<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q/A
AMENDMENT NO. 1 TO
-------------------
[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 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ____________ TO ____________
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1103425
(State of incorporation) (I.R.S. Employer Identification No.)
The Campus 5966 La Place Court, Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(619) 438-7400
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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,
Assets 1996 1995
------ ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 767,000 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 3,856,000 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 2,057,000 2,223,000
Inventory, net -- 5,618,000
Net assets of discontinued operations -- 4,560,000
----------- -----------
Total current assets 19,904,000 26,009,000
Broadcast equipment, net 5,656,000 --
Fixed assets, net 2,134,000 2,023,000
Notes receivable - related parties 4,832,000 4,176,000
Interest-bearing security deposits 539,000 2,200,000
Software development costs, net 3,698,000 3,152,000
Other assets 3,625,000 3,661,000
----------- -----------
Total assets $40,388,000 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,
Liabilities and Shareholders' Equity 1996 1996
------------------------------------ ------------ -----------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 6,506,000 $ 2,862,000
Short-term borrowings 2,018,000 1,371,000
Deferred revenue 1,011,000 1,024,000
Customer deposits 1,237,000 1,284,000
----------- -----------
Total current liabilities 10,772,000 6,541,000
Deferred revenue - long term 1,750,000 1,229,000
----------- -----------
Total liabilities 12,522,000 7,770,000
----------- -----------
Minority interest 29,000
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 57,559,000 56,747,000
Accumulated deficit (27,288,000) (23,187,000)
----------- -----------
Total shareholders' equity 27,837,000 33,451,000
Total liabilities and shareholders' equity $40,388,000 $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>
Hospitality services $ 5,157,000 3,969,000 15,201,000 10,958,000
Home 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 34,000 -- 816,000 232,000
----------- ---------- ---------- ----------
Total revenues 6,175,000 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 5,603,000 2,336,000 11,964,000 6,813,000
Legal and professional fees 415,000 100,000 1,295,000 1,417,000
Equipment lease expense 1,350,000 963,000 3,640,000 2,845,000
Research and development 515,000 534,000 1,425,000 1,269,000
Special charges 721,000 -- 721,000 --
----------- ---------- ---------- ----------
Total operating expenses 12,602,000 5,281,000 25,842,000 15,339,000
Operating income (loss) (6,427,000) 22,000 (6,155,000) (1,044,000)
Investment income, net of investment expense 28,000 92,000 136,000 101,000
----------- ---------- ---------- ----------
Earnings (loss) before minority
interest and income taxes (6,399,000) 114,000 (6,019,000) (943,000)
Minority interest (333,000) -- -- --
----------- ---------- ---------- ----------
Earnings (loss) from continuing
operations before income taxes (6,732,000) 114,000 (6,019,000) (943,000)
Provision for income taxes -- -- -- --
----------- ---------- ---------- ----------
Earnings (loss) from continuing operations (6,732,000) 114,000 (6,019,000) (943,000)
Gain (loss) from discontinued operations -- 791,000 1,918,000 76,000
----------- ---------- ---------- ----------
Net earnings (loss) $(6,732,000) 905,000 (4,101,000) (867,000)
=========== ========== ========== ==========
Net earnings (loss) per share:
Continuing operations $ (.30) -- (.27) (.04)
Discontinued operations -- .04 .09 --
----------- ---------- ---------- ----------
Net earnings (loss) $ (.30) .04 (.18) (.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
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from (used for) operating
activities:
Net earnings (loss) $(6,732,000) 905,000 (4,101,000) (867,000)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities:
Provision for depreciation,
obsolescence and amortization 2,565,000 198,000 3,450,000 689,000
Provision for doubtful accounts 167,000 11,000 255,000 94,000
(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) (734,000) (687,000)
Minority interest in net income
(loss) of consolidated subsidiary 362,000 -- 29,000 --
(Increase) decrease in:
Accounts receivable - trade 1,722,000 (159,000) 142,000 (990,000)
Broadcast equipment, net -- 32,000 -- (766,000)
Prepaid expenses and other assets 1,810,000 (5,129,000) 4,721,000 (7,386,000)
Increase (decrease) in:
Accounts payable and accrued liabilities 1,161,000 987,000 4,029,000 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 for)
operating activities 1,894,000 (3,454,000) 7,956,000 (7,901,000)
----------- --------- ---------- -----------
Cash flows from (used for) investing
activities:
Capital expenditures (246,000) (248,000) (590,000) (814,000)
Purchase of broadcast equipment (3,068,000) -- (2,276,000) --
Buyout of lease obligations (385,000) -- (385,000) --
Notes receivable - related parties (131,000) (25,000) (306,000) (300,000)
Software development costs (414,000) (471,000) (1,238,000) (1,580,000)
Receipt of marketable securities -
available for sale 77,000 -- (10,223,000) --
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 for)
investing activities (4,093,000) 2,264,000 (11,423,000) 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
September 30, September 30, September 30, September 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) (12,000) (11,000)
Proceeds from issuance of debt 653,000 45,000 659,000 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 for)
financing activities 2,070,000 2,989,000 (2,251,000) 6,332,000
----------- --------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents (129,000) 1,799,000 (5,718,000) 1,562,000
Cash and cash equivalents at beginning
of period 896,000 2,168,000 6,485,000 2,405,000
----------- --------- ---------- -----------
Cash and cash equivalents at end of period $ 767,000 3,967,000 767,000 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.
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.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
<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>
8
<PAGE>
4. Rescission of Sale and Other Charges.
------------------------------------
In December 1995, the Company sold a 45% interest in its LearnStar Inc.,
subsidiary to an unaffiliated company for $2,500,000 in return for a note
receivable in the amount of $2,500,000. The gain on the sale was deferred to be
recognized as the Company receives payments on the note. During the quarter
ended September 30, 1996 the parties agreed to rescind the sale. Earlier in
1996, the Company recognized a gain on the sale and also allocated losses to the
minority partner through credits to Minority Interest. The aggregate adjustment
to rescind the sale totaled $600,000, representing a reduction of other income
of $267,000 and a reduction in minority interest of $333,000.
In addition, 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 $ 944,000
Allowance for obsolete inventory and
equipment 2,478,000
Accrual for severance pay and other 1,620,000
----------
Total $5,042,000
==========
</TABLE>
The write-down of assets of $944,000 is comprised of deferred costs
associated with prospective franchising activities that the Company has
determined will not be pursued, a change in estimate related to advertising
costs capitalized under the guidelines of SOP 93-7, and a charge for a license
relating 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 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. 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.
9
<PAGE>
5. Business Segment Data.
---------------------
Operating results from continuing operations is presented for the principal
business segments of the Company for the three and nine months ended September
30, 1996 and 1995. The Company's principal business units are its Hospitality
Network (Hospitality Interactive Services), International Licensees
(International), Home Interactive Services (Home Services) and LearnStar, Inc.
(Education Interactive Services). Corporate overhead has been allocated to each
business segment.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenue
Hospitality Interactive Services $ 5,503,000 4,759,000 17,367,000 13,358,000
International 309,000 139,000 420,000 227,000
Home Services 422,000 158,000 1,105,000 420,000
Education Interactive Services 73,000 -- 305,000 --
Other (132,000) 247,000 490,000 290,000
----------- --------- ---------- ----------
Total $ 6,175,000 5,303,000 19,687,000 14,295,000
=========== ========= ========== ==========
Earnings (Loss) from Continuing Operations
before income taxes
Hospitality Interactive Services $(4,483,000) 718,000 (3,545,000) 323,000
International (306,000) (387,000) (278,000) (501,000)
Home Services (1,379,000) (198,000) (1,262,000) (546,000)
Education Interactive Services (1,054,000) -- (1,424,000) --
Other 490,000 (19,000) 490,000 (219,000)
----------- --------- ---------- ----------
Total $(6,732,000) 114,000 (6,019,000) (943,000)
=========== ========= ========== ==========
</TABLE>
The following table presents the revenue and operating results from
continuing operations for the principal business units for each of the quarters
in 1996.
<TABLE>
<CAPTION>
First Second Third Year
Quarter Quarter Quarter to Date
1996 1996 1996 1996
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenue
Hospitality Interactive Services $5,509,000 6,355,000 5,503,000 17,367,000
International 111,000 309,000 420,000
Home Services 255,000 428,000 422,000 1,105,000
Education Interactive Services 38,000 194,000 73,000 305,000
Other 297,000 325,000 (132,000) 490,000
---------- --------- --------- ----------
Total $6,210,000 7,302,000 6,175,000 19,687,000
========== ========= ========= ==========
Earnings (Loss) from Continuing Operations
before income taxes
Hospitality Interactive Services $ 482,000 456,000 (4,483,000) (3,545,000)
International 25,000 3,000 (306,000) (278,000)
Home Services 22,000 95,000 (1,379,000) (1,262,000)
Education Interactive Services (285,000) (85,000) (1,054,000) (1,424,000)
Other -- -- 490,000 490,000
---------- --------- --------- ----------
Total $ 244,000 469,000 (6,732,000) (6,019,000)
========== ========= ========= ==========
</TABLE>
10
<PAGE>
Each of the business segments continues to use working capital and may
continue to require additional capital for operating expenses, new services
development, marketing of services and equipment purchases.
6. 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, 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 are based on 21,270,000
common shares.
11
<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 Hospitality Services
customers, nor have any of the Company's Home 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.
Material Changes in Results of Operations
- -----------------------------------------
Three month periods ended September 30, 1996 and September 30, 1995
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. The gain on the sale was deferred to be recognized as the
Company receives payments on the note. During the quarter ended September 30,
1996 the parties agreed to rescind the sale. The Company had earlier recognized
a gain on the sale and also allocated losses to the minority partner through
credits to Minority Interest. The aggregate adjustment to rescind the sale
totaled $600,000.
In addition, 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 $ 944,000
Allowance for obsolete inventory and
equipment 2,478,000
Accrual for severance pay and other 1,620,000
----------
Total $5,042,000
==========
</TABLE>
The write-down of assets of $944,000 is comprised of certain costs associated
with prospective franchising activities that the Company has determined will not
be pursued, a change in estimate related to advertising costs capitalized under
the guidelines of SOP 93-7, and a charge for a license related to its LearnStar
subsidiary. None of these charges is due to contractions in the core businesses
of the Company, and they will not effect future liquidity or results of
operations.
12
<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 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. 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 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.
The Company incurred a net loss of $6,732,000 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 a $600,000 charge for the
rescission of the sale of LearnStar. Net of the other charges and the charge for
rescission of the sale of LearnStar, the Company incurred a loss in the three
months ended September 30, 1996 of $1,090,000. This compares, on a comparable
basis, to a profit for the three months ended September 30, 1995 of $114,000.
For the current quarter, total revenues increased 16% from $5,303,000 to
$6,175,000. This increase is the result of growth in most of the Company's
principal revenue activities.
Hospitality 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. Home Services increased 110% from $165,000 to
$347,000 due to 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 Hospitality and Home Services increased 33% from
$282,000 to $375,000 due to increased number of Hospitality advertisers and the
first advertising contract for Home 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 at random times 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
Hospitality 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
Hospitality 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 installed at its Hospitality 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.
13
<PAGE>
Operating Expenses related to Hospitality and Home services rose from
$1,348,000 in the prior year's quarter to $3,998,000 in the current years
quarter, an increase of 197%. 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 13% compared to a
combined increase in Hospitality and Home services revenue of 33%. Selling,
General and Administrative expenses increased 140% from $2,336,000 to
$5,603,000. 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. Exclusive of these specific charges, Selling,
General and Administrative expenses increased 67% over the previous year's
quarter largely due to general growth and enhanced sales and marketing efforts
by both NTN and LearnStar. Legal and Professional expenses increased 315% due to
fees associated with litigation and other legal and accounting services
incurred. Research and Development expense remained consistent as the Company
continued its exploration of new technical platforms and interactive 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.
Nine month periods ended September 30, 1996 and September 30, 1995
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. The gain on the sale was deferred to be recognized as the
Company receives payments on the note. During the quarter ended September 30,
1996 the parties agreed to rescind the sale. The Company had earlier recognized
a gain on the sale and also allocated losses to the minority partner through
credits to Minority Interest. The aggregate adjustment to rescind the sale
totaled $600,000.
In addition, 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 $ 944,000
selected business activities
Allowance for obsolete inventory and 2,478,000
equipment
Accrual for severance pay and other 1,620,000
----------
Total $5,042,000
==========
</TABLE>
The write-down of assets of $944,000 is comprised of certain costs associated
with prospective franchising activities that the Company has determined will not
be pursued, a change in estimate related to advertising costs capitalized under
the guidelines of SOP 93-7, and a charge for a license related to its LearnStar
subsidiary. None of these charges is due to contractions in the core businesses
of the Company, and they 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 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. 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 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.
The Company incurred a net loss of $4,101,000 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
14
<PAGE>
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 a $600,000 charge for the rescission of the sale of LearnStar.
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. Net of the other charges, the charge for rescission of the
sale of LearnStar and the sale of New World, the Company incurred a loss in the
nine months ended September 30, 1996 of $377,000. This compares, on a comparable
basis, to a loss for the nine months ended September 30, 1995 of $943,000.
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.
Hospitality 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. Home Services increased 155% from $404,000 to
$1,030,000 due to 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 Hospitality and Home Services increased 10% from
$788,000 to $869,000 due to increased number of Hospitality advertisers and the
first advertising contract for Home 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 at random times 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
Hospitality 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
Hospitality 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 installed at its Hospitality 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 Expenses related to Hospitality and Home 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 Hospitality and Home services revenue of 43%. Selling,
General and Administrative expenses increased 76% from $6,813,000 to
$11,964,000. 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. Exclusive of these specific charges,
Selling, General and Administrative expenses increased 51% over the previous
years quarter largely due to general growth and enhanced sales and marketing
efforts by both NTN and LearnStar. Legal and Professional expenses decreased 9%
due to the timing of services associated with litigation and other legal and
accounting services. Research and Development expense increased 12% as the
Company continued its exploration of new technical platforms and interactive
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.
Material Changes in Financial Condition
- ---------------------------------------
15
<PAGE>
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 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. The gain on the sale was deferred to be recognized as the
Company receives payments on the note. In the quarter ended September 30, 1996
the parties agreed to rescind the sale. The Company had earlier recognized a
gain on the sale and also appropriately allocated losses to the minority partner
through credits to Minority Interest. The aggregate adjustment to rescind the
sale totaled $600,000.
In addition, the Company recorded special 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 vast majority of the special
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 only special 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 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.
Total assets decreased 2% from $41,221,000 to $40,388,000 from December 31,
1995 to September 30, 1996. The decrease in assets is primarily due to the
special charges recorded in the third quarter. Cash decreased from $6,485,000 to
$767,000 at September 30, 1996 due to cash used to repurchase share 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 the buyout of certain sale and leaseback
agreements.
The 45% increase in Accounts Receivable - Trade from $2,668,000 to
$3,856,000 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 $12,522,000 from
December 31, 1995 to September 30, 1996. The increase in Accounts Payable and
Accrued Liabilities from $2,862,000 to $6,506,000 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 special charges
totaling $1,620,000 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
16
<PAGE>
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 $4,718,000 from December
31, 1995 to September 30, 1996, primarily the net result of the New World sale
transaction, the special charges recorded in the third quarter and the
reclassification of Broadcast equipment to non-current assets. Revenues from the
principal business segments, Hospitality 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 largely due to the
special charges recorded in the third quarter. The Software Development and
Distribution segments (New World) was sold in June 1996 and no longer represents
a business segment. Each business segment, was 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.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to be signed on its behalf by
the undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: March 28, 1997 By: /s/ Gerald Sokol, Jr.
-------------------------------------
Gerald Sokol, Jr.,
President and Chief Financial Officer
18
