of cancellations), of which 66,166 had been exercised.
During 1996, the Board of Directors approved the Company's 1996 Stock Option
Plan (the "1996 Option Plan"). The 1996 Option Plan provides for grants to
employees and others who provide significant services to the Company of options
to purchase up to 500,000 shares of common stock. As of September 30, 1999, the
Company had granted 483,484 options under the plan (net of cancellations), of
which 176,001 had been exercised.
During 1998, the Board of Directors approved the Company's 1998 Stock Option
Plan (the "1998 Option Plan"). The 1998 Option Plan provides for grants to
employees and others who provide significant services to us of options to
purchase up to 900,000 shares of common stock. As of September 30, 1999, the
Company had issued 828,500 options under the plan (net of cancellations), of
which 83,833 had been exercised.
During 1999, the Board of Directors approved the Company's 1999 Stock Option
Plan (the "1999 Option Plan"), The 1999 Option Plan provides for grants to
employees and others who provide a significant service to the Company of options
to purchase up to 1,500,000 shares of common stock. In addition, the 1999 Option
Plan allows for options already issued to be consolidated under the Option Plan.
As of September 30, 1999, the Company had issued 1,281,000 options under the
1999 Option Plan (net of cancellation), of which 218,000 were consolidated into
the plan from stock appreciation rights plans. As of September 30, 1999
10,000 options had been exercised under the 1999 Option Plan.
At December 31, 1998, we also had outstanding options and warrants not
issued pursuant to a formal plan that were issued to directors, certain
employees, and consultants and pursuant to financing transactions for the
purchase of 12,388,254 shares of common stock. The prices of these options and
warrants range from $1.50 to $15.00 per share; they have expiration dates in the
years 1999 through 2008. The options and warrants granted are not part of the
stock option plans discussed above.
F-13
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
7. STOCK OPTIONS (CONTINUED)
A summary of the status of our stock options and warrants as of
September 30, 1999 and December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
9/30/99 1998 1997 1996
9/30/99 WGTD. AVG. 1998 WGTD. AVG. 1997 WGTD. AVG. 1996 WGTD. AVG.
SHARES EXER PRICE SHARES EXER PRICE SHARES EXER PRICE SHARES EXER PRICE
---------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period..................... 7,850,007 3,539,218 3,328,718 2,747,082
Options and warrants
granted.................... 12,515,000 $9.38 6,376,073 $1.91 339,683 $1.91 887,500 $3.73
Options and warrants
exercised.................. 5,544,586 $1.97 1,844,951 $1.64 17,000 $0.73 -- --
Options and warrants
terminated................. 60,000 $2.33 220,333 $2.86 112,183 $4.06 305,864 $3.76
Outstanding at end of
period..................... 14,760,421 $8.06 7,850,007 $1.90 3,539,218 $1.81 3,328,718 $2.99
Options and warrants
exercisable at end of
period..................... 11,602,269 $8.89 5,782,275 $1.99 2,363,134 $1.87 1,719,134 $3.19
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 9/30/99 CONTRACTUAL LIFE EXERCISE PRICE AT 9/30/99 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <S> <C> <C> <C>
$0 to 4.00..... 4,936,421 5.3 Years $ 1.67 3,427,269 $ 1.69
$4.01 to 8.00.. 3,082,500 1.5 Years $ 7.65 2,500,000 $ 8.00
$8.01 to 12.00.. 1,737,500 3.9 Years $ 9.81 675,000 $10.85
$12.01 to 15.00 5,004,000 3.0 Years $14.00 5,000,000 $14.00
</TABLE>
The weighted average fair value of options granted during 1997 and 1998 was
$.64 and $.97 per share, respectively, excluding the value of options granted
and terminated within the year. In the case of each issuance, options were
issued at an exercise price that was higher than the fair market value of our
common stock on the date of grant. We apply APB No. 25 and related
Interpretations in accounting for our stock option and purchase plans.
Accordingly, no compensation cost has been recognized for option issuances. Had
compensation cost for our option issuances been determined based on the fair
value at the grant dates consistent with the method of FASB Statement 123, our
net loss and loss per basic and diluted share for the years ended December 31,
1996, 1997 and 1998 would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
NET LOSS TO COMMON SHAREHOLDERS 1996 1997 1998
- ------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
As reported........................... $10,300,481 $10,358,683 $20,552,359
Pro forma............................. $11,185,735 $10,574,807 $21,987,835
</TABLE>
F-14
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
7. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
NET LOSS PER BASIC AND DILUTED COMMON SHARE 1996 1997 1998
- ------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
As reported............................................ $0.88 $0.80 $0.96
Pro forma.............................................. $0.95 $0.82 $1.02
</TABLE>
The Company estimated the fair value of options issued during 1996, 1997 and
1998 on the date of each grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used: no dividend yield, expected
volatility for 1996 of 61.5%, expected volatility for 1997 of 57.3%, expected
volatility for 1998 of 49.53%, and a risk free interest rate of 6% for all
years.
Certain employees, including the executive officers Samuels, Reese, Crowley
and Cline, have been granted options to purchase Class B common stock, at fair
value as of the date of grant, of certain of our subsidiaries; such common
stock, if issued, will have majority voting rights in such subsidiaries.
8. STOCK APPRECIATION RIGHTS PLANS
The Company's 1992 Stock Appreciation Rights Plan ("SARs Plan") was approved
by the Company's stockholders in December 1992. Subject to adjustment as set
forth in the 1992 SARs Plan, the aggregate number of stock appreciation rights
to be granted could not exceed 900,000.
The Company's 1996 SARs Plan was adopted by the Board of Directors in
April 1996 and approved by the stockholders in July 1996. Subject to adjustment
as set forth in the 1996 SARs Plan, the aggregate number of SARs to be granted
pursuant to the 1996 SARs plan could not exceed 500,000; provided, however, that
at no time could there be more than an aggregate of 900,000 outstanding,
unexercised SARs granted pursuant to both the 1996 SARs Plan and the 1992 SARs
Plan. The 1996 SARs Plan imposed no limit on the number of recipients to whom
awards could be made. Both the 1992 and 1996 SARs Plans were administered by the
Stock Appreciation Rights Committee of the Company's Board of Directors.
SARs could not be exercised until six months from the date of grant. SARs
issued pursuant to the 1992 SARs Plan vested in five equal annual installments
beginning twelve months from the date of grant. SARs issued pursuant to the 1996
SARs Plan vested either in a lump sum or in such installments, which did not
need to be equal, as the Committee determined. If a holder of SARs ceased to be
an employee, director or consultant of the Company, or a subsidiary or
affiliate, other than by reason of the holder's death or disability, any SARs
that had not vested became void. Exercise of SARs also were subject to such
further restrictions (including limits on the time of exercise) as were
necessary 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 were 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 SARs the holder received for each share for which a stock
appreciation right was exercised, as determined by the SARs Committee in its
discretion, (a) shares of the Company's
F-15
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
8. STOCK APPRECIATION RIGHTS PLANS (CONTINUED)
common stock, (b) cash, or (c) cash and shares of common stock, equal to the
difference between (i) the fair market value per share of the common stock on
the date of exercise of the stock appreciation right and (ii) the exercise price
of a stock appreciation right, which amount could be no less than the fair
market value per share of common stock on the date of grant of the SARs.
Under the 1992 SARs Plan, as of December 31, 1998, the Company had granted
516,000 outstanding SARs (with an exercise price of $1.50 per share) to ten
employees. The SARs expired between 2001 and 2006. Under the 1996 SARs Plan, as
of December 31, 1998, the Company had granted 380,000 outstanding SARs (with an
exercise price of $1.50 per share) to six employees. The SARs expired between
2002 and 2006. During 1998, no SARs were exercised.
Our balance sheets at September 30, 1999 and December 31, 1998 reflect
expense accruals of $0 and $2.0 million, respectively, related to the Company's
SARs plan. No SARs were exercised for cash during the first three quarters of
1999. In May 1999, Messrs. Samuels, Reese and Crowley agreed to retroactively
exercise their vested SARs for unregistered shares of common stock, based upon
the closing market price of $3 15/16 on January 4, 1999. As a result, the SARs
expense for the first three months of 1999 was approximately $3.2 million less
than it would have been otherwise. In September 1999, all remaining SARs were
converted into options that became part of the Company's 1999 Option Plan. This
conversion resulted in a current period expense of $1.3 million with an
additional charge of $381,000 to future periods when the corresponding options
vest. In September 1999, the Company exchanged all of the outstanding SAR for
stock options with the same exercise prices and vesting dates and cancelled its
SAR plans. To account for this exchange, for the nine months ended
September 30, 1999 the Company simultaneously incurred non-cash compensation
expense of $1,254,000 as a component of selling and administrative expense and
non-cash income of $2.6 million from the elimination of the SAR liability
related. Additionally, the Company incurred a $254,000 non-cash charge to
deferred expenses for rights that had not vested as of September 30, 1999.
9. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
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
F-16
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
9. INCOME TAXES (CONTINUED)
carryforwards. The tax effects of significant items comprising the net deferred
tax asset as of December 31, 1997, and December 31, 1998 and September 30, 1999
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforwards...... $16,131,213 $20,254,782 $24,988,058
Differences between book and tax
basis of property............... 56,148 852,587 1,663,158
----------- ----------- -----------
16,187,361 21,107,369 26,651,216
Deferred tax liabilities:
Differences between book and tax
basis of property............... (181,104) (454,618) (441,255)
----------- ----------- -----------
16,000,257 20,652,751 26,209,961
Valuation Allowance................... (16,000,257) (20,652,751) (26,209,961)
----------- ----------- -----------
Net deferred tax asset................ $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
The increase in the valuation allowance for the years ended December 31,
1997 and 1998 and the nine-month period ending September 30, 1999, were
approximately $2.7, $4.7 and $5.6 million, respectively. 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 and 1998 and September 30, 1999, the Company had
federal net operating loss carryovers of approximately $45.7, $57.3 and
$70.7 million, respectively. These carryovers may be subject to certain
limitations and will expire between the years 1999 and 2014.
10. COMMITMENTS
At September 30, 1999, aggregate future minimum lease commitments under
non-cancelable operating leases, which expire in 2000, 2001, and 2015 were
approximately $12.2 million. The leases contain customary escalation clauses,
based principally on real estate taxes. Rent expense related to these leases for
the years ended December 31, 1996, 1997, and 1998 and for the nine months ended
September 30, 1999 aggregated $129,600, $330,430, $422,729 and $380,091,
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 one year after termination of
employment with the Company. As of September 30, 1999 the Company is committed
to expend a total of approximately $1.8 million under these agreements.
F-17
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
11. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and receivables. The Company attempts to mitigate cash investment risks by
placing such investments in insured depository accounts and with financial
institutions that have high credit ratings. Concentrations of risk with respect
to trade receivables exist because of the relatively few companies or other
organizations (primarily educational or government bodies) with which the
Company currently does business. The Company attempts to limit these risks by
closely monitoring the credit of those to whom it is contemplating providing our
products, and continuing such credit monitoring activities and other collection
activities throughout the payment period. In certain instances, the Company will
further minimize concentrations of credit risks by requiring partial advance
payments for the products provided.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments, including cash and cash equivalents, accounts
receivable and payable, and accruals, the carrying amounts approximated fair
value because of their short maturity. The Notes Payable of the Texas
Individualized Television Network, Inc. were issued in 1998 and management
believes that its carrying value is representative of its fair value.
13. SEGMENT REPORTING
ACTV, Inc., develops and markets proprietary technologies for individualized
television programming ("Individualized Programming") and for
television/Internet convergence ("HyperTV"). Since its inception, the Company
has been engaged in the development of Individualized Programming, the
production of programs that use Individualized Programming and marketing and
sales of the various products and services incorporating Individualized
Programming. During 1996, the Company conceptualized and developed HyperTV for
the television/Internet convergence market. In 1997, the Company introduced to
the education market eSchool Online, which is the first commercial application
of HyperTV.
F-18
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
13. SEGMENT REPORTING (CONTINUED)
Information concerning our business segments for the years 1996, 1997, and
1998 and for the nine months ended September 30, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Individualized Television........ $ -- $ -- $ -- $ -- $ --
HyperTV.......................... 1,476,329 1,650,955 1,405,838 1,058,560 1,328,961
Unallocated corporate............ -- -- -- -- --
------------ ------------ ------------ ----------- ------------
Total............................ $ 1,476,329 $ 1,650,955 $ 1,405,838 $ 1,058,560 $ 1,328,961
DEPRECIATION & AMORTIZATION
Individualized Television........ $ 381,135 $ 172,123 $ 763,241 $ 550,345 $ 636,275
HyperTV.......................... 1,086 29,622 206,338 172,139 280,994
Unallocated corporate............ 464,130 552,309 563,151 408,280 440,959
------------ ------------ ------------ ----------- ------------
Total............................ $ 846,351 $ 754,054 $ 1,532,730 $ 1,130,764 $ 1,358,228
INTEREST EXPENSE (INCOME)
Individualized Television........ $ -- $ (9,391) $ 850,770 $ 642,750 $ 756,011
HyperTV.......................... (152,040) (8,128) (8,405) (3,681) 1,502
Unallocated corporate............ (6,692) (99,351) 94,403 (26,247) (279,270)
------------ ------------ ------------ ----------- ------------
Total............................ $ (158,732) $ (116,870) $ 936,768 $ 612,822 $ 478,243
NET LOSS
Individualized Television........ $ (2,459,965) $ (2,678,832) $ (5,273,173) $(3,899,877) $ (4,389,478)
HyperTV.......................... (1,196,767) (1,771,671) (2,020,228) (1,348,185) (2,280,182)
Unallocated corporate............ (6,643,749) (5,908,180) (13,574,923) (4,620,961) (9,737,431)
------------ ------------ ------------ ----------- ------------
Total............................ $(10,300,481) $(10,358,683) $(20,868,324) $(9,869,023) $(16,407,091)
CAPITAL EXPENDITURES
Individualized Television........ $ 411,212 $ 139,897 $ 947,710 $ 597,115 $ 1,014,606
HyperTV.......................... -- 273,778 361,716 308,355 2,313,755
Unallocated corporate............ 32,977 2,482,128 618,495 563,005 68,220
------------ ------------ ------------ ----------- ------------
Total............................ $ 444,189 $ 2,895,803 $ 1,927,921 $ 1,468,475 $ 3,396,581
CURRENT ASSETS
Individualized Television........ $ 39,759 $ 290,421 $ 1,449,763 $ 608,911 $ 404,949
HyperTV.......................... 862,473 775,855 844,683 882,390 1,370,749
Unallocated corporate............ 6,683,183 337,255 4,280,110 7,010,108 14,306,696
------------ ------------ ------------ ----------- ------------
Total............................ $ 7,585,415 $ 1,403,531 $ 6,574,556 $ 8,501,409 $ 16,082,394
TOTAL ASSETS
ACTV Entertainment, Inc.......... $ 488,081 $ 3,105,174 $ 4,708,444 $ 3,755,066 $ 3,996,715
HyperTV.......................... 865,629 1,023,170 1,250,825 1,269,369 3,822,650
Unallocated corporate............ 10,338,914 3,773,575 7,646,773 10,591,185 17,305,606
------------ ------------ ------------ ----------- ------------
Total............................ $ 11,692,624 $ 7,901,919 $ 13,606,042 $15,615,620 $ 25,124,971
</TABLE>
F-19
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
14. INVESTMENT AND ADJUSTMENTS
In January 1995, the Company invested $274,325 in the common stock
(approximately 15% of ownership interest) of a company, which had licensed our
Individualized Programming for commercialization in special-purpose theaters.
The Company also performed executive production services for the this
company on a fee basis. During 1996, the Company recorded license fees and
production service revenue from the License 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 company 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 our full investment in the company of
$274,325.
15. INCENTIVE COMPENSATION PROVISIONS
For the nine months ended September 30, 1999, the Company incurred executive
compensation expense of $3.6 million. Approximately $1.3 million of the
nine-month total was non-cash compensation attributable to the exchange of stock
options for stock appreciation rights, as described above. An additional
component of total compensation expense was approximately $2.3 million for the
nine-month period, related to an incentive compensation provision that is based
on changes in the market value of the Company's common stock during the
twelve-month period ended March 31, 1999. The Company is accruing the total
value of the award in four equal quarterly amounts, beginning March 31, 1999,
since it is payable in quarterly installments that are contingent on continued
employment of the executive receiving this compensation. The Company paid
approximately $1.7 million, or 75% of the award, in the form of unregistered
common stock.
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The consolidated financial statements at December 31, 1996, reflect non-cash
activity during the year ended December 31, 1996, that relates to a reversal of
certain of the option exercises and resulting non-recourse loan transactions
described above: a credit to shareholders' equity of $367,500.
The consolidated financial statements at December 31, 1997 and 1998 and
September 30, 1998 and 1999, reflect non-cash activity during the year ended
December 31, 1997 and 1998 and nine months ended September 30, 1998 and 1999,
that relate to stock appreciation rights, notes and stock issued in lieu of cash
compensation, subsidiary preferred stock dividends and accretions, and preferred
stock dividends payable. The non-cash stock appreciation rights activity for the
years ended December 31, 1997 and 1998 and nine months ended September 30, 1998
and 1999 decreased by $701,517 and increased by $2.0 million, $455,251 and
$2.0 million, respectively. The stock issued in lieu of cash compensation for
the years ended December 31, 1997 and 1998 and nine months ended September 30,
1998 and 1999 was $443,125, $2.0 million, $2,016,023 and $6.3 million,
respectively. The notes issued in lieu of cash compensation for the years ended
December 31, 1998 equaled $686,641. During the term of the notes issued in
January 1998 by ACTV subsidiaries, ACTV Entertainment, Inc. and the Texas
F-20
<PAGE>
ACTV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED AS TO THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1999)
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
Network, the Company may pay any four semi-annual interest payments in kind
rather than in cash. The Company chose to make the first two semi-annual
interest payments in kind through issuance of notes (June 30, 1998 and
December 31, 1998). The subsidiary preferred stock dividends and accretions for
the years ended December 31, 1997 and 1998 were $2.6 million and $5.7 million,
respectively and the preferred stock dividends payable for the years ended
December 31, 1997 and 1998 and nine months ended September 30, 1998 and 1999
increased by $408,085, $162,595, $67,034, and $241,513, respectively.
The Company made no cash payments of interest or income taxes during the
years ended December 31, 1996, 1997 and 1998 or during the nine month period
ending September 30, 1999. However, we made cash interest payments in July 1999
of $369,632, related to the $5.0 million original fair value notes.
F-21
<PAGE>
[LOGO]
ACTV, Inc.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSE OF ISSUANCE AND DISTRIBUTION.
Shown below are estimates of the approximate amount of the fees and expenses
(other than underwriting commissions and discounts) we have incurred in
connection with this offering.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 41,745.00
Accounting fees and expenses................................ 70,000.00
Legal fees and expenses..................................... 300,000.00
Printer's fees and expenses................................. 200,000.00
Miscellaneous expenses...................................... 60,000.00
National Association of Securities Dealers, Inc.'s filing
fee....................................................... 15,812.00
-----------
Total................................................... $687,557.00
===========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law, which we refer to
as the "DGCL," permits a provision in the certificate of incorporation of each
corporation organized under the DGCL eliminating or limiting, with some
exceptions, the personal liability of a director to the corporation or its
stockholders for monetary damages for some breaches of fiduciary duty. Our
Restated Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by the DGCL.
Section 145 of the DGCL, which we refer to as "Section 145," in summary,
empowers a Delaware corporation to indemnify, within limits, its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, they actually and reasonably
incur in connection with any suit or proceeding, other than by or on behalf of
the corporation, if they acted in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interest of the corporation and, with
respect to a criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful.
With respect to any action by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) they actually and reasonably incur
in connection with the defense or settlement of the action or suit, provided
that person meets the standard of conduct described in the preceding paragraph.
No indemnification is permitted, however, in respect of any claim where that
person has been found liable to the corporation, unless the Court of Chancery or
court in which the action or suit was brought approves the indemnification and
determines that the person is fairly and reasonably entitled to be indemnified.
Paragraph Twelfth of our Restated Certificate of Incorporation contains a
provision which eliminates the personal liability of our directors to us and our
stockholders for monetary damages for unintentional breach of a director's
fiduciary duty to us. This provision does not permit any limitation on, or
elimination of, the liability of a director for disloyalty to us or our
stockholders, for failing to act in good faith, for engaging in intentional
misconduct or a knowing violation of law, for obtaining an improper personal
benefit or for paying a dividend or approving a stock repurchase that was
illegal under the DGCL.
Our Restated Certificate of Incorporation and By-Laws require us to
indemnify our directors and officers against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement in connection with
specified actions, suits or proceedings, whether civil, criminal, administrative
or investigative, other than an action by or in the right of ACTV (a "derivative
action"), if they acted in good faith and in a manner they reasonably believed
to be in or not opposed to our best interests, and,
II-1
<PAGE>
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. A similar standard of care is applicable in
the case of derivative actions, except that indemnification only extends to
expenses (including attorneys fees) incurred in connection with defense or
settlement of such an action. Moreover, the DGCL requires court approval before
there can be any indemnification where the person seeking indemnification has
been found liable to ACTV.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Gersten, Savage & Kaplowitz, LLP as to the
legality of the securities
23.1 Consent of Deloitte & Touche
23.2 Consent of Gersten, Savage & Kaplowitz, LLP (incorporated
into Exhibit 5.1)
24.1* Powers of Attorney (included on the signature page of this
registration statement)
</TABLE>
- ------------------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
(a) We hereby undertake that, for purposes of determining any liability
under the Securities Act, each filing of our annual report under Section 13(a)
or 15(d) of the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report under Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of these securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons under
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. If a claim for indemnification against liabilities
(other than the payment by ACTV of expenses incurred or paid by one of our
directors, officers, or controlling persons in the successful defense of any
action, suit, or proceeding) is asserted by that director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question as to
whether this indemnification is against public policy as expressed in the
Securities Act, and will be governed by the final adjudication of the issue.
(c) We hereby undertake that: (1) For purposes of determining any liability
under the Securities Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by us pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective; (2) For the
purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered in the
registration statement, and the offering of those securities at that time shall
be deemed to be the initial bona fide offering of those securities.
II-2
<PAGE>
SIGNATURES
Under the requirements of the Securities Act, we certify that we have
reasonable grounds to believe that we meet all of the requirements for filing on
Form S-3 and have duly caused this amendment no. 1 to the registration statement
to be signed on our behalf by the undersigned, duly authorized to sign this
amendment in the City of New York, New York, on the 18th day of January, 2000.
<TABLE>
<S> <C> <C>
ACTV, INC.
By: /s/ WILLIAM C. SAMUELS
-----------------------------------------
William C. Samuels
Chairman of the Board and Chief
Executive Officer
</TABLE>
Under the requirements of the Securities Act, this amendment no. 1 to the
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM C. SAMUELS
------------------------------------------- Chairman of the Board and January 18, 2000
William C. Samuels Chief Executive Officer
*
------------------------------------------- President, Chief Operating January 18, 2000
David Reese Officer and Director
Executive Vice President,
* President, HyperTV
------------------------------------------- Networks, Inc. and January 18, 2000
Bruce Crowley Director
Senior Vice President,
* Chief Financial Officer,
------------------------------------------- Assistant Secretary and January 18, 2000
Christopher C. Cline Chief Accounting Officer
* Senior Vice President,
------------------------------------------- General Counsel and January 18, 2000
Day L. Patterson Secretary
*
------------------------------------------- Director January 18, 2000
William A. Frank
*
------------------------------------------- Director January 18, 2000
Steven W. Schuster
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
------------------------------------------- Director January 18, 2000
Melvyn N. Klein
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ WILLIAM C. SAMUELS
--------------------------------------
William C. Samuels
(ATTORNEY-IN-FACT)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Gersten, Savage & Kaplowitz, LLP as to the
legality of the securities
23.1 Consent of Deloitte & Touche
23.2 Consent of Gersten, Savage & Kaplowitz, LLP (incorporated
into Exhibit 5.1)
24.1* Powers of Attorney (included on the signature page of this
registration statement)
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
Exhibit 1.1
[-] SHARES
ACTV, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
, 2000
CREDIT SUISSE FIRST BOSTON CORPORATION
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS INC.
SALOMON SMITH BARNEY INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. INTRODUCTORY. ACTV, Inc., a Delaware corporation ("COMPANY"),
proposes to issue and sell [-] shares ("FIRM SECURITIES") of its Common Stock
($0.10 par value) ("SECURITIES") and also proposes to issue and sell to the
Underwriters, at the option of the Underwriters, an aggregate of not more than
[-] additional shares ("OPTIONAL SECURITIES") of its Securities as set forth
below. The Firm Securities and the Optional Securities are herein collectively
called the "OFFERED SECURITIES". The Company hereby agrees with the several
Underwriters named in Schedule A hereto ("UNDERWRITERS") as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-92129) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("COMMISSION") and either
(i) has been declared effective under the Securities Act of 1933
("ACT") and is not proposed to be amended or (ii) is proposed to be
amended by amendment or post-effective amendment. If such registration
statement ("INITIAL REGISTRATION STATEMENT") has been declared
effective, either (i) an additional registration statement
("ADDITIONAL REGISTRATION STATEMENT") relating to the Offered
Securities may have been filed with the Commission pursuant to Rule
462(b) ("RULE 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered Securities
all have been duly registered under the Act pursuant to the initial
registration statement and, if applicable, the additional registration
statement or (ii) such an additional registration statement is
proposed to be filed with the Commission pursuant to Rule 462(b) and
will become effective upon filing pursuant to such Rule and upon such
filing the Offered Securities will all have been duly registered under
the Act pursuant to the initial registration statement and such
additional registration statement. If the Company does not propose to
amend the initial registration statement or if an additional
registration statement has been filed and the Company does not propose
to amend it, and if any post-effective amendment to either such
registration statement has been filed with the Commission prior to
the execution and delivery of this Agreement, the most recent amendment
(if any) to each such registration statement has been declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c) ("RULE 462(c)") under the Act or, in the case
of the additional registration statement, Rule 462(b). For purposes of
this Agreement, "EFFECTIVE TIME" with respect to the initial
registration statement or, if filed prior to the execution and delivery
of this Agreement, the additional registration statement means (i) if
the Company has advised the Representatives that it does not propose to
amend such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment
thereto (if any) filed prior to the execution and delivery of this
Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company
has advised the Representatives that it proposes to file an amendment
or post-effective amendment to such registration statement, the date
and time as of which
<PAGE>
such registration statement, as amended by such amendment or
post-effective amendment, as the case may be, is declared effective by
the Commission. If an additional registration statement has not been
filed prior to the execution and delivery of this Agreement but the
Company has advised the Representatives that it proposes to file one,
"EFFECTIVE TIME" with respect to such additional registration statement
means the date and time as of which such registration statement is
filed and becomes effective pursuant to Rule 462(b). "EFFECTIVE DATE"
with respect to the initial registration statement or the additional
registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its
Effective Time, including all material incorporated by reference
therein, including all information contained in the additional
registration statement (if any) and deemed to be a part of the initial
registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form
on which it is filed and including all information (if any) deemed to
be a part of the initial registration statement as of its Effective
Time pursuant to Rule 430A(b) ("RULE 430A(b)") under the Act, is
hereinafter referred to as the "INITIAL REGISTRATION STATEMENT". The
additional registration statement, as amended at its Effective Time,
including the contents of the initial registration statement
incorporated by reference therein and including all information (if
any) deemed to be a part of the additional registration statement as of
its Effective Time pursuant to Rule 430A(b), is hereinafter referred to
as the "ADDITIONAL REGISTRATION STATEMENT". The Initial Registration
Statement and the Additional Registration Statement are herein referred
to collectively as the "REGISTRATION STATEMENTS" and individually as a
"REGISTRATION STATEMENT". The form of prospectus relating to the
Offered Securities, as first filed with the Commission pursuant to and
in accordance with Rule 424(b) ("RULE 424(b)") under the Act or (if no
such filing is required) as included in a Registration Statement,
including all material incorporated by reference in such prospectus, is
hereinafter referred to as the "PROSPECTUS". No document has been or
will be prepared or distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the rules and regulations of the Commission ("RULES AND
REGULATIONS") and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, (ii) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all respects to
the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading and (iii) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects, to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all material respects to the requirements of the Act and the
Rules and Regulations, neither of such documents will include any
untrue statement of a material fact or will omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, and no Additional Registration Statement has
been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(b) hereof.
2
<PAGE>
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus; and the
Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification.
(d) Each subsidiary of the Company has been duly incorporated and
is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification; all of the issued
and outstanding capital stock of each subsidiary of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the
Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered
Securities will have been, validly issued, fully paid and nonassessable
and will conform to the description thereof contained in the
Prospectus; and the stockholders of the Company have no preemptive
rights with respect to the Securities.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter
for a brokerage commission, finder's fee or other like payment in
connection with this offering.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act.
(h) The Offered Securities have been approved for listing on the
Nasdaq Stock Market's National Market subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act may
be required under state securities laws.
(j) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or order
of any governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or any subsidiary of the Company
or any of their properties, or any agreement or instrument to which the
Company or any such subsidiary is a party or by which the Company or
any such subsidiary is bound or to which any of the properties of the
Company or any such subsidiary is subject, or the charter or by-laws of
the Company or any such subsidiary, and the Company has full power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and
delivered by the Company.
3
<PAGE>
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from
liens, encumbrances and defects that would materially affect the value
thereof or materially interfere with the use made or to be made thereof
by them; and except as disclosed in the Prospectus, the Company and its
subsidiaries hold any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them and have not received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries
taken as a whole ("MATERIAL ADVERSE EFFECT").
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(o) The Company and its subsidiaries own, possess or can acquire
on reasonable terms, adequate trademarks, trade names and other rights
to inventions, know-how, patents, copyrights, confidential information
and other intellectual property (collectively, "INTELLECTUAL PROPERTY
RIGHTS") necessary to conduct the business now operated by them, or
presently employed by them, and have not received any notice of
infringement of or conflict with asserted rights of others with respect
to any intellectual property rights that, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(p) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "ENVIRONMENTAL LAWS"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not aware
of any pending investigation which might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of
its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect, or
would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and no
such actions, suits or proceedings are threatened or, to the Company's
knowledge, contemplated.
(r) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied
on a consistent basis; and the schedules included in each Registration
Statement present fairly the information required to be stated therein.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there
has been no material adverse change, nor any development or event
4
<PAGE>
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(t) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ per share, the respective numbers
of shares of Firm Securities set forth opposite the names of the Underwriters in
Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, at the office of Cravath, Swaine & Moore,
against payment of the purchase price in Federal (same day) funds by official
bank check or checks or wire transfer to an account at a bank acceptable to
Credit Suisse First Boston Corporation ("CSFBC") drawn to the order of at
the office of Cravath, Swaine & Moore, at 10:00 A.M., New York time, on ,
2000, or at such other time not later than seven full business days thereafter
as CSFBC and the Company determine, such time being herein referred to as the
"FIRST CLOSING DATE". For purposes of Rule 15c6-1 under the Securities Exchange
Act of 1934, the First Closing Date (if later than the otherwise applicable
settlement date) shall be the settlement date for payment of funds and delivery
of securities for all the Offered Securities sold pursuant to the offering. The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as CSFBC requests and
will be made available for checking and packaging at the above office of
Cravath, Swaine & Moore at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, at the office of
Cravath, Swaine & Moore, against payment of the purchase price therefor in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to CSFBC drawn to the order of , at the
above office of Cravath, Swaine & Moore. The certificates for the Optional
Securities being purchased on each Optional Closing Date will be in definitive
form, in such denominations and registered in such names as CSFBC requests upon
reasonable notice prior to such Optional Closing Date and will be made available
for checking and packaging at the above office of Cravath, Swaine & Moore at a
reasonable time in advance of such Optional Closing Date.
5
<PAGE>
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. CERTAIN AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of
the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and
an additional registration statement is necessary to register a portion
of the Offered Securities under the Act but the Effective Time thereof
has not occurred as of such execution and delivery, the Company will
file the additional registration statement or, if filed, will file a
post-effective amendment thereto with the Commission pursuant to and in
accordance with Rule 462(b) on or prior to 10:00 P.M., New York time,
on the date of this Agreement or, if earlier, on or prior to the time
the Prospectus is printed and distributed to any Underwriter, or will
make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration
statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any)
or the Prospectus and will not effect such amendment or supplementation
without CSFBC's consent; and the Company will also advise CSFBC
promptly of the effectiveness of each Registration Statement (if its
Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of
any stop order proceedings in respect of a Registration Statement and
will use its best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent
to, nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in
Section 6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to
its securityholders an earnings statement covering a period of at least
12 months beginning after the Effective Date of the Initial
Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions of
Section 11(a) of the Act. For the purpose of the preceding sentence,
"AVAILABILITY DATE" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "AVAILABILITY DATE" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement, five of which will be signed and will include
all exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be
delivered under the Act in connection
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with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such
quantities as CSFBC requests. The Prospectus shall be so furnished on
or prior to 3:00 P.M., New York time, on the business day following the
later of the execution and delivery of this Agreement or the Effective
Time of the Initial Registration Statement. All other documents shall
be so furnished as soon as available. The Company will pay the expenses
of printing and distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934 or
mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance
of its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel) incurred in
connection with qualification of the Offered Securities for sale under
the laws of such jurisdictions as CSFBC designates and the printing of
memoranda relating thereto, for the filing fee incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. of the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the Company
in connection with attending or hosting meetings with prospective
purchasers of the Offered Securities and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) For a period of 90 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under
the Act relating to, any additional shares of its Securities or
securities convertible into or exchangeable or exercisable for any
shares of its Securities, or publicly disclose the intention to make
any such offer, sale, pledge, disposition or filing, without the prior
written consent of CSFBC except for grants of employee stock options
pursuant to the terms of a plan in effect on the date hereof, issuances
of Securities pursuant to the exercise of such options or exercise of
any other employee stock options outstanding on the date hereof.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time), of
Deloitte & Touche LLP confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
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(i) in their opinion the financial statements and
schedules examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by
the American Institute of Certified Public Accountants for a
review of interim financial information as described in Statement
of Auditing Standards No. 71, Interim Financial Information, on
the unaudited financial statements included in the Registration
Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim
financial statements of the Company, inquiries of officials of the
Company who have responsibility for financial and accounting
matters and other specified procedures, nothing came to their
attention that caused them to believe that:
(A) the unaudited financial statements
included in the Registration Statements do not comply
as to form in all material respects with the
applicable accounting requirements of the Act and the
related published Rules and Regulations or any
material modifications should be made to such
unaudited financial statements for them to be in
conformity with generally accepted accounting
principles;
(B) at the date of the latest available
balance sheet read by such accountants, or at a
subsequent specified date not more than three
business days prior to the date of such letter, there
was any change in the capital stock or any increase
in short-term indebtedness or long-term debt of the
Company and its consolidated subsidiaries or, at the
date of the latest available balance sheet read by
such accountants, there was any decrease in
consolidated net current assets or net assets, as
compared with amounts shown on the latest balance
sheet included in the Prospectus; or
(C) for the period from the closing date of
the latest statement of operations included in the
Prospectus to the closing date of the latest
available statement of operations read by such
accountants there were any decreases, as compared
with the corresponding period of the previous year
and with the period of corresponding length ended the
date of the latest statement of operations included
in the Prospectus, in consolidated net sales, net
operating income or in the total or per share amounts
of consolidated income before extraordinary items or
net income,
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case
to the extent that such dollar amounts, percentages and other
financial information are derived from the general accounting
records of the Company and its subsidiaries subject to the
internal controls of the Company's accounting system or are
derived directly from such records by analysis or computation)
with the results obtained from inquiries, a reading of such
general accounting records and other procedures specified in such
letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except
as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, "REGISTRATION STATEMENTS" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration is subsequent to such
execution and delivery, "REGISTRATION STATEMENTS"
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shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to
its Effective Time, and (iii) "PROSPECTUS" shall mean the prospectus
included in the Registration Statements. All financial statements and
schedules included in material incorporated by reference into the
Prospectus shall be deemed included in the Registration Statements for
purposes of this subsection.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or such later date as shall have
been consented to by CSFBC. If the Effective Time of the Additional
Registration Statement (if any) is not prior to the execution and
delivery of this Agreement, such Effective Time shall have occurred not
later than 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, the time the Prospectus is printed and distributed to any
Underwriter, or shall have occurred at such later date as shall have
been consented to by CSFBC. If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, the Prospectus shall have been filed with the Commission in
accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company or the Representatives, shall be contemplated
by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or
other), business, properties or results of operations of the Company
and its subsidiaries taken as one enterprise which, in the judgment of
a majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the
sale of and payment for the Offered Securities; (ii) any downgrading in
the rating of any debt securities of the Company by any "nationally
recognized statistical rating organization" (as defined for purposes of
Rule 436(g) under the Act), or any public announcement that any such
organization has under surveillance or review its rating of any debt
securities of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any material suspension or material
limitation of trading in securities generally on the New York Stock
Exchange, or any suspension of trading of any securities of the Company
on any exchange or in the over-the-counter market; (iv) any banking
moratorium declared by U.S. Federal or New York authorities; or (v) any
outbreak or escalation of major hostilities in which the United States
is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable
to proceed with completion of the public offering or the sale of and
payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Gersten, Savage & Kaplowitz, LLP, counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its
properties and conduct its business as described in the
Prospectus; and the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its
business requires such qualification;
(ii) The Offered Securities delivered on such Closing
Date and all other outstanding shares of the Common Stock of the
Company have been duly authorized and validly issued, are fully
paid and nonassessable and conform to the description thereof
contained in the Prospectus; and the stockholders of the Company
have no preemptive rights with respect to the Securities;
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<PAGE>
(iii) Each of HyperTV Networks, Inc. and ACTV
Entertainment, Inc. has been duly incorporated and is an existing
corporation in good standing under the laws of Delaware, with
power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus; and each
of HyperTV Networks, Inc. and ACTV Entertainment, Inc. is duly
qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification; all of the issued and outstanding capital stock of
each of HyperTV Networks, Inc. and ACTV Entertainment, Inc. has
been duly authorized and is validly issued and is fully paid and
nonassessable; and the capital stock of each of HyperTV Networks,
Inc. and ACTV Entertainment, Inc. owned by the Company, directly
or through subsidiaries, is owned free from liens, encumbrances
and defects.
(iv) Except as disclosed in the Prospectus, there are
no contracts, agreements or understandings known to such counsel
between the Company and any person granting such person the right
to require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company
under the Act;
(v) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated by
this Agreement in connection with the issuance or sale of the
Offered Securities by the Company, except such as have been
obtained and made under the Act and such as may be required under
state securities laws;
(vi) The execution, delivery and performance of this
Agreement and the issuance and sale of the Offered Securities will
not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body or
any court having jurisdiction over the Company or any subsidiary
of the Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to
which any of the properties of the Company or any such subsidiary
is subject, or the charter or by-laws of the Company or any such
subsidiary, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated
by this Agreement;
(vii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such
opinion, the Additional Registration Statement (if any) was filed
and became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus either was
filed with the Commission pursuant to the subparagraph of Rule
424(b) specified in such opinion on the date specified therein or
was included in the Initial Registration Statement or the
Additional Registration Statement (as the case may be), and, to
the best of the knowledge of such counsel, no stop order
suspending the effectiveness of a Registration Statement or any
part thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the Act,
and each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective effective
or issue dates, complied as to form in all material respects with
the requirements of the Act and the Rules and Regulations; such
counsel have no reason to believe that any part of a Registration
Statement or any amendment thereto, as of its effective date or as
of such Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading
or that the Prospectus or any amendment or supplement thereto, as
of its issue date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material fact
necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; the
descriptions in the Registration Statements and Prospectus of
statutes, legal and governmental
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proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; and such
counsel do not know of any legal or governmental proceedings
required to be described in a Registration Statement or the
Prospectus which are not described as required or of any contracts
or documents of a character required to be described in a
Registration Statement or the Prospectus or to be filed as
exhibits to a Registration Statement which are not described and
filed as required; it being understood that such counsel need
express no opinion as to the financial statements or other
financial data contained in the Registration Statements or the
Prospectus; and
(viii) This Agreement has been duly authorized,
executed and delivered by the Company.
(e) The Company shall have requested and caused Dorsey & Whitney
LLP, intellectual property counsel for the Company, to furnish to the
Representatives its opinion, dated the Closing Date and addressed to
the Representatives, to the effect that:
In its capacity as the Company's patent counsel and in the context
of its representation, such counsel has reviewed certain statements
under the headings "Business--Patents and Other Intellectual Property",
"--Legal Proceedings", "Risk Factors--Our efforts to protect our
patents and proprietary information from competitors may not be
adequate" and "--Our business may be restricted or may be subject to
litigation in the future as a result of the intellectual property
rights of other" in the Prospectus (collectively, the "Statements").
Although such counsel has not independently verified the
completeness of the matters contained in the Statements, insofar as the
Statements constitute facts pertaining to such counsel's representation
and involve matters of United States law, the statements, to such
counsel's actual knowledge, fairly summarize the matters therein set
forth. As to questions of material fact relevant thereto, such counsel
has relied, to the extent such counsel deems appropriate, upon
representations made to such counsel by officers of the Company.
Specifically, such counsel believes as to certain aspects of the
Statements that:
(i) Subject to any disclosure to the contrary in the
Prospectus, to such counsel's actual knowledge there are no legal
or governmental proceedings, except patent office proceedings,
pending or threatened against the Company or its subsidiaries
relating to the patents or patent applications of the Company or
its subsidiaries referenced in the Statements.
(ii) Subject to any disclosure to the contrary in the
Prospectus, to such counsel's actual knowledge there are no facts
that would preclude the Company or its subsidiaries from having
clear title to or a valid license under the patents and patent
applications of the Company or its subsidiaries referenced in the
Statements.
(iii) Subject to any disclosure to the contrary in
the Prospectus, such counsel has no actual knowledge of any charge
asserted by a third party of infringement of any third party
patent by the Company or its subsidiaries.
Further, such counsel has no actual knowledge that causes such
counsel to believe, as of the date thereof, that the Statements contain
any untrue statement of a material fact or omit to state a material
fact necessary to make such Statements not misleading in the context in
which they are made.
(f) The Representatives shall have received from Cravath, Swaine &
Moore, counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to the incorporation of the Company,
the validity of the Offered Securities delivered on such Closing Date,
the Registration Statements, the Prospectus and other related matters
as the Representatives may require, and the
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Company shall have furnished to such counsel such documents as they
request for the purpose of enabling them to pass upon such matters.
(g) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: the representations and warranties of
the Company in this Agreement are true and correct; the Company has
complied with all agreements and satisfied all conditions on its part
to be performed or satisfied hereunder at or prior to such Closing
Date; no stop order suspending the effectiveness of any Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
462(b), including payment of the applicable filing fee in accordance
with Rule 111(a) or (b) under the Act, prior to the time the Prospectus
was printed and distributed to any Underwriter; and, subsequent to the
date of the most recent financial statements in the Prospectus, there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole except as set forth
in or contemplated by the Prospectus or as described in such
certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of Deloitte & Touche LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred
to in such subsection will be a date not more than three days prior to
such Closing Date for the purposes of this subsection.
(i) Each executive officer and director of the Company shall have
furnished to the Representatives a letter substantially in the form of
Exhibit A hereto and addressed to the Representatives relating to sales
of shares of Securities or any securities convertible into or
exercisable or exchangeable for such Securities, and each such letter
shall be in full force and effect on the Closing Date.
(j) Liberty Media Corporation shall have furnished to the
Representatives a letter substantially in the form of Exhibit B hereto
and addressed to the Representatives relating to sales of shares of
Securities or any securities convertible into or exercisable or
exchangeable for such Securities, and each such letter shall be in full
force and effect on the Closing Date.
(k) The Representatives shall have received a letter from the
Company agreeing that, until the distribution of the Securities is
complete, should any one of Robert Gladstone, David Nussbaum, Lester
Rosencrantz, Anthony Stoss or GKN Securities Corp. wish to exercise any
warrants held by said individual for the Company's Securities, the
Company will consent to a cashless exercise of said warrants if so
asked by said individual, and such letter shall be in effect on the
Closing Date.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or
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action as such expenses are incurred; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement in or omission or alleged omission from any of such documents
in reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information furnished
by any Underwriter consists of the information described as such in subsection
(b) below.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any who
controls the Company within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the fourth
paragraph under the caption "Underwriting" and the information contained in the
eighth paragraph under the caption "Underwriting".
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened action in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement (i) includes an unconditional release
of such indemnified party from all liability on any claims that are the subject
matter of such action and (ii) does not include a statement as to, or an
admission of, fault, culpability or a failure to act by or on behalf of an
indemnified party.
(d) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the
13
<PAGE>
Company bear to the total underwriting discounts and commissions received by the
Underwriters. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section
14
<PAGE>
8 or the occurrence of any event specified in clause (iii), (iv) or (v) of
Section 6(c), the Company will reimburse the Underwriters for all out-of-pocket
expenses (including fees and disbursements of counsel) reasonably incurred by
them in connection with the offering of the Offered Securities.
10. NOTICES. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at ACTV, Inc., 1270 Avenue
of the Americas, New York, NY 10020, Attention: William C. Samuels, Chairman and
Day L. Pattersen, Esq. General Counsel, with a copy to Jay M. Kaplowitz, Esq.,
Gersten, Savage & Kaplowitz, LLP, 101 East 52nd Street, 9th Floor, New York, NY
10022; provided, however, that any notice to an Underwriter pursuant to Section
7 will be mailed, delivered or telegraphed and confirmed to such Underwriter.
11. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. REPRESENTATION OF UNDERWRITERS. The Representatives will act for
the several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
15
<PAGE>
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
ACTV, INC.
By____________________________
Name:_______________________
Title:________________________
16
<PAGE>
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS INC.
SALOMON SMITH BARNEY INC.
Acting on behalf of themselves and as the
Representatives of the several Underwriters
By CREDIT SUISSE FIRST BOSTON CORPORATION
By________________________
Name:___________________
Title:____________________
17
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
---------
UNDERWRITER FIRM SECURITIES
- ----------- ---------------
<S> <C>
Credit Suisse First Boston Corporation...................................
Bear Stearns & Co. Inc...................................................
Lehman Brothers Inc......................................................
Salomon Smith Barney Inc.................................................
-----------------------------
Total................................................................. $
=============================
</TABLE>
18
<PAGE>
Exhibit A
, 2000
ACTV, Inc.
1270 Avenue of the Americas
Rockefeller Center, Suite 2401
New York, NY 10020
Credit Suisse First Boston Corporation
Bear, Stearns & Co. Inc.
Lehman Brothers Inc.
Salomon Smith Barney Inc.
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, NY 10010
Dear Sir or Madam:
As an inducement to the Underwriters to execute the
Underwriting Agreement pursuant to which a primary offering will be made of the
Common Stock, $0.10 par value per share (the "Securities"), of ACTV, Inc. (the
"Company"), the undersigned hereby agrees that, for a period of 90 days after
the public offering (the "Commencement Date") of the Securities pursuant to the
Underwriting Agreement to which you are or expect to become parties, the
undersigned will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of Common Stock or securities convertible
into or exchangeable or exercisable for any shares of Common Stock, or publicly
disclose the intention to make any such offer, sale, pledge or disposal without
the prior written consent of Credit Suisse First Boston Corporation.
In furtherance of the foregoing, the Company and its transfer
agent and registrar are hereby authorized to decline to make any transfer of
shares of Common Stock if such transfer would constitute a violation or breach
of this Agreement.
This Agreement shall be binding on the undersigned and the
respective successors, heirs, personal representatives and assigns of the
undersigned. This Agreement shall lapse and become null and void if the
Commencement Date shall not have occurred on or before the date that is 90 days
after the date of this Agreement.
Very truly yours,
<PAGE>
Exhibit B
, 2000
ACTV, Inc.
1270 Avenue of the Americas
Rockefeller Center, Suite 2401
New York, NY 10020
Credit Suisse First Boston Corporation
Bear, Stearns & Co. Inc.
Lehman Brothers Inc.
Salomon Smith Barney Inc.
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, NY 10010
Dear Sir or Madam:
As an inducement to the Underwriters to execute the
Underwriting Agreement pursuant to which an offering will be made that is
intended to result in an orderly market for the Common Stock, $0.10 par value
per share (the "Securities"), of ACTV, Inc. (the "Company"), the undersigned
hereby agrees that, from the date hereof and until 90 days after the public
offering date set forth in the final prospectus used to sell the Securities (the
"Public Offering Date") pursuant to the Underwriting Agreement to which you are
or expect to become parties, the undersigned will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, any shares of
Securities or securities convertible into or exchangeable or exercisable for any
shares of Securities, or enter into a transaction that would have the same
effect, or publicly disclose the intention to make any such offer, sale, pledge
or disposal, or cause the Company to file a registration statement with the
Securities and Exchange Commission with respect to any Securities or securities
convertible into or exchangeable or exercisable for any shares of Securities
without the prior written consent of Credit Suisse First Boston Corporation.
Any Securities received upon exercise of options or warrants
granted to the undersigned will also be subject to this Agreement. Any
Securities acquired by the undersigned in the open market will not be subject to
this Agreement. A transfer of Securities to a family member or trust may be
made, provided the transferee agrees to be bound in writing by the terms of this
Agreement.
In furtherance of the foregoing, the Company and its transfer
agent and registrar are hereby authorized to decline to make any transfer of
shares of Common Stock if such transfer would constitute a violation or breach
of this Agreement.
This Agreement shall be binding on the undersigned and the
respective successors, heirs, personal representatives and assigns of the
undersigned. This Agreement shall lapse and become null and void if the Public
Offering Date shall not have occurred on or before the date that is 120 days
after the date of this Agreement.
Very truly yours,
<PAGE>
EXHIBIT 5.1
[Gersten, Savage, & Kaplowitz, LLP Letterhead]
January 14, 2000
ACTV, Inc.
1270 Avenue of the Americas
New York, New York 10020
Gentlemen:
You have requested our opinion, as counsel for ACTV, Inc., a Delaware
corporation (the "Company"), in connection with the registration statement on
Form S-3, Pre-Effective Amendment No. 1, (the "Registration Statement"), under
the Securities Act of 1933, being filed by the Company with the Securities and
Exchange Commission.
The Registration Statement relates to an offering by the Company of up
to 4,600,000 shares of common stock, par value $0.10 per share (the "Common
Stock"), including up to 600,000 shares issuable by the Company upon exercise of
the underwriters' over-allotment option.
We have examined such records and documents and made such examination
of law as we have deemed relevant in connection with this opinion. It is our
opinion that when there has been compliance with Securities Act of 1933, the
Common Stock, when issued, delivered, and paid for, will be fully paid, validly
issued and nonassessable.
No opinion is expressed herein as to any laws other than the State of
New York, of the United States and the corporate laws of the State of Delaware.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we are
in the category of persons whose consent is required under Section 7 of
Securities Act of 1933 and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
Very truly yours,
/s/ Gersten, Savage & Kaplowitz, LLP
--------------------------------------
GERSTEN, SAVAGE & KAPLOWITZ, LLP
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of ACTV, Inc. on Form
S-3 of our report dated March 11, 1999, appearing in the Prospectus, which is
part of this Registration Statement. We also consent to the reference to us
under the heading, "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
January 14, 2000
