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 September 30, 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 November 11, 1996: 23,134,953 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
September 30, 1996 (Unaudited) and December 31, 1995
September 30, December 31,
1996 1995
--------------- --------------
Assets
------
Current assets:
Cash and cash equivalents $ 767,000 6,485,000
Marketable securities - available for sale 10,223,000 -
Interest-bearing security deposits 2,056,000 1,575,000
Accounts receivable - trade, net of
allowance for doubtful accounts 3,856,000 2,668,000
Accounts receivable - officers and directors - 100,000
Accounts receivable - other 265,000 1,750,000
Notes receivable - related parties 680,000 1,030,000
Prepaid expenses and other current assets 2,057,000 2,223,000
Inventory - 5,618,000
Net assets of discontinued operations - 4,560,000
--------------- --------------
Total current assets 19,904,000 26,009,000
Broadcast equipment, net 5,656,000 -
Fixed assets, net 2,134,000 2,023,000
Notes receivable - related parties 4,832,000 4,176,000
Interest-bearing security deposits 539,000 2,200,000
Software development costs, net 3,698,000 3,152,000
Other assets 3,625,000 3,661,000
--------------- --------------
Total assets $ 40,388,000 41,221,000
=============== ==============
(Continued)
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
September 30, 1996 (Unaudited) and December 31, 1995
September 30, December 31,
Liabilities and Shareholders' Equity 1996 1995
------------------------------------ ----------------- ----------------
Current liabilities:
Accounts payable and accrued liabilities $ 6,506,000 2,862,000
Short-term borrowings 2,018,000 1,371,000
Deferred revenue 1,011,000 1,024,000
Customer deposits 1,237,000 1,284,000
------------------ ---------------
Total current liabilities 10,772,000 6,541,000
Deferred revenue - long term 1,750,000 1,229,000
------------------ ---------------
Total liabilities 12,522,000 7,770,000
------------------ ---------------
Minority interest 29,000 -
Shareholders' equity:
10% Cumulative convertible preferred stock, $.005 par value, 10,000,000
shares authorized; issued and outstanding 161,112 in 1996 and 1995 1,000 1,000
Common stock, $.005 par value, 50,000,000 shares authorized; shares
issued and outstanding 23,134,953 in 1996 and 22,502,707 in 1995 116,000 112,000
Treasury stock, 594,500 shares in 1996 and 50,000 shares in 1995 at cost (2,551,000) (222,000)
Additional paid-in capital 57,559,000 56,747,000
Accumulated deficit (27,288,000) (23,187,000)
------------------ ---------------
Total shareholders equity 27,837,000 33,451,000
Total liabilities and shareholders' equity $ 40,388,000 41,221,000
================== ===============
See accompanying notes to unaudited consolidated financial statements.
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
Three Months Three Months Nine Months Nine Months
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
--------------- --------------- --------------- --------------
Hospitality services $ 5,157,000 3,969,000 15,201,000 10,958,000
Home services 347,000 165,000 1,030,000 404,000
Advertising revenues 375,000 282,000 869,000 788,000
Equipment sales, net 262,000 887,000 1,771,000 1,913,000
Other revenue 34,000 - 816,000 232,000
--------------- --------------- --------------- --------------
Total revenues 6,175,000 5,303,000 19,687,000 14,295,000
Operating expenses:
Operating costs 1,520,000 1,348,000 4,319,000 2,995,000
Selling, general and administrative 3,896,000 2,336,000 10,257,000 6,813,000
Legal and professional fees 279,000 100,000 1,159,000 1,417,000
Equipment lease expense 1,350,000 963,000 3,640,000 2,845,000
Research and development 515,000 534,000 1,425,000 1,269,000
Special charges 5,042,000 - 5,042,000 -
--------------- --------------- --------------- --------------
Total operating expenses 12,602,000 5,281,000 25,842,000 15,339,000
Operating income (loss) (6,427,000) 22,000 (6,155,000) (1,044,000)
Investment income, net of investment expense 28,000 92,000 136,000 101,000
--------------- --------------- --------------- --------------
Earnings (loss) before minority interest and
income taxes (6,399,000) 114,000 (6,019,000) (943,000)
Minority interest (333,000) - - -
--------------- --------------- --------------- --------------
Earnings (loss) from continuing
operations before income taxes (6,732,000) 114,000 (6,019,000) (943,000)
Provision for income taxes - - - -
--------------- --------------- --------------- --------------
Earnings (loss) from continuing operations (6,732,000) 114,000 (6,019,000) (943,000)
Gain (loss) from discontinued operations - 791,000 1,918,000 76,000
--------------- --------------- --------------- --------------
Net earnings (loss) $ (6,732,000) 905,000 (4,101,000) (867,000)
=============== =============== =============== ==============
Net earnings (loss) per share:
Continuing operations $ (.30) - (.27) (.04)
Discontinued operations - .04 .09 -
--------------- --------------- --------------- --------------
Net earnings (loss) $ (.30) .04 (.18) (.04)
=============== =============== =============== ==============
Weighted average number of shares outstanding 22,487,000 21,270,000 22,599,000 19,618,000
=============== =============== =============== ==============
See accompanying notes to unaudited consolidated financial
statements.
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
Three Months Three Months Nine Months Nine Months
Sept 30, Sept 30, Sept 30, Sept 30,
1996 1995 1996 1995
---------------- ---------------- -------------- ---------------
Cash flows from (used for) operating activities: $ (6,732,000) 905,000 (4,101,000) (867,000)
Net earnings (loss)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities:
Provision for depreciation,
obsolescence and amortization 2,565,000 198,000 3,450,000 689,000
Provision for doubtful accounts 167,000 11,000 255,000 94,000
Gain on sale and leaseback
transactions 427,000 (152,000) - (791,000)
Amortization of deferred gain on
sale and leaseback transactions 267,000 (231,000) (734,000) (687,000)
Minority interest in net income
(loss) of consolidated subsidiary 362,000 - 29,000 -
(Increase) decrease in:
Accounts receivable - trade 1,722,000 (159,000) 142,000 (990,000)
Broadcast equipment, net - 32,000 - (766,000)
Prepaid expenses and other assets 1,810,000 (5,129,000) 4,721,000 (7,386,000)
Increase (decrease) in:
Accounts payable and accrued
liabilities 1,161,000 987,000 4,029,000 2,221,000
Deferred revenue 133,000 (116,000) 212,000 227,000
Customer deposits 12,000 200,000 (47,000) 355,000
---------------- ---------------- -------------- ---------------
Net cash provided by (used for)
operating activities 1,894,000 (3,454,000) 7,956,000 (7,901,000)
---------------- ---------------- -------------- ---------------
Cash flows from (used for) investing activities:
Capital expenditures (246,000) (248,000) (590,000) (814,000)
Purchase of broadcast equipment (3,068,000) - (2,276,000) -
Buyout of lease obligations (385,000) - (385,000) -
Notes receivable - related parties (131,000) (25,000) (306,000) (300,000)
Software development costs (414,000) (471,000) (1,238,000) (1,580,000)
Receipt of marketable securities - available
for sale 77,000 - (10,223,000) -
Proceeds from sales of marketable securities
- available for sale - 370,000 - 1,000,000
Proceeds from sale and leaseback transactions
(1,460,000) 2,250,000 2,415,000 4,500,000
Deposits related to sale and leaseback
transactions 1,534,000 388,000 1,180,000 325,000
---------------- ---------------- -------------- ---------------
Net cash provided by (used for)
investing activities (4,093,000) 2,264,000 (11,423,000) 3,131,000
---------------- ---------------- -------------- ---------------
6
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
Three Months Three Months Nine Months Nine Months
Sept 30, Sept 30, Sept 30, Sept 30,
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
Cash flows from (used for) financing activities:
Principal payments on debt $ (3,000) (4,000) (12,000) (11,000)
Proceeds from issuance of debt 653,000 45,000 659,000 1,875,000
Purchase of equipment related to sale
and leaseback transactions 843,000 (1,285,000) (1,385,000) (2,470,000)
Proceeds from issuance of common
stock, less issuance costs paid in cash 577,000 4,233,000 817,000 6,938,000
Payments for purchase of treasury stock - - (2,330,000) -
---------------- ---------------- ---------------- ----------------
Net cash provided by (used for)
financing activities 2,070,000 2,989,000 (2,251,000) 6,332,000
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in cash and
cash equivalents (129,000) 1,799,000 (5,718,000) 1,562,000
Cash and cash equivalents at beginning of period
896,000 2,168,000 6,485,000 2,405,000
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 767,000 3,967,000 767,000 3,967,000
================ ================ ================ ================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 52,000 34,000 117,000 72,000
================= ================ ================ ================
Income taxes $ - - - -
================= ================ ================ ================
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 September 30, 1996 and 1995 information furnished herein was taken from
the books and records of the Company without audit. However, such information
reflects all adjustments that are, in the opinion of management, necessary to
reflect properly results of the interim periods presented. The results of
operations for the period ended September 30, 1996 are not necessarily
indicative of the results to be expected for the fiscal year ending December 31,
1996.
Certain items in the prior year consolidated financial statements have been
reclassified to conform to the format used for the current periods presented.
3. Discontinued Operations - Sale of New World Computing.
------------------------------------------------------
On June 30, 1996 the Company entered into a definitive agreement to sell all
of the assets and business of its New World Computing subsidiary to the 3DO
Company (3DO) for approximately $13,600,000. In consideration of the sale, 3DO
issued to the Company 1,017,953 shares of common stock of 3DO and assumed
$1,650,000 of liabilities of New World. 3DO has guaranteed that the cash value
realized by the Company upon sale of the shares will not be less than $10.04 per
share, not withstanding the market price of such shares.
The disposal of the New World has been accounted for as a discontinued
operation. Accordingly, the consolidated financial statements for all prior
periods have been reclassified to report separately the net assets and operating
results of the discontinued business.
The gain (loss) resulting from the sale of New World and revenues from
discontinued operations for each period reported is as follows.
Three Months Three Months Nine Months Nine Months
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
------------------ ------------------ ------------------ ------------------
Gain on disposal of New World $ - - 4,200,000 -
Income (loss) from discontinued
operations of New World - 791,000 (1,282,000) 76,000
Tax provision for gain on sale - - (1,000,000) -
------------------ ------------------ ------------------ ------------------
Total $ - 791,000 1,918,000 76,000)
================== ================== ================== ==================
Revenues $ - 1,866,000 2,085,000 3,286,000
================== ================== ================== ==================
8
4. Rescission of Sale and Special Charges.
---------------------------------------
In December 1995, the Company sold a 45% interest in its LearnStar, Inc.
subsidiary to an unaffiliated company for $2,500,000 in return for a note
receivable in the amount of $2,500,000. The gain on the sale was deferred to be
recognized as the Company receives payments on the note. During the quarter
ended September 30, 1996 the parties agreed to rescind the sale. Earlier in
1996, the Company recognized a gain of $267,000 on the sale and also allocated
losses to the minority partner through credits to Minority Interest. The
aggregate adjustment to rescind the sale totaled $600,000, representing a
reduction of other income of $267,000 and a reduction in minority interest of
$333,000.
In addition, the Company recorded special charges totaling $5,042,000. These
charges are based on management's analysis and review of assets, obligations,
current operations and future strategic plans of the Company. This special
charge is comprised of the following:
Write-down of assets related to
selected business activities $ 944,000
Allowance for obsolete inventory
and equipment 2,478,000
Accrual for severance pay,
and other 1,620,000
----------
Total $5,042,000
==========
5. Business Segment Data.
----------------------
Operating results from continuing operations is presented for the principal
business segments of the Company for the three and nine months ended September
30, 1996 and 1995. The Company's principal business units are its Hospitality
Network (Hospitality Interactive Services), International Licensees
(International), Home Interactive Services (Home Services) and Learnstar, Inc.
(Education Interactive Services). Corporate overhead has been allocated to each
business segment.
Three Months Three Months Nine Months Nine Months
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
-------------------- -------------------- -------------------- --------------------
Revenue
Hospitality Interactive Services $ 5,503,000 4,759,000 17,367,000 13,358,000
International 309,000 139,000 420,000 227,000
Home Services 422,000 158,000 1,105,000 420,000
Education Interactive Services 73,000 - 305,000 -
Other (132,000) 247,000 490,000 290,000
-------------------- -------------------- -------------------- --------------------
Total $ 6,175,000 5,303,000 19,687,000 14,295,000
==================== ==================== ==================== ====================
Net Income (Loss) from Continuing Operations
Hospitality Interactive Services $ (4,483,000) 718,000 (3,545,000) 323,000
International (306,000) (387,000) (278,000) (501,000)
Home Services (1,379,000) (198,000) (1,262,000) (546,000)
Education Interactive Services (1,054,000) - (1,424,000) -
Other 490,000 (19,000) 490,000 (219,000)
-------------------- -------------------- -------------------- --------------------
Total $ (6,732,000) 114,000 (6,019,000) (943,000)
==================== ==================== ==================== ====================
9
The following table presents the revenue and operations results from
continuing operations for the principal business units for each of the quarters
in 1996.
First Second Third Year
Quarter Quarter Quarter to Date
1996 1996 1996 1996
------------- ----------- ----------- ------------
Revenue
Hospitality Interactive Services $ 5,509,000 6,355,000 5,503,000 17,367,000
International 111,000 - 309,000 420,000
Home Services 255,000 428,000 422,000 1,105,000
Education Interactive Services 38,000 194,000 73,000 305,000
Other 297,000 325,000 (132,000) 490,000
------------- ----------- ----------- ------------
Total $ 6,210,000 7,302,000 6,175,000 19,687,000
============= =========== =========== ============
Net Income (Loss) from Continuing Operations
Hospitality Interactive Services $ 482,000 456,000 (4,483,000) (3,545,000)
International 25,000 3,000 (306,000) (278,000)
Home Services 22,000 95,000 (1,379,000) (1,262,000)
Educational Interactive Services (285,000) (85,000) (1,054,000) (1,424,000)
Other - - 490,000 490,000
------------- ----------- ----------- ------------
Total $ 244,000 469,000 (6,732,000) (6,019,000)
============= =========== =========== ============
6. Earnings per Share.
-------------------
Earnings per share amounts are computed by dividing net earnings increased by
preferred dividends resulting from the assumed exercise of stock options and
warrants and the assumed conversion of convertible preferred shares, and the
resulting assumed reduction of outstanding indebtedness, by the weighted average
number of common and common equivalent shares outstanding during the period.
Common stock equivalents represent the dilutive effect of the assumed exercise
of certain outstanding options and warrants and preferred stock.
Earnings per share amounts are based on 22,599,000, 19,618,000, and
22,487,000 common shares for the nine months ended September 30, 1996 and 1995
and three months ended September 30, 1996, respectively. The impact of the
common stock equivalents would have had an antidilutive effect for these period
and accordingly have not been included in the computation. Earnings per share
amounts for the three months ended September 30, 1995 is based on 21,270,000
common shares.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
- -------
The Company uses existing technology to develop, produce and distribute
two-way multi-player interactive programs in connection with live events and
also produces and distributes its own original interactive programs. The
Company's principal sources of revenue from distribution activities are derived
from (a) distribution fees in the United States; (b) advertising fees, (c)
distribution fees from foreign licensees; (d) sales of interactive equipment;
(e) licensing fees from foreign and domestic licensees; and (f) the licensing of
the Company's technology and equipment sales to other users.
On October 25, 1996, the Company reported that it was recently advised by
the United States Federal Communications Commission (FCC) that its Playmaker(R)
keypad had not received formal approval. Upon notification,, the Company
commenced testing its equipment and submitted its application to the FCC. There
was no interruption of the Company's services to existing Hospitality Services
customers, nor have any of the Company's Home Services been affected. The
Company believes that its application was complete and has not been advised of
any problem with its application, nor of any reason as to why its application
should not be granted. Upon receipt of FCC approval, the Company will be in a
position to immediately begin shipments to new locations.
There has been no impact on revenues in the third quarter as a result of
this situation. The Company believes there will be some impact on revenues in
the fourth quarter, however, the extent of the impact cannot be estimated at
this time.
Material Changes in Results of Operations
- -----------------------------------------
Three month periods ended September 30, 1996 and September 30, 1995
In December 1995, the Company sold a 45% interest in LearnStar to an
unaffiliated company for $2,500,000 in return for a note receivable in the
amount of $2,500,000. The gain on the sale was deferred to be recognized as the
Company receives payments on the note. In the quarter ended September 30, 1996
the parties agreed to rescind the sale. The Company had earlier recognized a
gain on the sale and also allocated losses to the minority partner through
credits to Minority Interest. The aggregate adjustment to rescind the sale
totaled $600,000.
In addition, the Company recorded special charges totaling $5,042,000.
These charges are based on a review of assets, obligations, current operations
and future strategic plans of the Company.
The Company incurred a net loss of $6,732,000 for the three months ended
September 30, 1996 compared to a net profit of $905,000 for the three months
ended September 30, 1995. 1995 results have been adjusted to reflect the sale
of New World in 1996 as a discontinued operation. The 1996 results include
special charges totaling $5,042,000 and a $600,000 charge for the rescission of
the sale of LearnStar. Net of the special charges and the charge for
rescission of the sale of LearnStar, the Company incurred a loss in the three
months ended September 30, 1996 of $1,090,000. This compares, on a comparable
basis, to a profit for the three months ended September 30, 1995 of $114,000.
For the current quarter, total revenues increased 16% from $5,303,000 to
$6,175,000. This increase is the result of growth in most of the Companys
principal revenue activities.
Hospitality Services increased 30% from $3,969,000 to $5,157,000. The
increase is primarily due to an expansion in the number of subscriber locations
contracting for services. Home Services increased 110% from $165,000 to
$347,000 due to increasing number of on-line customers and increasing
participation by the ultimate consumers. In addition, the Company has increased
the number of programs available on various distribution platforms. Advertising
revenues related to both Hospitality and Home Services increased 33% from
$282,000 to $375,000 due to increased number of Hospitality advertisers and the
first advertising contract for Home Services.
Equipment Sales, net of cost of sales decreased 70% from $887,000 to
$262,000. In the third quarter of 1996 the Company ceased selling equipment
(used in Hospitality locations) under sale and leaseback arrangements. In
addition, the Company entered into several transactions to buy out of existing
sale and leaseback obligations. Further, equipment sales to foreign licensees
are subject to outside influences and can occur at random times throughout the
year. Accordingly, the decrease in equipment sales is attributable to
fluctuations in sales to foreign licensees and a change in the method of
financing the equipment for new Hospitality locations. Equipment sales have
been highly volatile in the past and are
11
expected to remain so, as they are dependent on the timing of expansion plans of
the Company's foreign licensees and its educational customers.
Exclusive of the special charges of $5,042,000, total Operating Expenses
rose from $5,281,000 in the prior years quarter to $7,560,000 in the current
years quarter, an increase of 43%. The increase is largely attributable to an
increase in equipment lease expense related to sale and leaseback arrangements
for Hospitality locations, selling, general and administrative costs and direct
operating costs. Operating costs for the delivery of interactive services which
increased 13% from $1,348,000 in the prior years quarter to $1,520,000 in the
current year's quarter, is generally due to the expansion in the number of
subscribers and on-line services contracting for services. Selling, General and
Administrative expenses increased 67% from $2,336,000 to $3,896,000 due to
general growth and enhanced sales and marketing efforts by both NTN and
LearnStar. Research and Development expense remained consistent as the Company
continued its exploration of new technical platforms and interactive services.
Nine month periods ended September 30, 1996 and September 30, 1995
In December 1995, the Company sold a 45% interest in LearnStar to an
unaffiliated company for $2,500,000 in return for a note receivable in the
amount of $2,500,000. The gain on the sale was deferred to be recognized as the
Company receives payments on the note. In the quarter ended September 30, 1996
the parties agreed to rescind the sale. The Company had earlier recognized a
gain on the sale and also appropriately allocated losses to the minority partner
through credits to Minority Interest. The aggregate adjustment to rescind the
sale totaled $600,000.
In addition, the Company recorded special charges totaling $5,042,000.
These charges are based on a review of assets, obligations, current operations
and future strategic plans of the Company.
The Company incurred a net loss of $4,101,000 for the nine months ended
September 30, 1996 compared to a net loss of $867,000 for the nine months ended
September 30, 1995. 1995 results have been adjusted to reflect the sale of New
World in 1996 as a discontinued operation. The 1996 results include special
non-recurring charges totaling $5,042,000 and a $600,000 charge for the
rescission of the sale of LearnStar. The 1996 results also include a gain on
the sale of the Company's New World subsidiary of $1,918,000, net of taxes and
operating losses during the disposition period. Net of the special charges, the
charge for rescission of the sale of LearnStar and the sale of New World, the
Company incurred a loss in the nine months ended September 30, 1996 of $377,000.
This compares, on a comparable basis, to a loss for the nine months ended
September 30, 1995 of $943,000.
For the current period, total revenues increased 38% from $14,295,000 to
$19,687,000. This increase is the result of growth in most of the Companys
principal revenue activities.
Hospitality Services increased 39% from $10,958,000 to $15,201,000. The
increase is primarily due to an expansion in the number of subscriber locations
contracting for services. Home Services increased 155% from $404,000 to
$1,030,000 due to increasing number of on-line customers and increasing
participation by the ultimate consumers. In addition, the Company has increased
the number of programs available on a distribution platforms. Advertising
revenues related to both Hospitality and Home Services increased 10% from
$788,000 to $869,000 due to increased number of Hospitality advertisers and the
first advertising contract for Home Services.
Equipment Sales, net of cost of sales decreased 7% from $1,913,000 to
$1,771,000. In the third quarter of 1996 the Company ceased selling equipment
(used in Hospitality locations) under sale and leaseback arrangements. In
addition, the Company entered into several transactions to buyout of existing
sale and leaseback obligations. Further, equipment sales to foreign licensees
are subject to outside influences and can occur at random times throughout the
year. Accordingly, the decrease in equipment
12
sales is attributable to fluctuations in sales to foreign licensees and a change
in the method of financing the equipment for new Hospitality locations.
Equipment sales have been highly volatile in the past and are expected to remain
so, as they are dependent on the timing of expansion plans of the Company's
foreign licensees and its educational customers.
Exclusive of the special charges of $5,042,000, total Operating Expenses
rose from $15,339,000 in the prior years quarter to $20,800,000 in the current
years quarter, an increase of 36%. The increase is largely attributable to an
increase in equipment lease expense related to sale and leaseback arrangements
for Hospitality locations, selling, general and administrative costs and direct
operating costs. Operating costs for the delivery of interactive services which
increased 44% from $2,995,000 in the prior years period to $4,319,000 in the
current year's period, is generally due to the expansion in the number of
subscribers and on-line services contracting for services. Selling, General and
Administrative expenses increased 51% from $6,813,000 to $10,257,000 due to
general growth and enhanced sales and marketing efforts by both NTN and
LearnStar. Research and Development expense increased 12% as the Company
continued its exploration of new technical platforms and interactive services.
Material Changes in Financial Condition
- ---------------------------------------
The following analysis compares information as of the most recent unaudited
balance sheet date of September 30, 1996 to the prior year-end audited balance
sheet dated December 31, 1995.
In December 1995, the Company sold a 45% interest in LearnStar to an
unaffiliated company for $2,500,000 in return for a note receivable in the
amount of $2,500,000. The gain on the sale was deferred to be recognized as the
Company receives payments on the note. During the quarter ended September 30,
1996 the parties agreed to rescind the sale. The Company had earlier recognized
a gain on the sale and also allocated losses to the minority partner through
credits to Minority Interest. The aggregate adjustment to rescind the sale
totaled $600,000.
In addition, the Company recorded special charges totaling $5,042,000.
These charges are based on a review of assets, obligations, current operations
and future strategic plans of the Company.
Total assets decreased 2% from $41,221,000 to $40,388,000 from December 31,
1995 to September 30, 1996. The decrease in assets is primarily due to the
special charges recorded in the third quarter. Cash decreased from $6,485,000 to
$767,000 at September 30, 1996 due to cash used to repurchase share of the
Companys stock and to fund operations. Marketable Securities-Available for Sale
result from the sale of New World and represent 1,017,953 shares of the 3DO
Company. Following the end of the third quarter the Company commenced selling
the 3DO shares. The 3DO Company has guaranteed that the cash value realized by
the Company upon sale of the shares will not be less than $10.04 per share, not
withstanding the market price of such shares. Interest-bearing security deposits
decreased by $1,180,000 due to the buyout of certain sale and leaseback
agreements.
The 45% increase in Accounts Receivable - Trade from $2,668,000 to
$3,856,000 at September 30, 1996, reflects the overall growth of the Company's
primary operations and a large contract with Bell Canada for the development of
certain products. Accounts Receivable - Other decreased from $1,750,000 to
$265,000, the result of payments received and the buyout of certain lease
obligations. In the third quarter the Company commenced a program to repurchase
equipment previously sold to and leased back from third parties. The Company
intends to continue such a program and either buy out of lease obligations or
enter into new financing arrangements. Accordingly, Broadcast Equipment,
formerly shown as Inventory, has been reclassified to non-current assets. The
Company does not intend to sell this equipment in the future, accordingly,
depreciation of these assets will commence in the fourth quarter. Further, the
Company evaluated its current inventory of equipment in light of current and
anticipated operations and determined that certain equipment was obsolete and
would not be used in the future. Accordingly, a charge of $2,478,000 was
recorded in the quarter to write off these assets.
Total liabilities increased 61% from $7,770,000 to $12,522,000 from December
31, 1995 to September 30, 1996. The increase in Accounts Payable and Accrued
Liabilities from $2,862,000 to
13
$6,506,000 reflects the overall growth of the Company, an accrual for
liabilities incurred in the sale of New World including a provision for taxes of
$1,000,000, and certain special charges totalling $1,620,000 noted earlier. The
increase in aggregate Deferred Revenue (long-term and current) from $2,253,000
to $2,761,000 reflects a $500,000 deferral related to the Bell Canada agreement,
net of reductions due to amortization and buy out of lease obligations. Revenue
related to the Bell Canada agreement will be recognized as product is delivered
beginning in late 1996 or in 1997.
Overall, the Company's working capital decreased $4,718,000 from December
31, 1995 to September 30, 1996, primarily the net result of the New World sale
transaction, the special charges recorded in the third quarter and the
reclassification of Broadcast equipment to non-current assets. 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 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.
PART II OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS.
The description of certain legal proceedings contained in the Companys
Annual Report on Form 10-K for the year ended December 31, 1995 under the
caption Legal Proceedings, is incorporated herein by reference. An update of
events subsequent to that Report follows.
On April 18, 1995, a class action lawsuit was filed in the United States
District Court for the Southern District of California (San Diego). The
complaint alleges violations of federal securities laws based upon the Companys
projections for the fourth quarter of 1994 and for the 1994 fiscal year, and
further alleges that certain of the Companys insiders sold stock on information
not generally known to the public. The Company, which has assumed the defense
of this matter on behalf of all defendants, has denied liability based upon the
allegations contained in the complaint. Plaintiffs have claimed to be entitled
to damages between $8 million to $10 million. The Company believes, based in
part on the advice of outside counsel, that the actual damages, if any, would be
substantially less than such amount. This lawsuit has been scheduled for trial
to commence on May 6, 1997.
On July 3, 1995, a single shareholder filed a separate lawsuit in the
United States District Court for the Northern District of Texas containing
allegations essentially identical to those raised in the shareholder lawsuit in
April, 1995. Upon the Companys motion, the case has been transferred from Texas
to California. The discovery and other proceedings of this case are being
coordinated with the lawsuit referred to in the immediately preceding paragraph.
The Company denies the allegations in the complaint and has filed its own
counterclaim against third parties for indemnification.
There can be no assurance that any or all of the foregoing claims will be
decided in favor of the Company, which is not insured against the claims made.
During the pendency of such claims, the
14
Company will continue to incur the costs of defense of same. If the shareholder
litigation is decided in a manner adverse to the Company, it may have a material
effect on the Companys financial condition and result of operations. Management
believes, however, based in part on the advice of outside counsel, the
likelihood of such an outcome is remote.
Until recently, the Company was involved as a plaintiff or defendant in
various previously reported lawsuits in both the United States and Canada
involving Interactive Network, Inc. (IN). With the courts assistance, the
Company and IN have been able to reach a resolution of all pending disputes in
the United States and have agreed to private arbitration regarding any future
licensing, copyright or infringement issues which may arise between the parties.
There remain two lawsuits involving the Company, its unaffiliated Canadian
licensee and IN, which were filed in Canada in 1992. No substantive action has
been taken in furtherance of either action.
Other than as set forth above, there is no material litigation pending or
threatened against the Company.
There can be no assurance that any or all of the preceding actions will
be decided in favor of the Company. The Company believes, based in part on the
advice of outside, independent counsel, that the costs of defending and
prosecuting these actions will not have a material adverse effect on the
Companys financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of stockholders on August 16, 1996. The
matters voted upon at such meeting were election of two directors to the Board
of Directors and approval of the amendment to the 1995 Stock Option Plan.
The voting on each proposal was as set forth in the table below.
VOTES VOTES
"FOR" "AGAINST" * ABSTENTIONS **
Elections of Directors
Patrick J. Downs 19,444,272 1,105,186 -
Donald C. Klosterman 19,451,772 1,097,686 -
Approval of the amendment to the 1995
Stock Option Plan 6,753,332 3,013,535 146,961
* As to election of directors, represents shares where authority to vote for
the specified nominee was withheld.
* Abstentions include "broker non-votes", which are abstentions by nominee
holders on behalf of beneficial owners who have given no instruction to the
nominee holder. When no such instructions are received, such nominee holders
have no authority to vote even though present or represented at the meeting.
15
Item 6. EXHIBITS AND REPORTS ON REPORT 8-K.
EX-27 Financial Data Schedule
Form 8-K filed June 30, 1996 reporting the sale of New World
Computing to the 3DO Company.
Form 8-K filed July 24, 1996 reporting the settlement of the Class
Action Litigation.
Form 8-K filed September 19, 1996 reporting the addition of two new
board members.
Form 8-K filed October 31, 1996 reporting the FCC Playmaker(R)
approval application.
16
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: November 14, 1996 By: /s/GERALD SOKOL, JR.
----------------------
Gerald Sokol, Jr.,
Chief Financial Officer
17