March 23, 2001
ACTV INC /DE/ (IATV)
Annual Report (SEC form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our consolidated financial statements and related notes included elsewhere and incorporated by reference. The results discussed below are not necessarily indicative of the results to be expected in any future periods. To the extent that the information presented in this discussion addresses financial projections, information or expectations about our products or markets or otherwise makes statements about future events, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. See "Special Note Regarding Forward-Looking Statements" for further information about forward-looking statements.
Overview
We are 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 Enhanced Media.
We have developed a range of services, products and proprietary technologies for each of these business segments. Our Digital TV technologies enable television programmers and advertisers to create individualized programming for digital television transmission systems. We believe that our Digital TV technologies are unique in providing targeting, interactivity and accountability for television commercials, and in giving viewers the ability to instantly customize their viewing experiences for a wide variety of programming applications. Our Enhanced Media technologies allow both for the enhancement of video and audio content, including standard TV programming, with Web-based information and interactivity, and for the delivery of games through the Internet. For the Enhanced Media market, we are a leading provider of technology and services that synchronize the delivery of television programming and Internet content.
We believe that the new applications enabled by the expansion of digital TV transmission systems and TV/Internet convergence platforms will revolutionize television as we know it by turning passive viewing into an interactive experience. Digital and convergence technology will allow television distributors, advertisers and programmers to bring interactivity to a mass audience. We believe that our proprietary technologies, tools, applications, and ability to deliver technical and creative services uniquely position us to capitalize on this anticipated digital television revolution.
To assist in our development of ACTV as a full-service digital media company, we received strategic investments from Liberty Digital Inc., our largest shareholder, and Motorola Broadband Communications Sector.
RESULTS OF OPERATIONS
Comparison of Fiscal Year Ended December 31, 2000 and December 31, 1999
Revenues. Revenues increased 176% to $8.0 million for the year ended December 31, 2000, from $2.9 million for the year ended December 31, 1999. The increase is the result of increasing revenues from our Enhanced Media products.
Operating Expenses. Operating expenses for the year ended December 31, 2000 were $13.1 million, compared with $5.6 million for the year ended December 31, 1999, an increase of $7.5 million. The increase was in part due to the development of our Digital Television business, which is not yet producing revenue, along with increased costs associated with our Enhanced Media operations.
Selling and Administrative Costs. Selling and administrative expenses for year ended December 31, 2000 were $33.4 million, compared with $19.2 million for the year ended December 31, 1999, an increase of $14.2 million. The increase in costs was attributable to the development of the sales, marketing and engineering organizations for Digital Adco, increased investment in management infrastructure, and growth in corporate expenses. Selling and administrative expenses for 2000 also includes $6.9 million of deferred compensation expense, of which $4.6 million was non-cash.
Depreciation and Amortization. Depreciation and amortization expense increased $1.8 million for the year ended December 31, 2000, to $3.9 million, from $2.1 million during the same period of 1999, due primarily to our increasing investment in patents, software development, and equipment.
Interest (Expense)/Income. Interest income, net of interest expense, for the year ended December 31, 2000 was $7.4 million, compared with net interest expense of $0.6 million for the year ended December 31, 1999. The increase was the result of significantly higher cash balances resulting from our February 2000 follow-on offering. We incurred interest expense for 1999 of $1.0 million, compared to $0.3 million for 2000. Interest expense for 1999 and 2000 relates to the $5 million original face value notes issued by a subsidiary of ours in January 1998; the notes were retired on April 3, 2000.
Minority Interest. The minority interest benefit for the year ended December 31, 2000 was $1.7 million, compared with expense of $588 in 1999. The benefit is attributable to the minority interest held by others in Digital Adco, which was formed in November.
Extraordinary Item. We recorded an extraordinary change in 2000 of $1.4 million, resulting from the early extinguishment of $5.0 million notes issued in January 1998.
Net Loss Applicable to Common Shareholders. For the year ended December 31, 2000, our net loss applicable to common stockholders after extraordinary loss was $.70, compared with a loss of $.70 for 1999.
Comparison of Fiscal Year Ended December 31, 1999 and December 31, 1998
Revenues. Revenues increased 79% to $2.9 million for the year ended December 31, 1999, from $1.6 million for the year ended December 31, 1998, due to an increase in Enhanced Media sales. Substantially all of our revenues in 1998 and the majority of our revenues in 1999 were derived from sales of HyperTV and Bottle Rocket software, services and related computer hardware.
Operating Expenses. Operating expenses were $5.6 million compared with $3.1 million, an increase of $2.5 million. The increase in expenses is directed related to the increased Enhanced Media revenue.
Selling and Administrative Expenses. Selling and administrative expenses increased 77% to $19.2 million for the year ended December 31, 1999, from $10.8 million for the year ended December 31, 1998, due chiefly to non-cash employee compensation, paid in the form of stock and to greater expenses related to HyperTV.
Depreciation and Amortization. We continue to innovate in the areas of software development and intellectual properties. Accordingly, our depreciation and amortization expense increased approximately $0.6 million, or 73%.
Interest (Expense) Income-Net. Interest expense increased 12% to $1.0 million for the year ended December 31, 1999, from $0.9 million for the year ended December 31, 1998. Interest expense is related to the $5.0 million notes issued in January 1998 by one of our subsidiaries. We chose to pay the interest due on the notes on June 30, 1998 and December 31, 1998 in kind rather than in cash. Interest income increased 145% to $0.5 million for the year ended December 31, 1999, from $.2 million for the year ended December 31, 1998. The increase was due to higher average cash balances in 1999.
Preferred Stock Dividend and Accretion. For the years ended December 31, 1999 and 1998, we paid $.5 million in preferred stock dividends, related to our Series B preferred stock. The Series B preferred stock was issued in November 1998 and was redeemed in full in May 1999.
Net Loss Applicable to Common Stockholders. Net loss applicable to common stockholders increased 20% to $27.0 million, or $0.70 per basic and diluted share, for the year ended December 31, 1999, from $22.5 million, or $1.04 per basic per basic and diluted share, for the year ended December 31, 1998.
Comparison of Fiscal Year Ended December 31, 1998 and December 31, 1997
Revenues. Revenues decreased 2% to $1.62 million for the year ended December 31, 1998, from $1.65 million for the year ended December 31, 1997. The decrease was the result of our product shift toward on-line learning software and services in 1998 and away from video programming and related equipment.
Operating Expenses. Operating expenses increased 70% to $3.1 million for the year ended December 31, 1998, from $1.8 million for the year ended December 31, 1997. The increase was due in
part to the growth in the Bottle Rocket operations and from the increased activity of our Texas-based regional network operation.
Selling and Administrative Expenses. Selling and administrative expenses increased by 58% to $10.8 million for the year ended December 31, 1998 from $6.9 million in 1997, resulting from increased activity of our Texas-based regional network operation.
Depreciation and Amortization. Depreciation and amortization expense increased 107% to $1.6 million from $0.8 million for 1997. This increase was due principally to depreciation for the full year in 1998 of television production equipment installed in our Texas subsidiary's facility, compared to several months during 1997, and to greater amortization of software development costs in the more recent year.
Stock Appreciation Rights. Stock appreciation rights costs were $2.0 million in for the year ended December 31, 1998, compared with $0.3 million expense for 1997. This resulted from a higher common stock price at December 31, 1998 compared with 1997.
Interest (Expense) Income-Net. We incurred interest expense of $0.9 million for the year ended December 31, 1998, compared to no interest expense for the year ended December 31, 1997. Interest expense is related to the $5.0 million notes issued in January 1998 by one of our subsidiaries. Interest income increased 63% to $0.2 million for the year ended December 31, 1998, from $0.1 million for the year ended December 31, 1997. The increase resulted from higher available average cash balances in the more recent year.
Minority InterestSubsidiary Preferred Stock Dividend and Accretion. For the years ended December 31, 1998 and 1997, we recorded $5.4 million and $3.0 million, respectively, for dividends and accretion on subsidiary convertible preferred stock issuances, which were accounted for as a minority interest. All dividend payments were made in our common stock. The increase during 1998 is the result principally of our redemption in full of the subsidiary convertible preferred stock.
Net Loss Applicable to Common Stockholders. Net loss applicable to common stockholders increased 112% to $22.5 million, or $1.04 per basic and diluted share, for the year ended December 31, 1998, from $10.4 million, or $0.80 per basic and diluted share, for the year ended December 31, 1997.
Liquidity and Capital Resources.
Since our inception, we have not generated revenues sufficient to fund our operations, and have incurred operating losses. Through December 31, 2000, we had an accumulated deficit of $138.2 million. Our cash position on December 31, 2000 was $122.5 million, compared with $9.4 million on December 31, 1999.
Net Cash Provided By (Used In) Operating Activities. During the year ended December 31, 2000, we used cash of $29.0 million for operations, compared with $15.6 million for the year ended December 31, 1999. The increase in net cash used by operating activities principally relates to higher operating losses and increased working capital uses.
Net Cash Used In Investing Activities and Capital Expenditures. For the year ended December 31, 2000, we used cash for investing activities of $17.1 million, compared with $11.3 million, for year ended December 31, 1999. The increase in cash used in investing activities is due in part to investments in patents, $3.8 million of strategic equity investments, and increased capital expenditures for the development of interactive TV products, and leasehold improvements.
Net Cash Provided By Financing Activities. We have and continue to fund our cash requirements from the net proceeds of a public, follow-on offering completed on February 3, 2000. Through a group
of underwriters, we sold total of 4.6 million common shares, resulting in net proceeds of $129.4 million. In addition, on March 27, 2000, Liberty Digital, Inc. invested an additional $20 million in us by exercising a warrant granted in March 1999, and OpenTV invested $10 million in our Digital Adco subsidiary.
Impact of Inflation
Inflation has not had any significant effect on the our operating costs.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company'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 cash equivalents and investments. Currently, changes in U.S. interest rates would not have a material effect on the interest earned on the Company's cash equivalents and investments. A majority of these cash equivalents and investments earn a fixed rate of interest while the remaining portion earns interest at a variable rate. The Company does not anticipate that exposure to interest rate market risk will have a material impact on the Company due to the nature of the Company's investments.
During April 2000, the Company received a warrant to acquire 2,500,000 shares of Liberty Livewire Corporation ("Livewire"), a publicly traded company. The warrant becomes exercisable at the rate of 500,000 shares per year, commencing on April 13, 2001, includes certain registration rights and may be exercised until March 31, 2015. The warrant is not transferable, except in certain circumstances. The Company estimated the value of the warrant to be $76,016,175 at the date it was received, using the Black-Scholes pricing model, with a risk free rate of 6.5%, a volatility of 80% and assuming no cash dividends. The estimated value of the warrant at December 31, 2000 was $17,300,000, using the same assumptions. The Company expects the value of the warrant to fluctuate based on the underlying stock price of Livewire. Any future changes in estimated value attributable to shares that are both exercisable and that are expected to be registered within one year will be recorded in other comprehensive income. The Company does not currently expect to exercise or register shares in the coming year.
Item 8. Financial Statements and Supplementary Data
The Financial Statements are listed under Item 14 in this report.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
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