<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 May 15, 1998 26,867,000 shares of common stock, $.005 par value.
1
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PART I--FINANCIAL INFORMATION
-----------------------------
Item 1. FINANCIAL STATEMENTS.
2
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1998 (Unaudited) and December 31, 1997
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1998 1997
------ -------------------- --------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,763,000 4,764,000
Accounts receivable, net of allowance for doubtful accounts of
$1,092,000 in 1998 and $1,313,000 in 1997 3,386,000 2,724,000
Prepaid expenses and other current assets 688,000 902,000
-------------------- --------------------
Total current assets 7,837,000 8,390,000
Broadcast equipment and fixed assets, net 7,473,000 7,973,000
Software development costs, net 3,264,000 3,697,000
Other assets 260,000 211,000
-------------------- --------------------
Total assets $ 18,834,000 20,271,000
==================== ====================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable 1,222,000 914,000
Accrued expenses 2,970,000 4,006,000
Accrual for management severance 1,261,000 1,154,000
Obligations under capital lease 36,000 46,000
Deferred revenue 1,630,000 1,483,000
Customer deposits 708,000 770,000
-------------------- --------------------
Total current liabilities 7,827,000 8,373,000
Deferred revenue 34,000 84,000
Obligations under capital lease 168,000 179,000
Accrual for settlement warrants 1,555,000 1,516,000
Accrual for management severance 648,000 1,093,000
Other long-term liabilities 300,000 300,000
-------------------- --------------------
Total liabilities 10,532,000 11,545,000
-------------------- --------------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock, $.005 par
value, 10,000,000 shares authorized; issued and outstanding
161,000 in 1998 and 1997 1,000 1,000
Series B 4% cumulative convertible preferred stock, $.005 par
value, 85,000 shares authorized; issued and outstanding 68,000 in
1998 and 70,000 in 1997 1,000 1,000
Common stock, $.005 par value, 50,000,000 shares authorized; shares
issued and outstanding 24,774,000 in 1998 and 23,677,000 in 1997
124,000 118,000
Additional paid-in capital 70,384,000 70,541,000
Accumulated deficit (59,209,000) (58,596,000)
Treasury stock, 330,000 shares in 1998 and 782,000 in 1997, at cost
(2,999,000) (3,339,000)
-------------------- --------------------
Total shareholders' equity 8,302,000 8,726,000
-------------------- --------------------
Total liabilities and shareholders' equity $ 18,834,000 20,271,000
==================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
March 31 March 31
1998 1997
--------------------- --------------------
<S> <C> <C>
Network services $ 4,861,000 4,669,000
Online/Internet services 597,000 848,000
Advertising revenues 170,000 245,000
Other revenues 544,000 778,000
--------------------- --------------------
Total revenues 6,172,000 6,540,000
--------------------- --------------------
Operating expenses:
Direct operating costs 1,066,000 2,161,000
Selling, general and administrative 3,619,000 6,415,000
Litigation, legal and professional fees 327,000 344,000
Equipment lease expense 233,000 234,000
Stock-based compensation expense 165,000 1,883,000
Depreciation and amortization 1,346,000 1,301,000
Research and development 18,000 400,000
--------------------- --------------------
Total operating expenses 6,774,000 12,738,000
--------------------- --------------------
Operating loss (602,000) (6,198,000)
Other income (expense):
Interest income 64,000 62,000
Interest expense (75,000) (211,000)
--------------------- --------------------
Loss before income taxes (613,000) (6,347,000)
Provision for income taxes -- --
--------------------- --------------------
Net loss $ (613,000) (6,347,000)
===================== ====================
Net loss per share: $ (0.03) $ (0.27)
===================== ====================
Weighted average number of shares outstanding 23,751,000 23,239,000
===================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Months
March 31 March 31
1998 1997
-------------------- ------------------
<S> <C> <C>
Cash flows used for operating activities:
Net loss $ (613,000) (6,347,000)
Adjustments:
Depreciation and amortization 1,346,000 1,301,000
Provision for doubtful accounts 400,000 225,000
Loss from disposition of broadcast equipment 60,000 60,000
Non-cash compensation charges 165,000 1,883,000
Accreted interest expense 67,000 116,000
Stock issued in settlement of litigation -- 56,000
Amortization of deferred revenue (342,000) 62,000
Changes in assets and liabilities:
Accounts receivable (1,062,000) (278,000)
Prepaid expenses and other assets 226,000 591,000
Accounts payable and accrued expenses (1,070,000) 149,000
Deferred revenue 439,000 (107,000)
Customer deposits (62,000) (118,000)
-------------------- ------------------
Net cash used in operating activities
(446,000) (2,407,000)
-------------------- ------------------
Cash flows used for investing activities:
Capital expenditures (461,000) (766,000)
Notes Receivable (70,000) --
Software development costs (3,000) (309,000)
-------------------- ------------------
Net cash used in investing activities
(534,000) (1,075,000)
-------------------- ------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
March 31 March 31
1998 1997
-------------------- --------------------
<S> <C> <C>
Cash flows from (used for) financing activities:
Proceeds from issuance of debt $ -- 155,000
Principal payments on capital leases (21,000) --
Proceeds from issuance of common stock, less
issuance costs paid in cash -- 214,000
-------------------- --------------------
Net cash provided by (used in) financing
activities (21,000) 369,000
-------------------- --------------------
Net decrease in cash and cash equivalents (1,001,000) (3,113,000)
Cash and cash equivalents at beginning of period 4,764,000 6,579,000
-------------------- --------------------
Cash and cash equivalents at end of period $ 3,763,000 $ 3,466,000
==================== ====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,000 $ 91,000
==================== ====================
Income taxes $ -- $ --
==================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. General.
-------
Management has elected to omit substantially all notes to the Company's
consolidated financial statements. Reference should be made to the Company's
Form 10-K filed for the year ended December 31, 1997, which report incorporated
the notes to the Company's year-end financial statements.
2. Unaudited Information.
---------------------
The March 31, 1998 and 1997 information furnished herein was derived from the
books and records of the Company without audit. However, such information
reflects all adjustments that are, in the opinion of management, necessary to
reflect properly the results of the interim periods presented. The results of
operations for the period ended March 31, 1998 are not necessarily indicative of
the results to be expected for the fiscal year ending December 31, 1998.
Certain items in the prior period consolidated financial statements have been
reclassified to conform to the format used for the current period presented.
3. Basic and Diluted Earnings per Share.
------------------------------------
In December 1997, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share". SFAS No. 128 supercedes APB No. 15 and replaces "primary"
and "fully diluted" earnings per share ("EPS") under APB No. 15 with "basic" and
"diluted" EPS. Unlike primary EPS, basic EPS excludes the dilutive effects of
options, warrants and other convertible securities. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of the
Company, similar to fully diluted EPS. Options, warrants and convertible
preferred stock, representing approximately 15,448,000, and 928,000 shares were
excluded from the computations of net loss per common share for the three-months
ended March 31, 1998 and 1997, respectively, as their effect is anti-dilutive.
The adoption of SFAS No. 128 did not have a material effect on the Company's net
loss per common share.
4. Proposed Sale of Subsidiaries
-----------------------------
In January 1998, the Board of Directors concluded that the interests of the
Company's shareholders are best served by concentrating Company resources and
efforts on its two core businesses, the NTN Network and Online/Internet
services. Accordingly, the Board resolved either to sell or cease the operations
of its two subsidiaries, LearnStar and IWN, on or before March 31, 1998.
Effective March 31, 1998, the Company ceased funding the continuing operations
of both subsidiaries.
In March 1998, the Company entered into a letter of intent to sell a
majority of its interest in LearnStar to NewStar Learning Systems, L.L.C., a
company in which Sally A. Zoll, President of LearnStar, has an interest. The
Company is currently negotiating a definitive agreement and currently expects to
sell 82.5% of its interest in LearnStar on or before July 1, 1998 for a cash
payment of $1,862,000.
On April 1, 1998, the Company reached an agreement in principle with
Omnigon, a California corporation, to sell up to 80% of the equity of IWN to
Omnigon on or before May 31, 1998. Ten percent (10%) of the equity in IWN is
beneficially owned by current and former IWN employees. The Company is currently
negotiating a definitive agreement that would have Omnigon pay $2,400,000 at
closing for an 80% IWN equity interest. At Omnigon's option, however, it will
have the right to pay $1,200,000 at closing and deliver its promissory note,
secured by the purchased IWN common shares, for $1,600,000 payable with interest
in three installments over a five-month term. If Omnigon elects the latter
option, it will acquire 77.5% of the IWN equity from the Company. No assurance
can be given that the proposed
7
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transaction will be completed. Omnigon paid $100,000 in April 1998 and an
additional $100,000 in May 1998 for the option to acquire IWN on the foregoing
terms. Any such payments made are non-refundable and will not be applied to the
purchase price of the IWN shares. The Company has agreed that IWN will use such
payments from Omnigon to pay the operating expenses of IWN prior to a closing or
cancellation of the proposed transaction.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
- -------
NTN Communications, Inc. is a leading producer and programmer of interactive
television, online and Internet entertainment. The Company broadcasts to a
variety of delivery platforms 24 hours a day, providing entertainment and
informational programming, including multi-player sports and trivia games. The
NTN Network distributes programming to more than 15 million consumers per month
throughout North America through hospitality locations, such as hotels, bars,
and restaurants.
The organization and business of the Company, the accounting policies
followed by the Company and other information are contained in the notes to the
Company's financial statements files as part of the Company's December 31, 1997
Form 10-K. This quarterly report should be read in conjunction with such annual
report.
Material Changes in Results of Operations
- -----------------------------------------
Three-month periods ended March 31, 1998 and March 31, 1997
Operations for the quarter ended March 31, 1998 resulted in a net loss of
$613,000, or $0.03 per share, compared to a net loss of $6,347,000, or $0.27 per
share in the quarter ended March 31, 1997. The 1997 results include significant
charges which related only to 1997, including a $5,206,000 charge for management
reorganization and a $650,000 charge related to defective broadcast equipment.
For the current quarter, total revenues declined 6% to $6,172,000 from
$6,540,000 in the first quarter last year. This occurred due primarily to a
decline in Online/Internet Services, offset by a slight increase in revenues
generated by Network Services.
Network Service revenues increased 4% to $4,861,000 for the quarter ended
March 31, 1998 compared to $4,669,000 for the quarter ended March 31, 1997.
During the first quarter of 1998, the Company began implementing its plan to
redirect its sales and marketing efforts, change its service suspension policy
relative to non-performing customers, and revise customer service procedures
intended to improve overall customer satisfaction and retention. Active
subscriber locations have remained steady during this ongoing process and have
increased slightly compared with the first quarter of 1997. Management expects,
but cannot guarantee, that these changes will result in improved ability to
attract and retain active customer locations.
Revenue from Online/Internet Services declined $251,000, or 30%, from
revenue of $848,000 in the first quarter of 1997. The Company operated during
the first quarter under an interim contractual agreement stipulating billings on
a fee-for-service basis with its principal Internet partner, America Online.
America Online paid the Company a fee during 1997 to terminate its existing
contract and renegotiate a new agreement. The Company expects to complete a new
contract with AOL shortly, pursuant to which fees will be billed for services
provided.
Advertising revenues declined 31% to $170,000 in the first quarter of 1998
compared with the prior first quarter. The revenue recognized constitutes
remaining billings on expiring contracts. Management expected a decline in the
first quarter of 1998 related to timing caused by the simultaneous expiration of
several multi-year contracts.
Other revenue, which consists of certain sales of IWN, Learnstar, NTN's
affiliate in Canada and other non-recurring revenue items, decreased 30% to
$544,000 during the current quarter versus $778,000 in the prior year quarter.
This decline related primarily to one-time revenue items recorded in the first
quarter of the prior year.
9
<PAGE>
Of the total revenue for the first quarter, Network Services represented
79%, Online/Internet services represented 10%, and Equipment, Advertising and
Other Revenue represented 11%, compared with 71%, 13% and 16%, respectively, for
the first quarter of 1997.
Total operating expense decreased 47% from $12,738,000 in the first quarter
of 1997 to $6,774,000 in the same quarter of 1998. This decrease consisted
primarily of non-recurring expenses incurred in the first quarter of 1997.
Specifically, Operating Expenses related to a management reorganization of
$5,206,000 were recognized, and Equipment Charges of $650,000 related to
defective broadcast equipment, were recorded in the first quarter of 1997.
Total Direct Operating Costs declined 51% from $2,161,000 in the first
quarter of 1997 to $1,066,000 in the same quarter of 1998. The first quarter of
1997 contained a charge of $650,000 for defective broadcast equipment.
Operationally, the Company has increased its internal field and marketing staff
and decreased its reliance on independent representatives. This shift in
strategic direction has resulted in a reduction of commissions, site visit fees,
and other operating costs of 48% in the first quarter of 1998 versus the same
quarter of 1997. Salary and related employment expenses are expected to
increase, offsetting some of these savings, resulting in overall cost savings
and improvement in customer service.
Total Selling, general and administrative expenses declined 44% from
$6,415,000 in the first quarter of 1997 to $3,619,000 in 1998. Excluding the
charges of $3,277,000 related to a management reorganization in the first
quarter of 1997, Selling, General and Administrative expenses increased $481,000
in the first quarter of 1998 compared to the same quarter of 1997. The Company
experienced an increase in employee-related costs associated with the re-
direction of its sales and marketing function, as described above.
Stock-based compensation decreased 91% from $1,883,000 in the first quarter
of 1997 to $165,000 in the same quarter of 1998. The 1997 charges related to
the reorganization of its executive management personnel.
Research and Development Expenses decreased from $400,000 in the first
quarter of 1997 to $18,000 in the first quarter of 1998. This was due to
workforce reductions made in 1997 as well as significantly reduced R & D efforts
at the LearnStar and IWN subsidiaries.
Interest Expense in the first quarter of 1997 related principally to the
IWN Put Option, which was paid in full in June, 1997.
Material Changes in Financial Condition
- ---------------------------------------
Compared with December 31, 1997, total assets declined 7% from $20,271,000 to
$18,834,000 at March 31, 1998. This resulted principally from a decline in
broadcast equipment, capitalized software development costs, and other assets
which was offset by an increase in Accounts Receivable. Cash decreased
$1,001,000 during the period, consisting of $446,000 to fund operations,
$534,000 for capital expenditures, and $21,000 to comply with contractual
obligations related to equipment leases.
Accounts Receivable increased $662,000 during the first quarter of 1998
compared to year end. Accounts Receivable related to Network Services decreased
due to management efforts to improve collections and manage customer turnover in
1997. This was offset by an increase in Accounts Receivable for advertising,
online interactive Internet services, and international sales billed at the end
of the quarter.
Broadcast Equipment and Fixed Assets and Capitalized Software Development
Costs decreased $933,000, or 8%, during the current quarter principally due to
depreciation and amortization.
During the first quarter of 1998 total liabilities decreased 9%, or
$1,013,000, primarily related to declines in Accrued Expenses and Accruals for
management severance. Accrued Expenses decreased due to payments for year end
professional and legal services, and payments to independent representatives in
10
<PAGE>
final settlement of their accounts. The decline in the Accrual for management
severance resulted from payments made in compliance with management
reorganization agreements with former officers.
Generally, the Company believes that internally generated funds will provide
sufficient resources to meet funding requirements in the near term. The Company
has working capital of $10,000 at the end of the first quarter of 1998 compared
to $17,000 as of December 31, 1997. The Company has $3,763,000 in cash and cash
equivalents available at March 31, 1998.
The Company intends to implement a plan to upgrade its equipment, including
its Playmakers(R) and technology, including plans to migrate to a Windows-based
platform. Management believes these plans could be implemented using internally-
generated funds by managing the timing and extent of the upgrades. However,
there can be no assurance that funding from additional sources will not be
required.
The Company announced its intention to sell its two operating subsidiaries
and has executed letters of intent to consummate the sales with two independent
purchasers. It is expected that both transactions will either be completed or
terminated on or before July 1, 1998. Completion of either or both of such sales
would generate additional funds available for ongoing operations.
11
<PAGE>
PART II OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS.
In March, 1998, the Company's former independent representative in
the State of Georgia filed suit against the Company in Atlanta, Georgia
alleging wrongful termination of its distributor agreement and other
breaches of such agreement. The Company has denied these claims and intends
to defend itself vigorously in this litigation. It is not anticipated at
the present time that the outcome of the lawsuit will have a material
adverse effect on the financial position, results of operations or the
liquidity of the Company.
Item 2. CHANGE IN SECURITIES.
In January, 1998, the Company agreed to issue a total of 759,437
shares of Common Stock in exchange for the surrender and cancellation of
certain previously outstanding options and warrants to purchase an
aggregate 2,578,250 shares of Common Stock at exercise prices ranging from
$2.00 to $5.75 per share. The value of the shares issued was approximately
$900,000 based on the market price of the Common Stock at the time of the
exchanges.
In March, 1998, the Company agreed to issue 277,200 shares of Common
Stock and to pay withholding taxes of approximately $107,000 to two former
officers in exchange for the surrender and cancellation of certain
previously outstanding options and warrants to purchase 1,500,000 shares of
Common Stock at exercise prices ranging from $2.00 to $4.75 per share. The
value of the shares issued and the cash payments was approximately $300,000
based on the market price of the Common Stock at the time of the exchange.
Item 6. EXHIBITS AND REPORTS ON REPORT 8-K.
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K
None
12
<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: May 15, 1997 By: /s/GERALD SOKOL, JR.
----------------------
Gerald Sokol, Jr.,
President and Chief Executive Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,763,000
<SECURITIES> 0
<RECEIVABLES> 4,478,000
<ALLOWANCES> 1,092,000
<INVENTORY> 0
<CURRENT-ASSETS> 7,837,000
<PP&E> 21,039,000
<DEPRECIATION> 10,302,000
<TOTAL-ASSETS> 18,834,000
<CURRENT-LIABILITIES> 7,827,000
<BONDS> 0
0
2,000
<COMMON> 124,000
<OTHER-SE> 8,176,000
<TOTAL-LIABILITY-AND-EQUITY> 18,834,000
<SALES> 6,172,000
<TOTAL-REVENUES> 6,172,000
<CGS> 1,066,000
<TOTAL-COSTS> 6,774,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,000
<INCOME-PRETAX> (613,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (613,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (613,000)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
