SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Amendment No. 1)
(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
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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 January 4, 2002
- ----- -----------------------------------------
Common Stock 43,019,277
INTERACTIVE NETWORK, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
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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
SIGNATURES...................................................................7
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 is being filed to amend Item 1 of Part
I to read as follows. No other changes are being made to the Form 10-Q.
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)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.01) $ (0.03) $ (0.04) $ (0.14)
Shares used in basic and diluted net loss
per share 43,019,277 39,637,241 43,019,277 39,069,181
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.
Long-term debt at September 30, 2001 and December 31, 2000, was as follows:
September 30, December 31,
2001 2000
- ------------------------------------------------------------------------
Promissory note - prime + 1% $1,259,502 $684,520
Convertible notes - 10% 1,657,436 -
- ------------------------------------------------------------------------
Less current portion - 85,565
- ------------------------------------------------------------------------
Total long-term debt $2,916,938 $598,955
- ------------------------------------------------------------------------
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. In September 2001 the Company amended its previous
agreement with its counsel for payment of the remaining amount on the following
terms: the remaining pre-confirmation legal fees of approximately $494,517 is
included in a new promissory note from the Company to Morrison & Foerster, along
with the approximately $684,520 owed to legal 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. The Company
has paid approximately $62,000 in interest and incurred approximately an
additional $41,500 of interest expense on these $684,520 in post-confirmation
expenses as of October 15, 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.
The interest accruing on this promissory note after October 1, 2002, will be
paid with such equal monthly installments.
In the second quarter of 2001, the Company raised $1.12 million through the sale
of 112 units to private investors pursuant to 10% Convertible Promissory Notes
and Common Stock Purchase Warrants. Each unit consists of (i) a $10,000
convertible promissory note bearing interest at 10% per annum that is
convertible into its common stock at the rate of $.50 per share, and (ii) a
five-year warrant to purchase 20,000 shares at an exercise price of $.60 per
share. An additional $505,000 (50.5 units) was raised in the third quarter under
the same terms.
5
The issuance of convertible debt securities by the Company with a detachable
conversion feature did not create a "beneficial conversion feature" because the
conversion price ($.60) was not "in-the-money at the commitment date." As
described in EITF 98-5, the debt was therefore accounted for in accordance with
APB Opinion 14, Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants, Paragraph 16. The Company determined that the portion of the
proceeds from the issuance allocable to the warrants is de minimus, and
therefore the entire proceeds were treated as debt.
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. The Company has
made an additional loan for $100,000 in October 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.
Condensed financial data of Two Way TV (US) for the three and nine month periods
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
============
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.
6
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: January 9, 2002
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)
7