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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-K/A
AMENDMENT NO. 2 TO
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1103425
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(619) 438-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.005 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K (S 229.405 of this Chapter) is not contained herein
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
Registrant as of April 11, 1996, computed by reference to the closing sale price
of such stock on the American Stock Exchange, was approximately $89,000,000.
(All directors and executive officers of Registrant are considered affiliates.)
At April 11, 1996 Registrant had 23,899,145 shares of Common Stock, $.005
par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the period ended
December 31, 1995 are incorporated by reference into Part I of this Report.
<PAGE>
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
- ----------------------
General
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected financial data and
consolidated financial statements and notes thereto included elsewhere herein.
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) sales of equipment; (d)
distribution fees from foreign licensees; (e) licensing fees from foreign and
domestic licensees; and (f) the licensing of the Company's technology and
equipment sales to other users.
The Company also develops and publishes interactive entertainment software
and video games for general consumer use on a variety of home personal computers
and console entertainment systems. The principal sources of revenue from
software and video game activities are derived from (a) domestic retail sales
through mass merchants, warehouse clubs, general retailers and mail order
catalogues, and (b) license fees and royalties from international licensees who
translate and publish the video games in over a dozen countries around the
world.
Results of Operations
Following is a comparative discussion by fiscal year of the results of
operations for the last three years ended December 31, 1995. The Company
believes that inflation has not had a material effect on its operations to date.
Year Ended December 31, 1995 as compared to the Year Ended December 31, 1994
The Company reported a net loss of $3,948,000 for the year ended December
31, 1995 compared to net earnings of $707,000 for the year ended December 31,
1994. In 1994, the Company formed LearnStar to pursue interactive educational
applications in the United States. Most of 1994 was devoted to beta testing the
product and conducting preliminary market tests. In 1995, LearnStar began
marketing and selling its product on a full-time basis. Due to start-up costs
and relatively higher marketing costs during the first year of operations,
LearnStar reported a net loss of $2,149,000 for the year ended December 31,
1995.
In late 1995 the Company entered into a sale and purchase agreement to
sell 45% of the stock of its subsidiary, LearnStar, Inc. Although the sale was
legally consummated, the recognition of the gain of $3,354,000 was deferred in
accordance with generally accepted accounting principles and will be recognized
when principal payments are received in 1996 and 1997. Also in late 1995, the
Company set up an allowance of $1,000,000 for inventory in connection with the
upgrading of its broadcast distribution system and expensed $754,000 of costs
incurred in connection with the development of the market in Mexico. Through
much of its life, the Company's technology has been stable with little variation
in the type of equipment used. In 1995 the Company decided to upgrade many of
its computers that are utilized by its Hospitality subscriber locations. This
decision was based on the improvements made in software programs and graphic
displays of information that require more memory and quicker processing time.
The Company anticipates that such upgrades will also occur in the future based
on further technological changes which cannot be quantified currently. Further,
in 1995 the Company experienced a substantial increase in legal expenses due to
increased activities in litigation and other legal matters along with increased
costs of developing and providing products and services, and increased marketing
expenditures.
Total revenue increased 24% from $24,646,000 to $30,442,000. This
increase is the result of growth in many of the Company's principal revenue
activities.
1
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Distribution and Production Services increased 41% from $12,244,000 to
$17,307,000. The increase in broadcast 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 55% from $4,387,000 to $6,784,000. Equipment
sales include both sale and leaseback transactions and direct sales to the
Company's customers. 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 subscribers. The sales price and cost of
sales for equipment sold to customers and others has been constant for the past
two years. Accordingly, the increase in equipment sales from 1994 to 1995 is
wholly attributable to changes in volume. As of December 31, 1995, 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 additional sales will
be dependent on increases in the number of subscriber locations as well as the
availability of financing, as to which there can be no assurance.
Product Sales related to video and computer games decreased 26% from
$5,263,000 to $3,884,000. Sales of video and computer game products are
typically seasonal and will vary with the number of new products released in any
period. The decrease in net revenue is primarily due to the glut of competing
products in the market, the timing of new products released during the year and
the use of more conservative amounts provided for potential returns.
License Fees and Royalties increased 12% from $1,934,000 in 1994 to
$2,167,000 in 1995. License Fees in 1994 predominantly relate to NTN's
Hospitality and International Licensing operations whereas in 1995 license
revenues predominantly relate to the Company's New World operations. Licensing
arrangements are not dependent upon seasonal forces and will vary in type and
amount from period to period.
Other Revenue decreased from $818,000 to $300,000 in the current year's
period. Other Revenue in 1994 primarily consisted of inventory transferred to
the Company by its United Kingdom licensee in exchange for release from a
license agreement. Other Revenue has historically varied widely.
Cost of Services-Distribution and Production Services, which increased 68%
from $5,198,000 in the prior year to $8,756,000 in the current year, reflects
increased costs of equipment leases and other costs associated with the
expansion in the number of subscribers contracting for distribution services.
The gross margin on distribution and production services decreased from 58% to
49% as a result of increased costs related to commissions, service fees and
increased costs of equipment leases. Cost of Sales - Product Sales relates to
the Company's video game products increased from $1,502,000 to $1,844,000 or
23%. These costs vary depending upon the timing of products released, the volume
of products sold, the complexity of the games and the development costs
associated with each product. The gross margin on product sales decreased from
71% to 53% as the result of amortizing deferred development costs related to
specific products sold in 1995. The increase in Cost of Sales-Equipment from
$2,753,000 to $4,981,000, an increase of 81%, is due to the increase in
equipment sales, which can vary from period to period. Before the one-time
charge to earnings of $1,000,000 to upgrade the broadcast distribution system,
the gross margin from equipment sales increased from 37% to 41% due to lower
costs associated with certain equipment, but after consideration of this charge,
the gross margin decreased to 27%.
Operating Expenses rose from $14,898,000 in the prior year to $20,160,000
in the current year, an increase of 35%. Legal and Professional Fees increased
214% from $590,000 to $1,851,000 due to substantial legal expenses incurred
relating to litigation and other legal matters. Selling, General and
Administrative expenses increased 36% from $12,336,000 to $16,838,000 due to an
increase in the number of employees hired to develop and produce new products
and services and large increases in marketing activities related to the
development of the LearnStar products and services. Research and Development
expense decreased from $1,972,000 to $1,471,000, or 25% as the Company increased
its efforts in projects in current production.
Other Income (Expense) increased from $412,000 to $1,351,000 or 228%.
Included in Other Income is a gain from the sale of a 10% interest in the IWN
subsidiary of $329,000 and reimbursement of previously incurred legal expenses
from the Company's insurance carrier of approximately $1,000,000. Income Tax
expense was zero in both years. The lack of tax expense is due to the losses,
the nature of revenues and expenses in each year and net operating loss
carryforwards available to the Company. The Company currently has available
approximately $27,000,000 of net operating loss carryovers for federal tax
purposes.
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Year Ended December 31, 1994 as compared to the Year Ended December 31, 1993
The Company reported net income of $707,000 for the year ended December
31, 1994 and a net loss $1,301,000 for the year ended December 31, 1993.
For the year ended 1994, revenues grew 43% to $24,646,000 from
$17,258,000 for the year ended 1993. This increase is the result of growth in
the number of Locations contracting for the Company's distribution services,
license fee revenue and royalties from licensees and increased equipment sales.
Distribution revenues from Locations increased 81% to $12,244,000 in 1994 from
$6,778,000 in 1993 and equipment sales increased 11% to $4,387,000 in 1994 from
$3,970,000 in 1993. License fees and royalties in 1994 were $1,934,000 compared
to $802,000 in 1993, an increase of 141%, which resulted from new licenses
granted to both foreign and domestic companies. Retail sales of Products
decreased 4% to $5,263,000 from $5,468,000 due to the glut of competing products
on the market and the timing of new Product releases by the Company during the
year.
Total Cost of Sales grew to $9,453,000 in 1994 from $7,514,000 in 1993, an
increase of 26%, a result of increased sales. The Company improved its gross
margin on equipment sales to 37% from 32% as a result of Management's continuing
efforts in controlling equipment costs and higher marginal sales. The rise in
Cost of Services - Distribution and Production Services of $1,937,000 to
$5,198,000 in 1994 from $3,261,000 in 1993 is due to the greater number of
subscribers served. The Company improved its gross margin on Distribution and
Production Services to 58% from 52% as the result of decreasing costs associated
with service fees, equipment rentals and freight charges.
The Company's total operating expenses increased 33% to $14,898,000 in
1994 from $11,198,000 in 1993 as a result of the Company's expanding its overall
activities. Selling, General and Administrative expenses increased 32% to
$12,336,000 in 1994 from $9,347,000 in 1993 as the result of an increase in the
number of employees and continuing increased marketing and sales activities.
Research and Development expenses increased 84% to $1,972,000 in 1994 from
$1,073,000 in 1993 as the Company increased its research and development
efforts. The Company also expended $3,264,000 on software development projects
qualifying for capitalization in 1994 compared to $726,000 in the prior year.
Interest expense of $54,000 for the year ended December 31, 1994 was
reduced from $71,000 for the year ended December 31, 1993. Interest income in
1994 totaled $466,000 compared to $505,000 in 1993. The decrease in net interest
income resulted from the use of funds for operations and investments in
developed software in 1994.
Income tax expense was zero in 1994 compared to $281,000 in 1993. The
decrease in tax expense was due to the nature of the revenues and expenses in
each year and net operating loss carryforwards available to the Company.
Liquidity and Capital Resources
Following is a discussion of the Company's recent and future sources of and
demands on liquidity, as well as an analysis of liquidity levels.
Expenditures have exceeded revenues from operations through most of the
Company's history and may do so in the future. The Company plans to fund any
such deficiency from its existing cash and, if necessary, from other sources, as
discussed below.
Total assets increased 37% from $31,239,000 to $42,813,000 from December
31, 1994 to December 31, 1995. Cash and Marketable Securities - Available for
Sale increased from $3,429,000 to $6,475,000 at December 31, 1995. The change
reflects additional cash proceeds from debt and equity sources net of cash used
to fund operations and invest in the development of future products and services
for the NTN Network and video game products.
The 11% decrease in Accounts Receivable - Trade from $5,881,000 to
$5,247,000 at December 31, 1995, reflects an enhancement in the collection
efforts as well as an increase in the allowance for returns and doubtful
accounts. Accounts Receivable - Other increased from $600,000 to $1,750,000,
primarily the result of a large equipment sale transaction in the third quarter.
The increase in Inventory from $4,628,000 to $6,503,000 is primarily the result
of continued expansion of the NTN Network and development of additional video
game
3
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Products. Prepaid Expenses increased from $1,769,000 to $2,325,000 from
December 31, 1994 to December 31, 1995 primarily due to increased prepaid
expenses, deferred funding costs, and security deposits held by the Company.
Interest bearing Security Deposits (both current and non-current)
increased 18% from $3,200,000 to $3,775,000 as the result of increased leasing
transactions related to the increase in new Locations. Software Development
Costs (both current and non-current) increased 66% from $3,405,000 to $5,669,000
as the result of substantial investments made in the development of new software
and Products. Net Fixed Assets increased 49% primarily due to the move to the
new headquarters and expansion of the NTN Broadcast Center. Notes Receivable
(both current and long term) increased from $3,262,000 to $5,206,000 or 60%
primarily as the result of finalizing terms related to the sale of IWN and the
sale of a license to IWN L.P.
Total liabilities increased 62% from $5,782,000 to $9,362,000 from
December 31, 1994 to December 31, 1995. The increase in Accounts Payable and
Accrued Liabilities from $2,744,000 to $3,713,000 reflects the overall growth of
the Company and the timing of payments. Customer Deposits increased from
$1,006,000 to $1,284,000 from December 31, 1994 to December 31, 1995 due to
deposits received from new customers throughout the year.
The increase in aggregate Deferred Revenue (long-term and current) from
$1,556,000 to $2,270,000 reflects additional deferred gains on the sale of the
equipment involved in lease transactions, which are amortized to revenue over
three-year periods. Debt (long-term and current) increased from $476,000 to
$2,095,000 as a result of additional borrowings to augment working capital
needed for operational expenses, new software and product development, marketing
of services and purchase of broadcast-related equipment.
The increase in Common Stock and Additional Paid-in-Capital reflects the
issuance of 3,000,000 shares of Common Stock and conversion of preferred stock
and the exercise of warrants during 1995. In late 1995 the Company began to
repurchase its own shares and at year end had 50,000 shares of treasury stock.
Overall, shareholders' equity increased $7,994,000 due to equity contributions
of $12,164,000, less $222,000 for treasury stock purchases and the net loss of
$3,948,000.
Overall, the Company's working capital increased from $13,886,000 at
December 31, 1994 to $18,416,000 at December 31, 1995, primarily due to
significant proceeds from financing activities. Revenues from the principal
business segments, Hospitality, Education and Software Development increased
(Decreased) by 30%, 100% and (7%), respectively in 1995 compared to 1994. The
Hospitality and Software Development segments reported profits in 1995 as well
as in 1994. The Education segment reported a loss of $2,149,000 in its first
year of operation. Each business segment, as well as the Company in general may
continue to require additional working capital for operational expenses, new
software and product development, marketing of services and purchase of hardware
components relating to 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 consistently sustain the Company.
The Company is exploring alternative capital financing possibilities that
may include (i) additional lines of credit, (ii) lease financing of equipment
the Company furnishes to subscribers, (iii) licensing of the Company's
technology, (iv) sales of interests in subsidiaries, or (v) sale of additional
debt or equity securities. With respect to lease financing, the Company has
leased for three-year terms expiring in various amounts over the next three
years, the Location Systems at substantially all of its United States Locations.
The Company has issued licenses and has received revenue for certain products
and services for Australia, South Africa and Canada. The Company will continue
to negotiate for additional lease financing and additional foreign licensing.
Marketing and Expansion Plan
The Company's plan to maintain profitability includes the following
elements: (i) increasing sales staff; (ii) increasing advertising sales on the
NTN Network; (iii) expanding Company services to corporate and education
customers; (iv) pursuit of additional foreign licensing opportunities; (v)
increasing use of distributors who service retailers, (vi) sales of interests in
subsidiaries and (vii) expanding products and services to a wider variety of
technological platforms.
4
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Throughout the Company's history, the principal component of its revenues
has been derived from distribution services from Locations in the Hospitality
industry (restaurants, bars and hotels). Management believes that this component
will continue to grow in total revenues within the next year, but may decline as
a percentage of the Company's total revenues. To increase the number of
Locations, the Company has taken several steps. It increased its sales staff to
accommodate the growth in 1995 and the anticipated growth in 1996. The Company
offers sales and technical support to its independent distributors, who are
responsible for marketing the Company's services to potential Locations. In
1996, the Company will continue to attend national and regional hospitality
industry trade shows and has increased its budget for advertising in trade
publications.
In 1995, the Company enhanced its graphics capabilities and obtained
additional advertising revenues from national advertisers. The Company has a
full-time Director of Advertising Sales and is currently negotiating with
several potential advertisers for commercial spots on the NTN Network.
The Company has produced special event and corporate training programs in
which the customer uses the Company's interactive equipment to increase
participant interest in training and product knowledge and to communicate
rapidly with a large number of participants. Management believes special event
and corporate training may offer an opportunity for growth, and has a full-time
Director of Sales for special event and corporate training. In addition, the
Company has commenced the development of marketing materials and a direct mail
campaign for corporate training services. To enhance the Company's capabilities
for use in special events and corporate training, the Company has developed a
system that allows up to 800 Playmakers(TM) to be used at a single event.
Revenues from sales of equipment used in Locations has historically been
a material component of the Company's revenue. Potential growth in this area,
however, is largely dependent on the Company's success in increasing the number
of Locations and the business of the Company's foreign licensees.
Management believes that another market segment with potential for
long-term growth is the market for interactive television services in the home.
The Company expects to remain a provider of specialized programming to networks
operated by other organizations, such as cable networks, computer on-line
systems and wireless or telephone-based communication networks. The Company
expects to deliver the video portion of its programming directly to cable
television systems, with viewer responses using equipment developed by others.
In light of this, the Company expects that any significant revenues from home
use of the Company's services will be dependent upon an expansion in the overall
home viewer market for home interactive information and entertainment services.
The Company maintains excellent working relationships with major providers of
home interactive information and entertainment services. As the market for home
interactive information and entertainment services expands, the Company will
seek to capitalize on this market. Revenues to date from in-home programming
have not been significant.
The Company has plans to expand its penetration in the education sector
as well. Currently, the LearnStar System is operational at over 100 schools
throughout the nation. In 1995, the Company will focus efforts to expand into
additional schools in many states. Revenues from these sources have not been
significant in the past and no assurance can be given that plans to expand the
education market will be successful.
Revenues from Product sales of interactive software and video games have
been fairly consistent over the past few years. In 1996, the Company plans to
expand its available Products through the publication of software developed by
independent sources and by continuing to internally create new games and
Products. Further, the Company intends to publish Products on additional
technological platforms such as the SONY Playstation and other similar type
entertainment systems. Further, the Company intends to offer its services and
Products to new media platforms such as on-line services and the Internet.
Although there can be no assurance that the Company will prove to be
successful in implementing its marketing and expansion plan, Management believes
that the Company's prospects have been materially improved by the growth of the
core business units and increased customer awareness.
The Company has several lawsuits pending as previously described in "Legal
Proceedings." There can be no assurance that any or all of the described
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 and that any
5
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adverse outcome of the litigation involving IN also will not result in a
material adverse effect on the Company's financial position or results of
operation, or the Company's position in the interactive industry.
Other
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires
that impairment losses for long lived assets be recognized if the estimated
undiscounted future cash flows, without interest, is less than the carrying
amount of the asset. The standard also requires that assets designated to be
disposed of are to be recorded at the lower of the asset carrying value or fair
value less cost to sell. The Company has not adopted SFAS 121. The adoption of
SFAS 121 is not expected to have a material impact on the Company's financial
position or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS 123"), effective for fiscal years beginning after December
31, 1995. SFAS 123 establishes the fair value method of accounting for stock-
based compensation arrangements, under which compensation cost is determined
using the fair value of the stock option at the grant date and the number of
options vested, and is recognized over the period in which the related services
are rendered. If the Company were to retain its current intrinsic value based
method, as allowed by SFAS 123, it will be required to disclose the pro forma
effect of adopting the fair value based method. The Company will adopt SFAS 123
using the pro forma disclosure method.
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Item 8. Consolidated Financial Statements and Supplementary Data
--------------------------------------------------------
See "Index to Consolidated Financial Statements and Schedule" elsewhere in
this report for a listing of the Consolidated Financial Statements and Schedule
filed with this report, which are incorporated herein by reference.
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PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedule, and
--------------------------------------------------------
Reports on Form 8-K
- -------------------
(a) The following documents are filed as part of this report:
1,2. Consolidated Financial Statements and Schedule.
The Consolidated Financial Statements and Schedule of the Company and its
consolidated subsidiaries are set forth beginning on page F-2 hereof and are
incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 2 to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 28, 1997 NTN COMMUNICATIONS, INC.
By: /s/ Gerald Sokol, Jr.
---------------------
Gerald Sokol, Jr., President and
Chief Financial Officer
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report......................................... F-1
Consolidated Financial Statements
Consolidated Balance Sheets as December 31, 1995 and 1994...... F-2
Consolidated Statements of Operations for the years
ended December 31, 1995, 1994 and 1993................... F-3
Consolidated Statements of Shareholders' Equity (Deficiency)
for the years ended December 31, 1995, 1994 and 1993..... F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993................... F-5
Notes to Consolidated Financial Statements........................... F-7
Schedule II.......................................................... F-22
</TABLE>
F-1
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Independent Auditors' Consent and Report on Schedules
-----------------------------------------------------
The Board of Directors
NTN Communications, Inc.:
We have audited the accompanying consolidated balance sheets of NTN
Communications, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in Item 14 a(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NTN Communications,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investments in debt and equity securities
in 1994.
San Diego, California
April 12, 1996 KPMG Peat Marwick LLP
F-2
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,475,000 2,429,000
Marketable securities - available for sale -- 1,000,000
Interest-bearing security deposits (note 14) 1,575,000 1,225,000
Accounts receivable - trade, net of allowance
for returns and doubtful accounts of
$1,417,000 in 1995 and $1,097,000
in 1994 (note 6) 5,247,000 5,881,000
Accounts receivable - officers and directors 100,000 100,000
Accounts receivable - other 1,750,000 600,000
Notes receivable - related parties (note 4) 1,030,000 --
Software development costs, net of accumulated
amortization of $787,000 in 1995 and $177,000
in 1994 1,525,000 1,212,000
Inventory, net of reserve for obsolescence of
$1,000,000 in 1995 6,503,000 4,628,000
Prepaid expenses and other current assets 2,325,000 1,769,000
----------- -----------
Total current assets 26,530,000 18,844,000
Fixed assets, net (note 5) 2,100,000 1,405,000
Interest-bearing security deposits (note 14) 2,200,000 1,975,000
Software development costs, net of accumulated
amortization of $1,014,000 in 1995 and
$408,000 in 1994 4,144,000 2,193,000
Notes receivable, related parties (note 6) 4,176,000 3,262,000
Deposits and other assets 3,663,000 3,560,000
----------- -----------
Total assets $ 42,813,000 31,239,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 3,713,000 2,744,000
Short-term borrowings and current portion
of long-term debt (note 6) 2,093,000 468,000
Deferred revenue 1,024,000 740,000
Customer deposits 1,284,000 1,006,000
----------- -----------
Total current liabilities 8,114,000 4,958,000
Deferred revenue 1,246,000 816,000
Long-term debt, excluding current portion
(note 6) 2,000 8,000
----------- -----------
Total liabilities 9,362,000 5,782,000
----------- -----------
Shareholders' equity (notes 6, 7 and 8):
10% Cumulative convertible preferred stock,
$.005 par value, 10,000,000 shares authorized;
issued and outstanding 162,612 in 1995 and
197,612 in 1994 1,000 1,000
Common stock, $.005 par value, 50,000,000 shares
authorized; shares issued and outstanding
22,502,707 in 1995 and 19,178,060 in 1994 112,000 96,000
Additional paid-in capital 56,747,000 44,599,000
Accumulated deficit (23,187,000) (19,239,000)
----------- -----------
33,673,000 25,457,000
Less 50,000 shares of treasury stock, at cost (222,000) --
----------- -----------
Total shareholders' equity 33,451,000 25,457,000
----------- -----------
Commitments and contingencies (notes 14 and 15)
Total liabilities and shareholders' equity $ 42,813,000 31,239,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
(NOTE 2)
<S> <C> <C> <C>
Distribution and production services $ 17,307,000 12,244,000 6,778,000
Product sales 3,884,000 5,263,000 5,468,000
Equipment sales 6,784,000 4,387,000 3,970,000
License fees and royalties 2,167,000 1,934,000 802,000
Other revenue 300,000 818,000 240,000
---------- ---------- ----------
Total revenue 30,442,000 24,646,000 17,258,000
---------- ---------- ----------
Cost of distribution and production services 8,756,000 5,198,000 3,261,000
Cost of product sales 1,844,000 1,502,000 1,537,000
Cost of equipment sales 4,981,000 2,753,000 2,716,000
---------- ---------- ----------
Total cost of sales 15,581,000 9,453,000 7,514,000
---------- ---------- ----------
Gross profit 14,861,000 15,193,000 9,744,000
---------- ---------- ----------
Operating expenses:
Selling, general and administrative 16,838,000 12,336,000 9,347,000
Legal and professional fees 1,851,000 590,000 778,000
Research and development 1,471,000 1,972,000 1,073,000
---------- ---------- ----------
Total operating expenses 20,160,000 14,898,000 11,198,000
---------- ---------- ----------
Operating income (loss) (5,299,000) 295,000 (1,454,000)
Other income (expense)
Interest income 478,000 466,000 505,000
Interest expense (170,000) (54,000) (71,000)
Equity in earnings (loss) of affiliate (286,000) -- --
Other 1,329,000 -- --
---------- ---------- ----------
1,351,000 412,000 434,000
Earnings (loss) before income taxes (3,948,000) 707,000 (1,020,000)
Income taxes (note 5) -- -- 281,000
---------- ---------- ----------
Net earnings (loss) $ (3,948,000) 707,000 (1,301,000)
========== ========== ==========
Net earnings (loss) per share $ (0.19) 0.03 (0.08)
========== ========== ==========
Weighted average number of shares outstanding 20,301,000 21,124,000 17,135,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficiency)
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
10% CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
-------- -------- ---------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 392,498 $ 2,000 13,214,597 $ 66,000 26,009,000 (18,645,000) -- 7,432,000
Issuance of stock in
conversion of debt -- -- 29,646 -- 75,000 -- -- 75,000
Issuance of stock for
exercise of warrants and
options, net of issuance
costs -- -- 5,572,868 28,000 17,419,000 -- -- 17,447,000
Conversion of preferred
stock to common stock (137,498) (1,000) 38,439 -- 1,000 -- -- --
Net loss -- -- -- -- -- (1,301,000) -- (1,301,000)
-------- -------- ---------- --------- ---------- ----------- --------- ----------
Balance, December 31, 1993 255,000 1,000 18,855,550 94,000 43,504,000 (19,946,000) -- 23,653,000
Issuance of stock for
exercise of warrants and
options, net of issuance
costs -- -- 306,440 2,000 1,095,000 -- -- 1,097,000
Conversion of preferred
stock to common stock (57,388) -- 16,070 -- -- -- -- --
Net earnings -- -- -- -- -- 707,000 -- 707,000
-------- -------- ---------- --------- ---------- ----------- --------- ----------
Balance, December 31, 1994 197,612 $ 1,000 19,178,060 $ 96,000 44,599,000 (19,239,000) -- 25,457,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficiency)
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
10% CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
-------- -------- ---------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock for
exercise of warrants and
options, net of issuance
costs -- -- 314,843 1,000 679,000 -- -- 680,000
Conversion of preferred
stock to common stock (35,000) -- 9,804 -- -- -- -- --
Issuance of stock in private
offerings, net of issuance
costs -- -- 3,000,000 15,000 11,469,000 -- -- 11,484,000
Acquisition of 50,000 common
shares -- -- -- -- -- -- (222,000) (222,000)
Net loss -- -- -- -- -- (3,948,000) -- (3,948,000)
-------- -------- ---------- --------- ---------- ----------- --------- ----------
Balance, December 31, 1995 162,612 $ 1,000 22,502,707 $ 112,000 56,747,000 (23,187,000) (222,000) 33,451,000
======== ======== ========== ========= ========== =========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
(NOTE 2)
Cash flows from operating activities:
Net earnings (loss) $ (3,948,000) 707,000 (1,301,000)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,150,000 837,000 282,000
Provision for doubtful accounts 983,000 1,037,000 206,000
Loss on sale of marketable securities -
available for sale 70,000 -- --
Amortization of deferred gain on sale and
leaseback transactions (1,316,000) (1,300,000) (900,000)
(Increase) decrease in:
Accounts receivable - trade (349,000) (3,430,000) (3,094,000)
Software development costs (1,033,000) (1,983,000) --
Inventory, net (1,875,000) (872,000) (2,265,000)
Prepaid expenses and other assets (1,729,000) (1,413,000) (1,096,000)
Increase (decrease) in:
Accounts payable and accrued liabilities, net of
amounts paid in stock 969,000 1,076,000 (80,000)
Customer deposits 278,000 356,000 368,000
---------- ---------- ----------
Net cash used in operating activities (5,800,000) (4,985,000) (7,880,000)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (1,196,000) (898,000) (699,000)
Notes receivable (1,944,000) (406,000) (2,653,000)
Software development costs (2,857,000) (1,281,000) (726,000)
Purchases of other investments (103,000) (823,000) (807,000)
Purchases of marketable securities -
available for sale -- -- (4,515,000)
Proceeds from maturities of marketable securities -
available for sale -- 2,554,000 961,000
Proceeds from sales of marketable securities -
available for sale 930,000 -- --
Proceeds from sale and leaseback transactions 4,500,000 4,250,000 3,500,000
Deposits related to sale and leaseback transactions (575,000) (2,100,000) (800,000)
---------- ---------- ----------
Net cash provided by (used in) investing activities (1,245,000) 1,296,000 (5,739,000)
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
(NOTE 2)
Cash flows from financing activities:
Principal payments on debt $ (1,031,000) (557,000) (237,000)
Proceeds from issuance of debt 2,650,000 633,000 375,000
Purchase of equipment related to sale and leaseback
transactions (2,470,000) (2,263,000) (2,103,000)
Proceeds from issuance of common stock, less issuance
costs paid in cash 12,164,000 1,097,000 17,447,000
Repurchase of common stock (222,000) -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities 11,091,000 (1,090,000) 15,482,000
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 4,046,000 (4,779,000) 1,863,000
Cash and cash equivalents at beginning of year 2,429,000 7,208,000 5,345,000
---------- ---------- ----------
Cash and cash equivalents at end of year $ 6,475,000 2,429,000 7,208,000
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 59,000 54,000 38,000
========== ========== ==========
Income taxes $ 0 399,000 62,000
========== ========== ==========
Supplemental schedule of noncash investing and financing
activities - stock issued upon conversion of debt,
net of issuance costs $ -- -- 75,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
NTN Communications, Inc. ("The Company") was organized under the laws of
the state of Delaware in 1984 for the purpose of investing in various
business ventures. The Company, through its business units and subsidiaries
develops, produces and distributes individual and multi-player interactive
entertainment and education programs to a variety of media platforms.
The Company is also engaged in the development and distribution of
interactive video game software. The Company operates under several
distribution and license agreements in the United States, United Kingdom,
Australia, Germany, France and Switzerland. These products are sold
primarily to wholesale distributors. Royalties result from licensing rights
sold to foreign publishers.
BASIS OF ACCOUNTING PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, National Telecommunicator Network, Inc.
and New World Computing, Inc., and its partially-owned subsidiaries IWN
Corporation, Inc. and LearnStar Inc. (LearnStar). During 1995, the Company
directly owned 50% of LearnStar, however the Company funded all operations
of LearnStar, and accordingly LearnStar has been consolidated as if it were
wholly-owned. All significant intercompany balances and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For the purpose of financial statement presentation, the Company considers
all highly liquid investment instruments with original maturities of three
months or less to be cash equivalents. Cash and cash equivalents at
December+31, 1995 and 1994, consist of operational cash accounts and
certificates of deposit with original maturities of three months or less.
MARKETABLE SECURITIES - AVAILABLE FOR SALE
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). The Company has
classified applicable investments as "available for sale".
Securities available for sale are carried at fair value with unrealized
gains and losses, net of tax, reported as a separate component of
shareholders' equity. The cost of securities sold is based on the specific
identification method.
At December 31, 1994 marketable securities available for sale consisted of
mutual funds invested in government-backed debt instruments. The fair value
of available for sale securities approximated cost.
Proceeds from the sale of investment securities available for sale was
$930,000 in 1995 and gross realized losses included in income in 1995 was
$70,000.
F-9
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
DEPRECIATION
Depreciation of fixed assets is computed using the straight-line method
over the estimated useful lives of the assets (three to five years).
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or market
and consist principally of finished goods and equipment. The Company
maintains a valuation reserve which reflects the Company's estimate of the
impact on inventory of potential obsolescence, excess quantities, and
declines in market prices.
DEPOSITS AND OTHER ASSETS
Deposits and other assets include long-term life insurance contracts and
other assets. These investments are carried at cost which approximates
market value.
REVENUE RECOGNITION
Distribution and Production Service Revenue: Revenue is recognized as the
service is provided by the Company.
Product Sales: Revenue is recognizes when the product is shipped. Subject
to limitations, the Company permits customers to obtain exchanges within
certain specified periods, and provides price protection on certain unsold
merchandise. Revenue is reflected net of an allowance for returns.
Equipment Sales: Revenue is recorded when equipment is shipped or
transferred to the purchaser.
License Fee and Royalties: For those agreements which provide the customers
the right to multiple copies in exchange for guaranteed amounts, revenue is
recognized upon execution of the agreement since the Company has no
remaining obligations or incremental costs. Per copy royalties on sales
that exceed the guarantee are recognized as earned. For those agreements
which provide for the marketing rights and the future use of the Companyis
name, technology and trademarks, revenue is recognized when all material
services or conditions relating to the sale have been performed or
satisfied.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
VALUATION OF STOCK TRANSACTIONS
For stock issued in return for services, the transactions have been
recorded at the value of the services received, if determinable; if such
value was not determinable, the transactions were valued at the fair market
value of the stock issued.
F-10
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs related to the development of certain
software products. In accordance with Statement of Financial Accounting
Standards No.+86, capitalization of costs begins when technological
feasibility has been established and ends when the product is available for
general release to customers. Amortization of costs for specific products
is recognized on the relative value basis over the estimated economic life
of each specific product, generally within one year. Amortization of costs
related to interactive programs is recognized on a straight line basis over
three to five years.
ADVERTISING COSTS
The Company accounts for advertising costs in accordance with SOP No. 93-7,
Reporting on Advertising Costs. Direct response advertising is capitalized
only if customer sales can be directly correlated to the advertising costs
and if future benefit can be demonstrated. Capitalized advertising costs
are amortized using the straight-line method over the estimated benefit
period. Advertising expense for 1995, 1994 and 1993 was $290,000, $136,000,
and $172,000, respectively. Amounts capitalized at December 31, 1995 and
1994 was $310,000 and $243,000, respectively.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
EARNINGS (LOSS) 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, 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. The impact of the outstanding stock options
and warrants and conversion of preferred stock would have had an anti-
dilutive effect in years where losses are reported, and accordingly, have
not been included in the computation.
RECLASSIFICATIONS
Certain items in the 1994 and 1993 consolidated financial statements have
been reclassified to conform to the 1995 presentation.
(2) MERGER
On December 31, 1993, a subsidiary of the Company completed its merger with
New World Computing, Inc. (New World), a developer and distributor of
interactive video game software. The Company issued 1,025,000 shares of
common stock for all of the outstanding common stock of New World. The
transaction was accounted for as a pooling of interests. The consolidated
financial statements for 1993 were restated to reflect the merger.
(3) SALE OF SUBSIDIARY INTERESTS
F-11
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In December 1995 the Company purchased the shares of LearnStar owned by ACT
III Communications to increase its ownership in LearnStar to 100%. Also in
December 1995, the Company sold a 45% interest in LearnStar to an
unaffiliated company for $2,500,000 in return for a note receivable in the
amount of $2,500,000. As the Company's basis in LearnStar is negative, the
gain on the sale of the stock was $3,354,000. The gain was deferred and will
be recognized as the Company receives proceeds on the note receivable
arising from the sale.
In December 1995, the Company entered into a sale and purchase agreement to
sell 10% of its interest in IWN Inc. to an unaffiliated company for $350,000
A gain of $329,000 was recognized upon consummation of the sale.
(4) NOTES RECEIVABLE - RELATED PARTIES
Short-term and long-term notes receivable is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
6% unsecured notes from officers and
directors. Revised in April 1996 to
mature in three annual installments
beginning in April 1997 of 10%, 30%
and 60%, respectively. Payable either
in cash or through redemption of
Company shares at fair market value. $ 3,438,000 2,947,000
Non-interest bearing note of $2,500,000
from unaffiliated company due $400,000
in 1996 and $2,100,000 in 1997, net of
deferred gain. Secured by common
stock. -- --
6% - 8% unsecured notes from officers
and directors. Due in December 1996. 680,000 315,000
Non-interest bearing unsecured note.
Payment received in March 1996. 350,000 --
5% unsecured note. Due from IWN L.P,
an unconsolidated limited partnership
in which the Company is a general
partner. Due March 2000 or earlier to
the extent of available cash as
provided in the limited partnership
agreement. 738,000 --
----------- ---------
Total 5,206,000 3,262,000
Current portion (1,030,000) --
----------- ---------
$ 4,176,000 3,262,000
=========== =========
</TABLE>
Notes receivable from officers and directors include amounts advanced to
officers and directors to obtain a federal or state income tax deduction for
the Company. In 1993, the Company obtained a deduction of $6,900,000 related
to compensation to officers and directors in prior years. The amount has
been recorded as an addition to the Company's existing net operating loss
carryforward. In order to obtain the deduction, the Company was required to
withhold and to deposit amounts with the appropriate government taxing
authorities on behalf of the officers and directors.
F-12
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In 1995, the Company entered into a sale agreement to sell 45% of its shares
in LearnStar in exchange for a note of $2,500,000. The gain has been
deferred and will be recognized as the Company receives proceeds on the note
receivable arising from the sale.
(5) FIXED ASSETS
Fixed assets are recorded at cost and consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Furniture and fixtures $ 767,000 271,000
Equipment 2,917,000 2,217,000
Automobile 47,000 47,000
----------- ---------
3,731,000 2,535,000
Accumulated depreciation 1,631,000 1,130,000
----------- ---------
$ 2,100,000 1,405,000
=========== =========
</TABLE>
(6) SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings and long-term debt is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
$750,000 variable rate line of credit
(30-day commercial paper rate plus
2.9%, 8.73% at December 31, 1995).
Matures in October 1996. Secured by
accounts receivable. $ 722,000 445,000
Variable rate loan (8.4% at December
31, 1995), due in May 1996, secured by
life insurance policies. 1,356,000 --
Other. 17,000 31,000
----------- ---------
Total 2,095,000 476,000
Current portion of long-term debt (2,093,000) (468,000)
----------- ---------
$ 2,000 8,000
=========== =========
</TABLE>
The aggregate maturities of long-term debt for years subsequent to December
31, 1995 are as follows: 1996, $2,093,000; 1997, $2,000.
(7) INCOME TAXES
The company accounts for income taxes in accordance with Statement of
Financial Accounting
F-13
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Standards No. 109, "Accounting for Income Taxes," ("SFAS 109"). Under the
assets and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the estimated future consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax balances.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
At December 31, 1995, the Company has available net operating loss
carryforwards of approximately $27,000,000 for federal income tax purposes,
which begin to expire in 2006. The net operating loss carryforwards for
state purposes, which begin to expire in 1996 are less than 50% of the
federal tax amounts. The Company may have additional net operating loss
carryforwards available subject to annual limitations under Internal Revenue
Code 382.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current
Federal $ -- -- 234,000
State -- -- 71,000
-------- -------- --------
-- -- 305,000
-------- -------- --------
Deferred
Federal -- -- (15,000)
State -- -- (9,000)
-------- -------- --------
-- -- (24,000)
-------- -------- --------
Total $ -- -- 281,000
======== ======== ========
</TABLE>
F-14
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effects of significant temporary differences which comprise deferred tax
assets and liabilities as of December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Deferred tax assets:
Book-Tax amortization difference $ 23,000 16,000
Bad debt reserve 696,000 174,000
Inventory reserve 70,000 30,000
Compensation and vacation accrual 242,000 143,000
Sale-Leaseback transactions 803,000 622,000
Prepaid litigation expense 110,000 --
NOL carryforwards 12,210,000 10,363,000
Other 44,000 --
------------ ----------
Total gross deferred tax assets 14,198,000 11,348,000
Less: Valuation allowance (11,727,000) (9,930,000)
------------ ----------
Net deferred tax assets $ 2,471,000 1,418,000
------------ ----------
Deferred tax liabilities:
Book-Tax depreciation difference $ (105,000) (51,000)
Capitalized software (2,236,000) (1,361,000)
Gain on sale of IWN Inc. interest (128,000) --
Other (2,000) (6,000)
------------ ----------
Total gross deferred liabilities (2,471,000) (1,418,000)
------------ ----------
Net deferred taxes $ -- --
============ ==========
</TABLE>
A reconciliation of income taxes atthe Federal statutory rate with the provision
for income taxes follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Federal income tax rate (40%) (40%) (40%)
Taxes on subsidiary not offset by net
operating loss carryforwards -- -- 27.5%
Effect of net operating loss
carryfoward and valuation allowances 40% 40% 40%
----- ----- -----
Effective income tax rate 0% 0% 27.5%
===== ===== =====
</TABLE>
The net change in the total valuation allowance for the years ended December
31, 1995 and 1994 was an increase of $1,797,000 and $300,000, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax
F-15
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based on the level of historical operating earnings
and projections for taxable income for the future, management has determined
that it is more likely than not that the portion of deferred tax assets not
utilized through the reversal of deferred tax liabilities will not be
realized. Accordingly, the Company has recorded a valuation allowance to
reduce deferred tax assets to the amount that is more likely than not to be
realized.
(8) COMMON STOCK OPTIONS
In 1995, The Company sold and issued an aggregate of 3,000,000 shares of
common stock. In September and October 1995, 2,400,000 of these shares were
issued at an initial price of $4.00 per share to certain institutional
investors (Investors). Pursuant to the terms of the sale, the initial
purchase price paid by the Investors is subject to adjustment based on the
average of the closing prices ("Average Share Price") of the Common Stock
for all trading days during the 60-day period commencing on January 15, 1996
("Valuation Period"). Under the agreement, if the Average Share Price during
the Valuation Period is less than $4.70, the Company will issue to the
Investors, at no additional cost to the Investors, additional shares of
common stock so as to result in a purchase price per share of common stock
equal to 85% of the Average Share Price. Conversely, if the Average Sales
Price exceeded $4.70 during the Valuation Period, the Investors are
obligated to pay to the Company the dollar amount by which the product of
85% of the Average Share Price during the Valuation Period and 2,400,000
exceeds the amount provided to the Company. As a result of these terms, the
Company anticipates that it will issue approximately 1,200,000 additional
shares to the Investors in 1996.
The Company has a qualified incentive stock option plan under which
2,000,000 restricted common shares are authorized for grant. Options granted
in or after 1993 generally vest 33% annually, commencing one year from the
date of grant and expire five years from the date of grant. A summary of the
status of the Company's qualified incentive stock option plan follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTION PRICE EXERCISABLE
OPTIONS PER SHARE OPTIONS
----------- ------------ -----------
<S> <C> <C> <C>
December 31, 1993 715,097 $2.25 - 8.25 317,897
Options granted 705,450 5.75 - 8.25 90,000
Options that became exercisable -- 6.50 - 8.25 133,400
Options exercised (8,867) 2.25 - 6.50 (8,867)
Options lapsed and canceled (19,900) 6.38 - 6.50 --
--------- ------------ ---------
December 31, 1994 1,391,780 2.25 - 8.25 532,430
Options granted 1,691,600 4.00 - 8.00 530,000
Options that became exercisable -- 6.38 - 8.25 369,450
Options exercised (10,500) 2.25 - 6.50 (10,500)
Options lapsed and canceled (62,550) 4.50 - 6.50 (62,550)
--------- ------------ ---------
December 31, 1995 3,010,330 $2.25 - 8.25 1,358,830
========= ============ =========
</TABLE>
F-16
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company previously had a non-qualified stock option plan under which
1,455,000 restricted common shares were granted. Non-qualified options vest
50% annually, commencing one year from the date of grant and expire five
years from the date of grant. A summary of the status of the non-qualified
stock options follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTION PRICE EXERCISABLE
OPTIONS PER SHARE OPTIONS
----------- ------------ -----------
<S> <C> <C> <C>
December 31, 1993 1,260,000 $2.00 - 8.25 460,000
Options granted 195,000 5.75 - 8.25 --
Options that became exercisable -- -- 400,000
Options exercised -- -- --
Options lapsed and canceled -- -- --
--------- ------------ -------
December 31, 1994 1,455,000 2.00 - 8.25 860,000
Options granted -- -- --
Options that became exercisable -- 5.75 - 8.25 497,500
Options exercised -- -- --
Options lapsed and canceled -- -- --
--------- ------------ -------
December 31, 1995 1,455,000 $2.00 - 8.25 1,357,500
========= ============ =========
</TABLE>
(9) 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company has authorized 10,000,000 shares of 10% cumulative convertible
preferred stock, of which 162,612 and 197,612 were issued and outstanding
at December 31, 1995 and 1994, respectively. The stock has no voting rights
and has a $1.00 per share liquidation preference over common stock. At
December 31, 1995, each share is currently convertible into .2801 shares of
common stock at the option of the holder. During 1995, 35,000 shares of
cumulative convertible preferred stock converted into 9,804 shares of
common stock.
(10) WARRANTS
The Company has issued various warrants to purchase common stock, all of
which are exercisable as of December 31, 1995. The following summarizes
warrants issued and outstanding:
<TABLE>
<CAPTION>
OUTSTANDING WARRANT PRICE EXERCISABLE
WARRANTS PER SHARE WARRANTS
----------- ------------- -----------
<S> <C> <C> <C>
December 31, 1993 3,245,121 $2.00 - 20.00 3,245,121
Warrants granted 437,500 5.13 - 7.50 437,500
Warrants that became exercisable -- -- --
Warrants exercised (297,573) 2.00 - 3.70 (297,573)
Warrants lapsed and canceled (3,119) 20.00 (3,119)
---------- ------------- ----------
December 31, 1994 3,381,929 2.00 - 8.00 3,381,929
Warrants granted 733,500 4.00 - 6.13 733,500
Warrants that became exercisable -- -- --
Warrants exercised (225,600) 2.00 - 3.70 (225,600)
Warrants lapsed and canceled -- -- --
---------- ------------- ----------
December 31, 1995 3,889,829 $2.00 - 8.00 3,889,829
========= ============ =========
</TABLE>
F-17
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) BUSINESS SEGMENT AND EXPORT SALES DATA
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended December 31, 1995,
1994 and 1993. The Company's principal business units are its Hospitality
Network (Hospitality Interactive Services), LearnStar, Inc. (Education
Interactive Services) and New World (Software Development and
Distribution). Corporate and Other includes other smaller segments and the
corporate operations.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Net Sales
Hospitality Interactive Services $21,720,000 16,710,000 8,970,000
Education Interactive Services 1,095,000 -- --
Software Development and Distribution 5,379,000 5,747,000 6,135,000
Corporate and Other 2,248,000 2,189,000 2,153,000
----------- ---------- ----------
Total $30,442,000 24,646,000 17,258,000
=========== ========== ==========
Operating Income (Loss)
Hospitality Interactive Services $ 3,547,000 2,839,000 1,461,000
Education Interactive Services (2,149,000) -- --
Software Development and Distribution 127,000 251,000 633,000
Corporate and Other (6,824,000) (2,795,000) (3,548,000)
----------- ---------- ----------
Total $(5,299,000) 295,000 (1,454,000)
=========== ========== ==========
Identifiable Assets
Hospitality Interactive Services $28,125,000 20,246,000 21,787,000
Education Interactive Services 1,320,000 1,104,000 --
Software Development and Distribution 6,152,000 4,856,000 1,706,000
Corporate and Other 7,216,000 5,033,000 3,747,000
----------- ---------- ----------
Total $42,813,000 31,239,000 27,240,000
=========== ========== ==========
Capital Expenditures
Hospitality Interactive Services $ 945,000 763,000 629,000
Education Interactive Services 116,000 -- --
Software Development and Distribution 30,000 51,000 --
Corporate and Other 105,000 84,000 70,000
----------- ---------- ----------
Total $ 1,196,000 898,000 699,000
=========== ========== ==========
Depreciation and Amortization
Hospitality Interactive Services $ 965,000 499,000 249,000
Education Interactive Services 78,000 -- --
Software Development and Distribution 1,071,000 310,000 18,000
Corporate and Other 36,000 28,000 15,000
----------- ---------- ----------
Total $ 2,150,000 837,000 282,000
=========== ========== ==========
</TABLE>
F-18
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Sales to foreign customers are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Distribution and production services $ 896,000 660,000 580,000
Equipment sales 711,000 429,000 689,000
License fees and royalties 1,521,000 851,000 802,000
----------- ---------- ----------
Total $ 3,128,000 1,940,000 2,071,000
=========== ========== ==========
</TABLE>
(12) RETIREMENT AND SAVINGS PLANS
DEFINED BENEFIT PENSION PLAN
The Company has established a non-qualified, con-contributory pension plan
covering certain key executives. This plan is subject to modification at
any time. The plan provides retirement benefits based on years of service
and compensation. Net pension expense was $7,000 and $5,000 in 1995 and
1994 respectively. Accrued pension liability totaled $12,000 and $5,000 at
December 31, 1995 and 1994, respectively.
DEFINED CONTRIBUTION PLAN
During 1994, the Company also established a defined contribution plan which
is organized under Section 401(k) of the Internal Revenue Code, which
allows employees who have completed at least six months of service or
reached age 21, whichever is later, to defer up to 15% of their pay on a
pre-tax basis. The Company, at its discretion, may contribute to the plan.
For the year ended December 31, 1995 and 1994 the Company made no such
contributions.
DEFERRED COMPENSATION PLAN
The Company also maintains an unfunded, non-qualified deferred compensation
plan, which was created in 1994 for certain members of management. This
plan allows participants to defer a minimum of $5,000 up to limits set by
the Internal Revenue Code.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The Company believes that the
fair value of financial instrument assets and financial instrument
liabilities approximate their carrying value, except that the carrying
value of notes receivable at December 31, 1995 exceeds the fair value by
approximately $250,000. The following methods and assumptions were used to
estimate the fair value of financial instruments:
The carrying values of cash and cash equivalents, marketable securities,
accounts receivable, other assets, accounts payable and accrued liabilities
and short-term borrowings approximates fair value because of the short
maturity of those instruments. The fair value of notes receivable and
interest-bearing security deposits are determined as the present value of
expected future cash flows discounted at the interest rate currently
offered by the Company which approximates rates currently offered by local
lending institutions for instruments of similar terms and risks.
(14) COMMITMENTS AND CONTINGENCIES
F-19
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company leases office and production facilities and equipment under
agreements which expire at various dates. In 1995, the Company entered into
a noncancelable operating lease with an entity which is partially owned by
the Company. The Company incurred no lease expense under the lease in 1994
and 1993. Certain leases contain renewal provisions and generally require
the Company to pay utilities, insurance, taxes and other operating
expenses. Additionally, the Company has entered into agreements for the
sale and leaseback of certain equipment used in broadcast operations.
Deferred gains on sale and leaseback transactions is amortized to
operations over the three year lease terms. Each lease provides an option
to the Company to repurchase the equipment at the estimated fair market
value at the end of the lease terms. Included in assets are interest-
bearing security deposits totaling $3,775,000 relating to these agreements.
Lease expense under operating leases totaled $4,763,000, $3,272,000 and
$1,425,000 in 1995, 1994 and 1993, respectively.
Future minimum lease obligations under noncancelable operating leases at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING RELATED PARTY OTHER
- ------------ ------------- -------------
<S> <C> <C>
1996 $ 285,000 4,822,000
1997 314,000 3,179,000
1998 350,000 1,198,000
1999 373,000 162,000
2000 378,000 161,000
Thereafter 189,000 12,000
------------- -------------
Total $ 1,889,000 9,534,000
============= =============
</TABLE>
The Company provides services to group viewing locations, generally bars
and lounges, and to third party distributors primarily throughout the
United States. In addition, the Company licenses its technology and
products to licensees outside of the United States. Concentration of credit
risk with respect to trade receivables are limited due to the large number
of customers comprising the Companys customer base, and their dispersion
across many different industries and geographies. The Company performs
ongoing credit evaluations of its customers financial condition and,
generally, requires deposits from its customers. At December 31, 1995, the
Company had no significant concentrations of credit risk.
(15) LEGAL ACTIONS
Beginning in 1992 the Company has been involved in various lawsuits with
Interactive Network, Inc. The remaining lawsuits have all been suspended
pending substantive discussions regarding a global resolution of all
disputes. The Company believes, based in part on the advice of outside
independent counsel, that these actions and possible resolutions will not
have a material adverse effect on the Company's financial position or
results of operations.
The Company is also defending litigation filed by various shareholders of
the Company. The class action suit seeks 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 has vigorously defended this
litigation and believes, in part, based upon the opinion of outside
counsel, on the merits of its defense, the Company has entered into
substantive negotiations to resolve this matter out-of-court to avoid
costly and protracted litigation, in the best interests of its
shareholders. A preliminary framework for such a resolution has
F-20
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
been reached, however, any proposed settlement between the parties will be
subject to notification to each of the class members and final court
approval.
In April 1995, a second class action lawsuit was filed against the Company.
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. In July 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 complaints and has
filed its own counterclaim against third parties for indemnification. The
Company has denied liability based upon the allegations contained in the
complaints which do not contain any statement or demand for a specific
amount of damages. Much discovery has been undertaken and, at this time,
the Company intends to continue to vigorously contest these matters.
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 legal 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.
F-21
<PAGE>
Schedule II
-----------
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
ADDITIONS BALANCE
ALLOWANCE FOR BALANCE AT CHARGED TO AT END
DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS (a) OF PERIOD
- ----------------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
1993 $ 70,000 206,000 96,000 180,000
1994 $ 180,000 375,000 120,000 435,000
1995 $ 435,000 987,000 663,000 759,000
</TABLE>
(a) Reflects trade accounts receivable written off during the year.
<TABLE>
<CAPTION>
ADDITIONS BALANCE
RESERVE FOR SALES BALANCE AT OFFSET TO AT END
RETURNS AND ALLOWANCES BEGINNING REVENUE DEDUCTIONS (b) OF PERIOD
- ---------------------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
1993 $ - - - -
1994 $ - 1,261,000 599,000 662,000
1995 $ 662,000 1,186,000 1,190,000 658,000
</TABLE>
(b) Reflects actual returns and allowances charged against the reserve during
the year.
<TABLE>
<CAPTION>
ADDITIONS BALANCE
BALANCE AT CHARGED TO AT END
RESERVE FOR OBSOLESCENCE BEGINNING EXPENSE DEDUCTIONS (b) OF PERIOD
- ------------------------ ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
1993 $ - - - -
1994 $ - - - -
1995 $ - 1,000,000 - 1,000,000
</TABLE>
F-22
