<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1103425
(State of incorporation) (I.R.S. Employer Identification No.)
The Campus 5966 La Place Court, Carlsbad, California 92008
(Address of principal executive offices)(Zip Code)
(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 11, 1996: 23,134,953 shares of common stock, $.005 par
value.
1
<PAGE>
PART I--FINANCIAL INFORMATION
-----------------------------
Item 1. FINANCIAL STATEMENTS.
2
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1996 (Unaudited) and December 31, 1995
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,346,000 6,485,000
Marketable securities - available for sale 10,223,000 --
Interest-bearing security deposits 2,056,000 1,575,000
Accounts receivable - trade, net of allowance
for doubtful accounts 4,123,000 2,668,000
Accounts receivable - officers and directors -- 100,000
Accounts receivable - other 265,000 1,750,000
Notes receivable - related parties 680,000 1,030,000
Prepaid expenses and other current assets 2,059,000 2,223,000
Inventory, net -- 5,618,000
Net assets of discontinued operations -- 4,560,000
----------- -----------
Total currrent assets 20,752,000 26,009,000
Broadcast equipment, net 5,656,000 --
Fixed assets, net 2,345,000 2,023,000
Notes receivable - related parties 4,094,000 4,176,000
Interest-bearing security deposits 539,000 2,200,000
Software development costs, net 3,698,000 3,152,000
Other assets 3,216,000 3,661,000
----------- -----------
Total assets $40,300,000 41,221,000
=========== ===========
</TABLE>
(Continued)
3
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
September 30, 1996 (Unaudited) and December 31, 1995
<TABLE> <CAPTION>
September 30, December 31,
1996 1995
------------- -------------
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 6,922,000 2,862,000
Short-term borrowings 4,680,000 1,371,000
Deferred revenue 1,011,000 1,024,000
Customer deposits 1,237,000 1,284,000
------------- -------------
Total current liabilities 13,850,000 6,541,000
Deferred revenue - long term 1,750,000 1,229,000
------------- -------------
Total liabilities 15,600,000 7,770,000
------------- -------------
Shareholders' equity:
10% Cumulative convertible preferred stock, $.005 par value, 10,000,000
shares authorized; issued and outstanding 161,112 in 1996 and 1995 1,000 1,000
Common stock, $.005 par value, 50,000,000 shares authorized; shares
issued and outstanding 23,134,953 in 1996 and 22,502,707 in 1995 116,000 112,000
Treasury stock, 594,500 shares in 1996 and 50,000 shares in 1995 at cost (2,551,000) (222,000)
Additional paid-in capital 59,469,000 56,747,000
Accumulated deficit (32,335,000) (23,187,000)
------------- -------------
Total shareholders' equity 24,700,000 33,451,000
Total liabilities and shareholders' equity $ 40,300,000 41,221,000
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Network services $ 5,157,000 3,969,000 15,201,000 10,958,000
Online/Internet services 347,000 165,000 1,030,000 404,000
Advertising revenues 375,000 282,000 869,000 788,000
Equipment sales, net 262,000 887,000 1,771,000 1,913,000
Other revenue 301,000 -- 816,000 232,000
----------- ----------- ----------- -----------
Total revenue 6,442,000 5,303,000 19,687,000 14,295,000
Operating expenses:
Operating costs 3,998,000 1,348,000 6,797,000 2,995,000
Selling, general and administrative 6,195,000 2,672,000 16,647,000 7,393,000
Legal and professional fees 458,000 100,000 1,506,000 1,417,000
Equipment lease expense 1,350,000 963,000 3,640,000 2,845,000
Depreciation and amortization 669,000 198,000 1,442,000 689,000
Other charges 721,000 -- 721,000 --
----------- ----------- ----------- -----------
Total operating expenses 13,391,000 5,281,000 30,753,000 15,339,000
Operating income (loss) (6,949,000) 22,000 (11,066,000) (1,044,000)
Investment income, net of investment expense (52,000) 92,000 -- 101,000
----------- ----------- ----------- -----------
Earnings (loss) from continuing operations
before income taxes (7,001,000) 114,000 (11,066,000) (943,000)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Earnings (loss) from continuing operations (7,001,000) 114,000 (11,066,000) (943,000)
Gain from discontinued operations -- 791,000 1,918,000 76,000
----------- ----------- ----------- -----------
Net earnings (loss) $(7,001,000) 905,000 (9,148,000) (867,000)
=========== =========== =========== ===========
Net earnings (loss) per share:
Continuing operations $ (0.31) -- (0.49) (.04)
Discontinued operations -- 0.04 0.09 --
----------- ----------- ----------- -----------
Net earnings (loss) $ (0.31) 0.04 (0.40) (.04)
=========== =========== =========== ===========
Weighted average number of shares outstanding 22,487,000 21,270,000 22,599,000 19,618,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Sept 30, Sept. 30, Sept 30, Sept 30,
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from (used for) operating activities:
Net earnings (loss) $(7,001,000) 905,000 (9,148,000) (867,000)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Gain on discontinued operations -- -- (3,200,000) --
Provision for depreciation,
obsolescence and amortization 2,587,000 198,000 3,361,000 689,000
Provision for doubtful accounts 167,000 11,000 255,000 94,000
Loss from discontinued operations -- -- 1,282,000 --
Accrual for issuance of warrants 293,000 -- 1,910,000 --
(Gain) loss on sale and leaseback
transactions 427,000 (152,000) -- (791,000)
Amortization of deferred gain on sale
and leaseback transactions 267,000 (231,000) (200,000) (687,000)
Change in discontinued operations -- -- (3,102,000) --
Change in assets and liabilities:
Accounts receivable - trade 1,455,000 (159,000) (125,000) (990,000)
Broadcast equipment, net -- 32,000 -- (766,000)
Prepaid expenses and other assets 1,853,000 (5,129,000) 236,000 (7,386,000)
Increase (decrease) in:
Accounts payable and accrued
liabilities 1,171,000 987,000 4,455,000 2,221,000
Deferred revenue 133,000 (116,000) 212,000 227,000
Customer deposits 12,000 200,000 (47,000) 355,000
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,364,000 (3,454,000) (4,111,000) (7,901,000)
----------- ----------- ----------- -----------
Cash flows from (used for) investing activities:
Capital expenditures (318,000) (248,000) (846,000) (814,000)
Purchase of broadcast equipment (3,068,000) -- (3,068,000) --
Buyout of lease obligations (385,000) -- (385,000) --
Notes receivable - related parties (131,000) (25,000) 432,000 (300,000)
Software development costs (414,000) (471,000) (1,238,000) (1,580,000)
Receipt of marketable securities - available
for sale 77,000 -- 77,000 --
Proceeds from sales of marketable securities
- available for sale -- 370,000 -- 1,000,000
Proceeds from sale and leaseback transactions
(1,460,000) 2,250,000 2,415,000 4,500,000
Deposits related to sale and leaseback
transactions 1,534,000 388,000 1,180,000 325,000
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (4,165,000) 2,264,000 (1,433,000) 3,131,000
----------- ----------- ----------- -----------
</TABLE>
6
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Sept 30, Sept 30, Sept 30, Sept 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from (used for) financing activities:
Principal payments on debt $ (3,000) (4,000) (18,000) (11,000)
Proceeds from issuance of debt 950,000 45,000 3,321,000 1,875,000
Purchase of equipment related to sale and
leaseback transactions 843,000 (1,285,000) (1,385,000) (2,470,000)
Proceeds from issuance of common stock,
less issuance costs paid in cash 577,000 4,233,000 817,000 6,938,000
Payments for purchase of treasury stock -- -- (2,330,000) --
---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities 2,367,000 2,989,000 405,000 6,332,000
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents (434,000) 1,799,000 (5,139,000) 1,562,000
Cash and cash equivalents at beginning of period 1,780,000 2,168,000 6,485,000 2,405,000
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $1,346,000 3,967,000 1,346,000 3,967,000
========== ========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 52,000 34,000 117,000 72,000
========== ========== ========== ==========
Income taxes $ -- -- -- --
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
(Unaudited)
1. General.
-------
Management has elected to omit substantially all notes to the Company's
financial statements. Reference should be made to the Company's Form 10-K filed
for the year ended December 31, 1995, which report incorporated the notes to the
Company's year-end financial statements.
2. Unaudited Information.
---------------------
The September 30, 1996 and 1995 information furnished herein was taken from
the books and records of the Company without audit. However, such information
reflects all adjustments that are, in the opinion of management, necessary to
reflect properly results of the interim periods presented. The results of
operations for the period ended September 30, 1996 are not necessarily
indicative of the results to be expected for the fiscal year ending December 31,
1996.
Certain items in the prior year consolidated financial statements have been
reclassified to conform to the format used for the current periods presented.
The financial statements as of and for the quarter ended September 30, 1996
and for the nine months ended September 30, 1996 has been amended to be
consistent with the method of accounting for the consolidation of the accounts
and activity related to IWN L.P. and stock-based compensation pursuant to SFAS
123 as reported in the Annual Report on Form 10-K for the year ended December
31, 1996.
3. Discontinued Operations - Sale of New World Computing.
-----------------------------------------------------
On June 30, 1996 the Company entered into a definitive agreement to sell all
of the assets and business of its New World Computing subsidiary to the 3DO
Company (3DO) for approximately $13,600,000. In consideration of the sale, 3DO
issued to the Company 1,017,953 shares of common stock of 3DO and assumed
$1,650,000 of liabilities of New World. 3DO has guaranteed that the cash value
realized by the Company upon sale of the shares will not be less than $10.04
per share, notwithstanding the market price of such shares.
The disposal of the New World has been accounted for as a discontinued
operation. Accordingly, the consolidated financial statements for all prior
periods have been reclassified to report separately the net assets and operating
results of the discontinued business.
The gain (loss) resulting from the sale of New World and revenues from
discontinued operations for each period reported is as follows.
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Gain on disposal of New World $ -- -- 4,200,000 --
Income (loss) from discontinued operations
of New World -- 791,000 (1,282,000) 76,000
Tax provision for gain on sale -- -- (1,000,000) --
---------- ---------- ---------- ----------
Total $ -- 791,000 1,918,000 76,000
========== ========== ========== ==========
Revenues $ -- 1,866,000 2,085,000 3,286,000
========== ========== ========== ==========
</TABLE>
4. Significant Charges.
-------------------
In the current period, the Company recorded significant other charges
totaling $5,042,000. These charges are based on management's analysis and review
of assets, obligations, current operations and future strategic plans of the
Company. The charges are summarized as follows:
<TABLE>
<S> <C>
Write-down of assets related to selected business activities (Other charges) $ 721,000
Allowance for obsolete inventory and equipment 2,478,000
Accrual for severance pay and other 1,843,000
----------
Total $5,042,000
==========
</TABLE>
The write-down of assets is comprised of certain costs associated with
prospective franchising activities that the Company has determined will not be
pursued and a charge for a license related to its LearnStar subsidiary.
The allowance for obsolete inventory and equipment is a result of an
evaluation of the Company's current inventory of equipment related to current
and future anticipated operations that resulted in a determination that certain
equipment had become obsolete and would not be used in the future.
The accrual of severance pay and other charges is related to liabilities
recorded as a result of planned lay-offs of personnel and a change in estimate
related to advertising costs capitalized under the guidelines of SOP 93-7. Most
individuals will receive severance payments immediately, however individuals
receiving large severance payments will be paid over an extended period of time
in excess of one year.
5. Earnings per Share.
------------------
Earnings per share amounts are computed by dividing net earnings increased
by preferred dividends resulting from the assumed exercise of stock options and
warrants and the assumed conversion of convertible preferred shares, and the
resulting assumed reduction of outstanding indebtedness, by the weighted average
number of common and common equivalent shares outstanding during the period.
Common stock equivalents represent the dilutive effect of the assumed exercise
of certain outstanding options and warrants and preferred stock.
Earnings per share amounts are based on 22,599,000, 19,618,000 and
22,487,000 common shares for the nine months ended September 30, 1996 and 1995
and three months ended September 30, 1996,
9
<PAGE>
respectively. 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. Earnings per share amounts for the three months ended
September 30, 1995 is based on 21,270,000 common shares.
Earnings per share for 1996 periods as presented have been adjusted to
reflect amended results of operations for the three and nine-month periods ended
September 30, 1996. Previously reported earnings per share for the three months
ended September 30, 1996 was $(0.30) compared to the revised amount of $(0.31).
Previously reported earnings per share for the nine months ended September 30,
1996 was $(0.18) compared to the revised amount of $(0.40).
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
- -------
The Company uses existing technology to develop, produce and distribute
two-way multi-player interactive programs in conjunction with live events and
also produces and distributes its own original interactive programs. The
Company's principal sources of revenue from distribution activities are derived
from (a) distribution fees in the United States; (b) advertising fees, (c)
distribution fees from foreign licensees; (d) sales of interactive equipment;
(e) licensing fees from foreign and domestic licensees; and (f) the licensing of
the Company's technology and equipment sales to other users.
On October 25, 1996, the Company reported that it was recently advised by
the United States Federal Communications Commission (FCC) that its Playmaker(R)
keypad had not received formal approval. 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 Network Services
customers, nor have any of the Company's Online/Internet Services been affected.
The Company believes that its application was complete and has not been advised
of any problem with its application, nor of any reason as to why its application
should not be granted. Upon receipt of FCC approval, the Company will be in a
position to immediately begin shipments to new locations.
There has been no impact on revenues in the third quarter as a result of
this situation. The Company believes there will be some impact on revenues in
the fourth quarter, however, the extent of the impact cannot be estimated at
this time.
The financial statement as of and for the quarter ended September 30, 1996
and for the nine months ended September 30, 1996 has been amended to be
consistent with the method of accounting for the consolidation of the accounts
and activity related to IWN L.P. and stock-based compensation pursuant to SFAS
as reported in the Annual Report on Form 10-K for the year ended December 31,
1996.
Material Changes in Results of Operations
- -----------------------------------------
Three month periods ended September 30, 1996 and September 30, 1995
In 1996 the Company recorded significant charges totaling $5,042,000. These
charges are based on management's analysis and review of assets, obligations,
current operations and future strategic plans of the Company.
The charges are summarized as follows:
<TABLE>
<S> <C>
Write-down of assets related to selected business activities $ 721,000
Allowance for obsolete inventory and equipment 2,478,000
Accrual for severance pay and other 1,843,000
----------
Total $5,042,000
==========
</TABLE>
The write-down of assets is comprised of certain costs associated with
prospective franchising activities that the Company has determined will not be
pursued and a charge for a license related to its LearnStar subsidiary. None of
these charges are due to contractions in the core businesses of the Company, and
will not effect future liquidity or results of operations.
11
<PAGE>
The allowance for obsolete inventory and equipment is a result of an
evaluation of the Company's current inventory of equipment related to current
and future anticipated operations that resulted in a determination that certain
equipment had become obsolete and would not be used in the future. This charge
was not due to a contraction in the Company's core businesses and will not
effect future liquidity or results of operations.
The accrual of severance pay and other charges is related to liabilities
recorded as a result of planned lay-offs of personnel and a change in estimate
related to advertising costs capitalized under the guidelines of SOP 93-7. Most
individuals will receive severance payments immediately, however individuals
receiving large severance payments will be paid over an extended period of time
in excess of one year. The planned lay-offs is not due to a contraction in the
Company's core businesses but rather to cost-cutting measures being implemented
to improve profitability. Severance payments, depending on the extent and
timing, could effect future liquidity, but are expected to be funded from
on-going operations.
The Company incurred a net loss, as amended, of $7,001,000 for the three
months ended September 30, 1996 compared to a net profit of $905,000 for the
three months ended September 30, 1995. 1995 Results have been adjusted to
reflect the sale of New World in 1996 as a discontinued operation. The 1996
results include significant other charges totaling $5,042,000 and the operations
of IWN L.P.
For the current quarter, total revenues increased 21% from $5,303,000 to
$6,442,000. This increase is the result of growth in most of the Company's
principal revenue activities.
Network Services increased 30% from $3,969,000 to $5,157,000. The increase is
primarily due to an expansion in the number of subscriber locations contracting
for services. Online/Internet Services increased 110% from $165,000 to $347,000
due to an increasing number of on-line customers and increasing participation by
the ultimate consumers. In addition, the Company has increased the number of
programs available on various distribution platforms. Advertising revenues
related to both Network and Online/Internet Services increased 33% from $282,000
to $375,000 due to increased number of Network advertisers and the first
advertising contract for Online/Internet Services.
Equipment Sales, net of cost of sales decreased 70% from $887,000 to
$262,000. Equipment sales are predominantly due to 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.
In the third quarter of 1996 the Company ceased selling equipment (used in
Network locations) under sale and leaseback arrangements. In addition, the
Company entered into several transactions to buy out of existing sale and
leaseback obligations. In 1992, the Company began entering into sale-leaseback
arrangements as a method of financing the acquisition of equipment installed at
Network locations. At the time, the Company had few customers and a limited
track record of providing its interactive programming to customers. Further, the
Company's ability to raise capital through other mean was limited. Accordingly,
this financing method, although inherently expensive, was an available source of
capital at the time such arrangements were established. In the past few years,
the Company has gained additional experience in providing interactive programs
and the customer base has continued to grow at a rapid rate. With this growth
and improved operations, management believes that sale-leaseback arrangements
are not the best financing method currently available to the Company.
Accordingly, the Company has discontinued selling and leasing back the equipment
installed at its Network locations under historic terms and has begun a program
to repurchase the equipment that was the subject of many previous sale-leaseback
arrangements. Although the program requires the immediate use of cash, it is
expected to result in improved future cash flow due to the elimination of many
lease payments.
Operating Costs related to Network and Online/Internet services rose from
$1,348,000 in prior years quarter to $3,998,000 in the current years quarter, an
increase of 197%. The increase is largely
12
<PAGE>
attributable to a charge of $2,478,000 for a write-down of obsolete equipment
and to the expansion in the number of subscribers and online services
contracting for services. Exclusive of the charge for obsolete equipment,
operating costs increased 13% compared to a combined increase in Network and
Online/Internet services revenue of 33%. Selling, General and Administrative
expenses increased 131% from $2,672,000 to $6,195,000. Included in Selling,
General and Administrative expenses are several significant charges including an
accrual of severance benefits, an increase in the allowance for bad debt, and a
change in estimate for deferred advertising costs aggregating $1,707,000.
Further, the quarter ended in 1996 includes $293,000 in charges recorded
pursuant to SFAS 123 for the issuance of warrants to third parties. Exclusive
of these specific charges, Selling, General and Administrative expenses
increased 57% over the previous years quarter largely due to general growth and
enhanced sales and marketing efforts. Legal and Professional expenses increased
358% due to fees associated with litigation and other legal and accounting
services incurred. Other charges include a write-down of assets of $721,000 for
costs associated with prospective franchising activities that the Company has
determined will not be pursued and a charge for a license related to its
LearnStar subsidiary due to the rescission of the sale of interests of
LearnStar.
Nine month periods ended September 30, 1996 and September 30, 1995
In 1996 the Company recorded significant charges totaling $5,042,000.
These charges are based on management's analysis and review of assets,
obligations, current operations and future strategic plans of the Company.
The charges are summarized as follows:
<TABLE>
<S> <C>
Write-down of assets related to selected business activities $ 721,000
Allowance for obsolete inventory and equipment 2,478,000
Accrual for severance pay and other 1,843,000
----------
Total $5,042,000
==========
</TABLE>
The write-down of assets is comprised of certain costs associated with
prospective franchising activities that the Company has determined will not be
pursued and a charge for a license related to its LearnStar subsidiary. None of
these charges are due to contractions in the core businesses of the Company, and
will not effect future liquidity or results of operations.
The allowance for obsolete inventory and equipment is a result of an
evaluation of the Company's current inventory of equipment related to current
and future anticipated operations that resulted in a determination that certain
equipment had become obsolete and would not be used in the future. This charge
was not due to a contraction in the Company's core businesses and will not
effect future liquidity or results of operations.
The accrual of severance pay and other charges is related to liabilities
recorded as a result of planned lay-offs of personnel and a change in estimate
related to advertising costs capitalized under the guidelines of SOP 93-7. Most
individuals will receive severance payments immediately, however individuals
receiving large severance payments will be paid over an extended period of time
in excess of one year. The planned lay-offs is not due to a contraction in the
Company's core businesses but rather to cost-cutting measures being implemented
to improve profitability. Severance payments, depending on the extent and
timing, could effect future liquidity, but are expected to be funded from
on-going operations.
The Company incurred a net loss, as amended, of $9,148,000 for the nine
months ended September 30, 1996 compared to a net loss of $867,000 for the nine
months ended September 30, 1995. 1995 results have been adjusted to reflect the
sale of New World in 1996 as a discontinued operation. The 1996 results include
significant other non-recurring charges totaling $5,042,000 and losses
attributable to IWN L.P.
13
<PAGE>
operations of $3,047,000, and charges pursuant to SFAS 123 of $1,910,000. The
1996 results also include a gain on the sale of the Company's New World
subsidiary of $1,918,000, net of taxes and operating losses during the
disposition period.
For the current period, total revenues increased 38% from $14,295,000
to $19,687,000. This increase is the result of growth in most of the Company's
principal revenue activities.
Network Services increased 39% from $10,958,000 to $15,201,000. The
increase is primarily due to an expansion in the number of subscriber locations
contracting for services. Online/Internet Services increased 155% from $404,000
to $1,030,000 due to an increasing number of on-line customers and increasing
participation by the ultimate consumers. In addition, the Company has increased
the number of programs available on a distribution platforms. Advertising
revenues related to both Network and Online/Internet Services increased 10% from
$788,000 to $869,000 due to increased number of Network advertisers and the
first advertising contract for Online/Internet Services.
Equipment Sales, net of cost of sales decreased 7% from $1,913,000 to
$1,771,000. Equipment sales are predominantly due to 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.
In the third quarter of 1996 the Company ceased selling equipment (used
in Network locations) under sale and leaseback arrangements. In addition, the
Company entered into several transactions to buy out of existing sale and
leaseback obligations. In 1992, the Company began entering into sale-leaseback
arrangements as a method of financing the acquisition of equipment installed at
Network locations. At the time, the Company had few customers and a limited
track record of providing its interactive programming to customers. Further,
the Company's ability to raise capital through other means was limited.
Accordingly, this financing method although inherently expensive, was the best
available source of capital at the time such arrangements were established. In
the past few years, the Company has gained additional experience in providing
interactive programs and the customer base has continued to grow at a rapid
rate. With this growth and improved operations, management believes that
sale-leaseback arrangements are not the best financing method currently
available to the Company. Accordingly, the Company has discontinued selling and
leasing back the equipment that was the subject of many previous sale-leaseback
arrangements. Although the program requires the immediate use of cash, it is
expected to result in improved future cash flow due to the elimination of many
lease payments.
Operating Costs related to Network and Online/Internet services rose
from $2,995,000 in the prior years period to $6,797,000 in the current years
period, an increase of 127%. The increase is largely attributable to a charge
of $2,478,000 for a write-down of obsolete equipment and to the expansion in the
number of subscribers and online services contracting for services. Exclusive
of the charge for obsolete equipment, operating costs increased 44% compared to
a combined increase in Network and Online/Internet services revenue of 43%.
Selling, General and Administrative expenses increased 125% from $7,393,000 to
$16,647,000. Included in Selling, General and Administrative expenses are
several significant charges including an accrual of severance benefits, an
increase in the allowance for bad debt, and a change in estimate for deferred
advertising costs aggregating $1,707,000. Further, the nine months ended in
1996 includes $1,910,000 in charges recorded pursuant to SFAS 123 for the
issuance of warrants to third parties, and costs associated with the start-up
operations of IWN L.P. of $2,301,000. Exclusive of these specific charges,
Selling, General and Administrative expenses increased 45% over the previous
years quarter largely due to general growth and enhanced sales and marketing
efforts. Legal and Professional expenses increased 6% due to the timing of
services associated with litigation and other legal and accounting services.
Other charges include a write-down of assets of $721,000 for costs associated
with prospective franchising activities that the Company has determined will not
be pursued and a charge for a license related to its LearnStar subsidiary due
to the rescission of the sale of interests of LearnStar.
14
<PAGE>
Material Changes in Financial Condition
- ---------------------------------------
The following analysis compares information as of the most recent unaudited
balance sheet date of September 30, 1996 to the prior year-end audited balance
sheet dated December 31, 1995.
In 1996, the Company recorded significant charges totaling $5,042,000.
These charges are based on a review of assets, obligations, current operations
and future strategic plans of the Company. The majority of these charges were
non-cash related charges which will have no impact on future cash flow. None of
these non-cash charges are due to contractions in the core businesses of the
Company, and will not effect future liquidity or results of operations. The most
significant charge that will involve future cash flow is the accrual for
severance pay which will be paid over an extended period of time in excess of
one year for those individuals receiving large severance packages. The planned
lay-offs are not due to a contraction in the Company's core businesses but
rather to cost-cutting measures being implemented to improve profitability.
Severance payments, depending on the extent and timing, could effect future
liquidity, but are expected to be funded from on-going operations.
Total assets decreased 2% from $41,221,000 to $40,300,000 from December 31,
1995 to September 30, 1996. The decrease in assets is primarily due to the
significant other charges recorded in the third quarter. Cash decreased from
$6,485,000 to $1,346,000 at September 30, 1996 due to cash used to repurchase
shares of the Company's stock and to fund operations. Marketable
Securities-Available for Sale result from the sale of New World and represent
1,017,953 shares of the 3DO Company. Following the end of the third quarter
the Company commenced selling the 3DO shares. The 3DO Company has guaranteed
that the cash value realized by the Company upon sale of the shares will not be
less than $10.04 per share, notwithstanding the market price of such shares.
Interest-bearing security deposits decreased by $1,180,000 due to buyout of
certain sale and leaseback agreements.
The 55% increase in Accounts Receivable - Trade from $2,668,000 to
$4,123,000 at September 30, 1996, reflects the overall growth of the Company's
primary operations and a large contract with Bell Canada for the development of
certain products. Accounts Receivable - Other decreased from $1,750,000 to
$265,000, the result of payments received and the buyout of certain lease
obligations.
In the third quarter the Company commenced a program to repurchase
equipment previously sold to and leased back from third parties. The Company
intends to continue such a program and either buy out of lease obligations or
enter into new financing arrangements. Accordingly, Broadcast Equipment,
formerly shown as Inventory, has been reclassified to non-current assets. The
Company does not intend to sell this equipment in the future, accordingly,
depreciation of these assets will commence in the fourth quarter. The new policy
is expected to result in improved cash flow due to the elimination of many lease
payments. Further, the Company evaluated its current inventory of equipment in
light of current and anticipated operations and determined that certain
equipment was obsolete and would not be used in the future. Accordingly, a
charge of $2,478,000 was recorded in the quarter to write-off these assets.
Total liabilities increased 61% from $7,770,000 to $15,600,000 from
December 31, 1995 to September 30, 1996. The increase in Accounts Payable and
Accrued Liabilities from $2,862,000 to $6,922,000 reflects the overall growth of
the Company, an accrual for liabilities incurred in the sale of New World
including a provision for taxes of $1,000,000, and certain significant charges
totaling $1,843,000 noted earlier. The increase in aggregate Deferred Revenue
(long-term and current) from $2,253,000 to $2,761,000 reflects a $500,000
deferral related to the Bell Canada agreement, net of reductions due to
amortization and buy out of lease obligations. Revenue related to the Bell
Canada agreement will be recognized as product is delivered beginning in late
1996 or in 1997.
Overall, the Company's working capital decreased $12,566,000 from December
31, 1995 to September 30, 1996, primarily the net result of the New World sale
transaction, the significant charges
15
<PAGE>
recorded in the third quarter and the reclassification of Broadcast equipment to
non-current assets. Revenues from the principal business activities, Network and
Education grew 30% and 100%, respectively, in the nine months ended September
30, 1996 compared to the prior year nine month period. Both segments reported
losses in 1996. The Software Development and Distribution segments (New World)
was sold in June 1996 and no longer represents a business segment. Each business
segment, as well as the Company in general may continue to require additional
working capital for operating expenses, new services development, marketing of
services and purchase of the hardware components used in the reception of its
services. There can be no assurance that the Company's currently available
resources will be sufficient to allow the Company to support its operations
until such time, if any, as its internally generated cash flow is able to
sustain the Company.
In the past, the Company has been able to fund its operations and
improve its working capital position by sales of Common Stock upon exercise of
warrants and options, by leasing transactions for equipment in use at subscriber
locations, and by licensing its technology to foreign licensees. The Company is
exploring alternative capital financing possibilities which may include (i)
licensing and related royalties of the Company's technology and products; (ii)
borrowing arrangements under fixed and revolving credit agreements; or (iii)
sale of additional equity securities. The Company will continue to negotiate
for additional lease and debt financing and additional foreign licensing,
however, the extent to which any of the foregoing may be effected cannot be
predicted at this time.
16
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS.
The description of certain legal proceedings contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 under the
caption "Legal Proceedings", is incorporated herein by reference. An update of
events subsequent to that Report follows.
On April 18, 1995, a class action lawsuit was filed in the United States
District Court for the Southern District of California (San Diego). The
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 to $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. This lawsuit has been scheduled for trial
to commence on May 6, 1997.
On July 3, 1995, a single shareholder files 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 has been transferred from Texas
to California. The discovery and other proceedings of this case are being
coordinated with the lawsuit referred to in the immediately preceding paragraph.
The Company denies the allegations in the complaint and has filed its own
counterclaim against third parties for indemnification.
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, it may have a material effect on the Company's financial
condition and result of operations. Management believes, however, based in part
on the advice of outside counsel, the likelihood of such an outcome is remote.
Until recently, the Company was involved as a plaintiff or defendant in
various previously reported lawsuits 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 involving 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.
Other than as set forth above, there is no material litigation pending or
threatened against the company.
There can be no assurance that any or all of the preceding actions will be
decided in favor of the Company. The Company believes, based in part on the
advice of outside, independent counsel, that the costs of defending and
prosecuting these actions will not have a material adverse effect on the
Company's financial position or results of operations.
17
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of stockholders on August 16, 1996.
The matters voted upon at such meeting were election of two directors to the
Board of Directors and approval of the amendment to the 1995 Stock Option Plan.
The voting on each proposal was as set forth in the table below.
<TABLE>
<CAPTION>
VOTES VOTES
"FOR" "AGAINST"* ABSTENTIONS**
<S> <C> <C> <C>
Elections of Directors
Patrick J. Downs 19,444,272 1,105,186 --
Donald C. Klosterman 19,451,772 1,097,686 --
Approval of the amendment to the 1995
Stock Option Plan 6,753,332 3,013,535 146,961
</TABLE>
* As to election of directors, represents shares where authority to vote for
the specified nominee was withheld.
** Abstentions include "broker non-votes", which are abstentions by nominee
holders on behalf of beneficial owners who have given no instruction to the
nominee holder. When no such instructions are received, such nominee
holders have no authority to vote even though present or represented at
the meeting.
Item 6. EXHIBITS AND REPORTS ON REPORT 8-K
Form 8-K filed June 30, 1996 reporting the sale of New World
Computing to the 3DO Company.
Form 8-K filed July 24, 1996 reporting the settlement of the
Class Action Litigation.
Form 8-K filed September 19, 1996 reporting the addition of two
new board members.
Form 8-K filed October 31, 1996 reporting the FCC Playmaker(R)
approval application.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized
NTN COMMUNICATIONS, INC.
Date: August 7, 1997 By: /s/GERALD SOKOL, JR.
---------------------
Gerald Sokol, Jr.,
President and Chief Operating Officer
19
