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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-49610
TWO WAY TV (US), INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 943349099
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
6300 WILSHIRE BLVD., SUITE 1750
LOS ANGELES, CALIFORNIA 90048
(Address of principal executive offices) (Zip Code)
(323) 852-6164
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 92,854,425 shares of Common
Stock, outstanding as of November 19, 2002.
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TWO WAY TV (US), INC.
FORM 10-Q
For The Period Ended September 30, 2002
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets
September 30, 2002 and December 31, 2001
Statements of Operations
Three and Nine Months Ended September 30, 2002 and
September 30, 2001
Statements of Cash Flows
Nine Months Ended September 30, 2002 and September 30, 2001
Notes to the Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
Index to Exhibits
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934, including, without limitation, statements regarding
possible growth in the market for interactive digital TV and new product
development. Except for historical information, the matters discussed in this
report on Form 10-Q are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected due to certain factors, including those discussed below in
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operation - Factors Affecting Future Operating Results and elsewhere in this
report. You should not rely on forward-looking statements in this report or in
the pages from our other filings made with the SEC incorporated by reference
into this report, if any. The following discussion should be read in conjunction
with the consolidated financial statements and notes thereto included elsewhere
in this report on Form 10-Q.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TWO WAY TV US, INC.
BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
UNAUDITED DECEMBER
SEPTEMBER 30, 2002 31, 2001
------------- -------------
ASSETS
Current assets
Restricted cash $ 5,662,167 0
Cash 153,456 $ 90,176
Accounts receivable 218,700 30,000
------------- -------------
Total current assets 6,034,323 120,176
Property and equipment net of accumulated depreciation 295,386 388,363
Deposits and other assets 13,685 20,655
------------- -------------
Total assets $ 6,343,394 $ 529,194
============= =============
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 1,487,739 $ 27,551
Accounts payable shareholder 71,485 71,485
Convertible notes payable 1,819,529 500,000
Deferred legal fees 1,437,850
Liabilities subject to compromise 5,533,643
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Total current liabilities 10,350,246 599,036
Amount due to shareholders 320,939 320,939
Notes due shareholders 1,000,000 0
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11,671,185 919,975
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Commitments and contingencies shareholders' equity (deficit):
Preferred stock 0 0
Common stock at par value 93,120 26,800
Additional paid-in capital 2,115,200 4,373,200
Due from shareholder 0 (75,000)
Accumulated deficit (7,536,111) (4,715,781)
------------- -------------
Total shareholders' equity (deficit) (5,327,791) (390,781)
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Total liabilities and shareholders' equity (deficit) $ 6,343,394 $ 529,194
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-2-
TWO WAY TV US, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ------------------------------
UNAUDITED UNAUDITED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2002 30, 2001 30, 2002 30, 2001
------------ ------------ ------------ ------------
Revenue 72,900 0 255,800 0
General and administrative expense 661,030 534,331 2,302,318 (1,921,690)
------------ ------------ ------------ ------------
Loss from operations (588,130) (534,331) (2,046,518) (1,921,690)
------------ ------------ ------------ ------------
Other income and (expense)
Interest income 23,804 35 48,295 871
Interest (expense) (69,690) 0 (282,051) 0
Impairment loss 0 0 (674,000) 0
Other income and (expense) 193,741 0 193,741 (70,000)
------------ ------------ ------------ ------------
Net other income and (expense) 147,855 35 (714,015) (69,129)
Net income/(loss) before taxes on income (440,275) (534,296) (2,760,533) (1,990,819)
Taxes on income 0 (376) (420) (2,308)
NET INCOME/(LOSS) (440,275) (534,672) (2,760,953) (1,993,127)
------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (0.02) $ (0.01) $ (0.02) $ (0.02)
Shares used in basic and diluted per share calculation 92,854,425 70,587,278 92,854,425 70,587,278
------------ ------------ ------------ ------------
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TWO WAY TV US, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
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SEPTEMBER 30, SEPTEMBER 30,
2002 2001
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Cash flows from operating activities:
Net income (loss) $(2,760,953) $(1,993,057)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 29,580 54,155
Changes in assets and liabilities:
Accounts receivable (188,700) 0
Prepaid expenses and other assets 6,970 0
Accounts payable 826,665 (51,121)
Shareholder payable (71,485) (35,158)
Impairment allowance and goodwill 674,000 70,000
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Cash provided by (used in) operating activities: (1,483,923) (1,955,181)
------------ ------------
Cash flows from investment activities:
Purchase of equipment (net) (6,633) (98,969)
Goodwill acquired (614,000) 0
Acquisition of Interactive Network 1,092,836 0
------------ ------------
Cash provide by (used in) investment activities: 472,203 (98,969)
------------ ------------
Cash flows from financing activities:
Redemption of debt (net) 0 (3,400,000)
Notes payable to shareholders 1,075,000 1,400,000
Sale of common stock, net 0 3,400,000
------------ ------------
Cash flow provided by (used in) financing activities: 1,075,000 1,400,000
------------ ------------
Net decrease in cash 63,280 (654,150)
Cash at beginning of period 90,176 783,182
------------ ------------
Cash at end of period $ 153,456 $ 129,032
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-4-
TWO WAY TV (US), INC.
(FORMERLY TWIN ENTERTAINMENT, INC.)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2001 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2002
The consolidated financial information of Two Way TV (US), 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, 2002 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, 2001 filed with the Securities and
Exchange Commission (SEC) on April 16, 2002, the Form 8-K filed with the SEC on
May 15, 2002, as amended on July 12, 2002 to attach pro forma financial
statements for the merged company and the Form 10-Q filed with the SEC on August
27, 2002. The results of operations for the three-month period ended September
30, 2002 are not necessarily indicative of the results for any subsequent
quarter or for the entire year ending December 31, 2002.
NOTE 1. MERGER WITH INTERACTIVE NETWORK, INC.
The following are the principal terms with respect to the exchange of
shares of capital stock of Two Way TV (US), Inc., formerly TWIN Entertainment,
Inc. (the Company), a Delaware corporation, for the shares of Interactive
Network, Inc., a California corporation.
MERGER
On May 31, 2001, Interactive Network, the Company and Two Way TV
Limited, a corporation organized under the laws of England and Wales, entered
into an Agreement and Plan of Reorganization providing for a merger (the Merger)
of Interactive Network into the Company, with the Company as the surviving
corporation. Immediately prior to the Merger, each share of the Company's common
stock was split at a ratio of 3.5293639 for 1. Concurrent with the Merger, all
shares of the Company held by Interactive Network were cancelled. The
Interactive Network shareholders were issued 45,660,949 shares in exchange for
their shares of Interactive Network common stock. In the Merger, each share of
common stock of Interactive Network was converted into one share of common stock
of the Company, and options and warrants to purchase Interactive Network common
stock and promissory notes convertible into Interactive Network common stock
were converted into options and warrants to purchase and promissory notes
convertible into the same number of shares of common stock of the Company under
the same conditions. The Merger was accounted for as a purchase transaction for
accounting and financial reporting purposes, in accordance with generally
accepted accounting principles. After the Merger, the results of operations of
Interactive Network were included in the consolidated financial statements of
the Company. The purchase price was allocated based on the fair values of the
assets acquired and the liabilities assumed by the combined company. Interactive
Network had a pre-acquisition shareholder deficiency of approximately $3,231,000
at March 31, 2002. The consolidation recognizes the $614,000 of goodwill that
arises from the combination by bringing the intangible rights of Interactive
Network directly under the ownership of the Company, rather than the indirect
ownership through license that existed prior to Merger. The remaining $2,617,000
has been charged to additional paid-in capital $2,192,000 and due to shareholder
$425,000. On August 30, 2001, TWIN Entertainment, Inc. changed its name to Two
Way TV (US), Inc. The Merger was effective as of April 30, 2002.
-5-
NOTE 2. CONTINGENT LIABILITIES AND LITIGATION
A former shareholder has the right to be paid $1.85 million under the
terms of a promissory note which provides that no payments become due and
payable until such time as the Company has generated certain levels of positive
cash flow from operations for two consecutive quarters. No liability has been
accrued for this contingent liability, because the Company has never achieved
positive cash flow, and the possibility that it will achieve such cash flows in
the future is remote. In addition, the former shareholder is engaged in
continuing litigation with some of the Company's current and former directors.
The Company has agreed to indemnify the directors in the event they suffer a
loss. See also Part II, "Item 1. Legal Proceedings-Lockton Matter" of this
Report on Form 10-Q.
In June 2001 Interactive Network raised $1.625 million from the
issuance of one year notes with a note holder conversion option into common
stock at $0.50. These notes were not converted by the note holders and fell due
for repayment in or about June 2002. The Company has not made any payments to
the note holders and the notes are therefore in default. Management is
negotiating a potential extension of the maturity of these notes, however no
agreement has been reached and certain note holders may commence legal action
against the Company.
NOTE 3. NOTES PAYABLE
During the quarter ended September 30, 2002, the company received
financing from Two Way TV Limited of $50,000 which was received in the form of
an unsecured debt obligation. The loan is for a one year term and bears interest
at the rate of 10%. The loan balance plus accrued interest becomes due and
payable in September 2003. The Company also received financing from Two Way TV
Limited in the amount of $150,000 during the quarter ended September 30, 2002,
in the form of a loan that is convertible into shares of the Company's Common
Stock at a price of $0.12 per share.
NOTE 4. IMPAIRMENT OF LONG LIVED ASSETS
In accordance with SFAS No. 141 Business Combinations and SFAS No. 142
Accounting for Goodwill, the Company recorded approximately $614,000 of goodwill
in conjunction with its purchase of Interactive Network, Inc.
For reasons discussed in Note 6 below, the Company determined that the
goodwill was permanently and totally impaired. Consequently an impairment loss
of $614,000 was recognized in the quarter ended June 30, 2002.
NOTE 5. DISCONTINUED OPERATIONS
The Company believes that its current cash will not be sufficient to
meet its anticipated cash needs for working capital and capital expenditures for
the remainder of 2002 and has currently ceased all of its revenue generating
operations. The Company is currently seeking to sell additional equity or debt
securities. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to those accruing to holders of common stock, and the term of this debt
could impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to its
stockholders, and the Company cannot be certain that additional financing will
be available in amounts or on terms acceptable to the Company, if at all. If the
Company is unable to secure additional financing required to support its
activities by December 2002, it will most likely cease all its operations.
The Company has not been able to meet its ongoing trade obligations on
a current basis, and as a result, certain of the Company's creditors have filed
or have threatened to file actions against the Company. See Part II, "Item 1.
Legal Proceedings" for additional information regarding certain of these claims
which have been filed against the Company. The Company expects that other
actions may be filed against the Company to recover amounts allegedly due from
the Company. The Company may consider filing for protection with the United
States Bankruptcy Court, depending on its efforts to work out payment plans with
creditors, locate additional financing, and the actions taken by the Company's
creditors.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, CERTAIN STATEMENTS
IN THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (MD&A) ARE FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
REPORT, THE WORD EXPECTS, ANTICIPATES, ESTIMATES, AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED. SUCH RISKS AND UNCERTAINTIES ARE SET FORTH BELOW UNDER
FACTORS AFFECTING FUTURE OPERATING RESULTS. THE FOLLOWING DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT.
OVERVIEW
Two Way TV (US), Inc., (we, us, Two Way TV) formerly Twin
Entertainment, Inc., was created as a joint venture between Interactive Network,
Inc. and Two Way TV Limited. We were incorporated in Delaware on January 10,
2000 in order to develop and market Interactive Network's patent portfolio and
Two Way TV Limited's content, technology and patents for digital interactive
services.
On April 30, 2002, we completed our merger with Interactive Network,
Inc. Former Interactive Network shareholders as a whole now own approximately
49% of our issued and outstanding stock, with the balance held by Two Way TV
Limited. As a result of the merger, we now own and control all of Interactive
Network's intellectual property and in particular their patent portfolio.
Following the effective date of the merger, our common stock was formally listed
on the NASDAQ Over the Counter Bulletin Board with the ticker symbol TWTV.
We have only a limited operating history upon which you can evaluate
our business and prospects. Our limited operating history and the rapidly
changing nature of our business makes predicting our future operating results
difficult. As a result, we believe that our results for any particular period
are not indicative of future operating results.
CURRENT OPERATIONS
Over the last nine months we have continuously reduced our operations
and in the quarter ended June 30, 2002, we suspended all of our revenue
generating operations because the income generated by our business was not
sufficient to sustain these operations. During our last fiscal year, we incurred
a net loss of $3.9 million on a proforma basis and in the quarter ended
September 30, 2002, we incurred a net loss of $440,275 million and had negative
cash flow from operations of $118,000. In order to resume and maintain
operations for at least one year thereafter, we estimate that, exclusive of
currently outstanding debt, we will require financing of approximately $2
million, although we cannot assure you that this amount will be adequate for
this purpose. We are investigating the possibility of merging or otherwise
affiliating with a business that could benefit from the use of our technology
and patents, but currently have not identified any such business. Any such
merger or affiliation will also most likely require significant financing. Since
April 1, 2002, we have borrowed $575,000 from Two Way TV Limited. During the
quarter ended September 30, 2002, we borrowed $200,000 from Two Way TV Limited,
$150,000 of which was obtained pursuant to an unsecured one-year loan that is
convertible into shares of our Common Stock at a price of $0.12 per share and
$50,000 of which was borrowed pursuant to an unsecured debt obligation that is
due in September 2003 and bears interest at the rate of 10%. Two Way TV Limited
offered to extend another $100,000 to us, subject to our agreement to secure the
entire loan amount with our intellectual property and our ability to obtain
certain waivers from the holders of $1.625 million in notes issued by
Interactive Networks in June 2001. However, we were unable to meet these
conditions and the offer of additional funding has now been withdrawn. We have
received an informal offering of additional funding from certain note holders,
subject to granting them a security interest with respect to all new capital
loaned, as well as to some of the prior amounts loaned to us pursuant to the
June 2001 notes, and meeting certain other conditions, however, we currently
have no firm commitments for any additional financing and may be unable to raise
needed cash on terms acceptable to us if at all. Financings may be on terms that
are dilutive or potentially dilutive to our stockholders. Further, our weak
financial condition could restrict our ability to merge or affiliate with a
business partner as well as prevent us from establishing a source of financing.
If we are unable to secure the financing required to support our activities by
December 2002, we will most likely cease all operations.
-7-
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND
SEPTEMBER 30, 2001
REVENUE
We recorded $72,900 of revenue in the three month period ended
September 30, 2002 compared to $0 in the three month period ended September 30,
2001. We recorded $255,800 of revenue in the nine months ended September 30,
2002 compared to $0 in the nine months ended September 30, 2001. Our revenue was
generated from accrued license fees from Two Way TV Limited.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative (SG&A) expenses were $661,030
for the three months ended September 30, 2002 and $534,331 for the three months
ended September 30, 2001. SG&A expenses were $2,302,318 in the nine months ended
September 30, 2002 as compared to $1,921,690 in the nine months ended September
30, 2001. The increases of $126,699 and $380,628, respectively, reflect the
additional expenses resulting from the merger with Interactive Network.
INTEREST INCOME
Interest income was $23,804 for the three months ended September 30,
2002 and $35 for the three months ended September 30, 2001. Interest income was
$48,295 for the nine months ended September 30, 2002 and $871 for the nine
months ended September 30, 2001. Interest income consists of interest earned on
our cash balances and short-term investments and the increases are due to
interest earned on the Restricted Cash balance held in relation to the
Liabilities subject to compromise.
NET OPERATING LOSSES AND TAX CREDIT CARRY-FORWARDS
As of September 30, 2002, we believe we had approximately $7.5 million
of federal net operating loss carry-forwards for tax reporting purposes
available to offset future taxable income as compared to $4.2 million of net
operating loss carry-forwards as of September 30, 2001. Such net operating loss
carry-forwards begin to expire in 2015, to the extent that they are not
utilized. We have not recognized any current benefit from the future use of loss
carry-forwards since inception. Management's evaluation of all the available
evidence in assessing realizability of the tax benefits of such loss
carry-forwards indicates that the underlying assumptions of future profitable
operations contain risks that do not provide sufficient assurance to recognize
the tax benefits currently. The net operating loss carry-forwards could be
limited in future years if there is a significant change in our ownership.
Because we have ceased our revenue generating activities, we do not
expect any material revenue or earnings to be generated during the fourth
quarter of fiscal 2002 and possibly into fiscal 2003. However, in the event that
we do resume our revenue generating activities, as a result of our limited
operating history and the emerging nature of our markets, it is difficult for us
to forecast our revenues or earnings accurately. Our current and future expense
levels are based largely on our investment plans and estimates of future
revenues and are, to a large extent, fixed. We may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in revenues relative to our planned
expenditures would have an immediate adverse effect on our business, results of
operations and financial condition.
In addition, our limited operating history and rapid growth will make
it difficult for us to assess the impact of seasonal factors on our business.
Nevertheless, we expect our business to be subject to television usage seasonal
fluctuations, reflecting a combination of seasonal trends for the products and
services offered by us.
Also, our business also may be subject to cyclical variations for the
products and services we offer, depending highly on the adoption and
installation of needed technology, especially sophisticated digital set-top
boxes, by our distributors.
-8-
Due to the foregoing factors, and the current situation of the Company
as described in Current Operations above, our quarterly revenues and operating
results are difficult to forecast. We believe that year-to-year comparisons of
our operating results may not be meaningful and should not be relied upon as an
indication of future performance. In addition, it is possible that in one or
more future quarters our operating results will fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock would almost certainly be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through our
stockholders initial contributions of $1,000,000 and our borrowing from our
major stockholders. As of September 30, 2002, there were $1,075,000 of loans
outstanding to Two Way TV Limited.
Two Way TV Limited has advanced $320,939 to us to finance our
operations. We have agreed with Two Way TV Limited that we will prioritize
repayment of such debt upon our receiving third-party funding of at least
$3,000,000. At September 30, 2002, cash, cash equivalents and short-term
investments, excluding restricted cash, totaled $153,456.
Cash used in operating activities was $1,483,923 for the nine months
ended September 30, 2002 and $1,955,181 for the nine months ended September 30,
2001. The decrease in cash used is attributable to reductions to our operating
activities.
Cash provided by investing activities was $472,203 for the nine months
ended September 30, 2002 compared to cash used in investing activities of
$98,969 for the nine months ended September 30, 2001. Net cash used in investing
activities reflects purchases of equipment, primarily computers and servers for
deployment and expansion of our services. The net cash provided by investing
activities in the first nine months of fiscal 2002 was attributable to the
acquisition of Interactive Network.
Cash provided by financing activities was $1,075,000 for the nine
months ended September 30, 2002 and was $1,400,000 for the nine months ended
September 30, 2001. Cash provided by financing activities was primarily from the
issuance of notes to certain shareholders.
In June 2001 Interactive Network raised $1.625 million from the
issuance of one year notes with a conversion option at $0.50. These notes were
not converted by the note holders and fell due for repayment on June 27, 2002.
We have not made any payments to the note holders and the notes are therefore in
default. Management is continuing to negotiate a potential extension of the
maturity of these notes, however no agreement has been reached and we believe
that it is likely that certain note holders may commence legal action.
Our former President and Chief Operating Officer, Bob Regan, who
resigned effective August 22, 2002, was employed in April 2000 and as part of
his employment arrangement, we offered an annual bonus of 20% of his annual
salary for performing his role and an additional 20% of his annual salary for
meeting agreed objectives. We have not made any bonus payments to Mr. Regan
since his employment commenced. Mr. Regan claims that he was owed a full bonus
for each of the two years ending April 2002. The Company is currently
considering the merits of this claim and has decided to accrue in full as at
September 30, 2002 for this potential liability of $200,000.
On August 2, 1999, David B. Lockton filed a complaint for damages in
the case entitled DAVID B. LOCKTON, ET AL. V. AT&T BROADBAND & INTERNET
SERVICES, ET AL., currently pending in United States District Court for the
Northern District of California (Lockton Matter). In his complaint, Mr. Lockton
asserted several causes of action against Bruce W. Bauer, John J. Bohrer, Donald
Graham, William Green, and William Groeneveld (the Director Defendants), in
their capacities as directors of Interactive Network during the time that the
actions on which Mr. Lockton's claims are based. Effective April 30, 2002,
Interactive Network merged with the Company. Although Interactive Network was
not and the Company is not a party to this litigation, the Director Defendants
have been and will be indemnified by the Company if and to the extent the
Director Defendants are liable. Mr. Lockton also asserted a number of claims
-9-
against AT&T Broadband & Internet Services and Gary S. Howard (the AT&T
Defendants) and against attorney Joseph Cotchett. Mr. Lockton's complaint sought
compensatory and punitive damages, as well as attorneys fees and costs. Although
Mr. Lockton's complaint contains no specific prayer for an identified sum of
monetary relief, he has indicated in his pleadings that he seeks damages in
excess of $7,000,000. Mr. Lockton requested a jury trial. Please refer to Part
II, "Item 1. Legal Proceedings" of this Report on Form 10-Q for additional
information regarding the procedural status of the Lockton Matter. An adverse
ruling in the Lockton Matter would potentially have a significant negative
impact on our liquidity and capital resources.
As noted in "--Current Operations" above, since April 1, 2002 we have
secured a total of $575,000 of financing from Two Way TV Limited. During the
quarter ended September 30, 2002, we borrowed a total of $200,000 from Two Way
TV Limited, $150,000 of which was obtained pursuant to unsecured one-year loan
that is convertible into shares of our Common Stock at a price of $0.12 per
share and $50,000 of which was borrowed pursuant to an unsecured debt obligation
that bears interest at the rate of 10%. Two Way TV Limited offered to loan us an
additional $100,000, subject to our agreement to pledge our intellectual
property to secure the entire loan balance and our ability to obtain certain
waivers from the holders of the $1.625 million in notes issued by Interactive
Network in June 2001. However, we were unable to meet these conditions and the
offer of additional funding has now been withdrawn. On September 13, 2002, we
borrowed $50,000 from Pyramid Partners LP (a client of Perkins Capital
Management), an entity associated with one of our directors, Richard Perkins. We
repaid this amount on September 26, 2002. We have received an informal offering
of additional funding from certain note holders, subject to granting them a
security interest with respect to all new capital loaned, as well as to some of
the prior amounts loaned to us pursuant to the June 2001 notes, and meeting
certain other conditions, however, we currently have no firm commitments for any
additional financing and we may be unable to raise needed cash on terms
acceptable to us if at all. If we grant a security interest to the providers of
new financing, our failure to repay the note in a timely manner may result such
parties foreclosing on their security interest in our assets upon a default if
the note and accrued interest are not repaid when due.
In July 2002, we settled an outstanding claim with Fish & Richardson
related to their claim in the bankruptcy of Interactive Network. The resolution
of this claim resulted in a payment to Fish & Richardson in the sum of $100,000
from the escrow account held pursuant to the Order of the Bankruptcy Court in
the Interactive Network Bankruptcy proceeding, and the release of funds
therefrom to Two Way TV in the sum of $193,000.
We recently settled a dispute with one of our creditors, Merrill
Corporation, which claimed $179,388 for services rendered to us. Prior to the
filing of any action, on October 22, 2002, an agreement was reached with the
creditor to settle the matter on mutually agreeable terms.
As a combined result of our cost cutting measures and the unlawful
detainer action brought against us by the landlord of our principal business
office in Los Angeles, California in November 2002, we have volunteered to
surrender the premises. We are negotiating with the landlord to voluntarily
vacate the premises amd settle amounts due under the lease, and are in the
process of searching for less expensive office premises.
We believe that our current cash will not be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for the
remainder of 2002, and as noted above, have presently ceased all revenue
generating operations. We are currently seeking to sell additional equity or
debt securities. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to those accruing to holders of common stock, and the term of this debt
could impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and we cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to secure additional financing required to support our activities by December
2002, we will most likely cease all operations.
We have not been able to meet our ongoing trade obligations on a
current basis, and as a result, certain of our creditors have filed or have
threatened to file actions against us. See Part II, "Item 1. Legal Proceedings"
for additional information regarding these certain of these claims which have
been filed against us. We expect that other actions may be filed against us to
recover amounts allegedly due from us. We may consider filing for protection
with the United States Bankruptcy Court, depending on our efforts to work out
payment plans with our creditors, locate additional financing, and the actions
taken by our creditors.
-10-
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF
FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. Statement 145 updates,
clarifies and simplifies existing accounting pronouncements including:
rescinding Statement No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect and amending Statement No.
13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Statement 145 is effective for fiscal years
beginning after May 15, 2002, with early adoption of the provisions related to
the rescission of Statement No. 4 encouraged. We do not expect the adoption of
this statement to have a material impact on our financial position or results of
operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
OUR FINANCIAL CONDITION IS EXTREMELY WEAK AND WE MAY BE UNABLE TO CONTINUE AS A
GOING CONCERN.
Our operations have been dependent upon short-term borrowing from our
stockholders and other funding resources. Our independent auditor's report on
our consolidated financial statements for the year ended December 31, 2001
includes language reflecting that substantial doubt exists as to our ability to
continue as a going concern. We have currently ceased all revenue generating
operations. Our financial statements show an accumulated deficit of
approximately $7.5 million. We expect to continue to incur net losses and
negative cash flow for the foreseeable future and, unless we are able to resume
operations and/or merge or affiliate with a business that generates revenue and
obtain financing necessary to support these activities by December 2002, we will
most likely be forced to cease all operations. Accordingly, any purchaser of our
securities should be prepared to lose his entire investment.
IF WE ARE ABLE TO RAISE ADDITIONAL CAPITAL, SUCH CAPITAL MAY BE IN THE FORM OF
CONVERTIBLE DEBT THAT WILL LIKELY BE SECURED AND ANY DEFAULT BY US COULD RESULT
IN FORECLOSURE BY THE SECURED PARTIES.
We believe that any party agreeing to extend credit to us to finance
our operations will likely require such credit to be secured by our assets,
including our intellectual property. In the event that we default under the
terms of any agreements pursuant to which we are able to obtain such additional
financing, the secured parties could foreclose on their security interests which
would leave us unable to conduct our operations and would leave little or
nothing to distribute to our shareholders in the event that we are required to
liquidate our operations.
IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS, WE MAY BE
FORCED TO CURTAIL ALL ACTIVITIES AND LIQUIDATE.
We had approximately $153,000 in cash as of September 30, 2002. It is
anticipated that our existing capital resources will not be sufficient to meet
our cash requirements through December 2002 and that we will need to raise
additional financing during that period. If we cannot raise or borrow the
necessary additional funds on acceptable terms, we may not be able to operate
our business as currently anticipated or develop or enhance our intellectual
property, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements.
If we raise additional capital through the issuance of equity
securities or rights convertible into equity securities, the percentage
ownership of our existing shareholders may decline, shareholders may experience
dilution in net book value per share, or these equity securities or rights may
have rights, preferences or privileges senior to those of the holders of our
common stock. Any debt financing, if available, may involve covenants limiting
or restricting our operations or future opportunities.
WE ARE IN DEFAULT OF THE CONVERTIBLE NOTES ISSUED BY INTERACTIVE NETWORK IN JUNE
2001, WHICH MAY PREVENT US FROM RESUMING OPERATIONS.
In or about June 2001 Interactive Network raised $1.625 million from
the issuance of one year notes with a note holder conversion option into common
stock at $0.50. These notes were not converted by the note holders and fell due
for repayment in or about June 2002. We have not made any payments to the note
holders and the notes are therefore in default. Management is negotiating a
potential extension of the maturity of these notes, however no agreement has
been reached and we believe that certain note holders may commence legal action.
-11-
WE MAY BE FORCED TO SEEK PROTECTION UNDER APPLICABLE PROVISIONS OF THE FEDERAL
BANKRUPTCY CODE IF WE ARE UNABLE TO MEET OUR ONGOING TRADE AND DEBT OBLIGATIONS
WHICH MAY RESULT IN CERTAIN OF OUR INTELLECTUAL PROPERTY LICENSES BEING
TERMINATED.
In addition to our default on the June 2001 notes issued by Interactive
Network, we have not been able to meet our ongoing trade obligations on a
current basis, and as a result, certain creditors have filed actions against us
and we expect that other creditors will file actions against us to recover
amounts allegedly due from us. (Please refer to Part II, "Item 1. Legal
Proceedings" of this Report on Form 10-Q for additional information regarding
these claims.) We may be forced to consider filing for protection with the
United States Bankruptcy Court, depending upon the success of our efforts to
locate additional financing, negotiate payment plans with our creditors and the
actions taken by our creditors. In the event that we file for bankruptcy
protection, our licenses to use the intellectual property of Two Way TV Limited
may be terminated and we may not be able to resume our revenue generating
operations unless we are able to obtain licenses from third parties which may
not be available to us on acceptable terms or at all.
WE HAVE INCURRED SIGNIFICANT NET LOSSES AND MAY NEVER ACHIEVE PROFITABILITY.
Since our launch in January 2000, we have operated at a loss. During
the period from January 10, 2000 to December 31, 2001, we generated no revenue
and had a net loss of $4.7 million. Furthermore, we may never achieve
profitability, and even if we do, we may not sustain or increase profitability
on a quarterly or annual basis in the future. The report of our independent
auditor on our December 31, 2001 financial statements contains a statement as to
our ability to continue as a going concern.
IF WE RESUME OUR BUSINESS, OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE
SIGNIFICANTLY.
If we resume our revenue generating activities, our quarterly results
of operations may vary significantly for a variety of reasons, including the
following:
o availability of adequate financing;
o timing of recognition of license fees;
o timing of new product and technology introductions by us or
Two Way TV Limited, or other licensees or competitors;
o fluctuations in the level of sales by OEMs and other vendors
of products incorporating our technology; and
o general economic conditions.
Each of the above factors is difficult to forecast and thus could
seriously harm our business, financial condition and results of operations.
OUR STOCK PRICE MAY BE VOLATILE.
Announcements of developments related to our business, announcements by
competitors, quarterly fluctuations in our financial results and general
conditions in the highly dynamic industry in which we will compete or the
national economies in which we will do business, and other factors, could cause
the price of our common stock to fluctuate, perhaps substantially. In addition,
in recent years the stock market has experienced extreme price fluctuations
which have often been unrelated to the operating performance of affected
companies. These factors and fluctuations could have a significantly harmful
effect on the market price of our common stock.
THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND COMPETITION FROM
BIGGER, BETTER CAPITALIZED COMPETITORS COULD RESULT IN PRICE REDUCTIONS, REDUCED
GROSS MARGINS AND LOSS OF MARKET SHARE IF WE RESUME OUR OPERATIONS.
We operate in an evolving and competitive industry of iTV games and
enhanced television products, and we expect that competition will increase. Our
primary competition comes from companies providing alternatives to the services
-12-
enabled by our technology. Until a sufficient market develops for the digital
set-top boxes enabled to run the full suite of our interactive television game
applications, we may also face competition from companies developing and
marketing standalone game products and services. In each of our business
activities, we face or will face current or potential competition from
competitors that may have significantly greater financial, manufacturing,
marketing, sales and distribution resources and management expertise than we
have.
Many of our existing and potential competitors have longer operating
histories, a larger customer base, greater name recognition and significantly
greater financial, technical, sales and marketing and other resources than we
do. This may place us at a disadvantage in responding to our competitors pricing
strategies, technological advances, advertising campaigns, strategic
partnerships and other initiatives. In addition, many of our competitors have
well-established relationships with our current and potential customers.
Moreover, many of the other companies operating in the iTV market have
significant financial resources, which have enabled them in the past and may
enable them in the future to make large strategic investments in our current and
potential customers. Such investments may enable competitors to strengthen
existing relationships or quickly establish new relationships with our current
or potential customers. Investments such as these may discourage our potential
or current customers who receive the investments from deploying our iTV games
and enhanced television products, regardless of such customers views of the
relative merits of our products and services.
THE MARKET FOR iTV GAMES AND ENHANCED TELEVISION PRODUCTS AND SERVICES IS NEW
AND MAY NOT DEVELOP AS ANTICIPATED.
The interactive TV games and enhanced television products market
currently is small and emerging. Our success will depend on the growth and
development of this market in the U.S. and Canada, and it will depend upon the
commercialization and broad acceptance by consumers and businesses of a wide
variety of iTV games and enhanced television products. Demand and market
acceptance of recently introduced products and services are subject to a high
level of uncertainty and, as a result, our profit potential is unproven. In
addition, the potential size of this new market opportunity and the timing of
its development and deployment are currently uncertain. Even recently,
development schedules of iTV games and enhanced television products offered by
our partners and competitors have been delayed or refocused as the industry
evolves. Until digital set-top boxes capable of running the full suite of our
applications are sufficiently deployed in the marketplace and enabled to utilize
our interactive game applications, our profit potential is uncertain. If the
market for iTV games and enhanced television products does not develop or
develops more slowly than anticipated, our revenues will not grow as fast as
anticipated, if at all.
IF WE RESUME OUR BUSINESS, OUR SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH
THE LATEST TECHNOLOGICAL CHANGES.
We currently have ceased our revenue generating activities. If we
resume these business activities, the market for iTV games and enhanced
television products is characterized by evolving industry standards, rapid
technological change and frequent new product introductions and enhancements.
Our technology and intellectual property are designed to enable our customers to
create interactive entertainment. Accordingly, our success will depend in large
part upon our ability to adhere to and adapt our iTV games and enhanced
television products to evolving industry-wide standards for iTV games and
enhanced television products. Therefore, we will need to develop and introduce
new products that meet changing customer requirements and emerging industry
standards on a timely basis. In addition, we may:
o Fail to design our current or future products to meet customer
requirements;
o Fail to develop and market products and services that respond
to technological changes or evolving industry standards in a
timely or cost-effective manner; and
o Encounter products, capabilities or technologies developed by
others that render our products and services obsolete or
noncompetitive or that shorten the life cycles of our existing
products and services.
-13-
RAPID TECHNOLOGICAL ADVANCES OR THE ADOPTION OF INCOMPATIBLE STANDARDS COULD
RENDER OUR PRODUCTS OBSOLETE OR NON-COMPETITIVE.
The rate of technological change currently affecting the industry of
iTV games and enhanced television products is particularly rapid compared to
other industries. The migration of television from analog to digital
transmission, the convergence of television, the Internet, communications and
other media, the development of high-end digital set-top boxes and other
emerging trends are creating a dynamic and unpredictable environment in which to
operate. Our ability to anticipate these trends and adapt to new technologies is
critical to our success.
Until digital set-top boxes capable of running our applications are
sufficiently deployed in the marketplace and enabled to utilize our interactive
game applications, our profit potential is uncertain. If a new digital set-top
box standard is defined, we do not know whether our products will be compatible
with such a standard once it is defined. The establishment of multiple standards
could hurt our business and significantly increase our expenses, particularly if
our products require significant redevelopment in order to conform to the newly
established standards.
Any delay or failure on our part to respond quickly, cost-effectively
and sufficiently to these developments could render our existing products and
services obsolete and cause us not to be competitive, resulting in a decrease in
our revenues without a corresponding decrease in our expenses. We may have to
incur substantial expenditures to modify or adapt our products or services to
respond to these developments. We must stay abreast of cutting-edge
technological developments and evolving service offerings to remain competitive,
increase the utility of our services and attract and retain qualified employees.
We must be able to incorporate new technologies into the products we design and
develop in order to address the increasingly complex and varied needs of our
customer base.
IF WE RESUME OUR BUSINESS, WE MAY HAVE DIFFICULTY RECRUITING PROFESSIONALS FOR
OUR BUSINESS.
Our business requires experienced programmers, creative designers, and
application developers. Our success will depend on identifying, hiring, training
and retaining such experienced, knowledgeable professionals. We must recruit
talented professionals in order for our business to grow. There is significant
competition for employees with the skills required to develop the products and
perform the services we offer. There can be no assurance that we will be able to
attract a sufficient number of qualified employees in the future to sustain and
grow our business, or that we will be successful in motivating and retaining the
employees we are able to attract. If we cannot attract, motivate and retain
qualified professionals, our business, financial condition and results of
operations will suffer. In addition, as a result of our recent cost reductions,
we have laid off certain key personnel, and there is no assurance that such key
personnel, or qualified replacement personnel will be available to us, if and
when needed.
INTELLECTUAL PROPERTY CLAIMS AGAINST US AND OUR PATENT PORTFOLIO COULD BE COSTLY
AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS. WE DO NOT HAVE LIABILITY
INSURANCE TO PROTECT AGAINST THIRD PARTY INTELLECTUAL PROPERTY INFRINGEMENT
CLAIMS THAT COULD BE EXPENSIVE TO DEFEND.
Our ability to effectively compete depends and will depend in part upon
maintaining and protecting our proprietary intellectual property, including our
patent portfolio. We will rely on patent, trademark, trade secret and copyright
law, as well as confidentiality procedures and licensing arrangements, to
establish and protect our rights in our technology. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use our
proprietary technology without authorization. Litigation may be necessary in the
future to enforce or protect our intellectual property rights or to determine
the validity and scope of the proprietary rights of others. Such litigation
could cause us to incur substantial costs and diversion of resources, which in
turn could materially adversely affect our business.
We expect that, like other iTV games and enhanced television products
providers, we will increasingly be subject to infringement claims as the number
of products and competitors developing iTV games and enhanced television
products grows and the functionality of products in different industry segments
overlaps. From time to time, we hire or retain employees or external consultants
who may work for other companies developing products similar to those offered by
us. These former employers may claim that our products are based on their
products and that we have misappropriated their intellectual property. Any such
litigation could prevent us from exploiting our patent portfolio and cause us to
incur substantial costs, which in turn could materially adversely affect our
business.
-14-
Furthermore, we currently do not have liability insurance to protect
against the risk that licensed third party technology infringes the intellectual
property of others. Any claims relating to our intellectual property, regardless
of their merit, could seriously harm our ability to develop and market our
products and manage our day-to-day operations because they could be time
consuming and costly to defend.
INCREASING GOVERNMENT REGULATION COULD CAUSE DEMAND FOR OUR PRODUCTS AND
SERVICES TO DECLINE SIGNIFICANTLY IF WE RESUME OUR OPERATIONS.
We are subject not only to regulations applicable to businesses
generally, but also laws and regulations that apply directly to the industry of
iTV games and enhanced television products. Although there are currently few
such laws and regulations, state, federal and foreign governments may adopt a
number of these laws and regulations governing any of the following issues:
o user privacy;
o copyrights;
o consumer protection;
o the media distribution of specific material or content; and
o the characteristics and quality of iTV games and enhanced
television products and services.
One or more states or provinces or the federal government could enact
regulations aimed at companies, like us, which provide iTV games and enhanced
television products. The likelihood of such regulations being enacted will
increase as iTV becomes more pervasive and extends to more peoples daily lives.
Any such legislation or regulation could dampen the growth of the industry of
iTV games and enhanced television. If such a reduction in growth occurs, demand
for our products and services will decline significantly.
THE ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR CERTIFICATE OF INCORPORATION COULD
DETER A CHANGE IN CONTROL.
Some of the provisions of our certificate of incorporation may
discourage attempts by other companies to acquire or merge with it, which could
reduce the market value of our common stock. These provisions include:
o the authorization of our board of directors to issue shares of
undesignated preferred shares in one or more series without
the specific approval of the holders of common shares;
o the establishment of advance notice requirements for director
nominations and actions to be taken at shareholder meetings;
and
o the requirement that two-thirds of the shareholders entitled
to vote at a meeting are required to approve any change to
some of the provisions of our certificate of incorporation.
-15-
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 policy, we did not have significant overall interest rate risk
exposure at September 30, 2002.
FOREIGN CURRENCY RATE RISK
We have no transactions in currencies other than United States dollars.
We do not currently have any significant foreign currency exposure, and we do
not expect to incur significant currency-related gains or losses in 2002. We did
not engage in foreign currency hedging activities during the twelve months ended
December 31, 2001 or the nine months ended September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief
executive officer and chief financial officer, after evaluating the
effectiveness of our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date
(the "Evaluation Date") within 90 days before the filing date of this quarterly
report, has concluded that as of the Evaluation Date, our disclosure controls
and procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made known to him by
others within those entities so that we are able to record, process, summarize
and disclose such information in the reports we file with the SEC within the
time periods specified in the SEC's rules and forms.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in
our internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent to the
Evaluation Date.
-16-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LOCKTON MATTER
On August 2, 1999, David B. Lockton filed a complaint for damages in
the case entitled DAVID B. LOCKTON, ET AL. V. AT&T BROADBAND & INTERNET
SERVICES, ET AL., currently pending in United States District Court for the
Northern District of California. In his complaint, Mr. Lockton asserted several
causes of action against Bruce W. Bauer, John J. Bohrer, Donald Graham, William
Green, and William Groeneveld (the Director Defendants), in their capacities as
directors of Interactive Network during the time that the actions on which Mr.
Lockton's claims are based. Effective April 30, 2002, Interactive Network merged
with the Company. Although Interactive Network was not and the Company is not a
party to this litigation, the Director Defendants have been and will be
indemnified by the Company if and to the extent the Director Defendants are
liable. Mr. Lockton also asserted a number of claims against AT&T Broadband &
Internet Services and Gary S. Howard (the AT&T Defendants) and against attorney
Joseph Cotchett. Mr. Lockton's complaint sought compensatory and punitive
damages, as well as attorneys fees and costs. Although Mr. Lockton's complaint
contains no specific prayer for an identified sum of monetary relief, he has
indicated in his pleadings that he seeks damages in excess of $7,000,000. Mr.
Lockton requested a jury trial.
On June 16, 2000, the court granted in part and denied in part the
Director Defendants' motion to dismiss, dismissing Mr. Lockton's cause of action
for breach of fiduciary duty. Thereafter, Mr. Lockton filed a first amended
complaint, followed by the operative second amended complaint, asserting the
following causes of action: (1) interference with contractual relations (first
cause of action); (2) conspiracy to interfere with contractual relations (second
cause of action); (3) intentional interference with prospective economic
advantages (third cause of action); and (4) defamation (fourth cause of action)
(against the Director Defendants only). The Director Defendants answered the
second amended complaint on September 18, 2000.
On October 3, 2000, the AT&T Defendants filed a counterclaim against
Mr. Lockton and a third party complaint against Interactive Network seeking
declaratory relief.
On February 1, 2001, the AT&T Defendants filed a motion for summary
judgment as to the first through third causes of action in the second amended
complaint, in which motion the Director Defendants joined. On June 5, 2001, the
court granted the motion as to the first through third causes of action.
On January 7, 2002, the Court heard the Director Defendants' motion for
summary judgment as to the single remaining claim, for defamation. The Court
granted summary judgment in favor of defendants Green, Graham, and Groeneveld,
and denied summary judgment for defendants Bauer and Bohrer. The court
additionally set a status and trial setting conference for February 4, 2002.
The named parties agreed to a mediation, which resulted in a
handwritten and signed settlement agreement dated March 13, 2002, signed by some
of the parties, to be followed by further documentation and execution of certain
obligations by the parties thereto and by Two Way TV (US), Inc. Disagreements
arose between the parties in attempting to draft and agree upon further
documentation, and there was no execution of the obligations set forth in the
mediation settlement. As a result, both Lockton and the Director Defendants
filed pleadings with the District Court in July 2002 indicating that the
settlement had failed and that the case should be restored to the civil active
list, and set for trial. On August 1, 2002, the AT&T Defendants filed an
opposition requesting the mediation settlement be enforced. On November 12,
2002, the AT&T Defendants filed a motion in District Court, set for hearing on
December 18, 2002, to enforce the mediation settlement as to all parties, or in
the alternative, that it be enforced as to the purported settlement between
Lockton and the AT&T Defendants.
In addition, Lockton has indicated his intention, contingent upon the
reopening of the case, to file an amendment to his complaint to add the law firm
of Morrison & Foerster and two of its partners as defendants in the case, and to
file a motion for leave to file a motion to reconsider the District Court's
prior rulings on summary judgment.
-17-
The law firm of Kecker & Van Ness, counsel for the Director Defendants,
has filed a motion to withdraw as counsel in the case, based upon claimed
conflicts of interest and nonpayment of legal fees, which motion is set to be
heard in the District Court on November 25, 2002.
FISH & RICHARDSON MATTER
In July 2002, we settled an outstanding claim of Fish & Richardson in
the bankruptcy of Interactive Network. The resolution of this claim resulted in
a payment to Fish & Richardson in the sum of $100,000 from the escrow account
held pursuant to the Order of the Bankruptcy Court in the Interactive Network
Bankruptcy proceeding, and the release of funds from the escrow account to Two
Way TV in the sum of approximately $193,000.
NATIONAL DATACAST MATTER
On September 30, 2002, the District Court issued its Order and its
Judgment, both entered on October 16, 2002, on the respective appeals of
National Datacast, Inc. (NDI) and Two Way TV from the Bankruptcy Court Judgment.
The District Court affirmed in part and reversed in part the Judgment of the
Bankruptcy Court, and remanded the case to the Bankruptcy Court with
instructions for further findings of fact and determinations. The previous
Bankruptcy Court award of lost profits in favor of NDI and against Two Way TV in
the sum of $3,916,667 was reversed and remanded by the District Court for
further proceedings to determine whether NDI is entitled to lost profits, and if
so, the amount of such lost profits. Other grounds for appeal raised by Two Way
TV were denied by the District Court, and the cross appeal of NDI was denied by
the District Court. In response to the Order and Judgment of the District Court,
the Bankruptcy Court set a Status Conference for December 6, 2002, to determine
how to proceed with the case in accordance with the District Court's rulings to
adjudicate whether lost profits are recoverable, and if so, the amount of such
lost profits. NDI filed a Notice of Appeal with the District Court on November
14, 2002.
NTN MATTER
We are continuing the litigation brought by Interactive Network against
Networks North, Inc. (formerly NTN Communications Canada, Inc.) (NTN) in Canada
for that company's alleged infringement of our patents. Discovery has been
largely completed and the case is proceeding to trial, though no trial date has
yet been set. On October 23, 2002, NTN filed a motion for additional security
for costs, which is common under Canadian law to protect defendants' rights to
recover attorneys fees and costs from the plaintiff in the event the defendant
prevails in the case. We have previously posted security with the Court in
Canada in the amounts of $10,000 (Canadian) (in 1998), plus an additional
$30,000 (Canadian) (in 2000). The pending motion by NTN seeks to have an
additional $289,976 (Canadian) posted by us in anticipation of trial costs. We
have opposed this motion in Court and are seeking to have any increase reduced
to a reasonable amount and have requested that any requirement to post increased
security not become due until six months prior to the actual trial date, which
has not yet been set. We expect the Court to rule on the motion in the near
future. In the event that NTN prevails in its motion, in whole or in substantial
part, we may not be able to post the amount of security for costs ordered, in
which case we would risk a dismissal of our case along with a request by NTN for
recovery of its fees and costs in the case to date.
OTHER MATTERS
On August 9, 2002, an action was filed against us by The Brenner Group,
Inc. in Santa Clara Superior Court, case number CV 810174, for amounts
purportedly due for accounting services in the sum of $18,132.94, plus costs of
suit and attorneys fees incurred. We filed an Answer in September 2002 denying
the material allegations of the Complaint, and the case is pending.
The law firm of Winthrop & Weinstine, P.A. brought an action against
Two Way TV in the State Court of Minnesota for the recovery of attorneys fees
claimed in the sum of $289,720, plus interest thereon. The Complaint was served
upon Two Way TV on October 8, 2002. Our response is due in State Court in
Minnesota on November 21, 2002. Settlement negotiations are ongoing.
-18-
An unlawful detainer action was served on Two Way TV on November 5,
2002 by 6300 Wilshire Associates, LLC, as Los Angeles Superior Court Case Number
BC 284557, seeking possession of the Los Angeles offices which we currently
occupy, rent and related expenses, and costs and fees claimed by the landlord
under the applicable lease. In connection with and to secure the obligations
under the lease, a letter of credit was posted by Two Way TV Limited in the sum
of $93,177, which remains outstanding. The term of the lease extends through
September of 2004, and the monthly rental thereunder is presently $12,226,
increasing to $12,595 in the final year. We filed and served our Answer to the
unlawful detainer action on November 12, 2002. Negotiations are currently
pending in the case with the Plaintiff for a voluntary vacating of the premises.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) Recent Sales of Unregistered Securities
We issued an unsecured loan to one of our shareholders, Two Way TV
Limited, during the quarter ended September 30, 2002 in the amount of $150,000
that is convertible into shares of our Common Stock at a price of $0.12 per
share. The loan is for a one year term. The loan balance is due and payable in
September 2003. The Note was issued pursuant to Section 4(2) of the Securities
Act. The loan proceeds were used fund our operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) In June 2001 Interactive Network raised $1.625 million from the
issuance of one year notes with a conversion option at $0.50. These notes were
not converted by the note holders and fell due for repayment in or about June
2002. We have not made any payments to the note holders and the notes are
therefore in default. As of September 30, 2002, $199,529 in interest has
accrued on these notes. Management is negotiating a potential extension of the
maturity of these notes, however no agreement has been reached and we believe
that it is likely that certain note holders may commence legal action.
ITEM 5. OTHER INFORMATION.
Effective October 23, 2002, Mr. Bruce W. Bauer was appointed as our new
Chief Executive Officer and Chief Financial Officer following the resignation of
Piers Wilson as our Chief Executive Officer, Secretary and Chief Financial
Officer. It is expected that Mr. Wilson will continue in his role as a member of
our Board of Directors through November 2002. Mr. Bauer served as Chairman and
CEO of Interactive Network from June of 1998 through May 2002 when we completed
our merger. Mr. Bauer has served as Chairman of our Board of Directors since the
merger. Although no employment agreement has yet been finalized with Mr. Bauer,
we anticipate Mr. Bauer will receive the salary of $155,000 per year, plus
additional compensation in the form of "success fees" for transactions
successfully closed, and will be granted two million fully-vested options to
purchase shares of our Common Stock in consideration for his acceptance of these
appointments.
Mr. Robert Hesse joined our Board of Directors and was elected
corporate Secretary in October 2002. Mr. Hesse was previously on the board of
Interactive Network prior to the merger. Our Board currently consists of Mr.
Bauer, Mr. Hesse, Richard Perkins of Perkins Capital and Piers Wilson and Mathew
Timms, each of Two Way TV Limited.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ---------------- --------------------------------------------------------------
2.1 Agreement and Plan of Reorganization by and among Interactive
Network, Inc. Two Way TV Limited and TWIN Entertainment, Inc.
dated as of May 31, 2001 (Incorporated by reference from
Exhibit 2.1 to our Registration Statement on Form S-4 as filed
with the Commission on September 26, 2001. File Number
333-70250).
2.2 Amendment No. 1 to Agreement and Plan of Reorganization dated
January 23, 2002 (Incorporated by reference from Exhibit 2.2
to Amendment No. 2 to our Registration Statement on Form S-4
as filed with the Commission on January 24, 2002. File Number
333-70250).
3.1 Certificate of Incorporation of Two Way TV (US), Inc.,
formerly TWIN Entertainment, Inc., as amended (Incorporated by
reference from Exhibit 3.1 to our Form 10-Q as filed with the
Commission on May 15, 2002).
3.2 Bylaws of Two Way TV (US), Inc., formerly TWIN Entertainment,
Inc. (Incorporated by reference to our Report on Form 10-Q as
filed with the Commission on August 27, 2002. File Number
333-70250).
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K:
On July 12, 2002, we filed a Form 8-K/A, which amended our Report on
Form 8-K filed on May 15, 2002, announcing our merger with Interactive Network,
Inc. The Form 8-K/A attached pro forma financial statements for the merged
company.
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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 on November 19, 2002.
TWO WAY TV (US), INC.
By: /s/ Bruce W. Bauer
-----------------------------
Bruce W. Bauer
Chief Executive Officer and
Chief Financial Officer
(DULY AUTHORIZED OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
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CERTIFICATIONS
I, Bruce W. Bauer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Two Way TV (US),
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002
/s/ Bruce W. Bauer
------------------
Bruce W. Bauer
President, Chief Executive Officer
and Chief Financial Officer
(PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL OFFICER)
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EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or
incorporated by reference into this Form 10-Q:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ---------------- --------------------------------------------------------------
2.1 Agreement and Plan of Reorganization by and among Interactive
Network, Inc. Two Way TV Limited and TWIN Entertainment, Inc.
dated as of May 31, 2001 (Incorporated by reference from
Exhibit 2.1 to our Registration Statement on Form S-4 as filed
with the Commission on September 26, 2001. File Number
333-70250).
2.2 Amendment No. 1 to Agreement and Plan of Reorganization dated
January 23, 2002 (Incorporated by reference from Exhibit 2.2
to Amendment No. 2 to our Registration Statement on Form S-4
as filed with the Commission on January 24, 2002. File Number
333-70250).
3.1 Certificate of Incorporation of Two Way TV (US), Inc.,
formerly TWIN Entertainment, Inc., as amended (Incorporated by
reference from Exhibit 3.1 to our Form 10-Q as filed with the
Commission on May 15, 2002).
3.2 Bylaws of Two Way TV (US), Inc., formerly TWIN Entertainment,
Inc. (Incorporated by reference to our Report on Form 10-Q as
filed with the Commission on August 27, 2002. File Number
333-70250).
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-23-