** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10–Q**

 

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

** **

**Forthe quarterly period ended September 30, 2001**

 

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**ACTV, Inc.**

(Exact name of registrant as specified in its charter)

 

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** **

| **Delaware**                                                   |   | **94–2907258**                         |
|----------------------------------------------------------------|--------|---------------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer   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) hasfiled all reports required to be filed by Sections 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 xNo o

 

As of November 13, 2001, there were 55,880,028 shares of theregistrant’s common stock outstanding.

 

**Item 1.            Financial Statements**

**ACTV, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**
|                                                                                                                                                             |   | **September 30,** |        | **December 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|------------------|--------|
|                                                                                                                                                             |   | **2001**          |        | **2000**         |   |
|                                                                                                                                                             |   | **(Unaudited)**   |        |             |   |
| **ASSETS**                                                                                                                                                       |   |              |        |             |   |
| Current assets:                                                                                                                                                  |   |              |        |             |   |
| Cash and cash  equivalents                                                                                                                                       |   | $                 | 75,917,573  |             | $      | 122,488,041 |   |
| Accounts  receivable-net                                                                                                                                         |   | 2,215,672         |        | 1,182,376        |   |
| Other                                                                                                                                                            |   | 7,478,509         |        | 4,402,541        |   |
| Total current  assets                                                                                                                                            |   | 85,611,754        |        | 128,072,958      |   |
|                                                                                                                                                             |   |              |        |             |   |
| Property and  equipment-net                                                                                                                                      |   | 6,963,338         |        | 12,628,232       |   |
|                                                                                                                                                             |   |              |        |             |   |
| Other assets:                                                                                                                                                    |   |              |        |             |   |
| Restricted cash                                                                                                                                                  |   | 4,196,827         |        | 3,165,368        |   |
| Investment in  warrant                                                                                                                                           |   | 16,255,355        |        | 76,016,175       |   |
| Investments-other                                                                                                                                                |   | 8,348,887         |        | 3,250,000        |   |
| Patents and  patents pending                                                                                                                                     |   | 8,177,815         |        | 8,053,642        |   |
| Software  development costs                                                                                                                                      |   | 5,830,127         |        | 3,328,101        |   |
| Goodwill                                                                                                                                                         |   | 25,232,493        |        | 1,362,072        |   |
| Other                                                                                                                                                            |   | 1,365,553         |        | 275,638          |   |
| Total other  assets                                                                                                                                              |   | 69,407,057        |        | 95,450,996       |   |
| Total assets                                                                                                                                                     |   | $                 | 161,982,149 |             | $      | 236,152,186 |   |
|                                                                                                                                                             |   |              |        |             |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                   |   |              |        |             |   |
|                                                                                                                                                             |   |              |        |             |   |
| Current  liabilities:                                                                                                                                            |   |              |        |             |   |
| Accounts payable  and accrued expenses                                                                                                                           |   | $                 | 4,350,972   |             | $      | 7,712,857 |   |
| Deferred revenue                                                                                                                                                 |   | 4,057,348         |        | 4,032,776        |   |
| Total current  liabilities                                                                                                                                       |   | 8,408,320         |        | 11,745,633       |   |
|                                                                                                                                                             |   |              |        |             |   |
| Deferred revenue                                                                                                                                                 |   | 67,871,591        |        | 70,586,450       |   |
| Minority  interest                                                                                                                                               |   | 10,862,786        |        | 13,307,131       |   |
|                                                                                                                                                             |   |              |        |             |   |
| Stockholders’  equity:                                                                                                                                      |   |              |        |             |   |
| Common stock,  $0.10 par value, 200,000,000 shares authorized: issued and outstanding  55,864,480 at September 30, 2001 and 51,228,154 at December 31, 2000 |   | 5,586,448         |        | 5,122,816        |   |
| Additional paid-in capital                                                                                                                                       |   | 299,459,553       |        | 273,605,573      |   |
| Accumulated  deficit                                                                                                                                             |   | (230,206,549      | )           | (138,215,417     | )      |
| Total  stockholders’ equity                                                                                                                                 |   | 74,839,452        |        | 140,512,972      |   |
| Total  liabilities and stockholders’ equity                                                                                                                 |   | $                 | 161,982,149 |             | $      | 236,152,186 |   |

 

*See notes toconsolidated financial statements.*

 

**ACTV, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

**(Unaudited)**

 
|                                                               |   | **For the Three  Months** |        | **For the Nine  Months** |   |
|--------------------------------------------------------------------|--------|---------------------------|-------------|--------------------------|--------|
|                                                               |   | **Ended September  30,**  |        | **Ended September  30,** |   |
|                                                               |   | **2001**                  |        | **2000**                 |   | **2001** |   | **2000** |   |
| Revenues                                                           |   | $                         | 3,259,379   |                     | $      | 2,794,433 |   | $ | 10,759,273 |   | $ | 5,842,646 |   |
|                                                               |   |                      |        |                     |   |   |   |   |   |
| Costs and  expenses:                                               |   |                      |        |                     |   |   |   |   |   |
| Operating  expenses                                                |   | 3,208,655                 |        | 3,245,126                |   | 12,091,921 |   | 9,136,422 |   |
| Selling and  administrative                                        |   | 6,423,126                 |        | 9,015,025                |   | 24,286,239 |   | 20,481,176 |   |
| Depreciation and  amortization                                     |   | 1,595,440                 |        | 863,787                  |   | 4,481,775 |   | 2,328,378 |   |
| Amortization of  goodwill                                          |   | 1,058,082                 |        | 106,593                  |   | 2,518,888 |   | 319,779 |   |
| Loss on  investment in warrant                                     |   | 59,760,820                |        | -                        |   | 59,760,820 |   | - |   |
| Restructuring  charge                                              |   | 5,610,100                 |        | -                        |   | 5,610,100 |   | - |   |
| Total expenses                                                     |   | 77,656,223                |        | 13,230,531               |   | 108,749,743 |   | 32,265,755 |   |
|                                                               |   |                      |        |                     |   |   |   |   |   |
| Loss from  operations                                              |   | (74,396,844               | )           | (10,436,098              | )      | (97,990,470 | ) | (26,423,109 | ) |
|                                                               |   |                      |        |                     |   |   |   |   |   |
| Interest income                                                    |   | 763,350                   |        | 2,225,659                |   | 3,554,988 |   | 5,602,064 |   |
| Interest expense                                                   |   | -                         |        | (13,407                  | )      | - |   | (284,619 | ) |
| Interest—net                                                  |   | 763,350                   |        | 2,212,252                |   | 3,554,988 |   | 5,317,445 |   |
|                                                               |   |                      |        |                     |   |   |   |   |   |
| Loss before  minority interest and extraordinary item              |   | (73,633,494               | )           | (8,223,846               | )      | (94,435,482 | ) | (21,105,664 | ) |
|                                                               |   |                      |        |                     |   |   |   |   |   |
| Minority  interest                                                 |   | 930,579                   |        | 606,822                  |   | 2,444,350 |   | 1,084,719 |   |
|                                                               |   |                      |        |                     |   |   |   |   |   |
| Loss before  extraordinary item                                    |   | $                         | (72,702,915 | )                        | $      | (7,617,024 | ) | $ | (91,991,132 | ) | $ | (20,020,945 | ) |
|                                                               |   |                      |        |                     |   |   |   |   |   |
| Extraordinary  loss on early extinguishment of debt                |   | -                         |        | -                        |   | - |   | (1,411,139 | ) |
| Net loss                                                           |   | $                         | (72,702,915 | )                        | $      | (7,617,024 | ) | $ | (91,991,132 | ) | $ | (21,432,084 | ) |
|                                                               |   |                      |        |                     |   |   |   |   |   |
| Basic and  diluted loss per common share before extraordinary item |   | $                         | (1.30       | )                        | $      | (0.15 | ) | $ | (1.68 | ) | $ | (0.41 | ) |
| Basic and  diluted loss per common share after extraordinary item  |   | $                         | (1.30       | )                        | $      | (0.15 | ) | $ | (1.68 | ) | $ | (0.43 | ) |
|                                                               |   |                      |        |                     |   |   |   |   |   |
| Weighted average  number of common shares outstanding              |   | 55,851,828                |        | 50,743,722               |   | 54,721,804 |   | 49,274,794 |   |
|                                                                    |        |                           |             |                          |        |  |  |  |  |  |  |  |  |  |

 

*See notes toconsolidated financial statements.*

 

**ACTV, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 
|                                                               |   | **For the Nine  Months Ended**September 30, |        |
|--------------------------------------------------------------------|--------|---------------------------------------------|-------------|
|                                                               |   | **2001**                                    |        | **2000** | ** ** |
| Cash flows from  operating activities:                             |   |                                        |        |   |   |
| Net loss                                                           |   | $                                           | (91,991,132 | ) | $ | (21,432,084 | ) |
| Adjustments to  reconcile net loss to net cash used in operations: |   |                                        |        |   |   |
| Depreciation and  amortization                                     |   | 7,000,663                                   |        | 2,648,157 |   |
| Deferred  compensation from stock appreciation rights              |   | 75,000                                      |        | 306,000 |   |
| Amortization of  deferred revenue                                  |   | (2,714,859                                  | )           | (904,954 | ) |
| Common stock  issued in lieu of cash payment                       |   | 1,103,593                                   |        | 3,040,000 |   |
| Minority  interest                                                 |   | (2,444,350                                  | )           | (1,084,719 | ) |
| Non-cash portion  of restructuring charge                          |   | 4,246,991                                   |        | — |   |
| Loss on  investment in warrant                                     |   | 59,760,820                                  |        | — |   |
|                                                               |   |                                        |        |   |   |
| Changes in  assets and liabilities:                                |   |                                        |        |   |   |
| Accounts  receivable                                               |   | 73,111                                      |        | (423,807 | ) |
| Other assets                                                       |   | (886,144                                    | )           | (5,539,109 | ) |
| Accounts payable  and accrued expenses                             |   | (3,256,349                                  | )           | 800,872 |   |
| Deferred revenue                                                   |   | 24,572                                      |        | (515,231 | ) |
| Net cash used in  operating activities                             |   | (29,008,084                                 | )           | (23,104,875 | ) |
| Cash flows from  investing activities:                             |   |                                        |        |   |   |
| Investment in  patents                                             |   | (588,319                                    | )           | (411,622 | ) |
| Purchases of  property and equipment                               |   | (7,610,143                                  | )           | (3,878,463 | ) |
| Investment in  software development costs                          |   | (3,124,043                                  | )           | (700,436 | ) |
| Strategic  investments                                             |   | (5,098,887                                  | )           | (3,750,000 | ) |
| Acquisition of  business net of cash and cash equivalents          |   | (118,463                                    | )           | — |   |
| Net cash used in  investing activities                             |   | (16,539,855                                 | )           | (8,740,521 | ) |
| Cash flows from  financing activities:                             |   |                                        |        |   |   |
| Retirement of  debt - net                                          |   | —                                      |        | (4,566,095 | ) |
| Purchase of  letters of credit                                     |   | (1,031,459                                  | )           | — |   |
| Net proceeds  from subsidiary equity transactions                  |   | —                                      |        | 11,549,900 |   |
| Net proceeds  from equity financings                               |   | 8,930                                       |        | 150,124,973 |   |
| Net cash (used)  provided by financing activities                  |   | (1,022,529                                  | )           | 157,108,778 |   |
| Net (decrease)  increase in cash and cash equivalents              |   | (46,570,468                                 | )           | 125,263,382 |   |
|                                                               |   |                                        |        |   |   |
| Cash and cash  equivalents, beginning of period                    |   | 122,488,041                                 |        | 9,413,170 |   |
| Cash and cash  equivalents, end of period                          |   | $                                           | 75,917,573  |   | $ | 134,676,552 |   |

* *

***SupplementalDisclosure to the Consolidated Statements of Cash Flows***

* *
|                              |   | **For the Nine**  |       |
|-----------------------------------|--------|-------------------|------------|
|                              |   | **Months Ended**  | ** ** |
|                              |   | **September 30,** |       |
|                              |   | **2001**          | ** ** |
| Retirement of  Common Stock       |   | $                 | 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 toconsolidated financial statements.*

 

**ACTV, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

 
|                                                                               |   | **Common Stock** |   | **Additional Paid** |      |           |   |        |   |
|------------------------------------------------------------------------------------|--------|------------------|--------|---------------------|-----------|----------------|--------|-------------|--------|
|                                                                               |   | **Shares**       |   | **Amount**          |      | **in Capital** |   | **Deficit** |   | **Total** |   |
| Balance at December 31, 2000                                                       |   | 51,228,154       |   | $                   | 5,122,816 |           | $      | 273,605,573 |   | $ | (138,215,417 | ) | $ | 140,512,972 |   |
|                                                                               |   |             |   |                |      |           |   |        |   |   |   |
| Issuance of  shares in 

connection with  exercise of stock options & warrants |   | 1,309,046        |   | 130,904             |      | 734,343        |   | —      |   | 865,247 |   |
|                                                                               |   |             |   |                |      |           |   |        |   |   |   |
| Issuance of  common stock for 401(k) plan                                          |   | 92,960           |   | 9,296               |      | 237,979        |   | —      |   | 247,275 |   |
|                                                                               |   |             |   |                |      |           |   |        |   |   |   |
| Issuance of  shares in 

connection with  acquisition                              |   | 4,007,889        |   | 400,789             |      | 27,074,301     |   | —      |   | 27,475,090 |   |
|                                                                               |   |             |   |                |      |           |   |        |   |   |   |
| Retirement of  common stock                                                        |   | (773,569         | )      | (77,357             | )         | (2,192,643     | )      | —      |   | (2,270,000 | ) |
|                                                                               |   |             |   |                |      |           |   |        |   |   |   |
| Net loss                                                                           |   | —           |   | —              |      | —         |   | (91,991,132 | )      | (91,991,132 | ) |
|                                                                               |   |             |   |                |      |           |   |        |   |   |   |
| Balance at  September 30, 2001                                                     |   | 55,864,480       |   | $                   | 5,586,448 |           | $      | 299,459,553 |   | $ | (230,206,549 | ) | $ | 74,839,452 |   |

 

*See notes toconsolidated financial statements.*

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**THREE AND NINE MONTHSENDED SEPTEMBER 30, 2001 AND 2000**1

 

**1.        Basisof Presentation**

 

The results of operations for the three and ninemonths ended September 30, 2001 and 2000 are not necessarily indicative of afull year’s operations. In the opinion of management, the accompanyingconsolidated financial statements include all adjustments of a normal recurringnature that are necessary to present fairly such financial statements.

 

All significant intercompany balances and transactionshave been eliminated in consolidation. Certain information and footnotedisclosures normally included in the financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted.

 

These consolidated financial statements should be readin conjunction with the audited financial statements and notes thereto includedin our annual report on Form 10–K for the year ended December 31, 2000.

 

We consider all highly liquid debt instrumentspurchased with an original maturity of three months or less to be cashequivalents.

 

Certain reclassifications have been made to the prioryears’ financial statements to conform to the 2001 presentation.

 

**2.        FinancingActivities**

 

On March 27, 2000, Liberty Digital, Inc. invested anadditional $20 million in the Company, increasing its investment to 16%, byexercising a warrant granted in March 1999.

 

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

 

**3.        Mergerand Acquisition Activity**

 

*Acquisition*

 

On March 7, 2001, theCompany acquired all of the assets and business of Intellocity, Inc.,("Intellocity") a technology and engineering solutions providerfocusing on the interactive television market. The Company acquired Intellocityfor 4,007,890 shares of the Company's common stock, aggregating $23.2 million,and issued options to purchase 762,665 shares of the Company's common stockvalued at $4.3 million, for an aggregate purchase price of$27.5 million. The Company could make an additional payment of up to1.5 million shares and options contingent upon Intellocity’s achievingcertain performance targets for the year ended December 31, 2001.  Management of the Company believes that itis extremely unlikely that Intellocity, given its results for the nine monthsended September 30, 2001, will achieve such performance targets.  Intellocity shareholders are subject toprovisions restricting the sale of the ACTV stock; these restrictions rangeover 4 years. The acquisition was accounted for under the purchase methodof accounting in the first quarter of 2001.

 

The Company completed areview and determination of such fair values in the third quarter of 2001.  The fair value of assets acquired andliabilities assumed amounted to approximately $1.5 million.  Goodwill, representing the excess cost overthe fair value of net assets acquired, was calculated to be $26.4 million andis being amortized over 7 years.

 

On August 17, 2000, theCompany acquired all of the outstanding capital stock of Bottle Rocket, Inc., abusiness engaged in the creation and marketing of online, games-basedentertainment.  The Company acquiredBottle Rocket in exchange for 272,035 shares of the Company’s commonstock.  The acquisition of Bottle Rockethas been accounted for under the pooling of interests method of accounting and,accordingly, the Company’s historical consolidated financial statements havebeen restated to include the accounts and results of operations of BottleRocket.

 

The following tablerepresents the results of operations on a pro forma basis, as if the acquisitionof Bottle Rocket and Intellocity had been completed on January 1, 2000.  These pro forma results include estimatesand assumptions that management believes are reasonable.

 
|                                                                |   | **For the Nine  Months Ended**September 30, |        |
|---------------------------------------------------------------------|--------|---------------------------------------------|-------------|
|                                                                |   | **2001**                                    |        | **2000** | ** ** |
| **Revenues**                                                        |   |                                        |        |   |   |
| ACTV                                                                |   | $                                           | 7,126,501   |   | $ | 4,040,129 |   |
| Bottle Rocket                                                       |   | 865,484                                     |        | 1,802,517 |   |
| Intellocity                                                         |   | 4,227,889                                   |        | 6,037,670 |   |
| Combined                                                            |   | $                                           | 12,219,874  |   | $ | 11,880,316 |   |
|                                                                |   |                                        |        |   |   |
| **Income (Loss) before Minority  Interest and Extraordinary Item**  |   |                                        |        |   |   |
| ACTV                                                                |   | $                                           | (91,290,003 | ) | $ | (22,366,661 | ) |
| Bottle Rocket                                                       |   | (2,118,974                                  | )           | (1,546,148 | ) |
| Intellocity                                                         |   | (1,874,209                                  | )           | 1,120,739 |   |
| Combined                                                            |   | $                                           | (95,283,186 | ) | $ | (22,792,070 | ) |
|                                                                |   |                                        |        |   |   |
| **Income (Loss) before Extraordinary  Item**                        |   |                                        |        |   |   |
| ACTV                                                                |   | $                                           | (88,845,650 | ) | $ | (21,281,942 | ) |
| Bottle Rocket                                                       |   | (2,118,974                                  | )           | (1,546,148 | ) |
| Intellocity                                                         |   | (1,874,209                                  | )           | 1,120,739 |   |
| Combined                                                            |   | $                                           | (92,838,833 | ) | $ | (21,707,351 | ) |
|                                                                |   |                                        |        |   |   |
| **Net Income (Loss)**                                               |   |                                        |        |   |   |
| ACTV                                                                |   | $                                           | (88,845,650 | ) | $ | (22,693,081 | ) |
| Bottle Rocket                                                       |   | (2,118,974                                  | )           | (1,546,148 | ) |
| Intellocity                                                         |   | (1,874,209                                  | )           | 1,120,739 |   |
| Combined                                                            |   | $                                           | (92,838,833 | ) | $ | (23,118,490 | ) |
|                                                                |   |                                        |        |   |   |
| **Basic and Diluted Earnings per  Share before Extraordinary Item** |   | $                                           | (1.66       | ) | $ | (0.41 | ) |
|                                                                |   |                                        |        |   | ** ** |
| **Basic and Diluted Earnings per  Share after Extraordinary Item**  |   | $                                           | (1.66       | ) | $ | (0.43 | ) |

** **

**4.        Minority Interest**

 

For the three-monthperiods ended September 30, 2001 and 2000, we recorded a minority interestbenefit of $0.9 million and $0.6 million, respectively.  For the nine-month periods ended September30, 2001 and 2000, we recorded a minority interest benefit of $2.4 million and$1.1 million, respectively. The minority interest benefit for both periods isprincipally the result of an apportionment of the loss of our Digital ADCOsubsidiary, whose results are consolidated with ours, to outside minorityowners of this subsidiary.

 

**5.        SegmentInformation**

 

We have two principal business segments; DigitalTelevision and Enhanced Media. Information concerning our business segments for the three and ninemonths ending September 30, 2001 and 2000 are as follows:

 
|                                |   | **For the Three  Months Ended** |        | **For the Nine  Months Ended** |   |
|-------------------------------------|--------|---------------------------------|-------------|--------------------------------|--------|
|                                |   | **September 30,**               |        | **September 30,**              |   |
|                                |   | **2001**                        |        | **2000**                       |   | **2001** |   | **2000** |   |
| **Revenues**                        |   |                            |        |                           |   |   |   |   |   |
| Digital  Television                 |   | $                               | 833,039     |                           | $      | — |   | $ | 3,382,452 |   | $ | — |   |
| Enhanced Media                      |   | 2,426,340                       |        | 2,794,433                      |   | 7,376,821 |   | 5,842,646 |   |
| Total                               |   | $                               | 3,259,379   |                           | $      | 2,794,433 |   | $ | 10,759,273 |   | $ | 5,842,646 |   |
|                                |   |                            |        |                           |   |   |   |   |   |
| **Depreciation & Amortization** |   |                            |        |                           |   |   |   |   |   |
| Digital  Television                 |   | $                               | 782,952     |                           | $      | 419,675 |   | $ | 2,160,197 |   | $ | 1,076,829 |   |
| Enhanced Media                      |   | 390,481                         |        | 271,401                        |   | 1,214,793 |   | 788,304 |   |
| Unallocated Corporate               |   | 1,480,089                       |        | 279,304                        |   | 3,625,673 |   | 783,024 |   |
| Total                               |   | $                               | 2,653,522   |                           | $      | 970,380 |   | $ | 7,000,663 |   | $ | 2,648,157 |   |
|                                |   |                            |        |                           |   |   |   |   |   |
| **Interest Income (Expense) - net** |   |                            |        |                           |   |   |   |   |   |
| Digital  Television                 |   | $                               | 42,578      |                           | $      | 71,665 |   | $ | 230,524 |   | $ | (170,138 | ) |
| Enhanced Media                      |   | 1,440                           |        | (3,365                         | )      | 4,737 |   | (1,936 | ) |
| Unallocated  Corporate              |   | 719,332                         |        | 2,143,952                      |   | 3,319,727 |   | 5,489,519 |   |
| Total                               |   | $                               | 763,350     |                           | $      | 2,212,252 |   | $ | 3,554,988 |   | $ | 5,317,445 |   |
|                                |   |                            |        |                           |   |   |   |   |   |
| **Net Loss**                        |   |                            |        |                           |   |   |   |   |   |
| Digital  Television                 |   | $                               | (2,521,811  | )                              | $      | (1,908,412 | ) | $ | (6,021,249 | ) | $ | (6,909,436 | ) |
| Enhanced Media                      |   | (61,071,530                     | )           | (3,025,312                     | )      | (66,020,226 | ) | (8,409,037 | ) |
| Unallocated  Corporate              |   | (9,109,574                      | )           | (2,683,300                     | )      | (19,949,657 | ) | (6,113,611 | ) |
| Total                               |   | $                               | (72,702,915 | )                              | $      | (7,617,024 | ) | $ | (91,991,132 | ) | $ | (21,432,084 | ) |
|                                |   |                            |        |                           |   |   |   |   |   |
| **Capital Expenditures**            |   |                            |        |                           |   |   |   |   |   |
| Digital  Television                 |   | $                               | 778,426     |                           | $      | 1,380,096 |   | $ | 2,980,897 |   | $ | 2,677,566 |   |
| Enhanced Media                      |   | 217,337                         |        | 380,115                        |   | 1,166,649 |   | 1,495,715 |   |
| Unallocated  Corporate              |   | 1,674,956                       |        | 623,843                        |   | 7,174,959 |   | 817,240 |   |
| Total                               |   | $                               | 2,670,719   |                           | $      | 2,384,054 |   | $ | 11,322,505 |   | $ | 4,990,521 |   |

** **

**BalanceSheet Accounts**

** **
|                   |   | **September 30, 2001** |        | **December 31, 2000** |       |
|------------------------|--------|------------------------|-------------|-----------------------|------------|
| **Current Assets**     |   |                   |        |                  |       |
| Digital  Television    |   | $                      | 5,059,132   |                  | $          | 10,290,068 |   |
| Enhanced Media         |   | 3,957,604              |        | 2,382,673             |       |
| Unallocated Corporate  |   | 76,595,018             |        | 115,400,217           |       |
| Total                  |   | $                      | 85,611,754  |                  | $          | 128,072,958 |   |
|                   |   |                   |        |                  |       |
| **Total Assets**       |   |                   |        |                  |       |
| Digital  Television    |   | 13,295,700             |        | $                     | 17,010,470 |   |
| Enhanced Media         |   | 24,844,613             |        | 83,127,887            |       |
| Unallocated  Corporate |   | 123,841,836            |        | 136,013,829           |       |
| Total                  |   | $                      | 161,982,149 |                  | $          | 236,152,186 |   |

** **

**6.        ExecutiveCompensation**

 

For the nine-monthperiods ended September 30, 2001 and September 30, 2000, we incurred executiveincentive compensation expense of $2.3 million and $4.6 million,respectively.  For the three-monthperiods ending September 30, 2001 and September 30, 2000, this charge was $0and $2.3 million respectively.  Thisexpense, which related to an executive incentive compensation provision thatsubsequently was cancelled, was based on changes in the market value of ourcommon stock and paid in unregistered securities.  The compensation recognized was contingent on continuedemployment of the executive and subject to forfeiture.

 

**7.        Investmentin Warrant**

 

The Company and Liberty Livewire LLC, a unit of Liberty LivewireCorporation ("Livewire") in April 2000 entered into a joint marketingventure, "HyperTV with Livewire." HyperTV with Livewire receivedvarious rights to use certain patented ACTV technologies in providing turnkeyconvergence services, including application hosting, web authoring services,data management, e-commerce and other value–added services foradvertisers, television programmers, studios and networks.

 

Inconnection with entering into the joint marketing agreement, the Companyreceived a warrant to acquire 2,500,000 shares of Livewire common stock at anexercise price of $30 per share. The warrant, which expires in June 2015 andincludes registration rights, vests ratably over five years, beginningApril 13, 2001. With certain exceptions, the warrant is not transferable.The Company recorded an investment and deferred revenue in the amount ofapproximately $76.0 million, the estimated value of the warrant (using theBlack–Scholes pricing model) at the time the agreement was executed,.Using the same methodology, the estimated value of the warrant at September 30,2001 was $16.3 million.  For the threeand nine-month periods ending September 30, 2001, the Company recorded anon-cash impairment charge of $59.8 million to write down the value of thewarrant to its estimated value as of September 30, 2001. This charge reflectsthe Company’s belief that—due to a protracted decline in the market value ofLiberty Livewire's common stock—the decline in value of the warrant was other thantemporary.

 

Foraccounting purposes, the Company periodically estimates the value of thewarrant. Any change in estimated value attributable to shares that are bothexercisable and are expected to become registered within one year, will berecorded through increases or decreases in Other Comprehensive Income. Thedeferred revenues recorded by the Company are being amortized into revenue overa period of 21 years, the contractual term of the joint marketing venture.

 

**8.        CorporateRestructuring**

 

Duringthe third quarter 2001, the Company completed certain restructuringinitiatives, which contributed to a 21% reduction in operating and SG&Aexpenses for the three months ended September 30, 2001 as compared to the threemonths ended September 30, 2000.  Therestructuring charge totaled $5.6 million and related to the surrender of realestate leases and employee severance expenses.  The restructuring charge includes a non-cashexpense totaling $4.1 million, which is the net effect of the write-off ofproperty and equipment for abandoned leased office space in excess of areversal of rent liability for the leased space and of cash payments to theCompany—received in October 2001—related to the property and equipment. Alsoincluded is approximately $1.5 million for employee severance expenses, ofwhich $1.3 million was paid in cash during the nine-month period endedSeptember 30, 2001.

 

**9.        SupplementalDisclosure of Non-cash Activities**

 

For the nine-month periods ending September 30, 2001and 2000 we recorded deferred expense of $1.5 million and $3.0 million,respectively, for stock–based compensation.

 

We also recorded revenue of $2.7 million and $0.9million during the nine-month periods ended September 30, 2001 and 2000,respectively, relating to amortization of the deferred revenue recorded inconnection with the Liberty Livewire warrant (See Note 7).

 

**10.     Recently Issued Accounting Pronouncements**

 

On July 20, 2001, theFinancial Accounting Standards Board issued Statements of Financial AccountingStandards ("SFAS") No. 141, "Business Combinations" andSFAS No. 142 "Goodwill and Other Intangible Assets". Thesepronouncements significantly change the accounting for business combinations,goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interestsmethod of accounting for business combinations and further clarifies thecriteria to recognize intangible assets separately from goodwill. Therequirements of SFAS No. 141 are effective for any business combinationaccounted for by the purchase method that is completed after June 30, 2001.SFAS No. 142 states goodwill and indefinite lived intangible assets are nolonger amortized but are reviewed for impairment annually (or more frequentlyif impairment indicators arise).  Separable intangible assets that are notdeemed to have an indefinite life will continue to be amortized over theiruseful lives. The amortization provisions of SFAS No. 142 apply togoodwill and intangible assets acquired after June 30, 2001. With respect togoodwill and intangible assets acquired prior to July 1, 2001, companies arerequired to adopt the pronouncement in their fiscal year beginning afterDecember 15, 2001. Goodwill is currently being amortized at approximately $4.2million annually. The Company has not yet completed its analysis of the newpronouncements and has not yet determined what effects the new pronouncementswill have on its financial statements.  

 

**ITEM2.                 MANAGEMENT’S DISCUSSIONAND ANALYSIS  FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

* *

Overview

 

We are a digital media company that provides technical services, toolsand proprietary applications for digital television and enhanced media. We havetwo operating business segments, which we call Digital TV and Enhanced Media.

 

ACTV’s Digital TV segment provides applications andtechnical services to television distributors, advertisers, programmers anddigital TV infrastructure companies, as they move from analog to digitalsystems. In addition, our Digital TV technologies enable television programmersand advertisers to create individualized programming for digital televisiontransmission systems. We believe that these technologies are unique inproviding targeting, interactivity and accountability for televisioncommercials, and in giving viewers the ability to customize their viewingexperiences for a wide variety of programming applications. Our Enhanced Mediatechnologies allow both for the enhancement of video and audio content,including standard TV programming, with Web-based information, interactivityand games. For the Enhanced Media market, we provide technology and servicesfor synchronizing the delivery of television programming and Internet content.

 

RESULTS OF OPERATIONS

**Comparison of Three-Month Periods EndedSeptember 30, 2001 and September 30, 2000**

 

*Revenues.*During the three-month period endedSeptember 30, 2001, our revenues increased 18%, to $3.3 million, compared with$2.8 million in the three-month period ended September 30, 2000. In the morerecent period, Enhanced Media licensing and services accounted forapproximately 74% of our revenue, with Digital TV professional and technicalservices providing the remaining 26%. In last year’s three-month period, all ofour revenues were derived from Enhanced Media licensing and services.

 

*Total Operating,Selling, and General and Administrative Expense*s.  Totaloperating, selling, general and administrative expenses decreased approximately22% in the third quarter of 2001, to $9.6 million, from $12.3 million in thethird quarter of 2000.

 

*Loss on Investment in Warrant.*  During the third quarter of 2001, werecorded a non-cash impairment charge of $59.8 million to write down a warrantto its estimated value at September 30, 2001, using the Black-Scholes pricingmodel. This charge reflects our belief that—due to a protracted decline in themarket value of the common stock underlying the warrant—the impairment in itsvalue is other than temporary.

 

*Restructuring Charge.* During the thirdquarter 2001, we recorded an expense of $5.6 million, the majority of which wasnon-cash, related to restructuring initiatives. This expense includes chargesfor the surrender of real estate leases and employee severance costs. Pursuantto the surrender—agreed to in September 2001—of certain of our New York Cityleases, we will recognize in the fourth quarter as an increase in unrestrictedcash and cash equivalents a total of approximately $9.3 million, includingpayments from third parties and a release of restricted cash used to guaranteethe leases.

 

*Depreciation andAmortization.*Depreciation and amortization expense increased 170%, to $2.7 million in thethree months ended September 30, 2001, versus $1.0 million during the sameperiod in 2000. The increase was the result of the depreciation of a largerfixed asset base, including leasehold improvements and equipment related to thedeployment of SpotOn, and higher amortization expense for capitalized softwaredevelopment and for goodwill. In March 2001, we recorded additional goodwill inconnection with our purchase of Intellocity.

 

*Interest  – Net.* Interest income in third quarter of 2001 was$0.8 million, compared with $2.2 million in the third quarter of 2000. Thedecrease was the result of lower average cash balances during the more recentquarter and lower prevailing interest rates on short-term investments.

 

*Net Loss Applicableto Common Stockholders.*  For the three months endedSeptember 30, 2001, our net loss applicable to common stockholders was $72.7million, or $1.30 per basic and diluted share, an increase of 857% compared tothe net loss of $7.6 million, or $0.15 per basic and diluted share, for thethree months ended September 30, 2000. The increase was the result of thesignificant warrant impairment and restructuring charges incurred during themore recent period, which were significantly greater than the effects of anincrease in revenues along with a reduction in operating, selling, general andadministrative expenses for the three-month period ended September 30, 2001.

 

**Comparison of Nine-Month Periods EndedSeptember 30, 2001 and September 30, 2000**

 

*Revenues.* During the nine-month period ended September 30,2001, our revenues increased 86%, to $10.8 million, compared with $5.8 millionin the nine-month period ended September 30, 2000. In the more recent period,Enhanced Media licensing and services accounted for 69% of our revenue, withDigital TV professional and technical services providing the remaining 31%. Inlast year’s nine-month period, all of our revenues were derived from EnhancedMedia licensing and services.

 

*Total Operating,Selling, and General and Administrative Expenses.*  Totaloperating, selling, general and administrative expenses increased approximately23% in the first nine months of 2001, to $36.4 million, from $29.6 million inthe first nine months of 2000.

 

*Loss onInvestment in Warrant.* For the nine-month period ending September 30, 2001, we recorded anon-cash impairment charge of $59.8 million to write down a warrant to itsestimated value at September 30, 2001, using the Black-Scholes pricing model.This charge reflects our belief that—due to a protracted decline in the marketvalue of the common stock underlying the warrant—the impairment in its value isother than temporary.

 

*RestructuringCharge.* For the nine-month period ended September 30, 2001,we recorded an expense of $5.6 million, the majority of which was non-cash,related to restructuring initiatives. This expense includes charges for thesurrender of real estate leases and employee severance costs. Pursuant to thesurrender—agreed to in September 2001—of certain of our New York City leases,we will recognize in the fourth quarter as an increase in unrestricted cash andcash equivalents a total of approximately $9.3 million, including payments fromthird parties and a release of restricted cash used to guarantee the leases.

 

*Depreciation andAmortization.*Depreciation and amortization expense increased 169%, to $7.0 million in thenine-month period ended September 30, 2001, from $2.6 million in the nine-monthperiod ended September 30, 2000. The increase was the result of depreciation ofa larger fixed asset base, including leasehold improvements and equipmentrelated to the deployment of SpotOn, and higher amortization expense forcapitalized software development and for goodwill. Beginning in March 2001, werecorded additional goodwill in connection with our purchase of Intellocity,Inc.

 

*Interest  – Net.*Interest income in nine months of 2001 was $3.6million, compared with $5.6 million in the first nine months of 2000. Thedecrease was the result of lower average cash balances during the nine monthsended September 30, 2001 and lower prevailing interest rates on short-terminvestments. We incurred no interest expense in the first nine months of 2001,compared to interest expense of $0.3 million in the first nine months of 2000.The interest expense for the first nine months of 2000 relates to a $5 millionoriginal face value note issued in January 1998 by a subsidiary of ours; thenote was redeemed in April 2000.

 

*Net Loss Before Extraordinary Item.*For the nine months ended September 30, 2001, our net loss applicable to commonstockholders was $92.0 million, $1.68 per basic and diluted share, an increaseof 360% compared to the net loss of $20.0 million, or $0.41 per basic anddiluted share, for the nine months ended September 30, 2000. The increase wasthe result of the warrant impairment and restructuring charges incurred duringthe more recent period, along with higher expenses in all other categories,which more than offset higher revenues in the nine months ended September 30,2001.

 

*Net Loss Applicable to Common Stockholders.*For the nine months ended September 30, 2001, our net loss applicable to commonstockholders after extraordinary loss was $92.0 million, or $1.68 per basic anddiluted share, compared to the net loss of $21.4 million, or $0.43 per basicand diluted share, for the nine months ended September 30, 2000.  The extraordinary loss was the result ofearly retirement of long-term debt on April 3, 2000.  The extraordinary loss includes a prepayment premium of $0.4million and the unamortized original issue discount and deferred issuance costsof $0.8 million and $0.2 million, respectively, for a total loss of $1.4million, or $0.03 per share.

 

**Liquidityand Capital Resources**

 

Since ourinception, we (including our operating subsidiaries) have not generatedrevenues sufficient to fund our operations, and have incurred operating losses.Through September 30, 2001, we had an accumulated deficit of approximately$230.2 million. Our cash position on September 30, 2001 was $75.9 million,compared to $122.5 million on December 31, 2000.

 

*Net Cash Used In Operating Activities.*During the nine months ended September 30, 2001, we used $29.0 million in cashfor operations, compared with $23.1 million for the nine months ended September30, 2000. The increase in net cash used by operating activities in thenine-month period ended September 30, 2001, as compared to the same period theprevious year, was principally due to a higher net loss during the more recentperiod.

 

*Net Cash Used In Investing Activities andCapital Expenditures.* With regard to investing activities, in the nine months ended September30, 2001, we used cash of $16.5 million, compared to $8.7 million in the ninemonths ended September 30, 2000. The increase in the more recent period is dueto greater investments in equipment and leasehold improvements, softwaredevelopment and strategic equity investments.

 

*Net Cash (Used In) Provided By FinancingActivities.* With regard to financing activities, in the nine months ended September30, 2001, we used cash of $1.0 million, compared to $157.1 million provided byfinancing activities in the nine months ended September 30, 2000. The cash usedin the more recent period was related to the assignation of $1.1 million forthe guarantee of letters of credit required under a facilities lease. Cashprovided by financing activities of $161.6 million in the nine months endedSeptember 30, 2000 related to a public follow-on offering completed in February2000, the exercise of a warrant in March 2000, and a partial payment for thesale of shares in our Digital ADCO subsidiary. We used cash of $4.6 million inthe nine months ended September 30, 2000 for the retirement of debt.

 

Pursuant tothe surrender—agreed to in September 2001—of certain of our New York Cityleases, we will realize in the fourth quarter of 2001 an increase inunrestricted cash and cash equivalents totaling approximately $9.3 million,including payments from third parties and a release of restricted cash used toguarantee the leases.

 

We met ourcash needs in the nine-month periods of both 2001 and 2000 primarily from thenet proceeds of a public, follow-on offering completed in February 2000.Through a group of underwriters we sold total of 4.6 million common shares,resulting in net proceeds of $129.7 million. In addition, Liberty Digital, Inc.in March 2000 invested an additional $20 million in us by exercising a warrantgranted in March 1999.

 

In August 2000, OpenTV invested $10 million in our Digital ADCOsubsidiary and in late 2000 Motorola Broadband made a final payment of $1.5million, pursuant to its share purchase obligation of $5 million upon theformation of Digital ADCO.

 

**Impact of Inflation**

 

Inflationhas not had any significant effect on the Company’s operating costs.

 

**Item 3.            Quantitative and QualitativeDisclosures About Market Risk**

 

Not applicable

 

**PART II.  OTHER INFORMATION**

 

**Item 1.            Legal Proceedings**

 

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

 

**Item 2.            Changes in Securities**

 

Not applicable

 

**Item 3.            Defaults Upon Senior Securities**

 

Not applicable.

 

**Item 4.            Submission of Matters to a Vote ofStockholders**

 

None.

 

**Item 5.            Other Information**

 

None.

 

**Item 6.            Exhibits and Reports on Form 8–K**

 
|   | (a)    | Exhibits                               |
|--------|--------|----------------------------------------|
|   |   |                                   |
|   |   | None                                   |
|   |   |                                   |
|   | (b)    | Reports on Form  8–K:  None. |

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                   |   |   | **ACTV, Inc.**                                 |
|------------------------|--------|--------|------------------------------------------------|
|                   |   |   |                                           |
|                   |   |   | Registrant                                     |
|                   |   |   |                                           |
|                   |   |   |                                           |
| Date:November 14, 2001 |   |   | /s/ David Reese                                |
|                   |   |   | David Reese                                    |
|                   |   |   | Chairman, Chief Executive Officer and Director |
|                   |   |   |                                           |
|                   |   |   |                                           |
| Date:November 14, 2001 |   |   | /s/ Christopher C. Cline                       |
|                   |   |   | Christopher C. Cline                           |
|                   |   |   | Chief Financial Officer                        |
|                   |   |   | (Principal  Financial and Accounting Officer)  |