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 June 30, 2001
-------------
[ ] 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 June 30, 2001
- ----- --------------------------------------
Common Stock 43,019,277
INTERACTIVE NETWORK, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS......................................1
CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2001 (Unaudited) AND DECEMBER 31, 2000.........1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
AND 2000................................................2
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2001
AND 2000................................................3
NOTES TO FINANCIAL STATEMENTS (Unaudited).................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.......................................10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.........................................11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................12
ITEM 6. EXHIBITS..................................................12
SIGNATURES ..........................................................13
i
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERACTIVE NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2001 2000
-------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Restricted cash $ 5,543,978 $ 5,609,735
Cash 948,999 685,168
Royalty fee receivable 135,000 250,000
Prepaid expenses and other current assets 46,523 47,218
-------------- --------------
Total current assets 6,674,500 6,592,121
Deposits and other assets 3,144 3,220
-------------- --------------
Total assets $ 6,677,644 $ 6,595,341
============== ==============
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 791,103 $ 443,952
Liabilities subject to compromise 5,504,922 5,503,263
Promissory note - current - 85,565
Deferred legal fees - 957,775
-------------- --------------
Total current liabilities 6,296,025 6,990,555
Promissory note - noncurrent 1,246,130 598,955
Convertible Promissory Notes 1,120,616 -
Shareholders' deficit:
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding as of
June 30, 2001 and December 31, 2000 - -
Common stock, no par value, 150,000,000 shares
authorized; 43,019,277 shares issued and outstanding
as of both June 30, 2001 and December 31, 2000 145,874,986 145,874,986
Accumulated deficit (147,860,113) (146,869,155)
-------------- --------------
Total shareholders' (deficit) (1,985,127) (994,169)
-------------- --------------
Total liabilities and shareholders' (deficit) $ 6,677,644 $ 6,595,341
============== ==============
See accompanying notes to consolidated financial statements.
1
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Royalty fees $ 67,500 $ - $ 135,000 $ -
------------ ------------ ------------ ------------
General and administrative expenses:
Salaries 69,417 65,641 147,336 131,282
Employer payroll taxes 9,004 8,689 22,726 17,331
Contract labor 7,012 11,858 32,520 28,606
Rent 9,000 3,099 18,000 5,165
Directors' & Officers' insurance 16,801 - 32,702 -
Other administrative costs 9,796 22,444 16,994 53,065
Legal fees 91,341 117,969 139,450 170,977
Accounting fees 26,060 17,054 47,156 54,372
Advisory fees - - - 390,000
Legal - NTN litigation 23,549 10,135 25,936 14,904
Shareholder relations - proxy - 24,776 1,400 28,659
------------ ------------ ------------ ------------
General and administrative expenses 261,980 281,665 484,220 894,361
------------ ------------ ------------ ------------
Loss from operations (194,480) (281,665) (349,220) (894,361)
Other (income) and expense
Interest (income) (72,352) (99,196) (145,428) (199,849)
Interest expense 148,409 89,000 286,374 195,000
Net loss from investment in affiliate
accounted for by the equity method 314,486 273,160 619,345 278,651
Reserve for impairment of investment (164,486) - (219,345) -
Litigation settlement - 3,301,000 - 3,081,785
------------ ------------ ------------ ------------
Other (income) and expense, net 226,057 3,563,964 540,946 3,355,587
------------ ------------ ------------ ------------
Loss before reorganization expenses (420,537) (3,845,629) (890,166) (4,249,948)
Reorganization expenses 100,792 250 100,792 106,522
------------ ------------ ------------ ------------
Net loss before federal & state taxes (521,329) (3,845,879) (990,958) (4,356,470)
Federal & state taxes - - - 800
Net loss $ (521,329) $ (3,45,879) $ (990,958) $(4,357,270)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
---------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (990,958) $(4,357,270)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Loss from investment in affiliate 619,345 278,651
Allowance for investment in affiliate (219,345) -
Changes in assets and liabilities:
Royalty fee receivable 115,000 -
Prepaid expenses and other assets 771 (22,781)
Accounts payable 381,975 (71,055)
Liabilities subject to compromise 1,659 2,331,397
Deferred legal fees (500,000) -
Other accrued liabilities 69,626 350,000
------------ ------------
Cash provided by (used in) operating activities: (521,927) (1,491,058)
Cash flows from investing activities:
Investment in TWIN Entertainment - (500,000)
Promissory note receivable from TWIN Entertainment (400,000) -
------------ ------------
Cash provided by (used in) financing activities: (400,000) (500,000)
------------ ------------
Cash flows from financing activities:
Proceeds from bridge financing 1,120,000 -
Sale of common stock - 350,997
------------ ------------
Cash provided by (used in) financing activities: 1,120,000 350,997
------------ ------------
Net increase (decrease) in cash $ 198,073 $(1,640,061)
Cash:
Beginning of period 6,294,903 7,576,158
------------ ------------
End of period $ 6,492,977 $ 5,936,097
============ ============
See accompanying notes to consolidated financial statement.
3
INTERACTIVE NETWORK, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 2001
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 June 30, 2001 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, 2000 filed with the Securities and Exchange Commission
("SEC") on April 16, 2001. The results of operations for the three-month or
six-month periods ended June 30, 2001 are not necessarily indicative of the
results for any subsequent quarter or for the entire year ending December 31,
2001.
Current liabilities consist of accounts payable, and 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 was 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. On June 30,
2001, with approval from the Bankruptcy Court, the Company paid Morrison &
Foerster $500,000 as partial payment of the principal and interest on the
pre-confirmation fees. The remaining pre-confirmation fees are subject to an
agreement between Morrison & Foerster and the Company, with the first payment
due on October 15, 2002.
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 300 De Haro Street, Suite 342, San Francisco, CA 94103.
TWIN Entertainment operates in the United States and Canada using technology
licensed to it by the Company and Two Way TV. In addition to its initial
investment of $500,000, the Company made additional investments in TWIN
Entertainment in the form of multiple loans totaling $1.25 million through the
first quarter of 2001. The Company made further loans of $50,000 in May 2001 and
$100,000 in June 2001, and after the quarter ended June 30, 2001, made
additional loans of $100,000 in July 2001 and $100,000 in August 2001. Two Way
TV made similar loans to TWIN Entertainment, leaving the relative ownership
interests in TWIN Entertainment unchanged. Each party 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 parties.
The Company's share of the operating loss from its joint venture investment in
TWIN Entertainment was approximately $314,486 for the quarter ended June 30,
2001 accounted for by the equity method. The Company also adjusted its allowance
against its investment and outstanding loans in the amount of $164,486 to write
the investment, including loans, down to zero at June 30, 2001, as no assurance
can be made that the joint venture will be profitable in the future.
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, 2000,
filed with the SEC on April 16, 2001. 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, 2000, 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,
Gannett, 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. We continue to concentrate on exploiting
our patent portfolio in a cost-effective way through licenses, joint ventures,
strategic alliances, or other methods that do not involve large overhead
demands. In the event that our proposed merger with TWIN Entertainment is
consummated, as discussed below, we believe that TWIN Entertainment will engage
in restrictive licensing of our intellectual property and focus on developing
and licensing products and services that utilize our patents and Two Way TV's
technology.
We have an advisory panel of consultants and have re-employed our former Chief
Scientist, Dr. Robert Brown, to provide the technical and management expertise
to assist in the fulfillment of our goals. Further, our management may hire
additional personnel to meet our anticipated future needs. Our bankruptcy
reorganization plan was approved by the Bankruptcy Court in 1999 and we continue
to expend 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, which is co-owned and 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. Each of us and Two Way TV have subsequently financed TWIN's operations
equally. TWIN Entertainment currently expects to 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
intellectual property rights and technology, including then-existing and future
content, software, know-how and other technological materials and information,
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, which was filed with the SEC on
February 11, 2000 as Exhibit 2.5 to a Report on Form 8-K and which is
incorporated herein by reference), with a minimum annual royalty of no less than
$250,000 by January 31, 2001, with the minimum royalty payment increasing by at
least eight percent (8%) each year thereafter. In March 2001, Two Way TV paid us
a royalty of $250,000 for the year ending December 31, 2000. Although we have
not received the royalty payment for the year ending December 31, 2001, the
Company has recognized the corresponding prorated minimum revenue due for the
six months ended June 30, 2001.
Since the original formation of TWIN Entertainment we have made additional
investments in TWIN Entertainment in the form of loans, and Two Way TV made
similar loans to TWIN Entertainment. Each of us and Two Way reserves the right
to convert the loan amounts into equity of TWIN Entertainment in the future
under terms to be determined and agreed upon at a later date by the parties. In
the second quarter of 2001, we made additional loans of $50,000 in May 2001 and
$100,000 in June 2001 and after the close of second quarter, we have loaned an
additional $100,000 in July 2001 and $100,000 in August 2001, on similar terms
to TWIN Entertainment, and Two Way TV also made similar loans to TWIN
Entertainment.
We understand that TWIN Entertainment's management continues to discuss with a
number of companies 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, or, if the merger
discussed below is successfully consummated, Two Way TV (US), will use our
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.
5
In December 2000, we announced that we were negotiating the terms of a
transaction with Two Way TV under which we would acquire 100% ownership of TWIN
Entertainment. At the time of our announcement, we anticipated that Two Way TV
would exchange its interest in TWIN Entertainment for a substantial stake in
Interactive Network, and TWIN Entertainment would merge with us, forming a
single company. In June 2001, we announced that on May 31, 2001, we entered into
an agreement whereby we are to be merged with and into TWIN Entertainment to
form a new company to be called Two Way TV (US), Inc. In the proposed
transaction, Two Way TV will own 45% of Two Way TV (US) on a fully diluted basis
and our existing shareholders will own approximately 55% of the combined
company. At the closing of the merger, Two Way TV is to grant an exclusive
license in the United States and Canada to Two Way TV (US) to all of the Two Way
TV games, technologies and patents, and Two Way TV (US) is to grant an exclusive
license outside of the United States and Canada to Two Way TV of its patents.
The completion of any transaction as currently reported is subject to many
conditions, including approval by our shareholders, finalization of certain
material commercial arrangements with third parties and any required regulatory
review and legal processes. Thus, while we currently believe that the
transaction will be completed, it remains possible that the merger will not take
place.
LIQUIDITY AND CAPITAL RESOURCES
We consummated a settlement agreement in 1998 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 June 30, 2001, the balance of these reserved
funds was approximately $5.5 million. As of June 30, 2001, all allowed and
disputed prepetition claims either allowed or disputed totaled approximately
$5.5 million, not including a cross-claim filed by National Datacast, Inc. in
the amount of $800,000. 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. If we are not successful in defeating, substantially
reducing or deferring payment of these claims by creditors, our working capital
requirements would need to be satisfied by external sources of financing to the
extent revenues from exploitation of our patent portfolio are not sufficient.
Certain investors agreed to allow the Company to use funds committed by them in
our recent Stock Purchase and Investment Agreement financing (discussed below)
to supplement our bankruptcy reserve account on a monthly basis to retain the
100% coverage (as determined by the Bankruptcy Court) as interest accrues on
certain of those claims, as applicable. By this arrangement, we obtained an
order of the Bankruptcy Court staying the enforcement of the National Datacast,
Inc., claim. The Bankruptcy Court entered the stay order on November 13, 2000.
We funded the reserve account in the amount agreed upon with National Datacast
and the Bankruptcy Court within the deadline set by the stay order, and have
continued to keep it funded at 100% through June 30, 2001. The only remaining
claims as of June 30, 2001 secured by the reserve account are those of National
Datacast (which is on appeal as discussed below in "Other Contingencies and
Commitments"), Fish & Richardson (which is subject to a claim objection
proceeding as discussed below in "Other Contingencies and Commitments") and
Equitable Life Assurance Society ("Equitable") (which claim was paid on a
monthly basis pursuant to a settlement with Equitable, with the final
installment of about $35,000 paid on July 1, 2001, making Equitable no longer a
creditor). These unresolved claims were secured by a lien on the revenue arising
from our intellectual property, but in accordance with our confirmed plan of
reorganization, the lien was released because the reserve account is funded for
100% of remaining creditor claims (as determined by the Bankruptcy Court).
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 is required for them to avoid infringement upon one or more of
our patents. Where we cannot make favorable agreements with companies whom we
believe are infringing upon our 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 believe
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. In the event of the successful
completion of the proposed merger with TWIN Entertainment, we believe that TWIN
Entertainment will engage in restrictive licensing of our intellectual property
and also develop and license products and services that utilize our patents and
Two Way TV's technology.
6
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. We have
incurred expenses of approximately $125,000 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 $27,160 to cover the defendant's legal costs in the case of an
unfavorable decision against us. We currently expect to incur aggregate
additional expenses in excess of $60,000 in connection with the pursuit of this
claim.
We currently expect our need for working capital for the remainder of fiscal
year 2001 to consist largely of general and administrative expenses, repayment
of debt due in 2001, professional fees and patent development and marketing
expenses to establish a groundwork for generating revenues from our intellectual
property assets. Between September 13, 2000 and December 31, 2000, we raised
$3.1 million through the sale of 2,541,672 units to private investors pursuant
to a Stock Purchase and Investment Agreement dated September 13, 2000. 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. The
proceeds funded our operations into the second quarter of 2001, with the
investors retaining substantial control over the use of proceeds from their
investment. 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 and related documents. A copy of that agreement has been
filed as Exhibit 10.19 to the Quarterly Report on Form 10-Q filed with the SEC
on November 14, 2000, and is incorporated herein by reference.
In the second quarter of 2001, we raised $1.12 million through the sale of 112
units to private investors pursuant to 10% Convertible Promissory Notes and
Common Stock Purchase Warrants, copies of the form of which have been filed as
Exhibits 10.20 and 10.21, respectively, to this Form 10-Q and are incorporated
herein by reference. Each unit consists of (i) a $10,000 convertible promissory
note bearing interest at 10% per annum that is convertible into our Common Stock
at the rate of $0.50 per share and (ii) a five-year warrant to purchase 20,000
shares at an exercise price of $0.60 per share. Of the $1.12 million raised
through June 30, 2001, $500,000 was used as partial payment on the
pre-confirmation fees owed to Morrison & Foerster (as discussed below), $300,000
was loaned to TWIN Entertainment (as discussed below), and we intend to use the
remainder to fund our operations through the third quarter 2001. We raised an
additional $292,500 in this financing after June 30, 2001 and through the date
of this Report.
In 2001, we and Two Way TV each increased our investment in TWIN Entertainment.
We and Two Way TV each loaned TWIN Entertainment $250,000 in February 2001,
$50,000 in May 2001, $100,000 in June 2001, $100,000 in July 2001 and $100,000
in August 2001, each loan in the form of convertible promissory notes on terms
to be agreed upon by the parties at a later date. In addition, if the merger
with TWIN Entertainment is successful, we will incur additional general costs
(both directly and indirectly as a financier of TWIN Entertainment) related to
the merger. The $250,000 loaned to TWIN Entertainment in February 2001 and the
$50,000 loaned to TWIN Entertainment in May 2001 were paid out of proceeds from
the sale of units pursuant to the Stock Purchase and Investment Agreement and
are in the form of loans in which each of us and Two Way TV 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 parties. The $100,000 loaned
in June 2001, the $100,000 loaned in July 2001, and the $100,000 loaned in
August 2001 were each paid out of the proceeds from the sale of the units
pursuant to the Convertible Promissory Note and Warrant Agreement discussed
above and are in the form of loans on terms and conditions similar to prior
loans to TWIN Entertainment.
We incurred legal expenses reflected on previous balance sheets of $957,775
prior to confirmation of our bankruptcy reorganization plan on April 22, 1999,
which became payable on April 22, 2000, subject to Bankruptcy Court approval. 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 $684,520 remained unpaid as of
June 30, 2001. On June 30, 2001, the Bankruptcy Court approved pre-confirmation
fees owed of $932,775, and we paid $500,000 to our counsel as partial payment of
the principal and interest owed on such pre-confirmation fees. We have amended
our previous agreement with our counsel for payment of the remaining amount on
the following terms: the remaining preconfirmation legal fees of approximately
$520,043 is included in a new promissory note from us to Morrison & Foerster,
along with the approximately $684,520 owed to our counsel for post-confirmation
expenses. Interest is accruing on the $520,043 of pre-confirmation expenses as
of October 15, 2000 at 1% per annum over Bank of America's prime rate. The
7
Company has paid approximately $62,000 in interest and incurred approximately an
additional $41,500 of interest expense on these deferred pre-confirmation legal
fees as of June 30, 2001. Interest will begin accruing on the approximately
$684,520 in post-confirmation expenses as of July 1, 2001 at 1% per annum over
Bank of America's prime rate. Repayment of principal and interest on this
promissory note is required to commence on October 15, 2002, and will be paid in
24 equal monthly installments each consisting of 1/24th of the aggregate of the
unpaid principal amount under the promissory note and the unpaid interest
accrued through September 30, 2002. We also amended the warrant previously
issued to our counsel to, among other things, reflect a revised warrant exercise
price of $0.69, which was 101% of the average Closing Price for the 20 days
prior to the date of the issuance of the revised warrant. In addition to the
foregoing legal expenses, through June 30, 2001, contingent legal expenses in
the amount of approximately $1.1 million 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 the contested claim of
National Datacast, or, if an appeal is not pursued, through cancellation of the
unscheduled contingent legal expenses by exercise of a warrant issued on similar
terms as the warrant described above.
OTHER CONTINGENCIES AND COMMITMENTS
We continue to dispute the claims of National Datacast in our bankruptcy
proceeding. As of June 30, 2001, National Datacast's claim, including accrued
interest, totaled approximately $5.06 million. We appealed the July 2000
memorandum decision and on November 13, 2000 we obtained from the Bankruptcy
Court a stay of enforcement of the judgement by National Datacast pending the
appeal. We filed our opening brief on March 6, 2001. 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 and adjusting the reserve account on a monthly basis thereafter enough to
cover remaining claims in light of accruing interest, where applicable. We
funded the reserve account within the deadline set by the stay order, and have
continued to keep it funded at 100% through June 30, 2001. National Datacast
filed a cross-claim in the amount of approximately $800,000. That amount was not
requested to be covered by the reserve account at the time we obtained the stay
from the Bankruptcy Court and it is not currently covered.
We have settled the claims of Equitable for a total of $840,000, one half of
which was paid upon approval by the Bankruptcy Court of the settlement, and one
half of which was to be paid in equal monthly installments over the twelve
months thereafter, without interest. As of July 2001, we have paid the first
half of the settlement and made all twelve (12) of the monthly installments. The
final installment of approximately $35,000 was paid in July 2001. Equitable is
no longer a creditor.
Fish & Richardson claims it is owed approximately $267,000 (with interest) as of
June 30, 2001, for prepetition legal services rendered to Interactive Network.
We contend that we owe Fish & Richardson substantially less, if anything at all.
We recently filed an objection to Fish & Richardson's claim. At a status
conference on March 30, 2001, the Bankruptcy Court set trial on this dispute for
September 4-5, 2001. The Fish & Richardson claim is covered by the reserve
account.
We are continuing our litigation against Networks North, Inc. (formerly NTN
Communications Canada, Inc.) in Canada for that company's alleged infringement
of our patents. To date, we have incurred expenses of approximately $125,000 in
connection with the pursuit of this claim. We currently expect to incur
aggregate additional expenses in excess of $60,000 in connection with the
pursuit of this claim.
On October 30, 2000, a judgment was entered on the complaint filed in our
bankruptcy case by David Lockton, a shareholder and our former CEO.
Subsequently, we paid Mr. Lockton the amount of his allowed claims plus interest
to the date of the payment, less $81,000 for the purchase price of the 900,000
shares of our common stock issued to him upon exercise of the options granted to
him under the judgment, and issued to him and registered the 900,000 shares. Mr.
Lockton retains the right to be paid $1.85 million under the terms of his
promissory note. Under the terms of the promissory note, payments do not become
due and payable until such time that the Company has generated certain levels of
positive cash flow for two consecutive fiscal quarters and any such payments may
be limited or suspended based on the extent of the Company's cash flows.
8
Certain directors of the Company have also been sued by Mr. Lockton in a
separate action. Although the Company is not a party to the suit, we do have a
potential obligation to indemnify our directors for claims raised in the suit.
The parties are currently in settlement negotiations and at this time the
Company does not believe that the resolution of this suit will have a material
adverse effect on the Company's financial position.
RESULTS OF OPERATIONS
ROYALTY FEES. During the three month and six month periods ended June 30, 2001,
we recognized approximately $67,500 and $135,000, respectively, in prorated
revenue from minimum royalty fees owed based upon an agreement with Two Way TV.
In the three month and six month periods ended June 30, 2000, we had no revenue.
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 six month periods ended June 30, 2001
were approximately $262,000 and $484,000, respectively, compared to
approximately $282,000 and $894,000, respectively, for the same periods of 2000.
The decrease for the three months ended June 30, 2001 versus the comparable
period in the prior year was primarily due to a reduction in legal services
required and fees incurred. The decrease for the six months ended June 30, 2001
versus the comparable period in the prior year was primarily due to a one-time
charge of $390,000 recorded in the three months ended March 31, 2000 for
advisory fees related to additional claims filed with the Bankruptcy Court.
OTHER INCOME AND EXPENSE
INTEREST INCOME. Our interest income for the three and six month periods ended
June 30, 2001, was approximately $72,000 and $145,000, respectively, compared
with approximately $99,000 and $200,000 for the same periods, respectively, in
2000. Our interest income consisted primarily of interest earned on deposits
mandated by the Bankruptcy Court for restricted use. The decrease of
approximately $55,000 from the six month period ended June 30, 2000, was due to
the declining cash balance on proceeds from the Stock Purchase and Investment
Agreement financing.
INTEREST EXPENSE. Our interest expense for the three and six month periods ended
June 30, 2001 was approximately $148,000 and $286,000, respectively, compared to
approximately $89,000 and $195,000 for the same periods in 2000. Interest
expense for 2001 and 2000 was related to interest accrued to unsecured creditors
as part of our bankruptcy reorganization and accrued on pre-confirmation
deferred legal fees. See discussion of the settlement agreement under "Liquidity
and Capital Resources" and the unsecured creditors under "Other Contingencies
and Commitments."
NET LOSS FROM INVESTMENT IN AFFILIATE. For the three and six month periods ended
June 30, 2001, we recorded a net loss from investment in affiliate of
approximately $314,000 and $619,000, respectively, compared to approximately
$273,000 and $279,000, respectively, for the same periods in 2000, accounted for
by the equity method. These net loss amounts are our share of the net losses
incurred by TWIN Entertainment during these periods based upon its unaudited
results of operations. We also adjusted our allowance against this investment
and outstanding loans in the amount of approximately $219,000 to write our
investment, including the loans, down to zero at June 30, 2001, as no assurance
can be made that the joint venture will be profitable in the future.
LITIGATION SETTLEMENT. No settlement was received in the three and six month
periods ending June 30, 2001. During the same periods in 2000 approximately
$3,301,000 and $3,082,000, respectively, was received.
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. We incurred approximately
$101,000 in reorganization expenses for the three and six month periods ended
June 30, 2001 compared to approximately $250 and $107,000 for the comparable
periods in 2000.
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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 June 30, 2001.
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
2001. We did not engage in foreign currency hedging activities during the six
months ended June 30, 2001.
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 REGARDING RESULTS OF APPEALS IN THE COMPANY'S CHAPTER 11
PROCEEDING 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.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We continue to pursue the objections we have to claims of creditors in our
bankruptcy proceedings. As of June 30, 2001, we have set aside approximately
$5.5 million in a reserve account to pay creditors whose claims we are
disputing, as required under our plan of reorganization. As of June 30, 2001,
prepetition claims either allowed or disputed totaled approximately $5.5
million.
We continue to dispute the claims of National Datacast in our bankruptcy
proceeding. As of June 30, 2001, National Datacast's claim, including accrued
interest, totaled approximately $5.06 million. We appealed the July 2000
memorandum decision, and filed our opening brief on March 6, 2001. On November
13, 2000, we obtained from the Bankruptcy 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
and adjusting the reserve account on a monthly basis thereafter enough to cover
remaining claims in light of accruing interest, where applicable. We funded the
reserve account within the deadline set by the stay order, and have continued to
keep it funded at 100% through June 30, 2001. National Datacast filed a
cross-claim in the amount of approximately $800,000. That amount was not
requested to be covered by the reserve account at the time we obtained the stay
from the Bankruptcy Court and it is not currently covered.
We have settled the claims of Equitable for a total of $840,000, one half of
which was paid upon approval by the Bankruptcy Court of the settlement, and one
half of which was to be paid in equal monthly installments over the twelve
months thereafter, without interest. As of July 2001, we have paid the first
half of the settlement and made all twelve (12) of the monthly installments. The
final installment of approximately $35,000 was paid in July 2001. Equitable is
no longer a creditor.
Fish & Richardson claims it is owed approximately $267,000 (with interest) as of
June 30, 2001, for prepetition legal services rendered to Interactive Network.
We contend that we owe Fish & Richardson substantially less, if anything at all.
We recently filed an objection to Fish & Richardson's claim. At a status
conference on March 30, 2001, the Bankruptcy Court set trial on this dispute for
September 4-5, 2001.
We are continuing our litigation against Networks North, Inc. (formerly NTN
Communications Canada, Inc.) in Canada for that company's alleged infringement
of our patents. To date, we have incurred expenses of approximately $125,000 in
connection with the pursuit of this claim. We currently expect to incur
aggregate additional expenses in excess of $60,000 in connection with the
pursuit of this claim.
Certain directors of the Company have been sued by David Lockton, a shareholder
and our former CEO, in a separate action. Although the Company is not a party to
the suit, we do have a potential obligation to indemnify the directors for
claims raised in the suit. The parties are currently in settlement negotiations
and at this time the Company does not believe that the resolution of this suit
will have a material adverse effect on the Company's financial position.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
In the second quarter of 2001, we raised $1.12 million through the sale of 112
units to private investors pursuant to 10% Convertible Promissory Notes and
Common Stock Purchase Warrants, copies of the forms of which have been filed as
Exhibits 10.20 and 10.21, respectively, to this Form 10-Q and are incorporated
herein by reference. Each unit consists of (i) a $10,000 convertible promissory
note bearing interest at 10% per annum that is convertible into our Common Stock
at the rate of $0.50 per share and (ii) a five-year warrant to purchase 20,000
shares at an exercise price of $0.60 per share. We believe that the sale of
these units were exempt from the registration requirements of Section 5 of the
Securities Act of 1933 (the "Securities Act") because the offer and sale of
these units were transactions not involving any public offering within the
meaning of Section 4(2) of the Securities Act and satisfied the conditions of
Rules 505 and 506 promulgated under the Securities Act. Each investor
represented to us that such investor was an accredited investor within the
meaning of Rule 501 promulgated under the Securities Act. Of the $1.12 million
raised through June 30, 2001, $500,000 was used as partial payment on the
pre-confirmation fees owed to Morrison & Foerster, $300,000 was loaned to TWIN
Entertainment and we intend to use the remainder to fund our operations through
the third quarter 2001. We raised an additional $292,500 in this financing after
June 30, 2000 and through the date of this report.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 10.20 Form of 10% Convertible Promissory Note
Exhibit 10.21 Form of Common Stock Purchase Warrant
(b) Reports on Form 8-K
None
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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: August 14, 2001
INTERACTIVE NETWORK, INC.
(Registrant)
By: /s/ Bruce W. Bauer
--------------------------------------
Bruce W. Bauer
Chairman of the Board
President, Chief Executive Officer
(principal executive officer) and
Chief Financial Officer
(principal financial officer)
13