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, 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 October 15, 2001
- ----- -----------------------------------------
Common Stock 43,019,277
INTERACTIVE NETWORK, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS................................................2
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2001 (Unaudited) AND DECEMBER 31, 2000................2
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000.....3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000............................................................4
NOTES TO FINANCIAL STATEMENTS (Unaudited)...........................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...........................13
ITEM 6. EXHIBITS............................................................13
SIGNATURES...................................................................13
i
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERACTIVE NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Restricted cash $ 5,614,309 $ 5,609,735
Cash 585,787 685,168
Royalty fee receivable 202,500 250,000
Prepaid expenses and other current assets 40,160 47,218
-------------- --------------
Total current assets 6,442,756 6,592,121
Deposits and other assets 3,430 3,220
-------------- --------------
Total assets $ 6,446,186 $ 6,595,341
============== ==============
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 605,840 $ 443,952
Liabilities subject to compromise 5,577,630 5,503,263
Promissory note - current - 85,565
Deferred legal fees - 957,775
-------------- --------------
Total current liabilities 6,183,470 6,990,555
Promissory note - noncurrent 1,247,254 598,955
Convertible promissory notes 1,657,436 -
Shareholders' deficit:
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding as of
September 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 September 30, 2001 and December 31, 2000 145,874,986 145,874,986
Accumulated deficit (148,516,960) (146,869,155)
-------------- --------------
Total shareholders' deficit (2,641,974) (994,169)
-------------- --------------
Total liabilities and shareholders' deficit $ 6,446,186 $ 6,595,341
============== ==============
See accompanying notes to consolidated financial statements.
2
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Royalty fees $ 67,500 $ - $ 202,500 $ -
------------ ------------ ------------ ------------
General and administrative expenses:
Salaries 75,000 81,188 222,336 213,016
Employer payroll taxes 5,914 6,524 28,640 23,309
Contract labor (8,083) 69,233 24,436 97,839
Rent 9,000 6,000 27,000 11,165
Directors' & Officers' insurance 37,848 7,751 70,550 7,751
Other administrative costs 11,775 23,519 28,754 77,384
Legal fees 114,580 177,642 254,174 348,619
Accounting fees 19,244 40,339 66,415 94,711
Advisory fees - - - 390,000
Legal - NTN litigation 10,851 19,911 36,787 34,815
Shareholder relations - proxy - 210,795 1,400 239,454
------------ ------------ ------------ ------------
General and administrative expenses 276,129 642,902 760,492 1,538,063
------------ ------------ ------------ ------------
Loss from operations (208,629) (642,902) (557,992) (1,538,063)
Other (income) and expense
Interest (income) (54,125) (96,183) (199,553) (296,032)
Interest expense 170,668 180,000 457,042 375,000
Net loss from investment in affiliate
accounted for by the equity method 299,951 256,064 919,296 534,715
Reserve for impairment of investment 49 - (219,296) -
Litigation settlement - - - 3,081,785
------------ ------------ ------------ ------------
Other (income) and expense, net 416,543 339,881 957,489 3,695,468
------------ ------------ ------------ ------------
Loss before reorganization expenses (625,172) (982,783) (1,515,481) (5,233,531)
Reorganization expenses 28,524 242,996 129,173 349,518
------------ ------------ ------------ ------------
Net loss before federal & state taxes (653,696) (1,225,779) (1,644,654) (5,583,049)
Federal & state taxes 3,152 4,800 3,152 4,800
Net loss $ (656,848) $(1,230,579) $(1,647,806) $(5,587,849)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $(1,647,806) $(5,587,849)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Loss from investment in affiliate 919,296 34,715
Allowance for investment in affiliate (219,296) -
Changes in assets and liabilities:
Royalty fee receivable 47,500 -
Prepaid expenses and other assets 6,849 34,263
Accounts payable 196,713 548,891
Liabilities subject to compromise 74,367 2,791,368
Deferred legal fees (525,000) -
Other accrued liabilities 132,570 (3,600)
------------ ------------
Cash provided by (used in) operating activities: (1,014,807) (2,182,212)
Cash flows from investing activities:
Investment in Two Way TV (US) (1,700,000) -
Promissory note receivable from Two Way TV (US) 1,000,000 (750,000)
------------ ------------
Cash provided by (used in) financing activities: (700,000) (750,000)
------------ ------------
Cash flows from financing activities:
Proceeds from bridge financing 1,620,000 -
Sale of common stock - 1,704,996
------------ ------------
Cash provided by (used in) financing activities: 1,620,000 1,704,996
------------ ------------
Net increase (decrease) in cash $ (94,807) $(1,227,216)
Cash:
Beginning of period 6,294,903 7,576,158
------------ ------------
End of period $ 6,200,096 $ 6,348,942
------------ ------------
See accompanying notes to consolidated financial statements
4
INTERACTIVE NETWORK, INC.
Notes to Unaudited Consolidated Financial Statements
September 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 September 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
nine-month periods ended September 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 Two Way TV (US), Inc. (formerly known as TWIN Entertainment, Inc.) ("Two Way
TV (US)"), a corporate joint venture between the Company and Two Way TV Limited
("Two Way TV Ltd."). Two Way TV (US)'s offices are located at 6300 Wilshire
Blvd., Suite 1750, Los Angeles, CA 90048. Two Way TV (US) operates in the United
States and Canada using technology licensed to it by the Company and Two Way TV
Ltd. In addition to its initial investment of $500,000 in January 2000, the
Company made additional investments in Two Way TV (US) in the form of multiple
loans totaling $1.4 million through the second quarter of 2001. The Company made
further loans during the quarter ended September 30, 2001 of $100,000 in July
2001, $100,000 in August 2001 and $100,000 in September 2001. Two Way TV Ltd.
made similar loans to Two Way TV (US), leaving the relative ownership interests
in Two Way TV (US) unchanged. On September 10, 2001, each of us and Two Way TV
Ltd. converted the loan amounts to equity in Two Way TV (US) at a price of $0.50
per share, resulting in a 3,400,000 new shares of Two Way TV (US) common stock
issued to us and 3,400,000 new shares of Two Way TV (US) common stock issued to
Two Way TV Ltd. The Company has made an additional loan for $100,000 in October
2001.
Condensed financial data of Two Way TV (US) for the three and nine month periods
ended September 30, 2001 and the period from inception at January 10, 2000 ended
September 30, 2001 is as follows:
THREE MONTHS NINE MONTHS PERIOD FROM
ENDED ENDED INCEPTION ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2001 2001
SUMMARY OF OPERATIONS
Revenues $ 0 $ 0 $ 0
Costs and expenses 534,296 2,031,922 4,218,371
Loss before income taxes 376 2,309 3,109
Net loss $ (534,672) $(2,034,231) $(4,221,480)
Interactive Network's equity in net loss $ (267,336) $(1,017,116) $(2,110,740)
BALANCE SHEET DATA
Assets
Current assets $ 136,983
Non-current assets 406,017
------------
Total assets $ 542,999
============
5
LIABILITIES AND SHAREHOLDERS'EQUITY
Current liabilities $ 323,305
Non-current liabilities 0
------------
323,305
Shareholders' deficit 219,694
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 542,999
============
The Company periodically evaluates the recoverability of its equity investments,
in accordance with APB No. 18, "The Equity Method of Accounting for Investments
in Common Stock," and if circumstances arise where a loss in value is considered
to be other than temporary, the Company will record a write-down of investment
cost. The Company's recoverability analysis is based on the projected
undiscounted cash flows of the operating ventures, which is the lowest level of
cash flow information available. The Company's share of the operating loss from
its joint venture investment in Two Way TV (US) was approximately $300,000 for
the quarter ended September 30, 2001 accounted for by the equity method. The
Company also made a small $49 adjustment to its allowance against its investment
and outstanding loans to write the investment, including loans, down to zero at
September 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.
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.
Today, we own certain intellectual property assets related to the interactive
television market and other interactive technology. 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 Two Way TV (US) is
consummated, as discussed below, we believe that Two Way TV (US) 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 Ltd.'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.
On January 31, 2000, we consummated the formation of a joint venture company,
which was initially called TWIN Entertainment, Inc., and is now known as Two Way
TV (US), and which is co-owned and co-managed by Two Way TV Ltd. and by us under
the terms of a Joint Venture and Stock Purchase Agreement dated as of December
6, 1999. Each of Two Way TV Ltd. and us have subsequently financed Two Way TV
(US)'s operations equally. We believe that Two Way TV (US) 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 to Two Way TV (US) the non-exclusive use of our patents and other
intellectual property for the United States and Canada. Two Way TV Ltd. also
licensed to Two Way TV (US) certain of its 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.
6
Additionally, as part of the agreements with Two Way TV Ltd. to create Two Way
TV (US), we settled all outstanding claims with Two Way TV Ltd. 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 Ltd. in exchange for a royalty payment of a certain percentage of Two
Way TV's world wide sales. In March 2001, Two Way TV Ltd. 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 ended December 31, 2001, we have recognized the
corresponding prorated minimum revenue due for the nine months ended September
30, 2001.
Since the original formation of Two Way TV (US) in January 2000 we have made
additional investments in Two Way TV (US) in the form of loans, and Two Way TV
Ltd. made similar loans to Two Way TV (US). In the third quarter of 2001, we
made additional loans of $100,000 in July 2001, $100,000 in August 2001 and
$100,000 in September 2001, on similar terms to Two Way TV (US), and Two Way TV
Ltd. also made similar loans to Two Way TV (US). On September 10, 2001, each of
Two Way TV Ltd. and us converted the loan amounts to equity in Two Way TV (US)
at a price of $0.50 per share, resulting in 3,400,000 new shares of Two Way TV
(US) common stock issued to us and 3,400,000 new shares of Two Way TV (US)
common stock issued to Two Way TV Ltd. In October 2001, we loaned an additional
$100,000 to Two Way TV (US) and Two Way TV Ltd. made a similar loan.
We understand that Two Way TV (US)'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 us and Two
Way TV Ltd. Although Two Way TV (US) has not currently recognized revenues and
we have no assurance that it will be profitable in the future, we believe that
Two Way TV (US) will use our intellectual property and Two Way TV Ltd.'s
technology to become an active participant in the interactive television and
broadband market in the U.S. and Canada.
In December 2000, we announced that we were negotiating the terms of a
transaction with Two Way TV Ltd. under which we would acquire 100% ownership of
Two Way TV (US). At the time of our announcement, we anticipated that Two Way TV
Ltd. would exchange its interest in Two Way TV (US) for a substantial stake in
Interactive Network, and Two Way TV (US) 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 Two Way TV (US) to form a
new company to be called Two Way TV (US), Inc. In the proposed transaction,
shareholders of Two Way TV Ltd. will own approximately 52% of the combined
company's outstanding shares and approximately 45% of its shares on a fully
diluted basis and our existing shareholders will own approximately 48% of the
outstanding shares and 55% of the combined company's shares on a fully diluted
basis. At the closing of the merger, Two Way TV Ltd. is to grant an exclusive
license in the United States and Canada to Two Way TV (US) to all of the Two Way
TV Ltd. 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 Ltd. 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, we have no assurance that the merger will be
completed or will be completed on the terms outlined above.
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 September 30, 2001, the balance of these
reserved funds was approximately $5.6 million. As of September 30, 2001, all
allowed and disputed prepetition claims either allowed or disputed totaled
approximately $5.6 million, not including issues raised on cross appeal by
National Datacast, Inc., ("National Datacast") 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
7
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. We have no assurance
that we will be successful in raising funds from external sources. Certain
investors agreed to allow us to use funds committed by them in our recent Stock
Purchase and Investment Agreement financing completed in December 2000
(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 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 September 30, 2001. The only
remaining claims as of September 30, 2001 secured by the reserve account are
those of National Datacast (which is on appeal as discussed below in "Other
Contingencies and Commitments") and Fish & Richardson (which is subject to a
claim objection proceeding as discussed below in "Other Contingencies and
Commitments").
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 Two Way TV (US). Although it has
currently realized no revenue, we believe Two Way TV (US) 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 Two Way TV (US), we believe that Two Way TV (US) 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 Ltd.'s
technology.
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 $139,000 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 $80,000 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 and professional fees.
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 the Quarterly Report on Form 10-Q
filed with the SEC on August 14, 2001, and are incorporated herein by reference.
In the third quarter of 2001, we raised an additional $505,000 through the sale
of 50.5 units. 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 of our Common Stock at an exercise price of $0.60 per share. Of the
$1.625 million raised through September 30, 2001, $500,000 was used as partial
payment on the pre-confirmation fees owed to Morrison & Foerster, $300,000 was
loaned to Two Way TV (US), and we intend to use the remainder to fund our
operations through the first quarter 2002.
In 2001, we and Two Way TV Ltd. each increased our investment in Two Way TV
(US). We and Two Way TV Ltd. each loaned Two Way TV (US) a total of $700,000
through September 30, 2001, each loan in the form of convertible promissory
notes. On September 10, 2001, each of us and Two Way TV Ltd. converted the loan
amounts to equity in Two Way TV (US) at a price of $0.50 per share, resulting in
3,400,000 new shares of Two Way TV (US) common stock issued to Two Way TV Ltd.
and 3,400,000 new shares of Two Way TV (US) common stock issued to us. In
addition, if the merger with Two Way TV (US) is successful, we will incur
additional general costs (both directly and indirectly as a financier of Two Way
8
TV (US)) related to the merger. The $250,000 loaned to Two Way TV (US) in
February 2001 and the $50,000 loaned to Two Way TV (US) 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 Ltd. reserved the right to convert to equity in Two Way TV (US) 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 $300,000 loaned during the third
quarter 2001 and the $100,000 loaned in October 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.
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
September 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 $494,517 is included in a new promissory note from us to Morrison &
Foerster, along with the $684,520 owed to our counsel for post-confirmation
expenses. Interest is accruing on the $494,517 of pre-confirmation expenses as
of July 1, 2001 at 1% per annum over Bank of America's prime rate. We have paid
approximately $62,000 in interest and incurred approximately $9,500 of accrued
interest expense on these deferred pre-confirmation legal fees as of September
30, 2001. Interest has been accruing on the $684,520 in post-confirmation
expenses as of October 15, 2000 at 1% per annum over Bank of America's prime
rate. We have incurred approximately $59,000 of accrued interest expense on
these deferred post-confirmation legal fees as of September 30, 2001. 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. The
interest accruing on this promissory note after October 1, 2002, will be paid
with such equal monthly installments. 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 September 30, 2001,
contingent legal expenses in the amount of approximately $1.1 million have been
incurred by us 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 September 30, 2001, National Datacast's claim, including
accrued interest, totaled approximately $5.3 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 judgment by National Datacast pending the
appeal. We filed our opening brief on March 6, 2001. National Datacast filed a
cross appeal against the Company on issues on which the bankruptcy court found
for us involving potential damages in the amount of approximately $800,000. The
stay of enforcement of the judgment 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 September 30, 2001. The approximately $800,000 at issue
in National Datacast's cross appeal 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.
9
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. The final installment was paid in July
2001. Equitable is no longer a creditor.
Fish & Richardson claims it is owed approximately $277,000 (with interest) as of
September 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, and the trial later was continued until
December 11-12, 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 $139,000 in
connection with the pursuit of this claim. We currently expect to incur
aggregate additional expenses in excess of $80,000 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 we have 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 our cash flows.
Certain of our directors have also been sued by Mr. Lockton in a separate
action. Although we are not a party to the claims against the directors, we do
have a potential obligation to indemnify our directors for claims raised in the
suit. The trial court granted summary judgment in favor of the directors on
three of the four causes of action. Mr. Lockton filed a motion to reconsider the
ruling on the summary judgment motion and to stay the action pending appeal
regarding that motion. In August 2001, the trial court denied the motions by Mr.
Lockton and reaffirmed the ruling on the summary judgment motion. The only
remaining cause of action is for defamation. The suit is set for trial in
February 2002. The directors intend to file for summary judgment as to the
remaining cause of action for defamation within the next few weeks. At this time
we do not believe that the resolution of this suit will have a material adverse
effect on our financial position.
RESULTS OF OPERATIONS
ROYALTY FEES. During the three month and nine month periods ended September 30,
2001, we recognized approximately $67,500 and $202,500, respectively, in
prorated revenue from minimum royalty fees owed based upon an agreement with Two
Way TV Ltd. In the three month and nine month periods ended September 30, 2000,
we received no royalty fees.
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,
2001 were approximately $276,000 and $760,000, respectively, compared to
approximately $643,000 and $1,538,000, respectively, for the same periods of
2000. The decrease for the three months ended September 30, 2001 versus the
comparable period in the prior year reflects the reduction of fees associated
with shareholder relations and other contracted services. The three months ended
September 30, 2001 also reflects a negotiated reduction of market research fees.
The decrease for the nine months ended September 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 and the reduction of fees
associated with shareholder relations, legal and accounting fees. These
decreases were partially offset by premiums paid for directors and officers
insurance.
10
OTHER INCOME AND EXPENSE:
INTEREST INCOME. Our interest income for the three and nine month periods ended
September 30, 2001, was approximately $54,000 and $200,000, respectively,
compared with approximately $96,000 and $296,000 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 $93,000 from the nine month period ended September 30,
2000, was due to the declining cash balance and declining interest rates.
INTEREST EXPENSE. Our interest expense for the three and nine month periods
ended September 30, 2001 was approximately $171,000 and $457,000, respectively,
compared to approximately $180,000 and $375,000 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 deferred legal
fees.
NET LOSS FROM INVESTMENT IN AFFILIATE. For the three and nine month periods
ended September 30, 2001, we recorded a net loss from investment in affiliate of
approximately $300,000 and $919,000, respectively, compared to approximately
$256,000 and $535,000, respectively, for the same periods in 2000, accounted for
by the equity method. These amounts represent our share of the net losses
incurred by Two Way TV (US) 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 $49 to write our investment
down to zero at September 30, 2001, as, although we believe Two Way TV (US) may
develop revenue in the future, it does not currently recognize revenue and no
assurance can be made that the joint venture will be profitable in the future.
LITIGATION SETTLEMENT. No settlement expense was recorded in the three and nine
month periods ending September 30, 2001. During the nine months ended September
30, 2000 approximately $3,082,000 of additional expense was recognized to
reflect increased claims by debtors under bankruptcy proceedings.
REORGANIZATION EXPENSES. Reorganization expenses 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
$29,000 and $129,000 in reorganization expenses for the three and nine month
periods ended September 30, 2001 compared to approximately $243,000 and $350,000
for the comparable periods in 2000.
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, 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 nine months ended September 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.
11
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 September 30, 2001, we have set aside
approximately $5.6 million in a reserve account to pay creditors whose claims we
are disputing, as required under our plan of reorganization. As of September 30,
2001, prepetition claims either allowed or disputed totaled approximately $5.6
million.
We continue to dispute the claims of National Datacast in our
bankruptcy proceeding. As of September 30, 2001, National Datacast's claim,
including accrued interest, totaled approximately $5.3 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 judgment by National Datacast
pending the appeal. We filed our opening brief on March 6, 2001. National
Datacast filed a cross appeal against the Company on issues on which the
bankruptcy court found for us involving potential damages in the amount of
approximately $800,000. The stay of enforcement of the judgment 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 September 30, 2001. The
approximately $800,000 at issue in National Datacast's cross appeal 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. The final installment was paid in
July 2001. Equitable is no longer a creditor.
Fish & Richardson claims it is owed approximately $277,000 (with
interest) as of September 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, and the trial later was continued until
December 11-12, 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
$139,000 in connection with the pursuit of this claim. We currently expect to
incur aggregate additional expenses in excess of $80,000 in connection with the
pursuit of this claim.
Certain of our directors have also been sued by Mr. Lockton in a
separate action. Although we are not a party to the claims against the
directors, we do have a potential obligation to indemnify our directors for
claims raised in the suit. The trial court granted summary judgment in favor of
the directors on three of the four causes of action. Mr. Lockton filed a motion
to reconsider the ruling on the summary judgment motion and to stay the action
pending appeal regarding that motion. In August, the trial court denied the
motions by Mr. Lockton and reaffirmed the ruling on the summary judgment motion.
The only remaining cause of action is for defamation. The suit is set for trial
in February 2002. The directors intend to file for summary judgment as to the
remaining cause of action for defamation within the next few weeks. At this time
we do not believe that the resolution of this suit will have a material adverse
effect on our financial position.
12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
In the second and third quarters of 2001, we raised a total of $1.625
million through the sale of 162.5 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 the
Quarterly Report on Form 10-Q filed with the SEC on August 14, 2001, 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 $1.625 million raised through September 30, 2001, $500,000 was used as
partial payment on the pre-confirmation fees owed to Morrison & Foerster,
$300,000 was loaned to Two Way TV (US), and we intend to use the remainder to
fund our operations through the first quarter 2001.
ITEM 6. EXHIBITS
(a) Exhibits
None
(b) Reports on Form 8-K
None
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 14, 2001
INTERACTIVE NETWORK, INC.
(Registrant)
By: /s/ Bruce Bauer
----------------------------------
Bruce W. Bauer
Chairman of the Board
President, Chief Executive Officer
(principal executive officer) and
Chief Financial Officer
(principal financial officer)
13