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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
ACTV, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 94-2907258
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1270 Avenue of the Americas
New York, New York 10020
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(Address of principal executive offices) (Zip Code)
(212) 262-2570 (Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, Par Value $0.10 Boston Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of March 24, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the NASDAQ Stock Market closing price
on March 24, 1997) was $20,128,518.
As of March 24, 1997, there were 11,838,734 shares of the registrant's common
stock outstanding.
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PART I
Item 1. BUSINESS
General
The corporate structure of ACTV, Inc. ("Company") is as follows: ACTV,
Inc. owns 100% of the common shares of ACTV Holdings, Inc. ("Holdings"), which
wholly owns (i) The Individualized Regional Sports Network, Inc. ("In Sports"),
(ii) ACTV Entertainment, Inc., (iii) ACTV Net, Inc., and (iv) four subsidiaries
that are currently inactive. In Sports, in turn, wholly owns The Texas
Individualized Television Network, Inc. and The Los Angeles Individualized
Television Network, Inc.
The Company and Holdings have granted the appropriate operating
subsidiaries exclusive, perpetual licenses to use the Company's proprietary
technologies that individualize television programming ("Individualized
Programming") within the business area being operated by such subsidiary and
have given the subsidiaries the right to sublicense it. Under the licenses, each
subsidiary will pay the Company a 5% royalty on net revenues if the subsidiary
is no longer majority owned by the Company, and a royalty of 5% of the net sales
of any sublicensee.
Unless otherwise indicated, all references in this Form 10-K to the
Company or ACTV include ACTV, Inc. and all of its subsidiaries.
This document includes certain forward looking statements about the
Company and its industry that are based on management's current expectations.
Actual results may differ materially as a result of any one or more of the risks
identified in the Company's filings under the Securities and Exchange Act of
1934.
Certain Relationships with Subsidiaries
Consolidation of Educational Partnership into ACTV
In July 1992, ACTV Net, Inc. (formerly ACTV Interactive, Inc.) ("ACTV
Net") entered into a partnership agreement with Post-Newsweek Education, Inc., a
wholly-owned subsidiary of the Post Company, pursuant to which ACTV Interactive
("Partnership") was formed as a Delaware general partnership, for the purpose of
selling products and services incorporating the Company's Individualized
Programming to the education market. The Post Company and ACTV Net received 51%
and 49% interests, respectively, in the Partnership. On March 11, 1994, the
Company purchased the Post Company's 51% interest in the Partnership for $4.5
million. The Company and the Post Company agreed to the amount of such
consideration after arms-length negotiations without receiving a valuation from
a disinterested third party.
Reorganization of ACTV Entertainment and the LGV Agreements
In March 1988, the Company formed ACTV Entertainment, Inc. ("ACTV
Entertainment") as an equal stockholder with a subsidiary of Le Groupe
Videotron, Ltee. of Montreal, Canada ("LGV"), Videotron Technologies Ltd. The
Company granted to ACTV Entertainment the exclusive right to use the Company's
Individualized Programming in the United States cable, DBS and broadcast
television markets.
In June 1993, LGV withdrew from its ownership in ACTV Entertainment, and
the Company became the sole shareholder of ACTV Entertainment under the terms of
an agreement with the subsidiary of LGV, which also settled all outstanding
legal disputes between the companies.
In connection with the settlement, LGV ceased paying royalties to the
Company. Simultaneously with the change in ownership of ACTV Entertainment, the
1987 LGV exclusive foreign license for Canada, Europe and the Soviet Union was
changed to a non-exclusive, royalty-free license to manufacture a set-top
terminal with compatible ACTV Programming functionality for its Videoway
service.
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The modified license also allows LGV to produce ACTV Programming for its
own Videoway subscribers. The license is subject to the condition that neither
LGV nor its sub-licensees receive any royalty or other fees with respect to
Individualized Programming, except for promotion and direct production expenses
paid by LGV. Any royalties from third parties will be paid to the Company. LGV
is not currently producing Individualized Programming, except in the London,
England cable systems that it recently sold.
Board Policy and Corporate Structure of Subsidiaries
The policy of the Company is and has been, as set forth in the prospectus
relating to its initial public offering in May 1990, "to license [the Company's]
technology and arrange joint ventures for its use in a number of different
industries." The Board of Directors has adopted a plan to take effect in the
event that an entity deemed not likely to further such policy or to act
inconsistently with the best interests of all the Company's shareholders seeks
to acquire or has acquired 20% or more of the Company. The text of the Board
resolution relating to this issue is as follows:
Resolved, that it being in the best interests of the Corporation and the
shareholders of the Corporation, the Board of Directors hereby approves and
adopts a plan that, in the event that the Board of Directors determines that an
acquirer has acquired, or seeks to acquire, 20% or more of the Corporation and
that such acquirer is not a suitable acquirer since such acquirer will not
further the Corporation's policy of acting as a broad licensor of the ACTV
Individualized Programming, or is otherwise likely to act inconsistently with
the best interests of all the Corporation's shareholders, the Board is
authorized to take all necessary action (including the hiring of an investment
banking firm), to offer, by invitation, non-exclusive licenses to use and
exploit ACTV Individualized Programming. The terms of such licenses may include
the payment of royalties consisting of a significant initial advance, minimum
annual payments and/or a percentage of annual net sales, and shall be consistent
with, and no less favorable than, the terms of existing licenses. The Board is
authorized, in its discretion, to employ an independent investment banking firm
for the purpose of evaluating the terms of such licenses. In the event that an
acquirer is identified and an auction is commenced, the Board reserves the right
to terminate the auction at any time prior to the Corporation's entering into
the non-exclusive license agreement."
The Board has authorized that each of the Company's direct and indirect
subsidiaries (except Holdings) have two classes of common stock and one class of
preferred stock. The second class of common stock, which is equivalent in the
number authorized to 20% of the total common stock authorized, carries
"super-voting" powers. It is the Board's policy that up to 20% of the equity of
the Company's direct and indirect subsidiaries (except Holdings) may be
allocated to executive officers, directors and employees of the Company and its
subsidiaries in consideration of services rendered and to reward and motivate
executives.
The foregoing may have anti-takeover effect and may be used to delay,
discourage or prevent a change in control of the Company.
Pursuant to such policy Messrs. Samuels, Reese, Crowley and Cline have
been granted options to purchase Class B Common Stock of certain of the
Company's subsidiaries; such common stock, if issued, will have majority voting
rights in such subsidiaries.
The Company
The Company's Individualized Programming significantly enhances the
quality of most genres of television programming by allowing the viewer to make
instant and seamless changes within the live or pre-recorded television
programming he or she is viewing. Individualized Programming appears to be a
standard TV program, but in fact is a multi-path broadcast of several elements
of programming
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material, such as instant replay, isolation cameras, statistical data, or
alternative story lines. There is no limit to the number of viewers who can
interact simultaneously with the Company's Individualized Programming. The chief
markets presently targeted by the Company for its Individualized Programming are
in-home entertainment, particularly, sports programming, and education, with an
emphasis in the education market on distance learning and Internet applications.
Individualized Programming is achieved by the viewer's using a remote
control that is similar to a standard remote control, but which contains four
extra function keys. These keys allow access to the appropriate path to be
selected. For example, in sports programming, a viewer could use the remote
control to select a display of statistical data, to isolate the camera on a
particular player or to see an instant replay. In game shows, the viewer could
use the remote control to answer the question being posed to the contestants; or
in a news broadcast, to select an in depth report on the news story. In the case
of live broadcasts, the Company's producer is actually determining which player
should be covered by the isolation camera and an announcer can be providing
commentary related to such player that is different than the live action
commentary. In prerecorded broadcasts, the various alternatives are pre-recorded
as part of the broadcast itself.
The Company's Individualized Programming is designed to work with both
single and multiple channels of 6 MHz band-width and with different modes of
transmission, including cable, direct broadcast satellite ("DBS"), wireless
cable, broadcast systems and distance learning networks. The Company's initial
emphasis is to deploy its programming over the digital cable and wireless
systems that have upgraded their signal origination facilities (referred to in
the industry as "headends"). The Company's Individualized Programming is able to
be broadcast over the cable operator's system and be received by the viewer who
has a digital set-top box into which the Company's software applications have
been downloaded.
The Company, working with the David Sarnoff Research Center ("Sarnoff"), a
world leader in the development of digital platforms, has developed an approach
to integrating the Company's Individualized Programming into digital television
set-top terminals, without an increase in the manufacturing costs of the
terminals. The Company is currently incorporating its Individualized Programming
into General Instrument Corporation's ("GI") MPEG-2 digital set-top terminal.
The Company is seeking to exploit the entertainment market, principally in
the U.S., through the launch of regionally based entertainment networks
("Regional Networks"). The Company's ability to develop differentiated,
high-quality branded programming in a digital entertainment environment is
initially based on its key strategic alliance with FOX Sports Net. FOX Sports
Net owns and operates eight regional sports affiliates in the United States,
which together provide more than 3,000 hours of live programming covering more
than 1,500 events each year. The Company has the rights to license FOX Sports
Net programming from each of FOX Sports Net's regional sports affiliates and to
offer enhanced FOX Sports Net programming to any distributor that carries the
corresponding regional FOX Sports Net channel. The Company intends initially to
enhance FOX Sports Net's professional and college sports programs with its
Individualized Programming in the West and Southwest regions of the United
States. The Fox Sports Net agreement extends through June 2003.
In the education market, the Company has developed analog and digital
Individualized Programming for distance learning that features return path
capabilities. The Company's distance learning system is a point-to-multi-point
broadcast system that can deliver pre-recorded individualized lessons as well as
integrate individualized lessons into live distance learning lessons. In
addition, the Company has begun development of the first application of its
planned Java-based software suite, "eSchool," that the Company expects will
permit an instructor to use the Internet as an accompanying instructional tool
during a live or pre-recorded video distance learning session.
The Company operates directly and through wholly-owned subsidiaries. The
principal subsidiaries are ACTV Entertainment, which will be primarily
responsible for the Company's focus in
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the entertainment market, two subsidiaries that will operate regional networks
within FOX Sports Net regions in Texas and Southern California, featuring
individualized FOX Sports Net regional programming, and ACTV Net, which is
responsible for the Company's education business.
The Company was incorporated under the laws of the State of Delaware on
July 24, 1989. The Company is the successor, by merger effective November 1,
1989, to ACTV, Inc., a California corporation, organized on July 11, 1983. The
Company's executive offices are located at 1270 Avenue of the Americas, New
York, New York 10020, telephone number (212) 262-2570.
Overview of the Cable and Wireless Cable Television Industries
Cable television was introduced in the early 1950's to provide television
signals to small or rural towns with few or no available off-air television
signals and to communities with reception difficulties caused by terrain
problems. Since that time, the cable television industry has added non-broadcast
programming, utilized improved technology to increase channel capacity and
expanded its service markets to include more densely populated areas and those
communities in which off-air reception is not problematic. Enhanced channel
capacity has increased the potential number of programming offerings available
to the subscriber and, consequently, increased the potential revenue available
per subscriber. State-of-the-art analog cable television systems are currently
capable of providing approximately 36 to 108 channels of programming.
Cable television systems offer customers various levels (or "tiers") of
basic cable service consisting of off-air television signals of local networks,
independent and educational stations, a limited number of television signals
from "superstations" originating from distant cities, various
satellite-delivered, non-broadcast channels and certain programming originated
locally by the cable systems. For an extra monthly charge, cable systems also
typically offer premium television services to their customers, consisting of
satellite-delivered channels generally providing feature films, live sports
events, concerts and other special entertainment features.
A cable televisions system consists of two principal operating components:
one or more signal origination points (headends), which receive television,
radio and data signals that are transmitted by means of off-air antennas,
microwave relay systems and satellite earth stations, and a signal distribution
system. Each headend includes a tower, antennae or other receiving equipment at
a location favorable for receiving broadcast signals and one or more earth
stations that receives signals transmitted by satellite. The headend facility
also houses the electronic equipment that amplifies, modifies and modulates the
signals, preparing them for passage over the system's network of cables. Cable
television systems may also originate their own programming and other
information services for distribution through the systems.
The signal distribution system consists of amplifiers and trunk lines,
which originate at the headend and carry the signal to various parts of the
system, smaller distribution cables and distribution amplifiers, which carry the
signal to the immediate vicinity of the subscriber and drop lines, which carry
the signal in to the subscriber's home. In the past several years, many cable
operators have used fiber optic (in place of co-axial cable) technology to
transmit signals through the primary trunk lines.
Cable television is currently available for purchase by more than 90% of
the approximately 98 million U.S. television households. The cable television
industry is an established provider of multichannel programming, with
approximately 65% of total U.S. television households subscribing. Cable systems
typically offer up to 80 channels of programming at an average monthly
subscription price of $33.
The development of digital transmission and compression technology has
resulted in both opportunities and additional competition for the traditional
cable television industry, allowing for the
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transmission of a greater number of channels with better audio and video but at
the same time facilitating different modes of transmission, such as satellite
and wireless transmission.
In response to these developments, over the past several years, cable
operators, with access to sufficient financial resources, have begun upgrading
their headends and other facilities to the digital platform. At the same time as
the cable operators have begun the migration to the digital platform, DBS and
wireless cable were being developed. Once digital delivery is available to a
cable home it needs only an appropriately configured digital set-top terminal to
receive Individualized Programming. GI has announced orders for approximately 4
million digital set-tops to date.
Digital satellite television services use communications satellites to
transmit multichannel video programming directly to consumers, who receive such
signals on home satellite dishes ("HSD"). With digital compression technology,
each frequency channel can be converted on average into five or more analog
channels of programming, thereby enabling the digital satellite service
operation to offer a broader variety of programming choices than analog
satellite systems and enabling subscribers of digital satellite services to
receive laser disc-quality picture and CD-quality sound from the satellite.
The operator of a digital satellite television service typically enters
into agreements with programmers, who deliver their programming content to the
digital satellite service operator via commercial satellite, fiber optics or
microwave transmissions. The digital satellite service operator generally
monitors such signals for quality, and may add promotional messages, public
service programming or other system-specific content. The signals are then
digitized, compressed, encrypted and combined with other programming and
necessary data streams (such as conditional access information) that share a
given transponder. Each transponder's signal is then uplinked, or transmitted,
to the transponder owned by the service operator on the service's satellite,
which receives and transmits the signal to HSDs configured to receive it.
In order to receive programming, a subscriber requires (i) a properly
installed HSD and related equipment, (ii) an integrated receiver/decoder (known
as the "set-top box" or "terminal"), which receives the data stream from each
broadcasting transponder, separates it into separate digital programming
signals, decrypts and decompresses those signals that the subscriber is
authorized to receive and converts such digital signals into analog radio
frequency signals, and (iii) a television set, to view and listen to the
programming contained in such analog signals.
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Wireless cable operators include multichannel, multi-point distribution
systems ("MMDS"), which deliver programming services over microwave channels to
subscribers with special antennas, and other so-called "wireless cable" systems.
The number of wireless cable systems is likely to grow, as virtually all markets
have been licensed or tentatively licensed, and developments in digital
compression technology will significantly increase the number of channels, as
well as the video and audio quality of wireless cable systems. Moreover,
wireless cable systems may provide their customers with local programming, a
potential advantage over existing digital satellite television systems. In 1995,
several large telephone companies acquired significant ownership in numerous
wireless cable companies. This infusion of money into the wireless cable
industry can be expected to accelerate its growth and its competitive impact.
However, while it is anticipated that most large wireless operators backed by
local telephone companies will upgrade to digital technology over the next
several years, such upgrades will require the installation of new digital
decoders in customers' homes and modifications to transmission facilities, at a
potentially significant cost. Wireless cable also generally requires direct line
of sight from the receiver to the transmitter tower, creating the potential for
substantial interference from terrain, buildings and foliage.
Business Strategies
For the in-home entertainment market, the Company's strategies are as follows:
Target regions where the operation's headends are being upgraded to digital.
Given its initial emphasis on digital deployment, the Company has specifically
targeted the West and Southwest regions of the United States for marketing and
providing its Individualized Programming; many significant cable operators in
these regions have upgraded their headends and have indicated that they will be
offering digital converter boxes to their subscribers.
Negotiate and sign affiliate agreements with cable operators to provide the
Individualized Programming to their subscribers. The Company is in preliminary
discussions with a number of cable operators with cable systems in the West and
Southwest to sign affiliate agreements to market and provide to their cable
subscribers the option of receiving the Individualized Programming. The Company
believes that its programming offerings will provide operators with a
potentially significant source of new revenues from a completely new and
differentiated product offering to its subscribers.
Through a focused marketing effort, educate both cable operators and potential
subscribers about the benefits of Individualized Programming. The Company
believes that, as cable operators become better educated about the benefits of
Individualized Programming and understand the additional revenues that can be
earned by providing these offerings to their subscribers, the Company's revenues
and penetration rates will increase. As consumers and cable operators understand
how the Company can provide a significantly better way of viewing a sporting
event or news program, the Company believes its penetration rates will grow. Key
marketing efforts will include: (1) offering the Company's Individualized
Programming free of charge for one month to potential new subscribers; (2)
cross-promotional activities with other programming content providers such as
FOX Sports Net ; (3) cross-promotional activities with cable operators and (4)
traditional print media, television advertising, and other marketing strategies.
Keep programming costs low during the Company's first few years of operation and
expand its penetration primarily through sports and news programming. The
Company believes that its enhanced sports and news programming content will be
the primary elements in attracting new subscribers to its Individualized
Programming. As such, it is the Company's intention to keep programming costs
low by primarily focusing on just sports and news programming until cash flow is
sufficient to allow for
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additional programming such as music, game shows, and other subjects to appeal
to potential subscribers who may be interested in such program types and less
interested in sports and news programming.
In the education market, the Company intends to implement the following
strategies:
Emphasize the collaborative development of program content. The target market
for the Company's education products includes schools, state and local agencies,
universities and private business. In addition to authoring the software and
hardware necessary to implement the Company's intranet and television product,
the Company provides content development services and services related to the
implementation of distance learning.
Create joint ventures with customers to market the customer's content to other
users. The education programs developed by customers using the Company's
Individualized Programming in many instances have application for others. The
Company intends to jointly market such programming to other potential users
along with the customer who has developed the Individualized Programming.
Develop proprietary content programming. The Company believes that it can
develop programming content that will have application for and marketability to
many potential customers. The Company intends to create such programming either
in its entirety, or by acquiring rights to existing education content and
adapting it to Individualized Programming.
Individualized Programming
General
The Company's process of creating individualized television
programming involves viewer selection from a multiple number of
frame-synchronized video, graphics, and/or audio signals delivered at one time.
Viewers see and/or hear only one of the signals at a given moment; the others
remain transparent. Each viewer interacts with the programming individually by
making selections or decisions using a traditional remote control. In response
to these keyed inputs, the Individualized Programming seamlessly switches from
one signal to another, giving each viewer his or her appropriate response. The
viewer cannot detect when such a switch takes place because it occurs with frame
accuracy.
The results appear seamless and uninterrupted - for the viewer the
programming is completely individualized. Although an individualized program and
its associated branches are taped in a normal linear fashion, the program, when
shown, has thousands of possible variations available for each viewer to
experience. The particular version seen is based on each viewer's individually
selected preferences and inputs. An unlimited number of independent viewers can
interact with a program simultaneously.
To develop Individualized Programming the Company generally seeks to form
joint ventures or licensing agreements with producers of standard linear shows
or with networks that have rights to such shows. Individualized Programming can
be created in a number of ways: enhancing existing programs that have been
produced in a standard linear format, adding "piggy-back" branch alternatives
during the shooting of ongoing shows, or creating entirely original productions
solely for use by the Company.
The cost of the Company original productions is higher than a linear
version of the same program of comparative length. However, production costs are
significantly lower than regular linear television shows when existing material
can be enhanced, or when productions are "piggy-backed." Production costs vary
significantly based upon the nature and type of programming to be produced. An
advantage of Individualized Programming is its higher repeatability, as compared
to standard
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programming, since an individualized program's cost can be amortized over a
greater number of showings.
Entertainment Programming
The Company's business plan is to develop regional television networks,
offered by traditional distributors of television programming, that will feature
traditional genres of programming. The differentiation afforded by
Individualized Programming will allow distributors to offer their customers the
Company's program's on a subscription basis. The regional individualized
television networks will provide distributors with the potential of significant
additional revenue, as well as an opportunity to differentiate their service
offerings and accelerate the deployment of digital set-tops.
Examples of the Company's entertainment programming are:
Sports. Individualized sports will enable viewers to access elements that
enhance each game's regular coverage during a live event. In hockey, for
example, the Company's Individualized Programming allows a viewer to select
features like "Hit Parade," a recap of the game's hardest checks; "Saving
Grace," a compilation of the game's best saves; "Star Cam," which provides an
isolated view of a featured player; "Goals-On-Demand," a compilation of all the
scores in the contest; plus in-depth Statistics and instant replay at anytime.
News. Individualized Programming allows the viewer to go deeper into the
news presented by the linear program. In the first section of an evening news
program, viewers can access more information about the story they are watching,
calling up "datapoints" or additional facts about the story presented. They can
also access maps, graphs, charts, or other enhancements to the linear story. As
the program continues, viewers can choose among the linear program, expanded
coverage of the day's top stories, or other kinds of news (international,
financial, etc.) in which they may have a particular interest.
Game Shows. Individualized Programming allows each viewer to actively
participate in the game. The viewer can decide which team to play on, enter
answers and receive individualized responses to his or her choices. The system's
memory keeps viewers informed of their performance throughout the program and
provides final results at the end of the show. Advertisers and sponsors can
offer promotional premiums to the viewers with the best scores.
Advertising. Individualized Programming gives television advertisers
unique opportunities to target their message demographically. By asking the
viewer basic questions at the beginning of the program, Individualized
Programming can recall this information during a commercial break and send the
viewer the appropriate advertisement. A second advantage for advertisers is the
concept of individualized commercials. For example, before a commercial break in
a sporting event, viewers are asked which type of car they would like to see:
sedan, pick-up truck, sport utility or luxury sedan. The Company's
Individualized Programming records this choice, then sends the requested
commercial to each viewer. This same choice can be recalled at a later
commercial break to provide additional information. Individualized Programming
stores the responses in the system memory and can trigger branches based on the
accumulated responses at the end of the program. Advertisers can use this
functionality of Individualized Programming to offer promotional premiums to
viewers based on their performance.
Education
The Company has developed, and is continuing the development of, new
two-way analog and digital programming technologies for distance learning. The
Company offers a point-to-multipoint
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broadcast system that can deliver pre-recorded individualized lessons or can
integrate individualized segments into live distance learning lessons. By using
a simple remote control, the student is able to alter program content to suit
specific needs and interests. Students receive individualized responses to their
input. Moreover, at the end of the lesson, the system's memory component can
recall each student's performance and give the local facilitator a detailed
progress report.
Distance learning ("DL") networks typically involve a teacher at a central
broadcasting site distributing a lesson to multiple remote classroom sites.
Individualized Programming tools allow the teacher to create questions or offer
choices relating to the lesson and pre-record individualized responses. At
selected points in the lesson, the DL teacher can initiate the questions and
interactions, with each student across the network receiving individualized
responses. In addition, Individualized Programming gives the teacher immediate
feedback on the classes' responses, allowing the teacher to pace the lesson
accordingly. Additionally, the Company's planned Java-based software suite,
"eSchool," (described below) will permit the integration of the Internet with
video distance learning.
The Company's distance learning system was commercially introduced with an
installation in Georgia beginning in late 1995. The Company's contract with
Georgia was recently extended and expanded for a second year. In addition, in
late 1996 the Company launched its first distance learning project in the state
of Texas. The Company will deliver its individualized educational programming
functionality to 37 Texas Workforce Commission ("TWC") sites, along with
proprietary software and training that will facilitate the creation of
Individualized Programming by TWC educators themselves.
In 1995, the Company signed an agreement with GI to allow Individualized
Programming for distance learning to be integrated with GI's DigiCipher(R)
system. The new digital system will allow programming networks to develop
Individualized Programming and distribute it digitally to their customers.
In 1997, the Company began the development of the first applications of
its planned Java-based software suite, "eSchool," which permits an instructor to
use the Internet as an accompanying instructional tool during a live video
distance learning session. (Java is a programming language developed for the
Internet by Sun Microsystems.) eSchool functionality, together with the
Company's distance learning technology, will work to create a "virtual"
classroom. eSchool software can be used for pre-recorded as well as live
programming; the video can come from any source. The Company expects to release
the first version of eSchool software to the market during the second quarter of
1997.
The Company has enhanced 127 educational television titles with its
Individualized Programming and has distributed the programs in the kindergarten
to 12th grade market. The programs focus on reading, math, and vocational
education. Sales of these products represented a majority of the Company's
revenue prior to the commercial introduction of the distance learning system.
Education products are marketed through both a direct and distributor sales
force. The Company produced the educational television titles jointly through
license agreements with Phoenix Learning Group, Bergwall Productions, Inc.,
Agency for Instructional Technology, AIMS Media, The Hasty Pudding Puppet Co.,
TakeOff, Video Educational Excellence and Turner Educational Services, Inc.
Programming Relationship with FOX Sports Net
Recently, the Company completed a successful, 18-month Individualized
Programming trial in greater Los Angeles. The Company's Individualized
Programming was delivered to 1,000 cable subscribers of the TCI of Ventura
County cable system. FOX Sports West supplied sports programming to the Company
for the trial. Viewers participating in the trial were able to individualize FOX
Sports West offerings such as L.A. Lakers basketball, L.A. Kings hockey, and
California Angels baseball.
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FOX Sports Net is the domestic telecasting arm of the worldwide sports
alliance recently formed between News Corporation, Liberty Media and
TeleCommunications Inc. The network consists of eight owned and operated
regional sports affiliates from coast to coast. Combined, FOX Sports Net's
regional sports networks provide more than 3,000 hours of live programming each
year, covering more than 1,500 events. The FOX Sports Net regional networks
offer their programming for distribution as a basic service - all homes served
by the distributor receive the service as part of the basic distributor fee.
In December 1996 the Company and FOX Sports Net entered into a master
programming agreement that extends through June 30, 2003 and covers all FOX
Sports Net programming. The agreement grants the Company the right to license
FOX Sports Net programming from each FOX Sports Net regional sports network and
rebroadcast an Individualized Programming version of the program in the
respective FOX Sports Net regional territory. The Company intends to enhance FOX
Sports Net's professional and college sports programs with its Individualized
Programming. Under terms of the agreement, the Company has the right to offer
enhanced FOX Sports Net programming to any distributor that carries the
corresponding regional FOX Sports Net channel. FOX Sports Net will receive a
share of subscriber fee and advertising revenue generated by the Company's
future individualized television networks located within FOX Sports Net regions.
Based on the success of the Individualized Programming trial in TCI's
Ventura County System, as well as the relationship with FOX Sports Net, the
Company plans to launch the Regional Networks within the regions served by FOX
Sports Southwest and FOX Sports West. Current plans are for the launch of the
Southwest Regional Network as early as the fourth quarter of 1997 and the West
Regional Network shortly thereafter. FOX Sports Southwest distributes
programming to 5.1 million households in Texas, Louisiana, Arkansas, Oklahoma
and nine New Mexico counties, while FOX Sports West serves 4.5 million
households in Southern California, Hawaii and Clark County, Nevada. The planned
Regional Networks, like the recently completed trial, will feature FOX Sports
Net regional programming enhanced by the Company's Individualized Programming.
Over time, the Company will produce other national programming and make such
programming available to the Regional Networks. The Company will be responsible
for the incremental content, transmission, delivery and master control costs
incurred in connection with the enhancement of the Individualized Programming to
be presented through its Regional Networks.
The Company has chosen the regions served by FOX Sports Southwest and FOX
Sports West because the Company believes these regions will be among those
targeted for the initial distribution of digital set-top boxes by cable
operators and wireless program providers. Furthermore, the Company will direct
initial marketing of the Regional Networks toward those cable operators in each
respective FOX Sports Net regional market who are upgrading their distribution
facilities to digital and who buy digital set-top boxes. Expansion could follow
either in additional FOX Sports Net regions or in other regional sports markets.
Production
Entertainment
The Company's entertainment programs are distributed to each region from a
master control facility, which includes the necessary equipment to both produce
and distribute Individualized Programming. The master control facility for
Southern California was constructed in 1995 at the offices of TCI of Ventura
County in Westlake Village, California. The Company has selected the facility
used by FOX Sports Southwest in Irving, Texas as the site of the master control
in that region. The Company expects this facility to be operational by the
fourth quarter of 1997.
11
Education
The major components of the Company's intranet DL products are authoring
software, which customers use to develop their own individualized programs, and
hardware installed at the receiving site that connects students to the system.
The authoring software is designed to enable a teacher to produce lessons for
broadcast using a personal computer, video camera and other standard ancillary
hardware. The Company provides training and support in the use of the authoring
software, allowing the customer to produce individualized education content in
its own facilities..
Product Development
Current Development
The Company's current research and development efforts are focused
primarily on digital application of its Individualized Programming and
Java-based Internet software for the education market. The Company entered into
a collaborative agreement in August 1995 with Sarnoff to investigate and
potentially develop digital applications of its Individualized Programming.
Currently, the Company, Sarnoff, and GI are working together to incorporate the
Company's Individualized Programming into GIs new MPEG-2 digital set-top cable
box ("DCT 1000"). The Company is also in the process of expanding and further
refining its Individualized Programming to incorporate additional
functionalities that can be used in the digital cable platform. Research and
development of the Company's eSchool Java-based software suite for the Internet
is expected to be on-going throughout 1997 and beyond.
Functionality
The set-top terminal receives information from codes either embedded into
the video program material or delivered in a data packet. It thus maintains
"memory" on the progress of the viewer and provides automatic branching. At
appropriate times during the program, the CPU will make branch switches
automatically, accumulate data, recall information, create graphics and/or
implement a pre-programmed set of instructions.
In single channel analog (6 MHz of band-width) applications,
Individualized Programming can individualize audio and/or graphics, based on
multiple signals. When additional analog channels of band-width are available,
video can be individualized as well.
In digital systems, multiple video, audio and graphics can be
individualized in 6 MHz of band-width. Sarnoff has developed the Company's
digital applications that will enable the implementation of Individualized
Programming into the various developing digital television systems.
Individualized Programming can be delivered through any digital video system and
received by a standard digital set-top terminal such as GI's DCT 1000. The
Company's software application can be downloaded into each set-top terminal.
There is no additional memory or hardware necessary for upgrading a digital
set-top terminal to allow it to deliver the Company's Individualized Programming
to subscribers.
Individualized Programming can be transmitted through any service
provider's channel, and can even be broadcast under the new digital television
standard recently approved by the FCC. Individualized Programming uses one 6 MHz
channel with 64 QAM, or 8VSB modulation techniques providing adequate data rates
to support the Company's programming. It is channel independent and can be
transmitted over any 6 MHz channel using any practical modulation scheme. The
Company will create entertainment content at its regional production facilities
and then distribute throughout each region by means of several different
delivery options, including land lines and satellite. The distribution method
will be determined by the geographical nature of the region and the economic
viability of the different delivery techniques available in each region. The
Company will deliver to the
12
service provider a complete MPEG-2 compatible transport stream containing all of
the necessary information for the application to run properly in its system.
The Company's signal is received at the cable operator's distribution
facility by an appropriate receiver. The service provider will simply have to
pass the signal through its CA (Conditional Access) system and send the signal
out to the customers. Using standard MPEG-2 compression techniques at a 4:1
compression ratio, the Company will provide its service through a single 6 MHz
channel. The Company does not require any back channel capability to support the
programming. Individualized Programming creates an individualized look and feel
by using relational data base management and a very small amount of local memory
in order to create millions of possible combinations.
The Company's application software requires approximately 25K bytes of
code space, either ROM (Read Only Memory), PROM (programmable read only memory)
or EEPROM (Electrical Erasable PROM). The application requires a small amount of
scratch pad memory, up to 2 KB of RAM (Random Access Memory). While the
Company's software does not require NVRAM (Non-volatile RAM), up to 1 KB of
NVRAM might be necessary for any future back channel applications.
Individualized Programming seamlessly switches the user through multiple
channels of video and audio in response to user inputs throughout the program.
The switch may be delayed as long as the script writer chooses. Seamless
switching is accomplished by using a subset of the MPEG-2 syntax for splicing.
With Individualized Programming, switching is simpler than creating a seamless
splice between two unrelated video streams, because it takes advantage of the
fact that the video and audio encoders are co-located.
The Company's Individualized Programming incorporates a command language
that is used to configure the set-top converter and control the information that
the user sees under specific conditions. The command language requires a small
amount of additional bandwidth in the channel and approximately 2K bytes/sec of
additional data must be sent in a digital system. When commands are received by
the application software running in the set-top converter, they are processed by
the software and the correct information is presented.
The Company first introduced its Individualized Programming applications
for entertainment outside the United States through a 1987 license with Le
Groupe Videotron, Ltd. ("LGV"), the second largest Canadian cable/broadcast
television company. The license was modified in June 1993. See "The Company"
Certain Relationships with Subsidiaries Reorganization of ACTV Entertainment and
LGV Agreements."
Government Regulation.
The Company believes that neither its present or future implementation of
its Individualized Programming is subject to any substantial government
regulation. However, the broadcast industry in general, and cable television,
DBS and wireless communication in particular are subject to substantial
government regulation.
Pursuant to an Act of Congress passed in 1992 (" 1992 Cable Act"), the
Federal Communications Commission ("FCC") 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 the operations
of the Company.
13
Set-Top Converters, Terminals, and Other Interactive Devices
The Company does not intend to manufacture set-top converters, terminals,
video servers, or other interactive devices. This equipment will be supplied to
the Company pursuant to agreements between the Company and equipment suppliers.
In April 1996, the Company and GI signed a non-exclusive, royalty-free
manufacturing agreement for GI's MPEG-2 digital terminal. Sarnoff is working
with GI to integrate Individualized Programming with this digital terminal. The
project is scheduled for completion in the second half of 1997. The Company also
has a non-exclusive, royalty-free manufacturing license with LGV that allows the
latter to incorporate the Company's Individualized Programming into its analog
set-top cable boxes. The Company intends to grant licensees similar to those
granted to GI and LGV to other manufacturers that are selected by the future
distributors of Individualized Programming.
In the education market, the Company has entered into an arrangement with
GI pursuant to which Individualized Programming for distance learning will be
integrated with GI's DigiCipher system. The new digital system, which combines
the Company's Individualized Programming and GI's DigiCipher System, will allow
programming networks to develop the Company's Individualized Programming and
distribute it digitally to their customers. The development of the new digital
distance learning system is scheduled for completion in the second quarter of
1997.
The Company has a non-exclusive agreement with KDI Precision Products,
Inc. ("KDI") to manufacture the Company's classroom and distance learning
systems that incorporate Individualized Programming. KDI sells the systems to
the Company at prices and in accordance with a delivery schedule agreed upon
from time to time. KDI also is a distributor of components such as television
monitors, VCRs, remote controls, printers and cabinets used in conjunction with
the systems. The agreement renews automatically for successive one-year terms
unless terminated by either party on six-months' written notice.
KDI is currently the only manufacturer of the classroom and distance
learning systems. The Company believes that KDI can produce sufficient systems
to meet the anticipated needs of the Company in the education marketplace. In
the event that KDI were unable to supply the systems, there can be no assurance
that the Company could produce sufficient systems or obtain sufficient systems
from another manufacturer at an acceptable price. The inability of the Company
to obtain systems would have a material adverse affect on the business of the
Company.
There can be no assurance that the Company will be successful in
developing additional manufacturing licenses.
Patents and Other Intellectual Property
The Company has sought to protect the proprietary features of its
Individualized Programming it employs 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 twelve patents, with six additional patents pending. The patents,
which deal with different aspects of Individualized Programming, expire at
various dates from 1998 to 2014.
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. When
a patent is granted by the European Patent Office, and upon the filing of
appropriate translations, protection will be available in the designated
European countries. The Company believes such patents will strengthen its
competitive position in the aforementioned countries.
14
The inventors named on all of the patents issued have assigned to the
Company all right, title, and interest in and to the above U.S. patents and any
corresponding foreign patents or applications based thereon. In addition, Dr.
Michael Freeman, the principal inventor of Individualized Programming and a
current employee of the Company, has agreed to assign to the Company the rights
and title in and to all future patents and applications, and any corresponding
foreign patents or application relating to the Individualized Programming.
There can be no assurance that the patents held by the Company are
enforceable, particularly in view of the high cost of patent litigation, nor can
there be any assurance that the Company will derive any competitive advantages
therefrom. To the extent that patents are not issued for any other products
developed by the Company, the Company would be subject to more competition. The
issuance of patents may be insufficient to prevent competitors from essentially
duplicating the Company's products by designing around the patented aspects. In
addition, there can be no assurance that the Company's products will not
infringe on patents owned by others, licenses to which may not be available to
the Company, nor that competitors will not develop functionally similar products
outside the protection of any patents the Company has or may obtain.
The Company requires each of its employees, consultants and advisors to
execute a confidentiality and assignment of proprietary rights agreement upon
the commencement of employment or a consulting relationship with the Company.
These arrangements generally provide that all inventions, ideas, and
improvements made or conceived by the individual arising out of the employment
or consulting relationship shall be the exclusive property of the Company. This
information shall be kept confidential and not disclosed to third parties,
except by consent of the Company or in other specified circumstances. There can
be no assurance, however, that these agreements will provide effective
protection for the Company's proprietary information in the event of
unauthorized use or disclosure of such information.
Competition
The business of providing subscription and pay television programming is
highly competitive. The Company faces competition from numerous other companies
offering video, audio and data products and services. The Company's existing and
potential competitors comprise a broad range of companies engaged in
communications and entertainment, including cable programming providers, cable
premium pay programming providers (such as HBO, Cinema, etc.), premier multiplex
pay channels under the digital format, pay per view movies and special event
offering, television networks, home video products companies, as well as
companies developing new technologies and programming concepts. Many of the
Company's competitors have greater financial, marketing and programming
resources than the Company. The Company expects that quality, uniqueness and
variety of programming, quality of picture and service and cost will be the key
bases of competition, along with competition from other programming alternatives
that may provide new sources of revenue to cable operators.
At the present time, there are a number of different new television
technologies, often labeled as interactive television, that have been developed
or are under development by others that might be considered competitive with the
Company's Individualized Programming. These new technologies, in general, are
delivered via cable television, or through play-along devices that are attached
to the television set. To the best of the Company's knowledge, none of the
point-to-multi-point systems based on these technologies allows the viewer to
affect what is seen on the television in the same manner or to the extent of
Individualized Programming, which is unique in its approach and function.
15
EMPLOYEES
At December 31, 1996, the Company employed 26 full-time employees. The Company
believes that its relationships with its employees are generally satisfactory.
Item 2. PROPERTY - OFFICES AND FACILITIES
The Company (including its subsidiaries) maintains its principal and
executive offices at Rockefeller Center, 1270 Avenue of the Americas, New York,
New York, where it leases approximately 8,000 square feet at a rent of
approximately $22,200 per month pursuant to a lease that expires in January
2001. The Company maintains an engineering staff and an editing studio at 1600
Broadway, New York, New York, where it leases approximately 2,500 square feet at
a rent of $3,450 per month, pursuant to a lease that expires in December 1999.
The lease agreement provides for cancellation by either party with no penalty
after December 31, 1996. In addition, the Company maintains offices at 9454
Wilshire Boulevard, Beverly Hills, California, which are leased on a
month-to-month basis for approximately $1,350 per month by The Los Angeles
Individualized Television Network, Inc. The Company believes it will require an
office in Texas and greater office space in Southern California, as well as
television master control facilities in each of these areas to effect the launch
and operation of its planned regional individualized networks in the respective
markets. The Company believes its current facilities are suitable and adequate,
and that they provide the productive capacity necessary for the performance of
the operations of the Company. None of the Company's properties is leased from
affiliated persons.
Item 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company is a
party.
Item 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
On July 17, 1996 the Company held an Annual Meeting of Shareholders for
which it solicited votes by proxy. The following is a brief description of the
matters voted upon at the meeting and a statement of the number of votes cast
for and against, and the number of abstentions as to each matter.
1. To approve an amendment to the Company's By-Laws to provide for the
election of directors to staggered terms.
For Against Abstain
6,142,468 339,897 96,700
2. Election of directors:
For Withheld
William C. Samuels 10,970,518 92,385
William A. Frank 10,976,918 85,985
David Reese 10,983,118 79,785
Steven W. Schuster 10,983,718 79,185
Bruce Crowley 10,983,118 79,785
Richard Hyman 10,983,718 79,185
16
3. To approve an amendment to the Company's Restated Certificate of
Incorporation that would increase the authorized shares of the Company's Common
Stock to 35,000.
For Against Abstain
9,995,974 276,794 109,035
4. To adopt the Company's 1996 Stock Appreciation Rights Plan.
For Against Abstain
5,337,077 687,706 497,265
5. To adopt the Company's 1996 Stock Option Plan.
For Against Abstain
5,596,137 803,256 503,655
6. To ratify appointment of Deloitte & Touche LLP as independent auditors of
the Company.
For Against Abstain
10,524,583 28,735 85,585
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Automated Quotation System of
the National Association of Securities Dealers, Inc. ("NASDAQ") and the Boston
Stock Exchange under the symbols "IATV" and "IAT", respectively. The following
table sets forth the high and low sale prices for Common Stock as reported by
NASDAQ.
Common Stock
1996 Quarter High Low
--------------------
First 5 1/8 3 11/16
Second 4 9/16 3 1/2
Third 4 5/16 3 1/16
Fourth 3 27/32 2 11/16
1995 Quarter High Low
--------------------
First 6 5/8 3 3/8
Second 5 1/4 4
Third 5 3/4 3 7/16
Fourth 5 13/16 3 1/8
On March 24, 1997, there were approximately 280 holders of record of the
Company's 11,838,734 outstanding shares of Common Stock.
On March 24, 1997, the closing bid and asked prices of the Common Stock as
reported by NASDAQ were $2 5/32 and $2 3/8, respectively.
17
The Company has not paid cash dividends since its organization. The Company
plans to use earnings, if any, to fund growth and does not anticipate the
declaration or the payment of cash dividends in the foreseeable future.
Item 6. SELECTED FINANCIAL DATA
Years Ended December 31,
--------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Statement of Operations:
Revenues (1) $532,596 $164,602 $938,416 $1,311,860 $1,476,329
Operating Expenses (1) 2,798,847 3,443,513 5,734,132 8,272,884 10,240,158
Equity in Net Loss of
ACTV Interactive (2) 187,781 506,303 143,500 -- --
Loss Before Extraordinary
Item (3) 2,778,085 4,156,955 5,122,010 6,920,906 8,800,481
Net Loss (3) 2,778,085 4,156,955 4,465,240 6,826,789 8,800,481
Weighted Average Shares
Outstanding 4,665,686 5,800,134 7,897,278 10,162,128 11,739,768
Loss Per Common Share Before
Extraordinary Item (3) 0.59 0.72 0.65 0.68 0.75
Net Loss Per Common
Share (3) 0.59 0.72 0.57 0.67 0.75
Balance Sheet Data: 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- --------
Working Capital (104,486) 2,263,225 1,503,703 2,397,027 5,093,859
Total Assets 3,146,503 5,920,720 7,733,314 8,551,128 11,692,624
Long Term Obligations 1,792,794 2,220,794 2,325,061 -- --
Stockholders' Equity (4) 1,006,314 1,910,603 3,972,543 6,893,853 9,201,068
Total Capitalization 2,799,108 4,131,397 6,297,604 6,893,853 9,201,068
(1) For the period between July 15, 1992, and March 11, 1994, all education
sales and expenses were reported separately by the Company's 49%
affiliate, ACTV Interactive, and were not consolidated with the Company's
statements of operations. For the remainder of 1994, operational results
related to education were included with those of the Company, as a result
of the Company's March 11, 1994 purchase of the Post Company's 51%
interest in ACTV Interactive.
(2) The results of ACTV Interactive are accounted for under the equity method
of accounting for the years 1992 and 1993 and for the period January 1,
1994 to March 11, 1994.
(3) Includes for the year ended 12/31/94 an extraordinary gain of $656,770,
($.08 per share) related to the extinguishment of debt and equipment lease
obligations. Includes for the year ended 12/31/95 an extraordinary gain of
$94,117 ($.01 per share) related to the extinguishment of debt
obligations.
(4) No cash or non-cash dividends have been paid or granted and the Company
does not anticipate the declaration or payment of dividends in the
foreseeable future.
18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
To the extent that the information presented in this Form 10-K discusses
financial projections, information or expectations about the Company's products
or markets, or otherwise makes statements about future events, such statements
are forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. These
include, among others, the successful and timely development and acceptance of
new products and markets and the availability of sufficient funding to effect
such product and/or market development.
ACTV, Inc. (the "Company") was organized to develop and market ACTV's
Individualized Programming, which permits each viewer to simultaneously
experience individualized television programming. Since its inception, the
Company has incurred operating losses approximating $39.2 million related
directly to the development and marketing of the ACTV's Individualized
Programming.
ACTV's Individualized Programming is designed to work with both single and
multiple channels of 6 MHz band-width and with different modes of transmission:
cable, direct broadcast satellite ("DBS"), wireless cable, broadcast systems and
distance learning networks. While it is compatible with one-way analog systems,
the Company's emphasis is on the newer digital systems that have recently begun
to be deployed.
ACTV's strategy is to generate revenues from the sale of ACTV Programming
that it either owns, has licensed or that has been created by a third party
under a license from ACTV, including fees paid by subscribers to premium cable
networks in which the Company has an ownership interest.
The chief markets presently targeted by the Company for ACTV's
Individualized Programming are in-home entertainment, education (with an
emphasis on distance learning and Internet applications) and site-based
entertainment. The Company seeks to exploit these markets, principally in the
U.S., through licensing its Individualized Programming, by creating joint
venture relationships, and by direct sales.
In December 1996 the Company and Fox Sports Net entered into a master
programming agreement that extends through June 30, 2003 and covers all Fox
Sports Net programming. The agreement grants the Company the right to license
Fox Sports Net programming from each Fox Sports Net regional sports network. The
Company intends to enhance Fox Sports Net's professional and college sports
programs with its Individualized Programming.
Under terms of the agreement, the Company has the right to offer enhanced
Fox Sports Net programming to any distributor that carries the corresponding
regional Fox Sports Net channel. In each region, the Company and Fox Sports Net
will work together to develop innovative sports programming, which will be the
basis for differentiated programming services offered by the Company. Fox Sports
Net will receive a share of subscriber fee and advertising revenue generated by
future ACTV individualized television networks located within Fox Sports Net
regions.
Fox Sports Net is the domestic telecasting arm of the worldwide sports
alliance recently formed between News Corporation, Liberty Media and
TeleCommunications Inc. The network consists of seven owned and operated
regional sports affiliates from coast to coast. Combined, Fox Sports' regional
cable networks provide more than 3,000 hours of live programming each year,
covering more than 1,200 events.
The Company recently completed a successful, 18-month individualized
regional network trial, which began in the Los Angeles area in May 1995. The
trial, which ran through the end of 1996,
19
provided ACTV individualized programming to 1,000 cable subscribers in Ventura
and Los Angeles Counties. Sports and news programming for the trial were
supplied to ACTV by Fox Sports West and Cable News Network, Inc. ("CNN"),
respectively. The cable operator for the trial was TCI of Ventura County.
Viewers participating in the trial were able to individualize CNN's PrimeNews
program, as well as Fox Sports-West offerings such as L.A. Lakers basketball,
L.A. Kings hockey, and California Angels baseball.
Based on the success of the Los Angeles trial, the Company plans a
commercial launch of two individualized networks (the "Regional Networks") over
the next twelve months within Fox Sports regions in Texas and Southern
California. Fox Sports Southwest has 5.1 million homes in Texas, Louisiana,
Arkansas, Oklahoma and nine New Mexico counties, while Fox Sports West reaches
4.5 million subscribers in the region from Los Angeles to San Diego and Phoenix.
The planned Regional Networks, like the recently completed trial, will feature
individualized Fox Sports regional programming. The Company will produce other
national programming, such as news, and make such programming available to the
Regional Networks. The Company will be responsible for the incremental content,
transmission, delivery and master control costs incurred in connection with the
enhancement of the ACTV Programming to be presented through its Regional
Networks.
In March 1995, the Company formed The Los Angeles Individualized
Television Network, Inc., one of its wholly-owned operating subsidiaries, to
operate the Company's Southern California trial. This subsidiary will be
responsible for the launch and operation of planned the Southern California
regional network. Similarly, the Texas Individualized Television Network, Inc.,
another wholly-owned operating subsidiary of the Company, will launch and
operate the network projected for the Fox Sports Southwest region within the
same time frame.
The Company anticipates that its Regional Networks will offer premium
cable programming services that are advertiser-supported, with monthly
subscription prices comparable to other U.S. premium channels. Although the
Company's intention is to launch the Regional Networks over the next
twelve-month period, there is no assurance that it will secure the funding
necessary to effect such launches, or that other factors might not delay or
prohibit the successful implementation of the plan.
The Company will direct initial marketing of the Regional Networks toward
the cable operators in each respective Fox Sports Net regional market who are
buying digital set-top boxes. Expansion could follow in either additional Fox
Sports Net regions or in other regional sports markets. The Company has
established four new wholly-owned subsidiaries that would serve as operators of
additional regional individualized networks covering the San Francisco, Chicago,
New York, and Atlanta regions in the event that the Company decides to expand
and provide the individualized television programming to other regions across
the U.S. To date, the four new wholly-owned subsidiaries have not engaged in any
business activities. The recently complete trial, and the projected Regional
Network expansion, is part of the Company's plan to develop the entertainment
division of its business, which to date, does not generate any revenue for the
Company. There can be no assurance that the Regional Networks, even if launched,
will generate significant revenues for the Company.
In January 1995, the Company granted an exclusive license to Greenwich
Entertainment Group ("The Greenwich Group") for the use of its Individualized
Programming in the theater environment, specifically in shopping malls, museums
and entertainment centers. ACTV owns approximately 15% of The Greenwich Group's
common stock.
In March 1988, the Company formed ACTV Entertainment Inc. ("ACTV
Entertainment") as an equal shareholder with Le Groupe Videotron ("LGV") of
Canada. The Company granted to ACTV Entertainment the exclusive right to use the
Company's Individualized Programming in the United States DBS, cable, and
broadcast television markets.
20
In June 1993, LGV withdrew from its ownership in ACTV Entertainment, and
the Company became the sole shareholder of ACTV Entertainment under the terms of
an agreement with a subsidiary of LGV. While ACTV gained full ownership and
control of ACTV Entertainment in the settlement, it did agree to give up the
royalty income it was receiving from the analog set-top cable license with LGV
($3.00 per user per year). Simultaneously with the change in ownership of ACTV
Entertainment, the 1987 LGV exclusive foreign license for Canada, Europe and the
Soviet Union was changed to a non-exclusive, royalty-free license to manufacture
an analog set-top terminal with compatible ACTV Programming functionality for
its Videoway service.
The modified license also allows LGV to produce ACTV Programming itself
for its own Videoway subscribers. The license is subject to the condition that
neither LGV nor its sub-licensees receive any royalty or other fees with respect
to ACTV Programming, except for promotion and direct production expenses paid by
LGV. Any royalties from third parties will be paid exclusively to ACTV. LGV is
not currently producing ACTV Programming, except in the London, England cable
systems that it recently sold.
The Company continues to seek other licensees and joint venture partners
both in and outside the United States. The Company is and will continue to be
dependent upon the ability of licensees and joint venture partners to offer
products and services that are commercially viable, and to actively promote and
distribute its Individualized Programming.
There can be no assurance that the Company will be successful in reaching
agreements with licensees and joint venture partners, that the Company's
strategy of marketing its Individualized Programming through its licensees and
joint venture partners will be successful, or that the methods that its
licensees and joint venture partners choose to market the Individualized
Programming will be successful. Further, the Company may be adversely affected
by the financial and business considerations of its licensees and joint venture
partners. Future joint venture and license agreements may provide that the
licensees and joint venture partners will receive equity interest in the Company
and/or its subsidiaries.
In July 1992, the Company entered into an agreement with a subsidiary of
the Washington Post Company (the "Post Company") to form ACTV Interactive, a
partnership organized for the purpose of marketing products and services
incorporating Individualized Programming to the education marketplace. The
subsidiary of the Post Company owned a 51% share.
On March 11, 1994, the Company purchased the Post Company's full 51%
interest in ACTV Interactive for consideration of $4.5 million. The Company and
the Post Company agreed to the amount of such consideration after arms-length
negotiations without receiving a valuation from a disinterested third party.
For purposes of discussing the combined statements of the Company, its
subsidiaries, and ACTV Interactive, all intercompany items have been eliminated.
21
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1995 and December 31, 1996
During the year ended December 31, 1996 ("Fiscal 1996"), the Company's
revenues increased 13%, to $1,476,329, from $1,311,860 for the year ended
December 31, 1995 ("Fiscal 1995"). The increase was the result of significantly
higher education revenues from distance learning and the recognition of
production revenues in the more recent period (compared to no production
revenues in 1995), which more than offset a small decline in non-distance
learning education sales.
Cost of sales increased 94% in Fiscal 1996, to $647,488 , from $334,136 in
Fiscal 1995, and cost of sales as a percentage of sales revenue increased to 44%
in the more recent year, from 25% in 1995. The relatively higher cost of sales
in Fiscal 1996 was due to a greater proportion of total revenues generated from
lower margin equipment products and production services, as compared to Fiscal
1995's sales mix.
Total expenses excluding cost of sales and interest expense in Fiscal 1996
increased 21%, to $9,592,670, from $7,938,748 in the comparable period in 1995.
The increase was attributable to higher operating expenses (principally
resulting from the Company's regional individualized network trial in Southern
California), greater research and development expenditures, higher selling and
administrative expenses, and a valuation allowance of $274,325 for the full
amount of the Company's investment in The Greenwich Group. As a component of
Fiscal 1996 selling and administrative expenses the Company also reserved
$82,746 against license fee and production service receivables from The
Greenwich Group. The Greenwich Group has experienced difficulty in raising
sufficient capital to fund its operations and growth and has been unable to pay
the Company for its services and license.
In Fiscal 1996, direct expenses related to the entertainment and education
markets were approximately $2.5 million and $2.6 million, respectively.
Depreciation and amortization expense for Fiscal 1996, decreased 24%, to
$846,351, from $1,113,278 for Fiscal 1995. This decrease was due primarily to
the relatively higher depreciation expense incurred in Fiscal 1995 that related
to set-top converters purchased for the California trial.
The Company's interest expense for Fiscal 1996, decreased to zero,
compared to $98,392 in the prior year. The decrease was due to the repayment of
in full of the Company's debt obligations during 1995. Interest income for
Fiscal 1996 increased 15%, to $158,732, compared with $138,510 in Fiscal 1995.
The increase resulted from higher available average cash balances in the more
recent year.
For the year ended December 31, 1996, the Company accrued $195,384 for the
payment of dividends to holders of convertible preferred stock issued in August
1996 by one of its wholly-owned subsidiaries.
For Fiscal 1996, the Company's net loss applicable to common shareholders
was $8,800,481 or $.75 per share, an increase of 29% over the net loss of
$6,826,789 or $.67 per share, incurred in Fiscal 1995. Included in the Fiscal
1995 net loss is an extraordinary gain of $94,117, or $.01 per share as the
result of the extinguishment of certain obligations for value that was less than
the amounts recorded on the Company's books for such obligations. The increase
in net loss was due to increased operating, selling and administrative expenses
and lower operating margins during the more recent year, as noted above.
22
Comparison of the Years Ended December 31, 1994 and December 31, 1995
During the year ended December 31, 1995, the Company's revenues increased
40%, to $1,311,860, from $938,416 in the year ended December 31, 1994. The
increase was the result of higher sales to the education market and to the
Company's recognition in the more recent period of the sales of its education
subsidiary, ACTV Net, during the full year. Prior to the Company's purchase on
March 11, 1994 of the Washington Post's 51% interest in this subsidiary, in
which the Company previously owned the remaining 49% interest, the results of
ACTV Interactive were accounted for under the equity method of accounting. As a
result, the sales of ACTV Interactive during the period from January 1, 1994, to
March 11, 1994, were not included in the reported revenues of the Company.
Cost of sales in the year ended December 31, 1995, was $334,136, compared
to $296,839 in the year ended December 31, 1994. All cost of sales for both
years were related to education product sales. The Company's cost of sales as a
percentage of sales revenue decreased to 25% in 1995, as compared to 31% in
1994. The decrease during the more recent period was the result of
proportionately greater sales of programming, which carries a higher margin,
versus equipment.
Total expenses excluding cost of sales and interest expense in the year
ended December 31, 1995, increased 46%, to $7,938,748, from $5,437,293 in the
comparable period in 1994. A significant factor was the increase in stock
appreciation rights expense of over $1 million during the year ended December
31, 1995, due to a higher price of the Company's stock at year end, as well as
to certain exercises during 1995. The increase was due also to higher research
and development expenses, and to greater selling and administrative and
operating costs associated with the May 1995 launch of the Company's network
trial in Los Angeles. A third reason for the increase was the Company's
recognition in the more recent period, as explained above, of the expenses of
ACTV Interactive, which during a portion of 1994 were reported separately.
Direct expenses related to the entertainment market for the fiscal year
ended December 31, 1995 were approximately $1.4 million, and direct expenses
related to the education market for the fiscal year ended December 31, 1995 were
approximately $1.9 million.
Depreciation and amortization expense for the year ended December 31,
1995, increased 54%, to $1,113,278, from $798,559 for the year ended December
31, 1994. This increase was the result of the greater depreciation expense in
the more recent period relating to equipment used in the Los Angeles trial and
to patents. In addition, the Company's amortization of goodwill arising from the
purchase of the Washington Post's interest in ACTV Interactive was higher in
1995 due to its recognition for the full yearly period, as compared to its
recognition in 1994 for the period from March 11, 1994 to December 31, 1994.
The Company's interest expense for the year ended December 31, 1995,
decreased 57%, to $98,392, compared to $226,671 in the prior year's comparable
period. The decrease was due to the repayment of in full of the Company's debt
obligations during 1995. Interest income in the year ended December 31, 1995,
increased 216%, to $138,510, compared with $43,877 in the year ended December
31, 1994. The increase resulted from higher available cash balances in the more
recent period.
For the year ended December 31, 1995, the Company's net loss before
extraordinary items was $6,920,906, or $.68 per share, an increase of 35% over
the net loss of $5,122,010, or $.65 per share, incurred in the prior year's
comparable period. The Company recorded an extraordinary gain of $94,117 in the
year ended December 31, 1995 and $656,770 in the year ended December 31, 1994,
the result of the extinguishment of certain obligations for value that was less
than the amounts recorded on the Company's books for such obligations. Net loss
after the extraordinary gain for the year ended December 31, 1995, was
$6,826,789, or $.67 per share as compared to $4,465,240, or $.57 per
23
share, for the year ended December 31, 1994. The increase in net loss was due to
principally to the increased operating, selling and administrative and stock
appreciation right expenses noted above during the more recent year.
Liquidity and Capital Resources
Since its inception, the Company (including its operating subsidiaries
ACTV Entertainment, ACTV Net, Inc., The Los Angeles Individualized Television
Network, Inc., and 3D Virtual, Inc.) has not generated revenues sufficient to
fund its operations, and has incurred operating losses. Through December 31,
1996, the Company had an accumulated deficit of approximately $39.2 million. The
Company's cash position on December 31, 1996, was $6,520,756 compared to
$3,531,782 on December 31, 1995.
During the year ended December 31, 1996, the Company used $7,560,486 in
cash for its operations, compared with $5,098,477 for the year ended December
31, 1995. The increase in the more recent year was due to higher operating and
selling and administrative expenses. The Company met its cash needs in the year
ended December 31, 1996 from the proceeds of a private placement of common stock
($1.9 million in net proceeds) and of convertible preferred stock issued by its
wholly-owned subsidiary ($9.1 million in net proceeds). The Company met its cash
needs in the year ended December 31, 1995, principally from the proceeds of a
series of sales of common stock to private investors throughout the first three
quarters of the year (aggregating $9.0 million in proceeds). During the year
ended December 31, 1995, the Company used cash of $2,247,469 to repay in full
both its short-term and long-term notes payable obligations.
With respect to investing activities in the year ended December 31, 1996,
the Company used cash of $444,189 related to the purchase of television
production equipment and office improvements. In the year ended December 31,
1995, the Company used cash of $575,323 related principally to equipment
purchases for the California trial referred to above.
ACTV Entertainment, ACTV Net and The Los Angeles Individualized
Television Network, Inc. and 3D Virtual, Inc. are dependent on advances from the
Company to meet their obligations.
During the year ended December 31, 1996, the Company advanced
approximately $1.2 million to ACTV Net and $2.4 million to The Los Angeles
Individualized Television Network, Inc. subsidiaries. Advances to other
subsidiaries were minimal during 1996.
Advances are based upon budgeted expenses and revenues for each respective
subsidiary. Adjustments are made during the course of the year based upon the
subsidiary's performance versus the projections made in the budget.
The Company's balance sheet as of December 31, 1996, also reflects the
accrual of expenses of $701,517 related to the Company's stock appreciation
rights plan. As compared to the Company's balance sheet as of December 31, 1995,
the Company's balance sheet as of December 31, 1996, reflects an increase of
$195,384 in preferred dividends payable, resulting from the issuance of $10
million principal value of convertible preferred stock during August 1996.
The Company believes that it may be required to expend approximately $1.5
to $2.0 million during 1997 to facilitate the completion of current research and
development projects, relating principally to firmware for digital set-top
converter boxes, upgraded software for its entertainment master control
facilities and Internet software applications.
Management of the Company believes that its current funds will enable the
Company to finance its operations at their present level for at least the next
twelve months. Such belief is based on assumptions that could prove to be
incorrect, in which case the Company may require additional
24
financing during this period. Moreover, the Company believes that it will
require additional funds of $25 - $35 million to launch and operate the two
Regional Networks planned for the next twelve-month period. While the Company
has engaged an investment bank for assistance in securing such financing, the
Company has no commitments from lenders or investors at this time and there is
no assurance that it will be able to raise the necessary capital to effect such
launches.
The Company does not have any material contractual commitments for capital
expenditures.
Impact of Inflation
Inflation has not had any significant effect on the Company's operating
costs.
Statement of Financial Accounting Standards No. 121.
This statement, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of," which is effective for fiscal years beginning after December 15,
1995, did not have a material impact on the consolidated financial statements of
the Company.
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123").
This statement, "Accounting for Stock-Based Compensation," is effective
for fiscal years beginning after December 15, 1995. The new standard defines a
fair value method of accounting for the issuance of stock options and other
equity instruments. Pursuant to SFAS No. 123 companies are encouraged, but not
required, to adopt the fair value method of employee stock-based transactions.
If the fair value method is not adopted for reporting purposes, the supplemental
pro forma disclosures are required of the effect of the fair value method on
operations and per share results. The Company has decided not to adopt the fair
value method in its financial statements and to present the supplemental pro
forma information.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are listed under Item 14 in this report.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Item 10. MANAGEMENT
Executive Officers and Directors
The Company intends to file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year covered by this Report on Form
10-K a definitive proxy statement (the "Proxy Statement"), pursuant to
Regulation 14A pertaining to the Annual Meeting of Stockholders to be held in
May 1997. Information regarding directors and executive officers of the Company
will appear under the caption "Election of Directors" in the Proxy Statement and
is incorporated herein by reference.
25
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear under the caption
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will appear under the caption "Ownership of Securities" in the Proxy
Statement and is incorporated herein by reference.
Item 13. CERTAIN TRANSACTIONS
Information regarding certain transactions will appear under the caption
"Certain Transactions" in the Proxy Statement and is incorporated herein by
reference.
PART IV
Item 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K:
(a)1. FINANCIAL STATEMENTS:
See the Consolidated Financial Statements beginning on Page F-1 hereafter, which
is incorporated by reference.
(a)2. FINANCIAL STATEMENT SCHEDULE
The following Financial Statement Schedule for the year ended December 31, 1996
is filed as part of this Annual Report. The Company had no activity reportable
on this schedule for the years ended December 31, 1995 and 1994.
Schedule II - Valuation and Qualifying Accounts and Reserves
Column B Column C Column D Column E
---------- ---------------------- ---------- --------
Balance at Charged to Charged to Balance
Beginning Costs and Other Deductions End
Description of Period Expenses Accounts -Describe of Period
Year ended
12/31/96:
Accounts
receivable $-- $82,746 $-- $-- $82,746
allowance for
doubtful accounts
Reserve for
investment losses $-- $274,325 $-- $-- $274,325
26
(a)3. EXHIBITS (inapplicable items omitted):
3.1.a Restated Certificate of Incorporation of the Company.*
3.1.b Amendment to Certificate of Incorporation of the Company.**
3.2 By-Laws of the Company.*
9.1 Voting Agreement dated November 11, 1994, by and between William
C. Samuels and Michael J. Freeman.***
9.2 Voting Trust Agreement dated March 10, 1994 by and among William
C. Samuels, The Washington Post Company and ACTV, Inc.**
10.1 First Amendment to Lease, dated December January 13, 1997 by and
between the Registrant, as the Tenant, and Rockefeller Center
Properties, as the Landlord.
10.2 Form of 1989 Employee Incentive Stock Option Plan.*
10.3 Form of Amendment No. 1 to 1989 Employee Incentive Stock Option
Plan.*
10.4 Form of 1989 Employee Non-qualified Stock Option Plan.*
10.5 Form of Amendment No. 1 to 1989 Employee Non-qualified Stock
Option Plan.*
10.6 1986 Non-qualified Stock Option Plan.*
10.7 Form of 1986 Non-qualified Stock Option Agreement.*
10.8 1996 Non-qualified Stock Option Plan.
10.9 1992 Stock Appreciation Rights Plan.
10.10 1996 Stock Appreciation Rights Plan.
10.11 Employment Agreement dated August 1, 1995, as amended January 1,
1997 between the Company and William Samuels.
10.12 Employment Agreement dated August 1, 1995, as amended January 1,
1997 between the Company and David Reese.
10.13 Employment Agreement dated 15th day of December, 1995, as amended
January 1, 1997 between the Company and Bruce Crowley.
10.14 Master Programming License Agreement dated December 2, 1996, by
and between the Company and Liberty/Fox Sports, LLC.
10.15 Enhancement License Agreement dated December 4, 1996, by and
between the Company and Prime Ticket Networks, L.P., d/b/a Fox
Sports West.****
10.16 Enhancement License Agreement dated February 28, 1997, by and
between the Company and ARC Holding, Ltd., d/b/a Fox Sports
Southwest.****
10.17 Agreement dated march 30, 1995 between General Instrument
Corporation and the Company.***
10.18 Technical Services Agreement dated May 1995 between the David
Sarnoff Research Center, Inc. and the Company.***
10.19 Option Agreement dated December 4, 1995 between the David Sarnoff
Research Center and the Company.
10.20 Form of Option Agreement entered into by William Samuels, David
Reese, Bruce Crowley and Christopher Cline in connection with the
Series B Common Stock of ACTV Entertainment, Inc., ACTV Net, Inc.,
Los Angeles Individualized Regional Network, Inc. and Texas
Individualized Regional Network, Inc.
10.21(a) deleted
10.21(b) deleted
10.21(c) Option Agreement dated September 29, 1995 between the Company and
Richard H. Bennett.***
10.21(d) Assignment dated September 29, 1995 between the Company and
Richard H. Bennett.***
10.21(e) Stock Option Agreement, dated as of December 1, 1995, amended
March 24, 1997 by and between the Registrant and William C.
Samuels.
10.21(f) Stock Option Agreement, dated March 24, 1997, by and between the
Registrant and William C. Samuels.
27
10.21(g) Stock Option Agreement, dated as of March 24, 1997, by and between
the Registrant and David Reese.
10.21(h) Stock Option Agreement, dated as of December 1, 1995, amended
March 24, 1997 by and between the Registrant and David Reese.
10.21(i) Stock Option Agreement, dated as of March 24, 1997, by and between
the Registrant and Bruce Crowley.
10.21(j) Stock Option Agreement, dated as of December 1, 1995, amended
March 24, 1997 by and between the Registrant and Bruce Crowley.
10.21(k) Stock Option Agreement, dated as of March 24, 1997, by and between
the Registrant and Christopher Cline.
10.22 Option Agreement, dated March 11, 1997, by and between the
Registrant and The Washington Post Company.
27 Financial Data Schedule
* Incorporated by reference from Form S-1 Registration Statement (File
No. 33-34618)
** Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1993.
*** Incorporated by reference from Form S-1 Registration Statement (File
No. 33-63879) which became effective on February 12, 1996.
**** Certain information contained in this exhibit has been omitted and
filed separately with the Commission along with an application for
non-disclosure of information pursuant to Rule 24b-2 of the Securities
Act of 1933, as amended.
28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of ACTV, Inc.:
We have audited the accompanying consolidated balance sheets of ACTV, Inc. and
subsidiaries ("the Company") as of December 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1996, 1995, and 1994. Our audits also included the
financial statement schedule listed in the index at Item 14 (a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years ended December 31, 1996, 1995, and 1994 in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
February 27, 1997
New York, New York
F-1
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
1995 1996
---------------- ---------------
Current Assets:
Cash and cash equivalents....................... $3,531,782 $6,520,756
Accounts receivable-net......................... 349,291 410,193
Education equipment inventory................... 112,218 337,504
Other 61,011 316,962
---------------- ---------------
Total current assets....................... 4,054,302 7,585,415
---------------- ---------------
Property and equipment-net...................... 416,895 724,089
---------------- ---------------
Other Assets:
Video program inventory......................... 214,824 --
Patents and patents pending..................... 268,980 253,779
Goodwill 3,493,932 3,067,560
Other 102,195 61,781
---------------- ---------------
Total other assets......................... 4,079,931 3,383,120
---------------- ---------------
Total .............................. $8,551,128 $11,692,624
================ ===============
`
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses........... $1,090,392 $1,594,655
Deferred stock appreciation rights.............. 566,883 701,517
Preferred dividends payable..................... -- 195,384
---------------- ---------------
Total current liabilities.................. 1,657,275 2,491,556
Shareholders' equity:
Preferred stock, $.10 par value, 1,000,000
shares authorized, none issued............. -- --
Convertible preferred stock, no par value,
436,000 shares authorized: issued and
outstanding none at December 31, 1995,
400,000 at December 31, 1996......... -- 9,115,664
Common stock, $.10 par value, 35,000,000
shares authorized: issued and outstand-
ing 11,396,419 at December 31, 1995,
11,787,106 at December 31, 1996......... 1,139,642 1,178,711
Additional paid-in capital...................... 36,686,742 38,272,205
Notes receivable from stock sales............... (567,500) (200,000)
Accumulated deficit............................. (30,365,031) (39,165,512)
---------------- ---------------
Total shareholders' equity................. 6,893,853 9,201,068
---------------- ---------------
Total................................. $8,551,128 $11,692,624
================ ===============
See Notes to Consolidated Financial Statements
F-2
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1994 1995 1996
--------- ---------- ----------
Revenues:
Sales revenues.................................... $928,640 $1,311,130 $1,459,540
License fees from related party................... -- 730 16,789
Royalties from related party...................... 9,776 -- --
----------------- ----------------- -----------------
Total revenues................................ 938,416 1,311,860 1,476,329
Cost of Sales..................................... 296,839 334,136 647,488
----------------- ----------------- -----------------
Gross profit.................................. 641,577 977,724 828,841
Expenses:
Operating expenses................................ 890,871 1,260,134 1,955,601
Selling and administrative........................ 4,193,931 4,998,020 6,332,759
Depreciation and amortization..................... 446,092 686,906 419,979
Amortization of goodwill.......................... 343,467 426,372 426,372
Loss on investment................................ -- -- 274,325
Stock appreciation rights......................... (437,068) 567,316 183,634
----------------- ----------------- -----------------
Total expenses................................ 5,437,293 7,938,748 9,592,670
Interest (income).................................... (43,877) (138,510) (158,732)
Interest expense-- related parties................... 226,671 98,392 --
----------------- ----------------- -----------------
Interest expense (income) - net................... 182,794 (40,118) (158,732)
Loss before minority interest in equity
of investee and extraordinary gain................ 4,978,510 6,920,906 8,605,097
Interest in ACTV Interactive......................... (143,500) -- --
----------------- ----------------- -----------------
Net loss before extraordinary
gain................................................. 5,122,010 6,920,960 8,605,097
Gain on extinguishment of debt and equipment lease
obligations.......................................... 656,770 94,117 --
----------------- ----------------- -----------------
Net loss............................................. 4,465,240 6,826,789 8,605,097
Preferred stock dividend............................. -- -- 195,384
Loss applicable to common stock
shareholders......................................... $4,465,240 $6,826,789 $8,800,481
================= ================= =================
Loss per common share before
extraordinary gain................................... $.65 $.68 $.75
Loss per common share after
extraordinary gain................................... $.57 $.67 $.75
Weighted average number of common shares
outstanding. ........................................ 7,897,278 10,162,128 11,739,768
See Notes to Consolidated Financial Statements
F-3
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Convertible Preferred Stock Additional
------------------------- ------------------------- Paid-In
Shares Amount Shares Amount Capital Deficit
---------- ----------- --------- ---------- ----------- ------------
Balances January 1, 1994 6,507,799 $650,780 -- -- $20,332,825 $(19,073,002)
Issuance of shares in connection
with financing 757,100 75,710 -- -- 2,892,628 --
Issuance of shares in connection
with exercise of stock options 818,317 81,832 -- -- 1,564,326 --
Issuance of shares in connection
with conversion of convertible
note 871,334 87,133 -- -- 1,508,051 --
Issuance of shares for services 65,000 6,500 311,000 --
Net loss -- -- -- -- -- (4,465,240)
---------- ---------- --------- ---------- ----------- -------------
Balances December 31, 1994 9,019,550 $901,955 -- -- $26,608,830 $ (23,538,242)
========== ========== ========= ========== =========== =============
Issuance of shares in connection
with financings 1,990,293 199,029 -- -- 8,730,627 --
Issuance of shares in connection
with exercise of stock options 308,247 30,825 -- -- 1,129,924 --
Issuance of shares for services 78,329 7,833 -- -- 217,361 --
Net loss -- -- -- -- -- (6,826,789)
---------- ---------- --------- ---------- ----------- -------------
Balances December 31, 1995 11,396,419 $1,139,642 -- -- $36,686,742 $ (30,365,031)
========== ========== ========= ========== =========== =============
Issuance of shares in connection
with financings 450,000 45,000 400,000 9,115,664 1,832,985
Issuance of shares for services 45,687 4,569 109,478
Reversal of option exercise (105,000) (10,500) (357,000)
Net loss -- -- -- -- -- (8,800,481)
---------- ---------- --------- ---------- ----------- -------------
Balances December 31, 1996 11,787,106 $1,178,711 400,000 $9,115,664 $38,272,205 $ (39,165,512)
========== ========== ========= ========== =========== =============
See Notes to Consolidated Financial Statements.
F-4
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1994 1995 1996
---------- ---------- ----------
Cash flows from operating activities:
Net loss applicable to common
shareholders................................... $4,465,240 $6,826,789 $8,605,097
---------- ---------- ----------
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization................... 789,558 1,220,873 846,354
Stock appreciation rights....................... (549,068) (183,309) 134,634
Gain on extinguishment of debt and equipment
lease obligations............................... (656,770) (94,717) --
Stock issued in lieu of cash
compensation............................... 250,000 563,430 114,047
Other 1,151 -- --
Loss on investment.............................. -- -- 274,325
Bad debt reserve................................ -- -- 82,746
Changes in assets and liabilities:
Accounts receivable............................. (48,917) (150,938) (143,648)
Education equipment inventory................... (13,183) 34,065 (225,286)
Other assets.................................... 31,765 80,552 (542,824)
Accounts payable and accrued expenses........... 404,733 165,023 504,263
Interest payable................................ 226,619 93,333 --
Loss from interest in ACTV Interactive.......... 143,500 -- --
---------- ---------- ----------
Net cash used in operating
activities................................. (3,885,852) (5,098,477) (7,560,486)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from exercise of warrants
and options..................................... 1,646,159 122,810 --
Proceeds from convertible preferred
stock issuance.................................. -- -- 9,115,664
Proceeds from equity financing.................. 2,968,338 8,951,859 1,877,985
Equipment lease repayment....................... (65,000) -- --
Discounted note prepayment...................... -- (101,458) --
Note repayment.................................. -- (2,247,469) --
Repayment pool principal repayment.............. (71,020) -- --
---------- ----------- ----------
Net cash provided by financing activities............. 4,478,477 6,725,742 10,993,649
Cash flows from investing activities:
Cash acquired in acquisition of remaining
interest in affiliate...................... 672,160 -- --
Cash paid for interest in affiliate............. (2,500,000) -- --
Investment in patents pending................... (142,122) -- --
Investment in property and equipment............ (1,686) (575,323) (444,189)
----------- ---------- ----------
Net cash used in investing activities................. (1,971,648) (575,323) (444,189)
----------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents ...................................... (1,379,023) (1,051,942) 2,988,974
Cash and cash equivalents,
beginning of period............................. 3,858,863 2,479,840 3,531,782
----------- ---------- ----------
Cash and cash equivalents,
end of period................................... 2,479,840 3,531,782 6,520,756
=========== ========== ==========
See Notes to Consolidated Financial Statements.
Supplemental disclosure of cash flow information: See Note 15
ACTV, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization ACTV, Inc., incorporated July 8, 1983, and its subsidiaries (the
"Company" or "ACTV"), were organized to develop and market a proprietary
individualized television programming technology (the "Individualized
Programming"), which permits a viewer to experience instantly responsive
television. Since its inception, the Company has been engaged in the development
of Individualized Programming, the production of programs that use its
Individualized Programming ("ACTV Programming") and the marketing and sales of
the various products and services incorporating the Company's Individualized
Programming.
On July 14, 1992, the Company entered into an agreement with a subsidiary of The
Washington Post Company (the "Post Company") to form ACTV Interactive, a
partnership organized to sell products and services using the Company's
Individualized Programming to the education marketplace. The Company contributed
its applicable Individualized Programming and the subsidiary of the Post Company
contributed $2,500,000 in cash. As a result thereof, the Company recognized an
increase of $1,225,000 in its additional paid-in capital representing its pro
rata share in the equity of the joint venture. The Company owned, during 1993,
through its wholly owned subsidiary ACTV Net, Inc. ("ACTV Net"), formerly ACTV
Interactive, Inc., a 49% interest in ACTV Interactive, and accounted for its
investment under the equity method of accounting. Furthermore, under the terms
of a worldwide license, the Company received a 5% royalty on sales made by ACTV
Interactive.
On March 11, 1994, the Company purchased the Post Company's full 51% interest in
ACTV Interactive for $2.5 million in cash and a $2 million 8% note due December
31, 1996 (See Note 13). During 1995, in a series of payments, the Company repaid
in full this note and all accrued interest thereon. ACTV Net is currently
dependent on advances and/or loans from the Company.
Principles of Consolidation - The Company's consolidated financial statements
include the balances of its wholly-owned operating subsidiaries, ACTV
Entertainment, ACTV Net, The Los Angeles Individualized Television Network, Inc.
and 3D Virtual, Inc. In consolidation, all intercompany account balances are
eliminated.
Property and Equipment - Property and equipment are recorded at cost and
depreciated on the straight-line method over their estimated useful lives
(generally five years). Depreciation expense for the years ended December 31,
1994, 1995 and 1996 aggregated $6,207, $70,790 and 189,957, respectively.
Education Equipment - Education equipment consists of distance learning and
classroom terminals, videocassette recorders, television monitors and computer
printers that the Company holds in inventory. This inventory is carried on the
Company's books at the lower of cost or market.
Patents and Patents Pending - The cost of patents, which for patents issued
represents the consideration paid for the assignment of patent rights to the
Company by an employee and for patents pending represents legal costs related
directly to such patents pending, is being amortized on a straight-line basis
over the estimated economic lives of the respective patents (averaging 10
years), which is less than the statutory life of each patent. The balances at
December 31, 1995, and 1996, are net of accumulated amortization of $101,170 and
$116,371, 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 primarily recorded as products are shipped and
services are rendered, using the completed contract method of accounting.
Research and Development - Research and development costs, which represent
primarily refinements to the Programming Technology, were $465,740 for the year
ended December 31, 1994, $616,455 for the year ended December 31, 1995, and
$1,221,362 for the year ended December 31, 1996.
F-6
Loss per Common Share - Loss per common share equals net loss divided by the
weighted average number of shares of Common Stock outstanding during the period.
The Company did not consider the effect of stock options and the Convertible
Preferred Stock upon the calculation of the loss per common share as it would be
anti-dilutive.
Reclassifications - Certain reclassifications have been made in the December 31,
1994, and 1995, financial statements to conform to the December 31, 1996,
presentation.
Intangibles - The excess of the purchase cost over the fair value of net assets
acquired in an acquisition (goodwill) is being amortized on a straight-line
basis over a period of 10 years. On a quarterly basis, the Company evaluates the
realizability of goodwill based upon the expected undiscounted cash flows of the
acquired business. Impairments, if any, will be recognized through a charge to
operation in the period in which the impairment is deemed to exist. Based on
such analysis, the Company does not believe that goodwill has been impaired.
Long-Lived Assets- In 1996, the Company adopted Statement of Financial Standard
No. 121, which requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may no longer be
recoverable. Adoption of this statement did not have a material impact on the
Company.
2. NATURE OF OPERATIONS
ACTV generates revenues from the sale of individualized ACTV Programming that it
either owns, has licensed or that has been created by a third party under a
license from ACTV. Currently, the principal markets for the Company's products
are in-home entertainment and education (with an emphasis on distance learning
and Internet applications) within the United States and Canada. Education
programming and related equipment is sold to schools, colleges, and private
education networks. In-home entertainment programming will be sold to the end
user through cable television systems on a subscription basis, or through other
providers of television programming to home viewers, e.g., satellite, telephone
company fiber networks, etc. No single client accounted for more than 10% of the
Company's revenues during the year ended December 31, 1996, except for Georgia
Public Television, which accounted for approximately 11% and 17% of total
revenues in 1995 and 1996, respectively.
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 December 31, 1996 and the
reported amounts of revenues and expenses during the year ended December 31,
1996. Actual results could differ from these estimates.
4. PROPERTY AND EQUIPMENT - NET
Property and equipment - net at December 31, 1995, and 1996, consisted of the
following (at cost):
1995 1996
---- ----
Machinery and equipment $477,213 $636,845
Office furniture and fixtures 10,472 357,373
------ -------
Total 487,685 994,218
Less accumulated depreciation 70,790 270,129
------ -------
Total $416,895 $724,089
======== ========
F-7
5. EXTRAORDINARY ITEM
On June 11, 1985, the Company entered into a Refinancing and Restructuring
Agreement (the "Plan") providing for the termination of prior agreements
relating to the formation of ACTV, Inc. The Plan also stated that any amounts
owing by the Company to related parties and other creditors at the date of the
agreement were the responsibility of the Company. Such amounts were to be
repayable solely from the "Repayment Pool", which was defined as ten percent of
"available cash flow" in excess of $1,000,000 generated by the Company in any
given calendar year. Available cash flow was defined as the excess of gross
revenues (excluding financing proceeds) over certain cash expenditures. During
1994, the Company, in separate transactions concluded with all holders of
Repayment Pool obligations, settled all outstanding liabilities related to the
Repayment Pool. Average consideration paid by the Company in such settlement
transactions was approximately 17% of face value. For the year ended December
31, 1994, the Company recognized an extraordinary gain of $620,898 related to
the Repayment Pool settlement transactions.
In addition, for the year ended December 31, 1994, the Company recognized an
extraordinary gain of $35,872 pursuant to an unrelated transaction.
6. FINANCING ACTIVITIES
During 1996, the Company raised approximately $11.0 million net from the
proceeds of a private placement of common stock ($1.9 million in net proceeds)
and of 5% convertible preferred stock (the "Convertible Preferred Stock") issued
by its wholly-owned subsidiary ($9.1 million in net proceeds). The Convertible
Preferred Stock is convertible into Common Stock of ACTV, Inc., beginning
January 1, 1997, at discounts to the market price of the Common Stock that
increase from 14% in January 1997 to a maximum of 30.375% in September 1997.
After September 1, 1997, holders of the Convertible Preferred Stock will be able
to use the lesser of (i) the then current market price of the Company's Common
Stock, or (ii) an average market price during the month of August 1997 as the
price to which the 30.375% discount is applied for conversions. In addition,
beginning in October 1997, the Company will have the right to redeem the
Convertible Preferred Stock at a price equal to $25 times the number of shares
being purchased, plus accrued and unpaid dividends (the "Redemption Price").
This right may be exercised by the Company only if the closing price of the
Company's Common Stock is above $9.00 for thirty consecutive trading days prior
to redemption. Notwithstanding the foregoing, any or all of the Convertible
Preferred Stock may be purchased by the Company from the holders at a price
equal to the Redemption Price times 1.43627 at any time prior to October 1997.
The Company believes that it is highly likely that the holders of the
Convertible Preferred Stock will elect to convert their stock into Common Stock
of the Company and, accordingly, has included the Convertible Preferred Stock in
its consolidated statement of shareholders' equity.
In March 1992, the Company issued to the Post Company $1,500,000 aggregate
principal amount of units represented by an 8% convertible note (the
"Convertible Note") and 720,000 shares of the Company's common stock (the
"Common Stock"). Also in March 1992, the Post Company acquired pursuant to an
option agreement (the "Option Agreement") an option to purchase up to 750,000
shares of Common Stock at either $2.00 or $2.50 per share, depending on the date
of exercise. Both the conversion of the Convertible Note and the exercise of the
option were dependent upon the occurrence of certain events. The Convertible
Note required that 25% of the outstanding balance be retired by March 17, 1994,
and the remaining outstanding balance be retired in three semi-annual
installments. The Company recorded the fair market value of the common shares
issued ($720,000) as original issue discount, and had been amortizing this
amount over the life of the Notes. The Convertible Note was secured by a
security interest as described in Note 13.
In connection with the Option Agreement, the Post Company also received the
right to purchase from the Company at a fair market exercise price to be
determined an amount of shares of Common Stock necessary to increase the Post
Company's percentage ownership of the total then outstanding shares of Common
Stock to 51%. Such right is exercisable through March 17, 1997, subject to
extension in certain circumstances. Until March 17, 1995, the Post Company
agreed not to acquire more than 40% of the Company unless certain events
occurred, such as a tender offer, a proxy contest, or the acquisition by a third
party of in excess of 15% of the Company's common stock, as set forth in a
standstill agreement between the Company and the Post Company.
In March 1994, the Post Company exercised its option to purchase 750,000 shares
at $2.00 per share, and converted the Convertible Note's principal, plus accrued
interest of $241,000, into 871,334 shares of the Common Stock.
F-8
During 1995, the Company repaid in full principal and interest relating to a $2
million note issued in March 1994 pursuant to the Company's purchase of the Post
Company's 51% interest in ACTV Interactive. Upon repayment of this obligation,
the security interest described in Note 13 was canceled.
Management of the Company believes that its current funds will enable the
Company to finance its operations at their present level for at least the next
twelve months. Such belief is based on assumptions that could prove to be
incorrect, in which case the Company may require additional financing during
this period. Moreover, the Company believes that it will require additional
funds of $25 - $35 million to launch and operate the two Regional Networks
planned for the next twelve-month period. While the Company has engaged an
investment bank for assistance in securing such financing, the Company has no
commitments from lenders or investors at this time and there is no assurance
that it will be able to raise the necessary capital to effect such launches.
7. SHAREHOLDERS' EQUITY
At December 31, 1996, the Company had reserved shares of Common Stock for
issuance as follows:
1989 Qualified Stock Option Plan 59,000
1989 Non-Qualified Stock Option Plan 46,500
1996 Qualified Stock Option Plan 212,500
Options granted outside of formal plans 3,010,718
---------
Total 3,328,718
Preferred Stock At December 31, 1996, the Company was authorized to issue
1,000,000 shares of Preferred Stock, par value $0.10 per share, designated as
Series A Convertible Preferred Stock (666,667 shares) and Series B Convertible
Preferred Stock (333,333 shares). No shares of Preferred Stock are issued and
outstanding.
Convertible Preferred Stock At December 31, 1996, the Company's wholly-owned
subsidiary, ACTV Holdings, Inc. was authorized to issue 436,000 shares of
Convertible Preferred Stock, no par value, of which 400,000 shares were issued
and outstanding.
8. STOCK OPTIONS
During 1989, the Board of Directors approved an Employee Incentive Stock Option
Plan (the "Employee Plan"). The Employee Plan provides for the granting of up to
100,000 options to purchase Common Stock to key employees. The Employee Plan
stipulates that the option price be not less than fair market value on the date
of grant. Options granted will have an expiration date not to exceed ten years
from the date of grant. At December 31, 1996, 100,000 options had been granted
under this plan, of which 19,000 had been exercised and 22,000 had expired or
been canceled.
In addition, in August 1989, the Board of Directors approved a Non-Qualified
Stock Option Plan (the "Non-Qualified Plan"), to be administered by the Board or
a committee appointed by the Board. The Non-Qualified Plan provides for the
granting of up to 100,000 options to purchase shares of Common Stock to
employees, officers, directors, consultants and independent contractors. The
Non-Qualified Plan stipulates that the option price be not less than fair market
value at the date of grant, or such other price as the Board may determine.
Options granted under this Plan shall expire on a date determined by the
committee but in no event later than three months after the termination of
employment or retainer. At December 31, 1996, 100,000 options had been granted
under this plan, of which 31,500 had been exercised and 22,000 had expired or
been canceled.
During 1996, the Board of Directors approved the Company's 1996 Stock Option
Plan (the "1996 Option Plan"). The 1996 Option Plan provides for option grants
to employees and others who provide significant services to the Company. Under
the 1996 Option Plan, the Company is authorized to issue options for a total of
500,000 shares of Common Stock. As of December 31, 1996, the Company had issued
224,500 options under the plan.
At December 31, 1995, the Company also had outstanding options that were issued
to Directors, certain employees and consultants for the purchase of 2,526,582
shares of Common Stock that were not issued pursuant to a formal plan. The
prices of these options range from $1.03 to $5.50 per share; they have
expiration dates in the years 1996 through 2002.
F-9
The options granted are not part of the Employee Incentive Stock Option Plan or
the Non-Qualified Stock Option Plan discussed above.
A summary of the status of the Company's stock options as of December 31, 1996,
1995 and 1994 is as follows:
1996 1995 1994
Wgtd. Wgtd. Wgtd.
Avg. Avg. Avg.
1996 Exer 1995 Exer 1994 Exer
Shares Price Shares Price Shares Price
---------- ----- --------- ----- --------- -----
Outstanding at beginning
of period 2,747,082 1,605,104 2,196,531
Options granted 887,500 $3.73 1,706,087 $3.41 327,500 $5.21
Options exercised 0 -- 141,833 $2.33 818,316 $2.01
Options terminated 305,864 $3.76 422,276 $5.27 100,611 $5.57
Outstanding at end
of period 3,328,718 $2.99 2,747,082 $3.27 1,605,104 $4.00
Options exercisable at end
of period 1,719,134 $3.19 1,091,083 $3.04 1,338,437 $3.75
The following table summarizes information about stock options outstanding at
December 31, 1996
Weighted Aver-
age Remaining Weighted Weighted
Number Contractual Aver- Aver-
Outstanding Life age Exercise Number age
Range of at Price Exercisable at Exercise
Exercise Prices 12/31/96 12/31/96 Price
- --------------- ------------ -------------- ------------ -------------- ------------
0 to 1.50 22,000 1.8 Years $0.56 17,000 $0.73
1.51 to 3.75 2,839,218 4.9 Years $2.76 1,269,052 $2.77
3.76 to 5.625 467,500 1.0 Year $4.48 420,000 $4.52
The weighted average fair value of options granted during 1995 and 1996 was
$1.69 and $1.21 per share, respectively, excluding the value of options granted
and terminated within the year. In the case of each issuance, options were
issued at an exercise price that was higher than the fair market value of the
Company's Common Stock on the date of grant. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock option and purchase plans. Accordingly, no compensation cost has been
recognized for option issuances. Had compensation cost for the Company's option
issuances been determined based on the fair value at the grant dates consistent
with the method of FASB Statement 123, the Company's net loss and loss per share
for the year ended December 31, 1995 and 1996 would have been increased to the
pro forma amounts indicated below:
Net loss to common shareholders 1995 1996
---- ----
As reported $6,826,789 $8,800,481
Pro forma $9,506,556 $9,685,735
Net loss per common share 1995 1996
---- ----
As reported $0.67 $0.75
Pro forma $0.94 $0.83
F-10
The Company estimated the fair value of options issued during 1995 and 1996 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 of 61.5% and a risk free interest rate of 6%.
9. STOCK APPRECIATION RIGHTS PLANS
The Company's 1992 Stock Appreciation Rights Plan (the "1992 SAR Plan") was
approved by the Company's stockholders in December 1992. Subject to adjustment
as set forth in the 1992 SAR Plan, the aggregate number of Stock Appreciation
Rights ("SARs") that may be granted shall not exceed 900,000.
The Company's 1996 Stock Appreciation Rights Plan (the "1996 SAR Plan") was
adopted by the Board of Directors in April 1996 and approved by the shareholders
in July 1996. Subject to adjustment as set forth in the 1996 SAR Plan, the
aggregate number of SARs that may be granted pursuant to the 1996 SAR Plan shall
not exceed 500,000; provided, however, that at no time shall there be more than
an aggregate of 900,000 outstanding, unexercised SARs granted pursuant to both
the 1996 SAR Plan and the 1992 SAR Plan. The 1996 SAR Plan imposes no limit on
the number of recipients to whom awards may be made.
Both the 1992 and 1996 SAR Plans are administered by the Stock Appreciation
Rights Committee (the "SAR Committee").
SARs may not be exercised until the six months from the date of grant. SARs
issued pursuant to the 1992 SAR Plan vest in five equal annual installments
beginning twelve months from the date of grant. SARs issued pursuant to the 1996
SAR Plan vest either in a lump sum or in such installments, which need not be
equal, as the Committee shall determine. If a holder of a SAR ceases to be an
employee, director or consultant of the Company or one of its subsidiaries or an
affiliate, other than by reason of the holder's death or disability, any SARs
that have not vested shall become void. Exercise of SARs also will be subject to
such further restrictions (including limits on the time of exercise) as may be
required to satisfy the requirements of Rule 16b-3 promulgated by the Securities
and Exchange Commission and any other applicable law or regulation (including,
without limitation, federal and state securities laws and regulations). SARs are
not transferable except by will or under the laws of descent and distribution or
pursuant to a domestic relations order as defined in the Internal Revenue Code
of 1986, as amended..
Upon exercise of a SAR, the holder will receive for each share for which a SAR
is exercised, as determined by the SAR Committee in its discretion, (a) shares
of the Company's Common Stock, (b) cash, or (c) cash and shares of the Company's
Common Stock, equal to the difference between (i) the fair market value per
share of the Common Stock on the date of exercise of the SAR and (ii) the value
of a SAR, which amount shall be no less than the fair market value per share of
Common Stock on the date of grant of the SAR.
Under the Company's 1992 SAR Plan, as of December 31, 1996, the Company has
granted 683,000 outstanding SARs (with exercise prices of $1.50 or $2.69 per
share) to eleven employees. The SARs expire between 1998 and 2006. During 1996,
a total of 16,000 SARs were exercised. Under the Company's 1996 SAR Plan, as of
December 31, 1996, the Company has granted 214,000 outstanding SARs (with an
exercise price $2.69 per share) to eight employees.
10. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes".
Deferred income taxes reflect the net tax effects at an effective tax rate of
35.33% of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes,
F-11
and (b) operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's net deferred tax asset as of December
31, 1995, and December 31, 1996, are as follows:
1995 1996
---- ----
Deferred tax assets:
Operating loss carryforwards $10,192,638 $13,365,772
Differences between book and tax basis of property 86,029 34,019
----------- -----------
10,278,667 13,399,791
Deferred tax liabilities:
Differences between book and tax basis of property (261,193) (106,819)
----------- -----------
10,017,474 13,292,972
Valuation Allowance (10,017,474) (13,292,972)
----------- -----------
Net deferred tax asset $ 0 $ 0
=========== ===========
The increase in the valuation allowance for the year ended December 31, 1996,
was approximately $3.3 million. There was no provision or benefit for federal
income taxes as a result of the net operating loss in the current year.
At December 31, 1996, the Company has Federal net operating loss carryovers of
approximately $37.8 million. These carryovers may be subject to certain
limitations and will expire between the years 1998 and 2010.
11. COMMITMENTS
At December 31, 1995, future aggregate minimum lease commitments under
non-cancelable operating leases, which expire in 1999 and 2001, were
approximately $1,097,660. The leases contain customary escalation clauses, based
principally on real estate taxes. Rent expense related to these leases for the
years ended December 31, 1994, 1995 and 1996 aggregated $169,457, $176,264, and
$129,600 respectively. The Company has employment agreements with certain key
employees. These agreements extend for a period of a maximum of five years and
contain non-competition provisions which extend two years after termination of
employment with the Company. At December 31, 1996, the Company is committed to
expend a total of approximately $2.4 million under these agreements.
12. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and receivables.
The Company attempts to mitigate cash investment risks by placing such
investments in insured depository accounts and with financial institutions that
have high credit ratings. Concentrations of risk with respect to trade
receivables exist because of the relatively few companies or other organizations
(primarily educational or government bodies) with which the Company currently
does business. The Company attempts to limit these risks by closely monitoring
the credit of those to whom it is contemplating providing its products, and
continuing such credit monitoring activities and other collection activities
throughout the payment period. In certain instances, the Company further
minimizes concentrations of credit risks by requiring partial advance payments
for the products provided.
13. PURCHASE OF REMAINING INTEREST IN SUBSIDIARY
On March 11, 1994, the Company purchased the Post Company's full 51% interest in
ACTV Interactive for consideration of $4.5 million, consisting of $2.5 million
in cash at closing and a $2 million note due December 31, 1996, (the "New
Note"). The New Note accrued interest at 8%, and specified required prepayments
from net proceeds in excess of an aggregate $5 million received by the Company
in the event of subsequent debt or equity financing. The principal of the New
Note was secured by certain collateral pursuant to a security agreement, through
which the Post Company acquired (a) a security interest in and lien, second in
priority, with respect to the collateral as to which the Company has granted a
first priority security interest pursuant to the Termination Agreement and (b) a
security interest in and lien, first in priority, with respect to any existing
United States patents and pending applications. During 1995, the Company repaid
in full principal and interest relating to the New Note. Upon repayment of this
obligation, the security interest described above was canceled.
F-12
14. INVESTMENT AND ADJUSTMENTS
In January 1995, the Company granted an exclusive license to Greenwich
Entertainment Group ("The Greenwich Group") for the use of its Individualized
Programming in the theater environment, specifically in shopping malls, museums
and entertainment centers. During 1996, ACTV invested $274,325 in The Greenwich
Group's common stock (approximately 15% of ownership interest).
The agreement with The Greenwich Group provides for the Company to receive an 8%
to 10% royalty of annual ticket sales per theater, dependent upon each theater's
volume. The Greenwich Group has one theater operating, and, at present, is not
constructing sufficient theaters to meet the minimum royalty required by the
ACTV license agreement. If the minimum royalty is not paid, the Company has the
right to cancel its license as to future theaters or to require the Greenwich
Group to issue to ACTV such number of The Greenwich Group shares of common stock
of equivalent value.
The Company has also performed executive production services for The Greenwich
Group on a fee basis. During 1996, the Company recorded license fee and
production service revenue from The Greenwich Group of $16,789 and $199,666,
respectively. At December 31, 1996, the Company had unpaid receivables pursuant
to such revenues of $82,746.
The Greenwich Group has experienced difficulty in raising sufficient capital to
fund its operations and growth and has been unable to pay the Company for its
services and license. Therefore, at December 31, 1996 the Company provided a
reserve for the full amount of the receivables outstanding of $82,746 and a
valuation allowance for its full investment in The Greenwich Group of $274,325.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The consolidated balance sheet at December 31, 1995, reflects non-cash activity
during the year ended December 31, 1995, that relates to the acquisition of a
patent: a credit to shareholders' equity of $110,000 for options issued but not
yet vested at a price below the prevailing market price on the date of issuance.
In addition, the consolidated balance sheet at December 31, 1995, reflects
non-cash activity during the year ended December 31, 1995, relating to
non-recourse loans made by the Company to certain employees in August 1995 to
purchase the Company's Common Stock by exercising options: a debit to
shareholders' equity of $567,500. The due dates of the non-recourse loans
correspond with the respective expiration dates of the options exercised.
The consolidated balance sheet at December 31, 1996, reflects non-cash activity
during the year ended December 31, 1996, that relates to a reversal of certain
of the option exercises and resulting non-recourse loan transactions described
above: a credit to shareholders' equity of $367,500.
The Company made no cash payments of interest or income taxes during the years
ended December 31, 1995 and 1996.
F-13
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of New York
and State of New York on the 27th day of March 1997.
ACTV, Inc.
By: /s/William C. Samuels
---------------------
William C. Samuels
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the date indicated.
Signature Title Date
- --------- ----- ----
/s/ William C. Samuels March 27, 1997
- ----------------------
William C. Samuels Chairman of the Board, Chief Executive
Officer, President and Director
/s/ David Reese March 27, 1997
- ---------------
David Reese Executive Vice President, President - ACTV
Entertainment, Inc., and Director
/s/ Bruce Crowley March 27, 1997
- -----------------
Bruce Crowley Executive Vice President, President - ACTV
Net, Inc., and Director
/s/ Christopher C. Cline March 27, 1997
- ------------------------
Christopher C. Cline Vice President, Chief Financial Officer and
Secretary
/s/ William Frank March 27, 1997
William A. Frank Director
/s/ Richard Hyman March 27, 1997
Richard Hyman Director
/s/ Jess Ravich March 27, 1997
Jess Ravich Director
/s/ Steven W. Schuster March 27, 1997
Steven W. Schuster Director
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
ACTV, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
EXHIBITS
EXHIBIT INDEX
3.1.a Restated Certificate of Incorporation of the Company.*
3.1.b Amendment to Certificate of Incorporation of the Company.**
3.2 By-Laws of the Company.*
9.1 Voting Agreement dated November 11, 1994, by and between William
C. Samuels and Michael J. Freeman.***
9.2 Voting Trust Agreement dated March 10, 1994 by and among William
C. Samuels, The Washington Post Company and ACTV, Inc.**
10.1 First Amendment to Lease, dated December January 13, 1997 by and
between the Registrant, as the Tenant, and Rockefeller Center
Properties, as the Landlord.
10.2 Form of 1989 Employee Incentive Stock Option Plan.*
10.3 Form of Amendment No. 1 to 1989 Employee Incentive Stock Option
Plan.*
10.4 Form of 1989 Employee Non-qualified Stock Option Plan.*
10.5 Form of Amendment No. 1 to 1989 Employee Non-qualified Stock
Option Plan.*
10.6 1986 Non-qualified Stock Option Plan.*
10.7 Form of 1986 Non-qualified Stock Option Agreement.*
10.8 1996 Non-qualified Stock Option Plan.
10.9 1992 Stock Appreciation Rights Plan.
10.10 1996 Stock Appreciation Rights Plan.
10.11 Employment Agreement dated August 1, 1995, as amended January 1,
1997 between the Company and William Samuels.
10.12 Employment Agreement dated August 1, 1995, as amended January 1,
1997 between the Company and David Reese.
10.13 Employment Agreement dated 15th day of December, 1995, as amended
January 1, 1997 between the Company and Bruce Crowley.
10.14 Master Programming License Agreement dated December 2, 1996, by
and between the Company and Liberty/Fox Sports, LLC.
10.15 Enhancement License Agreement dated December 4, 1996, by and
between the Company and Prime Ticket Networks, L.P., d/b/a Fox
Sports West.****
10.16 Enhancement License Agreement dated February 28, 1997, by and
between the Company and ARC Holding, Ltd., d/b/a Fox Sports
Southwest.****
10.17 Agreement dated march 30, 1995 between General Instrument
Corporation and the Company.***
10.18 Technical Services Agreement dated May 1995 between the David
Sarnoff Research Center, Inc. and the Company.***
10.19 Option Agreement dated December 4, 1995 between the David Sarnoff
Research Center and the Company.
10.20 Form of Option Agreement entered into by William Samuels, David
Reese, Bruce Crowley and Christopher Cline in connection with the
Series B Common Stock of ACTV Entertainment, Inc., ACTV Net, Inc.,
Los Angeles Individualized Regional Network, Inc. and Texas
Individualized Regional Network, Inc.
10.21(a) deleted
10.21(b) deleted
10.21(c) Option Agreement dated September 29, 1995 between the Company and
Richard H. Bennett.***
10.21(d) Assignment dated September 29, 1995 between the Company and
Richard H. Bennett.***
10.21(e) Stock Option Agreement, dated as of December 1, 1995, amended
March 24, 1997 by and between the Registrant and William C.
Samuels.
10.21(f) Stock Option Agreement, dated March 24, 1997, by and between the
Registrant and William C. Samuels.
10.21(g) Stock Option Agreement, dated as of March 24, 1997, by and between
the Registrant and David Reese.
10.21(h) Stock Option Agreement, dated as of December 1, 1995, amended
March 24, 1997 by and between the Registrant and David Reese.
10.21(i) Stock Option Agreement, dated as of March 24, 1997, by and between
the Registrant and Bruce Crowley.
10.21(j) Stock Option Agreement, dated as of December 1, 1995, amended
March 24, 1997 by and between the Registrant and Bruce Crowley.
10.21(k) Stock Option Agreement, dated as of March 24, 1997, by and between
the Registrant and Christopher Cline.
10.22 Option Agreement, dated March 11, 1997, by and between the
Registrant and The Washington Post Company.
27 Financial Data Schedule
* Incorporated by reference from Form S-1 Registration Statement (File
No. 33-34618)
** Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1993.
*** Incorporated by reference from Form S-1 Registration Statement (File
No. 33-63879) which became effective on February 12, 1996.
**** Certain information contained in this exhibit has been omitted and
filed separately with the Commission along with an application for
non-disclosure of information pursuant to Rule 24b-2 of the Securities
Act of 1933, as amended.