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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 0-19579
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INTERACTIVE NETWORK, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3025019
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(State or other jurisdiction of (I.R.S. Employer
incorporation and organization) Identification No.)
1161 OLD COUNTY ROAD, BELMONT CALIFORNIA 94002
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(Address of principal executive offices, including zip code)
(650) 508-8793
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequently to the distribution of securities under a plan
confirmed by a Court. Yes X No __
The aggregate market value of the voting stock held by non-affiliates
(non- officers, directors and 10% shareholders and excluding the shares held by
the Voting Trust (see Item 12)) of the Registrant, based on the closing price of
the common stock on March 1, 2000, as reported on the OTC Bulletin Board for the
last trading day prior to that date, was approximately $175,744,235. Shares of
common stock held by each executive officer and director and holder of 5% or
more of the outstanding common stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 1, 2000 the Registrant had outstanding 38,855,030 shares of
Common Stock.
Documents Incorporated By Reference
None
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INDEX
INTERACTIVE NETWORK, INC.
Page No.
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PART I
Item 1. BUSINESS........................................................4
Item 2. PROPERTIES......................................................7
Item 3. LEGAL PROCEEDINGS...............................................8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............8
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................9
Item 6. SELECTED FINANCIAL DATA.........................................10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................10
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................14
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................29
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............30
Item 11. EXECUTIVE COMPENSATION..........................................31
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................................36
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................37
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.....................................................37
SIGNATURES......................................................41
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CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K INCLUDES FORWARD-LOOKING STATEMENTS
ABOUT FUTURE FINANCIAL RESULTS, FUTURE BUSINESS CHANGES AND OTHER EVENTS THAT
HAVE NOT YET OCCURRED. FOR EXAMPLE, STATEMENTS LIKE WE "EXPECT," WE "BELIEVE,"
WE "INTEND" OR WE "ANTICIPATE" ARE FORWARD-LOOKING STATEMENTS. INVESTORS SHOULD
BE AWARE THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM OUR EXPECTATIONS BECAUSE
OF RISKS AND UNCERTAINTIES ABOUT THE FUTURE. IN ADDITION, WE WILL NOT
NECESSARILY UPDATE THE INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K IF ANY
FORWARD-LOOKING STATEMENT LATER TURNS OUT TO BE INACCURATE. DETAILS ABOUT RISKS
AFFECTING VARIOUS ASPECTS OF OUR BUSINESS ARE INCLUDED THROUGHOUT THIS ANNUAL
REPORT ON FORM 10-K, INCLUDING THOSE DESCRIBED BELOW IN "FACTORS AFFECTING
FUTURE OPERATING RESULTS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
THE TERMS "WE," "OUR" AND "US" AS USED IN THIS ANNUAL REPORT ON FORM
10-K REFER TO "INTERACTIVE NETWORK, INC." IN ADDITION, THIS ANNUAL REPORT ON
FORM 10-K INCLUDES OUR TRADEMARKS AND REGISTERED TRADEMARKS. PRODUCTS OR SERVICE
NAMES OF OTHER COMPANIES MENTIONED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE
TRADEMARKS OR REGISTERED TRADEMARKS OF THEIR RESPECTIVE OWNERS.
PART I
ITEM 1. BUSINESS.
TWO WAY TV JOINT VENTURE
On January 31, 2000, we consummated the formation of a joint venture
company, TWIN Entertainment Inc. ("TWIN Entertainment"), to be co-managed by us
and Two Way TV Limited ("Two Way TV") under the terms of a Joint Venture and
Stock Purchase Agreement dated as of December 6, 1999. A Form 8-K Report
regarding this matter was filed with the Commission on February 11, 2000 and is
incorporated herein by reference. We currently expect that TWIN Entertainment
will develop, market and supply digital (as well as analog) interactive and
related services, products and technology in the United States and Canada.
Pursuant to the Joint Venture and Stock Purchase Agreement, we and Two Way TV
each purchased 2,500,000 shares of TWIN Entertainment's common stock for
$500,000 and licensed it the non-exclusive use of our patents and other
intellectual property for the United States and Canada. Two Way TV also licensed
to TWIN Entertainment certain technology on a non-exclusive basis. Additionally,
as part of the agreements with Two Way TV to create TWIN Entertainment, we
entered into a separate worldwide exclusive license agreement that licenses our
intellectual property in countries other than the United States and Canada to
Two Way TV under a Termination and License Agreement.
We hope that TWIN Entertainment, which will initially be jointly
managed by us and Two Way TV, will use our and Two Way TV's technology to become
an active participant in the interactive television market. As part of our
agreements with Two Way TV, we have agreed to seek shareholder approval to make
our license to TWIN Entertainment exclusive, at which time Two Way TV's license
to TWIN Entertainment will also become exclusive. We intend to solicit this
approval at our annual meeting.
GENERAL
Our company was originally founded to provide interactive television
services, which we began providing in 1991. We incurred significant expenses in
developing, testing and marketing our services, and were forced to curtail our
operations by August, 1995, due to lack of ongoing financing. While in
operation, we acquired key strategic investors such as TCI Cable (now a part of
AT&T), NBC, Gannet, Motorola, Sprint, and AC Nielson.
Today, we own certain intellectual property assets related to the
interactive television market and other interactive technology. Our prior
strategic investors remain as shareholders and current management is confident
in its strategy to deliver shareholder value by marketing our intellectual
property through joint ventures and licensing and by working to enhance and
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develop our patent portfolio. We plan to concentrate on exploiting our patent
portfolio in a cost effective manner through licenses, joint ventures, strategic
alliances, or other methods that will not involve large overhead demands, such
as our recently announced joint venture with Two Way TV for the US and Canadian
markets and our recently announced license to Two Way TV of our other
intellectual property worldwide. To provide the technical and management
expertise to assist in the fulfillment of our goals, we established an Advisory
Panel of consultants and re-employed our former Chief Scientist, Dr. Robert
Brown, as our Chief Technical Officer.
We also continue to expend significant resources in finishing our
bankruptcy reorganization, as well as in the enforcement of our intellectual
property rights. We believe we are positioned to participate in the resurgence
of interactive television technology. Management believes that our intellectual
property assets put our company in a position to be a part of the interactive
content and interactive services businesses currently being created. Management
also believes that there is and will continue to be a large market in
interactive applications in the fields of entertainment, advertising, games, and
gambling through Internet and television delivery.
During the last three fiscal years, we have had no revenue from
operations.
INTERACTIVE NETWORK'S INTELLECTUAL PROPERTY
Interactive Network presently holds six United States patents. Our
primary patent expires in 2004, and the remaining patents expire in 2009. We
also hold two Canadian patents which are similar to two of our U.S. patents. In
January 2000 we consummated a transaction with Two Way TV whereby we formed TWIN
Entertainment and licensed to it our US and Canadian patents on a non-exclusive
basis. As discussed above, we have agreed with Two Way TV to recommend to and to
seek the approval of our shareholders to convert the non-exclusive license of
our technology to TWIN Entertainment to an exclusive license. If shareholder
approval is attained, absent termination of our agreement with TWIN
Entertainment or other specific circumstances, TWIN Entertainment will have the
exclusive right to use and enforce our patent rights in the US and Canada.
There can be no assurance that our 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 us; or that others will
not establish patent rights that would substantially interfere with our
business. We attempt to protect our trade secrets and other proprietary
information through agreements with our employees and consultants, and through
other security measures. Although we intend to protect our rights vigorously, we
cannot assure that these measures will be successful. The internet and
interactive television industries are subject to frequent litigation regarding
patent and other intellectual property rights. We are currently involved in
litigation with NTN Communications regarding its alleged infringement of our
patents in Canada. We cannot assure that third parties will not assert claims
against us with respect to existing or future intellectual property or that we
will not need to assert claims against third parties to protect our intellectual
property.
Your Board of Directors does not intend to return to the plan of
business followed by Interactive prior to its ceasing operation in mid-1995 that
required us to constantly seek new infusions of capital. Rather, we intend to
take steps to protect, enhance and exploit our patents and other technology in a
manner consistent with our existing resources. We do not plan on releasing our
own products or marketing any items directly. With Dr. Robert Brown and our
Advisory Panel, we hope to enhance, protect and further exploit our patent
portfolio, our other intellectual property and our market position. We are also
considering the filing of future patent applications on improvements to our
basic technology.
COMPETITION
We operate in extremely competitive markets and we expect that
competition will increase. In each of our business activities, we face current
and potential competition from competitors that have significantly greater
financial, technical, manufacturing, marketing, sales and distribution resources
and management expertise than we have. Because we do not currently sell our own
products or services, but instead license our technology to third parties, we do
not face any direct competition in the traditional sense. Our primary
competition comes from companies providing alternatives to the services enabled
by our technology, and we currently face competition from companies providing
enhanced television such as Gemstar and ACTV.
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In addition, our future prospects will be dependent upon the successful
development and introduction of new products by TWIN Entertainment, and highly
dependent if our license to TWIN Entertainment becomes exclusive. Our prospects
may also depend on our finding new joint venture or licensing opportunities if
our license to TWIN Entertainment remains nonexclusive. We do not solely control
TWIN Entertainment and cannot assure that it will be able to successfully
develop or market any such new products or that we will find any other such
partners, if applicable.
Factors Affecting Future Operating Results
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IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS, OUR
ABILITY TO EFFECTIVELY MANAGE GROWTH AND FUND OUR OPERATIONS WILL BE
HARMED.
We expect that our existing capital resources are not sufficient to
meet our cash requirements for the next 12 months and that we will need to raise
additional financing during that period. As of December 31, 1999, our available
working capital was approximately $1.1 million, and our budget for 2000 accounts
for cash needs of approximately $3.6 million, including repayment of
approximately $917,000 of debt due in 2000, our increased funding of $390,000 to
our bankruptcy trust for disputed claims and payments made to and reserved for
TWIN Entertainment operations of $1 million. We currently expect revenues in
2000 to be insufficient to meet these needs and are in negotiations to secure
other sources of outside financing. Such funds may not be available on
acceptable terms, if at all. If we cannot raise or borrow the necessary
additional funds on acceptable terms, we may not be able to operate our business
as we currently anticipate or develop or enhance our intellectual property, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.
If additional capital is raised through the issuance of equity
securities, the percentage ownership of our existing stockholders will decline,
stockholders may experience dilution in net book value per share, or these
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock. Any debt financing, if available, may involve
covenants limiting, or restricting our operations or future opportunities.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our quarterly results of operations may vary significantly in the
future for a variety of reasons, including the following:
o availability of adequate financing;
o timing of recognition of license fees;
o timing of dividends, distributions or stock sales, if any, by
TWIN Entertainment;
o timing of new product and technology introductions by us or
TWIN Entertainment, our licensees or competitors;
o fluctuations in the level of sales by OEMs and other vendors
of products incorporating TWIN Entertainment's or our
technology; and
o general economic conditions.
Each of the above factors is difficult to forecast and thus could
seriously harm our business, financial condition and results of operations.
Through 2000, we expect that revenues will be derived primarily from
dividends or distributions received from TWIN Entertainment and royalties from
our global license to Two Way TV. The uncertain timing of these royalties may
cause quarterly fluctuations in our operating results. In addition, our per unit
royalties from licenses are totally dependent upon the success of Two Way TV
products and services in the marketplace.
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OUR STOCK PRICE MAY BE VOLATILE.
Announcements of developments related to our business, announcements by
competitors, quarterly fluctuations in our financial results and general
conditions in the highly dynamic industry in which we compete or the national
economies in which we do business, and other factors, could cause the price of
our common stock to fluctuate, perhaps substantially. In addition, in recent
years the stock market has experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. These
factors and fluctuations could have a material adverse effect on the market
price of our common stock.
WE HAVE RECOGNIZED VERY LIMITED REVENUE, HAVE INCURRED SIGNIFICANT NET
LOSSES AND MAY NEVER ACHIEVE PROFITABILITY.
Since curtailing operations in 1995, we have incurred losses and have
had negative cash flow. As of December 31, 1999, we had an accumulated deficit
of $141.3 million. We expect to incur operating expenses over the next several
years in connection with the continued development and expansion of our
business. As a result, we expect to continue to incur losses for the foreseeable
future. The size of these net losses depends in part on the growth in our
business and on our expenses. Consequently, we may never achieve profitability,
and even if we do, we may not sustain or increase profitability on a quarterly
or annual basis in the future.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT
IN THE LOSS OF SIGNIFICANT RIGHTS.
From time to time, we or TWIN Entertainment may be subject to
intellectual property litigation which could:
o be time-consuming and expensive;
o divert management's attention and resources away from our
business;
o cause delays in product delivery and new service introduction;
o cause the cancellation of new products or services; or
o require us to pay significant royalties or licensing fees.
The enhanced television industry is highly litigious. A number of
companies in the enhanced television industry earn substantial profits from
technology licensing, and the introduction of new technologies such as ours is
likely to provoke lawsuits from such companies. An unsuccessful claim of
infringement by us could materially impair our ability to generate revenues.
EMPLOYEES
We are currently operating with a staff of three full-time employees
and are assisted by the members of our Advisory Panel.
ITEM 2. PROPERTIES
Our operations are located in an approximately 1,104 square foot
subleased facility in Belmont, California, leased on a month-to-month basis.
This facility houses our operations and administrative personnel. We are
currently looking for a new location to house our operations and administrative
personnel.
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ITEM 3. LEGAL PROCEEDINGS
In August of 1995, we commenced litigation against TCI, TDC, TCI
Programming Holding, III, TCI Cablevision of California, Inc., and Gary S.
Howard (the "TCI Parties"). In early 1998, settlement discussions between us and
the TCI Parties, together with NBC, Sprint and Motorola (the "Settling Parties")
grew serious. Ultimately, in July, 1998, our board of directors voted to approve
a Settlement Agreement between our company and the Settling Parties, dated as of
July 10, 1998 (the "Settlement Agreement"), which is discussed below. The
consummation of the Settlement Agreement was conditioned on a final
non-appealable order confirming a plan of reorganization to be filed by us under
Chapter 11 of the Bankruptcy Code. We filed a plan of reorganization under
Chapter 11 on December 22, 1998, and the plan was confirmed on April 12, 1999.
The confirmation was previously reported by us on Form 8-K, filed with the SEC
on April 15, 1999 and is incorporated herein by reference
On April 23, 1999, we consummated the Settlement Agreement with the
Settling Parties, by which:
o we dismissed without prejudice our lawsuits against each
other;
o approximately $39 million in principal and accrued interest of
our outstanding indebtedness held by the Settling Parties was
converted at $5.00 per share into 7,814,589 shares of our
common stock;
o $2.5 million was paid by the TCI Parties to Cotchett, Pitre &
Simon, counsel in that litigation, upon approval of our
bankruptcy reorganization;
o liens on our patent portfolio and other assets were released;
and
o the Settling Parties paid $10 million plus accrued interest to
us, a substantial part of which was allocated to pay creditors
and to form a reserve account for the payment of creditors
whose claims we are disputing.
In addition, in connection with the Settlement Agreement, the Company
and the Settling Parties entered into a Voting Agreement dated April 23, 1999
(the "Voting Agreement"), which provides that, except for any matter regarding
David Lockton (including his election to the Board of Directors) and certain
other major events with respect to the Company, the Settling Parties will vote
the shares they received in the Settlement Agreement as directed by a committee
of three independent persons (the "Committee"), selected as set forth in the
Voting Agreement. The Committee currently consists of John Bohrer, William H.
Green and Bruce Bauer.
The Settlement Agreement was previously filed as an exhibit to a Form
8-K filed with SEC on April 29, 1999 and is incorporated herein by reference. As
of March 1, 2000, we have set aside $6.4 million in a reserve account to pay
creditors whose claims we are disputing in the bankruptcy proceedings as part of
our reorganization. Material claims of over $6 million still exist. In addition
to claims reported elsewhere herein, the claim from National Datacast, which was
$3.6 million as of December 31, 1999, rose to $6.3 million in March, 2000. We
dispute their claim, except for approximately $585,000, which we have previously
paid. Under the terms of the confirmed plan of reorganization, any settled
claims will be paid from this trust and, in the event that the trust cannot
cover a claim, additional payments will be made out of any future positive cash
flow, if any. We continue to dispute certain claims relating to our creditors in
the bankruptcy proceedings and we feel that we have a basis to dispute or settle
all of the outstanding claims.
We originally filed an action in 1992, which we amended in December
1998, in the Federal Court of Canada against NTN Communications, Inc., NTN
Sports, Inc., and NTN Canada, Inc., for infringement of our Canadian Patent No.
1,274,903 and for damages and an injunction. We continue to pursue our earlier
claims for patent infringement against NTN Communications, Inc. in Canada and
intend to litigate these claims to full resolution.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table shows the range of high and low bid prices at which
transactions in our Common Stock occurred as reported by Dow Jones Interactive
Quotes & Market Data for the periods indicated. On March 1, 2000, the closing
price of our common stock was $6.75. Our common stock is currently being traded
on the OTC Bulletin Board and is listed under the symbol "INNN."
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HIGH LOW
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FISCAL YEAR ENDED DECEMBER 31, 1999
4th Quarter.......................................... $4.250 $0.531
3rd Quarter.......................................... $1.380 $0.570
2nd Quarter.......................................... $1.125 $0.450
1st Quarter.......................................... $1.030 $0.270
FISCAL YEAR ENDED DECEMBER 31, 1998
4th Quarter.......................................... $0.4375 $0.094
3rd Quarter.......................................... $0.359 $0.109
2nd Quarter.......................................... $0.281 $0.156
1st Quarter.......................................... $0.391 $0.156
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
On April 23, 1999, we consummated a settlement agreement with our
secured senior noteholders, pursuant to which $39,072,949 million in principal
and accrued interest of our outstanding indebtedness was converted at $5.00 per
share into 7,814,589 shares of our common stock. Liens on our patent portfolio
and other assets were released, and the noteholders paid $10 million plus
accrued interest to us, a substantial part of which was allocated to pay
creditors and to form a reserve account for the payment of creditors whose
claims we are disputing. The issuance was made pursuant to Section 4(2) of the
Securities Act.
On June 11, 1999, we issued Mr. Donald Graham 150,000 shares of our
common stock upon his exercise of his stock option for those shares. We received
$13,500 as the exercise price for this purchase and the issuance was made
pursuant to Section 4(2) of the Securities Act.
On August 3, 1999, we issued Mr. John Bohrer 50,000 shares of our
common stock upon his exercise of his stock option for those shares, we received
$4,500 as the exercise price for this purchase and the issuance was made
pursuant to Section 4(2) of the Securities Act.
HOLDERS OF RECORD
As of March 1, 2000, there were 666 shareholders of record of our
common stock.
DIVIDENDS
We have not declared nor paid any dividends since 1997. Future
dividends, if any, will depend on our profitability and anticipated capital
requirements. We have no present intention of paying dividends for the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data presented
below are derived from our consolidated financial statements. The Consolidated
financial statements for the fiscal year ended December 31, 1999 have been
audited by Marc Lumer & Company, and for the fiscal years ended 1998, 1997 and
1996 have been audited by KPMG LLP. The selected historical consolidated
financial data as of December 31, 1995 has been derived from unaudited
consolidated financial statements. 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."
<TABLE>
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YEARS ENDED DECEMBER 31
-----------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
(AUDITED) (AUDITED) (AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total Revenue...................................... $0 $0 $0 $0 $339
Net income (loss).................................. $8,147 $(1,488) $(5,938) $(4,552) $(20,899)
Net income (loss) per share (basic)................ $0.23 $(0.05) $(0.19) $(0.15) $(0.68)
Shares used in computing net income (loss) per share
(basic)............................................ 35,516 30,840 30,840 30,840 30,840
Total Assets....................................... $7,658 $379 $84 $174 $441
Long-term obligations.............................. $917 $0 $0 $33,817 $30,020
Liabilities subject to Compromise.................. $5,016 $46,296 $0 $0 $0
Cash dividends declared per common share........... $0 $0 $0 $0 $0
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In the Management Discussion and Analysis section of this Annual Report
on Form 10-K we are providing detailed information about our operating results
and changes in financial position over the past three fiscal years. This section
should be read in conjunction with the Consolidated Financial Statements and
related Notes.
Our company was originally founded to provide interactive television
services, which we began providing in 1991. We incurred significant expenses in
developing, testing and marketing our services, and were forced to curtail our
operations by August, 1995, due to lack of ongoing financing. While in
operation, we acquired key strategic investors such as TCI Cable (now a part of
AT&T ), NBC, Gannet, Motorola, Sprint, and AC Nielson.
Today, we own certain intellectual property assets related to the
interactive television market and other interactive technology. Our prior
strategic investors remain as our stockholders and our current management is
confident in its strategy to deliver stockholder value by marketing our
intellectual property and by working to enhance and develop our patent
portfolio. We plan to concentrate on exploiting our patent portfolio in a cost
effective way through licenses, joint ventures, strategic alliances, or other
methods that will not involve large overhead demands.
To provide the technical and management expertise to assist in the
fulfillment of our goals, we established an advisory panel of consultants and
re-employed our former Chief Scientist, Dr. Robert Brown. Further, our
management is planning to hire additional personnel to meet our anticipated
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future needs. Our bankruptcy reorganization plan has been approved by the
Bankruptcy Court and we continue to expend significant resources in litigating
disputed claims, as discussed more fully below. In addition, we expend
significant resources in the enforcement of our intellectual property rights.
Our management believes that our intellectual property assets put our company in
a position to be a part of the interactive content and interactive services
businesses currently being created.
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
our common stock, commenced a securities class action lawsuit against us and
certain other defendants (including David Lockton), alleging that we, aided by
the other defendants, made materially false statements during the period January
19, 1994, through March 31, 1995, concerning our plans to expand nationally when
we knew that we did not have the resources or market acceptance of our product
to support national expansion. This claim was settled on September 1, 1999, with
our out-of-pocket expenses limited to the $500,000 deductible under our
liability insurance.
2. CLAIMS IN CHAPTER 11 PROCEEDINGS WHICH WE ARE CONTESTING.
(a) DAVID LOCKTON. David Lockton has filed a claim for $3,778,000
(exclusive of postpetition interest) in our 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). We filed an
objection to Mr. Lockton's claim on June 21, 1999. In August of 1999,
Mr. Lockton brought an action in the Bankruptcy Court for recission of
his 1988 sale to the company of our key patent. We moved to have Mr.
Lockton held in contempt for violating the discharge injunction
provisions of its confirmed plan. At the hearing on the motion, the
Bankruptcy Court deferred a ruling to see whether Mr. Lockton would
dismiss the action without prejudice on his own. Mr. Lockton did this
shortly thereafter. In October, 1999, Mr. Lockton purported to amend
his claim to add a claim for $2.272 million for our alleged wrongful
denial of his attempt to exercise certain stock options Mr. Lockton
claims to hold. In response to a motion we made, the Bankruptcy Court
ruled that to the extent that the amendment asserted a pre-petition
claim, it was time-barred. Subsequently, in January, 2000, Mr. Lockton
filed a complaint in the bankruptcy case seeking specific performance
of his alleged stock option rights and damages of $17 million as
remedies for alleged wrongful denial of option rights. In March of
2000, the Bankruptcy Court ruled that Mr. Lockton could not assert any
damage claims in connection with his alleged stock option rights and
that he was limited to pursuing his alleged right to specific
performance. Mr. Lockton has pledged a portion of his total claim to
secure a $200,000 promissory note to Myron E. Etienne, Jr. We have
asserted various defenses to Mr. Lockton's claims under his Employment
Agreement, his Deferred Compensation and Non-Compensation Agreement and
purported option grants. Trial for these matters is set for May 8,
2000.
(b) OTHER MATERIAL CLAIMS. We filed other claim objections on June 21,
1999. Among the larger claims to which we objected was approximately $3
million of the approximately $3.6 million claim of 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. National Datacast amended its alleged claim to over $6.3
million in March, 2000. Trial on the National Datacast claim was set
for April of 2000, but the trial date has been vacated, with a new date
to be set. We scheduled as disputed secured claims of approximately
$1.7 million for the Equitable Life Assurance Society. Equitable did
not file a proof of claim, but it contends that it received inadequate
notice of the commencement of the bankruptcy case and bar date.
Negotiations with Equitable have produced a settlement agreement
(subject to Bankruptcy Court approval) under which we will pay
Equitable one-half of $840,000 upon approval of the settlement by the
Bankruptcy Court and the other half in equally monthly installments
over the next year without interest.
11
<PAGE>
(c) OTHER CLAIMS AND SETTLED CLAIMS. Under the terms of the
reorganization plan, the scheduled claim of $500,000 for Singatronics
is disallowed because it was scheduled as disputed and Singatronics did
not file a proof of claim. After discussions, the Internal Revenue
Service withdrew its claim of $494,000 arising from tax year 1995, and
the Santa Clara County tax collector reduced its claims concerning tax
years 1995 and 1996 from approximately $221,000 to approximately
$8,000. In December of 1999, the Bankruptcy Court tried our objection
to the claim of Venture Marketing, Inc. The result was a reduction in
the amount of the claim before post-petition interest (as provided in
the confirmed plan) from approximately $43,000 to approximately
$33,000. In February of 2000, the Company settled its objection to the
$549,320 claim of Window to the World Communications, Inc., for
$315,000 as payment in full. The Bankruptcy Court approved that
settlement, and we have made the payment. We will also be seeking
disallowance of certain other claims (aggregating approximately
$50,000) because the claimants failed to respond to the objections that
we filed to their claims. In april of 2000, we settled a claim asserted
by Next Factors, Inc., as assignee to Draft Worldwide (fka Kobs & Draft
Advertising). Next asserted a total claim of approximately $350,000.
Upon confirmation, we paid Next approximately $63,000 that we
acknowledged that we owed. Subject to Bankruptcy Court approval, we
have settled the balance of the claim for payment of an additional
$100,000 upon Bankruptcy Court approval. Certain other claim objections
or objections to claims asserted after the bar date remain at issue,
with settlement discussion underway in most instances.
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. As discussed in
our Annual Report and Proxy Statement for our special meeting on March 31, 1999,
we assumed certain obligations under existing contracts, including a 1992 Stock
Purchase Agreement with Gannett Co., Inc. and a 1992 know-how license agreement
with Two Way TV (the latter having been terminated under our Termination and
License Agreement with Two Way TV in January, 2000). We have treated obligations
we had to TCI, NBC, Sprint and Motorola as terminated under the Settlement
Agreement. In addition, we did not assume several contractual arrangements that
had 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 our plan of reorganization, we will
review the matter and take such steps as we consider appropriate to recognize or
disavow the contract in a manner that will be in our best interest.
4. TWO WAY TV JOINT VENTURE. As previously discussed above, the Company
formed a joint venture with Two Way TV and purchased one half of the capital
stock of TWIN Entertainment, the joint venture company. A Form 8-K Report
regarding this matter was filed with the Commission on February 11, 2000, and is
incorporated herein by reference. As a significant shareholder of TWIN
Entertainment, the Company's revenues are affected by TWIN Entertainment's
revenues. The Company has no obligation to provide further funds to TWIN
Entertainment. We have licensed technology to TWIN Entertainment on a
non-exclusive basis and have agreed to recommend to and to seek approval from
the shareholders to convert the agreement into an exclusive arrangement. In
addition, Two Way TV has a world-wide, exclusive license (excluding the United
States and Canada) of certain of our intellectual property in exchange for
royalty payments to be paid by it, more fully described in the Form 8-K
incorporated herein by reference.
5. 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 we have reduced
our operations requiring the use of computers to minimal support functions in
the last few years, this issue did not and is not expected to impact upon our
internal operations. As a seller of services to customers, we did not sell any
software and did not provide any warranty for Year 2000 problems under our
previous business model. Our patent portfolio was not and will not be
significantly affected by the Year 2000.
LIQUIDITY AND CAPITAL RESOURCES
We consummated a settlement agreement with our secured senior
noteholders and have paid all undisputed claims under our consummated plan of
reorganization. $39,072,949 in principal and accrued interest of our outstanding
indebtedness was converted at $5.00 per share into 7,814,589 shares of our
common stock. Liens on our patent portfolio and other assets were released, and
the noteholders paid $10 million plus accrued interest to us. A substantial
portion of the proceeds received from the noteholders was allocated to pay
12
<PAGE>
creditors and a large portion of those funds were set aside in a reserve account
for the payment of creditors whose claims we are continuing to dispute. As of
March 1, 2000, the balance of these reserved funds was $6.4 million. Material
claims of over $6 million still exist. The amount of funds available to us after
resolution of contested claims with creditors will depend on the extent to which
we are successful in substantially reducing, defeating or deferring payment of
the claims we are contesting. In the event we are not successful in defeating,
substantially reducing or deferring payment of these claims by creditors, our
working capital requirements would need to be satisfied in part by external
sources of financing to the extent revenues from exploitation of our patent
portfolio are not sufficient.
In addition, our available working capital as of December 31, 1999 was
approximately $1.1 million and our budget for 2000 contains expenses of
approximately $3.6 million, including repayment of approximately $917,000 of
debt due in 2000, our increased funding of $390,000 to our bankruptcy trust for
disputed claims, and payments made to and reserved for TWIN Entertainment
operations of $1 million. We currently expect revenues in 2000 to be
insufficient to meet budgeted needs for cash and are in negotiations to secure
outside sources of financing. In the event we do not secure adequate financing,
our ability to meet our working capital needs could be impaired.
Our current business plan continues to be one of exploiting our patent
portfolio through licenses, joint ventures or other methods that will not impose
large overhead or capital demands on us. We currently expect our need for
working capital for year 2000 to consist largely of general and administrative
expenses, repayment of debt due in 2000, patent development and marketing
expenses of approximately $2.6 million expected to be incurred in generating
revenues from our intellectual property assets, $1 million paid to and set aside
for TWIN Entertainment, and professional fees of approximately $120,000. We
anticipate a total operating budget of approximately $3.6 million for year 2000.
We will continue our litigation against NTN Communications, Inc. in
Canada for that company's alleged infringement of our patents. We currently
expect to incur aggregate additional expenses in excess of $35,000 in connection
with the pursuit of this claim.
FINANCING ACTIVITIES. In the fiscal year ended December 31,1999, we
received $18,000 upon the exercise of employee stock options and $2,106 from a
director pursuant to Section 16(b) of the Exchange Act. We have used $500,000 to
purchase the common stock of TWIN Entertainment and provide it with initial
capital and, in agreement with Two Way TV and have set aside an additional
$500,000 in our budget for 2000 for TWIN Entertainment's capital needs.
We recognize that we will require additional financing to meet our
budgeted needs for 2000. We have entered into agreements with two of our
advisory board members whereby they have agreed to provide up to $500,000 in the
aggregate in exchange for shares of our common stock upon our request. We are
also seeking other additional sources of financing.
RESULTS OF OPERATIONS
REVENUES. We had no revenues from operations for the years ended
December 31, 1999, 1998 or 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company incurred general and
administrative expenses of $1.3 million for the year ended December 31, 1999,
which consisted primarily of $264,327 related to professional fees for
accounting and audit services, expenses of $137,849 related to proxy
solicitation, SEC compliance, shareholder relations and our annual meeting in
1999. Other operating expenses included legal expense of $421,015 related to
other matters, including litigation related to bankruptcy claims which we
continue to dispute, and $238,117 of payroll and related expenses. The increase
of $192,000 from the $1.1 million for the year ended December 31, 1998 was
primarily due to increased legal fees. General and administrative expenses were
$179,000 less in the year ended December 31, 1998 than general and
administrative expenses for the year ended December 31, 1997, which was $1.3
million. This decrease was primarily due to decreased legal fees in 1998.
13
<PAGE>
OTHER INCOME AND EXPENSE
INTEREST INCOME. Our interest income for the year ended December 31,
1999 was $270,000, consisting primarily of interest earned on proceeds from the
settlement with the Settling Parties. Interest income for the year ended
December 31, 1998 was $6,618, and for the year ended December 31, 1997 was
$3,377. The increase of $264,000 between 1998 and 1999 was primarily due to the
interest received on the proceeds from the settlement.
INTEREST EXPENSE. Our interest expense for the year ended December 31,
1999, 1998 and 1997 was $458,000, $618,000 and $4.6 million, respectively. The
amounts for 1998 and 1997 represent interest accrued on the 12% Senior Secured
Convertible Promissory Notes issued to the Settling Parties, which were
converted as part of the Settlement Agreement. This interest stopped as of the
consummation of the Settlement Agreement. Interest expense for 1999 was related
to interest accrued to unsecured creditors as part of our bankruptcy
reorganization.
OTHER INCOME. We recorded other income of $141,000 in 1999, which
consisted of checks written to other unsecured creditors in our bankruptcy which
were returned for various reasons. After performing the actions and waiting for
the amount of time specified by our counsel we have redeposited these checks and
accounted for these funds as other income.
LITIGATION SETTLEMENT. We received $10.4 million from the Settling
Parties upon the consummation of the Settlement Agreement during the year ended
December 31, 1999, and $502,000 in connection with the proceeds from other
unrelated litigation during the year ended December 31, 1998.
REORGANIZATION EXPENSES. We had reorganization expenses of $865,000
during the year ended December 31, 1999 and expenses of $252,000 during the year
ended December 31, 1998. These expenses were directly related to our Chapter 11
bankruptcy reorganization, entered into as a condition to the consummation of
the Settlement Agreement, the litigation and other expenses incurred in
contesting claims in our bankruptcy reorganization, which is still ongoing.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is our policy not to enter into derivative
financial instruments. We do not currently have any significant foreign currency
exposure since we do not transact business in foreign currencies. Due to this,
we did not have significant overall currency exposure at December 31, 1999.
FOREIGN CURRENCY RATE RISK. As almost all of our sales and expenses are
denominated in U.S. dollars, we have experienced only insignificant foreign
exchange gains and losses to date, and we do not expect to incur significant
gains and losses. We do not engage in foreign currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
PAGE
----
Independent Auditor's Report............................................. 15
Report of KPMG LLP....................................................... 16
Consolidated Balance Sheets.............................................. 17
Consolidated Statements of Operations.................................... 18
Consolidated Statements of Changes in Shareholders' Equity (Deficit)..... 19
Consolidated Statements of Cash Flows.................................... 20
Notes to Consolidated Financial Statements............................... 21
14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Interactive Network, Inc.:
I have audited the accompanying consolidated balance sheet of Interactive
Network, Inc. and subsidiary (the "Company") as of December 31, 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to report on
these consolidated financial statements based on the results of our audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my report.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1999, and the results of its operations and its cash flows of the
year ended December 31, 1999 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 a settlement agreement with certain parties in litigation
(the "Settlement Agreement") whereby the Company entered into 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 confirmed by the Bankruptcy Court on
April 23, 1999. The Company is currently operating under the confirmed plan of
reorganization 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) develop an appropriate business plan and strategic direction for
the Company's planned future operations, including conservation of available
capital and working capital as the Company seeks to further develop and exploit
its patent portfolio, (2) confirm the availability of net operating tax losses
after reorganization, and (3) 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/ Marc Lumer
--------------
Marc Lumer
San Francisco, California
April 7, 2000
15
<PAGE>
REPORT OF KPMG LLP
The Board of Directors and Shareholders
Interactive Network, Inc.:
We have audited the accompanying consolidated balance sheets of Interactive
Network, Inc. and subsidiary (the "Company") as of December 31, 1998, and the
related consolidated statements of operations, shareholders' deficit and cash
flows for each of the years in the two-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 report.
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, (3) confirm the availability of net operating tax losses
after reorganization, and (4) generate adequate sources of working capital and
other liquidity as necessary to meet future obligations. Management's plans in
regard to these matters are 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
KPMG LLP
Mountain View, California
March 15, 1999
16
<PAGE>
<TABLE>
INTERACTIVE NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<CAPTION>
1999 1998
----------------- ----------------
Assets
<S> <C> <C>
Current assets:
Restricted cash $ 6,365,758 $ -
Cash 1,210,399 300,601
Prepaid expenses and other current assets 81,796 78,256
----------------- ----------------
Total assets $ 7,657,953 $ 378,857
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 614,077 $ -
Accrued liabilities to officer 3,600 -
Other accrued liabilities - 214,821
----------------- ----------------
Total current liabilities 617,677 214,821
Liabilities subject to compromise 5,015,718 46,296,316
Deferred legal fees 916,867 -
Commitments and Contingencies - -
Shareholders' deficit:
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding as of
December 31, 1999 and 1998 - -
Common stock, no par value, 150,000,000 shares
authorized; 38,855,030 and 30,840,441 shares issued and
outstanding as of December 31, 1999 and 1998, respectively 142,374,810 103,281,755
Accumulated deficit (141,267,119) (149,414,035)
----------------- ----------------
Total Shareholders' Equity (deficit) 1,107,691 (46,132,280)
----------------- ----------------
$ 7,657,953 $ 378,857
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues $ - $ - $ -
--------------- --------------- ---------------
General and administrative expenses 1,317,182 1,124,943 1,304,391
--------------- --------------- ---------------
Loss from operations (1,317,182) (1,124,943) (1,304,391)
Other (income) and expense
Interest income (270,373) (6,618) (3,377)
Interest expense (contractual interest exceeds
recorded interest expense by $4,453,297 in 1998) 458,000 618,821 4,636,864
Other income (141,273) - -
Litigation settlement (10,375,380) (501,837) -
--------------- --------------- ---------------
Other (income) and expense, net (10,329,026) 110,366 4,633,487
--------------- --------------- ---------------
Income (loss) before reorganization expenses 9,011,844 (1,235,309) (5,937,878)
Reorganization expenses 864,928 252,220 -
--------------- --------------- ---------------
Net income (loss) $ 8,146,916 $ (1,487,529) $ (5,937,878)
=============== =============== ===============
Basic net income (loss) per share $ 0.23 $ (0.19) $ (0.15)
=============== =============== ===============
Fully diluted net income (loss) per share $ 0.22 $ (0.19) $ (0.15)
=============== =============== ===============
Shares used in basic per share calculation 35,515,617 30,840,441 30,840,441
=============== =============== ===============
Shares used in fully diluted per share calculation 37,574,827 30,840,441 30,840,441
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
<TABLE>
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<CAPTION>
Common Stock
--------------------------------
Accumulated Total Shareholders'
Shares Amount deficit Equity (Deficit)
-------------- ---------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
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)
Net Income 8,146,916 8,146,916
Exercise of Stock Options 200,000 20,106 --- 20,106
Conversion of Notes Payable
into Common Stock 7,814,589 39,072,949 --- 39,072,949
-------------- ---------------- ------------------- ------------------------
Balances as of December 31, 1999 38,855,030 $ 142,374,810 $ (141,267,119) $ 1,107,691
-------------- ---------------- ------------------- ------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
<TABLE>
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,146,916 $ (1,487,529) $ (5,937,878)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Reorganization expenses 864,928 252,220 -
Changes in operating assets and liabilities:
Prepaid expenses and other assets (3,540) (44,701) 52,775
Accounts payable 614,077 - 925,000
Accrued liabilities to officer 3,600 948,473 286,946
Accrued interest - 619,210 4,636,864
Accrued sales tax and other accrued liabilities - - (605)
--------------- --------------- ---------------
Net cash provided by (used in)
operating activities before reorganization items 9,625,981 287,673 (36,898)
Professional fees paid for services rendered in connection
with Chapter 11 proceedings 50,000 (37,399) -
Payments to unsecured creditors 2,370,531 - -
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 7,255,450 250,274 (36,898)
Cash flows provided by investing activities:
Proceeds from sale of property, plant and equipment - - 3,000
Cash flows provided by financing activities:
Exercise of stock options 20,106 - -
--------------- --------------- ---------------
Increase (decrease) in cash 7,275,556 250,274 (33,898)
Cash at beginning of year 300,601 50,327 84,225
--------------- --------------- ---------------
Cash at end of year $ 7,576,157 300,601 50,327
=============== =============== ===============
Supplemental disclosure of cash flow information:
Income taxes paid (Note 7) $ 800 - -
=============== =============== ===============
Interest paid $ 123,113 - -
=============== =============== ===============
Non-Cash Items:
Conversion of current liabilities to liabilities subject to
compromise $ - $ 46,296,316 -
=============== =============== ===============
Conversion of notes payable into common stock $ 39,072,949 - -
=============== =============== ===============
Reorganization expenses $ 752,046 $ 214,821 -
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
INTERACTIVE NETWORK, INC.
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(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 for the
years 1995-1998.
The Company has been in compliance with its Securities and Exchange
Commission ("SEC") filings since the filing of its Form 10-K for the
fiscal year ended December 31, 1998. The last quarterly financial report
filed by the Company with the SEC was its Form 10-Q for the quarter
ended September 30, 1999.
(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 9 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 filed a petition under Chapter 11 of the Bankruptcy
Code in the U.S. Court for the Northern District of California 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 was consummated and the Company was
paid $10 million (plus accrued interest thereon, which approximates
$375,380). Additionally, an amount of $2.5 million was 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 were released and 7,814,589 shares of the
Company's common stock were issued 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 the Plan 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 $5 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 was completed in March 1999, and the
Plan was confirmed on April 12, 1999.
21
<PAGE>
The Company retained possession of its property throughout the bankruptcy
process and 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.
Liabilities subject to compromise presented in the accompanying
consolidated balance sheet represent the Company's estimate of
pre-petition liabilities allowed as of December 31, 1999 and 1998,
subject to adjustment in the reorganization process (see Note 5). 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. Although the Plan was confirmed, the Company
is still disputing the claims of certain creditors, and such claims are
considered Liabilities Subject to Compromise herein. The Company has also
settled with many of its creditors and repaid those amounts in 1999.
(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. Resolution of
disputed liabilities 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. The
ability of the Company to continue as a going concern is contingent upon,
among other things, the ability to (1) fully implement the confirmed Plan
in compliance with the Settlement Agreement (2) develop an appropriate
business plan and strategic direction for the Company's planned future
operations, including conservation of available capital and working
capital as the Company seeks to further develop and exploit its patent
portfolio, (3) confirm the availability of net operating tax loss
carryforwards after reorganization, and (4) generate adequate sources of
working capital and other liquidity as necessary to meet future
obligations, (5) settle the claims of the unsecured creditors within the
available cash resources as currently contemplated by management.
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 received under the Settlement Agreement will, after
paying its creditors under the Plan, be inadequate to supply any
necessary working capital during fiscal 2000. Additional working capital
will be necessary to meet the contemplated cash needs.
(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.
22
<PAGE>
(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, 1999 and 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
Note 5, certain accounts payable and accrued liabilities are
included amongst liabilities subject to compromise as of December
31, 1999 and 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 income (loss) per share are computed using
the weighted-average number of outstanding shares of common stock.
Diluted net loss per share does not include the effect of the
following contingently issuable shares because their effects are
antidilutive.
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
-------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-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 3,887,500 $0.54 1,350,000 $0.17 2,906,398 $0.09
Shares issuable upon the
exercise of warrants 234,753 $3.87 709,210 $5.96 734,210 $6.17
============ ============ ============
4,122,253 2,059,210 3,640,608
============ ============ ============
</TABLE>
Also, net loss per share for 1998 and 1997 does not include the
effect of shares issued on the conversion of secured notes payable
because their effects were antidilutive. See Note 5.
(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
23
<PAGE>
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 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 for
fiscal years beginning after June 30, 2000. Management believes
the adoption of SFAS No. 133 will not 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 determined that the adoption of the SOP did not have
an effect on its consolidated financial statements.
24
<PAGE>
(5) 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 pre-petition balance sheet accounts to
liabilities subject to compromise. Certain pre-petition 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, 1999 and 1998. Liabilities subject to compromise are summarized as
follows:
1999 1998
------------- -------------
Secured notes and accrued interest $ - $ 39,072,949
Accounts payable and accrued expenses 3,292,325 5,499,974
Accrued liabilities to shareholder 1,723,393 1,723,393
------------- -------------
$ 5,015,718 $ 46,296,316
============= =============
At December 31, 1999, $6,365,758 of the Company's cash
was in a reserve account held for settlement of claims from creditors.
The Settlement Agreement was consummated upon entry by the Bankruptcy
Court of a final non-appealable order confirming the Plan. Upon
consummation, the secured note holders released their security interests
and accrued interest of approximately $39 million and the Company issued
them 7,814,589 shares of common stock as part of the settlement. This
represents a conversion of the aggregate principal and interest at $5.00
per share.
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 available 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.
25
<PAGE>
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, 1999 and 1998. Amounts accrued under the deferred
compensation-noncompetition agreement as of December 31, 1999 and 1998,
reflect the amounts due at that date under the agreement. 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, 1999 and 1998. As indicated in Note 2, all claims, including amounts
accrued as of December 31, 1999 and 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 pre-petition 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 the Plan, the outcome of the claims review and
objection process may materially change the amounts and terms of
pre-petition liabilities. Consequently, the amounts included in the
consolidated balance sheets as liabilities subject to compromise may be
subject to future adjustment.
(6) REORGANIZATION EXPENSES
Reorganization expenses recorded in 1999 and 1998 consist of professional
fees paid or incurred for legal services related to the Company's
reorganization.
(7) 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.
The Company has not determined whether the reorganization or lack of
proper filing of income tax returns from December 31, 1993 through
December 31, 1998 has caused the Company to forfeit its net operating
loss carryforwards.
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.
There are sufficient net operating loss carryforwards to offset any
taxable income in 1999.
26
<PAGE>
(8) COMMON STOCK
The Company has reserved 3,650,000 shares of common stock for issuance
under its 1999 Stock Option Plan (the "1999 Plan"). The 1999 Plan,
adopted by the board of directors on February 26, 1999, and by the
shareholders on March 31, 1999, provides for the granting of incentive
stock options to employees (including officers) and nonqualified stock
options to employees, non-employee 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 1999 plan
has a term of 10 years. 912,500 options are available for grant under
this plan as of December 31, 1999.
The Company had reserved 5 million shares of common stock for issuance
under the 1988 Stock Option Plan (the "1988 Plan") under terms
substantially similar to the 1999 Plan. The 1988 Plan had a 10-year term.
This plan expired in September 1998, but some options granted under that
plan remain outstanding.
The following table summarizes the 1988 Plan option activity:
<TABLE>
<CAPTION>
Options Available Options Weighted-Average
for Grant Outstanding Exercise Price
-----------------------------------------------------------
<S> <C> <C> <C>
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
-----------------------------------------------------------
Exercised - (200,000) 0.09
-----------------------------------------------------------
Balance as of December 31, 1999 - 1,150,000 0.18
-----------------------------------------------------------
</TABLE>
On June 11, 1999, the Company issued Mr. Donald Graham 150,000 shares of
its common stock upon his exercise of his stock option for those share
for $13,500 at the exercise price.
On August 3, 1999, the Company issued Mr. John Bohrer, a director, 50,000
shares of its common stock upon his exercise of his stock option for
those shares for $4,500 at the exercise price.
Options exercisable under the 1988 Plan as of December 31, 1999, 1998 and
1997 were 1,150,000, 1,350,000, and 2,906,398 respectively, with
weighted-average exercise prices of $0.18, $0.17, and $0.09, per share,
respectively. The weighted-average grant date fair value of options
granted in 1999, 1998 and 1997 was $0.20, $0.31, and $0.14, respectively.
27
<PAGE>
1999 Plan Options outstanding as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted-Average
Number of Outstanding Remaining Contractual
Exercise Price Options Life (in years) Number of Options Vested
- ---------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
$0.42 to $1.01 2,637,500 4.5 2,437,500
2.23 100,000 4.9 100,000
- ---------------------- -------------------------- -------------------------- --------------------------
2,737,500 2,537,500
</TABLE>
1988 Plan Options outstanding as of December 31, 1999 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>
$0.09 250,000 0.8 250,000
$0.21 900,000 3.5 900,000
------------------ -------------------
1,150,000 1,150,000
================== ===================
</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.
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 income (losses) for the years ended
December 31, 1999, 1998 and 1997, would have been:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Income (loss) - as reported $ 8,146,916 $ (1,487,529) $ (5,968,478)
Net Income (loss) - pro forma $ 6,920,552 $ (1,590,529) $ (5,999,078)
Basic and diluted net loss per share - as reported $ 0.23 $ (0.05) $ (0.19)
Basic and diluted net loss per share - pro forma $ 0.19 $ (0.05) $ (0.19)
</TABLE>
The fair value of options granted during the years ended December 31,
1999, 1998 and 1997 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.
28
<PAGE>
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, 1999, 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.
Warrants for 234,753 shares of common stock with exercise prices ranging
from $2.86 to $4.80 per share were assumed under the plan of
reorganization. These warrants expire on March 30, 2000.
(9) 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, which was consummated in April 1999.
(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 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.
This claim was settled on September 1, 1999, with expenses limited
to the $500,000 deductible under the Company's liability
insurance. This amount was classified as liabilities subject to
compromise in 1998 and was paid in 1999 in full and final
settlement of the claim.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 26, 1999, we filed a Form 8-K Report, incorporated herein by
reference, announcing that each of Interactive Network and KPMG LLP decided that
it was in our best interest that KPMG LLP, our former independent accountants
engaged to audit our financial statements, be replaced with an accountant more
suitable to our current budgetary needs.
On March 10, 2000, we filed a Form 8-K Report, incorporated herein by
reference, announcing the engagement of Marc Lumer & Company as our independent
accountants to audit our 1999 Financial Statements.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information about our directors
and executive officers as of March 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bruce W. Bauer 49 Chairman of the Board of Directors, President and Chief
Executive Officer
John J. Bohrer 77 Secretary, Treasurer and Director
Robert Brown 63 Chief Technology Officer
William H. Green 73 Director
William L. Groeneveld 34 Director
</TABLE>
BRUCE W. BAUER has served as our Chairman of the Board of Directors,
President and Chief Executive Officer since June 1998. Prior to that, he served
as our Secretary from November 1996 through June 1998, and has been a member of
our board since October 1995. From 1980 to June 1998, Mr. Bauer owned and
operated Unlimited Services and Marathon Management Services, which provided
building and clean room services, supplies and consulting. Mr. Bauer received a
B.S. degree from Wittenberg University in 1974.
JOHN J. BOHRER has served as our Secretary and Treasurer since June
1998 and a director of our board 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.
ROBERT BROWN has served as our Chief Technology Officer since June
1999. From July 1996 to June 1999, Mr. Brown served as a Vice President for
Fourth Network. From July 1995 to July 1996, Mr. Brown was an independent
consultant. From January 1988 to July 1995, Mr. Brown served as a Senior Vice
President in Research and Development for our Company. Mr. Brown received a B.S.
degree in 1959, a M.S. degree in 1961, and a Ph.D. degree in 1964, all in
electrical engineering and all from Stanford University.
WILLIAM H. GREEN has served as a member of our board since June 1998.
Since 1998, Mr. Green has served as a Vice President of D.S.I. Corporation, a
dredging specialty company. From 1993 to 1998, he served as a consultant in the
aggregate division of Martin Marietta. He currently sits on the boards of
various private companies. Mr. Green attended the University of Nebraska at
Omaha from 1946 through 1949.
WILLIAM L. GROENEVELD has served as a member of our board since 1998.
Since January 1995, Mr. Groeneveld has served as head trader and Vice President
of Program Trading Corp.
30
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table sets forth all compensation earned by our Chief
Executive Officer and each of our four other most highly compensated executive
officers (collectively, the "Named Executive Officers") for the years ended
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
SECURITIES
SALARY BONUS UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR $ $ (#)
- --------------------------- ---- ---------------- ------------ ------------------
<S> <C> <C> <C> <C>
Bruce W. Bauer 1999 131,771 0 1,000,000
Chairman of the Board of Directors, Chief 1998 67,708(1) 0 900,000
Executive Officer and President 1997 0 0 0
</TABLE>
- -----------------
(1) Represents partial year salary from June 14, 1998 through December 31, 1998
($125,000 on an annualized basis).
OPTION GRANTS
The following table sets forth information concerning the stock options
granted to each of the Named Executive Officers for the 1999 fiscal year. In
accordance with the SEC rules, also shown below is the potential realizable
value over the term of the option (the period from the grant date to the
expiration date) based on 5% and 10% assumed annual rates of compounded stock
price appreciation. These amounts are based on certain assumed rates of
appreciation and do not represent our estimate of future stock price. Actual
gains, if any, on stock option exercises will be dependent on the future
performance of our common stock.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1999
INDIVIDUAL GRANTS (1)
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL RATES
SECURITIES PERCENT OF OF STOCK PRICE APPRECIATION FOR
UNDERLYING TOTAL OPTIONS OPTION TERM
OPTIONS GRANTED TO EXERCISE --------------------------------
GRANTED EMPLOYEES PRICE EXPIRATION
NAME (#) IN 1999 ($/SHARE) DATE 5% 10%
---- --- ------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Bruce W. Bauer 1,000,000(2) 90.91% $0.59 6/16/2004 165,200 359,000
</TABLE>
--------------------
(1) Gains are reported net of the option exercise price but before taxes
associated with exercise. These amounts represent certain assumed rates
of appreciation daily. Actual gains, if any, on stock option exercises
are dependent on future performance of our Common Stock.
(2) All options under this grant were fully exercisable as of the date of
the grant.
31
<PAGE>
OPTION HOLDING AND EXERCISES AND OPTION VALUES
The following table sets forth information concerning option holdings
and exercises for the 1999 fiscal year and the aggregate value of unexercised
options as of December 31, 1999 held by each of the Named Executive Officers.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL 1999
AND OPTION VALUES AT DECEMBER 31, 1999
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
AGGREGATE OPTION OPTIONS AT IN-THE-MONEY OPTIONS AT
EXERCISES IN 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 (1)
----------------- ---------------------- ------------------------
SHARES VALUE
ACQUIRED REALIZED
ON EXERCISE ($)
NAME (#) (2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------- ------------ ------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce W. Bauer 0 0 2,050,000 0 $13,005,000 0
</TABLE>
--------------------------
(1) Calculated on the basis of the closing price of our common stock as
reported on the OTC Bulletin Board on March 1, 2000 of $6.75 per share,
minus the exercise price.
(2) Calculated on the basis of the broker's reported sale price of our
common stock subject to the option, minus the exercise price.
EMPLOYMENT AGREEMENTS
We have entered into written employment agreements with the following
Named Executive Officers:
On June 15, 1999, we entered into an employment agreement with Bruce
Bauer, our Chief Executive Officer. This agreement provides for an annual salary
of $135,000 from June 15, 1999 through June 14, 2000, $145,000 from June 15,
2000 through June 14, 2001, and $155,000 from June 15, 2001 through June 14,
2002. No specific bonus provisions are included in the employment agreement. Mr.
Bauer is also entitled to vacation and benefits. Should we terminate the
employment agreement without cause or should Mr. Bauer terminate this employment
for good reason, all earned salary amounts not previously paid plus an amount
equal to the greater of Mr. Bauer's then-present salary for six months or the
remainder of the term of the agreement shall become due and payable effective
immediately and paid within a twenty four-hour period after the termination. A
penalty of ten percent (10%) per annum interest, compounded daily shall be added
effective after twenty-four hours on all unpaid balances due Mr. Bruce Bauer.
On June 16, 1999 our board issued Mr. Bruce Bauer, in connection with
his renewed employment agreement, a fully vested option to purchase 1,000,000
shares of our common stock with a term of five years and an exercise price equal
to $0.59 per share, the fair market value of our common stock at that time. This
description is a summary only. A copy of the employment agreement is filed as
Exhibit 10.13 hereto and incorporated herein by reference.
COMPENSATION OF DIRECTORS
Our directors who are also employees do not receive any additional
compensation for their services as directors. Directors who are not employees
receive an annual stock option grant of 50,000 shares in lieu of cash
competition. All directors are reimbursed for expenses incurred in connection
with attending board of directors and committee meetings.
32
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Bruce Bauer and John Bohrer were officers of Interactive Network and
during the last fiscal year participated in deliberations of the Board of
Directors concerning executive officer compensation.
BOARD REPORT ON EXECUTIVE COMPENSATION
Annual compensation of our executive officers is determined by our
board of directors. The board of directors was also responsible for
administering the 1988 and 1999 Option Plans, including the grant of options
under such plan. Messrs. Bauer and Bohrer are our employees and have voted on
matters relating to executive compensation and stock option grants, including
their own compensation and stock option grants.
We are currently operating with a skeleton staff of three officers (Mr.
Bauer as President and Chief Executive Officer, Mr. Bohrer as Secretary and
Treasurer and Dr. Brown as Chief Technology Officer), and one administrative
assistant and one secretary/receptionist, to conserve resources until we are
able to commence exploitation of our intellectual property assets. At that time,
we will again commence rehiring staff, as appropriate to carry out our goal of
realizing the value of our intellectual property. In that connection, we have
and may also use and compensate consultants, including our Advisory Panel, to
assist management.
Our compensation philosophy is to provide strong incentives to our
executives to maximize the overall value of our company. Our executive officers
are given an opportunity to participate in our growth through equity
participation in the form of stock options granted under our option plan. As a
result, our executive officers are directly rewarded for our performance as
reflected in our stock price and given an additional incentive to contribute to
our future success. Recent option grants have been made fully vested in order to
induce our executives and directors to remain with us through the settlement
with our creditors and in lieu of substantial cash compensation.
Base salaries and stock option grants are initially determined on the
basis of (i) the individual officer's position, and (ii) our desire to attract
and retain qualified personnel in a competitive marketplace. Salaries are
generally reviewed annually and are subject to increases based on our
determination that the individual's level of contribution to us has increased
since his or her salary had last been reviewed and increases in competitive pay
levels and the cost of living. Under normal circumstances, our board of
directors also determines initial awards of stock options, within a range
established for employees at various salary levels, based on the employee's
position and responsibilities. As stock options held by employees, including
executive officers, vest, we may approve grants of additional options based on
the employee's past performance and contributions to us. There is no provision
for bonus in the employment agreement of the current President and chief
executive officer, although we may decide to award such in our discretion. No
particular weighting is given to any of the factors considered.
33
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
our common stock with that of the Standard & Poor's 500 Index and the Nasdaq
Telecommunications Index. The comparison for each of the periods assumes that
$100 was invested on December 31, 1994 in our common stock including
reinvestment of dividends. These indices, which reflect formulas for dividend
reinvestment and weighing of individual stocks, do not necessarily reflect
returns that could be achieved by individual investors.
Notwithstanding anything to the contrary set forth in any of our
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings, the
preceding Compensation Committee Report on Executive Compensation and the
preceding Performance Graph shall not be incorporated by reference into any such
filings, nor shall such Report or graph be incorporated by reference into any
future filings.
Comparison of 5 Year Cumulative Total Return Among Interactive Network, Inc.,
the NASDAQ Stock Market (U.S.) Index and the NASDAQ Telecommunications Index
[PERFORMANCE GRAPH HERE]
Textual representation of the Performance Graph:
The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C> <C>
Interactive Network,
Inc. 100.00 2.00 4.00 12.00 20.00 177.00
NASDAQ Telco. Index 100.00 83.00 109.00 112.00 165.00 270.00
NASDAQ Market Index 100.00 141.00 174.00 213.00 300.00 542.00
------ ------ ------ ------ ------ ------
</TABLE>
- -----------------
(1) The graph assumes that $100 was invested on December 31, 1994 in the
Company's Common Stock, the NASDAQ Market Index and the NASDAQ
Telecommunications Index and that all dividends were reinvested. No dividends
have been declared or paid on the Company's Common Stock. Stockholder returns
over the indicated period should not be considered indicative of future
stockholder returns.
34
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and executive officers, and persons who own more than ten
percent of a registered class of our equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of our common
stock and other equity securities. Officers, directors and greater than ten
percent shareholders are required by SEC regulations to furnish us with copies
of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required during the fiscal year ended December 31, 1999, Section 16(a) filing
requirements applicable to Messrs. Bauer, Brown, Bohrer, Graham, Green and
Groeneveld were not complied with on a timely basis. However, all but former
Director Graham have since filed a Form 5 disclosure to bring their required
disclosure up to date.
35
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common stock as of March 1, 2000, by
(i) each stockholder known to us to own beneficially more than 5% of our common
stock; (ii) each of our directors; (iii) each Named Executive Officer; and (iv)
all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
APPROXIMATE
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) OWNED(1)
- ------------------------ -------- --------
<S> <C> <C>
AT&T Corp. (2) ................................................. 7,773,815 20.00%
32 Avenue of the Americas
New York, NY 10013-2412
National Broadcasting Company Holding, Inc. (2) ................ 3,645,575 9.38%
30 Rockefeller Plaza
New York, NY 10112
Voting Agreement (3) ........................................... 7,814,589 20.11%
David Lockton (4) .............................................. 2,250,000 5.47%
Bruce W. Bauer (5) ............................................. 2,150,500 5.03%
John J. Bohrer (6) ............................................. 222,850 *
William H. Green (7)............................................ 75,000 *
William L. Groeneveld (8)....................................... 62,500 *
Robert Brown (9)................................................ 137,375 *
All executive officers and directors as a group (5 persons) (10) 2,548,225 6.19%
</TABLE>
- -------------------
* Less than 1% of outstanding shares.
(1) Except as indicated and pursuant to applicable community property laws,
we believe that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(2) Includes for each entity only those shares listed herein for such entity:
(i) 2,942,907 shares held by Tele-Communications, Inc., a wholly-owned
subsidiary of AT&T Corp and (ii) 1,902,279 shares held by National
Broadcasting Company Holding, Inc., a wholly-owned subsidiary of General
Electric Company which are subject to the Voting Agreement (see footnote
3 below).
(3) Pursuant to the Voting Agreement, each of the Settling Parties agreed to
vote their shares issued in the Settlement Agreement as directed by the
Committee (except for matters relating to David Lockton and certain major
transactions of our company) which currently consists of John Bohrer,
William H. Greene and Bruce Bauer. This agreement does not provide for
any other joint action by the parties thereto. The parties to the Voting
Agreement disclaim beneficial ownership of shares owned by other parties
thereto, and the Committee disclaims beneficial ownership of all of the
shares subject to the Voting Agreement.
(4) David Lockton is claiming ownership of options to purchase 2,250,000
shares. He claims that one option granted in October of 1994 gave him the
right to purchase 450,000 shares that may be acquired upon exercise of
stock options that are currently exercisable and a second option granted
as of November 3, 1995 gave him the right to purchase 1,800,000 shares
that may be acquired upon exercise of stock options that are currently
exercisable. We dispute the ownership and validity of these options.
Trial on these matters is set for May 8, 2000 in U.S. Bankruptcy Court.
We have no knowledge regarding Lockton's ownership of any other shares.
36
<PAGE>
(5) Includes (i) 100,500 shares of Common Stock and (ii) 2,050,000 shares
that may be acquired upon exercise of stock options that are currently
exercisable.
(6) Includes 150,000 shares of Common Stock that may be acquired upon
exercise of stock options that are currently exercisable.
(7) Includes 75,000 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable.
(8) Includes 62,500 shares of Common Stock that may be acquired upon exercise
of stock options that are exercisable.
(9) Includes 100,000 shares of Common Stock that may be acquired upon
exercise of stock options that are currently exercisable within 60 days
of March 1, 2000.
(10) Includes 2,337,500 shares of Common Stock that may be acquired upon
exercise of stock options that are exercisable within 60 days of March 1,
2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
EMPLOYMENT AGREEMENT WITH DR. BROWN
On June 15, 1999, we entered into an employment agreement with Dr. Robert Brown,
our Chief Technology Officer. This agreement provides for an annual salary of
$125,000 from June 22, 1999 through June 21, 2000, $135,000 from June 22, 2000
through June 21, 2001, and $145,000 from June 22, 2001 through June 21, 2002,
and an option to purchases 300,000 shares of our stock, vesting 1/3 on each
anniversary of the agreement. No specific bonus provisions are included in the
employment agreement. Dr. Brown is also entitled to vacation and standard
benefits. Should we terminate the employment agreement without cause or should
Dr. Brown terminate this employment for good reason, all earned salary amounts
not previously paid plus an amount equal to the greater of Dr. Brown's
then-present salary for six months or the remainder of the term of the agreement
shall be paid upon such termination. This description is a summary only. a copy
of the employment agreement is filed as Exhibit 10.14 hereto and incorporated
herein by reference.
OTHER TRANSACTIONS
We have entered into indemnification agreements with each of our
directors and executive officers. These agreements require us to indemnify our
directors and executive officers to the fullest extent permitted by California
law.
All future transactions between us and our executive officers,
directors, principal stockholders and affiliates will be approved by a majority
of our board of directors, including a majority of the disinterested,
non-employee directors on our board of directors, and will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents have been filed as a part of this Annual
Report on Form 10-K.
(1) Financial Statements:
Reference is made to the Index to Financial Statements under Item
8 in Part II of this Form 10-K.
(2) Financial Statement Schedules:
All schedules have been omitted since they are not required or are
not applicable or the required information is shown in the
financial statements and related notes.
(3) Exhibits:
The exhibits listed below are required by Item 601 of Regulation
S-K. Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 1-K has been
identified.
37
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 4.1 of
Exhibits to Registrant's Form S-8 Registration Statement, as
filed with the Commission on November 10, 1992)
3.2 Certificate of Determination of the Registrant, filed with the
California Secretary of State on September 20, 1994
(incorporated by reference to Exhibit 3.3 of Exhibits to
Registrant's Form 8-K Report, as filed with the Commission on
October 3, 1994)
3.3 Certificate of Amendment of Amended and Restated Articles of
Incorporation of Registrant, dated May 22, 1995 (incorporated
by reference to Exhibit 3.3 of Exhibits to Registrant's Form
10-K Annual Report, as filed with the Commission on March 30,
1999)
3.4(a) Bylaws of the Registrant, as amended (incorporated by reference
to Exhibit 4.2 of Exhibits to Registrant's Form S-8
Registration Statement, as filed with the ) Commission on
November 10, 1992)
3.4(b) Amendment to By-laws of the Registrant, dated February 26, 1999
(incorporated by reference to Exhibit 3.4(b) of Exhibits to
Registrant's Form 10-K Annual Report, as filed with the
Commission on March 30, 1999)
4.1 Specimen Common Stock Certificate of the Registrant
(incorporated by reference to Exhibit 4.1 of Exhibits to
Registrant's Form S-1 Registration Statement (No. 33-58780),
filed with the Commission on February 25, 1993)
9.1 Voting Trust Agreement, included in Settlement Agreement
attached as an Exhibit to the Plan of Reorganization, filed by
Registrant in the United States Bankruptcy Court for the
Northern District of California (incorporated by reference to
Exhibit 1.1 of Exhibits to Registrant's Form 8-K, as filed with
the Commission on December 22, 1998)
*10.1 Sale of Patent Agreement, between the Registrant and David B.
Lockton, dated November 18, 1986, and amendments thereto, dated
December 21, 1987 and July 30, 1990
*10.5 Settlement Agreement and Covenant Not to Sue, between the
Registrant and NTN Communications, Inc., dated April 1987, and
attached Patent License Agreement (Exhibit 10.17 of
Registration Statement)
38
<PAGE>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- --------------------------------------------------------------------------------
*10.6(a) Employment Agreement, between the Registrant and David B.
Lockton, dated January 1, 1991 (incorporated herein by
reference to Exhibit 10.22 of Registration Statement)
10.6(b) Rider to Employment Agreement, between the Registrant and David
B. Lockton, dated December 10, 1994 (incorporated by reference
to Exhibit 10.54 to the Annual Report of the Registrant on Form
10-K for the year ended December 31, 1994)
10.7 Deferred Compensation and Non-Competition Agreement, between
the Registrant and David B. Lockton, dated December 10, 1994
(incorporated by reference to Exhibit 10.53 of Exhibit B to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994)
10.8 1999 Stock Option Plan (incorporated by reference to Exhibit A
to the Proxy Statement for the Special Meeting of Shareholders
of Registrant held on March 31, 1999-- filed with the
Commission on March 15, 1999)
10.9 Form of Stock Option Agreement for use with the 1999 Stock
Option Plan (incorporated by reference to Exhibit 10.9 of
Exhibits to Registrant's Form 10-K Annual Report, as filed with
the Commission on March 30, 1999)
*10.10 Form of Indemnification Agreement (Exhibit 10.27 of Form S-1
Registration Statement)
10.11 Know-How License Agreement, dated September 29, 1992, between
the Registrant and Interactive Network Limited (incorporated by
reference to Exhibit 10.32 of Exhibits to Registrant's Form S-1
Registration Statement (No. 33-58780), filed with the
Commission on February 25, 1993)
10.12(a) Stock Purchase Agreement, dated December 2, 1992, among the
Registrant, Gannett Co., Inc. and David B. Lockton
(incorporated by reference to Exhibit 28.4 of Exhibits to
Registrant's Form 8-K Report, as filed with the Commission on
December 17, 1992)
10.12(b) Waiver and Amendment of Stock Purchase Agreement, with Gannett
Co., Inc., dated September 22, 1994 (incorporated by reference
to Exhibit 10.12(b) of Exhibits to Registrant's Form 10-K
Annual Report, as filed with the Commission on March 30, 1999)
10.13 Employment Agreement between the Registrant and Bruce Bauer,
dated April 13, 2000--filed herewith
10.14 Employment Agreement between the Registrant and Dr. Robert
Brown, dated April 13, 2000-- filed herewith
39
<PAGE>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- --------------------------------------------------------------------------------
10.15 Addendum to Consulting Agreement for Gregg Freishtat
10.16 Addendum to Consulting Agreement for Eduard Mayer
23.1 Consent of KPMG LLP
25.1 Power of Attorney. Reference is made to the signature page of
this Report.
- ---------------------------
* Incorporated by reference to the Exhibits of corresponding number
(unless otherwise noted) to Registrant's Form S-1 Registration
Statement (No. 33-42951) filed with the Commission on September
24, 1991, as amended.
(b) Reports on Form 8-K.
o Form 8-K Report, filed with the Securities and Exchange Commission (the
"SEC") on April 15, 1999.
o Form 8-K Report, filed with the SEC on April 29, 1999.
o Form 8-K Report, filed with the SEC on May 26, 1999.
o Form 8-K Report, filed with the SEC on February 11, 2000.
o Form 8-K Report, filed with the SEC on March 10, 2000.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERACTIVE NETWORK, INC.
By: /s/ Bruce W. Bauer
--------------------------------------
Bruce W. Bauer
Chairman of the Board, Chief Executive
Officer and President
(Principal Executive Officer)
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Bruce W. Bauer Chairman of the Board, Chief Executive Officer April 14, 2000
- -------------------------------------------- and President (Principal Executive Officer)
Bruce W. Bauer
/s/ John J. Bohrer Director, Secretary and Treasurer April 14, 2000
- -------------------------------------------- (Principal Financial and Accounting Officer)
John J. Bohrer
/s/ William H. Green Director April 14, 2000
- --------------------------------------------
William H. Green
/s/ William L. Groeneveld Director April 14, 2000
- --------------------------------------------
William L. Groeneveld
</TABLE>
41
EXHIBIT 10.13
BRUCE W. BAUER EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT
This Agreement, dated as of June 15, 1999, is between Interactive
Network, Inc. ("Company"), and Bruce W. Bauer ("Executive"). Company and
Executive agree to the following terms and conditions of employment.
1. PERIOD OF EMPLOYMENT.
(a) BASIC TERM. Company shall employ Executive from the date of this
Agreement through June 14, 2002 (the "Term Date"), as, and to the extent,
extended under Section 1(b), unless Executive is terminated sooner in accordance
with Section 4.
(b) RENEWAL. This Agreement shall be renewed for an additional one (1)
year period on the Term Date and on each anniversary thereof, unless one party
gives to the other advance written notice of nonrenewal at least sixty (60) days
prior to such date. Either party may elect not to renew this Agreement with or
without cause, in which case this Section 1(b) shall govern Executive's
termination and not Section 4 (except for Executive's termination obligations
set forth in Section 4(e), which shall remain in effect).
2. POSITION AND RESPONSIBILITIES.
(a) POSITION. Executive accepts employment with Company as Chief
Executive Officer and President and shall perform all services appropriate to
that position, as well as such other services as may be assigned by the Board of
Directors of Company ("Board"). Executive shall devote his best efforts and
full-time attention to the performance of his duties. He shall report to the
Board.
(b) OTHER ACTIVITY. Except upon the prior written consent of Company,
Executive (during his employment with Company) shall not (i) accept any other
employment; or (ii) engage, directly or indirectly, in any other business,
commercial, or professional activity (whether or not pursued for pecuniary
advantage) that is or may be competitive with Company, that might create a
conflict of interest with Company, or that otherwise might interfere with the
business of Company, or any affiliate of Company.
3. COMPENSATION AND BENEFITS.
(a) COMPENSATION. In consideration of the services to be rendered under
this Agreement, Company shall pay Executive as follows, payable semi-monthly:
(i) $135,000 per year from June 15, 1999 through June 14, 2000;
(ii) $145,000 per year from June 15, 2000 through June 14, 2001;
(iii) $155,000 per year from June 15, 2001 through June 14, 2002.
Thereafter, the Board shall review Executive's compensation annually and shall
make such further adjustments, if any, as the Board in its sole discretion may
deem appropriate. All compensation and comparable payments to be paid to
Executive under this Agreement shall be less withholdings required by law.
(b) BENEFITS. Executive shall be entitled to four (4) weeks of paid
vacation, in addition to approved holidays. Company shall provide Executive
medical, dental, and vision benefits and shall adopt a 401(k) plan in which
Executive shall be eligible to participate. Executive shall also have the right
to participate in and to receive benefits from all other present and future
benefit plans specified in Company's policies and generally made available to
<PAGE>
similarly situated employees of Company. The amount and extent of benefits to
which Executive is entitled shall be governed by the specific benefit plan, as
amended. Until such time as the Company provides medical, dental, and vision
benefits, Company shall reimburse Executive for the total premium costs of his
present policies for said benefits. Executive also shall be entitled to any
benefits or compensation tied to termination as described in Section 4.
(c) EXPENSES. Company shall reimburse Executive for reasonable travel
and other business expenses incurred by Executive in the performance of his
duties, in accordance with Company's policies, as they may be amended in
Company's sole discretion.
(d) STOCK OPTIONS. As approved by the Board of Directors, Company shall
issue to Executive effective June 16, 1999 ("Issue Date") One Million
(1,000,000) options to purchase unrestricted shares of Company's common stock.
These options shall (i) be issued as ISO (incentive stock options); (ii) vest on
the Issue Date; (iii) have an exercise price equal to the fair market value of
the stock as of the Issue Date; (iv) expire June 16, 2004; and (v) be subject to
the applicable Company Stock Option Plan. In the event of a Corporate
Transaction, as defined in the Stock Option Plan of 1999, if the acquiring or
surviving entity does not agree in writing to convert Executive's stock options
outstanding immediately prior to the Transaction into options of equivalent
value for the common stock of said entity, then Company shall pay Executive
immediately prior to the closing of said Transaction a lump sum equal to the
difference between the exercise price and the fair market value of Company's
common stock as of the closing for all options which terminate due to the
Transaction.
4. TERMINATION OF EMPLOYMENT.
(a) BY COMPANY NOT FOR CAUSE. At any time, and without prior notice,
Company may terminate Executive without Cause (as defined below). If Company
terminates Executive without Cause, Company shall pay Executive on the date of
termination, less withholdings required by law, all unpaid salary and accrued
but unused vacation through the date of termination, plus a lump sum payment
equal to Executive's then present salary for the greater of (i) the balance of
the initial three (3) year term of this Agreement or (ii) six (6) months.
Company may dismiss Executive as provided in this Section 4 notwithstanding
anything to the contrary contained in or arising from any statements, policies,
or practices of Company relating to the employment, discipline, or termination
of its employees.
(b) BY COMPANY FOR CAUSE. At any time, and without prior notice,
Company may terminate Executive for Cause. Company shall pay Executive all
compensation then due and owing; thereafter, all of Company's obligations under
this Agreement shall cease. Termination shall be for "Cause" if Executive: (i)
acts in bad faith and to the material detriment of Company; (ii) willfully
refuses or fails to act in accordance with any specific direction or order of
the Board; (iii) exhibits in regard to his employment dishonesty, willful
misconduct, or substantially and materially unsatisfactory performance; or (iv)
is convicted of a crime involving dishonesty, breach of trust, or physical or
emotional harm to any person.
(c) BY EMPLOYEE NOT FOR GOOD REASON. At any time, Executive may
terminate his employment without Good Reason (as defined below) by providing
Company sixty (60) days' advance written notice.
(d) BY EMPLOYEE FOR GOOD REASON. Executive may terminate his employment
for Good Reason, provided Executive gives Company thirty (30) days' advance
written notice of the reason for termination and his intent to terminate this
Agreement. During this period, Company shall have an opportunity to correct the
condition constituting Good Reason. If the condition is remedied within this
period, Executive's notice to terminate shall be rescinded automatically; if not
remedied, termination shall become effective upon expiration of the above notice
period. In this event, Company shall pay Executive on the effective date of
termination the same amounts as provided in Section 4(a), "Termination of
Employment By Company Not For Cause".
Termination shall be for "Good Reason" if: (i) there is a material and
adverse change in Executive's position, duties, responsibilities, or status with
Company; (ii) there is a reduction in Executive's salary then in effect, other
<PAGE>
than a reduction comparable to reductions generally applicable to similarly
situated employees of Company; (iii) there is a material reduction in
Executive's benefits, other than a reduction comparable to reductions generally
applicable to similarly situated employees of Company; or (iv) Company
materially breaches this Agreement.
(e) TERMINATION OBLIGATIONS.
(i) Executive agrees that all property, including,
without limitation, all equipment, tangible Proprietary Information (as
defined below), documents, records, notes, contracts, and
computer-generated materials furnished to or prepared by Executive
incident to his employment belongs to Company and shall be returned
promptly to Company upon termination of Executive's employment.
Executive's obligations under this subsection shall survive the
termination of his employment and the expiration of this Agreement.
(ii) Upon termination of the Period of Employment,
Company shall pay Executive any amounts due under this Agreement within
24 hours of the effective date of such termination. All payments not
made within 24 hours shall be subject to an interest rate of ten
percent (10%) per annum compounded daily. All payment not made within
thirty (30) days shall be subject to a the highest interest rate
permitted by law but not to exceed twenty percent (20%) per annum
compounded daily.
5. PROPRIETARY INFORMATION. "Proprietary Information" is all information and any
idea pertaining in any manner to the business of Company (or any Company
affiliate), its employees, clients, consultants, or business associates, which
was produced by any employee of Company in the course of his or her employment
or otherwise produced or acquired by or on behalf of Company. Proprietary
Information shall include, without limitation, trade secrets, product ideas,
inventions, processes, formulas, data, know-how, software and other computer
programs, copyrightable material, marketing plans, strategies, sales, financial
reports, forecasts, and customer lists. All Proprietary Information not
generally known outside of Company's organization, and all Proprietary
Information so known only through improper means, shall be deemed "Confidential
Information." During his employment by Company, Executive shall use Proprietary
Information, and shall disclose Confidential Information, only for the benefit
of Company and as is necessary to perform his job responsibilities under this
Agreement.
6. NOTICES. Any notice or other communication under this Agreement must be in
writing and shall be effective upon delivery by hand, upon facsimile
transmission to Company (but only upon receipt by Executive of a written
confirmation of receipt), or three (3) business days after deposit in the United
States mail, postage prepaid, certified or registered, and addressed to Company
at the address or fax number below, or to Executive at the last known address
maintained in Executive's personnel file. Executive shall be obligated to notify
Company in writing of any change in his address. Notice of change of address
shall be effective only when done in accordance with this Section.
Company's Notice Address:
ATTN: Chairman of the Board of Directors
Interactive Network, Inc.
1161 Old County Road
Belmont, CA 94002
Fax Number: (650) 508-8794
<PAGE>
7. ACTION BY COMPANY. All actions required or permitted to be taken under this
Agreement by Company, including, without limitation, exercise of discretion,
consents, waivers, and amendments to this Agreement, shall be made and
authorized only by the Chairman of the Board or by his or her representative
specifically authorized in writing to fulfill these obligations under this
Agreement.
8. INTEGRATION. This Agreement is intended to be the final, complete, and
exclusive statement of the terms of Executive's employment by Company. This
Agreement supersedes all other prior and contemporaneous agreements and
statements, whether written or oral, express or implied, pertaining in any
manner to the employment of Executive, and it may not be contradicted by
evidence of any prior or contemporaneous statements or agreements. To the extent
that the practices, policies, or procedures of Company, now or in the future,
apply to Executive and are inconsistent with the terms of this Agreement, the
provisions of this Agreement shall control.
9. AMENDMENTS. This Agreement may not be amended except by a writing signed by
each of the parties. Failure to exercise any right under this Agreement shall
not constitute a waiver of such right.
10. ASSIGNMENT. Executive shall not assign any rights or obligations under this
Agreement. Company may, upon prior written notice to Executive, assign its
rights and obligations hereunder.
11. SEVERABILITY. If a court or arbitrator holds any provision of this Agreement
to be invalid, unenforceable, or void, the remainder of this Agreement shall
remain in full force and effect.
12. ATTORNEYS' FEES. In any legal action, arbitration, or other proceeding
brought to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees and costs.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of California.
14. INTERPRETATION. This Agreement shall be construed as a whole, according to
its fair meaning, and not in favor of or against any party. By way of example
and not in limitation, this Agreement shall not be construed in favor of the
party receiving a benefit nor against the party responsible for any particular
language in this Agreement. Captions are used for reference purposes only and
should be ignored in the interpretation of the Agreement.
<PAGE>
The parties have duly executed this Agreement as of the date first written
above.
/S/ Bruce W. Bauer
- ------------------------------
Bruce W. Bauer
Interactive Network, Inc.
/S/ Dr. Robert Brown
- -------------------------------
By: Dr. Robert Brown
Its: Chief Technology Officer,
at the direction of the
Board of Directors
EXHIBIT 10.14
DR. ROBERT BROWN EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT
This Agreement, dated as of June 15, 1999, is between Interactive
Network, Inc., a California corporation ("Company"), and Robert J. Brown
("Executive"). Company and Executive agree to the following terms and conditions
of employment.
1. PERIOD OF EMPLOYMENT. Company shall employ Executive to render services to
Company in the position and with the duties and responsibilities described in
Section 2 for the period (the "Period of Employment") commencing on the date of
this Agreement and ending upon the earlier of (i) June 22, 2002 or (ii) the date
upon which the Period of Employment is terminated in accordance with Section 4.
2. POSITION AND RESPONSIBILITIES.
(a) POSITION. Executive accepts employment with Company as Chief
Technology Officer and shall perform all services appropriate to that position,
as well as such other services as may be assigned by the Chief Executive Officer
of the Company ("CEO"). Executive shall devote his best efforts and full-time
attention to the performance of his duties. Executive shall report to and be
subject to the direction of the CEO. Executive shall be expected to travel if
necessary or advisable in order to meet the obligations of his position.
(b) OTHER ACTIVITY. Except upon the prior written consent of Company,
Executive (during the Period of Employment) shall not (i) accept any other
employment; or (ii) engage, directly or indirectly, in any other business,
commercial, or professional activity (whether or not pursued for pecuniary
advantage) that is or may be competitive with Company, that might create a
conflict of interest with Company, or that otherwise might interfere with the
business of Company, or any Affiliate. An "Affiliate" shall mean any person or
entity that directly or indirectly controls, is controlled by, or is under
common control with Company.
(c) WARRANTY. Executive agrees that he will not use for the benefit of,
or disclose to, Company any confidential information belonging to any former
employer or other entity unless he has written permission from the employer or
entity to do so (or unless Company has been granted such permission).
3. COMPENSATION AND BENEFITS.
(a) COMPENSATION. In consideration of the services to be rendered under
this Agreement, Company shall pay Executive as follows, payable semi-monthly:
(iv) $125,000 per year from June 22, 1999 through June 21, 2000;
(v) $135,000 per year from June 22, 2000 through June 21, 2001;
(vi) $145,000 per year from June 22, 2001 through June 21, 2002.
All compensation and comparable payments to be paid to Executive under this
Agreement shall be less withholdings required by law.
(b) BENEFITS. Executive shall be entitled to three (3) weeks of paid
vacation, in addition to approved holidays. Executive shall have the right to
participate in and to receive benefits from all present and future benefit plans
specified in Company's policies and generally made available to similarly
situated employees of Company, including, without limitation, medical and dental
benefits and participation in a 401(k) plan when established. The amount and
<PAGE>
extent of benefits to which Executive is entitled shall be governed by the
specific benefit plan, as amended. Until such time as the Company provides
medical and dental benefits, Company shall reimburse Executive for the total
premium costs of his present policies for said benefits. Executive also shall be
entitled to any benefits or compensation tied to termination as described in
Section 4.
(c) EXPENSES. Company shall reimburse Executive for reasonable travel
and other business expenses incurred by Executive in the performance of his
duties, in accordance with Company's policies, as they may be amended in
Company's sole discretion.
(d) STOCK OPTIONS. As approved by the Board of Directors of Company,
Company shall issue to Executive effective June 22, 1999 ("Issue Date") options
to purchase Three Hundred Thousand (300,000) shares of Company's common stock,
which shall vest as follows:
100,000 options to vest effective June 22, 1999
100,000 options to vest effective June 22, 2000
100,000 options to vest effective June 22, 2001
These options shall (i) be issued as ISO (incentive stock options);
(ii) have an exercise price equal to the fair market value of the stock as of
the Issue Date; (iii) be subject to the 1999 Stock Option Plan adopted by
Company ("Stock Option Plan"); and (iii) expire June 16, 2004. In the event of a
Corporate Transaction, as defined in the Stock Option Plan, if the acquiring or
surviving entity does not agree in writing to convert Executive's stock options
outstanding immediately prior to the Transaction into options of equivalent
value for the common stock of said entity, then Company shall pay Executive
immediately prior to the closing of said Transaction a lump sum equal to the
difference between the exercise price and the fair market value of Company's
common stock as of the closing for all options which terminate due to the
Transaction.
<PAGE>
4. TERMINATION OF EMPLOYMENT.
(a) BY COMPANY NOT FOR CAUSE. At any time, and without prior notice,
Company may terminate Executive without Cause (as defined below). If Company
terminates Executive without Cause, Company shall pay Executive on the date of
termination, less withholdings required by law, all unpaid salary and accrued
but unused vacation through the date of termination, plus a lump sum payment
equal to Executive's then present salary for the greater of (i) the balance of
the three (3) year term of this Agreement or (ii) six (6) months. Upon such
payment, all of Company's obligations under this Agreement shall cease. Company
may dismiss Executive as provided in this Section 4 notwithstanding anything to
the contrary contained in or arising from any statements, policies, or practices
of Company relating to the employment, discipline, or termination of its
employees.
(b) BY COMPANY FOR CAUSE. At any time, and without prior notice,
Company may terminate Executive for Cause. Company shall pay Executive all
compensation then due and owing; thereafter, all of Company's obligations under
this Agreement shall cease. Termination shall be for "Cause" if Executive: (i)
acts in bad faith and to the detriment of Company; (ii) willfully refuses or
fails to act in accordance with any specific direction or order of the Board or
CEO; (iii) exhibits in regard to his employment dishonesty, misconduct, or
unsatisfactory performance; (iv) is convicted of a crime involving dishonesty,
breach of trust, or physical or emotional harm to any person; or (v) breaches
any material term of this Agreement.
(c) BY EMPLOYEE NOT FOR GOOD REASON. At any time, Executive may
terminate his employment without Good Reason (as defined below) by providing
Company sixty (60) days' advance written notice. Company shall have the option,
in its complete discretion, to make Executive's termination effective at any
time prior to the end of such notice period, provided Company pays Executive all
compensation due and owing through the last day actually worked, plus an amount
equal to the base salary Executive would have earned through the balance of the
above notice period, not to exceed ninety (60) days; thereafter, all of
Company's obligations under this Agreement shall cease.
(d) BY EMPLOYEE FOR GOOD REASON. Executive may terminate his employment
for Good Reason, provided Executive gives Company thirty (30) days' advance
written notice of the reason for termination and his intent to terminate this
Agreement. During this period, Company shall have an opportunity to correct the
condition constituting Good Reason. If the condition is remedied within this
period, Executive's notice to terminate shall be rescinded automatically; if not
remedied, termination shall become effective upon expiration of the above notice
period. In this event, Company shall pay Executive on the effective date of
termination the same amounts as provided in Section 4(a), "Termination of
Employment By Company Not For Cause".
Termination shall be for "Good Reason" if: (i) there is a material and adverse
change in Executive's position, duties, responsibilities, or status with
Company; (ii) there is a reduction in Executive's salary then in effect, other
than a reduction comparable to reductions generally applicable to similarly
situated employees of Company; (iii) there is a material reduction in
Executive's benefits, other than a reduction comparable to reductions generally
applicable to similarly situated employees of Company; or (iv) Company
materially breaches this Agreement.
(e) TERMINATION OBLIGATIONS.
(i) Executive agrees that all property, including, without
limitation, all equipment, tangible Proprietary Information (as defined
below), documents, books, records, reports, notes, contracts, lists,
computer disks (and other computer-generated files and data), and
copies thereof, created on any medium and furnished to, obtained by, or
prepared by Executive in the course of or incident to his employment,
belongs to Company and shall be returned promptly to Company upon
termination of the Period of Employment.
(ii) All benefits to which Executive is otherwise entitled
shall cease upon Executive's termination, unless explicitly continued
either under this Agreement or under any specific written policy or
benefit plan of Company.
<PAGE>
(iii) Upon termination of the Period of Employment, Executive
shall be deemed to have resigned from all offices and directorships
then held with Company or any Affiliate.
(iv) The representations and warranties contained in this
Agreement and Executive's obligations under this Section 4(e) on
Termination Obligations, Section 5 on Proprietary Information, and
Section 6 on Inventions and Ideas shall survive the termination of the
Period of Employment and the expiration of this Agreement.
(v) Following any termination of the Period of Employment,
Executive shall fully cooperate with Company in all matters relating to
the winding up of pending work on behalf of Company and the orderly
transfer of work to other employees of Company. Executive shall also
cooperate in the defense of any action brought by any third party
against Company that relates in any way to Executive's acts or
omissions while employed by Company.
5. PROPRIETARY INFORMATION.
(a) DEFINED. "Proprietary Information" is all information and any idea
in whatever form, tangible or intangible, pertaining in any manner to the
business of Company, or any Affiliate, or its employees, clients, consultants,
or business associates, which was produced by any employee of Company in the
course of his or her employment or otherwise produced or acquired by or on
behalf of Company. All Proprietary Information not generally known outside of
Company's organization, and all Proprietary Information so known only through
improper means, shall be deemed "Confidential Information."
(b) GENERAL RESTRICTIONS ON USE. During the Period of Employment,
Executive shall use Proprietary Information, and shall disclose Confidential
Information, only for the benefit of Company and as is necessary to carry out
his responsibilities under this Agreement. Following termination, Executive
shall neither, directly or indirectly, use any Proprietary Information nor
disclose any Confidential Information, except as expressly and specifically
authorized in writing by Company. The publication of any Proprietary Information
through literature or speeches must be approved in advance in writing by
Company.
6. INVENTIONS AND IDEAS.
(a) DEFINED; STATUTORY NOTICE. The term "Invention/Idea" includes any
and all ideas, processes, trademarks, service marks, inventions, technology,
computer hardware or software, original works of authorship, designs, formulas,
discoveries, patents, copyrights, products, and all improvements, know-how,
rights, and claims related to the foregoing that are conceived, developed, or
reduced to practice by Executive, alone or with others, during the Period of
Employment, except to the extent that California Labor Code Section 2870
lawfully prohibits the assignment of rights in such intellectual property.
Executive acknowledges that he understands that this definition is
limited by California Labor Code Section 2870, which provides:
"(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
<PAGE>
(b) To the extent a provision in an employment agreement purports to require
an employee to assign an invention otherwise excluded from being required to be
assigned under subdivision (a), the provision is against the public policy of
this state and is unenforceable."
Nothing in this Agreement is intended to expand the scope of protection provided
Executive by Sections 2870 through 2872 of the California Labor Code.
(b) DISCLOSURE. Executive shall maintain adequate and current written
records on the development of all Invention/Ideas and shall disclose promptly to
Company all Invention/Ideas and relevant records, which records will remain the
sole property of Company. Executive agrees that all information and records
pertaining to any idea, process, trademark, service mark, invention, technology,
computer hardware or software, original work of authorship, design, formula,
discovery, patent, copyright, product, and all improvements, know-how, rights,
and claims related to the foregoing ("Intellectual Property"), that Executive
does not believe to be an Invention/Idea, but that is conceived, developed, or
reduced to practice by Executive (alone or with others) during the Period of
Employment, shall be disclosed promptly to Company (such disclosure to be
received in confidence). Company shall examine such information to determine if
in fact the Intellectual Property is an Invention/Idea subject to this
Agreement.
(c) ASSIGNMENT. Executive agrees to, and hereby does, assign to Company
his entire right, title, and interest (throughout the United States and in all
foreign countries), free and clear of all liens and encumbrances, in and to each
Invention/Idea, which shall be the sole property of Company, whether or not
patentable. In the event any Invention/Idea is deemed by Company to be
patentable or otherwise registrable, Executive shall assist Company (at its
expense) in obtaining letters patent or other applicable registrations thereon
and shall execute all documents and do all other things necessary or proper
thereto (including testifying at Company's expense) and to vest Company, or any
entity or person specified by Company, with full and perfect title thereto or
interest therein. Executive shall also take any action necessary or advisable in
connection with any continuations, renewals, or reissues thereof or in any
related proceedings or litigation. Should Company be unable to secure
Executive's signature on any document necessary to apply for, prosecute, obtain,
or enforce any patent, copyright, or other right or protection relating to any
Invention/Idea, whether due to Executive's mental or physical incapacity or any
other cause, Executive irrevocably designates and appoints Company and each of
its duly authorized officers and agents as Executive's agent and
attorney-in-fact, to act for and in Executive's behalf and stead and to execute
and file any such document, and to do all other lawfully permitted acts to
further the prosecution, issuance, and enforcement of patents, copyrights, or
other rights or protections with the same force and effect as if executed,
delivered, and/or done by Executive.
(d) EXCLUSIONS. Executive represents that there are no Invention/Ideas
that he desires to exclude from the operation of this Agreement. To the best of
Executive's knowledge, there is no existing contract in conflict with this
Agreement and there is no contract to assign any Intellectual Property that is
now in existence between Executive and any other person or entity.
7. NOTICES. Any notice or other communication under this Agreement must be in
writing and shall be effective upon delivery by hand, upon facsimile
transmission to either party (but only upon receipt by the transmitting party of
a written confirmation of receipt), or three (3) business days after deposit in
the United States mail, postage prepaid, certified or registered, and addressed
to Company or to Executive at the corresponding address or fax number below.
Executive shall be obligated to notify Company in writing of any change in his
address. Notice of change of address shall be effective only when done in
accordance with this Section.
<PAGE>
Company's Notice Address:
ATTN: Chief Executive Officer
Interactive Network, Inc.
1161 Old County Road
Belmont, CA 94002
Fax Number: (650) 508-8794
Executive's Notice Address:
Bruce W. Bauer
Interactive Network, Inc.
1161 Old County Road
Belmont, CA 94002
Fax Number: (650) 508-8794
8. ACTION BY COMPANY. All actions required or permitted to be taken under this
Agreement by Company, including, without limitation, exercise of discretion,
consents, waivers, and amendments to this Agreement, shall be made and
authorized only by the Chairman of the Board or by his or her representative
specifically authorized in writing to fulfill these obligations under this
Agreement.
9. INTEGRATION. This Agreement is intended to be the final, complete, and
exclusive statement of the terms of Executive's employment by Company. This
Agreement supersedes all other prior and contemporaneous agreements and
statements, whether written or oral, express or implied, pertaining in any
manner to the employment of Executive, and it may not be contradicted by
evidence of any prior or contemporaneous statements or agreements. To the extent
that the practices, policies, or procedures of Company, now or in the future,
apply to Executive and are inconsistent with the terms of this Agreement, the
provisions of this Agreement shall control.
10. AMENDMENTS; WAIVERS. This Agreement may not be amended except by an
instrument in writing, signed by each of the parties. No failure to exercise and
no delay in exercising any right, remedy, or power under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power under this Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy, or power provided
herein or by law or in equity.
11. ASSIGNMENT; SUCCESSORS AND ASSIGNS. Executive agrees that he will not
assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily
or involuntarily, or by operation of law, any rights or obligations under this
Agreement. Any such purported assignment, transfer, or delegation shall be null
and void. Nothing in this Agreement shall prevent the consolidation of Company
with, or its merger into, any other entity, or the sale by Company of all or
substantially all of its assets, or the otherwise lawful assignment by Company
of any rights or obligations under this Agreement. Subject to the foregoing,
this Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective heirs, legal representatives, successors, and
permitted assigns, and shall not benefit any person or entity other than those
specifically enumerated in this Agreement.
12. SEVERABILITY. If any provision of this Agreement, or its application to any
person, place, or circumstance, is held by an arbitrator or a court of competent
jurisdiction to be invalid, unenforceable, or void, such provision shall be
enforced to the greatest extent permitted by law, and the remainder of this
Agreement and such provision as applied to other persons, places, and
circumstances shall remain in full force and effect.
13. ATTORNEYS' FEES. In any legal action, arbitration, or other proceeding
brought to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees and costs.
<PAGE>
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of California.
15. INTERPRETATION. This Agreement shall be construed as a whole, according to
its fair meaning, and not in favor of or against any party. By way of example
and not in limitation, this Agreement shall not be construed in favor of the
party receiving a benefit nor against the party responsible for any particular
language in this Agreement. Captions are used for reference purposes only and
should be ignored in the interpretation of the Agreement.
16. EMPLOYEE ACKNOWLEDGMENT. Executive acknowledges that he has had the
opportunity to consult legal counsel in regard to this Agreement, that he has
read and understands this Agreement, that he is fully aware of its legal effect,
and that he has entered into it freely and voluntarily and based on his own
judgment and not on any representations or promises other than those contained
in this Agreement. Executive specifically acknowledges that he has received
notice of his statutory rights under Section 2870 of the California Labor Code,
as set forth in the above Section 6 on Inventions and Ideas.
The parties have duly executed this Agreement as of the date first written
above.
/S/ Robert Brown
- ------------------------------
Robert J. Brown
Interactive Network, Inc.
/S/ Bruce W. Bauer
- ------------------------------
By: Bruce W. Bauer
Its: Chief Executive Officer
EXHIBIT 10.15
ADDENDUM TO CONSULTING AGREEMENT FOR GREGG FREISHTAT
February 8, 2000
Mr. Gregg Freishtat
5860 Winterthur Drive
Atlanta, GA 30328
Re: Addendum to Consulting Agreement dated July 10, 1999
Dear Gregg:
This letter is written as an Agreement dated July 10, 1999 between you
and Interactive Network, Inc. (the "Company"). It represents a duly and validly
authorized, executed and delivered obligation of the Company enforceable in
accordance with its terms.
1. The Company acknowledges receipt of your Exercise Form for the
exercise, on a "cashless" or "net exercise" basis, of an option to purchase
250,000 shares of Common Stock of the Company at an exercise price of $.78 per
share. Pursuant to this net exercise, the Company is moving expeditiously to
issue to you 206,667 shares of Common Stock. In addition, the Company confirms
to you that such shares are subject to registration with the Securities and
Exchange Commission (the "SEC") on Form S-8 and that such a form has been, or
will be, filed with the SEC and is expected to go effective no later than the
end of March 2000. The Company shall not take any action to restrict the
liquidity of the stock.
2. In respect of the Company's current cash needs, you and the Company
hereby agree that:
(a) At any time between the date hereof and December 31, 2000, you
shall have the right to purchase from the Company up to
250,000 shares of Common Stock of the Company at the lesser of
$4.50 or the market price of a share on the date notice of
such purchase is given; and
(b) At any time between the date hereof and December 31, 2000, the
Company shall have the right to require you to purchase up to
$250,000 of Common Stock of the Company, at the lesser of
$4.50 or the market price of a share on the date notice of
such sale is given.
Either party wishing to exercise such right shall give the other party
written notice at least 10 days in advance of the proposed date of closing. You
shall have the right to make such purchase in your discretion under paragraph
(a) above, but shall nonetheless be relieved of any obligation to purchase such
stock under paragraph (b) above, if (I) at the time of the notice and at the
date of closing, the price of a share of Common Stock of the Company shall be
less than $3.80 per share or (ii) the Company shall not have obtained an
effective registration with the SEC under all applicable securities laws and
listing with the bulletin board market place of the shares referenced in
paragraph one above and those being purchased on or before the proposed closing
date, such that such shares are not restricted by any action taken by the
Company at the date of closing and for a reasonable time thereafter to permit
the sale of such shares in the public market. The Company agrees to use all best
efforts to effect and maintain any and all such SEC registrations and
appropriate listings, as well as any corresponding registrations necessary under
any applicable state securities laws, in order for you to be able to sell such
shares in the open market as of the date of closing and for a reasonable time
thereafter.
<PAGE>
3. Except as specifically set forth herein, the Consulting Agreement
shall not be affected hereby and shall remain in full force and effect except
that you have agreed that any eventual merger between the Company and Two Way TV
shall not trigger any additional compensation.
Gregg, I trust this meets with your expectations and our prior
understandings. If you have any questions, please do not hesitate to call. In
the meantime, if this is reflective of our understanding, I ask that you sign
and return to me the enclosed copy of this Addendum.
Very truly yours,
INTERACTIVE NETWORK, INC.
/s/ Bruce W. Bauer
------------------
Bruce W. Bauer
President and CEO
Agreed this __ day of Feburary, 2000:
/S/ GREGG FREISHTAT
-------------------
Gregg Freishtat
EXHIBIT 10.16
ADDENDUM TO CONSULTING AGREEMENT FOR EDUARD MAYER
Friday, February 08, 2000
Mr. Eduard Mayer
Oakwood
Abbey Road
Virginia Water
Surrey
England GU25 4RS
Re: Addendum to Consulting Agreement dated July 10, 1999
Dear Ed:
This letter is written as an Agreement dated July 10, 1999 between you
and Interactive Network, Inc. (the "Company"). It represents a duly and validly
authorized, executed and delivered obligation of the Company enforceable in
accordance with its terms.
1. The Company acknowledges receipt of your Exercise Form for the
exercise, on a "cashless" or "net exercise" basis, of an option to purchase
250,000 shares of Common Stock of the Company at an exercise price of $.78 per
share. Pursuant to this net exercise, the Company is moving expeditiously to
issue to you 203,571 shares of Common Stock. In addition, the Company confirms
to you that such shares are subject to registration with the Securities and
Exchange Commission (the "SEC") on Form S-8 and that such a form has been, or
will be, filed with the SEC and is expected to go effective no later than the
end of March 2000. The Company shall not take any action to restrict the
liquidity of the stock.
2. In respect of the Company's current cash needs, you and the Company
hereby agree that:
(a) At any time between the date hereof and December 31, 2000, you
shall have the right to purchase from the Company up to
250,000 shares of Common Stock of the Company at the lesser of
$4.50 or the market price of a share on the date notice of
such purchase is given; and
(b) At any time between the date hereof and December 31, 2000, the
Company shall have the right to require you to purchase up to
$250,000 of Common Stock of the Company, at the lesser of
$4.50 or the market price of a share on the date notice of
such sale is given.
Either party wishing to exercise such right shall give the other party
written notice at least 10 days in advance of the proposed date of closing. You
shall have the right to make such purchase in your discretion under paragraph
(a) above, but shall nonetheless be relieved of any obligation to purchase such
stock under paragraph (b) above, if (I) at the time of the notice and at the
date of closing, the price of a share of Common Stock of the Company shall be
less than $3.80 per share or (ii) the Company shall not have obtained an
effective registration with the SEC under all applicable securities laws and
<PAGE>
listing with the bulletin board market place of the shares referenced in
paragraph one above and those being purchased on or before the proposed closing
date, such that such shares are not restricted by any action taken by the
Company at the date of closing and for a reasonable time thereafter to permit
the sale of such shares in the public market. The Company agrees to use all best
efforts to effect and maintain any and all such SEC registrations and
appropriate listings, as well as any corresponding registrations necessary under
any applicable state securities laws, in order for you to be able to sell such
shares in the open market as of the date of closing and for a reasonable time
thereafter.
3. Except as specifically set forth herein, the Consulting Agreement
shall not be affected hereby and shall remain in full force and effect except
that you have agreed that any eventual merger between the Company and Two Way TV
shall not trigger any additional compensation.
Ed, I trust this meets with your expectations and our prior
understandings. If you have any questions, please do not hesitate to call. In
the meantime, if this is reflective of our understanding, I ask that you sign
and return to me the enclosed copy of this Addendum.
Very truly yours,
INTERACTIVE NETWORK, INC.
/s/ Bruce W. Bauer
------------------
Bruce W. Bauer
President and CEO
Agreed this 8th day of Feburary, 2000:
/S/ EDUARD MAYER
----------------
Eduard Mayer
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Interactive Network, Inc.:
We consent to the use in this 1999 Annual Report on Form 10-K of our report
dated March 15, 1999 relating to the consolidated balance sheet of Interactive
Network, Inc. and subsidiary as of December 31, 1998 and the related
consolidated statements of operations, shareholders' deficit and cash flows for
each of the years in the two-year period ended December 31, 1998.
Our report dated March 15, 1999 contains an explanatory paragraph that states,
among other things, that the Company filed for bankruptcy and was operating as a
debtor-in-possession under the jurisdiction of the bankruptcy court which
subjects the Company to a number of significant contingencies and raises
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
KPMG LLP
Mountain View, California
April 14, 2000
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