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, 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 November 11, 1999 the registrant had 28,930,000 shares of common stock,
$.005 par value, outstanding.
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
1999 December 31,
(Unaudited) 1998
------------ ------------
Assets
Current Assets:
Cash and cash equivalents $ 3,069,000 $ 4,560,000
Accounts receivable, net 2,165,000 2,471,000
Investments available for sale 887,000 -
Prepaid expenses and other current assets 1,270,000 1,100,000
------------ ------------
Total current assets 7,391,000 8,131,000
Broadcast equipment and fixed assets, net 9,521,000 7,249,000
Software development costs, net 352,000 1,141,000
Note receivable 14,000 70,000
Other assets 71,000 176,000
------------ ------------
Total assets $ 17,349,000 $ 16,767,000
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,214,000 $ 840,000
Accrued expenses 2,233,000 3,175,000
Accrual for management severance 768,000 866,000
Obligations under capital leases 624,000 205,000
Deferred revenue 677,000 645,000
Other short-term liabilities 120,000 -
------------ ------------
Total current liabilities 5,636,000 5,731,000
Deferred revenue 12,000 12,000
Obligations under capital leases 514,000 380,000
Accrual for settlement warrants 1,785,000 1,670,000
Accrual for management severance 13,000 619,000
Revolving line of credit 1,257,000 -
7% senior convertible notes 5,606,000 -
Other long-term liabilities 210,000 30,000
------------ ------------
Total liabilities 15,033,000 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 September 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 September 30, 1999 and December 31, 1998, respectively - 1,000
Common stock, $.005 par value, 50,000,000 shares authorized; 28,833,000
and 28,086,000 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 143,000 140,000
Additional paid-in capital 65,001,000 70,733,000
Accumulated deficit (61,946,000) (61,147,000)
Accumulated other comprehensive loss (410,000) -
Treasury stock, at cost, 111,000 and 329,000 shares at September 30,
1999 and December 31, 1998, respectively (473,000) (1,403,000)
------------ ------------
Total shareholders' equity 2,316,000 8,325,000
------------ ------------
Total liabilities and shareholders' equity $ 17,349,000 $ 16,767,000
============ ============
See accompanying notes to unaudited consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
Revenues:
Network services $ 5,038,000 $ 4,565,000 $ 14,708,000 $ 13,975,000
Online/Internet services 222,000 506,000 800,000 1,680,000
Advertising revenues 199,000 226,000 468,000 642,000
Other revenues 428,000 506,000 1,409,000 1,607,000
-------------- ------------- ------------- -------------
Total revenues 5,887,000 5,803,000 17,385,000 17,904,000
-------------- ------------- ------------- -------------
Operating expenses:
Direct operating costs 1,759,000 1,189,000 4,047,000 3,671,000
Selling, general and administrative 3,491,000 2,857,000 9,181,000 9,061,000
Litigation, legal and professional fees 57,000 231,000 542,000 887,000
Equipment lease expense 191,000 267,000 652,000 774,000
Stock-based compensation expense 35,000 - 91,000 165,000
Depreciation and amortization 1,623,000 1,314,000 4,763,000 4,075,000
Research and development 229,000 254,000 524,000 474,000
-------------- ------------- ------------- -------------
Total operating expenses 7,385,000 6,112,000 19,800,000 19,107,000
-------------- ------------- ------------- -------------
Operating loss (1,498,000) (309,000) (2,415,000) (1,203,000)
-------------- ------------- ------------- -------------
Other income (expense):
Interest income 13,000 101,000 86,000 228,000
Interest expense (262,000) (114,000) (699,000) (259,000)
Gain on sale of interest in subsidiary - - - 1,643,000
Gain on sale of assets of subsidiary 2,254,000 - 2,254,000 -
Other - - (25,000) -
-------------- ------------- ------------- -------------
Total other income (expense) 2,005,000 (13,000) 1,616,000 1,612,000
-------------- ------------- ------------- -------------
Income (loss) before income taxes 507,000 (322,000) (799,000) 409,000
Provision for income taxes - - - -
-------------- ------------- ------------- -------------
Net income (loss) $ 507,000 $ (322,000) $ (799,000) $ 409,000
============== ============= ============= =============
Accretion of beneficial conversion feature on
preferred stock - - - 758,000
-------------- ------------- ------------- -------------
Net income (loss) available to common shareholders $ 507,000 $ (322,000) $ (799,000) $ (349,000)
============== ============= ============= =============
Net income (loss) per common share - basic $ 0.02 $ (0.01) $ (0.03) $ (0.01)
============== ============= ============= =============
Net income (loss) per common share - diluted $ 0.02 $ (0.01) $ (0.03) $ (0.01)
============== ============= ============= =============
Weighted average shares outstanding - basic 28,573,000 26,857,000 28,235,000 25,516,000
============== ============= ============= =============
Weighted average shares outstanding - diluted 35,294,000 26,857,000 28,235,000 25,516,000
============== ============= ============= =============
See accompanying notes to unaudited consolidated financial statements
4
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,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
Cash flows provided by (used in) operating activities:
Net Income (loss) $ 507,000 $ (322,000) $ (799,000) $ 409,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,623,000 1,314,000 4,763,000 4,075,000
Provision for doubtful accounts 209,000 - 594,000 625,000
(Gain) loss from disposition of equipment - 60,000 (6,000) 180,000
Non-cash compensation charges 35,000 - 91,000 165,000
Accreted interest expense 98,000 66,000 303,000 198,000
Amortization of deferred revenue - - (85,000) -
Gain on sale of interest in subsidiary - - - (1,643,000)
Gain on sale of assets of subsidiary (2,254,000) - (2,254,000) -
Changes in assets and liabilities:
Accounts receivable 330,000 24,000 (288,000) (458,000)
Prepaid expenses and other assets 90,000 (237,000) (287,000) (171,000)
Accounts payable and accrued expenses 626,000 (168,000) (158,000) (1,030,000)
Deferred revenue (122,000) (164,000) 117,000 (779,000)
Management severance and other liabilities (187,000) (362,000) (735,000) (996,000)
-------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 955,000 211,000 1,256,000 575,000
-------------- ------------- ------------- -------------
Cash flows provided by (used in) investing activities:
Capital expenditures (2,548,000) (992,000) (4,453,000) (2,404,000)
Notes receivable 20,000 - 59,000 (70,000)
Capital software expenditures (25,000) - (56,000) (22,000)
Proceeds from sale of assets of subsidiary 1,227,000 - 1,227,000 -
Proceeds from sale of equipment - - 45,000 -
Proceeds from sale of subsidiary - - - 1,862,000
-------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities (1,326,000) (992,000) (3,178,000) (634,000)
-------------- ------------- ------------- -------------
Cash flows provided by (used in) financing activities:
Principal payments on capital leases (282,000) (35,000) (916,000) (58,000)
Net proceeds from line of credit 1,257,000 - 1,257,000 -
Principal payments on note payable (60,000) - (60,000) -
Exercise of stock options - - 150,000 -
-------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 915,000 (35,000) 431,000 (58,000)
-------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents
544,000 (816,000) (1,491,000) (117,000)
-------------- ------------- ------------- -------------
Cash and cash equivalents at beginning of period
2,525,000 5,463,000 4,560,000 4,764,000
============== ============= ============= =============
Cash and cash equivalents at end of period $ 3,069,000 $ 4,647,000 $ 3,069,000 $ 4,647,000
============== ============= ============= =============
See accompanying notes to unaudited consolidated financial statements
5
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,
1999 1998 1999 1998
------------- -------------- -------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 52,000 $ 8,000 $ 110,000 $ 13,000
Income taxes $ - $ - $ - $ -
============= ============== ============== ==============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of treasury stock pursuant to
anti-dilution provision $ - $ 1,200,000 $ 930,000 $ 1,332,000
============= ============== ============== ==============
Issuance of common stock in payment of interest $ 103,000 $ - $ 193,000 $ -
============= ============== ============== ==============
Issuance of common stock in payment of accrued
board compensation $ 247,000 $ - $ 247,000 $ -
============= ============== ============== ==============
Equipment acquired under capital leases $ 328,000 $ - $ 1,469,000 $ 375,000
============= ============== ============== ==============
Equipment and license acquired by issuing note
payable $ - $ - $ 360,000 $ -
============= ============== ============== ==============
Exchange of preferred stock for convertible notes
and warrants $ - $ - $ 5,449,000 $ -
============= ============== ============== ==============
Preferred dividend paid in common stock $ - $ - $ 8,000 $ 8,000
============= ============== ============== ==============
Issuance of common stock in exchange for cancellation
of options and warrants $ - $ - $ - $ 212,000
============= ============== ============== ==============
Unrealized loss on investments available for sale $ 410,000 $ - $ 410,000 $ -
============= ============== ============== ==============
Sale of assets of subsidiary in exchange for cash
of $1,227,000 and stock of eBet Online. $ 1,297,000 $ - $ 1,297,000 $ -
============= ============== ============== ==============
See accompanying notes to unaudited consolidated financial statements
6
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 nine months ended
September 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. Investments Available For Sale
Investment securities at September 30, 1999 consist of equity securities,
which are classified as available-for-sale securities. Available-for-sale
securities are recorded at fair value and unrealized holding gains and losses
are excluded from earnings and are reported as a separate component of
comprehensive income until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific-identification basis.
A decline in the market value of any available-for-sale security below cost that
is deemed to be other than temporary results in a reduction in the carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established.
3. Revolving Line of Credit
In August 1999, the Company entered into an agreement with Coast Business
Credit for a revolving line of credit not to exceed $4,000,000. Interest is
charged on the outstanding balance at a rate equal to the Prime Rate plus 1.5%
per annum, but cannot be less than 9% per annum. The line of credit is secured
by substantially all of the Company's assets. Total loan fees of $120,000 are
payable in three annual installments and are being amortized over the life of
the loan which matures on August 31, 2002.
7
4. Earnings (Loss) Per Share
Options, warrants, convertible preferred stock and convertible notes
representing approximately 4,402,000, 3,901,000, 13,346,000 and 5,940,000,
potentially dilutive common shares have been excluded from the computations of
net income (loss) per share for the three months ended September 30, 1999 and
1998 and for the nine months ended September 30, 1999 and 1998, respectively, as
their effect is anti-dilutive.
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Numerator for diluted earnings (loss)
per share:
Net income (loss) available
to common shareholders $ 507,000 (322,000) (799,000) (349,000)
Interest on 7% convertible notes 103,000 - - -
--------------- --------------- --------------- ---------------
610,000 (322,000) (799,000) (349,000)
=============== =============== =============== ===============
Denominator:
Denominator for basic earnings (loss) per
share -
Weighted average shares 28,573,000 26,857,000 28,235,000 25,516,000
Potential effect of dilutive securities:
Employee stock options and
director options 1,497,000 - - -
Warrants 526,000 - - -
Litigation settlements and management
Severance - - - -
Convertible preferred stock 61,000 - - -
Convertible debt 4,637,000 - - -
--------------- --------------- --------------- ---------------
Potentially dilutive common shares 6,721,000 - - -
--------------- --------------- --------------- ---------------
Denominator for diluted earnings per share -
Adjusted weighted average
shares and assumed conversions 35,294,000 26,857,000 28,235,000 25,516,000
=============== =============== =============== ===============
Basic earnings (loss) per common stock $ 0.02 (0.01) (0.03) (0.01)
=============== =============== =============== ===============
Diluted earnings (loss) per common stock $ 0.02 (0.01) (0.03) (0.01)
=============== =============== =============== ===============
Reflected in the 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 shareholders' equity. The beneficial conversion feature was fully
accreted as of September 30, 1998.
5. Segment Information
The Company analyzes segment performance based on revenue. Hospitality
revenues represent 93% of the Company's total revenue and is the only reportable
segment for the nine months ended September 30, 1999. The following tables set
forth certain information regarding the Company's segments and other operations:
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------- --------------- -------------- ---------------
Revenues:
Hospitality $ 5,564,000 5,297,000 16,127,000 15,739,000
Other 323,000 506,000 1,258,000 2,165,000
--------------- --------------- -------------- ---------------
Total revenues $ 5,887,000 5,803,000 17,385,000 17,904,000
=============== =============== ============== ===============
Operating loss:
Hospitality $ 932,000 1,509,000 3,206,000 4,708,000
Online/Internet services (507,000) 448,000 (1,366,000) 1,444,000
IWN, Inc. (16,000) (134,000) (44,000) (499,000)
Corporate (1,907,000) (2,132,000) (4,211,000) (6,840,000)
Other - - - (16,000)
--------------- --------------- -------------- ---------------
Operating loss $ (1,498,000) (309,000) (2,415,000) (1,203,000)
=============== ============== =============== ==============
6. Sale of Assets of Subsidiary
The results for the three and nine months ended September 30, 1999 include a
gain of $2,254,000 related to the sale of the assets of its wholly-owned
subsidiary, IWN, Inc., to eBet Limited in exchange for $1,227,000 in cash and
4,000,000 shares of eBet Online stock.
8
7. Subsequent Events
The following legal proceeding developments occurred subsequent to the period
ended September 30, 1999:
The Company reached a tentative settlement agreement with the class of
plaintiffs in Miller v. NTN Communications, et al.,filed in June 1997 whereby
the Company is to pay $3.25 million, subject to agreement on documentation and
preliminary and final approval by the U.S. District Court. The settlement
payment is fully covered by the Company's liability insurance.
The Company entered into a settlement agreement with the Business Software
Alliance ("BSA") in connection with the Company's use of certain software
products in the course of its business, with insufficient licenses for such use,
prior to 1998. Pursuant to the settlement agreement, the Company will pay to BSA
a total of $339,864 in ten equal monthly installments. The Company had
previously accrued an amount sufficient to cover the settlement.
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 reports on Form 10-Q for
the periods ended March 31, 1999 and June 30, 1999, which are incorporated
herein by reference.
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 distribute 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.
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 November 5, 1999, the
Company had received contracts for 1,412 sales of the DITV Network, of which 492
were new customers and 920 were conversions of customers from the original NTN
Network to the DITV Network. Of the 1,412 total sales, 1,211 had been installed
as of November 5, 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. The Company is currently deploying
Internet Stations to various NTN locations in Southern California and Texas for
beta testing.
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.
9
Results of Operations
Three months ended September 30, 1999 and September 30, 1998
Operations for the three months ended September 30, 1999 resulted in a net
income of $507,000 compared to a net loss of $322,000 for the three months ended
September 30, 1998. The results for the third quarter of 1999 include a gain of
$2,254,000 related to the sale of the assets of its wholly-owned subsidiary,
IWN, Inc., to eBet Limited in exchange for $1,227,000 in cash and 4,000,000
shares of eBet Online stock.
Total revenues increased 1% to $5,887,000 for the three months ended
September 30, 1999 from $5,803,000 for the three months ended September 30,
1998. This occurred primarily due to an increase in network services revenue,
which was partially offset by decreases in Online/Internet services revenues,
advertising and other revenues.
Network services revenue increased 10% to $5,038,000 for the three months
ended September 30, 1999 from $4,565,000 for the three months ended September
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 September 30, 1999, 596 DITV
systems were installed.
Revenue from Online/Internet services decreased 56% to $222,000 for the
three months ended September 30, 1999 from $506,000 for the three months ended
September 30, 1998. The decrease was largely due to revenue recognized for
production services provided in 1998 that did not occur in 1999. Additionally,
revenue decreased $60,000 as a result of the contract with AOL which provides
for reduced fees in the third quarter of 1999 compared to the third quarter of
1998.
Advertising revenues decreased 12% to $199,000 for the three months ended
September 30, 1999 from $226,000 for the three months ended September 30, 1998.
The decrease is due to advertising contracts that ended in 1998 and did not
recur in 1999.
Other revenues decreased 16% to $428,000 for the three months ended
September 30, 1999 from $506,000 for the three months ended September 30, 1998.
Included in other revenue for the three months ended September 30, 1998 were
equipment sales of $88,000. No such revenue was recorded for equipment sales in
1999.
Direct operating costs increased 48% to $1,759,000 for the three months
ended September 30, 1999 from $1,189,000 for the three months ended September
30, 1998. This increase was due to expenses of $266,000 associated with an
increase in the number of sites installed, increased freight expenses associated
with shipping equipment to the sites 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 September 30, 1999. Satellite transmissions costs and ISP
charges increased $275,000 due to additional services needed to support the DITV
network for the three months ended September 30, 1999.
Selling, general and administrative expenses increased 22% to $3,491,000 for
the three months ended September 30, 1999 from $2,857,000 for the three months
ended September 30, 1998. Consulting expenses increased $315,000 related to Year
2000 efforts for the three months ended September 30, 1999. Bad debt expense was
$209,000 for the three months ended September 30, 1999. No expense was incurred
for bad debts for the three months ended September 30, 1998, as the allowance
for bad debts as of September 30, 1998 was adequate. Additionally, marketing
expenses increased related to the launch of the new DITV network for the three
months ended September 30, 1999.
Professional fees decreased due to the settlement of litigation for which
the Company had accrued a liability for an amount which exceeded the settlement
amount. As a result, the Company reduced the accrued expenses and litigation,
legal and professional fee expenses by approximately $160,000 related to the
settlement for the three months ended September 30, 1999.
Equipment leases decreased $76,000 due to the payoff of such leases during
the three months ended September 30, 1999.
Stock-based compensation expense increased $35,000 for the three months
ended September 30, 1999. There was no stock-based compensation for the three
months ended September 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 $229,000 for the three months ended
September 30, 1999, compared to $254,000 for the three months ended September
30, 1998. The current period expenses result from the Company's research and
development efforts related to the next generation of the DITV network, Internet
stations and future Internet web sites. For the three-month period ended
September 30, 1998, the Company's research and development efforts focused
primarily on the upgrade of the NTN network.
10
Interest expense increased 130% to $262,000 for the three months ended
September 30, 1999 from $114,000 for the three months ended September 30, 1998.
The increase was primarily due to interest expense recorded in 1999 related to
its convertible notes, the revolving line of credit, other notes payable and
additional capital leases for equipment acquisitions that did not exist in 1998.
Nine months ended September 30, 1999 and September 30, 1998
Operations for the nine months ended September 30, 1999 resulted in a net
loss of $799,000 compared to a net income of $409,000 for the nine months ended
September 30, 1998. The operating results for the nine months ended September
30, 1999 include a gain of $2,254,000 related to the sale of the assets of its
wholly-owned subsidiary, IWN, Inc., to eBet Limited in exchange for $1,227,000
in cash and 4,000,000 shares of eBet Online stock. The operating results for the
nine months ended September 30, 1998 include a gain of $1,643,000 related to the
sale of a majority interest in one of the Company's subsidiaries.
Total revenues decreased 3% to $17,385,000 for the nine months ended
September 30, 1999 from $17,904,000 for the nine months ended September 30,
1998. This occurred primarily due to decreases in Online/Internet revenues,
advertising and other revenues offset by increases in network services revenue.
Network service revenue increased 5% to $14,708,000 for the nine months
ended September 30, 1999 from $13,975,000 for the nine months ended September
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 nine months ended September 30, 1999, 936 DITV
systems were installed.
Revenue from Online/Internet services decreased 52% to $800,000 for the nine
months ended September 30, 1999 from $1,680,000 for the nine months ended
September 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 $165,000 for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998.
Advertising revenues decreased 27% to $468,000 for the nine months ended
September 30, 1999 from $642,000 for the nine months ended September 30, 1998.
The decrease is due to advertising contracts that ended in 1998 and did not
recur in 1999.
Other revenues decreased 12% to $1,409,000 for the nine months ended
September 30, 1999 from $1,607,000 for the nine months ended September 30, 1998.
Other revenues for the nine months ended September 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 nine months ended September 30, 1999. This decrease
was partially offset by an increase in revenue from the Company's Canadian
licensee for the nine months ended September 30, 1999.
Direct operating costs increased 10% to $4,047,000 for the nine months ended
September 30, 1999 from $3,671,000 for the nine months ended September 30, 1998.
This increase was due to expenses of $393,000 associated with an increase in the
number of sites installed, increased freight expenses associated with shipping
equipment to the sites and an increase in the number of sales commissions paid
in connection with the roll out of the DITV network for the nine months ended
September 30, 1999. Satellite transmissions costs and ISP charges increased
$449,000 due to additional services needed to support the DITV network for the
nine months ended September 30, 1999. These increases were offset somewhat by
the settlement of an accrued liability for license fees that was less than had
been estimated. As a result, the Company reduced the accrued expenses and direct
operating costs by approximately $180,000 related to the settlement for the nine
months ended September 30, 1999. Additionally, the results for the nine months
ended September 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.
Selling, general and administrative expenses increased 1% to $9,181,000 for
the nine months ended September 30, 1999 from $9,061,000 for the nine months
ended September 30, 1998. The nine months ended September 30, 1999 included an
increase in consulting expenses of approximately $356,000 relating to Year 2000
remediation efforts. Marketing expenses also increased approximately $236,000
related to the new DITV network for the nine months ended September 30, 1999.
These increases were partially offset by approximately $276,000 in selling,
general and administrative expenses incurred by LearnStar for the nine months
ended September 30, 1998. As a result of the sale of an 82.5% interest in
LearnStar in June 1998, no such expenses were recorded for the nine months ended
September 30, 1999. Office lease expenses also decreased due to the sublet of
office space beginning in September 1998 which was previously occupied by the
Company.
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Professional fees decreased due to the settlement of litigation for which
the Company had accrued a liability for an amount which exceeded the settlement
amount. As a result, the Company reduced the accrued expenses and litigation,
legal and professional fee expenses by approximately $160,000 related to the
settlement for the nine months ended September 30, 1999.
Equipment leases decreased approximately $122,000 due to the payoff of such
leases during the nine months ended September 30, 1999.
Stock-based compensation expense decreased 45% to approximately $91,000 for
the nine months ended September 30, 1999 compared to $165,000 for the nine
months ended September 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 $524,000 for the nine months ended
September 30, 1999, compared to approximately $474,000 for the nine months ended
September 30, 1998. The current period expenses result from the Company's
research and development efforts related to the next generation of the DITV
network, Internet stations, and future Internet web sites. For the nine-month
period ended September 30, 1998, the Company's research and development efforts
focused primarily on the upgrade of the NTN network.
Interest expense increased 170% to $699,000 for the nine months ended
September 30, 1999 from $259,000 for the nine months ended September 30, 1998.
The increase was primarily due to interest expense recorded in 1999 related to
its convertible notes, the revolving line of credit, other notes payable and
additional capital leases for equipment acquisitions that did not exist in 1998.
Liquidity and Capital Resources
At September 30, 1999, the Company had cash and cash equivalents of
$3,069,000 and working capital (current assets in excess of current liabilities)
of $1,755,000, 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
$1,256,000 for the nine months ended September 30, 1999 and $575,000 for the
nine months ended September 30, 1998. The principal uses of cash for the nine
months ended September 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 $735,000. Depreciation, amortization
and other non-cash charges offset the uses. Net cash used in investing
activities was $3,178,000 for the nine months ended September 30, 1999 and
$634,000 for the nine months ended September 30, 1998. Included in net cash used
in investing activities for the nine months ended September 30, 1999 were
approximately $4,453,000 in capital expenditures offset by proceeds from the
sale of assets of a subsidiary of approximately $1,227,000 for the nine months
ended September 30, 1999. Net cash provided by financing activities was
approximately $431,000 for the nine months ended September 30, 1999. Net cash
used in financing activities was $58,000 for the nine months ended September 30,
1998. Net cash provided by financing activities for the nine months ended
September 30, 1999 included $1,257,000 of proceeds from the revolving line of
credit, net of principal payments, and $916,000 for principal payments on
capital leases.
In August 1999, the Company entered into an agreement with Coast Business
Credit for a revolving line of credit not to exceed $4,000,000. Interest is
charged on the outstanding balance at a rate equal to the Prime Rate plus 1.5%
per annum, but cannot be less than 9% per annum. The line of credit is secured
by substantially all of the Company's assets. Total loan fees of $120,000 are
payable in three annual installments and are being amortized over the life of
the loan which matures on August 31, 2002. The line of credit is expected to be
used primarily for capital expenditures related to the launch of DITV.
The Company believes that its cash on hand and anticipated cash flows from
its operations and the line of credit will be sufficient to meet its operating
needs through 1999. It is likely, however, the Company will require additional
financing in 2000 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 or commitment for any such
additional financing and there can be no assurance whether, or on what terms,
such financing will be available to the Company.
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
12
characterized as systems that organize and create efficiencies for the
corporation, but are not critical to its operations. The Company has completed
the assessment and remediation of all its computers, operating systems and
commercial off the shelf software packages. The Company's proprietary software
programs are being assessed by an independent outside consulting firm to
establish its ability to process future critical dates. The compliance audit and
remediation of the Company's proprietary software programs are expected to be
completed by the beginning of December.
The Company has incurred costs specific to remediation efforts of
approximately $400,000 through September 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. All location systems in
the DITV network are Year 2000 compliant. The Company has upgraded key back-end
systems with compliant commercial hardware, operating system and commercial off
the shelf software. The Company reviewed the Year 2000 compliance by its
principal vendors, and expects that the Company will not incur significant Year
2000 related costs on behalf of its vendors or other third parties.
The worst-case scenario would be if the Company were unable to broadcast its
program to its network services customers. Network services revenue represents
85% of total revenues for the nine months ended September 30, 1999. The Company
has developed 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
The Company is exposed to risks related to currency exchange rates, stock
market fluctuations, and interest rates. As of September 30, 1999, the Company
owned an investment available for sale which is common stock of an Australian
company that is subject to market risk. At September 30, 1999, the Company
recorded an unrealized loss of $410,000 associated with the investment. The
Company has convertible notes which bear interest at 7% per annum and a line
of credit at a rate equal to the Prime Rate plus 1.5% per annum, which cannot be
less than 9% per annum. A significant increase in interest rates could have an
adverse affect on the Company's financial condition or results of operations.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following legal proceeding developments occurred subsequent to the
period ended September 30, 1999:
The Company reached a tentative settlement agreement with the class of
plaintiffs in Miller v. NTN Communications, et al.,filed in June 1997 whereby
the Company is to pay $3.25 million, subject to agreement on documentation and
preliminary and final approval by the U.S. District Court. The settlement
payment is fully covered by the company's liability insurance.
The Company entered into a settlement agreement the Business Software
Alliance ("BSA") in connection with the Company's use of certain software
products in the course of its business, with insufficient licenses for such use,
prior to 1998. Pursuant to the settlement agreement, the Company will pay to BSA
a total of $339,864 in ten equal monthly installments. The company had
previously reserved an amount sufficient to cover the expense of the settlement.
The payments will therefore have no adverse impact on the company's future
operating results.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company issued 253,323 shares of common stock in August 1999 to the
board of directors in lieu of cash compensation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on August 27, 1999. The
following matters were voted upon at the meeting:
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1. Election of three Directors to hold office for the term expiring 2002:
Name of Director Elected Shares Voting in Favor Shares Withheld
- ------------------------ ---------------------- ---------------
Barry Bergsman 22,296,737 232,123
Stanley B. Kinsey 22,296,987 232,123
Donald C. Klosterman 22,294,935 232,123
The following individual is a continuing director with a term expiring in 2000:
Gary Arlen. The following individuals are continuing directors with terms
expiring in 2001: Robert Bennett and Esther Rodriguez.
2. Stockholder proposal submitted pursuant to Rule 14a-8 promulgated under the
Securities and Exchange Act of 1934, as amended, urging the Board of Directors
to arrange for the prompt sale of the Company to the highest bidder:
Votes In Favor: 2,570,098
Votes Against 19,989,634
Abstentions 232,123
The stockholder proposal was defeated.
3. Stockholder motion to initiate search to replace Chief Executive Officer of
the Company:
Votes In Favor 64,765
Votes Against 22,727.090
The motion was defeated.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Loan and Security Agreement, dated August 6, 1999, by and between NTN
Communications, Inc. and Coast Business Credit, a division of Southern
Pacific Bank.
10.2 Settlement Agreement, dated November 1, 1999, between the Business
Software Alliance and NTN Communications, Inc.
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 12, 1999 By: /s/ Kendra Berger
------------------
Kendra Berger
Chief Financial Officer
16
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
10.1 Loan and Security Agreement, dated August 6, 1999, by and between
NTN Communications, Inc. and Coast Business Credit, a division of
Southern Pacific Bank.
10.2 Settlement Agreement, dated November 1, 1999, between the Business
Software Alliance and NTN Communications, Inc.
27. Financial Data Schedule.
17