UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q/A
AMENDMENT NO. 1
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES X NO
----- -----
Number of shares outstanding of each of the registrant's classes of common
stock, as of August 9, 1996: 22,500,356 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
June 30, 1996 (Unaudited) and December 31, 1995
June 30, December 31,
1996 1995
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,780,000 6,485,000
Interest-bearing security deposits 1,766,000 1,575,000
Accounts receivable - trade, net of allowance for returns and doubtful
accounts 4,260,000 2,668,000
Accounts receivable - officers and directors -- 100,000
Accounts receivable - The 3DO Company 10,300,000 --
Accounts receivable - other 3,221,000 1,750,000
Notes receivable - related parties 680,000 1,030,000
Inventories, net 4,692,000 5,618,000
Prepaid expenses and other current assets 2,244,000 2,223,000
Net assets of discontinued operations -- 4,560,000
----------- -----------
Total current assets 28,943,000 26,009,000
Fixed assets, net 2,215,000 2,023,000
Interest-bearing security deposits 2,363,000 2,200,000
Software development costs, net of accumulated amortization 3,538,000 3,152,000
Notes receivable, related parties 3,963,000 4,176,000
Deposits and other assets 3,982,000 3,661,000
----------- -----------
Total assets $45,004,000 41,221,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 6,136,000 2,862,000
Short-term borrowings and current portion of long-term debt 3,727,000 1,371,000
Deferred revenue 1,286,000 1,024,000
Customer deposits 1,225,000 1,284,000
----------- -----------
Total current liabilities 12,374,000 6,541,000
Deferred revenue 1,799,000 1,229,000
Long-term debt, exlcuding current portion -- --
----------- -----------
Total liabilities 14,173,000 7,770,000
----------- -----------
Shareholders' equity:
10% Cumulative convertible preferred stock, $.005 par value, 10,000,000
shares authorized; issued and oustanding 162,612 in 1996 and 1995 1,000 1,000
Common Stock, $.005 par value, 50,000,000 shares authorized; shares issued
and outstanding 23,049,856 in 1996 and 22,502,707 in 1995 115,000 112,000
Additional paid-in capital 58,600,000 56,747,000
Accumulated deficit (25,334,000) (23,187,000)
----------- -----------
33,382,000 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 30,831,000 33,451,000
----------- -----------
Total liabilities and shareholders' equity $45,004,000 41,221,000
=========== ===========
See accompanying notes to consolidated financial statements.
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Network services $ 5,176,000 3,399,000 10,044,000 6,989,000
Online/Internet services 449,000 142,000 683,000 239,000
Advertising services 257,000 241,000 494,000 506,000
Equipment sales, net 1,021,000 604,000 1,509,000 1,025,000
License fees and royalties and other revenue 266,000 209,000 515,000 233,000
----------- ----------- ----------- -----------
Total revenues 7,169,000 4,595,000 13,245,000 8,992,000
----------- ----------- ----------- -----------
Operating expenses:
Operating costs 1,443,000 909,000 2,799,000 1,647,000
Selling, general and administrative 4,655,000 1,830,000 10,452,000 4,472,000
Litigation, legal and professional fees 725,000 133,000 1,048,000 1,317,000
Equipment and lease expense 1,138,000 952,000 2,290,000 1,882,000
Depreciation and amortization 427,000 375,000 773,000 740,000
----------- ----------- ----------- -----------
Total operating expenses 8,388,000 4,199,000 17,362,000 10,058,000
----------- ----------- ----------- -----------
Operating income (loss) (1,219,000) 396,000 (4,117,000) (1,066,000)
Other income (expense)
Interest income 45,000 24,000 165,000 88,000
Interest expense (65,000) (71,000) (113,000) (79,000)
----------- ----------- ----------- -----------
(20,000) (47,000) 52,000 9,000
Earnings (loss) from continuing operations
before income taxes (1,239,000) 349,000 (4,065,000) (1,057,000)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Earnings (loss) from continuing operations (1,239,000) 349,000 (4,065,000) (1,057,000)
Gain (loss) from discontinued operations 1,889,000 (224,000) 1,918,000 (715,000)
----------- ----------- ----------- -----------
Net earnings (loss) $ 650,000 125,000 (2,147,000) (1,772,000)
=========== =========== =========== ===========
Net earnings (loss) per share:
Continuing operations $ (0.05) 0.02 (0.18) (0.05)
Discontinued operations 0.08 (0.01) 0.08 (0.04)
----------- ----------- ----------- -----------
Net earnings (loss) 0.03 0.01 (0.10) (0.09)
=========== =========== =========== ===========
Weighted average number of shares
outstanding 23,848,000 20,949,000 22,656,000 19,459,000
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Cash flows from (used for) operating activities:
Net earnings (loss) $ 650,000 125,000 (2,147,000) (1,772,000)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities:
Gain on discontinued operations (3,200,000) -- (3,200,000) --
Depreciation and amortization 415,000 279,000 774,000 491,000
Provision for doubtful accounts (9,000) 31,000 88,000 83,000
Loss from discontinued operations 1,311,000 -- 1,282,000 --
Accrual for issuance of warrants 1,020,000 -- 1,617,000 --
Gain on sale and leaseback transactions (273,000) (463,000) (427,000) (639,000)
Loss on sale of marketable securities
available for sale -- -- -- 39,000
Amortization of deferred gain on sale
and leaseback transactions (257,000) (450,000) (467,000) (456,000)
Change in discontinued operations (3,121,000) -- (3,102,000) --
Change in assets and liabilities:
Accounts receivable - trade (1,382,000) (228,000) (1,580,000) (831,000)
Inventories, net 1,487,000 (249,000) 926,000 (798,000)
Prepaid expenses and other assets (2,502,000) (1,971,000) (2,543,000) (2,257,000)
Accounts payable and accrued liabilities 4,074,000 774,000 3,284,000 1,234,000
Deferred revenue 154,000 165,000 79,000 343,000
Customer deposits (11,000) 84,000 (59,000) 155,000
----------- ---------- ---------- ----------
Net cash used for operating
activities (1,644,000) (1,903,000) (5,475,000) (4,408,000)
----------- ---------- ---------- ----------
Cash flows from (used for) investing activities:
Capital expenditures (238,000) (313,000) (528,000) (566,000)
Notes receivable - officers and directors (501,000) (175,000) 563,000 (275,000)
Software development costs (353,000) (698,000) (824,000) (1,109,000)
Proceeds form sales of marketable securities
available for sale -- 130,000 -- 591,000
Proceeds from sale and leaseback
transactions 3,000,000 1,453,000 3,875,000 2,250,000
Deposits related to sale and leaseback
transactions (729,000) 187,000 (354,000) (63,000)
----------- ---------- ---------- ----------
Net cash provided by (used for)
investing activities 1,179,000 584,000 2,732,000 828,000
----------- ---------- ---------- ----------
(Continued)
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
Three Three Six Six
Months Months Months Months
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
----------- --------- ---------- ----------
Cash flows from (used for) financing activities:
Principal payments on debt (9,000) (2,000) (15,000) (7,000)
Proceeds from issuance of debt 599,000 1,064,000 2,371,000 1,830,000
Purchase of equipment related to
sale and leaseback transactions (1,721,000) (675,000) (2,228,000) (1,185,000)
Proceeds from issuance of common stock,
less issuance costs paid in cash 255,000 2,376,000 240,000 2,705,000
Payments for purchase of treasury stock -- -- (2,330,000) --
----------- --------- ---------- ----------
Net cash provided by (used for)
financing activities (876,000) 2,763,000 (1,962,000) 3,343,000
----------- --------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (1,341,000) 1,444,000 (4,705,000) (237,000)
Cash and cash equivalents at beginning
of period 3,121,000 724,000 6,485,000 2,405,000
----------- --------- ---------- ----------
Cash and cash equivalents at end of period $ 1,780,000 2,168,000 1,780,000 2,168,000
=========== ========= ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 33,000 44,000 66,000 66,000
----------- --------- ---------- ----------
Income taxes $ -- -- -- --
----------- --------- ---------- ----------
See accompanying notes to consolidated financial statements.
6
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 June 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 (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 June 30, 1996 are not necessarily indicative of the results to
be expected for the fiscal year ending December 31, 1996.
The financial statements as of and for the quarter ended June 30, 1996 and
for the six months ended June 30, 1996 have been amended to be consistent
with the method of accounting for the consolidation of the accounts and
activity related to IWN L.P. and stock-based compensation pursuant to SFAS
123 as reported in the Annual Report on Form 10-K for the year ended
December 31, 1996.
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 (New World) subsidiary
to The 3DO Company (3DO) for approximately $13,600,000. In consideration of
the sale, 3DO will issue to the Company 1,200,000 shares of common stock of
3DO and will assume approximately $1,600,000 of liabilities of New World.
The number of shares to be issued is subject to downward adjustment in
certain events. The Company anticipates the eventual number of shares to be
received will approximate 1,030,000. 3DO has guaranteed that the cash value
realized by the Company upon sale of the shares will not be less than $10
per share.
The disposal of New World has been accounted for as a discontinued
operation. Accordingly, New World is reported as a discontinued operation at
June 30, 1996 and the consolidated financial statements for all prior
periods have been reclassified to report separately the net assets and
operating results of the discontinued business.
7
NTN COMMUNICATIONS,INC. AND SUBSIDIARIES
Notes to Financial Statements, Continued
(Unaudited)
The gain (loss) resulting from the sale of New World and revenues from
discontinued operations for each period reported is as follows.
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Gain on disposal of New World $ 4,200,000 -- 4,200,000 --
Loss from discontinued
operations of New World (1,311,000) (224,000) (1,282,000) (715,000)
Tax provision for gain on sale (1,000,000) -- (1,000,000) --
------------ ------------ ------------ ------------
Total 1,889,000 (224,000) 1,918,000 (715,000)
============ ============ ============ ============
Revenues $ 841,000 714,000 2,085,000 1,420,000
============ ============ ============ ============
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 23,848,000 and 20,949,000 common
and common equivalent shares for the three months ended June 30, 1996
and 1995, respectively. These amounts include the dilutive effect of
common stock equivalents.
Earnings per-share amounts are based on 22,656,000 and 19,459,000 common
shares for the six months ended June 30, 1996 and 1995, respectively.
The impact of the common stock equivalents would have had an
antidilutive effect for these periods due to the reported loss and
accordingly have not been included in the computation.
Earnings per share for 1996 periods as presented have been adjusted to
reflect amended results of operations for the three and six-month
periods ended June 30, 1996. Previously reported earnings per share for
the three months ended June 30, 1996 was $0.10 compared to the revised
amount of $0.03. Previously reported earnings per share for the six
months ended June 30, 1996 was $0.11 compared to the revised amount of
$(0.10).
8
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 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.
The financial statements as of and for the quarter ended June 30, 1996 and for
the six months ended June 30, 1996 have been amended to be consistent with the
method of accounting for the consolidation of the accounts and activity related
to IWN L.P. and stock-based compensation pursuant to SFAS 123 as reported in the
Annual Report on Form 10-K for the year ended December 31, 1996.
Further, the amended financial statements are presented in the same format as
reported in the Annual Report on Form 10-K for the year ended December 31, 1996.
This format better represents the business operations of the Company and makes
for an easier comparison to current reports.
Material Changes in Results of Operations
- -----------------------------------------
Three month periods ended June 30, 1996 and June 30, 1995
The Company recognized net earnings, as amended, of $650,000 for the three
months ended June 30, 1996 compared to net earnings of $125,000 for the three
months ended June 30, 1995. 1995 results have been restated to reflect the sale
of New World in 1996 as a discontinued operation. The 1996 results include a
gain on the sale of the Company's New World subsidiary of $1,889,000, net of
taxes and operating losses during the disposition period. The increase in 1996
is also attributable to an increase in total revenues, coupled with controlled
cost of sales and reduced operating expenses, net of costs associated with
subsidiary operations.
For the current quarter, total revenues increased 56% from $4,595,000 to
$7,169,000. This increase is the result of growth in many of the Company's
principal revenue activities.
Network Services increased 52% from $3,399,000 to $5,176,000. The increase is
primarily due to an expansion in the number of subscriber locations contracting
for services from the Company. Online/Internet services increase 216% from
$142,000 to $449,000. The increase is due to growth in the number of online and
internet customers.
Equipment Sales increased 69% from $604,000 to $1,021,000. Equipment sales
include both sale and leaseback transactions and direct sales to the Company's
customers. The Company entered into a relatively larger sales and leaseback
transaction in the current quarter along with a substantial sale to a foreign
licensee. 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 June 30, 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 assurance.
9
Operating Costs increased 58% from $909,000 in the prior year's quarter to
$1,443,000 in the current year's quarter, which reflects the expansion in the
number of subscribers contracting for services. Selling, General and
Administrative expenses increased 154% from $1,830,000 to $4,655,000. Included
in Selling, General and Administrative expenses are charges for issuances of
warrants totaling $1,020,000 recorded in accordance with SFAS 123. Selling,
General and Administrative expenses also increased due to general inflation and
new sales and marketing efforts. Litigation, legal and professional fees
increased from $133,000 to $725,000. In June 1996 the Company entered into a
proposed settlement of a class action suit to avoid costly and protracted
litigation. As a result of the proposed settlement the Company recorded a
reserve of $400,000 which will be paid if the settlement is approved by the
Court.
Six month periods ended June 30, 1996 and June 30, 1995
The Company incurred a net loss, as amended, of $2,147,000 for six months ended
June 30, 1996 compared to $1,772,000 for the six months ended June 30, 1995. For
the current six month period, total revenues increased 47% from $8,992,000 to
$13,245,000. This increase is the result of growth in many of the Company's
principal revenue activities. 1995 results have been restated to reflect the
sale of New World in 1996 as a discontinued operation.
Network Services increased 44% from $6,989,000 to $10,044,000. The increase is
primarily due to an expansion in the number of subscriber locations contracting
for services from the Company. Online/Internet services increase 186% from
$239,000 to $683,000. The increase is due to growth in the number of online an
internet customers.
Equipment Sales rose 47% from $1,025,000 to $1,509,000. Equipment sales include
both sale and leasebank transactions and direct sales to the Company's
customers. The Company entered into relatively larger sale and leaseback
transactions in the current six month period along with a substantial sale to a
foreign licensee. 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 June 30, 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 assurances.
Operating Costs increased 70% from $1,647,000 in the prior year's six-month
period to $2,799,000 in the current year's six-month period, which generally
reflects the expansion in the number of subscribers contracting for services.
Selling, General and Administrative expenses increased 134% from $4,472,000 to
$10,452,000 due to charges for issuance of warrants totaling $1,617,000 recorded
pursuant to SFAS 123, operating costs associated with the LearnStar and IWN
subsidiaries, general inflation and new sales and marketing efforts. Litigation,
legal and professional fees decreased from $1,317,000 to $1,048,000. In
June 1996 the Company entered into a proposed settlement of a class action suit
to avoid costly and protracted litigation. As a result of the proposed
settlement the Company recorded a reserve of $400,000 which will be paid if the
settlement is approved by the Court. In 1995, the Company incurred many legal
expenses in connection with ongoing litigation.
Material Changes in Financial Condition
- ---------------------------------------
The following analysis compares information as of the most recent unaudited
balance sheet date of June 30, 1996 to the prior year-end audited balance sheet
dated December 31, 1995.
Total assets increased 9% from $41,221,000 to $45,004,000 from December 31, 1995
to June 30, 1996. The increase in assets is primarily the result of the sale of
New World Computing. Cash and cash equivalents
10
decreased from $6,485,000 to $1,780,000 at June 30, 1996 due to cash used to
repurchase shares of the Company's stock to fund operations.
The 60% increase in Accounts Receivable - Trade from $2,668,000 to $4,260,000
at June 30, 1996, reflects the overall growth of the Company in its primary
operations. Accounts Receivable - 3DO reflects the amount owing to the Company
as a result of the sale of New World. Accounts Receivable - Other increased
from $1,750,000 to $3,221,000, the result of a large sale and leaseback
transaction in the second quarter. The decrease in Inventory from $5,618,000 to
$4,692,000 is primarily the result of those same sale and leaseback
transactions.
Total liabilities increased 82% from $7,770,000 to $14,173,000 from December 31,
1995 to June 30, 1996. The increase in Accounts Payable and Accrued Liabilities
from $2,862,000 to $6,136,000 reflects the overall growth of the Company, the
timing of payments, an accrual for liabilities incurred in the sale of New World
including a provision for taxes of $1,000,000, and an accrual for a legal
settlement of $400,000. Short-term borrowings increased 172% from $1,371,000 to
$3,727,000 as a result of borrowings by the IWN L.P. subsidiary to fund its
operations. Customer Deposits remained steady from $1,284,000 to $1,225,000 from
December 31, 1995 to June 30, 1996 due to steady receipts and application of
deposits received from new customers throughout the period. The increase in
aggregate Deferred Revenue (long-term and current) from $2,253,000 to $3,085,000
reflects the additional amounts deferred due to sale and leaseback transactions
in the second quarter, net of amortization. Deferred gains are amortized to
revenue over three-year periods.
Overall, the Company's working capital decreased $2,899,000 from December 31,
1995 to June 30, 1996, primarily the result of liabilities incurred in
conjunction with the sale of New World and short-term borrowings incurred by
IWN L.P. 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. An update of events
subsequent to that Report follows.
NTN Communications, Inc. vs. Interactive Network, United States District Court
for the Northern District of California, filed June 11, 1992 and related award
of attorneys' fees; and NTN Communications, Inc. vs. Interactive Network, filed
in the Superior Court for the County of Santa Clara, California, on April 28,
1993; and Interactive Network vs. NTN Communications, Inc., filed in the
Superior Court for the County of Santa Clara, California, on February 28, 1994.
With the Court's 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.
NTN Communications, Inc., NTN Sports, Inc. and NTN Canada, Inc. vs. David
Lockton and Interactive Network, Inc., filed on June 12, 1992, in the Federal
Court of Canada, Trial Division. The Company, along with its Canadian licensee,
NTN Canada and NTN Canada's subsidiary, NTN Sports, Inc., also filed an action
against IN and David B. Lockton (the President of IN), seeking a declaration
that the Company's activities, and those of the Company's licensee in Canada, do
not infringe the IN/Canada patent. The Company thereafter amended its claims to
include an assertion of invalidity of the Canadian patent based upon untrue and
material allegations made by IN in the Petition for the Canadian patent. No
discovery has been undertaken. The existence of this litigation has not affected
the operations of the Company's Canadian licensee in Canada.
Interactive Network vs. NTN Communications, Inc., NTN Sports, Inc. and NTN
Canada, filed June 18, 1992, in the Federal Court of Canada, Trial Division,
seeking a declaration that the IN/Canada patent is valid and is infringed by the
Company's games, broadcast and associated equipment sold in Canada, an
injunction against such alleged infringement, and damages (of an unspecified
amount) based on certain games sold in Canada. IN has not taken any action in
furtherance of this litigation. The existence of this litigation has not
affected the operations of the Company's Canadian licensee in Canada.
In June, 1996, the Company entered into a proposed Settlement Agreement to
resolve litigation filed by various shareholders of the Company. The case,
originally filed in June, 1993, in the United States District Court for the
Southern District of California (San Diego), is a consolidation of four
lawsuits seeking class action status to recover unspecified damages for a drop
in the market price of the Company's common stock following an announcement that
an anticipated agreement under which the Company would sell certain equipment
and services to an arm of the Mexican government may be put out for bid. Whereas
the Company vigorously defended this litigation and believes, in part, based
upon the opinion of outside counsel, in the merits of its defense, the Company
has entered into the proposed Settlement Agreement to resolve this matter
out-of-court to avoid costly and protracted litigation, in the best interests of
its shareholders.
The terms of the settlement, which is contingent upon notification to eligible
shareholders and approval by the Court, are briefly described as follows: A
settlement fund will consist of $400,000 in cash plus 565,000 warrants to
purchase the common stock of NTN (the "Settlement Warrants"). Each Settlement
Warrant will have a term of three years from the Date of Issuance, as that term
is defined in the Agreement, and an exercise price equal to the average closing
price per share of NTN common stock on the American Stock Exchange during the
twenty trading days immediately preceding the Date of Issuance. During the
period from the second anniversary of the Date of Issuance until the expiration
or exercise of a Settlement Warrant, the holder of such Settlement Warrant shall
have the right, but not the
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obligation, to put the Settlement Warrant to NTN for repurchase at a price of
$3.25 per Settlement Warrant (the "Put Right"), provided, however, that this Put
Right shall expire once, if ever, during the period from and after the Date of
Issuance that the closing price per share of the NTN common stock on the
American Stock Exchange is more than $3.25 above the exercise price of the
Settlement Warrants on any seven trading days, whether consecutive or not. Upon
expiration of the Put Right, NTN shall have no further obligation to repurchase
the Settlement Warrants. In no event shall NTN have any obligation to repurchase
its common stock. For further information pertaining to the details of the
proposed settlement, reference is made to the Form 8-K filed by the Company on
July 24, 1996.
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 lawsuit
seeks unspecified damages and alleges violations of securities laws based upon
the Company's projections for the fourth quarter of 1994 and for fiscal year
1994, and further alleges that certain insiders sold stock on information not
generally known to the public. The Company has denied liability based upon the
allegations contained in the Complaint which does not contain any statement or
demand for a specific amount of damages. Much discovery has been undertaken.
Most recently, the Company was successful on its motion to disqualify three of
the five law firms from representing the plaintiffs in this action, including
co-lead, local San Diego counsel. The Company intends to continue to vigorously
contest the matter.
On July 3, 1995, a single shareholder filed a separate lawsuit in Texas
containing allegations essentially identical to those raised in the
shareholder lawsuit filed in April, 1995. The Company denies the allegations in
the complaint and has filed its own counterclaim against third parties for
indemnification. Upon the Company's motion, this case was transferred from Texas
to California, where the only action taken since the date of transfer has been
discovery propounded by 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
Company's financial position or results of operations.
Item 6. EXHIBITS AND REPORTS ON REPORT 8-K.
Form 8-K filed June 24, 1996 for proposed settlement of the Class Action
Litigation.
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SIGNATURES
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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 7, 1997 By: /s/ GERALD SOKOL, JR.
-------------------------
Gerald S. Sokol, Jr.
President and Chief Operating Officer
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