Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
--------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
--------------
ACTV, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
--------------
Delaware 94-2907258
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
233 Park Avenue South
New York, New York 10003
------------------ -----
(Address of principal executive offices) (Zip Code)
(212) 497-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
As of November 11, 2002, there were 55,931,181 shares of the registrant's
common stock outstanding.
================================================================================
Item 1. Financial Statements
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 28,333,608 $ 69,035,707
Short-term investments 28,851,304 8,951,695
Accounts receivable-net 2,585,131 1,319,805
Other 1,288,185 1,696,617
------------- -------------
Total current assets 61,058,228 81,003,824
Property and equipment-net 4,396,728 6,344,631
Other assets:
Restricted cash 484,913 484,913
Investment in warrant 3,653,233 16,255,355
Investments-other 5,783,697 7,397,776
Patents and patents pending 8,737,241 8,425,889
Software development costs 5,428,429 5,310,100
Goodwill 1,435,701 12,935,701
Other 1,248,145 1,429,132
------------- -------------
Total other assets 26,771,359 52,238,866
------------- -------------
Total assets $ 92,226,315 $ 139,587,321
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,981,815 $ 5,664,088
Deferred revenue 4,050,970 4,068,450
------------- -------------
Total current liabilities 8,032,785 9,732,538
Deferred revenue 64,251,779 66,966,638
Minority interest 1,232,075 3,215,652
Stockholders' equity:
Common stock, $0.10 par value, 200,000,000 shares authorized: issued
and outstanding 55,931,181 at September 30, 2002 and 55,881,938 at
December 31, 2001 5,593,118 5,588,194
Additional paid-in capital 311,467,534 317,496,700
Stockholder loans (182,999) (339,035)
Accumulated deficit (298,167,977) (263,073,366)
------------- -------------
Total stockholders' equity 18,709,676 59,672,493
------------- -------------
Total liabilities and stockholders' equity $ 92,226,315 $ 139,587,321
============= =============
See notes to consolidated financial statements.
2
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 2,834,603 $ 3,259,379 $ 9,254,542 $ 10,759,273
Costs and expenses:
Selling, general and administrative 8,885,629 9,631,781 23,489,408 36,378,161
Depreciation and amortization 1,393,390 1,595,440 4,098,342 4,481,775
Amortization of goodwill -- 1,058,082 -- 2,518,888
Loss on impairment of goodwill 11,500,000 -- 11,500,000 --
Stock-based compensation reduction -- (8,580,695) (6,002,831) (11,399,850)
Restructuring charge -- 5,610,100 -- 5,610,100
------------ ------------ ------------ ------------
Total costs and expenses 21,779,019 9,314,708 33,084,919 37,589,074
------------ ------------ ------------ ------------
Loss from operations (18,944,416) (6,055,329) (23,830,377) (26,829,801)
Interest income 302,735 763,350 1,004,312 3,554,989
Other expense (4,971,915) (5,248,908) (14,252,122) (1,028,623)
------------ ------------ ------------ ------------
Loss before minority interest and cumulative effect
of accounting change (23,613,596) (10,540,887) (37,078,187) (24,303,435)
Minority interest - subsidiaries 277,176 930,579 1,983,576 2,444,350
------------ ------------ ------------ ------------
Loss before cumulative effect of accounting change $(23,336,420) $ (9,610,308) $(35,094,611) $(21,859,085)
Cumulative transition effect of adopting SFAS No. 133 -- -- -- (58,732,197)
------------ ------------ ------------ ------------
Net loss $(23,336,420) $ (9,610,308 ) $(35,094,611) $(80,591,282)
============ ============ ============ ============
Net loss per share:
Basic and diluted
Before cumulative effect of accounting change $ (0.42) $ (0.17) $ (0.63) $ (0.40)
Cumulative transition effect of adopting SFAS No. 133 -- -- -- (1.07)
------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (0.42) $ (0.17) $ (0.63) $ (1.47)
============ ============ ============ ============
Shares used in basic and diluted calculations 55,931,118 55,851,828 55,917,304 54,721,804
See notes to consolidated financial statements.
3
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended September 30,
------------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss $ (35,094,611) $ (80,591,282)
Adjustments to reconcile net loss to net cash used in operations:
Cumulative transition effect of adopting SFAS No. 133 -- 58,732,197
Change in fair value of warrant 12,602,122 1,028,623
Depreciation and amortization 4,098,342 7,000,663
Deferred compensation - other -- 75,000
Stock-based compensation (6,002,831) (11,399,850)
Amortization of deferred revenue (2,714,859) (2,714,859)
Write-down of investments 1,650,000 --
Common stock issued in lieu of cash payment 89,156 1,767,275
Impairment of goodwill 11,500,000 --
Deferred revenue (17,480) 24,572
Minority interest (1,983,576) (2,444,350)
Non-cash portion of restructuring charge -- 4,246,991
Changes in assets and liabilities:
Accounts receivable (1,265,326) 73,111
Other assets 430,857 (1,766,143)
Accounts payable and accrued expenses (1,682,273) (3,256,349)
------------- -------------
Net cash used in operating activities (18,390,479) (29,224,401)
------------- -------------
Cash flows from investing activities:
Investment in short-term investments (19,899,609) --
Investment in patents (814,336) (588,319)
Investment in property and equipment (898,473) (7,610,143)
Investment in software development costs (708,750) (3,124,043)
Strategic investments (35,921) (5,217,350)
------------- -------------
Net cash used in investing activities (22,357,089) (16,539,855)
------------- -------------
Cash flows from financing activities:
Transfer to restricted cash -- (1,031,459)
Net proceeds from equity financings 6,718 115,249
Repayment of stockholders loans 38,751 109,998
------------- -------------
Net cash provided by/(used in) financing activities 45,469 (806,212)
------------- -------------
Net decrease in cash and cash equivalents (40,702,099) (46,570,468)
Cash and cash equivalents, beginning of period 69,035,707 122,488,041
------------- -------------
Cash and cash equivalents, end of period $ 28,333,608 $ 75,917,573
============= =============
Supplemental Disclosure to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning
retirement of common stock and acquisitions:
For the Nine Months Ended
September 30,
-----------------------
2002 2001
---------- ------------
Retirement of Common Stock: $117,285 $2,270,000
Purchase Acquisitions:
Assets acquired (excluding cash) -- 1,948,392
Liabilities assumed -- 2,744,148
Market value of shares issued -- 27,475,090
See notes to consolidated financial statements.
4
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional
-------------------------- Stockholder Paid-in Accumulated
Shares Amount Loans Capital Deficit Total
------------- ----------- ---------- ------------- ------------- -------------
Balance at December 31, 2001 55,881,938 $ 5,588,194 $ (339,035) $ 317,496,700 $(263,073,366) $ 59,672,493
Issuance of shares in connection
with exercise of stock options
and warrants 27,994 2,799 -- 3,919 -- 6,718
Adjustment to deferred stock compensation -- -- -- (6,002,831) -- (6,002,831)
Issuance of common stock for 401k plan 67,141 6,714 -- 82,442 -- 89,156
Retirement of common stock (45,893) (4,589) -- (112,696) -- (117,285)
Rescission/repayment of shareholder loans -- -- 156,036 -- -- 156,036
Net loss -- -- -- -- (35,094,611) (35,094,611)
------------- ----------- ---------- ------------- ------------- -------------
Balance at September 30, 2002 55,931,180 $ 5,593,118 $ (182,999) $ 311,467,534 $(298,167,977) $ 18,709,676
=== ==== ========== =========== ========== ============= ============= =============
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
1. Basis of Presentation
The results of operations for the three and nine months ended
September 30, 2002 and 2001 are not necessarily indicative of a full year's
operations. In the opinion of management, the accompanying consolidated
financial statements include all adjustments of a normal recurring nature, which
are necessary to present fairly such financial statements.
All significant intercompany balances and transactions have been
eliminated in consolidation. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These unaudited consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
our annual report on Form 10-K/A for the year ended December 31, 2001.
We consider all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2002 presentation.
2. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142 ("SFAS 142"), Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
We adopted SFAS 142 beginning on January 1, 2002. We completed the transitional
goodwill impairment test as required by SFAS 142 using a measurement date of
January 1, 2002. Based on the results of the transitional impairment test, we
were not required to recognize an impairment of goodwill. SFAS 142, requires
that the goodwill of a reporting unit be tested for impairment between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the value of a reporting unit below its carrying amount. Through
September 30, 2002, our Intellocity reporting unit fell significantly short of
the revenue and profitability goals management established for it at the
beginning of 2002. As a result of our review of the realizability of the
goodwill attributed to Intellocity, we recorded an impairment charge to goodwill
of $11.5 million during the third quarter of 2002, adjusting the asset value of
such goodwill from $12.0 million to $0.5 million. (See Note 3. Intangible Assets
and Goodwill). We will continue to perform future impairment tests as required
by SFAS 142. There can be no assurance that future impairment tests will not
result in a charge to earnings.
The following pro forma information for the three and nine months ended
September 30, 2001 presents net loss and net loss per common share adjusted to
exclude goodwill amortization expense of $1,058,082 and $2,518,888 recognized
respectively during the periods.
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Net loss:
As reported $ (9,610,308) $ (80,591,282)
Pro forma $ (8,552,226) $ (78,072,394)
Loss per common share--Basic and Diluted:
As reported $ (0.17) $ (1.47)
Pro forma $ (0.15) $ (1.43)
6
3. Intangible Assets and Goodwill
Goodwill totaled $1.4 million at September 30, 2002 and $12.9 million at
December 31, 2001, of which $0.5 million and $12.0 million, respectively,
related to our acquisition of Intellocity.
Accounting for goodwill is promulgated by FAS No. 142, which requires that
the goodwill of a reporting unit be tested for impairment between annual tests
if an event occurs or circumstances change that would more likely than not
reduce the value of a reporting unit below its carrying amount.
Through September 30, 2002, our Intellocity unit fell significantly short
of the revenue and profitability goals management established for it at the
beginning of 2002. In addition, we substantially scaled back Intellocity's
revenue forecasts for fiscal 2003. We believe this shortfall is principally the
result of Intellocity's existing and prospective clients who have reduced
expenditures for enhanced and interactive TV initiatives.
Consequently, we conducted a review of the realizability of the goodwill
value attributed to Intellocity. As a result of this review, we recorded an
impairment charge to goodwill of $11.5 million during the third quarter of 2002,
adjusting the asset value of such goodwill from $12.0 million to $0.5 million.
Our other intangible assets consist of patents, which as of September 30,
2002 and December 31, 2001 were as follows:
Gross
Intangible Accumulated Net Intangible
Assets Amortization Assets
-------------- -------------- --------------
September 30, 2002
Patents $ 10,847,493 $ (2,110,252) $ 8,737,241
December 31, 2001
Patents $ 10,033,157 $ (1,607,268) $ 8,425,889
Amortization expense related to patents totaled $502,984 and $463,888
during the nine months ended September 30, 2002 and 2001. The estimated
aggregate future amortization expense for intangible assets remaining as of
September 30, 2002 is as follows:
Remainder of 2002 $ 180,734
2003 722,932
2004 722,932
2005 722,932
2006 722,932
Thereafter 5,664,779
------------
Total $ 8,737,241
============
4. Financial Instruments
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended by SFAS 137 and 138. SFAS 133 requires that
all derivative financial instruments be recorded on the balance sheet at fair
value. The provisions of SFAS 133 affected accounting for 2.5 million restricted
warrants of Liberty Livewire Corporation held by us. Prior to the adoption of
SFAS 133, we carried the warrants at cost. With the adoption of SFAS 133, we now
record the warrants at fair value. The adoption of SFAS 133 resulted in our
recording a cumulative effect transition adjustment loss of $58.7 million at
January 1, 2001. Beginning in the first quarter of 2001, we have recorded
subsequent changes in the fair value of the warrants in our statements of
operations, which resulted in a charge of $3.3 million and $5.2 million for the
three months ended September 30, 2002 and 2001, respectively, and a charge of
$12.6 million and $1.0 million for the nine months ended September 30, 2002 and
2001, respectively.
7
There may be periods with significant non-cash increases or decreases to
our operating results related to the changes in the fair value of the Livewire
investment. The carrying value of our derivative instrument approximates fair
value. We determine the fair value of the Livewire warrants by reference to
underlying market values of Liberty Livewire's common stock as reported by
Nasdaq, and on estimates using the Black-Scholes valuation model.
5. Acquisition of Intellocity
In March 2001, we acquired all of the assets and business of Intellocity,
Inc., a technology and engineering solutions provider focusing on the
interactive television market. The aggregate purchase price of $27.5 million
consisted of 4,007,890 shares of our common stock, aggregating $23.2 million,
and options to purchase 762,665 shares of our common stock, valued at $4.3
million. Intellocity shareholders are subject to provisions restricting the sale
of the ACTV stock; these restrictions range over 4 years. The acquisition was
accounted for in the first quarter of 2001 under the purchase method of
accounting.
The fair value of assets acquired and liabilities assumed in the
acquisition of Intellocity amounted to approximately $1.5 million. We calculated
goodwill, representing the excess cost over the fair value of net assets
acquired, to be $26.4 million. Through December 31, 2001, we were amortizing
this amount over a seven-year period. In connection with our year-end review of
2001 results, we assessed the realizability of the goodwill value attributed to
Intellocity at December 31, 2001. As a result of this assessment, we recorded an
impairment charge to goodwill of $11.2 million during the fourth quarter of
2001, adjusting the asset value of such goodwill from $23.2 million to $12.0
million. We further assessed the goodwill in the third quarter of 2002, recorded
and impairment charge of $11.5 million and adjusted the goodwill value from
$12.0 to $0.5 million. (See Note 3. Intangible Assets and Goodwill)
The results of Intellocity's operations are included in our consolidated
results from the date of acquisition.
The following table presents the pro forma results of operations had the
acquisition of Intellocity been completed as of January 1, 2001. The pro forma
results are shown for illustrative purposes only and do not purport to be
indicative of the results that would have been reported if the business
combination had occurred on the date indicated or that may occur in the future.
These pro forma amounts include estimates and assumptions that we believe are
reasonable.
For the Nine
Months Ended
September 30, 2001
------------------
Revenues $ 12,219,874
------------
Loss before minority interest and
cumulative effect of accounting change $(24,151,139)
------------
Loss before cumulative effect of
accounting change $(22,706,789)
------------
Net loss $(81,438,986)
------------
Basic and diluted loss per share:
Before cumulative effect of accounting change (0.41)
Cumulative effect of accounting change $ (1.05)
------------
Basic and diluted loss per share $ (1.46)
------------
8
6. Minority Interest
We record a minority interest benefit resulting from Digital ADCO, in
which third parties hold equity positions that currently total 54.1%. Digital
ADCO was formed in November 1999 by co-founders ACTV, Inc. and Motorola
Broadband. Digital ADCO develops applications for the delivery of addressable
advertising. Under the terms of our agreement with Motorola Broadband, we
licensed five of our patents to Digital ADCO and Motorola Broadband licensed six
of its patents and made a capital commitment to Digital ADCO. During August
2000, OpenTV made a capital contribution and contributed patents on a
non-exclusive basis to Digital ADCO. Additionally, we formed Digital ADCO
International to license and distribute products and services outside of North
America and other western hemisphere countries. Digital ADCO, Inc.'s issued and
outstanding shares of capital stock presently consist of Class A common stock,
having one vote per share, and Class B common stock, having 25 votes per share.
OpenTV currently owns all of the issued and outstanding Class A common shares.
Motorola Broadband and we together own all of the issued and outstanding Class B
common shares. With our current position of 51% of the total votes outstanding,
we have majority voting control of Digital ADCO and, therefore, consolidate the
results of this entity for accounting purposes.
For the three months ended September 30, 2002 and 2001, we allocated
losses in the amounts of $785,821 and $824,101, respectively, and for the nine
months ended September 30, 2002 and 2001, we allocated losses in the amounts of
$2,265,553 and $2,204,621, respectively, from Digital ADCO to its minority
shareholders.
9
We also record a minority interest benefit from another subsidiary,
Advision LLC, in which we currently hold 95.1% equity ownership. In August 2002,
we acquired nCUBE's 45% equity interest in Advision, LLC in exchange for a
receivable from nCUBE for work performed by Intellocity prior to our acquisition
of that company. The book value of the receivable at the time of the exchange
was approximately $119,000. Prior to acquiring nCUBE's interest, we owned 51% of
Advision LLC. As a result of this transaction, we credited the nCUBE receivable
as an expense in the third quarter of 2002 and reduced the minority interest
benefit on our statement of operations in the amount of nCUBE's minority
interest balance of $554,215 at the date of the transaction.
Correspondingly, we increased minority interest on our balance sheet by this
same amount, in recognition of the fact that nCUBE's obligation to fund its
share of Advision's losses ceased upon consummation of the transaction. For the
three and nine months ended September 30, 2002, we allocated losses to the
holder of the remaining 4.9% minority interest in Advision, who is an employee
of ours, of $11,332 and $33,999, respectively. For the three and nine months
ended September 30, 2001, we allocated losses in the amount of $106,478 and
$239,729, respectively, to the minority shareholders of this subsidiary.
10
7. Segment Information
We have two principal business segments, which are delineated by their
respective markets: Digital Television and Enhanced Media. Information
concerning these business segments for the three and nine months ending
September 30, 2002 and 2001 is as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue
Digital
Television $ 658,796 $ 833,039 $ 2,364,290 $ 3,382,452
Enhanced Media 2,175,807 2,426,340 6,890,252 7,376,821
------------ ------------ ------------ ------------
Total $ 2,834,603 $ 3,259,379 $ 9,254,542 $ 10,759,273
============ ============ ============ ============
Depreciation &
Amortization
Digital
Television $ 817,385 $ 782,952 $ 2,375,013 $ 2,160,197
Enhanced Media 302,655 390,481 930,292 1,214,793
Unallocated
Corporate 273,350 1,480,089 793,037 3,625,673
------------ ------------ ------------ ------------
Total $ 1,393,390 $ 2,653,522 $ 4,098,342 $ 7,000,663
============ ============ ============ ============
Interest Income
Digital
Television $ 7,265 $ 42,578 $ 31,148 $ 230,524
Enhanced Media 13,350 1,440 34,745 4,737
Unallocated
Corporate 282,120 719,332 938,419 3,319,728
------------ ------------ ------------ ------------
Total $ 302,735 $ 763,350 $ 1,004,312 $ 3,554,989
============ ============ ============ ============
Net
(Loss)/Income
Digital
Television $ (5,095,882) $ (2,521,811) $ (9,947,326) $ (6,021,249)
Enhanced Media (3,437,862) (61,071,530) (11,689,228) (66,020,226)
Unallocated
Corporate (14,802,676) 53,983,033 (13,458,057) (8,549,807)
------------ ------------ ------------ ------------
Total $(23,336,420) (9,610,308) $(35,094,611) (80,591,282)
============ ============ ============ ============
Capital
Expenditures
Digital
Television $ 29,326 $ 294,704 $ 763,813 $ 1,583,860
Enhanced Media -- 20,213 1,847 65,061
Unallocated
Corporate 37,549 1,443,617 132,813 5,961,222
------------ ------------ ------------ ------------
Total $ 66,875 $ 1,758,534 $ 898,473 $ 7,610,143
============ ============ ============ ============
Balance Sheet Accounts
September 30, December 31,
2002 2001
------------ ------------
Current Assets
Digital Television $ 2,934,582 $ 4,061,843
Enhanced Media 7,590,157 4,735,475
Unallocated Corporate 50,533,489 72,206,506
------------ ------------
Total $ 61,058,228 $ 81,003,824
============ ============
Total Assets
Digital Television 9,660,434 $ 12,022,462
Enhanced Media 13,777,999 24,471,782
Unallocated Corporate 69,787,882 103,093,077
------------ ------------
Total $ 92,226,315 $139,587,321
============ ============
11
8. Executive Incentive Compensation
We incurred executive incentive compensation expense related to an
executive stock bonus of $2,300,000 for the nine months ended September 30,
2001. This expense related to stock incentive compensation awarded in the 2000
fiscal year but paid in a series of quarterly installments, which were subject
to forfeiture under certain conditions. The contractual provision that gave rise
to this bonus, which was based on changes in the market value of our common
stock and paid in unregistered securities, was cancelled during the second
quarter of 2001.
9. Investment in Warrant
ACTV and Liberty Livewire LLC, a unit of Livewire (formerly known as Todd
AO Corporation), entered into a joint marketing agreement to market "HyperTV(R)
with Livewire" in April 2000. Livewire has the right to use our patented HyperTV
convergence technology in providing to advertisers, TV programmers, studios and
networks such services as application hosting, web authoring, data management,
and e-commerce.
In connection with our granting these licensed rights to Livewire, we
received warrants to acquire 2,500,000 shares of Livewire at $30 per share. The
warrants are non-forfeitable and fully vested (as the term "vesting" is used by
the Financial Accounting Standards Board in its EITF 00-8: Accounting by a
Grantee for an Equity Instrument to Be Received in Conjunction with Providing
Goods or Services). The warrants, which become exercisable at the rate of
500,000 shares per year, beginning April 13, 2001, include certain registration
rights and may be exercised until March 31, 2015. With certain exceptions, the
warrants are not transferable. We previously recorded an investment and
corresponding deferred revenue in the amount of $76,016,175, the estimated value
of the warrants as of April 2000. We are amortizing the deferred revenue into
income over a period of 21 years, the contractual term of the joint marketing
agreement.
The estimated fair value of the warrants at September 30, 2002 and
December 31, 2001 was approximately $3.7 million and $16.3 million,
respectively. We perform fair value estimates of the warrants using
Black-Scholes pricing model. Currently, we account for the warrants under SFAS
No. 133 (See Note 4).
10. Net Loss Per Share
The following table sets forth the computation of basic and diluted loss
per share:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Numerator
Loss before cumulative effect of
accounting change $(23,336,420) $ (9,610,308) $(35,094,611) $(21,859,085)
Cumulative transition effect of
adopting SFAS No. 133 -- -- -- (58,732,197)
------------ ------------ ------------ ------------
Net loss (23,336,420) (9,610,308) (35,094,611) (80,591,282)
------------ ------------ ------------ ------------
Denominator
Basic weighted-average shares
outstanding 55,931,118 55,851,828 55,917,304 54,721,804
Net loss per basic and diluted share
Before cumulative effect of
accounting change $ (0.42) $ (0.17) $ (0.63) $ (0.40)
Cumulative transition effect of
adopting SFAS No. 133 -- -- -- (1.07)
------------ ------------ ------------ ------------
Basic and diluted net loss per
share $ (0.42) $ (0.17) $ (0.63) $ (1.47)
============ ============ ============ ============
12
11. Corporate Restructuring
During the third and fourth quarter of 2001, we completed certain
restructuring initiatives. The restructuring charges totaled $6.6 million and
related to the surrender of real estate leases and employee severance expenses.
We had paid out all accrued restructuring charges by June 30, 2002.
12. Agreement with iN DEMAND
In April 2002, we signed a multi-year agreement with iN DEMAND, pursuant
to which iN DEMAND will use our digital video technology to offer digital cable
customers Nascar In-Car on iN DEMAND. Nascar In-Car is a multi-channel
television package that uses a mix of digital compression technology, real-time
telemetry data and superior graphics to give subscribers an enhanced,
interactive viewing experience. iN DEMAND, is distributing the package on a
pay-per-view basis through certain digital cable systems in the US. Our
agreement with iN DEMAND, which covers a total of more than 90 races through
2004 (including 78 races after September 30, 2002), obligates us to incur
certain production costs, which we estimate will average $170,000 per race. In
turn, we receive a percentage of gross receipts from the sale of pay-per-view
subscriptions. Our revenues to date from Nascar In-Car subscription sales have
been negligible.
13. Supplemental Disclosure of Cash and Non-Cash Activities
We recorded no reduction in non-cash stock-based compensation expense for
the three months ended September 30, 2002 and a reduction in non-cash
stock-based compensation expense in the amount of $6,002,831 for the nine months
ended September 30, 2002. We recorded a reduction of non-cash, stock-based
compensation expense in connection with vested variable options of $8,580,695
and $11,399,850 for the three and nine months ended September 30, 2001,
respectively. In the first quarter of 2002, we rescinded the applicable option
exercise provisions that resulted in the variable option accounting treatment
for such options in our financial statements.
During both the three and nine months ended September 30, 2002 and
September 30, 2001, we recorded revenue of $904,953 and $2,714,859,
respectively, from amortization of the deferred revenue recognized in connection
with the Liberty Livewire warrants (See Note 9).
In January 2002, we canceled outstanding options totaling 2,093,334 shares
at exercise prices of $6.50 to $13.50 and, in their place, granted new options
totaling 1,046,667 shares at an exercise price of $2.00 per share, which was
above the market value of such shares at the time of grant. All the grantees
were employees whose salary compensation had been reduced in conjunction with
the Company's restructuring efforts in the second half of 2001. However, the
executive officers whose salary compensation was reduced were not eligible to
participate.
The newly granted options will be subject to variable option accounting
treatment. That is, if the closing market price of our common stock is greater
than $2.00 per share at any reporting date, we will recognize a non-cash
compensation expense equal to the difference between such market price and $2.00
multiplied by the number of outstanding option shares subject to variable
accounting treatment. To the extent that we are carrying an accrued expense of
this type at any given reporting date and there is a decline in the market price
of our stock at the end of the subsequent reporting period, we will recognize a
reduction in expense for the subsequent period.
Our September 30, 2002 consolidated financial statements reflect no
expense related to the 1,046,667 variable options, since the closing market
price of our common stock at September 30, 2002 was less than the option
exercise price of $2.00 per share.
13
14. Agreement with Liberty Media Corporation Regarding Possible Acquisition of
ACTV, Inc.
On September 26, 2002, we entered into an agreement with OpenTV Corp. for
the acquisition by OpenTV of ACTV, Inc. through a stock-for-stock merger. OpenTV
Corp. is an affiliate of Liberty Media Corporation, our largest shareholder. The
merger is subject to approval of both OpenTV and ACTV shareholders and
regulatory approval.
Under the terms of the agreement, each outstanding share of ACTV common
stock will be exchanged in the merger for a fraction of an OpenTV Class A
Ordinary Share equal to $1.65 divided by the then average market price of the
OpenTV Class A Ordinary Shares, provided that if the average market price of an
OpenTV Class A Ordinary Share is then less than $2.25 per share, it will be
valued at $2.25 per share for this purpose and if the average market price of an
OpenTV Class A Ordinary Share is then greater than $6.05 per share, it will be
valued at $6.05 per share for this purpose. In the event that the average market
price of the OpenTV Class A Ordinary Shares at the time of the merger is less
than $0.80 per share then we will have the right to terminate the merger
agreement unless OpenTV elects to adjust the exchange ratio so that our
shareholders receive not less than $0.584 per ACTV common share. The
stock-for-stock merger will be a taxable transaction for our shareholders. Both
our board of directors and that of OpenTV have agreed to recommend the merger to
their respective shareholders and key members of our board and management have
entered into agreements to vote their shares in favor of the transaction.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
You should read the following discussion together with our consolidated
financial statements and related notes included elsewhere. The results discussed
below are not necessarily indicative of the results to be expected in any future
periods. To the extent that the information presented in this discussion
addresses financial projections, information or expectations about our products
or markets or otherwise makes statements about future events, such statements
are forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. For
further information about forward-looking statements, see "Special Note
Regarding Forward-Looking Statements" in our annual report on Form 10-K/A for
the year ended December 31, 2001.
We are a digital media company that provides proprietary technologies,
tools, and technical and creative services for interactive TV advertising,
programming, and enhanced media applications. We have two operating business
segments, which we refer to as Digital TV and Enhanced Media.
We believe that our Digital TV technologies are unique in providing
targeting, interactivity and accountability for television commercials, and in
giving viewers the ability to instantly customize their viewing experiences for
a wide variety of programming applications. Our Enhanced Media technologies
allow both for the enhancement of video and audio content, including standard TV
programming, with Web-based information and interactivity for entertainment and
education applications.
Our expectation has been that the expansion of digital TV transmission
systems and the emergence of platforms providing the simultaneous delivery of
video and Internet content (convergence programming), will allow television
distributors, advertisers and programmers to bring interactivity to a mass
audience. We believe that our proprietary technologies, tools, and technical and
creative services capabilities position us to capitalize on this growth, if and
when it should occur. However, the market for interactive television services
and applications to date has been much slower to develop than we had
anticipated.
On September 26, 2002, we entered into an agreement with OpenTV Corp. for
the acquisition by OpenTV of ACTV, Inc. through a stock-for-stock merger. OpenTV
Corp. is an affiliate of Liberty Media Corporation, our largest shareholder. The
merger is subject to approval of both OpenTV and ACTV shareholders and
regulatory approval.
Results of Operations
Comparison of Three-Month Periods Ended September 30, 2002 and
September 30, 2001
Revenue. During the three-month period ended September 30, 2002, our
revenues decreased 15%, to $2.8 million, compared with $3.3 million in the
three-month period ended September 30, 2001. The decrease was the result of a
decline in technical and professional service revenue from our Digital
Television segment and in licensing and services revenue from our Enhanced Media
segment. Revenue recognized from the amortization of the deferred revenue from
the Livewire joint marketing arrangement was $904,953 for both periods. Such
revenue represents 32% and 28% of our total revenues for the six months ended
September 30, 2002 and 2001, respectively.
Total Selling, General and Administrative Expenses. Total selling, general
and administrative expenses decreased approximately 7% in the third quarter of
2002, to $8.9 million, from $9.6 million in the third quarter of 2001. The
decrease reflects significantly reduced personnel, occupancy and related
expenses in the more recent quarter, which more than compensated for increased
costs related to our Nascar In-Car project, launched in the second quarter of
2002. In addition, we incurred $0.9 million in expenses related to the merger
agreement between us and OpenTV.
15
Stock-Based Compensation. We recorded no increase or decrease in
stock-based compensation expense for the three months ended September 30, 2002,
as compared to a credit of stock-based compensation expense of $8.6 million for
the three months ended September 30, 2001. We had recorded a charge or credit to
stock-based compensation expense based on increases in the market value of our
common stock in excess of the exercise price of certain employee options, which
were subject to variable option accounting treatment. In the first quarter of
2002, we rescinded the applicable option exercise provisions that resulted in
the variable option accounting treatment of the options in question. Although we
have other currently outstanding options subject to variable option accounting
treatment, the exercise price of these options was greater than the market price
on each reporting date since their issuance in January 2002. Accordingly, we
recognized no stock-based compensation expense related to such options.
Depreciation and Amortization. Depreciation and amortization expense
decreased 48%, to $1.4 million in the three months ended September 30, 2002,
versus $2.7 million during the same period in 2001. The decrease is due
principally to our adoption of SFAS 142 as of January 1, 2002, resulting in no
amortization expense for goodwill in the three months ended September 30, 2002.
Depreciation expense for our Digital Television segment showed a marginal
increase, from $782,952 in the third quarter of 2001 to $817,385 in the more
recent quarter, as the result of capital equipment purchases in 2002 related to
the Nascar In-Car project.
Loss on Impairment of Goodwill. During the third quarter of 2002, we
recorded a non-cash impairment charge of $11.5 million related to the goodwill
associated with the Intellocity acquisition. Accounting for goodwill is
promulgated by SFAS 142, which requires that the goodwill of a reporting unit
be tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the value of a
reporting unit below its carrying amount.
Through September 30, 2002, our Intellocity unit fell significantly short
of the revenue and profitability goals management established for it at the
beginning of 2002. In addition, we substantially scaled back Intellocity's
revenue forecasts for fiscal 2003. We believe this shortfall is principally the
result of Intellocity's existing and prospective clients who have reduced
expenditures for enhanced and interactive TV initiatives.
Consequently, we conducted a review of the realizability of the goodwill
value attributed to Intellocity. As a result of this review, we developed a
revised operating plan to restructure and stabilize the business. The revised
projections by service line provided the basis for measurement of the asset
impairment charge. We calculated the present value of expected future cash flows
of Intellocity's service lines to determine the fair value of the assets.
Accordingly, in the third quarter of 2002, we recorded an impairment charge of
$11.5 million.
Interest Income. Interest income in the third quarter of 2002 was $0.3
million, compared with $0.8 million in the third quarter of 2001. The decrease
was the result of significantly reduced prevailing interest rates and lower
average cash balances during the more recent quarter. We incurred no interest
expense in the third quarter of 2002 or 2001.
Other Expense. Other expense includes the change in fair value of warrants
held by us, which we currently account for as a derivative instrument, pursuant
to the requirements of SFAS No. 133. For the three months ended September 30,
2002, we recorded a decrease in the value of the warrants of $3.3 million,
compared with an decrease of $5.2 million for the three months ended September
30, 2001. For the quarter ended September 30, 2002, other expense also includes
$1.7 million in write-downs related to certain of our strategic investments that
we deemed to be other than temporarily impaired. We based our impairment
assessment on the financial results and/or values in the latest rounds of
financings of such investments.
Net Loss. For the three months ended September 30, 2002, our net loss was
$23.3 million, or $0.42 per basic and diluted share, compared to net loss of
$9.6 million, or $0.17 per basic and diluted share, for the three months ended
September 30, 2001.
16
Comparison of Nine-Month Periods Ended September 30, 2002 and
September 30, 2001
Revenue. During the nine-month period ended September 30, 2002, our
revenues decreased 14%, to $9.3 million, compared with $10.8 million in the
nine-month period ended September 30, 2001. The decrease was principally due to
a decline in technical and professional service revenue from our Digital
Television segment. The revenue decline was even greater on a fully comparable
basis, given that the 2001 nine-month period included only seven months of
results of Intellocity, which we acquired in March of that year. Revenue
recognized from the amortization of the deferred revenue from the Livewire joint
marketing arrangement was $2,714,859 for both periods. Such revenue represents
29% and 25% of our total revenues for the six months ended September 30, 2002
and 2001, respectively.
Total Selling, General and Administrative Expenses. Total selling, general
and administrative expenses decreased approximately 35% in the first nine months
of 2002, to $23.5 million, from $36.4 million in the nine months of 2001. The
decrease reflects significantly reduced personnel, occupancy and related
expenses in the more recent quarter, which more than compensated for increased
costs related to our Nascar In-Car project, launched in the second quarter of
2002. In addition, we incurred $1.2 million in expenses related to the merger
agreement between us and OpenTV.
Stock-Based Compensation. Stock-based compensation expense was credited
$6.0 million for the nine months ended September 30, 2002, and credited $11.4
million for the nine months ended September 30, 2001. We had recorded a charge
or credit to stock-based compensation expense based on increases in the market
value of our common stock in excess of the exercise price of certain employee
options, which were subject to variable option accounting treatment. In the
first quarter of 2002, we rescinded the applicable option exercise provisions
that resulted in the variable option accounting treatment of the options in
question. Although we have other currently outstanding options subject to
variable options accounting treatment, the exercise price of these options was
greater than the market price on each reporting date since their issuance in
January 2002. Accordingly, we recognized no stock-based compensation expense
related to such options.
Depreciation and Amortization. Depreciation and amortization expense
decreased 41%, to $4.1 million in the nine-month period ended September 30,
2002, from $7.0 million in the nine-month period ended September 30, 2001. The
decrease is due principally to our adoption of SFAS 142 as of January 1, 2002,
resulting in no amortization expense for goodwill in the nine months ended
September 30, 2002.
Loss on Impairment of Goodwill. During the third quarter of 2002, we
recorded a non-cash impairment charge of $11.5 million related to the goodwill
associated with the Intellocity acquisition. Accounting for goodwill is
promulgated by SFAS 142, which requires that the goodwill of a reporting unit
be tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the value of a
reporting unit below its carrying amount.
Through September 30, 2002, our Intellocity unit fell significantly short
of the revenue and profitability goals management established for it at the
beginning of 2002. In addition, we substantially scaled back Intellocity's
revenue forecasts for fiscal 2003. We believe this shortfall is principally the
result of Intellocity's existing and prospective clients who have reduced
expenditures for enhanced and interactive TV initiatives.
Consequently, we conducted a review of the realizability of the goodwill
value attributed to Intellocity. As a result of this review, we developed a
revised operating plan to restructure and stabilize the business. The revised
projections by service line provided the basis for measurement of the asset
impairment charge. We calculated the present value of expected future cash flows
of Intellocity's service lines to determine the fair value of the assets.
Accordingly, in the third quarter of 2002, we recorded an impairment charge of
$11.5 million.
Interest Income. Interest income in the first nine months of 2002 was $1.0
million, compared with $3.6 million in the first nine months of 2001. The
decrease was the result of significantly reduced prevailing interest rates and
lower average cash balances during the more recent period. We incurred no
interest expense in the first nine months of either period.
17
Other Expense. Other expense includes the change in fair value of warrants
held by us, which we currently account for as a derivative instrument, pursuant
to the requirements of SFAS No. 133. For the nine months ended September 30,
2002, we recorded a decrease in the value of the warrants of $12.6 million,
compared with a decrease of $1.0 million for the nine months ended September 30,
2001. For the nine months ended September 30, 2002, other expense also includes
$1.7 million in write-downs related to certain of our strategic investments that
we deemed to be other than temporarily impaired. We based our impairment
assessment on the financial results and/or values in the latest rounds of
financings of such investments.
Cumulative Transition Effect of Change in Accounting Principle. Effective
January 1, 2001, ACTV adopted FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS 137 and 138("SFAS 133").
SFAS 133 requires that all derivative financial instruments be recorded in the
balance sheet at fair value. The provisions of SFAS 133 affected the accounting
for our investment of 2.5 million restricted warrants for Liberty Livewire
Corporation("Livewire"). Prior to the adoption of SFAS 133, these warrants were
carried at cost. With the adoption of SFAS 133, the Livewire investment is
recorded at fair value. This resulted in our recording a cumulative effect
transition adjustment loss of $58.7 million at January 1, 2001. There may be
periods with significant non-cash increases or decreases to our net income/loss
pertaining to the Livewire investment.
Net Loss. For the nine months ended September 30, 2002, our net loss was
$35.1 million, or $0.63 per basic and diluted share, compared to the net loss of
$80.6 million, or $1.47 per basic and diluted share, for the nine months ended
September 30, 2001.
18
Liquidity and Capital Resources
Since our inception, we have not generated revenues sufficient to fund our
operations and have incurred operating losses. Through September 30, 2002, we
had an accumulated deficit of $298.2 million. Our cash position on September 30,
2002 (including short-term investments) was $57.2 million, compared with $78.0
million on December 31, 2001.
Net Cash Used In Operating Activities. During the nine month period ended
September 30, 2002, we used cash of $18.4 million for operations, compared with
$29.2 million for the nine months ended September 30, 2001. The decrease in net
cash used by operating activities principally relates to lower operating losses
and decreased working capital uses.
Net Cash Used In Investing Activities. With regard to investing
activities, in the nine months ended September 30, 2002, we used cash of $22.4
million, compared to $16.5 million in the nine months ended September 30, 2001.
Approximately $19.9 million of the more recent period's total related to
investments in short-term financial instruments, compared to $0 of such
investments in the 2001 period. The large decrease in cash used in other
investing activities is due principally to a significant reduction in capital
expenditures and strategic investments.
In April 2001, we provided $5 million in financing to Playboy.com, Inc. in
the form of an 8% convertible promissory note. The note was automatically
converted on August 13, 2001 into shares of Series A Convertible Preferred Stock
of Playboy.com. The Series A Convertible Preferred Stock is convertible into
common stock of Playboy.com on a one-to-one basis, and may be redeemed at the
holder's option, after five years, and has customary anti-dilution provisions.
Holders of the Series A Convertible Preferred Stock will receive a
non-cumulative 8% per annum dividend. If Playboy.com is unable to pay the
redemption price for the Series A Convertible Preferred Stock, a holder can
require payment by Playboy Enterprises, Inc. In this event, Playboy Enterprises,
Inc. has the option of making such payment in cash or in shares of its common
stock.
Net Cash Provided By (Used In) Financing Activities. We had no significant
cash provided by or used in financing activities for either the nine-month
periods ended September 30, 2002 or September 30, 2001. We have and continue to
fund our cash requirements from the net proceeds of a public, follow-on offering
completed in February 2000. Through a group of underwriters, we sold a total of
4.6 million common shares, resulting in net proceeds of $129.4 million. In
addition, in the year ended December 31, 2000, Liberty Digital, Inc. invested an
additional $20 million in us by exercising a warrant granted in March 1999, and
OpenTV and Motorola invested a total of $13.0 million in our Digital ADCO
subsidiary.
The cost of patents, which represents patent acquisition costs and legal
costs relating to patents pending, is being amortized on a straight-line basis
over the estimated economic lives of the respective patents (averaging 15
years), which is less than the statutory life of each patent.
We capitalize costs incurred for the development of software products when
economic and technological feasibility of such products has been established.
Capitalized software costs are amortized on a straight-line basis over the
estimated useful lives of the respective products.
We record a charge or a credit to stock-based compensation expense for
increases or decreases in the market value of our common stock in excess of the
exercise price of certain employee options that are subject to variable option
accounting treatment. Our financial results for the three-month period in 2001
and the nine-month periods in both 2002 and 2001 reflect credits in stock-based
compensation pursuant to certain employee options. These credits are the result
of market price declines of our common stock during these periods. In the first
quarter of 2002, we rescinded the applicable option exercise provisions that
resulted in the variable option accounting treatment of such options, and
therefore no charges were recorded in the second quarter of 2002.
19
In January 2002, we canceled outstanding options totaling 2,093,334 shares
at exercise prices of $6.50 to $13.50 and, in their place, granted new options
totaling 1,046,667 shares at an exercise price of $2.00 per share. All the
grantees were employees whose salary compensation had been reduced in
conjunction with the Company's restructuring efforts in the second half of 2001.
However, the executive officers whose salary compensation was reduced were not
eligible to participate. The newly granted options will be subject to variable
option accounting treatment. That is, if the closing market price of our common
stock is greater than $2.00 per share at any reporting date, we will recognize a
non-cash compensation expense equal to the difference between such market price
and $2.00 times the number of outstanding option shares subject to variable
accounting treatment. To the extent that we are carrying an accrued expense of
this type at any given reporting date and there is a decline in the market price
of our stock at the end of the subsequent reporting period, we will recognize a
reduction in expense for the subsequent period.
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Our
actual results could differ from these estimates.
Critical Accounting Policies
ACTV and Liberty Livewire LLC, a unit of Liberty Livewire Corporation
("Livewire"), in April 2000 entered into a joint marketing arrangement to market
"HyperTV with Livewire." Livewire received various rights to use certain
patented ACTV technologies in providing turnkey convergence services, including
application hosting, web authoring services, data management, e-commerce and
other value-added services for advertisers, television programmers, studios and
networks.
In connection with granting these licensed rights to Livewire, we
received a warrant to acquire 2,500,000 shares of Livewire common stock at
an exercise price of $30 per share. The warrant, which expires in June 2015
and includes registration rights, is exercisable ratably over five years,
beginning April 13, 2001. With certain exceptions, the warrant is not
transferable. The warrants are non-forfeitable and fully vested (as the
term "vesting" is used by the Financial Accounting Standards Board in its
EITF 00-8: Accounting by a Grantee for an Equity Instrument to Be Received
in Conjunction with Providing Goods or Services). We recorded an investment
and deferred revenue in the amount of approximately $76.0 million, the
estimated value of the warrant (using the Black-Scholes pricing model) at
the time the agreement was executed. Beginning January 1, 2001 changes in
fair value in the investment in warrant are recorded to the statement of
operations as we adopted SFAS No. 133. We expect the value of the warrant
to fluctuate based on the underlying stock price of Livewire. We do not
currently expect to exercise or register shares in the coming year. The
deferred revenue we record is being amortized into revenue over a period of
21 years, the contractual term of the joint marketing arrangement.
The cost of patents which represent patent acquisition costs and
legal costs relating to 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.
We capitalize costs incurred for the development of software products
when economic and technological feasibility of such products has been
established. Capitalized software costs are amortized on a straight-line basis
over the estimated useful lives of the respective products
We recorded a charge or a credit to stock-based compensation expense
for increases or decreases, in the market value of the our common stock in
excess of the exercise price of certain employee options, which were subject to
variable option accounting treatment. We recorded a credit in stock-based
compensation for the year ended December 31, 2001 as the market price of our
common stock declined in 2001 as compared to its value as of December 31, 2000.
We recorded a credit in stock-based compensation for the year ended December 31,
2000 as the market price of our common stock declined in 2000 as compared to its
value as of December 31, 1999.
We currently evaluate the realizability of goodwill based upon the
expected undiscounted cash flows of the acquired business, which may change
after we adopt SFAS No. 142.
Beginning January 1, 2001, we account for our investment in restricted
warrants for Liberty Livewire Corporation under SFAS 133 which requires us to
record changes in the fair value of this investment in the statement of
operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Our
actual results could differ from these estimates.
Impact of Inflation
Inflation has not had any significant effect on our operating costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our interest income is affected by changes in the general level of U.S.
interest rates. Changes in U.S. interest rates could affect the interest earned
on our cash equivalents and investments. Currently, changes in U.S. interest
rates would not have a material effect on the interest earned on our cash
equivalents and investments. A majority of these cash equivalents and
investments earn a fixed rate of interest while the remaining portion earns
interest at a variable rate. We do not anticipate that exposure to interest rate
market risk will have a material impact on us due to the nature of our
investments.
During April 2000, we received a warrant to acquire 2,500,000 shares of
Livewire, a publicly traded company. The warrant becomes exercisable at the rate
of 500,000 shares per year, commencing on April 13, 2001, includes certain
registration rights and may be exercised until March 31, 2015. The warrant is
not transferable, except in certain circumstances. As of January 1, 2001,
changes in fair value in the investment in warrant were recorded to the
statement of operations as we adopted SFAS No. 133. The estimated value of the
warrant at September 30, 2002 was $3.7 million. We expect the value of the
warrant to fluctuate based on the underlying stock price of Livewire. We do not
currently expect to exercise or register shares in the coming year.
We record stock-based compensation expense based on increases and
decreases in the market price of our common stock above the exercise price of
employee options that are subject to variable option accounting treatment. To
the extent that we have a stock-based compensation obligation at the beginning
of a given reporting period, we recognize a reduction in stock-based
compensation expense related to unexercised variable options for that period
based on a reduction of the market price for our stock at the end of the period.
The obligation will increase as the market price for our common stock increases
at the end of a reporting period.
In January 2002, we canceled outstanding options totaling 2,093,334 shares
at exercise prices of $6.50 to $13.50 and, in their place, granted new options
totaling 1,046,667 shares at an exercise price of $2.00 per share. All the
grantees were employees whose salary compensation had been reduced in
conjunction with the Company's restructuring efforts in the second half of 2001.
However, the executive officers whose salary compensation was reduced were not
eligible to participate. The newly granted options will be subject to variable
option accounting treatment. That is, if the closing market price of our common
stock is greater than $2.00 per share at any reporting date, we will recognize a
non-cash compensation expense equal to the difference between such market price
and $2.00 times the number of outstanding option shares subject to variable
accounting treatment. To the extent that we are carrying an accrued expense of
this type at any given reporting date and there is a decline in the market price
of our stock at the end of the subsequent reporting period, we will recognize a
reduction in expense for the subsequent period.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. ACTV management,
including the Chief Executive Officer and Chief Financial Officer, have
conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion.
Changes in Internal Controle. There have been no significant changes in
our internal controls or in factors that could significantly affect internal
controls subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
ACTV, Inc. and its wholly-owned subsidiary HyperTV Networks, Inc. are
co-plaintiffs in a civil action filed against The Walt Disney Co., ABC, Inc.,
and ESPN, Inc. in December 2000, which action alleges that the defendants'
"Enhanced TV" system synchronizing a web site application to, amongst others,
ESPN Sunday Night and ABC Monday Night Football telecasts has infringed and is
continuing to infringe certain of the plaintiffs' patents. In May 2002, the
United States District Court for the Southern District of New York granted
summary judgment in favor of the defendants. Without addressing the validity and
enforceability of the three patents in suit, the Court reached summary judgment
on non-infringement alone. On July 3, 2002, the Company appealed the District
Court's decision to the U.S. Court of Appeals for the Federal Circuit in
Washington, D.C.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Stockholders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of net loss per share-- See Note 10.
99.1 Certification by David Reese, Chief Executive Officer.
99.2 Certification by Christopher C. Cline, Chief Financial Officer.
(b) Reports on Form 8-K:
Date Item
Filed Reported Event
----- -------- -----
October 2, 2002 Items 5 and 7. Press Release dated September 26,
2002 announcing ACTV, Inc. entered
into an Agreement and Plan of
Merger with OpenTV Corp.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTV, Inc.
Registrant
Date: November 14, 2002 /s/ David Reese
--------------------------------
David Reese
Chairman, Chief Executive
Officer and Director
Date: November 14, 2002 /s/ Christopher C. Cline
--------------------------------
Christopher C. Cline
Chief Financial Officer
(Principal Financial and
Accounting Officer)
- --------------------------------------------------------------------------------
22
Form of Sarbanes-Oxley Section 302(a) Certification
I, David Reese, Chief Executive Officer of ACTV, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ACTV, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ David Reese
--------------------------
David Reese
Chief Executive Officer
23
Form of Sarbanes-Oxley Section 302(a) Certification
I, Christopher C. Cline, Chief Financial Officer of ACTV, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ACTV, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Christopher C. Cline
----------------------------
Christopher C. Cline
Chief Financial Officer
24