<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
-------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1103425
(State of incorporation) (I.R.S. Employer Identification No.)
The Campus 5966 La Place Court, Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(619) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
----------- ---------
Number of shares outstanding of each of the registrant's classes of common
stock, as of August 9, 1996: 22,500,356 shares of common stock, $.005 par value.
1
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PART I--FINANCIAL INFORMATION
-----------------------------
Item 1. FINANCIAL STATEMENTS.
2
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1996 (Unaudited) and December 31, 1995
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1996 1995
------ ------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 896,000 6,485,000
Interest-bearing security deposits 1,766,000 1,575,000
Accounts receivable - trade, net of
allowance for returns and doubtful 4,260,000 2,668,000
accounts
Accounts receivable - officers and - 100,000
directors
Accounts receivable - The 3DO Company 10,300,000 -
Accounts receivable - other 3,221,000 1,750,000
Notes receivable - related parties 680,000 1,030,000
Inventories, net 4,692,000 5,618,000
Prepaid expenses and other current 2,240,000 2,223,000
assets
Net assets of discontinued operations - 4,560,000
------------- ------------
Total current assets 28,055,000 26,009,000
Fixed assets, net 2,054,000 2,023,000
Interest-bearing security deposits 2,363,000 2,200,000
Software development costs, net of 3,538,000 3,152,000
accumulated amortization
Notes receivable, related parties 4,701,000 4,176,000
Deposits and other assets 4,350,000 3,661,000
------------- ------------
Total assets $ 45,061,000 41,221,000
============= ============
</TABLE>
(Continued)
3
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
June 30, 1996 (Unaudited) and December 31, 1995
<TABLE>
<CAPTION>
June 30, December 31,
Liabilities and Shareholders' Equity 1996 1995
- ---------------------------------------- -------------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 5,730,000 2,862,000
Short-term borrowings and current 1,362,000 1,371,000
portion of long-term debt
Deferred revenue 1,286,000 1,024,000
Customer deposits 1,225,000 1,284,000
-------------- -----------
Total current liabilities 9,603,000 6,541,000
Deferred revenue 1,799,000 1,229,000
Long-term debt, excluding current
portion - -
-------------- -----------
Total liabilities 11,402,000 7,770,000
Minority interest (333,000) -
Shareholders' equity:
10% Cumulative convertible preferred
stock, $.005 par value, 10,000,000
shares authorized; issued and
outstanding 162,612 in 1996 and 1995 1,000 1,000
Common stock, $.005 par value,
50,000,000 shares authorized; shares
issued and outstanding 23,049,856 in
1996 and 22,502,707 in 1995 115,000 112,000
Additional paid-in capital 56,983,000 56,747,000
Accumulated deficit (20,556,000) (23,187,000)
-------------- -----------
36,543,000 33,673,000
Less 594,500 shares in 1996 and 50,000
shares in 1995 of treasury stock, at
cost (2,551,000) (222,000)
-------------- -----------
Total shareholders' equity 33,992,000 33,451,000
-------------- -----------
Total liabilities and
shareholders' equity $ 45,061,000 41,221,000
============== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
--------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Distribution and production services $ 5,882,000 3,782,000 11,221,000 7,734,000
Equipment sales 3,053,000 1,528,000 4,363,000 2,584,000
License fees and royalties 82,000 - 80,000 -
Other revenue, net 317,000 209,000 702,000 233,000
--------------- ---------- ---------- ----------
Total revenues 9,334,000 5,519,000 16,366,000 10,551,000
Cost of distribution and production
services 2,581,000 1,861,000 5,089,000 3,529,000
Cost of equipment sales 2,032,000 924,000 2,854,000 1,559,000
--------------- ---------- ---------- ----------
Total cost of sales 4,613,000 2,785,000 7,943,000 5,088,000
--------------- ---------- ---------- ----------
Gross profit 4,721,000 2,734,000 8,423,000 5,463,000
--------------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative 3,152,000 1,864,000 6,361,000 4,477,000
Legal and professional fees 716,000 133,000 880,000 1,317,000
Research and development 536,000 341,000 910,000 735,000
--------------- ---------- ---------- ----------
Total operating expenses 4,404,000 2,338,000 8,151,000 6,529,000
Operating income (loss) 317,000 396,000 272,000 (1,066,000)
Investment income, net of investment
expense 27,000 (47,000) 108,000 9,000
--------------- ---------- ---------- ----------
Earnings (loss) before minority
interest and income taxes 344,000 349,000 380,000 (1,057,000)
Minority interest 125,000 - 333,000 -
--------------- ---------- ---------- ----------
Earnings (loss) from continuing
operations before income taxes 469,000 349,000 713,000 (1,057,000)
Provision for income taxes - - - -
--------------- ---------- ---------- ----------
Earnings (loss) from continuing
operations 469,000 349,000 713,000 (1,057,000)
Gain (loss) from discontinued operations 1,889,000 (224,000) 1,918,000 (715,000)
--------------- ---------- ---------- ----------
Net earnings (loss) $ 2,358,000 125,000 2,631,000 (1,772,000)
=============== ========== ========== ==========
Net earnings (loss) per share:
Continuing operations $ .02 .02 .03 (.05)
Discontinued operations .08 (.01) .08 (.04)
Net earnings (loss) $ .10 .01 .11 (.09)
=============== ========== ========== ==========
Weighted average number of shares
outstanding 23,848,000 20,949,000 23,598,000 19,459,000
=============== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Cash flows from (used for) operating
activities:
Net earnings (loss) $ 2,358,000 125,000 2,631,000 (1,772,000)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 404,000 279,000 751,000 491,000
Provision for doubtful accounts (9,000) 31,000 88,000 83,000
Gain on sale and leaseback transactions (273,000) (463,000) (427,000) (639,000)
Loss on sale of marketable securities
- available for sale -- -- -- 39,000
Amortization of deferred gain on sale
and leaseback transactions (257,000) (450,000) (467,000) (456,000)
Minority interest in net income (loss)
of consolidated subsidiary (125,000) -- (333,000) --
(Increase) decrease in:
Accounts receivable - trade (1,382,000) (228,000) (1,580,000) (831,000)
Inventories, net 1,487,000 (249,000) 926,000 (798,000)
Prepaid expenses and other assets (7,566,000) (1,971,000) (7,917,000) (2,257,000)
Increase (decrease) in:
Accounts payable and accrued liabilities 3,886,000 774,000 2,868,000 1,234,000
Deferred revenue 154,000 165,000 79,000 343,000
Customer deposits (11,000) 84,000 (59,000) 155,000
------------ ---------- --------- ----------
Net cash used for operating activities (1,334,000) (1,903,000) (3,440,000) (4,408,000)
------------ ---------- --------- ----------
Cash flows from (used for) investing
activities:
Capital expenditures (142,000) (313,000) (344,000) (566,000)
Notes receivable - officers and
directors (501,000) (175,000) (175,000) (275,000)
Software development costs (353,000) (698,000) (824,000) (1,109,000)
Proceeds from sales of marketable securities
- available for sale -- 130,000 -- 591,000
Proceeds from sale and leaseback
transactions 3,000,000 1,453,000 3,875,000 2,250,000
Deposits related to sale and leaseback
transactions (729,000) 187,000 (354,000) (63,000)
------------- ---------- --------- ----------
Net cash provided by (used for)
investing activities 1,275,000 584,000 2,178,000 828,000
------------- ---------- --------- ----------
</TABLE>
6
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from (used for) financing
activities:
Principal payments on debt $ (9,000) (2,000) (15,000) (7,000)
Proceeds from issuance of debt 6,000 1,064,000 6,000 1,830,000
Purchase of equipment related to sale
and leaseback transactions (1,721,000) (675,000) (2,228,000) (1,185,000)
Proceeds from issuance of common stock,
less issuance costs paid in cash 255,000 2,376,000 240,000 2,705,000
Payments for purchase of treasury stock - - (2,330,000) -
--------------- ------------ ----------- ----------
Net cash provided by (used for)
financing activities (1,469,000) 2,763,000 (4,327,000) 3,343,000
--------------- ------------ ---------- ----------
Net increase (decrease) in cash and
cash equivalents (1,528,000) 1,444,000 (5,589,000) (237,000)
Cash and cash equivalents at beginning
of period 2,424,000 724,000 6,485,000 2,405,000
--------------- ------------ ---------- ----------
Cash and cash equivalents at end of
period $ 896,000 2,168,000 896,000 2,168,000
=============== ============ ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 33,000 44,000 66,000 66,000
=============== ============ ========== ==========
Income taxes $ - - - -
=============== ============ ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
(Unaudited)
1. General.
-------
Management has elected to omit substantially all notes to the Company's
financial statements. Reference should be made to the Company's Form 10-K filed
for the year ended December 31, 1995, which report incorporated the notes to the
Company's year-end financial statements.
2. Unaudited Information.
---------------------
The June 30, 1996 and 1995 information furnished herein was taken from the
books and records of the Company without audit. However, such information
reflects all adjustments (consisting only of normal recurring adjustments) that
are, in the opinion of management, necessary to reflect properly results of the
interim periods presented. The results of operations for the period ended June
30, 1996 are not necessarily indicative of the results to be expected for the
fiscal year ending December 31, 1996.
3. Discontinued Operations - Sale of New World Computing.
-----------------------------------------------------
On June 30, 1996 the Company entered into a definitive agreement to sell all
of the assets and business of its New World Computing subsidiary to The 3DO
Company (3DO) for approximately $13,600,000. In consideration of the sale, 3DO
will issue to the Company 1,200,000 shares of common stock of 3DO and will
assume approximately $1,600,000 of liabilities of New World. The number of
shares to be issued is subject to downward adjustment in certain events. The
Company anticipates the eventual number of shares to be received will
approximate 1,030,000. 3DO has guaranteed that the cash value realized by the
Company upon sale of the shares will not be less than $10 per share.
The disposal of the New World has been accounted for as a discontinued
operation. Accordingly, New World is reported as a discontinued operation at
June 30, 1996 and the consolidated financial statements for all prior periods
have been reclassified to report separately the net assets and operating results
of the discontinued business.
The gain (loss) resulting from the sale of New World and revenues from
discontinued operations for each period reported is as follows.
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Gain on disposal of New World $ 4,200,000 - 4,200,000 -
Income (loss) from discontinued
operations of New World (1,311,000) (224,000) (1,282,000) (715,000)
Tax provision for gain on sale (1,000,000) - (1,000,000) -
------------ -------- ---------- ---------
Total $ 1,889,000 (224,000) 1,918,000 (715,000)
============ ======== ========== =========
Revenues $ 841,000 714,000 2,085,000 1,420,000
============ ======== ========== =========
</TABLE>
8
<PAGE>
4. Business Segment Data.
---------------------
Operating results from continuing operations is presented for the principal
business segments of the Company for the three and six months ended June 30,
1996 and 1995. The Company's principal business units are its Hospitality
Network (Hospitality Interactive Services), International Licensees
(International), Home Interactive Services (Home Services) and Learnstar, Inc.
(Education Interactive Services).
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
Hospitality Interactive Services $ 8,121,000 5,421,000 14,183,000 9,834,000
International 176,000 13,000 363,000 217,000
Home Services 428,000 161,000 683,000 273,000
Education Interactive Services 240,000 --- 435,000 ---
Corporate and Other 369,000 (76,000) 702,000 227,000
----------------- --------- ---------- ----------
Total $ 9,334,000 5,519,000 16,366,000 10,551,000
================= ========= ========== ==========
Net Income (Loss) from Continuing
Operations
Hospitality Interactive Services $ 1,044,000 1,144,000 2,009,000 1,585,000
International 47,000 (146,000) 107,000 11,000
Home Services 153,000 (21,000) 223,000 (147,000)
Education Interactive Services (49,000) --- (304,000) ---
Corporate and Other (726,000) (628,000) (1,322,000) (2,506,000)
----------------- --------- ---------- ----------
Total $ 469,000 349,000 713,000 (1,057,000)
================= ========= ========== ==========
</TABLE>
9
<PAGE>
5. Earnings per Share.
------------------
Earnings per share amounts are computed by dividing net earnings increased by
preferred dividends resulting from the assumed exercise of stock options and
warrants and the assumed conversion of convertible preferred shares, and the
resulting assumed reduction of outstanding indebtedness, by the weighted average
number of common and common equivalent shares outstanding during the period.
Common stock equivalents represent the dilutive effect of the assumed exercise
of certain outstanding options and warrants and preferred stock.
Earnings per-share amounts are based on 23,598,000, 23,848,000 and 20,949,000
common and common equivalent shares for the six months ended June 30, 1996 and
three months ended June 30, 1996 and 1995, respectively. These amounts include
the dilutive effect of common stock equivalents.
Earnings per-share amounts are based on 19,459,000 common shares for the six
months ended June 30, 1995. The impact of the common stock equivalents would
have had an antidilutive effect for the six months ended June 30, 1995 due to
the reported loss and accordingly have not been included in the computation.
10
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
- -------
The Company uses existing technology to develop, produce and distribute
two-way multi-player interactive live events and also produces and distributes
its own original interactive programs. The Company's principal sources of
revenue from distribution activities are derived from (a) distribution fees in
the United States; (b) advertising fees, (c) distribution fees from foreign
licensees; (d) sales of interactive equipment; (e) licensing fees from foreign
and domestic licensees; and (f) the licensing of the Company's technology and
equipment sales to other users.
Material Changes in Results of Operations
- -----------------------------------------
Three month periods ended June 30, 1996 and June 30, 1995
The Company recognized net earnings of $2,358,000 for the three months
ended June 30, 1996 compared to net earnings of $125,000 for the three months
ended June 30, 1995. 1995 results have been restated to reflect the sale of New
World in 1996 as a discontinued operation. The 1996 results include a gain on
the sale of the Company's New World subsidiary of $1,889,000, net of taxes and
operating losses during the disposition period. The increase in 1996 is also
attributable to an increase in total revenues, coupled with controlled cost of
sales and reduced operating expenses.
For the current quarter, total revenues increased 69% from $5,519,000 to
$9,334,000. This increase is the result of growth in many of the Company's
principal revenue activities.
Distribution and Production Services increased 56% from $3,782,000 to
$5,882,000. The increase in distribution revenue is primarily due to an
expansion in the number of subscriber locations and on-line customers
contracting for services from the Company.
Equipment Sales increased 100% from $1,528,000 to $3,053,000. Equipment
sales include both sale and leaseback transactions and direct sales to the
Company's customers. The Company entered into a relatively larger sale and
leaseback transaction in the current quarter along with a substantial sale to a
foreign licensee. Equipment sales have been highly volatile in the past and are
expected to remain so, as they are dependent on the Company's ability to engage
in lease financing, the timing of expansion plans of the Company's foreign
licensees and its educational customers. As of June 30, 1996, the Company had
sold and leased back subscriber systems in place at a majority of the United
States subscriber locations. The Company's ability to make more such sales will
be dependent on increases in the number of subscriber locations, as to which
there can be no assurance.
License Fees revenues of $82,000 in 1996, compared to none in 1995,are the
result of foreign arrangements by the Company. Licensing arrangements are not
dependent upon seasonal forces and will vary in type and amount from period to
period.
Cost of Services-Distribution and Production Services, which increased 39%
from $1,861,000 in the prior year's quarter to $2,581,000 in the current year's
quarter, generally reflects the expansion in the number of subscribers
contracting for distribution services. The gross margin on distribution and
production services increased from 51% to 56% as a result of an increase in high
marginal revenue from advertising and distribution revenue from on-line service
customers. The increase in Cost of Sales-Equipment from $924,000 to $2,032,000,
an increase of 120%, is due to the increase in equipment
11
<PAGE>
sales and sale and leaseback transactions which can vary from period to period.
The Company's gross margin on equipment sales declined from 40% to 33% due to
lower margins associated with certain sales.
Operating Expenses rose from $2,338,000 in the prior years quarter to
$4,404,000 in the current years quarter, an increase of 88%. The increase is
largely attributable to an increase in legal and professional fees of $583,000
from 1995 to 1996. In June 1996 the Company entered into a proposed settlement
of a class action suit to avoid costly and protracted litigation. As a result
of the proposed settlement the Company recorded a reserve of $400,000 which will
be paid if the settlement is approved by the Court. Selling, General and
Administrative expenses increased 69% from $1,864,000 to $3,152,000 due to
general inflation and new sales and marketing efforts and management efforts to
control operating expenses. Research and Development expense expanded from
$341,000 to $536,000, or 57% as the Company stepped-up its exploration of new
technical platforms and interactive services.
Net Investment Income increased $74,000 as a result of increased interest-
bearing investments. Income Tax Expense remained flat at zero due to prior year
operating losses and the nature of revenues and expenses in each period.
Six month periods ended June 30, 1996 and June 30, 1995
The Company recognized net earnings of $2,631,000 for the six months ended
June 30, 1996 compared to a net loss of $1,772,000 for the six months ended June
30, 1995. 1995 results have been restated to reflect the sale of New World in
1996 as a discontinued operation. The difference in 1996 is attributed to an
increase in total revenues, coupled with controlled cost of sales, reduced
operating expenses and the sale of the New World Computing subsidiary. The loss
in 1995 was largely attributable to significant accruals related to litigation
and other legal matters.
For the current six month period, total revenues increased $5,455 from
$10,551,000 to $16,366,000. This increase is the result of growth in many of
the Company's principal revenue activities.
Distribution and Production Services increased 45% from $7,734,000 to
$11,221,000. The increase in distribution revenue is primarily due to an
expansion in the number of subscriber locations and on-line customers
contracting for services from the Company.
Equipment Sales rose 69% from $2,584,000 to $4,363,000. Equipment sales
include both sale and leaseback transactions and direct sales to the Company's
customers. The Company entered into relatively larger sale and leaseback
transactions in the current six month period along with a substantial sale to a
foreign licensee. Equipment sales have been highly volatile in the past and are
expected to remain so, as they are dependent on the Company's ability to engage
in lease financing, the timing of expansion plans of the Company's foreign
licensees and its educational customers. As of June 30, 1996, the Company had
sold and leased back subscriber systems in place at a majority of the United
States subscriber locations. The Company's ability to make more such sales will
be dependent on increases in the number of subscriber locations, as to which
there can be no assurance.
License Fees revenues of $80,000 in 1996, compared to none in 1995, are the
result of foreign arrangements by the Company. Licensing arrangements are not
dependent upon seasonal forces and will vary in type and amount from period to
period.
Cost of Services-Distribution and Production Services, which increased 44%
from $3,529,000 in the prior year's six month period to $5,089,000 in the
current year's six month period, generally reflects the expansion in the number
of subscribers contracting for distribution services. The gross margin on
distribution and production services increased slightly from 54% to 55% as a
result of an increase in high marginal revenue from advertising and distribution
revenue from on-line service customers. The increase in Cost of Sales-Equipment
from $1,559,000 to $2,854,000, an increase of 83%, is due to the increase in
12
<PAGE>
equipment sales, which can vary from period to period. The Company's gross
margin on equipment sales declined from 40% to 34% due to lower margins
associated with certain sales in 1996.
Operating Expenses rose from $6,529,000 in the prior years six month period
to $8,151,000 in the current years six month period, an increase of 25%. The
increase is largely attributable to an increase in Selling, General and
Administrative expenses of $1,884,000 from 1995 to 1996 due to general inflation
and new sales and marketing efforts. Legal and Professional Services expenses
declined from $1,317,000 to $880,000 primarily due to substantial expenses
incurred in 1995. In June 1996 the Company entered into a proposed settlement
of a class action suit to avoid costly and protracted litigation. As a result
of the proposed settlement the Company recorded a reserve of $400,000 which will
be paid if the settlement is approved by the Court. Research and Development
expense expanded from $735,000 to $910,000, or 24% as the Company stepped-up its
exploration of new technical platforms and interactive services.
Net Investment Income increased $99,000 as a result of increased interest-
bearing investments. Income Tax Expense remained flat at zero due to prior year
operating losses and the nature of revenues and expenses in each period.
Material Changes in Financial Condition
- ---------------------------------------
The following analysis compares information as of the most recent unaudited
balance sheet date of June 30, 1996 to the prior year-end audited balance sheet
dated December 31, 1995.
Total assets increased 9% from $41,221,000 to $45,061,000 from December 31,
1995 to June 30, 1996. The increase in assets is primarily the result of the
sale of New World Computing. Cash decreased from $6,485,000 to $896,000 at June
30, 1996 due to cash used to repurchase share of the Company's stock and to fund
operations.
The 60% increase in Accounts Receivable - Trade from $2,668,000 to $4,260,000
at June 30, 1996, reflects the overall growth of the Company in its primary
operations. Accounts Receivable - 3DO reflects the amount owing to the Company
as a result of the sale of New World. Accounts Receivable - Other increased
from $1,750,000 to $3,221,000, the result of a large sale and leaseback
transaction in the second quarter. The decrease in Inventory from $5,618,000 to
$4,692,000 is primarily the result of those same sale and leaseback
transactions.
Total liabilities increased 47% from $7,770,000 to $11,402,000 from December
31, 1995 to June 30, 1996. The increase in Accounts Payable and Accrued
Liabilities from $2,862,000 to $5,730,000 reflects the overall growth of the
Company, the timing of payments, an accrual for liabilities incurred in the sale
of New World including a provision for taxes of $1,000,000, and an accrual for a
legal settlement of $400,000. Customer Deposits remained steady from $1,284,000
to $1,225,000 from December 31, 1995 to June 30, 1996 due to steady receipts and
application of deposits received from new customers throughout the period. The
increase in aggregate Deferred Revenue (long-term and current) from $2,253,000
to $3,085,000 reflects additional amounts deferred due to sale and leaseback
transactions in the second quarter, net of amortization. Deferred gains are
amortized to revenue over three-year periods.
Overall, the Company's working capital decreased $1,016,000 from December 31,
1995 to June 30, 1996, primarily the net result of the New World sale
transaction. The Company may continue to require additional working capital for
operating expenses, new services development, marketing of services and purchase
of the hardware components used in the reception of its services. There can be
no assurance that the Company's currently available resources will be sufficient
to allow the Company to support its operations until such time, if any, as its
internally generated cash flow is able to sustain the Company.
In the past, the Company has been able to fund its operations and improve its
working capital position by sales of Common Stock upon exercise of warrants and
options, by leasing transactions for equipment in use at subscriber locations,
and by licensing its technology to foreign licensees. The
13
<PAGE>
Company is exploring additional alternative capital financing possibilities
which may include (i) licensing and related royalties of the Company's
technology and products; (ii) borrowing arrangements under fixed and revolving
credit agreements; or (iii) sale of additional equity securities. The Company
will continue to negotiate for additional lease and debt financing and
additional foreign licensing, however, the extent to which any of the foregoing
may be effected cannot be predicted at this time.
PART II OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS.
The description of certain legal proceedings contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 under the
caption "Legal Proceedings", is incorporated herein by reference. An update of
events subsequent to that Report follows.
NTN Communications, Inc. vs. Interactive Network, United States District
------------------------------------------------
Court for the Northern District of California, filed June 11, 1992 and related
award of attorneys' fees; and NTN Communications, Inc. vs. Interactive Network,
------------------------------------------------
filed in the Superior Court for the County of Santa Clara, California, on April
28, 1993; and Interactive Network vs. NTN Communications, Inc., filed in the
------------------------------------------------
Superior Court for the County of Santa Clara, California, on February 28, 1994.
With the Court's assistance, the Company and IN have been able to reach a
resolution of all pending disputes in the United States and have agreed to
private arbitration regarding any future licensing, copyright or infringement
issues which may arise between the parties.
NTN Communications, Inc., NTN Sports, Inc. and NTN Canada, Inc. vs. David
-------------------------------------------------------------------------
Lockton and Interactive Network, Inc., filed on June 12, 1992, in the Federal
- -------------------------------------
Court of Canada, Trial Division. The Company, along with its Canadian licensee,
NTN Canada and NTN Canada's subsidiary, NTN Sports, Inc., also filed an action
against IN and David B. Lockton (the President of IN), seeking a declaration
that the Company's activities, and those of the Company's licensee in Canada, do
not infringe the IN/Canada patent. The Company thereafter amended its claims to
include an assertion of invalidity of the Canadian patent based upon untrue and
material allegations made by IN in the Petition for the Canadian patent. No
discovery has been undertaken. The existence of this litigation has not
affected the operations of the Company's Canadian licensee in Canada.
Interactive Network vs. NTN Communications, Inc., NTN Sports, Inc. and NTN
--------------------------------------------------------------------------
Canada, filed June 18, 1992, in the Federal Court of Canada, Trial Division,
- -------
seeking a declaration that the IN/Canada patent is valid and is infringed by the
Company's games, broadcast and associated equipment sold in Canada, an
injunction against such alleged infringement, and damages (of an unspecified
amount) based on certain games sold in Canada. IN has not taken any action in
furtherance of this litigation. The existence of this litigation has not
affected the operations of the Company's Canadian licensee in Canada.
In June, 1996, the Company entered into a proposed Settlement Agreement to
resolve litigation filed by various shareholders of the Company. The case,
originally filed in June, 1993, in the United States District Court for the
Southern District of California (San Diego), is a consolidation of four lawsuits
seeking class action status to recover unspecified damages for a drop in the
market price of the Company's common stock following an announcement that an
anticipated agreement under which the Company would sell certain equipment and
services to an arm of the Mexican government may be put out for bid. Whereas
the Company vigorously defended this litigation and believes, in part, based
upon the opinion of outside counsel, in the merits of its defense, the Company
has entered into the proposed Settlement Agreement to resolve this matter out-
of-court to avoid costly and protracted litigation, in the best interests of its
shareholders.
The terms of the settlement, which is contingent upon notification to
eligible shareholders and approval by the Court, are briefly described as
follows: A settlement fund will consist of $400,000 in cash
14
<PAGE>
plus 565,000 warrants to purchase the common stock of NTN (the "Settlement
Warrants"). Each Settlement Warrant will have a term of three years from the
Date of Issuance, as that term is defined in the Agreement, and an exercise
price equal to the average closing price per share of NTN common stock on the
American Stock Exchange during the twenty trading days immediately preceding the
Date of Issuance. During the period from the second anniversary of the Date of
Issuance until the expiration or exercise of a Settlement Warrant, the holder of
such Settlement Warrant shall have the right, but not the obligation, to put the
Settlement Warrant to NTN for repurchase at a price of $3.25 per Settlement
Warrant (the "Put Right"), provided, however, that this Put Right shall expire
once, if ever, during the period from and after the Date of Issuance that the
closing price per share of the NTN common stock on the American Stock Exchange
is more than $3.25 above the exercise price of the Settlement Warrants on any
seven trading days, whether consecutive or not. Upon expiration of the Put
Right, NTN shall have no further obligation to repurchase the Settlement
Warrants. In no event shall NTN have any obligation to repurchase its common
stock. For further information pertaining to the details of the proposed
settlement, reference is made to the Form 8-K filed by the Company on July 24,
1996.
On April 18, 1995, a class action lawsuit was filed in the United States
District Court for the Southern District of California (San Diego). The lawsuit
seeks unspecified damages and alleges violations of securities laws based upon
the Company's projections for the fourth quarter of 1994 and for fiscal year
1994, and further alleges that certain insiders sold stock on information not
generally known to the public. The Company has denied liability based upon the
allegations contained in the Complaint which does not contain any statement or
demand for a specific amount of damages. Much discovery has been undertaken.
Most recently, the Company was successful on its motion to disqualify three of
the five law firms from representing the plaintiffs in this action, including
co-lead, local San Diego counsel. The Company intends to continue to vigorously
contest the matter.
On July 3, 1995, a single shareholder filed a separate lawsuit in Texas
containing allegations essentially identical to those raised in the shareholder
lawsuit filed in April, 1995. The Company denies the allegations in the
complaint and has filed its own counterclaim against third parties for
indemnification. Upon the Company's motion, this case was transferred from
Texas to California, where the only action taken since the date of transfer has
been discovery propounded by the Company.
There can be no assurance that any or all of the preceding actions will be
decided in favor of the Company. The Company believes, based in part on the
advice of outside, independent counsel, that the costs of defending and
prosecuting these actions will not have a material adverse effect on the
Company's financial position or results of operations.
Item 6. EXHIBITS AND REPORTS ON REPORT 8-K.
Form 8-K filed June 24, 1996 for proposed settlement of the Class
Action Litigation.
15
<PAGE>
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 hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: August 14, 1996 By: /s/ RONALD E. HOGAN
-----------------------
Ronald E. Hogan,
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 896
<SECURITIES> 0
<RECEIVABLES> 4,885
<ALLOWANCES> (625)
<INVENTORY> 4,692
<CURRENT-ASSETS> 28,055
<PP&E> 3,901
<DEPRECIATION> (1,847)
<TOTAL-ASSETS> 45,061
<CURRENT-LIABILITIES> 9,603
<BONDS> 0
0
1
<COMMON> 115
<OTHER-SE> 33,876
<TOTAL-LIABILITY-AND-EQUITY> 45,061
<SALES> 16,366
<TOTAL-REVENUES> 16,366
<CGS> 7,943
<TOTAL-COSTS> 7,943
<OTHER-EXPENSES> 8,151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (108)
<INCOME-PRETAX> 713
<INCOME-TAX> 0
<INCOME-CONTINUING> 713
<DISCONTINUED> 1,918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,631
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
