-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QTX5KDkl6n9Ho1kdOjgQZj08JNs3vIB3SjH+Ycx99UwLvO4KJh8qltdkL6gAyJmw HNadQZaKLfXrjwd5UqTVDQ== 0001019687-01-500642.txt : 20010815 0001019687-01-500642.hdr.sgml : 20010815 ACCESSION NUMBER: 0001019687-01-500642 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERACTIVE NETWORK INC /CA CENTRAL INDEX KEY: 0000879482 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 943025019 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19579 FILM NUMBER: 1712930 BUSINESS ADDRESS: STREET 1: 180 SECOND STREET, SUITE B CITY: LOS ALTOS STATE: CA ZIP: 94022 BUSINESS PHONE: 6509473345 MAIL ADDRESS: STREET 1: 180 SECOND STREET, SUITE B CITY: LOS ALTOS STATE: CA ZIP: 94022 10-Q 1 interactive_10q-063001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 ------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period from _______ to _______ Commission file number 000-19579 INTERACTIVE NETWORK, INC. (Exact name of registrant as specified in its charter) California 94-3025019 (State of incorporation) (I.R.S. employer identification number) 180 Second Street, Suite B Los Altos, California 94022 (Address of principal executive offices and zip code) (650) 947-3345 (Registrant's telephone number, including area code) with a copy to Robert S. Townsend Morrison & Foerster, LLP 425 Market Street San Francisco, CA 94105 (415) 268-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares outstanding as of June 30, 2001 - ----- -------------------------------------- Common Stock 43,019,277 INTERACTIVE NETWORK, INC. INDEX PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS......................................1 CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 (Unaudited) AND DECEMBER 31, 2000.........1 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000................................................2 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000................................................3 NOTES TO FINANCIAL STATEMENTS (Unaudited).................4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........4 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.........................................11 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................12 ITEM 6. EXHIBITS..................................................12 SIGNATURES ..........................................................13 i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERACTIVE NETWORK, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2001 2000 -------------- -------------- (UNAUDITED) ASSETS Current assets: Restricted cash $ 5,543,978 $ 5,609,735 Cash 948,999 685,168 Royalty fee receivable 135,000 250,000 Prepaid expenses and other current assets 46,523 47,218 -------------- -------------- Total current assets 6,674,500 6,592,121 Deposits and other assets 3,144 3,220 -------------- -------------- Total assets $ 6,677,644 $ 6,595,341 ============== ============== LIABILITIES AND SHAREHOLDERS' (DEFICIT) Current liabilities: Accounts payable and accrued liabilities $ 791,103 $ 443,952 Liabilities subject to compromise 5,504,922 5,503,263 Promissory note - current - 85,565 Deferred legal fees - 957,775 -------------- -------------- Total current liabilities 6,296,025 6,990,555 Promissory note - noncurrent 1,246,130 598,955 Convertible Promissory Notes 1,120,616 - Shareholders' deficit: Preferred stock, no par value, 10,000,000 shares authorized; no shares issued and outstanding as of June 30, 2001 and December 31, 2000 - - Common stock, no par value, 150,000,000 shares authorized; 43,019,277 shares issued and outstanding as of both June 30, 2001 and December 31, 2000 145,874,986 145,874,986 Accumulated deficit (147,860,113) (146,869,155) -------------- -------------- Total shareholders' (deficit) (1,985,127) (994,169) -------------- -------------- Total liabilities and shareholders' (deficit) $ 6,677,644 $ 6,595,341 ============== ============== See accompanying notes to consolidated financial statements. 1
INTERACTIVE NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------------------- --------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Royalty fees $ 67,500 $ - $ 135,000 $ - ------------ ------------ ------------ ------------ General and administrative expenses: Salaries 69,417 65,641 147,336 131,282 Employer payroll taxes 9,004 8,689 22,726 17,331 Contract labor 7,012 11,858 32,520 28,606 Rent 9,000 3,099 18,000 5,165 Directors' & Officers' insurance 16,801 - 32,702 - Other administrative costs 9,796 22,444 16,994 53,065 Legal fees 91,341 117,969 139,450 170,977 Accounting fees 26,060 17,054 47,156 54,372 Advisory fees - - - 390,000 Legal - NTN litigation 23,549 10,135 25,936 14,904 Shareholder relations - proxy - 24,776 1,400 28,659 ------------ ------------ ------------ ------------ General and administrative expenses 261,980 281,665 484,220 894,361 ------------ ------------ ------------ ------------ Loss from operations (194,480) (281,665) (349,220) (894,361) Other (income) and expense Interest (income) (72,352) (99,196) (145,428) (199,849) Interest expense 148,409 89,000 286,374 195,000 Net loss from investment in affiliate accounted for by the equity method 314,486 273,160 619,345 278,651 Reserve for impairment of investment (164,486) - (219,345) - Litigation settlement - 3,301,000 - 3,081,785 ------------ ------------ ------------ ------------ Other (income) and expense, net 226,057 3,563,964 540,946 3,355,587 ------------ ------------ ------------ ------------ Loss before reorganization expenses (420,537) (3,845,629) (890,166) (4,249,948) Reorganization expenses 100,792 250 100,792 106,522 ------------ ------------ ------------ ------------ Net loss before federal & state taxes (521,329) (3,845,879) (990,958) (4,356,470) Federal & state taxes - - - 800 Net loss $ (521,329) $ (3,45,879) $ (990,958) $(4,357,270) ============ ============ ============ ============ See accompanying notes to consolidated financial statements. 2
INTERACTIVE NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- 2001 2000 ------------ ------------ Cash flows from operating activities: Net loss $ (990,958) $(4,357,270) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Loss from investment in affiliate 619,345 278,651 Allowance for investment in affiliate (219,345) - Changes in assets and liabilities: Royalty fee receivable 115,000 - Prepaid expenses and other assets 771 (22,781) Accounts payable 381,975 (71,055) Liabilities subject to compromise 1,659 2,331,397 Deferred legal fees (500,000) - Other accrued liabilities 69,626 350,000 ------------ ------------ Cash provided by (used in) operating activities: (521,927) (1,491,058) Cash flows from investing activities: Investment in TWIN Entertainment - (500,000) Promissory note receivable from TWIN Entertainment (400,000) - ------------ ------------ Cash provided by (used in) financing activities: (400,000) (500,000) ------------ ------------ Cash flows from financing activities: Proceeds from bridge financing 1,120,000 - Sale of common stock - 350,997 ------------ ------------ Cash provided by (used in) financing activities: 1,120,000 350,997 ------------ ------------ Net increase (decrease) in cash $ 198,073 $(1,640,061) Cash: Beginning of period 6,294,903 7,576,158 ------------ ------------ End of period $ 6,492,977 $ 5,936,097 ============ ============ See accompanying notes to consolidated financial statement. 3
INTERACTIVE NETWORK, INC. Notes to Unaudited Consolidated Financial Statements June 30, 2001 The consolidated financial information of Interactive Network, Inc. (the "Company") furnished herein reflects all adjustments, consisting only of normal recurring adjustments which in the opinion of management are necessary to present fairly the financial position of the Company as of June 30, 2001 and the results of its operations and cash flows for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K Report for the year ended December 31, 2000 filed with the Securities and Exchange Commission ("SEC") on April 16, 2001. The results of operations for the three-month or six-month periods ended June 30, 2001 are not necessarily indicative of the results for any subsequent quarter or for the entire year ending December 31, 2001. Current liabilities consist of accounts payable, and legal fees and expenses incurred in connection with the Company's Chapter 11 bankruptcy proceedings and general corporate work. Payment of Morrison & Foerster's pre-confirmation fees, which was subject to Bankruptcy Court approval, was deferred by agreement until April 22, 2000, when payment was due in full without interest. As the Company lacked funds to pay Morrison & Foerster's fees at that time, Morrison & Foerster did not apply to the Bankruptcy Court for approval of its fees. On June 30, 2001, with approval from the Bankruptcy Court, the Company paid Morrison & Foerster $500,000 as partial payment of the principal and interest on the pre-confirmation fees. The remaining pre-confirmation fees are subject to an agreement between Morrison & Foerster and the Company, with the first payment due on October 15, 2002. INVESTMENT IN AFFILIATE. The Company owns 50% of the outstanding capital stock of TWIN Entertainment, Inc. ("TWIN Entertainment"), a corporate joint venture between the Company and Two Way TV Limited ("Two Way TV"). TWIN Entertainment's offices are located at 300 De Haro Street, Suite 342, San Francisco, CA 94103. TWIN Entertainment operates in the United States and Canada using technology licensed to it by the Company and Two Way TV. In addition to its initial investment of $500,000, the Company made additional investments in TWIN Entertainment in the form of multiple loans totaling $1.25 million through the first quarter of 2001. The Company made further loans of $50,000 in May 2001 and $100,000 in June 2001, and after the quarter ended June 30, 2001, made additional loans of $100,000 in July 2001 and $100,000 in August 2001. Two Way TV made similar loans to TWIN Entertainment, leaving the relative ownership interests in TWIN Entertainment unchanged. Each party reserves the right to convert such amounts to equity in TWIN Entertainment in the future under terms to be determined and agreed upon at a later date by the parties. The Company's share of the operating loss from its joint venture investment in TWIN Entertainment was approximately $314,486 for the quarter ended June 30, 2001 accounted for by the equity method. The Company also adjusted its allowance against its investment and outstanding loans in the amount of $164,486 to write the investment, including loans, down to zero at June 30, 2001, as no assurance can be made that the joint venture will be profitable in the future. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Conditions and Results of Operations contained in the Company's Annual Report for the year ended December 31, 2000, filed with the SEC on April 16, 2001. The discussion of the Company's current business and future expectations under this item contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Forward Looking Statements" below and in the section "Factors Affecting Future Operating Results" from Item 1 of the Company's 10-K for the fiscal year ended December 31, 2000, incorporated herein by reference. 4 OVERVIEW Interactive Network was originally founded to provide interactive television services, which we began providing in 1991. We incurred significant expenses in developing, testing and marketing our services, and were forced to curtail our operations by August 1995 due to lack of ongoing financing. While in operation, we acquired key strategic investors such as TCI Cable (now a part of AT&T), NBC, Gannett, 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. We continue to concentrate on exploiting our patent portfolio in a cost-effective way through licenses, joint ventures, strategic alliances, or other methods that do not involve large overhead demands. In the event that our proposed merger with TWIN Entertainment is consummated, as discussed below, we believe that TWIN Entertainment will engage in restrictive licensing of our intellectual property and focus on developing and licensing products and services that utilize our patents and Two Way TV's technology. We have an advisory panel of consultants and have re-employed our former Chief Scientist, Dr. Robert Brown, to provide the technical and management expertise to assist in the fulfillment of our goals. Further, our management may hire additional personnel to meet our anticipated future needs. Our bankruptcy reorganization plan was approved by the Bankruptcy Court in 1999 and we continue to expend resources in litigating disputed claims. In addition, we expend significant resources in the maintenance and enforcement of our intellectual property rights. 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 developed. On January 31, 2000, we consummated the formation of a joint venture company, TWIN Entertainment, which is co-owned and co-managed by us and Two Way TV under the terms of a Joint Venture and Stock Purchase Agreement dated as of December 6, 1999. Each of us and Two Way TV have subsequently financed TWIN's operations equally. TWIN Entertainment currently expects to develop, market and supply digital (as well as analog) interactive and related services, products and technology in the United States and Canada. We have licensed TWIN Entertainment 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 intellectual property rights and technology, including then-existing and future content, software, know-how and other technological materials and information, on a non-exclusive basis. Additionally, as part of the agreements with Two Way TV to create TWIN Entertainment, we settled all outstanding claims with Two Way TV and entered into a separate worldwide license agreement that exclusively licenses our intellectual property in countries other than the United States and Canada to Two Way TV in exchange for a royalty payment of a certain percentage of Two Way TV's world wide sales. Under the terms of the agreement, Two Way TV will pay us a royalty of 3% of worldwide Gross Profits (as defined in the Termination and License Agreement dated as of January 31, 2000, which was filed with the SEC on February 11, 2000 as Exhibit 2.5 to a Report on Form 8-K and which is incorporated herein by reference), with a minimum annual royalty of no less than $250,000 by January 31, 2001, with the minimum royalty payment increasing by at least eight percent (8%) each year thereafter. In March 2001, Two Way TV paid us a royalty of $250,000 for the year ending December 31, 2000. Although we have not received the royalty payment for the year ending December 31, 2001, the Company has recognized the corresponding prorated minimum revenue due for the six months ended June 30, 2001. Since the original formation of TWIN Entertainment we have made additional investments in TWIN Entertainment in the form of loans, and Two Way TV made similar loans to TWIN Entertainment. Each of us and Two Way reserves the right to convert the loan amounts into equity of TWIN Entertainment in the future under terms to be determined and agreed upon at a later date by the parties. In the second quarter of 2001, we made additional loans of $50,000 in May 2001 and $100,000 in June 2001 and after the close of second quarter, we have loaned an additional $100,000 in July 2001 and $100,000 in August 2001, on similar terms to TWIN Entertainment, and Two Way TV also made similar loans to TWIN Entertainment. We understand that TWIN Entertainment's management continues to discuss with a number of companies carriage and content agreements to deliver and create interactive entertainment under the licensing it has received from the Company and Two Way TV. It is our belief that TWIN Entertainment, or, if the merger discussed below is successfully consummated, Two Way TV (US), will use our intellectual property and Two Way TV's technology to become an active participant in the interactive television and broadband market in the U.S. and Canada. 5 In December 2000, we announced that we were negotiating the terms of a transaction with Two Way TV under which we would acquire 100% ownership of TWIN Entertainment. At the time of our announcement, we anticipated that Two Way TV would exchange its interest in TWIN Entertainment for a substantial stake in Interactive Network, and TWIN Entertainment would merge with us, forming a single company. In June 2001, we announced that on May 31, 2001, we entered into an agreement whereby we are to be merged with and into TWIN Entertainment to form a new company to be called Two Way TV (US), Inc. In the proposed transaction, Two Way TV will own 45% of Two Way TV (US) on a fully diluted basis and our existing shareholders will own approximately 55% of the combined company. At the closing of the merger, Two Way TV is to grant an exclusive license in the United States and Canada to Two Way TV (US) to all of the Two Way TV games, technologies and patents, and Two Way TV (US) is to grant an exclusive license outside of the United States and Canada to Two Way TV of its patents. The completion of any transaction as currently reported is subject to many conditions, including approval by our shareholders, finalization of certain material commercial arrangements with third parties and any required regulatory review and legal processes. Thus, while we currently believe that the transaction will be completed, it remains possible that the merger will not take place. LIQUIDITY AND CAPITAL RESOURCES We consummated a settlement agreement in 1998 with our secured senior noteholders and have paid all undisputed claims under our confirmed plan of reorganization. A substantial portion of the proceeds received from the noteholders was allocated to pay creditors and a large portion of those funds were set aside in a reserve account for the payment of creditors whose claims we are continuing to dispute. As of June 30, 2001, the balance of these reserved funds was approximately $5.5 million. As of June 30, 2001, all allowed and disputed prepetition claims either allowed or disputed totaled approximately $5.5 million, not including a cross-claim filed by National Datacast, Inc. in the amount of $800,000. The amount of funds available to us after resolution of contested claims with creditors will depend on the extent to which we are successful in substantially reducing, defeating or deferring payment of the claims we are contesting. If we are not successful in defeating, substantially reducing or deferring payment of these claims by creditors, our working capital requirements would need to be satisfied by external sources of financing to the extent revenues from exploitation of our patent portfolio are not sufficient. Certain investors agreed to allow the Company to use funds committed by them in our recent Stock Purchase and Investment Agreement financing (discussed below) to supplement our bankruptcy reserve account on a monthly basis to retain the 100% coverage (as determined by the Bankruptcy Court) as interest accrues on certain of those claims, as applicable. By this arrangement, we obtained an order of the Bankruptcy Court staying the enforcement of the National Datacast, Inc., claim. The Bankruptcy Court entered the stay order on November 13, 2000. We funded the reserve account in the amount agreed upon with National Datacast and the Bankruptcy Court within the deadline set by the stay order, and have continued to keep it funded at 100% through June 30, 2001. The only remaining claims as of June 30, 2001 secured by the reserve account are those of National Datacast (which is on appeal as discussed below in "Other Contingencies and Commitments"), Fish & Richardson (which is subject to a claim objection proceeding as discussed below in "Other Contingencies and Commitments") and Equitable Life Assurance Society ("Equitable") (which claim was paid on a monthly basis pursuant to a settlement with Equitable, with the final installment of about $35,000 paid on July 1, 2001, making Equitable no longer a creditor). These unresolved claims were secured by a lien on the revenue arising from our intellectual property, but in accordance with our confirmed plan of reorganization, the lien was released because the reserve account is funded for 100% of remaining creditor claims (as determined by the Bankruptcy Court). Our current business plan continues to be one of exploiting our patent portfolio through negotiating favorable licensing with those companies actively involved in, or planning to enter into, the area of interactive advertising and/or the delivery, or production of interactive entertainment where we believe a license from the Company is required for them to avoid infringement upon one or more of our patents. Where we cannot make favorable agreements with companies whom we believe are infringing upon our intellectual property, it is management's intention to litigate that infringement to enforce and to protect our rights. Additionally, we will continue to support TWIN Entertainment, which we believe will be successful in the future by contracting with content providers to create interactive programming and with cable and satellite operators to deliver interactive content to their subscribers. In the event of the successful completion of the proposed merger with TWIN Entertainment, we believe that TWIN Entertainment will engage in restrictive licensing of our intellectual property and also develop and license products and services that utilize our patents and Two Way TV's technology. 6 Management intends to continue its patent development program and to continue to seek out mutually advantageous agreements with other related companies to form partnerships and alliances which will enhance the value of, and assist in exploiting, our technology. We continue to pursue our claims for patent infringement against Networks North, Inc. (formerly NTN Communications Canada, Inc.) in Canada and intend to litigate these claims to full resolution. We have incurred expenses of approximately $125,000 in connection with the pursuit of this claim. As is customary in Canada, we were also required by the Court to post a bond for $27,160 to cover the defendant's legal costs in the case of an unfavorable decision against us. We currently expect to incur aggregate additional expenses in excess of $60,000 in connection with the pursuit of this claim. We currently expect our need for working capital for the remainder of fiscal year 2001 to consist largely of general and administrative expenses, repayment of debt due in 2001, professional fees and patent development and marketing expenses to establish a groundwork for generating revenues from our intellectual property assets. Between September 13, 2000 and December 31, 2000, we raised $3.1 million through the sale of 2,541,672 units to private investors pursuant to a Stock Purchase and Investment Agreement dated September 13, 2000. Each unit consists of one share of our common stock and a five-year warrant to purchase one share of our common stock at an exercise price of $1.90 per share. The proceeds funded our operations into the second quarter of 2001, with the investors retaining substantial control over the use of proceeds from their investment. This description is a general summary only and does not describe all the terms of the investment, which is governed by the Stock Purchase and Investment Agreement and related documents. A copy of that agreement has been filed as Exhibit 10.19 to the Quarterly Report on Form 10-Q filed with the SEC on November 14, 2000, and is incorporated herein by reference. In the second quarter of 2001, we raised $1.12 million through the sale of 112 units to private investors pursuant to 10% Convertible Promissory Notes and Common Stock Purchase Warrants, copies of the form of which have been filed as Exhibits 10.20 and 10.21, respectively, to this Form 10-Q and are incorporated herein by reference. Each unit consists of (i) a $10,000 convertible promissory note bearing interest at 10% per annum that is convertible into our Common Stock at the rate of $0.50 per share and (ii) a five-year warrant to purchase 20,000 shares at an exercise price of $0.60 per share. Of the $1.12 million raised through June 30, 2001, $500,000 was used as partial payment on the pre-confirmation fees owed to Morrison & Foerster (as discussed below), $300,000 was loaned to TWIN Entertainment (as discussed below), and we intend to use the remainder to fund our operations through the third quarter 2001. We raised an additional $292,500 in this financing after June 30, 2001 and through the date of this Report. In 2001, we and Two Way TV each increased our investment in TWIN Entertainment. We and Two Way TV each loaned TWIN Entertainment $250,000 in February 2001, $50,000 in May 2001, $100,000 in June 2001, $100,000 in July 2001 and $100,000 in August 2001, each loan in the form of convertible promissory notes on terms to be agreed upon by the parties at a later date. In addition, if the merger with TWIN Entertainment is successful, we will incur additional general costs (both directly and indirectly as a financier of TWIN Entertainment) related to the merger. The $250,000 loaned to TWIN Entertainment in February 2001 and the $50,000 loaned to TWIN Entertainment in May 2001 were paid out of proceeds from the sale of units pursuant to the Stock Purchase and Investment Agreement and are in the form of loans in which each of us and Two Way TV reserves the right to convert to equity in TWIN Entertainment in the future under terms to be determined and agreed upon at a later date by the parties. The $100,000 loaned in June 2001, the $100,000 loaned in July 2001, and the $100,000 loaned in August 2001 were each paid out of the proceeds from the sale of the units pursuant to the Convertible Promissory Note and Warrant Agreement discussed above and are in the form of loans on terms and conditions similar to prior loans to TWIN Entertainment. We incurred legal expenses reflected on previous balance sheets of $957,775 prior to confirmation of our bankruptcy reorganization plan on April 22, 1999, which became payable on April 22, 2000, subject to Bankruptcy Court approval. We also incurred post-confirmation legal expenses, principally in preparing and litigating objections to claims filed in the bankruptcy proceeding and for general corporate matters, on which a balance of $684,520 remained unpaid as of June 30, 2001. On June 30, 2001, the Bankruptcy Court approved pre-confirmation fees owed of $932,775, and we paid $500,000 to our counsel as partial payment of the principal and interest owed on such pre-confirmation fees. We have amended our previous agreement with our counsel for payment of the remaining amount on the following terms: the remaining preconfirmation legal fees of approximately $520,043 is included in a new promissory note from us to Morrison & Foerster, along with the approximately $684,520 owed to our counsel for post-confirmation expenses. Interest is accruing on the $520,043 of pre-confirmation expenses as of October 15, 2000 at 1% per annum over Bank of America's prime rate. The 7 Company has paid approximately $62,000 in interest and incurred approximately an additional $41,500 of interest expense on these deferred pre-confirmation legal fees as of June 30, 2001. Interest will begin accruing on the approximately $684,520 in post-confirmation expenses as of July 1, 2001 at 1% per annum over Bank of America's prime rate. Repayment of principal and interest on this promissory note is required to commence on October 15, 2002, and will be paid in 24 equal monthly installments each consisting of 1/24th of the aggregate of the unpaid principal amount under the promissory note and the unpaid interest accrued through September 30, 2002. We also amended the warrant previously issued to our counsel to, among other things, reflect a revised warrant exercise price of $0.69, which was 101% of the average Closing Price for the 20 days prior to the date of the issuance of the revised warrant. In addition to the foregoing legal expenses, through June 30, 2001, contingent legal expenses in the amount of approximately $1.1 million have been incurred by the Company in contesting claims in the Bankruptcy Court, which we will be obligated to pay only out of savings realized from a successful reversal or reduction on appeal of awards granted by the Bankruptcy Court with respect to the contested claim of National Datacast, or, if an appeal is not pursued, through cancellation of the unscheduled contingent legal expenses by exercise of a warrant issued on similar terms as the warrant described above. OTHER CONTINGENCIES AND COMMITMENTS We continue to dispute the claims of National Datacast in our bankruptcy proceeding. As of June 30, 2001, National Datacast's claim, including accrued interest, totaled approximately $5.06 million. We appealed the July 2000 memorandum decision and on November 13, 2000 we obtained from the Bankruptcy Court a stay of enforcement of the judgement by National Datacast pending the appeal. We filed our opening brief on March 6, 2001. The stay is conditioned on our funding of the reserve account securing the claims of unpaid or disputed claims created by our confirmed plan of reorganization at 100% of the remaining claims and adjusting the reserve account on a monthly basis thereafter enough to cover remaining claims in light of accruing interest, where applicable. We funded the reserve account within the deadline set by the stay order, and have continued to keep it funded at 100% through June 30, 2001. National Datacast filed a cross-claim in the amount of approximately $800,000. That amount was not requested to be covered by the reserve account at the time we obtained the stay from the Bankruptcy Court and it is not currently covered. We have settled the claims of Equitable for a total of $840,000, one half of which was paid upon approval by the Bankruptcy Court of the settlement, and one half of which was to be paid in equal monthly installments over the twelve months thereafter, without interest. As of July 2001, we have paid the first half of the settlement and made all twelve (12) of the monthly installments. The final installment of approximately $35,000 was paid in July 2001. Equitable is no longer a creditor. Fish & Richardson claims it is owed approximately $267,000 (with interest) as of June 30, 2001, for prepetition legal services rendered to Interactive Network. We contend that we owe Fish & Richardson substantially less, if anything at all. We recently filed an objection to Fish & Richardson's claim. At a status conference on March 30, 2001, the Bankruptcy Court set trial on this dispute for September 4-5, 2001. The Fish & Richardson claim is covered by the reserve account. We are continuing our litigation against Networks North, Inc. (formerly NTN Communications Canada, Inc.) in Canada for that company's alleged infringement of our patents. To date, we have incurred expenses of approximately $125,000 in connection with the pursuit of this claim. We currently expect to incur aggregate additional expenses in excess of $60,000 in connection with the pursuit of this claim. On October 30, 2000, a judgment was entered on the complaint filed in our bankruptcy case by David Lockton, a shareholder and our former CEO. Subsequently, we paid Mr. Lockton the amount of his allowed claims plus interest to the date of the payment, less $81,000 for the purchase price of the 900,000 shares of our common stock issued to him upon exercise of the options granted to him under the judgment, and issued to him and registered the 900,000 shares. Mr. Lockton retains the right to be paid $1.85 million under the terms of his promissory note. Under the terms of the promissory note, payments do not become due and payable until such time that the Company has generated certain levels of positive cash flow for two consecutive fiscal quarters and any such payments may be limited or suspended based on the extent of the Company's cash flows. 8 Certain directors of the Company have also been sued by Mr. Lockton in a separate action. Although the Company is not a party to the suit, we do have a potential obligation to indemnify our directors for claims raised in the suit. The parties are currently in settlement negotiations and at this time the Company does not believe that the resolution of this suit will have a material adverse effect on the Company's financial position. RESULTS OF OPERATIONS ROYALTY FEES. During the three month and six month periods ended June 30, 2001, we recognized approximately $67,500 and $135,000, respectively, in prorated revenue from minimum royalty fees owed based upon an agreement with Two Way TV. In the three month and six month periods ended June 30, 2000, we had no revenue. GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily consist of salary, wages and related payroll expenses for executive and administrative personnel, legal and accounting fees, other professional services, business travel and other administrative expenses. General and administrative expenses for the three and six month periods ended June 30, 2001 were approximately $262,000 and $484,000, respectively, compared to approximately $282,000 and $894,000, respectively, for the same periods of 2000. The decrease for the three months ended June 30, 2001 versus the comparable period in the prior year was primarily due to a reduction in legal services required and fees incurred. The decrease for the six months ended June 30, 2001 versus the comparable period in the prior year was primarily due to a one-time charge of $390,000 recorded in the three months ended March 31, 2000 for advisory fees related to additional claims filed with the Bankruptcy Court. OTHER INCOME AND EXPENSE INTEREST INCOME. Our interest income for the three and six month periods ended June 30, 2001, was approximately $72,000 and $145,000, respectively, compared with approximately $99,000 and $200,000 for the same periods, respectively, in 2000. Our interest income consisted primarily of interest earned on deposits mandated by the Bankruptcy Court for restricted use. The decrease of approximately $55,000 from the six month period ended June 30, 2000, was due to the declining cash balance on proceeds from the Stock Purchase and Investment Agreement financing. INTEREST EXPENSE. Our interest expense for the three and six month periods ended June 30, 2001 was approximately $148,000 and $286,000, respectively, compared to approximately $89,000 and $195,000 for the same periods in 2000. Interest expense for 2001 and 2000 was related to interest accrued to unsecured creditors as part of our bankruptcy reorganization and accrued on pre-confirmation deferred legal fees. See discussion of the settlement agreement under "Liquidity and Capital Resources" and the unsecured creditors under "Other Contingencies and Commitments." NET LOSS FROM INVESTMENT IN AFFILIATE. For the three and six month periods ended June 30, 2001, we recorded a net loss from investment in affiliate of approximately $314,000 and $619,000, respectively, compared to approximately $273,000 and $279,000, respectively, for the same periods in 2000, accounted for by the equity method. These net loss amounts are our share of the net losses incurred by TWIN Entertainment during these periods based upon its unaudited results of operations. We also adjusted our allowance against this investment and outstanding loans in the amount of approximately $219,000 to write our investment, including the loans, down to zero at June 30, 2001, as no assurance can be made that the joint venture will be profitable in the future. LITIGATION SETTLEMENT. No settlement was received in the three and six month periods ending June 30, 2001. During the same periods in 2000 approximately $3,301,000 and $3,082,000, respectively, was received. REORGANIZATION ITEMS. Reorganization items consist primarily of legal and trustee fees directly related to our Chapter 11 bankruptcy reorganization, entered into as a condition to the consummation of the Settlement Agreement and the litigation and other expenses incurred in contesting claims in our bankruptcy reorganization, which is still ongoing. We incurred approximately $101,000 in reorganization expenses for the three and six month periods ended June 30, 2001 compared to approximately $250 and $107,000 for the comparable periods in 2000. 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. It is our policy not to enter into derivative financial instruments. Due to this, we did not have significant overall interest rate risk exposure at June 30, 2001. FOREIGN CURRENCY RATE RISK. We have no transactions in currencies other than U.S. Dollars. We do not currently have any significant foreign currency exposure and we do not expect to incur significant currency-related gains and losses in 2001. We did not engage in foreign currency hedging activities during the six months ended June 30, 2001. FORWARD LOOKING STATEMENTS THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECTIONS OF THIS QUARTERLY REPORT CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES, FORECASTS AND PROJECTIONS ABOUT THE COMPANY'S FUTURE PROSPECTS, PLANS AND STRATEGIES, MANAGEMENT'S BELIEFS AND ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS "EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS ON SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS WHICH ARE DIFFICULT TO PREDICT. THEREFORE, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS, INCLUDING CHANGES THAT COULD AFFECT THE VALUE OF THE COMPANY'S INTELLECTUAL PROPERTY ASSETS AND DECISIONS BY THE BANKRUPTCY COURT REGARDING RESULTS OF APPEALS IN THE COMPANY'S CHAPTER 11 PROCEEDING WITH RESPECT TO ALLOWANCE OF CONTESTED CLAIMS WHICH MAY CAUSE A RESULTING INCREASE IN POST-PETITION INTEREST ON CLAIMS AND COULD REDUCE THE COMPANY'S ANTICIPATED WORKING CAPITAL. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We continue to pursue the objections we have to claims of creditors in our bankruptcy proceedings. As of June 30, 2001, we have set aside approximately $5.5 million in a reserve account to pay creditors whose claims we are disputing, as required under our plan of reorganization. As of June 30, 2001, prepetition claims either allowed or disputed totaled approximately $5.5 million. We continue to dispute the claims of National Datacast in our bankruptcy proceeding. As of June 30, 2001, National Datacast's claim, including accrued interest, totaled approximately $5.06 million. We appealed the July 2000 memorandum decision, and filed our opening brief on March 6, 2001. On November 13, 2000, we obtained from the Bankruptcy Court a stay of enforcement of the judgment by National Datacast pending the appeal. The stay is conditioned on our funding of the reserve account securing the claims of unpaid or disputed claims created by our confirmed plan of reorganization at 100% of the remaining claims and adjusting the reserve account on a monthly basis thereafter enough to cover remaining claims in light of accruing interest, where applicable. We funded the reserve account within the deadline set by the stay order, and have continued to keep it funded at 100% through June 30, 2001. National Datacast filed a cross-claim in the amount of approximately $800,000. That amount was not requested to be covered by the reserve account at the time we obtained the stay from the Bankruptcy Court and it is not currently covered. We have settled the claims of Equitable for a total of $840,000, one half of which was paid upon approval by the Bankruptcy Court of the settlement, and one half of which was to be paid in equal monthly installments over the twelve months thereafter, without interest. As of July 2001, we have paid the first half of the settlement and made all twelve (12) of the monthly installments. The final installment of approximately $35,000 was paid in July 2001. Equitable is no longer a creditor. Fish & Richardson claims it is owed approximately $267,000 (with interest) as of June 30, 2001, for prepetition legal services rendered to Interactive Network. We contend that we owe Fish & Richardson substantially less, if anything at all. We recently filed an objection to Fish & Richardson's claim. At a status conference on March 30, 2001, the Bankruptcy Court set trial on this dispute for September 4-5, 2001. We are continuing our litigation against Networks North, Inc. (formerly NTN Communications Canada, Inc.) in Canada for that company's alleged infringement of our patents. To date, we have incurred expenses of approximately $125,000 in connection with the pursuit of this claim. We currently expect to incur aggregate additional expenses in excess of $60,000 in connection with the pursuit of this claim. Certain directors of the Company have been sued by David Lockton, a shareholder and our former CEO, in a separate action. Although the Company is not a party to the suit, we do have a potential obligation to indemnify the directors for claims raised in the suit. The parties are currently in settlement negotiations and at this time the Company does not believe that the resolution of this suit will have a material adverse effect on the Company's financial position. 11 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Recent Sales of Unregistered Securities In the second quarter of 2001, we raised $1.12 million through the sale of 112 units to private investors pursuant to 10% Convertible Promissory Notes and Common Stock Purchase Warrants, copies of the forms of which have been filed as Exhibits 10.20 and 10.21, respectively, to this Form 10-Q and are incorporated herein by reference. Each unit consists of (i) a $10,000 convertible promissory note bearing interest at 10% per annum that is convertible into our Common Stock at the rate of $0.50 per share and (ii) a five-year warrant to purchase 20,000 shares at an exercise price of $0.60 per share. We believe that the sale of these units were exempt from the registration requirements of Section 5 of the Securities Act of 1933 (the "Securities Act") because the offer and sale of these units were transactions not involving any public offering within the meaning of Section 4(2) of the Securities Act and satisfied the conditions of Rules 505 and 506 promulgated under the Securities Act. Each investor represented to us that such investor was an accredited investor within the meaning of Rule 501 promulgated under the Securities Act. Of the $1.12 million raised through June 30, 2001, $500,000 was used as partial payment on the pre-confirmation fees owed to Morrison & Foerster, $300,000 was loaned to TWIN Entertainment and we intend to use the remainder to fund our operations through the third quarter 2001. We raised an additional $292,500 in this financing after June 30, 2000 and through the date of this report. ITEM 6. EXHIBITS (a) Exhibits Exhibit 10.20 Form of 10% Convertible Promissory Note Exhibit 10.21 Form of Common Stock Purchase Warrant (b) Reports on Form 8-K None 12 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. Date: August 14, 2001 INTERACTIVE NETWORK, INC. (Registrant) By: /s/ Bruce W. Bauer -------------------------------------- Bruce W. Bauer Chairman of the Board President, Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) 13 EX-10.20 3 interactive_10qex10-20.txt EXHIBIT 10.20 THE ISSUANCE OF THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS NOTE MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS SO REGISTERED OR UNLESS AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 IS AVAILABLE. INTERACTIVE NETWORK, INC. 10% CONVERTIBLE PROMISSORY NOTE $_______________ LOS ALTOS, CALIFORNIA ________________, 2001 Interactive Network, Inc., a California corporation (the "Company"), for value received, hereby promises to pay to ______________ or its registered assigns (the "Holder") the principal sum of __________________________ and ___/100 Dollars ($_________) on ___________, 2002. The Company also promises to pay interest (computed on the basis of a 360-day year) from the date hereof on the unpaid balance of such principal amount from time to time outstanding at the rate of ten percent (10%) per annum. Subject to the terms of Section 7, such interest shall be due and payable on the earlier of the date this Note matures or upon conversion of this Note, as described below. At the option of the Company, interest may be paid by the Company either in cash or in newly-issued, fully paid and non-assessable shares of common stock ("Common Stock") of the Company, which shares shall have the same value as the dollar amount of interest due. For this purpose, the value of the shares of Common Stock shall be equal to the "Market Value" as that term is defined in the "Bridge Warrants" (as the term "Bridge Warrants" is defined below). The Company shall give to the Holder at least five (5) business days' notice of its intent to pay the principal amount of this Note, in whole or in part. This Note is one of a series of promissory notes issued by the Company in its offering of units beginning in June 2001, with each unit consisting of a convertible promissory note in the form of this Note in the original principal amount of $10,000.00 and a warrant (collectively, the "Bridge Warrants") to purchase 20,000 shares of Common Stock. 1. CONVERSION. The Holder of this Note has the right, at its option, at any time prior to the payment of the principal amount of this Note, in whole or in part, to convert all or part of the outstanding principal amount of this Note into fully-paid and non-assessable shares of common stock of the Company ("Common Stock") at the rate of one share of Common Stock for $0.50 of outstanding principal hereof, subject to adjustment as set forth herein (the "Conversion Price"). In order to exercise this optional conversion privilege, the Holder of this Note shall surrender this Note to the Company during normal business hours at the Company's principal executive office, accompanied by written notice in form satisfactory to the Company that the Holder elects to convert the principal amount of this Note or a portion hereof specified in such notice. Such notice shall also state the name of the Holder (with the address) in which the certificate or certificates for shares of Common Stock issuable on such conversion shall be issued. 2. SURRENDER OF NOTE AND DELIVERY OF CERTIFICATES. When surrendered for conversion, this Note shall, unless the shares issuable on conversion are to be issued in the same name as the name in which this Note is then registered, be duly endorsed by, or accompanied by instruments of transfer duly executed by, the Holder or his or its duly authorized attorney. As promptly as practicable after the surrender of this Note for conversion in accordance with Section 1 above, the Company shall deliver or cause to be delivered at its principal executive office to the Holder a certificate or certificates for the number of shares of Common Stock issuable upon the conversion of this Note, or portion thereof, in accordance with the provisions hereof. Such conversion shall be deemed to have been made at the time this Note shall have been surrendered for conversion and the notice specified above shall have been received by the Company at its principal executive office (the "Conversion Date"), and the Holder in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on the Conversion Date the holder of record of the shares represented thereby. If less than the entire outstanding principal amount of this Note is being converted, the Company shall promptly deliver to the Holder a new Note for the unconverted principal balance, which Note and shall be of like tenor as to all terms as the Note surrendered. 14 3. ADJUSTMENT OF CONVERSION PRICE. (a) In case the Company shall: (i) declare a stock dividend on its Common Stock, (ii) subdivide outstanding shares of Common Stock into a large number of shares of Common Stock by reclassification, stock split, or otherwise, or (iii) combine outstanding shares of Common Stock into a smaller number of shares of Common Stock by reclassification or otherwise, the number of shares of Common Stock issuable upon conversion of this Note immediately prior to any such event shall be adjusted proportionately so that thereafter the Holder shall be entitled to receive upon conversion of this Note the number of shares of Common Stock which such Holder would have owned after the happening of any of the events described above had the Note been converted immediately prior to the happening of such event, provided that the Conversion Price shall in no event be reduced to less than the par value of the shares issuable upon conversion. An adjustment made pursuant to this Section shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) If, prior to maturity of this Note, the Company shall at any time consolidate or merge with another corporation or entity (other than a merger or consolidation in which the Company is the surviving corporation), the Holder will thereafter be entitled to receive, upon the conversion hereof, the securities or property to which a holder of the number of shares of Common Stock then deliverable upon the conversion hereof would have been entitled to receive upon such consolidation or merger, and the Company shall take steps in connection with such consolidation or merger as may be necessary to ensure that the provisions hereof shall thereafter be applicable to any securities or property thereafter deliverable upon the conversion of this Note. 4. NOTICE. If the Company proposes to take any action referred to in Section 3(a) or Section 3(b) above, or to effect the liquidation, dissolution, or winding up of the Company, then the Company shall cause notice thereof to be mailed to the registered Holder of this Note at least fifteen (15) days prior to the date on which the transfer books of the Company shall close or a record be taken for such stock dividend or the date when such reclassification, liquidation, dissolution or winding up shall be effective, as the case may be. 5. STATEMENT OF ADJUSTMENT. Whenever the Conversion Price shall be adjusted as provided in Section 3(a) above, the Company shall forthwith file and deliver by mail, first class, postage prepaid, to the Holder a statement, signed by the Chairman of the Board, the President, any Vice President, or Secretary of the Company, showing in reasonable detail and certifying as to the facts requiring such adjustment and the Conversion Price that will be effective after such adjustment. Where appropriate, such notice may be given in advance and may be included as part of a notice required to be mailed under the provision of Section 4 hereof. 6. FRACTIONAL SHARES. No fractional shares of Common Stock shall be issuable upon conversion of this Note, but a payment in cash will be made in respect of any fraction of a share which would otherwise be issuable upon the surrender of this Note, or portion hereof, for conversion. 7. ACCRUED INTEREST. Upon the payment or conversion of this Note, the Company shall be required to pay in cash any accrued but unpaid interest on the amount so converted up to the Conversion Date or date of payment. 8. PREPAYMENT OF PRINCIPAL. The principal indebtedness represented by this Note may be prepaid in whole or in part without the prior written consent of the Holder of this Note. 15 9. DEFAULT. The entire unpaid principal of this Note and the interest then accrued on this Note shall become and be immediately due and payable upon written demand of the Company by the Holder of this Note, without any other notice or demand of any kind or any presentment or protest, if any one of the following events shall occur and be continuing at the time of such demand, whether voluntarily or involuntarily, or, without limitation, occurring or brought about by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any governmental body: (a) If the Company (i) makes a composition or an assignment for the benefit of creditors, (ii) applies for, consents to, or acquiesces in, a petition seeking the appointment of a trustee, receiver or liquidator, in bankruptcy or otherwise, of itself or of all or a substantial portion of its assets, or (iii) admits in writing its inability to pay its debts generally as they become due; or (b) If an order for relief shall have been entered by a bankruptcy court or if a decree, order or judgment shall have been entered adjudging the Company insolvent, or appointing a receiver, liquidator, custodian or trustee; or (c) If the Company fails to pay principal and interest under this Note when due, or otherwise breaches any of its obligations or representations in any material respect under this Note. 10. SENIORITY. In the event of any distribution of the assets of the Company upon dissolution, liquidation or reorganization, the Holder of this Note will be entitled to receive payment in full of the indebtedness evidenced by this Note prior to the payment by the Company of any other indebtedness of the Company. 11. WAIVERS. The Company waives presentment, demand, protest, notice of protest, notice of presentment and all other notices and demands in connection with the enforcement of the rights of the Holder of this Note. Any failure of the Holder to exercise any right available hereunder or otherwise shall not be construed as a waiver of the right to exercise the same right or any other right. 12. TRANSFER OR EXCHANGE. Whenever this Note shall be surrendered at the principal executive office of the Company for transfer or exchange, accompanied by a written instrument of transfer duly executed by the Holder hereof (or its duly authorized attorney in writing), the Company shall execute and deliver in exchange for this Note a new Note or Notes, as may be requested by such Holder, in the same aggregate unpaid principal amount and payable on the same date as the principal amount of the Note or Notes so surrendered; and each such new Note shall be in such principal amount and registered in such name or names as such Holder may designate in writing. 13. LOSS OR DESTRUCTION OF NOTE. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note and of indemnity reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Note (in case of mutilation), the Company will make and deliver in lieu of this Note a new Note of like tenor and unpaid principal amount. 14. SUCCESSORS AND ASSIGNS. This Note, and the obligations and rights of the Company hereunder, shall be binding upon and inure to the benefit of the Company, the Holder of this Note, and their respective successors and assigns. 15. ENFORCEABILITY. The Company represents that this Note is enforceable against the Company in accordance with its terms. 16. CURRENCY. All payments shall be made in the currency of the United States of America as at the time of payment shall be legal tender therein for the payment of public and private debts. 16 17. NOTICES. All notices, requests, consents and demands shall be made in writing and shall be mailed postage prepaid, or delivered by hand, to the Company or to the Holder at their respective addresses set forth below or to such other address as may be furnished in writing to the other party hereto: If to the Holder: _____________________________ _____________________________ _____________________________ Attention: __________________ If to the Company: Interactive Network, Inc. 180 Second Street, Suite B Los Altos, California 94022 Attention: Mr. Bruce W. Bauer (650) 947-3345 telephone (650) 917-1615 facsimile 18. GOVERNING LAW. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware, without reference to Delaware's choice of law provisions. 19. REGISTRATION. The Company will register the resale of the shares of the Company's common stock into which this Note may be converted under the Registration Statement on Form S-4 to be filed by the Company in connection with its proposed merger with TWIN Entertainment, Inc. IN WITNESS WHEREOF, this Note has been executed and delivered on the date first above written by the duly authorized representative of the Company. Interactive Network, Inc. ___________________________________ (Name) (Title) ATTEST: ___________________________________ Secretary 17 EX-10.21 4 interactive_10qex10-21.txt EXHIBIT 10.21 THE ISSUANCE OF THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE UPON THE EXERCISE HEREOF HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND SUCH SHARES OF COMMON STOCK MAY NOT BE TRANSFERRED UNTIL INTERACTIVE NETWORK, INC. ("COMPANY") HAS BEEN FURNISHED WITH EVIDENCE SATISFACTORY TO COUNSEL FOR THE COMPANY THAT THERE HAS BEEN COMPLIANCE WITH ALL APPLICABLE FEDERAL AND STATE OR TERRITORIAL SECURITIES LAWS WITH RESPECT TO THE SALE OR OTHER TRANSFER OF THE WARRANTS AND SUCH SHARES OF COMMON STOCK INCLUDING, WITHOUT LIMITATION, AN OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO COUNSEL FOR THE COMPANY THAT THE SALE OR OTHER TRANSFER OF THE WARRANTS AND SUCH SHARES OF COMMON STOCK IS EXEMPT UNDER FEDERAL STATE SECURITIES LAWS. COMMON STOCK PURCHASE WARRANT Date of Issuance: __________, 2001 Warrant Certificate No. CN-_______ For value received, Interactive Network, Inc., a California corporation (the "Company"), hereby grants to ___________ or his or its registered assigns (the "Initial Holder") the right to purchase from the Company (the "Purchase Rights") up to an aggregate of _____ shares (the "Shares") of the Company's Common Stock at an initial exercise price ("Initial Exercise Price") of $0.60 per share. The number of Shares and the Initial Exercise Price of this Warrant are subject to adjustment pursuant to the provisions contained in this Warrant. (The terms "Registered Holder" or "Registered Holders" shall mean herein the Initial Registered Holder and any other Persons to which all or part of this Warrant has been duly transferred pursuant to the terms of this Warrant.) This Warrant is one of a series of warrants (the "Bridge Warrants") issued by the Company in its offering of units beginning in June 2001, with each unit consisting of a convertible promissory note in the original principal amount of $10,000.00 and a Bridge Warrant to purchase 20,000 shares of Common Stock. Certain capitalized terms used herein are defined in Section 3 hereof. This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. ------------------- 1.1 EXERCISE PERIOD. Subject to the provisions of Section 6 hereof, the Purchase Rights may be exercised in whole or in part (but not as to a fractional share of Common Stock) at any time beginning on the Date of Issuance and ending at 5:00 o'clock p.m., Pacific time, on ____________, 2006 (the "Exercise Period"). To the extent not exercised during the Exercise Period, the Purchase Rights shall expire and shall not be exercisable after such Exercise Period. 1.2 EXERCISE PROCEDURE. (a) Subject to the provisions of Section 8 hereof, the Purchase Rights will be deemed to have been exercised when the Company has received, examined, and accepted all of the following items (the "Exercise Time"): (i) a duly completed and signed Exercise Agreement, as described in Section 1.3 of this Agreement, executed by the person exercising such Purchase Rights (the "Purchaser"); (ii) this Warrant; 18 (iii) if this Warrant is not registered in the name of the Purchaser, a duly completed and signed Assignment or Assignments in the form set forth in EXHIBIT II evidencing the assignment of this Warrant to the Purchaser, in which case the Registered Holder will have complied with the provisions set forth in Section 6 hereof; (iv) a certified, cashier's or bank check or, in the sole discretion of the Company, a personal check, in an amount equal to the product of the Exercise Price (as defined in Section 2) multiplied by the number of Shares of Common Stock being purchased upon such exercise; and (v) an opinion of counsel as described in Section 6.2 hereof that the exercise of this Warrant is permissible under applicable securities laws. (b) Certificates evidencing the Shares of Common Stock purchased upon exercise of the Purchase Rights will be delivered by the Company to the Purchaser within fifteen (15) days after the date of the Exercise Time. Unless all of the Purchase Rights have expired or have been exercised, the Company will prepare a new Warrant, substantially identical hereto, representing the Purchase Rights formerly represented by this Warrant which have not expired or been exercised and will, within such fifteen (15) day period, deliver such new Warrant to the Person duly designated for delivery in the Exercise Agreement described in Section 1.2(a)(i). (c) The Shares of Common Stock issuable upon the exercise of the Purchase Rights will be deemed to have been issued to the Purchaser at the Exercise Time, and the Purchaser will be deemed for all purposes to have become the record holder of such Shares at the Exercise Time. (d) The issuance of certificates evidencing Shares of Common Stock acquired upon exercise of the Purchase Rights will be made without charge to the Registered Holders or the Purchasers for any issuance tax or other cost incurred by the Company in connection with such exercise and the related issuance of Shares of Common Stock. Each Share of Common Stock issuable upon exercise of the Purchase Rights will, upon payment of the Exercise Price therefor, be fully paid and nonassessable and free from all liens and charges with respect to the issuance thereof, except such as may have been created or caused by the Registered Holder or Purchaser. (e) The Company will not close its books against the transfer of this Warrant or of any share of Common Stock issued or issuable upon the exercise of the Purchase Rights in any manner which interferes with the timely exercise of the Purchase Rights. The Company will from time to time take all such action as may be necessary to assure that the par value per share of the unissued Common Stock acquirable upon exercise of the Purchase Rights is at all times equal to or less than the Exercise Price then in effect. 1.3 EXERCISE AGREEMENT. Upon any exercise of the Purchase Rights, the Purchaser shall duly complete, sign, and deliver to the Company an Exercise Agreement in the form set forth in EXHIBIT I, and, in addition, if the Shares of Common Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement also will state the name of the Person to whom the certificates for the Shares of Common Stock are to be issued, and if the number of Shares of Common Stock to be issued does not include all the Shares of Common Stock purchasable hereunder, it will also state the name of the Person to whom a new Warrant for the unexercised portion of the Purchase Rights is to be delivered. Such Exercise Agreement will be dated the actual date of execution thereof. 1.4 FRACTIONAL SHARES. If a fractional Share of Common Stock would, but for the provision of Section 1.1 hereof, be issuable upon exercise of the Purchase Rights, the Company will, within fifteen (15) business days after the date of the Exercise Time deliver to the Purchaser a check payable to the Purchaser in lieu of such fractional share in an amount equal to the difference between the Market Price of such fractional share as of the date of the Exercise Time and the Exercise Price of such fractional share. 19 1.5 RESERVATION OF SHARES. The Company shall reserve, out of the authorized and unissued shares of Common Stock, a number of shares sufficient to provide for the exercise of the Purchase Rights represented by this Warrant, and the Company and its transfer agent, if any, are hereby irrevocably authorized and directed at all times until the expiration of the Purchase Rights to reserve such number of authorized and unissued shares as shall be requisite for such purpose. The Company will supply its transfer agent with duly executed stock certificates for such purpose. The Company will furnish to its transfer agent a copy of all notices of adjustments, and certificates related thereto, transmitted pursuant to this Warrant. Section 2. Adjustment of Exercise Price and Number of Shares. ------------------------------------------------- To prevent dilution of the Purchase Rights, the Initial Exercise Price of any Purchase Rights, or the Initial Exercise Price as adjusted pursuant to this Section 2, shall be subject to adjustment from time to time as provided in this Section 2 (the Initial Exercise Price or the Initial Exercise Price as last adjusted pursuant to the terms of this Section 2, as the case may be, is called the "Exercise Price"), and the number of Shares of Common Stock obtainable upon exercise of the Purchase Rights shall be subject to adjustment from time to time as provided in this Section 2. 2.1 SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time subdivides (by any stock split, stock dividend or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price of all Purchase Rights in effect immediately prior to such subdivision will be proportionately reduced, and the number of Shares of Common Stock obtainable upon exercise of such Purchase Rights will be proportionately increased. If the Company at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price of all Purchase Rights in effect immediately prior to such combination will be proportionately increased, and the number of Shares of Common Stock obtainable upon exercise of such Purchase Rights will be proportionately decreased. 2.2 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. Any capital reorganization, reclassification, amalgamation, consolidation, merger or sale of all or substantially all of the Company's assets to another Person which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock, is referred to herein as an "Organic Change." Prior to the consummation of any Organic Change, the Company will make appropriate provision (in form and substance satisfactory to the registered holders of Bridge Warrants representing a majority of the Common Stock purchasable upon exercise of the Bridge Warrants (the "Majority Registered Holders") to insure that each of such registered holders will thereafter have the right to acquire and receive in lieu of or addition to the Shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of the Purchase Rights of all of the Bridge Warrants such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of Shares of Common Stock immediately theretofore acquirable and receivable upon exercise of the Purchase Rights of all of the Bridge Warrants had such Organic Change not taken place. In any such case, the Company will make appropriate provision (in form and substance satisfactory to the Majority Registered Holders) with respect to the Registered Holder's rights and interests to insure that the provisions of this Section 2 will thereafter be applicable to this Warrant. The Company will not effect any such amalgamation, consolidation, merger or sale unless, prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such amalgamation, consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form and substance satisfactory to the Majority Registered Holders) the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. 2.3 CERTAIN DISTRIBUTIONS. If the Company shall distribute to all holders of its shares of Common Stock notes or other evidence of indebtedness or assets (other than cash dividends not in excess of the Company's earnings for the immediately preceding fiscal year) or Options or Convertible Securities, then in each case the number of Shares of Common Stock thereafter obtainable upon the exercise of the Purchase Rights shall be determined by multiplying the number of Shares theretofore obtainable upon such exercise by a fraction, of which the numerator shall be the then current Market Price per share of Common Stock on the date of such distribution, and of which the denominator shall be the then current Market Price per share of Common Stock, less the then current Market Price of the portion of the assets, notes or other evidence of indebtedness so distributed or of such Options or Convertible Securities applicable to one share of Common Stock. Such adjustment shall be made whenever 20 any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. In the event of a distribution by the Company to all holders of its shares of Common Stock of stock of a Subsidiary or securities convertible into or exercisable for such stock, then in lieu of an adjustment in number of Shares of Common Stock acquirable upon the exercise of the Purchase Rights, the Registered Holder of this Warrant, upon the exercise thereof at any time after such distribution, shall be entitled to receive from the Company, such Registered Subsidiary, or both, as the Company shall determine, the stock or other securities to which such Registered Holder would have been entitled if such Registered Holder had exercised the Purchase Rights immediately prior thereto. 2.4 CERTAIN EVENTS. (a) ADJUSTMENT. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by such provisions, then the Company's board of directors will make an appropriate adjustment in the Exercise Price and the number of Shares of Common Stock obtainable upon exercise of the Purchase Rights so as to protect the rights of the Registered Holders of the Warrants. (b) NO IMPAIRMENT. The Company will not, by amendment of its charter or bylaws or through any Organic Change or other reorganization, amalgamation, transfer of assets, reclassification, merger, dissolution, issue or sale of securities, or otherwise, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by the Company under this Warrant but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Registered Holders of this Warrant against impairment. 2.5 NOTICES. (c) Immediately upon any adjustment of the Exercise Price or number of Shares subject to this Warrant, the Company will give written notice thereof to each Registered Holder. (d) The Company will give written notice to the Registered Holder at least fifteen (15) business days prior to the date on which the Company closes its books or takes a record with respect to any dividend or distribution upon the Common Stock, with respect to any pro rata subscription offer to holders of Common Stock, or for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (e) The Company also will give written notice to the Registered Holders at least fifteen (15) business days prior to the date on which any Organic Change, dissolution or liquidation will take place. Section 3. Definitions. ----------- For purposes of this Warrant, the following terms have the meanings set forth below: 3.1 "COMMON STOCK" means, collectively, the Company's common stock, no par value, and any capital stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. 3.2 "MARKET PRICE" of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on The Nasdaq National Market, the average closing or last sale prices, respectively, reported for the ten (10) consecutive trading days immediately preceding the Determination Date; 21 (b) If the Company's Common Stock is not traded on an exchange or on The Nasdaq National Market but is quoted on The Nasdaq SmallCap Market or in the over-the-counter market, the average of the closing bid and asked prices reported for the ten (10) consecutive trading days immediately preceding the Determination Date; or (c) If the Common Stock is not traded publicly, the value of the Common Stock determined by the Company and the Registered Holder(s) of this Warrant; provided, that if such parties are unable to reach agreement within five (5) trading days after the Determination Date, such Market Price shall be determined by an appraiser jointly selected by the Company and the Majority Registered Holders. 3.3 "PERSON" means an individual, partnership, joint venture, corporation, association, joint stock company, trust, unincorporated organization and government entity or any department, agency or political subdivision thereof. 3.4 "SUBSIDIARY" means a corporation, partnership, joint venture, association, joint stock company, trust, or unincorporated organization as to which the Company has "control" (as the term "control" is defined in the Securities Exchange Act of 1934). Section 4. Redemption Rights of the Company. -------------------------------- 4.1 This Warrant may be redeemed by the Company at any time on or before __________, 2006 at a redemption price of $0.01 per Share, upon giving notice of such redemption as set forth below, provided that (i) the closing sale price of the Common Stock exceeds $1.26 per share (subject to adjustment as provided in Section 2) for any thirty (30) consecutive trading days prior to such notice and (ii) a registration statement covering the resale of the Shares has been filed by the Company with the United States Securities and Exchange Commission and is effective as of the date of such notice. 4.2 Notice of redemption shall be mailed not less than thirty (30) calendar days prior to the date fixed for redemption to the Registered Holder(s) of this Warrant at his or their last registered address(es). Each such notice shall specify the date set for redemption, the place of redemption and the redemption price of $0.01 per Share at which each Warrant is to be redeemed, and shall state that payment of redemption price of the Warrant will be made on surrender of the Warrant at such place of redemption, and that if not exercised by the close of business on the date fixed for redemption, the Purchase Rights shall expire unless extended by the Company. 4.3 If notice of redemption is given in compliance with this Section 4, the Purchase Rights of this Warrant identified for redemption shall expire at the close of business on such date of redemption unless extended by the Company. Upon presentation and surrender of the Warrant at such place of payment specified in the notice, the Warrant shall be redeemed at the redemption price of $0.01 per Share. Section 5. No Voting Rights. ---------------- This Warrant does and will not entitle the Registered Holder(s) hereof to any voting rights or other rights as a shareholder of the Company with respect to the Shares unless and to the extent the Warrant is exercised. Section 6. Conditions to Exercise or Transfer of Warrant. --------------------------------------------- 6.1 TRANSFER OF WARRANT. Subject to the conditions referred to in the legend endorsed hereon and as hereinafter set forth, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Registered Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of EXHIBIT II hereto) at the principal office of the Company. 6.2 CONDITIONS TO TRANSFER. The Registered Holder, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or any part hereof, or before transferring any Common Stock issued upon the exercise hereof, of the Registered Holder's intention to do so, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice, or promptly upon receiving from the Registered Holder the items described in Sections 1.2(a)(i) through (iv) hereof, the Company shall present 22 copies thereof to the Company's counsel. If, in the opinion of such counsel, the proposed exercise or transfer may be effected without registration or qualification of the Warrant or the Shares of Common Stock purchasable upon the exercise hereof, under any federal, state, or territorial securities laws, the Company, as promptly as practicable, shall notify the Registered Holder of such opinion. The Registered Holder then shall be entitled to exercise or transfer this Warrant or any part hereof or to dispose of Shares of Common Stock received upon the previous exercise of this Warrant in accordance with the terms of the notice delivered by the Registered Holder to the Company; provided, however, that an appropriate legend may be endorsed on the Warrant or the certificates evidencing the Shares of Common Stock purchasable upon exercise of the Warrant, which legend sets forth the restrictions upon the transfer thereof necessary or advisable in the opinion of counsel satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act of 1933, as amended, and applicable state or territorial securities laws. If, in the opinion of the counsel referred to in this Section, the proposed exercise or transfer or disposition of the Warrant or Shares described in the written notice given pursuant to this Section may not be effected without registration or qualification of this Warrant or the Shares of Common Stock issued upon the exercise hereof, the Company shall promptly give written notice thereof to the Registered Holder, and the Registered Holder will limit and conduct his activities in respect to such as, in the opinion of such counsel, are permitted by law. Section 7. Right to Convert. ---------------- 7.1 CONVERSION RIGHT. The Registered Holder shall have the right to require the Company to convert this Warrant (the "Conversion Right"), at any time prior to its expiration, into shares of Common Stock as provided for in this Section. Upon exercise of the Conversion Right, the Company shall deliver to the Registered Holder (without payment by the Registered Holder of any exercise price) that number of shares of Common Stock equal to the quotient obtained by dividing (i) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate exercise price for the Shares in effect immediately prior to the exercise of the Conversion Right from the aggregate Market Price for the Shares immediately prior to the exercise of the Conversion Right) by (ii) the Market Price of one share of Common Stock immediately prior to the exercise of the Conversion Right. 7.2 EXERCISE OF CONVERSION RIGHT. The Conversion Right may be exercised by the Registered Holder, at any time or from time to time, prior to its expiration, on any business day, by delivering a written notice (the "Conversion Notice"), the form of which is attached hereto as EXHIBIT III, to the Company at the offices of the Company exercising the Conversion Right and specifying (i) the total number of Shares the Registered Holder will purchase pursuant to such conversion, and (ii) a place, and a date not less than five (5) nor more than twenty (20) trading days from the date of the Conversion Notice, for the closing of such purchase. 7.3 CLOSING OF CONVERSION RIGHT. At any closing under Section 7.2 hereof, (i) the Registered Holder will surrender the Warrant and deliver the items described in Sections 1.2(a)(iii) (if applicable) and 1.2(a)(v), (ii) the Company will deliver to the Registered Holder a certificate or certificates for the number of Shares of Common Stock issuable upon such conversion, together with cash, in lieu of any fraction of a share, and (iii) the Company will deliver to the Registered Holder a new Warrant representing the number of Shares, if any, with respect to which the Warrant shall not have been exercised. Section 8. Warrant Exchangeable for Different Denominations. ------------------------------------------------ This Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the Purchase Rights hereunder, and each of such new Warrants will represent such portion of such Purchase Rights as is designated by the Registered Holder at the time of such surrender. The date the Company initially issues this Warrant will be deemed to be the "Date of Issuance" hereof regardless of the number of times new certificates representing the unexpired and unexercised Purchase Rights formerly represented by this Warrant shall be issued. All Warrants representing portions of the Purchase Rights hereunder are referred to herein as the "Warrants." 23 Section 9. Replacement. ----------- Upon receipt of evidence reasonably satisfactory to the Company of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company or, in the case of any such mutilation, upon surrender of such certificate, the Company will (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 10. Notices. ------- Except as otherwise expressly provided herein, all notices given pursuant to or in connection with this Warrant will be in writing and will be delivered personally or by telecopy or by registered or certified mail, return receipt requested, postage prepaid, and will be deemed to have been given when so delivered or confirmed as received by telecopy or five (5) days after the date on which so mailed (i) to the Company, at its principal executive offices, (ii) to the Registered Holder of this Warrant at such Registered Holder's address as it appears in the records of the Company (unless otherwise indicated by any such Registered Holder), and (iii) to such other address as the Company or the Registered Holder shall advise the other pursuant to the provisions of this Section. Section 11. Amendment and Waiver. -------------------- Except as otherwise provided herein, the provisions of the Bridge Warrants, including this Warrant, may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Majority Registered Holders. Section 12. Descriptive Headings; Governing Law; Dollar Amounts. --------------------------------------------------- The descriptive headings of the several parts and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The construction, validity and interpretation of this Warrant will be governed by the internal law, and not the conflicts law, of the State of Delaware. All dollar amounts used herein are in United States dollars. Section 13. Registration. ------------ The Company will register the resale of the Shares under the Registration Statement on Form S-4 to be filed by the Company in connection with its proposed merger with TWIN Entertainment, Inc. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. INTERACTIVE NETWORK, INC. Attest: By:_____________________________________ Bruce W. Bauer Its: President and Chief Executive Officer _________________________________ 24 EXHIBIT I --------- EXERCISE AGREEMENT ------------------ To: Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. _____), hereby agrees to subscribe for and purchase _______ shares of the Common Stock covered by such Warrant and makes payment in full at the price per share provided by such Warrant. ___________________________________ Signature ___________________________________ Name Typed or Printed ___________________________________ Address ___________________________________ 25 EXHIBIT II ---------- ASSIGNMENT ---------- FOR VALUE RECEIVED, ______________________________ sells, assigns and transfers all of the rights under the attached Warrant (Certificate No. _____) with respect to the number of shares of the Common Stock set forth below, unto: Name of Assignee Address No. of - ---------------- ------- Shares ------ Dated: ___________________________________ Signature ___________________________________ Name Typed or Printed Witness:___________________________ 26 EXHIBIT III ----------- CONVERSION NOTICE ----------------- To: Interactive Network, Inc. Dated: ________________, 200__ The undersigned, pursuant to Section 7 of the attached Warrant Certificate (Certificate No.____), hereby agrees to subscribe for and purchase _________ shares of Common Stock covered by such Warrant by converting other shares covered by such Warrant according to the following formula: ________________________________ multiplied by ________________________________ Per Share Market Price number of shares subject to Warrant MINUS ________________________________ multiplied by ________________________________ Exercise price per share number of shares subject to Warrant DIVIDED BY ________________________________ Per share Market Price EQUALS:_________________________ Please indicate dates and price for each day used to determine Market Price: Dates: _____ _____ _____ _____ _____ _____ _____ Last Sales Price: _____ _____ _____ _____ _____ _____ _____ _______________________________________ Signature _______________________________________ Name Typed or Printed _______________________________________ Address _______________________________________ Telephone number (including area code) 27 -----END PRIVACY-ENHANCED MESSAGE-----