<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 September 30, 1997
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)
(760) 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 November 7, 1997: 23,672,001 shares of common stock, $.005 par
value.
<PAGE>
PART I--FINANCIAL INFORMATION
-----------------------------
Item 1. FINANCIAL STATEMENTS.
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 (Unaudited) and December 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 1,322,000 6,579,000
Accounts receivable - trade, net of allowance for
doubtful accounts 3,802,000 2,031,000
Accounts receivable - officers and directors -- 199,000
Prepaid expenses and other current assets 1,085,000 1,846,000
------------------- --------------------
Total current assets 6,209,000 10,655,000
Broadcast equipment and fixed assets, net 9,669,000 10,103,000
Software development costs, net 3,964,000 4,400,000
Retirement plan assets -- 2,527,000
Other assets 714,000 819,000
------------------- --------------------
Total assets $ 20,556,000 28,504,000
=================== ====================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 5,714,000 6,182,000
Short-term borrowings 3,748,000 5,060,000
Deferred revenue 1,550,000 254,000
Customer deposits 1,035,000 1,279,000
------------------- --------------------
Total current liabilities 12,047,000 12,775,000
Deferred revenue - long term 149,000 1,000,000
Long term debt 183,000 --
Accrual for settlement warrants 1,460,000 1,291,000
Other long-term liabilities 2,373,000 3,216,000
------------------- --------------------
Total liabilities 16,212,000 18,282,000
------------------- --------------------
Shareholders' equity:
10% Cumulative convertible preferred stock, $.005 par value,
10,000,000 shares authorized; issued and outstanding 161,000 in
1997 and 1996 1,000 1,000
Common stock, $.005 par value, 50,000,000 shares authorized; shares
issued and outstanding 23,672,000 in 1997 and 23,177,000 in 1996 118,000 116,000
Treasury stock, 782,000 shares in 1997 and 1996 at cost (3,339,000) (3,339,000)
Additional paid-in capital 63,412,000 59,583,000
Accumulated deficit (55,848,000) (46,139,000)
------------------- -------------------
Total shareholders' equity 4,344,000 10,222,000
------------------- --------------------
Total liabilities and shareholders' equity $ 20,556,000 28,504,000
=================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Network services $ 5,281,000 5,083,000 15,214,000 14,892,000
Online/Internet services 825,000 400,000 2,381,000 1,298,000
Advertising revenues 313,000 375,000 747,000 869,000
Equipment sales, net 165,000 262,000 392,000 1,771,000
License and royalty fees and other revenue 255,000 322,000 906,000 857,000
------------- ------------- ------------- -------------
Total revenues 6,839,000 6,442,000 19,640,000 19,687,000
Operating expenses:
Operating costs 1,496,000 3,998,000 5,524,000 6,797,000
Selling, general and administrative 4,297,000 6,195,000 17,441,000 16,647,000
Litigation, legal and professional fees 268,000 458,000 1,326,000 1,506,000
Equipment lease expense 233,000 1,350,000 699,000 3,640,000
Depreciation and amortization 1,481,000 669,000 3,905,000 1,442,000
Other charges - 721,000 - 721,000
------------- ------------- ------------- -------------
Total operating expenses 7,775,000 13,391,000 28,895,000 30,753,000
Operating loss (936,000) (6,949,000) (9,255,000) (11,066,000)
Other income (expense)
Interest income 32,000 40,000 178,000 205,000
Interest expense (230,000) (92,000) (632,000) (205,000)
------------- ------------- ------------- -------------
(198,000) (52,000) (454,000) -
Loss from continuing operations before
income taxes (1,134,000) (7,001,000) (9,709,000) (11,066,000)
Provision for income taxes - - - -
------------- ------------- ------------- -------------
Loss from continuing operations (1,134,000) (7,001,000) (9,709,000) (11,066,000)
Gain from discontinued operations, net - - - 1,918,000
------------- ------------- ------------- -------------
Net loss $ (1,134,000) (7,001,000) (9,709,000) (9,148,000)
============= ============= ============= =============
Net loss per share:
Continuing operations $ (0.05) (0.31) (0.41) (0.49)
Discontinued operations - - - 0.09
------------- ------------- ------------- -------------
Net loss $ (0.05) (0.31) (0.41) (0.40)
============= ============= ============= =============
Weighted average number of shares outstanding 23,623,000 22,487,000 23,411,000 22,599,000
============= ============= ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from (used for) operating activities:
Net income (loss) $ (1,134,000) (7,001,000) (9,709,000) (9,148,000)
Adjustments:
Gain on discontinued operations -- -- -- (3,200,000)
Depreciation and amortization 1,481,000 2,587,000 3,905,000 3,361,000
Provision for doubtful accounts 275,000 167,000 750,000 255,000
Loss from discontinued operations -- -- -- 1,282,000
Accrual for issuance of warrants 283,000 293,000 2,796,000 1,910,000
Accrual for settlement warrants 57,000 -- 169,000 --
(Gain) loss on sale and leaseback transactions -- 427,000 -- --
Amortization of deferred gain on sale and
leaseback transactions 51,000 267,000 187,000 (200,000)
Change in discontinued operations -- -- -- (3,102,000)
Changes in assets and liabilities:
Accounts receivable - trade (1,310,000) 1,455,000 (2,322,000) (125,000)
Prepaid expenses and other assets (76,000) 1,853,000 3,255,000 236,000
Accounts payable and accrued liabilities (523,000) 1,171,000 (1,311,000) 4,455,000
Deferred revenue 487,000 133,000 258,000 212,000
Customer deposits (44,000) 12,000 (244,000) (47,000)
------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities (453,000) 1,364,000 (2,266,000) (4,111,000)
------------- ------------- ------------- -------------
Cash flows from (used for) investing activities:
Capital expenditures (1,257,000) (3,386,000) (2,066,000) (3,914,000)
Buyout of lease obligations -- (385,000) -- (385,000)
Notes receivable - related parties -- (131,000) -- 432,000
Software development costs (246,000) (414,000) (831,000) (1,238,000)
Receipt of marketable securities --
available for sale -- 77,000 -- 77,000
Proceeds from sale and leaseback transactions -- (1,460,000) -- 2,415,000
Deposits related to sale and leaseback
transactions -- 1,534,000 -- 1,180,000
------------- ------------- ------------- -------------
Net cash (used in) investing activities (1,503,000) (4,165,000) (2,897,000) (1,433,000)
------------- ------------- ------------- -------------
</TABLE>
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from (used for) financing activities:
Principal payments on debt $ (260,000) (3,000) (5,830,000) (18,000)
Proceeds from issuance of debt 231,000 950,000 4,701,000 3,321,000
Purchase of equipment related to sale and
leaseback transactions -- 843,000 -- (1,385,000)
Proceeds from issuance of common stock, less
issuance costs paid in cash 262,000 577,000 1,035,000 817,000
Payments for purchase of treasury stock -- -- -- (2,330,000)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities 233,000 2,367,000 (94,000) 405,000
------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents (1,723,000) (434,000) (5,257,000) (5,139,000)
Cash and cash equivalents at beginning of period 3,045,000 1,780,000 6,579,000 6,485,000
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,322,000 1,346,000 1,322,000 1,346,000
============ ============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ -- 52,000 -- 117,000
============ ============ ============ ============
Income taxes $ -- -- -- --
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<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, 1996, which report incorporated the notes to the
Company's year-end financial statements.
2. Unaudited Information.
---------------------
The September 30, 1997 and 1996 information furnished herein was taken from
the books and records of the Company without audit. However, such information
reflects all adjustments that are, in the opinion of management, necessary to
reflect properly the results of the interim periods presented. The results of
operations for the period ended September 30, 1997 are not necessarily
indicative of the results to be expected for the fiscal year ending December 31,
1997.
Certain items in the prior year consolidated financial statements have been
reclassified to conform to the format used for the current periods presented.
3. Management Reorganization.
-------------------------
In March, 1997, the Company announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board, and Daniel C. Downs resigned as President.
In connection with the reorganization ("Reorganization"), other personnel
changes include the resignation of Mr. Ronald Hogan, as Senior Vice President,
and the terminations of Mr. Gerald McLaughlin, formerly Executive Vice
President, and Mr. Michael Downs, formerly President and CEO of LearnStar. The
Company has entered into separate Resignation and General Release Agreements
("Agreements") with each of the former officers for the purpose of settling
their prior employment agreements and other contracts and arrangements with the
Company. In compliance with the Agreements, NTN will continue to pay the former
executives their annual salaries and other benefits for the remaining terms of
their employment agreements with NTN, which expire on or before December 31,
1999. Charges for severance and other costs associated with the Reorganization
recorded in 1996 were $5,092,000. A charge for severance and other costs
associated with the Reorganization was $5,298,000 in 1997, including accreted
interest expense. The Company has recorded the charges in 1996 and 1997 in
accordance with Emerging Issues Task Force Issues No. 94 - 3.
4. Equity Financing.
----------------
On October 31, 1997, the Company completed a private placement whereby the
Company issued and sold to institutional investors 70,000 shares of the
Company's Series B Convertible Preferred Stock, $100 stated value per share
("Series B Preferred Stock"), for an aggregate purchase price of $7,000,000. In
connection with the private placement, the Company paid a brokerage fee of
$210,000 and incurred certain other offering expenses in the amount of
approximately $50,000. A portion of the net proceeds from the private placement
was used to repay approximately $3.9 million (including accrued interest) of
indebtedness to GTECH Corp (see note 5). The balance of the net proceeds will be
used for general working capital purposes.
The Series B Preferred Stock provides for a cumulative annual dividend of
$4 per share, payable in quarterly installments of $1 per share on the last day
of January, April, July and October of each year, commencing January 31, 1998.
Holders of the Series B Preferred Stock are entitled to convert 25% of the
Series B Preferred Stock into shares of the Company's Common Stock ("Conversion
Shares"), subject to certain limitations, on or after the earlier ("Initial
Conversion Date") of (1) the effective date of the Registration Statement
covering the Conversion Shares to be filed with the Securities and Exchange
Commission or (2) February 28, 1998. An additional 25% of the Series B Preferred
Stock will become convertible on each of the dates 60, 90 and 120 days,
respectively, following the Initial Conversion Date. Any outstanding shares of
the Series B Preferred Stock not converted by October 31, 2000 will
automatically be converted as of such date.
The number of Conversion Shares issuable upon conversion of each share of
Series B Preferred Stock ("Conversion Rate") will be determined by dividing the
sum of $100 plus any accrued and unpaid dividends on the Series B Preferred
Stock by the Conversion Price then in effect. The Conversion Price will be equal
to the lesser of (a) 140% of the average of the closing bid prices of the
Company's Common Stock on the five trading days immediately preceding the
Initial Conversion Date, but in no event higher than $3.50 per share, and (b)
85% of the lowest average of the closing bid prices of the Company's Common
Stock on any three trading days during the 20 trading days immediately preceding
the conversion date. The Conversion Rate is subject to adjustment in certain
events.
<PAGE>
5. Loan from GTECH Corp.
--------------------
In June 1997, the Company announced that it had signed a letter of intent
setting forth an agreement in principle to enter into a merger agreement with
GTECH Corp. On August 6, 1997 the Company and GTECH mutually agreed to
terminate the previously announced letter of intent. However, in connection
with the letter of intent, GTECH loaned $3.7 million to the Company. The loan
bears interest at the rate of 13% per year and is secured by a pledge of all of
the capital stock of the Company's IWN, Inc. subsidiary and a collateral
assignment of NTN's partnership interest in IWN, L.P. The principal amount of,
and accrued and unpaid interest on, the loan originally was due and payable
September 15, 1997, which maturity date was extended by GTECH until October 24,
1997. On November 3, 1997, the Company repaid all the outstanding principal and
accrued interest of approximately $3,900,000 to GTECH with a portion of the
proceeds of the private placement (see note 4).
6. Discontinued Operations - Sale of New World Computing.
-----------------------------------------------------
On June 30, 1996 the Company sold all of the assets and business of its New
World Computing subsidiary to The 3DO Company. The disposal of the New World
has been accounted for as a discontinued operation. Accordingly, the
consolidated financial statements for the nine-month period ended September 30,
1996 reports separately the operating results of the discontinued business.
7. 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.
For those periods with a net loss, the impact of the common stock
equivalents would have had an antidilutive effect for these periods and
accordingly have not been included in the computation.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND FORWARD LOOKING STATEMENTS.
General
- -------
The Company uses existing technology to develop, produce and distribute
point to multi-point 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) service
distribution fees in the United States; (b) advertising fees, (c) sales of
equipment to foreign licensees; (d) service distribution fees and royalties from
foreign licensees; and (e) licensing fees from foreign and domestic licensees.
As previously reported, on October 25, 1996, the Company reported that it
was advised on September 9, 1996 by the United States Federal Communications
Commission that its Playmaker(R) had not received FCC approval. The Company
immediately suspended shipment of the Playmakers(R) to new NTN Network Locations
pending approval by the FCC. Upon notification, the Company commenced testing
its equipment and submitted its application to the FCC. There was no
interruption of the Company's services to existing NTN Network customers, nor
were any of the Company's Online/Internet Services ever affected. The Company
received approval on January 15, 1997 and immediately began shipments to new
Locations. The Company will also implement a corrective action program to be
approved by the FCC.
As previously disclosed, new locations signed up by the Company during the
suspension of Playmakers(R) shipments were granted up to one day of credit by
the Company against future billings for each day the sites could not utilize the
NTN system. The Company estimates that the temporary suspension of Playmaker(R)
shipments and the credits extended by the Company to backlogged locations has
resulted in reduced cash flow of approximately $350,000 during 1997 from all
affected locations.
The Playmakers(R) are handheld radio frequency devices that contain
rechargeable batteries. As previously reported, Playmakers(R) manufactured
earlier this year and last year had experienced problems related to noise
sensitivity and recharging performance. The Company has completed various
modifications to its Playmakers(R) in accordance with recommendations of an
outside engineering consulting firm. The modifications have been undertaken in
an effort to decrease the number of "disconnects" (i.e. customers terminating
service) and to enhance customer satisfaction. Prior diminished customer
satisfaction has resulted in an increase in accounts receivable. To date, it
appears that such modifications have resulted in a decrease of technical
problems and an increase in reliability of performance. In addition, as
previously reported, the Company earlier discovered that the "basestation" - a
device used in conjunction with Playmakers(R) - had not been performing
satisfactorily. The Company decided to recall all poorly performing
basestations and replace all such equipment with an upgraded and improved model
in customer locations, which process began in 1997. The Company recorded a
charge of $650,000 in the quarter ended March 31, 1997 for the replacement of
equipment in the field. During the nine months ended September 30, 1997, the
Company's revenues have been adversely affected by in charges relating to the
repair and replacement of the affected equipment.
<PAGE>
Material Changes in Results of Operations
- -----------------------------------------
Three-month periods ended September 30, 1997 and September 30, 1996
The Company incurred a net loss of $1,134,000 for the three months ended
September 30, 1997 compared to a net loss of $7,001,000 for the three months
ended September 30, 1996. For the current quarter, total revenues increased 6%
from $6,442,000 to $6,839,000, primarily as a result of the growth in the
Company's primary services.
Network Services increased 4% from $5,083,000 to $5,281,000. This is
primarily due to a modest growth in the number of subscriber locations
contracting for services partially offset by a revised pricing structure.
Online/Internet Services increased 105% from $400,000 to $825,000 primarily due
to billings to AOL, recognition of revenue for production services related to a
large development contract of $110,000 and an increase in the basic services to
online customers. Although the hours of service has recently remained
relatively constant, the pricing structure has continued to evolve over the past
year in a consistently downward pattern. Advertising revenues decreased 17%
from $375,000 to $313,000 due to a lesser number of commercial spots sold.
Equipment Sales, net of cost of sales decreased 37% from $262,000 to
$165,000. Equipment Sales in the past have included large sale and leaseback
transactions. In late 1996, the Company decided to no longer enter into sale
and leaseback financing arrangements. Currently, equipment sales are
predominantly due to sales to educational customers. Equipment sales in the
past have also included sales to foreign licensees which are subject to outside
influences and can occur unevenly throughout the year. Equipment sales have
been highly volatile in the past and are expected to remain so, as they are
dependent on the timing of expansion plans of the Company's foreign licensees
and its educational customers.
Operating Expenses related to Network Services and Online/Internet Services
decreased 63% from $3,998,000 in the prior years quarter to $1,496,000 in the
current years quarter. The 1996 results include a charge for $2,478,000 for
obsolete equipment. Exclusive of this charge, Operating Expenses decreased 2%
from the prior years quarter. This is primarily attributable to a change in the
rate structure for commissions and service fees paid to sales, net of growth and
service reps and operating expenses commencing at IWN L.P. Selling, General and
Administrative Expenses decreased 31% from $6,195,000 to $4,297,000. The 1996
results include a charge of $1,707,000 related to an accrual of severance
benefits, a large increase in the allowance for doubtful accounts and a change
in estimate for deferred advertising costs. Exclusive of these charges,
Selling, General and Administrative Expenses decreased 4%. This is primarily
due to cutbacks in personnel and other operating expenses offset by additional
charges to increase the allowance for doubtful accounts of $275,000. Stock-
based compensation charges recorded in accordance with SFAS 123 were $283,000 in
1997 compared to $293,000 in 1996. Stock-based compensation charges result from
the issuance of warrants or options to non-employees and can vary from period to
period.
Deprecation and Amortization Expense increased 121% from $669,000 to
$1,481,000 due to depreciation charges resulting from the buyout of equipment
lease commitments late in 1996 in which the Company now owns most of its
Broadcast equipment. Equipment Lease Expense decreased 83% from $1,350,000 to
$233,000 also due to the buyout of leases in late 1996. Interest Expense
increased from $92,000 to $230,000 largely due to interest charges related to
the IWN Put Option, and accretion of interest for the settlement warrant
liability and the severance liability for the Reorganization that was discounted
when recorded.
Nine-month periods ended September 30, 1997 and September 30, 1996
In March, 1997, the Company announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board, and Daniel C. Downs resigned as President.
In connection with the reorganization ("Reorganization"), other personnel
changes include the resignation of Mr. Ronald Hogan, as Senior Vice President,
and the terminations of Mr. Gerald McLaughlin, formerly Executive Vice
President, and Mr. Michael Downs, formerly President and CEO of LearnStar. The
Company has entered into separate Resignation and General Release
<PAGE>
Agreements ("Agreements") with each of the former officers for the purpose of
settling their prior employment agreements and other contracts and arrangements
with the Company. In compliance with the Agreements, NTN will continue to pay
the former executives their annual salaries and other benefits for the remaining
terms of their employment agreements with NTN, which expire on or before
December 31, 1999. Charges for severance and other costs associated with the
Reorganization recorded in 1996 were $5,092,000. A charge for severance and
other costs associated with the Reorganization was $5,298,000 in 1997, including
accreted interest expense. The Company has recorded the charges in 1996 and 1997
in accordance with Emerging Issues Task Force Issues No. 94 - 3.
The Company incurred a net loss of $9,709,000 for the nine months ended
September 30, 1997 compared to a net loss of $9,148,000 for the nine months
ended September 30, 1996. The 1996 results include a gain from discontinued
operations related to the sale of New World of $1,918,000. The 1997 results
include significant charges totaling $5,298,000 related to the Reorganization
and a $650,000 charge related to defective equipment.
For the nine months ended September 30, 1997, total revenues declined
slightly from $19,687,000 to $19,640,000, primarily as a result of a large
decrease in equipment sales, coupled with modest growth in the Company's primary
services. In conjunction with the Company's decision to no longer enter into
sale and leaseback financing arrangements, equipment sales have become a minor
activity under current operations. Total revenue for the nine months ended
September 30, 1997, excluding Net Equipment Sales, increased 7% over the
corresponding prior year period.
Network Services increased 2% for the current nine-month period over 1996
from $14,892,000 to $15,214,000. The increase is primarily due to a modest
growth in the number of subscriber locations contracting for services partially
offset by a revised pricing structure. Online/Internet Services increased 83%
from $1,298,000 to $2,381,000 largely due to revenue from AOL of $818,000
related to a termination of a previous agreement, recognition of revenue for
production services related to a large development contract of $110,000 and a
modest increase in the basic services to online customers. Although the hours
of service has remained relatively constant, the pricing structure has continue
to evolve over the past year in a consistently downward pattern. Advertising
revenues decreased 14% during the current nine-month period from $869,000 to
$747,000 due to a lesser number of commercial spots sold.
Equipment Sales, net of cost of sales during the current nine-month period
decreased 78% from $1,771,000 to $392,000. Equipment Sales in the past have
included large sale and leaseback transactions. In late 1996, the Company
decided to no longer enter into sale and leaseback financing arrangements.
Currently, equipment sales are predominantly due to sales to educational
customers. Equipment sales in the past have also included sales to foreign
licensees which are subject to outside influences and can occur unevenly
throughout the year. Equipment sales have been highly volatile in the past and
are expected to remain so, as they are dependent on the timing of expansion
plans of the Company's foreign licensees and its educational customers.
Operating Expenses related to Network Services and Online/Internet Services
decreased 19% from $6,797,000 in the prior year's period to $5,524,000 in the
current year's period. The 1996 results include a charge for $2,478,000 for
obsolete equipment. The 1997 results include a charge of $650,000 for the
replacement and repair of defective equipment. Exclusive of these charges,
Operating Expenses increased 13% from the prior years period due to a slight
expansion in the number of subscribers and online services contracting for
services, operating expenses commencing at IWN L.P and a reduction in the rate
structure for commissions and service fees paid to sales and service reps.
Selling, General and Administrative Expenses increased 5% from $16,647,000 to
$17,441,000. Included in Selling, General and Administrative Expenses for 1997
are charges for the Reorganization totaling $3,277,000. The 1996 results
include a charge of $1,707,000 related to an accrual of severance benefits, a
large increase in the allowance for doubtful accounts and a change in estimate
for deferred advertising costs. Exclusive of these charges, Selling, General
and Administrative Expenses decreased 5%. Stock-based compensation charges made
in compliance with SFAS 123 which were $2,796,000 in 1997 compared to $1,910,000
in 1996. Stock-based compensation charges result from the issuance of warrants
or options to non-employees and can vary from period to period. Charges in 1997
include $1,450,000 that resulted from extension of the exercise period of
warrants owned by certain former officers pursuant to the Reorganization.
<PAGE>
Deprecation and Amortization Expense increased 171% from $1,442,000 to
$3,905,000 due to depreciation charges resulting from the buyout of equipment
lease commitments late in 1996 in which the Company now owns most of its
Broadcast equipment. Equipment Lease Expense decreased 81% from $3,640,000 to
$699,000 also due to the buyout of equipment leases in late 1996. Interest
Expense increased 208% from $205,000 to $632,000 largely due to interest charges
related to the IWN Put Option, and accretion of interest for the settlement
warrant liability and the liability for the Reorganization that was discounted
when recorded.
Material Changes in Financial Condition
- ---------------------------------------
The following analysis compares information as of the most recent unaudited
balance sheet date of September 30, 1997 to the prior year-end audited balance
sheet dated December 31, 1996.
Total assets decreased 28% from $28,504,000 to $20,556,000 from December
31, 1996 to September 30, 1997. The decrease in assets is primarily due to
losses and the reduction in the retirement assets used to repay related loans.
Cash decreased from $6,579,000 to $1,322,000 at September 30, 1997 due primarily
to $2,316,000 in cash used to fund operations. The decrease was attributable, in
part, to approximately $813,000 used for initial payments related to the
Reorganization and $522,000 paid to former officers under an existing deferred
compensation plan. The Company also expended $2,897,000 to develop new software
and purchase capital assets.
Accounts Receivable - Trade increased 87% from $2,031,000 to $3,802,000 at
September 30, 1997. Of this, $747,000 was invoiced late in the third quarter as
development fees and online services were earned and became billable.
Receivables from Network Services customers experienced some ongoing settlement
issues with customers due to the technical problems experienced earlier in the
year. In addition, unrelated to the technical problems, the Company has
experienced reduced payments from one of the Company's national accounts. The
Company has revamped its collection function and increased its allowance for
doubtful accounts in response to management's ongoing monitoring of credit risk.
Prepaid expenses and retirement plan assets decreased from $4,373,000 to
$1,085,000 due to termination of the executive retirement plan in connection
with the Reorganization. There were no accrued benefits due to employees under
the plan.
Broadcast Equipment and Fixed Assets decreased from $10,103,000 to
$9,669,000 as the result of additions for new Network Services subscribers, net
of depreciation of assets and a charge to write-off and repair certain equipment
of $650,000.
Total liabilities decreased 11% from $18,282,000 to $16,212,000 from
December 31, 1996 to September 30, 1997. The decrease in Accounts Payable and
Accrued Liabilities from $6,182,000 to $5,714,000 reflects the use of cash to
pay down liabilities following year end, offset by accrual of charges for
settlement of new litigation and the current portion of recently announced
litigation settlements. Short-term borrowings decreased from $5,060,000 to
$3,748,000 due to payoff of the amount due pursuant to the IWN Put Option and
payoff of the loan associated with the retirement plan, net of a new borrowing
from GTECH Corp. In June 1997, the Company borrowed $3.7 million from GTECH
Corp, with whom it had agreed in principle to enter into a merger agreement. The
funds were used to pay Symphony LLC for its interest in IWN. The merger
agreement was terminated in August 1997. Other long-term liabilities decreased
26% from $3,216,000 to $2,373,000 due to legal liabilities transferred to
current liabilities, accrual of amounts due under the Reorganization, net of
payments.
Short-term and long-term deferred revenues increased 35% from $1,254,000 to
$1,699,000. This is primarily due to large billings for development and on-line
services that were billed late in the quarter, but for which revenue recognition
is deferred, net of amortization.
Overall, the Company's working capital deficit increased $3,718,000 to
$5,838,000 from December 31, 1996 to September 30, 1997, primarily the result of
the use of cash to fund operations and charges and activity related to the
Reorganization. As a result of the working capital deficit and other factors,
the Company is in default of certain covenants of its leasing arrangements. The
leasing arrangements provide
<PAGE>
for payments from certain customers to be paid to a lockbox maintained by an
independent bank. The Company has agreed to direct the payments of other
customers to the lockboxes each month to provide the lessors with further
security. The excess funds are returned to the Company each month following the
lease payment. In return, the lessors have agreed to forego their contractual
rights to accelerate payments and other rights in the event of default.
The Company has $1,322,000 of cash available at September 30, 1997. In
1996, the Company completed a plan to repurchase equipment related to certain
lease obligations. This transaction has resulted in improved cash flow due to
the elimination of the lease payments. Further, following the Reorganization,
the Company implemented an organization and strategic restructuring plan aimed
at reducing overhead expenses, which included a workforce reduction and re-
focusing on immediate goals designed to generate immediate results.
The Company has both short-term and long-term needs for cash outside of its
normal operating needs. In the past year, the Company has experienced technical
problems related to its Playmaker(R) device. Further, the Company has also
experienced a high rate of customers discontinuing service. A task force has
been assembled to review the issue and to make recommendations to improve
Playmaker(R) performance. Based on preliminary data, the Company believes that
any required changes can be effected within the next year. The costs are
estimated to be less than $1 million and are expected to be funded through
current operational cash flow. The Company anticipates that the number of
customers discontinuing service due to technical problems may decrease once the
Playmaker(R) performance has been improved, although no assurances can be given
that a solution can be reached without undue delay or cost. If the technical
problems persist for an extended period of time, it may negatively impact the
Company's cash flow from operations.
As noted earlier, the Company completed a reorganization of its management
team that will require the payment to former officers over the next three years.
These payments include contractual amounts under employment agreements and
payment for unused vacation leave. Further, payments in 1997 include amounts
due for previously deferred compensation of approximately $500,000. The Company
has specific assets identified that were liquidated to pay-off the deferred
compensation obligation; therefore, no current cash assets were utilized for
that portion of the obligation. All other obligations owing to former officers
are expected to be funded through operations through 1999.
The Company has several lawsuits pending. In 1996, the Company settled one
lawsuit by establishing a settlement fund consisting of $400,000 in cash and
565,000 warrants to purchase the common stock of the Company. This settlement
minimizes the amount of cash used and provides for possible future inflow of
cash if the warrants are exercised. The Company is currently attempting to
settle other lawsuits and may settle these using a similar format of cash and
equity instruments.
As part of the Reorganization, the Company terminated the pension and
deferred compensation plan that benefited only former officers. The termination
of these plans generated approximately $500,000 in cash, after payment of
related loans against these assets.
The Company has entered into an agreement to sell its interest in The
Campus LLC, of which the Company has a 15% interest. The Campus LLC owns the
buildings in which the Company maintains its headquarters. The sale is expected
to be finalized in November 1997, at which time the Company anticipates
receiving approximately $1,250,000 for its interest. The Company's basis in The
Campus LLC is $500,000.
In October 1997, the Company completed a private placement whereby the
Company issued 70,000 shares of Series B Convertible Preferred Stock for an
aggregate sales price of $7,000,000. Approximately, $3,900,000 of the net
proceeds was used to repay GTECH as described below. The balance of the net
proceeds have been and will be used for working capital and general corporate
purposes.
In June 1997, the Company received a $3.7 million loan from GTECH Corp. The
loan bears interest at the rate of 13% per year and is secured by a pledge of
all of the capital stock of the Company's IWN, Inc. subsidiary and a collateral
assignment of NTN's partnership interest in IWN, L.P. The principal amount of,
and accrued and unpaid interest on, the loan originally was due and payable
September 15,
<PAGE>
1997, which maturity date was extended by GTECH until October 24, 1997. On
November 3, 1997, the Company repaid all the outstanding principal and accrued
interest of approximately $3,900,000 to GTECH with a portion of the proceeds of
the private placement.
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 Company is
exploring alternative capital financing possibilities which may include (1)
licensing and related royalties of the Company's technology and products; (2)
borrowing arrangements under fixed and revolving credit agreements; or (3) sale
of additional equity securities. The Company may negotiate for additional lease
and debt financing and additional foreign licensing, however, the extent to
which any of the foregoing may be accomplished, if at all, cannot be predicted
at this time.
The Company has certain lawsuits pending as described in this report. To
avoid the expense and disruption of protracted litigation the Company has
settled certain cases and may continue to attempt to settle others. There can be
no assurances that the Company will be successful in settling or defending such
actions or that any or all actions would be decided in favor of the Company or
that the continued cost of defending and prosecuting these actions will not have
a material adverse effect on the Company's financial position or results of
operations.
Forward Looking Statements
- --------------------------
Certain of the statements contained in this section of the report,
including those under "Material Changes in Results of Operations" and "Material
Changes in Financial Condition" are forward-looking. While the Company believes
that these statements are accurate, the Company's business is dependent upon
general economic conditions and various conditions specific to its industry, and
future trends cannot be predicted with certainty. In particular:
The Company currently uses a single vendor, Climax, located in Taiwan, to
manufacture its proprietary Playmaker. If, for reasons beyond the control of
the Company, Climax ceases operating its business, or if a dispute arises
between the Company and Climax, there will be some delay in the manufacture of
the Playmakers which will likely have an adverse impact on sales until an
alternate source for such manufacturing is identified and production can begin.
The Company is not currently aware of any direct competition in the
hospitality industry. However, there is competition from other providers of
entertainment to the hospitality industry for the funds available for such
entertainment which may have a negative impact on future sales as well as
impacting existing customers.
Sales and the possibility of certain customers "disconnecting" from the
Company's network may vary as a result of general economic conditions. In
addition, a decline in the general economic condition presents a risk that
customers may not be able to meet their financial obligations as they become due
which will likely result in an increase of accounts receivable and a decline in
revenues.
PART II OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS.
A description of certain legal proceedings is contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 under the
caption "Legal Proceedings".
In connection with the resolution of litigation entitled Sahba Azar, et al.
------------------
On Behalf of Themselves and All Others Similarly Situated vs. NTN
- -----------------------------------------------------------------
Communications, Inc., Donald C. Klosterman, Patrick J. Downs, Daniel C. Downs
- -----------------------------------------------------------------------------
and Alan P. Magerman, with which four other related actions were ultimately
- --------------------
consolidated, the Company has entered into a Stipulation of Settlement
Agreement. The terms of the
<PAGE>
settlement are set forth in greater detail in the Company's prior public filings
and more specifically, in the Form 8-K dated June 24, 1996. As of the date of
this filing, the registration statement relating to the shares of the Company's
common stock underlying the warrants has not yet become effective.
On April 18, 1995, a class action lawsuit was filed in United States
District Court entitled Lenora Isaacs, On behalf of Herself and All Others
-----------------------------------------------------------
Similarly Situated vs. NTN Communications and Patrick J. Downs. The complaint
- --------------------------------------------------------------
alleges violations of federal securities laws based upon the Company's
projections for the fourth quarter of 1994 and for the 1994 fiscal year, and
further alleges that certain of the Company's insiders sold stock on information
not generally known to the public. The Company, which has assumed the defense
of this matter on behalf of all defendants, has denied liability based upon the
allegations contained in the complaint. Plaintiffs have claimed to be entitled
to damages between $8 million and $10 million. The Company believes, based in
part on the advice of outside counsel, that the actual damages, if any, would be
substantially less than such amount. As previously announced, in order to avoid
the costs and expenses associated with complex litigation including attorney
fees, expert fees and costs, analyses which must be conducted and other costs
necessary to prepare to defend this case at trial and perhaps through the
appeals process, in addition to the business disruption occasioned by such
protracted litigation, the Company has agreed to an out-of-court settlement
having a total value of $1,450,000. The settlement, which is subject to final
court approval, consists of $250,000 in cash with the remaining balance of
$1,200,000 being payable with the Company's common stock or in cash, at the
Company's election. There can be no assurances that the settlement will be
approved.
On July 3, 1995, a single shareholder filed a separate lawsuit in the
United States District Court for the Northern District of Texas containing
allegations essentially identical to those raised in the shareholder lawsuit in
April 1995. Upon the Company's motion, the case was transferred from Texas to
California. The initial discovery and other proceedings of this action were
coordinated with the class-action lawsuit referred to in the immediately
preceding paragraph, and upon the parties' motion this separate action was
dismissed without prejudice in January 1997.
There can be no assurance that any or all of the foregoing claims will be
decided in favor of the Company, which is not insured against the claims made.
During the pendency of such claims, the Company will continue to incur the costs
of defense of same. If the shareholder litigation is decided in a manner adverse
to the Company, the resulting liabilities to the Company could materially and
adversely affect the Company's financial condition and result of operations.
In May 1997, a shareholder derivative complaint was filed against the
Company and certain of its former officers and directors in Superior Court of
California, North County Branch. The complaint, which sought injunctive relief
and an unspecified amount of damages, alleged that the Company was injured by a
lack of independence and breach of business judgment by the defendant officers
and directors by virtue of the Resignation Agreements and related transactions
entered into in connection with the recent management reorganization. The
Company believed that the lawsuit was without merit and conveyed its position to
plaintiffs' counsel. On June 10, 1997, the plaintiff voluntarily dismissed the
lawsuit without any payment from the Company. On June 11, 1997, the Company was
included as a defendant in the litigation entitled Elliot Miller and Jan Iver,
---------------------------
shareholders on behalf of themselves all others similarly situated vs. NTN
- --------------------------------------------------------------------------
Communications, Inc., Patrick J. Downs, Daniel C. Downs, Donald C. Klosterman,
- ------------------------------------------------------------------------------
Ronald E. Hogan, Gerald P. McLaughlin and KPMG Peat Marwick LLP. The complaint
- ---------------------------------------------------------------
alleges violations of state and federal securities laws based upon purported
omissions from the Company's periodic filings with the Commission. More
particularly, the complaint alleges that the Company and the defendant directors
and former officers devised an "exit strategy" to provide themselves with undue
compensation upon their resignation from the Company. Plaintiffs further allege
that the Company's financial statements misrepresented or omitted information
concerning contingent liabilities, in the form of guaranteed compensation to
management and the Symphony Option described below, and phantom assets in the
form of loans recoverable from management, which misrepresentations and
omissions allegedly served to inflate the trading price of the Company's Common
Stock.
On July 3, 1997, the Company, on behalf of itself and the named directors
and officers, filed a motion to dismiss the lawsuit. A ruling on this motion is
pending. All proceedings in the case are stayed pending resolution of the
Company's motion. The Company has submitted this claim to its insurance
<PAGE>
carriers; however, there can be no assurances that the insurance carriers will
accept coverage or that, if coverage is accepted, it will be without a
reservation of rights by the carriers. The insurance carriers are still
reviewing the submission of the claim to reach a decision as to coverage.
On August 8, 1997, a class action complaint was filed in the United States
District Court for the Southern District of California by Yehuda Lefkowitz, on
behalf of himself and others similarly situated against the Company and Patrick
and Daniel Downs. The complaint alleged that defendants made materially false
and misleading statements concerning the Company's business, operations and
products. The complaint was voluntarily dismissed, without prejudice, by the
plaintiff on September 3, 1997 having never been served and without any payment
by the defendants. Though the Company believes, based in part on the opinion of
outside counsel, that the action was without merit, there can be no assurances
that the plaintiff or others similarly situated will not refile the same or a
similar action at a future date.
The Company had been involved as a plaintiff or defendant in various
previously reported lawsuits in Federal courts in both the United States and
Canada involving Interactive Network, Inc. ("IN"). 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.
There remain two lawsuits among the Company, its unaffiliated Canadian licensee
and IN, which were filed in Canada in 1992. No substantive action has been
taken in furtherance of either action. These actions affect only the Canadian
operations of the Company and its Canadian licensee and do not extend to the
Company's operations in the United States or elsewhere. Although they cannot be
estimated with certainty, any damages the Company might incur in the event the
actions are determined adversely to the Company are not expected to be material
to the Company.
In December 1995, the Company entered into an agreement ("Agreement") with
Symphony IWN Investment LLC ("Symphony"), an unaffiliated company, under which
Symphony invested $3,000,000 for a 10% interest in IWN, Inc. and a limited
partner interest in IWN, L.P., a limited partnership of which IWN, Inc. is the
general partner. The Agreement included a provision (the "Symphony Option")
entitling Symphony to elect to cause the Company to repurchase Symphony's shares
of IWN, Inc. and limited partner interest in IWN, L.P. at any time during the
period from April 1, 1997 through December 1, 1997 for specified consideration.
In April 1997, Symphony notified the Company of its election to exercise
the Symphony Option, and in June 1997 the Company paid Symphony $3,555,727 in
satisfaction of its obligations under the Symphony Option. In July 1997, the
Company filed a lawsuit against Symphony containing claims for breach of
contract, specific performance, declaratory relief and intentional interference
with economic relations and a demand for punitive damages. Despite the fact
that Symphony had retained all sums paid by the Company, Symphony claimed it was
entitled to approximately $1,000,000 in additional funds and a greater number of
warrants to purchase the Company's stock based on anti-dilution provisions in
its warrants. The claims of Symphony were set forth in a subsequent lawsuit
filed by Symphony in July 1997 against the Company. In the interest of avoiding
the expense of legal fees and costs inherent in such litigation, and
accomplishing a prompt resolution of such claims, in August 1997, the parties
entered into a settlement and general release agreement. More specifically, the
Company agreed to pay Symphony an additional $75,000 and issue 72,500 shares of
Common Stock. The Company, in turn, received all the outstanding shares of IWN
Inc., the limited partner interest in IWN L.P. and warrants to purchase 400,000
shares of NTN Common Stock previously issued to Symphony.
Item 2. CHANGE IN SECURITIES.
In April 1997, the Company granted a warrant to purchase 1,000,000 common
shares to Frazier/King Media Holding Co. The warrant was granted pursuant to a
consulting agreement whereby Frazier/King agreed to provide financial and
management consulting services to the Company. The warrant is exercisable at
$2.81 and is immediately exercisable as to 200,000 shares and generally will
become exercisable as to the balance of the shares in installments of 100,000
shares on each of the following dates, July 15, 1997, October 15, 1997, January
15, 1998, April 15, 1998, July 15, 1998, October
<PAGE>
15, 1997 and January 15, 1999. In the event of a change of control (as defined)
of NTN, the warrant will become immediately exercisable in full.
In September 1997, the Company granted, under its 1995 Stock Option Plan,
options to purchase 100,000 common shares to Ms. Esther L. Rodriguez. The
option was granted as a result of Ms. Rodriguez agreeing to join the Board of
Directors. The option is exercisable at $2.4375 and becomes exercisable as to
one-third of the shares covered thereby on the first anniversary of the grant
date and will become vested and exercisable as to the balance of the covered
shares in two equal installments on the second and third anniversaries of the
grant date, subject to Ms. Rodriguez remaining a director.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Refer to Footnote 5 for a description of the loan from GTECH Corp and
repayment subsequent to September 30, 1997.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 6. EXHIBITS AND REPORTS ON REPORT 8-K.
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
<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: November 10, 1997 By: /s/GERALD SOKOL, JR.
----------------------
Gerald Sokol, Jr.,
President and Chief Executive Officer
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 1,322,000 1,322,000
<SECURITIES> 0 0
<RECEIVABLES> 5,181,000 5,181,000
<ALLOWANCES> 1,379,000 1,379,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,209,000 6,209,000
<PP&E> 14,027,000 14,027,000
<DEPRECIATION> 4,358,000 4,358,000
<TOTAL-ASSETS> 20,556,000 20,556,000
<CURRENT-LIABILITIES> 12,047,000 12,047,000
<BONDS> 183,000 183,000
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<SALES> 6,839,000 19,640,000
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<TOTAL-COSTS> 7,775,000 28,895,000
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<LOSS-PROVISION> 275,000 750,000
<INTEREST-EXPENSE> 198,000 454,000
<INCOME-PRETAX> (1,134,000) (9,709,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,134,000) (9,709,000)
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