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Interactive Network, Inc.
1998 Annual Report
...bringing its technology
to an interactive world
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INTERACTIVE NETWORK, INC.
1161 OLD COUNTY ROAD
BELMONT, CALIFORNIA 94002
March 15, 1999
Dear Fellow Shareholders:
As your President, Chief Executive Officer and Chairman, I am writing to
update you on where the Company has been, and outline our strategy and future
plans for our Company. As you may know, I have been a loyal and active investor
in Interactive Network, Inc. since 1993. I became a director in 1995, and
immediately became involved in the liquidation of assets to fund Interactive's
lawsuit against TCI. I later became the lead negotiator for the Board of
Directors in the State Court's supervised settlement negotiations. I was
elected by the Board of Directors as Chairman and CEO in June of this past
year.
Normally, an annual report to shareholders describes a company's activities
during the past year and its plan for the future. Because there were no annual
reports made to shareholders over the past several years, I thought it would be
helpful to give our shareholders an overview of what has been happening to the
Company in recent years, as well as the important plans for the future.
Let me first address the future, for the future of our Company is and must
be now. It is the current management's intention to proceed to market our
Intellectual Property while continually working toward enhancement and
development of its patent portfolio. Our current game plan is to concentrate on
exploiting our patent portfolio in a cost effective way through licenses, joint
ventures or other methods that will not involve the requirement of large
overhead demands on the Company. We will also consider a possible merger if it
offers an attractive alternative for our shareholders.
In order to implement our plans and preserve value for our shareholders, we
must first successfully emerge from our Chapter 11 Bankruptcy proceedings, pay
our creditors who have valid claims against the Company, and either defeat,
reduce or defer payment of a few large claims (including David Lockton's claim
of $3.778 million) that we believe should not be paid in full. Our cash
resources are limited, and shareholders should realize that our ability to
continue operations for an extended period of time will depend on our ability
to deal successfully with these large claims, obtain external sources of
financing or commence realizing revenues from our patent portfolio. In this
connection, you should read carefully "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere in this
Annual Report.
During the period from the Company's initial public offering in 1991 through
October 1994, the Company raised over $100,000,000 (raising over $38,000,000 in
September/October of 1994 alone), but was forced to curtail its operations by
August, 1995, due to lack of ongoing financing or cash reserves. Our plan will
be to conserve our capital funds and to rely on the financial muscle of our
partners and licensees. We do not intend to repeat the experience of past
management.
To provide the technical and management expertise to fulfill our goals, we
are presently establishing an Advisory Panel of consultants. The Company's
former Chief Scientist, Dr. Robert Brown, has already joined us on a part-time
basis and will become a member of our team. Current management has identified a
select group of individuals, some with expertise in the evaluation, development
and marketing of intellectual property to the companies for whom our patents
will hold value, and others with knowledge of the telecommunications and
networking industries, with whom we are negotiating to join our Advisory Panel.
To attract these individuals, we are exploring the use of a combination of
incentive compensation based on the results achieved and stock option grants,
rather than a monthly salary.
Throughout this process of recruitment of our Advisory Panel, I have
experienced enthusiastic response to our patent portfolio from persons
experienced in analyzing and economically developing patents. However, I
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must caution you that there can be no assurance that the Company's patents will
be upheld, if challenged, that competitors might not develop similar or
superior technology or products outside the protection of any patents issued to
the Company, or that others will not establish patent rights that would
substantially interfere with the Company's business.
In attempting to exploit the Company's patents, one logical approach would
be to build on our existing relationship with Two Way TV, an affiliate of Cable
& Wireless Communications PLC. Last fall I met with Two Way TV in an attempt to
stimulate their interest in the U.S. market and to determine if we had a basis
for working together on a joint venture or other similar arrangement. In
January, 1999, I met with Two Way TV representatives to continue our
discussions with respect to such an arrangement. Your Board of Directors'
intention, as one of its options in attempting to exploit its patent portfolio,
is to continue discussions with Two Way TV with the intention of seeking to
negotiate a mutually satisfactory arrangement. To date, however, there is no
assurance that any agreements will be reached or that Two Way TV will make a
proposal that your Board of Directors would consider fair to our shareholders.
Your Company's Intellectual Property
Your Company presently holds six U.S. patents, one Canadian patent (which is
similar to its primary patent #4,592,546), one Japanese patent (corresponding
to its US patent #5,083,800), and several European patents. This patent
portfolio centers around the primary U.S. patents (#4,592,546 and #5,083,800
expiring in 2004 and 2009) which involve a game of skill playable by several
participants remote in conjunction with a live event, or common event,
respectively. Patent #5,013,038 and the corresponding European patents cover a
method of evaluating data relating to a common subject using a statistical
sampling to find a clip level. Patent #5,120,076 also pertains to a method of
evaluating data to a common subject, then utilizing this data to apply a filter
to the responses of the mass number of users. Patent #5,813,913 is a game of
skill playable by remote participants in conjunction with a common event where
participants are grouped as to skill level. Patent #5,083,800, and its
corresponding European and Japanese patents and Canadian patent application,
describe an apparatus in which a common game is played by a group of players.
Patent #5,643,088 permits insertion of advertising during a game, or common
event.
Our Settlement of the TCI Litigation
When the Company curtailed its operations in August, 1995, it filed a
lawsuit against TeleCommunications, Inc. and its affiliates, on the ground that
TCI had failed to provide promised financing. For more than two years after
becoming directors we supported the pursuit of TCI litigation to a successful
conclusion. However, commencing in early 1998, we began to question whether it
was in the best interests of shareholders to continue the litigation for some
indefinite period with the resulting loss of the Company's ability to realize
on its sole remaining asset of value--its intellectual property portfolio which
is a depreciating asset. Accordingly, we were prepared to negotiate resolution
of the lawsuit if a settlement could be reached that we felt would be in the
best interests of shareholders. Negotiations proceeded for many months, from
February, 1998 until the Settlement Agreement was finally signed in July, 1998.
During this period I became the chief negotiator for the Company in dealing
with TCI. In the end, I negotiated successfully to require the noteholders to
pay an additional $2,5000,000 to cover our attorneys' fees, thereby avoiding
reducing our own $10,000,000 recovery by that amount. Throughout our
negotiations, David Lockton resisted any settlement of the lawsuit, and
eventually the Board concluded on June 14 of last year that it would be in the
best interests of shareholders to replace him as Chief Executive Officer by
naming me in his place.
The results of the Settlement Agreement are as follows:
. The $38.4 million in principal and accrued interest of the Company's
notes issued to TCI, NBC, Sprint and Motorola, in September, 1994, is to
be converted into shares of the Company's common stock at a conversion
price of $5 per share, far above the Company's closing market price of
38 cents per share on March 1, 1999.
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. Interest on the Company's notes ceased accruing in February, 1998, and
the Company will be relieved of future annual interest charges on the
notes (amounting to over $4.6 million per year based on 1997 interest
expense).
. Instead of being convertible into over 67,000,000 shares of the
Company's common stock (based on anti-dilution adjustments in effect
under the terms of the Notes as disclosed by the Company in its
quarterly report for March, 1995), the notes will be converted into
7,814,588 shares of the Company's common stock.
. Warrants issued by the Company to the noteholders (including warrants
issued to NBC that could potentially give NBC a right to purchase stock
equal to 25% of the Company's outstanding common stock at an exercise
price per share equal to 75% of the current market price of the
Company's common stock on the date of exercise) will be cancelled when
the Settlement Agreement is closed.
. The noteholders' lien on the Company's patent portfolio will be
released, allowing the Company to turn its attention to exploiting its
patents in a commercially sensible way, which it could not do so long as
the noteholders had control of the patents.
. The noteholders will pay $10 million to the Company, a substantial
portion of which the Company will use to pay its creditors. The Company
will be contesting in its Chapter 11 proceedings substantial claims
filed by certain creditors, including David Lockton. Accordingly, the
Company is not able to state at this point the precise portion of the
$10,000,000 that will ultimately be required to be paid or set aside to
satisfy claims of creditors. (See "Other Contingencies and Commitments--
Claims in Chapter 11 Proceedings Which the Company is Contesting" and
"Liquidity and Capital Resources" in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" elsewhere in
this Annual Report.)
. The noteholders will pay $2,500,000 to our litigation counsel.
Your Board of Directors evaluated the risks of litigation versus the
negotiated settlement and, over David Lockton's objection, chose the
settlement.
Chapter 11 Bankruptcy Proceedings
Because the settling noteholders agreed to convert their senior secured debt
into equity, they wanted assurance that the Company would be cleared of debts
that could be senior to their new equity position by going through a Chapter 11
bankruptcy proceeding. Accordingly, one important condition of the Settlement
Agreement was that the Company file a petition for reorganization under Chapter
11, and obtain a court order confirming the Company's plan of reorganization.
The Company filed its plan of reorganization on December 22, 1998, and the
Bankruptcy Court originally scheduled a hearing on confirmation of the plan for
February 18, 1999. David Lockton has fought vigorously in proceedings before
the Bankruptcy Court to delay confirmation of the Company's plan of
reorganization and to relitigate in the Bankruptcy Court proceedings the wisdom
of the Company's decision to enter into the Settlement Agreement. Only two
people--Mr. Lockton and Calvin Wilson, Jr., a partner of J.C. Bradford Company,
a stock brokerage firm--filed objections to confirmation of the plan of
reorganization. The confirmation hearing commenced as scheduled on February 18,
1999. However, in order to consider Mr. Lockton's objections, the Bankruptcy
Court scheduled additional days for hearings on February 23 and March 18-19,
1999.
Current management seeks to establish shareholder value by using cost
effective methods to market the primary assets of your Company, its patent
portfolio, through licenses, joint ventures, or mergers to the highest
bidder(s). We have all waited a long time for this opportunity. I am asking
each and every shareholder to allow current management to see it through on
behalf of all shareholders and to deliver the value we believe is there in our
Company's intellectual property. However, so long as David Lockton continues to
tie up the Company in litigation in the Bankruptcy court for his own purposes,
the resulting uncertainties may make it more difficult for us to establish the
relationships we want to create through our Advisory Panel of consultants and
exploit our Intellectual Property portfolio.
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On March 8, 1999, Mr. Lockton sent a written proposal to TCI, the Company's
largest shareholder, for a "global settlement" as follows:
"1. Interactive Network (Company) agrees to a mutually agreeable, fast and
independent process for the disposition of the intellectual property. I
would suggest using [a major accounting firm] to solicit bids and make
a final recommendation to the Board within 30 days of the close of the
Settlement of the Plan.
"2. The Company agrees to pay Lockton the full amount [for] his stock and
cash claims, plus recent attorney's fees for the special meeting,
bankruptcy, etc. Lockton agrees, in turn, to defer $1.25 to $1.5
million to help squeeze the Settlement under the $10 million proceeds.
"3. Lockton will support the Plan, as amended for the process for the sale
of the assets and provide global releases, non-cooperation agreements
with third parties, etc. I will withdraw my slate of directors and go
away.
"Leo, there is a shareholder group representing 4 million shares getting
ready to file a Federal class action against everyone prior to the
bankruptcy confirmation hearing on March 17, 1999. With a non-cooperation
agreement from me, executed, they will go away, but time is of the essence.
"If TCI, NBC, myself and Gannett agree the Company must be told that the
controlling shareholders want all these issues wrapped up on this basis
ASAP."
TCI has advised the Company through its counsel that it has rejected Mr.
Lockton's proposal.
AS SHAREHOLDERS, YOU CAN SEND A POWERFUL MESSAGE TO DAVID LOCKTON AND THE
INVESTMENT COMMUNITY THAT YOU DO NOT APPRECIATE WHAT HE IS DOING TO YOUR
COMPANY TO FURTHER HIS OWN INTERESTS BY PROMPTLY RETURNING YOUR PROXY IN FAVOR
OF RE-ELECTING THE CURRENT BOARD OF DIRECTORS AT THE SHAREHOLDERS MEETING TO BE
HELD ON MARCH 31, 1999.
Sincerely,
Bruce W. Bauer
President, Chief Executive Officer
and
Chairman of the Board of Directors
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Current Directors and Executive Officers of the Company.
Bruce W. Bauer has served as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since June 1998. Prior to that he
served as Secretary of the Company since November 1996 and has been a director
of the Company since October 1995. From 1980 to June 1998 Mr. Bauer owned and
operated Unlimited Services and Marathon Management Services, which provide
building and clean room services, supplies and consulting. Mr. Bauer received a
B.A. degree from Wittenberg University in 1974.
John J. Bohrer has served as Secretary and Treasurer of the Company since
June 1998 and has been a director of the Company since October 1995. From July
1978 to June 1993, Mr. Bohrer served as branch manager of Dickinson & Company,
a firm rendering investment services. From June 1993 until his retirement in
June 1997, he served as Vice President and branch manager of BDF Investments,
which also renders investment services. He is now a semi-retired investor. Mr.
Bohrer graduated from the New York Institute of Finance in 1947.
Donald D. Graham has been a director of the Company since October 1995. Mr.
Graham has been owner and president of Graham Enterprises, Inc., since 1977, a
provider of management, investment and consulting services, and has been a
majority owner, chairman of the Board of Directors and officer in several
private construction-related companies since 1985. Mr. Graham received a
B.S./B.A. from Creighton University in 1958. Mr. Graham has also been a
certified public accountant since 1959 and served as an Accounting Program
Instructor at Creighton University's MBA program from 1961-1968.
William H. Green was appointed a director of the Company in 1998. Mr. Green
has been Vice President of D.S.I. Corporation since 1998, which is a dredging
specialty company. Prior to that, he served as a consultant in the aggregate
division of Martin Marietta since 1993. He currently sits on the boards of
various private companies.
William L. Groeneveld was appointed a director of the Company in 1998. Mr.
Groeneveld has served as Head Trader, Vice President and co-owner of Program
Trading Corp., a provider of brokerage services, since November 1995. Prior to
that he served as a manager and stock broker with Barron Chase Securities since
November 1993.
David B. Lockton was the founder of the Company in 1986 and served as its
Chief Executive Officer until he was replaced by the Board of Directors in June
1998. Mr. Lockton has been a director of the Company since its inception.
Management is not including Mr. Lockton in its slate of nominees to be elected
at the March 31, 1999 meeting of shareholders. Mr. Lockton received a B.A.
degree from Yale University and a J.D. from the University of Virginia Law
School.
Financial Statements.
Attached hereto for your review are the consolidated balance sheets of the
Company as of December 31, 1998 and December 31, 1997 and accompanying
statements of operations and cash flows for the three years ending December 31,
1998, which have been audited by KPMG LLP, independent certified public
accountants.
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Selected Financial Data.
The following selected historical consolidated financial data presented
below are derived from the consolidated financial statements for the fiscal
years ended December 31, 1998, 1997 and 1996, have been audited by KPMG LLP,
independent auditors and are included elsewhere in this annual report. The
selected historical consolidated financial data as of December 31, 1995 has
been derived from unaudited consolidated financial statements that are not
included herein. The historical consolidated financial data as of December 31,
1994 is derived from audited consolidated financial statements of the Company
that are not included herein. The audit opinion for 1998, 1997, 1996 and 1994
contains an explanatory paragraph that states that our recurring losses from
operations and net capital deficiency raise substantial doubt about our ability
to continue as a going concern. The selected consolidated financial data set
forth below is qualified in its entirety by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations." In KPMG's opinion, the financial statements present fairly, in
all material respects, the financial position of the Company for the years
ended December 31 1998, 1997 and 1996. The consolidated financial statements
and the selected consolidated financial data do not include any adjustments
that might result from the outcome of that uncertainty (in thousands, except
per share data):
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------
(in thousands, except per share amounts)
1998 1997 1996 1995 1994
(Audited) (Audited) (Audited) (Unaudited) (Audited)
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Total revenue............. $ 0 $ 0 $ 0 $ 339 $ 876
Net loss.................. $ 1488 $5,938 $ 4,552 $20,899 $51,307
Net loss per share........ $ 0.05 $ 0.19 $ 0.15 $ 0.68 $ 3.05
Shares used in computing
net loss per share....... 30,840 30,840 30,840 30,840 16,831
Total Assets.............. $ 379 $ 84 $ 174 $ 441 $19,449
Long-term obligations..... $ 0 $ 0 $33,817 $30,020 $26,849
Liabilities subject to
Compromise............... $46,296 $ 0 $ 0 $ 0 $ 0
Cash dividends declared
per common share......... $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The discussion of the Company's current business and future expectations in
this section and elsewhere in this Annual Report 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.
Overview
On September 21, 1994, the Company consummated a Note Purchase Agreement
with an affiliate of TCI, NBC, Sprint and Motorola pursuant to which the
Company received $20,466,000 in cash in exchange for its 12% Senior Secured
Convertible Promissory Notes, due September 21, 1996. An additional $3,547,000
in those Notes were issued in exchange for other outstanding debt and accrued
interest held by the Note purchasers. In addition, during September and
October, 1994, the Company received net proceeds of approximately $17,927,000
from the sale of its Common Stock to certain non-U.S. purchasers in an offering
under Regulation S. At December 31, 1994, the Company had remaining $12,766,000
in cash and cash equivalents after the closing of the Note Purchase Agreement.
During the first six months of 1995, the Company sought unsuccessfully to raise
other funds and restructure the terms of the September 1994 transaction.
Ultimately, by June 30, 1995, the Company had substantially reduced its
operations and terminated the large majority of its employees. By August 1,
1995, the Company terminated the rest of its workforce and reduced its
operations to the pursuit of the litigation and the protection of its
Intellectual Property.
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On August 1, 1995, the Company filed suit against TCI and certain affiliated
entities, alleging that TCI had conspired to acquire the Company's Intellectual
Property by obtaining liens on its Intellectual Property through the September,
1994 Note Purchase transaction, then reneged on commitments to make further
loans and sought to foreclose on the Company's Intellectual Property when the
Company could not sustain its business without additional funds. The principal
business activity of the Company from August 1, 1995 until July 1998, when the
lawsuit was settled, was prosecution of the lawsuit. During this period the
Company maintained no permanent workforce and relied on temporary employees as
needed. The Company made no investments in fixed assets and in 1995 wrote off
its investment in control units it had purchased for sale to potential
subscribers.
Following entry into the Settlement Agreement with TCI and the other parties
thereto in July, 1998 (the "Settlement Agreement"), the Company filed a
petition under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court
for the Northern District of California, as it had agreed to do under its
Settlement Agreement with TCI and its co-noteholders, NBC, Sprint and Motorola
(the "Settling Parties"). On December 22, 1998, the Company filed its plan of
reorganization under Chapter 11 of the Bankruptcy Code, providing for payment
to all of the Company's creditors in full on their allowed claims. Under the
terms of the Settlement Agreement, upon entry by the Bankruptcy Court of a
final non-appealable order confirming the plan of reorganization, the
Settlement Agreement will be consummated and the Company will be paid
$10,000,000 (plus accrued interest thereon) by the Settling Parties, security
interests in its assets will be released, and 7,814,588 shares of the Company's
Common Stock will be issued in conversion of outstanding debt in the amount of
$39,072,949 held by the Settling Parties.
Other Contingencies and Commitments:
1. Litigation. On January 4, 1995, Baker Trading Partners, Eric Lofgren
and Russ Van Wormer, as representatives of a class of plaintiffs who
purchased the Company's common stock, commenced a securities class action
lawsuit against the Company and certain other defendants (including David
Lockton), alleging that the Company, aided by the other defendants, made
materially false statements during the period January 19, 1994, through
March 31, 1995, concerning its plans to expand nationally when the Company
knew that it did not have the resources or market acceptance of its product
to support national expansion. Although that action is still pending, the
Company believes that a settlement is imminent that will limit the
Company's out-of-pocket costs to the $500,000 deductible under its
liability insurance.
2. Claims in Chapter 11 Proceedings which the Company is
Contesting. David Lockton has filed a claim for $3,778,000 in the Company's
Chapter 11 proceedings, of which $918,000 is attributable to his Employment
Agreement and $2,859,967 is attributable to his Deferred Compensation and
Non-Competition Agreement (including a claim of $1,009,967 for interest and
liquidated damages under the latter agreement), making him the largest
unsecured creditor of the Company. Mr. Lockton has pledged a portion of his
total claim to secure a $200,000 promissory note to Myron E. Etienne, Jr.
The Company intends to defend against Mr. Lockton's claim of $1,009,967 for
interest and liquidated damages under his Deferred Compensation and Non-
Competition Agreement on the ground that such claim is expressly precluded
by the terms of that agreement, and also intends to contend that of the
balance of $1,850,000 payable to him under that agreement, $100,000 is to
be paid upon consummation of the Settlement Agreement, and the remaining
$1,750,000 is to be paid in quarterly installments of $62,500, commencing
after the consummation of the Settlement Agreement. The Company is also
considering what other claims or defenses it may have against Mr. Lockton
that would reduce the amounts otherwise payable to him under his claim. In
addition to Mr. Lockton's claim, among the larger claims the Company also
intends to contest are a claim in the amount of $3.5 million filed by
National Datacast (which Mr. Lockton advised in February 1998 would be a
$166,000 claim), on the grounds, among others, that the contract on which
the claim is based had been terminated by National Datacast in 1995, and a
substantial part of its claim was barred by its termination of the
Agreement, at least $1.2 million of the scheduled claims of the Equitable
Life Assurance Society, a claim of $494,000 by the Internal Revenue Service
for penalties for alleged failure to file withholding reports, and a
scheduled claim of $500,000 for Singatronics.
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3. Contractual Commitments. The Bankruptcy Code contemplates that a
debtor in Chapter 11 proceedings may identify executory contracts that it
intends to assume as a part of its plan of reorganization. Executory
contracts that are not expressly assumed are deemed rejected, and the only
remedy of the other party to the contract is to pursue a claim for damages
for breach of contract following confirmation of the Plan of
Reorganization. Certain of these executory contracts are described in the
Company's Proxy Statement for the Special Meeting on March 31, 1999
accompanying this Annual Report (the "Proxy Statement"). The Company plans
to assume certain obligations under existing contracts as more fully
described in the Proxy Statement, including a 1992 Stock Purchase Agreement
with Gannett Co., Inc. and a 1992 know-how license agreement with Two Way
TV, but will treat obligations it had to TCI, NBC, Sprint and Motorola
(also described in the Proxy Statement) as terminated unless the Settlement
Agreement is not consummated. In addition, the Company does not plan to
assume several contractual arrangements that might still be considered
executory but have not been operative for many years. If at some future
date the other party to one of those arrangements should seek to assert
that the arrangement was still in effect on the date of confirmation of the
Company's plan of reorganization, the Company will review the matter and
take such steps as it considers appropriate to recognize or disavow the
contract in a manner that will be in the best interest of the Company.
4. Year 2000. The Year 2000 issue results from the fact that many
computer programs were previously written using two digits rather than four
to define the applicable year. Programs written in this manner may
recognize a date ending in "00" as the year 1900 rather than the year 2000.
As the Company has reduced its operations requiring the use of computers to
minimal support functions in the last few years, this issue is not expected
to impact upon its internal operations. As a seller of services to
customers, the Company did not sell any software and did not provide any
warranty for Year 2000 problems. The Company's patent portfolio will not be
significantly affected by Year 2000 problems.
Liquidity and Capital Resources
Inasmuch as the Company has in the past generated little operating revenues,
it has historically met its financial needs by raising money through public and
private sales of debt and equity securities. During the period from the
Company's initial public offering in 1991 through October, 1994, the Company
raised over $100 million through such sales (raising over $38 million in
September/October of 1994 by the sale of its 12% senior secured convertible
notes and common stock). On January 1, 1995, the Company had $12,766,000 in
cash and cash equivalents remaining from the sale of its 12% senior secured
convertible notes and common stock in September/October 1994. Following a
$20,899,098 net loss in Fiscal Year 1995, the Company had $71,102 in cash at
December 31, 1995. During Fiscal Year 1996, the Company received no revenues
from operations and $35,000 proceeds from litigation. At December 31, 1996, the
Company had $84,225 in cash. During Fiscal Year 1997, the Company had no
revenues or other sources of income, and at December 31, 1997, the Company had
$50,327 in cash. During Fiscal Year 1998 the Company had no revenues but
received $501,837 from proceeds of litigation, which the Company's secured
creditors permitted to be released to permit the Company to fund its bankruptcy
proceedings. At December 31, 1998, the Company had $300,601 in cash remaining.
During Fiscal Years 1995, 1996 and 1997, the Company also received proceeds
from the sale of fixed assets in the amounts of $148,310, $170,997 and $3,000,
respectively.
If the Settlement Agreement described under "Overview" above were
consummated on March 31, 1999, the Company would receive $10 million in cash
(plus accrued interest thereon of approximately $120,000), of which it would
expect to use immediately no more than approximately $5,000,000 to pay
creditors whose claims would have been allowed in the Chapter 11 proceedings
and would be payable upon consummation of the Settlement Agreement. This figure
includes reorganization expenses, professional fees and post-petition interest
accrued on allowed claims in the Chapter 11 proceedings, aggregating
approximately $1,400,000 as of March 31, 1999, of which it would expect to
defer payment of at least $150,000. The Company intends to contest
approximately $8.6 million of claims filed in the Chapter 11 proceedings that
are not duplicates or claims of the Settling Parties. The amount of funds
available to the Company after resolution of contested claims will depend on
the extent to which the Company is successful in
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substantially reducing, defeating or deferring payment of the substantial
claims the Company is contesting described in "Other Contingencies and
Commitments--Claims in Chapter 11 Proceedings Which the Company is Contesting."
In the event the Company is not successful in defeating, substantially reducing
or deferring payment of these claims, the Company's working capital
requirements would need to be satisfied in part by external sources of
financing to the extent revenues from exploitation of its patent portfolio were
not sufficient.
The Company's current business plan is not to build up a large work force or
invest in plant, equipment or inventories, but to concentrate on exploiting its
patent portfolio through licenses, joint ventures or other methods that will
not involve large overhead or capital demands on the Company. The Company
currently expects its need for working capital after consummation of the
Settlement Agreement to consist largely of general and administrative and
patent development and marketing expenses of approximately $600,000, expected
to be incurred in generating revenues from its Intellectual Property assets,
and professional fees of approximately $240,000, out of a total annual
operating budget of approximately $1 million. The Company intends to resume
periodic filings with the Securities and Exchange Commission, the cost of which
is included in its budget for professional fees.
Results of Operations
Revenues. During the year ended December 31, 1994, the Company realized net
revenues of $876,000, its last full year of undiminished operation, in which
the Company was testing pricing points for a service-only revenue model prior
to its planned national rollout. During the year ended December 31, 1995, the
Company realized net revenues of $339,044, prior to reduction of its
operations. Thereafter the Company realized no revenues from operations for the
years ended December 31, 1996, 1997 or 1998. The Company realized revenues from
the sale of fixed assets in the amount of $140,244 and from the proceeds of
litigation of $35,000 in Fiscal Year 1996, from an insurance refund in the
amount of $60,756 in Fiscal Year 1997, and $501,837 in Fiscal Year 1998, in
connection with the prosecution of litigation.
Costs of Revenues. The Company incurred costs of revenues of $12,181,000 in
the year ended December 31, 1994, its last full year of undiminished operation,
which primarily included $4,102,000 in personnel costs, $2,394,000 in fees paid
to radio stations and to PBS for broadcasting the Company's programming and
$1,554,000 in premises costs. The Company incurred costs of revenues of
$3,861,652 for the year ended December 31, 1995, principally in the period
prior to reduction of operations. Thereafter the Company incurred no costs of
revenues during the years ended December 31, 1996, 1997 or 1998.
Research and Development. The Company incurred research and development
expenses of $3,862,000 in the year ended December 31, 1994, its last full year
of undiminished operation, which included research and development personnel
costs of $2,625,000. The Company incurred research and development expenses of
$913,395 during the year ended December 31, 1995, principally in the period
prior to reduction of operations. Thereafter the Company incurred no research
and development expenses during the years ended December 31, 1996, 1997 or
1998.
Selling and Marketing. The Company incurred selling and marketing expenses
of $11,198,000 in the year ended December 31, 1994, its last full year of
undiminished operation, which primarily included $2,511,000 in selling and
marketing personnel costs, $2,116,000 in professional fees, $5,196,000 in fees
related to production and placement of advertising material, and other costs
for product samples and prizes to subscribers. The Company incurred selling and
marketing expenses of $3,267,461 during the year ended December 31, 1995,
principally in the period prior to reduction of operations. Thereafter the
Company incurred no selling and marketing expenses during the years ended
December 31, 1996, 1997 or 1998.
General and Administrative. The Company incurred general and administrative
expenses of $7,182,000 in the year ended December 31, 1994, its last full year
of undiminished operation, which included general and
9
<PAGE>
administrative personnel costs of $3,961,000, facilities costs and legal and
professional fees. The Company incurred general and administrative expenses of
$8,249,279 during the year ended December 31, 1995, principally in the period
prior to reduction of operations. Thereafter the Company operated with a
skeleton workforce, incurred general and administrative expenses of $784,291
during the year ended December 31, 1996, which primarily included $287,000
accrued but not paid to a former officer of the Company, $133,477 in legal fees
incurred in connection with litigation, $125,000 of occupancy costs, temporary
office and warehouse help and compensation of approximately $35,000 paid to
Bruce Bauer in connection with liquidation of fixed assets and subleasing the
Company's unused premises. During the year ended December 31, 1997, general and
administrative expenses were $1,304,391, which included $925,000 accrued for
litigation costs, and $287,000 accrued but not paid to a former officer of the
Company. During the year ended December 31, 1998, general and administrative
expenses were $1,124,993, of which $948,473 represented amounts accrued but not
paid to a former officer of the Company. In addition, the Company incurred
$252,220 in 1998 in costs for the reorganization required by the Settlement
Agreement. Amounts accrued but not paid to a former officer of the Company in
1996, 1997 and 1998 are subject to dispute by the Company in the bankruptcy
proceedings.
Interest Income (Expense). During the years ended December 31, 1994, 1995,
1996, 1997 and 1998, interest expense was $1,120,000, $1,250,985, $3,808,118,
$4,636,864 and $618,821, respectively, representing the interest accrued on the
12% Senior Secured Convertible Promissory Notes issued under the September,
1994 Note Purchase Agreement. Upon consummation of the Settlement Agreement
(which stopped accrual of interest on the Notes at February 25, 1998), this
interest expense will disappear in future years as the Notes will be converted
into shares of the Company's common stock. If the Settlement Agreement were not
consummated, there would have been approximately $4,453,297 in additional
interest expense on the Notes for the year ended December 31, 1998.
Net Losses. During the years ended December 31, 1994, 1995, 1996, 1997 and
1998, the Company incurred net losses of $51,307,000, $20,899,100, $4,551,786,
$5,937,878 and $1,487,529, respectively. Except for Fiscal Year 1995, these
losses resulted primarily from accrual of interest expense on the 12% Senior
Secured Convertible Promissory Notes.
Market Price, Dividends and Forward-Looking Statements.
The Company's common stock is currently being traded on the OTC Bulletin
Board and is listed under the symbol "INNN." The following table represents the
high and low bid prices at which transactions in the Company's common stock
occurred during each quarter of 1998 and 1997, as reported by Dow Jones
Interactive Quotes & Market Data.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
March 1, 1999 $0.4300 $0.3800
1998
4th Quarter............................................. $0.4375 $0.0940
3rd Quarter............................................. $0.359 $0.109
2nd Quarter............................................. $0.281 $0.156
1st Quarter............................................. $0.391 $0.156
1997
4th Quarter............................................. $0.578 $0.172
3rd Quarter............................................. $0.313 $0.063
2nd Quarter............................................. $0.141 $0.078
1st Quarter............................................. $0.281 $0.047
</TABLE>
Holders of Record.
As of March 1, 1999, there were 809 shareholders of record of the Company's
common stock.
10
<PAGE>
Dividends.
The Company did not declare or pay any dividends in 1997 or 1998. Future
dividends, if any, will depend on the Company's profitability and anticipated
capital requirements. The Company has no present intention of paying dividends.
Forward Looking Statements.
Certain sections of this report, including the Letter to Shareholders and
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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 or such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions which are difficult to predict. Therefore, actual
results may differ significantly from the results described in these forward-
looking statements, including changes that could affect the value of the
Company's Intellectual Property assets and decisions by the bankruptcy court in
which the Company's Chapter 11 proceeding is pending with respect to allowance
of contested claims and delays in confirmation of the Company's plan of
reorganization which may cause a resulting increase in post-petition interest
on claims and could reduce the Company's anticipated working capital, and any
resulting effect on the consummation of the Settlement Agreement that might
result from such delays. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Undertaking.
Copies of the Annual Report of the Company on Form 10-K for the fiscal year
ended December 31, 1998 may be obtained from the Company without charge upon a
written request made to 1161 Old County Road, Belmont, California 94002,
Attention: Secretary.
11
<PAGE>
INTERACTIVE NETWORK, INC.
(Debtor-in-Possession)
Consolidated Financial Statements
December 31, 1998, 1997, and 1996
<PAGE>
INTERACTIVE NETWORK, INC.
(Debtor-in-Possession)
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-1
Consolidated Balance Sheets................................................ F-2
Consolidated Statements of Operations...................................... F-3
Consolidated Statements of Shareholders' Deficit........................... F-4
Consolidated Statements of Cash Flows...................................... F-5
Notes to Consolidated Financial Statements................................. F-6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Interactive Network, Inc.:
We have audited the accompanying consolidated balance sheets of Interactive
Network, Inc. (Debtor-in-Possession) and subsidiary (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' deficit and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1998 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2, the Company entered into the Settlement Agreement whereby the Company
commenced a reorganization by filing a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Northern District of California (the "Bankruptcy Court") on
September 14, 1998. Substantially all liabilities of the Company as of the date
of this report are subject to settlement under a plan of reorganization to be
confirmed by the Bankruptcy Court. The Company is currently operating as
debtor-in-possession under the jurisdiction of the Bankruptcy Court and
continuation of the Company as a going concern is contingent upon, among other
things, the ability to (1) formulate an acceptable plan of reorganization that
will be confirmed by the Bankruptcy Court, and be able to fully implement that
plan in compliance with the Settlement Agreement, (2) settle the claims of
unsecured creditors within available cash resources as currently contemplated
by management, (3) develop an appropriate business plan and strategic direction
for the Company's planned future operations after reorganization including
conservation of available capital and working capital as the Company seeks to
further develop and exploit its patent portfolio, (4) confirm the availability
of net operating tax losses after reorganization, and (5) generate adequate
sources of working capital and other liquidity as necessary to meet future
obligations. Management's plans in regard to these matters are also described
in Note 3. These contingencies and the uncertainties inherent in the bankruptcy
process raise substantial doubt about the ability of the Company to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ KPMG LLP
March 15, 1999
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ------------- -------------
<S> <C> <C>
Current assets:
Cash........................................... $ 300,601 $ 50,327
Prepaid expenses and other current assets...... 78,256 33,555
------------- -------------
Total current assets......................... 378,857 83,882
Property, plant and equipment, net............... -- --
------------- -------------
$ 378,857 $ 83,882
============= =============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable............................... $ -- $ 5,499,974
Accrued liabilities to shareholder............. -- 774,920
Other accrued liabilities...................... 214,821 --
Notes payable.................................. -- 26,512,725
Accrued interest on notes payable.............. -- 11,941,014
------------- -------------
Total current liabilities.................... 214,821 44,728,633
Liabilities subject to compromise................ 46,296,316 --
Commitments and contingencies
Shareholders' deficit:
Preferred stock, no par value, 10,000,000
shares authorized; no shares issued and
outstanding as of December 31, 1998 and 1997.. -- --
Common stock, no par value, 150,000,000 shares
authorized; 30,840,441 shares issued and
outstanding as of December 31, 1998 and 1997.. 103,281,755 103,281,755
Accumulated deficit............................ (149,414,035) (147,926,506)
------------- -------------
Total shareholders' deficit.................. (46,132,280) (44,644,751)
------------- -------------
$ 378,857 $ 83,882
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Revenues............................... $ -- $ -- $ --
General and administrative expenses.... 1,124,943 1,304,391 784,291
------------ ----------- -----------
Loss from operations............... (1,124,943) (1,304,391) (784,291)
------------ ----------- -----------
Other (income) and expense
Interest income...................... (6,618) (3,377) (5,623)
Interest expense (contractual inter-
est exceeds recorded interest ex-
pense by $4,453,297 in 1998)........ 618,821 4,636,864 3,808,118
Litigation settlement................ (501,837) -- (35,000)
------------ ----------- -----------
Total other expense, net........... 110,366 4,633,487 3,767,495
------------ ----------- -----------
Loss before reorganization
expenses.......................... (1,235,309) (5,937,878) (4,551,786)
Reorganization expenses................ 252,220 -- --
------------ ----------- -----------
Net loss........................... $ (1,487,529) $(5,937,878) $(4,551,786)
============ =========== ===========
Basic and diluted net loss per share... $ (0.05) $ (0.19) $ (0.15)
============ =========== ===========
Shares used in per share calculation... 30,840,441 30,840,441 30,840,441
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Consolidated Statements of Shareholders' Deficit
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common stock Total
----------------------- Accumulated shareholders'
Shares Amount deficit deficit
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balances as of December
31, 1995................ 30,840,441 $103,281,755 $(137,436,842) $(34,155,087)
Net loss................. -- -- (4,551,786) (4,551,786)
---------- ------------ ------------- ------------
Balances as of December
31, 1996................ 30,840,441 103,281,755 (141,988,628) (38,706,873)
Net loss................. -- -- (5,937,878) (5,937,878)
---------- ------------ ------------- ------------
Balances as of December
31, 1997................ 30,840,441 103,281,755 (147,926,506) (44,644,751)
Net loss................. -- -- (1,487,529) (1,487,529)
---------- ------------ ------------- ------------
Balances as of December
31, 1998................ 30,840,441 $103,281,755 $(149,414,035) $(46,132,280)
========== ============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
before reorganization items:
Net loss.............................. $ (1,487,529) $(5,937,878) $(4,551,786)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities before
reorganization items:
Reorganization expenses............. 252,220 -- --
Expenses settled through transfer of
fixed assets....................... -- -- 19,015
Changes in operating assets and
liabilities:
Prepaid expenses and other
assets........................... (44,701) 52,775 109,826
Accounts payable.................. -- 925,000 200,760
Accrued liabilities to
shareholder...................... 948,473 286,946 286,946
Accrued interest on notes
payable.......................... 619,210 4,636,864 3,808,118
Other accrued liabilities......... -- (605) --
------------ ----------- -----------
Net cash provided by (used in)
operating activities before
reorganization items........... 287,673 (36,898) (127,121)
Cash used in reorganization--
professional fees paid for services
rendered in connection with Chapter
11 proceedings....................... (37,399) -- --
------------ ----------- -----------
Cash provided by (used in)
operating activities........... 250,274 (36,898) (127,121)
Cash flows provided by investing
activities--proceeds from sale of
property, plant and equipment.......... -- 3,000 140,244
------------ ----------- -----------
Increase (decrease) in cash............. 250,274 (33,898) 13,123
Cash at beginning of year............... 50,327 84,225 71,102
------------ ----------- -----------
Cash at end of year..................... $ 300,601 $ 50,327 $ 84,225
============ =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year:
Income taxes (Note 8)............... $ -- $ -- $ --
============ =========== ===========
Interest............................ $ -- $ -- $ --
============ =========== ===========
Noncash items:
Conversion of current liabilities to
liabilities subject to compromise.. $ 46,296,316 $ -- $ --
============ =========== ===========
Reorganization expenses............. $ 214,821 $ -- $ --
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) The Company
Interactive Network, Inc. (the "Company") was incorporated in California on
November 10, 1986, to engage in the design, development, and marketing of a
subscription-based interactive television entertainment system. As discussed
more fully below, the Company was unable to continue operations due to the lack
of additional financing and curtailed operations in August 1995.
The Company currently does business only in the state of California and is
in good standing with the Secretary of State. Prior to 1995, the Company was
qualified to do intrastate business in four other states, but ceased doing
business outside California in 1995, and its qualification to do business in
those other states has been revoked or surrendered. The Company failed to file
tax returns or pay minimum franchise taxes to the California State Franchise
Tax Board for the years 1995-1998. The Company is not in compliance with its
Securities and Exchange Commission ("SEC") filings. The last quarterly
financial report filed by the Company with the SEC was their Form 10-Q for the
quarter ended March 31, 1995.
(2) Reorganization and Basis of Reporting
In August of 1995, the Company commenced litigation (the "Litigation")
against certain shareholders and their affiliated entities (the "Settling
Parties"). The Litigation arose in relation to the use of the Company's
intellectual property as collateral for secured loans made to the Company. See
Note 10 for additional information.
On July 10, 1998, the Company and the defendants in the Litigation, the
Settling Parties, entered into an agreement (the "Settlement Agreement")
whereby the Company agreed to file a petition under Chapter 11 of the
Bankruptcy Code in the U.S. Court for the Northern District of California,
which it did on September 14, 1998 (the "Petition Date"). Under the terms of
the Settlement Agreement, upon entry by the Bankruptcy Court of a final non-
appealable order confirming the Company's Plan of Reorganization ("the Plan"),
the Settlement Agreement will be consummated and the Company will be paid $10
million (plus accrued interest thereon, which approximates $120,000 at December
31, 1998) which has been held in escrow since July 1998. Also, an additional
amount of $2.5 million (also held in escrow since July 1998) will be paid by
the Settling Parties directly to the Company's attorneys in respect of the
Company's legal fees associated with the Litigation, security interests in the
Company's assets will be released and 7,814,588 shares of the Company's common
stock will be issued at a conversion price of $5 per share in conversion of
outstanding debt held by the Settling Parties in the amount of $39.1 million,
of which $26.5 million represents the principal amount and $12.6 million
represents accrued interest, as of February 25, 1998 (when interest ceased to
accrue under terms of the Settlement Agreement). In addition, the Settlement
Agreement includes releases of the Settling Parties by the Company and releases
of the Company by each of the Settling Parties with respect to the litigation
and any other preexisting claims or contracts including the cancellation of
outstanding warrants.
The Company's Plan under Chapter 11 was filed on December 22, 1998 and the
First Amendment to Chapter 11 Plan of Debtor and Debtor-in-Possession was filed
on February 18, 1999, providing for payment in full to all of the Company's
creditors on their allowed claims. The final date for filing claims was January
19, 1999, at which time non-duplicative claims totaling approximately $13.7
million were filed or scheduled (not including the claims of the Settling
Parties). Under the Plan, the Company intends to pay in full allowed claims,
and believes that (in addition to expenses of administration of approximately
$500,000) there are no more than approximately $8.7 million in allowed claims
(plus certain accrued interest), although the final figure is subject to the
claims objection and allowance procedures under Chapter 11. The Bankruptcy
Court commenced a hearing on confirmation of the Plan on February 18, 1999. The
hearing is not expected to be completed until at least March 19, 1999.
F-6
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
Since the Petition Date, the Company has continued in possession of its
property and, as Debtor-in-Possession, is authorized to operate and manage its
businesses and enter into all transactions (including among other items, paying
employee wages, obtaining services, supplies and inventories) that it could
have entered into in the ordinary course of business had there been no
bankruptcy filing. As Debtor-in-Possession, the Company may not engage in
transactions outside of the ordinary course of business without approval of the
Bankruptcy Court, after notice and a hearing.
Liabilities subject to compromise presented in the accompanying consolidated
balance sheet represent the Company's estimate of prepetition liabilities
expected to be allowed as of December 31, 1998, subject to adjustment in the
reorganization process (see Note 6). Under Chapter 11, actions to enforce
certain claims against the Company are stayed if the claims arose, or are based
on events that occurred, on or before the Petition Date. Other liabilities may
arise or be subject to compromise as a result of rejection of executory
contracts and unexpired leases or the Bankruptcy Court's resolution of claims
for contingencies and other disputed amounts. As a general matter, the
treatment of these liabilities will be determined as a part of the formulation
and confirmation of the Plan.
(3) Going Concern
The accompanying consolidated financial statements have been presented on
the basis that the Company is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the Chapter 11 filing and circumstances relating to
the filing, realization of assets and satisfaction of liabilities is subject to
uncertainty. Confirmation of the Plan by the Bankruptcy Court could materially
change the amounts reported in the accompanying consolidated financial
statements, which do not give effect to adjustments to the carrying values of
assets and liabilities, which may be necessary as a consequence of the Plan.
The ability of the Company to continue as a going concern is contingent upon,
among other things, the ability to (1) formulate an acceptable plan that will
be confirmed by the Bankruptcy Court, and be able to fully implement that plan
in compliance with the Settlement Agreement, (2) settle the claims of unsecured
creditors within available cash resources as currently contemplated by
management, (3) develop an appropriate business plan and strategic direction
for the Company's planned future operations after reorganization including
conservation of available capital and working capital as the Company seeks to
further develop and exploit its patent portfolio, (4) confirm the availability
of net operating tax loss carryforwards after reorganization, and (5) generate
adequate sources of working capital and other liquidity as necessary to meet
future obligations.
The Company's business plan is to concentrate on further development and
exploitation of its patent portfolio through licenses, joint ventures or other
methods that will not involve substantial capital requirements or large
overhead expenses for the Company. The Company does not intend to engage in the
manufacture or sale of products involving its patents, that would require
investment in plant, equipment or inventories, and believes that the cash it
expects to receive under the Settlement Agreement will, after paying its
creditors under the Plan, be adequate to supply any necessary working capital
for at least the next 12 months.
The confirmation and effectiveness of the Plan will be subject to a number
of conditions. Given these uncertainties, there can be no assurance (1) whether
the Plan will be confirmed by the Bankruptcy Court, (2) when the Plan will
become effective, or (3) whether the realization of assets and satisfaction of
liabilities will occur as currently contemplated by management.
F-7
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
(4) Summary of Significant Accounting Policies
(a) Principle of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned Nevada subsidiary formed in 1994,
RealTime Gaming Systems, Inc. This subsidiary has no assets or liabilities
and ceased to do business during 1995.
(b) Fair Value of Financial Instruments
The Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of
Financial Instruments, defines the fair values of a financial instrument as
the amount at which the instrument could be exchanged in a current
transaction between willing parties. At December 31, 1998, the fair values
of the Company's cash, other current assets and other accrued liabilities
approximate their carrying values due to their short maturity. As stated in
Notes 5 and 6, certain notes payable and accrued interest, other accounts
payable and accrued liabilities are included amongst liabilities subject to
compromise as of December 31, 1998. Accordingly, the fair value of these
items is not readily determinable.
(c) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(d) Per Share Information
Basic and diluted net loss per share are computed using the weighted-
average number of outstanding shares of common stock. Net loss per share
does not include the effect of the following contingently issuable shares
because their effects are antidilutive.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stock options
outstanding............ 1,350,000 $0.17 2,906,398 $0.09 2,456,389 $0.09
Shares issuable upon the
exercise of warrants... 709,210 $5.96 734,210 $6.17 843,210 $6.28
--------- --------- ---------
2,059,210 3,640,608 3,299,599
========= ========= =========
</TABLE>
Also, net loss per share for each of the years presented does not
include the effect of shares issuable on the conversion of secured notes
payable because their effects are antidilutive. See Notes 5 and 6 for the
detail of notes payable and their conversion rates.
F-8
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
(e) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Where a deferred tax asset has
been recognized, a valuation allowance is established if, based on
available evidence, it is more likely than not that the deferred tax asset
will not be realized.
(f) Stock Option Plan
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123, also allows entities to continue to
apply the provisions of Accounting Principals Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and provide pro forma net income
disclosures for employee stock option grants made as if the fair value
based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
(g) Comprehensive Income/Loss
The Company has no significant components of other comprehensive income
or loss.
(h) Recent Accounting Pronouncements
The FASB recently issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. For a
derivative not designated as a hedging instrument, changes in the fair
value of the derivative are recognized in earnings in the period of change.
The Company must adopt SFAS No. 133 by July 1, 1999. Management does not
believe the adoption of SFAS No. 133 will have a material effect on the
consolidated financial position or results of operations of the Company.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, Reporting on Costs of Start-Up
Activities, which provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. Start-up activities are
defined broadly as those one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a
new territory, conducting business with a new class of customer or
beneficiary, initiating a new process in an existing facility, or
commencing some new operation. The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company
has not yet determined what effect the adoption of the SOP will have on its
consolidated financial statements.
F-9
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
(5) Notes Payable and Accrued Interest
Notes payable and accrued interest as of December 31, 1998 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----- -----------
<S> <C> <C>
Notes Payable
Convertible notes to certain shareholders secured by all
of the Company's assets and due September 21, 1996;
interest at 12% prior to the due date and 15% after
this date, payable quarterly by cash or note........... $ -- $26,512,725
Accrued Interest
Accrued interest on secured notes....................... -- 11,941,014
----- -----------
Total notes payable and accrued interest................ $ -- $38,453,739
===== ===========
</TABLE>
The secured notes are convertible into shares of Series F redeemable
preferred stock ("Series F preferred") at a conversion rate of one share of
Series F preferred per $98.16 of principal and accrued interest The secured
notes will automatically be converted into Series F preferred stock upon the
occurrence of certain events. Each share of Series F preferred stock is
convertible into 43.4141 shares of common stock subject to adjustment for
future dilutive issuances.
The secured notes contain various covenants and restrictions, including
limitations on lease agreements and additional indebtedness. As of December 31,
1997, the Company was not in compliance with these covenants and, as a result,
classified the notes as current liabilities. The note holders also received
warrants to purchase 274,457 shares of the Company's common stock at an
exercise price of $7.995 per share subject to adjustment for dilutive
issuances.
Under the terms of the Settlement Agreement, upon entry by the Bankruptcy
Court of a final non-appealable order confirming the Plan, the Settlement
Agreement will be consummated and the note holders will release their security
interests in the Company's assets and 7,814,588 shares of the Company's common
stock will be issued at a conversion price of $5 per share on conversion of the
secured notes. Accordingly, this debt, along with the accrued interest, has
been reclassified to liabilities subject to compromise in the accompanying
December 31, 1998 consolidated balance sheet (see Note 6).
(6) Liabilities Subject to Compromise
Liabilities subject to compromise include substantially all of the current
and noncurrent liabilities of the Company as of the Petition Date which are
subject to settlement under the Plan. These liabilities were transferred from
their respective prepetition balance sheet accounts to liabilities subject to
compromise. Certain prepetition liabilities have been approved by the
Bankruptcy Court for payment and to the extent not paid, are included in
accrued expenses and other payables as of December 31, 1998. Liabilities
subject to compromise are summarized as follows:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Secured convertible notes to certain shareholders............... $26,512,725
Accrued interest on secured notes............................... 12,560,224
Accounts payable and accrued expenses........................... 5,499,974
Accrued liabilities to shareholder.............................. 1,723,393
-----------
$46,296,316
===========
</TABLE>
F-10
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
Under the terms of the Settlement Agreement, upon entry by the Bankruptcy
Court of a final non-appealable order confirming the Plan, the Settlement
Agreement will be consummated and the secured note holders will release their
security interests in the Company's assets and 7,814,588 shares of the
Company's common stock will be issued in conversion of the secured notes
described above. This represents a conversion of the aggregate principal and
interest at $5.00 per share (which bears no relation to the market value of the
Company's common stock).
Under the terms of the Settlement Agreement, interest ceased to accrue on
the Company's secured convertible notes on February 25, 1998. Accordingly,
interest has only been accrued up to this date. Contractual interest (computed
without regard to the Settlement Agreement) exceeds interest expense recorded
in the accompanying consolidated statement of operations for the year ended
December 31, 1998 by approximately $4.5 million.
The accrued liabilities to shareholder consists of amounts accrued in
relation to claims filed by a current shareholder and former officer of the
Company ("the Shareholder"). Included in this amount are certain claims for
unpaid compensation, amounts due under a deferred compensation/noncompetition
agreement, and interest, as to which the Company may contest the time of
payment or seek to reduce the amounts payable under the Chapter 11 proceedings.
The deferred compensation/noncompetition agreement was entered into between the
Company and the Shareholder in December 1994. Concurrently with the execution
of the deferred compensation/noncompetition agreement, a contingent promissory
note in the principal amount of $2,000,000 issued by the Company to the
Shareholder in December 1986 as consideration for the sale of certain patent
rights by the Shareholder to the Company was canceled. Under the terms of this
agreement the Company made a cash payment of $150,000 in 1994 to the
Shareholder. The Company also agreed to make a cash payment of $55,000 and to
cancel the Shareholder's obligation to the Company under a promissory note in
the principal amount of $45,000 on January 1, 1996. In addition, commencing
January 1, 1996, the Company agreed to pay the Shareholder $62,500 on each
January 1, April 1, July 1 and October 1 thereafter through October 1, 2002,
provided that the Company's unrestricted cash was sufficient to satisfy the
Company's requirements during the following 90-day period and that the
Shareholder continued to comply with the terms of the deferred
compensation/noncompetition agreement. To date the Company has made no
payments, other than the initial $150,000 in 1994. In consideration of and as a
condition to such payments, the Shareholder agreed that during the eight-year
period ending on December 31, 2002 he would not engage in or become associated
with any person or entity engaged in any activity in the United States or
Canada that is competitive with the business of the Company.
The Company has excluded certain amounts from the total claim of the
Shareholder in arriving at the amount included as an allowed claim as of
December 31, 1998. Amounts accrued under the Deferred
compensation/noncompetition agreement as of December 31, 1998, reflect the
amounts due at that date under the agreement, $948,000 of which was expensed in
1998. The Shareholder claim includes an additional amount of $1 million for
interest and penalties on payments due under this agreement during the period
January 1, 1999 to December 31, 2002 which has not been accrued as of December
31, 1998. As indicated in Note 2, all claims, including amounts accrued as of
December 31, 1998 are subject to the claims objection and allowance procedures
under Chapter 11.
The Company will continue to negotiate with creditors to reconcile claims
filed with the Bankruptcy Court to the Company's financial records. The
additional liability arising from this reconciliation process, if any, is not
subject to reasonable estimation. As a result, no provision has been recorded
for these possible claims. The Company will recognize the additional liability,
if any, as the amounts become subject to reasonable estimation. Additional
bankruptcy claims and prepetition liabilities may arise from the rejection of
executory contracts and unexpired leases, resolution of contingent and
unliquidated claims and the settlement of disputed claims. Under
F-11
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
the plan of reorganization ultimately confirmed by the Bankruptcy Court, the
outcome of the claims review and objection process may materially change the
amounts and terms of prepetition liabilities. Consequently, the amounts
included in the consolidated balance sheets as liabilities subject to
compromise are subject to future adjustment.
(7) Reorganization Expenses
Reorganization expenses recorded in 1998 consist of professional fees paid
or incurred for legal services related to the Company's reorganization.
(8) Income Taxes
The Company has not filed federal and state income tax returns for the years
ended December 31, 1994 through 1998. As of December 31, 1993, the Company had
approximately $47 million and $23 million of federal and California net
operating losses, respectively. The Company also had approximately $456,000 and
$190,000 of federal and California research and experimentation credits
carryforwards, respectively.
Should the net operating losses and credits described above, be available
for use, such carryforwards may be restricted in the event of an "ownership
change", as defined in Section 382 of the Internal Revenue Code. The Company
did have such a change in July 1989, and again in November 1991, subjecting
$13.9 million of its net operating loss carryforwards to an annual limitation
not to exceed $1.6 million. The Company has not determined whether an ownership
change has occurred after December 31, 1993. Further, Section 382 provides that
in the event the Company ceases its trade or business, its net operating losses
and credit carryforwards would be forfeited.
(9) Shareholders Deficit
Preferred Stock
The Company's restated certificate of incorporation authorizes 10,000,000
shares of preferred stock. As of December 31, 1998 the Company has designated
1,000,000 shares of convertible preferred stock as Series F and 1,000,000
shares of convertible redeemable preferred stock as Series G. As of December
31, 1998 there were no shares of preferred stock issued or outstanding.
The rights, preferences and restrictions of Series F and G preferred stock
are as follows:
. Each share is convertible into shares of common stock at conversion
price of $4 per share, subject to certain antidilution provisions.
. Holders of Series F and G preferred stock are entitled to receive
dividends of $3 per share when and if declared by the Board of
Directors. Dividends are cumulative. No dividends have been declared
through December 31, 1998.
. Series F and G preferred stock have a liquidation preference of $100 per
share.
. Holders of Series F preferred stock have the same voting rights as the
number of shares of common stock issuable upon conversion of such
shares. Series G preferred stock holders have no voting rights.
Common Stock
The Company had reserved 5,000,000 shares of common stock for issuance under
its 1988 Stock Option Plan (the 1988 Plan). The 1988 Plan provided for the
granting of incentive stock options to employees
F-12
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
(including officers) and nonqualified stock options to employees, nonemployee
directors and consultants, at prices not less than 100% and 85% of the fair
market value of the Company's common shares for incentive and nonqualified
stock options, respectively, at the grant date. Incentive and nonqualified
stock options may have terms of up to 10 years and vest over periods determined
by the Board of Directors. Options generally vest ratably over a 3- or 4-year
period unless as otherwise specified by the Board of Directors. The 1988 plan
had a term of 10 years and, as such, this plan was terminated in September
1998. No options are available for grant under this plan as of December 31,
1998 (see Note 12).
The following table summarizes option activity;
<TABLE>
<CAPTION>
Weighted-
Average
Options Available Options Exercise
for Grant Outstanding Price
----------------- ----------- ---------
<S> <C> <C> <C>
Balance as of December 31, 1995... 3,564,802 2,281,398 $0.09
Granted......................... (600,000) 600,000 0.09
---------- ---------- -----
Balance as of December 31, 1996... 2,964,802 2,881,398 0.09
Granted......................... (600,000) 600,000 0.09
Canceled........................ 150,000 (150,000) 0.09
---------- ---------- -----
Balance as of December 31, 1997... 2,514,802 3,331,398 0.09
Granted......................... (900,000) 900,000 0.21
Expired......................... 2,881,398 (2,881,398) 0.09
Canceled........................ (4,496,200) -- --
---------- ---------- -----
Balance as of December 31, 1998... -- 1,350,000 $0.17
========== ========== =====
</TABLE>
Options exercisable as of December 31, 1998, 1997 and 1996 were 1,350,000,
2,906,398 and 2,456,398, respectively, with weighted-average exercise prices of
$0.17, $0.09 and $0.09, respectively. The weighted-average grant date fair
value of options granted in 1998, 1997 and 1996 was $0.31, $0.14 and $0.14,
respectively.
Options outstanding as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average Number of
Outstanding Remaining Contractual Options
Exercise Price Options Life (in Years) Vested
-------------- ----------- --------------------- ---------
<S> <C> <C> <C>
$0.09.......................... 450,000 1.83 450,000
$0.21.......................... 900,000 4.50 900,000
--------- ---------
1,350,000 1,350,000
========= =========
</TABLE>
The Company has taken the position that the options granted to the
Shareholder in 1995 were not authorized under the 1988 Stock Option Plan, as
amended in 1995, because the number of options granted exceeded the allowed
maximum for a single grant in any one year. In addition, the Company maintains
that 2,456,398 options which were held by the Shareholder expired in 1998
because they were not exercised within the time allowed after the Shareholder
ceased to be an employee of the Company. The Shareholder is disputing these
assertions.
F-13
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
The Company uses the intrinsic value-based method under APB Opinion No. 25,
in accounting for its employee stock-based compensation plans and, accordingly,
no compensation cost has been recognized for stock options granted to employees
in the accompanying consolidated financial statements. Had compensation cost
for the Company's stock-based compensation plans been determined consistent
with the fair value approach set forth in SFAS No. 123, Accounting for Stock-
Based Compensation, the Company's net losses for the years ended December 31,
1998, 1997 and 1996, would have been:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net loss--as reported............... $(1,482,529) $(5,968,478) $(4,551,786)
Net loss--pro forma................. $(1,590,529) $(5,999,078) $(4,582,386)
Basic and diluted net loss per
share--as reported................. $ (0.05) $ (0.19) $ (0.15)
Basic and diluted net loss per
share--pro forma................... $ (0.05) $ (0.19) $ (0.15)
</TABLE>
The fair value of options granted during the years ended December 31, 1998,
1997 and 1996 is estimated on the date of grant using the Black-Scholes model
with the following assumptions: no dividend yield, risk-free interest of 6.0%,
volatility of 60% and expected lives of 5 years.
A shareholder holds warrants to purchase the Company's common stock
dependent upon meeting certain performance criteria in offering television
programming identifying the Company's interactive games. The warrants specify
that the shareholder can purchase approximately 25% of the Company's common
stock outstanding at the time of exercise in three installments of 5%, 10%, and
10% after satisfying each of three separate performance criteria. In 1994, the
Board of Directors amended the original warrant agreement to establish an
exercise price for the original warrants of either $8.50 per share or 75% of
the then current market price of common stock, and to grant to the shareholder
an additional warrant to purchase 200,000 shares of common stock at an exercise
price of $5.875. The 25% warrants contain certain antidilution provisions and
terms of four, five and six years commencing when the performance criteria for
the first warrant are satisfied. Accordingly, if and when it becomes probable
that this shareholder will satisfy any of the three separate performance
criteria, the Company will recognize expenses relating to the respective
differences between the warrant exercise prices of the shares and their then
fair market value. As of December 31, 1998, none of these warrants have been
exercised, and no common stock has been issued in relation to these warrants.
It is expected these warrants will be canceled as part of the Settlement
Agreement.
In 1993, the Company granted to a shareholder rights of first refusal to
purchase up to 25% of new securities issued for a 10-year period. The agreement
also provides that 637,731 shares will be purchased in installments and the
consideration to be paid will consist of services to be rendered to the Company
by the shareholder. The Company has issued 51,361 shares of common stock for
services rendered. In July 1994, 197,000 of the remaining shares were issued
for $6.52 cash per share. As of December 31, 1998, the Company, has outstanding
warrants for the purchase of 509,210, shares of common stock at exercise prices
ranging from $2.86 to $8.00 per share, subject to further antidilution
adjustment. These warrants expire at various dates between September 23, 1999
and March 30, 2000. Included are warrants for the purchase of 274,457 shares of
common stock at an exercise price of $8.00 per share that were granted to the
Settling Parties as part of various financing agreements entered into between
the Settling Parties and the Company. It is expected all of these warrants and
shareholder rights will be canceled as part of the Settlement Agreement (see
Note 2). The remaining warrants have exercise prices ranging from $2.86 to
$4.80 per share and expire on March 30, 2000.
F-14
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
(10) Litigation
(a) As indicated in Note 2, in August 1995 the Company commenced litigation
against certain shareholders and their affiliated entities (Settling
Parties) alleging that the defendants had attempted to acquire the
Company's intellectual property by obtaining liens thereon through
secured loans, reneging on commitments to make future loans and then
seeking to foreclose on the Company's intellectual property when the
Company could not sustain its business without additional funds. The
defendants counterclaimed to foreclose their liens. In July 1998, the
Settling Parties entered into the Settlement Agreement referred to in
Note 2, settling the litigation. Final resolution of the litigation is
conditioned on confirmation of the Plan filed by the Company in December
1998 with the U.S. Bankruptcy Court for the Northern District of
California.
(b) Prior to 1995, the Company was a party to various litigation matters
with NTN Communications, Inc. ("NTN") and related parties, primarily
involving the validity of the Company's basic patent, the scope of each
party's respective technologies and the Company's right to offer its
game "IN The Huddle." The Company obtained judgment against NTN
enforcing a prior settlement agreement with NTN and in 1998 received
payment of approximately $500,000 from NTN. The Company is continuing to
pursue litigation in Canada against NTN's affiliate, NTN Canada, Inc.,
for infringement of its patent.
(c) In 1995, two securities class action complaints were filed against the
Company and certain of its former officers and directors for alleged
violation of Federal securities laws in connection with various public
statements made by the Company and certain of its officers and directors
during the period from January 19, 1994 to March 31, 1995. The
securities class action plaintiffs failed to file a proof of claim in
the Company's bankruptcy proceedings by January 19, 1999. Since the
Company had scheduled these alleged claims as disputed, contingent and
unliquidated, the Company expects these claims will be disallowed under
applicable bankruptcy law and rules.
Although this action is still pending, the Company believes a settlement
of the suit will be negotiated with the defendants' obligations being
covered by the Company's directors and officers' insurance policy. Any
settlement is conditional upon court approval. The Company's insurance
carrier has agreed to advance defense costs, including the $500,000
deductible under the policy in return for the Company's promise to repay
the $500,000 deductible amount out of the proceeds payable to the
Company under the Settlement Agreement referred to in Note 2. This
amount is included within accounts payable as of December 31, 1997 and
were reclassified to liabilities subject to compromise in 1998.
(11) Commitments and Licenses
In September 1994, the Company entered into an agreement with a major
shareholder that provides that (1) the Company will permit the shareholder or
its affiliates to distribute the Company's control units in territories where
the shareholder or its affiliates own or operate cable systems or other wire-
line telecommunications services, (2) if requested by the shareholder or its
affiliates, the Company will grant the shareholder and its affiliates such
rights as may be necessary to carry the Company's interactive programming
signals and offer the Company's services over cable systems owned or operated
by the shareholder or its affiliates, and (3) if the shareholder or its
affiliates develop a plan that requires the use of the Company's proprietary
technology to transmit the Company's interactive programming or services over
cable systems owned or operated by the shareholder or its affiliates and the
Company is unable, due to capacity constraints, to
F-15
<PAGE>
INTERACTIVE NETWORK, INC.
(DEBTOR-IN-POSSESSION)
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
adequately provide such programming or service, the Company shall license its
technology to the shareholder or its affiliates. The terms of any such
arrangements shall be no less favorable to the shareholder and its affiliates
than the terms offered to similarly situated third parties.
The Company expects all of the above commitments will be terminated upon
consummation of the Settlement Agreement discussed in Note 2.
(12) Subsequent Events
The Company's Board of Directors adopted the 1999 Stock Plan (the "1999
Plan") on February 26, 1999 subject to approval by the Company's shareholders.
The 1999 Plan provides for the grant of incentive and nonstatutory stock
options to employees, nonemployee directors and consultants. A total of
3,650,000 shares of common stock have been reserved for issuance under the 1999
Plan and the number of shares reserved under the 1999 Plan is not subject to
increase.
F-16
