** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10–Q/A**

 

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AmendmentNo. 1 

To

 
| **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 ýNo o

 

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

 

The amendment No. 1 to Form 10Q is being filed to giveeffect to the restatement of the Company's consolidated financial statements asdiscussed in Note 13 to the consolidated financial statements.

 

** **

 

**Item 1.            FinancialStatements**

**ACTV, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(As Restated- See Note 13)**
|                                                                                                                                                             |   | **September 30,** |        | **December 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|------------------|--------|
|                                                                                                                                                             |   | **2001**          |        | **2000**         |   |
| **ASSETS**                                                                                                                                                       |   | **(Unaudited)**   |        |             |   |
| Current assets:                                                                                                                                                  |   |              |        |             |   |
| Cash and cash  equivalents                                                                                                                                       |   | $                 | 75,917,573  |             | $      | 122,488,041 |   |
| Accounts  receivable-net                                                                                                                                         |   | 2,215,672         |        | 1,182,376        |   |
| Other                                                                                                                                                            |   | 6,944,901         |        | 3,758,935        |   |
| Total current  assets                                                                                                                                            |   | 85,078,146        |        | 127,429,352      |   |
|                                                                                                                                                             |   |              |        |             |   |
| 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                                                                                                                                                     |   | $                 | 161,448,541 |             | $      | 235,508,580 |   |
|                                                                                                                                                             |   |              |        |             |   |
| **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                                                                                                                                      |   | 311,527,843       |        | 297,073,713      |   |
| Stockholder  loans                                                                                                                                               |   | (533,608          | )           | (643,606         | )      |
| Accumulated  deficit                                                                                                                                             |   | (242,274,839      | )           | (161,683,557     | )      |
| Total  stockholders’ equity                                                                                                                                 |   | 74,305,844        |        | 139,869,366      |   |
| Total  liabilities and stockholders’ equity                                                                                                                 |   | $                 | 161,448,541 |             | $      | 235,508,580 |   |

 

*See notes to consolidatedfinancial statements.*

 

2

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**ACTV, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(As Restated- SeeNote 13)**

 
|                                                                                                    |   | **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:                                                                                    |   |                     |       |                    |   |   |   |   |   |
| Selling, general  and administrative expenses                                                           |   | 9,631,781                |       | 12,260,151              |   | 36,378,161 |   | 29,617,598 |   |
| Stock-based  compensation income                                                                        |   | (8,580,695               | )          | (3,902,019              | )      | (11,399,850 | ) | (138,058,336 | ) |
| 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 |   |
| Restructuring  charge                                                                                   |   | 5,610,100                |       | —                  |   | 5,610,100 |   | — |   |
| Total  expenses/(income)                                                                                |   | 9,314,708                |       | 9,328,512               |   | 37,589,074 |   | (105,792,581 | ) |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| (Loss)/income  from operations                                                                          |   | (6,055,329               | )          | (6,534,079              | )      | (26,829,801 | ) | 111,635,227 |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| Interest income                                                                                         |   | 763,350                  |       | 2,225,659               |   | 3,554,989 |   | 5,602,064 |   |
| Interest expense                                                                                        |   | —                   |       | (13,407                 | )      | — |   | (284,619 | ) |
| Interest-net                                                                                            |   | 763,350                  |       | 2,212,252               |   | 3,554,989 |   | 5,317,445 |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| Other income/(expense)                                                                                  |   | (5,248,908               | )          | —                  |   | (1,028,623 | ) | — |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| (Loss)/income  before minority interest, extraordinary item and cumulative effect of  accounting change |   | (10,540,887              | )          | (4,321,827              | )      | (24,303,435 | ) | 116,952,672 |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| Minority  interest                                                                                      |   | 930,579                  |       | 606,822                 |   | 2,444,350 |   | 1,084,719 |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| (Loss)/income  before extraordinary item and cumulative effect of accounting change                     |   |                     | (9,610,308 | )                       |   | (3,715,005 | ) |   | (21,859,085 | ) |   | 118,037,391 |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| Extraordinary  loss on early extinguishment of debt                                                     |   | —                   |       | —                  |   | — |   | (1,411,139 | ) |
| Cumulative  transition effect of adopting  SFAS No. 133                                            |   | —                   |       | —                  |   | (58,732,197 | ) | — |   |
| Net  (loss)/income                                                                                      |   | $                        | (9,610,308 | )                       | $      | (3,715,005 | ) | $ | (80,591,282 | ) | $ | 116,626,252 |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| Net  (loss)/income per share:                                                                           |   |                     |       |                    |   |   |   |   |   |
| Basic                                                                                                   |   |                     |       |                    |   |   |   |   |   |
| (Loss)/income  before extraordinary item and cumulative effect of accounting change                     |   | $                        | (0.17      | )                       | $      | (0.07 | ) | $ | (0.40 | ) | $ | 2.40 |   |
| Extraordinary  item                                                                                     |   | —                   |       | —                  |   | — |   | (0.03 | ) |
| Cumulative  transition effect of adopting  SFAS No. 133                                                 |   | —                   |       | —                  |   | (1.07 | ) | — |   |
| Basic  (loss)/income per share                                                                          |   | $                        | (0.17      | )                       | $      | (0.07 | ) | $ | (1.47 | ) | $ | 2.37 |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| Diluted                                                                                                 |   |                     |       |                    |   |   |   |   |   |
| (Loss)/income  before extraordinary item and cumulative effect of accounting change                     |   | $                        | (0.17      | )                       | $      | (0.07 | ) | $ | (0.40 | ) | $ | 1.91 |   |
| Extraordinary  item                                                                                     |   | —                   |       | —                  |   | — |   | (0.02 | ) |
| Cumulative  transition effect of adopting  SFAS No. 133                                                 |   | —                   |       | —                  |   | (1.07 | ) | — |   |
| Diluted net  (loss)/income per share                                                                    |   | $                        | (0.17      | )                       | $      | (0.07 | ) | $ | (1.47 | ) | $ | 1.89 |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| Shares used in  basic calculations                                                                      |   | 55,851,828               |       | 50,743,722              |   | 54,721,804 |   | 49,274,794 |   |
|                                                                                                    |   |                     |       |                    |   |   |   |   |   |
| Shares used in  diluted calculations                                                                    |   | 55,851,828               |       | 50,743,722              |   | 54,721,804 |   | 61,739,619 |   |

 

*See notes toconsolidated financial statements.*

 

 

3

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**ACTV, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(As Restated- SeeNote 13)**

 
|                                                                        |   | **For the Nine Months Ended**September 30, |        |
|-----------------------------------------------------------------------------|--------|--------------------------------------------|-------------|
|                                                                        |   | **2001**                                   |        | **2000** |   |
| Cash flows from  operating activities:                                      |   |                                       |        |   |   |
| Net  (loss)/income                                                          |   | $                                          | (80,591,282 | ) | $ | 116,626,252 |   |
| Adjustments to  reconcile net (loss)/income to net cash used in operations: |   |                                       |        |   |   |
| Cumulative  transition effect of adopting SFAS No. 133                      |   | 58,732,197                                 |        | — |   |
| Change in fair  value of warrant                                            |   | 1,028,623                                  |        | — |   |
| Depreciation and  amortization                                              |   | 7,000,663                                  |        | 2,648,157 |   |
| Deferred  compensation — other                                         |   | 75,000                                     |        | 306,000 |   |
| Stock-based  compensation                                                   |   | (11,399,850                                | )           | (138,058,336 | ) |
| Amortization of  deferred revenue                                           |   | (2,714,859                                 | )           | (904,954 | ) |
| Common stock  issued in lieu of cash payment                                |   | 1,767,275                                  |        | 3,040,000 |   |
| Minority  interest                                                          |   | (2,444,350                                 | )           | (1,084,719 | ) |
| Non-cash portion  of restructuring charge                                   |   | 4,246,991                                  |        | — |   |
|                                                                        |   |                                       |        |   |   |
| Changes in  assets and liabilities:                                         |   |                                       |        |   |   |
| Accounts  receivable                                                        |   | 73,111                                     |        | (423,807 | ) |
| Other assets                                                                |   | (1,766,143                                 | )           | (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                                      |   | (29,224,401                                | )           | (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                                                      |   | (5,217,350                                 | )           | (3,750,000 | ) |
| Net cash used in  investing activities                                      |   | (16,539,855                                | )           | (8,740,521 | ) |
| Cash flows from  financing activities:                                      |   |                                       |        |   |   |
| Retirement of  debt — net                                              |   | —                                     |        | (4,566,095 | ) |
| Transfer to  restricted cash                                                |   | (1,031,459                                 | )           | — |   |
| Net proceeds  from subsidiary equity transactions                           |   | —                                     |        | 11,549,900 |   |
| Net proceeds  from equity financings                                        |   | 115,249                                    |        | 150,124,973 |   |
| Repayment of  stockholder loans                                             |   | 109,998                                    |        | — |   |
| Net cash (used)  provided by financing activities                           |   | (806,212                                   | )           | 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.*

 

4

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**ACTV, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

**(As Restated- SeeNote 13)**

 
|                                                                            |   | **Common Stock** |   |       |      |                   |   |                           |    |                    |        |
|---------------------------------------------------------------------------------|--------|------------------|--------|------------|-----------|------------------------|--------|--------------------------------|---------|-------------------------|-------------|
|                                                                            |   | **Shares**       |   | **Amount** |      | **Stockholder  Loans** |   | **Additional Paid in Capital** |    | **Accumulated Deficit** |        | **Total** |   |
| Balance at December 31, 2000                                                    |   | 51,228,154       |   | $          | 5,122,816 |                   | $      | (643,606                       | )       | $                       | 297,073,713 |   | $ | (161,683,557 | ) | $ | 139,869,366 |   |
| Issuance of shares in connection with exercise of stock options &  warrants |   | 1,309,046        |   | 130,904    |      | —                 |   | 734,343                        |    | —                  |        | 865,247 |   |
| Adjustment in deferred stock compensation                                       |   | —           |   | —     |      | —                 |   | (11,399,850                    | )  | —                  |        | (11,399,850 | )  |
| 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 |   |
| Repayment of stockholder loans                                                  |   | —           |   | —     |      | 109,998                |   | —                         |    | —                  |        | 109,998 |   |
| Retirement of common stock                                                      |   | (773,569         | )      | (77,357    | )         | —                 |   | (2,192,643                     | )  | —                  |        | (2,270,000 | ) |
| Net loss                                                                        |   | —           |   | —     |      | —                 |   | —                         |    | (80,591,282             | )           | (80,591,282 | ) |
| Balance at September 30, 2001                                                   |   | 55,864,480       |   | $          | 5,586,448 |                   | $      | (553,608                       | )       | $                       | 311,527,843 |   | $ | (242,274,839 | ) | $ | 74,305,844 |   |

 

*See notes toconsolidated financial statements.*

 

5

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND2000**1

**(As Restated- SeeNote 13)**

 

**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/A 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.        FinancialInstruments**

 

Effective January 1, 2001, ACTV adopted SFAS StatementNo. 133, "Accounting for Derivative Instruments and HedgingActivities," as amended by SFAS 137 and 138. SFAS 133 requires that allderivative financial instruments be recorded in the balance sheet at fairvalue. The provisions of SFAS 133 affected the Company's accounting for itsinvestment of 2.5 million restricted warrants for Liberty Livewire Corporation("Livewire"). Prior to the adoption of SFAS 133, these warrants were carriedat cost. With the adoption of SFAS 133, the Livewire investment is recorded atfair value. This resulted in the Company recording a cumulative effecttransition adjustment loss of $58.7 million at January 1, 2001. Beginning inthe first quarter of 2001, the Company records subsequent changes in the fairvalue of this investment in the statement of operations.

 

There may be periods with significant non-cashincreases or decreases to the Company's net income/loss related to the changesin the fair value of the Livewire investment. The carrying value of theCompany's derivative instrument approximates fair value. The fair value of theLivewire investment is determined by reference to underlying market valuesresulting from trading of Livewire on a national securities exchange and onestimates using the Black-Scholes valuation model.

 

**3.        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 $129.4 million.

 

**4.        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 provider focusing on theinteractive television market. The Company acquired Intellocity for 4,007,890shares of the Company’s common stock, aggregating $23.2 million, andissued options to purchase 762,665 shares of the Company’s common stock valuedat $4.3 million, for an aggregate purchase price of $27.5 million.The Company could make an additional payment of up to 1.5 million sharesand options contingent upon Intellocity’s achieving certain performance targetsfor the year ended December 31, 2001.  Management of the Company believes that it is extremely unlikelythat Intellocity, given its results for the nine months ended September 30,2001, will achieve such performance targets. Intellocity shareholders are subject to provisions restricting the saleof the ACTV stock; these restrictions range over 4 years. The acquisitionwas accounted for under the purchase method of accounting in the first quarterof 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 $0.8 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. (See Note 12)

 

The following tablepresents the combined results of operations on a pro forma basis had theacquisition of Intellocity been completed as of January 1, 2000. The pro formaresults are shown for illustrative purposes only and do not purport to beindicative of the results which would have been reported if the businesscombination had occurred on the date indicated or which may occur in thefuture. These pro forma amounts include estimates and assumptions thatmanagement believes are reasonable.

 
|                                                                                                    |   | **For the  Nine Months Ended September 30,** |        |
|---------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|-------------|
|                                                                                                    |   | **2001**                                     |        | **2000** |   |
|                                                                                                    |   |                                         |        |   |   |
| Revenue                                                                                                 |   | $                                            | 12,219,874  |   | $ | 11,880,316 |   |
|                                                                                                    |   |                                         |        |   |   |
| (Loss)/income  before minority interest, extraordinary item and cumulative effect of  accounting change |   | $                                            | (25,151,139 | ) | $ | 115,126,008 |   |
|                                                                                                    |   |                                         |        |   |   |
| (Loss)/income  before extraordinary item and cumulative effect of accounting change                     |   | $                                            | (22,706,789 | ) | $ | 116,350,985 |   |
|                                                                                                    |   |                                         |        |   |   |
| Net  (loss)/income                                                                                      |   | $                                            | (81,438,986 | ) | $ | 114,939,846 |   |
|                                                                                                    |   |                                         |        |   |   |   |   |
| Basic                                                                                                   |   |                                         |        |   |   |
| (Loss)/income  per share before extraordinary item and cumulative effect of accounting  change          |   | $                                            | (0.41       | ) | $ | 2.10 |   |
| Extraordinary  item                                                                                     |   | —                                       |        | (0.07 | ) |
| Cumulative  effect of accounting change                                                                 |   | (1.05                                        | )           | — |   |
| Basic  (loss)/income per share                                                                          |   | $                                            | (1.46       | ) | $ | 2.03 |   |
|                                                                                                    |   |                                         |        |   |   |
| Diluted                                                                                                 |   |                                         |        |   |   |
| (Loss)/income  per share before extraordinary item and cumulative effect of accounting  change          |   | $                                            | (0.41       | ) | $ | 2.10 |   |
| Extraordinary  item                                                                                     |   | —                                       |        | (0.07 | ) |
| Cumulative  effect of accounting change                                                                 |   | (1.05                                        | )           | — |   |
| Diluted  (loss)/income per share                                                                        |   | $                                            | (1.46       | ) | $ | 2.03 |   |

 

6

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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 table setsforth the certain combined amounts of the previously reported separate resultsof the companies.

 
|                                                                                                    |   | **For the Nine Months Ended September 30, 2000** |        |
|---------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|-------------|
|                                                                                                    |   | **ACTV**                                         |        | **Bottle Rocket** |   | **Combined** |   |
| Revenues                                                                                                |   | $                                                | 4,040,129   |   | $ | 1,802,517 |   | $ | 5,842,646 |   |
|                                                                                                    |   |                                             |        |   |   |   |   |
| Income/(loss)  before minority interest, extraordinary item and cumulative effect of  accounting change |   | 118,498,820                                      |        | (1,546,148 | ) | 116,952,672 |   |
|                                                                                                    |   |                                             |        |   |   |   |   |
| Income/(loss) before  extraordinary item and cumulative effect of accounting change                     |   | 119,583,539                                      |        | (1,546,148 | ) | 118,037,391 |   |
|                                                                                                    |   |                                             |        |   |   |   |   |
| Net  income/(loss)                                                                                      |   | $                                                | 118,172,400 |   | $ | (1,546,148 | ) | $ | 116,626,252 |   |

 

 

**5.****                         MinorityInterest**

 

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.

 

7

----

 

**6.        SegmentInformation** **(As Restated- See Note 13)**

 

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)/Income**                    |   |                           |       |                          |   |   |   |   |   |
| 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                   |   | 53,983,033                     |       | 1,218,719                     |   | (8,549,807 | ) | 131,944,725 |   |
| Total                                    |   | $                              | (9,610,308 | )                             | $      | (3,715,005 | ) | $ | (80,591,282 | ) | $ | 116,626,252 |   |
|                                     |   |                           |       |                          |   |   |   |   |   |
| **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 |   |

 

** **
|                   |   | **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 |   | 76,061,410              |        | 114,756,611            |       |
| Total                  |   | $                       | 85,078,146  |                   | $          | 127,429,352 |   |
|                   |   |                    |        |                   |       |
| **Total Assets**       |   |                    |        |                   |       |
| Digital  Television    |   | 13,295,700              |        | $                      | 17,010,470 |   |
| Enhanced Media         |   | 24,844,613              |        | 83,127,887             |       |
| Unallocated  Corporate |   | 123,308,228             |        | 135,370,223            |       |
| Total                  |   | $                       | 161,448,541 |                   | $          | 235,508,580 |   |

 

8

----

 

**7.        ExecutiveCompensation**

 

For the nine-month periods ended September 30, 2001and September 30, 2000, we incurred executive incentive compensation expense of$2.3 million and $4.6 million, respectively. For the three-month periods ending September 30, 2001 and September 30,2000, this charge was $0 and $2.3 million respectively.  This expense, which related to an executiveincentive compensation provision that subsequently was cancelled, was based onchanges in the market value of our common stock and paid in unregisteredsecurities.  The compensation recognizedwas contingent on continued employment of the executive and subject to forfeiture.

 

**8.        Investmentin Warrant**

 

The Company and Liberty Livewire LLC, a unitof Liberty Livewire Corporation (“Livewire”) in April 2000 entered into a jointmarketing venture, “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.

 

In connection with entering into the joint marketingagreement, the Company received a warrant to acquire 2,500,000 shares ofLivewire common stock at an exercise price of $30 per share. The warrant, whichexpires in June 2015 and includes registration rights, vests ratably over fiveyears, beginning April 13, 2001. With certain exceptions, the warrant isnot transferable. The Company previously recorded an investment and deferredrevenue in the amount of approximately $76.0 million, the estimated fair valueof the warrant (using the Black–Scholes pricing model) at the time theagreement was executed. Using similar methodology, the estimated value of thewarrant at September 30, 2001 was $16.3 million. The investment is nowaccounted for under SFAS No. 133, (See Note 2.) The deferred revenue recordedby the Company is being amortized into revenue over a period of 21 years,the contractual term of the joint marketing venture.

 

**9.        CorporateRestructuring**

 

During the thirdquarter 2001, the Company completed certain restructuring initiatives, whichcontributed to a 21% reduction in selling, general and administrative expensesfor the three months ended September 30, 2001 as compared to the three monthsended 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-cash expense totaling $4.2million, which is the net effect of the write-off of property and equipment forabandoned leased office space and the reversal of the straight-line rentrecorded for the leased office space. Also included is approximately $1.5million for employee severance expenses, of which $1.3 million was paid in cashduring the nine-month period ended September 30, 2001.

 

**10.      SupplementalDisclosure of Non-Cash Activities**

 

For each of the nine-months ended September 30, 2001and 2000 we recorded deferred expense of $1.5 million and $3.0 million,respectively, relating to the unamortized portion of the executive incentivecompensation paid in common stock.

 

TheCompany recorded  a reduction innon-cash stock-based compensation expense in connection with vested variablestock options of  $11.4 million and$138.1 million, respectively for the nine months ended September 30, 2001 and2000.

 

9

----

 

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 8).

 

**11.      Net (Loss)/Income Per Share**

** **

           Thefollowing table sets forth the computation of basic and diluted (loss)/incomeper share.

 
|                                                                                 |   | **Three  months ended**  |       | **Nine  months ended**   |   |
|--------------------------------------------------------------------------------------|--------|--------------------------|------------|--------------------------|--------|
|                                                                                 |   | **September  30,  2001** |       | **September  30,  2000** |   | **September  30,  2001** |   | **September  30,  2000** |   |
|                                                                                 |   |                     |       |                     |   |   |   |   |   |
| Numerator:                                                                           |   |                     |       |                     |   |   |   |   |   |
| (Loss)/income  before extraordinary item and  cumulative effect of accounting change |   | $                        | (9,610,308 | )                        | $      | (3,715,005 | ) | $ | (21,858,085 | ) | $ | 118,037,391 |   |
| Extraordinary  loss on early extinguishment of debt                                  |   |                     | —     |                     |   | — |   |   | — |   |   | (1,411,139 | ) |
| Cumulative  transition effect of adopting   SFAS No. 133                             |   |                     | —     |                     |   | — |   |   | (58,732,197 | ) |   | — |   |
| Net (loss)  income                                                                   |   | $                        | (9,610,308 | )                        | $      | (3,715,005 | ) | $ | (80,591,282 | ) | $ | 116,626,252 |   |
|                                                                                 |   |                     |       |                     |   |   |   |   |   |
| Denominator                                                                          |   |                     |       |                     |   |   |   |   |   |
| Basic  weighted-average shares outstanding                                           |   | 55,851,828               |       | 50,743,722               |   | 54,721,804 |   | 49,274,794 |   |
| Weighted-average  options outstanding                                                |   | —                   |       | —                   |   | — |   | 12,464,825 |   |
| Diluted weighted  average shares outstanding                                         |   | 55,851,828               |       | 50,743,722               |   | 54,721,804 |   | 61,739,619 |   |
|                                                                                 |   |                     |       |                     |   |   |   |   |   |
| (Loss)/income  per share                                                             |   |                     |       |                     |   |   |   |   |   |
| Basic                                                                                |   |                     |       |                     |   |   |   |   |   |
| Before  extraordinary item and cumulative effect of accounting change                |   | $                        | (0.17      | )                        | $      | (0.07 | ) | $ | (0.40 | ) | $ | 2.40 |   |
| Extraordinary  item                                                                  |   |                     | —     |                     |   | — |   |   | — |   |   | (0.03 | ) |
| Cumulative  transition effect of adopting SFAS No. 133                               |   | —                   |       | —                   |   | (1.07 | ) | — |   |
| Basic net  (loss)/income per share                                                   |   | $                        | (0.17      | )                        | $      | (0.07 | ) | $ | (1.47 | ) | $ | 2.37 |   |
|                                                                                 |   |                     |       |                     |   |   |   |   |   |
| Diluted                                                                              |   |                     |       |                     |   |   |   |   |   |
| Before  extraordinary item and cumulative effect of accounting change                |   | $                        | (0.17      | )                        | $      | (0.07 | ) | $ | (0.40 | ) | $ | 1.91 |   |
| Extraordinary  item                                                                  |   |                     | —     |                     |   | — |   |   | — |   |   | (0.02 | ) |
| Cumulative  transition effect of adopting SFAS No. 133                               |   | —                   |       | —                   |   | (1.07 | ) | — |   |
| Diluted net  (loss) income per share                                                 |   | $                        | (0.17      | )                        | $      | (0.07 | ) | $ | (1.47 | ) | $ | 1.89 |   |

 

**12.     Recently Issued Accounting Pronouncements**

 

In June 2001, theFinancial Accounting Standards Board issued Statements of Financial AccountingStandards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142 “Goodwilland Other Intangible Assets”. These pronouncements significantly change theaccounting for business combinations, goodwill, and intangible assets. SFAS No.141 eliminates the pooling-of-interests method of accounting for businesscombinations and further clarifies the criteria to recognize intangible assetsseparately from goodwill. The requirements of SFAS No. 141 are effective forany business combination accounted for by the purchase method that is completedafter June 30, 2001. SFAS No. 142 states goodwill and indefinite livedintangible assets are no longer amortized but are reviewed for impairmentannually (or more frequently if impairment indicators arise).  Separableintangible assets that are not deemed to have an indefinite life will continueto be amortized over their useful lives. The amortization provisionsof SFAS No. 142 apply to goodwill and intangible assets acquired afterJune 30, 2001. With respect to goodwill and intangible assets acquired prior toJuly 1, 2001, companies are required to adopt the pronouncement in their fiscalyear beginning after December 15, 2001. Goodwill is currently being amortizedat approximately $4.2 million annually. The Company has not yet completed itsanalysis of the new pronouncements and has not yet determined what effects thenew pronouncements will have on its financial statements.

 

**13.     Restatement**

 

Subsequent to theissuance of the Company's 2000 consolidated financial statements, the Companydetermined that stock options granted to certain employees should be accountedfor as variable plan stock options.  Accordingly,the Company has restated its financial statements to reflect the application ofvariable stock option accounting to the affected stock option awards.  The changes resulted in the recording ofadditional stock-based compensation of $8.6 million and $3.9 million for thethree months ended September 30, 2001 and September 30, 2000,respectively.  The changes resulted in acredit of $11.4 million and $138 million of stock-based compensation expensefor the nine month periods ended September 30, 2001 and September 30, 2000,respectively.

 

In addition, subsequentto the issuance of the Company's 2001 third quarter 10-Q, the Companydetermined that the investment in Livewire qualifed as a derivative under SFASNo. 133. Accordingly, the Company has restated its financial statements toreflect the adoption of SFAS No. 133 to the Livewire investmtent. The adoptionresulted in the recording of a cumulative transition adjustment of $58.7million in the first quarter of 2001 and additional expense of $5.2 millionrelated to the change in fair value of the underlying investment for the threemonth period ended September 30, 2001. 

 

 

10

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A summary of the significant effects of therestatement is as follows:

 
|                           |   | **As of September 30, 2001** |          |
|--------------------------------|--------|------------------------------|---------------|
|                           |   | **As Previously  Reported**  |          | **As Restated** |   |
|                           |   |                         |          |   |   |
| **Other currrent assets**      |   | **$**                        | **7,478,509** |   | **$** | **6,944,901** |   |
| **Stockholder loan**           |   | **—**                   |          | **(533,608** | **)** |
| **Additional paid-in-capital** |   | **299,459,553**              |          | **311,527,843** |   |
| **Accumulated deficit**        |   | **(230,206,549**             | **)**         | **(242,274,839** | **)** |
|                                |        |                              |               |  |  |  |  |

 
|                                                                                    |   | **For the Three Months Ended September 30,** |       |
|-----------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                                    |   | **2001**                                     |       | **2000** |   |
|                                                                                    |   | **As Previously Reported**                   |       | **As Restated** |   | **As Previously Reported** |   | **As Restated** |   |
| **Stock-based compensation (income)/expense**                                           |   | **$**                                        | **—** | ** ** | **$** | **(8,580,695** | **)** | **$** | **—** | ** ** | **$** | **(3,902,019** | **) ** |
| **Loss on investment in warrant**                                                       |   | **(59,760,820**                              | **)**      | **—** |   | **—** |   | **—** |   |
| **Loss from operations**                                                                |   | **(74,396,844**                              | **)**      | **(6,055,329** | **)** | **(10,436,098** | **)** | **(6,534,079** | **)** |
| **Other income/(expense)**                                                              |   | **—**                                   |       | **(5,248,908** | **)** | **—** |   | **—** |   |
| **Loss before extraordinary item and cumulative  effect of accounting change**          |   | **(72,702,915**                              | **)**      | **(9,610,308** | **)** | **(7,617,024** | **)** | **(3,715,005** | **)** |
| **Net loss**                                                                            |   | **(72,702,915**                              | **)**      | **(9,610,308** | **)** | **(7,617,024** | **)** | **(3,715,005** | **)** |
|                                                                                    |   |                                         |       |   |   |   |   |   |   |
| **Basic and diluted net loss per  share**                                               |   | **$**                                        | **(1.30**  | **)** | **$** | **(0.17** | **)** | **$** | **(0.15** | **)** | **$** | **(0.07** | **)** |
|                                                                                    |   |                                         |       |   |   |   |   |   |   |
|                                                                                    |   | **For the Nine Months Ended September 30,**  |       |
|                                                                                    |   | **2001**                                     |       | **2000** |   |
|                                                                                    |   | **As Previously Reported**                   |       | **As Restated** |   | **As Previously Reported** |   | **As Restated** |   |
|                                                                                    |   |                                         |       |   |   |   |   |   |   |
| **Stock-based compensation expense  (income)**                                          |   | **$**                                        | **—** |   | **$** | **(11,399,850** | **)** | **$** | **—** |   | **$** | **(138,058,336** | **)** |
| **Loss on investment in warrant**                                                       |   | **(59,760,820**                              | **)**      | **—** |   | **—** |   | **—** |   |
| **(Loss)/income from operations**                                                       |   | **(97,990,470**                              | **)**      | **(26,829,801** | **)** | **(26,423,109** | **)** | **111,635,227** |   |
| **Other income/(expense)**                                                              |   |                                         | **—** |   |   | **(1,028,623** | **)** |   | **—** |   |   | **—** |   |
| **(Loss)/income before  extraordinary item and cumulative effect of accounting change** |   | **(91,991,132**                              | **)**      | **(21,859,085** | **)** | **(20,020,945** | **)** | **118,037,391** |   |
| **Cumulative transition effect of  adopting  SFAS No. 133**                        |   | **—**                                   |       | **(58,732,197** | **)** | **—** |   | **—** |   |
| **Net (loss)/income**                                                                   |   | **(91,991,132**                              | **)**      | **(80,591,282** | **)** | **(21,432,084** | **)** | **116,626,252** |   |
|                                                                                    |   |                                         |       |   |   |   |   |   |   |
| **(Loss)/income per common share:**                                                     |   |                                         |       |   |   |   |   |   |   |
|                                                                                    |   |                                         |       |   |   |   |   |   |   |
| **Basic**                                                                               |   |                                         |       |   |   |   |   |   |   |
| **Before extraordinary item and  cumulative effect of accounting change**               |   | **$**                                        | **(1.68**  | **)** | **$** | **(0.40** | **)** | **$** | **(0.41** | **)** | **$** | **2.40** |   |
| **Extraordinary item**                                                                  |   | **—**                                   |       | **—** |   | **(0.02** | **)** | **(0.03** | **)** |
| **Cumulative transition effect of  adopting   SFAS No. 133**                            |   | **—**                                   |       | **(1.07** | **)** | **—** |   | **—** |   |
| **Basic net (loss)/income per share**                                                   |   | **$**                                        | **(1.68**  | **)** | **$** | **(1.47** | **)** | **$** | **(0.43** | **)** | **$** | **2.37** |   |
|                                                                                    |   |                                         |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted**                                                                             |   |                                         |       |   |   |   |   |   |   |
| **Before extraordinary item and  cumulative effect of accounting change**               |   | **$**                                        | **(1.68**  | **)** | **$** | **(0.40** | **)** | **$** | **(0.41** | **)** | **$** | **1.91** |   |
| **Extraordinary item**                                                                  |   | **—**                                   |       | **—** |   | **(0.02** | **)** | **(0.02** | **)** |
| **Cumulative transition effect of  adopting   SFAS No. 133**                            |   | **—**                                   |       | **(1.07** | **)** | **—** |   | **—** |   |
| **Diluted net (loss)/income per  share**                                                |   | **$**                                        | **(1.68**  | **)** | **$** | **(1.47** | **)** | **$** | **(0.43** | **)** | **$** | **1.89** |   |
|                                                                                         |        |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

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**ITEM2.****                                                  MANAGEMENT’SDISCUSSION AND ANALYSIS  FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

Overview

 

You should read the followingdiscussion together with our consolidated financial statements and relatednotes included elsewhere. The results discussed below are not necessarilyindicative of the results to be expected in any future periods. To the extentthat the information presented in this discussion addresses financialprojections, information or expectations about our products or markets orotherwise makes statements about future events, such statements are forward–lookingand are subject to a number of risks and uncertainties that could cause actualresults to differ materially from the statements made. See “Special NoteRegarding Forward–Looking Statements” for further information aboutforward–looking statements. Management’s Discussion and Analysis ofFinanicial Condition and Results of Operations presented gives effect to therestatement of our previously reported results of operations for theseperiods.  See Note 13 to theconsolidated financial statements for a discussion of this matter.

 

Weare a digital media company that provides technical services, tools andproprietary applications for digital television and enhanced media. We have twooperating business segments, which we call Digital TV and Enhanced Media.

 

ACTV’s Digital TV segment provides applicationsand technical 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.

 

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

 

*Revenues.*During the three-month period ended September 30,2001, our revenues increased 18%, to $3.3 million, compared with $2.8 millionin the three-month period ended September 30, 2000. In the more recent period,Enhanced Media licensing and services accounted for approximately 74% of ourrevenue, with Digital TV professional and technical services providing theremaining 26%. In last year’s three-month period, all of our revenues werederived from Enhanced Media licensing and services.

 

*Total Selling, General andAdministrative Expense*s.  Total selling, general and administrativeexpenses decreased approximately 22% in the third quarter of 2001, to $9.6million, from $12.3 million in the third quarter of 2000.

 

*Stock-Based Compensation*. Stock-based compensationexpense was credited $8.6 million for the three months ended September 30,2001, as compared to a credit of stock-based compensation expense of $3.9million for the three months ended September 30, 2000.  The Company records a charge or credit tocompensation expense based on increases or decreases in the market value of theCompany's common stock in excess of the exercise price of certain employeeoptions, which are subject to variable option accounting treatment.

 

 

12

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*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. Duringthe fourth quarter of 2001 and pursuant to the surrender of certain New YorkCity leases, the Company will benefit in unrestricted cash and cash equivalentsby approximately $9.3 million resulting from payments made by third parties anda release of restricted cash used to guarantee leases.

 

*Depreciation and Amortization.* Depreciation and amortization expense increased 170%, to $2.7 millionin the three months ended September 30, 2001, versus $1.0 million during thesame period in 2000. The increase was the result of the depreciation of alarger fixed asset base, including leasehold improvements and equipment relatedto the deployment of SpotOn, and higher amortization expense for capitalizedsoftware development and for goodwill. In March 2001, we recorded additionalgoodwill in connection with our purchase of Intellocity.

 

*Interest  — Net.* Interest income in thirdquarter of 2001 was $0.8 million, compared with $2.2 million in the thirdquarter of 2000. The decrease was the result of lower average cash balancesduring the more recent quarter and lower prevailing interest rates onshort-term investments.

 

*Other Income/(Expense).* Other income(expense) is the change in fair value of the investment inwarrant which is now accounted for as a derivative after adoption of SFAS No.133 and the application of its requirements. For the three months endedSeptember 30, 2001, the Company recorded a decrease in the value of the warrantof $5.2 million.

 

*Cumulative Transition Effect of Changein Accounting Principle.* Effective January 1,2001, ACTV adopted SFAS No. 133, "Accounting for Derivative Instrumentsand Hedging Activities", as amended by SFAS 137 and 138. SFAS 133 requiresthat all derivative financial instruments be recorded in the balance sheet at fairvalue. The provisions of SFAS 133 affected the Company's accounting for itsinvestment of 2.5 million restricted warrants for Liberty Livewire Corporation("Livewire"). Prior to the adoption of SFAS 133, these warrants werecarried at cost. With the adoption of SFAS 133, the Livewire investment isrecorded at fair value. This resulted in the Company recording a cumulativeeffect transition adjustment loss of $58.7 million at January 1, 2001. Theremay be periods with significant non-cash increases or decreases to theCompany's net income/loss as a result of the changes in the fair value of theLivewire investment.

 

*Net Loss.*  For the three months endedSeptember 30, 2001, our net loss was $9.6 million, or $0.17 per basic anddiluted share, compared to the net loss of $3.7 million, or $0.07 per basic anddiluted share, for the three months ended September 30, 2000. The increase wasthe result of the significant warrant impairment and restructuring chargesincurred during the more recent period, which were significantly greater thanthe effects of an increase in revenues along with a reduction in selling,general and administrative expenses for the three-month period ended September30, 2001.

 

**Comparison of Nine-Month Periods Ended September 30, 2001 andSeptember 30, 2000**

 

*Revenues.* During the nine-month period ended September 30, 2001, our revenuesincreased 86%, to $10.8 million, compared with $5.8 million in the nine-monthperiod ended September 30, 2000. In the more recent period, Enhanced Medialicensing and services accounted for 69% of our revenue, with Digital TVprofessional and technical services providing the remaining 31%. In last year’snine-month period, all of our revenues were derived from Enhanced Medialicensing and services.

 

*Total Selling, and General andAdministrative Expenses.*  Total selling, general and administrativeexpenses increased approximately 23% in the first nine months of 2001, to $36.4million, from $29.6 million in the first nine months of 2000.

 

*Stock-Based Compensation*. Stock-based compensationexpense was credited $11.4 million for the nine months ended September 30,2001, compared to a credit of compensation expense of $138.0 million for thenine months ended September 30, 2000. The Company records a charge or credit to compensation expense based onincreases or decreases in the market value of the Company's common stock inexcess of the exercise price of certain employee options, which are subject tovariable option accounting treatment.

 

 

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*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. During the fourthquarter of 2001 and pursuant to the surrender of certain New York City leases,the Company will benefit in unrestricted cash and cash equivalents byapproximately $9.3 million resulting from payments made by third parties and arelease of restricted cash used to guarantee leases.

 

*Depreciation and Amortization.* Depreciation and amortization expense increased 169%, to $7.0 millionin the nine-month period ended September 30, 2001, from $2.6 million in thenine-month period ended September 30, 2000. The increase was the result ofdepreciation of a larger fixed asset base, including leasehold improvements andequipment related to the deployment of SpotOn, and higher amortization expensefor capitalized software development and for goodwill. Beginning in March 2001,we recorded additional goodwill in connection with our purchase of Intellocity,Inc.

 

*Interest  — Net.*Interest income in ninemonths of 2001 was $3.6 million, compared with $5.6 million in the first ninemonths of 2000. The decrease was the result of lower average cash balancesduring the nine months ended September 30, 2001 and lower prevailing interestrates on short-term investments. We incurred no interest expense inthe first nine months of 2001, compared to interest expense of $0.3 million inthe first nine months of 2000. The interest expense for the first nine monthsof 2000 relates to a $5 million original face value note issued in January 1998by a subsidiary of ours; the note was redeemed in April 2000.

 

*Other Income/(Expense).* Other income(expense) is the change in fair value of the investment inwarrant which is now accounted for as a derivative after adoption of SFAS 133and the application of its requirements. For the nine months ended September20, 2001, the Company recorded a decrease in the fair value of the warrant of$1.0 million.

 

*Net (Income)/Loss Before Extraordinary Item.* For the ninemonths ended September 30, 2001, our net loss before extraordinary item was$21.9 million, $0.40 per basic and diluted share, compared to the net incomebefore extraordinary item of $118.0 million, or $2.40 per basic share and $1.91per diluted share, for the nine months ended September 30, 2000. The increasewas the result of the warrant impairment and restructuring charges incurredduring the more recent period, along with higher expenses in all othercategories, which more than offset higher revenues in the nine months endedSeptember 30, 2001.

 

*Cumulative Transition Effect of Changein Accounting Principle.* Effective January 1,2001, ACTV adopted SFAS Statement No. 133, "Accounting for DerivativeInstruments and Hedging Activities" ("SFAS 133"), as amended bySFAS 137 and 138. SFAS 133 requires that all derivative financial instruments berecorded in the balance sheet at fair value. The provisions of SFAS 133affected the Company's accounting for its investment of 2.5 million restrictedwarrants for Liberty Livewire Corporation ("Livewire"). Prior to theadoption of SFAS 133, these warrants were carried at cost. With the adoption ofSFAS 133, the Livewire investment is recorded at fair value. This resulted inthe Company recording a cumulative effect transition adjustment loss of $58.7million at January 1, 2001. There may be periods with significant non-cashincreases or decreases to the Company's net income/loss pertaining to theLivewire investment.

 

*Net(Income)/ Loss.* For the nine months endedSeptember 30, 2001, our net loss after extraordinary loss was $80.6 million, or$1.47 per basic and diluted share, compared to the net income of $116.6million, or $2.37 per basic share and $1.89 per diluted share, for the ninemonths ended September 30, 2000.  Theextraordinary loss was the result of early retirement of long-term debt onApril 3, 2000.  The extraordinary lossincludes a prepayment premium of $0.4 million and the unamortized originalissue discount and deferred issuance costs of $0.8 million and $0.2 million,respectively, for a total loss of $1.4 million, or $0.03 per share.

 

**Liquidity and Capital Resources**

 

Since our inception, we(including our operating subsidiaries) have not generated revenues sufficientto fund our operations, and have incurred operating losses. Through September30, 2001, we had an accumulated deficit of approximately $242.2 million. Ourcash position on September 30, 2001 was $75.9 million, compared to $122.5million on December 31, 2000.

 

*Net Cash Used In Operating Activities.* During thenine months ended September 30, 2001, we used $29.2 million in cash for operations,compared with $23.1 million for the nine months ended September 30, 2000. Theincrease in net cash used by operating activities in the nine-month periodended September 30, 2001, as compared to the same period the previous year, wasprincipally due to a higher net loss during the more recent period.

 

*Net Cash Used In Investing Activities and CapitalExpenditures.*  With regardto investing activities, in the nine months ended September 30, 2001, we usedcash of $16.5 million, compared to $8.7 million in the nine months endedSeptember 30, 2000. The increase in the more recent period is due to greaterinvestments in equipment and leasehold improvements, software development andstrategic equity investments.

 

*Net Cash (Used In) Provided By Financing Activities.*  With regard to financing activities, in thenine months ended September 30, 2001, we used cash of $1.0 million, compared to$157.1 million provided by financing activities in the nine months endedSeptember 30, 2000. The cash used in the more recent period was related to the

 

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assignation of $1.1 million for the guaranteeof letters of credit required under a facilities lease. Cash provided byfinancing activities of $161.6 million in the nine months ended September 30,2000 related to a public follow-on offering completed in February 2000, theexercise of a warrant in March 2000, and a partial payment for the sale ofshares in our Digital ADCO subsidiary. We used cash of $4.6 million in the ninemonths ended September 30, 2000 for the retirement of debt.

 

During the fourth quarter of2001 and pursuant to the surrender of certain New York City leases, the Companywill benefit in unrestricted cash and cash equivalents by approximately $9.3million resulting from payments made by third parties and a release ofrestricted cash used to guarantee leases.

 

We met our cash needs in thenine-month periods of both 2001 and 2000 primarily from the net proceeds of apublic, follow-on offering completed in February 2000. Through a group ofunderwriters we sold total of 4.6 million common shares, resulting in netproceeds of $129.4 million. In addition, Liberty Digital, Inc. in March 2000invested an additional $20 million in us by exercising a warrant granted inMarch 1999.

 

InAugust 2000, OpenTV invested $10 million in our Digital ADCO subsidiary and inlate 2000 Motorola Broadband made a final payment of $1.5 million, pursuant toits share purchase obligation of $5 million upon the formation 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**

 

The Company's interestincome is affected by changes in the general level of U.S. interest rates.  Changes in U.S. interest rates could affectthe interest earned on the Company's cash equivalents and investments.  Currently, changes in U.S. interest rateswould not have a material effect on the interest earned on the Company's cashequivalents and investments.  A majorityof these cash equivalents and investments earn a fixed rate of interest whilethe remaining portion earns interest at a variable rate.  The Company does not anticipate thatexposure to interest rate market risk will have a material impact on theCompany due to the nature of the Company's investments.

 

During April 2000, theCompany received a warrant to acquire 2,500,000 shares of Liberty LivewireCorporation ("Livewire"), a publicly traded company.  The warrant becomes exercisable at the rateof 500,000 shares per year, commencing on April 13, 2001, includes certainregistration rights and may be exercised until March 31, 2015.  The warrant is not transferable, except incertain circumstances.  The Companyestimated the value of the warrant to be $76,016,175 at the date it wasreceived, using the Black-Scholes pricing model, with a risk free rate of 6.5%,a volatility of 80% and assuming no cash dividends.  The estimated fair value of the warrant at September 30, 2001 wasapproximately $16.3 million, using similar assumptions.  The Company expects the fair value of thewarrant to fluctuate based on the underlying stock price of Livewire.  As of January 1, 2001 any change in fairvalue in the investment in warrant is recorded to the statement of operationsas the Company adopted SFAS No. 133. The Company does not currently expect toexercise or register shares in the coming year.

 

The Company recordsstock-based compensation expense based on increases and decreases in the marketprice of the Company's common stock above the exercise price of certainemployee options, which are subject to variable option accountingtreatment.  To the extent that theCompany has a stock-based compensation obligation at the beginning of a givenreporting period, the Company will recognize a reduction in stock-basedcompensation expense related to unexercised variable options for that periodbased on a reduction of the market price for the Company's stock at the end ofthe period.  The obligation willincrease as the market price for the Company's common stock increases at theend of a reporting period.

 

**PART II.  OTHERINFORMATION**

 

**Item 1.            Legal Proceedings**

 

ACTV, Inc. and its wholly-owned subsidiary HyperTVNetworks, Inc. are co-plaintiffs in a civil action filed against The WaltDisney Co., ABC, Inc. and ESPN, Inc. in December, 2000, which action allegesthat the defendants' "Enhanced TV" system synchronizing a web siteapplication to, amongst others, EPSN *SundayNight* and ABC *Monday NightFootball* telecasts has infringed and is continuing to infringecertain of the plaintiffs' patents. That action is continuing in the U.S. District Court, Southern Districtof New York.

 

**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. |

** **

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** **

**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: April 10, 2002 |   |   | /s/ David Reese                                |
|                 |   |   | David Reese                                    |
|                 |   |   | Chairman, Chief Executive Officer and Director |
|                 |   |   |                                           |
|                 |   |   |                                           |
| Date: April 10, 2002 |   |   | /s/ Christopher C. Cline                       |
|                 |   |   | Christopher C. Cline                           |
|                 |   |   | Chief Financial Officer                        |
|                 |   |   | (Principal Financial and  Accounting Officer)  |

 

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