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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 June 30, 1999
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 August 4, 1999 the registrant had 28,579,268 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
June 30,
1999 December 31,
Assets (Unaudited) 1998
------------ ------------
Current Assets:
Cash and cash equivalents $ 2,525,000 $ 4,560,000
Accounts receivable, net 2,704,000 2,471,000
Prepaid expenses and other current assets 1,423,000 1,100,000
------------ ------------
Total current assets 6,652,000 8,131,000
Broadcast equipment and fixed assets, net 8,047,000 7,249,000
Software development costs, net 468,000 1,141,000
Note receivable 32,000 70,000
Other assets 362,000 176,000
------------ ------------
Total assets $ 15,561,000 $ 16,767,000
============ ============
Liabilities and Shareholder's Equity
Current Liabilities:
Accounts payable $ 707,000 $ 840,000
Accrued expenses 2,466,000 3,175,000
Accrual for management severance 866,000 866,000
Obligations under capital lease 543,000 205,000
Deferred revenue 799,000 645,000
Other short-term liabilities 120,000 --
------------ ------------
Total current liabilities 5,501,000 5,731,000
Deferred revenue 12,000 12,000
Obligations under capital lease 549,000 380,000
Accrual for settlement warrants 1,747,000 1,670,000
Accrual for management severance 97,000 619,000
7% senior convertible notes 5,551,000 --
Other long-term liabilities 270,000 30,000
------------ ------------
Total liabilities 13,727,000 8,442,000
------------ ------------
Shareholders' Equity:
Series A 10% cumulative convertible preferred stock, $.005 par value,
5,000,000 shares authorized; 161,000 shares issued
and outstanding at June 30, 1999 and December 31, 1998 1,000 1,000
Series B 7% cumulative convertible preferred stock, $.005 par
value, 85,000 shares authorized; 0 and 56,000 shares issued and
outstanding at June 30, 1999 and December 31,
1998, respectively -- 1,000
Common stock, $.005 par value, 50,000,000 shares authorized;
28,406,000 and 28,086,000 shares issued and outstanding
at June 30, 1999 and December 31, 1998, respectively 141,000 140,000
Additional paid-in capital 64,618,000 70,733,000
Accumulated deficit (62,453,000) (61,147,000)
Treasury stock, at cost, 111,000 and 329,000 shares at
June 30, 1999 and December 31, 1998, respectively (473,000) (1,403,000)
------------ ------------
Total shareholders' equity 1,834,000 8,325,000
------------ ------------
------------ ------------
Total liabilities and shareholders' equity $ 15,561,000 $ 16,767,000
============ ============
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 Six Months Ended
---------------------------- -----------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Network services $ 4,853,000 $ 4,549,000 $ 9,670,000 $ 9,410,000
Online/Internet services 288,000 577,000 578,000 1,174,000
Advertising revenues 186,000 246,000 269,000 416,000
Other revenues 484,000 558,000 981,000 1,102,000
------------ ------------ ------------ ------------
Total revenues 5,811,000 5,930,000 11,498,000 12,102,000
------------ ------------ ------------ ------------
Operating expenses:
Direct operating costs 1,143,000 1,661,000 2,288,000 2,727,000
Selling, general and administrative 2,832,000 2,586,000 5,690,000 6,205,000
Litigation, legal and professional fees 243,000 329,000 485,000 656,000
Equipment lease expense 227,000 274,000 461,000 507,000
Stock-based compensation expense 17,000 -- 56,000 165,000
Depreciation and amortization 1,443,000 1,170,000 3,140,000 2,516,000
Research and development 160,000 202,000 295,000 220,000
------------ ------------ ------------ ------------
Total operating expenses 6,065,000 6,222,000 12,415,000 12,996,000
------------ ------------ ------------ ------------
Operating loss (254,000) (292,000) (917,000) (894,000)
------------ ------------ ------------ ------------
Other income (expense)
Interest income 30,000 63,000 73,000 127,000
Interest expense (235,000) (70,000) (437,000) (145,000)
Gain on sale of interest in subsidiary -- 1,643,000 -- 1,643,000
Other (15,000) -- (25,000) --
------------ ------------ ------------ ------------
Total other income (expense) (220,000) 1,636,000 (389,000) 1,625,000
------------ ------------ ------------ ------------
Income (loss) before income taxes (474,000) 1,344,000 (1,306,000) 731,000
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ (474,000) $ 1,344,000 $ (1,306,000) $ 731,000
============ ============ ============ ============
Accretion of beneficial conversion
feature on preferred stock -- 194,000 -- 758,000
------------ ------------ ------------ ------------
Net income (loss) available to common
shareholder $ (474,000) $ 1,150,000 $ (1,306,000) $ (27,000)
============ ============ ============ ============
Net income (loss) per common share - basic $ (0.02) $ 0.04 $ (0.05) $-
============ ============ ============ ============
Net income (loss) per common share - diluted $ (0.02) $ 0.04 $ (0.05) $-
============ ============ ============ ============
Weighted average shares outstanding - basic 28,249,000 25,877,000 28,063,000 24,834,000
============ ============ ============ ============
Weighted average shares outstanding - diluted 28,249,000 31,523,000 28,063,000 31,635,000
============ ============ ============ ============
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 Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Cash flows provided by (used in) operating activities:
Net income (loss) $ (474,000) $ 1,344,000 $ (1,306,000) $ 731,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,443,000 1,170,000 3,140,000 2,516,000
Provision for doubtful accounts 192,000 225,000 385,000 625,000
(Gain) loss from disposition of equipment (6,000) 60,000 (6,000) 120,000
Non-cash compensation charges 17,000 -- 56,000 165,000
Accreted interest expense 100,000 65,000 192,000 132,000
Amortization of deferred revenue (34,000) -- (85,000) --
Gain on sale of interest in subsidiary -- (1,643,000) -- (1,643,000)
Changes in assets and liabilities:
Accounts receivable (126,000) 580,000 (618,000) (482,000)
Prepaid expenses and other assets (464,000) (160,000) (377,000) 66,000
Accounts payable and accrued expenses (92,000) (185,000) (784,000) (917,000)
Deferred revenue 18,000 (616,000) 239,000 (531,000)
Management severance and other long-term (200,000) (275,000) (535,000) (663,000)
liabilities
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities 374,000 565,000 301,000 119,000
------------ ------------ ------------ ------------
Cash flows provided by (used in) investing activities:
Capital expenditures (1,154,000) (706,000) (2,001,000) (1,167,000)
Notes receivable 19,000 -- 38,000 (70,000)
Capital software expenditures (3,000) (19,000) (31,000) (22,000)
Proceeds from sale of equipment 45,000 -- 45,000 --
Proceeds from sale of interest in subsidiary -- 1,862,000 -- 1,862,000
------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities (1,093,000) 1,137,000 (1,949,000) 603,000
------------ ------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Principal payments under capital leases (414,000) (2,000) (537,000) (23,000)
obligations
Principal payments on note payable -- -- -- --
Exercise of stock options -- -- 150,000 --
------------ ------------ ------------ ------------
Net cash provided by (used in) financing (414,000) (2,000) (387,000) (23,000)
activities
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,133,000) 1,700,000 (2,035,000) 699,000
Cash and cash equivalents at beginning of period 3,658,000 3,763,000 4,560,000 4,764,000
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,525,000 $ 5,463,000 $ 2,525,000 $ 5,463,000
============ ============ ============ ============
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 Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 32,000 $ -- $ 58,000 $ 5,000
============== ============== ============== ==============
Income taxes $ -- $ -- $ -- $ --
============== ============== ============== ==============
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of treasury stock pursuant to
anti-dilution provisions $ 930,000 $ -- $ 930,000 $ 132,000
============== ============== ============== ==============
Issuance of common stock in payment of interest $ 90,000 $ -- $ 90,000 $ 132,000
============== ============== ============== ==============
Equipment acquired under capital leases $ 712,000 $ 375,000 $ 1,044,000 $ 375,000
============== ============== ============== ==============
Equipment and license acquired by issuing note
payable $ 360,000 $ -- $ 360,000 $ --
============== ============== ============== ==============
Exchange of preferred stock for convertible
notes and warrants $ -- $ -- $ 5,449,000 $ --
============== ============== ============== ==============
Preferred dividend paid in common stock $ 8,000 $ 8,000 $ 8,000 $ 8,000
============== ============== ============== ==============
Issuance of common stock in exchange for
cancellation of options and warrants $ -- $ -- $ -- $ 212,000
============== ============== ============== ==============
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 ended December 31, 1999.
The consolidated financial statements for the three and six months ended
June 30, 1999 and 1998 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K, filed for the year ended December 31, 1998.
Certain items in the prior period consolidated financial statements have
been reclassified to conform to the current period presentation.
2. Earnings (Loss) Per Share
Options, warrants, convertible preferred stock and convertible notes
representing approximately 13,491,000, and 13,309,000 potentially dilutive
common shares have been excluded from the computations of net income (loss) per
share for the three and six months ended June 30, 1999, respectively, as their
effect is anti-dilutive.
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Numerator for basic and diluted earnings
per share -
Net income (loss) available to common
shareholders $ (474,000) 1,150,000 (1,306,000) (27,000)
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share -
Weighted average shares 28,249,000 25,877,000 28,063,000 24,834,000
Potential effect of dilutive securities:
Employee stock options and director fees -- 579,000 -- 383,000
Warrants -- 148,000 -- 74,000
Litigation settlements and management
severance -- 2,088,000 -- 2,467,000
Convertible preferred stock -- 2,831,000 -- 3,877,000
Convertible notes payable -- -- -- --
------------ ------------ ------------ ------------
Potentially dilutive common shares -- 5,646,000 -- 6,801,000
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
Adjust weighted average shares and
assumed conversions 28,249,000 31,523,000 28,063,000 31,635,000
============ ============ ============ ============
Basic earnings (loss) per common stock $ (0.02) 0.04 (0.05) --
============ ============ ============ ============
Diluted earnings (loss) per common stock $ (0.02) 0.04 (0.05) --
============ ============ ============ ============
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Reflected in the net loss available to common shareholders for the three and
six months ended June 30, 1998 is the accretion of the beneficial conversion
feature on the Series B Preferred Stock in the amount of $194,000 and $758,000,
respectively. 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 shareholders' equity. The
beneficial conversion feature was fully accreted as of June 30, 1998.
3. Segment Information
The Company analyzes segment performance based on revenue. Network Services
comprise 84% of the Company's total revenue and is the only reportable segment
for the six months ended June 30, 1999. The following tables set forth certain
information regarding the Company's segments and other operations:
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues:
Network Services $ 4,853,000 4,549,000 9,670,000 9,410,000
Other 958,000 1,381,000 1,828,000 2,692,000
----------- ----------- ----------- -----------
Total revenues $ 5,811,000 5,930,000 11,498,000 12,102,000
=========== =========== =========== ===========
Operating income (loss):
Network Services $ 2,163,000 1,465,000 4,160,000 3,915,000
Other 261,000 582,000 (144,000) 1,417,000
Corporate (2,678,000) (2,339,000) (4,933,000) (6,226,000)
----------- ----------- ----------- -----------
Total operating loss $ (254,000) (292,000) (917,000) (894,000)
=========== =========== =========== ===========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward Looking Statements
This Quarterly Report contains forward looking statements, including
statements relating to, among other things, the success of the DITV network,
future growth of the Company's business and successful implementation of its
Internet station strategy, which are subject to risks and uncertainties
including, the impact of the Y2K remediation costs, product demand, market
acceptance, 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, 1998 and its quarterly report on Form 10-Q for
the period ended March 31, 1999.
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. NTN networks distributes programming to more than 17.7 million
viewer/participants per month in the United States through hospitality
locations, such as restaurants, bars and hotels. Additionally, NTN distributes
programming to approximately 500 sites in Canada through its Canadian licensee.
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In February 1999, the Company introduced a second Network to be broadcast to
the Hospitality industry. The Company installed the first of these Digital
Interactive TV Systems ("DITV") in April 1999. As of August 4, 1999, the Company
had received contracts for 935 sales of the DITV Network of which 287 were new
customers and 648 were conversions of customers from the original NTN Network to
the DITV Network. Of the 935 total sales, 581 have been installed as of August
4, 1999.
The DITV Network has all the capabilities of the original NTN Network plus a
more television-like quality in advertisements and games. The new
"Playmaker"(R) wireless input devices used with the DITV Network have been
enhanced in several ways including: (a) updated radio frequency technology
mitigates the interference problems common to the prior series; (b) a larger
eight-line LCD display to allow for several possible future features, including
user "chat" from one unit to another within the host premises and the display of
information such as sports scores and stock quotes; (c) a redesigned keypad
conforms to the industry standard QWERTY keyboard layout as well as utilizing a
"play zone" to provide a dedicated input area for the games; and (d) a longer
battery life. Further, the Company has developed enhancements to its interactive
software, including a migration to a Windows(R)-based platform, to allow
full-motion video presentation.
In April 1999, the Company acquired the assets and rights to certain
technology, hardware and video games used in the Internet game business from
Sikander, Inc., a Nevada corporation. The technology enables NTN to link the
viewer/participants on its existing network to coin-operated Internet stations,
thus providing out-of-home access to the Web and video games for patrons in
restaurants, hotels and other public venues.
In addition to the introduction of NTN's DITV network and the purchase of
the assets related to the Internet game business, the Company's Internet
business plan will make it possible for consumers to access NTN's interactive
content from a complete range of delivery systems including NTN's two
hospitality networks, the Internet, America Online, interactive cable services
and other interactive delivery systems.
Results of Operations
Three months ended June 30, 1999 and June 30, 1998
Total revenues decreased 2% to $5,811,000 for the three months ended
June 30, 1999 from $5,930,000 for the three months ended June 30, 1998. This
occurred primarily due to declines in Online/Internet revenues and other
revenues, offset by increases in Network Services.
Network Service revenues increased 7% to $4,853,000 for the three months
ended June 30, 1999 from $4,549,000 for the three months ended June 30, 1998.
This increase is primarily due to an increase in rates charged for the setup,
installation and training for the DITV network as compared to the original
network. During the three months ended June 30, 1999, 339 DITV systems had been
installed. Active sites have also increased during the three months ended June
30, 1999 compared to the three months ended June 30, 1998.
Revenue from Online/Internet services decreased 50% to $288,000 for the
three months ended June 30, 1999 from $577,000 for the three months ended June
30, 1998. The decrease was largely due to revenue recognized for production
services provided in 1998 that did not occur in 1999. Additionally, the Company
entered into a new contract in the second quarter of 1998 with its Internet
partner, America Online. The contract provides for a flat monthly fee rather
than fees based on AOL member usage of the Company's content which resulted in a
reduction of revenue of $50,000 for the three months ended June 30, 1999
compared to the three months ended June 30, 1998.
Other revenues decreased 13% to $484,000 for the three months ended June 30,
1999 from $558,000 for the three months ended June 30, 1998. Included in other
revenue for the three months ended June 30, 1998 were equipment sales
of $128,000. No revenue was recorded for equipment sales in 1999. This decrease
was partially offset by an increase in miscellaneous revenue for the three
months ended June 30, 1999.
Direct operating costs decreased 31% to $1,143,000 for the three months
ended June 30, 1999 from $1,661,000 for the three months ended June 30, 1998.
This decrease was due to the settlement of an accrued liability for license fees
that was less than had been estimated. As a result, the Company reduced the
excess liability and license fee expense by approximately $180,000 related to
the settlement for the three months ended June 30, 1999. Additionally, the three
months ended June 30, 1998, included approximately $360,000 in costs related to
the realignment of the satellite dishes at hospitality locations in order to
receive broadcast
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transmissions from the Galaxy III-R satellite when the PanAmSat Galaxy IV
satellite failed to operate in May 1998. These decreases were offset by an
increase in expenses associated with an increase in the number of sites
installed and an increase in the number of sales commissions paid in connection
with the roll out of the DITV network for the three months ended June 30, 1999.
Satellite transmissions costs and ISP charges also increased due to additional
services needed to support the DITV network for the three months ended June 30,
1999.
Selling, general and administrative expenses increased 10% to $2,832,000 for
the three months ended June 30, 1999 from $2,586,000 for the three months ended
June 30, 1998. This increase was due to the Company receiving approximately
$200,000 in nonrefundable payments from a prospective buyer, Omnigon, in
conjunction with the negotiations for the sale of IWN, Inc., in April 1998.
These negotiations were later terminated. The payments of $200,000 were offset
against the selling, general and administrative expenses of IWN, Inc., in the
three months ended June 30, 1998. Additionally, marketing expenses increased as
a direct result of additional advertising related to the launch of the new DITV
network for the three months ended June 30, 1999. These increases were offset by
curtailing the operations of IWN, Inc., thereby reducing selling, general and
administrative expenses by approximately $90,000 for the three months ended June
30, 1999, compared to the three months ended June 30, 1998. Additionally, office
lease expenses decreased due to the sublet of office space beginning in
September 1998 which was previously occupied by the Company.
Stock-based compensation expenses increased to $17,000 for the three months
ended June 30, 1999. There was no stock-based compensation for the three months
ended June 30, 1998. The 1999 charges resulted from the issuance of warrants and
options to non-employees which can vary from period-to-period.
Research and development expenses were $160,000 for the three months ended
June 30, 1999, compared to $202,000 for the three months ended June 30, 1998.
The current period expenses result from the Company's research and development
efforts related to the next generation of the DITV network and future internet
web sites. For the three month period ending June 30, 1998, the Company's
research and development efforts focused primarily on the upgrade of the NTN
network.
Interest expense increased 235% to $235,000 for the three months ended June
30, 1999 from $70,000 for the three months ended June 30, 1998. The increase was
primarily due to interest expense recorded in 1999 related to its convertible
notes, other notes payable and additional capital leases for equipment
acquisitions that did not exist in 1998.
Six months ended June 30, 1999 and June 30, 1998
Total revenues decreased 5% to $11,498,000 for the six months ended June 30,
1999 from $12,102,000 for the six months ended June 30, 1998. This occurred
primarily due to declines in Online/Internet revenues, advertising and other
revenues, offset by increases in Network Services.
Network Service revenues increased 3% to $9,670,000 for the six months ended
June 30, 1999 from $9,410,000 for the six months ended June 30, 1998. This
increase is primarily due to an increase in rates charged for the setup,
installation and training for the DITV network as compared to the original
network. During the six months ended June 30, 1999, 339 DITV systems had been
installed. Active sites have also increased during the six months ended June 30,
1999 compared to the six months ended June 30, 1998.
Revenue from Online/Internet services decreased 51% to $578,000 for the six
months ended June 30, 1999 from $1,174,000 for the six months ended June 30,
1998. The decrease was largely due to revenue recognized for production services
provided in 1998 that did not occur in 1999. Additionally, the Company entered
into a new contract in the second quarter of 1998 with its Internet partner,
America Online. The contract provides for a flat monthly fee rather than fees
based on AOL member usage of the Company's content which resulted in a reduction
of revenue of $105,000 for the six months ended June 30, 1999 compared to the
six months ended June 30, 1998.
Advertising revenues decreased 35% to $269,000 for the six months ended June
30, 1999 from $416,000 for the six months ended June 30, 1998. The decrease is
due to advertising contracts that ended in 1998 and did not recur in 1999.
Other revenues decreased 11% to $981,000 for the six months ended June 30,
1999 from $1,102,000 for the six months ended June 30, 1998. Other revenues for
the six months ended June 30, 1998 included approximately $285,000 in sales
generated by LearnStar, Inc. (LearnStar). As a result of the sale of an 82.5%
interest in LearnStar in June 1998, no such revenue was recorded for the six
months ended June 30, 1999. This decrease is offset by an increase in revenue
from the Company's Canadian licensee for the six months ended June 30, 1999.
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Direct operating costs decreased 16% to $2,288,000 for the six months ended
June 30, 1999 from $2,727,000 for the six months ended June 30, 1998. This
decrease, in part, relates to a reduction in field marketing expenses of
$143,000 due to less reliance on independent representatives in favor of
employed field and marketing personnel. Additionally, this decrease was due to
the settlement of an accrued liability for license fees that was less than had
been estimated. As a result, the Company reduced the excess liability and
license fee expense by approximately $180,000 related to the settlement for the
six months ended June 30, 1999. Additionally, the six months ended June 30,
1998, included approximately $360,000 in costs related to the realignment of the
satellite dishes at hospitality locations in order to receive broadcast
transmissions from the Galaxy III-R satellite when the PanAmSat Galaxy IV
satellite failed to operate in May 1998. These decreases were offset by an
increase in expenses associated with an increase in the number of sites
installed and an increase in the number of sales commissions paid in connection
with the roll out of the DITV network for the six months ended June 30, 1999.
Satellite transmissions costs and ISP charges also increased due to additional
services needed to support the DITV network for the six months ended June 30,
1999.
Selling, general and administrative expenses decreased 8% to $5,690,000 for
the six months ended June 30, 1999 from $6,205,000 for the six months ended June
30, 1998. The six months ended June 30, 1998 included approximately $276,000 in
selling, general and administrative expenses incurred by LearnStar. As a result
of the sale of an 82.5% interest in LearnStar in June 1998, no such expenses
were recorded for the six months ended June 30, 1999. Additionally, the Company
significantly curtailed its operations of IWN, Inc., thereby reducing selling,
general and administrative expenses by approximately $286,000 for the six months
ended June 30, 1999, compared to the six months ended June 30, 1998. Office
lease expenses also decreased due to the sublet of office space beginning in
September 1998 which was previously occupied by the Company.
Stock-based compensation expense decreased 66% to $56,000 for the six months
ended June 30, 1999 compared to $165,000 for the six months ended June 30, 1998.
The 1999 charges resulted from the issuance of warrants and options to
non-employees and can vary from period-to-period.
Research and development expenses were $295,000 for the six months ended
June 30, 1999, compared to $220,000 for the six months ended June 30, 1998. The
current period expenses result from the Company's research and development
efforts related to the next generation of the DITV network and future internet
web sites. For the six month period ending June 30, 1998, the Company's research
and development efforts focused primarily on the upgrade of the NTN network.
Interest expense increased 201% to $437,000 for the six months ended
June 30, 1999 from $145,000 for the six months ended June 30, 1998. The increase
was primarily due to interest expense recorded in 1999 related to its
convertible notes, other notes payable and additional capital leases for
equipment acquisitions that did not exist in 1998.
Liquidity and Capital Resources
At June 30, 1999, the Company had cash and cash equivalents of $2,525,000
and working capital (current assets in excess of current liabilities) of
$1,151,000, compared to cash and cash equivalents of $4,560,000 and working
capital of $2,400,000 at December 31, 1998. Net cash provided by operations was
$301,000 for the six months ended June 30, 1999 and $119,000 for the six months
ended June 30, 1998. The principal uses of cash for the six months ended June
30, 1999 were to fund the Company's net loss and for severance payments made by
the Company in compliance with management resignation agreements with former
officers totaling $535,000. The uses were offset by an increase in deferred
revenue of $205,000, depreciation, amortization and other non-cash charges. Net
cash used in investing activities was $1,949,000 for the six months ended June
30, 1999 and net cash provided by investing activities was$603,000 for the six
months ended June 30, 1998. Included in net cash used in investing activities
for the six months ended June 30, 1999 were $2,001,000 in capital expenditures.
Net cash used in financing activities was $387,000 for the six months ended June
30, 1999 and$23,000 for the six months ended June 30, 1998. Net cash used in
financing activities for the six months ended June 30, 1999 included principal
payments under capital leases of $537,000 offset by the proceeds of $150,000
from the exercise of stock options.
The Company has launched a second hospitality network, the DITV network,
which includes improvements to its Playmakers(R) and a Windows-based platform.
The Company believes that its cash on hand and anticipated cash flows from its
operations will be sufficient to meet its operating needs at least through 1999.
It is likely, however, the Company will require additional financing to
completely implement its plan to convert its entire existing customer base to
the new DITV network, to expand the DITV network, implement the Company's
Internet station strategy and expand the Company's Internet business. The
Company has no agreement to obtain any additional financing, and there can be no
assurance that it will be able to obtain needed financing on terms acceptable to
it, or at all. Capital financing possibilities may include borrowing
arrangements under fixed and revolving credit agreements or sale of additional
equity securities. If the Company is unable to obtain any needed financing, it
may have to delay or
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postpone completing the conversion to the DITV Network or to curtail other
business plans until which financing or additional funding can be obtained. The
Company began to convert existing customers to the new DITV network in April
1999, replacing Playmakers(R) and broadcast equipment with new technology. The
Company plans to continue operating the DITV network and the NTN original
network concurrently for a minimum of 12 more months.
Year 2000
The Company, with the assistance of independent outside consultants, has
been assessing its "Year 2000" computer readiness and exposure to Year 2000
issues, 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 segregated its systems into
two categories: mission critical and support systems. Mission critical systems
are characterized as hardware and applications contributing to the income of the
business. Support systems are characterized as systems that organize and create
efficiencies for the corporation, but are not critical to its operations. The
Company has completed the assessment phase and is starting the renovation phase
which should be completed by the third quarter of 1999.
The Company's mission critical systems are segregated between systems
located in our hospitality sites (Locations) and back-end systems which support
both the DITV network and the NTN original network, for which the Company will
incur expected costs of approximately $1,000,000 to ensure Year 2000 compliance.
The Company intends to fund these costs with cash on hand, leases from vendors
and internally generated funds. The Company has incurred costs specific to
remediation efforts of approximately $65,000 through June 30, 1999. Certain
compliance issues have been eliminated as a result of the DITV network and the
new equipment purchased related to DITV including back-end equipment. The
Company is testing Year 2000 compliance at the system BIOS, operating system and
application levels. The Company has determined that 25% of Location systems may
not be Year 2000 compliant due to the inaccurate roll over of the system BIOS
which could compromise content scheduling. It is estimated that the replacement
of these systems will cost a total of approximately $725,000 for all affected
Locations. All Location systems in the DITV network are Year 2000 compliant. The
Company has identified key back-end systems that will require an upgrade of
commercial hardware and data base software. As can be determined thus far, the
operating systems and Company-developed applications are not affected, but are
being verified for compliance. The Company has also initiated a review of Year
2000 compliance by its principal vendors, and this estimate assumes that the
Company will not incur significant Year 2000 related costs on behalf of its
vendors or other third parties.
Concerning the support systems, all corporate personal computers and servers
have been deemed Year 2000 compliant. The operating systems and commercial
software packages have been upgraded to compliant versions.
The worst-case scenario would be if the Company were unable to broadcast its
program to its network services customers. Network services revenue represents
84% of total revenues for the six months ended June 30, 1999. The Company is
currently developing a contingency plan in the event that this occurs. However,
a widespread or extended failure of the Company's internal systems, or systems
of third parties, to be Year 2000 compliant, could potentially have a material
adverse effect on the Company's business, financial condition or operating
results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company issued 218,400 shares of common stock from treasury in
April, 1999 to certain investors pursuant to certain anti-dilution provisions of
the Company's agreement with the investors.
On June 29, 1999, the Company entered into an Engagement Agreement with
Interactive Marketing, Inc. ("IMI") pursuant to which IMI was engaged to provide
strategic and tactical marketing services to the Company. For IMI's services
under the Engagement Agreement, the Company issued IMI a warrant to purchase
300,000 shares of common stock at an exercise price of $0.8125 per share. The
warrant is exercisable as to 50,000 shares on the last day of each of the six
consecutive months commencing June 30, 1999 and ending November 30, 1999. To
date these warrants have not been exercised. In addition, IMI will receive cash
compensation of $17,500 per month through the end of the first year of the term
of the Engagement Agreement. Further, a warrant for up to an additional 300,000
shares of the Company's common stock may be granted by the Company to IMI if IMI
exceeds certain milestones to be negotiated as provided in the Engagement
Agreement. The Engagement Agreement expires on May 15, 2000.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Asset Purchase Agreement dated as of April 23, 1999, by and between the
Company and Sikander, Inc.*
10.2 Promissory Note dated as of April 29, 1999, issued by the Company to
Sikander, Inc.*
10.3 Earn Out Option dated as of April 23, 1999, by and between the Company and
Sikander, Inc.*
10.4 Stock Option Agreement dated as of April 23, 1999, by and between the
Company and Edward Bevilacqua.*
10.5 Engagement Agreement dated as of June 29, 1999 by and between the Company
and Interactive Marketing, Inc.
10.6 Warrant No. WE-012 issued to Interactive Marketing, Inc.
27. Financial Data Schedule.
(b) Reports on Form 8-K
None
* Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 filed with the Commission and
incorporated herein by reference.
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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: August 06, 1999
By: /s/ Kendra Berger
-----------------------
Kendra Berger
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.1 Asset Purchase Agreement dated as of April 23, 1999, by and between the
Company and Sikander, Inc.*
10.2 Promissory Note dated as of April 29, 1999, issued by the Company to
Sikander, Inc.*
10.3 Earn Out Option dated as of April 23, 1999, by and between the Company and
Sikander, Inc.*
10.4 Stock Option Agreement dated as of April 23, 1999, by and between the
Company and Edward Bevilacqua.*
10.5 Engagement Agreement dated as of June 29, 1999 by and between the Company
and Interactive Marketing, Inc.
10.6 Warrant No. WE-012 issued to Interactive Marketing, Inc.
27. Financial Data Schedule.*
* Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 filed with the Commission and
incorporated herein by reference.