SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (x) Quarterly report pursuant to Section 13 or 15(9) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 -------------- ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period from _____ to _____ Commission file number 000-19579 INTERACTIVE NETWORK, INC. (Exact name of registrant as specified in its charter) California 94-3025019 (State of incorporation) (I.R.S. employer identification number) 1161 Old County Road Belmont, California 94002 (Address of principal executive offices and zip code) (650) 508-8793 (Registrant's telephone number, including area code) with a copy to Robert S. Townsend Morrison & Foerster, LLP 425 Market Street San Francisco, CA 94105 (415) 268-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 ___ No x --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares outstanding as of May 14, 1999 - ----- ------------------------------------- Common Stock 38,655,030 INTERACTIVE NETWORK, INC. INDEX PART I. FINANCIAL INFORMATION Page ---- ITEM 1. FINANCIAL STATEMENTS....................................................... 1 CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND MARCH 31, 1999 (Unaudited)......................... 1 CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 19991............................... 2 STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 1999................................ 3 NOTES TO FINANCIAL STATEMENTS.............................................. 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 4 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS........................................................... 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................... 7 SIGNATURES ............................................................................ 8 i INTERACTIVE NETWORK, INC. CONSOLIDATED BALANCE SHEET AS OF AS OF 12/31/98 3/31/99 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 300,601 $ 155,993 Prepaid expenses 78,256 78,256 ------------- ------------- Total Current Assets 378,857 234,249 ============= ============= Total Assets 378,857 234,249 ============= ============= LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities Accounts Payable -- 255,000 Accrued Taxes Payable -- 800 Other Accrued Liabilities 214,821 3,600 ------------- ------------- Total Current Liabilities 214,821 259,400 Liabilities Subject to Compromise 46,296,316 46,296,316 Long Term Liabilities 845,400 Shareholders' Deficit Common Stock 103,281,755 103,283,861 Accumulated Deficit - Prior (149,414,035) (149,414,035) Accumulated Deficit - Current -- (1,036,693) -------------- ------------- Accumulated Deficit (46,132,280) (47,166,867) ============= ============= Total Liabilities and Equity (Deficit) $ 378,857 $ 234,249 ============== ============= 1 INTERACTIVE NETWORK, INC. CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) Revenues: -- General and Administrative Expenses: -- Salaries 40,250 Employer Payroll Taxes 3,710 Contract Labor 25,600 Rent 1,100 Insurance -- Other Administrative Costs 33,346 Accounting Fees 255,000 Legal - NTN Litigation 7,620 Shareholder Relations - Proxy 30,862 Payroll Taxes - Q395 6,252 ----------- Total G&A Expenses 403,740 REORGANIZATION ITEMS: Professional Fees 634,179 U.S. Trustee Quarterly Fees 500 ----------- Total Reorganization Items 634,679 Interest 2,526 Net Profit (Loss) Before Federal & State Taxes (1,035,893) Federal & State Income Taxes 800 =========== Net Profit (Loss) $(1,036,893) =========== 2 INTERACTIVE NETWORK, INC. STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED) 3 MONTHS ENDED MARCH 31, 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (1,036,693) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Reorganization expenses 845,400 Changes in assets and liabilites: Accounts payable 255,000 Taxes payable 800 Other accrued liabilities (211,221) -------------------- Cash provided by (used in) operating activities: (146,714) ==================== CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock 2,106 -------------------- Cash provided by (used in) financing activities: 2,106 ==================== NET DECREASE IN CASH (144,608) CASH: Beginning of period 300,601 End of period 155,993 3 INTERACTIVE NETWORK, INC. Notes to Unaudited Consolidated Financial Statements March 31, 1999 The consolidated financial information of Interactive Network, Inc. (the "Company") furnished herein reflects all adjustments, consisting only of normal recurring adjustments which in the opinion of management are necessary to present fairly the financial position of the Company as of March 31, 1999 and the results of its operations and cash flows for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K Report for the year ended December 31, 1998 filed with the Securities and Exchange Commission ("SEC") on March 15, 1999. The results of operations for the three-month period ended March 31, 1999 are not necessarily indicative of the results for any subsequent quarter or for the entire year ending December 31, 1999. Long Term liabilities consists of professional fees and expenses incurred in connection with the Company's Chapter 11 bankruptcy proceedings. Payment of these fees, which is subject to Bankruptcy Court approval, has been deferred by agreement until April 22, 2000, when payment is due in full without interest. This amount, as well as the amount of professional accounting fees, are subject to reduction by the Bankruptcy Court. On April 23, 1999, the Company consummated its Settlement Agreement with its secured senior noteholders, pursuant to which $39 million in principal and accrued interest of the Company's outstanding indebtedness was converted at $5.00 per share into 7,814,589 shares of the Company's Common Stock, liens on the Company's patent portfolio and other assets were released, and the noteholders paid $10 million plus accrued interest to the Company, a substantial part of which was allocated to pay creditors and to form a reserve account for the payment of creditors whose claims it is disputing. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Conditions and Results of Operations contained in the Company's Annual Report for the year ended December 31, 1998, filed with the SEC on March 15, 1999. The discussion of the Company's current business and future expectations under this item contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Forward Looking Statements" below. OVERVIEW On April 23, 1999, the Company consummated a Settlement Agreement with its senior secured noteholders (affiliates of TCI, and NBC, Sprint and Motorola), (the "Settling Parties"), as a result of which the Company was paid $10,000,000 (plus accrued interest thereon) by the Settling Parties, all security interests held by the Settling Parties in its assets were released, and 7,814,589 shares of the Company's Common Stock was issued in conversion of outstanding debt in the amount of $39,072,949 held by the Settling Parties at $5.00 per share. OTHER CONTINGENCIES AND COMMITMENTS: There have been no changes in the discussion of "Other Contingencies and Commitments" since the Company's discussion of that subject in its Annual Report for the year ended December 31, 1998, except that the claims of Equitable Life Assurance for $1.2 million, the Internal Revenue Service for $494,000, and Singatronics for $500,000 have either been barred or withdrawn, and the County of Santa Clara has reduced its claim from approximately $300,000 to just under $4,000. 4 LIQUIDITY AND CAPITAL RESOURCES The Settlement Agreement described under "Overview" above was consummated on April 23, 1999, at which time the Company received $10 million in cash (plus accrued interest thereon of approximately $300,000). The Company is in the process of paying undisputed claims and reserving funds for disputed claims in accordance with its reorganization plan. Accurate figures for these in-progress activities are not yet available. The Company has also granted a lien on any income derived from its intellectual property assets until the reserve account amounts to 100% of the contested amount. The amount of funds available to the Company after resolution of contested claims will depend on the extent to which the Company is successful in substantially reducing, defeating or deferring payment of the substantial claims the Company is contesting described in "Other Contingencies and Commitments--Claims in Chapter 11 Proceedings Which the Company is Contesting" in the Company's Annual Report. In the event the Company is not successful in defeating, substantially reducing or deferring payment of these claims, the Company's working capital requirements would need to be satisfied in part by external sources of financing to the extent revenues from exploitation of its patent portfolio were not sufficient. The Company's current business plan is not to build up a large work force or invest in plant, equipment or inventories, but to concentrate on exploiting its patent portfolio through licenses, joint ventures or other methods that will not involve large overhead or capital demands on the Company. The Company currently expects its need for working capital after consummation of the Settlement Agreement to consist largely of general and administrative and patent development and marketing expenses of approximately $600,000, expected to be incurred in generating revenues from its Intellectual Property assets, and professional fees of approximately $240,000, out of a total annual operating budget of approximately $500,000. RESULTS OF OPERATIONS Revenues. During the quarter ended March 31, 1999, the Company realized no revenues. Costs of Revenues. The Company incurred no costs of revenues in the quarter ended March 31, 1999. Research and Development. The Company incurred no research and development expenses in the quarter ended March 31, 1999. Selling and Marketing. The Company incurred no selling and marketing expenses in the quarter ended March 31, 1999. General and Administrative. The Company incurred general and administrative expenses of $403,740 in the quarter ended March 31, 1999. Of these, $255,000 related to professional fees for accounting and audit services Interest Income (Expense). The Company realized $2,526 of interest income and incurred no interest expense during the quarter ended March 31, 1999. Net Losses. During the quarter ended March 31, 1999, the Company incurred a net loss of $1,036,693. This loss resulted primarily from expenses incurred for salaries, expenses related to the Company's Chapter 11 reorganization, and expenses of proxy solicitation for its special Meeting of Shareholders on March 31, 1999. FORWARD LOOKING STATEMENTS. The Management's Discussion and Analysis of Financial Condition and Results of Operations sections of this quarterly report contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the Company's future prospects, plans and strategies, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations on such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual results may differ significantly from the results described in these forward-looking statements, including changes that could affect the value of the Company's 5 intellectual property assets and decisions by the bankruptcy court in which the Company's Chapter 11 proceeding is pending with respect to allowance of contested claims which may cause a resulting increase in post-petition interest on claims and could reduce the Company's anticipated working capital. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 6 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The action of the United States Bankruptcy Court for the Northern District of California on April 12, 1999, confirming Registrant's Chapter 11 plan of reorganization, as reported in Registrant's report on Form 8-K filed with the Securities and Exchange Commission on April 14, 1999, is incorporated here by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The results of the Registrant's Special Meeting of Shareholders held on March 31, 1999, as reported in Registrant's report on Form 8-K filed with the Securities and Exchange Commission on April 14, 1999, are incorporated herein by reference. ITEM 6. EXHIBITS Exhibit 2.1 Plan of Reorganization. The action of the United ---------------------- States Bankruptcy Court for the Northern District of California on April 12, 1999, confirming Registrant's Chapter 11 plan of reorganization, as reported in Registrant's report on Form 8-K filed with the Securities and Exchange Commission on April 14, 1999, is incorporated here by reference. Exhibit 22.1 Published Report Regarding Matters Submitted to Vote ---------------------------------------------------- of Securityholders. The results of the Registrant's ------------------ Special Meeting of Shareholders held on March 31, 1999, as reported in Registrant's report on Form 8-K filed with the Securities and Exchange Commission on April 14, 1999, are incorporated herein by reference. Exhibit 27.1 Financial Data Schedule. ----------------------- 7 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. Date: May 14, 1999 INTERACTIVE NETWORK, INC. (Registrant) By: /s/ Bruce W. Bauer ------------------------------------- Bruce W. Bauer Chairman of the Board President and Chief Executive Officer 8