UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 December 11, 1997: 23,672,000 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, 1997 (Unaudited) and December 31, 1996
June 30, December 31,
Assets 1997 1996
------ --------------- ---------------
Current assets:
Cash and cash equivalents $ 3,045,000 6,579,000
Accounts receivable - trade, net of allowance for
doubtful accounts 2,767,000 2,031,000
Accounts receivable - officers and directors --- 199,000
Prepaid expenses and other current assets 1,024,000 1,846,000
------------ ------------
Total current assets 6,836,000 10,655,000
Broadcast equipment and fixed assets, net 9,445,000 10,103,000
Software development costs, net 4,178,000 4,400,000
Retirement plan assets --- 2,527,000
Other assets 687,000 819,000
------------ ------------
Total assets $ 21,146,000 28,504,000
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 5,884,000 6,182,000
Short-term borrowings 3,960,000 5,060,000
Deferred revenue 486,000 254,000
Customer deposits 1,079,000 1,279,000
------------ ------------
Total current liabilities 11,409,000 12,775,000
Deferred revenue - long term 675,000 1,000,000
Accrual for settlement warrants 1,403,000 1,291,000
Other long-term liabilities 2,726,000 3,216,000
------------ ------------
Total liabilities 16,213,000 18,282,000
------------ ------------
Shareholders' equity:
10% Cumulative convertible preferred stock, $.005 par value,
10,000,000 shares authorized; issued and outstanding 161,000
in 1997 and 1996 1,000 1,000
Common stock, $.005 par value, 50,000,000 shares authorized;
shares issued and outstanding 23,599,000 in 1997 and
23,177,000 in 1996 117,000 116,000
Treasury stock, 782,000 shares in 1997 and 1996 at cost (3,339,000) (3,339,000)
Additional paid-in capital 62,868,000 59,583,000
Accumulated deficit (54,714,000) (46,139,000)
------------ ------------
Total shareholders' equity 4,933,000 10,222,000
Total liabilities and shareholders' equity $ 21,146,000 28,504,000
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1997 and 1996
(Unaudited)
Three Months Three Months Six Months Six Months
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------ ---------- ----------
Network services $ 5,087,000 5,176,000 10,056,000 10,044,000
Online/Internet services 627,000 449,000 1,475,000 683,000
Advertising revenues 189,000 257,000 434,000 494,000
Equipment sales, net 40,000 1,021,000 227,000 1,509,000
License and royalty fees and other revenue 318,000 266,000 609,000 515,000
------------ ------------ ---------- ----------
Total revenues 6,261,000 7,169,000 12,801,000 13,245,000
Operating expenses:
Operating costs 1,819,000 1,443,000 4,028,000 2,799,000
Selling, general and administrative 4,446,000 4,655,000 13,144,000 10,452,000
Litigation, legal and professional fees 714,000 725,000 1,058,000 1,048,000
Equipment lease expense 232,000 1,138,000 466,000 2,290,000
Depreciation and amortization 1,171,000 427,000 2,424,000 773,000
------------ ------------ ---------- ----------
Total operating expenses 8,382,000 8,388,000 21,120,000 17,362,000
Operating loss (2,121,000) (1,219,000) (8,319,000) (4,117,000)
Other income (expense)
Interest income 84,000 45,000 146,000 165,000
Interest expense (191,000) (65,000) (402,000) (113,000)
------------ ------------ ---------- ----------
(107,000) (20,000) (256,000) 52,000
Loss from continuing operations before
income taxes (2,228,000) (1,239,000) (8,575,000) (4,065,000)
Provision for income taxes -- -- -- --
------------ ------------ ---------- ----------
Loss from continuing operations (2,228,000) (1,239,000) (8,575,000) (4,065,000)
Gain from discontinued operations, net -- 1,889,000 -- 1,918,000
------------ ------------ ---------- ----------
Net earnings (loss) $ (2,228,000) 650,000 (8,575,000) (2,147,000)
============ ============ ========== ==========
Net earnings (loss) per share:
Continuing operations $ (0.10) (0.05) (0.37) (0.18)
Discontinued operations -- 0.08 -- 0.08
------------ ------------ ---------- ----------
Net earnings (loss) $ (0.10) 0.03 (0.37) (0.10)
============ ============ ========== ==========
Weighted average number of shares outstanding 22,345,000 23,848,000 23,303,000 22,656,000
============ ============ ========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three and Six Months Ended June 30, 1997 and 1996
(Unaudited)
Three Three Six Six
Months Months Months Months
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Cash flows from (used for) operating activities:
Net income (loss) $(2,228,000) 650,000 (8,575,000) (2,147,000)
Adjustments:
Gain on discontinued operations --- (3,235,000) --- (3,235,000)
Depreciation and amortization 1,171,000 415,000 2,424,000 774,000
Provision for doubtful accounts 250,000 (9,000) 475,000 88,000
Loss from discontinued operations --- 1,346,000 --- 1,346,000
Accrual for issuance of warrants 630,000 1,020,000 2,513,000 1,617,000
Accrual for settlement warrants 56,000 --- 112,000 ---
(Gain) loss on sale and leaseback
transactions --- (273,000) --- (427,000)
Amortization of deferred gain on sale and
leaseback transactions 74,000 (257,000) 136,000 (467,000)
Change in discontinued operations --- (3,121,000) --- (3,121,000)
Changes in assets and liabilities:
Accounts receivable - trade (734,000) (1,382,000) (1,012,000) (1,580,000)
Inventory --- 1,487,000 --- 926,000
Prepaid expenses and other assets 2,740,000 (2,502,000) 3,331,000 (2,543,000)
Accounts payable and accrued liabilities (1,053,000) 4,074,000 (788,000) 3,284,000
Deferred revenue (122,000) 154,000 (229,000) 79,000
Customer deposits (82,000) (11,000) (200,000) (59,000)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 702,000 (1,644,000) (1,813,000) (5,465,000)
----------- ----------- ----------- -----------
Cash flows from (used for) investing activities:
Capital expenditures (151,000) (238,000) (809,000) (528,000)
Notes receivable - related parties --- (501,000) --- 563,000
Software development costs (276,000) (353,000) (585,000) (824,000)
Proceeds from sale and leaseback transactions --- 3,000,000 --- 3,875,000
Deposits related to sale and leaseback
transactions --- (729,000) --- (354,000)
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (427,000) 1,179,000 (1,394,000) 2,732,000
----------- ----------- ----------- -----------
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three and Six Months Ended June 30, 1997 and 1996
(Unaudited)
Three Months Three Months Six Months Six Months
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------ ----------- -----------
Cash flows from (used for) financing activities:
Principal payments on debt $(5,570,000) (9,000) (5,570,000) (15,000)
Proceeds from issuance of debt 4,315,000 599,000 4,470,000 2,371,000
Purchase of equipment related to sale and
leaseback transactions -- (1,721,000) -- (2,228,000)
Proceeds from issuance of common stock,
less issuance costs paid in cash 559,000 255,000 773,000 240,000
Payments for purchase of treasury stock -- -- -- (2,330,000)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (696,000) (876,000) (327,000) (1,962,000)
----------- ----------- ----------- -----------
Net decrease in cash and cash equivalents (421,000) (1,341,000) (3,534,000) (4,695,000)
Cash and cash equivalents at beginning of period 3,466,000 3,121,000 6,579,000 6,475,000
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 3,045,000 1,780,000 3,045,000 1,780,000
=========== =========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ -- 33,000 -- 66,000
=========== =========== =========== ===========
Income taxes $ -- -- -- --
=========== =========== =========== ===========
See accompanying notes to unaudited 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, 1996, which report incorporated the notes to the
Company's year-end financial statements.
2. Unaudited Information.
---------------------
The June 30, 1997 and 1996 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 the results of the interim periods presented. The results of
operations for the period ended June 30, 1997 are not necessarily indicative of
the results to be expected for the fiscal year ending December 31, 1997.
Certain items in the prior year consolidated financial statements have
been reclassified to conform to the format used for the current periods
presented. The 1996 financial statements presented herein agree to the amended
financial statements as presented in the 10Q/A for the period ended
June 30, 1996.
3. Management Reorganization.
-------------------------
In March, 1997, the Company announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board, and Daniel C. Downs resigned as President.
In connection with the reorganization ("Reorganization"), other personnel
changes include the resignation of Mr. Ronald Hogan, as Senior Vice President,
and the terminations of Mr. Gerald McLaughlin, formerly Executive Vice
President, and Mr. Michael Downs, formerly President and CEO of LearnStar. The
Company has entered into separate Resignation and General Release Agreements
("Agreements") with each of the former officers for the purpose of settling
their prior employment agreements and other contracts and arrangements with the
Company. In compliance with the Agreements, NTN will continue to pay the former
executives their annual salaries and other benefits for the remaining terms of
their employment agreements with NTN, which expire on or before December 31,
1999. Charges for severance and other costs associated with the Reorganization
recorded in 1996 were $5,092,000. A charge for severance and other costs
associated with the Reorganization was $5,252,000 in 1997, including accreted
interest expense. The Company has recorded the charges in 1996 and 1997 in
accordance with Emerging Issues Task Force Issues No. 94 - 3.
4. Loan from GTECH Corp.
--------------------
In June 1997, the Company announced that it had signed a letter of intent
setting forth an agreement in principle to enter into a merger agreement with
GTECH Corp. On August 6, 1997 the Company and GTECH mutually agreed to
terminate the previously announced letter of intent. However, in connection
with the letter of intent, GTECH agreed to lend $3.7 million to the Company to
cover its obligation to repay Symphony for its interest in IWN. The loan, which
bears interest at 13%, is due and payable on September 15, 1997.
5. Discontinued Operations - Sale of New World Computing.
-----------------------------------------------------
On June 30, 1996 the Company sold all of the assets and business of its
New World Computing subsidiary to The 3DO Company. The disposal of the New World
has been accounted for as a discontinued
7
operation. Accordingly, the consolidated financial statements for the quarter
ended June 30, 1996 report separately the operating results of the discontinued
business.
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.
For those periods with a net loss, the impact of the common stock valents
would have had an antidilutive effect for these periods and accordingly have not
been included in the computation.
Earnings per share for 1996 as presented has been adjusted to reflect the
amended results of operations for the 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).
7. Contingencies.
-------------
The Company is party to several pending settlements and legal
proceedings as described below.
On April 18, 1995, a class-action lawsuit entitled Lenora Isaacs, On
behalf of Herself and All Others Similarly Situated vs. NTN Communications and
Patrick J. Downs, was filed in United States District Court for the Southern
District of California. The complaint alleges violations of federal securities
laws based upon the Company's projected results of operations for the fourth
quarter of 1994 and for fiscal 1994, and further alleges that certain of the
Company's insiders sold stock on information not generally known to the public.
Although the Company denies liability based upon the allegations contained in
the complaint, in order to avoid the costs and expenses associated with complex
and protracted litigation, the Company has agreed to an out-of-court settlement
having a total value of approximately $1,450,000. It is anticipated that the
settlement would be payable $250,000 in cash and $1,200,000 either in shares of
the Company's Common Stock or in cash at the Company's election. The Common
Stock would be valued for this purpose at approximately the market price of the
Common Stock when the settlement is effected. The proposed settlement is subject
to Court approval, and there can be no assurance that the settlement will be
approved by the Court as proposed.
In May 1997, a shareholder derivative action was filed against the
Company and certain of its former officers and directors. The complaint which
sought injunctive relief and an unspecified amount of damages, alleged that the
Company was injured by a lack of independence and breach of business judgment by
the defendant officers and directors by virtue of the Resignation Agreements and
related transactions entered into between the Company and its former officers in
connection with the recent management reorganization. On June 10, 1997, the
plaintiff voluntarily dismissed the lawsuit, without prejudice. Although the
Company believes, based in part on the opinion of outside counsel, that the
action was without merit, there can be no assurances that the plaintiff or
others similarly situated will not refile the same or a similar action at a
future date.
On June 11, 1997, the Company was included as a defendant in a lawsuit,
entitled Elliot Miller and Jan Iver, Shareholders on Behalf of Themselves and
All Others Similarly Situated vs. NTN Communications, Inc., Patrick J. Downs,
Daniel C. Downs, Donald C. Klosterman, Ronald E. Hogan, Gerald P. McLaughlin and
KPMG Peat Marwick LLP, filed in the United States District Court. The complaint
seeks class-action status for alleged violations of state and federal securities
laws based upon purported omissions from the Company's periodic filings with the
Securities and Exchange Commission. More particularly, the complaint alleges
that the Company and the defendant directors and former officers devised an
"exit strategy" to provide themselves with undue compensation upon their
resignation from the Company. The plaintiffs further allege that the Company's
financial statements misrepresented or omitted information concerning certain
alleged contingent liabilities and phantom assets. According to the plaintiffs,
these alleged misrepresentations and omissions served to inflate the trading
price of the Company's Common Stock. On July 3, 1997, the Company, on behalf of
itself and the named directors and officers, filed a motion to dismiss the
lawsuit. On November 6, 1997, the motion was granted, with leave to amend, as to
the state causes of action and denied as to the federal causes of action. The
Company has submitted this claim to its insurance carriers; however, there can
be no assurances that the insurance carriers will accept coverage or that, if
coverage is accepted, it will be without a reservation of rights by the
carriers.
On August 8, 1997, another purported class-action lawsuit was filed
against the Company in the United States District Court for the Southern
District of California entitled Yehuda Lefkowitz, on Behalf of Himself and
Others Similarly Situated vs. NTN Communications and Patrick J. Downs and Daniel
C. Downs. The complaint, which alleged that defendants made materially false and
misleading statements concerning the Company's business, operations and
products, was voluntarily dismissed by the plaintiff, without prejudice, on
September 3, 1997. Although the Company believes, based in part on the opinion
of outside counsel, that the action was without merit, there can be no
assurances that the original plaintiff or others similarly situated will not
refile the same or a similar action at a future date.
There can be no assurance that any or all of the foregoing claims will
be settled or decided in a manner favorable to the Company. During the pendency
of such claims, the Company will continue to incur the costs of defense of the
same. The Company generally is not insured against the claims made and, if one
or more of the shareholder claims are decided in a manner adverse to the
Company, the resulting liabilities to the Company could materially and adversely
affect the Company's future financial condition and result of operations.
In December 1995, the Company entered into an agreement with Symphony
IWN Investment LLC ("Symphony"), an affiliated company, under which Symphony
invested $3,000,000 for a 10% interest in IWN, Inc., and a limited partner
interest in IWN, L.P., a limited partnership of which IWN, Inc. is the general
partner. The agreement included a provision (the "Symphony Option") entitling
Symphony to elect to cause the Company to repurchase Symphony's shares of IWN,
Inc. and limited partner interest in IWN, L.P. at any time during the period
from April 1, 1997 through December 1, 1997 for specified consideration.
In April 1997, Symphony notified the Company of its election to exercise
the Symphony Option, and in June 1997 the Company paid Symphony approximately
$3,556,000 in satisfaction in full of its obligations under the Symphony Option.
Symphony and Symphony Management Associates, Inc., its affiliate, ("SMA"),
claimed, however, that Symphony also was entitled to approximately $1,000,000 in
additional funds, as well as additional warrants to purchase the Company's stock
based on anti-dilution provisions of a warrant held by Symphony. The Company did
not record any additional amounts with respect to Symphony's and SMA's claims,
since the Company believed, based in part on the advice of outside counsel, that
it had satisfied in full its obligations to Symphony.
On July 1, 1997, the Company and its subsidiary, IWN, Inc., filed a
lawsuit against Symphony and SMA in the Superior Court of California for the
County of San Diego, North County Branch for alleging breach of contract,
specific performance, declaratory relief, and intentional interference with
economic relations. On July 3, 1997, Symphony and SMA filed a countersuit in
Delaware against the Company and IWN, Inc. seeking specific performance by the
Company to deliver a secured promissory note to Symphony in the disputed amount
and declaratory relief with respect to Symphony's right to additional warrants
based upon alleged dilution and attorneys' fees. The Company and IWN, Inc. filed
a motion to dismiss the Delaware lawsuit, and all proceedings in the lawsuit
were precluded pending resolution of the Company's motion. In August 1997, the
parties entered into a settlement and general release agreement under which the
Company paid Symphony $75,000 and issued it 72,500 shares of the Company's
Common Stock. Symphony, in turn, surrendered to the Company all the outstanding
shares of IWN, Inc., the limited partner interest in IWN L.P. and a warrant to
purchase 400,000 shares of the Company's Common Stock held by Symphony.
The Company had been involved as a plaintiff or defendant in various
previously reported lawsuits in Federal courts in both the United States and
Canada involving Interactive Network, Inc. ("IN"). 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.
There remain two lawsuits among the Company, its unaffiliated Canadian licenses
and IN, which were filed in Canada in 1992. No substantive action has been taken
in furtherance of either action. These actions affect only the Canadian
operations of the Company and its Canadian licensee and do not extend to the
Company's operations in the United States or elsewhere. Although they cannot be
estimated with certainty, any damages the Company might incur in the event the
actions are determined adversely to the Company are not expected to be material
to the Company.
Other than as set forth above, there is no material litigation pending
or threatened against the Company.
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) service distribution
fees in the United States; (b) advertising fees, (c) sales of equipment to
foreign licensees; (d) service distribution fees and royalties from foreign
licensees; and (e) licensing fees from foreign and domestic licensees.
On October 25, 1996, the Company reported that it was advised on
September 9, 1996 by the United States Federal Communications Commission that
its Playmaker(R) had not received FCC approval. The Company immediately
suspended shipment of the Playmakers(R) to new NTN Network Locations pending
approval by the FCC. Upon notification, the Company commenced testing its
equipment and submitted its application to the FCC. There was no interruption of
the Company's services to existing NTN Network customers, nor were any of the
Company's Online/Internet Services ever affected. The Company received approval
on January 15, 1997 and immediately began shipments to new Locations, including
approximately 290 new customers which were previously awaiting installation. The
installation of the Locations was completed in January and February 1997. The
Company will also implement a corrective action program to be approved by
the FCC.
The Playmakers(R) are handheld radio frequency devices that contain
rechargeable batteries. Recently manufactured Playmakers(R) have experienced
problems related to noise sensitivity and recharging performance. The Company
has modified the circuit board to address the problems, and is in the process of
upgrading the approximately 14,000 affected Playmakers(R). The Company believes
the modifications will be completed by August 1997. These problems have
negatively affected the number of new Network Services customers signed up by
the Company and have caused an increase in the number of "disconnects" -
customers terminating service and an increase in accounts receivable from
dissatisfied customers.
New locations signed up by the Company during the suspension of
Playmakers(R) shipments were granted up to one day of credit by the Company
against future billings for each day the sites could not utilize the NTN system.
The Company estimates that the temporary suspension of Playmaker(R) shipments
and the credits extended by the Company to backlogged locations has resulted in
reduced cash flow of approximately $350,000 during the first half of 1997 from
all affected locations.
In addition, the Company has discovered that the "basestation" - a device
used in conjunction with Playmakers(R) - has not been performing satisfactorily.
The Company recently decided to recall all poorly performing basestations and
replace all such equipment with a recently upgraded and improved model in
customer locations, which process will commence in the second quarter. The
Company recorded a charge of $650,000 in the quarter ended March 31, 1997 for
the replacement and repair of defective equipment.
The financial statement as of and for the quarter ended June 30, 1996 and
for the six months ended June 30, 1996 has 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.
Material Changes in Results of Operations
- -----------------------------------------
Three-month periods ended June 30, 1997 and June 30, 1996
9
The Company incurred a net loss of $2,228,000 for the three months ended
June 30, 1997 compared to a net profit of $650,000 for the three months ended
June 30, 1996. The 1996 results include a net gain from discontinued operations
related to the sale of New World of $1,889,000.
For the current quarter, total revenues decreased 13% from $7,169,000 to
$6,261,000, primarily as a result of a large decrease in equipment sales. In
conjunction with the Company's decision to no longer enter into sale and
leaseback financing arrangements, equipment sales is a minor activity in 1997.
Total revenue, excluding Net Equipment Sales, increased 1% in the second quarter
of 1997 compared to the same quarter of 1996.
Network Services decreased 2% from $5,176,000 to $5,087,000. The decrease
is primarily due to a lower pricing strategy, offset by a growth in the number
of subscriber locations contracting for services. Online/Internet Services
increased 40% from $449,000 to $627,000 due to an increasing number of on-line
customers. Advertising revenues decreased 26% from $257,000 to $189,000 due to a
smaller number of commercial spots sold.
Equipment Sales, net of cost of sales decreased 96% from $1,021,000 to
$40,000. Equipment sales are predominantly due to sales to foreign licensees
which are subject to outside influences and can occur unevenly throughout the
year. Equipment sales have been highly volatile in the past and are expected to
remain so, as they are dependent on the timing of expansion plans of the
Company's foreign licensees and its educational customers.
Operating Expenses related to Network Services and Online/Internet
Services increased 26% from $1,443,000 in the prior years quarter to $1,819,000
in the current years quarter. The increase is primarily attributable to a change
in the rate structure for commissions and service fees paid to sales and service
reps and operating expenses commencing at IWN L.P. Selling, General and
Administrative Expenses decreased 4% from $4,655,000 to $4,446,000. The decrease
in 1997 is primarily due to cutbacks in personnel and other operating expenses
offset by additional charges to increase the allowance for doubtful accounts of
$250,000. Also, stock-based compensation charges recorded in accordance with
SFAS 123 were $630,000 in 1997 compared to $1,020,000 in 1996. Stock-based
compensation charges result from the issuance of warrants or options to non-
employees and will vary from period to period.
Deprecation and Amortization Expense increased 174% from $427,000 to
$1,171,000 due to depreciation charges resulting from the buyout of equipment
lease commitments late in 1996 in which the Company now owns most of its
Broadcast equipment. Equipment Lease Expense decreased 80% from $1,138,000 to
$232,000 also due to the buyout of leases in late 1996. Interest Expense
increased from $65,000 to $191,000 largely due to interest charges related to
the IWN Put Option, and accretion of interest for the settlement warrant
liability and the severance liability for the Reorganization that was discounted
when recorded.
Six-month periods ended June 30, 1997 and June 30, 1996
In March, 1997, the Company announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board, and Daniel C. Downs resigned as President.
In connection with the reorganization ("Reorganization"), other personnel
changes include the resignation of Mr. Ronald Hogan, as Senior Vice President,
and the terminations of Mr. Gerald McLaughlin, formerly Executive Vice
President, and Mr. Michael Downs, formerly President and CEO of LearnStar. The
Company has entered into separate Resignation and General Release Agreements
("Agreements") with each of the former officers for the purpose of settling
their prior employment agreements and other contracts and arrangements with the
Company. In compliance with the Agreements, NTN will continue to pay the former
executives their annual salaries and other benefits for the remaining terms of
their employment agreements with NTN, which expire on or before December 31,
1999. Charges for severance and other costs associated with the Reorganization
recorded in 1996 were $5,092,000. A charge for severance and other costs
associated with the Reorganization was $5,252,000 in 1997, including accreted
interest expense. The Company has recorded the charges in 1996 and 1997 in
accordance with Emerging Issues Task Force Issues No. 94 - 3.
10
The Company incurred a net loss of $8,575,000 for the six months ended
June 30, 1997 compared to a net loss of $2,147,000 for the six months ended June
30, 1996. The 1996 results include a gain from discontinued operations related
to the sale of New World of $1,918,000. The 1997 results include significant
charges totaling $5,252,000 related to the Reorganization, a $650,000 charge
related to defective equipment and a $400,000 charge related to the possible
settlement of litigation.
For the six months ended June 30, 1997 period, total revenues decreased
3% from $13,245,000 to $12,801,000, primarily as a result of a large decrease in
equipment sales. In conjunction with the Company's decision to no longer enter
into sale and leaseback financing arrangements, equipment sales have become a
minor activity under current operations. Total revenue for the six months ended
June 30, 1997, excluding Net Equipment Sales, increased 7% over the
corresponding prior year period.
Network Services increased slightly for the current six-month period over
1996 from $10,044,000 to $10,056,000. This is primarily due to a lower pricing
strategy, offset by a growth in the number of subscriber locations contracting
for services. Online/Internet Services increased 116% from $683,000 to
$1,475,000 due to an increasing number of on-line customers, including America
On-Line. Advertising revenues decreased 12% during the current six-month period
from $494,000 to $434,000 due to a smaller number of commercial spots sold.
Equipment Sales, net of cost of sales during the current six-month period
decreased 85% from $1,509,000 to $227,000. Equipment sales are predominantly
due to sales to foreign licensees which are subject to outside influences and
can occur unevenly throughout the year. Equipment sales have been highly
volatile in the past and are expected to remain so, as they are dependent on the
timing of expansion plans of the Company's foreign licensees and its educational
customers.
Operating Expenses related to Network Services and Online/Internet
Services rose from $2,799,000 in the prior year's period to $4,028,000 in the
current year's period, an increase of 44%. The increase is largely attributable
to a charge of $650,000 for the replacement and repair of defective equipment,
to a slight expansion in the number of subscribers and online services
contracting for services, and a reduction in the rate structure for commissions
and service fees paid to sales and service reps. Selling, General and
Administrative Expenses increased 26% from $10,452,000 to $13,144,000. Included
in Selling, General and Administrative Expenses are charges for the
Reorganization totaling $3,277,000. Also included are stock-based compensation
charges made in compliance with the new accounting standards prescribed by SFAS
123 which were $2,513,000 in 1997 compared to $1,617,000 in 1996. Stock-based
compensation charges result from the issuance of warrants or options to non-
employees and will vary from period to period. Charges in 1997 include
$1,450,000 that resulted from extension of the exercise period of warrants owned
by certain former officers pursuant to the Reorganization. Exclusive of these
specific charges, Selling, General and Administrative Expenses decreased 17%
over the previous year's period largely due to personnel cutbacks.
Deprecation and Amortization Expense increased 214% from $773,000 to
$2,424,000 due to depreciation charges resulting from the buyout of equipment
lease commitments late in 1996 in which the Company now owns most of its
Broadcast equipment. Equipment Lease Expense decreased 80% from $2,290,000 to
$466,000 also due to the buyout of equipment leases in late 1996. Interest
Expense increased 256% from $113,000 to $402,000 largely due to interest charges
related to the IWN Put Option, and accretion of interest for the settlement
warrant liability and the liability for the Reorganization that was discounted
when recorded.
Material Changes in Financial Condition
- ---------------------------------------
The following analysis compares information as of the most recent
unaudited balance sheet date of June 30, 1997 to the prior year-end audited
balance sheet dated December 31, 1996.
Total assets decreased 26% from $28,504,000 to $21,146,000 from December
31, 1996 to June 30, 1997. The decrease in assets is primarily due to losses and
the reduction in the retirement assets used to repay related loans. Cash
decreased from $6,579,000 to $3,045,000 at June 30, 1997 due primarily to
11
$1,813,000 in cash needed to fund operations. The decrease was attributable, in
part, to approximately $813,000 used for initial payments related to the
Reorganization and $522,000 paid to former officers under an existing deferred
compensation plan. The Company also expended $1,394,000 to develop new software
and purchase capital assets.
Accounts Receivable - Trade increased 36% from $2,031,000 to $2,767,000
at June 30, 1997. The Company's receivables from Network Services customers grew
substantially because many customers delayed payment as a result of technical
problems with equipment that was addressed beginning in 1997. Prepaid expenses
and retirement plan assets decreased from $4,373,000 to $1,024,000 due to
termination of the retirement plan in connection with the Reorganization. There
were no accrued benefits due to employees under the plan.
Broadcast Equipment decreased from $10,103,000 to $9,445,000 as the
result of depreciation of assets, a charge to write-off and repair certain
equipment of $650,000, net of additions for new Network Services subscribers.
Total liabilities decreased 11% from $18,282,000 to $16,213,000 from
December 31, 1996 to June 30, 1997. The decrease in Accounts Payable and Accrued
Liabilities from $6,182,000 to $5,884,000 reflects the use of cash to pay down
liabilities following year end, offset by accrual of charges for settlement of
new litigation and the current portion of recently announced settlements. Short-
term borrowings decreased from $5,060,000 to $3,960,000 due to payoff of the
amount due pursuant to the IWN Put Option, payoff of the loan associated with
the retirement plan net of a new borrowing from GTECH Corp. In June 1997, the
Company borrowed $3.7 million form GTECH Corp, with whom it has agreed in
principle to enter into a merger agreement. The funds were used to pay Symphony
for its interest in IWN. Other long-term liabilities decreased 15% from
$3,216,000 to $2,726,000 due to legal liabilities transferred to current
liabilities, net of an increase of certain liabilities related to the
Reorganization.
Overall, the Company's working capital deficit increased $2,453,000 from
December 31, 1996 to June 30, 1997, primarily the result of the use of cash to
fund operations and charges and activity related to the Reorganization.
Management has implemented an organizational and strategic restructuring
aimed at reducing overhead expenses by 20% and focusing on the Company's core
business units. This involved a workforce reduction, including five senior
officers, the buyout of many high-rate lease commitments, and restructuring its
management personnel and responsibilities. Management believes that these
factors will contribute toward achieving profitability and improving cash flow.
The Company has $3,045,000 of cash available at June 30, 1997. In 1996,
the Company completed a plan to repurchase equipment related to certain lease
obligations. This transaction has resulted in improved cash flow due to the
elimination of the lease payments. Further, following the Reorganization, the
Company implemented an organization and strategic restructuring plan aimed at
reducing overhead expenses, which included a workforce reduction and re-focusing
on immediate goals designed to generate immediate results.
The Company has both short-term and long-term needs for cash outside of
its normal operating needs. In recent months, the Company has experienced
technical problems related to its Playmaker(R) device. Further, the Company has
also experienced a high rate of customers discontinuing service. A task force
has been assembled to review the issue and to make recommendations to improve
Playmaker(R) performance. Based on preliminary data, the Company believes that
any required changes can be effected within the next year. The costs are
estimated to be less than $1 million and are expected to be funded through
current operational cash flow. The Company anticipates that the number of
customers discontinuing service due to technical problems may decrease once the
Playmaker(R) performance has been improved, although no assurances can be given
that a solution can be reached without undue delay or cost. If the technical
problems persist for an extended period of time, it may negatively impact the
Company's cash flow from operations.
As noted earlier, the Company completed a reorganization of its
management team that will require the payment to former officers over the next
three years. These payments include contractual amounts under employment
agreements and payment for unused vacation leave. Further, payments in 1997
include amounts due for previously deferred compensation of approximately
$500,000. The Company has specific assets identified that were liquidated to
pay-off the deferred compensation obligation; therefore, no current cash assets
were utilized for that portion of the obligation. All other obligations owing to
former officers are expected to be funded through operations through 1999.
The Company has several lawsuits pending. In 1996, the Company settled
one lawsuit by establishing a settlement fund consisting of $400,000 in cash and
565,000 warrants to purchase the common stock of the Company. This settlement
minimizes the amount of cash used and provides for possible future inflow of
cash if the warrants are exercised. The Company is currently attempting to
settle other lawsuits and may settle these using a similar format of minimal
cash and equity instruments.
As part of the Reorganization, the Company terminated the pension and
deferred compensation plan that benefited only former officers. The termination
of these plans generated approximately $500,000 in cash, after payment of
related loans against these assets.
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 may negotiate for additional
lease and debt financing and additional foreign licensing, however, the extent
to which any of the foregoing may be accomplished, if at all, cannot be
predicted at this time.
The Company has certain lawsuits pending as described in this report. To
avoid the expense and disruption of protracted litigation the Company has
settled certain cases and may continue to attempt to settle others. The Company
has recorded a liability of $400,000 for the Company's best estimate of a
settlement costs and related legal expenses. There can be no assurances that
the Company will be successful in settling or defending such actions or that any
or all actions would be decided in favor of the Company or that the continued
cost of defending and prosecuting these actions will not have a material adverse
effect on the Company's financial position or results of operations.
12
PART II OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS.
A description of certain legal proceedings is contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 under the
caption "Legal Proceedings".
In May 1997, a shareholder derivative complaint was filed in Superior
Court of California, North Country Branch. The complaint, which seeks injunctive
relief and an unspecified amount of damages, was brought by a current
shareholder against NTN and certain officers and directors and alleges that the
Company was injured by a lack of independence and breach of business judgment by
virtue of certain agreements entered into in connection with the recent
Reorganization. The Company believes that the lawsuit is without merit and
intends to vigorously defend against the action. The Company has not formerly
responded due to the fact that the action was only recently filed.
In connection with the resolution of litigation entitled Sahba Azar, et
al. On Behalf of Themselves and All Others Similarly Situated vs. NTN
Communications, Inc., Donald C. Klosterman, Patrick J. Downs, Daniel C. Downs
and Alan P. Magerman, with which four other related actions were ultimately
consolidated, the Company has entered into a Stipulation of Settlement
Agreement. The terms of the settlement are set forth in greater detail in the
Company's prior public filings and more specifically, in the Form 8-K dated June
24, 1996. As of the date of this filing, the registration statement relating to
the shares of the Company's common stock underlying the warrants has not yet
become effective.
On April 18, 1995, a class action lawsuit was filed in United States
District Court entitled Lenora Isaacs, On behalf of Herself and All Others
Similarly Situated vs. NTN Communications and Patrick J. Downs. The complaint
alleges violations of federal securities laws based upon the Company's
projections for the fourth quarter of 1994 and for the 1994 fiscal year, and
further alleges that certain of the Company's insiders sold stock on information
not generally known to the public. 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 and $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. As previously announced, in order to avoid
the costs and expenses associated with complex litigation including attorney
fees, expert fees and costs, analyses which must be conducted and other costs
necessary to prepare to defend this case at trial and perhaps through the
appeals process, in addition to the business disruption occasioned by such
protracted litigation, the Company has agreed to an out-of-court settlement
having a total value of $1,450,000. The settlement, which is subject to final
court approval, consists of $250,000 in cash with the remaining balance of
$1,200,000 being payable with the Company's common stock or in cash, at the
Company's election. The Company had previously established reserves to cover the
Settlement.
In May 1997, a shareholder derivative complaint was filed in the Superior
Court of California, San Diego, North County Branch. The complaint, which sought
injunctive relief and an unspecified amount of damages, was brought by a current
shareholder against the Company and certain officers and directors. More
specifically, the plaintiff alleged that the Company was injured by a lack of
independence and breach of business judgment by virtue of certain agreements
entered into in connection with the recent management reorganization. The
Company believed that the lawsuit was without merit and conveyed its position to
plaintiffs' counsel. On June 10, 1997, the plaintiff voluntarily dismissed the
lawsuit without any payment whatsoever from the Company.
On June 11, 1997, the Company was included as a defendant in the
litigation entitled Elliot Miller and Jan Iyer, shareholders on behalf of
themselves and all others similarly situated vs. NTN Communications, Inc.,
Patrick J. Downs, Daniel C. Downs, Donald C. Klosterman, Ronald E. Hogan, Gerald
P. McLaughlin and KPMG Peat Marwick LLP, which complaint was filed by the same
lead plaintiff and lead attorneys as in the previously dismissed derivative
action. The new complaint alleges violations of state and federal securities
laws based upon purported omissions from NTN's filings with the Securities and
Exchange Commission. More particularly, the complaint alleges that the directors
and former officers
13
devised an "exit strategy" to provide themselves with undue compensation upon
their resignation from NTN. Plaintiffs further allege that defendants made false
statements about, and failed to disclose, contingent liabilities (guaranteed
compensation to management and the "Put" due to Symphony IWN Investment LLC) and
phantom assets (loans to management) in NTN's financial statements and Peat
Marwick's audit reports, all of which served allegedly to inflate the trading
price of NTN's common stock.
On July 3, 1997, the Company and the named directors and officers filed a
motion to dismiss the lawsuit. The motion is scheduled to be heard by the
District Court on October 27, 1997. All proceedings in the case are stayed
pending resolution of the Company's motion. The Company has submitted this
claim to its insurance carriers, however, there can be no assurances that the
insurance carriers will accept coverage or that if coverage is accepted, it will
be without a reservation of rights by the insurance carriers.
On July 1, 1997, the Company and its subsidiary, IWN, Inc., filed a
lawsuit against Symphony Management Associates, Inc. Symphony IWN Investment,
LLC and Frank Scarpa in the Superior Court of California for the County of San
Diego, North County Branch. The complaint contains claims for breach of
contract, specific performance, declaratory relief and intentional interference
with economic relations and includes a claim for punitive damages and the
recovery of attorneys' fees. The complaint arises out of the Investment
Agreement dated as of December 31, 1995 entered into between Symphony Management
Associates, Inc ("SMA") and IWN, Inc. and NTN Communications, Inc. Under the
Investment Agreement, the Company granted Symphony IWN Investment LLC ("LLC"),
an affiliate of SMA, a "Put Option", which entitled LLC to elect to cause the
Company to repurchase SMA's shares of IWN, Inc. and limited partner interest in
IWN, L.P. during a limited period of time, for specified consideration.
As previously announced by the Company, in April 1997, LLC notified the
Company of its election to exercise the Put Option. On June 18, 1997, the
Company paid LLC approximately $3,556,000 with funds loaned to the Company by
GTECH Corporation. Though LLC retained all sums paid by Company, LLC claims it
is entitled to approximately $1,000,000 in additional funds and a greater number
of warrants to purchase the Company's stock based on anti-dilution provisions in
its warrants. The claims of SMA and LLC were set forth in a subsequent lawsuit
filed by SMA and LLC in Delaware on July 3, 1997 against the Company and IWN,
Inc. More specifically, the lawsuit seeks specific performance by the Company to
deliver a secured promissory note, declaratory relief with respect to LLC's
right to additional warrants based upon alleged dilution and attorneys' fees.
The Company and IWN, Inc. have filed a motion to dismiss the Delaware lawsuit,
and all proceedings in the lawsuit are precluded pending resolution of the
Company's motion. The Company intends to vigorously prosecute its California
action and defend against the Delaware lawsuit filed by SMA and LLC. In the
meantime, however, in the interest of avoiding the expense of legal fees and
costs inherent in such litigation, and accomplishing a prompt resolution of such
claims, the Company has been engaged in settlement negotiations with SMA and
LLC. There can be no assurance that such litigation can be amicably resolved
without the need for further litigation, nor can there be any assurance that if
the litigation does proceed, the Company will be the prevailing party.
Item 2. CHANGE IN SECURITIES.
In April 1977, the Company granted a warrant to purchase 1,000,000 common
shares to Frazier/King Media Holding Co. The warrant was granted pursuant to a
consulting agreement whereby Frazier/King agreed to provide financial and
management consulting services to the Company. The warrant is exercisable at
$2.81 and is immediately exercisable as to 200,000 shares and generally will
become exercisable as to the balance of the shares in installments of 100,000
shares on each of the following dates, July 15, 1997, October 15, 1997, January
15, 1998, April 15, 1998, July 15, 1998, October 15, 1997 and January 15, 1999.
In the event of a change of control (as defined) of NTN, the warrant will become
immediately exercisable in full.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
14
None.
Item 6. EXHIBITS AND REPORTS ON REPORT 8-K.
None.
15
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: December 15, 1997 By: /s/GERALD SOKOL, JR.
----------------------
Gerald Sokol, Jr.,
President and Chief Executive Officer
16