-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Irt5mI4mOvZQVozUcfCQ6s/TjqM2v0/J6KBJDSzE37PwsLgOG3Gf1AC8y4o9NlbA 7wC2euXisIobCCw1kzo4qA== /in/edgar/work/0001092388-00-500238/0001092388-00-500238.txt : 20001115 0001092388-00-500238.hdr.sgml : 20001115 ACCESSION NUMBER: 0001092388-00-500238 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTV INC /DE/ CENTRAL INDEX KEY: 0000854152 STANDARD INDUSTRIAL CLASSIFICATION: [3663 ] IRS NUMBER: 942907258 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10377 FILM NUMBER: 764141 BUSINESS ADDRESS: STREET 1: 1270 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2122622571 MAIL ADDRESS: STREET 1: 12270 AVE OF THE AMERICAS #2401 STREET 2: 12270 AVE OF THE AMERICAS #2401 CITY: NEW YORK STATE: NY ZIP: 10020 10-Q 1 actv_10q-v2.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000

ACTV, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

94-2907258
(I.R.S. Employer
Identification No.)

1270 Avenue of the Americas
New York, New York
(Address of principal executive offices)

10020
(Zip Code)

(212) 217-1600
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

As of November 10, 2000, there were 50,933,118 shares of the registrant's common stock outstanding.

Item 1. Financial Statements

ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	September 30, 2000			December 31, 1999

	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	134,676,552		$	9,413,170
Accounts receivable-net		1,892,971			1,469,164
Other		6,062,617			1,589,430

Total current assets		142,632,140			12,471,764


Property and equipment-net		6,289,875			3,770,195


Other assets:
Investment in warrant		76,016,175			-
Investments-other		4,000,000			250,000
Patents and patents pending		8,114,836			8,142,928
Software development costs		2,354,503			2,183,950
Goodwill		1,468,665			1,788,444
Other		3,391,020			833,113

Total other assets		95,345,199			13,198,435

Total assets	$	244,267,214		$	29,440,394


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	2,768,038		$	1,967,164
Deferred revenue		4,002,577			897,990

Total current liabilities		6,770,615			2,865,154

Long-term notes payable		-			4,804,342
Deferred revenue		71,491,403			-
Minority interest		12,465,774			2,000,593

Stockholders' equity:
Common stock, $0.10 par value, 200,000,000 shares authorized: issued and outstanding 50,933,118 at September 30, 2000, 42,440,032 at December 31, 1999		5,093,312			4,244,004
Additional paid-in capital		273,512,879			116,448,332
Accumulated deficit		(125,066,769	)		(100,922,031	)

Total stockholders' equity		153,539,422			19,770,305

Total liabilities and stockholders' equity	$	244,267,214		$	29,440,394

See notes to consolidated financial statements.

ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,

	2000			1999			2000			1999

Revenues	$	2,794,433		$	603,712		$	5,842,646		$	1,730,466


Costs and expenses:
Operating expenses		3,245,126			1,414,572			9,136,422			3,136,470
Selling and administrative		9,015,025			5,817,579			20,481,176			13,539,944
Depreciation and amortization		863,787			404,067			2,328,378			1,110,708
Amortization of goodwill		106,593			106,593			319,779			319,779
Stock appreciation rights		-			(2,605,319	)		-			1,950,330

Total expenses		13,230,531			5,137,492			32,265,755			20,057,231


Interest income		2,225,659			187,631			5,602,064			310,271
Interest (expense)		(13,407	)		(261,305	)		(284,619	)		(782,922	)

Interest income/(expense)-net		2,212,252			(73,674	)		5,317,445			(472,651	)


(Loss) before minority interest, preferred stock dividend and accretion and extraordinary items		(8,223,846	)		(4,607,454	)		(21,105,664	)		(18,799,416	)

Minority interest		606,822			-			1,084,719			-
Preferred stock dividend and accretion		-			-			-			494,431

(Loss) before extraordinary item	$	(7,617,024	)	$	(4,607,454	)	$	(20,020,945	)	$	(19,293,847	)

Extraordinary loss on early extinguishment of debt		-			-			(1,411,139	)		-

Net (loss)	$	(7,617,024	)	$	(4,607,454	)	$	(21,432,084	)	$	(19,293,847	)


Basic and diluted (loss) per common share before extraordinary item	$	(0.15	)	$	(0.11	)	$	(0.41	)	$	(0.54	)
Basic and diluted (loss) per common share after extraordinary item	$	(0.15	)	$	(0.11	)	$	(0.43	)	$	(0.54	)

Weighted average number of common shares outstanding		50,743,722			41,702,126			49,274,794			35,426,283

See notes to consolidated financial statements.

ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,

	2000			1999			2000			1999

Cash flows from operating activities:
Net loss	$	(7,617,024	)	$	(4,607,454	)	$	(21,432,084	)	$	(19,293,847	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization		970,380			510,660			2,648,157			1,430,487
Deferred compensation from stock appreciation rights		-			1,950,330			306,000			1,950,330
Stock appreciation rights		-			(4,555,649	)		-			-
Amortization and accretion of deferred expenses related to debt financing		-			271,769			-			761,094
Amortization of deferred revenue		(904,954	)		-			(904,954	)		-
Common stock issued in lieu of cash payment		1,520,000			2,034,844			3,040,000			6,313,480
Common stock issued for preferred dividends and accretion		-			-			-			241,513
Minority interest		(606,822	)		-			(1,084,719	)		-

Changes in assets and liabilities:
Accounts receivable		(317,404	)		(171,200	)		(423,807	)		(493,811	)
Other assets		(3,380,790	)		(8,387	)		(5,539,109	)		(1,412,314	)
Accounts payable and accrued expenses		517,678			(150,219	)		800,872			6,285
Deferred revenue		(374,488	)		564,901			(515,231	)		652,934

Net cash used in operating activities		(10,193,424	)		(4,160,405	)		(23,104,875	)		(9,843,849	)
Cash flows from investing activities:
Investment in patents		(183,421	)		(13,487	)		(411,622	)		(1,506,988	)
Investment in property and equipment		(1,952,930	)		(701,103	)		(3,878,463	)		(1,353,976	)
Investment in software development costs		(247,703	)		(358,280	)		(700,436	)		(857,080	)
Strategic investments		-			-			(3,750,000	)		-

Net cash used in investing activities		(2,384,054	)		(1,072,870	)		(8,740,521	)		(3,718,044	)
Cash flows from financing activities:
Retirement of debt		(300,000	)		(110,827	)		(4,566,095	)		(170,827	)
Preferred stock dividends payable		-			-			-			115,660
Redemption of preferred stock		-			-			-			(5,792,538	)
Net proceeds from subsidiary equity transactions		10,000,000			-			11,549,900			-
Net proceeds from equity financings		1,666,703			6,686,224			150,124,973			28,620,507

Net cash provided by financing activities		11,366,703			6,575,397			157,108,778			22,772,802

Net (decrease) increase in cash and cash equivalents		(1,210,775	)		1,342,122			125,263,382			9,210,909
Cash and cash equivalents, beginning of period		135,887,327			13,067,039			9,413,170			5,198,252

Cash and cash equivalents, end of period	$	134,676,552		$	14,409,161		$	134,676,552		$	14,409,161

See notes to consolidated financial statements.

ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

	Common Stock

	Shares			Amount			Additional Paid in Capital			Deficit			Total

Balance at December 31, 1999 as originally reported		42,167,997			4,216,800			110,692,842			(95,270,130	)		19,639,512

Adjustment for pooling of interests		272,035			27,204			5,755,490			(5,651,901	)		130,793


Adjusted balance at December 31, 1999		42,440,032		$	4,244,004		$	116,448,332		$	(100,922,031	)	$	19,770,305

Issuance of shares in connection with public offering		4,600,000			460,000			128,917,268			-			129,377,268

Issuance of shares for services		947,000			94,700			7,617,788			-			7,712,488

Issuance of shares in connection with exercise of stock options & warrants		3,004,562			300,456			20,837,127			-			21,137,583

Retirement of common stock		(58,476	)		(5,848	)		(307,636	)		(2,712,654	)		(3,026,138	)

Net loss		-			-			-			(21,432,084	)		(21,432,084	)


Balance at September 30, 2000		50,933,118		$	5,093,312		$	273,512,879		$	(125,066,769	)	$	153,539,422

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 and 2000

1. Basis of Presentation

The results of operations for the three and nine months ended September 30, 2000 and 1999 are not necessarily indicative of a full year's operations. In the opinion of our management, the accompanying financial statements include all adjustments of a normal recurring nature, which are necessary to present fairly such financial statements.

All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 1999.

We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Certain reclassifications have been made to the prior years' financial statements to conform to the 2000 presentation.

2. Financing Activities

On February 3, 2000, we completed a follow-on offering of 4.6 million common shares, including 0.6 million common shares to cover the over-allotments of our underwriters, Credit Suisse First Boston, Bear Stearns & Co. Inc., Lehman Brothers, and Salomon Smith Barney. The 4.6 million total common shares were priced to the public at $30 per share, for total gross proceeds of $138 million. We paid underwriting discounts and commissions of $1.80 per share or $8.28 million, resulting in net proceeds of $28.20 per share, or $129.7 million.

On March 27, 2000 Liberty Digital, Inc. invested an additional $20 million in us, increasing its investment to 16% by exercising a warrant granted in March 1999.

On September 6, 2000, Digital ADCO, Inc., a subsidiary of ACTV, Inc. and General Instruments, a subsidiary of Motorola Broadband Communications, announced the completion of a direct minority investment by OpenTV Corp. Digital ADCO, Inc. with Motorola Broadband Communications and OpenTV have joined to create a new subsidiary named Digital ADCO International.

3. Merger and Acquisition Activity

Acquisition

On August 17, 2000, the Company acquired all of the outstanding capital stock of Bottle Rocket, Inc. ("Bottle Rocket") in exchange for 272,035 shares of the Company's common stock. Bottle Rocket creates online entertainment based on proprietary technology engines for trivia, prediction, simulation, arcade-style, and multi-player games. The acquisition of Bottle Rocket has been accounted for under the pooling of interests method of accounting and, accordingly, the Company's historical consolidated financial statements have been restated to include the accounts and results of operations of Bottle Rocket.

The results of operations previously reported by the Company, the results of operations of Bottle Rocket and the combined amounts presented in the accompanying consolidated financial statements are presented below:

			Years ended December 31

	Nine months ended September 30, 1999		1999		1998		1997

	(unaudited)
Revenues:
ACTV	$	1,328,961	$	2,117,938	$	1,405,838	$	1,650,958
Bottle Rocket		401,505		791,704		219,301		297,450

Combined	$	1,730,466	$	2,909,642	$	1,625,139	$	1,948,408


Net Loss:
ACTV	$	16,407,091	$	22,883,180	$	20,389,151	$	10,358,683
Bottle Rocket		2,886,756		3,648,706		1,675,003		305,566

Combined	$	19,293,847	$	26,531,886	$	22,064,154	$	10,664,249

There were no eliminations or other adjustments to historical financial statements or significant non-recurring charges as a result of this transaction. Bottle Rocket had no operations prior to1997.

4. Extinguishment of Long Term Debt

On April 3, 2000, we repaid certain notes in full, thereby incurring a loss on extinguishment of debt that we recorded as an extraordinary item in the quarter ended June 30, 2000. The extraordinary loss includes a prepayment premium of $369,632, and the unamortized original issue discount and deferred issue costs of $819,294 and $222,213, respectively, for a total loss of $1,411,139, or $0.03 per share. We incurred the debt in January 1998, when subsidiaries of ours entered into a note purchase agreement with certain private investors. Pursuant to the agreement, the purchasers purchased $5.0 million aggregate principal amount notes from our subsidiaries. The notes bore interest at a rate of 13.0% per annum, payable semi-annually. During the term of the note, the issuer had the option, pay any four semi-annual interest payments in kind rather than in cash, with an increase in the rate applicable to such payments in kind to 13.75% per annum.

5. Investments

We entered into various strategic equity investments in privately held companies that operate in our industry. The investments are stated at cost, aggregating $4,000,000. We do not exercise effective control over operations for any of these strategic equity investments.

6. Minority Interest

We record minority interest resulting from Digital ADCO. Digital ADCO was formed in November 1999 and co-founded by ACTV, Inc. and Motorola Broadband. Digital ADCO develops applications for the delivery of addressable advertising. Under the terms of our agreement with Motorola Broadband, we licensed five of our patents to Digital ADCO and Motorola Broadband licensed six of its patents and made a capital commitment to Digital ADCO. During August 2000, OpenTV made a capital contribution and contributed patents on a non-exclusive basis to Digital ADCO. Additionally, Digital ADCO International is being formed to license and distribute products and services outside of North America and other western hemisphere countries. Digital Adco, Inc.'s issued and outstanding shares of capital stock presently consist of Class A common stock, having one vote per share, and Class B common stock, having 25 votes per share. All of Digital Adco's issued and outstanding shares are presently held by three investors. Open TV currently owns the issued and outstanding Class A common shares. ACTV, Inc. and Motorola Broadband, the co-founders of Digital Adco, own the issued and outstanding Class B common shares. ACTV, Inc. currently owns 45.9% of Digital ADCO, and exercise voting control of the venture.

For the three and nine months ended September 30, 2000, we allocated losses in the amount of $568,985 and $1,001,377 from Digital ADCO to Motorola Broadband and OpenTV.

In May 2000, Thomas R. Wolzien exercised his option to acquire a 49.9% interest in Media Online Services. We record minority interest resulting from this exercise and allocated losses in the amount of $37,837 and $83,342 for the three and nine months ended September 30, 2000.

7. Segment Information

We have two principal business segments. The Digital Television segment, which includes Digital ADCO, develops and markets technologies which enables interactive television and advertising.

The Enhanced Media segment, which includes HyperTV, Bottle Rocket, and Media Online Services, develops and markets technologies for the convergence of the Internet and television, for Internet gaming, for Internet radio and for streaming media applications.

Information concerning the our business segments for the three and nine-month periods ending September 30, 2000 and 1999 are as follows:

	For the Three months ended September 30,						For the Nine months ended September 30,

	2000			1999			2000			1999

Revenues
Digital Television	$	-		$	-		$	-		$	-
Enhanced Media		2,794,433			603,712			5,842,646			1,730,466
Unallocated corporate		-			-			-			-

Total	$	2,794,433		$	603,712		$	5,842,646		$	1,730,466


Depreciation & Amortization
Digital Television	$	419,675		$	231,737		$	1,076,829		$	636,275
Enhanced Media		271,401			134,004			788,304			353,253
Unallocated Corporate		279,304			144,919			783,023			440,959

Total	$	970,380		$	510,660		$	2,648,157		$	1,430,487


Interest Income (Expense)
Digital Television	$	71,665		$	(257,264	)	$	(170,138	)	$	(756,011	)
Enhanced Media		(3,365	)		7,383			(1,936	)		4,090
Unallocated corporate		2,143,952			176,207			5,489,519			279,270

Total	$	2,212,252		$	(73,674	)	$	5,317,445		$	(472,651	)


Net (Loss)
Digital Television	$	(1,908,412	)	$	(1,863,077	)	$	(5,498,297	)	$	(4,389,478	)
Enhanced Media		(3,025,312	)		(2,186,962	)		(8,409,037	)		(5,166,938	)
Unallocated corporate		(2,683,300	)		(557,415	)		(6,113,611	)		(9,737,431	)

Total	$	(7,617,024	)	$	(4,607,454	)	$	(20,020,945	)	$	(19,293,847	)


Capital Expenditures
Digital Television	$	1,380,096		$	433,393		$	2,677,566		$	1,014,606
Enhanced Media		380,115			618,831			1,495,715			2,635,218
Unallocated corporate		623,843			20,646			817,240			68,220

Total	$	2,384,054		$	1,072,870		$	4,990,521		$	3,718,044

Balance Sheet Accounts as of September 30,

	2000		1999

Current Assets
Digital Television	$	10,562,359	$	404,949
Enhanced Media		2,136,266		3,044,641
Unallocated corporate		129,933,515		14,306,696

Total	$	142,632,140	$	17,756,286


Total Assets
Digital Television	$	16,115,454	$	3,996,715
Enhanced Media		82,330,052		5,831,760
Unallocated corporate		145,821,708		17,305,606

Total	$	244,267,214	$	27,134,081

8. Stock Appreciation Rights Plan

The stock appreciation rights expense for the three and nine months ended September 30, 2000 was $0 and the three and nine months ended September 30, 1999 was $(2,605,319) and $1,950,330, respectively. In September 1999, all remaining SARs were converted into options under our 1999 option plan. Deferred expenses were recorded related to SARs that had not yet vested. In May 2000, we recognized $306,000 of those deferred expenses as period costs.

9. Executive Compensation

For both the three and nine months ended September 30, 2000 we incurred executive incentive compensation expense of $2,300,000 and $4,600,000, respectively. For both the three and nine months ended September 30, 1999, we incurred executive incentive compensation expense of $780,844 and $1,561,688. This expense is related to an executive incentive compensation provision which is based on changes in the market value of our common stock and is paid in unregistered securities. The future compensation to be recognized is contingent on continued employment of the executive and subject to forfeiture.

10. Investment in Warrant

The Company and Liberty Livewire LLC, a unit of Liberty Livewire Corporation ("Livewire") (formerly known as Todd AO Corporation), entered into a joint marketing venture "HyperTV® with Livewire" on April 13, 2000. HyperTV with Livewire will use ACTV's patented HyperTV convergence technology to combine the emotive power of television with the interactivity of the Internet, and will provide turnkey convergence services, including application hosting, web authoring services, data management, e-commerce and other value-added services for advertisers, television programmers, studios and networks.

The Company received a warrant to acquire 2,500,000 shares of Livewire at $30 per share in connection with entering into the joint marketing agreement. The warrant becomes exercisable at the rate of 500,000 shares per year, commencing on April 13, 2001, includes certain registration rights, and may be exercised until March 31, 2015. With certain exceptions, the warrant is not transferable. The Company has recorded an investment and deferred revenue in the amount of $ 76,016,175, the estimated value of the warrant. The Company estimated the value of the warrant using the Black Scholes pricing model with a risk free rate of 6.5%, a volatility of 80% and assuming no cash dividends. For accounting purposes, the Company will periodically estimate the value of the warrant. Any change in estimated value attributable to shares that are both exercisable and are expected to become registered within one year will be recorded through increases or decreases in Other Comprehensive Income. The deferred income recorded by the Company is being amortized into income over a period of 21 years, the contractual term of the joint marketing venture.

11. Supplemental Disclosure of Cash and Non-cash Activities

For both the three and nine months ended September 30, 2000 we recorded a deferred expense of $1,520,000 and $3,040,000 for stock-based compensation.

We also recorded revenue of $904,954 during the quarter ended September 30, 2000 relating to amortization of the deferred revenue recorded in connection with the Liberty Livewire warrant (See Note 10).

We also paid $284,619 in interest costs for the nine months ended September 30, 2000, and we made no cash payments of interest or income taxes during the nine months ended September 30, 1999.

12. New Accounting Pronouncements Not Yet Effective

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement requires that all derivative instruments be measured at fair value and recognized in the consolidated balance sheets as either assets or liabilities. In addition, the accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and the resulting designation. For a derivative designated as a hedge, the change in fair value will be recognized as a component of other comprehensive income; for a derivative not designated as a hedge, the change in the fair value will be recognized in the consolidated statements of operations.

In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No 133" which delayed the adoption of SFAS 133 to fiscal years beginning after June 15, 2000.

In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities - An Amendment of FASB Statement No. 133." This Statement amends the accounting and reporting standards of SFAS 133 for certain derivative instruments, for certain hedging activities and for decisions made by the FASB relating to the Derivatives Implementation Group ("DIG") process. Certain decisions arising from the DIG process that required specific amendments to SFAS 133 were incorporated into this Statement. We plan to adopt SFAS 133 and SFAS 138 in the first quarter of 2001.

We do no expect the adoption of SFAS No. 133 to have an impact on our results of operations, financial position or cash flows.

13. Preferred Stock Rights Agreement

Our policy is and has been to license our technology and arrange joint ventures for its use in a number of different industries. In August 2000, our Board of Directors adopted a Preferred Stock Rights Agreement, which gives our Board of Directors certain alternative courses of action if a potential acquirer of 15% or more of our common stock is deemed unlikely to further such policy or if such potential acquirer acts inconsistently with the best interests of our stockholders. The Preferred Stock Rights Agreement does not apply to existing holders of 15% or more of our common stock. Pursuant to the Preferred Stock Rights Agreement, we could distribute certain preferred stock purchase rights to our current stockholders. These rights would become exercisable if an outside party became the beneficial owner of 15% or more of our issued and outstanding common stock, unless our Board of Directors determines to defer the exercise of, or redeem, such rights. The potential acquirer's rights under the Preferred Stock Rights Agreement will be null and void. Once exercisable, each preferred stock purchase right would entitle the holder thereof to purchase .001 of share of our Series C Preferred Stock at an exercise price of $0.00001 per share. Each share of our Series C Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of our stockholders. Once issued our Board of Directors could vote to exchange the preferred stock purchase rights for shares 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. Our Board of Directors has also approved an amendment to our Bylaws which provides that only a majority of the Board of Directors or the Chairman of the Board may call a special meeting of the stockholders. 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.

ACTV Entertainment, Inc. ("Entertainment") and HyperTV Networks, Inc. are subsidiaries of ACTV, Inc. In part as an anti-takeover defense, in 1997 and 1998 Entertainment and HyperTV granted stock options for their respective Class B common shares to a limited number of their officers and employees, which Class B stock options - as amended in December, 1999 - were to become exercisable only upon a "change of control" of ACTV, Inc., as the term "change of control" was defined in those options. Effective October 2, 2000, all of those Class B stock options were terminated, with the result that there are no options outstanding at this date with respect to any of the Class B shares of either Entertainment or HyperTV.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

ACTV

We are a digital media company that has developed proprietary and patented technologies which enable interactive television and Internet applications. We have two business segments, Digital Television and Enhanced Media. Digital Television, through our products One To One TV and SpotOn, enables television programmers and advertisers to create individualized programming for digital television. Enhanced Media, through our HyperTV, Bottle Rocket and Media Online Services businesses, primarily enhances standard video and radio content with information and interactivity.

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.

To this end, we have built key strategic relationships with industry leaders, including:

Liberty Media Corporation, Liberty Livewire Corporation and Liberty Digital Inc., collectively our largest shareholder and a co-venturer;

Motorola Broadband Sector, a shareholder and a co-investor; and

iN DEMAND LLC, the nation's leading pay-per-view network.

RESULTS OF OPERATIONS

Comparison of Three Month Periods Ended September 30, 2000 and September 30, 1999

Revenues. During the three month period ended September 30, 2000, our revenues increased 363%, to $2,794,433, from $603,712 for the three month period ended September 30, 1999. The increase is the result of increasing sales of the company's Enhanced Media products, along with $904,954 in revenue from the Livewire warrant.

Total Costs and Expenses. Operating costs for the three months ended September 30, 2000 were $3,245,126, compared to $1,414,572 for the three months ended September 30, 1999. Selling and administrative expenses for the three months ended September 30, 2000 were $9,015,025, compared to $5,817,579 for the three months ended September 30, 1999. The increases were principally the result of costs associated with the development and sales of our Enhanced Media products, increased product development costs and higher selling and administrative expenses associated with developing the sale force and infrastructure. Third quarter 2000 selling and administrative expenses also includes $2,300,000 of deferred compensation expense, of which $1,520,000 was non-cash.

Depreciation and Amortization. Depreciation and amortization expense increased $459,720 for the three month period ended September 30, 2000, to $970,380, from $510,660 during the same period of 1999, due primarily to our increasing investment in patents, software development, and equipment.

Interest (Expense)/Income. Interest income-net in the three month period ended September 30, 2000 was $2,212,252, compared with ($73,674) for the three month period ended September 30, 1999. The increase was the result of significantly higher cash balances resulting from our February 2000 follow-on offering. We incurred interest expense for the quarter ending September 30, 2000 of $13,407, compared to $261,305 for the same period of 1999. The interest expense for 1999 relates to the $5 million original face value notes issued by a subsidiary of ours in January 1998, and such notes were retired on April 3, 2000.

Net Loss. For the three months ended September 30, 2000 and 1999, our net loss applicable to common stockholders after extraordinary loss was $7,617,024 and $4,607,454, or $0.15 and $0.11, per basic and diluted share, respectively.

Comparison of Nine Month Periods Ended September 30, 2000 and September 30, 1999

Revenues. During the nine month period ended September 30, 2000, our revenues increased 238%, to $5,842,646, from $1,730,466 for the nine month period ended September 30, 1999. The increase is the result of increasing sales of the company's Enhanced Media products, along with $904,954 in revenue from the Livewire warrant.

Total Costs and Expenses. Operating costs for the nine months ended September 30, 2000 were $9,136,422, compared to $3,136,470 for the nine months ended September 30, 1999. Selling and administrative expenses for the nine months ended September 30, 2000 were $20,481,176, compared to $13,539,944 for the nine months ended September 30, 1999. The increases were principally the result of costs associated with the development and sales of Enhanced Media products, increased product development costs and higher selling and administrative expenses associated with developing the sale force and infrastructure. Year 2000 selling and administrative expenses also includes $4,600,000 of deferred compensation expense, of which $3,040,000 was non-cash.

Depreciation and Amortization. Depreciation and amortization expense increased $1,217,670 for the period ended September 30, 2000, to $2,648,157, from $1,430,487 during the same period of 1999, due primarily to our increasing investment in patents, software development, and equipment.

Interest Income (Expense). Interest income for the nine month period ended September 30, 2000 was $5,602,064, compared with $310,271 for the nine month period ended September 30, 1999. The increase was the result of significantly higher cash balances resulting from our February 2000 follow-on offering. We incurred interest expense for the period ending September 30, 2000 of $284,619, compared to $782,922 for the same period of 1999. The interest expense for both periods relates to the $5 million original face value notes issued by a subsidiary of ours in January 1998, and is lower during the period ending September 30, 2000 due to retirement of the notes on April 3, 2000.

Preferred Stock Dividends. For the nine month period ended September 30, 1999, we paid $494,431 for preferred stock dividends, related to our Series B preferred stock. We redeemed all of our outstanding preferred stock in the second quarter of 1999.

Net Loss Before Extraordinary Item. For the nine months ended September 30, 2000, our net loss applicable to common stockholders before extraordinary item was $20,020,945 or $0.41 per basic and diluted share, an increase of 4% compared to the net loss of $19,293,847 or $0.54 per basic and diluted share for the nine months ended September 30, 1999.

Net Loss. For the nine months ended September 30, 2000 and 1999, our net loss applicable to common stockholders after extraordinary loss was $21,432,084 or $0.43 per basic and diluted share, and $19,293,847 or $0.54 per basic and diluted share. The extraordinary loss was the result of early retirement of long term debt on April 3, 2000. The extraordinary loss includes a prepayment premium of $369,632, and the unamortized original issue discount and deferred issue costs of $819,294 and $222,213, respectively, for a total loss of $1,411,139 or $0.03 per share.

Liquidity and Capital Resources

Since our inception, we have not generated revenues sufficient to fund our operations, and have incurred operating losses. Through September 30, 2000, we had an accumulated deficit of $125,066,769. Our cash position on September 30, 2000 was $134,676,552, compared to $9,413,170 on December 31, 1999.

Net cash provided by (used in) operating activities

During the nine months ended September 30, 2000, we used $23,104,875 for cash for operations, compared with $9,843,849 for the nine months ended September 30, 1999. The increase in net cash used by operating activities principally relates to increased operating losses incurred through the roll out and execution of our business plan.

Net cash used in investing activities and capital expenditures

For the nine months ended September 30, 2000, we used cash for investing activities of $8,740,521, compared with $3,718,044, for the nine months ended September 30, 1999. The increase in cash used in investing activities is

primarily due to $3,750,000 of strategic equity investments, along with increased capital expenditures for the roll out of the interactive TV products.

Net cash provided by financing activities

We have and continue to fund our cash requirements from the net proceeds of a public, follow-on offering completed on February 3, 2000. Through a group of underwriters, we sold total of 4.6 million common shares, resulting in net proceeds of $129.7 million. In addition, on March 27, 2000, Liberty Digital, Inc. invested an additional $20 million in us by exercising a warrant granted in March 1999. With this warrant exercise, Liberty Digital increased its investment in us to 16%.

Impact of Inflation

Inflation has not had any significant effect on the Company's operating costs.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending material legal proceedings to which the Company is a party.

Item 2. Changes in Securities

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Stockholders

None.

Item 5. Other Information

On August 17, 2000, the Company completed the acquisition of all of the issued and outstanding capital stock, stock options and warrants of Bottle Rocket, Inc., a Delaware corporation, in consideration for: (i) 254,936 shares of the Company's common stock; (ii) stock options to purchase up to 27,599 shares of the Company's common stock; and (iii) warrants to purchase up to 26,216 shares of the Company's common stock.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

11 Computation of Loss per Share

27 Financial Data Schedule

(b) Reports on Form 8-K: None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			ACTV, Inc.
			Registrant


Date: November 13, 2000			/s/ William C. Samuels

			William C. Samuels Chairman, Chief Executive Officer and Director


Date: November 13, 2000			/s/ Joseph P. Dwyer

			Joseph P. Dwyer Executive Vice President, Chief Financial Officer (principal financial and accounting officer)

EX-11 2 ex11.htm EXHIBIT 11

EXHIBIT 11

ACTV, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,

	2000			1999			2000			1999

Weighted average shares outstanding		50,743,722			41,702,126			49,274,794			35,426,283
Net loss before extraordinary item	$	(7,617,024	)	$	(4,607,454	)	$	(20,020,945	)	$	(19,293,847	)
Extraordinary loss on early extinguishment of debt		—			—			(1,411,139	)		—

Net loss	$	(7,617,024	)	$	(4,607,454	)	$	(21,432,084	)	$	(19,293,847	)

Basic and diluted loss per share before extraordinary item	$	(0.15	)	$	(0.11	)	$	(0.41	)	$	(0.54	)

Basic and diluted loss per share	$	(0.15	)	$	(0.11	)	$	(0.43	)	$	(0.54	)

EX-27 3 ex-27.xfd EXHIBIT 27
5 This schedule contains summary financial information extracted from the company's consolidated financial statements for the quarterly periods ended September 30, 1999, and September 30, 2000, and is qualified in its entirety by reference to such consolidated financial statements. 9-MOS 9-MOS Jan-01-1999 Jan-01-2000 Dec-31-1999 Dec-31-2000 Sep-30-1999 Sep-30-2000 14,409,160 134,676,552 0 0 1,029,474 1,892,971 0 0 77,231 0 17,756,285 142,632,140 5,434,771 10,324,153 2,333,067 4,034,280 27,134,081 244,267,214 2,157,719 6,770,615 0 0 0 0 0 0 4,181,904 5,093,312 16,053,056 148,446,110 27,134,081 244,267,214 1,730,466 5,842,646 1,730,466 5,842,646 3,136,470 9,136,422 20,057,231 32,265,755 0 0 0 0 (472,651) 5,317,445 0 0 0 0 (19,293,847) (20,020,945) 0 0 0 (1,411,139) 0 0 (19,293,847) (21,432,084) (0.54) (0.43) (0.54) (0.43)

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