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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, 1998
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
----- -----
At November 16, 1998 the registrant had 28,073,000 shares of common stock,
$.005 par value, outstanding.
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PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
1998 December 31,
(Unaudited) 1997
------------------ ----------------------
Assets
Current assets:
Cash and cash equivalents $ 4,647,000 4,764,000
Accounts receivable, net 2,062,000 2,724,000
Prepaid expenses and other current assets 1,071,000 902,000
------------------ ----------------------
Total current assets 7,780,000 8,390,000
Broadcast equipment and fixed assets, net 7,759,000 7,973,000
Software development costs, net 2,344,000 3,697,000
Note receivable 70,000 --
Other assets 126,000 211,000
------------------ ----------------------
Total assets $ 18,079,000 20,271,000
================== ======================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable 474,000 914,000
Accrued expenses 1,981,000 4,006,000
Accrual for management severance 764,000 1,154,000
Obligations under capital lease 202,000 46,000
Deferred revenue 612,000 1,483,000
Customer deposits 658,000 770,000
------------------ ----------------------
Total current liabilities 4,691,000 8,373,000
Obligations under capital lease 340,000 179,000
Accrual for settlement warrants 1,631,000 1,516,000
Accrual for management severance 775,000 1,093,000
Other long-term liabilities 107,000 384,000
------------------ ----------------------
Total liabilities 7,544,000 11,545,000
------------------ ----------------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock,
$.005 par value, 10,000,000 shares authorized;
161,000 issued and outstanding at September 30, 1998
and December 31, 1997 1,000 1,000
Series B 4% cumulative convertible preferred stock,
$.005 par value, 85,000 shares authorized; 56,000 and
70,000 shares issued and outstanding at September 30, 1998
and December 31, 1997, respectively 1,000 1,000
Common stock, $.005 par value, 50,000,000 shares authorized;
28,073,000 and 23,677,000 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 140,000 118,000
Additional paid-in capital 72,337,000 70,541,000
Accumulated deficit (58,945,000) (58,596,000)
Treasury stock, 330,000 and 782,000 shares at September 30,
1998 and December 31, 1997, respectively, at cost (2,999,000) (3,339,000)
------------------ ----------------------
Total shareholders' equity 10,535,000 8,726,000
------------------ ----------------------
Total liabilities and shareholders' equity $ 18,079,000 20,271,000
================== ======================
See accompanying notes to unaudited consolidated financial statements.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
--------------------------------------- -----------------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------------- ------------------ ------------------- -------------------
Revenues:
Network services $ 4,565,000 4,981,000 13,975,000 14,301,000
Online/Internet services 506,000 825,000 1,680,000 2,381,000
Advertising revenues 226,000 313,000 642,000 747,000
Other revenues 506,000 720,000 1,607,000 2,211,000
------------------- ------------------ ------------------- -------------------
Total revenues 5,803,000 6,839,000 17,904,000 19,640,000
------------------- ------------------ ------------------- -------------------
Operating expenses:
Direct operating costs 1,189,000 1,496,000 3,671,000 5,524,000
Selling, general and
administrative 2,857,000 4,013,000 9,061,000 13,844,000
Litigation, legal and professional
fees 231,000 268,000 887,000 1,326,000
Equipment lease expense 267,000 233,000 774,000 699,000
Stock-based compensation expense -- 284,000 165,000 2,797,000
Depreciation and amortization 1,314,000 1,481,000 4,075,000 3,905,000
Research and development 254,000 -- 474,000 800,000
------------------- ------------------ ------------------- -------------------
Total operating expenses 6,112,000 7,775,000 19,107,000 28,895,000
------------------- ------------------ ------------------- -------------------
Operating loss (309,000) (936,000) (1,203,000) (9,255,000)
------------------- ------------------ ------------------- -------------------
Other income (expense):
Interest income 101,000 32,000 228,000 178,000
Interest expense (114,000) (230,000) (259,000) (632,000)
Gain on sale of interest in subsidiary -- -- 1,643,000 --
------------------- ------------------ ------------------- -------------------
Total other income (expense) (13,000) (198,000) 1,612,000 (454,000)
------------------- ------------------ ------------------- -------------------
Income (loss) before income taxes (322,000) (1,134,000) 409,000 (9,709,000)
------------------- ------------------ ------------------- -------------------
Provision for income taxes -- -- -- --
------------------- ------------------ ------------------- -------------------
Net income (loss) $ (322,000) (1,134,000) 409,000 (9,709,000)
=================== ================== =================== ===================
Accretion of beneficial conversion
feature on preferred stock $ -- -- (758,000) --
------------------- ------------------ ------------------- -------------------
Net loss available to
common shareholders $ (322,000) (1,134,000) (349,000) (9,709,000)
=================== ================== =================== ===================
Basic loss per common share $ (0.01) (0.05) (0.01) (0.41)
=================== ================== =================== ===================
Diluted loss per common share $ (0.01) (0.05) (0.01) (0.41)
=================== ================== =================== ===================
Weighted average shares outstanding - basic 26,857,000 23,623,000 25,516,000 23,411,000
=================== ================== =================== ===================
Weighted average shares outstanding - diluted 26,857,000 23,623,000 31,312,000 23,411,000
=================== ================== =================== ===================
See accompanying notes to unaudited consolidated financial statements.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ---------------- ---------------- -----------------
Cash flows from (used in) operating activities:
Net income (loss) $ (322,000) (1,134,000) 409,000 (9,709,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Gain on sale of interest in subsidiary -- -- (1,643,000) --
Depreciation and amortization 1,314,000 1,481,000 4,075,000 3,905,000
Provision for doubtful accounts -- 275,000 625,000 750,000
Loss from disposition of broadcast
equipment 60,000 -- 180,000 --
Non-cash compensation charges -- 283,000 165,000 2,796,000
Accreted interest expense 66,000 -- 198,000 --
Stock issued in settlement of litigation -- 57,000 -- 169,000
Changes in assets and liabilities:
Accounts receivable 24,000 (1,310,000) (458,000) (2,322,000)
Prepaid expenses and other assets (237,000) (76,000) (171,000) 3,255,000
Accounts payable and accrued expense (168,000) (170,000) (1,030,000) (468,000)
Deferred revenue (141,000) 538,000 (667,000) 445,000
Customer deposits (23,000) (44,000) (112,000) (244,000)
Accruals for management severance and
other long-term liabilities (362,000) (353,000) (996,000) (843,000)
----------------- ---------------- ---------------- -----------------
Net cash provided by (used in)
operating activities 211,000 (453,000) 575,000 (2,266,000)
----------------- ---------------- ---------------- -----------------
Cash flows from (used in) investing activities:
Capital expenditures (992,000) (1,257,000) (2,404,000) (2,066,000)
Issuance of note receivable -- -- (70,000) --
Software development costs -- (246,000) (22,000) (831,000)
Proceeds from sale of interest in subsidiary -- -- 1,862,000 --
----------------- ---------------- ---------------- -----------------
Net cash used in investing
activities (992,000) (1,503,000) (634,000) (2,897,000)
----------------- ---------------- ---------------- -----------------
See accompanying notes to unaudited consolidated financial statements.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited), Continued
Three Months Ended Nine Months Ended
------------------------------------- --------------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ------------------ ----------------- -------------------
Cash flows from (used in) financing activities:
Principal payments on debt $ -- (260,000) -- (5,830,000)
Proceeds from issuance of debt -- 231,000 -- 4,701,000
Principal payments under capital lease
obligations (35,000) -- (58,000) --
Proceeds from issuance of common stock,
less issuance costs -- 262,000 -- 1,035,000
----------------- ------------------ ----------------- -------------------
Net cash provided by (used
in) financing activities (35,000) 233,000 (58,000) (94,000)
----------------- ------------------ ----------------- -------------------
Net decrease in cash and cash equivalents (816,000) (1,723,000) (117,000) (5,257,000)
Cash and cash equivalents at beginning of period 5,463,000 3,045,000 4,764,000 6,579,000
----------------- ------------------ ----------------- -------------------
Cash and cash equivalents at end of period $ 4,647,000 1,322,000 4,647,000 1,322,000
================= ================== ================= ===================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 8,000 -- 13,000 --
================= ================== ================= ===================
Income taxes $ -- -- -- --
================= ================== ================= ===================
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of common stock in settlement of
legal claim $ 1,200,000 -- 1,332,000 --
================= ================== ================= ===================
Issuance of common stock in exchange for
cancellation of options and warrants $ -- -- 212,000 --
================= ================== ================= ===================
Equipment acquired under capital leases $ -- -- 375,000 --
================= ================== ================= ===================
Preferred dividend paid in capital stock $ -- -- 8,000 --
================= ================== ================= ===================
See accompanying notes to unaudited consolidated financial statements.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and subsidiaries
(collectively "the Company") and the results of their operations and their cash
flows for the interim periods presented. Management has elected to omit
substantially all notes to the Company's consolidated financial statements as
permitted by the rules and regulations of the Securities and Exchange
Commission. Results of operations for the interim periods are not necessarily
indicative of results to be expected for any other interim period or for the
year ending December 31, 1998.
The consolidated financial statements for the three and nine months
ended September 30, 1998 and September 30, 1997 are unaudited and should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K, as amended, filed for the year ended
December 31, 1997.
Certain items in the prior period consolidated financial statements
have been reclassified to conform to the current period presentation.
2. Earnings (Loss) Per Share
The following table sets forth the computation of earnings (loss) per
share for the three and nine months ended September 30, 1998 and 1997. Options,
warrants and convertible preferred stock representing approximately 3,901,000,
847,000 and 1,286,000 potentially dilutive common shares have been excluded from
the computations of net loss per share for the three months ended September 30,
1998 and 1997 and the nine months ended September 30, 1997, respectively, as
their effect is anti-dilutive.
Three Months Ended Nine Months Ended
----------------------------------- -------------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ---------------- ------------------ -----------------
Numerator for earnings (loss) per share -
Net loss available to common
shareholders $ (322,000) (1,134,000) (349,000) (9,709,000)
================= ================ ================== =================
Denominator:
Denominator for basic earnings per share -
Weighted average shares 26,857,000 23,623,000 25,516,000 23,411,000
Potential effect of dilutive securities:
Employee stock options and director fees -- -- 278,000 --
Warrants -- -- 50,000 --
Litigation settlements and management
severance -- -- 1,940,000 --
Convertible preferred stock -- -- 3,528,000 --
----------------- ---------------- ------------------ -----------------
Potentially dilutive common shares -- -- 5,796,000 --
----------------- ---------------- ------------------ -----------------
Denominator for diluted earnings per share -
Adjusted weighted average shares and
assumed conversions 26,857,000 23,623,000 31,312,000 23,411,000
================= ================ ================== =================
Basic earnings (loss) per share $ (0.01) (0.05) (0.01) (0.41)
================= ================ ================== =================
Diluted earnings (loss) per share $ (0.01) (0.05) (0.01) (0.41)
================= ================ ================== =================
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The Company was recently notified that it may be required to issue common
stock pursuant to certain anti-dilution provisions of Stock Purchase Agreements
in connection with the sale of common stock in April 1995. Based on a
preliminary review, the Company may be required to issue 1,000,000 to 2,500,000
shares of common stock. As no final determination has been made, no amount was
included in the diluted earnings per share calculations.
Reflected in net loss available to common shareholders for the nine
months ended September 30, 1998 is the accretion of the beneficial conversion
feature on the Series B Preferred Stock in the amount of $758,000. The amount of
the beneficial conversion feature is measured at the date of issue of the
convertible security as the difference between the conversion price and the
market value of the common stock into which the security is convertible. This
amount is accounted for as a non-cash dividend on the convertible preferred
stock with the same amount credited to additional paid-in capital, allocated
over the period from issuance to first convertibility. Therefore, there is no
impact to total shareholders' equity. The beneficial conversion feature was
given effect as of January 1, 1998 as the impact to 1997 was not material to the
consolidated financial statements. The beneficial conversion feature was fully
accreted as of June 30, 1998. As described in Note 4 to the consolidated
financial statements, the Company entered into an exchange agreement with the
holders of the Series B Preferred Stock.
3. Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 (SFAS), "Disclosure about Segments of an
Enterprise and Related Information". This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company plans to adopt SFAS No. 131 in connection with the preparation of
the consolidated financial statements for the year ended December 31, 1998, as
permitted by the pronouncement. The Company has not yet assessed the impact of
the adoption of SFAS. No. 131 on its financial statement disclosures.
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
adoption of this standard is not expected to have a material impact on
consolidated results, financial condition or long-term liquidity.
4. Subsequent Events
The following significant events have occurred subsequent to December
31, 1997:
On April 1, 1998, the Company reached an agreement in principle with
Omnigon, a California corporation, to sell up to 90% of the equity of its
subsidiary IWN, Inc. (IWN) to Omnigon on or before May 31, 1998. Omnigon paid
the Company $100,000 in April 1998 and an additional $100,000 in May 1998 for
the option to acquire IWN under specific terms. Subsequently, however, the
Company terminated negotiations with Omnigon for the proposed sale of IWN. As
agreed, the Company used the non-refundable payments made by Omnigon to pay the
operating expenses of IWN prior to the cancellation of the proposed transaction.
NTN redirected IWN's business strategy toward the Australian, New Zealand and
Asian marketplace, and building upon its existing venture in that market with
IWN Australasia Limited (IWN-A). NTN and IWN-A, in which NTN holds a 25% equity
interest, have agreed that IWN will provide research and development and
technical support for IWN-A operations over the next several months. IWN-A will
fund the development and support activities. NTN and IWN-A have also agreed they
will work to develop a more comprehensive strategy during the coming months to
build the asset base of IWN-A in the Australian, New Zealand and Asian
marketplace.
On June 16, 1998, the Company sold an 82.5% interest in LearnStar, Inc.
(LearnStar) to NewStar Learning Systems, L.L.C. (NewStar) for $1,862,000. The
transaction resulted in a gain of $1,643,000, which is included in other income
for the nine months ended September 30, 1998. Sally A Zoll, President of
LearnStar, and Joe King, a partner with former NTN Director Ed Frazier in
Frazier/King Media Holding, each hold an equity interest in NewStar. Upon
closing of the transaction, Ed Frazier resigned from the Board of Directors of
NTN in order to avoid any perception of a conflict of interest between his
ongoing business relationship with Mr. King and NTN's continued minority
interest in LearnStar.
In August, 1998, Barry Bergsman was appointed to the Board of
Directors. From 1985 to present Mr. Bergsman has been president of Intertel
Communications, Inc.
In September, 1998, the Company issued a total of 1,200,000 shares of
common stock, issued at a fixed price of $1.00 per share, pursuant to a
settlement of a class-action lawsuit approved by the court in January 1998 which
was originally filed against the Company and certain other defendants in April,
1995. An accrual related to this settlement of $1,200,000 was included in
accrued expenses as of December 31, 1997.
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In October 1998, the holders of the Company's outstanding Series B
Preferred Stock ("Preferred Stock") agreed to exchange their remaining
$5,600,000 of Preferred Stock (and accrued dividends) for 7% Convertible Senior
Subordinated Notes due February 1, 2001 with a fixed conversion price of $1.275
per common share. The convertible notes are to be issued three days following
the effective date of a registration statement which the Company has agreed to
file with the SEC covering the underlying shares issuable upon conversion of the
convertible notes. As of October 5, 1998, the aggregate principal amount of the
convertible notes would have been approximately $5,800,000 and the notes would
thus have been convertible into approximately 4,550,000 shares of common stock.
Interest on the convertible notes will be paid quarterly, in arrears, with the
first interest payments due December 1998. The Company has the option to pay
regularly scheduled interest payments in either cash or common stock. If paid in
common stock, the Company must provide written notice to the holders 45 days
prior to the interest payment date. In consideration of the stock for debt
exchange, the Company issued the Preferred Stock holders warrants expiring
February 1, 2001 to purchase an aggregate of one million shares of common stock.
The warrants have an initial exercise price of $1.25 per common share, which
will be subject to reduction in the event that the common stock trades at levels
above the exercise price. The convertible notes are subordinate in right of
payment to the prior payment of all senior debt as defined in the exchange
agreement. Pursuant to the terms of the exchange agreement, senior debt is not
to exceed $10,000,000 at any time. The Company is restricted under the terms of
the convertible notes from incurring any indebtedness (except senior debt and
subordinated debt as defined in the exchange agreement) in excess of $2,000,000
at any time.
The Company will be in default under the convertible notes if it fails
to pay any principal or interest on the convertible notes when due, and in
certain other events, including the event of a material adverse change in the
condition of the Company, financial or otherwise, or operations of the Company
as determined by the holders of the convertible notes in their discretion. If
the Company defaults under the convertible notes, in the discretion of the
holders the entire principal balance and accrued and unpaid interest will
immediately be due and payable in full.
In October 1998, the Board of Directors of the Company appointed
Stanley B. Kinsey as Chairman and Chief Executive Officer effective October 8,
1998. Gerald Sokol, Jr., formerly Chief Executive Officer, remains as the
Company's President and Chief Financial Officer pursuant to his Employment
Agreement which expires on June 30, 2000. The Company and Mr. Sokol are
currently seeking to reach an agreement concerning the terms and conditions of
Mr. Sokol's ongoing employment. However, Mr. Sokol has advised the Company that
it is his position that, if a new agreement cannot be reached, he will be
entitled to the entire remaining balance due him under his Employment Agreement
(including bonuses and employee benefits).
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
NTN Communications, Inc. develops, produces and distributes individual
and multi-player interactive programs to a variety of media platforms. The
Company broadcasts to a variety of delivery platforms 24 hours a day, providing
entertainment and informational programming, including multi-player sports and
trivia games. The NTN Network distributes programming to more than 15 million
viewer/participants per month throughout North America through hospitality
locations, such as hotels, bars and restaurants.
Results of Operations
Three months ended September 30, 1998 and September 30, 1997
Total revenues decreased 15% to $5,803,000 for the three months ended
September 30, 1998 from $6,839,000 for the three months ended September 30,
1997. This occurred primarily due to declines in network services,
Online/Internet services and other revenues.
Network services revenues decreased 8% to $4,565,000 for the three
months ended September 30, 1998 from $4,981,000 for the three months ended
September 30, 1997. This occurred primarily due to a reduction in average site
count and average billing rates.
Revenue from Online/Internet services decreased 39% to $506,000 for the
three months ended September 30, 1998 from $825,000 for the three months ended
September 30, 1997. The decrease was primarily a result of the Company entering
into a new contract with its Internet partner, America Online. During 1997
America Online paid the Company a one-time fee to renegotiate its then existing
contract. Excluding the termination fee revenue recorded in the three months
ended September 30, 1997 of $463,000, revenue from Online/Internet services
increased 40%. This increase resulted from an increase in revenues recognized
for production services.
Other revenues decreased 30% to $506,000 for the three months ended
September 30, 1998 from $720,000 for the three months ended September 30, 1997.
The third quarter of 1997 included approximately $300,000 in sales generated by
LearnStar. As a result of the sale of an 82.5% interest in LearnStar in June
1998, no such revenue was recorded for the three months ended September 30,
1998. Other revenues for the current period consist primarily of revenue
resulting from the Company's license agreement with its Canadian affiliate, and
other non-recurring revenue items. Excluding the revenue generated by LearnStar
in 1997, other revenue increased 20% due to an increase in revenue generated
from the Canadian licensee.
Direct operating costs decreased 21% to $1,189,000 for the three months
ended September 30, 1998 from $1,496,000 for the three months ended September
30, 1997. This decrease related to a reduction in site visit fees, commissions
and other field expenses due to (i) the Company's decreased reliance on
independent representatives in favor of employed field and marketing personnel
and (ii) a revision, effective January 1, 1998, in the Company's commission and
bonus structure for all field personnel. Additionally, the direct operating
costs for the three months ended September 30, 1997 included approximately
$70,000 of costs incurred by the Company's LearnStar operation.
Selling, general and administrative expenses decreased 29% to
$2,857,000 for the three months ended September 30, 1998 from $4,013,000 for the
three months ended September 30, 1997. This decrease was primarily attributable
to management's implementation of an organizational and strategic restructuring
aimed at reducing overhead costs. The restructuring involved a workforce
reduction and restructuring of management personnel and responsibilities. This
restructuring has resulted in overall cost reductions including payroll and
related costs, promotional and marketing material expenses. This decrease was
partially offset by an increase in employee-related costs associated with the
shift from independent representatives to employed field and marketing staff.
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There were no stock-based compensation expenses for the three months
ended September 30, 1998, compared to $284,000 for the three months ended
September 30, 1997. The 1997 charges resulted from the issuance of warrants and
options to nonemployees.
Research and development expenses were $254,000 for the three months
ended September 30, 1998. There were no research and development expenses
incurred for the same period of 1997. The current period expenses result from
the Company's research and development efforts related to the upgrade of the NTN
Network.
Interest expense decreased 50% to $114,000 for the three months ended
September 30, 1998 from $230,000 for the three months ended September 30, 1997.
The decrease was primarily due to interest expense recorded in 1997 related to a
note payable to GTECH Corporation which was paid in full in November 1997.
Nine months ended September 30, 1998 and September 30, 1997
Operations for the nine months ended September 30, 1998 resulted in net
income of $409,000 compared to a net loss of $9,709,000 for the nine months
ended September 30, 1997. The 1997 results included significant charges which
related only to 1997, including a $6,074,000 charge for management
reorganization and a $650,000 charge related to defective broadcast equipment.
The 1998 results include a gain of $1,643,000 related to the sale of an 82.5%
interest in LearnStar in June 1998.
Total revenues decreased 9% to $17,904,000 for the nine months ended
September 30, 1998 from $19,640,000 for the nine months ended September 30,
1997. This occurred primarily due to a reduction in network services,
Online/Internet services and other revenues.
Network services revenues decreased 2% to $13,975,000 for the nine
months ended September 30, 1998 from $14,301,000 for the nine months ended
September 30, 1997. This occurred primarily due to a reduction in average site
count and average billing rates.
Revenue from Online/Internet services decreased 29% to $1,680,000 for
the nine months ended September 30, 1998 from $2,381,000 for the nine months
ended September 30, 1997. The decrease was primarily a result of the Company
entering into a new contract with its Internet partner, America Online (AOL).
During the nine months ended September 30, 1997, America Online paid the Company
a fee to renegotiate its then existing contract. Excluding the termination fee
revenue recorded in the nine months ended September 30, 1997 of $463,000,
revenue from Online/Internet services decreased 12%. The new agreement, dated as
of December 1, 1997, provides for a flat monthly fee rather than fees based on
AOL member usage of the Company's content which resulted in slightly lower
revenue in the nine months ended September 30, 1998 compared to the same period
in 1997. This decrease was partially offset by an increase in revenue recognized
for production services.
Other revenues, which currently consist primarily of revenue resulting
from the Company's license agreement with its Canadian affiliate, and other
non-recurring revenue items, decreased 27% to $1,607,000 for the nine months
ended September 30, 1998 from $2,211,000 for the nine months ended September 30,
1997. Other revenues for the nine months ended September 30, 1997 included
approximately $411,000 in sales generated by LearnStar. As a result of the sale
of an 82.5% interest in LearnStar in June 1998, only six months of such revenue
totaling $280,000 is recorded for the nine months ended September 30, 1998.
Additionally, other revenue for the nine months ended September 30, 1997
included non-recurring items such as revenues related to the liquidation of
whole-life insurance policies for certain former officers.
Direct operating costs decreased 34% to $3,671,000 for the nine months
ended September 30, 1998 from $5,524,000 for the nine months ended September 30,
1997. This decrease related to a reduction in site visit fees, commissions and
other field expenses due to (i) the Company's decreased reliance on independent
representatives in favor of employed field and marketing personnel and (ii) a
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revision, effective January 1, 1998, in the Company's commission and bonus
structure for all field personnel. Additionally, the direct costs for the nine
months ended September 30, 1997 included approximately $260,000 of costs
incurred by the Company's LearnStar operation. Additionally, a $650,000 charge
was recorded in 1997 for the replacement and repair of defective equipment. No
such charge was recorded in 1998.
Selling, general and administrative expenses decreased 35% to
$9,061,000 for the nine months ended September 30, 1998 from $13,844,000 for the
nine months ended September 30, 1997. Excluding the charges of $3,277,000
related to a management reorganization in the nine months ended September 30,
1997, selling, general and administrative expenses decreased 14% in the nine
months ended September 30, 1998 as compared to the same period of 1997. The
decrease was primarily attributable to management's implementation of an
organizational and strategic restructuring aimed at reducing overhead costs. The
restructuring involved a workforce reduction, including five senior officers,
the buy-out of many high-rate lease commitments, and restructuring of management
personnel and responsibilities. This restructuring has resulted in overall cost
reductions including payroll and related costs, travel, promotional and
marketing material expenses. This decrease was partially offset by an increase
in employee-related costs associated with the shift from independent
representatives to employed field and marketing staff.
Litigation, legal and professional fees decreased 33% to $887,000 for
the nine months ended September 30, 1998 from $1,326,000 for the nine months
ended September 30, 1997. During the nine months ended September 30, 1997, an
accrual was recorded for pending litigation totaling $400,000. Subsequently, the
litigation was settled and the fees were paid. No such accrual was required for
the nine months ended September 30, 1998.
Stock-based compensation decreased 94% to $165,000 for the nine months
ended September 30, 1998 from $2,797,000 for the nine months ended September 30,
1997. The 1997 charge related to the reorganization of the Company's executive
management personnel.
Research and development expenses decreased 41% to $474,000 for the
nine months ended September 30, 1998 from $800,000 for the nine months ended
September 30, 1997. The decrease was due to certain research and development
endeavors which began in early 1997 that were completed by the end of the second
quarter of 1997. These efforts included initial design and implementation of the
Company website, redesign of the America Online site and content and other
production for third parties. For the nine-month period ended September 30,
1998, the Company's research and development efforts related to the upgrade of
the NTN network.
Interest expense decreased 59% to $259,000 for the nine months ended
September 30, 1998 from $632,000 for the nine months ended September 30, 1997.
The decrease was primarily due to interest expense recorded in 1997 in
connection with the Symphony put option which was paid in full in June 1997 and
the note payable to GTECH Corporation which was paid in full in November 1997.
In June 1998, the Company sold an 82.5% interest in LearnStar for
$1,862,000. The transaction resulted in a gain of $1,643,000, which is included
in other income for the nine months ended September 30, 1998.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash and cash equivalents of
$4,647,000 and working capital (current assets in excess of current liabilities)
of $3,089,000, compared to cash and cash equivalents of $4,764,000 and working
capital of $17,000 at December 31, 1997. Net cash provided by operations was
$575,000 for the nine months ended September 30, 1998 and net cash used in
operations was $2,266,000 for the nine months ended September 30, 1997. Included
in net cash provided by operations for the nine months ended September 30, 1998
were severance payments made by the Company in compliance with management
reorganization agreements with former officers totaling $760,000. Net cash used
in investing activities was $634,000 for the nine months ended September 30,
1998 and $2,897,000 for the nine months ended September 30, 1997. Included in
net cash used in investing activities for the nine months ended September 30,
1998 were $2,404,000 in capital expenditures and $1,862,000 in proceeds from the
sale of an 82.5% interest in the Company's subsidiary, LearnStar, Inc. Net cash
used in financing activities was $58,000 and $94,000 for the nine months ended
September 30, 1998 and 1997, respectively.
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The Company is in the process of implementing its plan to upgrade its
network, including improvements to its Playmakers(R) and related technology, as
well as migrating to a Windows-based platform. The Company believes that its
cash on hand and anticipated cash flows from its operations will be sufficient
to meet the Company's operating needs through 1998. It is very likely, the
Company will require additional financing to support its planned upgrade and
expansion of the NTN Network domestically and internationally. Capital financing
possibilities 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. There can be
no assurance that the Company will be able to secure such financing. When the
timing of the plan to upgrade and replace Playmakers(R) and broadcast equipment
with new technology becomes definitive, the Company expects to evaluate the
estimated remaining useful lives of existing equipment and technology and
anticipates that depreciation will be accelerated and/or impairment losses
recognized. Impairment losses, if any, will be recognized in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
In October 1998, the holders of the Company's outstanding Series B
Preferred Stock agreed to exchange their remaining $5,600,000 of Preferred Stock
(and accrued dividends) for 7% senior convertible subordinated notes due
February 1, 2001 with a fixed conversion price of $1.275 per common share. In
consideration of the debt for stock exchange, the Company issued the Preferred
Stock holders warrants expiring February 1, 2001 to purchase an aggregate of one
million shares of common stock. The warrants have an initial exercise price of
$1.25 per common share which will be subject to reduction in the event that the
common stock trades at levels significantly above the exercise price. As a
result of this exchange, the Company expects to incur additional interest
expense related to both the convertible notes and the warrants beginning in the
fourth quarter of 1998.
The Playmaker(R) systems currently utilize MS-DOS software. The Company
currently does not have sufficient licenses to use MS-DOS for substantially all
of its Playmaker systems, and has received a letter from counsel representing
Business Software Alliance and from counsel for Microsoft Corporation requesting
certain information regarding our use of MS-DOS. It is possible that Microsoft
will require remuneration for past unlicensed use of MS-DOS as a condition to
granting any such future licenses. The Company's management is uncertain what
effect this may have on the financial condition or results of operations.
The Company, with the assistance of independent outside consultants,
has been assessing its "Year 2000" computer readiness and exposure to Year 2000
issue which relates to the inability of computer software programs to recognize
the arrival of the year 2000 because of a common software design feature that
describes the current year by only its last two digits. In connection with such
assessment, the Company initiated a review of the information technology systems
utilized in the Company's business and operations. Based on this review, the
Company has preliminarily determined that a substantial portion of the Company's
internal computer systems are not Year 2000 compliant. The Company has
inventoried its key information technology systems and is in the process of
assessing these key systems for compliance. The assessment phase is expected to
be completed by the end of 1998. These key systems include the NTN Network,
including its computer hardware in over 2,800 locations, the Company's internal
operating systems, system applications, database systems, business systems,
development tools and desktop software. This includes but is not limited to MS
NT 4.0 (service pack 3), MS NT 4.0 (enterprise server), Novell NetWare 3.11,
Windows 95, Cheyenne ARCServe, Norton AntiVirus, MacAfee 6.10, MS Exchange 5.0,
FAXServe, MS IIS, MS SQL 6.5 (service pack 3), MS SQL 6.5 (enterprise server),
Dbase IV, Access 97, Access 2.0, Platinum 3.3b, Platinum report writer, Platinum
FRx 4.70, Clientele 2.1.2099, Visual Studio 6.0, Visual Basic 4.0 and Cold
Fusion 2.0.
Information systems with non-compliant code are expected to be modified
or replaced with systems that are Year 2000 compliant, the most significant of
which will be the planned upgrade of the NTN Network. The cost for this upgrade
and other remediations could exceed $4,000,000. A majority of the total
estimated spending represents equipment expenditures to upgrade the NTN Network
which would have been incurred absent Year 2000 compliance issues. This estimate
assumes that the Company will not incur significant Year 2000 related costs on
behalf of its vendors, or other third parties. The Company has also
initiated a review of Year 2000 compliance by its principal vendors.
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The Company's most likely worst-case scenario in the event the planned
upgrade of the NTN Network and other remediations are not completed is that the
Company would be unable to broadcast its programs to its network services
customers. Network services revenue represents 78% of total revenues for the
nine months ended September 30, 1998. The Company has not yet established a
contingency plan in the event that this occurs.
As a result, a failure of the Company's internal systems or systems of
third parties to be Year 2000 compliant would have a material adverse effect on
the Company's business, financial condition or operating results.
Forward Looking Statements
This Quarterly Report contains forward looking statements, including
statements relating to future growth, which are subject to risks and
uncertainties including the success of the Company's planned upgrade of its
broadcast platform, changing economic conditions, product demand and market
acceptance risks, the impact of competitive products and pricing, the effect of
the Company's accounting policy and other risk factors detailed in the Company's
Securities and Exchange Commission filings, including the Company's Report on
Form 10-K for the fiscal year ended December 31, 1997, its quarterly reports on
Form 10-Q and reports on Form 8-K.
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PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
In September 1998, the Company issued a total of 1,200,000 shares of
common stock pursuant to a court-approved settlement of a class-action lawsuit,
which was originally filed against the Company and certain other defendants in
April 1995. Included in the 1,200,000 shares were 483,333 shares issued to
counsel for the plaintiffs in the class action. All of these shares of common
stock were valued for this purpose at $1.00 per share.
Item 2. CHANGE IN SECURITIES.
In October 1997, the Company issued and sold to Investors an aggregate of
70,000 shares of the Company's Series B Preferred Stock for $7,000,000. As of
October 5, 1998, 14,000 shares of the Series B Preferred Stock (plus accrued
dividends) had previously been converted into 2,430,000 shares of common stock,
leaving 56,000 shares of Series B Preferred Stock outstanding. As of October 5,
1998, the Company and Investors entered into an Exchange Agreement by which the
Investors agreed to surrender for cancellation all of its shares of Series B
Preferred Stock in exchange for the Company's grant to the Investors of warrants
and convertible notes as described in note 3 of the notes to the financial
statements included in Part I of this Report, which is incorporated herein by
reference.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.1 Specimen common stock certificate (previously filed as an exhibit
to the Company's Registration Statement on Form 8-A, File No.
0-19383, and incorporated herein by reference).
4.2 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the Commission on
November 7, 1997 and incorporated herein by reference).
4.3 Exchange Agreement dated as of October 5, 1998, by and among the
Company, Stark International and Shepherd Investments
International, Ltd.
4.4 Registration Rights Agreement dated as of October 5, 1998, by and
among the Company, Stark International and Shepherd Investments
International, Ltd. (filed as Exhibit A to the Exchange Agreement
filed herewith).
4.5 Warrant No. 10/05/98-1 issued to Stark International (filed as
Exhibit B to the Exchange Agreement filed herewith).
4.6 Warrant No. 10/05/98-2 issued to Shepherd Investments
International, Ltd. (filed as Exhibit B to the Exchange Agreement
filed herewith).
4.7 Form of 7% Convertible Senior Subordinated Note of the Company
(filed as Exhibit C to the Exchange Agreement filed herewith).
10.1 Employment Agreement dated July 1, 1998 by and between NTN
Communications, Inc. and Gerald Sokol, Jr.
27. Financial Data Schedule.
(b) Reports on Form 8-K
None
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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 16, 1998 By: /s/GERALD SOKOL, JR.
--------------------------------------
Gerald Sokol, Jr.,
President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No. Description
- - ------- -----------
4.3 Exchange Agreement
4.4 Registration Rights Agreement dated as of October 5, 1998,
by and among the Company, Stark International and Shepherd
Investments International, Ltd. (filed as Exhibit A to the
Exchange Agreement filed herewith).
4.5 Warrant No. 10/05/98-1 issued to Stark International (filed
as Exhibit B to the Exchange Agreement filed herewith).
4.6 Warrant No. 10/05/98-2 issued to Shepherd Investments
International, Ltd. (filed as Exhibit B to the Exchange
Agreement filed herewith).
4.7 Form of 7% Convertible Senior Subordinated Note of the
Company (filed as Exhibit C to the Exchange Agreement filed
herewith).
10.1 Employment Agreement dated July 1, 1998
27 Financial Data Schedule