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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-K
_________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1103425
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(760) 438-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.005 PAR VALUE AMERICAN STOCK EXCHANGE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH
REGISTERED)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K (S 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [_]
The aggregate market value of the voting stock held by non-affiliates of
Registrant as of April 10, 1998, computed by reference to the closing sale price
of such stock on the American Stock Exchange, was approximately $17,000,000.
(All directors and executive officers of Registrant are considered affiliates
for this purpose.)
As of April 10, 1998, Registrant had 24,437,000 shares of Common Stock,
$.005 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
Part I
<C> <S> <C>
1. Business 3
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
8. Consolidated Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Part III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
Part IV
14. Exhibits, Consolidated Financial Statement Schedule, and Reports on Form 8-K
Index to Consolidated Financial Statements and Schedule F-1
</TABLE>
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This Report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act,
including, without limitation, statements that include the words "believes,"
"expects," "anticipates," "plans" or similar expressions and statements relating
to anticipated costs savings, the Company's strategic plans, capital
expenditures, industry trends and prospects and the Company's financial
position. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to differ materially from those expressed or implied
by such forward-looking statements. Although the Company believes that its
plans, intentions and expectation reflected in such forward-looking statements
are reasonable, it can give no assurance that such plans, intentions or
expectation will be achieved. Important factors that could cause actual results
to differ materially from the Company's expectations are set forth in this
Report.
PART I
ITEM 1. BUSINESS
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GENERAL
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NTN Communications, Inc. ("NTN" or the "Company") was originally
incorporated in the State of Delaware on April 13, 1984 under the name of Alroy
Industries. Alroy Industries completed a public offering of its Common Stock on
November 26, 1984. On April 15, 1985, Alroy Industries acquired all of the
outstanding stock of National Telecommunicator Network, Inc. In connection with
the acquisition, Alroy Industries changed its name to NTN Communications, Inc.
In 1993, NTN completed a merger with New World Computing, Inc. ("New
World") pursuant to which New World became a wholly-owned subsidiary of NTN. In
1996, the Company sold substantially all of the assets of New World.
In 1994, the Company formed LearnStar, Inc. ("LearnStar"), which operated
throughout 1997 as a wholly-owned subsidiary of NTN. In January 1998, the Board
of Directors of NTN resolved to either sell or cease the operations of
LearnStar.
In 1994, the Company also formed IWN, Inc. ("IWN"), which serves as the
general partner of IWN L.P., a limited partnership engaged in the development of
interactive technology for gaming applications. IWN has no business or
operations apart from its service as the general partner of IWN L.P. In January
1998, the Board of Directors of NTN resolved to either sell or cease the
operations of IWN and IWN L.P.
Unless otherwise indicated, references herein to "NTN" or the "Company"
include NTN and its consolidated subsidiaries, LearnStar, IWN and IWN L.P.
RECENT DEVELOPMENTS
RECENT MANAGEMENT PERSONNEL CHANGES
-----------------------------------
The Company experienced a broad change in its executive management during
1997. Gerald Sokol, Jr. was appointed as Chief Executive Officer of the Company
in October 1997. He joined the Company as Chief Financial Officer in July 1996,
was appointed Chief Operating Officer in November 1996, and in February 1997, in
connection with the management reorganization described below, was appointed
President of the Company. In September 1997, Geoffrey D. Labat assumed from Mr.
Sokol the duties of Chief Operating Officer after having joined the Company in
May 1997 as Chief Technical Officer.
In March 1997, Edward C. Frazier, who has served as a director of the
Company since August 1996, was also appointed Chairman of the Board. In
February 1998, Mr. Frazier resigned his position as Chairman of the Board, but
remains a director of the Company. Under the Bylaws of the Company, Mr. Sokol,
as Chief Executive Officer, became the acting Chairman of the Board of
Directors.
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In August 1997, three of the Company's incumbent directors resigned, and in
September and November 1997, respectively, Esther L. Rodriguez and Stanley B.
Kinsey were appointed as directors. There can be no assurance that the new
management of the Company, under the supervision of the Board of Directors, will
be able to operate the Company more successfully than prior management or that
additional management changes will not be made in the future.
RESIGNATION AGREEMENTS AND MODIFICATION OF RESIGNATION AGREEMENTS
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In late 1996, Ronald E. Hogan, the Company's former Chief Financial Officer
resigned as an executive officer of the Company and the Company discontinued
certain consulting arrangements with Alan P. Magerman, who was then serving as a
director of the Company. In March 1997, the Company announced a further
reorganization of its executive management personnel in which Patrick J. Downs,
then Chief Executive Officer and Chairman of the Board of the Company, Daniel C.
Downs, then the Company's President, Gerald McLaughlin, then an Executive Vice
President of the Company, and Michael Downs, then President of LearnStar,
resigned or were terminated. The Company entered into separate Resignation and
General Release Agreements (the "Resignation Agreements") with each of the
former officers pursuant to which the officers' prior employment agreements were
terminated and each former officer entered into a Consulting Agreement under
which he agreed to consult with the Company on such matters as it may request
from time to time. The three-year terms of the Consulting Agreements coincided
with the remaining terms of the executives' prior employment agreements.
In consideration of entering into the Consulting Agreements, NTN agreed to
extend the expiration dates of certain options and warrants held by the former
officers and, with respect to Patrick J. Downs and Daniel C. Downs, to waive
provisions of certain stock options which required that the options be exercised
within a specified period of time following termination. In the first quarter of
1997, the Company recorded charges of $1,450,000 related to the modifications of
options and warrants held by the former officers.
Under the Resignation Agreements, the Company agreed to honor certain
provisions of the officers' prior employment agreements to continue to pay the
former executives their prior annual salaries and other benefits for the
remaining terms of such agreements including certain medical and life insurance
benefits and car allowances. Total payments to or on behalf of former
executives were approximately $1,944,000 in 1997.
In March 1998, the Company and three of the former officers agreed to
modify the respective Resignation Agreements of the former officers to defer
payment of a total of approximately $627,000 of the amounts which were to have
been paid in 1998 and 1999. The deferred amounts will be paid monthly during
2000, with an aggregate balloon payment of $102,800 payable on December 31,
2000. Medical and life insurance benefits to the three former executives were
also extended to December 31, 2000 pursuant to the modified Resignation
Agreements. The modifications also provide an option to the Company to settle
all amounts due pursuant to the Resignation Agreements in shares of Common
Stock. The option period commenced March 20, 1998 and extends to June 18, 1998.
The number of shares of Common Stock to be issued will be 66% of the number of
shares determined by dividing the present value of the amounts then owing (using
a discount rate of 5%) by the average closing price of the Common Stock for the
ten trading days prior to the third business day before the notice of the
exercise of the option. Should the conversion option be exercised, the Company
has agreed to file a Registration Statement on behalf of the former officers to
register the shares to be issued within 20 days of providing notice of its
intent to exercise its option. If the Company fails to have the Registration
Statement declared effective within 120 days of the notice, the Company will be
obligated to pay a one-time fee of $135,000 to the former officers as additional
compensation. Amounts to be paid pursuant to the modified Resignation Agreements
are expected to be funded from on-going operations.
In 1997, in connection with the management reorganization, NTN agreed to
the vesting of certain options held by Mr. McLaughlin to purchase 100,000 shares
of Common Stock and issued to Mr. McLaughlin a fully vested option to purchase
150,000 shares of Common Stock at an exercise price of $3.88 per share. The
Company also paid Mr. Magerman an aggregate of $225,000 and purchased from him
for a price of $81,250 certain warrants to purchase 325,000 shares of Common
Stock.
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In the fourth quarter of 1996, the Company laid off approximately 16% of
its workforce as a cost-cutting measure. The Company also laid off a
significant number of employees in 1997 and may continue trimming its workforce
to reduce costs. Severance payments related to the layoff will not affect the
Company's future liquidity, since the majority of the related severance and
other benefit payments were made in 1996 and 1997. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RECENT PRIVATE PLACEMENT OF SERIES B PREFERRED STOCK
----------------------------------------------------
On October 31, 1997, the Company completed a private placement in which it
issued and sold to two institutional investors a total of 70,000 shares of the
Company's Series B Convertible Preferred Stock ("Series B Preferred Stock"),
$100 stated value per share, for an aggregate purchase price of $7,000,000. On
February 12, 1998, 25% of the Series B Preferred Stock, or 17,500 shares, were
convertible into approximately 2,940,000 shares of Common Stock at the option of
the holder. In March 1998, the holders of the Series B Preferred Stock
converted 2,000 shares of Series B Preferred Stock plus accrued dividends into
336,658 shares of Common Stock at a conversion price of $0.60 per share. See
Item 5, "Market for Registrant's Common Equity and Related Stockholder Matters."
RECENT EXCHANGES OF CERTAIN OUTSTANDING OPTIONS AND WARRANTS
------------------------------------------------------------
In the first quarter of January 1998, the Company agreed to issue an
aggregate 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 of 2,578,250 shares of Common Stock at exercise prices ranging from
$2.00 to $5.75 per share. The terms of the exchanges were determined in
privately negotiated transactions between the Company and the option holders and
warrant holders involved, based on a discount from the valuation of the options
and warrants as determined in accordance with the Black-Scholes method, which
takes into account such factors as the exercise prices and exercise periods of
the options and warrants and the volatility of the market price of the Common
Stock. The Company may enter into similar agreements in the future to exchange
shares of Common Stock for other currently outstanding options or warrants. 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 which, was less than the
estimated fair value of the warrants and options received in the exchange.
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
warrants and options 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
cash payments was approximately $300,000, based on the market price of the
Common Stock at the time, which was less than the estimated fair value of the
warrants and options received in the exchange.
RECENT DECISION CONCERNING 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.
In March 1998, the Company entered into a letter of intent ("LOI") to sell
85% of its interest in LearnStar to NewStar Learning Systems ("NewStar"), a
company in which Sally A. Zoll, President of LearnStar, is a shareholder. Under
the LOI, NewStar would pay $1,200,000 for 85% of the Common Stock of LearnStar
and the Company would retain the LearnStar accounts receivable of approximately
$800,000 as of February 28, 1998. Pending a closing of the transaction, which
might occur as late as September 30, 1998, NewStar would be responsible for
providing operating funds to LearnStar. The Company is currently negotiating a
definitive agreement; however the terms of the sale have not been finalized.
There can no assurance that a definitive agreement will be executed or that
LearnStar will be sold should the proposed transaction not close.
5
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On April 1, 1998, the Company reached an agreement in principle with
Omnigon, a California corporation, to sell 85% of the equity of IWN to Omnigon
on or before May 31, 1998. The agreement in principle provides that Omnigon will
pay $2,400,000 at closing for the 85% IWN equity interest. At Omnigon's option,
however, it will have the right to pay $1,200,000 at closing and deliver a
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 only 82.5% of the IWN equity. The
parties are currently negotiating the terms of a definitive agreement for this
transaction and no assurance can be given that the proposed transaction will be
completed. Omnigon paid $100,000 in April 1998 and has agreed to pay $100,000 in
May 1998, for the option to acquire IWN on the foregoing terms. Any such payment
made will be non-refundable and will not be applied to the purchase price of the
IWN shares. The Company has agreed that IWN shall use any such payment from
Omnigon to pay its operating expenses prior to a closing or cancellation of the
proposed transaction.
PRINCIPAL SERVICES AND PRODUCTS
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Since the Company has decided either to sell or cease the operations of its
two non-core subsidiaries, LearnStar and IWN, the discussions throughout this
report are limited to its remaining core operations. Historical financial
information related to LearnStar and IWN is included as necessary to provide
an understanding of the Company's operations.
NTN develops, produces and distributes individual and multi-player
interactive programs to a variety of media platforms. These interactive sports
and trivia games permit multiple viewers to participate with and simultaneously
respond to the programming content. NTN has an exclusive agreement with the
National Football League ("NFL") and understandings or agreements with others to
provide interactive play-along programming, such as its proprietary QB1(R)
football game, in conjunction with live television events. The Company
broadcasts a wide variety of games, trivia and informational programming to
group viewing locations such as hotels, sports taverns and restaurants through
its own interactive NTN Network. In addition, NTN brings multi-player
interactive games into consumer households through its arrangement with personal
computer on-line services and interactive television services. Since NTN can
distribute its programs via satellite, cable, telephone and wireless
transmission technologies, its applications are not dependent on specific
hardware or technical platforms.
The Company currently provides its products and services to the following
markets which directly related to multi-player interactive entertainment.
Network Services ("Network Services") - Live interactive television network
("NTN Network") featuring sports and trivia games which are broadcast to group
environments.
Online/Internet Services ("Online/Internet Services") - Live interactive
sports and trivia games including those currently broadcast over the NTN Network
to the home consumer market via third-party providers, such as America OnLine
("AOL"), CompuServe and GTE MainStreet.
Although the Company has previously derived revenues from licensing it
services to companies in foreign countries ("Foreign Licensing"), there were no
material revenues from this source in 1997, and the Company has no current plans
to pursue foreign licensing as a source of future revenues.
The following is a brief description of each of the Company's markets:
NETWORK SERVICES - Network Services represents the majority of the
Company's business, providing an interactive television broadcast network
featuring sports, trivia and informational programming to over 2,700 hospitality
sites in the U.S. as of December 31, 1997. These sites include restaurant
chains (e.g., TGI Friday's, Ruby Tuesdays, Black Angus), local and regional
bowling alleys, pizzerias, sports complexes, taverns and military bases. Through
various platforms including satellite, cable and wireless transmission sources,
Network Services can link its subscribers to encourage local, regional and
national competitions for its programming.
ONLINE/INTERNET SERVICES - The Company provides to the home consumer market
many of the same services as is available on the NTN Network, via arrangements
with on-line, cable delivery and internet services.
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Online/Internet Services is not dependent on any particular technology or method
of transmission to deliver its programming. In addition to the same sports and
trivia games which are currently broadcast over the NTN Network, Online/Internet
Services includes other multi-player interactive games expressly designed for
the home environment. Currently, revenues are derived from 1) play-along
services, in which NTN services are broadcast along with live events generating
subscription fees from interactive game participation, or "pay-per-play", and 2)
information services, where NTN's database is provided as a value-added
information service to subscribers who want statistical data. Customers include
AOL, CompuServe, GTE MainStreet and Bell Canada.
FOREIGN LICENSING - The Company has licensed independent companies to
broadcast in Australia/New Zealand and South Africa. Further, the Company
licenses its programs and software to Networks North, Inc., a Canadian company
("NTN Canada"). Licensees, except in Canada, operate their own broadcast center
and produce interactive programs specifically geared to the local culture and
society. The Canadian licensee uses the broadcast provided by the Company on
the NTN Network. The South African licensee ceased its NTN-licensed operations
in March 1998. Foreign licensing is not expected to contribute significantly to
revenues in the foreseeable future.
MARKETING AND DISTRIBUTION OF SERVICES AND PRODUCTS
NETWORK SERVICES. Network Services are provided via the NTN Network, which
serves over 2,700 locations ("Locations") throughout all 50 States.
The NTN Network presently features from 14 hours to 17 hours, depending on
the time zone, of interactive sports and entertainment trivia game programming
on weekdays, with extended programming hours on weekends. The balance of
broadcast time is devoted to a non-audible graphics-based service transmitting
information, including sports scores and upcoming program promotions.
Original programming for the NTN Network is developed and produced at the
Company's corporate offices in Carlsbad, California, for distribution to
Locations. The Company's facilities are equipped with video, satellite and
communications equipment, and multimedia computers. The Company can provide
simultaneous transmission of up to 16 live events for interactive play and a
multitude of interactive games and other programs, allowing distribution of
different programs to customers in different geographical locations.
The Company uses two independent services to distribute NTN programming via
satellite to customers, although it is not dependent upon either service because
there are several other providers that offer similar services. The Company
attempts to use the most effective and least expensive multiple data
transmission techniques to distribute data from the Company's facilities to
customers, including direct connect, internet transmission, and direct satellite
broadcast.
Each Location is furnished with NTN proprietary equipment (a "Location
System") including a personal computer, a satellite data receiving unit (usually
a small satellite dish), and a minimum of five hand-held, portable keypads
("Playmakers(R)") which players use to make their selections. During live
interactive programs, players participate in the play-along programs using two
television screens. One screen features the live broadcast from the television
network (e.g., ABC's Monday Night Football), while the second screen displays
the NTN Network program. Participants play the game by entering their selection
on Playmakers(R), which transmit a radio signal to the on-site computer or
through connection to the NTN broadcast center (the "Broadcast Center") in
Carlsbad, California. At the conclusion of the broadcast, total scores are
calculated and sent via phone lines. Within seconds, rankings are tabulated and
rankings and scores for each participating Location are transmitted back to such
Location via the NTN Network. This allows players to compete not only with
other patrons at their Location, but against all players across the nation who
are participating interactively on the NTN Network. The following diagram
depicts the transmissions for a typical real-time, interactive game via
satellite. Customers generally execute a one-year contract to obtain the
Company's services and pay a monthly fee ranging from $400-$800.
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[GRAPH OF NTN BROADCAST CENTER]
In addition to tabulating Playmaker(R) responses at the Location and
communicating with the Company's Broadcast Center, the Location System can
manipulate screens locally by calling up high-resolution computer generated
graphics and inserting the screens into the broadcast schedule. Accordingly, the
Company can offer both national and local advertising.
Interactive Game Programs. Network Services offers a variety of sports and
--------------------------
entertainment trivia games that challenge players' skill and knowledge and
create significant customer loyalty. An example of interactive sports
programming is QB1(R), the Company's first and most popular game program.
QB1(R) is an interactive football strategy game developed and broadcast under an
exclusive license from the NFL, which tests a player's ability to predict an
offensive team's plays during a live televised football game. Points are
awarded based on the accuracy of the player's prediction, rather than whether
the team scores or advances the ball. The Company broadcasts QB1(R) in
conjunction with every NFL game and selected Canadian Football League and
college football games.
The NTN Network presently features the following interactive sports games
programs:
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NTN PLAY-ALONG GAMES - Interactive games played in conjunction with live,
televised events. Games include the following:
<TABLE>
<CAPTION>
GAME DESCRIPTION
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<C> <S>
QB1(R) NFL licensed interactive strategy game in conjunction
with live telecasts of college and professional football
games
Triples(R) Interactive horse racing game in conjunction with live
telecasts of horse races
Uppercut(R) Interactive strategy game in conjunction with live
telecasts of boxing matches
NTN PowerPlay(R) National Hockey League licensed interactive strategy
game in conjunction with live telecasts of professional
hockey games (Canada only)
</TABLE>
NTN FANTASY GAMES - Fantasy league games played in conjunction with
sporting events or rotisserie leagues. Games include the following:
<TABLE>
<CAPTION>
GAME DESCRIPTION
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<C> <S>
Brackets(TM) Basketball or hockey tournament prediction game
Dream Team Baseball(TM) Managing a professional all-star baseball team
Football Challenge(TM) Weekly selection of winners of college and professional
football games
Football Fantasy(TM) Managing a professional all-star football team
Hockey Draft(TM) Managing a professional all-star hockey team
Hoops(R) Managing a professional all-star basketball team
Survivor(R) Weekly single elimination prediction game for
professional football
Oddsmaker Challenge(TM) Weekly selection of winners of various sporting events
</TABLE>
INTERACTIVE TRIVIA GAME PROGRAMS. During trivia game programs, each
Location System simultaneously displays selected trivia questions which are
displayed on the NTN television monitor at each Location. Participants use the
Playmaker(R) to select answers, which are collected, transmitted and tabulated
in a similar manner to NTN's interactive sports games. Participants' scores are
displayed on the dedicated television monitors, along with national, regional
and local rankings, as applicable.
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While certain of the Company's sports games are available only during the
seasons when the respective sports are played, trivia game programs allow the
Company to offer year-round interactive programming. The NTN Network generally
provides the trivia programming during evening hours, when Locations,
particularly restaurants and taverns, tend to be busiest. The NTN Network
presently features the following interactive trivia games programs:
NTN PREMIUM TRIVIA GAMES - Promotion-oriented weekly game shows that
generally require 1-2 hours of participation. Prizes are awarded to the top
finishers, except where prohibited by law. Games include the following:
<TABLE>
<CAPTION>
GAME DESCRIPTION
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<C> <S>
Trivial Pursuit Live(R) Interactive version of the famous Trivial Pursuit game -
licensed from Hasbro Interactive.
Playback (TM) Music trivia
Showdown(R) Advanced trivia challenge
SportsIQ(TM) Weekly sports trivia game
Sports Trivia Challenge(R) Advanced sports trivia covering multiple topics
Spotlight(TM) Entertainment and media based trivia game (movies, music)
</TABLE>
NTN TRIVIA GAMES - General-themed, standard games typically one-half hour
in length. Games include the following:
<TABLE>
<CAPTION>
GAME DESCRIPTION
---- -----------
<C> <S>
Brain Buster(R) Interactive trivia game covering esoteric topics
Countdown(R) Interactive trivia game using word plays
Topix(TM) Theme driven trivia game played under controlled timing
Wipeout(TM) Interactive trivia game eliminating incorrect answers
Nightside(R) Adult oriented trivia
Sports Trivia(R) General trivia game covering sports topics
Viewer's Revue(R) Audience-supplied content trivia game
Retroactive(TM) Pop-culture trivia with 60's, 70's and 80's content
Football Weekend Roundup(TM) Football trivia game
</TABLE>
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CUSTOM GAMES - Interactive games created specifically for media companies
such as Capital Cities/ABC for simultaneous broadcast with their live telecasts.
<TABLE>
<CAPTION>
GAME DESCRIPTION
---- -----------
<C> <S>
NTN Awards Show(TM) Interactive game played in conjunction with the Academy
Awards, Grammy Awards and other award shows
NTN Draft Show(TM) Interactive game played in conjunction with the annual
NFL draft
</TABLE>
Since 1987, Network Services has broadcast the NTN Awards Show(TM) to all
Locations in connection with the live Academy Awards telecast. The NTN Awards
Show(TM) contains movie trivia and biographical information on nominees and
allows players to select winners up to the actual announcement and compete with
other players via the NTN Network, in a manner similar to QB1(R).
Information Programming. During the hours in which the Company is not
------------------------
broadcasting interactive games, the Company uses its broadcast network to
transmit sports information as well as NTN Network programming information. The
Company obtains the majority of its sports information (for which it pays a
monthly fee) from Sportsticker wire service, electronically formats the
information and then retransmits it for broadcast to Locations.
Advertising. The NTN Network, in a manner similar to the television
-----------
broadcast medium, sets aside a number of minutes of a broadcast hour for
advertising, promotional spots (promoting NTN Network's competitions and special
events), "tune-in spots" (promoting NTN Network programming schedule), and
public service announcements.
The Company has currently set aside fourteen minutes each hour for
advertising, promotional spots and "tune-in spots." Each spot is designed to be
fifteen seconds in length, for a total of 56 spots per hour. The Company can
insert advertising messages into its interactive sports and trivia programming
at any number of Locations. Further, messages can be broadcast over the NTN
Network or custom-tailored for a specific Location or several Locations.
The Company sells advertising in blocks of two-fifteen second ad spots per
hour for a total of fourteen hours per day. Further, programming content has
been blended with the advertiser's logo and message. For example, the Cuervo
1800 Countdown(R) Shows provide 30 minutes of commercial exposure to Miller and
Cuervo products. Sponsorships of programs are also available and provide
advertisers with specific premium exposure within a sponsored program.
Advertisers are also given the opportunity to communicate directly with the
NTN Network's Players Plus(R) ("Players Plus") members, numbering over
1,000,000. Players Plus is a frequent player club which members join by
entering their name, address, zip code and identification number into a
Playmaker(R), which is then captured at the Broadcast Center. Members earn
points each time they play and also a chance to win prizes in the monthly
Players Plus sweepstakes. Sponsors are capable of receiving feedback through
interaction with customers in the form of customer surveys.
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ONLINE/INTERNET SERVICES. The Company offers many of the same services and
programs as seen on the NTN Network to the home consumer market via
Online/Internet Services. Online/Internet Services includes multi-player
interactive games made available to the consumers' households through the
Company's arrangements with personal computer on-line services and interactive
television services. In addition, Online/Internet Services includes other
multi-player interactive games designed expressly for the home environment. The
Company offers the games to end users via third party networks such as AOL.
Revenues received include development fees and monthly revenues based upon usage
and certain minimum guarantees from these third-party networks. The end-user
does not pay NTN directly, but pays the online service provider who is
responsible for paying the Company.
The current focus of home distribution is via on-line services, such as
AOL, where a substantial customer base already exists. The Company's
interactive sports and trivia games are maintained on the Company's servers and
are available on-line 24 hours a day, seven days a week.
The Company's Online/Internet Services are unique since the programs are
not dependent upon, and consequently not bound by, any particular technology or
method of delivery. Regardless of which technology emerges as the primary means
of delivery to home users, management believes its programming content will be
available to the household.
The Company also assists other companies in providing content and programs
via content distributors. For a share of the revenue generated by consumer use,
the Company provides program translation services and maintains the programs on
its servers. This has not been a significant source of revenue in the past and
is not expected to be a significant source of revenue in the future.
Online/Internet Services are distributed to on-line networks, also known as
content distributors. These games, in turn, are made available to their
customer base for a fee. The diagram below depicts the transmissions necessary
for a consumer to use the Company's service in his or her home.
[GRAPH OF VIA CABLE/TELEPHONE]
FOREIGN LICENSING. NTN has provided its services in certain foreign
markets through licensing agreements with foreign licensees. Generally, the
Company licenses its products in foreign countries by granting the rights to use
NTN's interactive broadcast technology. NTN provides licensees with
technological know-how and assistance to build
12
<PAGE>
a broadcast center, and to develop interactive products and programs. For many
years, NTN has provided service to customers in Canada through its unaffiliated
licensee, NTN Canada. In 1993, NTN issued a 20-year license to an unaffiliated
company in Australia ("NTN Australasia"), to create the first interactive
television network in Australia and New Zealand. In 1994, NTN issued a license
to MultiChoice Ltd., an unaffiliated company, to develop and operate an
interactive broadcast network in South Africa. The South African licensee ceased
its NTN-licensed operations in March 1998.
MARKETING AND EXPANSION STRATEGY
- --------------------------------
NETWORK SERVICES. Network Services markets services to customers primarily
through advertising in national trade periodicals, national and regional
industry trade shows, telemarketing, direct mail and direct contact through the
field representatives. All sales prospects are organized and tracked through
shared database software. Currently, services are sold through a regional-based
management team that utilize direct salespersons as well as independent
representatives. The independent representatives' agreements are typically one-
year agreements, with renewal clauses if the representative meets certain
performance goals. In late 1997, the Company expanded the number of regional
sales managers and direct salespersons in selected markets. The Company also
terminated many of the prior arrangements with independent representatives. In
connection with the cancellation of the independent representative agreements,
the Company paid one representative a total of $288,000 and may pay additional
sums in the future, as other terminations occur. The Company believes its in-
house sales team will be more successful in meeting its sales goals. In March
1998, the Company entered into an agreement with Datatec Systems, Inc. to
provide installation and repair services to its NTN Network customers throughout
the United States.
The Company's future business strategy related to the NTN Network is to
continue to increase available programming and market to additional group
viewing Locations. In addition, the Company intends to develop additional
revenue sources for the NTN Network such as local and regional advertising. No
assurance can be given that the Company will be successful in the implementation
of its business strategy.
ONLINE/INTERNET SERVICES. Since the end-user of Online/Internet Services
is the service provider's customer, the Company relies on the service provider's
marketing efforts to promote its products. However, the Company works in
conjunction with service providers to develop the promotions and advertisements.
For example, service providers such as AOL may include the Company's game logo
on an initial "start-up" screen which millions of its subscribers can access at
no expense to NTN. Subscribers generally pay the service provider a flat fee or
a fee based on the amount of time that the subscriber has participated with the
Company's games and services, and the service provider pays NTN.
In the future, the Company expects its products to elicit more exposure
from the distributors as a result of increased brand recognition and continued
promotions. NTN will continue to take a proactive position with respect to
marketing products to each distributor to ensure inclusion in as many of their
promotional efforts as possible. The Company expects its direct marketing costs
to continue to be minimal. No assurance can be given as to whether the Company
will be successful in the implementation of its business strategy.
13
<PAGE>
SOURCES OF REVENUE
The following table sets forth certain information with respect to the
principal sources of the Company's revenues during the years ended December 31,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
(Dollars in thousands) YEARS ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Network Services $ 20,245 20,029 15,559
Online/Internet Services 3,326 1,811 620
Advertising 772 1,590 1,128
Equipment Sales, net 55 1,310 1,363
LearnStar Revenues 786 7 440
IWN Revenues 275 0 0
Other Revenue 402 524 972
</TABLE>
NETWORK SERVICES. The primary market for Network Services is comprised of
approximately 300,000 taverns and restaurants in North America. Other potential
Locations may also be found among hotels, military bases, college campuses,
hospitals, and other group viewing Locations such as country clubs, fraternal
organizations, and bowling centers.
To date, Network Services' customers have generally been public viewing
locations such as restaurant chains (e.g., TGI Friday's, Ruby Tuesdays, Black
Angus), local and regional bowling alleys, pizzerias, sports complexes, sports
taverns and military bases. Many of the Company's customers such as hotel and
restaurant chains have multiple Locations. Locations generally enter into a
one-year broadcast service agreement with the Company pursuant to which they pay
a monthly broadcast fee of approximately $400-800 per Location. The Company
currently serves over 2,700 Locations located in all 50 States.
The Company has a license agreement with an independent licensee, NTN
Canada, pursuant to which NTN Canada solicits Locations to the NTN Network in
Canada. The Company provides NTN Network programs to NTN Canada in exchange for
an annual license fee payable in monthly installments based upon the number of
Locations in Canada, which presently number approximately 550.
As a percentage of total revenues, Network Services revenues amounted to
78%, 78% and 77% in 1997, 1996 and 1995, respectively.
ONLINE/INTERNET SERVICES. The Company provides its services to on-line
users pursuant to the agreements with various system providers such as AOL. The
on-line computer industry remains a fast-growing consumer market in terms of
subscribers. Fees from system providers are individually negotiated. In 1997,
the Company received from AOL a one-time fee of $1,000,000 for agreeing to
terminate its existing contract and renegotiate the terms of a continuing
relationship. Revenue from other service providers is based on the actual use
of the NTN interactive programs by their underlying customers.
The Company has granted to NTN Canada the exclusive right to market NTN
interactive services to online users in Canada. The Company is entitled to
receive a royalty equal to 25% of any revenues generated from Canadian online
customers. The Company has not received any revenues to date relating to the
Canadian online services and no assurance can be given that the Company will
receive any such royalties in the future. As a percentage of total revenue,
Online/Internet Services revenues amounted to 13%, 7% and 3% in 1997, 1996 and
1995, respectively.
ADVERTISING REVENUE. The Company sells advertising spots for broadcast on
the NTN Network as well as for Online/Internet Services. Advertisers can buy
time for promotional spots as well as sponsorship of specific events
14
<PAGE>
or programs. As a percentage of total revenue, Advertising amounted to 3%, 6%
and 6% in 1997, 1996 and 1995, respectively. Advertising revenue decreased in
1997 due to reorganizations in personnel assigned to sell advertising spots. The
Company has retained an independent advertising agency to obtain additional
advertising revenues from certain industry sectors and intends to execute one or
more other advertising sales agency agreements in the coming year. Although the
Company is confident in its ability to attract substantial advertisers to the
NTN Network, no assurance can be given that the Company will be successful in
the implementation of its advertising strategy.
EQUIPMENT SALES. Typically, Location Systems are provided to customers but
ownership is maintained by the Company or is leased from third parties. The
Company sells interactive equipment, particularly Playmakers(R), to its
licensees in Canada and Australia. Equipment is generally sold to customers
with no return rights except in the case of defect. As a percentage of total
revenue, Equipment Sales amounted to 0%, 5% and 7% in 1997, 1996 and 1995,
respectively. Equipment sales are not expected to contribute significantly to
revenues in the foreseeable future.
LEARNSTAR REVENUES. LearnStar revenues are comprised of equipment sales
and software licensed to schools and school districts. Software is licensed and
the Company agrees to provide maintenance of equipment and software upgrades for
three to five years. A portion of the revenue related to licensed software is
deferred and amortized over the contract term. Payment terms are generally
provided over the term of the contract. As a percentage of total revenue,
LearnStar Revenues amounted to 3%, 2% and 2% in 1997, 1996 and 1995,
respectively. LearnStar Revenues are not expected to contribute to revenues in
the foreseeable future, as the Board has determined either to sell or cease the
operations of LearnStar.
IWN REVENUES. IWN Revenues are comprised of a software license agreement
with IWN Australasia Limited, an Australian corporation of which IWN L.P. owns
25% of the outstanding common stock. IWN Revenues are not expected to
contribute to revenues in the foreseeable future, as the Board has determined
either to sell or cease the operations of IWN.
RAW MATERIALS
For media platforms such as on-line services, the Company distributes its
programs to the recipients who maintain their own receiving, translation and re-
broadcasting equipment. Accordingly, the Company has no raw materials or
equipment needs for these customers beyond its own back-end servers.
For the NTN Network, the Location System is assembled from off-the-shelf
components available from a variety of sources, except for the Playmaker(R)
package. The Company installs and maintains the Location Systems. The
Playmaker(R) is currently manufactured to the Company's specifications by a non-
affiliated manufacturer in Taiwan. In 1997, the Company obtained all design
plans and source codes for the Playmaker(R) from the manufacturer. Over the
past two years, and currently, the Company's Network Services customers have
experienced reliability problems with Playmakers(R). The 1997 results include a
charge of $650,000 for the replacement and repair of defective equipment and a
charge of $1,893,000 for obsolete and destroyed equipment. Equipment function
problems have been a substantial cause of customer contract terminations in the
past. The Company is working to provide a solution to such reliability
problems, although no assurances can be given that a timely solution can be
reached without undue cost. The Company believes that there are numerous other
manufacturers who could supply Playmakers(R) although no assurances can be given
that, if necessary, such alternative sources could be secured at commercially
reasonable costs and without undue delay.
LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
The Company's sports games make use of simultaneous telecasts of sporting
events. Where the Company has licenses with various sporting leagues, the
Company is also permitted to utilize the trademarks and logos of national teams
and leagues in connection with the playing of an interactive game.
The Company is party to an agreement with the NFL, which grants the Company
the exclusive right to use the trademarks and service marks of the NFL in
connection with the playing and marketing of QB1(R). The NFL agreement grants
the Company the exclusive data broadcast rights to conduct interactive games in
conjunction with the broadcast of NFL football games, for which the NFL receives
a royalty based on revenues billed by the Company in
15
<PAGE>
connection with QB1(R) play. The agreement with the NFL expires in March 2000.
This most recent agreement expands the Company's rights to include certain
approved online services to all territories in which such online services are
accessible and significantly includes the Internet. There can be no guarantee
that the Company will be able to renew the agreement in the future. Further, it
is unclear whether non-renewal of the agreement would have a material adverse
effect on the Company.
The Company keeps confidential as trade secrets the software used in the
production of its programs. The hardware used in the Company's operations is
virtually off-the-shelf, except for the Playmaker(R) keypads. The Company owns
copyrights to all of its programs. In addition to the registration of the
trademark for QB1(R), the Company has either received, or is presently applying
for, trademark protection for the names of its other proprietary programming, to
the extent that trademark protection is available for them. The Company's
intellectual property assets are important to the Company's business and,
accordingly, the Company maintains a program directed to the protection of its
intellectual property assets.
SEASONAL BUSINESS
Overall, the Company's business generally is not seasonal. Revenue is
billed monthly as service is provided to customers. However, sales of new
Locations have traditionally been higher in the Summer and early Fall months
compared to the rest of the year. This trend coincides with the start of the
NFL season in August.
The hospitality industry has historically experienced a relatively high
business failure rate. Likewise, the Company has lost customers due to the
failure of customer businesses; to change in ownership and non-renewal of
contracts, collectively referred to as "churn". The Company's historical churn
experience has also been seasonal in that the percentage of churn has been
highest following the completion of the NFL season in February, although churn
occurs in all months. During the Company's operating history, approximately 25-
30% of the existing Network Services customers at the beginning of a year, have
churned by the end of that year. The Company has implemented marketing programs
and other efforts to reduce the churn rate, however no assurance can be given
that such efforts will be successful.
Online/Internet Services are provided to consumers via online distributors
such as AOL and CompuServe. This industry is relatively young and little
historical data is available. No seasonal effect has been noted, however.
WORKING CAPITAL
The discussion under "Liquidity and Capital Resources" included in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", is incorporated herein by reference.
SIGNIFICANT CUSTOMERS
The Company's customers are diverse and varied in size as well as location.
The services are provided point to multi-point so that the Company is not
dependent on any one customer. The Company does not have any individual
customer who accounted for 10% or more of its consolidated revenues in 1997,
1996 or 1995.
16
<PAGE>
BACKLOG
The Company generally does not have a significant backlog at any time
because the Company normally can deliver and install new Location Systems within
the delivery schedule requested by customers (generally within two to three
weeks). For other Online Services, there is no backlog because services are
generally distributed point to multi-point and the Company does not have to
provide specific equipment to the customer, making it relatively simple to add
new customers without any significant delay.
GOVERNMENT CONTRACTS
The Company provides its distribution services to a small number of
government agencies (usually military base recreation units), however the number
of government customers is small compared to the overall customer base.
Contracts with government agencies are provided under substantially the same
terms and conditions as other corporate customers.
COMPETITIVE CONDITIONS
The Interactive Entertainment industry is still in its formative stage, but
currently may be divided into three major segments: (1) media distribution
services such as on-line services, telephone companies and cable television
companies and the NTN Network; (2) equipment providers such as computer and
peripheral equipment manufacturers; and (3) content and programming providers,
such as movie studios, NTN and software publishers. The Company does not act as
a direct provider of equipment to consumers. The Company operates as a media
distribution service through its own NTN Network. Also, the Company is a
program provider to an array of other media distribution services to consumers
utilizing a variety of equipment and delivery mechanisms.
NTN has a growing number of competitors in the programming segment of the
Interactive Entertainment industry. The Company's programming content is not
dependent upon, and consequently not bound by, any particular technology or
method of distribution to the consumer. The Company's programming is,
therefore, readily available to consumers on a wide variety of entertainment and
media services including: the NTN Network; on-line services including AOL, and
cable television, including GTE MainStreet, which is available to households in
certain regions.
The Company competes with other companies for total entertainment dollars
in the marketplace. The Company's programming competes generally with broadcast
television, pay-per-view, and other content offered on cable television. On
other mediums, the Company competes with other content and services available to
the consumer through on-line services. The Company's programming is interactive
in nature but is distinguished from other forms of interactive programming by
its simultaneous multi-player format and the two-way interactive features.
Presently, the technological capabilities of transmitting entertainment products
to the consumer exceed the supply of quality programming and services available
on the existing delivery systems. The Company is able to utilize the wide
variety of services available for transmission of entertainment products to the
consumer by forming strategic alliances with service providers to supply the
Company's programs for re-transmission. The Company's programming is available
to the consumer over a multitude of media platforms and delivery systems.
17
<PAGE>
NETWORK SERVICES. Currently, Network Services on the NTN Network have no
competitors that furnish live, multi-player interactive entertainment similar in
scope and nature. Although the Company has no direct competitors in this area,
it does compete for total entertainment dollars in the marketplace. Other forms
of entertainment provided in public eating and drinking establishments include
music-based systems and cable and pay-per-view television. However, evidence
provided by customers indicates that patrons are inclined to stay longer and
consume more food and drink when NTN Network interactive games are offered as
the main source of entertainment. Accordingly, Network Services customers
generally tend to view these services as a profit generator rather than a cost
center.
ONLINE/INTERNET SERVICES. In the Online/Internet Services market, the
consumer has many entertainment options from which to choose, ranging from cable
television to telephone based services to computer on-line providers and the
Internet. The Company offers live, multi-player games and services which are
available to multiple interactive platforms in the home. Also, the Company
competes for a share of the total home entertainment dollars against broadcast
television, pay-per-view and other content offered on cable television. The
Company also competes with other programming available to consumers through on-
line services such as AOL. Cable television, in its various forms, provides
consumers the opportunity to make viewing selections from anywhere between 30 to
100 free and pay channels, thus limiting the amount of time devoted to any
particular channel. For the most part, cable television is predominantly a
passive medium, and does not offer the viewer the opportunity to participate in
its programming, and even less frequently, does it offer programming designed
for active participation. On-line providers, such as AOL, can provide literally
thousands of options for content and entertainment, however, such on-line
services have traditionally been confined to that company's subscriber base.
Interaction among viewers is thus limited to the particular program as offered
only on the specific on-line service. The Company offers consumers the
opportunity to participate and compete against other viewers who are seeing the
identical program over several different technological media, including
interactive television, personal computers and/or the NTN Network.
RESEARCH AND DEVELOPMENT
During the three years ended December 31, 1997, the Company incurred
approximately $1,600,000, $3,396,000 and $1,471,000, respectively related to
Company-sponsored research and development projects, including projects
performed by consultants for the Company.
The Company has previously experienced problems in the performance of its
49 megahertz Playmaker(R) device. The Company is currently developing a new 900
megahertz Playmaker(R) device to augment its existing 49 megahertz Playmaker(R)
device. The new device is expected to be more reliable. Further, the Company
is developing enhancements to its interactive software including a planned
migration to a "Windows" based platform and continued research into new and
enhanced graphics. The Company continuously evaluates various methods of
transmitting its programs and services. There is no assurance that the Company
will successfully complete current or planned development projects or will do so
within the prescribed time parameters and budgets. There can be no assurance,
furthermore, that a market will develop for any product successfully developed.
The Company works closely with independent user groups in an attempt to
develop new and enhanced services and products in response to customer needs.
GOVERNMENT REGULATIONS
The cost of compliance with federal, state and local laws has not had a
material effect upon the Company's capital expenditures, earnings or competitive
position to date. On October 25, 1996, the Company reported that it was advised
by the United States Federal Communications Commission (FCC) that its
Playmaker(R) keypad had never received FCC 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 NTN
Network customers, nor were any of the Company's Online/Internet Services ever
affected. The Company implemented a corrective action program approved by the
FCC on January 15, 1997 and immediately began shipments to new Locations. To
date, the FCC has not advised the Company of the amount of penalty, if any,
which may be imposed. In light of the circumstances, the Company believes that
the amount of any such penalty will not have a material, adverse effect on the
financial condition of the Company. The Company does not anticipate that it
will have to incur any material expenses in the future in order to comply with
federal, state or local laws.
18
<PAGE>
EMPLOYEES
The Company and its subsidiaries employ approximately 155 people on a full-
time basis and 30 people on a part-time basis, and also utilize independent
contractors for specific projects. In addition, the Company retains a number of
non-affiliated programming and systems consultants. It is expected that as the
Company expands, additional employees and consultants will be required. The
Company believes that its present employees and consultants have the technical
knowledge necessary for the operation of the Company and that it will experience
no particular difficulties in engaging additional personnel with the necessary
technical skills when required. None of the Company's employees are represented
by a union and the Company believes its employee relations are satisfactory.
ITEM 2. PROPERTIES
----------
In 1997, the Company sold its membership in a limited liability company
that owns "The Campus", the three-building complex that houses the Company's
headquarters. The Company continues to lease space in The Campus pursuant to a
six-year lease for approximately 39,000 square feet of office and warehouse
space. The lease expires in June 2001 and the monthly rent is approximately
$36,000. The Company also leases approximately 4,000 square feet of warehouse
space near the corporate headquarters, under a lease that runs through September
1998, at a rent of approximately $3,000 per month. The Company does not expect
to renew this lease and does not anticipate leasing additional space in the next
year.
ITEM 3. LEGAL PROCEEDINGS
-----------------
In February 1998, the Company completed its previously announced settlement
of a class-action lawsuit pending against the Company since 1993. The terms of
the settlement were as follows: A settlement fund was established consisting of
$400,000 in cash plus 565,000 warrants to purchase the Common Stock of the
Company ("Settlement Warrants"). Each Settlement Warrant has a term of three
years from February 18, 1998. The Settlement Warrants were issued on February
18, 1998 and entitle the holder of a Settlement Warrant to purchase a share of
Common Stock of the Company at a price of $0.96. During the period from
February 18, 2000 to February 18, 2001, the holders of Settlement Warrants have
the right, but not the obligation, to put the Settlement Warrants to the Company
for repurchase at a price of $3.25 per Settlement Warrant (the "Put Right"),
provided, however, that this Put Right shall expire, if at any time after
February 18, 1998 the closing price per share of the Company's Common Stock on
the American Stock Exchange is more than $4.22 on any seven trading days,
whether consecutive or not. Upon expiration of the Put Right, the Company shall
have no further obligation to repurchase the Settlement Warrants. In no event
shall the Company have any obligation to repurchase its Common Stock.
Although the Put Right may expire based on the closing price of the Common
Stock over the next three years, the Company has recognized the potential
liability related to the Put Right. Accordingly, a charge of $1,291,000 for the
present value (discounted at 15%) and related interest expense for the Put Right
was recognized in 1996. The difference between the amount expensed and the
total potential liability, $545,000, will be accreted as interest expense and
charged over the period from September 1996 until February 18, 2000. In 1997, a
total of $225,000 was charged to interest expense.
On April 18, 1995, a class action lawsuit was filed in United States
District Court for the Southern District of California entitled Lenora Isaacs,
--------------
on behalf of herself and all others similarly situated vs. NTN Communications
- -----------------------------------------------------------------------------
and Patrick J. Downs. The complaint alleges violations of federal securities
- --------------------
laws based upon the Company's projections for the fourth quarter of 1994 and for
the 1994 fiscal year, and further alleges that certain of the Company's insiders
sold stock on information not generally known to the public. As previously
announced, the Company has agreed to a settlement having a total value of
$1,450,000. The settlement, which was approved by the Court in January 1998,
consists of $250,000 in cash with the remaining balance of $1,200,000 being
payable with the Company's Common Stock or in cash, at the Company's election.
It is anticipated that the claims process will be completed by the summer of
1998 and that the Common Stock will be issued shortly thereafter. A charge of
$2,800,000 was recorded in 1996 for the estimated settlement. In the fourth
quarter of 1997, the Company reduced
19
<PAGE>
the accrual for the settlement and accordingly reduced its legal expense by
$1,350,000 as a result of the change in estimate related to the settlement.
In May 1997, a shareholder derivative complaint was filed in the Superior
Court of California, San Diego, North County Branch. The complaint, which
sought injunctive relief and an unspecified amount of damages, was brought by a
current shareholder against the Company and certain officers and directors.
More specifically, the plaintiff alleged that the Company was injured by a lack
of independence and breach of business judgment by virtue of certain agreements
entered into in connection with the recent management reorganization. The
Company believed that the lawsuit was without merit and conveyed its position to
the plaintiffs' counsel. On June 10, 1997, the plaintiff voluntarily dismissed
the lawsuit without any payment from the Company.
On June 11, 1997, the Company was included as a defendant in litigation
entitled Eliot Miller and Jay Iyer, shareholders on behalf of themselves and all
-----------------------------------------------------------------------
others similarly situated vs. NTN Communications, Inc., Patrick J. Downs, Daniel
- --------------------------------------------------------------------------------
C. Downs, Donald C. Klosterman, Ronald E. Hogan, Gerald P. McLaughlin and KPMG
- ------------------------------------------------------------------------------
Peat Marwick LLP, which complaint was filed by the same lead plaintiff and lead
- ----------------
attorneys as in the previously dismissed derivative action. The new complaint
alleges violations of state and federal securities laws based upon purported
omissions from the Company's filings with the Securities and Exchange
Commission. More particularly, the complaint alleges that the directors and
former officers devised an "exit strategy" to provide themselves with undue
compensation upon their resignation from the Company. Plaintiffs further allege
that defendants made false statements about, and failed to disclose, contingent
liabilities (guaranteed compensation to management and the right of an investor
in IWN to require the Company to repurchase its investment during 1997) and
phantom assets (loans to management) in the Company's financial statements and
KPMG Peat Marwick LLP's audit reports, all of which served allegedly to inflate
the trading price of the Company's Common Stock. In 1997, KPMG Peat Marwick LLP
was dismissed from the suit after filing a motion to dismiss. In November 1997,
the Court dismissed all of the plaintiff's state law causes of action against
the Company but retained the plaintiff's federal law causes of action. In
February 1998, the attorneys representing the plaintiffs in this litigation
filed an action entitled Dorman vs. NTN Communications, Inc. in the Superior
Court of San Diego County, California in which they essentially replead the
state law causes of action dismissed in the federal lawsuit. In the Company's
opinion, the claims in these two lawsuits are covered by directors and officers
liability insurance providing $10,000,000 of coverage. The Company has submitted
these claims to its directors and officers liability insurance underwriters, who
have accepted such claims subject to reservation of rights. The Company's
deductible under the insurance policy is $250,000 per claim.
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 courts 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. These actions affect only the
Canadian operations of the Company and its Canadian licensee and do not extend
to the Company's operations in the United States or elsewhere. Although they
cannot be estimated with certainty, any damages the Company might incur are not
expected to be material.
The Company is a defendant in two other lawsuits. In November, 1997, the
Company's former advertising manager brought a suit alleging breach of an
alleged employment contract and age discrimination. The Company has denied any
liability in this case and does not believe its resolution will have a material
adverse effect on the financial position, results of operations and liquidity
of the Company.
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 denied these claims and intends to defend itself
vigorously in this litigation. It is not anticipated at the present time that
the outcome of this lawsuit will have a material adverse effect on the financial
position, results of operations and liquidity of the Company.
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 all claims made.
During the pendency of such claims, the Company will continue to incur the costs
of defense of same. Other than set forth above, there is no material litigation
pending or threatened against the Company.
20
<PAGE>
Recently the Company was informed that it was in default of certain
covenants contained in two leases for equipment installed at various NTN Network
locations. The Company has made all payments pursuant to these leases when and
as due and expects to do so for the remaining terms of the leases, which expire
in June and October, 1999, respectively. The respective covenants provide for a
minimum working capital ratio, for customer payments to be directed to a
specific account maintained by an independent bank, and for a minimum collection
to lease payment ratio. The Company has agreed to direct the payments of
additional customers to the specific bank accounts each month to provide the
lessors with further security. Excess account balances are returned to the
Company each month following the monthly lease payments. The Company has reached
an agreement to cure the alleged lease defaults with one lessor and such lessor
has rescinded its default notice to the Company subject to the execution and
delivery of a lease amendment and an additional collateral assignment agreement
on or before April 30, 1998. The other lessor has agreed to accept the
Company's offer to cure the default if it is paid an administrative fee. The
Company believes that it will reach an agreement to cure the alleged default on
the second lease transaction. The Company's only other sale-leaseback
transaction also contains similar covenant provisions and the Company is in
default for the same reasons. The third lessor has not declared a default. If it
does, the Company believes it may be able to enter into a similar arrangement to
direct payments from additional customers to the individual collateral bank
account. The third lease also expires in 1999.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------
The Company held its annual meeting of stockholders on November 3, 1997.
The matter voted upon at such meeting was the election of three directors to the
Board of Directors.
The voting for the proposal was as set forth in the table below.
<TABLE>
<CAPTION>
VOTES VOTES
"FOR" "AGAINST" * ABSTENTIONS**
------------------------------------------------------------------
Elections of Directors
<S> <C> <C> <C>
Gerald Sokol, Jr. 18,369,343 75,461 --
Edward C. Frazier 18,396,953 103,071 --
Robert Bennett 18,397,453 74,961 --
</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.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS
- -------
The Company's Common Stock is listed on the American Stock Exchange
("AMEX"), under the symbol "NTN." The prices below are the high and low sales
prices for the Common Stock reported by the AMEX for the two most recent fiscal
years.
<TABLE>
<CAPTION>
1997 LOW HIGH
---- --- ----
<S> <C> <C>
First Quarter $3 - 3/8 $4 - 7/16
Second Quarter 2 - 5/16 4 - 3/4
Third Quarter 2 - 3/16 4 - 7/16
Fourth Quarter 1 2 - 1/4
<CAPTION>
1996 LOW HIGH
---- --- ----
First Quarter $3 - 1/8 $4 - 7/8
Second Quarter 3 - 7/8 5 - 1/8
Third Quarter 4 - 9/16 6 - 1/8
Fourth Quarter 3 - 7/16 5 - 3/16
</TABLE>
On April 10, 1998, the closing price for the Common Stock reported on the
AMEX was $0.81. On that date, there were approximately 4,000 record owners of
the Common Stock.
Trading of the Company's redeemable common stock purchase warrants ("NTNW")
commenced on the AMEX in February 1998. Through April 10, 1998, the low and
high sales prices of the warrants as reported on the AMEX were $5/8 and $1 5/16,
respectively.
To date, the Company has not declared or paid any cash dividends with
respect to its Common Stock, and the current policy of the Board of Directors is
to retain earnings, if any, after payment of dividends on the Preferred Stock to
provide for the growth of the Company. Consequently, no cash dividends are
expected to be paid on the Company's Common Stock in the foreseeable future.
Further, there can be no assurance that the proposed operations of the Company
will generate the revenues and cash flow needed to declare a cash dividend or
that the Company will have legally available funds to pay dividends.
On October 31, 1997, the Company sold and issued an aggregate of 70,000
shares of Series B Preferred Stock at a purchase price of $100 per share to two
institutional purchasers Stark International and Shepherd Investments
International, Ltd. (which each purchased 35,000 shares of Series B Preferred
Stock). The sale of the Series B Preferred Stock was effected pursuant to
Regulation D of the Securities and Exchange Commission under the Securities Act
of 1993 as amended. LG Partners, Inc. provided financial advisory services to
the Company in connection with the sale of the Series B Preferred Stock and
received a fee for such services of $210,000. The Series B Preferred Stock bears
a cumulative annual dividend of $4 per share, payable in quarterly installments
of $1 per share on the last day of January, April, July and October of each
year, commencing January 31, 1998.
Any holder of Series B Preferred Stock is entitled to convert 25% of the
Series B Preferred Stock owned by the holder into shares of Common Stock at any
time on or after February 12, 1998 (the "Initial Conversion Date"). An
additional 25% of the Series B Preferred Stock owned by a holder will become
convertible on each of the dates 60, 90 and 120 days, respectively, following
the Initial Conversion Date. Notwithstanding the foregoing, no holder will be
entitled to convert Series B Preferred Stock to the extent that the shares of
Common Stock issuable upon such conversion would cause the aggregate shares of
Common Stock beneficially owned by the holder and its affiliates to exceed 4.9%
of the shares of Common Stock outstanding following such conversion. Any
outstanding shares of the Series B Preferred Stock not converted by October 31,
2000 will automatically be converted as of such date.
The number of shares of Common Stock issuable upon conversion of each share
of Series B Preferred Stock is determined by dividing the sum of $100 plus any
accrued and unpaid dividends on the Series B Preferred Stock by the conversion
price then in effect. The conversion price on any conversion date will be equal
to the lesser of (a) 140% of the average of the closing bid prices of the Common
Stock on the AMEX on the five trading days immediately preceding the Initial
Conversion Date, but in no event more than $3.50 per share, (the "conversion
ceiling") and (b) 85% of the lowest average of the closing bid prices of the
Common Stock on any three trading days during the 20 trading days immediately
preceding the conversion date. The conversion price and conversion ceiling are
subject to adjustment in certain events, including stock dividends or
subdivisions or reclassifications of the Common Stock. The actual number of
shares of Common Stock into which the Series B Preferred Stock shall be
converted will depend on the conversion price and conversion rate in effect on
the relevant conversion date.
The number of shares issuable on conversion of the Series B Preferred Stock
is subject to adjustment in the event of a stock split, stock dividend or
similar transaction involving the Common Stock. The Company will not be
22
<PAGE>
required to issue shares of Common Stock on any conversion to the extent that it
is prohibited from doing so by applicable law or the rules or regulations of the
AMEX or other exchange on which the Common Stock is then traded. In such event,
the holders may elect to have the Company either (i) redeem the Series B
Preferred Stock for cash at a redemption price per share equal to the product of
the number of shares of Common Stock then issuable upon the closing bid prices
of the Common Stock on the five trading days immediately preceding the
redemption election, (ii) rescind the conversion and retain the Series B
Preferred Stock, subject to the future right to convert on the terms described
herein or (iii) issue shares of Common Stock at a conversion price equal to the
average of the closing bid prices of the Common Stock for the five trading days
immediately preceding the date on which the Company receives the holders
election.
A registration statement on Form S-3 covering 8,820,000 shares of Common
Stock, some or all of which may be issuable upon conversion of the Series B
Preferred Stock, was declared effective by the Securities and Exchange
Commission on February 12, 1998.
As of April 10, 1998, the holders of the Series B Preferred Stock had
converted 2,000 shares of Series B Preferred Stock and accrued dividend thereon
into 336,658 shares of Common Stock at a conversion price of $.60 per share of
Common Stock.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following tables furnish information with respect to selected
consolidated financial data of the Company over the past five years. The Board
of Directors has recently determined either to sell or cease operations of its
two subsidiaries, LearnStar and IWN, effective March 31, 1998. The following
table has not been modified to reflect the possible sale or disposal of the
operations of LearnStar or IWN.
Statement of Operations Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 25,861 25,711 20,082 16,146 11,123
Total operating expenses 38,668 51,566 25,508 16,102 13,210
------------------------------------------------------------------------------------
Operating income (loss) (12,807) (25,855) (5,426) 44 (2,087)
Other income, net 350 1 1,409 412 457
------------------------------------------------------------------------------------
Earnings (loss) from continuing
operations (12,457) (25,854) (4,017) 456 (1,630)
Earnings (loss) from
discontinued operations -- (1,317) 69 251 329
Gain on sale of discontinued
operations -- 4,219 -- -- --
Income taxes -- -- -- -- --
------------------------------------------------------------------------------------
Net earnings (loss) $ (12,457) (22,952) (3,948) 707 (1,301)
====================================================================================
Basic and diluted net earnings
(loss) per share:
Continuing operations $ (0.55) (1.15) (0.19) 0.02 (0.10)
Discontinued operations -- 0.13 -- 0.01 0.02
------------------------------------------------------------------------------------
Net earnings (loss) $ (0.55) (1.02) (0.19) 0.03 (0.08)
==================================================================================
Weighted average equivalent
shares outstanding 22,696 22,568 20,301 21,124 17,135
==================================================================================
</TABLE>
Balance Sheet Data
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total current assets $ 8,390 10,655 26,009 18,844 23,102
Total assets $ 20,271 28,504 41,221 31,239 27,240
Total current liabilities $ 8,373 12,775 6,541 4,958 2,933
Total liabilities $ 11,545 18,282 7,770 5,782 3,587
Shareholders' equity $ 8,726 10,222 33,451 25,457 23,653
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
GENERAL
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected financial data and
the consolidated financial statements and notes thereto included elsewhere
herein.
The Company uses existing technology to develop, produce and distribute
two-way multi-player interactive live events and also produces and distributes
its own original interactive programs. The Company's principal sources of
revenue from distribution activities are derived from (a) service distribution
fees in the United States; (b) advertising fees, (c) sales of equipment to
foreign licensees; (d) service distribution fees and royalties from foreign
licensees; and (e) licensing fees from foreign and domestic licensees.
The Company has traditionally funded its operations through cash flow from
operations and sales of equity and various debt financings. Although the
Company should benefit from additional operational cash flow from the growth of
new Locations, there can be no assurances that this cash flow will be sufficient
to sustain the Company's operations. The Company has generated cash in the past
from the sale of licenses, however, this source is sporadic and dependent upon
many influences, including the Company's willingness to continue foreign
licensing activities. Another source of cash in recent years has been
advertising revenue. Although this revenue source has grown in prior years,
advertising revenues decreased in 1997 and the NTN Network remains a relatively
new media for advertisers. There can be no assurances that advertising revenue
will grow or that the interactive broadcasting medium will become an accepted
advertising venue.
On March 5, 1997, the Company announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board, and Daniel C. Downs resigned as President.
In addition, three other officers resigned or were terminated in connection with
the reorganization. The Company recorded substantial charges related to the
management reorganization and other items as more fully described below.
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
operations for the three years ended December 31, 1997. The Company believes
that inflation has not had a material effect on its operations to date.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
In March 1997, the Company announced a reorganization of its executive
management personnel as described under "Recent Developments" in Item 1 of the
Report, which information is incorporated herein by reference. Charges for
severance and other costs associated with the management reorganization recorded
in 1996 were $5,092,000. A charge for severance and other costs associated with
the management reorganization and other personnel changes was $4,998,000 in
1997, including accreted interest expense. The Company has recorded the
charges in 1996 and 1997 in accordance with Emerging Issues Task Force Issues
No. 94 - 3.
The Company incurred a net loss of $12,457,000 for the year ended December
31, 1997 compared to a net loss of $22,952,000 for the year ended December 31,
1996. The 1996 results include a net gain from the impact of discontinuing the
operations of the Company's former subsidiary, New World Computing, Inc., of
$2,902,000. The 1997 results include charges totaling $4,998,000 related to the
Reorganization and a $2,543,000 charge related to defective and obsolete
equipment.
For the year ended December 31, 1997, total revenues increased slightly
from $25,711,000 to $25,861,000, primarily as a result of modest growth in the
Company's primary services which offset a significant decrease in equipment
sales and reduced advertising revenue. Since the Company no longer enters into
sale and leaseback financing arrangements, equipment sales have become a minor
revenue source under current operations. Total revenue for the year ended
December 31, 1997, excluding Equipment Sales, net increased 6% over the prior
year.
25
<PAGE>
Network Services increased 1% from $20,029,000 to $20,245,000. The
increase is primarily due to a modest growth in the number of subscriber
locations contracting for services partially offset by a revised pricing
structure. Online/Internet Services increased 84% from $1,811,000 to $3,326,000
largely due to non-recurring revenue of $1,000,000 from AOL related to AOL's
termination of its prior contract with the Company, recognition of revenue for
production services related to a large development contract of $380,000 and a
modest increase in the basic services to online customers. Although the hours
of service has remained relatively constant, the pricing structure has continued
to evolve over the past year in a downward pattern. Advertising revenues
decreased 51% during the current year from $1,590,000 to $772,000 due to a
lesser number of commercial spots sold.
Equipment Sales, net of cost of sales, during the current year decreased
73% from $1,757,000 to $475,000. Equipment Sales in the past have included
large sale and leaseback transactions. In late 1996, the Company decided to no
longer enter into sale and leaseback financing arrangements. Currently,
equipment sales are predominantly due to sales to educational customers through
the LearnStar subsidiary. The Company has determined to sell or discontinue its
LearnStar operations. In either case, equipment sales to educational customers
are expected to decline in the future. Equipment sales in the past have also
included sales to foreign licensees which are subject to outside influences and
can occur unevenly throughout the year. Equipment sales have been highly
volatile in the past and are expected to remain so, as they are dependent on the
timing of expansion plans of the Company's foreign licensees.
Operating Expenses consist of direct incremental service costs directly
related to revenue sources. Operating Expenses increased 7% from $6,124,000 in
the prior year to $6,565,000 in the current year. The increase in costs is
primarily due to a modest expansion in the number of subscribers and online
services contracting for services, increased field service costs, net of a
reduction in the sales commissions.
Selling, General and Administrative Expenses increased 12% from $17,169,000
to $19,209,000. Included in Selling, General and Administrative Expenses for
1997 are charges for the management reorganization totaling $4,813,000 and costs
associated with the abandoned merger with GTECH Corporation of $376,000. The
1996 results include a charge of $840,000 related to a charge of severance and
a change in estimate for deferred advertising costs of $222,000. Stock-based
compensation charges made in compliance with SFAS No. 123 were $3,205,000 in
1997 compared to $1,910,000 in 1996. Exclusive of these charges, Selling,
General and Administrative Expenses decreased $3,142,000 or 22%. This decrease
is primarily due to trimming the workforce and cost controls implemented in
1997. Stock-based compensation charges result from the issuance, extensions or
modifications of warrants or options to non-employees and can vary from period
to period. Charges in 1997 include $1,450,000 that resulted from extension of
the exercise period and reductions in the exercise price of warrants owned by
certain former officers pursuant to the management reorganization.
Litigation, Legal and Professional expenses decreased from $6,484,000 in
1996 to $808,000 in 1997. The 1996 amount includes charges for the settlement
of litigation of approximately $4,400,000. Charges for litigation in 1997 were
approximately $1,000,000. Included in the charges for 1996 was $2,800,000 for
the settlement of certain litigation, for which a settlement agreement was
executed in 1997 for $1,450,000. The reduction in the settlement estimate of
$1,350,000 was recorded as a reduction of Litigation, Legal and Professional
Services in 1997. In the fourth quarter of 1997, the Company reduced the accrual
for the settlement and accordingly reduced its legal expense by $1,350,000 as a
result of the change in estimate related to the settlement.
Depreciation and Amortization Expense increased 134% from $2,265,000 to
$5,305,000 due to depreciation charges resulting from the buyout of equipment
lease commitments late in 1996. The Company now owns most of its Broadcast
equipment. Equipment Lease Expense decreased 86% from $6,837,000 to $936,000
also due to the buyout of equipment leases in late 1996.
Bad Debt expense relates to trade receivables for Network Services,
Online/Internet services and educational customers. Bad Debt expense decreased
21% from $1,840,000 in 1996 to $1,462,000 in 1997. Beginning in 1996, the
Company began to experience reliability problems with its equipment in NTN
Network Locations. These problems led to an increase in bad debt expense as
customers withheld payments. In 1997, the equipment problems continued but
improved, resulting in a lower bad debt expense in 1997.
Equipment Charges increased 3% from $2,478,000 in 1996 to $2,543,000 in
1997. Equipment Charges consist of charges for obsolescence and shrinkage of the
Company's stock of broadcast equipment. The Company performs periodic reviews of
its broadcast equipment. In connection with these reviews, the Company
determined that certain equipment primarily related to terminated sites had
become obsolete, defective, or could not be located.
26
<PAGE>
Other Income (Expense) increased from $1,000 in 1996 to $350,000 in 1997.
Interest Expense increased 103% from $390,000 to $793,000 largely due to
interest charges related to the repurchase of an the shares of IWN from
Symphony, interest paid to GTECH, and accretion of interest for the settlement
warrant liability and the liability for the management reorganization. In 1997,
the Company sold its interest in a building and recorded a gain of $905,000.
There was no tax expense in 1997 and 1996 primarily due to taxable losses and
offsetting temporary differences in both years.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
The Company incurred a net loss of $22,952,000 for the year ended December
31, 1996 compared to a net loss of $3,948,000 for the year ended December 31,
1995. The 1996 results include a gain on the sale of the Company's New World
subsidiary of $4,219,000, net of taxes of $16,000, and operating losses of
$1,317,000. In 1996, the Company treated New World as a discontinued operation.
In the second quarter, the Company reported an estimated tax expense of
$1,000,000. The change in the estimated tax provision resulted from an
analysis of the relevant tax laws and a valuation study performed to establish
the Company's minimum tax liability which analysis was completed in the fourth
quarter. The 1996 and 1995 results have been adjusted to reflect the sale of New
World in 1996 as a discontinued operation. The 1996 results also include other
significant charges for the resignation and termination of officers and layoffs
of other personnel, cancellation of notes receivable, loss on buyout of lease
commitments, a write-down of assets associated with business activities that the
Company has determined will no longer be pursued, a write-down for obsolete
inventory and equipment, and accrual for costs and expenses for the resolution
of litigation. In addition, the current year's results of operations include
charges related to the issuance of equity instruments pursuant to the guidelines
of SFAS No. 123. An analysis of revenue and operating costs follows a detailed
discussion of the significant other charges.
Charges for severance recorded related to terminations or resignations of
managers and other employees in 1996 amounted to $840,000. Most of the former
officers involved in the management reorganization in 1997, along with Mr.
Donald Klosterman, a director of NTN, were indebted to NTN for certain loans
that were made in previous years. By their terms these loans were cancelable
under certain circumstances in connection with the termination of the officer's
employment. Therefore, in conjunction with the management reorganization, all
outstanding notes receivable were canceled, and accordingly a charge for
$4,252,000 for principal and the related accrued interest was recorded in 1996.
Also included in the loans canceled were personal loans made to Alan Magerman, a
director, and Patrick J. Downs of approximately $185,000 ($145,000 of principal
and $40,000 of accrued interest) and $251,000 ($227,000 of principal and $24,000
of accrued interest), respectively.
In addition to the reorganization of executive personnel, the Company had
earlier announced the planned lay-offs of non-executive personnel. The planned
lay-offs were not due to a contraction in the Company's core businesses, but
rather were cost-cutting measures implemented to improve operations. Severance
payments for non-executive lay-offs will not affect future liquidity as the
majority of severance and other benefit payments were made in 1996.
From 1993 through June 30, 1996, the Company had entered into various sale
and leaseback arrangements with independent third parties. In the fourth
quarter of 1996, the Company completed a plan to repurchase equipment related to
the aforementioned lease arrangements. The Company recorded a charge of
approximately $2,007,000 related to the termination of these lease transactions.
To the extent possible, management does not intend to use the same sale and
leaseback arrangements as a method of financing in future periods. In addition,
management does not intend to purchase equipment to be held as inventory for
sale and leaseback arrangements. Accordingly, in the fourth quarter of 1996,
the Company reclassified all remaining inventory to Broadcast Equipment and
began recording depreciation charges on all assets placed in service.
Unamortized deferred revenues associated with prior sale-leaseback transactions
were netted against the cost of repurchasing the assets.
The Company performs periodic reviews of its inventory and broadcast
equipment. In connection with such a review, it was determined that
advancements in technology had rendered obsolete certain equipment and inventory
used by the Company. Accordingly, a charge of $2,478,000 was recorded in the
third quarter of 1996. This charge was not due to a contraction in the
Company's core businesses and will not effect future liquidity or results of
operations.
27
<PAGE>
In June, 1996, the Company entered into a Settlement Agreement to resolve
litigation filed by various shareholders of the Company. The case, originally
filed in 1993, sought class action status to recover unspecified damages for a
drop in the market price of the Company's Common Stock following an announcement
that an anticipated agreement under which the Company would sell certain
equipment and services to an arm of the Mexican government may be put out to
bid.
To settle the case, a settlement fund was established consisting of
$400,000 in cash plus 565,000 warrants to purchase the Common Stock of the
Company ("Settlement Warrants"). Each Settlement Warrant has a term of three
years from February 18, 1998. The Settlement Warrants were issued on February
18, 1998 and entitle the holder of a Settlement Warrant to purchase a share of
Common Stock of the Company at a price of $0.96. During the period from
February 18, 2000 to February 18, 2001, the holders of Settlement Warrants have
the right, but not the obligation, to put the Settlement Warrants to the Company
for repurchase at a price of $3.25 per Settlement Warrant (the "Put Right"),
provided, however, that this Put Right shall expire, if at any time after
February 18, 1998 the closing price per share of the Company's Common Stock on
the American Stock Exchange is more than $4.22 on any seven trading days,
whether consecutive or not. Upon expiration of the Put Right, the Company shall
have no further obligation to repurchase the Settlement Warrants. In no event
shall the Company have any obligation to repurchase its Common Stock.
On April 18, 1995, a second class action lawsuit was filed in United States
District Court. The complaint alleges violations of federal securities laws
based on 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
believes there is no basis for the claimants' allegations. Nonetheless, the
Company, to avoid the expense and disruption of protracted litigation, has been
attempting to settle the case. The Company estimated and recorded a charge of
$2,800,000 in 1996 related to this suit. The case was settled in 1997.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS No. 123"), effective for fiscal years beginning after
December 31, 1995. SFAS No. 123 establishes the fair value method of accounting
for stock-based compensation arrangements, under which compensation cost is
determined using the fair value of the stock option at the grant date and the
number of options vested, and is recognized over the period in which the related
services are rendered. The Company chose to continue using the intrinsic value
based method for issuances to employees, as allowed by SFAS No. 123.
Under SFAS No. 123, transactions involving non-employees for which issuance
of equity instruments for goods or services are to be recorded using the fair
value method. The fair value method states that the amount recorded is to be
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. In 1996, the
Company issued a total of 616,000 warrants to non-employees for the purchase of
the Company's Common Stock and recorded a charge of $1,910,000 related to the
issuance of those equity instruments.
In December 1995, the Company entered into an agreement ("Agreement") with
Symphony LLC ("Symphony"), an unaffiliated company, whereby Symphony agreed to
purchase a 10% interest in IWN for $350,000 and would make capital contributions
totaling $2,650,000 to IWN L.P., a limited partnership of which IWN is the
general partner.
The Agreement included a provision whereby Symphony had the option to put
("IWN Put Option") its partnership interest and its shares of IWN to NTN
commencing April 1, 1997 through December 1, 1997 for certain consideration.
Accordingly, the Company included the accounts and results of operations of IWN
L.P. in the Company's consolidated financial statements for the year ended
December 31, 1996. On April 8, 1997, Symphony exercised the IWN Put Option. At
December 31, 1996, the aggregate obligation, assuming the Put Option would be
exercised, was $3,045,000. This amount was recorded as a short-term borrowing in
the consolidated financial statements as of December 31, 1996. Operating losses
for IWN L.P. aggregated $2,961,000 in 1996.
For the year ended December 31, 1996, total revenues increased 28% from
$20,082,000 to $25,711,000. This increase is the result of growth in the
Company's principal revenue activities, Network Services and Online/Internet
Services.
28
<PAGE>
Network Services increased 29% from $15,559,000 to $20,029,000. The
increase is primarily due to an expansion in the number of subscriber locations
contracting for services. Online/Internet Services increased 192% from $620,000
to $1,811,000 due to an increase in services to online customers and a growth in
consumer revenue hours. In addition, the Company has increased the number of
programs available through this distribution platform. Advertising revenues
related to both Network Services and Online/Internet Services increased 41% from
$1,128,000 to $1,590,000 primarily due to an increased number of commercial
spots sold.
Equipment Sales decreased 3% from $1,803,000 to $1,757,000. Equipment
sales are predominantly related to foreign licensees which are subject to
outside influences and can occur at random times throughout the year and sale
and leaseback arrangements. Equipment sales have been highly volatile in the
past and are expected to remain so, as they are dependent upon the timing of
expansion plans of the Company's foreign licensees. In late 1996, the Company
decided to no longer enter into sale and leaseback transactions.
Operating Expenses consist of incremental service costs directly related to
revenues. Operating Expenses rose from $3,799,000 to $6,124,000, an increase of
61%. The increase is largely attributable to the expansion in the number of
subscribers and on-line services contracting for services and increased service
and freight costs associated with increasing equipment reliability issues.
Selling, General and Administrative expenses increased 45% from $11,838,000
to $17,169,000. Included in Selling, General And Administrative expenses are
several significant charges incurred in 1996. The significant charges include
an accrual of $1,910,000 pursuant to SFAS No. 123 related to the issuance of
warrants; an accrual of severance benefits to certain officers and other
employees of $840,000; additional marketing expenses incurred during the period
that shipments of Playmakers(R) were suspended pending approval from the FCC of
$350,000; a charge of $222,000 related to a change in estimate for deferred
advertising costs; and approximately $2,900,000 of costs associated with the
development of a product at the IWN L.P. subsidiary. Prior to 1996, IWN L.P.
was an unconsolidated affiliate.
Litigation, Legal and Professional expenses increased 277% from $1,720,000
to $6,484,000 due to charges and legal fees associated with settling various
litigation and on-going operations. Included in Litigation, Legal and
Professional services in 1996 are charges of approximately $4,400,000 for
settlement of existing lawsuits. Equipment lease expense increased 73% from
$3,957,000 to $6,837,000 due to the increase in equipment under lease agreements
for the majority of the year and the buyout in late 1996 of certain lease
obligations resulting in a charge of $2,007,000. Depreciation and Amortization
expense increased 110% from $1,078,000 to $2,265,000 due to the higher base of
depreciable assets that resulted from the buyout.
Bad Debt expense relates to trade receivables for Network Services,
Online/Internet services and educational customers. Bad Debt expense increased
185% from $645,000 in 1995 to $1,840,000 in 1996. Beginning in 1996, the
Company began to experience reliability problems with its equipment in NTN
Network Locations. These problems led to an increase in bad debt expense as
customers withheld payments.
Equipment Charges increased 148% from $1,000,000 in 1995 to $2,478,000 in
1996. Equipment Charges consist of charges for obsolescence and shrinkage of
its stock of broadcast equipment. The Company performs periodic reviews of its
broadcast equipment. In connection with such a review, it was determined that
certain equipment used by the Company had become obsolete or defective.
Accordingly, a charge of $2,478,000 was recorded in 1996. The increase is
associated with the growth of the number of customers and the amount of
equipment to be replaced.
In connection with the management reorganization, the Company canceled, as
of December 31, 1996, certain notes receivable due from executive officers
resulting in a charge of $4,252,000. Other Charges of $721,000 include a
write-down of assets associated with business activities that the Company has
determined will no longer be pursued.
Other Income (Expense) decreased from $1,409,000 in 1995 to $1,000 in 1996.
The 1996 results include accreted interest expense associated with the
Settlement Warrants of $57,000. The 1995 results include reimbursement of
previously incurred legal expenses from the Company's insurance carrier of
approximately $1,000,000. There was no tax expense in 1996 and 1995 primarily
due to taxable losses and offsetting temporary differences in both years.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Following is a discussion of the Company's recent and future sources of and
demands on liquidity, as well as an analysis of liquidity levels. Expenditures
have exceeded revenues from operations through most of the Company's history and
may do so in the future. To reduce operating costs, the Company has determined
either to sell or cease operations of its two subsidiaries, LearnStar and IWN as
of March 31, 1998. The Company plans to fund any future operating deficiencies
from its existing cash and, if necessary, from other sources, as discussed
below.
In 1997, the Company reported a loss of $12,457,000. The 1997 results
include charges totaling $4,998,000 related to the management reorganization and
a $2,543,000 charge related to obsolete and defective equipment.
In 1996, the Company reported a loss of $22,952,000. The 1996 results
include substantial charges for the Reorganization and layoffs of other
personnel, cancellation of notes receivable, loss on buyout of lease
obligations, a write-down of assets associated with business activities that the
Company has determined will no longer be pursued, write-down for obsolete
inventory and equipment, and accrual for legal and litigation settlements. In
addition, the year included charges related to the issuance of equity
instruments as recorded under the guidelines of SFAS No. 123. Many of these are
non-cash related charges which had little impact on future cash flow. None of
the non-cash charges are due to contractions in the core businesses of the
Company, and therefore are not expected to effect future liquidity or results of
operations.
Charges for the management reorganization and potential liabilities related
to settlement of litigation will generally be paid over a period of time in
excess of one year, and can, in some cases be settled with the issuance of stock
instead of using cash. The management reorganization and lay-offs of other
employees were not due to a contraction in the Company's core businesses, but
rather were cost-cutting measures being implemented to improve operations. These
liabilities, depending on the extent and timing, could affect future liquidity,
but are expected to be funded from on-going operations.
Total assets decreased 29% from $28,504,000 to $20,271,000 at December 31,
1996 to December 31, 1997. The decrease in assets is primarily due to operating
losses, and repayment of debt, which was offset by net proceeds of Series B
Preferred Stock issuances. Cash decreased from $6,579,000 to $4,764,000 at
December 31, 1997 due primarily to $1,944,000 used for payments to former
officers pursuant to the management reorganization, net of cash proceeds from
the issuance of Series B Preferred Stock of $6,707,000. From the proceeds of the
Series B Preferred Stock, the Company repaid its loan to GTECH Corporation of
$3,700,000. The Company also expended $4,720,000 to develop new software and
purchase capital assets.
Accounts Receivable - Trade increased 34% from $2,031,000 at December 31,
1996 to $2,724,000 at December 31, 1997. Receivables from Network Services
customers experienced some ongoing settlement issues with customers due to the
technical problems experienced in 1996 and 1997. In addition, unrelated to the
technical problems, the Company has experienced reduced payments from one of the
Company's national accounts. The Company has revamped its collection function in
response to management's ongoing monitoring of credit risk. In addition, the
Company wrote-off a substantial number of uncollectable accounts in 1997.
Prepaid expenses, other assets and retirement plan assets decreased from
$5,192,000 to $902,000 due to termination of the executive retirement plan in
connection with the management reorganization and the sale of the Company's
interest in The Campus. There were no accrued benefits due to employees under
the retirement plan.
Broadcast Equipment and Fixed Assets decreased from $10,103,000 to
$7,973,000 as the result of depreciation of assets and charges for obsolete,
defective and unlocatable equipment of $2,543,000, net of additions for new
Network Services subscribers.
Total liabilities decreased 37% from $18,282,000 to $11,545,000 from
December 31, 1996 to December 31, 1997. The 74% decrease in Accounts Payable and
Accrued Expenses from $5,758,000 to $3,307,000 reflects the timing of payments
in 1996 and the reduction in general expenses in 1997. Accrual for Litigation
Costs (long and short-term) decreased from $2,800,000 to $1,913,000 as the
Company continued to settle legal issues in 1997. In 1996, a charge of
$2,800,000 was recorded for the estimated settlement related to pending
litigation. In the fourth quarter of 1997, the Company reduced the accrual for
the settlement and accordingly reduced Accrual for Litigation Costs by
$1,350,000 as a result in the change in estimate related to the settlement.
Accrual for Management Severance (long and short-term) increased from $840,000
to $2,247,000 due to charges recorded due to the management reorganization, net
of payments to former officers. Short-term borrowings of $5,060,000 at December
31, 1996 which consisted of the IWN Put Option and the loan associated with the
retirement plan, were paid in full in 1997. In June 1997, the Company borrowed
$3,700,000 from GTECH Corp, with whom it had agreed in principle to enter into a
30
<PAGE>
merger agreement. The funds were used to pay Symphony for its interest in IWN.
Short-term and long-term deferred revenues increased 25% from $1,254,000 to
$1,567,000. Deferred revenues represent gains on sales and leaseback
transactions and software development contracts for which revenue is deferred
pending the outcome of certain events.
The Company has working capital of $17,000 at December 31, 1997, compared
to a deficit of $2,120,000 at December 31, 1996. This is primarily the result
of the issuance of Series B Preferred Stock, net of the use of cash to fund
operations and charges and activity related to the management reorganization.
Revenues from the principal business activities, Network Services,
Online/Internet Services, and Advertising grew 4% in the year ended December 31,
1997 compared to the prior year. The Company is expected to 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.
As a result of the working capital ratio and other factors, the Company is
in default of certain covenants of certain leasing arrangements. The leasing
arrangements provide for payments from certain customers to be paid to a lockbox
maintained by an independent bank. The Company has agreed to direct the
payments of other customers to the lockboxes each month to provide the lessors
with further security. The excess funds are returned to the Company each month
following the lease payment. In return, the lessors have agreed not to pursue
their contractual rights to accelerate payments and other rights in the event of
default. There can be no assurance, however, that they will not do so in the
future, if the Company fails to satisfy all of its obligations under the leasing
arrangements.
The Company had $4,764,000 of cash available at December 31, 1997. In
1996, the Company completed a plan to repurchase equipment related to certain
lease obligations. This transaction has resulted in improved cash flow due to
the elimination of the lease payments. Further, following the management
reorganization, the Company implemented an organization and strategic
restructuring plan aimed at reducing expenses, which included a workforce
reduction and focusing on immediate goals designed to generate immediate
results.
The Company has both short-term and long-term needs for cash outside of its
normal operating needs. In recent years, the Company has experienced technical
problems related to its Playmaker(R) device. Further, the Company has also
experienced a high rate of customers discontinuing service. A task force has
been assembled to review the issue and to make recommendations to improve
Playmaker(R) performance. Based on current data, the Company believes that any
required changes can be affected within the next year. The costs are estimated
to be less than $1,000,000 and are expected to be funded through operational
cash flow. The Company anticipates that the number of customers discontinuing
service due to technical problems may revert to historical levels once the
Playmaker(R) performance has been improved, although no assurances can be given
that a solution can be reached without undue delay or cost. If the technical
problems persist for an extended period of time, it may negatively impact the
Company's cash flow from operations.
As noted earlier, the Company completed a reorganization of its management
team that requires the payment to former officers over the next three years.
These payments include contractual amounts under Resignation Agreements and
payment for unused vacation leave. In March 1998, the Company and three of the
former officers agreed to an amendment of Resignation Agreements entered into
pursuant to the management reorganization. The Agreements were modified to
extend the payment term an additional year to December 31, 2000 and provided for
reductions of amounts to be paid in 1998 and 1999 totaling $272,000 and
$355,000, respectively. All obligations owing to former officers are expected to
be funded through operations. The modification also provides an option to the
Company to settle all amounts due pursuant to the in shares of Common Stock. The
option period commenced March 9, 1998 and extends to June 18, 1998. The number
of shares of Common Stock to be issued will be 66% of the number of shares
determined by dividing the present value of the amount then owing using a
discount rate of 5% by the average closing price of the Common Stock for the ten
trading days prior to the third business day before the notice of the exercise
of the option. Should the conversion option be exercised, the
31
<PAGE>
Company agrees to file a Registration Statement on behalf of the former officers
to register the shares to be issued within 20 days of providing notice of its
intent to exercise its option. The number of shares of Common Stock to be issued
shall be 66% of the number of shares determined by dividing the present value of
the amount then owing using a discount rate of 5% by the average closing price
of the Common Stock for the ten trading days prior to the third business day
before the notice of the exercise of the option.
The Company has conducted an analysis of its external and internal
operating systems in conjunction with the "Year 2000" issue. The Year 2000
issue relates to the ability of computer software programs to recognize the
arrival of the year 2000 because of a common software design feature that
describes the current year by only its last two digits. The Company has
determined that its operations will handle Year 2000 compliance correctly
assuming that the operating systems upon which they run have been updated to
comply. Many of the Company's programs obtain date information directly from
the computer's operating systems. Thus the current versions of the Company's
programs are as "compliant" as the operating systems upon which they run.
Microsoft Corporation, which provides the basic operating system on which the
Company operates, has stated that their products will continue to operate
properly into the twenty-first century. Although the Company does not believe
there are any material operational issues or costs associated with preparing its
internal systems for the year 2000, there can be no assurances that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal systems.
The Company has several lawsuits pending. In early 1998, the Company
completed one settlement by establishing a settlement fund consisting of
$400,000 in cash and 565,000 warrants to purchase the Common Stock of the
Company and received Court approval to settle a second for $250,000 in cash and
either cash or stock valued at $1,200,000. These settlements minimize the
amount of cash used and provide for possible future inflow of cash if the
warrants are exercised.
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.
In March 1998, the Company entered into a letter of intent ("LOI") to sell
85% of its interest in LearnStar to NewStar Learning Systems ("NewStar"), a
company in which Sally A. Zoll, President of LearnStar, is a shareholder. Under
the LOI, NewStar would pay $1,200,000 for 85% of the Common Stock of LearnStar
and the Company would retain the LearnStar accounts receivable of approximately
$800,000 as of February 28, 1998. Pending a closing of the transaction, which
might occur as late as September 30, 1998, NewStar would be responsible for
providing operating funds to LearnStar. The Company is currently negotiating a
definitive agreement, however the terms of the sale have not been finalized.
There can no assurance that a definitive agreement will be executed or that
LearnStar will be sold on similar terms should the proposed transaction not
close.
On April 1, 1998, the Company reached an agreement in principle with
Omnigon, a California corporation, to sell 85% of the equity of IWN to Omnigon
on or before May 31, 1998. It is intended that Omnigon pay $2,400,000 at
closing for the 85% 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 82.5% of the IWN equity. The parties are currently
negotiating the terms of a definitive agreement for this transaction and no
assurance can be given that the proposed transaction will be completed. Omnigon
paid $100,000 in April 1998 and has agreed to pay $100,000 in May 1998 for the
option to acquire IWN on the foregoing terms. Any such payment made will be non-
refundable and will not be applied to the purchase price of the IWN shares. The
Company has agreed that IWN shall use any such payment from Omnigon to pay its
operating expenses prior to a closing or cancellation of the proposed
transaction.
The Company believes that its existing cash balances, cash flow from
operations, changes in payment terms for long-term contracts and the
concentration of its efforts on its key business activities in the coming year
will be adequate to cover its capital and other needs for 1998. In the past,
the Company has been able to augment its cash flow from operations by periodic
sales of Common Stock and other equity instruments, 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 may negotiate for additional
lease and debt financing and
32
<PAGE>
additional foreign licensing, however, the extent to which any of the foregoing
may be accomplished, if at all, cannot be predicted at this time.
The Company has certain lawsuits pending as previously described in "Legal
Proceedings." The Company intends to vigorously defend against claimants
allegations, but to avoid the expense and disruption of protracted litigation
has settled certain cases and may continue to attempt to settle others. There
can be no assurances that the Company will be successful in settling or
defending such actions or that any or all actions would be decided in favor of
the Company or that the continued cost of defending and prosecuting these
actions will not have a material adverse effect on the Company's financial
position or results of operations.
MARKETING AND EXPANSION PLAN
The Company's plan to reach profitability includes the following elements:
(i) reorganizing and expanding the sales staff; (ii) increasing advertising
sales; (iii) reducing operating expenses and streamlining its operations; (iv)
and upgrading and enhancing information systems.
Throughout the Company's history, the principal component of its revenues
has been derived from Network Services to Locations in the hospitality industry
(restaurants, taverns and hotels). Management believes that this component will
continue to grow in total revenues within the next year, but may decline as a
percentage of the Company's total revenues as other revenue streams increase at
a higher rate. To increase the number of Locations, the Company has taken
several steps. It reorganized its sales staff in late 1997 in order to provide
for growth in 1998. The Company has terminated many of the agreements with
independent representatives and will utilize its own staff in the major markets
for sales and marketing efforts. In March 1998, the Company entered into an
agreement with Datatec Systems, Inc. to provide installation and repair services
to its NTN Network customers throughout the United States. In 1998, the Company
will continue to attend national and regional hospitality industry trade shows
and has maintained its budget for advertising in trade publications.
A source of growth in 1997 was from Online/Internet Services revenue. The
Company will continue to provide additional programs to current customers in an
effort to increase consumer revenue hours. In addition, the Company will
continue to seek new outlets for its programs and also provide production
services for a fee.
In 1997, the Company enhanced its graphics capabilities but failed to
obtain additional advertising revenues from national advertisers. The Company
has hired an independent consultant to sell commercial spots on the NTN Network
as well for the Company's Online/Internet programs.
Management believes that another market segment with potential for long-
term growth is the market for interactive television services in the home. The
Company expects to remain a provider of specialized programming to networks
operated by other organizations, such as cable networks, computer on-line
systems and wireless or telephone-based communication networks. The Company
expects to deliver the video portion of its programming directly to cable
television systems, with viewer responses processed using equipment developed by
others. In light of this, the Company expects that any significant revenues
from home use of the Company's services will be dependent upon an expansion in
the overall home viewer market for home interactive information and
entertainment services. The Company maintains working relationships with major
providers of home interactive information and entertainment services. As the
market for home interactive information and entertainment services expands, the
Company will seek to capitalize on this market. Revenues to date from in-home
programming have not been significant. No assurance can be given that plans to
expand into the interactive television market will be successful.
Although there can be no assurance that the Company will prove to be
successful in implementing its marketing and expansion plan, management believes
that the Company's prospects have improved as a result of recent growth of its
core business activities, changes in its sales and marketing programs and
increased customer service programs.
33
<PAGE>
OTHER
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." This Statement sets standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purposes financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. This Statement requires only additional informational disclosures and
is effective for the Company's fiscal year ending December 31, 1998.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and require that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This Statement will be effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This Statement
requires only additional informational disclosures and is effective for the
Company's fiscal year ending December 31, 1998.
34
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------
See Index to Consolidated Financial Statements and Schedule on page F-1,
for a listing of the Consolidated Financial Statements and Schedule filed with
this report, which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following table sets forth as of December 31, 1997 certain information
regarding the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Current
Director Term
Name Age Position(s) Held Since Expires
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gerald Sokol, Jr. 35 President, Chief Executive Officer,
Chief Financial Officer and Acting
Chairman of the Board
1997 2000
Edward C. Frazier (2) 45 Director 1997 2000
Robert M. Bennett (2) 71 Director 1996 1998
Donald C. Klosterman(1) 68 Director 1985 1999
Esther L. Rodriguez (1) 56 Director 1997 1998
Stanley B. Kinsey (1) 44 Director 1997 1999
Geoffrey D. Labat 38 Chief Operating Officer
Daniel F. Purner 35 Vice President - Business Development
V. Tyrone Lam 36 Vice President and General Manager -
NTN Network
F. Kevin Loughran 49 Vice President, Secretary and
General Counsel
</TABLE>
---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee
The following biographical information is furnished with respect to the
directors and executive officers:
Gerald Sokol, Jr. joined the Company in July 1996 as Chief Financial
Officer. In November 1996, he became Chief Operating Officer and in February
1997, he was promoted to President. In April 1997, he was appointed to the
Board of Directors. In September 1997, he relinquished his duties as Chief
Operating Officer to Mr. Labat. In October 1997, he became Chief Executive
Officer. Prior to joining the Company, Mr. Sokol was Vice President of Finance
and Treasurer of TeleCommunications, Inc. since 1987.
35
<PAGE>
Edward C. Frazier has been a director since August 1996 and served as
Chairman of the Board from March 1997 to February 1998. In February 1998, Mr.
Frazier resigned as Chairman of the Board, but remains a Director. From 1988
until 1996, Mr. Frazier was the President and Chief Executive Officer of Liberty
Sports. In August 1996, Mr. Frazier founded Frazier/King Media, a media
property holding company and consulting firm.
Robert M. Bennett has been a director since August 1996. From 1991 to the
present, Mr. Bennett has been the President of Trans Atlantic Entertainment.
Since 1989, Mr. Bennett has been the President of Bennett Productions, Inc.
Donald C. Klosterman has been a director of the Company (or its
predecessor) since 1985. He served as the President of Pacific Casino
Management, Inglewood, California from June 1994 to November 1995. Mr.
Klosterman served as Chairman of the Board of the Company from 1985 until April
1994. From 1990 until March 1994, he also has acted as a consultant to the
Company. Mr. Klosterman is a director of Aldila Shaft Manufacturer.
Esther L. Rodriguez was appointed as a director of NTN in September 1997.
She retired as a Vice President of Next Level Systems, Inc. (formerly General
Instrument), a leading telecommunications company, in November 1996 after having
served in various executive capacities since joining General Instrument in 1987.
For the two years prior to her retirement, Ms. Rodriguez served as head of
worldwide business development and sales teams for private commercial business
and educational network systems. Following her retirement, she founded and has
served as Chief Executive Officer of Rodriguez Consulting Group, a management
consulting firm. Ms. Rodriguez has over 25 years' experience in general
management, business development and marketing, including 17 years' experience
in worldwide telecommunications.
Stanley B. Kinsey was appointed as a director in November 1997. Mr. Kinsey
was the Chief Executive Officer and co-founder of IWERKS Entertainment, a
leading high-technology entertainment company from 1985 to 1995. Prior to 1985,
Mr. Kinsey was the Senior Vice President of Operations and New Technologies for
the Walt Disney Studios.
Geoffrey D. Labat has served as Chief Operating Officer since September 5,
1997. Prior to joining NTN as Chief Technology Officer in May 1997, from July
1995 to May 1997, Mr. Labat served as Regional Director, Engineering/Operations
of GST Telecommunications, a public competitive local exchange
telecommunications carrier, deploying fiber optic communication networks in the
southwest United States. From February 1993 to June 1995, Mr. Labat was
Director of Telecommunications for Autotote Corporation, a provider of wagering
systems, wagering facility management, lottery systems and satellite television
broadcast services. From August 1990 to February 1993, Mr. Labat served as
Director of Operations/Engineering for Telecom Broadcasting. Mr. Labat is a 19-
year veteran of the telecommunications/broadcast television industry,
experienced in the design, implementation, and management of
telecommunications/broadcast networks worldwide.
Daniel F. Purner has served as Vice President of Business Development since
September 1997. A 12-year veteran of NTN, Mr. Purner was previously Vice
President of Production, responsible for in-house development and production for
all NTN interactive products. From 1990 to 1993, he managed NTN's involvement
in the United Kingdom.
V. Tyrone Lam has served as Vice President and General Manager of the NTN
Network since September 1997. Prior to this he served as Associate Vice
President of Marketing from February 1997. Mr. Lam joined NTN in December 1994
in a marketing position. From April 1992 to December 1994, Mr. Lam managed the
interactive television sports and games development for the EON Corporation and
has held other sales and marketing positions in the computer software industry.
F. Kevin Loughran joined the Company in October 1997. Prior to joining NTN,
he was engaged in the private practice of law, specializing in banking, and
commercial law since January 1993. Prior to this, Mr. Loughran served as
Executive Vice President and General Counsel of Mercantile National Bank from
1990 to 1993 and as Senior Vice President and Assistant General Counsel of
Security Pacific National Bank from 1988 to 1990.
36
<PAGE>
Section 16(A) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Under the federal securities laws, the Company's directors and officers and
any persons holding more than 10% of the Company's Common Stock are required to
report their ownership of the Company's Common Stock and any changes in that
ownership to the Securities and Exchange Commission. Specific due dates for
these reports have been established, and the Company is required to report any
failure to file by these dates. During 1997, its directors, officers and 10%
stockholders satisfied all of these filing requirements, except as follows:
Upon becoming executive officers of the Company, Messrs. Labat, Lam, Purner
and Loughran did not file appropriate documents as required. In each case, the
officer involved failed to notify appropriate persons at NTN responsible for
assisting officers and directors in meeting their Section 16 reporting
obligations. In making these statements, the Company has relied upon a review
of Forms 3, 4 and 5 and amendments thereto furnished to the Company pursuant to
Rule 16a-3 under the Exchange Act during fiscal 1997 and the written
representations of its directors and officers.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Summary Compensation Table
The following Summary Compensation Table shows the compensation paid or
accrued as of each of the last three fiscal years to all individuals who served
as the Chief Executive Officer of the Company during 1997 and to the two other
most highly compensated executive officers of the Company who were serving as
executive officers at the end of fiscal year 1997 whose total annual salary and
bonus exceeded $100,000 (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
- -------------------------------------------------------------------------------------- -------------------
Other Annual Securities
Name and Principal Position Year Salary (1) Bonus Compensation Underlying Option
- -------------------------------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C>
Gerald Sokol Jr. (3)
President, Chief Executive
Officer and Chief Financial
Officer 1997 $ 240,662 $335,500 (4) $ 16,749 (5) 600,000
1996 87,423 -- 14,480 (6) 875,000
1995 -- -- -- --
Daniel F. Purner
Vice President Business
Development 1997 104,085 (10) -- 4,749 (7) 175,000
1996 79,073 -- 4,319 85,000
1995 82,400 -- 3,978 12,500
V. Tyrone Lam
Vice President and General
Manager NTN Network 1997 105,367 (10) -- 4,575 (7) 165,000
1996 75,177 -- 4,319 45,000
1995 53,846 -- 3,255 5,000
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Patrick J. Downs (2)
Chief Executive Officer 1997 -- -- 345,963 (8) --
1996 192,885 -- 953,710 (9) 200,000
1995 192,044 -- -- 200,000
</TABLE>
- ----------------
(1) Includes amounts, if any, deferred under the Company's 401(k) Plan and
Deferred Compensation Plan.
(2) In March 1997, NTN announced a reorganization of its executive management
personnel in which Patrick J. Downs resigned as Chairman of the Board and
Chief Executive Officer of NTN. Mr. Downs continued to serve on NTN's
Board of Directors until August 27, 1997 at which date he resigned from
the Board of Directors.
(3) Mr. Sokol joined the Company in July 1996. No data is available for prior
years.
(4) Includes a $150,000 home loan made to Mr. Sokol in August 1996, which in
accordance with its terms was forgiven in March 1997, and bonuses
aggregating $185,500.
(5) Represents group insurance premiums and Board of Directors fees of $12,000,
which were approved by the Board to be paid in shares of stock in December
1997. A total of 10,667 shares of stock will be issued to Mr. Sokol in
1998.
(6) Represents moving expenses paid or reimbursed by NTN in connection with Mr.
Sokol's joining NTN.
(7) Represents group medical insurance premiums.
(8) In March 1997, NTN entered into a Resignation and General Release
Agreements (the "Resignation Agreements") with the Named Executive Officer
indicated for the purpose of settling his prior employment agreements and
other contracts and arrangements with NTN. See "Termination of Employment
and Change in Control Arrangements." Pursuant to the Resignation
Agreements, the former executive agreed to enter into a Consulting
Agreements with NTN, in consideration of which NTN agreed to honor certain
provisions of the prior employment agreement of the Named Executive Officer
which called for NTN's payment of the former Named Executives Officer's
annual salary for the remaining terms of such employment agreements. This
amounts represent those payments, along with payments for accrued vacation,
and deferred compensation and insurance premiums that NTN paid.
38
<PAGE>
(9) The former Named Executive Officer was indebted to NTN for prior loans
extended to him by NTN in the amount shown in the table. In accordance with
the original terms of the loan, pursuant to the Resignation Agreement
described in note 8, NTN agreed to cancel such indebtedness as of December
31, 1996, along with the accrued interest.
(10) Mr. Purner and Mr. Lam were employees of the Company in previous years but
were not Executive Officers until 1997.
Stock Option Grants
The following table contains information concerning grants of stock options
during fiscal 1997 with respect to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term (1)
- ------------------------------------------------------------------------------------------ --------------------------------
% of Total
Number of Options
Shares Granted to
Underlying Employees In Exercise Expiration
Name Options Granted Fiscal Year Price Date 5% 10%
- ------------------------------------------------------------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Sokol, Jr. 300,000 (2) 12.6% $2.81 3/11/07 $530,158 $1,343,525
300,000 (3) 12.6% 2.81 3/11/07 530,158 1,343,525
Daniel F. Purner 75,000 (4) 3.2% 3.25 11/4/06 153,293 388,475
100,000 (4) 4.2% 2.00 11/3/07 125,779 318,748
V. Tyrone Lam 65,000 (4) 2.7% 3.25 11/4/06 132,854 336,678
100,000 (4) 4.2% 2.00 11/3/07 125,779 318,748
Patrick J. Downs -- -- -- -- -- --
</TABLE>
39
<PAGE>
- -------------------
(1) The 5% and 10% assumed rates of appreciation are prescribed by the rules
and regulations of the Securities and Exchange Commission and do not
represent management's estimate or projection of future value of the Common
Stock.
(2) Represents an option granted under NTN's 1995 Option Plan which was
immediately exercisable upon grant. The original exercise price of the
option of $4.50 per share was reduced in May 1997 to the exercise price
shown in the table.
(3) Represents an option granted under NTN's 1995 Option Plan which is to
become exercisable on February 18, 1999. The original exercise price of
the option of $4.50 per share was reduced in May 1997 to the exercise price
shown in the table.
(4) Represents options granted under NTN's 1995 Option Plan which become
exercisable in three equal installments on each of the first, second and
third anniversaries of the dates of grant.
40
<PAGE>
STOCK OPTION EXERCISES AND OPTION VALUES
The following table contains information concerning stock options exercised
during 1997 and stock options which were unexercised at the end of fiscal 1997
with respect to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Options At Fiscal Year-End Options at Fiscal Year-End (1)
---------------------------------------------------------------------------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Sokol, Jr. -- -- 1,052,500 422,500 *(2) *(2)
Daniel F. Purner 3,000 $5,070 50,333 238,167 * *
V. Tyrone Lam -- -- 17,000 198,000 * *
Patrick J. Downs -- -- 750,000 -- * *
</TABLE>
- ---------------------
(1) Represents the amount by which the aggregate market price on December 31,
1997 of the shares of the Company's Common Stock subject to such options
exceeded the respective exercise prices of such options. An asterisk
denotes that the respective exercise prices of the options shown exceeded
the market price of the underlying shares of Common Stock at December 31,
1997.
(2) Based on the exercise price of the options as amended in May 1997.
DIRECTOR COMPENSATION
Directors currently receive compensation of $2,000 per month for their
services as directors. In December 1997, the Board elected to pay the 1997 fees
and the 1998 fees in shares of treasury stock. Each director who serves in 1997
is to be issued 16,000 shares of stock, except Mr. Sokol, who will receive
10,667 shares for serving a partial year. For 1998, each current director will
receive 21,333 shares of Common Stock, with the understanding that should they
fail to serve the entire year, they would repay to the Company in cash or shares
of the Common Stock the unearned portion of their fees. Directors are also
eligible for the grant of options or warrants to purchase Common Stock from time
to time for services in their capacity as directors.
Upon joining the Board in August 1996, Messrs. Bennett and Frazier were
granted options to purchase 100,000 shares each at an exercise price of $5.00
per share. These options became vested as to one-third of the shares covered
thereby on the first anniversary of grant date and will become vested and
exercisable as to the balance of the covered shares in two equal installments on
the second and third anniversaries of the grant date, subject to Messrs. Bennett
and Frazier remaining as directors. The options were amended in May 1997 to
reduce their exercise prices to $2.81 per share and to provide for immediate
vesting and exercisability in the event of a "Change of Control Event" as
defined.
41
<PAGE>
Upon joining the Board in September 1997, Ms. Rodriguez was granted options
to purchase 100,000 shares of Common Stock at an exercise price of $2.4375 per
share. Ms. Rodriguez's options will become vested and exercisable in three
equal installments on the first, second and third anniversaries of the grant
date, subject to Ms. Rodriguez remaining as a director. The options provide for
immediate vesting in full in the event of a "Change of Control Event" as
defined.
Upon joining the Board in November 1997, Mr. Kinsey was granted options to
purchase 100,000 shares of Common Stock at an exercise price of $1.875 per
share. Mr. Kinsey's options will become vested and exercisable in three equal
installments on the first, second and third anniversaries of the grant date,
subject to Mr. Kinsey remaining as a director. The options provide for
immediate vesting in full in the event of a "Change of Control Event" as
defined.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
In March 1997, NTN agreed with Patrick J. Downs, Daniel C. Downs, Gerald P.
McLaughlin, and Ronald E. Hogan that each officer would resign or be terminated.
Pursuant to Resignation Agreements between each former officer and NTN, the
existing employment agreements of the former officers were terminated and each
former officer entered into a Consulting Agreement with NTN, under which each
former officer agreed to consult with NTN on such matters as it may request from
time to time. The three-year terms of the Consulting Agreements coincide with
the remaining terms of the prior employment agreements.
Pursuant to the Resignation Agreements, NTN agreed to honor certain
provisions of the prior employment agreements of the former officers which
called for payment of the former officers' annual salaries for the remaining
terms of such employment agreements and to pay the former officers all deferred
compensation and accrued vacation accumulated by them through December 31, 1996.
The former officers relinquished any right under the prior employment agreements
to certain bonuses based on future performance of NTN and surrendered to NTN for
cancellation certain options held by them to purchase an aggregate of 2,325,000
shares of Common Stock. The Resignation Agreements also contain mutual, general
releases between NTN and each of the former officers with respect to their prior
employment and other relations between the parties.
Patrick J. Downs, Daniel C. Downs, Gerald P. McLaughlin, and Ronald E.
Hogan will receive under their Consulting Agreements the sum of $746,160,
$746,160, $812,887 and $583,492, respectively. The resigning officers also will
continue to receive medical benefits and life insurance paid for by NTN, and for
48 months, Patrick J. Downs, Daniel C. Downs and Gerald P. McLaughlin will
continue to receive a monthly car allowance.
In connection with the Consulting Agreements, NTN also agreed to extend the
expiration dates of certain options and warrants held by the former officers
and, with respect to Patrick J. Downs and Daniel C. Downs, to waive provisions
of their respective stock options which required the exercise of certain options
within a specified period of time following termination. Using the 5% and 10%
assumed rates of appreciation prescribed by the rules and regulations of the
Securities and Exchange Commission, the potential realizable value to the former
officers of these option and warrant extensions and waivers is as follows:
Patrick J. Downs -- $850,670 and $2,076,507, respectively; Daniel C. Downs --
$931,443 and $2,259,752, respectively; Gerald P. McLaughlin -- $392,543 and
$947,099, respectively; and Ronald E. Hogan -- $527,940 and $1,231,620,
respectively.
In connection with the management reorganization, NTN agreed to the vesting
of certain options held by Mr. McLaughlin to purchase 100,000 shares and issued
to Mr. McLaughlin a fully vested option to purchase 150,000 shares of Common
Stock of the Company. In November 1997, Mr. McLaughlin exchanged these options
and warrants for 50,000 shares of Common Stock. The Company also paid Alan P.
Magerman, a director of the Company an aggregate of $225,000 and purchased from
Mr. Magerman for a price of $81,250 certain warrants to purchase 325,000 shares
of Common Stock held by Mr. Magerman.
Each of the former officers was indebted to the Company for certain prior
loans extended to them by the Company, which by their terms were cancelable
under certain circumstances in the event of termination of the officer's
employment. As a result, the management reorganization triggered the
cancellation of indebtedness and
42
<PAGE>
accrued interest of Patrick J. Downs, Daniel C. Downs, Gerald P. McLaughlin, and
Ronald E. Hogan to the Company in the amounts of $953,710, $657,265, $514,715
and $463,526, respectively.
In May 1997, the Company entered into a written Employment Agreement with
Gerald Sokol, Jr. under which Mr. Sokol will serve as President and Chief
Operating Officer of the Company for a period of three years ending May 15,
2000. Under the Employment Agreement, Mr. Sokol is to receive an annual salary
of $250,000, which will increase by 5% (plus any increase in the consumer price
index) during each of the second and third years of the term of employment. Mr.
Sokol also is entitled to an annual bonus based on the Company's "Operating Cash
Flow" (as defined) as follows: 2.5% of the first $5,000,000 of Operating Cash
Flow; 1.5% of any Operating Cash Flow in excess of $5,000,000 and up to
$10,000,000; and 1% of any Operating Cash Flow in excess of $10,000,000.
Pursuant to this clause, Mr. Sokol received a bonus of $100,500 in 1997.
The Company also has agreed pursuant to the Employment Agreement to provide
Mr. Sokol and his dependents certain medical insurance and to purchase
$1,000,000 of life insurance ($2,000,000 in the event of accidental death or
dismemberment) on Mr. Sokol payable to his beneficiaries.
Mr. Sokol's Employment Agreement may be terminated by the Company in the
event of his disability, in which event Mr. Sokol or his representatives will be
entitled to be paid severance in an amount equal to 75% of his compensation
(including the annual bonus calculated as described above) for the remainder of
the term of the Employment Agreement. The Employment Agreement also may be
terminated by NTN in the event of Mr. Sokol's personal dishonesty, willful
misconduct or breach of fiduciary duty, or if he breaches the Employment
Agreement and fails to cure the breach within 30 days. In the event NTN
terminates the Employment Agreement without cause, attempts to reassume Mr.
Sokol's duties or to change his duties without cause, Mr. Sokol will be entitled
to a liquidated amount equal to his entire compensation under the Employment
Agreement for the remainder of its term.
Mr. Sokol may terminate the Employment Agreement at any time after one year
on three months' notice to NTN and at any time following a "Change of Control
Event" (as defined). In the event Mr. Sokol or NTN terminates Mr. Sokol's
employment following a Change of Control Event, he will be entitled to receive
severance in an amount equal to one year's salary plus a prorated portion of the
annual bonus called for under the Employment Agreement.
In connection with his agreeing to join NTN as its Chief Financial Officer,
in August 1996 Mr. Sokol was granted various options to purchase an aggregate of
up to 700,000 shares of Common Stock. All of these options, as well as
additional options held by Mr. Sokol to purchase an aggregate of 175,000 shares
of Common Stock, were amended in May 1997 to reduce the respective exercise
prices of the options to $2.81 per share. In February 1997, Mr. Sokol was
granted additional options to purchase 600,000 shares of Common Stock at an
exercise price of $2.81 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All compensation determinations for 1997 for NTN's executives were made by
the Board of Directors of NTN as a whole upon the advice of the Compensation
Committee of the Board. None of the directors or executive officers of NTN has
served on the Board of Directors or the compensation committee of any other
company or entity, any of whose officers served either on the Board of Directors
or on the Compensation Committee of the Board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth as of March 25, 1998 the number and
percentage ownership of Common Stock by (i) all persons known to the Company to
own beneficially more than 5% of the outstanding shares of Common Stock based
upon reports filed by each such person with the Securities and Exchange
Commission ("Commission"), (ii) each director of the Company, (iii) each of the
Named Executive Officers, and (iv) all of the executive officers and directors
of the Company as a group. Except as otherwise indicated, and subject to
applicable community property and similar laws, each of the persons named has
sole voting and investment power with respect to the shares of Common Stock
shown. An asterisk denotes beneficial ownership of less than 1%.
43
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percent of Common Stock
Name Beneficially Owned (1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Gerald Sokol, Jr.(2) 1,114,500 4.4%
Edward C. Frazier (3) 682,833 2.7%
Robert M. Bennett (4) 140,666 *
Donald C. Klosterman (5) 795,082 3.2%
Esther L. Rodriguez (6) 22,333 *
Stanley B. Kinsey 21,333 *
Daniel F. Purner (7) 60,599 *
V. Tyrone Lam (8) 17,000 *
Patrick J. Downs (9) 276,419 1.1%
All executive officers and directors
of the Company as a group (12 persons) (10) 3,239,098 11.7%
</TABLE>
(1) Included as outstanding for purposes of this calculation are 24,437,000
shares of Common Stock (the amount outstanding as of March 25, 1998) plus,
in the case of each particular holder, the shares of Common Stock subject
to currently exercisable options, warrants, or other instruments
exercisable for or convertible into shares of Common Stock (including such
instruments exercisable within 60 days after March 25, 1998) held by that
person, which instruments are specified by footnote. Shares issuable as
part or upon exercise of outstanding options, warrants, or other
instruments other than as described in the preceding sentence are not
deemed to be outstanding for purposes of this calculation.
(2) Includes 1,052,500 shares subject to currently exercisable options held by
Mr. Sokol.
(3) Includes 500,000 shares subject to currently exercisable warrants and
137,500 shares subject to currently exercisable options held by Mr.
Frazier.
(4) Includes 33,333 shares subject to currently exercisable options held by Mr.
Bennett.
(5) Includes 200,000 shares subject to currently exercisable warrants and
150,000 shares subject to currently exercisable options held by Mr.
Klosterman.
(6) Includes 1,000 shares owned by the Rodriguez Family Trust, of which Ms.
Rodriguez is a co-trustee with members of her immediate family. As co-
trustee, Ms. Rodriguez shares voting and investment power with respect to
the shares
(7) Includes 50,334 shares subject to currently exercisable options held by Mr.
Purner.
(8) Includes 17,000 shares subject to currently exercisable options held by Mr.
Lam.
(9) Includes 138,600 shares to be issued pursuant to the Stock Exchange
Agreement dated March 19, 1998, and excludes 750,000 options and warrants
to be exchanged pursuant to the Stock Exchange Agreement.
(10) Includes 700,000 shares subject to currently exercisable warrants and,
1,464,000 shares subject to currently exercisable options held by executive
officers and directors, including those described in notes (2) through (9)
above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
During 1996, the Company had outstanding loans to a director and certain of
its officers. The loans represent withholding amounts paid by the Company on
behalf of the director and officers to taxing authorities in order to obtain a
tax deduction for federal and state income tax purposes relating to compensation
to these officers and directors for
44
<PAGE>
prior years. The loans were evidenced by individual promissory notes in favor of
the Company which bore interest at annual rates of between 6% and 8%, were
unsecured and were due on demand.
In April 1996, the Company restructured the loans to the director and
officers as described in the preceding paragraph. Pursuant to the
restructuring, each director and officer executed a three-year promissory note
in favor of the Company in a principal amount equal to the aggregate outstanding
principal balance and accrued interest on the loans as follows: Donald C.
Klosterman - $1,179,043; Patrick J. Downs - $680,429; Daniel C. Downs -$629,141;
Gerald P. McLaughlin - $492,691; Ronald E. Hogan - $445,384; and Robert
Klosterman - $237,383. The terms of the notes were as follows: 10% of the
principal amount was due at the end of 12 months from the date of the note; an
additional 30% of the principal amount was due at the end of 24 months; and the
balance of the principal amount (i.e., 60%) was due at the end of 36 months.
The notes were pre-payable at any time without penalty and bore interest at the
rate of 6% per annum, which was payable annually in arrears.
The maker of each note had the option to satisfy amounts outstanding under
his note by relinquishing to the Company for cancellation either (i) shares of
the Company's Common Stock (valued for this purpose at the closing market price
on the date of transfer), or (ii) warrants to purchase the Company's Common
Stock (valued for this purpose at the fair market value on the date of transfer
as determined in good faith by the Board of Directors of the Company). To the
extent the maker of a note surrendered to the Company shares of Common Stock in
satisfaction of all or part of his note or interest thereon, the executive was
to be granted a 10-year nontransferable option (an incentive stock option to the
extent permissible) to purchase the same number of shares of Common Stock as
were being surrendered, which would be immediately exercisable at an exercise
price equal to the value at which the Common Stock was surrendered to the
Company in satisfaction of the note, subject to shareholder approval if required
by law or stock exchange rules.
Under the terms of the notes, if any officer was terminated by the Company
for any reason other than for "cause" at any time within the three-year term of
his note (or in the case of Donald C. Klosterman, if the stockholders failed to
reelect him to the Board of Directors), the balance of the note and any interest
accrued thereon were to be canceled. "Cause" for this purpose was defined as
personal dishonesty or willful misconduct which materially and adversely affects
the Company.
In March 1997, Patrick J. Downs, Daniel C. Downs, Ronald E. Hogan, and
Gerald P. McLaughlin resigned or were terminated. Pursuant to Resignation and
General Release Agreements between the Company and each resigning officer, and
in accordance with the terms of the foregoing notes, effective December 31,
1996, the Company canceled the obligations of Patrick J. Downs, Daniel C. Downs,
Gerald P. McLaughlin and Ronald E. Hogan under the foregoing notes, the
principal and accrued interest of which totaled $953,710, $657,265, $514,715 and
$463,526, respectively. See "Executive Compensation - Employment Agreements and
Termination of Employment and Change in Control Arrangements."
ADVANCE TO MR. SOKOL
In March 1997, as a consequence of the reorganization of NTN's management,
an advance of $150,000 provided to Mr. Sokol in 1996 was forgiven. The advance,
originally provided in August 1996, in connection with his agreeing to join NTN
was for use in purchasing a residence in California. The advance was to be
forgiven over four years as a bonus or upon the occurrence of a change in
control of NTN. Such a change of control occurred in March 1997.
CONSULTING ARRANGEMENTS
In December 1996, NTN retained Frazier/King Media Holding Co.
("Frazier/King"), a media consulting firm of which Edward C. Frazier is a
principal and a 50% owner, to provide consulting services to NTN relating to the
development of a local advertising sales program. Under the terms of the one-
year engagement, NTN paid Frazier/King $100,000 plus reimbursement of expenses
incurred by Frazier/King of approximately $35,000.
45
<PAGE>
In March 1997, NTN entered into a separate Consulting Agreement with Mr.
Frazier, under which he agreed to spend on average seven days a month consulting
with management of NTN regarding NTN's operations and serving as a consultant to
NTN's President and as a member of NTN's Executive Advisory Board, which had
just been created by NTN's Board of Directors. The Executive Advisory Board was
subsequently disbanded. The Consulting Agreement was to expire in March 1999,
unless sooner terminated. In consideration for his services under the foregoing
Consulting Agreement, Mr. Frazier was granted a five-year, nonqualified stock
option to purchase 250,000 shares of Common Stock at an exercise price of $4.50
per share, which was to vest in 24 monthly installments of approximately 10,416
shares each, subject to Mr. Frazier remaining as a consultant, and was to become
exercisable on and after February 28, 1999. NTN also agreed to reimburse Mr.
Frazier for certain expenses relating to his consulting services. In May 1997,
Mr. Frazier's option was amended to reduce the exercise price to $2.81 and to
provide that it would become immediately exercisable in full in the event of a
"Change of Control" (as defined) of NTN. In January 1998, the Board of
Directors cancelled the Consulting Agreement and reduced the compensation to
104,167 options, which are 100% vested at March 31, 1998. In connection with
the option granted to Mr. Frazier under the Consulting Agreement, NTN recorded a
charge pursuant to SFAS No. 123 of $224,000 in 1997. An additional charge of
$58,000 will be recorded in 1998.
In April 1997, NTN entered into another Consulting Agreement with
Frazier/King, under which Frazier/King was engaged to review and consult with
management of NTN regarding NTN's strategic business plan, current operations
and future development and to devise and structure an appropriate plan to secure
future financing for NTN. The Consulting Agreement was terminable by NTN any
time upon ten days notice to Frazier/King in the event the Board of Directors as
a whole determined in good faith that Frazier/King had failed materially to
perform, or had breached its duties, under the Consulting Agreement.
For Frazier/King's services under the foregoing Consulting Agreement, NTN
granted Frazier/King a warrant to purchase 1,000,000 shares of Common Stock at
an exercise price of $2.81, the approximate market value of the Common Stock on
the date of the Consulting Agreement, and agreed to reimburse Frazier/King for
expenses (other than normal operating expenses) incurred by it in performing its
consulting services. Frazier/King's warrant was immediately vested and
exercisable as to 200,000 shares of Common Stock covered thereby and was to
become vested and exercisable as to the balance of 800,000 covered shares in
quarterly installments of 100,000 shares each as of the 15th day of each July,
October, January and April commencing July 15, 1997 and ending April 15, 1999,
provided that the Board of Directors of NTN has determined that Frazier/King was
performing satisfactorily under the Consulting Agreement. In January, 1998, the
Board and Frazier/King agreed to terminate this consulting agreement and the
number of warrants granted was reduced to 500,000, which were immediately
vested. In connection with the warrant granted to Frazier/King, NTN recorded a
charge pursuant to SFAS No. 123 of $1,401,000, in 1997.
In March, 1997, the Company announced a reorganization of its executive
management personnel as described under "Recent Developments" in Item 1 of the
Report, which information is incorporated herein by reference.
INDEMNITY AGREEMENTS
The Company has entered into indemnity agreements with each of its
directors and executive officers. The indemnity agreements provide that the
Company will indemnify these individuals under certain circumstances against
certain liabilities and expenses they may incur in their capacities as directors
of the Company. The Company believes that the use of such indemnity agreements
is customary among corporations and that the terms of the indemnity agreements
are reasonable and fair to the Company, and are in its best interests to retain
experienced directors.
PROPOSED SALE OF LEARNSTAR
See the discussion under "Recent Developments-Recent Decision Concerning
Subsidiaries", which information is incorporated herein by reference, relating
to the Company's proposed sale of LearnStar to NewStar, a company in which Sally
A. Zoll, President of LearnStar, is a shareholder.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND
--------------------------------------------------------
REPORTS ON FORM 8-K
-------------------
(a) The following documents are filed as a part of this report:
1,2. Consolidated Financial Statements and Schedule.
The consolidated financial statements and schedule of the Company and
its consolidated subsidiaries are set forth in the "Index to Consolidated
Financial Statements" on page F-0.
3. Exhibits. The following exhibits are filed as a part of this report:
<TABLE>
<C> <S>
10.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (1)
10.2 By-laws of the Company (2)
10.3* 1985 Incentive Stock Option Plan, as amended (2)
10.4* 1985 Nonqualified Stock Option Plan, as amended (4)
10.5 License Agreement with NTN Canada (4)
10.6 National Football League License Agreement (4)
10.7 Lease of Office with The Campus L.L.C. (7)
10.8 Third Amended and Restated Agreement of Limited Partnership of IWN,
L.P., dated as of December 31, 1995. (8)
10.9 First Amendment to the Third Amended and Restated Agreement of Limited
Partnership of IWN, L.P., dated as of March 11, 1996. (8)
10.10 Amended and Restated Technology and Trademark License Agreement, dated
as of December 31, 1995, between NTN Communication, Inc. and IWN, Inc.
(8)
10.11 Amended and Restated Technology and Trademark Sub-license Agreement,
dated as of December 31, 1995, between IWN, Inc. and IWN, L.P. (8)
10.12 Worldwide Technology and Trademark Agreement, dated as of December 31,
1995, between IWN, Inc. and IWN, L.P. (8)
10.13 Non-competition Agreement, dated as of December 31, 1995, between IWN,
Inc. and IWN, L.P. (8)
10.14 Non-competition Agreement, dated as of December 31, 1995, between IWN,
L.P. in favor of NTN Communications, Inc. and IWN, Inc. (8)
10.15* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Patrick J. Downs. (9)
10.16* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Daniel C. Downs. (9)
10.17* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Ronald E. Hogan (9)
10.18* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Gerald P. McLaughlin. (9)
10.19* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Michael J. Downs. (9)
10.20* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Robert Klosterman. (9)
10.21* Letter agreement, dated March 4, 1997, between NTN and Alan Magerman.(9)
10.22* Consulting Agreement, dated as of December 31, 1996, between NTN
Communications Inc. and Patrick J. Downs. (9)
10.23* Consulting Agreement, dated as of December 31, 1996, between NTN
Communications Inc. and Daniel C. Downs. (9)
10.24* Consulting Agreement, dated as of December 31, 1996, between NTN
Communications Inc. and Ronald E. Hogan. (9)
10.25* Consulting Agreement, dated as of December 31, 1996, between NTN
Communications Inc. and Gerald P. McLaughlin. (9)
10.26* Consulting Agreement, dated as of March 14, 1997, between NTN
Communications Inc. and Donald Klosterman. (9)
</TABLE>
47
<PAGE>
<TABLE>
<C> <S>
10.27* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Patrick J. Downs. (9)
10.28* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Daniel C. Downs. (9)
10.29* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Ronald E. Hogan. (9)
10.30* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Gerald P. McLaughlin. (9)
10.31* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Michael J. Downs. (9)
10.32* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Robert Klosterman. (9)
10.33* Special Stock Option dated August 18, 1996 between NTN Communications,
Inc. and Gerald Sokol, Jr.(9)
10.34* Special Stock Option dated August 25, 1996 between NTN Communications,
Inc. and Robert Bennett(9)
10.35* Special Stock Option dated August 30, 1996 between NTN Communications,
Inc. and Edward C. Frazier (9)
10.36* Amendment to Nonqualified Stock Option Agreement, dated as of April 14,
1997, between NTN Communications, Inc. and Edward C. Frazier. (11)
10.37 Letter agreement, dated December 17, 1996, between NTN Communications,
Inc. and Frazier/King Media Holding Co. (11)
10.38* Consulting Agreement, dated as of March 1, 1997, between NTN
Communications, Inc. and Edward C. Frazier. (11)
10.39* Consulting Agreement, dated as of April 23, 1997, between NTN
Communications, Inc. and Frazier/King Media Holding Co., together with a
Warrant Certificate for the purchase of 1,000,000 shares of Common
Stock. (11)
10.40 Securities Purchase Agreement, dated as of October 31, 1997, among
NTN Communications, Inc. and the investors listed therein. (12)
10.41 Compromise Settlement and Mutual General Release by and between NTN
Communications, Inc. and Interactive Entertainment Systems and Barry N.
Hurley (13)
10.42 Warrant Agreement, dated as of February 18, 1998 between NTN
Communications, Inc. and American Stock Transfer and Trust Company, as
warrant agent, including a form of warrant certificate. (13)
10.43* Employment Agreement dated May 16, 1997 by and between NTN
Communications, Inc. and Gerald Sokol Jr. (13)
10.44* Performance Incentive Stock Option Agreement dated November 4, 1996 by
and between NTN Communications, Inc. and Gerald Sokol, Jr. (13)
10.45* Nonqualified Stock Option Agreement dated May 14, 1997 by and between
NTN Communications, Inc. and Gerald Sokol, Jr. (13)
10.46 Exclusive Maintenance and Installation Agreement dated March 30, 1998 by
and between NTN Communications, Inc. and Datatec Systems, Inc. (13)
10.47* Modification to Resignation Agreement, dated as of March 9, 1998 by and
between NTN Communications, Inc. and Daniel C. Downs (13)
10.48* Modification to Resignation Agreement, dated as of March 9, 1998 by and
between NTN Communications, Inc. and Patrick J. Downs (13)
10.49* Modification to Resignation Agreement, dated as of March 20, 1998 by and
between NTN Communications, Inc. and Ronald E. Hogan (13)
23.00 Consent of KPMG Peat Marwick LLP. (13)
27.00 Financial Data Schedule. (13)
</TABLE>
______________________
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's registration statement
on Form S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1989, and incorporated by reference.
48
<PAGE>
(4) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1990, and incorporated by reference.
(5) Previously filed as an exhibit to the Company's report on Form 8-K dated
December 31, 1993, and incorporated by reference.
(6) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1993, and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1994, and incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(9) Previously filed as an exhibit to the Company's report on Form 8-K dated
March 5, 1997 and incorporated by reference.
(10) Previously filed as an exhibit to the Company's report on Form 8-K dated
June 30, 1996 and incorporated by reference
(11) Previously filed as an exhibit to the Company's report on Form 10-K
dated December 31, 1996 and incorporated by reference.
(12) Previously filed as an exhibit to the Company's report on Form 8-K dated
November 7, 1997 and incorporated by reference.
(13) Filed herewith.
(b) Reports on Form 8-K.
None.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATED: April 10, 1998
NTN COMMUNICATIONS, INC.
By: /s/ GERALD SOKOL, JR
--------------------
Gerald Sokol Jr., President, Chief Executive Officer, Chief Financial
Officer and Acting Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERALD SOKOL, JR President, Chief Executive Officer, Chief April 10, 1998
- --------------------- Financial Officer and Acting Chairman of
Gerald Sokol, Jr. the Board
/s/ EDWARD C. FRAZIER Director April 10, 1998
- ----------------------
Edward C. Frazier
/s/ ROBERT M. BENNETT Director April 10, 1998
- ----------------------
Robert M. Bennett
/s/ DONALD C. KLOSTERMAN Director April 10, 1998
- -------------------------
Donald C. Klosterman
/s/ ESTHER L. RODRIGUEZ Director April 10, 1998
- ------------------------
Esther L. Rodriguez
/s/ STANLEY B. KINSEY Director April 10, 1998
- ----------------------
Stanley B. Kinsey
</TABLE>
50
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----------------
<S> <C>
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended December 31, 1997, F-4
1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended F-5
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, F-7
1997, 1996 and 1995
Notes to Consolidated Financial Statements F-9
Financial Statement Schedule II - Valuation and Qualifying Accounts F-25
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
NTN Communications, Inc.:
We have audited the consolidated financial statements of NTN Communications,
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NTN Communications,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
San Diego, California
April 10, 1998
F-2
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,764,000 6,579,000
Accounts receivable - trade, net of allowance for doubtful
accounts of $1,313,000 in 1997 and $1,563,000 in 1996 2,724,000 2,031,000
Accounts receivable - officers and employees -- 199,000
Prepaid expenses and other current assets 902,000 1,846,000
------------ ------------
Total current assets 8,390,000 10,655,000
Broadcast equipment and fixed assets, net (note 4) 7,973,000 10,103,000
Software development costs, net of accumulated amortization
of $3,710,000 in 1997 and $1,829,000 in 1996 3,697,000 4,400,000
Retirement plan assets (note 9) -- 2,527,000
Other assets 211,000 819,000
------------ ------------
Total assets $ 20,271,000 28,504,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 914,000 2,193,000
Accrued expenses (note 9) 2,393,000 3,565,000
Accrual for litigation costs (note 11) 1,613,000 -
Accrual for management severance (note 3) 1,154,000 424,000
Short-term borrowings (note 5) -- 5,060,000
Obligations under capital lease (note 10) 46,000 --
Deferred revenue 1,483,000 254,000
Customer deposits 770,000 1,279,000
------------ ------------
Total current liabilities 8,373,000 12,775,000
Deferred revenue 84,000 1,000,000
Obligations under capital lease (note 10) 179,000 --
Accrual for settlement warrants (note 11) 1,516,000 1,291,000
Accrual for litigation costs (note 11) 300,000 2,800,000
Accrual for management severance (note 3) 1,093,000 416,000
------------ ------------
Total liabilities 11,545,000 18,282,000
------------ ------------
Shareholders' equity (notes 7 and 8):
Series A 10% cumulative convertible preferred stock, $.005 par value,
10,000,000 shares authorized; shares issued and outstanding 161,000
in 1997 and 1996 1,000 1,000
Series B 4% cumulative convertible preferred stock, $.005 par value,
85,000 shares authorized; shares issued and outstanding 70,000 in 1997
and none in 1996 1,000 --
Common stock, $.005 par value, 50,000,000 shares authorized; shares issued
and outstanding 23,677,000 in 1997 and 23,177,000 in 1996 118,000 116,000
Additional paid-in capital 70,541,000 59,583,000
Accumulated deficit (58,596,000) (46,139,000)
------------ ------------
12,065,000 13,561,000
Less treasury stock, at cost, 782,000 shares in 1997 and 1996 (3,339,000) (3,339,000)
------------ ------------
Total shareholders' equity 8,726,000 10,222,000
------------ ------------
Commitments and contingencies (notes 3, 10 and 11)
Total liabilities and shareholders' equity $ 20,271,000 28,504,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statement.
F-3
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Network services $ 20,245,000 20,029,000 15,559,000
Online/Internet services 3,326,000 1,811,000 620,000
Advertising revenue 772,000 1,590,000 1,128,000
Equipment sales, net of cost of sales of $231,000, $3,801,000,
and $4,981,000 in 1997, 1996 and 1995, respectively 475,000 1,757,000 1,803,000
License and royalty fees and other revenue 1,043,000 524,000 972,000
------------ ------------ ------------
Total revenue 25,861,000 25,711,000 20,082,000
------------ ------------ ------------
Operating expenses:
Operating expenses 6,565,000 6,124,000 3,799,000
Selling, general and administrative 19,449,000 17,169,000 11,838,000
Litigation, legal and professional expenses (note 11) 808,000 6,484,000 1,720,000
Equipment lease expense 936,000 6,837,000 3,957,000
Depreciation and amortization 5,305,000 2,265,000 1,078,000
Bad debt expense 1,462,000 1,840,000 645,000
Equipment charges 2,543,000 2,478,000 1,000,000
Research and development 1,600,000 3,396,000 1,471,000
Cancellation of notes receivable - related parties (note 3) -- 4,252,000 --
Other charges -- 721,000 --
------------ ------------ ------------
Total operating expenses 38,668,000 51,566,000 25,508,000
------------ ------------ ------------
Operating loss (12,807,000) (25,855,000) (5,426,000)
Other income (expense):
Interest income 238,000 391,000 478,000
Interest expense (793,000) (390,000) (112,000)
Equity in loss of affiliate -- -- (286,000)
Other (note 10) 905,000 -- 1,329,000
------------ ------------ ------------
Total other income 350,000 1,000 1,409,000
Loss from continuing operations before
income taxes (12,457,000) (25,854,000) (4,017,000)
Income taxes (note 6) -- -- --
============ ============ ============
Loss from continuing operations (12,457,000) (25,854,000) (4,017,000)
Earnings (loss) from discontinued operations (note 2) -- (1,317,000) 69,000
Gain on sale of discontinued operations, net of tax (note 2) -- 4,219,000 --
------------ ------------ ------------
Net loss $(12,457,000) (22,952,000) (3,948,000)
============ ============ ============
Basic and diluted net loss per share:
Continuing operations $ (0.55) (1.15) (0.19)
Discontinued operations -- 0.13 --
------------ ------------ ------------
Net loss $ (0.55) (1.02) (0.19)
============ ============ ============
Weighted-average shares outstanding 22,696,000 22,568,000 20,301,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
SERIES A AND B
CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- --------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------- ------ ---------- -------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 198,000 $1,000 19,178,000 $ 96,000 44,599,000 (19,239,000) -- 25,457,000
Issuance of stock for exercise of
warrants and options -- -- 312,000 1,000 679,000 -- -- 680,000
Conversion of preferred stock to
common stock (35,000) -- 10,000 -- -- -- -- --
Issuance of stock in lieu of
dividends -- -- 3,000 -- -- -- -- --
Issuance of stock in private
offerings, net of issuance costs -- -- 3,000,000 15,000 11,469,000 -- -- 11,484,000
Treasury shares purchased -- -- -- -- -- -- (222,000) (222,000)
Net loss -- -- -- -- -- (3,948,000) -- (3,948,000)
------- ------ ---------- -------- ---------- ----------- ----------- -----------
Balance, December 31, 1995 163,000 $1,000 22,503,000 $112,000 56,747,000 (23,187,000) (222,000) 33,451,000
Issuance of stock for exercise of
warrants and options -- -- 251,000 1,000 316,000 -- -- 317,000
Issuance of stock in lieu of
dividends -- -- 3,000 -- -- -- -- --
Conversion of preferred stock to
common stock (2,000) -- -- -- -- -- -- --
Issuance of stock in private
offerings, net of issuance costs -- -- 420,000 3,000 610,000 -- -- 613,000
Treasury shares purchased -- -- -- -- -- -- (3,117,000) (3,117,000)
Warrants granted to non-employees -- -- -- -- 1,910,000 -- -- 1,910,000
Net loss -- -- -- -- -- (22,952,000) -- (22,952,000)
------- ------ ---------- -------- ---------- ----------- ----------- -----------
Balance, December 31, 1996 161,000 $1,000 23,177,000 $116,000 59,583,000 (46,139,000) (3,339,000) 10,222,000
------- ------ ---------- -------- ---------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity Continued
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
SERIES A AND B
CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- -------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------- ------ ---------- ------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, forward December 31,
1996 161,000 $1,000 23,177,000 $116,000 59,583,000 (46,139,000) (3,339,000) 10,222,000
Issuance of stock for exercise of
warrants and options -- -- 419,000 2,000 888,000 -- -- 890,000
Issuance of Series B Preferred
Stock in private offering, net of
issuance costs 70,000 1,000 -- -- 6,706,000 -- -- 6,707,000
Issuance of stock in lieu of
dividends -- -- 8,000 -- -- -- -- --
Issuance and modifications of
warrants granted to non-employees -- -- -- -- 3,205,000 -- -- 3,205,000
Issuance of shares for settlement
of litigation -- -- 73,000 -- 159,000 -- -- 159,000
Net loss -- -- -- -- -- (12,457,000) -- (12,457,000)
------- ------ ---------- -------- ---------- ----------- ----------- -----------
Balance, December 31, 1997 231,000 $2,000 23,677,000 $118,000 70,541,000 (58,596,000) (3,339,000) 8,726,000
======= ====== ========== ======== ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(12,457,000) (22,952,000) (3,948,000)
Adjustments:
Gain on sale of discontinued operations -- (4,219,000) --
Gain on sale of interest in building (905,000) -- --
Depreciation and amortization 5,305,000 2,265,000 1,078,000
Bad debt expense 1,462,000 1,840,000 645,000
Loss from discontinued operations -- 1,317,000 --
Loss from cancellation of notes receivable -- 4,252,000 --
Loss on buyout of lease commitments -- 2,007,000 --
Loss from disposition of broadcast equipment 2,543,000 2,478,000 1,000,000
Non-cash stock compensation charges 3,205,000 1,910,000 --
Charge for settlement warrants -- 1,234,000 --
Accreted interest expense 410,000 57,000
Amortization of deferred revenue (719,000) (898,000) (1,316,000)
Stock issued in settlement of litigation 159,000 -- --
Change in discontinued operations -- (2,761,000) (942,000)
Loss on sale of marketable securities - available
for sale -- -- 70,000
Change in assets and liabilities:
Accounts receivable - trade (1,956,000) 448,000 486,000
Inventory, net -- -- (1,670,000)
Prepaid expenses and other assets 3,542,000 1,430,000 (1,659,000)
Accounts payable, accrued expenses and
other accrued liabilities (2,116,000) 6,521,000 886,000
Deferred revenue 1,032,000 (1,101,000) --
Customer deposits (509,000) (5,000) 278,000
------------ ----------- ----------
Net cash used in operating activities (1,004,000) (6,177,000) (5,092,000)
------------ ----------- ----------
Cash flows from investing activities:
Capital expenditures (3,700,000) (4,411,000) (2,167,000)
Proceeds from sale of interest in building 1,405,000 -- --
Proceeds from sale of discontinued operations -- 10,223,000 --
Notes receivable -- 216,000 (2,163,000)
Software development costs (1,020,000) (2,274,000) (2,070,000)
Purchases of other investments -- -- (103,000)
Proceeds from sales of marketable securities -
available for sale -- -- 930,000
Proceeds from sale and leaseback transactions -- 3,553,000 4,500,000
Deposits related to sale and leaseback transactions -- -- (575,000)
------------ ----------- ----------
Net cash provided by (used in) investing activities (3,315,000) 7,307,000 (1,648,000)
------------ ----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Principal payments on debt $(9,563,000) -- (20,000)
Proceeds from issuance of debt 4,470,000 3,704,000 1,368,000
Purchase of equipment related to sale and leaseback
transactions -- (2,553,000) (2,470,000)
Proceeds from issuance of common and preferred
stock, less issuance costs paid in cash 7,597,000 930,000 12,164,000
Repurchase of common stock -- (3,117,000) (222,000)
----------- ---------- ----------
Net cash provided by (used in) financing activities 2,504,000 (1,036,000) 10,820,000
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (1,815,000) 94,000 4,080,000
Cash and cash equivalents at beginning of year 6,579,000 6,485,000 2,405,000
----------- ---------- ----------
Cash and cash equivalents at end of year $ 4,764,000 6,579,000 6,485,000
=========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 367,000 -- --
=========== ========== ==========
Income taxes $ -- -- --
=========== ========== ==========
</TABLE>
Non-cash investing and financing activities:
In 1997, the Company acquired equipment of $258,000 under a capital lease.
In 1996, the Company transferred $5,618,000 of assets previously categorized as
Inventory, a current asset, to Broadcast Equipment, a non-current asset
(note 4).
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1996 and 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
NTN Communications, Inc. ("The Company") was organized under the laws of the
state of Delaware in 1984 for the purpose of investing in various business
ventures. The Company, through its business units and subsidiaries,
develops, produces and distributes individual and multi-player interactive
entertainment and education programs to a variety of media platforms.
BASIS OF ACCOUNTING PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, LearnStar Inc., (LearnStar), IWN Inc.
("IWN") and IWN L.P., a limited partnership.
LIQUIDITY
The Company has experienced significant losses from operations and utilized
cash flows from operating activities in each of the three years ended
December 31, 1997. Management has implemented an organizational and
strategic restructuring aimed at reducing overhead expenses and focusing on
the Company's core business units. This process involved a workforce
reduction, including five senior officers, the buyout of certain high-rate
lease commitments, and restructuring its management personnel and
responsibilities. Management believes that these steps will contribute
toward achieving profitability and improving cash flow. Management believes
it can raise additional funds through further equity and debt issuances.
In addition, the Company has committed to concentrate its 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 (note 12).
CASH AND CASH EQUIVALENTS
For the purpose of financial statement presentation, the Company considers
all highly liquid investment instruments with original maturities of three
months or less to be cash equivalents. Cash and cash equivalents at December
31, 1997 and 1996, consist of operational cash accounts and money market
accounts with original maturities of three months or less.
MARKETABLE SECURITIES - AVAILABLE FOR SALE
Securities available for sale are carried at fair value with unrealized
gains and losses, net of tax, reported as a separate component of
shareholders' equity. The cost of securities sold is based on the specific
identification method.
Proceeds from the sale of investment securities available for sale was
$930,000 in 1995 and gross realized losses included in income in 1995 was
$70,000. There were no purchases or sales of investment securities available
for sale in 1997 or 1996.
F-9
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
BROADCAST EQUIPMENT AND FIXED ASSETS
Depreciation of fixed assets is computed using the straight-line method over
the estimated useful lives of the assets (three to five years). Depreciation
of broadcast equipment is computed using the straight-line method over the
estimated useful lives of the assets (two to four years).
REVENUE RECOGNITION
Network and Online/Internet Services: Revenue is recognized as the service
is provided by the Company.
Advertising: Revenue for advertising is recognized ratably over the contract
period as advertisements are broadcast or displayed.
Equipment Sales: Revenue is recognized when equipment is shipped or
transferred to the purchaser.
License Fee and Royalties: Revenue is recognized when all material services
or conditions relating to the sale have been performed or satisfied.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases, and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs related to the development of certain software
products. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed" capitalization of costs begins when
technological feasibility has been established and ends when the product is
available for general release to customers. Amortization of costs related to
interactive programs is recognized on a straight line basis over three years.
STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to
recognize as expense over the vesting period, the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB No. 25 and provide pro
forma net income and pro forma earnings per share disclosures for employee
stock options grants made in 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Under SFAS No. 123, options or warrants issued to non-employees in exchange
for goods or services received are recorded at the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
F-10
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. The Company
believes that the fair value of financial instrument assets and financial
instrument liabilities approximate their carrying value. The following methods
and assumptions were used to estimate the fair value of financial instruments:
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates fair value because of the short
maturity of these instruments. The fair value of the accrual for settlement
warrants and other long-term liabilities are determined using the present value
of expected future cash flows discounted at the interest rate currently offered
by the Company which approximates rates currently offered by local lending
institutions for instruments of similar terms and risks.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
BASIC AND DILUTED EARNINGS PER COMMON 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 17,630,000, 1,078,000, and 1,511,000 shares were
excluded from the computations of net loss per common share for the years ended
December 31, 1997, 1996 and 1995, 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.
RECLASSIFICATIONS
Certain items in the 1996 and 1995 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
F-11
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) DISCONTINUED OPERATIONS - NEW WORLD COMPUTING
On June 30, 1996, the Company sold all of the assets and business of its
New World Computing subsidiary ("New World") to the 3DO Company ("3DO") for
approximately $13,600,000. In consideration of the sale, 3DO issued to the
Company approximately 1,018,000 shares of its common stock and assumed
approximately $1,600,000 of liabilities of New World. 3DO guaranteed that
the cash value realized by the Company upon sale of the shares would not be
less than $10.04 per share, notwithstanding the market price of such
shares. The Company sold all of the 3DO shares in 1996 and obtained payment
of $3,877,000 from 3DO pursuant to the guarantee.
The disposal of New World has been classified as discontinued operations in
the accompanying consolidated financial statements. 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 Company recorded a gain on the sale of New World of $4,219,000, net of
tax of $16,000. New World's revenue through the sale date was $2,085,000.
For 1995 New World revenues were $5,379,000.
(3) MANAGEMENT REORGANIZATION
On March 5, 1997, the Company announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board and Daniel C. Downs resigned as
President. In addition, three other officers resigned or were terminated in
connection with the reorganization ("Reorganization"). The Company entered
into separate agreements ("Agreements") with each of the former officers
setting out the terms on which their existing employment contracts with the
Company will be settled. In compliance with the Agreements, the Company
will continue to pay the former officers their current annual salaries and
other benefits for the remaining terms of their employment agreements with
the Company, which expire on or before December 31, 1999.
In March 1998, the Company and three of the former officers agreed to an
amendment of the Agreements. The Agreements were modified to extend the
payment term an additional year to December 31, 2000 and provided for
reductions of amounts to be paid in 1998 and 1999 totaling $272,000 and
$355,000, respectively. Medical and life insurance benefits pursuant to the
Agreements were also extended to December 31, 2000. The modification also
provides the Company an option to settle all amounts due pursuant to the
Agreements in shares of Common Stock. The option period commenced March 9,
1998 and extends to June 27, 1998. The number of shares of Common Stock to
be issued will be 66% of the number of shares determined by dividing the
present value of the amount then owing using a discount rate of 5% by the
average closing price of the Common Stock for the ten trading days prior to
the third business day before the notice of the exercise of the option.
Should the conversion option be exercised, the Company agrees to file a
Registration Statement on behalf of the former officers to register the
shares to be issued within 20 days of providing notice of its intent to
exercise its option. If the Company fails to have the Registration
Statement declared effective within 120 days of the notice, the Company
will be obligated to pay a one-time fee of $135,000 to the former officers
as additional compensation.
Pursuant to the Agreements, in 1997 the Company canceled an aggregate of
2,325,000 of outstanding warrants and options to purchase Common Stock of
the Company previously issued to the former officers. In addition, the
Company agreed to extend the exercise period and reduce the exercise price
of certain other warrants and options retained by the former officers.
Total charges related to the Reorganization are comprised of the following:
F-12
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Contractual payments for Agreements,
net of discount $ 3,128,000 840,000
Cancellation of notes receivable and related accrued interest of
$216,000 from former officers (note 5) -- 4,252,000
Cancellation of note receivable from President 150,000 --
Bonus granted to President 85,000 --
Charge related to extension of the exercise period and reduction in
the exercise price of certain warrants and options 1,450,000 --
------------ ------------
Total charges $ 4,813,000 5,092,000
============ ============
</TABLE>
In 1997, interest expense totaling $185,000 was incurred related to the
Agreements.
Effective December 31, 1996, as a result of the Reorganization, a total of
$4,252,000 of loans to former officers and the related interest were
cancelled including personal loans made to Alan Magerman, a former director
and Patrick J. Downs of $185,000 and $251,000, respectively.
Upon joining the Company as Chief Financial Officer, Gerald Sokol, Jr.
(currently President and Chief Executive Officer) was granted a total of
700,000 options to purchase Common Stock at prices ranging from $5.00 to
$5.08 per share. The options were exercisable as follows: 100,000 upon
grant, 200,000 in three equal annual installments and 400,000 exercisable
only if the closing price of the Common Stock was at least $11 per share
for ten consecutive days prior to August 15, 1998. All of the options were
subject to acceleration in the event of a "Change in Control Event" as
defined. Such a Change of Control Event occurred in March 1997 as a
consequence of the Reorganization and all the options became vested and
exercisable in full at that time. Also as a result of the Reorganization in
1997, the Board of Directors granted to Gerald Sokol Jr. an additional
600,000 options to purchase the Common Stock of the Company.
(4) BROADCAST EQUIPMENT AND FIXED ASSETS
Broadcast equipment and fixed assets are recorded at cost and consist of
the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Broadcast equipment $ 8,602,000 8,230,000
Furniture and fixtures 832,000 917,000
Other equipment 3,838,000 3,729,000
------------ ------------
13,272,000 12,876,000
Accumulated depreciation (5,299,000) (2,773,000)
------------ ------------
$ 7,973,000 10,103,000
============ ============
</TABLE>
Beginning in 1993 through June 30, 1996, the Company had entered into
various sale and leaseback arrangements. In the fourth quarter of 1996, the
Company completed a plan to repurchase equipment related to the prior
years' lease arrangements. The Company recorded a charge of approximately
$2,007,000 related to the termination of these lease arrangements. This
charge is included in equipment lease expense in 1996. To the extent
possible, management does not intend to use the same sale and leaseback
arrangements as a method of financing in future periods. In
F-13
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
addition, management does not intend to purchase equipment to be held as
inventory for sale and sale and leaseback arrangements. Accordingly, in the
fourth quarter of 1996, the Company reclassified all remaining inventory to
broadcast equipment and began recording depreciation charges on all assets
placed in service.
(5) SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Variable rate loan, paid in 1997 $ -- 2,015,000
Short-term debt related to the IWN Put
Option, paid in 1997 -- 3,045,000
------------ ------------
Total -- 5,060,000
Less current portion -- (5,060,000)
------------ ------------
Long term portion $ -- --
============ ============
</TABLE>
In December 1995, the Company entered into a sale, purchase, and investment
agreement ("Agreement") with Symphony LLC ("Symphony"), an unaffiliated
company whereby Symphony agreed to purchase a 10% interest in IWN for
$350,000 and would make capital contributions totaling $2,650,000 to IWN
L.P., a limited partnership of which IWN is the general partner. In
accordance with the Agreement, the Company issued to Symphony a warrant to
purchase 400,000 shares of the Company's Common Stock, exercisable at
$4.125 per share.
The Agreement included a provision whereby Symphony had the option to put
("Put Option") its partnership interest in IWN L.P. and its shares of IWN
to the Company during the period from April 1, 1997 through December 1,
1997 for certain consideration. Accordingly, the amount contributed by
Symphony was recorded as a short-term borrowing.
On April 8, 1997, Symphony exercised the Put Option. In June 1997, the
Company paid Symphony $3,556,000 in full payment of the Put Option.
Included in this amount was accrued interest of $261,000 and an additional
capital contribution made in 1997 by Symphony of $400,000. In addition, the
warrant to purchase 400,000 shares of the Company's Common Stock was
cancelled.
In June 1997, the Company borrowed $3,700,000 from GTECH Corp. ("GTECH"),
with whom it had agreed in principle to enter into a merger agreement. Of
this amount, $3,556,000 was used to pay Symphony as noted above. The merger
agreement was terminated in August 1997. The loan bore interest at the rate
of 13% per year and was secured by a pledge of all of the capital stock of
IWN Inc. and a collateral assignment of the Company's partnership interest
in IWN L.P. On November 3, 1997, the Company repaid the entire outstanding
principal and accrued interest of $3,883,000 to GTECH with a portion of the
proceeds of a private placement of preferred stock (note 8).
(6) INCOME TAXES
For each of the years ended December 31, 1997, 1996 and 1995, there was no
provision for current or deferred income taxes. The components that
comprise deferred tax assets and liabilities at
F-14
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C>
Deferred tax assets:
NOL carryforwards $ 14,527,000 12,292,000
Legal and litigation accruals 1,465,000 1,711,000
Allowance for doubtful accounts 549,000 696,000
Compensation and vacation accrual 1,021,000 580,000
Operating accruals 240,000 695,000
Sale and leaseback transactions 119,000 208,000
Allowance for equipment obsolescence 333,000 --
Deferred revenue 396,000 199,000
Research and experimentation credit 247,000 175,000
Other 73,000 86,000
-------------------- --------------------
Total gross deferred tax assets 18,970,000 16,642,000
Valuation allowance (17,572,000) (14,804,000)
-------------------- --------------------
Net deferred tax assets 1,398,000 1,838,000
-------------------- --------------------
Deferred tax liabilities:
Capitalized software 1,263,000 1,513,000
Depreciation 135,000 129,000
Other -- 196,000
-------------------- --------------------
Total gross deferred liabilities
1,398,000 1,838,000
-------------------- --------------------
Net deferred taxes $ -- --
==================== ====================
</TABLE>
The reconciliation of computed expected income taxes to effective income
taxes by applying the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Tax at federal income tax rate $ (4,235,000) (7,804,000) (1,342,000)
State taxes, net of federal benefit (142,000) 139,000 --
Settlement warrants and SFAS 123 charges 1,109,000 650,000 --
Change in valuation allowance 2,768,000 3,077,000 1,342,000
Adjustments of net operating loss
carryforwards 563,000 3,694,000 --
Other (63,000) 244,000 --
--------------------- ---------------------- -----------------------
Effective income taxes $ -- -- --
===================== ====================== =======================
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1997, 1996 and 1995 was an increase of $2,768,000, $3,077,000
and $1,797,000, respectively. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that
F-15
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based on the level of
historical operating results and projections for the taxable income for the
future, management has determined that it is more likely than not that the
portion of deferred tax assets not utilized through the reversal of
deferred tax liabilities will not be realized. Accordingly, the Company has
recorded a valuation allowance to reduce deferred tax assets to the amount
that is more likely than not to be realized.
At December 31, 1997, the Company has available net operating loss
carryforwards of approximately $39,000,000 for federal income tax purposes,
which begin to expire in 2006. The net operating loss carryforwards for
state purposes, which begin to expire in 1998 are approximately
$13,500,000.
(7) COMMON STOCK OPTIONS AND WARRANTS
The Company has two active stock option plans. The 1995 Employee Stock
Option Plan (the "Option Plan") was approved by the shareholders in 1995
and was subsequently amended. Under the Option Plan, options for the
purchase of the Company's common stock may be granted to officers,
directors and employees. Options may be designated as incentive stock
options or as nonqualified stock options and generally vest over three
years, except, the Board of Directors, at its discretion, can authorize
acceleration of vesting periods. Options under the Option Plan, which have
a term of up to ten years, are exercisable at a price per share not less
than the fair market value on the date of grant. The aggregate number of
shares authorized for issuance under the Option Plan is 7,000,000.
In addition, the Company has issued options pursuant to a Special Stock
Option Plan ("Special Plan"). Options issued under the Special Plan are
made at the discretion of the Board of Directors and are designated only as
nonqualified options. The options generally have a term of up to ten years,
are exercisable at a price per share not less than the fair market value on
the date of grant and vest over various terms.
A summary of the status of the Company's two active stock option plans as
of December 31, 1997, 1996 and 1995 and changes during the years ended on
those dates is presented below.
<TABLE>
<CAPTION>
Special Plan Option Plan
-------------------------------------------- --------------------------------------------
Weighted Average Weighted Average
Shares Exercise Price(a) Shares Exercise Price
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1994 -- -- 2,846,000 $6.22
Granted -- -- 1,767,000 5.24
Exercised -- -- (10,000) 3.06
Canceled -- -- (63,000) 6.22
-------------------------------------------- --------------------------------------------
Outstanding December 31, 1995 -- -- 4,540,000 5.84
Granted 600,000 $5.00 2,398,000 3.69
Exercised -- -- (29,000) 3.07
Canceled -- -- (220,000) 5.52
-------------------------------------------- --------------------------------------------
Outstanding December 31, 1996 600,000 5.00 6,689,000 5.09
Granted 430,000 3.30 1,947,000 2.66
Exercised -- -- (45,000) 2.08
Canceled -- -- (3,503,000) 5.58
-------------------------------------------- --------------------------------------------
</TABLE>
F-16
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<S> <C> <C> <C> <C>
Outstanding December 31, 1997 1,030,000 $3.01 5,088,000 $3.47
============================================ ============================================
</TABLE>
(a) In May 1997, the Board of Directors approved a modification to
previously issued options whereby the exercise price of 1,612,000 options
issued to certain members of the Board of Directors, management and
employees was reduced to $2.81. The previous exercise prices ranged from
$3.50 to $5.08. No compensation expense was recorded as a result of the
modification.
In January 1998, the Company issued approximately 759,000 shares of Common
Stock in exchange for the surrender and cancellation of certain previously
outstanding warrants and options to purchase approximately 2,578,000 shares
of Common Stock at exercise prices ranging from $2.00 to $5.75 per share.
The fair market value of the shares issued was approximately $900,000,
which was less than the fair value of the warrants and options received in
the exchange.
In March 1998, the Company agreed to issue approximately 277,000 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 warrants and options to purchase 1,500,000 shares of
Common Stock at exercise prices ranging from $2.00 to $4.75 per share. The
fair market value of the shares to be issued is approximately $200,000,
which was less than the fair value of the warrants and options received in
the exchange.
The following summarizes options and warrants issued and outstanding as of
December 31, 1997 and March 31, 1998 following completion of the exchanges
noted above:
<TABLE>
<S> <C>
Outstanding December 31, 1997:
Options 6,118,000
Warrants 4,194,000
Exchanged for Common Stock (4,078,000)
-------------------
Outstanding March 31, 1998 6,234,000
===================
</TABLE>
A summary of options exercisable and the weighted average fair value of
options issued in 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------
<S> <C> <C>
Special Plan:
Options exercisable at end of year 740,000 --
=======================================
Weighted average fair value of options
granted during the year $3.74 $4.34
=======================================
Option Plan:
Options exercisable at end of year 3,080,000 3,534,000
=======================================
Weighted average fair value of options
granted during the year $2.58 $3.24
=======================================
</TABLE>
The following table summarizes information about the Special Plan and the
Option Plan as of December 31, 1997.
F-17
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- ---------------------------------------------
Weighted Average
Range of Average Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
Special Plan:
$2.81 - $4.50 1,030,000 6 years $3.01 740,000 $3.09
Option Plan:
$1.88 - $3.00 2,190,000 9 years $2.58 785,000 $2.77
$3.01 - $4.50 2,310,000 8 years $3.65 1,707,000 $4.01
$4.51 - $6.50 588,000 5 years $5.27 588,000 $5.40
</TABLE>
The Company has issued various options pursuant to the Special Plan to non-
employees to purchase common stock, the majority of which are exercisable
as of December 31, 1997. In compliance with SFAS No. 123, the Company
expensed $354,000 in 1997 associated with the grant of 134,000 options. The
fair value of each grant in 1997 was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 0% percent, risk-free interest rate of 6.5%,
expected volatility of 179%, and an expected option life of 5 years.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized in the consolidated financial statements for the
issuance of options to employees pursuant to the Special Plan and the
Option Plan. Had compensation cost related to employees for the Company's
stock-based compensation plans been determined consistent with SFAS No.
123, the Company's net loss per share applicable to common stock would have
been increased to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C> <C>
Net loss As reported $ 12,457,000 22,952,000 3,948,000
Pro forma $ 16,733,000 27,823,000 7,686,000
Net loss per share As reported $ 0.55 1.02 0.19
Pro forma $ 0.74 1.23 0.38
</TABLE>
Pro forma net loss reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for options
under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above since compensation cost is reflected over the option
vesting periods and compensation cost for options and granted prior to
January 1, 1996 are not considered. The fair value of each option grant in
1997, 1996 and 1995 is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average
assumptions: 1997 - dividend yield of 0% percent, risk-free interest rate
of 6.5%, expected volatility of 179%, and expected option lives ranging
from 5 years to 10 years; 1996 - dividend yield of 0% percent, risk-free
interest rates ranging from 6.5% to 6.8%, expected volatility of 90%, and
expected option lives ranging from 5 years to 10 years; 1995 - dividend
yield of 0% percent, risk-free interest rate of 6.6%, expected volatility
of 90%, and expected option lives ranging from 5 years to 8 years.
F-18
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company has issued various warrants to non-employees to purchase common
stock, all of which are exercisable as of December 31, 1997. The weighted
average fair value of warrants granted during 1997, 1996 and 1995 was
$1.83, $3.11 and $3.28, respectively. In compliance with SFAS No. 123, the
Company expensed $1,401,000 in 1997 and $1,910,000 in 1996 associated with
the grant of 1,065,000 warrants in 1997 and 616,000 warrants in 1996,
respectively.
At December 31, 1997, 1996 and 1995, the weighted average exercise price of
exercisable warrants was $3.31, $4.10 and $3.95 respectively. The fair
value of each warrant grant in 1997 and 1996 is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1997 - dividend yield of 0% percent, risk-
free interest rate of 6.5%, expected volatility of 179%, and an expected
warrant life of 10 years; 1996 - dividend yield of 0% percent, risk-free
interest rates ranging from 5.3% to 6.5%, expected volatility of 90%, and
an expected warrant life of 5 years; 1995 - dividend yield of 0% percent,
risk-free interest rate of 6.5%, expected volatility of 90%, and an
expected warrant live of 5 years. The following summarizes warrants issued
and outstanding:
<TABLE>
<CAPTION>
OUTSTANDING
WARRANTS
-----------
<S> <C>
December 31, 1994 3,382,000
Granted 1,033,000
Exercised (226,000)
Canceled --
-----------
December 31, 1995 4,189,000
Granted 616,000
Exercised (224,000)
Canceled --
-----------
December 31, 1996 4,581,000
Granted 1,065,000
Exercised (374,000)
Canceled (1,078,000)
-----------
December 31, 1997 4,194,000
===========
</TABLE>
(8) CUMULATIVE CONVERTIBLE PREFERRED STOCK
Series A
--------
The Company has authorized 10,000,000 shares of Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Stock"). At December 31,
1997 and 1996, there were 161,000 shares of Series A Preferred Stock issued
and outstanding. The Series A Preferred Stock provides for a cumulative
annual dividend of 10%, payable in semi-annual installments in June and
December. Dividends may be paid in cash or with shares of common stock. In
1997 and 1996, the Company issued approximately 8,000 and 3,000 common
shares, respectively, for payment of dividends. At December 31, 1997, the
cumulative unpaid dividends for the Series A Preferred Stock was
approximately $1,000.
The Series A Preferred Stock has no voting rights and has a $1.00 per share
liquidation preference over common stock. At December 31, 1997, each share
is convertible to Common Stock, at the option of the holders, into 60,690
shares of Common Stock at an adjusted conversion price of $2.65. The number
of shares into which the Series A Preferred Stock can be converted is
subject to adjustment in certain events. During 1997, there were no
conversions. There are no mandatory conversion terms or dates associated
with the Series A Preferred Stock.
F-19
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Series B
--------
The Company has authorized 85,000 shares of Series B Cumulative Convertible
Preferred Stock ("Series B Preferred Stock"). On October 31, 1997, the
Company completed a private placement in which it issued and sold to two
institutional investors a total of 70,000 shares of the Company's Series B
Preferred Stock, $100 stated value per share for an aggregate purchase
price of $7,000,000. In connection with the private placement, the Company
paid a brokerage fee of $210,000 and incurred certain other offering
expenses in the amount of approximately $84,000. A portion of the net
proceeds from the private placement was used to repay indebtedness and
accrued interest to GTECH totaling $3,883,000. The balance of the net
proceeds has been and will be used for general working capital purposes.
The Series B Preferred Stock provides for a cumulative annual dividend of
$4 per share, payable in quarterly installments of $1 per share on the last
day of January, April, July and October of each year, commencing January
31, 1998. Dividends may be paid in cash or with shares of Series B
Preferred Stock, or by increasing the stated value of the Series B
Preferred Stock. At December 31, 1997, the cumulative unpaid dividends for
the Series B Preferred Stock were approximately $47,000.
The Series B Preferred Stock has no voting rights and has a per-share
liquidation preference over common stock equal to the sum of $100 and all
accrued and unpaid dividends. Holders of the Series B Preferred Stock are
entitled to convert 25% of their shares into shares of the Company's Common
Stock ("Conversion Shares"), subject to certain limitations, on or after
February 12, 1998 ("Initial Conversion Date"). An additional 25% of the
Series B Preferred Stock will become convertible on each of April 13, 1998,
May 13, 1998 and June 12, 1998. Any outstanding shares of the Series B
Preferred Stock not converted by October 31, 2000 will automatically be
converted as of such date.
The number of Conversion Shares issuable upon conversion of each share of
Series B Preferred Stock ("Conversion Rate") is determined by dividing the
sum of $100 plus any accrued and unpaid dividends on the Series B Preferred
Stock by the Conversion Price then in effect. The Conversion Price is equal
to the lesser of (a) 140% of the average of the closing bid prices of the
Company's Common Stock on the five trading days immediately preceding
February 12, 1998, but in no event higher than $3.50 per share, and (b) 85%
of the lowest average of the closing bid prices of the Company's Common
Stock on any three trading days during the 20 trading days immediately
preceding any conversion date. The Conversion Rate is subject to adjustment
in certain events.
As of December 31, 1997, no shares of Series B Preferred Stock were
convertible into Common Stock. Following the determination of the Initial
Conversion Date and the Conversion Rate in February 1998, 25% of the Series
B Preferred Stock, or 17,500 shares, were convertible into approximately
2,940,000 shares of common stock at the option of the holders. In March
1998, 2,000 shares of Series B Preferred Stock plus accrued dividends were
converted into 336,658 shares of Common Stock at a conversion price of
$0.60 per share.
(9) RETIREMENT AND SAVINGS PLANS
DEFINED BENEFIT PENSION PLAN
In connection with the Reorganization in 1997, the Company terminated a
non-qualified, non-contributory pension plan that covered certain former
officers. There were no accrued pension benefits payable to any
participants upon termination of the plan. The plan was secured by whole-
life insurance policies for certain former officers. The Company had
previously borrowed funds against these assets. Upon termination, the loans
were paid and the net assets were liquidated.
DEFERRED COMPENSATION PLAN
F-20
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In connection with the Reorganization, the Company terminated an unfunded,
non-qualified deferred compensation plan that covered certain former
officers. The accrued plan benefits of $580,000 included in accrued
expenses as of December 31, 1996 were substantially paid to participants in
1997. Unpaid benefits at December 31, 1997 were $58,000, which are payable
in two equal installments on January 1, 1998 and 1999.
DEFINED CONTRIBUTION PLAN
During 1994, the Company established a defined contribution plan which is
organized under Section 401(k) of the Internal Revenue Code, which allows
employees who have completed at least six months of service or reached age
21, whichever is later, to defer up to 15% of their pay on a pre-tax basis.
The Company, at its discretion, may contribute to the plan. For the years
ended December 31, 1997, 1996 and 1995, the Company made no such
contributions.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office and production facilities and equipment under
agreements which expire at various dates. Certain leases contain renewal
provisions and generally require the Company to pay utilities, insurance,
taxes and other operating expenses. Additionally, the Company has entered
into lease agreements for certain equipment used in broadcast operations,
some of which involve sale and leaseback transactions. Any deferred gains
on sale and leaseback transactions are amortized over the three year lease
terms. Each lease provides an option to the Company to repurchase the
equipment at the estimated fair market value at the end of the lease term.
Included in other assets at December 31, 1997 are security deposits
totaling $184,000 relating to these agreements. Lease expense under
operating leases totaled $1,299,000, $5,648,000, and $4,763,000, in 1997,
1996 and 1995, respectively. (note 11)
In November 1997, the Company sold its interest in a LLC that owns the
building containing the Company's corporate office. A gain of $905,000 was
recognized in 1997.
Future minimum lease obligations under noncancelable operating leases at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING TOTAL
------------------ -------------------
<S> <C>
1998 $ 1,329,000
1999 913,000
2000 412,000
2001 177,000
-------------------
Total $ 2,831,000
===================
</TABLE>
CAPITAL LEASE
The Company entered into a capital lease in 1997 for the purchase of new
equipment. Future minimum lease payments under the capital lease together
with the present value of the net minimum lease payments as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
1998 $ 67,000
1999 67,000
</TABLE>
F-21
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<S> <C>
2000 67,000
2001 75,000
-----------
Total minimum lease payments 276,000
Less: Amount representing interest (10.7%) (51,000)
-----------
Present value of net minimum lease payments 225,000
Less current portion (46,000)
-----------
Long term portion $ 179,000
===========
</TABLE>
CREDIT RISK
The Company provides services to group viewing locations, generally bars
and lounges, and to third party distributors, primarily throughout the
United States. In addition, the Company licenses its technology and
products to licensees outside of the United States. Concentration of credit
risk with respect to trade receivables are limited due to the large number
of customers comprising the Company's customer base, and their dispersion
across many different industries and geographies. The Company performs
ongoing credit evaluations of its customer's financial condition. At
December 31, 1997, the Company had no significant concentration of credit
risk.
(11) LEGAL ACTIONS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or
liquidity.
In February 1998, the Company completed its previously announced settlement
of a class-action lawsuit pending against the Company since 1993. The terms
of the settlement were as follows: A settlement fund was established
consisting of $400,000 in cash plus 565,000 warrants to purchase the Common
Stock of the Company ("Settlement Warrants"). Each Settlement Warrant has a
term of three years from February 18, 1998. The Settlement Warrants were
issued on February 18, 1998 and entitle the holder of a Settlement Warrant
to purchase a share of common stock of the Company at a price of $0.96.
During the period from February 18, 2000 to February 18, 2001, the holders
of Settlement Warrants have the right, but not the obligation, to put the
Settlement Warrants to the Company for repurchase at a price of $3.25 per
Settlement Warrant (the "Put Right"), provided, however, that this Put
Right shall expire, if at any time after February 18, 1998 the closing
price per share of the Company's Common Stock on the American Stock
Exchange is more than $4.22 on any seven trading days, whether consecutive
or not. Upon expiration of the Put Right, the Company shall have no further
obligation to repurchase the Settlement Warrants. In no event shall the
Company have any obligation to repurchase its Common Stock.
Although the Put Right may expire based on the closing price of the Common
Stock over the next three years, the Company has recognized the potential
liability related to the Put Right. Accordingly, a charge of $1,291,000 for
the present value (discounted at 15%) and related interest expense for the
Put Right was recognized in 1996. The difference between the amount
expensed and the total potential liability, $545,000, will be accreted as
interest expense and charged over the period from September 1996 until
February 18, 2000. In 1997, a total of $225,000 was charged to interest
expense.
On April 18, 1995, a class action lawsuit was filed in United States
District Court for the Southern District of California entitled Lenora
------
Isaacs, on behalf of herself and all others similarly situated vs. NTN
----------------------------------------------------------------------
Communications and Patrick J. Downs. The complaint alleges violations of
-----------------------------------
federal securities laws based upon the Company's projections for the fourth
quarter of 1994 and for the 1994 fiscal year, and further alleges that
certain of the Company's insiders sold stock on information not generally
known to the public. As previously announced, the Company has agreed
F-22
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
to a settlement having a total value of $1,450,000. The settlement, which
was approved by the Court in January 1998, consists of $250,000 in cash
with the remaining balance of $1,200,000 being payable with the Company's
common stock or in cash, at the Company's election. It is anticipated that
the claims process will be completed by the summer of 1998 and that the
common stock will be issued shortly thereafter. A charge of $2,800,000 was
recorded in 1996 for the estimated settlement. In the fourth quarter of
1997, the Company reduced the accrual for the settlement expense and
accordingly reduced its legal expense by $1,350,000 as a result of the
change in estimate.
In May 1997, a shareholder derivative complaint was filed in the Superior
Court of California, San Diego, North County Branch. The complaint, which
sought injunctive relief and an unspecified amount of damages, was brought
by a current shareholder against the Company and certain officers and
directors. More specifically, the plaintiff alleged that the Company was
injured by a lack of independence and breach of business judgment by virtue
of certain agreements entered into in connection with the recent management
reorganization. The Company believed that the lawsuit was without merit and
conveyed its position to the plaintiffs' counsel. On June 10, 1997, the
plaintiff voluntarily dismissed the lawsuit without any payment from the
Company.
On June 11, 1997, the Company was included as a defendant in litigation
entitled Eliot Miller and Jay Iyer, shareholders on behalf of themselves
---------------------------------------------------------------
and all others similarly situated vs. NTN Communications, Inc., Patrick J.
--------------------------------------------------------------------------
Downs, Daniel C. Downs, Donald C. Klosterman, Ronald E. Hogan, Gerald P.
------------------------------------------------------------------------
McLaughlin and KPMG Peat Marwick LLP, which complaint was filed by the same
------------------------------------
lead plaintiff and lead attorneys as in the previously dismissed derivative
action. The new complaint alleges violations of state and federal
securities laws based upon purported omissions from the Company's filings
with the Securities and Exchange Commission. More particularly, the
complaint alleges that the directors and former officers devised an "exit
strategy" to provide themselves with undue compensation upon their
resignation from the Company. Plaintiffs further allege that defendants
made false statements about, and failed to disclose, contingent liabilities
(guaranteed compensation to management and the right of an investor in IWN
to require the Company to repurchase its investment during 1997) and
phantom assets (loans to management) in the Company's financial statements
and KPMG Peat Marwick LLP's audit reports, all of which served allegedly to
inflate the trading price of the Company's Common Stock. In 1997, KPMG Peat
Marwick LLP was dismissed from the suit after filing a motion to dismiss.
In November 1997, the Court dismissed all of the plaintiff's state law
causes of action against the Company but retained the plaintiff's federal
law causes of action. In February 1998, the attorneys representing the
plaintiffs in this litigation filed an action entitled Dorman vs. NTN
Communications, Inc. in the Superior Court of San Diego County, California
in which they essentially replead the state law causes of action dismissed
in the federal lawsuit. In the Company's opinion, the claims in these two
lawsuits are covered by directors and officers liability insurance
providing $10,000,000 of coverage. The Company has submitted these claims
to its directors and officers liability insurance underwriters, who have
accepted such claims subject to reservation of rights. The Company's
deductible under the insurance policy is $250,000 per claim.
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 courts 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. These
actions affect only the Canadian operations of the Company and its Canadian
licensee and do not extend to the Company's financial position, results of
operations and liquidity in the United States or elsewhere. Although they
cannot be estimated with certainty, any damages the Company might incur are
not expected to be material.
The Company is a defendant in two other lawsuits. In November, 1997, the
Company's former advertising manager brought a suit alleging breach of an
alleged employment contract and age discrimination. The Company has denied
any liability in this case and does not believe its resolution will have a
material adverse effect on the financial position, results of operations
and liquidity of the Company.
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
F-23
<PAGE>
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
and other breaches of such agreement. The Company denied these claims and
intends to defend itself vigorously in this litigation. It is not
anticipated at the present time that the outcome of this lawsuit will have
a material adverse effect on the financial position, results of operations
and liquidity of the Company.
Recently the Company was informed that it was in default of certain
covenants contained in two leases for equipment installed at various NTN
Network locations. The Company has made all payments pursuant to these
leases when and as due and expects to do so for the remaining terms of the
leases, which expire in June and October, 1999, respectively. The
respective covenants provide for a minimum working capital ratio, for
customer payments to be directed to a specific account maintained by an
independent bank, and for a minimum collection to lease payment ratio. The
Company has agreed to direct the payments of additional customers to the
specific bank accounts each month to provide the lessors with further
security. Excess account balances are returned to the Company each month
following the monthly lease payments. The Company has reached an agreement
to cure the alleged lease defaults with one lessor and such lessor has
rescinded its default notice to the Company subject to the execution and
delivery of a lease amendment and an additional collateral assignment
agreement on or before April 30, 1998. The other lessor has agreed to
accept the Company's offer to cure the default if it is paid an
administrative fee. The Company believes that it will eventually reach an
agreement to cure the alleged default on the second lease transaction. The
Company's only other sale-leaseback transaction also contains similar
covenant provisions and the Company is in default for the same reasons. The
third lessor has not declared a default. If it does, the Company believes
it may be able to enter into a similar arrangement to direct payments from
additional customers to the individual collateral bank account. The third
lease also expires in 1999.
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 all claims
made. During the pendency of such claims, the Company will continue to
incur the costs of defense of same. Other than set forth above, there is no
material litigation pending or threatened against the Company.
(12) SUBSEQUENT EVENT
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.
In March 1998, the Company entered into a letter of intent to sell 85% of
its interest in LearnStar to NewStar Corporation, a company in which Sally
A. Zoll, President of LearnStar, is a shareholder. The Company is currently
negotiating a definitive agreement, however the terms of the sale have not
been finalized. Effective March 31, 1998, the Company has ceased funding
the LearnStar operations.
On April 1, 1998, the Company reached an agreement in principle with
Omnigon, a California corporation, to sell 90% of the equity of IWN to
Omnigon on or before May 31, 1998. The Company is currently negotiating a
definitive agreement, however the terms of the sale have not been
finalized. Notwithstanding, effective March 31, 1998, the Company ceased
funding the IWN operations. Omnigon paid $100,000 in April 1998 and has
agreed to pay $100,000 in May 1998 for the option to acquire IWN on the
foregoing terms. Any such payment made will be non-refundable and will not
be applied to the purchase price of the IWN shares. The Company has agreed
that IWN shall use any such payment from Omnigon to pay its operating
expenses prior to a closing or cancellation of the proposed transaction.
F-24
<PAGE>
Schedule II
-----------
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts (a)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
ADDITIONS BALANCE
ALLOWANCE FOR BALANCE AT CHARGED TO AT END
DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS (b) OF PERIOD
----------------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
1995 $ 362,000 645,000 449,000 $ 558,000
1996 $ 558,000 1,840,000 835,000 $1,563,000
1997 $1,563,000 1,462,000 1,712,000 $1,313,000
</TABLE>
(a) On June 30, 1996, the Company sold all of the assets and business of its
New World Computing subsidiary. The disposal of New World has been
classified as a discontinued operation in the accompanying consolidated
financial statements and the consolidated financial statement schedule
above for all prior periods.
(b) Reflects trade accounts receivable written off during the year.
See accompanying independent auditors report.
F-25
<PAGE>
Exhibit 10.1
RESTATED CERTIFICATE OF
OF
INCORPORATION
NTN Communications, Inc. a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is NTN Communications, Inc. NTN
Communications, Inc. was originally incorporated under the name Alroy
Industries, Inc., and the original Certificate of Incorporation of the
corporation was filed with the Secretary of State of the State of Delaware on
April 13, 1984.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the Certificate of Incorporation
of this corporation.
3. The Board of Directors of NTN Communications, Inc. has duly adopted
resolutions setting forth proposed amendments to the Certificate of
Incorporation of said corporation, declaring said amendments to be available,
and directing the officers of said corporation to solicit the written consent of
the stockholders of said corporation to said amendments.
4. Thereafter, said amendments to the Certificate of Incorporation herein
certified were duly adopted in accordance with Section 242 of the Delaware
General Corporation Law by affirmative written consent of a majority of the
outstanding stock of each class entitled to vote thereon in accordance with
Section 228 of the Delaware General Corporation Law. Written notice of the
taking of such action by written consent of stockholders has been given to those
stockholders who have not so consented in writing, as provided in Section 228 of
the Delaware General Corporation Law.
5. The text of the Restated Certificate of Incorporation as heretofore
amended or supplemented is hereby restated and further amended to read in its
entirety as follows;
1.
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
-------------------------------------
NTN COMMUNICATIONS, INC.
------------------------
ARTICLE I
The name of the corporation (the "Corporation") is NTN COMMUNICATIONS, INC.
ARTICLE II
The address of the corporation's registered office in the State of Delaware
is 1013 Center Road, in the city of Wilmington, county of New Castle, Delaware.
The name of the Corporation's registered agent at such address is Corporate
Agents, Inc.
ARTICLE III
The nature of the business or purpose to be conducted or promoted is to be
engaged in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE IV
After giving effect to the reverse stock split described below, the total
number of shares of stock which the corporation shall have authority to issue is
60,000,000 shares, of which 50,000,000 shares shall be Common Stock, par value
$.005 per share, and 10,000,000 shares shall be Preferred Stock, par value $.005
per share.
(a) Series A Preferred Stock. This corporation is authorized to issue a
------------------------
series of Preferred Stock designated "Series A Convertible Preferred Stock"
consisting of 5,000,000 shares.
(1) Dividend Rights.
---------------
(i) Rights to Cash Dividends. In the absence of any action
------------------------
pursuant to part (ii) of this subdivision (a)(1), the holders of the Series A
Preferred shall be entitled to receive cumulative dividends of ten cents per
share per annum, payable semiannually in equal installments of five cents per
share on December 1 and June 1 of each Year. The dividends so payable on any
December 1 or June 1 will be paid by check or draft to the person (the
"Registered Holder") in whose name the Series A Preferred is registered as of
the close of business on November 15 or May 15 next preceding the interest
payment date (whether or not a business day), at such person's address as it
appears on the registration books of the Corporation.
(ii) Rights to Stock Dividends. At the Corporation's option, the
-------------------------
Corporation may declare and pay a dividend for any dividend payment date(s) in
the form of its common stock, $.005 par value per share (the "Common Stock"),
such stock dividend to be in lieu of the dividend provided for by part (i) of
this subdivision (a)(1). To determine the amount of Common Stock to be issued as
a substitute dividend on the Series A Preferred, the Common Stock will be valued
as its market value. Market value is defined for this purpose as the average
closing bid price for the twentieth through eleventh trading days preceding the
date on which interest is due.
(2) Voting Rights. The Series A Preferred shall have no voting
-------------
rights.
2.
<PAGE>
(3) Rights on Liquidation, Dissolution and Winding Up. Upon
-------------------------------------------------
liquidation, dissolution and winding up, each share of the Series A Preferred
shall have preference over the Common Stock to the extent of $1.00 per share,
but shall not otherwise be entitled to share in the proceeds of any liquidation,
dissolution or winding up. The preference of subordination or the rights of the
Series A Preferred with respect to any other class of stock, or any other series
of preferred stock, shall be as stated in the instrument defining the rights of
such other class or series. Neither the merger or consolidation of the
Corporation into or with any other corporation or any other corporation into or
with the Corporation, nor a sale, transfer or lease of all or any part of the
assets of the Corporation, shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this subdivision(3).
(4) Conversion Rights. Commencing on the date of the issuance of the
-----------------
Series A Preferred, the Series A Preferred shall at any time be convertible at
the option of the holder thereof into duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock at a conversion rate (the
"Conversion Rate") as set forth below (subject to adjustment as provided in
subdivision (5) hereof).
(i) The Registered Holder shall have the right at any time to
convert shares of Series A Preferred into that number of fully paid and
nonassessable shares of Common Stock of the Corporation that equals the number
of shares of Series A Preferred that are surrendered for conversion divided by
the Conversion Rate. The Conversion Rate shall initially be 100%, and shall be
subject to adjustment pursuant to subdivision (5) hereof. Upon the surrender of
the Series A Preferred accompanied by the written request for conversion from
the Registered Holder, the Corporation shall issue and deliver to such
Registered Holder certificates evidencing such shares of Common Stock.
(ii) In order to exercise the conversion privileges, the
Registered Holder shall surrender the Series A Preferred to the Corporation at
its principal address, accompanied by written notice to the Corporation that
such holder elects to convert all or a portion of the same. Such notice shall
also state the name or names (with address) in which the certificate or
certificates for shares of Common Stock and any re-issued Series A Preferred
shall be issued upon such conversion. As promptly as practicable after the
receipt of such notice and surrender of the Series A Preferred, the Corporation
shall issue and deliver to such holder, or to his assignee or assignees on his
written order, a certificate or certificates for the number of full shares of
Common Stock and any re-issued Series A Preferred issuable upon the conversion
of the Series A Preferred. Such conversion shall be deemed to have been effected
at the close of business of the first business day after the date on which such
notice shall have been received by the Corporation and such Series A Preferred
shall have been surrendered.
(iii) No fractional shares shall be issued upon conversion of the
Series A Preferred and any portion of the same which would otherwise be
convertible into a fractional share shall be paid in cash in the amount of the
liquidation preference of the fractional share. No payment or adjustment shall
be made upon any conversion on account of any cash dividends on the Common Stock
issued upon such conversion.
(5) Adjustments to Conversion Rate.
------------------------------
The Conversion Rate shall be subject to adjustment as provided in this
subdivision (5).
(i) in case the Corporation shall (A) pay a dividend, or make a
distribution, in shares of its Common Stock (the "Shares"), (B) subdivide its
outstanding Shares into a greater number of Shares, (C) combine its outstanding
Shares into a smaller number of Shares, or (D) issue by reclassification of its
Shares any shares of Common Stock of the Corporation (other than a change in par
value, or from par value to no par value, or from no par value to par value),
the Conversion Rate in effect immediately prior thereto shall be adjusted so
that the Registered Holder shall
3.
<PAGE>
be entitled to receive the number of Shares which he would have owned or have
been entitled to receive immediately following the happening of any of the
events described above, had the Series A Preferred been converted immediately
prior to the record or effective date thereof.
An adjustment made pursuant to subparts (i)(A)-(D) above shall become
effective immediately after the record date in the case of a dividend or
distribution in Shares and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
If, as a result of an adjustment made pursuant to this paragraph, the Registered
Holder shall become entitled to receive shares of two or more classes of Common
Stock of the Corporation, the Board of Directors (whose determination shall be
conclusive and shall be evidenced by a resolution) shall determine the
allocation of the adjusted Conversion Rate between or among shares of such
classes of Common Stock.
(ii) In case of any reclassification of the outstanding Shares
(other than a change in par value, or from par value to no par value, or from no
par value to par value or as a result of a subdivision, combination or stock
dividend), or in case of any consolidation of the Corporation with or merger of
the Corporation into another corporation wherein the Corporation is not the
surviving entity, or in case of any sale of all, or substantially all, of the
property, assets, business and goodwill of the Corporation, the Corporation, or
such successor or purchasing corporation, as the case may be, shall provide, by
a written instrument delivered to the Registered Holder, that the Registered
Holder shall thereafter be entitled upon conversion to the kind and amount of
shares of stock or other equity securities, or other property or assets which
would have been receivable by such Registered Holder upon such reclassification,
consolidation, merger or sale, if the Series A Preferred had been converted
immediately prior thereto. Such corporation, which thereafter shall be deemed to
be the "Corporation" for purposes of the Series A Preferred, shall provide in
such written instrument for adjustments to the Conversion Rate which shall be as
nearly equivalent as may be practicable to the adjustments provided for in
this subdivision(5). par value
(iii) Common Stock Issued at Less Than the Conversion Price. If
-----------------------------------------------------
the Corporation shall issue any Common Stock without consideration or for a
consideration per share less than the applicable Equivalent Preference Amount,
the Equivalent Preference Amount shall immediately be reduced to the amount
determined by dividing (A) an amount equal to the sum of (1) the number of
shares of Common Stock outstanding immediately prior to such issuance multiplied
by the Equivalent Preference Amount in effect immediately prior to such issuance
and (2) the consideration, if any, received by the Corporation upon such
issuance, by (B) the total number of shares of Common Stock outstanding
immediately after such issuance. The Equivalent Preference Amount at any time
shall be the value that results when the liquidation preference of one share of
Series A Preferred is multiplied by the Conversion Rate in effect at that time;
thus the Conversion Rate applicable after the adjustment in the Equivalent
Preference Amount provided by this part (iii) shall be the figure that results
when the adjusted Equivalent Preference Amount is divided by the liquidation
preference of one share of Series A Preferred.
For the purpose of determining the date on which an adjustment to the
Conversion Rate pursuant to this part (iii) shall take effect, the Conversion
Rate shall be adjusted as of the earlier of (x) the date, if any, on which the
Corporation shall enter into a firm contract for the issuance of such shares of
Common Stock, or securities convertible into or exchangeable or exercisable for
shares of Common Stock; (y) the date of actual issuance of such shares of Common
Stock or such other securities.
For the purposes of any adjustment of the Conversion Rate pursuant to this
part (iii), the following provisions shall also be applicable:
4.
<PAGE>
(A) Cash. In the case of the issuance of Common Stock for
----
cash, the amount of the consideration received by the Corporation shall be
deemed to be the amount of the cash proceeds received by the Corporation for
such Common Stock before deducting therefrom any discounts, commissions, taxes
or other expenses allowed, paid or incurred by the Corporation for any
underwriting or otherwise in connection with the issuance and sale thereof.
(B) Consideration Other Than Cash. In the case of the
-----------------------------
issuance of Common Stock (otherwise than upon the conversion of shares of
capital stock or other securities of the Corporation) for a consideration in
whole or in part other than cash, including securities acquired in exchange
therefor (other than securities by their terms so exchangeable), the
consideration other than cash shall be deemed to be the fair value thereof as
determined by the Board of Directors, irrespective of any accounting treatment;
provided that such fair value as determined by the Board of Directors shall not
exceed the aggregate current market price of the shares of Common Stock being
issued as of the date the Board of Directors authorizes the issuance of such
shares.
(C) Options and Convertible Securities. In the case of the
----------------------------------
issuance of (x) options, warrants or other rights to purchase or acquire Common
Stock (whether or not at the time exercisable), (y) securities by their terms
convertible into or exchangeable for Common Stock (whether or not at the time so
convertible or exchangeable) or (z) options, warrants or rights to purchase such
convertible or exchangeable securities (whether or not at the time exercisable):
(1) the aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options, warrants or other rights to
purchase or acquire Common Stock shall be deemed to have been issued at the time
such options, warrants or rights were issued and for a consideration equal to
the consideration (determined in the manner provided in subparts (A) and (B)
above), if any, received by the Corporation upon the issuance of such options,
warrants or rights plus the minimum purchase price provided in such options,
warrants or rights for the Common Stock covered thereby;
(2) the aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities, or upon the exercise of options, warrants or other
rights to purchase or acquire such convertible or exchangeable securities and
the subsequent conversion or exchange thereof, shall be deemed to have been
issued at the time such securities were issued or such options, warrants or
rights were issued and for a consideration equal to the consideration, if any,
received by the Corporation for any such securities and related options,
warrants or rights (excluding any cash received on account of accrued interest
or accrued dividends), plus the additional consideration (determined in the
manner provided in subparts (A) and (B) above), if any, to be received by the
Corporation upon the conversion or exchange of such securities, or upon the
exercise of any related options, warrants or rights to purchase or acquire such
convertible or exchangeable securities and the subsequent conversion or exchange
thereof.
(3) on any change in the number of shares of Common
Stock deliverable upon exercise of any such options, warrants or rights or
conversion or exchange of such convertible or exchangeable securities or any
change in the consideration to be received by the Corporation upon such
exercise, conversion or exchange (the "Change in Number or Consideration"),
including, but not limited to, a change resulting from the anti-dilution
provisions thereof, the Conversion Rate as then in effect shall forthwith be
readjusted to such Conversion Rate as would have been obtained had an adjustment
been made upon the issuance of such options, warrants or rights not exercised
prior to the Change in Number or Consideration, or of such convertible or
exchangeable securities not converted or exchanged prior to the Change in Number
or Consideration, upon the basis of the Change in Number or Consideration;
5.
<PAGE>
(4) on the expiration or cancellation of any such
options, warrants or rights, or the termination of the right to convert or
exchange such convertible or exchangeable securities, if the Conversion Rate
shall have been adjusted upon the issuance thereof, the Conversion Rate shall
forthwith be readjusted to such Conversion Rate as would have been obtained had
an adjustment been made upon the issuance of such options, warrants, rights or
such convertible or exchangeable securities on the basis of the issuance of only
the number of shares of Common Stock actually issued upon the exercise of such
options, warrants or rights, or upon the conversion or exchange of such
convertible or exchangeable securities; and
(5) if the Conversion Rate shall have been adjusted
upon the issuance of any such options, warrants, rights or convertible or
exchangeable securities, no further adjustment of the Conversion Rate shall be
made for the actual issuance of Common Stock upon the exercise, conversion or
exchange thereof.
(vi) Whenever the Conversion Rate shall be adjusted as
herein provided, the Corporation shall compute the adjusted Conversion Rate in
accordance with such provisions and shall prepare a certificate signed by its
President, any Vice-President or the Chief Financial Officer setting forth the
adjusted Conversion Rate and showing in reasonable detail the facts upon which
such adjustment was based and shall mail such certificate to the Registered
Holders of the Series A Preferred.
(6) Reservation of Shares. The Corporation shall at all times reserve
---------------------
and keep available out of its authorized and unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the Series A Preferred,
such number of shares as shall from time to time be sufficient to effect the
conversion of all shares of Series A Preferred from time to time outstanding,
and, if at any time the number of shares of Common Stock remaining unissued are
not sufficient to permit the conversion of all the then-outstanding shares of
Series A Preferred, the Corporation shall take such action as is necessary to
increase the authorized amount of Common Stock to such number of shares as shall
be sufficient for such purposes.
(b) Other Series or Classes of Preferred Stock. Shares of an additional
------------------------------------------
Preferred Stock may be issued from time to time in one or more series, each such
series to have such distinctive designation or title as may be stated and
expressed in this Article IV or as may be fixed by the Board of Directors prior
to the issuance of any shares thereof. Each such series of Preferred Stock shall
have such voting powers, full or limited, or no voting powers, and such
designations, preferences and such relative, participating, optional or other
special rights (including, without limitation, the right to convert the shares
of such Preferred Stock into shares of the Corporation's Common Stock at such
rate and upon such terms and conditions as may be fixed by the Corporation's
Board of Directors), with such qualifications, limitations, or restrictions of
such preferences or rights as shall be stated and expressed in this Article IV
or in the resolution or resolutions providing for the issue of such series of
Preferred Stock as may be adopted from time to time by the Board of Directors
prior to the issuance of any shares thereof, in accordance with the laws of the
State of Delaware.
Except as may be otherwise provided in this Article IV or in the resolution
or resolutions providing for the issue of a particular series, the Board of
Directors may from time to time increase the number of shares of any series
already created by providing that any unissued shares of Preferred Stock shall
constitute part of such series, or may decrease (but not below the number of
shares thereof then outstanding) the number of shares of any series already
created by providing that any unissued shares previously assigned to such series
shall no longer constitute part thereof.
All shares of Preferred Stock of all series shall be of equal rank and be
identical in all respects except in respect to the particulars which may be
fixed by the Board of Directors as provided in this Article IV.
6.
<PAGE>
(c) Common Stock
------------
(1) After the requirements with respect to the preferential dividends
of the Preferred Stock shall be met, and after the Corporation shall have
complied with all of the requirements, if any, with respect to the setting aside
of sums for redemption, the holders of Common Stock shall be entitled to receive
such dividends as may be declared from time to time by the Board of Directors.
(2) After distribution in full of the preferential amounts required
to be distributed to the holders of the Preferred Stock and to the holders of
any class of stock of the Corporation ranking as to distribution of assets
senior to the Common Stock, in the event of voluntary or involuntary liquidation
or dissolution or winding-up of the Corporation, the holders of the Common Stock
shall be entitled to receive all of the remaining assets of the Corporation,
tangible and intangible, of whatever kind available to distribution to
stockholders ratably in proportion to the number of shares of Common Stock held
by them, respectively.
(3) Each holder of record of Common Stock shall have the right to
vote each share of Common Stock standing in his name on the record books of the
Corporation. Except as otherwise provided herein or in any Certificate of
Designations, Preferences and Rights of Preferred Stock filed in the Office of
the Secretary of State of the State of Delaware, or otherwise as required by
law, the holders of Preferred Stock and the holders of Common Stock shall vote
together as one class on all matters.
Upon the filing of this Restated Certificate of Incorporation all
outstanding shares of Common Stock held by each holder of record on such date
shall be automatically combined at the rate of 1-for-20 without any further
action on the part of the holders thereof or this Corporation. No fractional
shares will be issued. All fractional shares resulting from such combination
shall be rounded upwards to the next whole number of shares of Common Stock.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
The Board of Directors is authorized to make, alter or repeal the Bylaws of
the Corporation, to fix the amount reserved as working capital, and to authorize
and cause to be executed, mortgages and liens without limit as to the amount
upon the property and franchise of this corporation.
With the consent in writing, and pursuant to a vote of the holders of a
majority of the capital stock issued and outstanding, the Directors shall have
the authority to dispose, in any manner, of the whole property of the
Corporation.
ARTICLE VII
The Corporation shall indemnify, in the manner and to the full extent
permitted by law, any person (or the estate of any person) who was or is a
party, or is threatened to be made a party to, any threatened, pending or
completed action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. Where required by law,
the indemnification provided for herein shall be made only as authorized in the
specific case upon a determination in the
7.
<PAGE>
manner provided by law, that indemnification of the director, officer, employee
or agent is proper under the circumstances. The Corporation may, to the full
extent permitted by law, purchase and maintain insurance on behalf of any such
person against any liability which may be asserted against him. To the full
extent permitted by law, the indemnification provided herein shall include
expenses (including attorney's fees) in any action, suit or proceeding, or in
connection with any appeal therein, judgments, fines and amounts paid in
settlement, and in the manner provided by law any such expenses may be paid by
the Corporation in advance of the final disposition of such action, suit or
proceeding. The indemnification provided herein shall not be deemed to limit the
right of the Corporation to indemnify any other person for any such expense to
the full extent permitted by law, nor shall it be deemed exclusive of any other
rights to which any person seeking indemnification from the Corporation may be
entitled under any agreement vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
To the extent permitted by law, no director of the Corporation shall be
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the director derived an
improper personal benefit.
ARTICLE VIII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation in the manner now or
hereafter prescribed by law.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed under the seal of the company this tenth day of June, 1991.
NTN COMMUNICATIONS, INC.
By /s/ Patrick J. Downs
------------------------------
Patrick J. Downs, President
[Seal]
Attest:
/s/ Ronald E. Hogan
- ------------------------------
Ronald E. Hogan, Secretary
8.
<PAGE>
NTN COMMUNICATIONS, INC.
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES B CONVERTIBLE PREFERRED STOCK
_________________
NTN Communications, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, its Board of Directors, by unanimous
written consent dated October 29, 1997, adopted the following resolution, which
resolution remains in full force and effect as of the date hereof:
WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") is authorized, within the limitations and restrictions stated in the
Corporation's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), to fix by resolution or resolutions the designation, powers,
preferences, voting rights and other rights of each series of preferred stock,
and the qualifications, limitations or restrictions thereof, and such other
subjects or matters as may be fixed by resolution or resolutions of the Board of
Directors under the General Corporation Law of Delaware; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its
authority as aforesaid, to authorize and fix the terms of a new series of
preferred stock and the number of shares constituting such series:
NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized such series
of preferred stock on the terms and with the provisions herein set forth:
1. DESIGNATION OF SERIES. The designation of such series of preferred stock
is Series B Convertible Preferred Stock ("Series B Preferred Stock"). The
number of shares constituting such series is 85,000, with a value of $100 per
share for the purpose of calculating dividends and amounts payable upon
redemption, liquidation, dissolution or winding up ("stated value"). Shares of
Series B Preferred Stock converted, redeemed or purchased by the Corporation
shall be canceled and shall revert to authorized but unissued shares of
preferred stock undesignated as to series.
2. DIVIDENDS. The holders of the outstanding Series B Preferred Stock shall
be entitled to receive cumulative dividends at the annual rate of $4.00 per
share of Series B Preferred Stock. Such dividends shall be payable in quarterly
payments of $1.00 per share on the last day of January, April, July and October
of each year, commencing on January 31, 1998 (each of such dates being a
"Dividend Payment Date"). Such dividend shall accrue on each share from October
31, 1997 and shall accrue from day-to-day, whether or not earned or declared.
Dividend payments made
1.
<PAGE>
with respect to Series B Preferred Stock may be made, subject to the terms
hereof, at the option of and in the sole discretion of the Board of Directors,
in cash or, in full or in part, by issuing fully paid and nonassessable shares
of Series B Preferred Stock such that the stated value of such shares of Series
B Preferred Stock plus the amount of cash dividend paid in part, if any, is
equal to the amount of the cash dividend which would otherwise be paid on such
Dividend Payment Date if such dividend were paid entirely in cash. The issuance
of such shares of Series B Preferred Stock (plus the amount of cash dividends,
if any, paid together therewith) shall constitute full payment of such dividend.
In no event shall an election by the Board of Directors to pay dividends, in
full or in part, in cash on any Dividend Payment Dates preclude the Board of
Directors from electing either such alternative in respect of all or any portion
of any subsequent dividend. Declared but unpaid dividends shall not bear
interest.
3. VOTING. The Series B Preferred Stock shall have no voting rights except as
required by the Delaware General Corporation Law.
4. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, each
share of Series B Preferred Stock shall have preference over the Common Stock to
the extent of $100.00 per share plus all accrued but unpaid dividends to the
date payment is made, but shall not otherwise be entitled to share in the
proceeds of any liquidation, dissolution or winding up. If, upon such
liquidation, dissolution or winding up, the assets available for distribution to
the holders of all series of preferred stock of the Corporation shall be
insufficient to permit the payment of the full preferential amounts payable to
them, then the entire assets of the Corporation to be distributed shall be
distributed ratably among the holders of such preferred stock in proportion to
their respective liquidation values. A consolidation or merger of the
Corporation with or into any other corporation or corporations, or a sale of all
or substantially all of the assets of the Corporation, shall not be deemed to be
a liquidation, dissolution or winding up within the meaning of this Paragraph 4.
5. CONVERSION RIGHTS. Subject to Paragraph 6 hereof, each holder of shares of
Series B Preferred Stock shall be entitled to convert at any time (a) 25% of the
number of shares owned by such holder, commencing on the earlier of (i) the
effective date of a Registration Statement filed with the Securities and
Exchange Commission to register the resale of the Common Stock issuable upon
conversion of the Series B Preferred or (ii) February 28, 1998; (b) an
additional 25% of the shares of Series B Preferred Stock held by such holder
commencing 60 days after the first 25% of such shares becomes convertible; (c)
an additional 25% of the shares of Series B Preferred Stock held by such holder
commencing 90 days after the first 25% of such shares becomes convertible; and
(d) the remaining 25% of the shares of Series B Preferred Stock held by such
holder commencing 120 days after the first 25% of such shares becomes
convertible. Notwithstanding anything herein to the contrary, at the close of
business October 31, 2000, any and all outstanding shares of Series B
2.
<PAGE>
Preferred Stock which have not previously been converted into Common Stock shall
automatically be converted into Common Stock at the Conversion Price defined
herein.
6. CONVERSION PRICE. Each share of Series B Preferred Stock shall be
converted into a number of shares of Common Stock determined by dividing (i) the
sum of $100 plus the amount of any accrued but unpaid dividends on such share as
of the Conversion Date, by (ii) the Conversion Price in effect on the Conversion
Date. The Conversion Price for each share of Common Stock shall be equal to the
lesser of (a) 140% of the average closing bid prices of the Common Stock on the
five trading days immediately preceding the date upon which the Registration
Statement referred to in Paragraph 5 above becomes effective, but in no event
higher than $3.50 per share of Common Stock; or (b) 85% of the lowest average of
closing bid prices of the Common Stock over a period of three consecutive
trading days during the 20 trading days immediately preceding the Conversion
Date. In each case, the closing bid prices shall be as reported by Bloomberg,
L.P. or, in the event the Common Stock is not so reported, the closing bid
prices shall be as reported in any other reliable publication designated by the
Company. The Conversion Price shall be subject to further adjustment as set
forth in Paragraph 8 hereof. No fractions of shares or scrip representing
fractions of shares will be issued on conversion, but the number of shares
issuable upon conversion of all or any portion of a holder's shares shall be
rounded to the nearest whole share. The date on which notice of conversion is
given (the "Conversion Date") shall be deemed to be the date on which the
Corporation receives the holder's stock certificates for Series B Preferred
Stock, with the conversion notice duly executed, or the date the Corporation
receives a facsimile transmission of such notice of conversion if the stock
certificates for such Series B Preferred Stock are received by the Corporation
within three business days thereafter.
The Corporation shall not be required to convert any share of Series B
Preferred Stock, or any portion thereof, to the extent that as a consequence of
such conversion, together with all prior conversions of Series B Preferred
Stock, the Corporation would be required to issue shares of Common Stock
amounting to more than 19.9% of the shares of the Common Stock outstanding on
[October 31, 1997] [the Conversion Date of such shares]. The Corporation shall
promptly notify all holders of Series B Preferred Stock in writing in the event
that the Corporation can no longer convert any such Series B Preferred Stock
and, on November 1, 2000, or earlier at the request of the holders of a majority
in interest of the then outstanding Series B Preferred Stock, the Corporation
shall redeem the Series B Preferred Stock at a redemption price equal to $100
per share plus any accrued but unpaid dividends on such share as of the date of
such redemption.
7. CONVERSION PROCEDURE. In order to exercise the conversion privileges, a
holder of Series B Preferred Stock shall surrender shares of such stock
to the Corporation at its principal address, accompanied by written notice to
the Corporation that such holder elects to convert all or a portion of the same.
Such notice shall also state the name or names (with address) in which the
certificate or
3.
<PAGE>
certificates for shares Common Stock and any reissued Series B Preferred Stock
shall be issued upon such conversion. As promptly as practicable after the
receipt of such notice and surrender of the shares of Series B Preferred Stock,
the Corporation shall issue and deliver to such holder, or to such holder's
assignee or assignees on its written order, a certificate or certificates for
the number of full shares of Common Stock and any reissued Series B Preferred
issuable upon conversion of such Series B Preferred Stock.
8. ADJUSTMENTS TO CONVERSION PRICE. If the Corporation shall (i) declare a
dividend or make a distribution in shares of Common Stock, (ii) subdivide or
reclassify the outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify the outstanding Common Stock into a
smaller number of shares, the Conversion Price in effect on the record date of
such dividend or distribution or the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that the
holder of any shares of Series B Preferred Stock surrendered for conversion
after such date shall be entitled to receive the number of shares of Common
Stock which such holder would have owned or been entitled to receive had such
Series B Preferred Stock been converted immediately prior to such date.
Successive adjustments in the Conversion Price shall be made whenever any event
specified above shall occur. All calculations under this Paragraph 8 shall be
made to the nearest cent or to the nearest one-hundredth of a share, as the case
may be. No adjustment in the Conversion Price shall be made if the amount of
such adjustment would be less than $0.01, but any such amount shall be carried
forward and an adjustment with respect thereto shall be made at the time of and
together with any subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate $0.01 or more.
9. RESERVATION OF SHARES OF COMMON STOCK FOR CONVERSION. The Corporation shall
at all times reserve and keep available out of its authorized and unissued
shares of Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all shares of Series B
Preferred Stock that are then outstanding.
10. NOTICE OF ADJUSTMENT OF CONVERSION PRICE. Whenever the Conversion Price is
adjusted as herein provided, the Corporation shall forthwith file with any
transfer agent or agents for the Series B Preferred Stock, if any, and at the
principal office of the Corporation, a statement signed by the President or a
Vice President and by the Chief Financial Officer or the Secretary of the
Corporation setting forth the adjusted Conversion Price. The statement so filed
shall be open to inspection by any holder of record of shares of Series B
Preferred Stock. The Corporation shall also, at the time of filing any such
statement, mail notice to the same effect to the holders of shares of Series B
Preferred Stock at their addresses appearing on the books of the Corporation or
supplied by such holders to the Corporation for the purpose of notice.
4.
<PAGE>
11. SEVERABILITY OF PROVISIONS. If any right, preference or limitation of the
Series B Preferred Stock set forth in these resolutions and the Certificate of
Designations filed pursuant hereto (as such resolution may be amended from time
to time) is invalid, unlawful or incapable of being enforced by reason of any
rule of law or public policy, all other rights, preferences and limitations set
forth in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
12. LIMITATIONS. Except as may otherwise be required by law, the shares of
Series B Preferred Stock shall not have any powers, preferences or relative,
participating, optional or other special rights other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) or otherwise in the Certificate of Incorporation of the Corporation.
IN WITNESS WHEREOF, this Certificate of Designations has been signed by an
authorized officer of the Corporation this 29th day of October, 1997.
NTN COMMUNICATIONS, INC
By_____________________________
5.
<PAGE>
EXHIBIT 10.41
COMPROMISE SETTLEMENT AND MUTUAL GENERAL RELEASE
------------------------------------------------
This Agreement is made between NTN Communications, Inc. ("NTN") a Delaware
corporation, on the one hand and Interactive Entertainment Systems, Inc.
("IES"), an Oklahoma corporation and Barry N. Hurley (collectively, the
"Distributor"), on the other hand.
RECITALS
--------
A. On or about March 22, 1989, Barry N. Hurley {"Hurley") became the
exclusive representative of NTN in the states of Arizona, Arkansas, Alabama,
Kentucky, Mississippi, Tennessee, Illinois, New Mexico, Missouri, Ohio and
Oklahoma pursuant to eleven respective Distributor Agreements (the "Distributor
Agreements") dated as of March 22, 1989.
B. Pursuant to certain Supplements ("Supplements") dated as of May 1, 1993,
to each of the Distributor Agreements Hurley agreed to certain modifications of
the Distributor Agreements and NTN authorized Hurley to retain the management
services of IES to assist Hurley in the performance of his obligations pursuant
to the respective Distributor Agreements as modified by the respective
Supplements (the Distributor Agreements as so modified being hereinafter
collectively referred to as the "Distributor Agreements").
C. The parties have had frequent disputes and differences regarding the
performance of their respective obligations pursuant to the Distributor
Agreements and, without admitting the claims and contentions of each other, are
desirous of compromising, adjusting and finally and completely settling certain
claims, contentions and disputes among them, whether known or unknown, and to
release each other from their respective liabilities and/or obligations, and in
order to compromise these disputes and claims of each of the parties, and in
consideration of the benefits to each other that may occur to each of the
parties by saving expenses of litigation and other valuable consideration, and
in consideration of the promises and mutual release of each to the other, it is
hereby mutually agreed as follows:
AGREEMENT
---------
1. Distributor releases NTN and NTN releases Distributor from any and all
claims, causes of action, demands or liabilities of whatever nature, anticipated
or unanticipated, known or unknown, in connection with or in any way related to
the Distributor Agreements or any other matter of any nature whatsoever.
2. The releases granted, and all other covenants, conditions and provisions
of this Agreement, shall extend and apply equally to, be binding upon, and inure
to the benefit of any and all of the officers, directors, servants, employees,
agents, brokers, partners, spouses, representatives, parent corporations,
subsidiaries, heirs, executors, administrators, trustees, beneficiaries,
shareholders, assigns, successors in interest and attorneys of each of the
parties.
3. The releases granted extend to any and all claims or demands for costs
and attorney's fees.
<PAGE>
4. This Agreement constitutes the full and complete compromise,
adjustment and settlement of any and all of the foregoing claims, disputed or
otherwise.
5. Upon execution and delivery of this Agreement by the parties NTN shall
pay to Hurley the sum of ONE HUNDRED FIFTY-SIX THOUSAND, FIVE HUNDRED
SEVENTY-SEVEN DOLLARS AND FIFTY CENTS ($156,577.50).
6. Upon execution and delivery of this Agreement by the parties NTN shall
issue 175,000 duly authorized, validly issued, fully paid and non-assessable
shares of its common stock, $.005 par value (the "Settlement Shares") as
follows:
a. 150,000 of the Settlement Shares shall be issued in the name of
Barry N. Hurley; and
b. 25,000 of the Settlement Shares shall be issued in the name of
Down Home Investment Company, Inc.
7. As soon as possible following the issuance of the Settlement Shares,
NTN shall use its best efforts to register the offer or sale of the Settlement
Shares under a registration statement on form S-3 pursuant to the Securities Act
of 1933, as amended, and in accordance with the applicable rules and regulations
of the Securities and Exchange Commission.
8. Each of the parties further covenants and agrees that it will not
institute any action, claim or proceeding in any court or other tribunal for
relief based in whole or in part upon any act, action, claim or demand from
which the parties are released and/or are waived by and under the terms of this
Agreement.
9. The parties understand and agree that there is a risk that, subsequent
to the execution of this Agreement, one or more parties will incur or suffer
loss, damages, or injuries which in some way have been caused by one or more of
the other parties and could have been the subject of a claim, demand or cause of
action as of the date of this Agreement, but which are unknown and unanticipated
at the time this Agreement is signed. All parties do hereby assume the
above-mentioned risks and understand that this Agreement shall apply to all
known or unanticipated results of the occurrences described above, as well as
those known and anticipated, and upon the advice of legal counsel, all parties
do hereby waive any and all rights under California Civil Code (S)1542, which
section has been duly explained and reads as follows:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which, if known by him, must have materially affected his
settlement with the debtor.
10. It is further agreed that in the event any litigation or arbitration
is threatened or commenced, or any dispute arises with respect to the
interpretation or enforcement of any
-2-
<PAGE>
provision of this Agreement, the prevailing party shall be entitled to its costs
and expenses, including attorneys' fees.
11. The provisions of this Agreement are severable and should any
provisions be, for any reason, unenforceable, the balance shall, nonetheless, be
of full force and effect.
12. The Agreement shall, in all respects, be interpreted, enforced,
and governed by and under the laws of the State of California without regard to
principles of conflict of laws. This Agreement is to be deemed to have been
jointly prepared by the parties, and any uncertainty or ambiguity existing
herein shall not be interpreted against any of the other parties, but according
to the application of the rules of interpretation of contracts, if any such
uncertainty or ambiguity exists.
13. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together, shall
constitute one and the same instrument. The parties agree that the delivery of a
counterpart bearing a facsimile signature of a party shall be binding on such
party as fully as a counterpart bearing an original signature. Two or more
counterparts being in the aggregate the original or facsimile signatures of all
parties shall constitute a fully executed copy of this Agreement.
14. Each party hereto has had the opportunity to seek the advice of
counsel concerning this settlement and this Agreement. Each party expressly
represents and warrants that he or it has had the advice of and assistance of
counsel concerning this settlement and this Agreement prior to its execution.
15. No party (nor any officer, agents, partner, employee,
representative or attorney of or for any party), has made any statement,
representation or assurance to any other party or other person, entity or third
party regarding any fact relied upon in entering into this Agreement, and each
party does not rely upon any statement, representation or assurance of any other
party (or any officer, agent, partner, employee, representative or attorney of
or for any other party), in executing this Agreement, or in making the
settlement provided herein, except as expressly stated in this Agreement.
16. Each party expressly agrees that time is of the essence in
performance of all covenants and conditions of this Agreement.
17. Each party hereto agrees to execute, acknowledge, deliver, file,
and record such further certificates, documents and instruments and to do all
such further acts and things as may be necessary to carry out the intent and
purposes of this Agreement.
-3-
<PAGE>
18. Each party to this Agreement expressly warrants that he or it has
the authority necessary to execute this Agreement and has not sold, transferred,
conveyed, or otherwise assigned and rights in or to any of the matters released
herein.
IN WITNESS WHEREOF, the parties and each of them, have executed this
instrument on the dates set forth by their names.
Dated: March 16, 1998 /s/ Barry N. Hurley
__________________________________________
BARRY N. HURLEY
In his individual capacity
INTERACTIVE ENTERTAINMENT
SYSTEMS, INC.
Dated: March 16, 1998 By: /s/ Barry N. Hurley
_______________________________________
Barry N. Hurley
Its President
NTN COMMUNICATIONS, INC.
Dated: March 17, 1998 By: /s/ Gerald Sokol, Jr.
_______________________________________
Gerald Sokol, Jr.
President
APPROVED AS TO FORM
AND CONTENT:
Dated: March 17, 1998 By: /s/ [SIGNATURE ILLEGIBLE]
_______________________________________
Attorney for Barry N. Hurley and
Interactive Entertainment Systems, Inc.
Dated: March 17, 1998 By: /s/ [SIGNATURE ILLEGIBLE]
______________________________________
Attorney for NTN Communications, Inc.
-4-
<PAGE>
EXHIBIT 10.42
WARRANT AGREEMENT
WARRANT AGREEMENT (this "Agreement") dated as of this 18th day of February,
1998, between NTN COMMUNICATIONS, INC., a Delaware corporation (the "Company"),
and AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York corporation, as Warrant
Agent.
W I T N E S S E T H:
-------------------
WHEREAS, in connection with a settlement of a purported consolidated class
action lawsuit against the Company, the Company will issue up to 565,000
redeemable common stock purchase warrants (the "Warrants") to purchase an
aggregate of up to 565,000 shares of Common Stock; and
WHEREAS, the Company desires to provide for the form and provisions of the
Warrants, the terms upon which they shall be issued and exercised and the
respective rights and obligations of the Company, the Warrant Agent and the
holders of the Warrants, and the issuance of certificates representing the
Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on the Company's
behalf, and the Warrant Agent is willing to so act, in connection with the
issuance, acquisition, transfer, redemption and exchange of certificates
representing the Warrants and the transfer of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have
-----------
the meanings indicated, unless the context shall otherwise require:
(a) "Commission" shall mean the Securities and Exchange Commission.
(b) "Common Stock" shall mean the Common Stock, par value $.005 per
share, of the Company.
(c) "Corporate Office" shall mean the office of the Warrant Agent
at 40 Wall Street, New York, New York 10005, or such other address at which the
Warrant Agent's principal business in New York, New York, shall be administered
at any particular time.
(d) "Exercise Date" shall mean, as to any Warrant, the date on
which the Warrant Agent shall have received both (i) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (ii)
payment in cash or by certified check made payable to the Warrant Agent for the
account of the Company, of the amount in lawful money of the United States of
America equal to the applicable Purchase Price.
1.
<PAGE>
(e) "Initial Warrant Exercise Date" shall mean February 18, 1998.
(f) "Initial Warrant Redemption Date" shall mean the date 24
months after the Initial Warrant Exercise Date.
(g) "Purchase Price" shall mean, subject to modification and
adjustment as provided in Section 9, zero and 96/100th Dollars ($0.96), and
further subject to the Company's right, in its sole discretion, to decrease the
Purchase Price for a period of not less than 10 business days on not less than
10 days' prior written notice to the Registered Holders and Warrant Agent.
(h) "Redemption" shall have the meaning set forth in Section
10(c).
(i) "Redemption Date" shall have the meaning set forth in Section
10(b).
(j) "Redemption Price" shall have the meaning set forth in Section
10(c).
(k) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 7.
(l) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(m) "Subsidiary" or "Subsidiaries" shall mean any corporation or
corporations, as the case may be, of which stock having ordinary power to elect
a majority of the Board of Directors of such corporation (regardless of whether
or not at the time stock of any class or classes of such corporation shall have
or may have voting power by reason of the happening of any contingency) is at
the time directly or indirectly owned by the Company or by one or more
Subsidiaries, or by the Company and one or more Subsidiaries.
(n) "Transfer Agent" shall mean American Stock Transfer & Trust
Company or its successor.
(o) "Warrant Agent" shall mean American Stock Transfer & Trust
Company or its successor authorized herein.
(p) "Warrant Certificate" shall mean a certificate representing
each of the Warrants substantially in the form annexed hereto as Exhibit A.
(q) "Warrant Exercise Expiration Date" shall mean the earlier of
(i) 5:00 P.M. (New York time), on February 18, 2001, or, if such date shall in
the State of New York be a holiday or a day on which banks are authorized to
close, then 5:00 P.M. (New York time) on the next following day which in the
State of New York is not a holiday or a day on which banks are authorized to
close, subject to the Company's right, prior to the Warrant Exercise Expiration
Date, in its sole discretion, to extend such Warrant Exercise Expiration Date on
20 days' prior written notice to the Registered Holders, or (ii) the Redemption
Date.
(r) "Warrant Redemption Expiration Date" shall mean 5:00 p.m. (New
York time) on the first date following the Initial Warrant Exercise Date as of
which the closing sale price of the Common Stock on the American Stock Exchange,
or on such other principal exchange on which Common Stock is traded at any
particular time (or if the Common Stock is no longer traded on a securities
exchange, the high closing bid price for the Common Stock in the over-the-
counter
2.
<PAGE>
market as reported by NASDAQ), has exceeded the sum of (i) the Purchase Price
plus (ii) $3.25 (subject to equitable adjustment to reflect stock splits, stock
dividends, stock combinations, recapitalizations and like occurrences) for any
seven trading days, whether or not consecutive.
SECTION 2. Appointment of Warrant Agent.
----------------------------
The Company hereby appoints the Warrant Agent to act as agent for the
Company with respect to the Warrants, and the Warrant Agent hereby accepts such
appointment and agrees to perform the same in accordance with the terms and
conditions set forth in this Agreement.
SECTION 3. Warrants and Issuance of Warrant Certificates.
---------------------------------------------
(a) Each Warrant shall initially entitle the Registered Holder of
the Warrant Certificate representing such Warrant to purchase at the Purchase
Price therefor from the Initial Warrant Exercise Date until the Warrant Exercise
Expiration Date one share of Common Stock upon the exercise thereof, subject to
modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates
representing 565,000 Warrants to purchase up to an aggregate of 565,000 shares
of Common Stock (subject to modification and adjustment as provided in Section
9) shall be executed by the Company and delivered to the Warrant Agent.
(c) From time to time up to the Warrant Exercise Expiration Date,
the Warrant Agent shall countersign and deliver Warrant Certificates in required
denominations of one or whole number multiples thereof to the persons entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. No Warrant Certificates shall be issued except (i) Warrant
Certificates initially issued hereunder, (ii) Warrant Certificates issued upon
any transfer or exchange of Warrants, (iii) Warrant Certificates issued in
replacement of lost, stolen, destroyed or mutilated Warrant Certificates
pursuant to Section 8, and (iv) at the option of the Company, Warrant
Certificates in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price or the number of shares
of Common Stock purchasable upon exercise of the Warrants made pursuant to
Section 9 hereof.
SECTION 4. Form and Execution of Warrant Certificates.
------------------------------------------
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Warrants may be listed, or to
conform to usage. The Warrant Certificates shall be dated the date of issuance
thereof (whether upon initial reissuance, transfer, exchange or in lieu of
mutilated, lost, stolen or destroyed Warrant Certificates).
(b) Warrant Certificates shall be executed on behalf of the Company
by the Chairman of the Board, President or any Vice President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary,
by manual signatures or by facsimile signatures printed thereon, and shall have
imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall
be manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of
3.
<PAGE>
the Warrant Certificates shall cease to be such officer of the Company before
the date of issuance of the Warrant Certificates or before countersignature by
the Warrant Agent and delivery thereof, such Warrant Certificates, nevertheless,
may be countersigned by the Warrant Agent, issued and delivered with the same
force and effect as though the person who signed such Warrant Certificates had
not ceased to be such officer of the Company.
SECTION 5. Exercise.
--------
(a) Warrants in denominations of one or whole number multiples
thereof can be exercised commencing at any time on or after the Initial Warrant
Exercise Date, but not after the Warrant Exercise Expiration Date, upon the
terms and subject to the conditions set forth herein and in the applicable
Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date, provided that
the Warrant Certificate representing such Warrant, with the exercise form
thereon duly executed by the Registered Holder thereof or his attorney duly
authorized in writing, together with payment in cash or by certified check made
payable to the Warrant Agent for the account of the Company, of an amount in
lawful money of the United States of America equal to the applicable Purchase
Price, together with any and all applicable taxes due in connection with the
exercise thereof, has been received in good funds by the Warrant Agent. The
person entitled to receive the securities deliverable upon such exercise shall
be treated for all purposes as the holder of such securities as of the close of
business on the Exercise Date. As soon as practicable on or after the Exercise
Date, the Warrant Agent on behalf of the Company shall cause to be issued to the
person or persons entitled to receive the same a Common Stock certificate or
certificates for the shares of Common Stock deliverable upon such exercise, and
the Warrant Agent shall deliver the same to the person or persons entitled
thereto. Upon the exercise of any Warrant, the Warrant Agent shall promptly
notify the Company in writing of such fact and of the number of securities
delivered upon such exercise and shall cause all payments of an amount in cash
or by certified check made payable to the order of the Company, equal to the
Purchase Price, to be deposited promptly in the Company's bank account. In
addition, if such Warrants shall not have been exercised in full, the Warrant
Agent shall deliver to such person a new countersigned Warrant for the number of
shares as to which such Warrant shall not have been exercised. Notwithstanding
the foregoing, the Company shall not be obligated to deliver any securities
pursuant to the exercise of a Warrant unless a registration statement under the
Securities Act with respect to such securities is effective. Warrants may not be
exercised, or securities issued to, any Registered Holder in any state in which
such exercise would be unlawful.
(b) The Company shall not be obligated to issue any fractional
share interests or fractional warrant interests upon the exercise of any Warrant
or Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of
fractional interests. Any fraction equal to or greater than one-half shall be
rounded up to the next full share or Warrant, as the case may be, and any
fraction less than one-half shall be eliminated.
SECTION 6. Reservation of Shares; Listing; Payment of Taxes; etc.
------------------------------------------------------
(a) The Company covenants that it will at all times up to the
Warrant Exercise Expiration Date reserve and keep available out of its
authorized Common Stock, solely for the purpose of issue upon exercise of all
outstanding Warrants, such number of shares of Common Stock as shall then be
issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery thereof, be duly and validly issued and
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, and that upon
4.
<PAGE>
issuance such shares shall be listed on each securities exchange, if any, on
which the other shares of outstanding Common Stock are then listed.
(b) The Company covenants that it has filed a registration
statement under the federal securities laws with respect to the shares issuable
upon exercise of the Warrants, such registration statement has become effective
and it will use its best efforts to keep such registration statement current
while any of the Warrants are outstanding and, if required by law, deliver a
prospectus which complies with Section 10(a)(3) of the Securities Act to the
Registered Holder exercising any such Warrant (except, if in the opinion of
counsel to the Company, such registration is not required under the Act or if
the Company receives a letter from the staff of the Commission stating that it
would not take any enforcement action if such registration is not effected). The
Company will use its best efforts to obtain appropriate approvals or
registrations under state securities laws. With regard to any such securities,
however, the Warrants may not be exercised by, or shares of Common Stock issued
to, any Registered Holder in any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes
and other governmental charges that may be imposed with respect to the issuance
of the Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing shares
of Common Stock or other securities required upon exercise of the Warrants, and
the Company will comply with all such requisitions.
SECTION 7. Exchange and Registration of Transfer.
-------------------------------------
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be so exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and the Company
shall execute and the Warrant Agent shall countersign, issue and deliver in
exchange therefor the Warrant Certificate or Certificates which the Registered
Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its Corporate Office books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof. Upon due presentment
for registration of transfer of any Warrant Certificate to such office, the
Company shall execute and the Warrant Agent shall issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing
an equal aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney duly authorized in
writing.
5.
<PAGE>
(d) No service charge shall be made for any exchange or
registration of transfer of Warrant Certificates. However, the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange shall be promptly cancelled by the Warrant Agent.
(f) Prior to due presentment for registration of transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary.
(g) The Warrant Agent shall not be required to effect any
registration of transfer or exchange which would result in the issuance of a
Warrant Certificate for a fraction of a Warrant.
SECTION 8. Loss or Mutilation.
------------------
Upon receipt by the Company and the Warrant Agent of evidence satisfactory
to them of the ownership of and the loss, theft, destruction or mutilation of
any Warrant Certificate and (in the case of loss, theft or destruction) of
indemnity satisfactory to them, and (in case of mutilation) upon surrender and
cancellation thereof, the Company shall execute and the Warrant Agent shall
countersign and deliver in lieu thereof a new Warrant Certificate representing
an equal aggregate number of Warrants. Applicants for a substitute Warrant
Certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Warrant Agent may prescribe.
SECTION 9. Adjustment of Purchase Price and Number of Shares of Common
-----------------------------------------------------------
Stock Deliverable.
- -----------------
(a) (i) Except as hereinafter provided, in the event the Company
shall, at any time or from time to time after the date hereof up to the Warrant
Exercise Expiration Date, issue any shares of Common Stock as a stock dividend
to the holders of Common Stock, or subdivide or combine the outstanding shares
of Common Stock into a greater or lesser number of shares (any such issuance,
subdivision or combination being herein called a "Change of Shares"), then, and
thereafter upon each further Change of Shares, the Purchase Price for the
Warrants (whether or not the same shall be issued and outstanding) in effect
immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent to the nearest cent) determined by
dividing (i) the sum of (a) the total number of shares of Common Stock issued
and outstanding immediately prior to such Change of Shares, multiplied by the
Purchase Price in effect immediately prior to such Change of Shares, and (b) the
consideration, if any, received by the Company upon such issuance, subdivision
or combination by (ii) the total number of shares of Common Stock issued and
outstanding immediately after such Change of Shares; provided, however, that in
no event shall the Purchase Price be adjusted pursuant to this computation to an
amount in excess of the Purchase Price immediately prior to such computation,
except in the case of a combination of outstanding shares of Common Stock.
For the purposes of any adjustment to be made in accordance with this
Section 9, shares of Common Stock issuable by way of dividend or other
distribution shall be deemed to have been issued immediately after the opening
of business on the day following the record date for the determination of
stockholders entitled to receive such dividend or other distribution and shall
be deemed to have been issued without consideration.
6.
<PAGE>
(ii) Upon each adjustment of the Purchase Price pursuant to
this Section 9, the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall be the number derived by multiplying the number
of shares of Common Stock purchasable immediately prior to such adjustment by
the Purchase Price in effect prior to such adjustment and dividing the product
so obtained by the applicable adjusted Purchase Price.
(b) In the event, at any time or from time to time after the date
hereof up to the Warrant Exercise Expiration Date, of any reclassification or
change of outstanding shares of Common Stock issuable upon exercise of the
Warrants (other than a change in par value, or from par value to no par value,
or from no par value to par value or as a result of a subdivision or
combination), or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with a Subsidiary in which merger
the Company is the continuing corporation and which does not result in any
reclassification or change of the then outstanding shares of Common Stock or
other capital stock issuable upon exercise of the Warrants (other than a change
in par value, or from par value to no par value, or from no par value to par
value or as a result of subdivision or combination)) or in case of any sale or
conveyance to another corporation of the property of the Company as an entirety
or substantially in its entirety, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company, or such
successor or purchasing corporation, as the case may be, shall make lawful and
adequate provision whereby the Registered Holder of each Warrant then
outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance and shall forthwith file at the Corporate Office of the Warrant Agent
a statement signed by its President or a Vice President and by its Treasurer or
an Assistant Treasurer or its Secretary or an Assistant Secretary evidencing
such provision. Such provisions shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in Section 9(a). The provisions of this Section 9(b) shall similarly apply
to successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(c) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certifi cates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 3(c) hereof, continue to express the Purchase Price per
share and the number of shares purchasable thereunder as the Purchase Price per
share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
(d) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant, after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly file each certificate with the Warrant Agent and cause a brief summary
to be sent by ordinary first-class mail to each Registered Holder at his last
address as it shall appear on the registry books of the Warrant Agent. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof. The affidavit of an officer of the Warrant
Agent or the Secretary or an Assistant Secretary of the Company that such notice
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated herein.
7.
<PAGE>
(e) No adjustment of the Purchase Price shall be made as a result
of or connection with the issuance of shares of Common Stock if the amount of
said adjustment shall be less than $.10; provided, however, that in such case,
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment that shall amount, together with any adjustment so carried forward,
to at least $.10. In addition, Registered Holders shall not be entitled to cash
dividends made by the Company prior to the exercise of any Warrant or Warrants
held by them.
SECTION 10. Redemption.
----------
(a) Subject to the provisions of Section 10(d), at any time or
from time to time on or after the Initial Warrant Redemption Date and up to the
Warrant Redemption Expiration Date, each Registered Holder may, at such
Registered Holder's option, cause the Company to redeem (a "Redemption"), out of
funds legally available therefor, up to all of the Warrants held by such
Registered Holder. The price (the "Redemption Price") to be paid by the Company
for any Warrants redeemed by the Company pursuant to this Section 10 shall be
$3.25 per Warrant (subject to equitable adjustment to reflect stock splits,
stock dividends, stock combinations, recapitalizations and like occurrences).
(b) Each Registered Holder of Warrants may exercise his right to
have Warrants redeemed pursuant to this Section 10 by surrendering for such
purpose to the Warrant Agent, at its Corporate Office, a Warrant Certificate or
Certificates representing the Warrants to be redeemed, accompanied by a written
notice stating that such Registered Holder elects to have redeemed all or a
specified whole number of such Warrants in accordance with this Section 10 and,
if less than the full number of Warrants evidenced by the surrendered Warrant
Certificate or Certificates are being redeemed, specifying the name or names in
which such Registered Holder wishes the Warrant Certificate or Certificates for
the balance of such Warrants to be issued. In case such notice shall specify a
name or names other than that of such Registered Holder, such notice shall be
accompanied by payment of all transfer taxes and other charges payable upon the
issuance of Warrants in such other name or names. As promptly as practicable,
and in any event within 30 days after the surrender of such Warrant Certificate
or Certificates and the receipt of such notice relating thereto and, if
applicable, payment of all transfer taxes, the Company shall deliver or cause to
be delivered to the Warrant Agent (i) the Redemption Price of the Warrants being
so redeemed and (ii) if less than the full number of Warrants evidenced by the
surrendered Warrant Certificate or Certificates are being redeemed, a new
Warrant Certificate or Certificates, of like tenor, for the number of Warrants
evidenced by such surrendered Warrant Certificate or Certificates less the
number of such Warrants redeemed. Such Redemption shall be deemed to have been
made at 5:00 p.m. (New York time) on the date (the "Redemption Date") of giving
of such notice and of such surrender of the Warrant Certificate or Certificates
representing the Warrants to be redeemed, so that the rights of the Registered
Holder thereof shall cease after such time, except for the right thereafter to
receive the Redemption Price in accordance herewith.
(c) If on any Redemption Date, less than all of the Warrants
requested to be redeemed by the Registered Holders thereof may be legally
redeemed by the Company, the Redemption shall be effected in compliance with the
requirements of the principal national securities exchange or over-the-counter
market, if any, on which the Warrants are listed or, if the Warrants are not
listed on a securities exchange or traded over-the-counter, pro rata among such
Registered Holders based upon the respective Redemption Price which would
otherwise be payable on or with respect to such Warrants if they were redeemed
in full.
8.
<PAGE>
(d) Notwithstanding any other provision of this Agreement, the
right of the Registered Holders to have the Warrants redeemed as provided herein
shall expire on the Warrant Redemption Expiration Date. The Company will notify
the Warrant Agent promptly following the occurrence of the Warrant Redemption
Expiration Date and cause such notice to be sent by ordinary first-class mail to
each Registered Holder at his last address as it shall appear on the registry
books of the Warrant Agent. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity thereof or of the
Warrant Redemption Expiration Date.
SECTION 11. Concerning the Warrant Agent.
----------------------------
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued upon
exercise of the Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price provided in this Agreement, or to determine
whether any fact exists which may require any such adjustment, or with respect
to the nature or extent of any such adjustment when made, or with respect to the
method employed in making the same. It shall not (i) be liable for any recital
or statement of fact contained herein or for any action taken, suffered or
omitted by it in reliance on any Warrant Certificate or other document or
instrument believed to be in good faith to be genuine and to have been signed or
presented by the proper party or parties, (ii) be responsible for any failure on
the part of the Company to comply with any of its covenants and obligations
contained in this Agreement or in any Warrant Certificate, or (iii) be liable
for any act or omission in connection with this Agreement except for its own
negligence, willful misconduct or bad faith.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order
or demand of the Company shall be sufficient if evidenced by an instrument
signed by the Chairman of the Board of Directors, President or any Vice
President (unless other evidence in respect thereof is more specifically
prescribed). The Warrant Agent shall not be liable for any action taken,
suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless against any and all losses, expenses and liabilities,
including judgments, costs and reasonable counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
except losses, expenses and liabilities arising as a result of the Warrant
Agent's negligence, willful misconduct or bad faith.
9.
<PAGE>
(f) The Warrant Agent may resign its duties and be discharged from
all other duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence, willful misconduct or bad faith),
after giving 60 days' prior written notice to the Company. At least 30 days
prior to the date such resignation is to become effective, the Warrant Agent
shall cause a copy of such notice of resignation to be mailed to the Registered
Holder of each Warrant Certificate at the Company's expense. Within a reasonable
period of time following such resignation the Company shall appoint in writing a
new Warrant Agent. If the Company shall fail to make such appointment within a
period of 30 days after having been notified in writing of such resignation by
the resigning Warrant Agent, then the Registered Holder of any Warrant
Certificate may apply to any court of competent jurisdiction in the State of
California for the appointment of a new Warrant Agent. Any new Warrant Agent,
either appointed by the Company or by such a court, shall be a bank or trust
company having capital and surplus, as shown by its last published report to its
stockholders, of not less than $10,000,000 or a stock transfer company doing
business in New York, New York or the State of California. After acceptance in
writing of such appointment by the new Warrant Agent is received by the Company,
such New Warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new
Warrant Agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new Warrant Agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new Warrant Agent shall be a successor Warrant Agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor Warrant Agent shall promptly
cause notice of its succession as Warrant Agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its Subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years from
the date of exercise any Warrant Certificate received by it upon such exercise.
SECTION 12. Modification of Agreement.
--------------------------
The Warrant Agent and the Company may by supplement agreement make any
changes or corrections in this Agreement (i) that they shall deem appropriate to
cure any ambiguity or to correct any defective or inconsistent provision or
manifest mistake or error herein contained, or (ii) that they may deem necessary
or desirable and which shall not adversely affect the interests of the holders
of Warrant Certificates; provided, however, that this Agreement shall not
otherwise be modified, supplemented or altered in any respect except with the
consent in writing of the Registered Holders representing not less than a
majority of the Warrants then outstanding; provided further, that no change in
the number or nature of the Warrants shall be made without the consent in
writing of the
10.
<PAGE>
Registered Holders representing not less than a majority of the Warrants then
outstanding, other than such changes as are presently specifically prescribed by
this Agreement as originally executed.
SECTION 13. Notices.
-------
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been made when delivered against receipt
or when deposited in the United States mails, first-class postage prepaid, if to
the Registered Holder of a Warrant Certificate, at the address of such holder as
shown on the registry books maintained by the Warrant Agent; if to the Company,
at 5966 La Place Court, Carlsbad, California 92008, Attention: Chief Financial
Officer, or at such other address as may have been furnished to the Warrant
Agent in writing by the Company; and if to the Warrant Agent, at its Corporate
Office.
SECTION 14. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of California without giving effect to conflicts of laws.
SECTION 15. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns and the
holders from time to time of Warrant Certificates or any of them. Except as
hereinafter stated, nothing in this Agreement is intended or shall be construed
to confer upon any other person any right, remedy or claim or to impose upon any
other person any duty, liability or obligation.
SECTION 16. No Rights as Stockholders.
-------------------------
A Warrant does not entitle the Registered Holder thereof to any of the
rights of a stockholder of the Company, including, without limitation, the right
to receive dividends or other distributions, exercise any preemptive rights or
to vote or to consent or to receive notice as a stockholder in respect of the
meetings of stockholders or the election of directors of the Company or any
other matter.
SECTION 17. Counterparts.
------------
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
11.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
fully executed as of the first date first above written.
[SEAL]
NTN COMMUNICATIONS, INC. AMERICAN STOCK TRANSFER &
TRUST COMPANY
As Warrant Agent
/s/ Gerald Sokol, Jr.
By:__________________________ By:____________________________
Name: Gerald Sokol, Jr. Name:
Title: Chief Executive Officer Title:
By:_________________________
Secretary
12.
<PAGE>
EXHIBIT A
---------
February 18, 1998 VOID AFTER February 18, 2001
__________ WARRANTS
REDEEMABLE COMMON STOCK PURCHASE WARRANT CERTIFICATE
NTN COMMUNICATIONS, INC.
CUSIP 629410 14 3
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Common Stock Purchase Warrants (the "Warrants") specified above.
Each Warrant initially entitles the Registered Holder to purchase, subject to
the terms and conditions set forth in this Warrant Certificate and the Warrant
Agreement (as hereinafter defined), one fully paid and nonassessable share of
Common Stock, $.005 par value per share, of NTN Communications, Inc., a Delaware
corporation (the "Company"), at any time on or after February 18, 1998 (the
"Initial Warrant Exercise Date"), and prior to the Warrant Exercise Expiration
Date (as hereinafter defined), upon the presentation and surrender of this
Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of American Stock Transfer & Trust Company,
___________, ____________, New York, ________, as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of zero and 96/100th
Dollars ($0.96), in lawful money of the United States of America in cash or by
certified check made payable to the Warrant Agent for the account of the
Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated February 18,
1998, by and between the Company and the Warrant Agent. Capitalized terms used
but not defined herein have the meanings ascribed to them in the Warrant
Agreement.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Warrant Exercise Expiration Date" shall mean the earlier of (i)
5:00 P.M. (New York time) on February 18, 2001, or, if such date shall in the
State of New York be a holiday or a day on which the banks are authorized to
close, then 5:00 P.M. (New York time) on the next
A-1
<PAGE>
following day which in the State of New York is not a holiday or a day on which
banks are authorized to close, subject to the Company's right, prior to the
Warrant Exercise Expiration Date, in its sole discretion, to extend such Warrant
Exercise Expiration Date on 20 days' prior written notice to the Registered
Holders, or (ii) the Redemption Date.
This Warrant Certificate is transferable in New York, New York and is
exchangeable, upon the surrender hereof by the Registered Holder at the
Corporate Office of the Warrant Agent, for a new Warrant Certificate or
Certificates of like tenor representing an equal aggregate number of Warrants,
each of such new Warrant Certificates to represent such number of Warrants as
such Registered Holder at the time of such surrender shall be entitled to
receive. Upon due presentment and payment of any tax or other charge imposed in
connection therewith or incident thereto, for registration or surrender of this
Warrant Certificate at such office, a new Warrant Certificate of Certificates
representing an equal aggregate number of Warrants will be issued to the
transferee for exchange therefor, subject to the limitations provided in the
Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to receive dividends or other
distributions, exercise any preemptive rights or to vote or to consent or to
receive notice as a stockholder in respect of the meetings of stockholder or the
election of directors of the Company or any other matter.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Registered Holder, at a redemption price (the
"Redemption Price") of $3.25 per Warrant (subject to equitable adjustments to
reflect stock splits, stock dividends, stock combinations, recapitalizations,
and like occurrences) at any time commencing on or after the Initial Warrant
Redemption Date and up to the Warrant Redemption Expiration Date. On and after
the Redemption Date, the Registered Holder shall have no rights with respect to
this Warrant except the right to receive upon surrender of this Warrant
Certificate the Redemption Price as provided in the Warrant Agreement.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as may be provided
in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of California without giving effect to conflicts of
laws.
A-2
<PAGE>
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
[SEAL]
Dated: _______________, 1998 NTN COMMUNICATIONS, INC.
By:_____________________________
Name: Gerald Sokol, Jr.
Title: Chief Executive Officer
By:_____________________________
Secretary
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Warrant Agent
By:__________________________________
Authorized Officer
[SEAL]
A-3
<PAGE>
EXHIBIT 10.43
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated May 16, 1997 by and between NTN COMMUNICATIONS,
INC., a Delaware corporation (the "Company"), and Gerald Sokol, Jr. (the
"Executive").
1. Term of Employment
------------------
Subject to the provisions of Section 10 below, the Company shall employ the
Executive, and the Executive shall serve the Company in the capacity of
President and Chief Operating Officer for a term of three (3) years commencing
as of May 16, 1997 and ending May 15, 2000 (the "Term of Employment").
2. Duties
------
During the Term of Employment, the Executive will serve the Company
faithfully, diligently, and competently and to the best of his ability, will
devote full regular working time to his employment with management and executive
authority and responsibility for the business, affairs and operations of the
Company any subsidiaries thereof, subject to the terms of this Agreement and the
direction and control of the Chief Executive Officer and the Board of Directors.
3. Compensation
------------
During the Term of Employment, the Company shall pay to the Executive as
compensation for the performance of his duties and obligations hereunder a
salary at the rate of $250,000 per annum during the first year and the term of
this Agreement. After the first year, the Company shall pay the Executive a
minimum salary at the rate of 105% of the preceding year's salary, which rate
shall additionally be increased on the anniversary date each year during the
Term of Employment in proportion to any upward changes in Consumer Price Index
of the U.S. Bureau of Labor Statistics of Urban Wage Earners and Clerical
Workers, U.S. City Average (1967=100) during the calendar year immediately
preceding each such anniversary date (in the event that such index shall be
changed or discontinued, the index published by the United States Government
which is most nearly the same as such index shall be used to make the foregoing
calculations).
In addition, Executive will be paid an annual bonus based upon the
"Operating Cash Flow" of the Company for the prior SEC reporting year of
employment (beginning with the 1997 fiscal year). Operating Cash Flow is defined
herein to mean revenue less operating SG&A expenses, excluding depreciation,
interest expense and any one time or extraordinary charges. Such bonus shall be
paid within 60 days after the determination of Operating Cash Flow. A schedule
setting forth the formula for calculating such bonus is attached hereto as
Exhibit A.
<PAGE>
4. Expenses and Other Benefits.
---------------------------
All travel, entertainment and other reasonable business expenses incident
to the rendering of services by the Executive hereunder will be promptly paid or
reimbursed by the Company subject to submission by the Executive in accordance
with the Company's policies in effect from time to time.
The Executive shall be entitled during the Term of Employment to
participate in employee benefit and welfare plans and programs of the Company
including any employee incentive stock option plans, qualified or unqualified,
to the extent that any other executives or officers of the Company or its
subsidiaries are eligible to participate and subject to the provisions, rules,
regulations, and laws applicable thereto. Notwithstanding the foregoing, the
Company shall provide the Executive, at a minimum, with the following benefits:
(a) Coverage, at no expense to the Executive, of the Executive, his
wife, if any, and those of his children who qualify as dependents under Section
152 of the Internal Revenue code of 1954, under a major medical insurance
program with an annual cumulative deductible amount of no more than $500,
(b) Coverage of the Executive by life insurance, payable to his
designated beneficiary, in the amount of $1,000,000 and, in the event of
accidental death or dismemberment, in the amount of $2,000,000. Coverage shall
begin the first day of the Term of Employment hereunder and shall continue
throughout the Term of Employment; and
(c) A paid vacation of four (4) weeks, in addition to any authorized
holidays of the Company, during each 12-month period during the Term of
Employment.
5. Death or Disability
-------------------
This Agreement shall be terminated by the death of the Executive and also
may be terminated by the Board of Directors of the Company if the Executive
shall be rendered incapable by illness or any physical or mental disability
(individually, a "disability") from substantially complying with the terms,
conditions and provisions to be observed and performed on his part for a period
in excess of six months (whether or not consecutive) during any 12 months during
the Term of Employment. If this Agreement is to be terminated by reason of
illness, or any physical or mental disability of the Executive, the Company
shall give thirty days' written notice to that effect to the Executive in the
manner provided herein and the Executive shall be entitled to 75% of the
Executive's compensation that was to accrue during the balance of the Term of
Employment.
6. Disclosure of Information: Inventions and Discoveries
-----------------------------------------------------
The Executive shall promptly disclose to the Company all processes,
trademarks, inventions, improvements, discoveries and other information
(collectively, "developments") directly related to the business of the Company
conceived, developed or acquired by him alone
2.
<PAGE>
or with others during the Term of Employment or during any earlier or later
period of employment by the Company, whether or not during regular working hours
or through the use of material or facilities of the Company. For the purpose of
Sections 6, 7 and 8 hereof, the business of the Company includes without
limitation the fields of electronically simulated sports games or interactive
television applications. All such developments shall be the sole and exclusive
property of the Company, and upon request the Executive shall deliver to the
Company all drawings, sketches, models and other data and records relating to
such development. In the event any such development shall be deemed by the
Company to be patentable, the Executive shall, at the expense of the Company,
assist the Company in obtaining a patent or patents thereon and execute all
documents and do all other things necessary or proper to obtain letters patent
and invest the Company with full title thereto.
7. Non-Competition
---------------
The Company and the Executive agree that the services rendered by the
Executive hereunder are unique and irreplaceable. During his employment by the
Company and for a period of one year thereafter, the Executive shall not engage
or participate in, directly or indirectly (whether as an officer, director,
employee, partner, consultant, advisor, holder of an equity or debt instrument,
lender or in any other manner or capacity), or lend his name to, any business in
the fields of electronically simulated sports games or interactive television
which in the judgment of the Company is, or as a result of the Executive's
engagement or participation would become, competitive with any aspect of the
business of the Company. Ownership of less than 5% of the outstanding shares of
the capital stock, partnership interest or indebtedness of any corporation or
partnership interest listed on a national or regional securities exchange or
publicly traded in the over-the-counter market shall not constitute a violation
of this Section 7.
8. Non-Disclosure
--------------
The Executive will not at any time after the date of this Employment
Agreement divulge, furnish or make accessible to anyone (otherwise than in the
regular course of business of the Company) any knowledge or information with
respect to confidential or secret processes, inventions, discoveries,
improvements, formulas, plans, material, devices, ideas or other know-how,
whether patentable or not, with respect to any confidential or secret
engineering, development or research work or with respect to any other
confidential or secret aspect of the business of the Company (including, without
limitation, customer lists, supplier lists and pricing arrangements with
customers or suppliers).
9. Remedies
--------
The Company may pursue any appropriate legal, equitable or other remedy,
including injunctive relief, in respect of any failure by the Executive to
comply with the provisions of Section 6, 7 or 8 hereof, it being acknowledged by
the Executive that the remedy at law for any such failure would be inadequate.
If the Company shall have failed to cure any material breach by the Company of
any material provision of this Agreement within 30 days after notice by the
Executive to the Company specifying such breach with particularity, the
Executive may, in
3.
<PAGE>
addition to other remedies, give notice to the Company of acceleration of the
entire amount of compensation which was to accrue to the Executive during the
balance of the Term of Employment, and such amount shall be immediately due and
payable to the Executive.
10. Termination
-----------
Executive may terminate this Agreement at any time after the first year on
three (3) months' written notice of termination. The Executive's employment with
the Company may be terminated by the Board of Directors of the Company (i) upon
three (3) days' notice to the Executive in the event of the Executive's personal
dishonesty, willful misconduct or breach of fiduciary duty or (ii) upon thirty
(30) days' notice to the Executive if the Executive shall be in material breach
of any material provision of this Employment Agreement other than as provided in
clause (i) above and shall have failed to cure such breach during such thirty
day period. Any such notice to the Executive shall specify with particularity
the reason for termination or proposed termination. In the event of termination
under this Section 10 or under Section 5 (except as provided therein), the
Company's unaccrued obligations under this Agreement shall cease and the
Executive Shall forfeit all right to receive any unaccrued compensation or
benefits hereunder but shall have the right to reimbursement of expenses already
incurred. Notwithstanding any termination of the Agreement pursuant to this
Section 10 or by reason of disability under Section 5, the Executive, in
consideration of his employment hereunder to the date of such termination, shall
remain bound by the provisions of Sections 6, 7 and 8 (unless this Agreement is
terminated on account of the breach hereof by the Company) of this Agreement
except that if this Agreement is terminated following a Change in Control Event
(as defined below) then Executive shall remain bound only by the provisions of
Sections 6 and 8. Termination without cause or any attempt by the Board of
Directors of the Company to reassume any of the responsibilities or duties from
the Executive or to change the duties of the Executive without cause shall be
deemed a breach of this Agreement by the Company without cause and shall
immediately entitle the Executive, as liquidated damages therefore, to the
entire remaining balance due him as compensation pursuant to this Agreement for
his therein expired term.
Notwithstanding anything to the contrary contained herein, Executive or the
Company shall have the option to terminate this Agreement at any time following
a "Change in Control Event." In the event of such termination following a Change
in Control Event, Executive shall be entitled to receive one year's salary as
provided in Section 3 together with a prorata portion of the bonus to which
Executive would have been entitled. A "Change in Control Event" shall mean:
(a) The acquisition by any individual entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (a "Person") of beneficial ownership of 50% or
more of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
- -------- -------
in Control Event: (A) any acquisition by the Company or (B) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company.
4.
<PAGE>
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual who becomes a director subsequent
to the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a 11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other that the Board; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation (a "transaction"), unless, following such transaction in
each case, more than 50% of, respectively, the then outstanding shares of common
stock of the Company resulting from such transaction and the combined voting
power of the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the outstanding Common stock and
Outstanding Voting Securities immediately prior to such transaction; or
(d) Approval by the shareholders of the Company of (A) a complete
liquidation or dissolution of the Company or (B) the sale or other disposition
of all or substantially all of the assets of the Company unless such assets are
sold to a corporation and following such sale or other disposition, the
condition described in paragraph (3) above is satisfied; or
(e) Any corporate personnel reorganization or change in personnel
pursuant to which Executive is required to report to someone other than Edward
C. Frazier.
11. Resignation
-----------
In the event that the Executive's services hereunder are terminated under
Section 5 or 10 of this Agreement (except by death), the Executive agrees that
he will deliver his written resignation as an officer of the Company and/or
Director of the Company to the Board of Directors, such resignation to become
effective immediately.
12. Data
----
Upon expiration of the Term of Employment or termination pursuant to
Section 5 or 10 hereof, the Executive or his personal representative shall
promptly deliver to the Company all books, memoranda, plans, records and written
data of every kind relating to the business and affairs of the Company which are
then in his possession on account of his employment hereunder, but excluding all
such materials in the Executive's possession on account of his past or current
status as a director or shareholder of the Company.
5.
<PAGE>
13. Arbitration
-----------
Any dispute or controversy arising under this Agreement or relating to its
interpretation or the breach hereof, including the arbitrability of any such
dispute or controversy, shall be determined and settled by arbitration in San
Diego, California pursuant to the Rules then obtaining of the American
Arbitration Association. Any reward rendered herein shall be final and binding
on each and all of the parties, and judgement may be entered thereon in any
court of competent jurisdiction.
14. Insurance
---------
The Company shall have the right at its own cost and expense to apply for
and to secure in its own name, or otherwise, life, health or accident insurance
or any or all of them covering the Executive, and the Executive agrees to submit
to any usual and customary medical examination and otherwise to cooperate with
the Company in connection with the procurement of any such insurance, and any
claims thereunder.
15. Waiver of Breach
----------------
Any waiver of any breach of this Employment Agreement shall not be
construed to be a continuing waiver or consent to any subsequent breach on the
part either of the Executive or of the Company.
16. Assignment
----------
Neither party hereto may assign his or its rights to delegate his or its
duties under this Employment Agreement without the prior written consent of the
other party; provided, however, that this Agreement shall inure to the benefit
-------- -------
of and be binding upon the successors and assignees of the Company, all as
though such successors and assignees of the Company and their respective
successors and assignees were of the Company, upon (a) a sale of all or
substantially aa of the Company's assets, or upon merger or consolidation of the
Company with or into any other corporation, and (b) upon delivery on the
effective day of such sale, merger or consolidation to the Executive of a
binding instrument of assumption by such successors and assigns of the rights
and liabilities of the Company under this Agreement.
17. Notices
-------
Any notice required or desired to be given hereunder shall be in writing
and shall be deemed sufficiently given when delivered or 3 days after mailing in
United States certified or registered mail, postage prepaid, to the party for
whom intended at the following address:
The Company:
NTN COMMUNICATIONS, INC.
5966 La Place Court
6.
<PAGE>
Suite 100
Carlsbad, CA 92008
The Executive:
Gerald Sokol, Jr.
2220 Sara Way
Carlsbad, CA 92008
or to such other address as either party may from time to time designate by like
notice to the other.
18. General
-------
The terms and provisions of this Agreement shall constitute the entire
agreement by the Company and the Executive with respect to the subject matter
hereof, and shall supersede any and all prior agreements or understandings
between the Executives and the Company, whether written or oral. This Agreement
may be amended or modified only by a written instrument executed by the
Executive and the Company, and any such amendment or modification or any
termination of this Agreement shall become effective only after written approval
thereof has been received by the Executive. This Agreement shall be governed by
and construed in accordance with California law. In the event that any terms or
provisions of this Agreement shall be held to be invalid or unenforceable, such
invalidity or unenforceability shall not affect the validity or enforceability
of the remaining items and provisions hereof. In the event of any judicial,
arbitral or other proceeding between the parties hereto with respect to the
subject matter hereof, the prevailing party shall be entitled, in addition to
all other relief, to reasonable attorneys' fees and expenses and court costs.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
NTN COMMUNICATIONS, INC.
By: /s/ Laura Kass
AGREED TO AND ACCEPTED:
By: /s/ Gerald Sokol, Jr.
---------------------
Gerald Sokol, Jr.
7.
<PAGE>
Attachment A
Details of Contract
- --------------------------------------------------------------------------------
Term: A three year contract that expires at the end of
each 12 month period, unless otherwise renewed at
the sole option of the employee.
Salary: $250,000 plus minimum 5% salary increases per year,
beginning 12 months from the date of the agreement.
Life Insurance: $1,000,000 life insurance policy premium to be fully
funded after three years. Beneficiary shall be
employee's family. Employee will establish and
company will reimburse expenses (per prior
agreement).
Cancellation Provisions: The contract shall automatically cancel, any unpaid
bonus for the current year shall be paid, and the
employee entitled to 12 months severance, upon the
occurrence of any of the following items:
1. Change of Control (defined as any third
party gaining control, directly or
indirectly, of the company, whether friendly
or not, at any time during the term of the
contract. Control does not mean 50% or more.
For purposes of this agreement, the SEC
definition will be used.)
2. New CEO, other than Ed Frazier.
3. The company moves from the San Diego area.
<TABLE>
<CAPTION>
Bonus: Operating Cash Flow/(1)/ Bonus
------------------- -----
<C> <S> <C>
$0 - $ 5 million 2.5%
$5 - $10 million 1.5%
Greater than $10 million 1.0%
</TABLE>
/(1)/ Defined as revenue less operating and SG&A
expenses, excluding depreciation, interest expense
and any one time or extraordinary charges.
<PAGE>
EXHIBIT 10.44
NTN COMMUNICATIONS, INC.
PERFORMANCE INCENTIVE STOCK OPTION AGREEMENT
THIS PERFORMANCE INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") is
made and entered into as of November 4, 1996, but modified as to exercise price
as of May 14, 1997, by and between NTN COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), and GERALD SOKOL, JR., an individual (the
"Optionee").
WITNESSETH
WHEREAS, the Company's Board of Directors authorized the grant to the
Optionee pursuant to the Company's 1995 Stock Option Plan, as amended, (the
"Plan") of an option (the "Option") to purchase 175,000 shares of Common Stock,
$.005 par value, of the Company (the "Common Stock") upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and covenants made
herein and the mutual benefits to be derived herefrom, the parties hereto agree
as follows:
1. Grant of Incentive Option. The Company hereby grants to the Optionee
-------------------------
the right and option to purchase, in accordance with the terms and conditions of
the Plan and this Agreement, an aggregate of 175,000 shares of Common Stock at
the price of $2.81 per share (the "Price"), exercisable from time to time, prior
to the close of business on November 3, 2006 (the "Expiration Date"). The Option
is intended to constitute an incentive stock option within the meaning of
Section 422A of the Internal Revenue code of 1986, as amended (the "Code").
2. Vesting and Exercisability of Option. The shares subject to this
------------------------------------
option will become vested and exercisable as to one-third on the first
anniversary of the Date of Grant, as to an additional one-third on the second
anniversary of the Date of Grant, and as to the final one-third on the third
anniversary of the Date of Grant. The right to purchase any or all of such
shares will terminate on the close of business on November 3, 2006.
Notwithstanding the foregoing, the vesting of this option is conditioned on the
meeting of the criteria set forth in the "Notice of Grant of Performance Based
Incentive Options" which Optionee previously received. In the event of the
Optionee's Termination of Employment (other than by reason of death) this Option
may only be exercised by Optionee to the extent exercisable at Termination of
Employment, at any time prior to 90 days after Termination of Employment in
order to qualify for incentive stock option tax treatment.
3. Change in Control Event.
-----------------------
Notwithstanding Section 2 hereof, the Option shall become vested and
exercisable in full immediately upon a Change in Control Event. A "Change in
Control Event" shall mean:
(1) The acquisition by any individual entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (a "Person") of beneficial ownership of 50% or
more of the then outstanding voting
<PAGE>
securities of the Corporation entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); provided, however, that the
-------- -------
following acquisitions shall not constitute a Change in Control Event: (A) any
acquisition by the Corporation or (B) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation controlled by the Corporation.
(2) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual who becomes a director subsequent
to the date hereof whose election, or nomination for election by the
Corporation's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(3) Approval by the shareholders of the Corporation of a
reorganization, merger or consolidation (a "transaction"), unless, following
such transaction in each case, more than 50% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
transaction and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entitles who were the beneficial
owners, respectively, of the outstanding Common stock and Outstanding Voting
Securities immediately prior to such transaction; or
(4) Approval by the shareholders of the Corporation of (A) a complete
liquidation or dissolution of the Corporation or (B) the sale or other
disposition of all or substantially all of the assets of the Corporation, unless
such assets are sold to a corporation and following such sale or other
disposition, the condition described in paragraph (3) above is satisfied.
4. Method of Exercise of Option and Payment of Purchase Price. Each
----------------------------------------------------------
exercise of the Option shall be by means of a written notice of exercise
delivered to the Company and specifying the number of whole shares with respect
to which the Option is being exercised, together with any written statements
required pursuant to Section 9 below and payment of the Price in full in cash or
by check payable to the order of the Company; provided that so-called cashless
exercises may be permitted in the discretion of the Committee administering the
Plan. The delivery of shares pursuant to an exercise of this Option will be
conditional upon payment by the Optionee of amounts sufficient to enable the
Company to pay all applicable federal, state and local withholding taxes.
5. Effect of Death of Optionee. The Option and all other rights
---------------------------
hereunder, to the extent such rights shall not have been exercised, shall,
unless sooner terminated pursuant to the Plan, terminate and become null and
void at the end of twelve months following the Optionee's death. During the
twelve-month period after death, the Option may, to the extent exercisable on
the date of death (or earlier termination), be exercised by the executor of the
Optionee's will or
2
<PAGE>
the administrator of the holder's estate; provided that in no event may the
Option be exercised by any person after the Expiration Date.
6. Non-Assignability of Option. Subject to the provisions of the Plan,
---------------------------
the Option and the rights and privileges conferred hereby are not transferable
or assignable and may not be offered, sold, pledged, hypothecated or otherwise
disposed of in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment, garnishment, levy or similar process.
During the Optionee's lifetime, the Option may be exercised only by the
Optionee, or, subject to the provisions of Section 5, within twelve months after
his death by the executor of his will or the administrator of his estate, and
not otherwise, regardless of any community property or other interest therein of
the Optionee's spouse or such spouse's successor in interest. In the event that
the spouse of the Optionee shall have acquired a community property interest in
the Option, the Optionee, or such transferees, may exercise it on behalf of the
spouse of the Optionee or such spouse successor in interest.
7. Adjustments and Other Rights. The rights of the Optionee hereunder
----------------------------
will be subject to adjustments and modifications in certain circumstances and
upon occurrence of certain events including a reorganization, merger,
combination, recapitalization, reclassification, stock split, reverse stock
split, stock dividend or stock consolidation, as set forth in the Plan.
8. Optionee Not A Stockholder. Neither the Optionee nor any other person
--------------------------
entitled to exercise the Option shall have any of the rights or privileges of a
shareholder of the Company as to any shares of Common Stock not actually issued
and delivered to him. No adjustment will be made for dividends or other rights
for which the record date is prior to the date on which such stock certificate
or certificates are issued even if such record date is subsequent to the date
upon which notice of exercise was delivered and the tender of payment was
accepted.
9. Application of Securities Laws. No shares of Common Stock may be
------------------------------
purchased pursuant to the Option unless and until any then applicable
requirements of the Securities and Exchange Commission, the California
Department of Corporations and any other regulatory agencies, including any
other state securities law commissioners having jurisdiction over the Company or
such issuance, and any exchanges upon which the Common Stock may be listed,
shall have been fully satisfied. The Optionee represents, agrees and certifies
that:
(a) If the Optionee exercises the Option in whole or in part at a time
when there is not in effect under the Securities Act of 1933, as amended (the
"Act"), a registration statement relating to the Common Stock issuable upon
exercise and available for delivery to him a prospectus meeting the requirements
of Section 10(a)(3) of the Act, the Optionee will acquire the Common Stock
issuable upon such exercise for the purpose of investment and not with a view to
resale or distribution and that, as a condition to each such exercise, he or she
will furnish to the Company a written statement to such effect, satisfactory in
form and substance to the Company, which statement also acknowledges that the
Option shares have not been registered under the Act and are "restricted
securities" within the meaning of Rule 144 under the Act and are subject to
restrictions on transfer; and
3
<PAGE>
(b) If and when the Optionee proposes to publicly offer or sell the
Common Stock issued to him upon exercise of the Option, the Optionee will notify
the Company prior to any such offering or sale and will abide by the opinion of
counsel to the Company as to whether and under what conditions and
circumstances, if any, he or she may offer and sell such shares, but such
procedure need not be followed if a Prospectus was delivered to the Optionee
with the shares of Common Stock and the Common Stock was and is listed on the
New York Stock Exchange or the American Stock Exchange.
The Optionee understands that the certificate or certificates representing
the Common Stock acquired pursuant to the Option may bear a legend referring to
the foregoing matters and any limitations under the Act and state securities
laws with respect to the transfer of such Common Stock, and the Company may
impose stop transfer instructions to implement such limitations, if applicable.
Any person or persons entitled to exercise the Option under the provisions of
Section 5 above shall be bound by and obligated under the provisions of this
Section 9 to the same extent as is the Optionee.
10. Notices. Any notice to be given under the terms of this Agreement or
-------
pursuant to the Plan shall be in writing and addressed to the Secretary of the
Company at its principal office and any notice to be given to the Optionee shall
be addressed to him at the address given beneath the Optionee's signature
hereto, or at such other address as either party may hereafter designate in
writing to the other party. Any such notice shall be deemed to have been duly
given when enclosed in a properly sealed envelope addressed as aforesaid,
registered or certified, and deposited (postage and registry or certification
fee prepaid) in a post office or branch post office regularly maintained by the
United States Government.
11. Effect of Agreement. This Agreement shall be assumed by, be binding
-------------------
upon and inure to the benefit of any successor or successors of the Company to
the extent to be provided in the Plan.
12. Withholding. The provisions of the Plan shall govern any withholding
-----------
that the Company is required to make with respect to the exercise of the Option.
13. Applicability of the Plan. The Option and this Agreement will be
-------------------------
subject to, and the Company and the Optionee agree to be bound by, all of the
terms and conditions of the Plan as and when adopted by the Board of Directors
of the Company and approved by the Company's stockholders. The rights of the
Optionee will be subject to limitations, adjustments, modifications, suspension
and termination in certain circumstances and upon the occurrence of certain
conditions as set forth in the Plan as originally adopted, but shall not be
adversely affected by any future amendments to the Plan.
14. Laws Applicable to Construction. The Option has been granted, executed
-------------------------------
and delivered as of the day and year first above written in Carlsbad,
California, and the interpretation, performance and enforcement of the Option
and this Agreement shall be governed by the internal laws of the State of
California.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by a duly authorized officer and the Optionee has hereunto set his
hand as of the day and year first above written.
NTN COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/Laura Kass
----------------------
LAURA KASS
Its Secretary
OPTIONEE
/s/Gerald Sokol, Jr.
-------------------------
GERALD SOKOL, JR.
-------------------------
-------------------------
[Address]
5
<PAGE>
EXHIBIT 10.45
NTN COMMUNICATIONS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "Agreement") is made and
entered into as of May 14, 1997, by and between NTN COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), and GERALD SOKOL, JR., an individual (the
"Otionee").
WITNESSETH
WHEREAS, the Company's Board of Directors on March 12, 1997 authorized the
grant to the Optionee pursuant to the Company's 1995 Stock Option Plan, as
amended, (the "Plan") of an option (the "Option") to purchase all or any part of
600,000 shares of Common Stock, $.005 par value, of the Company (the "Common
Stock") upon the terms and conditions hereinafter set forth; and
WHEREAS, this Agreement modifies the exercise price of the option granted
on March 12, 1997, and incorporates the other terms and conditions of such
option;
NOW, THEREFORE, in consideration of the mutual promises and covenants made
herein and the mutual benefits to be derived herefrom, the parties hereto agree
as follows:
1. Grant of Nonqualified Option. The Company hereby grants to the
-----------------------------
Optionee the right and option to purchase, in accordance with the terms and
conditions of the Plan and this Agreement, an aggregate of 600,000 shares of
Common Stock at the price of $2.81 per share (the "Price"), exercisable from
time to time, prior to the close of business on March 11, 2007 (the "Expiration
Date"). The Option is intended not to constitute an incentive stock option
within the meaning of Section 422A of the Internal Revenue code of 1986, as
amended (the "Code").
2. Vesting and Exercisability of Option. The Option will become
------------------------------------
immediately vested and exercisable as to 300,000 shares. The remaining 300,000
shares subject hereto will become vested and exercisable on the second
anniversary of the Date of Grant. The right to purchase any or all of such
shares will terminate on the close of business on March 11, 2007.
3. Change in Control Event.
-----------------------
Notwithstanding Section 2 hereof, the Option shall become vested and
exercisable in full immediately upon a Change in Control Event. A "Change in
Control Event" shall mean:
(1) The acquisition by any individual entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (a "Person") of beneficial ownership of 50% or more of the
then outstanding voting securities of the Corporation entitled to vote generally
in the election of directors (the "Outstanding Voting Securities"); provided,
--------
however, that the following acquisitions shall not constitute a Change in
- -------
Control Event: (A) any acquisition by the Corporation or (B) any acquisition by
any employee
1.
<PAGE>
benefit plan (or related trust) sponsored or maintained by the Corporation or
any corporation controlled by the Corporation.
(2) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual who becomes a director subsequent
to the date hereof whose election, or nomination for election by the
Corporation's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(3) Approval by the shareholders of the Corporation of a
reorganization, merger or consolidation (a "transaction"), unless, following
such transaction in each case, more than 50% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
transaction and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entitles who were the beneficial
owners, respectively, of the outstanding Common stock and Outstanding Voting
Securities immediately prior to such transaction; or
(4) Approval by the shareholders of the Corporation of (A) a complete
liquidation or dissolution of the Corporation or (B) the sale or other
disposition of all or substantially all of the assets of the Corporation, unless
such assets are sold to a corporation and following such sale or other
disposition, the condition described in paragraph (3) above is satisfied.
4. Method of Exercise of Option and Payment of Purchase Price. Each
----------------------------------------------------------
exercise of the Option shall be by means of a written notice of exercise
delivered to the Company and specifying the number of whole shares with respect
to which the Option is being exercised, together with any written statements
required pursuant to Section 9 below and payment of the Price in full in cash or
by check payable to the order of the Company; provided that so-called cashless
exercises may be permitted in the discretion of the Committee administering the
Plan. The delivery of shares pursuant to an exercise of this Option will be
conditional upon payment by the Optionee of amounts sufficient to enable the
Company to pay all applicable federal, state and local withholding taxes.
5. Effect of Death of Optionee. The Option and all other rights
---------------------------
hereunder, to the extent such rights shall not have been exercised, shall,
unless sooner terminated pursuant to the Plan, terminate and become null and
void at the end of twelve months following the Optionee's death. During the
twelve-month period after death, the Option may, to the extent exercisable on
the date of death (or earlier termination), be exercised by the executor of the
Optionee's will or the administrator of the holder's estate; provided that in no
event may the Option be exercised by any person after the Expiration Date.
6. Non-Assignability of Option. Subject to the provisions of the
---------------------------
Plan, the Option and the rights and privileges conferred hereby are not
transferable or assignable and may not be
2.
<PAGE>
offered, sold, pledged, hypothecated or otherwise disposed of in any way
(whether by operation of law or otherwise) and shall not be subject to
execution, attachment, garnishment, levy or similar process. During the
Optionee's lifetime, the Option may be exercised only by the Optionee, or,
subject to the provisions of Section 5, within twelve months after his death by
the executor of his will or the administrator of his estate, and not otherwise,
regardless of any community property or other interest therein of the Optionee's
spouse or such spouse's successor in interest. In the event that the spouse of
the Optionee shall have acquired a community property interest in the Option,
the Optionee, or such transferees, may exercise it on behalf of the spouse of
the Optionee or such spouse successor in interest.
7. Adjustments and Other Rights. The rights of the Optionee hereunder
----------------------------
will be subject to adjustments and modifications in certain circumstances and
upon occurrence of certain events including a reorganization, merger,
combination, recapitalization, reclassification, stock split, reverse stock
split, stock dividend or stock consolidation, as set forth in the Plan.
8. Optionee Not A Stockholder. Neither the Optionee nor any other person
--------------------------
entitled to exercise the Option shall have any of the rights or privileges of a
shareholder of the Company as to any shares of Common Stock not actually issued
and delivered to him. No adjustment will be made for dividends or other rights
for which the record date is prior to the date on which such stock certificate
or certificates are issued even if such record date is subsequent to the date
upon which notice of exercise was delivered and the tender of payment was
accepted.
9. Application of Securities Laws. No shares of Common Stock may be
------------------------------
purchased pursuant to the Option unless and until any then applicable
requirements of the Securities and Exchange Commission, the California
Department of Corporations and any other regulatory agencies, including any
other state securities law commissioners having jurisdiction over the Company or
such issuance, and any exchanges upon which the Common Stock may be listed,
shall have been fully satisfied. The Optionee represents, agrees and certifies
that:
(a) If the Optionee exercises the Option in whole or in part at a
time when there is not in effect under the Securities Act of 1933, as amended
(the "Act"), a registration statement relating to the Common Stock issuable upon
exercise and available for delivery to him a prospectus meeting the requirements
of Section 10(a)(3) of the Act, the Optionee will acquire the Common Stock
issuable upon such exercise for the purpose of investment and not with a view to
resale or distribution and that, as a condition to each such exercise, he or she
will furnish to the Company a written statement to such effect, satisfactory in
form and substance to the Company, which statement also acknowledges that the
Option shares have not been registered under the Act and are "restricted
securities" within the meaning of Rule 144 under the Act and are subject to
restrictions on transfer; and
(b) If and when the Optionee proposes to publicly offer or sell the
Common Stock issued to him upon exercise of the Option, the Optionee will notify
the Company prior to any such offering or sale and will abide by the opinion of
counsel to the Company as to whether and under what conditions and
circumstances, if any, he or she may offer and sell such shares, but such
procedure need not be followed if a Prospectus was delivered to the Optionee
with the shares of Common Stock and the Common Stock was and is listed on the
New York Stock Exchange or the American Stock Exchange.
3.
<PAGE>
The Optionee understands that the certificate or certificates representing
the Common Stock acquired pursuant to the Option may bear a legend referring to
the foregoing matters and any limitations under the Act and state securities
laws with respect to the transfer of such Common Stock, and the Company may
impose stop transfer instructions to implement such limitations, if applicable.
Any person or persons entitled to exercise the Option under the provisions of
Section 5 above shall be bound by and obligated under the provisions of this
Section 9 to the same extent as is the Optionee.
10. Notices. Any notice to be given under the terms of this Agreement or
-------
pursuant to the Plan shall be in writing and addressed to the Secretary of the
Company at its principal office and any notice to be given to the Optionee shall
be addressed to him at the address given beneath the Optionee's signature
hereto, or at such other address as either party may hereafter designate in
writing to the other party. Any such notice shall be deemed to have been duly
given when enclosed in a properly sealed envelope addressed as aforesaid,
registered or certified, and deposited (postage and registry or certification
fee prepaid) in a post office or branch post office regularly maintained by the
United States Government.
11. Effect of Agreement. This Agreement shall be assumed by, be binding
-------------------
upon and inure to the benefit of any successor or successors of the Company to
the extent to be provided in the Plan.
12. Withholding. The provisions of the Plan shall govern any withholding
-----------
that the Company is required to make with respect to the exercise of the Option.
13. Applicability of the Plan. The Option and this Agreement will subject
-------------------------
to, and the Company and the Optionee agree to be bound by, all of the terms and
conditions of the Plan as when adopted by the Board of Directors of the Company
and approved by the Company's stockholders. The rights of the Optionee will be
subject to limitations, adjustments, modifications, suspension and termination
in certain circumstances and upon the occurrence of certain conditions as set
forth in the Plan as originally adopted, but shall not be adversely affected by
any future amendments to the Plan.
14. Laws Applicable to Construction. The Option has been granted,
-------------------------------
executed and delivered as of the day and year first above written in Carlsbad,
California, and the interpretation, performance and enforcement of the Option
and this Agreement shall be governed by the internal laws of the State of
California.
4.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by a duly authorized officer and the Optionee has hereunto set his
hand as of the day and year first above written.
NTN COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Ed Frazier
----------------------
Title: Acting Chairman
-------------------
OPTIONEE
/s/ Gerald Sokol, Jr.
-------------------------
Gerald Sokol, Jr.
-------------------------
-------------------------
[Address]
5.
<PAGE>
EXHIBIT 10.46
EXCLUSIVE INSTALLATION AND MAINTENANCE AGREEMENT
This Exclusive Installation and Maintenance Agreement, effective March 30, 1998
(the "Agreement"), is made by and between DATATEC SYSTEMS, INC. (hereinafter
"Datatec"), a New Jersey corporation whose principal office is located at 20C
Commerce Blvd., Totowa, NJ 07512, and NTN COMMUNICATIONS, INC., a Delaware
corporation (hereinafter "NTN"), whose principal office is located at The
Campus, 5966 La Place Court, Carlsbad, CA 92008.
RECITALS
NTN produces and broadcasts interactive entertainment programming to bars,
restaurants, hotels and other hospitality locations throughout the United States
(each a "Site" and collectively the "Sites") utilizing personal computers,
broadcast (one-way) satellite communications equipment, hand-held wireless
keyboard transmitters operating on the 49 megahertz frequency (the "49 Mg
Playmakers") and the 900 megahertz frequency (the "900 Mg Playmakers") and radio
frequency antennas and charging trays for the 45 Mg Playmakers and the 900 Mg
Playmakers (collectively, the "Equipment").
NTN has heretofore utilized numerous independent contractors to install and
maintain the 49 Mg Playmakers throughout the United States and desires to
contract with a single national service provider for the purpose of installing
and maintaining the Equipment.
Datatec has expertise in the installation and maintenance of computing and
telecommunications equipment located throughout the United States.
The parties hereto intend that Datatec shall become the exclusive national
service provider to NTN for the purpose of installing and maintaining the
Equipment at any and all Sites now existing or hereafter created utilizing the
Equipment during the term of this Agreement.
NOW, THEREFORE, in consideration of the within terms and conditions, the
parties hereto agree as follows:
1. APPOINTMENT NTN hereby appoints Datatec as its exclusive provider of
-----------
installation and maintenance services for its Equipment located at Sites within
the United States for the term of this Agreement, and Datatec hereby accepts
such appointment. The specific services to be provided by Datatec hereunder (the
"Services") and the fees therefor are more particularly set forth in the Work
Assignment Schedule annexed hereto and made a part hereof (the "Schedule").
2. TERM AND TERMINATION
--------------------
(a) This Agreement shall become effective as of the date first
written above and shall remain in effect for a period of three (3) year(s)
unless it is earlier terminated in the manner provided below, or unless
renewed or otherwise extended by mutual written agreement signed by both
parties. Notwithstanding anything herein to the contrary, Datatec shall not
be obligated to commence the performance of its Services hereunder prior to
April 20, 1998.
(b) During the initial three-year term of this Agreement NTN, but not
Datatec, shall have the right to cancel this Agreement upon thirty (30)
days prior written notice stating its intention to terminate this Agreement
and specifying the date upon which the termination will be effective. In
such event, NTN shall, in addition to any other amounts owed to Datatec for
services rendered under this Agreement, pay Datatec an early termination
fee equal to the product of (i) two (2) multiplied by (ii) the monthly
support services fee (number of Sites receiving Services x $27.88 [as
increased
<PAGE>
annually in accordance with the Schedule]) billed for the month prior to the
effective date of early termination.
(c) After the initial three year term, this Agreement may be terminated by
either party upon not less than thirty (30) days prior written notice to the
other, stating the intention to terminate the Agreement and specifying the date
upon which termination shall be effective; provided, however, that termination
of this Agreement (i) shall not become effective until the completion of
Services being performed by Datatec on the day prior to the effective date of
termination, unless otherwise agreed upon in writing and (ii) shall not affect
NTN's obligation to make payment to Datatec for work completed by Datatec prior
to termination, which obligation shall survive termination of this Agreement. In
addition, the obligations of the parties set forth in Sections 3, 6, 7, 9, 10,
11, 13 and 14 hereof shall survive any termination or expiration of this
Agreement.
3. PAYMENT AND TAXES
-----------------
(a) In consideration of the performance of the Services hereunder, NTN
shall pay to Datatec fees, charges and expenses as set forth in the Schedule.
Installation-De-installation Services as set forth on the Schedule, shall be
invoiced upon completion of such Services and be on net/30 terms. Maintenance
Services as set forth on the Schedule shall be invoiced as follows: Not later
than the fifteenth day of each month during the term of this Agreement, NTN
shall advise Datatec in writing as to the number of Sites to be maintained by
Datatec during the next succeeding month, which number shall be based on the
number of Sites operating at the time such advice is sent to Datatec. Datatec
shall invoice NTN in advance based on the said number of Sites and the
applicable maintenance charges set forth in the Schedule, and such invoiced
amounts shall be on net/30 terms from the date of said invoice, which invoice
shall be dated not earlier than the 30/th/ day of the month next preceding the
month for which services are being billed. All amounts due hereunder shall be
payable in full by NTN in United States currency without set-off or deduction
for any reason. Interest on late payments will be assessed at the rate of one
(1%) percent per month, or the maximum permitted by law, whichever is less. In
addition to such amounts, NTN agrees to pay or reimburse Datatec for all
applicable taxes not based on Datatec's net income or net worth, including but
not limited to sales, use, privilege and property taxes, or any amounts levied
in lieu thereof, based on any fees or charges payable on Services provided
hereunder or otherwise arising out of or in connection with this Agreement,
whether such taxes are now or hereafter imposed by any federal, state, local or
other taxing authority.
(b) Notwithstanding anything in this Agreement to the contrary, in the
event that as a result of a change in the technology and/or method of
distribution employed by NTN in connection with the Equipment and/or Sites that
increases or decreases the cost to Datatec of performing the Services, the
parties shall negotiate in good faith an adjustment to the fees set forth in the
Schedule. If the parties are unable to agree on an adjustment within thirty
(30) days after either party has requested same, then, notwithstanding anything
in this Agreement to the contrary, either party may terminate this Agreement on
thirty (30) days notice to the other; provided, however, that in the event of
such termination within eighteen (18) months of the date hereof, NTN shall be
obligated to pay Datatec the early termination payment provided in Section 2(b)
hereof, and in the event of such termination thereafter during the initial term
of this Agreement, NTN shall be obligated to pay Datatec one-half (1/2) of the
said early termination payment.
(c) Upon acceptance of the Agreement, NTN shall pay Datatec, as an advance
payment (the "Advance Payment") for Services to be performed by Datatec
hereunder, the sum of $150,000.00. Datatec shall apply the Advance Payment to
amounts billed by Datatec to NTN from and after November 1, 1998, or, in the
event that prior to such date NTN is more than 45 days delinquent in the payment
of any amounts due to Datatec under this Agreement, Datatec shall have the
right, but not the obligation to apply the Advance Payment, or the applicable
portion thereof, to said overdue amount. Datatec shall credit to NTN interest on
the unused portion of the Advance Payment at the rate of six (6%) percent
2
<PAGE>
per annum, computed as if the year consisted of 360 days, until the Advance
Payment is applied in accordance with this Agreement. Said interest shall also
be applied, in the manner provided above, against amounts billed by Datatec to
NTN.
4. FACILITIES; APPROVALS, ETC.
---------------------------
NTN agrees to use its best efforts to obtain and/or make available to Datatec,
without charge, all facilities, services, consents and approvals reasonably
required by Datatec for the performance of Services pursuant to the Agreement,
including, but not limited to, obtaining all necessary consents and approvals
(i.e., the consents of landlords and other third parties having an interest in
the installation Site), and providing Datatec with access to the Sites during
reasonable hours, suitable workspace and such technical materials, data and
other information determined by Datatec to be necessary for the performance of
such Services as set forth in the Schedule. Without limiting the foregoing, NTN
shall be responsible for (1) performing a Site survey at each Site at which
Datatec is to perform installation Services which will identify suitable
locations for installing the Equipment at the Site; (ii) delivering each Site
survey to Datatec at least five (5) business days prior to the date Datatec is
scheduled to install the Equipment at the Site; and (iii) delivering to the
Site, the Equipment to be installed at such Site.
5. PERSONNEL
---------
Datatec shall have the sole right to determine which of its employees,
independent contractors or other personnel shall be assigned to perform Services
under this Agreement, and to reassign and replace such employees, independent
contractors and other personnel. Datatec shall be solely responsible for payment
of all compensation payable to Datatec personnel in connection with the
performance of the Services hereunder, including payment of employment-related
taxes and worker's compensation insurance, if applicable. Datatec shall have the
right to subcontract all or any portion of its rights, duties, obligations or
responsibilities hereunder upon notice to NTN; provided that Datatec shall
remain primarily liable for the performance of its obligations hereunder.
6. NON-SOLICITATION
----------------
NTN hereby covenants and agrees that during the term of this Agreement, and for
a period of one (1) year thereafter, it shall not (and shall use its best
efforts to ensure that its subsidiaries and affiliates do not) directly or
indirectly solicit, hire or otherwise retain or engage, whether as an employee,
independent contractor or otherwise, any employee or other personnel of Datatec
or former employee who performed any Services during the term of this Agreement,
excluding, however, former employees whose employment with Datatec has been
terminated for three (3) months or more.
7. INDEPENDENT CONTRACTOR
----------------------
It is understood and agreed that this Agreement does not create any relationship
of association, partnership or joint venture between the parties, nor does it
create any implied licenses, nor constitute either party as the agent or legal
representative of the other for any purpose whatsoever; and the relationship of
Datatec to NTN for all purposes, including but not limited to, federal and state
tax purposes, shall be one of independent contractor. Neither party shall have
any right or authority to create any obligation or responsibility, express or
implied, on behalf or in the name of the other, or to bind the other in any
manner whatsoever.
8. INSURANCE
---------
(a) During the term of this Agreement, Datatec shall maintain, at its sole
expense:
3
<PAGE>
(i) a comprehensive general liability policy, including coverage for
broad form property damage, personal injury, contractual
liability and completed operations with minimum limits of One
Million Dollars ($1,000,000.00) per occurrence. Two Million
Dollars ($2,000,000.00) in the aggregate, to cover claims
arising or resulting from the negligence, acts or omissions of
Datatec, its officers, employees and agents in connection with
this Agreement;
(ii) a commercial automobile liability policy covering owned, hired
and non-owned vehicles with minimum combined single limits of
One Million Dollars ($1,000,000.00) per accident; and
(iii) policies providing workers' compensation insurance as required
by law.
Datatec shall add NTN as an additional insured under its general liability
and automobiles liability policies, and shall, within five (5) days hereof,
provide to NTN a certificate or certificates from Datatec's insurers evidencing
the above coverages.
9. CONFIDENTIALITY
---------------
In the performance of otherwise in connection with this Agreement, a
party may disclose to the other certain information that (i) is marked or
identified in writing as confidential or proprietary information of such
party prior to, upon or promptly after receipt by the receiving party (the
"Confidential Information"). The party receiving Confidential Information
shall hold the Confidential Information in confidence and will use such
Confidential Information only for the purposes of fulfilling its
obligations under this Agreement. Nothing in this Agreement will be
interpreted to confer upon a party any implied or express license to use
the Confidential Information for any other purpose. A party shall not use
the Confidential Information of the other party for any other purpose
without the express written permission of such other party. A party shall
not disclose, provide, disseminate or otherwise make available any
Confidential Information of the other party, or any part thereof in any
form whatsoever to any third party without the express written permission
of such other party. Notwithstanding anything in this Section 9 to the
contrary, Confidential Information shall not include (i) information which
is in the public domain or in possession of the receiving party without
restriction at the time of receipt under this Agreement; (ii) is used or
disclosed with the prior written approval of the other party; (iii) is
independently developed by the receiving party; (iv) is or becomes known
from a source other than the disclosing party without breach of this
Agreement by the receiving party; or (v) is ordered to be released by a
court of competent jurisdiction or appropriate regulatory authority, but in
such case the party subject to such order agrees promptly to notify the
other party to enable the other party to assert a confidential or protected
status for the information.
10. INDEMNIFICATION AND LIMITATION OF LIABILITY
-------------------------------------------
(a) Each party shall defend, indemnify and hold the other harmless
from and against all claims, actions, suits, proceedings, damages, losses,
and expenses (including, but not limited to, reasonable attorney's fees and
costs) to the extent that any such claim, action, suit, proceeding, damage,
loss or expense is the result of any act or omission of the indemnifying
party or of any of its employees, agents, servants, independent
contractors, subcontractors or other personnel provided that the party
seeking indemnification notifies the indemnifying party promptly in writing
thereof and gives the indemnifying party exclusive authority to defend or
settle any such matter and complete information required for the defense of
same.
(b) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED BY SECTION 12 HEREOF,
NOTWITHSTANDING ANY OTHER TERM OR PROVISION IN THIS AGREEMENT TO THE
CONTRARY, DATATEC'S LIABILITY UNDER THIS AGREEMENT FOR ANY
4
<PAGE>
CAUSE WHATSOEVER, AND REGARDLESS OF THE FORM OF ACTION (WHETHER IN CONTRACT, IN
TORT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY (INCLUDING NEGLIGENCE,
OR OTHERWISE) WILL BE LIMITED TO GENERAL MONEY DAMAGES (AND NO OTHER RELIEF) IN
AN AMOUNT NOT TO EXCEED THE AGGREGATE FEES PAID BY NTN HEREUNDER. UNDER NO
CIRCUMSTANCES WILL DATATEC BE LIABLE FOR ANY LOSS OF PROFITS, LOST DATA, COST OF
PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES, ANY CLAIM OR DEMAND
AGAINST NTN BY ANY OTHER PARTY, OR SPECIAL, CONSEQUENTIAL OR INDIRECT DAMAGES OF
ANY KIND WHATSOEVER.
(c) Neither party hereto shall be liable for failure or delay in performing any
of its obligations hereunder if such failure or delay is occasioned by
compliance with any governmental regulation, request or order, or by
circumstances beyond the reasonable control of the party, including, but not
limited to, Acts of God, war, insurrection, fire and/or flood, accident, labor
strikes, work stoppage or slowdown, or inability to obtain raw materials,
supplies, power or equipment necessary to enable such party to perform its
obligations hereunder. Each party shall (i) promptly notify the other in
writing of any such event of force majeure, the expected duration thereof, and
its anticipated effect on the ability of such party to perform its obligations
hereunder and (ii) make reasonable efforts to remedy any such event of force
majeure.
11. LIMITED WARRANTY
----------------
Datatec warrants to NTN that for a period of one (1) year after each
Installation Completion Date, hereafter defined, the materials supplied by
Datatec in connection with the installation of any Equipment pursuant to this
Agreement (hereafter, the "Installation Services") shall be free from defects in
material and workmanship. For purposes hereof, the "Installation Completion
Date" means the date of completion of installation of Equipment at a Site.
Datatec will notify NTN of the date of completion of each Site in accordance
with the operating procedures to be developed by the parties pursuant to Section
2 (d). Datatec further warrants to NTN that all Services performed by Datatec
hereunder shall be completed in a good and workmanlike manner and according to
standards generally accepted in the industry. Datatec's sole obligation under
such warranties shall be to repair or replace (at the option of Datatec) such
defective materials and/or workmanship or to make such changes and corrections
with respect to such Services as may be required to cause the same substantially
to conform to the foregoing warranties; provided, however, that such warranties
shall be void and of no effect if the Equipment which is the subject of any
Services performed by Datatec has been abused, or used, altered, or operated in
any manner or in any environment not consistent with the intended purpose, or
modified or repaired in any manner not in accordance with common industry
practices. THE WARRANTIES AND REMEDIES SET FORTH IN THIS SECTION 11 CONSTITUTE
THE ONLY WARRANTIES WITH RESPECT TO ANY SERVICES PERFORMED OR GOODS PROVIDED BY
DATATEC, AND THE EXCLUSIVE REMEDIES IF SUCH WARRANTIES ARE BREACHED; AND SUCH
WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY
MATTER WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, EVEN IF DATATEC HAS BEEN
ADVISED AS TO THE POSSIBILITY OF SUCH DAMAGES.
12. EQUITABLE RELIEF
----------------
Datatec acknowledges and agrees that NYN will have no adequate remedy at law if
Datatec fails or otherwise determines not to provide Services in accordance with
this Agreement. NTN may therefore pursue equitable remedies, including specific
performance of this Agreement or preliminary or permanent injunctions against
any such breach of the Agreement without resort to
5
<PAGE>
arbitration. For this purpose, Datatec hereby consents to be subject to the
jurisdiction of the Superior Court of the State of California for San Diego
County.
13. DISPUTE RESOLUTION PROCEDURE
----------------------------
(a) Except as otherwise provided in Section 12 hereof, this section governs
any dispute, disagreement, claim, or controversy between the parties arising
out of or relating to this agreement or its breach (the "Disputed Matter"). All
Disputed Matters shall be submitted to the following dispute resolution
process:
(i) Internal Mediation. Each party shall select, from time to time, a
senior executive to act as its mediator in connection with a Disputed Matter.
Each Disputed Matter shall be referred jointly to such senior executives. If
such executives do not agree upon a decision within five (5) days after
referral of the matter to them, the parties shall proceed to the next stage of
the dispute resolution procedure.
(ii) Outside Mediation. Either party may, upon written notice and
within five (5) days after the conclusion of internal mediation, elect to
utilize a non-binding resolution procedure whereby each presents its case at a
hearing before a panel consisting of a senior executive of each of the parties
and a mutually acceptable neutral adviser. The hearing will occur no more than
ten (10) days after the party serves written notice to use outside mediation.
Each party may be represented at the hearing by attorneys. If the matter cannot
be resolved at such hearing by the senior executives, the neutral adviser may
be asked to assist the senior executives in evaluating the strengths and
weaknesses of each party's position on the merits of the disputed matter.
Thereafter, the senior executives shall meet and try again to resolve the
matter. If the matter cannot be resolved at such meeting, the parties' only
recourse is binding arbitration as provided for in this Section and the outside
mediation proceedings will have been without prejudice to the legal position
of either party. No arbitration may commence concerning the Disputed Matter
until fifteen (15) days have elapsed from the first day of the hearing. The
parties shall each bear their respective costs incurred in connection with this
procedure, except that they shall share equally the fees and expenses of the
neutral adviser and the costs of the facility for the hearing. Both parties
agree to use their best efforts to mutually agree on the use of a facility for
which no charge will be made. Notwithstanding the foregoing, if the Disputed
Matter concerns, in whole or in part, non-payment by NTN of amounts claimed to
be owed to Datatec, the Disputed Matter, may, at Datatec's election, be
immediately submitted to arbitration as provided below.
(iii) Arbitration. If the Disputed Matter is not submitted to outside
mediation or, if submitted, cannot be resolved pursuant to outside mediation,
then either party may within ten (10) days after the completion of inside or
outside mediation, as appropriate, upon written notice, submit the Disputed
Matter to formal binding arbitration in accordance with the arbitration
provisions set forth in Section 14 hereof.
(b) Pending the resolution of any Disputed Matter under Subsections 13 (a)(i)
or (ii) above or pursuant to Section 14 below, both Datatec and NTN shall
continue their performance under this Agreement, including but not limited to
the payment of all sums which are due or which become due during the dispute
resolution process.
Except as otherwise expressly provided in Section 12 of this Agreement,
neither party will institute any action or proceeding against the other party
in any court concerning any Disputed Matter other than the entry of judgment
upon an award rendered by the arbitrators pursuant to this Section.
14. ARBITRATION PROVISIONS
----------------------
(a) Any dispute between the parties shall be settled by final and binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbritration Association (the "AAA"); provided, however, that if such rules are
inconsistent with any provision of this Agreement, this Agreement shall
control.
6
<PAGE>
(b) Any such arbitration shall be conducted in the City of Chicago, Illinois at
a place and time mutually agreed upon by the parties or, failing mutual
agreement, selected by the arbitrator.
(c) Any arbitration shall be conducted before a single arbitrator who shall be
compensated for his or her services at a rate to be determined by the AAA, in
the event the parties are not able to agree upon his or her rate of
compensation, but based upon hourly or daily consulting rates for the neutral
arbitrator reasonably consistent with such arbitrator's normal charges or fees
charged by similarly experienced and qualified arbitrators. Within five (5) days
of notice by a party seeking arbitration under this provision, the parties shall
appoint the arbitrator. The arbitrator must be employed by the communications
industry with a minimum of five (5) years experience in communications equipment
installation and maintenance. In the event the parties cannot agree on the
selection of an arbitrator within the stated time period, the AAA rules for the
selection of an arbitrator shall be followed, provided that the selection is
from among persons who meet the above-stated requirements.
(d) Each party shall bear its own costs and expenses of arbitration including,
but not limited to, filing fees and attorney's fees, and each party hereby
agrees to pay one-half (1/2) of the administrative fees of the AAA and of the
compensation to be paid to the arbitrator in any such arbitration and one-half
(1/2) of the costs of transcripts and other expenses of the arbitration
proceedings, subject, however, to allocation of costs and expenses (including
attorneys' fees) by the arbitrator consistent with the award.
(e) The parties agree to make available to the arbitrator all nonprivileged
books, records, schedules and other information reasonably requested by them.
Such matters are to be made available to the arbitrator at such times as are
deemed necessary by the arbitrator to make a decision as herein provided.
(f) The arbitrator may conduct any pre-trial proceedings by telephonic
conference call rather than by a face-to-face meeting.
(g) The arbitrator shall, prior to rendering a decision on the arbitration
matter, afford each of the parties an opportunity, both orally and in writing,
to present any relevant evidence (the formal rules of evidence applicable to
judicial proceedings shall not apply) and to express, orally and/or in writing
that party's point of view and arguments as to the proper determination of the
arbitration matter; provided, however, that either party submitting written
material shall be required to deliver a copy of such written material to the
other party concurrently with the delivery thereof to the arbitrator and such
other party shall have the opportunity to submit a written reply, a copy of such
shall also be delivered to the other party concurrently with the delivery
thereof to the arbitrator. Oral argument shall take place only at a hearing
before the arbitrator at which all parties are afforded a reasonable opportunity
to be present and be heard.
(h) In the event of a willful and unjustified default by any of the parties
hereto in appearing before the arbitrator(s) after due written notice shall have
been given, the arbitrator is hereby authorized to render a decision upon the
testimony of the party appearing before the arbitrator. A party asserting that
its failure to appear was justified must prove such justification by clear and
convincing evidence.
(i) The arbitrator shall make a decision and award resolving the dispute within
thirty (30) days after the selection of the arbitrator; and within fifteen (15)
days of the last hearing held concerning such dispute(s).
(j) Any judgment upon the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof.
(k) Within thirty (30) days after the arbitrator makes his or her decision and
award, the arbitrator shall render findings of fact and conclusions of law and a
written opinion setting forth the basis and reasons for any decision and award
rendered and deliver such documents to each party to this Agreement along with a
signed copy of the award.
7
<PAGE>
(i) The arbitrator chosen in accordance with these provisions shall not have
the power to alter, limit, expand, amend or otherwise affect the terms of this
Agreement or these arbitration provisions, and any award is subject to the
Limitation of Liability and Consequential Damages and Limited Warranty
provisions contained in Sections 10 and 11 hereof.
15. AMENDMENTS AND SEVERABILITY
---------------------------
This Agreement may not be amended or modified, nor may any right hereunder be
waived except by a written agreement signed by the party against which the same
is sought to be enforced. This Agreement will not be amended or modified by the
terms of any purchase order or acknowledgment, which will be considered solely
for convenience of NTN regardless of whether Datatec may have accepted or signed
the same. Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
the Agreement in any other jurisdiction.
16. NOTICES
-------
Any notice, request, demand or other communication required or permitted under
this Agreement shall be in writing and shall be deemed to have been be properly
given (i) if personally delivered, on the delivery date; (ii) three (3) days
after deposit in the mails if mailed by certified or registered air mail, return
receipt requested and postage prepaid; or (iii) if sent by facsimile, on the
date of receipt as evidenced by the facsimile confirmation report (provided,
however, that in the event of a notification of breach, the notice shall also be
mailed in the manner provided in (i) or (ii) above), in each case addressed or
transmitted as set forth on the signature page of this Agreement or to such
other address or facsimile number as from time to time may be given in the
manner permitted above.
17. AUTHORITY
---------
Each party warrants and represents that it has the power to enter into
this Agreement and perform in accordance with the provisions hereof and that the
execution and performance of the Agreement has been duly and validly authorized
in accordance with all applicable laws and governing instruments.
18. GENERAL
-------
This Agreement, together with any addendum hereto and the attached
Schedule (i) constitute the entire Agreement between the parties and supersedes
and replaces all prior agreements and representations with respect to the
subject matter thereof, (ii) shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns, (ii) shall not
confer any rights or remedies upon any person or entity not a party hereto. In
any action or proceeding to enforce its rights under this Agreement, the
prevailing party shall be entitled to recover reasonable attorney's fees and
costs.
19. WAIVER
------
No waiver of any breach of any of the provisions of the Agreement shall
be construed to be a waiver of any succeeding breach of the same or any other
provision.
20. GOVERNING LAW
-------------
This Agreement shall be construed and governed in accordance with the
laws of the State of California without regard to principles of conflict of
laws.
8
<PAGE>
21. COUNTERPARTS: SIGNATURES
------------------------
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute on
and the same agreement. Facsimile signatures of the parties may be used in
connection with the execution or any amendment of this Agreement, but each party
executing this Agreement or any such amendment pursuant to a facsimile signature
shall promptly provide the appropriate signature page containing such party's
original signature to the other party.
IN WITNESS WHEREOF, the parties have caused their authorized representative
to execute this Agreement as of the date first above written.
ACCEPTED BY DATATEC SYSTEMS, INC: ACCEPTED BY CUSTOMER:
DATATEC SYSTEMS, INC. NTN COMMUNICATIONS, INC.
20C Commerce Blvd. The Campus, 5966 La Place Court
Totowa, NJ 07512 Carlsbad, CA 92008
(Facsimile (973-575-9599)(Att'n (Facsimile (760) 929-5293)(Att'n:
Ray Koch and Jim Cummiskey) Geoff Labat and Kevin Loughran, Esq.)
By: /s/ James J. Cummiskey By: /s/ Geoffrey P. Labat
---------------------- ----------------------
(Authorized Officer) (Authorized Officer)
James J. Cummiskey, Vice President Geoffrey P. Labat
---------------------------------- --------------------------
(Name and Title) (Name and Title)
3/30/98 3/30/98
-------------------------- --------------------------
(Date) (Date)
03/30/98 3:43 PM
Document #: 36870
9
<PAGE>
WORK ASSIGNMENT SCHEDULE
------------------------
This Work Assignment Schedule is entered into by and between Datatec
Systems, Inc. ("Datatec") and NTN Communications ("Customer") pursuant to that
certain Installation and Support Services Agreement between Datatec and Customer
(the "Agreement"), and relates to certain Installation and Support Services (as
defined in the Agreement), which Customer desires Datatec to perform under the
terms and conditions set forth herein and in the Agreement. The following
Installation and Support Services are the subject of this Work Assignment
Schedule:
Description of Services: NTN Install and Support
Project Pricing
- ---------------
Installation Services (49 MHz.) $884.00/Site
(900 MHz.) $723.00/Site
Support Services (24-48 hour response) $27.88/Site/Month
De-installation Services $380.00/Each
A. Description of Installation Services and Procedures
- ------------------------------------------------------
NTN Installation Coordinator contacts Datatec Call Center ("DCC")
providing:
Account name
Address
Phone number
Contact
Completed Site Survey
Shipping delivery timeline
Work schedule considerations (hours of operation/property availability
considerations)
DCC advises NTN of scheduled installation date
NTN deploys system to new subsriber to arrive no later than 1 working day
prior to the scheduled installation date.
Datatec verifies system delivery
Datatec Installation Services include:
(49 MHz.)
<PAGE>
NTN Network Service Contract
Assemble, secure and align satellite dish
Run cable from dish to IDR card
Test satellite signal
Placement of dedicated PC
Position and mount antennas for RF delivery system in accordance with
recommended procedures
Run cable to/from basestation to said antennas
Run video feed to insertion point of existing distribution system. Using
provided modulator, select unused channel.
Verify that entire video distribution system is fully functional after
insertion, amplifying or attenuating feeds as needed.
Link modem to customer provided phone jack
Test modem functions
Completion of check-list/sign-off form
Insure facility is left in clean condition
Playmaker charging tray(s) and charger(s)
(900 MHz.)
Same as above without the need to run cable or mount antennas for the RF
delivery system.
Datatec will provide the following:
(6) 8x8x16 concrete blocks for dish ballast
RG6 cabling
RG6 Connectors
Tie Wraps
All Needed Tools
Datatec will perform installation services within 14 calendar days after
notification.
Installation fees include all project management fees.
B. Description of De-installation Services and Procedures
- ----------------------------------------------------------
NTN notifies the DCC providing:
Account name
Address
Phone Number
Contact
List of equipment to be returned (including # of Playmakers)
Copy of UCC-1 form
Special circumstances (i.e. short notice because going out of business)
The Datatec technician contacts subscriber to arrange equipment removal.
Datatec dispatches technician to remove system within 30 days of
notification.
Equipment removal includes:
All visible internal NTN related cabling
Basestation antennas
Computer
Modulator (if provided)
Charging tray(s)
2
<PAGE>
NTN Network Service Contract
Charger(s)
Playmakers Satellite dish
All visible external cabling
The Datatec technician will notify the NTN Call Center of job completion,
and collect RMA information. During call, Datatec technician will inform
NTN of any discrepancy between the actual number of Playmakers collected
and NTN records.
At the completion of the de-installation, Datatec packages and returns system
components via preferred carrier per RMA protocol, including:
Computer
Basestation antennas
Modulator (if provided)
Charging tray(s)
Charger(s)
Playmakers
LNB from satellite dish (Datatec to dispose of remaining assembly)
NTN will incur all freight costs directly from their preferred
carrier. Datatec will ship and track all product returned to NTN.
C. Description Of Support Services And Procedures
- --------------------------------------------------
All calls will initially go to the NTN Call Center. The NTN call center will
then contact a single designated dispatcher within Datatec and shall provide
the following:
Account information
Nature of problem
Description of parts shipped (if any) and ETA of such shipment
Tracking data (if any)
RMA data (if any)
Datatec confirms shipment of party before going to site.
Datatec dispatches technician by next day in 60% of the cases and within two
days in 100% of the cases, excepting shipping delays
Datatec technician contacts NTN Call Center upon completion of repair for
additional testing, documentation, verification and release. In the
event that wait times exceed 15 minutes, the Datatec technician will
leave a voice mail message. This will then serve as the release
NTN closes open ticket
Datatec technician returns and tracks all RMA components to NTN via
preferred carrier per RMA protocol to NTN facility in Carlsbad, CA.
NTN will incur all freight costs directly from its preferred carrier
3
<PAGE>
NTN Network Service Contract
Support services include maintenance and replacement of the following
components/systems:
CPU
Hard Disk
Keyboard
NTSC video board
IDR
RF basestation
Modem
Modem interface to customer provided wall jack
RG6 cabling and connectors
Satellite dish
RF delivery system including antennas
Video interface to existing distribution system
Modulator (if provided by NTN)
Charging system
Support services include all project management fees.
D. Required Field Personnel Equipment
----------------------------------
External IDR (Wavefore 800-473-3332)
Radio Shack audio amplifier (part #277-1008) and interface cable (dish
alignment)
Compass and inclinometer
Ladder(s)
RG6 crimper, wire stripper, wire cutter
RG6 connectors: F, F-RCA, F-BNC, F-UHF
Bulk RG6 cable (1000 ft)
Drill and assorted bits
Single line phone
Portable color monitor with RF and video inputs
Phillips and flathead screwdrivers
Ratchet with 10 mm and 13 mm deep sockets (sat dish assembly)
Tape fish & push poles for cable runs
(6) 8x8x16 concrete blocks for dish ballast
Voltmeter
50 and 100 ft extension cords
4
<PAGE>
NTN Network Service Contract
IBM compatible computer keyboard with PS2 adapter
Basestation antenna and interface cable (NTN provided)
E. Labor
-----
Items not covered in the above scope of work
<TABLE>
<S> <C>
- - Straight Time $80.00/hr.
- - Monday through Friday, first 8 hours of each day
- - Over Time $120.00/hr.
- - Monday through Friday, after first 8 hours of each day
- - Saturday, first 8 hours
- - Double Time $125.00/hr.
- - Monday through Friday, after first 16 hours
- - Saturday, after first 8 hours or Sundays or Holidays
- - Travel Time (+50 Miles from Office) $80.00/hr.
- - Sunday through Saturday, all day
Expenses
Per Diem (+50 Miles from Office) $52.00/day
Van Included
Other Expenses As Needed Cost x 1.2
Rental Car
Airfare
Lift Rental
Tool Rental
Special Shipping
Hotel
Materials (Outside of Scope) Current List
</TABLE>
Other Contract Assumptions
The terms of this contract are only valid with a package of items A, B and C in
the defined scope of work.
Datatec's furnishing of a call center is contingent upon NTN agreeing to
utilizing Datatec exclusively for items A-C in enclosed scope of work
description.
Expenses are incurred when the site is more than 50 miles from a Datatec office
when T, M and E is applicable (work not covered under items A-C).
All Project Management fees are included in hourly rate.
All installation, deinstallation and support prices (items A-C) will incur an
upward adjustment of 3% on March 1, 1999 and 3% on March 1, 2000
5
<PAGE>
NTN Network Service Contract
ACCEPTED BY DATATEC: ACCEPTED BY CUSTOMER:
- ----------------------------------- -----------------------------------
DATATEC INDUSTRIES, INC. NTN Communications, Inc.
20C Commerce Way The Campus
Totowa, New Jersey 07512 5966 La Place Court
Carlsbad, CA 92008
- ----------------------------------- -----------------------------------
By: By:
X /s/ James J. Cummiskey X /s/ Geoffrey D. Labat
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
(Authorized Officer) (Authorized Officer)
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
(Print) (Print)
(Name and Title) (Name and Title)
James J. Cummiskey, Vice President Geoffrey D. Labat
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
Date: Date:
3/30/98 3/30/98
- ----------------------------------- -----------------------------------
6
<PAGE>
EXHIBIT 10.47
MODIFICATION TO RESIGNATION AGREEMENT
-------------------------------------
THIS MODIFICATION TO RESIGNATION AGREEMENT ("Modification") dated as of
March 9, 1998, is entered into by and between NTN Communications, Inc., a
Delaware corporation (the "Company"), and Daniel C. Downs ("Downs").
RECITALS
--------
A. Pursuant to a Resignation and General Release Agreement ("Resignation
Agreement") effective as of December 31, 1996, Downs is entitled to severance
payments ("Severance Payments") of $18,164.16 per month for the twelve months
ending December 31, 1997, $20,616.32 per month for the twelve months ending
December 31, 1998 and $23,399.53 per month for the twelve months ending December
31, 1999.
B. Pursuant to the Resignation Agreement, Downs also is entitled to a car
allowance of $500 per month until December 31, 1999 (the "Car Allowance").
C. As of April 1, 1998 the total aggregate Severance Payments owing to
Downs pursuant to paragraph 2(a) of the Resignation Agreement and Car Allowance
owing to Downs pursuant to paragraph 2(f) of the Resignation Agreement will be
$471,968.20.
D. Downs and the Company have agreed that Severance Payments and the Car
Allowance shall be paid as hereinafter provided in this Modification.
NOW, THEREFORE, in consideration of the premises, and of mutual covenants
contained herein and the mutual benefits to be derived therefrom, the Company
and Downs agree as follows:
AGREEMENT
---------
1. Payment Schedule. Effective April 1, 1998, Severance Payments payable
----------------
pursuant to paragraph 2(a) of the Resignation Agreement and the Car Allowance
payable pursuant to paragraph 2(f) of the Resignation Agreement shall be payable
on the dates and in the amounts specified in Exhibit "A" attached hereto, less
appropriate withholding taxes, as required. The total amount of Severance
Payments and Car Allowance payable from and after April 1, 1998 will be
$471,968.20. Any unpaid portion of that balance shall be due and payable on
December 31, 2000. If any payment specified in Exhibit "A" is not paid by the
Company for more than 90 consecutive days, then all payments shall be
accelerated and become immediately due and payable.
2. Medical and Life Insurance. The period through which the Company
--------------------------
shall continue to include Downs under its medical insurance program and to
provide life insurance to Downs, each without cost to Downs, shall continue
through December 31, 2000.
3. Option to Convert Payments to Stock.
-----------------------------------
<PAGE>
3.1 At any time during the period commencing with the execution of
this Agreement and ending 110 days thereafter, the Company shall have the option
to convert all amounts then owing to Downs pursuant to section 1 hereof to
common stock of the Company on the following basis: the Company shall give
written notice of exercise of such option. The number of shares of common stock
to be issued (the "Shares") shall be 66% of that number of shares determined by
dividing (x) the present value of the amounts then owing to Downs pursuant to
section 1 hereof using a discount rate of 5% by (y) the average closing price of
the common stock on the American Stock Exchange for the ten trading days prior
to the third business day before the notice of the exercise of the option.
3.2 Upon the Company's exercise of this option the release and
extinguishment by Downs of all rights to payments pursuant to section 1 hereof
shall be effective.
3.3 The Company agrees that, within twenty days after the notice of
exercise, it shall file a Registration Statement on Form S-3 (the "Registration
Statement") with the Securities and Exchange Commission covering the Shares, and
shall use its best efforts to have the Registration Statement declared
effective. In the event the Company fails to file the Registration Statement
within such twenty day period, it shall be obligated to continue to make
payments to Downs as required by section 1 hereof until such time as the
Registration Statement is filed. In the event the Registration Statement is not
declared effective within 120 days of the notice, the Company shall pay Downs a
one-time cash payment of $45,000 unless the Board of Directors of the Company
determines, in its reasonable judgment, that the failure to have such
Registration Statement effective within 120 days was primarily due to delays
occasioned by the proposed transaction between the Company and NTN Canada, in
which case the 120 day requirement will be extended by the number of days of
such delay. The Company shall bear all costs and expenses of such registration
except for any brokerage or finders' fees which shall be payable by Downs.
3.4 In the event the Company gives written notice of exercise, the
period through which the Company shall continue to include Downs under its
medical insurance program and to provide life insurance to Downs, each without
cost to Downs, shall continue through December 31, 1999.
3.5 The Company shall pay all federal and state withholding taxes
relating to the issuance of the shares to Downs.
4. Agreement in Effect. Except as specifically modified hereby, all of
-------------------
the terms and conditions of the Resignation Agreement shall remain in full force
and effect without modification, including, but not limited to, paragraph 2(b)
regarding the payment of accrued vacation and paragraph 2(c) regarding payment
of deferred compensation. All future references to the Resignation Agreement
shall mean the Resignation Agreement as hereby modified.
5. California Law. This Modification is made and entered into in the
--------------
State of California and shall be interpreted, construed and enforced in
accordance with the laws of the State of California without giving effect to its
conflict of laws principles.
2
<PAGE>
6. Counterparts. This Modification may be executed in more than one
------------
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
7. Entire Agreement. Unless otherwise specified, this Modification and
----------------
the documents referenced herein represent the entire understanding of the
parties with respect to the transactions set forth herein, and supersede all
prior representations, understandings and agreements made by the parties.
Neither this Modification nor any of the provisions hereof may be modified,
amended or waived except by means of a writing executed by the parties.
8. Attorneys' Fees. In the event of any controversy, claim, or dispute
---------------
between the parties hereto, arising out of or relating to this Modification, or
the breach thereof, the prevailing party shall be entitled to recover from the
other party reasonable expenses, attorneys' fees and costs. Attorneys' fees
incurred in enforcing any judgment are recoverable as a separate item, and this
provision for post-judgment attorneys' fees shall survive any judgment and shall
not be deemed merged into the judgment.
9. Interpretation. This Modification shall not be interpreted against a
--------------
party by virtue of such party's participation in the drafting of the
Modification or any provisions herein.
10. Parties Bound. This Modification shall be binding upon and inure to
-------------
the benefit of the personal and legal representatives, successors and permitted
assigns of the parties hereto and also upon the heirs, executors and
administrators of the individual persons executing this Modification.
IN WITNESS WHEREOF, the parties hereto have executed this Modification or
have caused this Modification to be duly executed on their respective behalf by
their respective officers thereunto duly authorized, effective as of the day and
year first above written.
NTN COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Gerald Sokol, Jr.
________________________________________
Name: Gerald Sokol, Jr.
Title: President
/s/ Daniel C. Downs
___________________________________________
Daniel C. Downs
Address:
3
<PAGE>
19404 Camino Del Aguila
Escondido, CA 92025
4
<PAGE>
EXHIBIT "A"
DANIEL C.DOWNS PAYMENT SCHEDULE
-------------------------------
BALANCE AS OF MARCH 31: $476,341.22
-----------------------------------
<TABLE>
<CAPTION>
==================================================
REMAINING
MONTH PAYMENT BALANCE
----- ------- -------
- --------------------------------------------------
<S> <C> <C>
Apr-98 $ 8986.79 $ 467,354.43
- --------------------------------------------------
May-98 8986.79 $ 458,367.64
- --------------------------------------------------
Jun-98 8986.79 $ 449,380.85
- --------------------------------------------------
Jul-98 10387.50 $ 438,993.35
- --------------------------------------------------
Aug-98 10387.50 $ 428,605.85
- --------------------------------------------------
Sep-98 10387.50 $ 418,218.35
- --------------------------------------------------
Oct-98 10387.50 $ 407,830.85
- --------------------------------------------------
Nov-98 10387.50 $ 397,443.35
- --------------------------------------------------
Dec-98 10387.50 $ 387,055.85
-----------
- --------------------------------------------------
1998 TOTAL
PAYMENTS $ 89,285.37
==================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================
REMAINING
MONTH PAYMENT BALANCE
----- ------- -------
- --------------------------------------------------
<S> <C> <C>
Jan-99 $ 12976.26 $ 374,079.59
- --------------------------------------------------
Feb-99 12976.26 $ 361,103.33
- --------------------------------------------------
Mar-99 12976.26 $ 348,127.07
- --------------------------------------------------
Apr-99 12976.26 $ 335,150.81
- --------------------------------------------------
May-99 12976.26 $ 322,174.55
- --------------------------------------------------
Jun-99 12976.26 $ 309,198.29
- --------------------------------------------------
Jul-99 12976.26 $ 296,222.03
- --------------------------------------------------
Aug-99 12976.26 $ 283,245.77
- --------------------------------------------------
Sep-99 12976.26 $ 270,269.51
- --------------------------------------------------
Oct-99 12976.26 $ 257,293.25
- --------------------------------------------------
Nov-99 12976.26 $ 244,316.99
- --------------------------------------------------
Dec-99 12976.26 $ 231,340.73
------------
- --------------------------------------------------
1999 TOTAL
PAYMENTS $ 155,715.12
==================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
==================================================
REMAINING
MONTH PAYMENT BALANCE
----- ------- -------
- --------------------------------------------------
<S> <C> <C>
Jan-00 $ 15571.51 $ 215,769.22
- --------------------------------------------------
Feb-00 15571.51 $ 200,197.71
- --------------------------------------------------
Mar-00 15571.51 $ 184,626.20
- --------------------------------------------------
Apr-00 15571.51 $ 169,054.69
- --------------------------------------------------
May-00 15571.51 $ 153,483.18
- --------------------------------------------------
Jun-00 15571.51 $ 137,911.67
- --------------------------------------------------
Jul-00 15571.51 $ 122,340.16
- --------------------------------------------------
Aug-00 15571.51 $ 106,768.65
- --------------------------------------------------
Sep-00 15571.51 $ 91,197.14
- --------------------------------------------------
Oct-00 15571.51 $ 75,625.63
- --------------------------------------------------
Nov-00 15571.51 $ 60,054.12
- --------------------------------------------------
Dec-00 15571.51 $ 44,482.61
------------
- --------------------------------------------------
2000 TOTAL
PAYMENTS $ 186,858.12
==================================================
</TABLE>
Remaining Balance Due 12/31/00: $44,482.61
<PAGE>
EXHIBIT 10.48
MODIFICATION TO RESIGNATION AGREEMENT
-------------------------------------
THIS MODIFICATION TO RESIGNATION AGREEMENT ("Modification") dated as of
March 9, 1998, is entered into by and between NTN Communications, Inc., a
Delaware corporation (the "Company"), and Patrick J. Downs ("Downs").
RECITALS
--------
A. Pursuant to a Resignation and General Release Agreement ("Resignation
Agreement") effective as of December 31, 1996, Downs is entitled to severance
payments ("Severance Payments") of $18,164.16 per month for the twelve months
ending December 31, 1997, $20,616.32 per month for the twelve months ending
December 31, 1998 and $23,399.53 per month for the twelve months ending December
31, 1999.
B. Pursuant to the Resignation Agreement, Downs also is entitled to a car
allowance of $500 per month until December 31, 1999 (the "Car Allowance").
C. As of April 1, 1998 the total aggregate Severance Payments owing to
Downs pursuant to paragraph 2(a) of the Resignation Agreement and Car Allowance
owing to Downs pursuant to paragraph 2(f) of the Resignation Agreement will be
$473,583.59.
D. Downs and the Company have agreed that Severance Payments and the Car
Allowance shall be paid as hereinafter provided in this Modification.
NOW, THEREFORE, in consideration of the premises, and of mutual covenants
contained herein and the mutual benefits to be derived therefrom, the Company
and Downs agree as follows:
AGREEMENT
---------
1. Payment Schedule. Effective April 1, 1998, Severance Payments payable
----------------
pursuant to paragraph 2(a) of the Resignation Agreement and the Car Allowance
payable pursuant to paragraph 2(f) of the Resignation Agreement shall be payable
on the dates and in the amounts specified in Exhibit "A" attached hereto, less
appropriate withholding taxes, as required. The total amount of Severance
Payments and Car Allowance payable from and after April 1, 1998 will be
$473,583.59. Any unpaid portion of that balance shall be due and payable on
December 31, 2000. If any payment specified in Exhibit "A" is not paid by the
Company for more than 90 consecutive days, then all payments shall be
accelerated and become immediately due and payable.
2. Medical and Life Insurance. The period through which the Company
--------------------------
shall continue to include Downs under its medical insurance program and to
provide life insurance to Downs, each without cost to Downs, shall continue
through December 31, 2000.
3. Option to Convert Payments to Stock.
-----------------------------------
<PAGE>
3.1 At any time during the period commencing with the execution of
this Agreement and ending 110 days thereafter, the Company shall have the option
to convert all amounts then owing to Downs pursuant to section 1 hereof to
common stock of the Company on the following basis: the Company shall give
written notice of exercise of such option. The number of shares of common stock
to be issued (the "Shares") shall be 66% of that number of shares determined by
dividing (x) the present value of the amounts then owing to Downs pursuant to
section 1 hereof using a discount rate of 5% by (y) the average closing price of
the common stock on the American Stock Exchange for the ten trading days prior
to the third business day before the notice of the exercise of the option.
3.2 Upon the Company's exercise of this option the release and
extinguishment by Downs of all rights to payments pursuant to section 1 hereof
shall be effective.
3.3 The Company agrees that, within twenty days after the notice of
exercise, it shall file a Registration Statement on Form S-3 (the "Registration
Statement") with the Securities and Exchange Commission covering the Shares, and
shall use its best efforts to have the Registration Statement declared
effective. In the event the Company fails to file the Registration Statement
within such twenty day period, it shall be obligated to continue to make
payments to Downs as required by section 1 hereof until such time as the
Registration Statement is filed. In the event the Registration Statement is not
declared effective within 120 days of the notice, the Company shall pay Downs a
one-time cash payment of $45,000 unless the Board of Directors of the Company
determines, in its reasonable judgment, that the failure to have such
Registration Statement effective within 120 days was primarily due to delays
occasioned by the proposed transaction between the Company and NTN Canada, in
which case the 120 day requirement will be extended by the number of days of
such delay. The Company shall bear all costs and expenses of such registration
except for any brokerage or finders' fees which shall be payable by Downs.
3.4 In the event the Company gives written notice of exercise, the
period through which the Company shall continue to include Downs under its
medical insurance program and to provide life insurance to Downs, each without
cost to Downs, shall continue through December 31, 1999.
3.5 The Company shall pay all federal and state withholding taxes
relating to the issuance of the shares to Downs.
4. Agreement in Effect. Except as specifically modified hereby, all of
-------------------
the terms and conditions of the Resignation Agreement shall remain in full force
and effect without modification, including, but not limited to, paragraph 2(b)
regarding the payment of accrued vacation and paragraph 2(c) regarding payment
of deferred compensation. All future references to the Resignation Agreement
shall mean the Resignation Agreement as hereby modified.
5. California Law. This Modification is made and entered into in the
--------------
State of California and shall be interpreted, construed and enforced in
accordance with the laws of the State of California without giving effect to its
conflict of laws principles.
2
<PAGE>
6. Counterparts. This Modification may be executed in more than one
------------
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
7. Entire Agreement. Unless otherwise specified, this Modification and
----------------
the documents referenced herein represent the entire understanding of the
parties with respect to the transactions set forth herein, and supersede all
prior representations, understandings and agreements made by the parties.
Neither this Modification nor any of the provisions hereof may be modified,
amended or waived except by means of a writing executed by the parties.
8. Attorneys' Fees. In the event of any controversy, claim, or dispute
---------------
between the parties hereto, arising out of or relating to this Modification, or
the breach thereof, the prevailing party shall be entitled to recover from the
other party reasonable expenses, attorneys' fees and costs. Attorneys' fees
incurred in enforcing any judgment are recoverable as a separate item, and this
provision for post-judgment attorneys' fees shall survive any judgment and shall
not be deemed merged into the judgment.
9. Interpretation. This Modification shall not be interpreted against a
--------------
party by virtue of such party's participation in the drafting of the
Modification or any provisions herein.
10. Parties Bound. This Modification shall be binding upon and inure to
-------------
the benefit of the personal and legal representatives, successors and permitted
assigns of the parties hereto and also upon the heirs, executors and
administrators of the individual persons executing this Modification.
IN WITNESS WHEREOF, the parties hereto have executed this Modification or
have caused this Modification to be duly executed on their respective behalf by
their respective officers thereunto duly authorized, effective as of the day and
year first above written.
NTN COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Gerald Sokol, Jr.
-------------------------
Name: Gerald Sokol, Jr.
Title: President
/s/ Patrick J. Downs
----------------------------
Patrick J. Downs
Address:
----------------------------
----------------------------
3
<PAGE>
EXHIBIT "A"
PAT DOWNS PAYMENT SCHEDULE
--------------------------
BALANCE AS OF MARCH 31: $476,341.22
-----------------------------------
<TABLE>
<CAPTION>
REMAINING
MONTH PAYMENT BALANCE
- ------------- ----------- ---------
<S> <C> <C>
Apr-98 $ 8986.79 $467,354.43
May-98 8986.79 $458,367.64
Jun-98 8986.79 $449,380.85
Jul-98 10387.50 $438,993.35
Aug-98 10387.50 $428,605.85
Sep-98 10387.50 $418,218.35
Oct-98 10387.50 $407,830.85
Nov-98 10387.50 $397,443.35
Dec-98 10387.50 $387,055.85
-----------
1998 TOTAL
PAYMENTS $89,285.37
<CAPTION>
REMAINING
MONTH PAYMENT BALANCE
- ------------- ----------- ---------
<S> <C> <C>
Jan-99 $ 12976.26 $374,079.59
Feb-99 12976.26 $361,103.33
Mar-99 12976.26 $348,127.07
Apr-99 12976.26 $335,150.81
May-99 12976.26 $322,174.55
Jun-99 12976.26 $309,198.29
Jul-99 12976.26 $296,222.03
Aug-99 12976.26 $283,245.77
Sep-99 12976.26 $270,269.51
Oct-99 12976.26 $257,293.25
Nov-99 12976.26 $244,316.99
Dec-99 12976.26 $231,340.73
-----------
1999 TOTAL
PAYMENTS $155,715.12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REMAINING
MONTH PAYMENT BALANCE
- ------------- ----------- ---------
<S> <C> <C>
Jan-00 $ 15571.51 $215,769.22
Feb-00 15571.51 $200,197.71
Mar-00 15571.51 $184,626.20
Apr-00 15571.51 $169,054.69
May-00 15571.51 $153,483.18
Jun-00 15571.51 $137,911.67
Jul-00 15571.51 $122,340.16
Aug-00 15571.51 $106,768.65
Sep-00 15571.51 $ 91,197.14
Oct-00 15571.51 $ 75,625.63
Nov-00 15571.51 $ 60,054.12
Dec-00 15571.51 $ 44,482.61
-----------
2000 TOTAL
PAYMENTS $186,858.12
</TABLE>
Remaining Balance Due 12/31/00: $44,482.61
<PAGE>
EXHIBIT 10.49
MODIFICATION TO RESIGNATION AGREEMENT
-------------------------------------
THIS MODIFICATION TO RESIGNATION AGREEMENT ("Modification") dated as of
March 20, 1998, is entered into by and between NTN Communications, Inc., a
Delaware corporation (the "Company"), and Ronald E. Hogan ("Hogan").
RECITALS
--------
A. Pursuant to a Resignation and General Release Agreement ("Resignation
Agreement") effective as of December 31, 1996, Hogan is entitled to severance
payments ("Severance Payments") of $14,204.24 per month for the twelve months
ending December 31, 1997, $16,121.81 per month for the twelve months ending
December 31, 1998, and $18,298.26 per month for the twelve months ending
December 31, 1999.
B. Pursuant to the Resignation Agreement, Hogan also is entitled to
accrued vacation pay of $134,475.39, payable at the rate of $7,470.86 per month
through June 30, 1998 (the "Vacation Pay").
C. As of April 1, 1998 the total aggregate Severance Payments owing to
Hogan pursuant to paragraph 2(a) of the Resignation Agreement and Vacation Pay
owing to Hogan pursuant to paragraph 2(b) of the Resignation Agreement will be
$381,643.49.
D. Hogan and the Company have agreed that Severance Payments and the
Vacation Pay shall be paid as hereinafter provided in this Modification.
NOW, THEREFORE, in consideration of the premises, and of mutual covenants
contained herein and the mutual benefits to be derived therefrom, the Company
and Hogan agree as follows:
AGREEMENT
---------
1. Payment Schedule. Effective April 1, 1998, Severance Payments payable
----------------
pursuant to paragraph 2(a) of the Resignation Agreement and the Vacation Pay
payable pursuant to paragraph 2(b) of the Resignation Agreement shall be payable
on the dates and in the amounts specified in Exhibit "A" attached hereto, less
appropriate withholding taxes, as required. The total amount of Severance
Payments and Vacation Pay payable from and after April 1, 1998 will be
$381,643.49. Any unpaid portion of that balance shall be due and payable on
December 31, 2000. If any payment specified in Exhibit "A" is not paid by the
Company for more than 90 consecutive days, then all payments shall be
accelerated and become immediately due and payable.
2. Medical and Life Insurance. The period through which the Company
--------------------------
shall continue to include Hogan under its medical insurance program and to
provide life insurance to Hogan, each without cost to Hogan, shall continue
through December 31, 2000.
1
<PAGE>
3. Option to Convert Payments to Stock.
-----------------------------------
a. At any time during the period commencing with the execution of
this Agreement and ending 110 days thereafter, the Company shall have the option
to convert all amounts then owing to Hogan pursuant to Paragraph 1 hereof to
common stock of the Company on the following basis: the Company shall give
written notice of exercise of such option. The number of shares of common stock
to be issued (the "Shares") shall be 66% of the number of shares determined by
dividing (x) the present value of the amounts then owing to Hogan pursuant to
Paragraph 1 hereof using a discount rate of 5% by (y) the average closing price
of the common stock on the American Stock Exchange for the ten trading days
prior to the third business day before the notice of the exercise of the option.
b. Upon the Company's exercise of this option the release and
extinguishment by Hogan of all rights to pursuant to Paragraph 1 hereof shall be
effective.
c. The Company agrees that, within twenty days after the notice of
exercise, it shall file a Registration statement on Form S-3 (the "Registration
Statement") with the Securities and Exchange Commission covering the Shares and
shares of Common Stock of the Company to be issued to Hogan, and shall use its
best efforts to have the Registration Statement declared effective. In the
event the Company fails to file the Registration Statement within such twenty-
day period, it will be obligated to continue to make payments to Hogan as
required by Paragraph 1 hereof until such time as the Registration Statement is
filed. The Company also agrees that in the event the Registration Statement is
not declared effective within 120 days of the notice, the Company shall pay
Hogan a one-time cash payment of $45,000 unless the Board of Directors of the
Company determines, in its reasonable judgment, that the failure to have such
Registration Statement effective within 120 days was primarily due to delays
occaisioned by the proposed transaction between the Company and NTN Canada, in
which case the 120 day requirement will be extended by the number of days of
such delay. The Company shall bear all costs and expenses of such registration
except for any brokerage or finder's fees which shall be payable to Hogan.
d. In the event the Company gives written notice of exercise, the
period through which the Company shall continue to include Hogan under its
medical insurance program and to provide life insurance to Hogan, each without
cost to Hogan, shall continue through December 31, 1999.
e. The Company shall pay all federal and state withholding taxes
relating to the issuance of shares to Hogan.
4. Agreement in Effect. Except as specifically modified hereby, all of
-------------------
the terms and conditions of the Resignation Agreement shall remain in full force
and effect without modification, including, but not limited to, paragraph 2(b)
regarding the payment of accrued vacation and paragraph 2(c) regarding payment
of deferred compensation. All future references to the Resignation Agreement
shall mean the Resignation Agreement as hereby modified.
2
<PAGE>
5. California Law. This Modification is made and entered into in the
--------------
State of California and shall be interpreted, construed and enforced in
accordance with the laws of the State of California without giving effect to its
conflict of laws principles.
6. Counterparts. This Modification may be executed in more than one
------------
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
7. Entire Agreement. Unless otherwise specified, this Modification and
----------------
the documents referenced herein represent the entire understanding of the
parties with respect to the transactions set forth herein, and supersede all
prior representations, understandings and agreements made by the parties.
Neither this Modification nor any of the provisions hereof may be modified,
amended or waived except by means of a writing executed by the parties.
8. Attorneys' Fees. In the event of any controversy, claim, or dispute
---------------
between the parties hereto, arising out of or relating to this Modification, or
the breach thereof, the prevailing party shall be entitled to recover from the
other party reasonable expenses, attorneys' fees and costs. Attorneys' fees
incurred in enforcing any judgment are recoverable as a separate item, and this
provision for post-judgment attorneys' fees shall survive any judgment and shall
not be deemed merged into the judgment.
9. Interpretation. This Modification shall not be interpreted against a
--------------
party by virtue of such party's participation in the drafting of the
Modification or any provisions herein.
10. Parties Bound. This Modification shall be binding upon and inure to
-------------
the benefit of the personal and legal representatives, successors and permitted
assigns of the parties hereto and also upon the heirs, executors and
administrators of the individual persons executing this Modification.
IN WITNESS WHEREOF, the parties hereto have executed this Modification or
have caused this Modification to be duly executed on their respective behalf by
their respective officers thereunto duly authorized, effective as of the day and
year first above written.
NTN COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Gerald Sokol, Jr., President
-----------------------------------
Name: Gerald Sokol, Jr.
Title: President
/s/ Ronald E. Hogan
-----------------------------------
Ronald E. Hogan
611 West Circle Drive
Solana Beach CA 92075
3
<PAGE>
EXHIBIT 23
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NTN Communications, Inc.:
We consent to incorporation by reference in the Registration Statement (No.s
333-17247 and 333-12777) on Form S-8 and in the Registration Statement (No.s
333-40625, 333-14129, 33-42350, 33-77826, 33-97780, 33-64417 and 333-03805) on
Form S-3 of NTN Communications, Inc. of our report dated April 10, 1998,
relating to the consolidated balance sheets of NTN Communications, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997, and the related
financial statement schedule, which report appears in the December 31, 1997
Annual Report on Form 10-K of NTN Communications, Inc.
San Diego, California
April 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 4,764,000 6,579,000
<SECURITIES> 0 0
<RECEIVABLES> 4,037,000 3,793,000
<ALLOWANCES> 1,313,000 1,563,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 902,000 1,846,000
<PP&E> 13,272,000 12,876,000
<DEPRECIATION> 5,299,000 2,773,000
<TOTAL-ASSETS> 20,271,000 28,504,000
<CURRENT-LIABILITIES> 8,373,000 12,775,000
<BONDS> 0 0
1,000 0
1,000 1,000
<COMMON> 118,000 116,000
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 20,271,000 28,504,000
<SALES> 24,343,000 23,430,000
<TOTAL-REVENUES> 25,861,000 25,711,000
<CGS> 0 0
<TOTAL-COSTS> 36,668,000 51,566,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 793,000 390,000
<INCOME-PRETAX> (12,457,000) (25,854,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (12,457,000) (25,854,000)
<DISCONTINUED> 0 (1,317,000)
<EXTRAORDINARY> 0 4,219,000
<CHANGES> 0 0
<NET-INCOME> (12,457,000) (22,952,000)
<EPS-PRIMARY> (0.55) (1.02)
<EPS-DILUTED> (0.55) (1.02)
</TABLE>
