<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 31-1103425
(State of incorporation) (I.R.S. Employer Identification No.)
The Campus 5966 La Place Court, Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
</TABLE>
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
At August 4, 1999 the registrant had 28,579,268 shares of common stock,$.005
par value, outstanding.
<PAGE> 2
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
2
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
1999 December 31,
Assets (Unaudited) 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,525,000 $ 4,560,000
Accounts receivable, net 2,704,000 2,471,000
Prepaid expenses and other current assets 1,423,000 1,100,000
------------ ------------
Total current assets 6,652,000 8,131,000
Broadcast equipment and fixed assets, net 8,047,000 7,249,000
Software development costs, net 468,000 1,141,000
Note receivable 32,000 70,000
Other assets 362,000 176,000
------------ ------------
Total assets $ 15,561,000 $ 16,767,000
============ ============
Liabilities and Shareholder's Equity
Current Liabilities:
Accounts payable $ 707,000 $ 840,000
Accrued expenses 2,466,000 3,175,000
Accrual for management severance 866,000 866,000
Obligations under capital lease 543,000 205,000
Deferred revenue 799,000 645,000
Other short-term liabilities 120,000 --
------------ ------------
Total current liabilities 5,501,000 5,731,000
Deferred revenue 12,000 12,000
Obligations under capital lease 549,000 380,000
Accrual for settlement warrants 1,747,000 1,670,000
Accrual for management severance 97,000 619,000
7% senior convertible notes 5,551,000 --
Other long-term liabilities 270,000 30,000
------------ ------------
Total liabilities 13,727,000 8,442,000
------------ ------------
Shareholders' Equity:
Series A 10% cumulative convertible preferred stock, $.005 par value,
5,000,000 shares authorized; 161,000 shares issued
and outstanding at June 30, 1999 and December 31, 1998 1,000 1,000
Series B 7% cumulative convertible preferred stock, $.005 par
value, 85,000 shares authorized; 0 and 56,000 shares issued and
outstanding at June 30, 1999 and December 31,
1998, respectively -- 1,000
Common stock, $.005 par value, 50,000,000 shares authorized;
28,406,000 and 28,086,000 shares issued and outstanding
at June 30, 1999 and December 31, 1998, respectively 141,000 140,000
Additional paid-in capital 64,618,000 70,733,000
Accumulated deficit (62,453,000) (61,147,000)
Treasury stock, at cost, 111,000 and 329,000 shares at
June 30, 1999 and December 31, 1998, respectively (473,000) (1,403,000)
------------ ------------
Total shareholders' equity 1,834,000 8,325,000
------------ ------------
------------ ------------
Total liabilities and shareholders' equity $ 15,561,000 $ 16,767,000
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- -----------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Network services $ 4,853,000 $ 4,549,000 $ 9,670,000 $ 9,410,000
Online/Internet services 288,000 577,000 578,000 1,174,000
Advertising revenues 186,000 246,000 269,000 416,000
Other revenues 484,000 558,000 981,000 1,102,000
------------ ------------ ------------ ------------
Total revenues 5,811,000 5,930,000 11,498,000 12,102,000
------------ ------------ ------------ ------------
Operating expenses:
Direct operating costs 1,143,000 1,661,000 2,288,000 2,727,000
Selling, general and administrative 2,832,000 2,586,000 5,690,000 6,205,000
Litigation, legal and professional fees 243,000 329,000 485,000 656,000
Equipment lease expense 227,000 274,000 461,000 507,000
Stock-based compensation expense 17,000 -- 56,000 165,000
Depreciation and amortization 1,443,000 1,170,000 3,140,000 2,516,000
Research and development 160,000 202,000 295,000 220,000
------------ ------------ ------------ ------------
Total operating expenses 6,065,000 6,222,000 12,415,000 12,996,000
------------ ------------ ------------ ------------
Operating loss (254,000) (292,000) (917,000) (894,000)
------------ ------------ ------------ ------------
Other income (expense)
Interest income 30,000 63,000 73,000 127,000
Interest expense (235,000) (70,000) (437,000) (145,000)
Gain on sale of interest in subsidiary -- 1,643,000 -- 1,643,000
Other (15,000) -- (25,000) --
------------ ------------ ------------ ------------
Total other income (expense) (220,000) 1,636,000 (389,000) 1,625,000
------------ ------------ ------------ ------------
Income (loss) before income taxes (474,000) 1,344,000 (1,306,000) 731,000
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ (474,000) $ 1,344,000 $ (1,306,000) $ 731,000
============ ============ ============ ============
Accretion of beneficial conversion
feature on preferred stock -- 194,000 -- 758,000
------------ ------------ ------------ ------------
Net income (loss) available to common
shareholder $ (474,000) $ 1,150,000 $ (1,306,000) $ (27,000)
============ ============ ============ ============
Net income (loss) per common share - basic $ (0.02) $ 0.04 $ (0.05) $-
============ ============ ============ ============
Net income (loss) per common share - diluted $ (0.02) $ 0.04 $ (0.05) $-
============ ============ ============ ============
Weighted average shares outstanding - basic 28,249,000 25,877,000 28,063,000 24,834,000
============ ============ ============ ============
Weighted average shares outstanding - diluted 28,249,000 31,523,000 28,063,000 31,635,000
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ (474,000) $ 1,344,000 $ (1,306,000) $ 731,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,443,000 1,170,000 3,140,000 2,516,000
Provision for doubtful accounts 192,000 225,000 385,000 625,000
(Gain) loss from disposition of equipment (6,000) 60,000 (6,000) 120,000
Non-cash compensation charges 17,000 -- 56,000 165,000
Accreted interest expense 100,000 65,000 192,000 132,000
Amortization of deferred revenue (34,000) -- (85,000) --
Gain on sale of interest in subsidiary -- (1,643,000) -- (1,643,000)
Changes in assets and liabilities:
Accounts receivable (126,000) 580,000 (618,000) (482,000)
Prepaid expenses and other assets (464,000) (160,000) (377,000) 66,000
Accounts payable and accrued expenses (92,000) (185,000) (784,000) (917,000)
Deferred revenue 18,000 (616,000) 239,000 (531,000)
Management severance and other long-term (200,000) (275,000) (535,000) (663,000)
liabilities
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities 374,000 565,000 301,000 119,000
------------ ------------ ------------ ------------
Cash flows provided by (used in) investing activities:
Capital expenditures (1,154,000) (706,000) (2,001,000) (1,167,000)
Notes receivable 19,000 -- 38,000 (70,000)
Capital software expenditures (3,000) (19,000) (31,000) (22,000)
Proceeds from sale of equipment 45,000 -- 45,000 --
Proceeds from sale of interest in subsidiary -- 1,862,000 -- 1,862,000
------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities (1,093,000) 1,137,000 (1,949,000) 603,000
------------ ------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Principal payments under capital leases (414,000) (2,000) (537,000) (23,000)
obligations
Principal payments on note payable -- -- -- --
Exercise of stock options -- -- 150,000 --
------------ ------------ ------------ ------------
Net cash provided by (used in) financing (414,000) (2,000) (387,000) (23,000)
activities
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,133,000) 1,700,000 (2,035,000) 699,000
Cash and cash equivalents at beginning of period 3,658,000 3,763,000 4,560,000 4,764,000
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,525,000 $ 5,463,000 $ 2,525,000 $ 5,463,000
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 32,000 $ -- $ 58,000 $ 5,000
============== ============== ============== ==============
Income taxes $ -- $ -- $ -- $ --
============== ============== ============== ==============
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of treasury stock pursuant to
anti-dilution provisions $ 930,000 $ -- $ 930,000 $ 132,000
============== ============== ============== ==============
Issuance of common stock in payment of interest $ 90,000 $ -- $ 90,000 $ 132,000
============== ============== ============== ==============
Equipment acquired under capital leases $ 712,000 $ 375,000 $ 1,044,000 $ 375,000
============== ============== ============== ==============
Equipment and license acquired by issuing note
payable $ 360,000 $ -- $ 360,000 $ --
============== ============== ============== ==============
Exchange of preferred stock for convertible
notes and warrants $ -- $ -- $ 5,449,000 $ --
============== ============== ============== ==============
Preferred dividend paid in common stock $ 8,000 $ 8,000 $ 8,000 $ 8,000
============== ============== ============== ==============
Issuance of common stock in exchange for
cancellation of options and warrants $ -- $ -- $ -- $ 212,000
============== ============== ============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and subsidiaries
(collectively "the Company") and the results of their operations and their cash
flows for the interim periods presented. Management has elected to omit
substantially all notes to the Company's consolidated financial statements as
permitted by the rules and regulations of the Securities and Exchange
Commission. Results of operations for the interim periods are not necessarily
indicative of results to be expected for any other interim period or for the
year ended December 31, 1999.
The consolidated financial statements for the three and six months ended
June 30, 1999 and 1998 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K, filed for the year ended December 31, 1998.
Certain items in the prior period consolidated financial statements have
been reclassified to conform to the current period presentation.
2. Earnings (Loss) Per Share
Options, warrants, convertible preferred stock and convertible notes
representing approximately 13,491,000, and 13,309,000 potentially dilutive
common shares have been excluded from the computations of net income (loss) per
share for the three and six months ended June 30, 1999, respectively, as their
effect is anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings
per share -
Net income (loss) available to common
shareholders $ (474,000) 1,150,000 (1,306,000) (27,000)
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share -
Weighted average shares 28,249,000 25,877,000 28,063,000 24,834,000
Potential effect of dilutive securities:
Employee stock options and director fees -- 579,000 -- 383,000
Warrants -- 148,000 -- 74,000
Litigation settlements and management
severance -- 2,088,000 -- 2,467,000
Convertible preferred stock -- 2,831,000 -- 3,877,000
Convertible notes payable -- -- -- --
------------ ------------ ------------ ------------
Potentially dilutive common shares -- 5,646,000 -- 6,801,000
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
Adjust weighted average shares and
assumed conversions 28,249,000 31,523,000 28,063,000 31,635,000
============ ============ ============ ============
Basic earnings (loss) per common stock $ (0.02) 0.04 (0.05) --
============ ============ ============ ============
Diluted earnings (loss) per common stock $ (0.02) 0.04 (0.05) --
============ ============ ============ ============
</TABLE>
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Reflected in the net loss available to common shareholders for the three and
six months ended June 30, 1998 is the accretion of the beneficial conversion
feature on the Series B Preferred Stock in the amount of $194,000 and $758,000,
respectively. The amount of the beneficial conversion feature is measured at the
date of issue of the convertible security as the difference between the
conversion price and the market value of the common stock into which the
security is convertible. This amount is accounted for as a non-cash dividend on
the convertible preferred stock with the same amount credited to additional
paid-in capital, allocated over the period from issuance to first
convertibility. Therefore, there is no impact to shareholders' equity. The
beneficial conversion feature was fully accreted as of June 30, 1998.
3. Segment Information
The Company analyzes segment performance based on revenue. Network Services
comprise 84% of the Company's total revenue and is the only reportable segment
for the six months ended June 30, 1999. The following tables set forth certain
information regarding the Company's segments and other operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Network Services $ 4,853,000 4,549,000 9,670,000 9,410,000
Other 958,000 1,381,000 1,828,000 2,692,000
----------- ----------- ----------- -----------
Total revenues $ 5,811,000 5,930,000 11,498,000 12,102,000
=========== =========== =========== ===========
Operating income (loss):
Network Services $ 2,163,000 1,465,000 4,160,000 3,915,000
Other 261,000 582,000 (144,000) 1,417,000
Corporate (2,678,000) (2,339,000) (4,933,000) (6,226,000)
----------- ----------- ----------- -----------
Total operating loss $ (254,000) (292,000) (917,000) (894,000)
=========== =========== =========== ===========
</TABLE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward Looking Statements
This Quarterly Report contains forward looking statements, including
statements relating to, among other things, the success of the DITV network,
future growth of the Company's business and successful implementation of its
Internet station strategy, which are subject to risks and uncertainties
including, the impact of the Y2K remediation costs, product demand, market
acceptance, and other risk factors detailed in the Company's Securities and
Exchange Commission filings, including the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998 and its quarterly report on Form 10-Q for
the period ended March 31, 1999.
General
NTN Communications, Inc. develops, produces and distributes individual and
multi-player interactive programs to a variety of media platforms. The Company
broadcasts to a variety of delivery platforms 24 hours a day, providing
entertainment and informational programming, including multi-player sports and
trivia games. NTN networks distributes programming to more than 17.7 million
viewer/participants per month in the United States through hospitality
locations, such as restaurants, bars and hotels. Additionally, NTN distributes
programming to approximately 500 sites in Canada through its Canadian licensee.
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In February 1999, the Company introduced a second Network to be broadcast to
the Hospitality industry. The Company installed the first of these Digital
Interactive TV Systems ("DITV") in April 1999. As of August 4, 1999, the Company
had received contracts for 935 sales of the DITV Network of which 287 were new
customers and 648 were conversions of customers from the original NTN Network to
the DITV Network. Of the 935 total sales, 581 have been installed as of August
4, 1999.
The DITV Network has all the capabilities of the original NTN Network plus a
more television-like quality in advertisements and games. The new
"Playmaker"(R) wireless input devices used with the DITV Network have been
enhanced in several ways including: (a) updated radio frequency technology
mitigates the interference problems common to the prior series; (b) a larger
eight-line LCD display to allow for several possible future features, including
user "chat" from one unit to another within the host premises and the display of
information such as sports scores and stock quotes; (c) a redesigned keypad
conforms to the industry standard QWERTY keyboard layout as well as utilizing a
"play zone" to provide a dedicated input area for the games; and (d) a longer
battery life. Further, the Company has developed enhancements to its interactive
software, including a migration to a Windows(R)-based platform, to allow
full-motion video presentation.
In April 1999, the Company acquired the assets and rights to certain
technology, hardware and video games used in the Internet game business from
Sikander, Inc., a Nevada corporation. The technology enables NTN to link the
viewer/participants on its existing network to coin-operated Internet stations,
thus providing out-of-home access to the Web and video games for patrons in
restaurants, hotels and other public venues.
In addition to the introduction of NTN's DITV network and the purchase of
the assets related to the Internet game business, the Company's Internet
business plan will make it possible for consumers to access NTN's interactive
content from a complete range of delivery systems including NTN's two
hospitality networks, the Internet, America Online, interactive cable services
and other interactive delivery systems.
Results of Operations
Three months ended June 30, 1999 and June 30, 1998
Total revenues decreased 2% to $5,811,000 for the three months ended
June 30, 1999 from $5,930,000 for the three months ended June 30, 1998. This
occurred primarily due to declines in Online/Internet revenues and other
revenues, offset by increases in Network Services.
Network Service revenues increased 7% to $4,853,000 for the three months
ended June 30, 1999 from $4,549,000 for the three months ended June 30, 1998.
This increase is primarily due to an increase in rates charged for the setup,
installation and training for the DITV network as compared to the original
network. During the three months ended June 30, 1999, 339 DITV systems had been
installed. Active sites have also increased during the three months ended June
30, 1999 compared to the three months ended June 30, 1998.
Revenue from Online/Internet services decreased 50% to $288,000 for the
three months ended June 30, 1999 from $577,000 for the three months ended June
30, 1998. The decrease was largely due to revenue recognized for production
services provided in 1998 that did not occur in 1999. Additionally, the Company
entered into a new contract in the second quarter of 1998 with its Internet
partner, America Online. The contract provides for a flat monthly fee rather
than fees based on AOL member usage of the Company's content which resulted in a
reduction of revenue of $50,000 for the three months ended June 30, 1999
compared to the three months ended June 30, 1998.
Other revenues decreased 13% to $484,000 for the three months ended June 30,
1999 from $558,000 for the three months ended June 30, 1998. Included in other
revenue for the three months ended June 30, 1998 were equipment sales
of $128,000. No revenue was recorded for equipment sales in 1999. This decrease
was partially offset by an increase in miscellaneous revenue for the three
months ended June 30, 1999.
Direct operating costs decreased 31% to $1,143,000 for the three months
ended June 30, 1999 from $1,661,000 for the three months ended June 30, 1998.
This decrease was due to the settlement of an accrued liability for license fees
that was less than had been estimated. As a result, the Company reduced the
excess liability and license fee expense by approximately $180,000 related to
the settlement for the three months ended June 30, 1999. Additionally, the three
months ended June 30, 1998, included approximately $360,000 in costs related to
the realignment of the satellite dishes at hospitality locations in order to
receive broadcast
9
<PAGE> 10
transmissions from the Galaxy III-R satellite when the PanAmSat Galaxy IV
satellite failed to operate in May 1998. These decreases were offset by an
increase in expenses associated with an increase in the number of sites
installed and an increase in the number of sales commissions paid in connection
with the roll out of the DITV network for the three months ended June 30, 1999.
Satellite transmissions costs and ISP charges also increased due to additional
services needed to support the DITV network for the three months ended June 30,
1999.
Selling, general and administrative expenses increased 10% to $2,832,000 for
the three months ended June 30, 1999 from $2,586,000 for the three months ended
June 30, 1998. This increase was due to the Company receiving approximately
$200,000 in nonrefundable payments from a prospective buyer, Omnigon, in
conjunction with the negotiations for the sale of IWN, Inc., in April 1998.
These negotiations were later terminated. The payments of $200,000 were offset
against the selling, general and administrative expenses of IWN, Inc., in the
three months ended June 30, 1998. Additionally, marketing expenses increased as
a direct result of additional advertising related to the launch of the new DITV
network for the three months ended June 30, 1999. These increases were offset by
curtailing the operations of IWN, Inc., thereby reducing selling, general and
administrative expenses by approximately $90,000 for the three months ended June
30, 1999, compared to the three months ended June 30, 1998. Additionally, office
lease expenses decreased due to the sublet of office space beginning in
September 1998 which was previously occupied by the Company.
Stock-based compensation expenses increased to $17,000 for the three months
ended June 30, 1999. There was no stock-based compensation for the three months
ended June 30, 1998. The 1999 charges resulted from the issuance of warrants and
options to non-employees which can vary from period-to-period.
Research and development expenses were $160,000 for the three months ended
June 30, 1999, compared to $202,000 for the three months ended June 30, 1998.
The current period expenses result from the Company's research and development
efforts related to the next generation of the DITV network and future internet
web sites. For the three month period ending June 30, 1998, the Company's
research and development efforts focused primarily on the upgrade of the NTN
network.
Interest expense increased 235% to $235,000 for the three months ended June
30, 1999 from $70,000 for the three months ended June 30, 1998. The increase was
primarily due to interest expense recorded in 1999 related to its convertible
notes, other notes payable and additional capital leases for equipment
acquisitions that did not exist in 1998.
Six months ended June 30, 1999 and June 30, 1998
Total revenues decreased 5% to $11,498,000 for the six months ended June 30,
1999 from $12,102,000 for the six months ended June 30, 1998. This occurred
primarily due to declines in Online/Internet revenues, advertising and other
revenues, offset by increases in Network Services.
Network Service revenues increased 3% to $9,670,000 for the six months ended
June 30, 1999 from $9,410,000 for the six months ended June 30, 1998. This
increase is primarily due to an increase in rates charged for the setup,
installation and training for the DITV network as compared to the original
network. During the six months ended June 30, 1999, 339 DITV systems had been
installed. Active sites have also increased during the six months ended June 30,
1999 compared to the six months ended June 30, 1998.
Revenue from Online/Internet services decreased 51% to $578,000 for the six
months ended June 30, 1999 from $1,174,000 for the six months ended June 30,
1998. The decrease was largely due to revenue recognized for production services
provided in 1998 that did not occur in 1999. Additionally, the Company entered
into a new contract in the second quarter of 1998 with its Internet partner,
America Online. The contract provides for a flat monthly fee rather than fees
based on AOL member usage of the Company's content which resulted in a reduction
of revenue of $105,000 for the six months ended June 30, 1999 compared to the
six months ended June 30, 1998.
Advertising revenues decreased 35% to $269,000 for the six months ended June
30, 1999 from $416,000 for the six months ended June 30, 1998. The decrease is
due to advertising contracts that ended in 1998 and did not recur in 1999.
Other revenues decreased 11% to $981,000 for the six months ended June 30,
1999 from $1,102,000 for the six months ended June 30, 1998. Other revenues for
the six months ended June 30, 1998 included approximately $285,000 in sales
generated by LearnStar, Inc. (LearnStar). As a result of the sale of an 82.5%
interest in LearnStar in June 1998, no such revenue was recorded for the six
months ended June 30, 1999. This decrease is offset by an increase in revenue
from the Company's Canadian licensee for the six months ended June 30, 1999.
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<PAGE> 11
Direct operating costs decreased 16% to $2,288,000 for the six months ended
June 30, 1999 from $2,727,000 for the six months ended June 30, 1998. This
decrease, in part, relates to a reduction in field marketing expenses of
$143,000 due to less reliance on independent representatives in favor of
employed field and marketing personnel. Additionally, this decrease was due to
the settlement of an accrued liability for license fees that was less than had
been estimated. As a result, the Company reduced the excess liability and
license fee expense by approximately $180,000 related to the settlement for the
six months ended June 30, 1999. Additionally, the six months ended June 30,
1998, included approximately $360,000 in costs related to the realignment of the
satellite dishes at hospitality locations in order to receive broadcast
transmissions from the Galaxy III-R satellite when the PanAmSat Galaxy IV
satellite failed to operate in May 1998. These decreases were offset by an
increase in expenses associated with an increase in the number of sites
installed and an increase in the number of sales commissions paid in connection
with the roll out of the DITV network for the six months ended June 30, 1999.
Satellite transmissions costs and ISP charges also increased due to additional
services needed to support the DITV network for the six months ended June 30,
1999.
Selling, general and administrative expenses decreased 8% to $5,690,000 for
the six months ended June 30, 1999 from $6,205,000 for the six months ended June
30, 1998. The six months ended June 30, 1998 included approximately $276,000 in
selling, general and administrative expenses incurred by LearnStar. As a result
of the sale of an 82.5% interest in LearnStar in June 1998, no such expenses
were recorded for the six months ended June 30, 1999. Additionally, the Company
significantly curtailed its operations of IWN, Inc., thereby reducing selling,
general and administrative expenses by approximately $286,000 for the six months
ended June 30, 1999, compared to the six months ended June 30, 1998. Office
lease expenses also decreased due to the sublet of office space beginning in
September 1998 which was previously occupied by the Company.
Stock-based compensation expense decreased 66% to $56,000 for the six months
ended June 30, 1999 compared to $165,000 for the six months ended June 30, 1998.
The 1999 charges resulted from the issuance of warrants and options to
non-employees and can vary from period-to-period.
Research and development expenses were $295,000 for the six months ended
June 30, 1999, compared to $220,000 for the six months ended June 30, 1998. The
current period expenses result from the Company's research and development
efforts related to the next generation of the DITV network and future internet
web sites. For the six month period ending June 30, 1998, the Company's research
and development efforts focused primarily on the upgrade of the NTN network.
Interest expense increased 201% to $437,000 for the six months ended
June 30, 1999 from $145,000 for the six months ended June 30, 1998. The increase
was primarily due to interest expense recorded in 1999 related to its
convertible notes, other notes payable and additional capital leases for
equipment acquisitions that did not exist in 1998.
Liquidity and Capital Resources
At June 30, 1999, the Company had cash and cash equivalents of $2,525,000
and working capital (current assets in excess of current liabilities) of
$1,151,000, compared to cash and cash equivalents of $4,560,000 and working
capital of $2,400,000 at December 31, 1998. Net cash provided by operations was
$301,000 for the six months ended June 30, 1999 and $119,000 for the six months
ended June 30, 1998. The principal uses of cash for the six months ended June
30, 1999 were to fund the Company's net loss and for severance payments made by
the Company in compliance with management resignation agreements with former
officers totaling $535,000. The uses were offset by an increase in deferred
revenue of $205,000, depreciation, amortization and other non-cash charges. Net
cash used in investing activities was $1,949,000 for the six months ended June
30, 1999 and net cash provided by investing activities was$603,000 for the six
months ended June 30, 1998. Included in net cash used in investing activities
for the six months ended June 30, 1999 were $2,001,000 in capital expenditures.
Net cash used in financing activities was $387,000 for the six months ended June
30, 1999 and$23,000 for the six months ended June 30, 1998. Net cash used in
financing activities for the six months ended June 30, 1999 included principal
payments under capital leases of $537,000 offset by the proceeds of $150,000
from the exercise of stock options.
The Company has launched a second hospitality network, the DITV network,
which includes improvements to its Playmakers(R) and a Windows-based platform.
The Company believes that its cash on hand and anticipated cash flows from its
operations will be sufficient to meet its operating needs at least through 1999.
It is likely, however, the Company will require additional financing to
completely implement its plan to convert its entire existing customer base to
the new DITV network, to expand the DITV network, implement the Company's
Internet station strategy and expand the Company's Internet business. The
Company has no agreement to obtain any additional financing, and there can be no
assurance that it will be able to obtain needed financing on terms acceptable to
it, or at all. Capital financing possibilities may include borrowing
arrangements under fixed and revolving credit agreements or sale of additional
equity securities. If the Company is unable to obtain any needed financing, it
may have to delay or
11
<PAGE> 12
postpone completing the conversion to the DITV Network or to curtail other
business plans until which financing or additional funding can be obtained. The
Company began to convert existing customers to the new DITV network in April
1999, replacing Playmakers(R) and broadcast equipment with new technology. The
Company plans to continue operating the DITV network and the NTN original
network concurrently for a minimum of 12 more months.
Year 2000
The Company, with the assistance of independent outside consultants, has
been assessing its "Year 2000" computer readiness and exposure to Year 2000
issues, which relates to the inability 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. In
connection with such assessment, the Company initiated a review of the
information technology systems utilized in the Company's business and
operations. Based on this review, the Company has segregated its systems into
two categories: mission critical and support systems. Mission critical systems
are characterized as hardware and applications contributing to the income of the
business. Support systems are characterized as systems that organize and create
efficiencies for the corporation, but are not critical to its operations. The
Company has completed the assessment phase and is starting the renovation phase
which should be completed by the third quarter of 1999.
The Company's mission critical systems are segregated between systems
located in our hospitality sites (Locations) and back-end systems which support
both the DITV network and the NTN original network, for which the Company will
incur expected costs of approximately $1,000,000 to ensure Year 2000 compliance.
The Company intends to fund these costs with cash on hand, leases from vendors
and internally generated funds. The Company has incurred costs specific to
remediation efforts of approximately $65,000 through June 30, 1999. Certain
compliance issues have been eliminated as a result of the DITV network and the
new equipment purchased related to DITV including back-end equipment. The
Company is testing Year 2000 compliance at the system BIOS, operating system and
application levels. The Company has determined that 25% of Location systems may
not be Year 2000 compliant due to the inaccurate roll over of the system BIOS
which could compromise content scheduling. It is estimated that the replacement
of these systems will cost a total of approximately $725,000 for all affected
Locations. All Location systems in the DITV network are Year 2000 compliant. The
Company has identified key back-end systems that will require an upgrade of
commercial hardware and data base software. As can be determined thus far, the
operating systems and Company-developed applications are not affected, but are
being verified for compliance. The Company has also initiated a review of Year
2000 compliance by its principal vendors, and this estimate assumes that the
Company will not incur significant Year 2000 related costs on behalf of its
vendors or other third parties.
Concerning the support systems, all corporate personal computers and servers
have been deemed Year 2000 compliant. The operating systems and commercial
software packages have been upgraded to compliant versions.
The worst-case scenario would be if the Company were unable to broadcast its
program to its network services customers. Network services revenue represents
84% of total revenues for the six months ended June 30, 1999. The Company is
currently developing a contingency plan in the event that this occurs. However,
a widespread or extended failure of the Company's internal systems, or systems
of third parties, to be Year 2000 compliant, could potentially have a material
adverse effect on the Company's business, financial condition or operating
results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company issued 218,400 shares of common stock from treasury in
April, 1999 to certain investors pursuant to certain anti-dilution provisions of
the Company's agreement with the investors.
On June 29, 1999, the Company entered into an Engagement Agreement with
Interactive Marketing, Inc. ("IMI") pursuant to which IMI was engaged to provide
strategic and tactical marketing services to the Company. For IMI's services
under the Engagement Agreement, the Company issued IMI a warrant to purchase
300,000 shares of common stock at an exercise price of $0.8125 per share. The
warrant is exercisable as to 50,000 shares on the last day of each of the six
consecutive months commencing June 30, 1999 and ending November 30, 1999. To
date these warrants have not been exercised. In addition, IMI will receive cash
compensation of $17,500 per month through the end of the first year of the term
of the Engagement Agreement. Further, a warrant for up to an additional 300,000
shares of the Company's common stock may be granted by the Company to IMI if IMI
exceeds certain milestones to be negotiated as provided in the Engagement
Agreement. The Engagement Agreement expires on May 15, 2000.
12
<PAGE> 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Asset Purchase Agreement dated as of April 23, 1999, by and between the
Company and Sikander, Inc.*
10.2 Promissory Note dated as of April 29, 1999, issued by the Company to
Sikander, Inc.*
10.3 Earn Out Option dated as of April 23, 1999, by and between the Company and
Sikander, Inc.*
10.4 Stock Option Agreement dated as of April 23, 1999, by and between the
Company and Edward Bevilacqua.*
10.5 Engagement Agreement dated as of June 29, 1999 by and between the Company
and Interactive Marketing, Inc.
10.6 Warrant No. WE-012 issued to Interactive Marketing, Inc.
27. Financial Data Schedule.
(b) Reports on Form 8-K
None
* Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 filed with the Commission and
incorporated herein by reference.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: August 06, 1999
By: /s/ Kendra Berger
-----------------------
Kendra Berger
Chief Financial Officer
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.1 Asset Purchase Agreement dated as of April 23, 1999, by and between the
Company and Sikander, Inc.*
10.2 Promissory Note dated as of April 29, 1999, issued by the Company to
Sikander, Inc.*
10.3 Earn Out Option dated as of April 23, 1999, by and between the Company and
Sikander, Inc.*
10.4 Stock Option Agreement dated as of April 23, 1999, by and between the
Company and Edward Bevilacqua.*
10.5 Engagement Agreement dated as of June 29, 1999 by and between the Company
and Interactive Marketing, Inc.
10.6 Warrant No. WE-012 issued to Interactive Marketing, Inc.
27. Financial Data Schedule.*
</TABLE>
* Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 filed with the Commission and
incorporated herein by reference.
<PAGE> 1
EXHIBIT 10.5
[INTERACTIVE MARKETING, INC. LETTERHEAD]
TO: STAN KINSEY, NTN COMMUNICATIONS, INC.
FROM: ANDREW BATKIN, ALAN H. GERSON
SUBJECT: ENGAGEMENT AGREEMENT
DATE: JUNE 16, 1999
- -------------------------------------------------------------------------------
Thank for your interest in retaining Interactive Marketing Inc. (hereafter IMI)
to provide strategic and tactical Marketing services to NTN Communications,
Inc., (hereinafter, "NTN"). The following represents the terms of our
engagement:
1. Term:
a) NTN will retain Interactive Marketing Inc., to provide the
services as set forth in paragraph 3 below for a term of one (1)
year, commencing on May 15, 1999 (the "Effective Date"). However,
it is understood and agreed by the parties that both IMI and NTN
shall have the right to cancel this Agreement at the end of the
first One Hundred and Eighty (180) days of such term (the
"Term"), upon Five (5) days written notice.
2. Status of Personnel: The parties acknowledge that Interactive
Marketing Inc., (hereafter IMI) will be providing services hereunder
as a non-exclusive independent contractor. IMI shall provide the
services of Andrew Batkin and Alan Gerson and such other of its
management and employees as it deems appropriate to provide the
contracted services to NTN hereunder. All such persons will be under
the specific direction and control of IMI and IMI is responsible for
their compensation and any and all other obligations of an employer or
general contractor, including but not limited to withholdings for
taxes and responsibility for any or all employee benefits. Nothing in
this agreement shall be construed to make such persons employees of
NTN for any purpose.
3. Services: IMI shall, during the first One Hundred and Eighty (180)
days of the term provide the following services under this agreement:
a) Create an overall "Interactive Strategy" for the company, which
will contain strategic and tactical business recommendations for
integrating interactive media and technologies in the company's
overall marketing mix and business development efforts. To this
end, IMI shall create an independent review of the business
operations and opportunities of NTN and prepare a "White Paper"
report presenting its conclusions as
1
<PAGE> 2
to the status and potential of the business. This White Paper
will address, among other issues:
o A Competitive Analysis
o A Valuation of the NTN Content Assets
o Alternative Strategies to Exploit that Asset Value
b) This White Paper will include the following deliverables and meet the
following timetables:
i) Within 45 days of commencement of our engagement, IMI will
deliver an Initial Business Review and Assessment of the
company's competitive landscape, business objectives, core
capabilities, assets, products and services, as well as its
relationships and available media platforms to be leveraged
under an integrated approach to marketing and business
development, and meet with NTN management for an Initial
Review and Assessment of our research and observations.
ii) Within 75 days of the commencement of our engagement, IMI
will present an Initial Draft and Outline of its Go to Market
plan for creating multiple revenue streams from sources such
as advertising, e-commerce and subscriptions, etc. relating
to the exploitation of NTN content, player following, and
audience reach. IMI will meet with NTN to review, prioritize
and finalize the strategies for inclusion in an Interactive
Go To Market Plan.
iii) Within 150 days following the commencement of our engagement,
IMI will deliver a detailed Interactive Go To Market Plan.
outlining strategies to create multiple revenues streams from
e-advertising, e-commerce, e-subscriptions, that leverage
interactive media and technologies as a platform to extend
the company's current capabilities, assets, products and
services. These strategies will include but not necessarily
be limited to its content, current player universe and its
audience reach and will contain our strategic and tactical
recommendations as to how NTN can maximize its consumer and
trade marketing effectiveness and generate new revenue
opportunities by leveraging its core assets and capabilities.
iv) Upon delivery of the Go To Market Plan and throughout the
term of our engagement, IMI will provide close consultation
to NTN management to oversee the implementation and execution
of the strategies and tactical approaches contained in the
Plan, and to develop additional deliverables.
v) During the course of our engagement, IMI will integrate NTN
into its deal flow and strategic contacts to extend NTN's
business model and create additional opportunities for NTN,
and meet periodically with management to insure that IMI and
Management have the same understanding of Company goals and
objectives.
2
<PAGE> 3
4. Compensation: It is understood and agreed by and between the parties
that in exchange for the mutual promises and undertakings contained herein
that IMI shall be compensated as follows:
a) IMI will receive a base monthly retainer fee of Seventeen
Thousand Five Hundred Dollars ($17,500.00) due and payable on
the Effective Date and thereafter on the first day of each
subsequent full month through the end of the first year of
the Term.
b) b) NTN shall, in its discretion, consider designating IMI as
an exclusive or non-exclusive Independent Sales Agent for the
Internet Market.
c) IMI shall be granted options to purchase 300,000 shares in
NTN, at a per share price of equal to the Closing Market
Price of the shares of NTN on May 15, 1999, exercisable by
IMI for a minimum period of three years from the date such
shares were granted. All such options will contain standard
provisions providing for vesting on a change of control of
NTN. It is agreed that 300,000 shares will vest at the rate
of 50,000 shares per month commencing on the last day of each
of the first six months. In addition, after the initial five
months of the term, NTN and IMI will negotiate in good faith
a set of milestones related to overall revenue or
distribution goals of the products and services of NTN during
the remaining term of IMI's engagement. If these milestones
and goals are exceeded, IMI will be granted options to
purchase up to 300,000 additional shares of NTN at the Market
Price of NTN shares on the date that the parties agree to the
milestones. Upon exercise, IMI shall have full "piggyback"
registration rights with respect to the shares represented by
said Options. For purposes of this section "Market Price"
shall mean the closing price of NTN as reflected on the
American Stock Exchange for the trading day corresponding to
the applicable event.
d) IMI shall be entitled to reimbursement of all reasonable,
necessary and pre-approved travel, entertainment and business
expenses incurred in furtherance of NTN business and pursuant
to this undertaking, upon submission of reasonable
documentation and receipts. NTN will designate an executive
to be available to make timely approval of requests by IMI to
incur reimbursable expenses on NTN's account. IMI will be
guided by NTN policy relating to business entertainment and
travel expenses, and will submit requests for reimbursement
on forms acceptable to NTN. Reimbursement will be made to IMI
not later than Thirty (30) days after submission of
documentation. However, it is understood and agreed that NTN
corporate policy notwithstanding, Air Travel of a duration of
more than Three (3) hours, undertaken at the request of NTN,
will be booked at the lowest competitive coach rate for a
non-stop flight, if such is available (i.e. IMI employees
will not be required to take a one-stop flight if it is more
expensive, as is NTN's policy). In addition, NTN will pay the
cost of upgrade coupons to allow IMI employees to move to the
next highest level of service, if possible.
e) In the event that during the terms of this Agreement NTN
sells equity securities to Lycos.com. or Yahoo.com, NTN shall
pay to IMI upon the closing of such sale of equity
securities, a fee equal to 4% of the 1st million of the net
sales price of such securities, 3% of the second million, 2%
of the third million and 1% of any excess thereof.
5. Limitation of Liability: In the event of any breach of this Agreement
by either party, the limitation of any claim of loss by the
non-breaching party shall be no greater than the proven financial loss
sustained by the non-breaching party by virtue of such breach. In no
event
3
<PAGE> 4
shall either party be liable hereunder for incidental or consequential
damages for any breach of this Agreement.
6. Basis for Engagement: NTN acknowledges that IMI has been retained
because of its experience and knowledge in the field of Internet and
Interactive marketing, and that IMI will be providing its opinions and
consultations based on its accumulated knowledge and experience and
that of its principals and employees. NTN is free to accept or reject
any such advice, opinions and consultations offered, and to use,
modify or reject any such written materials prepared by IMI.
7. No Rights to Marks: Each party acknowledges that it is not being
granted or vested with any right or interest, ownership or otherwise,
in or to any of the other party's trademarks, trade- names, service
marks or logos by virtue of or pursuant to this Agreement.
8. Joint Ownership of Information: IMI and NTN shall jointly own any and
all general market data, developed from programs or initiatives
jointly conducted by IMI and NTN, but specifically not individual user
information or information relating to NTN customers, collected during
the Term, which shall remain the sole property of NTN.
9. Termination: In the event of any material breach of this Agreement by
a party, the other party may terminate this Agreement at any time upon
3 days notice to the other party if the breaching party fails to cure
such breach during such three day period.
10. Entire Agreement: This written Agreement constitutes the sole and only
agreement of the parties relating to the matters covered hereby. Any
prior or contemporaneous agreements, promises, negotiations or
representations not expressly set forth in the Agreement are of no
force or effect. This Agreement supercedes any and all existing
contracts and agreements by the parties with respect to the subject
matter covered herein. Any and all notices made or required hereunder
shall be delivered in writing to each party at their corporate
address, attention of their respective Chief Executive Officers.
4
<PAGE> 5
If this Agreement, consisting of Five (5) pages including this signature page,
accurately states the terms of our Agreement, please sign below where
indicated, and return to IMI together with the payment specified in section 5
a).
NTN Communications, Inc.
By /s/ STAN KINSEY Date 6/29/99
------------------ -------
Name and Title Stan Kinsey, CEO
---------------------
Interactive Marketing, Inc.
By /s/ ANDREW BATKIN Date 6/29/99
------------------- -------
Name and Title Andrew Batkin
---------------------
5
<PAGE> 1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT.
Warrant to Purchase
WE-012 300,000 Shares
NTN COMMUNICATIONS INC.
(Incorporated under the laws of the State of Delaware)
WARRANT CERTIFICATE FOR THE PURCHASE OF SHARES OF THE
$.005 PAR VALUE COMMON STOCK OF NTN COMMUNICATIONS INC.
EXERCISABLE ONLY AFTER JUNE 30, 1999 AND VOID AFTER JUNE 30, 2002.
Warrant Price: $0.8125 (eighty-one and one quarter cent) per share.
1. THIS IS TO CERTIFY that, for value received, INTERACTIVE MARKETING,
INC. (the "Holder"), is entitled to purchase, subject to the terms and
conditions hereinafter set forth, at anytime from and after June 30, 1999, and
on or before June 29, 2002 (the "Warrant Period"), up to 300,000 shares of the
$.005 par value common stock ("Common Stock") of NTN Communications Inc. (the
"Company"), and to receive certificate(s) for the Common Stock so purchased.
This Warrant shall be exercisable as to 50,000 shares on the last day of each
of the six consecutive months commencing June, 1999 (the "Exercise Dates"). If
a "Change of Control Event," as defined in Paragraph 7 hereof, occurs, this
warrant shall become exercisable in the full amount of 300,000 shares. This
Warrant may be exercised in whole or in part. Such exercise shall be
accomplished by tender to the Company of the purchase price set forth above as
the warrant price (the "Warrant Price"), either in cash or by certified check
or bank cashier's check, payable to the order of the Company, together with
presentation and surrender to the Company of this Warrant with an executed
subscription in substantially the form attached hereto as Exhibit A. Fractional
shares of the Company's Common Stock will not be issued upon the exercise of
this Warrant.
2. The Company agrees at all times to reserve and hold available out
of the aggregate of its authorized but unissued Common Stock the number of
shares of its Common Stock issuable upon the exercise of this and all other
Warrants of like tenor then
<PAGE> 2
outstanding. The Company further covenants and agrees that all shares of Common
Stock that may be delivered upon the exercise of this Warrant will, upon
delivery, be fully paid and nonassessable and free from all taxes, liens and
charges with respect to the purchase thereof hereunder.
This Warrant and the Common Stock issuable upon the exercise hereof
may not be sold, transferred, pledged or hypothecated unless the Company shall
have been supplied with evidence reasonably satisfactory to it that such
transfer is not in violation of the Securities Act of 1933, as amended (the
"Act") and any applicable state laws. Subject to the satisfaction of the
aforesaid condition, this Warrant shall be transferable by the Holder.
If this Warrant is transferred, in whole or in part, upon surrender of
this Warrant to the Company, the Company shall deliver to each transferee a
Warrant evidencing the rights of such transferee to purchase the number of
shares of Common Stock that such transferee is entitled to purchase pursuant to
such transfer.
The Company may place a legend on this Warrant or any replacement
Warrant and on each certificate representing shares issuable upon exercise of
this Warrant as to which the Company has not been supplied evidence that the
transfer of such security would not be in violation of the Act and any
applicable state laws.
3. This Warrant does not entitle the Holder to any voting rights or
other rights as a stockholder of the Company, nor to any other rights
whatsoever except the rights herein set forth, and no dividend shall be payable
or accrue by reason of this Warrant or the interest represented hereby, or the
shares purchasable hereunder, until or unless, and except to the extent that,
this Warrant is exercised.
4. This Warrant is exchangeable upon its surrender by the Holder to the
Company for new Warrants of like tenor and date representing in the aggregate
the right to purchase the number of shares purchasable hereunder, each of such
new Warrants to represent the right to purchase such number of shares as may be
designated by the Holder at the time of such surrender.
5. The Company shall comply with the reporting requirements of Sections
13 and 15(d) of the Securities Exchange Act of 1934 for so long as and to the
extent that such requirements apply to the Company.
6. The Warrant Price and the number of shares purchasable upon the
exercise of this Warrant are subject to adjustment from time to time upon the
occurrence of any of the events specified in this Section 6.
<PAGE> 3
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company,
the number of shares of Common Stock purchasable upon exercise of this Warrant
immediately prior thereto shall be adjusted so that the Holder of this Warrant
shall be entitled to receive the kind and number of shares of Common Stock or
other securities of the Company that he would have owned or have been entitled
to receive after the happening of any of the events described above, had such
Warrant been exercised immediately prior to the happening of such event or any
record date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) Whenever the number of shares of Common Stock purchasable
upon the exercise of this Warrant is adjusted, as herein provided, the Warrant
Price shall be adjusted by multiplying such Warrant Price immediately prior to
such adjustment by a fraction, of which the numerator shall be the number of
shares of Common Stock purchasable upon the exercise of this Warrant
immediately prior to such adjustment, and of which the denominator shall be the
number of shares of Common Stock so purchasable immediately thereafter.
(c) For the purpose of this Section 6, the term shares of
Common Stock shall mean (i) the class of stock designated as the Common Stock
of the Company at the date of this Warrant, or (ii) any other class of stock
resulting from successive changes or reclassifications of such shares
consisting solely of change in par value, or from par value to no par value, or
from no par value to par value.
(d) If during the Warrant Period the Company consolidates
with or merges into another corporation or transfers all or substantially all
of its assets the Holder shall thereafter be entitled upon exercise hereof to
purchase, with respect to each share of Common Stock purchasable hereunder
immediately prior to the date upon which such consolidation or merger becomes
effective, the securities or property to which a holder of shares of Common
Stock is entitled upon such consolidation or merger, without any change in, or
payment in addition to the Warrant Price in effect immediately prior to such
merger or consolidation, and the Company shall take such steps in connection
with such consolidation or merger as may be necessary to ensure that all of the
provisions of this Warrant shall thereafter be applicable, as nearly as
reasonably may be, in relation to any securities or property thereafter
deliverable upon the exercise of this Warrant. The Company shall not effect any
such consolidation, merger or asset transfer unless prior to the consummation
thereof the successor corporation (if other than the Company) resulting
therefrom shall assume by written agreement executed and mailed to the
registered Holder
<PAGE> 4
at his address shown on the books and records of the Company, the obligation to
deliver to such Holder any such securities or property as in accordance with
the foregoing provisions such Holder shall be entitled to purchase.
(e) Upon the happening of any event requiring an adjustment
of the Warrant Price, the Company shall forthwith give written notice thereof
to the registered Holder of this Warrant, stating the adjusted Warrant Price
and the adjusted number of shares of Common Stock or other securities or
property purchasable upon the exercise hereof resulting from such event and
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based. The Board of Directors of the Company shall
determine the adjusted Warrant Price and the securities or property purchasable
upon exercise. If any voluntary or involuntary dissolution, liquidation, or
winding up of the Company is proposed, the Company shall give at least 20 days
prior written notice of such proposal to the registered Holder hereof stating
the date on which such event is to take place and the date (which shall be at
least 20 days after giving of such notice) as of which the holders of shares of
Common Stock of record shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such dissolution, liquidation or
winding up. This Warrant and all rights hereunder shall terminate as of the
date on which such dissolution, liquidation, or winding up takes place. The
notices pursuant to this paragraph shall be given by first class mail, postage
prepaid, addressed to the registered Holder of this Warrant at his address
appearing in the records of the Company.
(f) Irrespective of any adjustments pursuant to this Section
6 to the Warrant Price or to the number of shares or other securities or other
property obtainable upon exercise of this Warrant, this Warrant may continue to
state the Warrant Price and the number of shares obtainable upon exercise, as
the same price and number of shares stated herein.
7. Notwithstanding anything to the contrary herein the Exercise Dates
shall automatically be accelerated 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 benefit plan (or related trust) sponsored
or maintained by the Corporation or any corporation controlled by the
Corporation.
<PAGE> 5
(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.
<PAGE> 6
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officers, and the corporate seal hereunto affixed.
DATED: July __, 1999 NTN COMMUNICATIONS INC.
By:
---------------------------------------
Stanley B. Kinsey
Chairman and CEO
ATTEST:
[seal] By:
---------------------------------------
Kendra Berger
Secretary
<PAGE> 7
SUBSCRIPTION FORM
(To be Executed by the Registered Holder to Exercise the Rights To Purchase
Common Stock Evidenced by the Within Warrant)
The undersigned hereby irrevocably subscribes for ________ shares (the
"Stock") of the Common Stock of NTN COMMUNICATIONS INC. (the "Company")
pursuant to and in accordance with the terms and conditions of the attached
Warrant and hereby makes payment of $___________ therefor, and requests that a
certificate for such shares be issued in the name of the undersigned and be
delivered to the undersigned at the address stated below. If such number of
shares is not all of the shares purchasable pursuant to the attached Warrant,
the undersigned requests that a new Warrant of like tenor for the balance of
the remaining shares purchasable thereunder be delivered to the undersigned at
the address stated below.
In connection with the issuance of the Stock, the undersigned hereby
represents to the Company that he is acquiring the Stock for his own account
for investment and not with a view to, or for resale in connection with, a
distribution of the shares within the meaning of the Securities Act of 1933, as
amended (the "Act"). The undersigned also understands that the Company has not
registered the Stock under the Act, in reliance upon the private offering
exemptions contained in Section 4(2) of the Act, and that such reliance is
based in part upon the undersigned's representations.
The undersigned understands that because the Stock has not been
registered under the Act, the undersigned must hold such Stock indefinitely
unless such Stock is subsequently registered and qualified under such statutes
or is exempt from such registration and qualification. Before the undersigned
makes any transfer or disposition of any shares of the Stock, the undersigned
agrees to give to the Company written notice of its intention to do so and to
describe briefly the manner of such proposed transfer or disposition. The
undersigned shall make no such transfer or disposition unless (a) such transfer
or disposition can be made without registration under the Act and qualification
under the Law by reason of specific exemptions from such registration and such
qualification, or (b) a registration statement has been filed pursuant to the
Act and has been declared effective with respect to such disposition.
The undersigned agrees that each certificate representing the Stock
delivered to him shall bear substantially the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The shares may not be
sold or transferred in the absence of such registration or an exemption
therefrom under said Act."
A-1
<PAGE> 8
The undersigned further agrees that the Company may place stop orders
on the certificates evidencing the Stock with the transfer agent, if any, to
the same effect as the above legend. The legend and stop transfer notice
referred to above shall be removed only upon the undersigned's furnishing to
the Company an opinion of counsel (reasonably satisfactory to the Company) to
the effect that such legend may be removed.
Date:__________________ INTERACTIVE MARKETING, INC.
By:
----------------------------------
Address:
225 South Sepulveda Boulevard, Suite 360
Manhattan Beach, CA 90266
Taxpayer ID Number:
----------------------------------
A-2
<PAGE> 9
ASSIGNMENT
(To be Executed by the Registered Holder to Effect Transfer of the Within
Warrant)
For Value Received _______________ hereby sells, assigns and transfers to
____________________ this warrant and the rights represented hereby to purchase
Common Stock in accordance with the terms and conditions hereof, and does
hereby irrevocably constitute and appoint _________________
______________________ as attorney to transfer this warrant on the books of the
Company with full power of substitution.
Date: Signed:
----------------------------- ----------------------------
Please print or typewrite name Please insert Social Security or other
and address of assignee: Tax Identification Number of Assignee:
- ---------------------------------- -----------------------------------
- ----------------------------------
- ----------------------------------
- ----------------------------------
Zip
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE WARRANT IN EVERY PARTICULAR, WITHOUT ALTERNATION OR
ENLARGEMENT, OR ANY CHANGE WHATSOEVER, AND SUCH SIGNATURE(S) MUST BE GUARANTEED
IN ACCORDANCE WITH PRACTICES PREVAILING IN THE SECURITIES INDUSTRY AT THE TIME
SUCH SIGNATURE IS PRESENTED TO THE COMPANY.
A-3
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,525,000
<SECURITIES> 0
<RECEIVABLES> 4,408,000
<ALLOWANCES> 1,704,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,652,000
<PP&E> 17,546,000
<DEPRECIATION> 9,499,000
<TOTAL-ASSETS> 15,561,000
<CURRENT-LIABILITIES> 5,501,000
<BONDS> 0
0
1,000
<COMMON> 141,000
<OTHER-SE> 1,692,000
<TOTAL-LIABILITY-AND-EQUITY> 15,561,000
<SALES> 11,498,000
<TOTAL-REVENUES> 11,498,000
<CGS> 2,288,000
<TOTAL-COSTS> 12,415,000
<OTHER-EXPENSES> 25,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 437,000
<INCOME-PRETAX> (1,306,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,306,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,306,000)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
