** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM10–Q/A**

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**AmendmentNo. 1 to**

**ý**                                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended June 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                            |   | (I.R.S. Employer    |
| incorporation or organization)                             |   | Identification No.) |
|                                                       |   |                |
| **225 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 August 9, 2001, there were 56,430,009 shares ofthe registrant’s common stock outstanding.

 

** **

**The amendment No. 1 to Form 10-Q isbeing filed to give effect to the restatement of the Company's consolidatedfinancial statements as discussed in Note 12 to the consolidated financialstatements.**

** **

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**Item 1.    Financial Statements**

**ACTV, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS (As Restated — See Note 12)**

 
|                                                                                                                                                        |   | **June 30, 2001** |        | **December 31, 2000** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|-----------------------|--------|
| **ASSETS**                                                                                                                                                  |   | **(Unaudited)**   |        |                  |   |
|                                                                                                                                                        |   |              |        |                  |   |
| Current assets:                                                                                                                                             |   |              |        |                  |   |
| Cash and cash  equivalents                                                                                                                                  |   | $                 | 86,826,944  |                  | $      | 122,488,041 |   |
| Accounts  receivable-net                                                                                                                                    |   | 3,927,428         |        | 1,182,376             |   |
| Other                                                                                                                                                       |   | 1,755,564         |        | 3,758,935             |   |
| Total current  assets                                                                                                                                       |   | 92,509,936        |        | 127,429,352           |   |
|                                                                                                                                                        |   |              |        |                  |   |
| Property and  equipment-net                                                                                                                                 |   | 17,098,576        |        | 12,628,232            |   |
|                                                                                                                                                        |   |              |        |                  |   |
| Other assets:                                                                                                                                               |   |              |        |                  |   |
| Restricted cash                                                                                                                                             |   | 4,231,646         |        | 3,165,368             |   |
| Investment in  warrant                                                                                                                                      |   | 21,504,263        |        | 76,016,175            |   |
| Investments-other                                                                                                                                           |   | 8,348,889         |        | 3,250,000             |   |
| Patents and  patents pending                                                                                                                                |   | 8,318,322         |        | 8,053,642             |   |
| Software  development costs                                                                                                                                 |   | 5,085,992         |        | 3,328,101             |   |
| Goodwill                                                                                                                                                    |   | 26,101,272        |        | 1,362,072             |   |
| Other                                                                                                                                                       |   | 1,453,260         |        | 275,638               |   |
| Total other  assets                                                                                                                                         |   | 75,043,644        |        | 95,450,996            |   |
| Total assets                                                                                                                                                |   | $                 | 184,652,156 |                  | $      | 235,508,580 |   |
|                                                                                                                                                        |   |              |        |                  |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                              |   |              |        |                  |   |
|                                                                                                                                                        |   |              |        |                  |   |
| Current  liabilities:                                                                                                                                       |   |              |        |                  |   |
| Accounts payable  and accrued expenses                                                                                                                      |   | $                 | 7,450,705   |                  | $      | 7,712,857 |   |
| Deferred revenue                                                                                                                                            |   | 4,171,080         |        | 4,032,776             |   |
| Total current  liabilities                                                                                                                                  |   | 11,621,785        |        | 11,745,633            |   |
|                                                                                                                                                        |   |              |        |                  |   |
| Deferred revenue                                                                                                                                            |   | 68,776,544        |        | 70,586,450            |   |
| Minority  interest                                                                                                                                          |   | 11,793,364        |        | 13,307,131            |   |
|                                                                                                                                                        |   |              |        |                  |   |
| Stockholders’  equity:                                                                                                                                 |   |              |        |                  |   |
| Common stock,  $0.10 par value, 200,000,000 shares authorized: issued and outstanding  56,418,049 at June 30, 2001 and 51,228,154 at December 31, 2000 |   | 5,641,805         |        | 5,122,816             |   |
| Additional  paid-in capital                                                                                                                                 |   | 320,794,253       |        | 297,073,713           |   |
| Stockholder  loans                                                                                                                                          |   | (1,311,065        | )           | (643,606              | )      |
| Accumulated  deficit                                                                                                                                        |   | (232,664,530      | )           | (161,683,557          | )      |
| Total  stockholders’ equity                                                                                                                            |   | 92,460,463        |        | 139,869,366           |   |
| Total  liabilities and stockholders’ equity                                                                                                            |   | $                 | 184,652,156 |                  | $      | 235,508,580 |   |

*See notes to consolidatedfinancial statements.*

 

 

2

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ACTV, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

**(As Restated — See Note12)**

** **

** **
|                                                                                                    |   | **For the Three Months Ended June 30,** |      | **For the Six Months Ended June 30,** |   |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|---------------------------------------|--------|
|                                                                                                    |   | **2001**                                |      | **2000**                              |   | **2001** |   | **2000** |   |
| Revenues                                                                                                |   | $                                       | 4,226,452 |                                  | $      | 1,655,176 |   | $ | 7,499,894 |   | $ | 3,048,213 |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Costs and  expenses:                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Selling, general  administrative                                                                        |   | 12,657,243                              |      | 10,470,710                            |   | 26,746,378 |   | 17,357,549 |   |
| Depreciation and  amortization                                                                          |   | 1,466,813                               |      | 753,054                               |   | 2,886,335 |   | 1,464,591 |   |
| Amortization of  goodwill                                                                               |   | 1,042,308                               |      | 106,593                               |   | 1,460,806 |   | 213,186 |   |
| Stock-based  compensation (income)/expense                                                              |   | (4,121,649                              | )         | (94,574,110                           | )      | (2,819,155 | ) | (134,156,317 | ) |
| Total  expenses/(income)                                                                                |   | 11,044,715                              |      | (83,243,753                           | )      | 28,274,364 |   | (115,120,991 | ) |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| (Loss)/income  from operations                                                                          |   | (6,818,263                              | )         | 84,898,929                            |   | (20,774,470 | ) | 118,169,204 |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Interest income                                                                                         |   | 1,171,229                               |      | 2,213,145                             |   | 2,791,638 |   | 3,381,024 |   |
| Interest expense                                                                                        |   | —                                  |      | (14,527                               | )      | — |   | (275,832 | ) |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Interest-net                                                                                            |   | 1,171,229                               |      | 2,198,618                             |   | 2,791,638 |   | 3,105,192 |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Other  income/(expense)                                                                                 |   | 12,955,697                              |      | —                                |   | 4,220,285 |   | — |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Income/(loss)  before minority interest, extraordinary item and cumulative effect of accounting  change |   | 7,308,663                               |      | 87,097,547                            |   | (13,762,547 | ) | 121,274,396 |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Minority  interest                                                                                      |   | 819,157                                 |      | 307,446                               |   | 1,513,771 |   | 477,896 |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Income/(loss)  before extraordinary item and cumulative effect of accounting change                     |   | $                                       | 8,127,820 |                                  | $      | 87,404,993 |   | $ | (12,248,776 | ) | $ | 121,752,292 |   |
| Extraordinary  loss on early extinguishment of debt                                                     |   | —                                  |      | (1,411,139                            | )      | — |   | (1,411,139 | ) |
| Cumulative  transition effect of adopting SFAS No. 133                                                  |   | —                                  |      | —                                |   | (58,732,197 | ) | — |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Net  income/(loss)                                                                                      |   | $                                       | 8,127,820 |                                  | $      | 85,993,854 |   | $ | (70,980,973 | ) | $ | 120,341,153 |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Income/(loss)  per share:                                                                               |   |                                    |      |                                  |   |   |   |   |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Basic                                                                                                   |   |                                    |      |                                  |   |   |   |   |   |
| Income/(loss)  before extraordinary item and cumulative effect of accounting change                     |   | $                                       | 0.15      |                                  | $      |  1.73 |   | $ | (0.23 | ) | $ |  2.54 |   |
| Extraordinary  item                                                                                     |   |                                    | —    |                                  |   | (0.03 | ) |   | — |   |   | (0.03 | ) |
| Cumulative  transition effect of adopting SFAS No. 133                                                  |   |                                    | —    |                                  |   | — |   |   | (1.08 | ) |   | — |   |
| Basic net  income/(loss) per share                                                                      |   | $                                       | 0.15      |                                  | $      |  1.70 |   | $ |  (1.31 | ) | $ |  2.51 |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |   |   |   |   |
| Diluted                                                                                                 |   |                                    |      |                                  |   |   |   |   |   |
| Income/(loss)  before extraordinary item and cumulative effect of accounting change                     |   | $                                       | 0.14      |                                  | $      | 1.48 |   | $ | (0.23 | ) | $ | 2.00 |   |
| Extraordinary  item                                                                                     |   |                                    | —    |                                  |   | (0.02 | ) |   | — |   |   | (0.02 | ) |
| Cumulative  transition effect of adopting SFAS No. 133                                                  |   |                                    | —    |                                  |   | — |   |   | (1.08 | ) |   | — |   |
| Diluted net  income/(loss) per share                                                                    |   | $                                       | 0.14      |                                  | $      | 1.46 |   | $ | (1.31 | ) | $ | 1.98 |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Shares used in  basic calculations                                                                      |   | 55,916,619                              |      | 50,606,978                            |   | 54,147,428 |   | 47,935,824 |   |
|                                                                                                    |   |                                    |      |                                  |   |   |   |   |   |
| Shares used in  diluted calculations                                                                    |   | 60,107,307                              |      | 58,867,573                            |   | 54,147,428 |   | 60,991,246 |   |

*See notes to consolidatedfinancial statements.*

 

3

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**ACTV, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

**(As Restated — See Note12)**

 
|                                                                        |   | **For the Six Months Ended**June 30, |        |
|-----------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                        |   | **2001**                             |        | **2000** |   |
| Cash flows from  operating activities:                                      |   |                                 |        |   |   |
| Net  (loss)/income                                                          |   | $                                    | (70,980,973 | ) | $ | 120,341,153 |   |
| 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                                            |   | (4,220,285                           | )           | — |   |
| Depreciation and  amortization                                              |   | 4,347,141                            |        | 1,677,777 |   |
| Deferred  compensation - other                                              |   | 75,000                               |        | 306,000 |   |
| Stock-based  compensation                                                   |   | (2,819,155                           | )           | (134,156,317 | ) |
| Amortization of  deferred revenue                                           |   | (1,809,906                           | )           | — |   |
| Common stock  issued in lieu of cash payment                                |   | 1,767,275                            |        | 1,520,000 |   |
| Deferred revenue                                                            |   | 138,304                              |        | (140,743 | ) |
| Minority  interest                                                          |   | (1,513,771                           | )           | (477,897 | ) |
|                                                                        |   |                                 |        |   |   |
| Changes in  assets and liabilities:                                         |   |                                 |        |   |   |
| Accounts  receivable                                                        |   | (1,528,965                           | )           | (106,403 | ) |
| Other assets                                                                |   | (2,097,101                           | )           | (2,158,213 | ) |
| Accounts payable  and accrued expenses                                      |   | (957,675                             | )           | 283,195 |   |
| Net cash used in  operating activities                                      |   | (20,867,914                          | )           | (12,911,448 | ) |
| Cash flows from  investing activities:                                      |   |                                 |        |   |   |
| Investment in  patents                                                      |   | (567,499                             | )           | (228,201 | ) |
| Investment in  property and equipment                                       |   | (5,892,035                           | )           | (1,925,533 | ) |
| Investment in  software development costs                                   |   | (2,192,252                           | )           | (452,733 | ) |
| Strategic  investments                                                      |   | (5,217,349                           | )           | (3,750,000 | ) |
| Net cash used in  investing activities                                      |   | (13,869,135                          | )           | (6,356,467 | ) |
| Cash flows from  financing activities:                                      |   |                                 |        |   |   |
| Retirement of  debt — net                                              |   | —                               |        | (4,266,095 | ) |
| Transfer to  restricted cash                                                |   | (1,066,278                           | )           | — |   |
| Net proceeds  from subsidiary equity transactions                           |   | —                               |        | 1,549,900 |   |
| Net proceeds  from equity financings                                        |   | 106,320                              |        | 148,458,270 |   |
| Repayment of  stockholders loans                                            |   | 35,910                               |        | — |   |
| Net cash  (used)/provided by financing activities                           |   | (924,048                             | )           | 145,742,075 |   |
| Net (decrease)  increase in cash and cash equivalents                       |   | (35,661,097                          | )           | 126,474,160 |   |
| Cash and cash  equivalents, beginning of period                             |   | 122,488,041                          |        | 9,413,169 |   |
| Cash and cash  equivalents, end of period                                   |   | $                                    | 86,826,944  |   | $ | 135,887,329 |   |

***Supplemental Disclosure to the Consolidated Statements ofCash Flows***

*The following schedule provides additional information concerningacquisitions:*
|                              |   | **For the Six Months Ended  June 30, 2001** |      |
|-----------------------------------|--------|---------------------------------------------|-----------|
| Retirement of Common Stock:       |   | $                                           | 1,520,000 |   |
| Purchase Acquisitions:            |   |                                        |      |
| Assets acquired (excluding  cash) |   | 2,089,071                                   |      |
| Liabilities assumed               |   | 2,695,524                                   |      |
| Market value of shares  issued    |   | 27,475,090                                  |      |
|                                   |        |                                             |           |  |

*See notes to consolidatedfinancial statements.*

** **

**4**

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** **

**ACTV, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(Unaudited)**

**(As Restated — See Note12)**

 
|                                                                            |   | **Common Stock** |   | **Stockholder Loans** |      | **Additional Paid in Capital** |    | **Accumulated  Deficit** |   | **Total**   |        |
|---------------------------------------------------------------------------------|--------|------------------|--------|-----------------------|-----------|--------------------------------|---------|--------------------------|--------|-------------|-------------|
|                                                                            |   | **Shares**       |   | **Amount**            |
| 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 |   | 1,278,446        |   | 127,844               |      |                           |    | 728,475                  |   | —      |        | 856,319 |   |
|                                                                            |   |             |   |                  |      |                           |    |                     |   |        |        |   |   |
| Adjustment to  deferred stock compensation                                      |   |             |   |                  |      |                           |    | (2,819,155               | )      |        |        | (2,819,155 | ) |
|                                                                            |   |             |   |                  |      |                           |    |                     |   |        |        |   |   |
| Issuance of  shares for services                                                |   | 92,960           |   | 9,296                 |      |                           |    | 237,979                  |   | —      |        | 247,275 |   |
|                                                                            |   |             |   |                  |      |                           |    |                     |   |        |        |   |   |
| Issuance of  shares in connection with acquisition                              |   | 4,007,889        |   | 400,789               |      |                           |    | 27,074,301               |   | —      |        | 27,475,090 |   |
|                                                                            |   |             |   |                  |      |                           |    |                     |   |        |        |   |   |
| Retirement of  common stock                                                     |   | (189,400         | )      | (18,940               | )         |                           |    | (1,501,060               | )      | —      |        | (1,520,000 | ) |
|                                                                            |   |             |   |                  |      |                           |    |                     |   |        |        |   |   |
| Issuance of  shareholder loan                                                   |   |             |   |                  |      | (667,459                       | )  |                     |   |        |        | (667,459 | ) |
|                                                                            |   |             |   |                  |      |                           |    |                     |   |        |        |   |   |
| Net loss                                                                        |   | —           |   | —                |      | —                         |    | —                   |   | (70,980,973 | )           | (70,980,973 | ) |
|                                                                            |   |             |   |                  |      |                           |    |                     |   |        |        |   |   |
| Balance at June  30, 2001                                                       |   | 56,418,049       |   | $                     | 5,641,805 |                           | $       | (1,311,065               | )      | $           | 320,794,253 |   | $ | (232,664,530 | ) | $ | 92,460,463 |   |

*See notes to consolidatedfinancial statements.*

 

 

** **

**5**

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** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTSTHREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000**

**(As Restated — See Note12)**

**1.        Basisof Presentation**

Theresults of operations for the three and six months ended June 30, 2001 and 2000are not necessarily indicative of a full year’s operations. In the opinion ofmanagement, the accompanying consolidated financial statements include alladjustments of a normal recurring nature, which are necessary to present fairlysuch financial statements.

Allsignificant intercompany balances and transactions have been eliminated inconsolidation. Certain information and footnote disclosures normally includedin the financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted.

Theseconsolidated financial statements should be read in conjunction with theaudited financial statements and notes thereto included in our annual report onForm 10–K/A for the year ended December 31, 2000.

Weconsider all highly liquid debt instruments purchased with an original maturityof three months or less to be cash equivalents.

Certainreclassifications have been made to the prior years’ financial statements toconform to the 2001 presentation.

**2.        FinancialInstruments**

EffectiveJanuary 1, 2001, ACTV adopted Statement of Financial Accounting Standards("SFAS") Statement No. 133, "Accounting for DerivativeInstruments and Hedging Activities", as amended by SFAS 137 and 138("SFAS 133"). SFAS 133 requires that all derivative financialinstruments be recorded in the balance sheet at fair value. The provisions ofSFAS 133 affected the Company's accounting for its investment of 2.5 millionrestricted warrants for Liberty Livewire Corporation ("Livewire").Prior to the adoption of SFAS 133, those warrants were carried at cost. Withthe adoption of SFAS 133, the Livewire investment is recorded at fair value.This resulted in the Company recording a cumulative effect transitionadjustment loss of $58.7 million at January 1, 2001. Beginning in the firstquarter of 2001, the Company records subsequent changes in the fair value ofthis investment in the statement of operations.

Theremay be periods with significant non-cash increases or decreases to theCompany's net income/loss related to the changes in the fair value of theLivewire Investment. The carrying value of the Company's derivative instrumentapproximates fair value. The fair value of the Livewire investment isdetermined by reference to underlying market values resulting from trading ofLivewire on a national securities exchange and on estimates using theBlack-Scholes valuation model.

**3.        FinancingActivities**

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

OnFebruary 3, 2000, the Company completed a follow–on offering of 4.6million common shares, including 0.6 million common shares to cover the over–allotmentsof our underwriters, Credit Suisse First Boston, Bear Stearns & Co. Inc.,Lehman Brothers, and Salomon Smith Barney. The 4.6 million total common shareswere priced to the public at $30 per share, for total gross proceeds of $138million. We paid underwriting discounts and commissions of $1.80 per share, or$8.28 million, resulting in net proceeds of $28.20 per share, or $129.4million.

**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 shares andoptions contingent upon Intellocity’s achieving certain performance targets forthe year ended December 31, 2001. Intellocity shareholders are subject toprovisions restricting the sale of the ACTV stock; these restrictions rangeover 4 years. The acquisition was accounted for under the purchase methodof accounting in the first quarter of 2001.

The preliminary estimatedfair value of assets acquired and liabilities assumed at the transaction dateamounted to $0.6 million.  Goodwill,representing the excess cost over the fair value of net assets acquired, wascalculated to be $26.2 million and will be amortized over 7 years.  (See Note 11)  The Company is presently completing the review and determinationof such fair values.  Accordingly, theallocation of the purchase price and the amount of goodwill are subject torevision, which if any, is not expected to be material.

The following tablepresents the proforma results of operations had the acquisition of Intellocitybeen completed as of January 1, 2000. The pro forma results are shown forillustrative purposes only and do not purport to be indicative of the resultswhich would have been reported if the business combination had occurred on thedate indicated or which may occur in the future.  These pro forma amounts include estimates and assumptions thatmanagement believes are reasonable.

 
|                                                                                                   |   | **For the  Six Months Ended June 30, 2000** |        |
|--------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|-------------|
|                                                                                                   |   | **2001**                                    |        | **2000** |   |
| Revenues                                                                                               |   | $                                           | 8,698,313   |   | $ | 6,442,926 |   |
|                                                                                                   |   |                                        |        |   |   |
| (Loss)/income before minority interest,  extraordinary item and cumulative effect of accounting change |   | $                                           | (14,610,251 | ) | $ | 120,592,463 |   |
|                                                                                                   |   |                                        |        |   |   |   |   |
| (Loss)/income before extraordinary item and  cumulative effect of accounting change                    |   | $                                           | (13,096,480 | ) | $ | 121,070,359 |   |
|                                                                                                   |   |                                        |        |   |   |   |
| Net (loss)/income                                                                                      |   | $                                           | (71,828,677 | ) | $ | 119,659,220 |   |
|                                                                                                   |   |                                        |        |   |   |   |   |
| Basic                                                                                                  |   |                                        |        |   |   |   |   |
| (Loss)/income per share before extraordinary item and cumulative  effect of accounting change          |   | $                                           | (0.24       | ) | $ | 2.25 |   |
| Extraordinary item                                                                                     |   |                                        | —      |   |   | (0.03 | ) |
| Cumulative effect of accounting change                                                                 |   |                                        | (1.04       | ) |   | — |   |
| Basic (loss)/income per share                                                                          |   | $                                           | (1.28       | ) | $ | 2.22 |   |
|                                                                                                   |   |                                        |        |   |   |   |   |
| Diluted                                                                                                |   |                                        |        |   |   |   |   |
| (Loss)/income per share before extraordinary item and cumulative  effect of accounting change          |   | $                                           | (0.24       | ) |   | 2.25 |   |
| Extraordinary item                                                                                     |   |                                        | —      |   |   | (0.03 | ) |
| Cumulative effect of accounting change                                                                 |   |                                        | (1.04       | ) |   | — |   |
| Diluted (loss)/income per share                                                                        |   | $                                           | (1.28       | ) | $ | 2.22 |   |

 

On August 17, 2000, the Company acquired all of the outstanding capitalstock of Bottle Rocket, Inc., a business engaged in the creation and marketingof online, games-based entertainment. The Company acquired Bottle Rocket in exchange for 272,035 shares of theCompany’s common stock.  The acquisitionof Bottle Rocket has been accounted for under the pooling of interests methodof accounting and, accordingly, the Company’s historical consolidated financialstatements have been restated to include the accounts and results of operationsof Bottle Rocket.

 

The following table sets forth the certain combined amounts of thepreviously reported separate results of the companies.

 
|                                                                                                   |   | **For the  Six Months Ended June 30, 2000** |        |
|--------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|-------------|
|                                                                                                   |   | **ACTV**                                    |        | **Bottle  Rocket** |   | **Combined** |   |
| Revenues                                                                                               |   | $                                           | 1,902,656   |   | $ | 1,145,557 |   | $ | 3,048,213 |   |
|                                                                                                   |   |                                        |        |   |   |   |   |
| Income/(Loss) before minority interest, extraordinary item and  cumulative effect of accounting change |   | $                                           | 122,353,948 |   | $ | (1,079,552 | ) | $ | 121,274,396 |   |
|                                                                                                   |   |                                        |        |   |   |   |   |
| Income/(Loss) before extraordinary item and cumulative effect of  accounting change                    |   | $                                           | 122,831,844 |   | $ | (1,079,552 | ) | $ | 121,752,292 |   |
|                                                                                                   |   |                                        |        |   |   |   |   |
| Net Income/(Loss)                                                                                      |   | $                                           | 121,420,705 |   | $ | (1,079,552 | ) | $ | 120,341,153 |   |

 

6

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**5.****                         MinorityInterest**

 

We record minorityinterest resulting from Digital ADCO. Digital ADCO was formed in November 1999 and co-founded by ACTV, Inc.and Motorola Broadband.  Digital ADCOdevelops applications for the delivery of addressable advertising.  Under the terms of our agreement withMotorola Broadband, we licensed five of our patents to Digital ADCO andMotorola Broadband licensed six of its patents and made a capital commitment toDigital ADCO.  During August 2000, OpenTV made a capital contribution and contributed patents on a non-exclusive basisto Digitial ADCO.  Additionally, DigitalADCO International is being formed to license and distribute products andservices outside of North America and other western hemisphere countries.  Digital ADCO, Inc.'s issued and outstandingshares of capital stock presently consist of Class A common stock, having onevote per share, and Class B common stock, having 25 votes per share.  All of Digitial ADCO's issued and outstandingshares are presently held by three investors. Open TV currently owns the issued and outstanding Class A commonshares.  ACTV, Inc. and MotorolaBroadband, the co-founders of Digital ADCO, own the issued and outstandingClass B common shares.  ACTV, Inc.currently owns 45.9% of Digital ADCO and exercises voting control of theventure.

 

For the three-monthperiods ended June 30, 2001 and 2000, we recorded a minority interest benefitof $0.8 million and $0.3 million, respectively.  For the six-month periods ended June 30, 2001 and 2000, we recordeda minority interest benefit of $1.5 million and $0.5 million, respectively. Theminority interest benefit for both periods is principally the result of anapportionment of the loss of our Digital ADCO subsidiary, whose results areconsolidated with ours, to outside minority owners of this subsidiary.

 

7

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**6.             SegmentInformation (As Restated — Note 12)**

Wehave two principal business segments; Digital Television and EnhancedMedia.  Information concerning ourbusiness segments for the three and six months ending June 30, 2001 and 2000 isas follows:

 
|                                |   | **For the Three Months Ended** June 30, |       | **For the Six Months Ended** June 30, |       |
|-------------------------------------|--------|-----------------------------------------|------------|---------------------------------------|------------|
|                                |   | **2001**                                |       | **2000**                              |       | **2001** |   | **2000** |   |
| **Revenues**                        |   |                                    |       |                                  |       |   |   |   |   |
| Digital  Television                 |   | $                                       | 1,820,097  |                                  | $          | — |   | $ | 2,549,413 |   | $ | — |   |
| Enhanced Media                      |   | 2,406,355                               |       | 1,655,176                             |       | 4,950,481 |   | 3,048,213 |   |
| Total                               |   | $                                       | 4,226,452  |                                  | $          | 1,655,176 |   | $ | 7,499,894 |   | $ | 3,048,213 |   |
|                                |   |                                    |       |                                  |       |   |   |   |   |
| **Depreciation & Amortization** |   |                                    |       |                                  |       |   |   |   |   |
| Digital  Television                 |   | $                                       | 688,244    |                                  | $          | 339,369 |   | $ | 1,377,245 |   | $ | 657,154 |   |
| Enhanced Media                      |   | 405,597                                 |       | 268,227                               |       | 824,312 |   | 516,904 |   |
| Unallocated  Corporate              |   | 1,415,280                               |       | 252,051                               |       | 2,145,584 |   | 503,719 |   |
| Total                               |   | $                                       | 2,509,121  |                                  | $          | 859,647 |   | $ | 4,347,141 |   | $ | 1,677,777 |   |
|                                |   |                                    |       |                                  |       |   |   |   |   |
| **Interest Income (Expense)**       |   |                                    |       |                                  |       |   |   |   |   |
| Digital  Television                 |   | $                                       | 73,787     |                                  | $          | 8,078 |   | $ | 187,945 |   | $ | (241,803 | ) |
| Enhanced Media                      |   | 490                                     |       | (3,713                                | )          | 3,298 |   | 1,428 |   |
| Unallocated  Corporate              |   | 1,096,952                               |       | 2,194,253                             |       | 2,600,395 |   | 3,345,567 |   |
| Total                               |   | $                                       | 1,171,229  |                                  | $          | 2,198,618 |   | $ | 2,791,638 |   | $ | 3,105,192 |   |
|                                |   |                                    |       |                                  |       |   |   |   |   |
| **Net Income/(Loss)**               |   |                                    |       |                                  |       |   |   |   |   |
| Digital  Television                 |   | $                                       | (1,667,007 | )                                     | $          | (3,218,004 | ) | $ | (3,499,440 | ) | $ | (5,001,023 | ) |
| Enhanced Media                      |   | (2,212,320                              | )          | (2,800,929                            | )          | (4,948,693 | ) | (5,383,829 | ) |
| Unallocated  Corporate              |   | 12,007,147                              |       | 92,012,787                            |       | (62,532,840 | ) | 130,726,005 |   |
| Total                               |   | $                                       | 8,127,820  |                                  | 85,993,854 |   | $ | (70,980,973 | ) | 120,341,153 |   |
|                                |   |                                    |       |                                  |       |   |   |   |   |
| **Capital Expenditures**            |   |                                    |       |                                  |       |   |   |   |   |
| Digital  Television                 |   | $                                       | 320,095    |                                  | $          | 981,906 |   | $ | 2,202,470 |   | $ | 1,297,471 |   |
| Enhanced Media                      |   | 692,798                                 |       | 551,210                               |       | 949,313 |   | 1,115,600 |   |
| Unallocated  Corporate              |   | 2,209,195                               |       | 173,975                               |       | 5,500,003 |   | 193,398 |   |
| Total                               |   | $                                       | 3,222,088  |                                  | $          | 1,707,091 |   | $ | 8,651,786 |   | $ | 2,606,469 |   |

 

**BalanceSheet Accounts**
|                   |   | **June 30,** |        | **December 31,** |       |
|------------------------|--------|--------------|-------------|------------------|------------|
|                   |   | **2001**     |        | **2000**         |       |
| **Current Assets**     |   |         |        |             |       |
| Digital Television     |   | $            | 8,674,604   |             | $          | 10,290,068 |   |
| Enhanced Media         |   | 3,975,640    |        | 2,382,673        |       |
| Unallocated  Corporate |   | 79,859,692   |        | 114,756,611      |       |
| Total                  |   | $            | 92,509,936  |             | $          | 127,429,352 |   |
|                   |   |         |        |             |       |
| **Total Assets**       |   |         |        |             |       |
| Digital  Television    |   | 16,919,383   |        | $                | 17,010,470 |   |
| Enhanced Media         |   | 84,830,420   |        | 83,127,887       |       |
| Unallocated  Corporate |   | 82,902,353   |        | 135,370,223      |       |
| Total                  |   | $            | 184,652,156 |             | $          | 235,508,580 |   |

 

8

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**7.        ExecutiveCompensation**

For each of the six-monthperiods ended June 30, 2001 and June 30, 2000, we incurred executive incentivecompensation expense of $2.3 million. This expense is related to an executive incentive compensationprovision, now cancelled, which was based on changes in the market value of ourcommon stock and paid in unregistered securities.  The compensation recognized was contingent on continuedemployment of the executive and subject to forfeiture.

**8.        Investmentin Warrant**

The Company and Liberty Livewire LLC, a unit of Liberty LivewireCorporation (“Livewire”) in April 2000 entered into a joint marketing venture,“HyperTV with Livewire.” HyperTV with Livewire received the non-exclusive rightto use certain patented ACTV technologies in providing turnkey convergenceservices, including application hosting, web authoring services, datamanagement, e-commerce and other value–added services for advertisers,television programmers, studios and networks.

In connection with entering into the jointmarketing agreement, the Company received a warrant to acquire 2,500,000 sharesof Livewire at an exercise price of $30 per share. The warrant, which expiresin June 2015 and includes registration rights, vests ratably over five years,beginning April 13, 2001. With certain exceptions, the warrant is nottransferable. The Company previously recorded an investment and deferredrevenue in the amount of $76.0 million, the estimated fair value of the warrantat the time the agreement was executed. The Company estimated the value of thewarrant using the Black–Scholes pricing model. Using similar methodology,the estimated value of the warrant at June 30, 2001 was $21.5 million. TheCompany is currently in the process of renegotiating the joint market agreementwith Livewire and expects to finalize a renegotiated agreement during the thirdquarter of 2001.  As a result, theCompany may be required to make adjustments to the carrying value of theinvestment in warrant, deferred revenue, or of both during the third quarter ofthis year. (See Note 2)

TheCompany periodically estimates the value of the warrant using the Black Scholesmodel. The deferred revenues recorded by the Company are being amortized intorevenue over a period of 21 years, the contractual term of the jointmarketing venture.

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

For the six-month period ended June 30, 2000 we recorded a deferredexpense of $1.5 million relating to the unamortized portion of incentivecompensation paid in common stock.

The Company  recorded a reversal of non-cash deferred stock-based compensation expense inconnection with vested variable stock options of  $2.8 million and $134.2 million, respectively for the six monthsmonths ended June 30, 2001 and 2000.

** **

**10. NET INCOME/(LOSS) PER SHARE**

Thefollowing table sets forth the computation of basic and diluted (loss)/incomeper share:
|                                                                                     |   | **Three Months  Ended** |          | **Six Months  Ended** |   |
|------------------------------------------------------------------------------------------|--------|-------------------------|---------------|-----------------------|--------|
|                                                                                     |   | **June 30, 2001**       |          | **June 30, 2000**     |   | **June 30, 2001** |   | **June 30, 2000** |   |
| **Numerator:**                                                                           |   |                    |          |                  |   |   |   |   |   |
| **Income/(loss) before  extraordinary item and cumulative  effect of accounting change** |   | **$**                   | **8,127,820** |                  | **$**  | **87,404,993** |   | **$** | **(12,248,776** | **)** | **$** | **121,752,292** |   |
| **Extraordinary loss on early  extinguishment of debt**                                  |   |                    | **–**    |                  |   | **(1,411,139** | **)** |   | **–** |   |   | **(1,411,139** | **)** |
| **Cumulative transition effect of  adopting SFAS No. 133**                               |   |                    | **–**    |                  |   | **–** |   |   | **(58,732,197** | **)** |   | **–** |   |
| **Net income/(loss)**                                                                    |   |                    | **8,127,820** |                  |   | **85,993,854** |   |   | **(70,980,943** | **)** |   | **120,341,153** |   |
|                                                                                     |   |                    |          |                  |   |   |   |   |   |
| **Demoninator**                                                                          |   |                    |          |                  |   |   |   |   |   |
| **Basic weighted-average shares  outstanding**                                           |   | **55,916,619**          |          | **50,606,978**        |   | **54,147,428** |   | **47,935,824** |   |
| **Weighted-average options  outstanding**                                                |   | **4,190,688**           |          | **8,260,595**         |   | **—** |   | **13,055,422** |   |
| **Diluted weighted average shares  outstanding**                                         |   | **60,107,307**          |          | **58,867,573**        |   | **54,147,428** |   | **60,991,246** |   |
|                                                                                     |   |                    |          |                  |   |   |   |   |   |
| **Net income/(loss) per share**                                                          |   |                    |          |                  |   |   |   |   |   |
| **Basic**                                                                                |   |                    |          |                  |   |   |   |   |   |
| **Before extraordinary item and cumulative effect of accounting change**                 |   | **$**                   | **0.15**      |                  | **$**  | **1.73** |   | **$** | **(0.23** | **)** | **$** | **2.54** |   |
| **Extraordinary item**                                                                   |   |                    | **–**    |                  |   | **(0.03** | **)** |   | **–** |   |   | **(0.03** | **)** |
| **Cumulative transition effect of  adopting SFAS No. 133**                               |   |                    | **–**    |                  |   | **–** |   |   | **(1.08** | **)** |   | **–** |   |
| **Basic net income/(loss) per share**                                                    |   | **$**                   | **0.15**      |                  | **$**  | **1.70** |   | **$** | **(1.31** | **)** | **$** | **2.51** |   |
|                                                                                     |   |                    |          |                  |   | ** ** |   |   |   |
| **Diluted**                                                                              |   |                    |          |                  |   |   |   |   |   |
| **Before extraordinary item and cumulative effect of accounting change**                 |   | **$**                   | **0.14**      |                  | **$**  | **1.48** |   | **$** | **(0.23** | **)** | **$** | **2.00** |   |
| **Extraordinary item**                                                                   |   |                    | **–**    |                  |   | **(0.02** | **)** |   | **–** |   |   | **(0.02** | **)** |
| **Cumulative transition effect of  adopting SFAS No. 133**                               |   |                    | **–**    |                  |   | **–** |   |   | **(1.08** | **)** |   | **–** |   |
| **Diluted net income/(loss) per  share**                                                 |   | **$**                   | **0.14**      |                  | **$**  | **1.46** |   | **$** | **(1.31** | **)** | **$** | **(1.98** | **)** |

**11.     Recently Issued Accounting Pronouncements**

In June, 2001, the Financial Accounting StandardsBoard ("FASB"), issued SFAS No. 141, “Business Combinations” and SFASNo. 142 “Goodwill and Other Intangible Assets”. These pronouncementssignificantly change the accounting for business combinations, goodwill, andintangible assets. SFAS No. 141 eliminates the pooling-of-interests method ofaccounting for business combinations and further clarifies the criteria torecognize intangible assets separately from goodwill. The requirements of SFASNo. 141 are effective for any business combination accounted for by thepurchase method that is completed after June 30, 2001. SFAS No. 142 statesgoodwill and indefinite lived intangible assets are no longer amortized but arereviewed for impairment annually (or more frequently if impairment indicatorsarise).  Separable intangible assets that are not deemed 

 

9

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to have an indefinite life will continue to be amortized over theiruseful lives. The amortization provisions of  SFAS No. 142 apply togoodwill and intangible assets acquired after June 30, 2001. With respect togoodwill and intangible assets acquired prior to July 1, 2001, companies arerequired to adopt the pronouncement in their fiscal year beginning afterDecember 15, 2001. Goodwill is currently being amortized at approximately $4.2million annually. The Company has not yet completed its analysis of the newpronouncements and has not yet determined what effects the new pronouncementswill have on its financial statements.

 

**12.          Restatement**

 

Subsequent to the issuanceof the Company's 2000 consolidated financial statements, the Company determinedthat stock options granted to certain employees should be accounted for asvariable plan stock options. Accordingly, the Company has restated its financial statements toreflect the application of variable stock option accounting to the affectedstock option awards.  The changesresulted in the credit to stock-based compensation expense of $4.1 million and$94.6 million, respectively, for the three months ended June 30, 2001 and 2000and $2.8 million and $134.2 million, respectively, for the six months endedJune 30, 2001 and 2000.

 

                Inaddition, subsequent to the issuance of the Company's 2001 second quarter 10-Q,the Company determined that the investment in Livewire qualified as aderivative under SFAS No. 133. Accordingly, the Company has restated itsfinancial statements to reflect the adoption of SFAS No. 133 to theLivewire investment. The adoption resulted in the recording of a cumulativetransition adjustment of $58.7 million in the first quarter of 2001 andadditional credit of $13 million and $4.2 million related to the change in fairvalue of the underlying investment for the three month and six month periodsended June 30, 2001, respectively. 

 

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

 
|                           |   | **As of June 30, 2001**    |           |             |       |
|--------------------------------|--------|----------------------------|----------------|------------------|------------|
|                           |   | **As Previously Reported** |           | **As Restated**  |       |   |   |   |   |
| **Other current assets**       |   | **$**                      | **3,066,629**  | ** **       | **$**      | **1,755,564** | ** ** |   |   |   |   |   |   |
| **Investment in warrant**      |   |                       | **76,016,175** |             |       | **21,504,263** |   |   |   |   |   |   |   |
| **Stockholder loan**           |   | **—**                 | ** **     | **(1,311,065**   | **)**      |   |   |   |   |
| **Additional paid-in-capital** |   | **300,145,267**            | ** **     | **320,794,253**  | ** ** |   |   |   |   |
| **Accumulated deficit**        |   | **(157,503,632**           | **)**          | **(232,664,530** | **)**      |   |   |   |   |

 
|                                                                                   |   | **For the Three  Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                                   |   | **2001**                                 | ** ** | **2000** | ** ** |
|                                                                                   |   | **As Previously Reported**               |       | **As Restated** |   | **As Previously Reported** |   | **As Restated** |   |
| **Stock-based compensation expense/(income)**                                          |   | **—**                               | ** ** | **(4,121,649** | **)** | **—** | ** ** | **(94,574,110** | **)** |
| **(Loss)/income from operations**                                                      |   | **(10,939,912**                          | **)**      | **(6,818,263** | **)** | **(9,675,181** | **)** | **84,898,929** | ** ** |
| **Other income/(expense)**                                                             |   | **—**                               |       | **(12,955,697** | **)** | **—** |   | **—** |   |
| **Loss/(income) before**extraordinary item  and cumulative effect of accounting change |   | **(8,949,526**                           | **)**      | **8,127,820** |   | **(7,169,117** | **)** | **87,404,993** | ** ** |
| **Net (loss)/income**                                                                  |   | **(8,949,526**                           | **)**      | **8,127,820** |   | **(8,580,256** | **)** | **85,993,854** | ** ** |
|                                                                                   |   |                                     |       |   |   |   |   |   |   |
|                                                                                   |   |                                     |       |   |   |   |   |   |   |
| **Net (loss)/income per share**                                                        |   |                                     |       |   |   |   |   |   |   |
| **Basic**                                                                              |   |                                     |       |   |   |   |   |   |   |
| **Before extraordinary item**                                                          |   | **$**                                    | **(0.16**  | **)** | **$** | **0.15** |   | **$** | **(0.14** | **)** | **$** | **1.73** |   |
| **Extraordinary item**                                                                 |   | **—**                               |       | **—** |   | **(0.03** | **)** | **(0.03** | **)** |
| **Basic net (loss)/income per share**                                                  |   | **$**                                    | **(0.16**  | **)** | **$** | **0.15** |   | **$** | **(0.17** | **)** | **$** | **1.70** |   |
|                                                                                   |   |                                     |       |   |   |   |   |   |   |
| **Diluted**                                                                            |   |                                     |       |   |   |   |   |   |   |
| **Before extraordinary item**                                                          |   | **$**                                    | **(0.16**  | **)** | **$** | **0.14** |   | **$** | **(0.14** | **)** | **$** | **1.48** |   |
| **Extraordinary item**                                                                 |   | **—**                               |       | **—** |   | **(0.03** | **)** | **(0.02** | **)** |
| **Diluted net (loss)/income per  share**                                               |   | **$**                                    | **(0.16**  | **)** | **$** | **0.14** |   | **$** | **(0.17** | **)** | **$** | **1.46** |   |
|                                                                                   |   |                                     |       |   |   |   |   |   |   |
|                                                                                   |   | **For the Six  Months Ended June 30,**   | ** ** |
|                                                                                   |   | **2001**                                 | ** ** | **2000** | ** ** |
|                                                                                   |   | **As Previously Reported**               |       | **As Restated** |   | **As Previously Reported** |   | **As Restated** |   |
| **Stock-based compensation (income)/expense**                                          |   | **–**                               |       | **(2,819,155** | **)** | **–** |   | **(134,156,317** | **)** |
| **(Loss)/income from operations**                                                      |   | **(23,593,624**                          | **)**      | **(20,774,470** | **)** | **(15,987,113** | **)** | **118,169,204** |   |
| **Other income/(expense)**                                                             |   | **—**                               |       | **4,220,285** |   | **—** |   | **—** |   |
| **(Loss)/income before extraordinary item**and cumulative effect of accounting change  |   | **(19,288,215**                          | **)**      | **(12,248,776** | **)** | **(12,404,024** | **)** | **121,752,292** |   |
| **Cumulative transition effect of adopting SFAS No.  133**                             |   | **—**                               |       | **(58,732,197** | **)** | **—** |   | **—** | ** ** |
| **Net/(loss) income**                                                                  |   | **(19,288,215**                          | **)**      | **(70,980,973** | **)** | **(13,815,163** | **)** | **120,341,153** |   |
|                                                                                   |   |                                     |       |   |   |   |   |   |   |
| **Net (loss)/income per share**                                                        |   |                                     |       |   |   |   |   |   |   |
| **Basic**                                                                              |   |                                     |       |   |   |   |   |   |   |
| **Before**extraordinary item and cumulative effect of accounting change                |   | **$**                                    | **(0.36**  | **)** | **$** | **(0.23** | **)** | **$** | **(0.26** | **)** | **$** | **2.54** |   |
| **Extraordinary item**                                                                 |   | **—**                               |       | **—** |   | **(0.03** | **)** | **(0.03** | **)** |
| **Cumulative transition effect of adopting SFAS  No. 133**                        |   | **—**                               |       | **(1.08** | **)** | **—** |   | **—** |   |
| **Basic net (loss)/income per share**                                                  |   | **$**                                    | **(0.36**  | **)** | **$** | **(1.31** | **)** | **$** | **(0.29** | **)** | **$** | **2.51** |   |
|                                                                                   |   |                                     |       |   |   |   |   |   |   |
| **Diluted**                                                                            |   |                                     |       |   |   |   |   |   |   |
| **Before**extraordinary item and cumulative effect of accounting change                |   | **$**                                    | **(0.36**  | **)** | **$** | **(0.23** | **)** | **$** | **(0.26** | **)** | **$** | **2.00** |   |
| **Extraordinary item**                                                                 |   | **—**                               |       | **—** |   | **(0.03** | **)** | **(0.02** | **)** |
| **Cumulative transition effect of adopting SFAS  No. 133**                        |   | **—**                               |       | **(1.08** | **)** | **—** |   | **—** |   |
| **Diluted net (loss)/income per share**                                                |   | **$**                                    | **(0.36**  | **)** | **$** | **(1.31)** |   | **$** | **(0.29** | **)** | **$** | **1.98** |   |

 

10

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**ITEM 2.                      MANAGEMENT’S DISCUSSION AND ANALYSIS**

**                                    OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Overview

 

You should read thefollowing discussion together with our consolidated financial statements andrelated notes included elsewhere and incorporated by reference. The resultsdiscussed below are not necessarily indicative of the results to be expected inany future periods. To the extent that the information presented in thisdiscussion addresses financial projections, information or expectations aboutour products or markets or otherwise makes statements about future events, suchstatements are forward–looking and are subject to a number of risks anduncertainties that could cause actual results to differ materially from thestatements made. See “Special Note Regarding Forward–Looking Statements”for further information about forward–looking statements. Management’sDiscussion and Analysis of Finanicial Condition and Results of Operationspresented gives effect to the restatement of our previously reported results ofoperations for these periods.  See Note12 to the consolidated financial statements for a discussion of this matter.

 

Weare a digital media company that provides technical and creative services,tools and proprietary applications for digital television and enhanced media.We have two operating business segments, which we call Digital TV and EnhancedMedia.

 

Wehave developed a range of services, products and proprietary technologies foreach of these business segments. ACTV’s Digital TV segment providesapplications and technical and creative services to television distributors,advertisers, programmers and digital TV infrastructure companies, as they movefrom analog to digital systems. In addition, our Digital TV technologies enabletelevision programmers and advertisers to create individualized programming fordigital television transmission systems. We believe that these technologies areunique in providing targeting, interactivity and accountability for televisioncommercials, and in giving viewers the ability to instantly customize theirviewing experiences for a wide variety of programming applications. OurEnhanced Media technologies allow both for the enhancement of video and audiocontent, including standard TV programming, with Web-based information,interactivity and games. For the Enhanced Media market, we provide technologyand services for synchronizing the delivery of television programming andInternet content.

RESULTS OF OPERATIONS

 

**Comparison of Three-Month Periods Ended June 30, 2001 andJune 30, 2000**

*Revenues.* During thethree-month period ended June 30, 2001, our revenues increased 147%, to $4.2million, compared with $1.7 million in the three-month period ended June 30,2000. In the more recent period, Enhanced Media licensing and servicesaccounted for approximately 57% of our revenue, with Digital TV professionaland technical services providing the remaining 43%. In last year’s three-monthperiod, all of our revenues were derived from Enhanced Media licensing andservices.

*TotalSelling, General and Administrative Expenses.* Total selling, general andadministrative expenses increased approximately 21% in the second quarter of2001, to $12.7 million, from $10.5 million in the second quarter of 2000. Theincrease was principally the result of increased sales, marketing, productdevelopment, staffing and facilities expense during the more recent quarter.

*Stock-Based Compensation*.  Stock-based compensation expense was credited $4.1 million forthe three months ended June 30, 2001, as compared to a credit of stock-basedcompensation expense of $94.6 million for the three months ended June 30,2001.  The Company records a charge orcredit to stock-based compensation expense based on increases in the marketvalue of the Company's common stock in excess of the exercise price of certainemployee options, which are subject to variable option accounting treatment.

 

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*Depreciationand Amortization*. Depreciation and amortization expense increased178%, to $2.5 million in the three months ended June 30, 2001, versus $0.9million during the same period in 2000. The increase was the result of the depreciationof a larger fixed asset base, including leasehold improvements and equipmentrelated to the deployment of SpotOn, and higher amortization expense forcapitalized software development and for goodwill. In March 2001, we recordedadditional goodwill in connection with our purchase of Intellocity.

*Interest —Net*. Interest income in second quarter of 2001 was $1.2 million, comparedwith $2.2 million in the second quarter of 2000. The decrease was the result oflower average cash balances during the more recent quarter. In February 2000,we raised approximately $129.4 million in net proceeds from a public follow-onoffering. We incurred no interest expense in the second quarter of 2001,compared to interest expense of $14,527 in the second quarter of 2000. Theinterest expense for the 2000 quarter relates to a $5 million original facevalue note redeemed in May 2000, which was issued by a subsidiary of ours inJanuary 1998.

*Other Income/(Expense).* Other income(expense) isthe change in fair value of the investment in warrant which is now accountedfor as a derivative instrument after the adoption of SFAS No. 133, and theapplication of its requirements.  Forthe three months ended June 30, 2001, the Company recorded an increase in thevalue of the warrant of $13 million.

*Net (Loss)/Income Before Extraordinary Item. *For the three months endedJune 30, 2001, our net loss applicable to common stockholders was $8.1 million,or $0.15 per basic and $0.14 per diluted share, compared to the net income of$87.4 million, or $1.73 per basic share and $1.48 per diluted share, for thethree months ended June 30, 2000.

*Net(Loss)/Income*. For the three months ended June 30, 2001, our netincome after extraordinary loss was $8.1 million, or $0.15 per basic and $0.14diluted share, compared to net income of $86.0 million, or $1.70 per basic share and $1.46 per diluted share, for thethree months ended June 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 issue costs of $0.8  million and $0.2 million, respectively, for a total loss of $1.4million, or $0.03 per share.

**Comparison of Six-Month PeriodsEnded June 30, 2001 and June 30, 2000**

*Revenues.* During thesix-month period ended June 30, 2001, our revenues increased 142%, to $7.5million, compared with $3.1 million in the six-month period ended June 30,2000. In the more recent period, Enhanced Media licensing and servicesaccounted for two-thirds of our revenue, with Digital TV professional andtechnical services providing the remaining third. In last year’s six-monthperiod, all of our revenues were derived from Enhanced Media licensing and services.

*TotalSelling, General and Administrative Expenses.* Total selling, general andadministrative expenses increased approximately 53% in the first half of 2001,to $26.7 million, from $17.4 million in the first half of 2000. The increasewas principally the result of increased sales, marketing, product development,staffing and facilities expense during the more recent period.

*Stock-Based Compensation. *Stock-based compensation expense was credited $2.8 million for the sixmonths ended June 30, 2001, compared to a credit of compensation expense of$134.2 million for the six months ended June 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.

*Depreciationand Amortization*. Depreciation and amortization expense increased153%, to $4.3 million in the six-month period ended June 30, 2001, from $1.7million in the six-month period ended June 30, 2000. The increase was theresult of depreciation of a larger fixed asset base, including leaseholdimprovements and equipment related to the deployment of SpotOn, and higheramortization expense for capitalized software development and for goodwill. InMarch 2001, we recorded additional goodwill in connection with our purchase ofIntellocity, Inc.

*Interest  — Net*. Net interest income infirst half of 2001 was $2.8 million, compared with $3.1 million in the firsthalf of 2000. The decrease was the result of lower average cash balances duringthe six months ended June 30, 2001. In February 2000, we raised approximately$129.4 million in net proceeds from a public follow-on offering. We incurred nointerest expense in the first half of 2001, compared to interest expense of$0.3 million in the first half of 2000. The interest expense for the 2000quarter relates to a $5 million original face value note redeemed in May 2000,which was issued by a subsidiary of ours in January 1998.

 

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*Other Income/(Expense).* Other income(expense) isthe change in fair value of the investment in warrant which is now accountedfor as a derivative after adoption of SFAS No. 133 and the application of itsrequirements.  For the six months endedJune 30, 2001, the Company recorded an increase in the value of the warrant of$4.2 million.

*Net (Loss)/Income Before Extraordinary Item. *For the six months endedJune 30, 2001, our net loss applicable to common stockholders was $12.2million, or $0.23 per basic and diluted share, compared to the net income of$121.8 million, or $2.54 per basic share and $2.00 per diluted share, for thesix months ended June 30, 2000.

*Cumulative Transition Effect of Change in AccountingPrinciple.* Effective January 1, 2001, ACTV adopted FASBStatement No. 133, "Accounting for Derivative Instruments and HedgingActivities", as amended by SFAS 137 and 138 ("SFAS 133"). SFAS133 requires that all derivative financial instruments be recorded in thebalance sheet at fair value. The provisions of SFAS 133 affected the Company'saccounting for its investment of 2.5 million restricted warrants for LibertyLivewire Corporation ("Livewire"). Prior to the adoption of SFAS 133,these warrants were carried at cost. With the adoption of SFAS 133, theLivewire investment is recorded at fair value. This resulted in the Company recording a cumulative effect transitionadjustment loss of $58.7 million at January 1, 2001. There may be periods withsignificant non-cash increases or decreases to the Company's net income/losspertaining to the Livewire investment.

* *

*Net (Loss)/Income*. For the six months endedJune 30, 2001, our net loss after extraordinary loss was $71.0 million, or$1.31 per basic and diluted share, compared to the net income of  of $120.3 million, or $2.51 per basic shareand $1.97 per diluted share, for the six months ended June 30, 2000.  The extraordinary loss was the result ofearly retirement of long-term debt on April 3, 2000.  The extraordinary loss includes a prepayment premium of $0.4million, and the unamortized original issue discount and deferred issuancecosts of $0.8 million and $0.2 million, respectively, for a total loss of $1.4million, or $0.03 per share.

**Liquidity and Capital Resources**

Sinceour inception, we (including our operating subsidiaries) have not generatedrevenues sufficient to fund our operations, and have incurred operating losses.Through June 30, 2001, we had an accumulated deficit of approximately $232.7million. Our cash position on June 30, 2001 was $86.8 million, compared to$122.5 million on December 31, 2000.

*Net CashProvided By Operating Activities.*During the six months endedJune 30, 2001, we used $20.8 million in cash for operations, compared with$12.9 million for the six months ended June 30, 2000. The increase in net cashused by operating activities in the six-month period ended June 30, 2001, ascompared to the same period the previous year, was principally due to increasedoperating and selling, general and administrative expenses.

*Net CashUsed In Investing Activities and Capital Expenditures.*  With regard to investing activities, in thesix months ended June 30, 2001, we used cash of $13.9 million, compared to $6.4million in the six months ended June 30, 2000. The increase in the more recentperiod is due to greater investments in equipment and leasehold improvements,software development and strategic equity investments.

 

In April 2001, we provided $5 million in financing toPlayboy.com, Inc. in the form of an 8% convertible promissory note. The notewas automatically convertible into shares of Series A Convertible PreferredStock of Playboy.com, upon the receipt of additional equity funding byPlayboy.com. Playboy.com received the additional funding and the note wasconverted to Series A Convertible Preferred Stock on August 13, 2001.

 

The Series A Convertible Preferred Stock isconvertible into common stock of Playboy.com on a one-to-one basis, and may beredeemed at the holder’s option, after five years, and has customaryanti-dilution provisions. Holders of the Series A Convertible Preferred Stockwill receive a non-cumulative 8% per annum dividend.

 

If Playboy.com is unable to pay the redemption pricefor the Series A Convertible Preferred Stock, a holder can require payment byPlayboy Enterprises, Inc. In this event, Playboy Enterprises, Inc. has theoption of making such payment in cash or in shares of its common stock.

*Net CashUsed In Financing Activities.* With regard to financing activities, in the six months ended June30, 2001, we used cash of $0.9 million, compared to $145.7 provided byfinancing activities in the six months ended June 30, 2000. The cash used inthe more recent period was comprised of a $2 million loan made to Intellocityin advance of our purchase of that company, and the assignation of $1.1 millionfor the guarantee of letters of credit required under a facilities lease. Cashprovided by financing activities of $150.0 million in the six months ended June30, 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 $4.3 million in the sixmonths ended June 30, 2000 for the retirement of debt.

Wemet our cash needs in the six-month periods of both 2001 and 2000 primarilyfrom the net proceeds of a public, follow-on offering completed in February2000. Through a group of underwriters we sold total of 4.6 million commonshares, resulting in net proceeds of $129.4 million. In addition, LibertyDigital, Inc. in March 2000 invested an additional $20 million in us byexercising a warrant granted in March 1999.

 

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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**

Inflation has not had any significant effect on theCompany’s operating costs.

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

TheCompany's interest income is affected by changes in the general level of U.S.interest rates.  Changes in U.S.interest rates could affect the interest earned on the Company's cashequivalents and investments.  Currently,changes in U.S. interest rates would not have a material effect on the interestearned on the Company's cash equivalents and investments.  A majority of these cash equivalents andinvestments earn a fixed rate of interest while the remaining portion earnsinterest at a variable rate.  TheCompany does not anticipate that exposure to interest rate market risk willhave a material impact on the Company due to the nature of the Company'sinvestments.

DuringApril 2000, the Company received a warrant to acquire 2,500,000 shares ofLiberty Livewire Corporatoin ("Livewire"), a publicly tradedcompany.  The warrant becomes exercisableat the rate of 500,000 shares per year, commencing on April 13, 2001, includescertain registration rights and may be exercised until March 31, 2015.  The warrant is not transferable, except incertain circumstances.  The Companypreviously estimated the fair value of the warrant to be $76,016,175 at thedate it was received, using the Black-Scholes pricing model, with a risk freerate of 6.5%, a volatility of 80% and assuming no cash dividends.  The estimated fair value of the warrant atJune 30, 2001 was $21.5 million, using similar assumptions.  The Company expects the value of the warrantto fluctuate based on the underlying stock price of Livewire.  The Company does not currently expect toexercise or register shares in the coming year.

TheCompany records stock-based compensation expense based on increases anddecreases in the market price of the Company's common stock above the exerciseprice of certain employee options, which are subject to variable optionaccounting treatment.  To the extentthat the Company has a stock-based compensation obligation at the beginning ofa given reporting 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 deferred obligationwill increase as the market price for the Company's common stock increases atthe end of a reporting period.

**PARTII.  OTHER INFORMATION**

**Item1.            Legal Proceedings**

ACTV,Inc. and its wholly-owned subsidiary HyperTV Networks, Inc. are co-plaintiffsin a civil action filed against The Walt Disney Co., ABC, Inc., and ESPN, Inc.in December, 2000, which action alleges that the defendants' "EnhancedTV" system synchronizing a web site application to, amongst others, ESPN *Sunday Night* and ABC *Monday Night Football* telecasts hasinfringed and is continuing to infringe certain of the plaintiffs'patents.  That action is continuing inthe U.S. District Court, Southern District of New York.

**Item2.            Changes in Securities**

Notapplicable

**Item 3.            Defaults Upon Senior Securities**

Notapplicable.

**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

11      Computation of net(loss)/income per share — See Note 10

(b)      Reports on Form 8–K:  None.

 

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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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