10Q out, freeedgar.com
Highlights:
3. In January 1998, the Company's subsidiaries, ACTV Entertainment, Inc., (the "Issuer") and The Texas Individualized Television Network, Inc., a wholly-owned subsidiary of the Issuer ("Texas Network"), entered into a Note Purchase Agreement, dated as of January 13, 1998 (the "Agreement") with certain private investors (the "Purchasers"). Pursuant to the Agreement, the Purchasers purchased $5.0 million aggregate principal amount notes from the Issuer and Texas Network. The notes bear interest at a rate of 13.0% per annum, payable semi-annually, with principal repayment in one installment on June 30, 2003. During the term of the note, the Issuer may, at its option, pay any four semi-annual interest payments in kind rather than in cash, with an increase in the rate applicable to such payments in kind to 13.75% per annum. The Note is secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc. The Issuer elected to pay the semi-annual interest payment due September 30, 1998 in kind rather than in cash.
In connection with the purchase of such note, the Purchasers received
on January 14, 1998 a common stock purchase warrant (the "Warrant") of Texas Network that grants the Purchasers the right to purchase up to 17.5% of the fully-diluted shares of common stock of Texas Network. The Warrant expires on June 30, 2003. The Warrant also grants the Purchasers the right, through July 14, 1999, to exchange the Warrant for such number of shares of the Company's Common Stock, at the time of and giving effect to such exchange, equal to 5.5% of the fully diluted number of shares of Common
Stock outstanding, after giving effect to the exercise or conversion of all then
outstanding options, warrants and other rights to purchase or acquire shares of Common Stock. After five years from the date of issuance, the Purchasers have the right to put the warrants to the Texas Network for a value based on a
multiple of its operating income.
For accounting purposes the Company has allocated approximately $1.2
million to the Warrant, which is reflected as a credit to additional paid-in
capital. The $1.2 million is being charged as additional interest expense over
the life of the Note.
4. During 1996, the Company raised approximately $9.1 million in net proceeds from the private placement of 5% exchangeable preferred stock (the "Exchangeable Preferred Stock") issued by its wholly owned subsidiary and convertible into shares of the Company. The private placement agreement provided for the Exchangeable Preferred Stock to be convertible into Common Stock of ACTV, Inc., beginning January 1, 1997, at varying discounts to the market price of Common Stock. After September 1, 1997, holders of the Exchangeable Preferred Stock have been able to use the lesser of (i) the then current market price of the Company's Common Stock, or (ii) an average market price during the month of August 1997 as the price to which the discount is applied for conversions. In addition, the Company has the right to redeem the Exchangeable Preferred Stock at a price equal to $25 times the number of shares being purchased, plus accrued and unpaid dividends (the "Redemption Price"). This right may be exercised by the Company if the closing price of the Company's Common Stock is above $9.00
for thirty consecutive trading days prior to redemption. The Company believes
that it is highly likely that the holders of the Exchangeable Preferred Stock will elect to convert their stock into Common Stock of the Company and, accordingly, has included the Exchangeable Preferred Stock in its consolidated statement of shareholders' equity.
The Exchangeable Preferred Stock is convertible into shares of common
stock at a discounted conversion price. The extent of the beneficial conversion feature was approximately $4.0 million, representing the maximum difference between the discounted conversion price and the prevailing market price of the Common Stock. A preferred stock accretion of $2,245,000 was recorded for the nine months ended September 30, 1997, as restated (see Note 7 below).
In November 1998, the holders of approximately 179,000 of the remaining
approximately 184,000 shares of Exchangeable Preferred Stock surrendered all of their Exchangeable Preferred shares against receipt of a new ACTV, Inc. Series B 10% Convertible Preferred Stock (the "Series B Preferred") with a face value of $3,425,000 and shares of Common Stock. In addition, the holders received warrants to purchase 1,325,000 shares of Common Stock at $2.00 per share. The total value received in Common Stock and Series B Preferred by the holders was less than the market value of the Exchangeable Preferred shares surrendered by such holders on the date of the transaction.
The Series B Preferred is fully redeemable by the Company at any time
at a 10% premium above face value plus accrued dividends. The holders of Series B Preferred are prohibited from converting any shares into Common Stock during the period from the present through November 13, 1999, whether or not the Company gives a notice of redemption during this period. Unlike the Exchangeable Preferred Stock, which is exchangeable at varying prices based on market conditions, the Series B Preferred shares are convertible at a fixed price, subject to a single adjustment. From November 13, 1999 to February 13, 2000, the Series B Preferred is convertible at a price of $2.00 per share. If not redeemed by February 13, 2000, the Series B Preferred
conversion price will be adjusted to a fixed price of $1.33 per share for the
remainder of its life.
The Company has the right to redeem the warrants in full at a price of $.01 per
warrant share in the event that the Company's Common Stock trades at or above an average of $4.50 per share during a period of 20 consecutive trading days.
5. The Company's balance sheets at September 30, 1998 and December 31, 1997 reflect a debit to shareholders' equity of $1,070,872 and 199,900, respectively, related to (a) a loan made by the Company to an employee in August 1995 (September 30, 1998 and December 31, 1997 balance of $199,900) and (b) loans made to four employees in the first nine months of 1998 (September 30, 1998 balance of $870,972). All of the loans were made to enable the employees to purchase the Company's common stock by exercising options. The loans have due dates that correspond to the respective expiration dates of the options exercised. Pursuant to the employment contracts of the employees to whom the 1998 loans were made, each loan will be forgiven if the respective employee remains employed by the Company on January 1, 1999. Therefore, the Company is recognizing compensation expense for the total amount of each 1998 loan on a
pro-rata basis over the period from the issuance of the loan through January 1,
1999. Such compensation expense recorded for the nine months ended September 30, 1998 was $1,474,581.
6. The consolidated balance sheet at September 30, 1998, reflects non-cash
activity during the nine month period ended September 30, 1998, that relates to
a the option exercises and resulting non-recourse loan transactions described in Note 3 above: an increase in notes receivable from stock sales of $870,972 (net of compensation expense of $1,474,581 and an increase in common stock and additional paid-in capital of a total of $2,345,553. The Company made no cash payments of interest or income taxes during the three and nine month periods ended September 30, 1997, or September 30, 1998. |
