UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1103425
(State of incorporation) (I.R.S. Employer Identification No.)
The Campus 5966 La Place Court, Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(619) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
----- -----
Number of shares outstanding of each of the registrant's classes of common
stock, as of May 13, 1996: 23,309,645 shares of common stock, $.005 par value.
1
PART I--FINANCIAL INFORMATION
-----------------------------
Item 1. FINANCIAL STATEMENTS.
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1996 (Unaudited) and December 31, 1995
March 31, December 31,
Assets 1996 1995
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 2,510,000 6,475,000
Interest-bearing security deposits 1,450,000 1,575,000
Accounts receivable - trade, net of allowance
for returns and doubtful accounts 5,427,000 5,247,000
Accounts receivable - officers and directors -- 100,000
Accounts receivable - other 875,000 1,750,000
Notes receivable - related parties 680,000 1,030,000
Software development costs, net of accumulated amortization 1,690,000 1,525,000
Inventories, net 6,933,000 6,503,000
Prepaid expenses and other current assets 2,772,000 2,325,000
----------- ----------
Total current assets 22,337,000 26,530,000
Fixed assets, net 2,240,000 2,100,000
Interest-bearing security deposits 1,950,000 2,200,000
Software development costs, net of accumulated amortization 4,510,000 4,144,000
Notes receivable, related parties 4,200,000 4,176,000
Deposits and other assets 3,862,000 3,663,000
----------- ----------
Total assets $39,099,000 42,813,000
=========== ==========
(Continued)
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
March 31, 1996 (Unaudited) and December 31, 1995
March 31, December 31,
Liabilities and Shareholders' Equity 1996 1995
- ---------------------------------------- ----------- ------------
Current liabilities:
Accounts payable and accrued liabilities $ 2,398,000 3,713,000
Short-term borrowings and current portion of long-term debt 2,092,000 2,093,000
Deferred revenue 1,148,000 1,024,000
Customer deposits 1,236,000 1,284,000
----------- -----------
Total current liabilities 6,874,000 8,114,000
Deferred revenue 1,052,000 1,246,000
Long-term debt, excluding current portion 2,000 2,000
----------- -----------
Total liabilities 7,928,000 9,362,000
Minority interest (208,000) --
Shareholders' equity:
10% Cumulative convertible preferred stock, $.005 par
value, 10,000,000 shares authorized; issued and
outstanding 162,612 in 1996 and 1995 1,000 1,000
Common stock, $.005 par value, 50,000,000 shares authorized;
shares issued and outstanding 23,904,145 in 1996 and
22,502,707 in 1995 113,000 112,000
Additional paid-in capital 56,730,000 56,747,000
Accumulated deficit (22,914,000) (23,187,000)
----------- -----------
33,930,000 33,673,000
Less 594,500 shares in 1996 and 50,000 shares in 1995
of treasury stock, at cost (2,551,000) (222,000)
----------- -----------
Total shareholders' equity 31,379,000 33,451,000
----------- -----------
Total liabilities and shareholders' equity $39,099,000 42,813,000
=========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995
(Unaudited)
Three Months Three Months
March 31, March 31,
1996 1995
------------ ------------
Distribution and production services $ 5,339,000 3,952,000
Product sales 1,212,000 513,000
Equipment sales 1,310,000 1,056,000
License fees and royalties 29,000 193,000
Other revenue, net 385,000 24,000
----------- ----------
Total revenues 8,275,000 5,738,000
Cost of distribution and production services 2,508,000 1,668,000
Cost of product sales 410,000 253,000
Cost of equipment sales 822,000 635,000
----------- ----------
Total cost of sales 3,740,000 2,556,000
----------- ----------
Gross profit 4,535,000 3,182,000
----------- ----------
Operating expenses:
Selling, general and administrative 3,852,000 3,537,000
Legal and professional fees 190,000 1,204,000
Research and development 498,000 394,000
----------- ----------
Total operating expenses 4,540,000 5,135,000
Operating income (loss) (5,000) (1,953,000)
Investment income, net of interest expense 70,000 56,000
----------- ----------
Earnings (loss) before minority interest and income taxes 65,000 (1,897,000)
Minority interest 208,000 --
----------- ----------
Earnings (loss) before income taxes 273,000 (1,897,000)
Income taxes -- --
----------- ----------
Net earnings (loss) $ 273,000 (1,897,000)
=========== ==========
Net earnings (loss) per share $ 0.01 (0.10)
=========== ==========
Weighted average number of shares outstanding 23,678,000 19,217,000
=========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995
(Unaudited)
Three Months Three Months
March 31, March 31,
1996 1995
------------ ------------
Cash flows from (used for) operating activities:
Net earnings (loss) $ 273,000 (1,897,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 643,000 98,000
Provision for doubtful accounts 312,000 53,000
Gain on sale and leaseback transactions (154,000) (176,000)
Loss on sale of marketable securities - available
for sale -- 39,000
Amortization of deferred gain on sale and leaseback
transactions (284,000) --
Minority interest in net income (loss) of
consolidated subsidiary (208,000) --
(Increase) decrease in:
Accounts receivable - trade (1,267,000) (1,543,000)
Software development costs, net (315,000) (188,000)
Inventories, net (430,000) (623,000)
Prepaid expenses and other assets 1,089,000 836,000
Increase (decrease) in:
Accounts payable and accrued liabilities (1,315,000) 369,000
Deferred revenue -- 178,000
Customer deposits (48,000) 71,000
----------- ----------
Net cash used for operating activities (1,704,000) (2,783,000)
----------- ----------
Cash flows from (used for) investing activities:
Capital expenditures (298,000) (254,000)
Notes receivable - officers and directors 326,000 119,000
Software development costs (686,000) (582,000)
Proceeds from sales of marketable securities -- 461,000
- available for sale
Proceeds from sale and leaseback transactions 875,000 1,000,000
Deposits related to sale and leaseback transactions 375,000 (250,000)
----------- ----------
Net cash provided by (used for) investing
activities 592,000 494,000
----------- ----------
6
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three Months Ended March 31, 1996 and 1995
(Unaudited)
Three Months Three Months
March 31, March 31,
1996 1995
------------ ------------
Cash flows from (used for) financing activities:
Principal payments on debt $ (1,000) (449,000)
Proceeds from issuance of debt -- 1,245,000
Purchase of equipment related to sale and leaseback
transactions (507,000) (510,000)
Proceeds from issuance of common stock, less issuance
costs paid in cash (15,000) 329,000
Payments for purchase of treasury stock (2,330,000) --
----------- ----------
Net cash provided by (used for) financing
activities (2,853,000) 615,000
----------- ----------
Net increase (decrease) in cash and cash equivalents (3,965,000) (1,674,000)
Cash and cash equivalents at beginning of period 6,475,000 2,429,000
----------- ----------
Cash and cash equivalents at end of period $ 2,510,000 755,000
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 20,000 22,000
=========== ==========
Income taxes $ -- --
=========== ==========
See accompanying notes to unaudited consolidated financial statements.
7
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
(Unaudited)
1. General.
-------
Management has elected to omit substantially all notes to the
Company's financial statements. Reference should be made to the Company's
Form 10-K filed for the year ended December 31, 1995, which report
incorporated the notes to the Company's year-end financial statements.
2. Unaudited Information.
---------------------
The March 31, 1996 and 1995 information furnished herein was taken
from the books and records of the Company without audit. However, such
information reflects all adjustments (consisting only of normal recurring
adjustments) that are, in the opinion of management, necessary to reflect
properly results of the interim periods presented. The results of
operations for the period ended March 31, 1996 are not necessarily
indicative of the results to be expected for the fiscal year ending
December 31, 1996.
3. Business Segment Data.
---------------------
Operating results are presented for the principal business
consolidated segments of the Company for the three months ended March 31,
1996 and 1995. The Company's principal business units are its Hospitality
Network (Hospitality Interactive Services), International Licensing
(International), Home Interactive Services (Home Services), Learnstar,
Inc. (Education Interactive Services) and New World (Software Development
and Distribution).
March 31, March 31,
1996 1995
---------- ----------
Net Sales
Hospitality Interactive Services $6,061,000 4,364,000
International 187,000 204,000
Home Services 255,000 112,000
Education Interactive Services 195,000 --
Software Development and Distribution 1,244,000 755,000
Corporate and Other 333,000 303,000
---------- ---------
Total $8,275,000 5,738,000
========== =========
Net Income (Loss)*
Hospitality Interactive Services $ 965,000 441,000
International 60,000 157,000
Home Services 70,000 (126,000)
Education Interactive Services (255,000) --
Software Development and Distribution 29,000 (491,000)
Corporate and Other (596,000) (1,878,000)
---------- ---------
Total $ 273,000 (1,897,000)
========== =========
* Consolidated basis after elimination of minority interest
8
4. Earnings per Share.
------------------
Earnings per share amounts are computed by dividing net earnings
increased by preferred dividends resulting from the assumed exercise of
stock options and warrants and the assumed conversion of convertible
preferred shares, and the resulting assumed reduction of outstanding
indebtedness, by the weighted average number of common and common
equivalent shares outstanding during the period. Common stock equivalents
represent the dilutive effect of the assumed exercise of certain
outstanding options and warrants and preferred stock.
Earnings per-share amounts are based on 23,678,000 common and common
equivalent shares for the three months ended March 31, 1996. These amounts
include the dilutive effect of common stock equivalents.
Earnings per-share amounts are based on 19,217,000 common shares for
the three months ended March 31, 1995. The impact of the common stock
equivalents would have had an antidilutive effect for the three months
ended March 31, 1995 due to the reported loss and accordingly have not
been included in the computation.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
-------
The Company uses existing technology to distribute two-way interactive
live events. The Company's principal sources of revenue from distribution
activities are derived from (a) distribution fees in the United States;
(b) advertising fees in the Unites States, (c) distribution fees from
foreign licensees; (d) sales of interactive equipment; (e) licensing fees
from foreign licensees; (f) royalties and sale of equipment to educational
institutions and (g) the licensing of the Company's technology and
interactive equipment sales to other users.
The Company also develops and publishes interactive entertainment
software and video games for general consumer use on a variety of home
personal computers and console entertainment systems. The principal
sources of revenue from software and video game activities are derived
from (a) domestic retail sales sold through mass merchants, warehouse
clubs, general retailers and mail order catalogues; and (b) license fees
and royalties from international licensees who translate and publish in
over a dozen countries around the world.
The Company has capitalized qualifying software development costs in
accordance with generally accepted accounting principles. However, through
1992, the Company expensed all of its development costs, charging such
expenses as they were incurred. These significant charges represent the
technology and know-how that the Company has developed and put into use in
its daily operations and may well be its most valuable asset. However, the
significant costs of developing the Company's key technological assets are
not fully presented on the Company's balance sheet as an asset.
Material Changes in Results of Operations
-----------------------------------------
Three month periods ended March 31, 1996 and March 31, 1995
The Company recognized net earnings of $273,000 for the three months
ended March 31, 1996 compared to a net loss of $1,897,000 for the three
months ended March 31, 1995. The difference in 1996 is attributed to an
increase in total revenues, coupled with controlled cost of sales and
reduced operating
9
expenses. The loss in 1995 was largely attributable to significant
accruals related to litigation and other legal matters.
For the current quarter, total revenues increased 44% from $5,738,000
to $8,275,000. This increase is the result of growth in many of the
Company's principal revenue activities.
Distribution and Production Services increased 35% from $3,952,000 to
$5,339,000. The increase in distribution revenue is primarily due to an
expansion in the number of subscriber locations and on-line customers
contracting for services from the Company.
Equipment Sales increased 24% from $1,056,000 to $1,310,000. Equipment
sales include both sale and leaseback transactions and direct sales to the
Company's customers. Equipment sales have been highly volatile in the past
and are expected to remain so, as they are dependent on the Company's
ability to engage in lease financing, the timing of expansion plans of the
Company's foreign licensees and its educational customers. As of March 31,
1996, the Company had sold and leased back subscriber systems in place at
a majority of the United States subscriber locations. The Company's
ability to make more such sales will be dependent on increases in the
number of subscriber locations, as to which there can be no assurance.
Product Sales related to video and computer games increased 136% from
$513,000 to $1,212,000. Sales of video and computer game products are
typically seasonal and will vary with the number of new products released
in any period. The increase in net revenue is primarily due to the timing
of new products released in each respective period.
License Fees declined 85% from $193,000 in 1995 to $29,000 in 1996.
Licensing arrangements are not dependent upon seasonal forces and will
vary in type and amount from period to period.
Cost of Services-Distribution and Production Services, which increased
50% from $1,668,000 in the prior year's quarter to $2,508,000 in the
current year's quarter, reflects increased costs of equipment leases and
other costs associated with the expansion in the number of subscribers
contracting for distribution services. Cost of Sales - Product Sales which
relates to the Company's video game products increased from $253,000 to
$410,000 in the current quarter or 62%. These costs vary depending upon
the timing of products released, the volume of products sold, the
complexity of the games and the development costs associated with each
product. The gross margin on product sales increased from 51% to 66% as
the result of amortizing deferred development costs related to specific
products sold in each period. The increase in Cost of Sales-Equipment from
$635,000 to $822,000, an increase of 30%, is due to the increase in
equipment sales, which can vary from period to period. The Company's gross
margin on equipment sales decreased from 40% to 37% due the mix of sales.
Operating Expenses declined from $5,135,000 in the prior years quarter
to $4,540,000 in the current years quarter, a decrease of 12%. The
decrease is primarily attributable to the decrease in legal and
professional fees of $1,014,000 from 1995 to 1996. Selling, General and
Administrative expenses increased from $3,537,000 to $3,852,000 due to
general inflation and new sales techniques and management efforts to
control operating expenses Research and Development expense expanded from
$394,000 to $498,000, or 26% as the Company stepped-up its exploration of
new technical platforms and interactive services.
Net Investment Income increased from $56,000 to $70,000 as a result of
increased interest-bearing investments. Income Tax Expense remained flat
at zero due to prior year operating losses and the nature of revenues and
expenses in each period. The Company currently has available approximately
$27,000,000 of net operating loss carryovers for federal tax purposes.
10
Material Changes in Financial Condition
---------------------------------------
The following analysis compares information as of the most recent
unaudited balance sheet date of March 31, 1996 to the prior year-end
audited balance sheet dated December 31, 1995.
Total assets decreased 9% from $42,813,000 to $39,099,000 from
December 31, 1995 to March 31, 1996. The decrease in assets is primarily
the result of the Company purchase of treasury shares totaling $2,330,000
and a reduction of trade payables of $1,315,000. Cash and Marketable
Securities - Available for Sale decreased from $6,475,000 to $2,510,000 at
March 31, 1996. The change reflects the use of cash related to treasury
stock purchases, cash used to fund operations and invest in the
development of future products and services for the NTN Network and video
game products.
The 3% increase in Accounts Receivable - Trade from $5,247,000 to
$5,427,000 at March 31, 1996, reflects an increase in the number of
subscribers receiving the Company's services and sales of products in the
first quarter, net of amounts collected. Accounts Receivable - Other
decreased from $1,750,000 to $875,000, the result of the smaller sale and
leaseback transaction in the first quarter. The increase in Inventory from
$6,503,000 to $6,933,000 is primarily the result of purchasing inventory
assets in anticipation of higher sales late in the year, net of sales.
Prepaid Expenses increased from $2,325,000 to $2,772,000 from December 31,
1995 to March 31, 1996 primarily due to increases in prepaid expenses and
security deposits held by the Company.
Net Fixed Assets increased 7% primarily due to continued expansion of
the NTN Broadcast Center. Software Development Costs increased $531,000 as
the Company continued its development of new programs and products.
Total liabilities decreased 15% from $9,362,000 to $7,928,000 from
December 31, 1995 to March 31, 1996. The decrease in Accounts Payable and
Accrued Liabilities from $3,713,000 to $2,398,000 reflects the overall
growth of the Company and the timing of payments. Customer Deposits
remained steady from $1,284,000 to $1,236,000 from December 31, 1995 to
March 31, 1996 due to steady receipts and application of deposits received
from new customers throughout the period. The decrease in aggregate
Deferred Revenue (long-term and current) from $2,270,000 to $2,200,000
reflects the amounts deferred for the sale and leaseback transactions in
the first quarter, net of amortization. Deferred gains are amortized to
revenue over three-year periods.
Overall, the Company's working capital decreased $2,953,000 from
December 31, 1995 to March 31, 1996, primarily as a result of the use of
cash to purchase treasury shares and to pay trade payables. The Company
may continue to require additional working capital for operating expenses,
new services development, marketing of services and purchase of the
hardware components used in the reception of its services. There can be no
assurance that the Company's currently available resources will be
sufficient to allow the Company to support its operations until such time,
if any, as its internally generated cash flow is able to sustain the
Company.
In the past, the Company has been able to fund its operations and
improve its working capital position by sales of Common Stock upon
exercise of warrants and options, by leasing transactions for equipment in
use at subscriber locations, and by licensing its technology to foreign
licensees. The Company is exploring additional alternative capital
financing possibilities which may include (i) licensing and related
royalties of the Company's technology and products; (ii) borrowing
arrangements under fixed and revolving credit agreements; or (iii) sale of
additional equity securities. The Company will continue to negotiate for
additional lease and debt financing and additional foreign licensing,
however, the extent to which any of the foregoing may be effected cannot
be predicted at this time.
11
PART II OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS.
The description of certain legal proceedings contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995
under the caption "Legal Proceedings", is incorporated herein by
reference.
Item 6. EXHIBITS AND REPORTS ON REPORT 8-K.
None.
12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: May 14, 1996 By: /s/ RONALD E. HOGAN
-----------------------
Ronald E. Hogan,
Chief Financial Officer
13