SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
------------------
( ) 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)
180 Second Street, Suite B
Los Altos, California 94022
(Address of principal executive offices and zip code)
(650) 947-3345
(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 [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
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 September 30, 2000
- ----- -------------------------------------------
Common Stock 40,537,441
INTERACTIVE NETWORK, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS..........................................1
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2000 (Unaudited) AND DECEMBER 31, 1999.........1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2000 AND 1999.................................2
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000
AND 1999....................................................3
NOTES TO FINANCIAL STATEMENTS.................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................4
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...........................................9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...........................................10
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................11
ITEM 6. EXHIBITS....................................................12
SIGNATURES..........................................................13
INTERACTIVE NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Restricted cash $ 6,343,121 $ 6,365,758
Cash 5,821 1,210,399
Prepaid expenses and other current assets 47,533 81,796
-------------- --------------
Total current assets 6,396,475 7,657,953
Investments, net of promissory note receivable 715,285 -
-------------- --------------
Total assets $ 7,111,760 $ 7,657,953
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,162,968 $ 614,077
Accrued liabilities to officer - 3,600
-------------- --------------
Total current liabilities 1,162,968 617,677
Liabilities subject to compromise 7,807,086 5,015,718
Deferred legal fees 916,867 916,867
Commitments and contingencies - -
Shareholders' deficit:
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding as of
September 30, 2000 and December 31, 1999, respectively - -
Common stock, no par value, 150,000,000 shares authorized;
40,537,441 and 38,855,030 shares issued and outstanding
as of September 30, 2000 and December 31, 1999,
respectively 144,079,807 142,374,810
Accumulated deficit (146,854,968) (141,267,119)
-------------- --------------
Total shareholders' equity (deficit) (2,775,161) 1,107,691
-------------- --------------
Total liabilities and shareholders' deficit $ 7,111,760 $ 7,657,953
============== ==============
See accompanying notes to consolidated financial statements.
1
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
REVENUES:
General and administrative expenses:
Salaries $ 81,188 $ 73,531 $ 213,016 $ 159,478
Employer payroll taxes and benefits 6,524 20,948 23,309 58,482
Legal Fees 177,642 77,127 348,619 113,043
Accounting fees 40,340 7,459 94,711 35,166
Professional fees and contract labor 69,233 54,383 97,839 100,700
Shareholder relations - proxy 210,795 - 239,454 51,259
Travel, meals and entertainment 11,256 20,877 42,912 20,877
Rent 6,000 4,066 11,165 7,366
Other administrative costs 7,267 17,747 29,477 60,512
Unusual items:
Audit Fees - 1995-1998 - - - 180,000
Advisory fees - - 390,000 -
Legal - NTN litigation 19,911 8,113 34,815 15,733
Taxes, penalty and interest 12,746 - 12,746 12,157
------------- ------------- ------------- -------------
Total G&A expenses 642,902 284,251 1,538,063 814,773
REORGANIZATION ITEMS:
Professional fees 242,746 107,207 348,268 862,853
U.S. Trustee quarterly fees 250 1,750 1,250 2,750
------------- ------------- ------------- -------------
Total reorganization items 242,996 108,957 349,518 865,603
------------- ------------- ------------- -------------
Loss from operations 885,898 393,208 1,887,581 1,680,376
OTHER INCOME:
Proceeds (losses) from litigation - 38,519 (3,081,785) 10,413,899
Interest income (expense) (83,817) (99,411) (78,968) (258,272)
Net profit (loss) from investment in affiliate
accounted for by the equity method (256,064) - (534,715) -
------------- ------------- ------------- -------------
Net income (loss) before federal & state taxes (1,225,779) (454,100) (5,583,049) 8,475,251
Federal & state income taxes 4,800 - 4,800 800
------------- ------------- ------------- -------------
Net profit (loss) $ (1,230,579) $ (454,100) $ (5,587,849) $ 8,474,451
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
2
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------- -------------
Cash flows from operating activities:
Net income (loss) $ (5,587,849) $ 8,474,451
Adjustments to reconcile net loss to net cash provided
by (used for) operating activites:
Reorganization expenses - 1,074,074
Changes in assets and liabilities:
Prepaid expenses 34,263 (1,562)
Accounts payable 548,891 248,861
Liabilities subject to compromise 2,791,368 (41,322,566)
Other accrued liabilities (3,600) (211,221)
------------- -------------
Cash provided by (used in) operating activities: (2,216,927) (31,737,963)
Cash flows from investing activities:
Promissory note receivable from TWIN Entertainment (750,000) -
Investment in TWIN Entertainment 34,715 -
------------- -------------
Cash provided by (used in) investing activities: (715,285) -
Cash flows from financing activities:
Sale of common stock 1,704,996 2,106
Exercise of options - 18,000
Proceeds from settlement agreement - 39,072,949
------------- -------------
Cash provided by (used in) financing activities: 1,704,996 39,093,055
Net increase (decrease) in cash $ (1,227,216) $ 7,355,092
Cash:
Beginning of period 7,576,158 300,601
End of period 6,348,942 7,655,693
See accompanying notes to consolidated financial statements.
3
INTERACTIVE NETWORK, INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
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 September 30, 2000
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, 1999 filed with the Securities and Exchange Commission
("SEC") on April 14, 2000. The results of operations for the nine-month period
ended September 30, 2000 are not necessarily indicative of the results for any
subsequent quarter or for the entire year ending December 31, 2000.
Long term liabilities consist of legal fees and expenses incurred in connection
with the Company's Chapter 11 bankruptcy proceedings and general corporate work.
Payment of Morrison & Foerster's pre-confirmation fees, which is subject to
Bankruptcy Court approval, was deferred by agreement until April 22, 2000, when
payment was due in full without interest. As the Company lacked funds to pay
Morrison & Foerster's fees at that time, Morrison & Foerster did not apply to
the Bankruptcy Court for approval of its fees. However, it expects to do so
soon. The amount of preconfirmation fees sought by Morrison & Foerster is
subject to reduction by the Bankruptcy Court and the payment of the
preconfirmation fees is subject to an agreement between Morrison & Foerster and
the Company.
KPMG LLP, which provided the Company with audit services in the pre-confirmation
period, sought approximately $200,000 in fees. The Company negotiated a reduced
rate, and the Bankruptcy Court approved payment of the reduced amount of
$180,000, which the Company paid in February 2000.
INVESTMENT IN AFFILIATE. The Company owns 50% of the outstanding capital stock
of TWIN Entertainment, Inc. ("TWIN Entertainment"), a corporate joint venture
between the Company and Two Way TV Limited ("Two Way TV"). TWIN Entertainment's
offices are located at 4929 Wilshire Boulevard - Suite 930, Los Angeles, CA
90010. TWIN Entertainment operates in the United States and Canada using
technology licensed by the Company and Two Way TV. The Company made an
additional investment in TWIN Entertainment in September 2000, and Two Way TV
made a similar investment, leaving the relative ownership interests in TWIN
Entertainment unchanged. Each party made a $750,000 loan to TWIN Entertainment
in which each shareholder reserves the right to convert such amounts to equity
in TWIN Entertainment in the future under terms to be determined and agreed upon
at a later date by the shareholders of TWIN Entertainment, Interactive Network
and Two Way TV.
The $534,715 of loss from investment represents the operating expenses of TWIN
Entertainment for the period from January 31, 2000 (inception) through September
30, 2000, accounted for by the equity method.
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, 1999,
filed with the SEC on April 14, 2000. 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 and in the section "Factors Affecting Future Operating
Results" from Item 1 of the Company's 10-K for the fiscal year ended December
31, 1999, incorporated herein by reference.
4
OVERVIEW
Interactive Network was originally founded to provide interactive television
services, which we began providing in 1991. We incurred significant expenses in
developing, testing and marketing our services, and were forced to curtail our
operations by August 1995, due to lack of ongoing financing. While in operation,
we acquired key strategic investors such as TCI Cable (now a part of AT&T), NBC,
Gannet, Motorola, Sprint, and AC Nielson.
Today, we own certain intellectual property assets related to the interactive
television market and other interactive technology. Our prior strategic
investors remain as our stockholders and our current management is confident in
its strategy to deliver stockholder value by marketing our intellectual property
and by working to enhance and develop our patent portfolio. We plan to
concentrate on exploiting our patent portfolio in a cost-effective way through
licenses, joint ventures, strategic alliances, or other methods that will not
involve large overhead demands.
To provide the technical and management expertise to assist in the fulfillment
of our goals, we established an advisory panel of consultants and re-employed
our former Chief Scientist, Dr. Robert Brown. Further, our management is
planning to hire additional personnel to meet our anticipated future needs. Our
bankruptcy reorganization plan has been approved by the Bankruptcy Court and we
continue to expend significant resources in litigating disputed claims. In
addition, we expend significant resources in the maintenance and enforcement of
our intellectual property rights. Our management believes that our intellectual
property assets put our company in a position to be a part of the interactive
content and interactive services businesses currently being developed.
On January 31, 2000, we consummated the formation of a joint venture company,
TWIN Entertainment, to be co-managed by us and Two Way TV under the terms of a
Joint Venture and Stock Purchase Agreement dated as of December 6, 1999. A Form
8-K Report regarding this matter was filed with the SEC on February 11, 2000 and
is incorporated herein by reference. We currently expect that TWIN Entertainment
will develop, market and supply digital (as well as analog) interactive and
related services, products and technology in the United States and Canada. We
have licensed TWIN Entertainment the non-exclusive use of our patents and other
intellectual property for the United States and Canada. Two Way TV also licensed
to TWIN Entertainment certain technology on a non-exclusive basis. Additionally,
as part of the agreements with Two Way TV to create TWIN Entertainment, we
settled all outstanding claims with Two Way TV and entered into a separate
worldwide license agreement that exclusively licenses our intellectual property
in countries other than the United States and Canada to Two Way TV in exchange
for a royalty payment of a certain percentage of Two Way TV's world wide sales.
Under the terms of the agreement, Two Way TV will pay us a royalty of 3% of
worldwide Gross Profits (as defined in the Termination and License Agreement
dated as of January 31, 2000, a Form 8-K Report regarding this matter was filed
with the SEC on February 11, 2000 and is incorporated herein by reference), with
a minimum annual royalty of no less than $250,000 by January 31, 2001, with the
royalty payment increasing by a minimum of eight percent (8%) each year
thereafter.
Presently, TWIN Entertainment's management is in discussions with a number of
companies to obtain carriage and content agreements to deliver and create
interactive entertainment under the licensing it has received from the Company
and Two Way TV. It is our belief that TWIN Entertainment will use the Company's
intellectual property and Two Way TV's technology to become an active
participant in the interactive television and broadband market in the U.S. and
Canada.
LIQUIDITY AND CAPITAL RESOURCES
We consummated a settlement agreement with our secured senior noteholders and
have paid all undisputed claims under our confirmed plan of reorganization. A
substantial portion of the proceeds received from the noteholders was allocated
to pay creditors and a large portion of those funds were set aside in a reserve
account for the payment of creditors whose claims we are continuing to dispute.
As of September 30, 2000, the balance of these reserved funds was $5.7 million.
As of November 1, 2000, the total of all allowed and disputed prepetition claims
either allowed or disputed totaled approximately $6.662 million. The amount of
funds available to us after resolution of contested claims with creditors will
depend on the extent to which we are successful in substantially reducing,
defeating or deferring payment of the claims we are contesting. In the event we
are not successful in defeating,
5
substantially reducing or deferring payment of these claims by creditors, our
working capital requirements would need to be satisfied in part by external
sources of financing to the extent revenues from exploitation of our patent
portfolio are not sufficient. Certain investors have agreed to allow the Company
to use funds committed in our recently completed financing (see below) by them
to supplement our bankruptcy reserve account to provide for 100% coverage of the
remaing claims covered by this account under our confirmed plan of
reorganization as of November 30, 2000 and to add funds thereafter on a monthly
basis to retain the 100% coverage as interest accrues on certain of those
claims, as applicable. By this arrangement, we have obtained an order of the
Bankruptcy Court staying the enforcement of the National Datacast, Inc., claim.
The Bankruptcy Court allowed the claim pending our appeal of that judgment so
long as we keep the reserve account funded in accordance with the specific terms
of the order, which we expect the Bankrupcty Court will enter on November 13,
2000. We expect to pay certain of those claims as they come due and to continue
to challenge others. The claims are also secured by a lien on the revenue
arising from the Company's intellectual property, a lien which does not attach
to the intellectual property itself.
Our current business plan continues to be one of exploiting our patent portfolio
through negotiating favorable licensing with those companies actively involved
in, or planning to enter into, the area of interactive advertising and/or the
delivery, or production of interactive entertainment where we believe a license
from the Company will be required to avoid their infringement upon one or more
of the Company's patents. Where we can not make favorable agreements with
companies whom we believe are infringing upon the Company's intellectual
property, it is management's intention to litigate that infringement to enforce
and to protect our rights. Additionally, we will continue to support TWIN
Entertainment, which we feel will be successful in the future by contracting
with content providers to create interactive programming and with cable and
satellite operators to deliver interactive content to their subscribers.
Management intends to continue its patent development program and to continue to
seek out mutually advantageous agreements with other related companies to form
partnerships and alliances which will enhance the value of, and assist in
exploiting, our technology. We continue to pursue our claims for patent
infringement against Networks North, Inc. (formerly NTN Communications Canada,
Inc.) in Canada and intend to litigate these claims to full resolution. To date,
we have incurred expenses of approximately $45,548 in connection with the
pursuit of this claim. As is customary in Canada, we were also required by the
Court to post a bond for $20,700 to cover the defendants legal costs in the case
of an unfavorable decision against the Plaintiff.
We currently expect our need for working capital for the remainder of fiscal
year 2000 to consist largely of general and administrative expenses, repayment
of debt due in 2000, professional fees, and patent development and marketing
expenses to establish a groundwork for generating revenues from our intellectual
property assets. In addition, $1.25 million total has been paid to TWIN
Entertainment in 2000. We have raised approximately $1.3 million through the
sale of our common stock, plus warrants for the purchase of our common stock, to
private investors as of September 30, 2000, and continue to solicit further
investment under this agreement. We entered into a Stock Purchase and Investment
Agreement dated September 13, 2000 with certain investors under which we agreed
to sell to the investors a minimum of 615,000 units and a maximum of 3,250,000
units for $1.22 per unit. Each unit consists of one share of our common stock
and a five-year warrant to purchase one share of our common stock at an exercise
price of $1.90 per share. Under the agreement, these investors retain
substantial control over the use of proceeds from their investment. In September
2000, investors purchased 1,109,836 units for total gross proceeds to the
Company of approximately $1.3 million, of which $750,000 has been invested in
TWIN Entertainment. The $750,000 invested in TWIN Entertainment is in the form
of a loan in which each shareholder reserves the right to convert to equity in
TWIN Entertainment in the future under terms to be determined and agreed upon at
a later date by the shareholders of TWIN Entertainment, Interactive Network and
Two Way TV.
In October 2000, we increased the maximum number of units offered under this
agreement to approximately 4.9 million units. In October 2000, investors
purchased an additional 1,369,835 units for total gross proceeds to the Company
of approximately $1.6 million. We intend to close this round of financing on or
before November 30, 2000. In addition to the $750,000 paid to TWIN
Entertainment, $930,530 has been set aside for the bankruptcy reserve account to
provide for 100% coverage of the remaining claims it protects under our
confirmed plan of reorganization as of November, 2000, and we intend to use the
remainder to fund our operations through the end of 2000 and the first quarter
of 2001. We believe that we will raise a total of between $3.9 million and $6.0
million in this financing. This description is a general summary only and does
not describe all the terms of the investment, which is governed by the Stock
Purchase and Investment Agreement. A copy of the Stock Purchase and Investment
Agreement has been filed as Exhibit 10.19 to this Form 10-Q and is incorporated
herein by reference.
6
We incurred legal expenses currently reflected on the Balance Sheets of $916,867
prior to confirmation of our bankruptcy reorganization plan on April 22, 1999,
which became payable on April 22, 2000, subject to Bankruptcy Court approval,
which our counsel intends shortly to seek. We also incurred post-confirmation
legal expenses, principally in preparing and litigating objections to claims
filed in the bankruptcy proceeding and for general corporate matters, on which a
balance of $684,250 remains unpaid, as of September 30, 2000. We have entered
into an agreement with our counsel for payment of these expenses on the
following terms: the preconfirmation legal fees currently reflected on the
Balance Sheets as $916,687 is due and payable on September 30, 2001, interest
free until that date and $684,255 payable in equal monthly installments over two
years, commencing October 15, 2001, with interest at 1% per annum over Bank of
America's prime rate. We will also issue to our counsel a warrant exercisable in
whole or in part from time to time for 10 years, to purchase sufficient shares
of our common stock to enable the warrant holder, by tender of the warrant in
satisfaction of such indebtedness, to extinguish such indebtedness in full. The
warrant exercise price will be equal to 101% of the average of the closing bid
prices for our common stock for the twenty business days on which the stock
traded preceding the date of filing with the SEC of the Company's Form 10-Q for
the quarter ended September 30, 2000 but not less than $1.22 per share. In
addition to the foregoing legal expenses, through September 30, 2000, contingent
legal expenses in the amount of $1,145,308 have been incurred by the Company in
contesting claims in the Bankruptcy Court, which we will be obligated to pay
only out of savings realized from a successful reversal or reduction on appeal
of awards granted by the Bankruptcy Court with respect to contested claims, or
through exercise of a warrant if an appeal is not pursued.
OTHER CONTINGENCIES AND COMMITMENTS:
David Lockton, a shareholder and our former CEO, filed a complaint in our
bankruptcy case seeking specific performance of his promissory note for $2.0
million, his alleged stock option rights for 2,225,000 shares of our common
stock and back pay on his employment agreement and damages of $17 million. In
March 2000, the Bankruptcy Court ruled that Mr. Lockton could not assert any
damage claims with respect to these stock option rights and that his remedy, if
any, must be limited to requests for specific performance. Trial of Mr.
Lockton's claims took place on May 8-11 and May 30-31, 2000. A memorandum
decision was filed by the Bankruptcy Court on September 27, 2000. The Bankruptcy
Court held that Mr. Lockton retained to the right to be paid $1.85 million under
the terms of his promissory note. The Bankruptcy Court also held that Mr.
Lockton was entitled to a judgement allowing Mr. Lockton's claim for $913,810.21
under his employment agreement and held that Mr. Lockton has the right to
exercise options to purchase 900,000 shares of our common stock at $0.09 per
share. This right to exercise options is forfeited if Mr. Lockton does not
exercise it within thirty days of the filing of the judgement. The Court also
held that Mr. Lockton was entitled to postpetition interest on the amount of the
judgment at the rate of 10% per annum simple interest. As of November 1, 2000,
the total postpetition interest was approximately $195,000. A judgment was
entered on October 30, 2000. On November 13, Mr. Lockton filed a motion to
reconsider.
In the quarter ended March 31, 2000, National Datacast, one of our largest
creditors, amended its claim to over $6.3 million from its previous $3.6 million
claim. Trial on this claim took place in July. On July 25, 2000, the Bankruptcy
Court issued a memorandum decision awarding National Datacast just over $4
million, plus payment of certain interest. With interest as provided in the
judgment, the claim totaled approximately $4.93 million as of November 1, 2000.
We have appealed this judgment. We have also obtained from the Bankrupcty Court
a stay of enforcement of the judgment by National Datacast pending the appeal.
The stay is conditioned on our funding of the reserve account securing the
claims of unpaid or disputed claims created by our confirmed plan of
reorganization at 100% of the remaining claims by the middle of November and
adding to the reserve account on a monthly basis thereafter enough to cover
remaining claims in light of accruing interest, where applicable. We expect the
stay order to be entered by the Bankrupcty Court on November 13, 2000.
We previously obtained Bankruptcy Court approval of our previously disclosed
preliminary settlement of the claims of the Equitable Life Assurance Society
("Equitable"). Under the settlement, Equitable accepted a total of $840,000 on
its scheduled claims of $1.7 million, to be paid one half upon approval by the
Bankruptcy Court, and one half in equal monthly installments over the twelve
months thereafter, without interest. As of September 30, 2000, we have paid the
first half of the settlement and made four (4) of the monthly payments.
We obtained a settlement of a disputed claim by Evans Research Associates that
was approved by the Bankruptcy Court. Under the settlement, we will pay Evans
$12,500, which is approximately 70% of the total amount claimed by Evans.
7
We are continuing our litigation against NTN Communications, Inc. in Canada for
that company's alleged infringement of our patents. To date, we have incurred
expenses of approximately $45,548 in connection with the pursuit of this claim.
We reported a liability of $68,814 on our 1999 Federal income tax return which
had not previously been reported or accrued. We believe that the tax liability
may be avoidable.
We paid $500,000 in the quarter ending March 31, 2000 to TWIN Entertainment
pursuant to a corporate joint venture. We made an additional $750,000 investment
in TWIN Entertainment in September, 2000. The $750,000 invested in TWIN
Entertainment is in the form of a loan in which each shareholder reserves the
right to convert such amounts to equity in TWIN Entertainment in the future
under terms to be determined and agreed upon at a later date by the shareholders
of TWIN Entertainment, Interactive Network and Two Way TV.
RESULTS OF OPERATIONS
REVENUES. During the three and nine month periods ended September 30, 2000 and
1999, the Company realized no revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
consist of salary, wages and related payroll expenses for executive and
administrative personnel, legal and accounting fees, other professional
services, business travel and other administrative expenses. General and
administrative expenses for the three and nine month periods ended September 30,
2000 were $642,902 and $1,538,063 respectively compared to $284,251 and $814,773
for the same periods of 1999. This increase for the three months ended September
30, 2000 versus the comparable period in the prior year was primarily due to
higher legal fees related to business development, shareholder relations, and
general corporate counsel in addition to higher salaries, wages and related
expenses reflecting the re-employment of our former Chief Scientist, Dr. Robert
Brown (see discussion above in "Overview"). Additionally, there was a one-time
charge of $390,000 included in the nine months ended September 30, 2000 for
advisory fees recorded in the previous quarter ended March 31, 2000 related to
additional claims filed with the Bankruptcy Court.
REORGANIZATION ITEMS. Reorganization items consist primarily of legal and
trustee fees directly related to our Chapter 11 bankruptcy reorganization,
entered into as a condition to the consummation of the Settlement Agreement and
the litigation and other expenses incurred in contesting claims in our
bankruptcy reorganization, which is still ongoing. Reorganization expenses for
the three and nine month periods ended September 30, 2000 were $242,996 and
$349,518 respectively compared to $108,957 and $865,603 for the comparable
periods in 1999. This carryover of legal fees from prior periods was primarily
due to legal expenses related to our defense of contested claims with unsecured
creditors in our bankruptcy reorganization.
INTEREST INCOME (EXPENSE). Interest income (expense) consists primarily of
interest earned on cash and cash equivalents held by the Company, offset by
interest accrued on unsecured claims pending resolution. For the three and nine
month periods ended September 30, 2000, we incurred interest expense of $180,000
and $375,000 respectively related to disputed claims in our bankruptcy pending
resolution. This was partially offset by $96,183 and $296,032 of interest earned
on cash and cash equivalents held by the Company for the comparable periods. The
Company had $88,727 of interest income on cash deposits and interest expense of
$347,000 on unsecured debt for the nine month period ended September 30, 1999.
The $207,305 increase in interest income for the nine months ended September 30,
2000 over the comparable period of 1999 was primarily due to the increased cash
balances on deposit for a longer period of time as a result of the settlement
with the secured senior noteholders in May 1999. The increase in interest
expense for the nine months ended September 30, 2000 when compared to the
comparable period of 1999 was $28,000, reflecting the increased balance in
unsecured debt resulting from certain settlement agreements. See discussion
under "Other Contingencies and Commitments."
OTHER INCOME (EXPENSE). During the nine month period ended September 30, 2000,
we recorded $3,081,785 in expenses to adjust previous estimates of our
liabilities to unsecured creditors. This included a $776,000 increase based on
the settlement agreement with Equitable Assurance Society and subsequently
approved by the Bankruptcy Court. Additionally, we increased our accrued
liability to reflect the memorandum decision of the Bankruptcy Court for the
National Datacast proceedings (see discussion under "Legal Proceedings"). This
increase in accrued liability is partially offset by a reduction in accrued
liabilities of $219,215 resulting from a negotiated settlement in the first
quarter.
8
NET PROFIT (LOSSES). During the three and nine month periods ended September 30,
2000 and 1999, we incurred net losses of $1,230,579 and $5,587,849,
respectively, compared to net loss of $454,100 and net profit of $8,474,451 for
the comparable periods of 1999. The losses in the current periods resulted from
the adjustment of estimated liabilities for claims of unsecured debtors and
having no revenues to offset the ongoing operating expenses and investment
losses incurred, compared with the prior period in which we received a
settlement from litigation (see discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations, Liquidity and Capital
Resources").
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK. It is our policy not to enter into derivative financial
instruments. Due to this, we did not have significant overall interest rate risk
exposure at September 30, 2000.
FOREIGN CURRENCY RATE RISK. We have no transactions in currencies other than
U.S. Dollars. We do not currently have any significant foreign currency exposure
and we do not expect to incur significant currency-related gains and losses in
2000. We did not engage in foreign currency hedging activities during the nine
months ended September 30, 2000.
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 INTELLECTUAL PROPERTY ASSETS AND DECISIONS BY
THE BANKRUPTCY COURT IN WHICH THE COMPANY'S CHAPTER 11 PROCEEDING WITH RESULTS
OF APPEAL 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.
9
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company continues to pursue the objections it has to claims of
creditors in its Bankruptcy proceedings. As of September 30, 2000, we
have set aside $5.7 million in a reserve account to pay creditors whose
claims we are disputing, as required under our plan of reorganization.
As of November 1, 2000, prepetition claims either allowed or disputed
totaled approximately $6.662 million.
In the quarter ended March 31, 2000, National Datacast, one of our
largest creditors, amended its claim to over $6.3 million from its
previous $3.6 million claim. Trial on this claim took place in July. On
July 25, 2000, the Bankruptcy Court issued a memorandum decision
awarding National Datacast just over $4 million, plus payment of
certain interest. With interest as provided in the judgment, the claim
totaled approximately $4.93 million as of November 1, 2000. We have
appealed this judgment. We have also obtained from the Bankrupcty Court
a stay of enforcement of the judgment by National Datacast pending the
appeal. The stay is conditioned on our funding of the reserve account
securing the claims of unpaid or disputed claims created by our
confirmed plan of reorganization at 100% of the remaining claims by the
middle of November and adding to the reserve account on a monthly basis
thereafter enough to cover remaining claims in light of accruing
interest, where applicable. We expect the stay order to be entered by
the Bankrupcty Court on November 13, 2000.
David Lockton, a shareholder and our former CEO, filed a complaint in
our bankruptcy case seeking specific performance of his promissory note
for $2.0 million, his alleged stock option rights for 2,225,000 shares
of our common stock and back pay on his employment agreement and
damages of $17 million. In March 2000, the Bankruptcy Court ruled that
Mr. Lockton could not assert any damage claims with respect to these
stock option rights and that his remedy, if any, must be limited to
requests for specific performance. Trial of Mr. Lockton's claims took
place on May 8-11 and May 30-31, 2000. A memorandum decision was filed
by the Bankruptcy Court on September 27, 2000. The Bankruptcy Court
held that Mr. Lockton retained to the right to be paid $1.85 million
under the terms of his promissory note. The Bankruptcy Court also held
that Mr. Lockton was entitled to a judgement allowing Mr. Lockton's
claim for $913,810.21 under his employment agreement and found that Mr.
Lockton had the right to exercise options to purchase 900,000 shares of
our common stock at $0.09 per share. This right to exercise options is
forfeited if Mr. Lockton does not exercise it within thirty days of the
filing of the judgement. The Court also held that Mr. Lockton was
entitled to postpetition interest on the amount of the judgment at the
rate of 10% per annum simple interest. As of November 1, 2000, the
total postpetition interest was about $195,000. A judgment was entered
on October 30, 2000. On November 13, Mr. Lockton filed a motion to
reconsider.
We previously obtained Bankruptcy Court approval of our previously
disclosed preliminary settlement of the claims of the Equitable Life
Assurance Society ("Equitable"). Under the settlement, Equitable
accepted a total of $840,000 on its scheduled claims of $1.7 million,
to be paid one half upon approval by the Bankruptcy Court, and one half
in equal monthly installments over the twelve months thereafter,
without interest. As of September 30, 2000, we have paid the first half
of the settlement and made four (4) of the monthly payments.
We obtained a settlement of a disputed claim by Evans Research
Associates that was approved by the Bankruptcy Court. Under the
settlement, we will pay Evans $12,500, which is approximately 70% of
the total amount claimed by Evans.
10
Fish & Richardson claims approximately $255,000 (with interest) as of
November 1, 2000 for prepetition legal services rendered to
Interactive. We contend that we owe Fish & Richardson substantially
less, if anything at all. We recently filed an objection to Fish &
Richardson's claim. Fish & Richardson's initial response is not yet
due.
We are continuing our litigation against NTN Communications, Inc. in
Canada for that company's alleged infringement of our patents. To date,
we have incurred expenses of approximately $45,548 in connection with
the pursuit of this claim.
Other claims of unsecured creditors remain at issue, with settlement
discussions continuing in most instances.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) RECENT SALES OF UNREGISTERED SECURITIES
We entered into a Stock Purchase and Investment Agreement dated
September 13, 2000 with certain accredited investors under which we
agreed to sell to the investors a minimum of 615,000 units and a
maximum of 3,250,000 units for $1.22 per unit. In October 2000 we
increased the maximum number of units offered to approximately 4.9
million units. Each unit consists of one share of our common stock and
a five-year warrant to purchase one share of our common stock at an
exercise price of $1.90 per share. Under the agreement, these investors
retain substantial control over the use of proceeds from their
investment. In September 2000, investors purchased 1,109,836 units for
total gross proceeds to the Company of approximately $1.3 million, of
which $750,000 was paid as an investment in TWIN Entertainment and
portions of the remainder will be set aside to fund our bankruptcy
reserve account and we plan to use any remainder to fund our
operations. The units were sold pursuant to Section 4(2) of the
Securities Act. The offering is still open, and we plan to conclude the
offering on or before November 30, 2000.
11
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 10.19 Stock Purchase and Investment Agreement dated
September 13, 2000.
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
12
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: November 13, 2000
INTERACTIVE NETWORK, INC.
(Registrant)
By: /S/ Bruce W. Bauer
----------------------------------
Bruce W. Bauer
Chairman of the Board
President, Chief Executive Officer
and Chief Financial Officer
13