-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYM+sDWvdJ6b8yrNyCJ3CDMMpocz7l7ktqdQOyHpqgSp2sdg7BgadLjUhW4/7nlO Q8X2pCsyEEFZBOVQVtc/1A== 0000944209-97-001682.txt : 19971217 0000944209-97-001682.hdr.sgml : 19971217 ACCESSION NUMBER: 0000944209-97-001682 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971216 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: NTN COMMUNICATIONS INC CENTRAL INDEX KEY: 0000748592 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 311103425 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-11460 FILM NUMBER: 97738780 BUSINESS ADDRESS: STREET 1: 5966 LA PLACE CT STREET 2: STE 100 CITY: CARLSBAD STATE: CA ZIP: 92008 BUSINESS PHONE: 6194387400 MAIL ADDRESS: STREET 1: 5966 LA PLACE COURT STREET 2: STE 100 CITY: CARLSBAD STATE: CA ZIP: 92008 FORMER COMPANY: FORMER CONFORMED NAME: ALROY INDUSTRIES INC DATE OF NAME CHANGE: 19850411 10-Q/A 1 FORM 10-Q/AMENDMENT NO.2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 2 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 Commission file number 1-11460 NTN COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Delaware 31-1103425 (State of incorporation) (I.R.S. Employer Identification No.) The Campus 5966 La Place Court, Carlsbad, California 92008 (Address of principal executive offices) (Zip Code) (760) 438-7400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. YES [X] NO [_] Number of shares outstanding of each of the registrant's classes of common stock, as of December 11, 1997: 23,672,000 shares of common stock, $.005 par value. 1 PART I--FINANCIAL INFORMATION ----------------------------- Item 1. FINANCIAL STATEMENTS. 2 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 1997 (Unaudited) and December 31, 1996
June 30, December 31, Assets 1997 1996 ------ --------------- --------------- Current assets: Cash and cash equivalents $ 3,045,000 6,579,000 Accounts receivable - trade, net of allowance for doubtful accounts 2,767,000 2,031,000 Accounts receivable - officers and directors --- 199,000 Prepaid expenses and other current assets 1,024,000 1,846,000 ------------ ------------ Total current assets 6,836,000 10,655,000 Broadcast equipment and fixed assets, net 9,445,000 10,103,000 Software development costs, net 4,178,000 4,400,000 Retirement plan assets --- 2,527,000 Other assets 687,000 819,000 ------------ ------------ Total assets $ 21,146,000 28,504,000 ============ ============ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable and accrued liabilities $ 5,884,000 6,182,000 Short-term borrowings 3,960,000 5,060,000 Deferred revenue 486,000 254,000 Customer deposits 1,079,000 1,279,000 ------------ ------------ Total current liabilities 11,409,000 12,775,000 Deferred revenue - long term 675,000 1,000,000 Accrual for settlement warrants 1,403,000 1,291,000 Other long-term liabilities 2,726,000 3,216,000 ------------ ------------ Total liabilities 16,213,000 18,282,000 ------------ ------------ Shareholders' equity: 10% Cumulative convertible preferred stock, $.005 par value, 10,000,000 shares authorized; issued and outstanding 161,000 in 1997 and 1996 1,000 1,000 Common stock, $.005 par value, 50,000,000 shares authorized; shares issued and outstanding 23,599,000 in 1997 and 23,177,000 in 1996 117,000 116,000 Treasury stock, 782,000 shares in 1997 and 1996 at cost (3,339,000) (3,339,000) Additional paid-in capital 62,868,000 59,583,000 Accumulated deficit (54,714,000) (46,139,000) ------------ ------------ Total shareholders' equity 4,933,000 10,222,000 Total liabilities and shareholders' equity $ 21,146,000 28,504,000 ============ ============
See accompanying notes to unaudited consolidated financial statements. 3 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Three and Six Months Ended June 30, 1997 and 1996 (Unaudited)
Three Months Three Months Six Months Six Months June 30, June 30, June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ---------- ---------- Network services $ 5,087,000 5,176,000 10,056,000 10,044,000 Online/Internet services 627,000 449,000 1,475,000 683,000 Advertising revenues 189,000 257,000 434,000 494,000 Equipment sales, net 40,000 1,021,000 227,000 1,509,000 License and royalty fees and other revenue 318,000 266,000 609,000 515,000 ------------ ------------ ---------- ---------- Total revenues 6,261,000 7,169,000 12,801,000 13,245,000 Operating expenses: Operating costs 1,819,000 1,443,000 4,028,000 2,799,000 Selling, general and administrative 4,446,000 4,655,000 13,144,000 10,452,000 Litigation, legal and professional fees 714,000 725,000 1,058,000 1,048,000 Equipment lease expense 232,000 1,138,000 466,000 2,290,000 Depreciation and amortization 1,171,000 427,000 2,424,000 773,000 ------------ ------------ ---------- ---------- Total operating expenses 8,382,000 8,388,000 21,120,000 17,362,000 Operating loss (2,121,000) (1,219,000) (8,319,000) (4,117,000) Other income (expense) Interest income 84,000 45,000 146,000 165,000 Interest expense (191,000) (65,000) (402,000) (113,000) ------------ ------------ ---------- ---------- (107,000) (20,000) (256,000) 52,000 Loss from continuing operations before income taxes (2,228,000) (1,239,000) (8,575,000) (4,065,000) Provision for income taxes -- -- -- -- ------------ ------------ ---------- ---------- Loss from continuing operations (2,228,000) (1,239,000) (8,575,000) (4,065,000) Gain from discontinued operations, net -- 1,889,000 -- 1,918,000 ------------ ------------ ---------- ---------- Net earnings (loss) $ (2,228,000) 650,000 (8,575,000) (2,147,000) ============ ============ ========== ========== Net earnings (loss) per share: Continuing operations $ (0.10) (0.05) (0.37) (0.18) Discontinued operations -- 0.08 -- 0.08 ------------ ------------ ---------- ---------- Net earnings (loss) $ (0.10) 0.03 (0.37) (0.10) ============ ============ ========== ========== Weighted average number of shares outstanding 22,345,000 23,848,000 23,303,000 22,656,000 ============ ============ ========== ==========
See accompanying notes to unaudited consolidated financial statements. 4 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Three and Six Months Ended June 30, 1997 and 1996 (Unaudited)
Three Three Six Six Months Months Months Months June 30, June 30, June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Cash flows from (used for) operating activities: Net income (loss) $(2,228,000) 650,000 (8,575,000) (2,147,000) Adjustments: Gain on discontinued operations --- (3,235,000) --- (3,235,000) Depreciation and amortization 1,171,000 415,000 2,424,000 774,000 Provision for doubtful accounts 250,000 (9,000) 475,000 88,000 Loss from discontinued operations --- 1,346,000 --- 1,346,000 Accrual for issuance of warrants 630,000 1,020,000 2,513,000 1,617,000 Accrual for settlement warrants 56,000 --- 112,000 --- (Gain) loss on sale and leaseback transactions --- (273,000) --- (427,000) Amortization of deferred gain on sale and leaseback transactions 74,000 (257,000) 136,000 (467,000) Change in discontinued operations --- (3,121,000) --- (3,121,000) Changes in assets and liabilities: Accounts receivable - trade (734,000) (1,382,000) (1,012,000) (1,580,000) Inventory --- 1,487,000 --- 926,000 Prepaid expenses and other assets 2,740,000 (2,502,000) 3,331,000 (2,543,000) Accounts payable and accrued liabilities (1,053,000) 4,074,000 (788,000) 3,284,000 Deferred revenue (122,000) 154,000 (229,000) 79,000 Customer deposits (82,000) (11,000) (200,000) (59,000) ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities 702,000 (1,644,000) (1,813,000) (5,465,000) ----------- ----------- ----------- ----------- Cash flows from (used for) investing activities: Capital expenditures (151,000) (238,000) (809,000) (528,000) Notes receivable - related parties --- (501,000) --- 563,000 Software development costs (276,000) (353,000) (585,000) (824,000) Proceeds from sale and leaseback transactions --- 3,000,000 --- 3,875,000 Deposits related to sale and leaseback transactions --- (729,000) --- (354,000) ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities (427,000) 1,179,000 (1,394,000) 2,732,000 ----------- ----------- ----------- -----------
5 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Three and Six Months Ended June 30, 1997 and 1996 (Unaudited)
Three Months Three Months Six Months Six Months June 30, June 30, June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ----------- ----------- Cash flows from (used for) financing activities: Principal payments on debt $(5,570,000) (9,000) (5,570,000) (15,000) Proceeds from issuance of debt 4,315,000 599,000 4,470,000 2,371,000 Purchase of equipment related to sale and leaseback transactions -- (1,721,000) -- (2,228,000) Proceeds from issuance of common stock, less issuance costs paid in cash 559,000 255,000 773,000 240,000 Payments for purchase of treasury stock -- -- -- (2,330,000) ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities (696,000) (876,000) (327,000) (1,962,000) ----------- ----------- ----------- ----------- Net decrease in cash and cash equivalents (421,000) (1,341,000) (3,534,000) (4,695,000) Cash and cash equivalents at beginning of period 3,466,000 3,121,000 6,579,000 6,475,000 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 3,045,000 1,780,000 3,045,000 1,780,000 =========== =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ -- 33,000 -- 66,000 =========== =========== =========== =========== Income taxes $ -- -- -- -- =========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements. 6 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Financial Statements (Unaudited) 1. General. ------- Management has elected to omit substantially all notes to the Company's financial statements. Reference should be made to the Company's Form 10-K filed for the year ended December 31, 1996, which report incorporated the notes to the Company's year-end financial statements. 2. Unaudited Information. --------------------- The June 30, 1997 and 1996 information furnished herein was taken from the books and records of the Company without audit. However, such information reflects all adjustments that are, in the opinion of management, necessary to reflect properly the results of the interim periods presented. The results of operations for the period ended June 30, 1997 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 1997. Certain items in the prior year consolidated financial statements have been reclassified to conform to the format used for the current periods presented. The 1996 financial statements presented herein agree to the amended financial statements as presented in the 10Q/A for the period ended June 30, 1996. 3. Management Reorganization. ------------------------- In March, 1997, the Company announced a reorganization of its executive management personnel in which Patrick J. Downs resigned as Chief Executive Officer and Chairman of the Board, and Daniel C. Downs resigned as President. In connection with the reorganization ("Reorganization"), other personnel changes include the resignation of Mr. Ronald Hogan, as Senior Vice President, and the terminations of Mr. Gerald McLaughlin, formerly Executive Vice President, and Mr. Michael Downs, formerly President and CEO of LearnStar. The Company has entered into separate Resignation and General Release Agreements ("Agreements") with each of the former officers for the purpose of settling their prior employment agreements and other contracts and arrangements with the Company. In compliance with the Agreements, NTN will continue to pay the former executives their annual salaries and other benefits for the remaining terms of their employment agreements with NTN, which expire on or before December 31, 1999. Charges for severance and other costs associated with the Reorganization recorded in 1996 were $5,092,000. A charge for severance and other costs associated with the Reorganization was $5,252,000 in 1997, including accreted interest expense. The Company has recorded the charges in 1996 and 1997 in accordance with Emerging Issues Task Force Issues No. 94 - 3. 4. Loan from GTECH Corp. -------------------- In June 1997, the Company announced that it had signed a letter of intent setting forth an agreement in principle to enter into a merger agreement with GTECH Corp. On August 6, 1997 the Company and GTECH mutually agreed to terminate the previously announced letter of intent. However, in connection with the letter of intent, GTECH agreed to lend $3.7 million to the Company to cover its obligation to repay Symphony for its interest in IWN. The loan, which bears interest at 13%, is due and payable on September 15, 1997. 5. Discontinued Operations - Sale of New World Computing. ----------------------------------------------------- On June 30, 1996 the Company sold all of the assets and business of its New World Computing subsidiary to The 3DO Company. The disposal of the New World has been accounted for as a discontinued 7 operation. Accordingly, the consolidated financial statements for the quarter ended June 30, 1996 report separately the operating results of the discontinued business. 6. Earnings per Share. ------------------- Earnings per share amounts are computed by dividing net earnings increased by preferred dividends resulting from the assumed exercise of stock options and warrants and the assumed conversion of convertible preferred shares, and the resulting assumed reduction of outstanding indebtedness, by the weighted average number of common and common equivalent shares outstanding during the period. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding options and warrants and preferred stock. For those periods with a net loss, the impact of the common stock valents would have had an antidilutive effect for these periods and accordingly have not been included in the computation. Earnings per share for 1996 as presented has been adjusted to reflect the amended results of operations for the periods ended June 30, 1996. Previously reported earnings per share for the three months ended June 30, 1996 was $0.10 compared to the revised amount of $0.03. Previously reported earnings per share for the six months ended June 30, 1996 was $0.11 compared to the revised amount of $(0.10). 7. Contingencies. ------------- The Company is party to several pending settlements and legal proceedings as described below. On April 18, 1995, a class-action lawsuit entitled Lenora Isaacs, On behalf of Herself and All Others Similarly Situated vs. NTN Communications and Patrick J. Downs, was filed in United States District Court for the Southern District of California. The complaint alleges violations of federal securities laws based upon the Company's projected results of operations for the fourth quarter of 1994 and for fiscal 1994, and further alleges that certain of the Company's insiders sold stock on information not generally known to the public. Although the Company denies liability based upon the allegations contained in the complaint, in order to avoid the costs and expenses associated with complex and protracted litigation, the Company has agreed to an out-of-court settlement having a total value of approximately $1,450,000. It is anticipated that the settlement would be payable $250,000 in cash and $1,200,000 either in shares of the Company's Common Stock or in cash at the Company's election. The Common Stock would be valued for this purpose at approximately the market price of the Common Stock when the settlement is effected. The proposed settlement is subject to Court approval, and there can be no assurance that the settlement will be approved by the Court as proposed. In May 1997, a shareholder derivative action was filed against the Company and certain of its former officers and directors. The complaint which sought injunctive relief and an unspecified amount of damages, alleged that the Company was injured by a lack of independence and breach of business judgment by the defendant officers and directors by virtue of the Resignation Agreements and related transactions entered into between the Company and its former officers in connection with the recent management reorganization. On June 10, 1997, the plaintiff voluntarily dismissed the lawsuit, without prejudice. Although the Company believes, based in part on the opinion of outside counsel, that the action was without merit, there can be no assurances that the plaintiff or others similarly situated will not refile the same or a similar action at a future date. On June 11, 1997, the Company was included as a defendant in a lawsuit, entitled Elliot Miller and Jan Iver, Shareholders on Behalf of Themselves and All Others Similarly Situated vs. NTN Communications, Inc., Patrick J. Downs, Daniel C. Downs, Donald C. Klosterman, Ronald E. Hogan, Gerald P. McLaughlin and KPMG Peat Marwick LLP, filed in the United States District Court. The complaint seeks class-action status for alleged violations of state and federal securities laws based upon purported omissions from the Company's periodic filings with the Securities and Exchange Commission. More particularly, the complaint alleges that the Company and the defendant directors and former officers devised an "exit strategy" to provide themselves with undue compensation upon their resignation from the Company. The plaintiffs further allege that the Company's financial statements misrepresented or omitted information concerning certain alleged contingent liabilities and phantom assets. According to the plaintiffs, these alleged misrepresentations and omissions served to inflate the trading price of the Company's Common Stock. On July 3, 1997, the Company, on behalf of itself and the named directors and officers, filed a motion to dismiss the lawsuit. On November 6, 1997, the motion was granted, with leave to amend, as to the state causes of action and denied as to the federal causes of action. The Company has submitted this claim to its insurance carriers; however, there can be no assurances that the insurance carriers will accept coverage or that, if coverage is accepted, it will be without a reservation of rights by the carriers. On August 8, 1997, another purported class-action lawsuit was filed against the Company in the United States District Court for the Southern District of California entitled Yehuda Lefkowitz, on Behalf of Himself and Others Similarly Situated vs. NTN Communications and Patrick J. Downs and Daniel C. Downs. The complaint, which alleged that defendants made materially false and misleading statements concerning the Company's business, operations and products, was voluntarily dismissed by the plaintiff, without prejudice, on September 3, 1997. Although the Company believes, based in part on the opinion of outside counsel, that the action was without merit, there can be no assurances that the original plaintiff or others similarly situated will not refile the same or a similar action at a future date. There can be no assurance that any or all of the foregoing claims will be settled or decided in a manner favorable to the Company. During the pendency of such claims, the Company will continue to incur the costs of defense of the same. The Company generally is not insured against the claims made and, if one or more of the shareholder claims are decided in a manner adverse to the Company, the resulting liabilities to the Company could materially and adversely affect the Company's future financial condition and result of operations. In December 1995, the Company entered into an agreement with Symphony IWN Investment LLC ("Symphony"), an affiliated company, under which Symphony invested $3,000,000 for a 10% interest in IWN, Inc., and a limited partner interest in IWN, L.P., a limited partnership of which IWN, Inc. is the general partner. The agreement included a provision (the "Symphony Option") entitling Symphony to elect to cause the Company to repurchase Symphony's shares of IWN, Inc. and limited partner interest in IWN, L.P. at any time during the period from April 1, 1997 through December 1, 1997 for specified consideration. In April 1997, Symphony notified the Company of its election to exercise the Symphony Option, and in June 1997 the Company paid Symphony approximately $3,556,000 in satisfaction in full of its obligations under the Symphony Option. Symphony and Symphony Management Associates, Inc., its affiliate, ("SMA"), claimed, however, that Symphony also was entitled to approximately $1,000,000 in additional funds, as well as additional warrants to purchase the Company's stock based on anti-dilution provisions of a warrant held by Symphony. The Company did not record any additional amounts with respect to Symphony's and SMA's claims, since the Company believed, based in part on the advice of outside counsel, that it had satisfied in full its obligations to Symphony. On July 1, 1997, the Company and its subsidiary, IWN, Inc., filed a lawsuit against Symphony and SMA in the Superior Court of California for the County of San Diego, North County Branch for alleging breach of contract, specific performance, declaratory relief, and intentional interference with economic relations. On July 3, 1997, Symphony and SMA filed a countersuit in Delaware against the Company and IWN, Inc. seeking specific performance by the Company to deliver a secured promissory note to Symphony in the disputed amount and declaratory relief with respect to Symphony's right to additional warrants based upon alleged dilution and attorneys' fees. The Company and IWN, Inc. filed a motion to dismiss the Delaware lawsuit, and all proceedings in the lawsuit were precluded pending resolution of the Company's motion. In August 1997, the parties entered into a settlement and general release agreement under which the Company paid Symphony $75,000 and issued it 72,500 shares of the Company's Common Stock. Symphony, in turn, surrendered to the Company all the outstanding shares of IWN, Inc., the limited partner interest in IWN L.P. and a warrant to purchase 400,000 shares of the Company's Common Stock held by Symphony. The Company had been involved as a plaintiff or defendant in various previously reported lawsuits in Federal courts in both the United States and Canada involving Interactive Network, Inc. ("IN"). With the court's assistance, the Company and IN have been able to reach a resolution of all pending disputes in the United States and have agreed to private arbitration regarding any future licensing, copyright or infringement issues which may arise between the parties. There remain two lawsuits among the Company, its unaffiliated Canadian licenses and IN, which were filed in Canada in 1992. No substantive action has been taken in furtherance of either action. These actions affect only the Canadian operations of the Company and its Canadian licensee and do not extend to the Company's operations in the United States or elsewhere. Although they cannot be estimated with certainty, any damages the Company might incur in the event the actions are determined adversely to the Company are not expected to be material to the Company. Other than as set forth above, there is no material litigation pending or threatened against the Company. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General - ------- The Company uses existing technology to develop, produce and distribute two-way multi-player interactive live events and also produces and distributes its own original interactive programs. The Company's principal sources of revenue from distribution activities are derived from (a) service distribution fees in the United States; (b) advertising fees, (c) sales of equipment to foreign licensees; (d) service distribution fees and royalties from foreign licensees; and (e) licensing fees from foreign and domestic licensees. On October 25, 1996, the Company reported that it was advised on September 9, 1996 by the United States Federal Communications Commission that its Playmaker(R) had not received FCC approval. The Company immediately suspended shipment of the Playmakers(R) to new NTN Network Locations pending approval by the FCC. Upon notification, the Company commenced testing its equipment and submitted its application to the FCC. There was no interruption of the Company's services to existing NTN Network customers, nor were any of the Company's Online/Internet Services ever affected. The Company received approval on January 15, 1997 and immediately began shipments to new Locations, including approximately 290 new customers which were previously awaiting installation. The installation of the Locations was completed in January and February 1997. The Company will also implement a corrective action program to be approved by the FCC. The Playmakers(R) are handheld radio frequency devices that contain rechargeable batteries. Recently manufactured Playmakers(R) have experienced problems related to noise sensitivity and recharging performance. The Company has modified the circuit board to address the problems, and is in the process of upgrading the approximately 14,000 affected Playmakers(R). The Company believes the modifications will be completed by August 1997. These problems have negatively affected the number of new Network Services customers signed up by the Company and have caused an increase in the number of "disconnects" - customers terminating service and an increase in accounts receivable from dissatisfied customers. New locations signed up by the Company during the suspension of Playmakers(R) shipments were granted up to one day of credit by the Company against future billings for each day the sites could not utilize the NTN system. The Company estimates that the temporary suspension of Playmaker(R) shipments and the credits extended by the Company to backlogged locations has resulted in reduced cash flow of approximately $350,000 during the first half of 1997 from all affected locations. In addition, the Company has discovered that the "basestation" - a device used in conjunction with Playmakers(R) - has not been performing satisfactorily. The Company recently decided to recall all poorly performing basestations and replace all such equipment with a recently upgraded and improved model in customer locations, which process will commence in the second quarter. The Company recorded a charge of $650,000 in the quarter ended March 31, 1997 for the replacement and repair of defective equipment. The financial statement as of and for the quarter ended June 30, 1996 and for the six months ended June 30, 1996 has been amended to be consistent with the method of accounting for the consolidation of the accounts and activity related to IWN L.P. and stock-based compensation pursuant to SFAS 123 as reported in the Annual Report on Form 10-K for the year ended December 31, 1996. Material Changes in Results of Operations - ----------------------------------------- Three-month periods ended June 30, 1997 and June 30, 1996 9 The Company incurred a net loss of $2,228,000 for the three months ended June 30, 1997 compared to a net profit of $650,000 for the three months ended June 30, 1996. The 1996 results include a net gain from discontinued operations related to the sale of New World of $1,889,000. For the current quarter, total revenues decreased 13% from $7,169,000 to $6,261,000, primarily as a result of a large decrease in equipment sales. In conjunction with the Company's decision to no longer enter into sale and leaseback financing arrangements, equipment sales is a minor activity in 1997. Total revenue, excluding Net Equipment Sales, increased 1% in the second quarter of 1997 compared to the same quarter of 1996. Network Services decreased 2% from $5,176,000 to $5,087,000. The decrease is primarily due to a lower pricing strategy, offset by a growth in the number of subscriber locations contracting for services. Online/Internet Services increased 40% from $449,000 to $627,000 due to an increasing number of on-line customers. Advertising revenues decreased 26% from $257,000 to $189,000 due to a smaller number of commercial spots sold. Equipment Sales, net of cost of sales decreased 96% from $1,021,000 to $40,000. Equipment sales are predominantly due to sales to foreign licensees which are subject to outside influences and can occur unevenly throughout the year. Equipment sales have been highly volatile in the past and are expected to remain so, as they are dependent on the timing of expansion plans of the Company's foreign licensees and its educational customers. Operating Expenses related to Network Services and Online/Internet Services increased 26% from $1,443,000 in the prior years quarter to $1,819,000 in the current years quarter. The increase is primarily attributable to a change in the rate structure for commissions and service fees paid to sales and service reps and operating expenses commencing at IWN L.P. Selling, General and Administrative Expenses decreased 4% from $4,655,000 to $4,446,000. The decrease in 1997 is primarily due to cutbacks in personnel and other operating expenses offset by additional charges to increase the allowance for doubtful accounts of $250,000. Also, stock-based compensation charges recorded in accordance with SFAS 123 were $630,000 in 1997 compared to $1,020,000 in 1996. Stock-based compensation charges result from the issuance of warrants or options to non- employees and will vary from period to period. Deprecation and Amortization Expense increased 174% from $427,000 to $1,171,000 due to depreciation charges resulting from the buyout of equipment lease commitments late in 1996 in which the Company now owns most of its Broadcast equipment. Equipment Lease Expense decreased 80% from $1,138,000 to $232,000 also due to the buyout of leases in late 1996. Interest Expense increased from $65,000 to $191,000 largely due to interest charges related to the IWN Put Option, and accretion of interest for the settlement warrant liability and the severance liability for the Reorganization that was discounted when recorded. Six-month periods ended June 30, 1997 and June 30, 1996 In March, 1997, the Company announced a reorganization of its executive management personnel in which Patrick J. Downs resigned as Chief Executive Officer and Chairman of the Board, and Daniel C. Downs resigned as President. In connection with the reorganization ("Reorganization"), other personnel changes include the resignation of Mr. Ronald Hogan, as Senior Vice President, and the terminations of Mr. Gerald McLaughlin, formerly Executive Vice President, and Mr. Michael Downs, formerly President and CEO of LearnStar. The Company has entered into separate Resignation and General Release Agreements ("Agreements") with each of the former officers for the purpose of settling their prior employment agreements and other contracts and arrangements with the Company. In compliance with the Agreements, NTN will continue to pay the former executives their annual salaries and other benefits for the remaining terms of their employment agreements with NTN, which expire on or before December 31, 1999. Charges for severance and other costs associated with the Reorganization recorded in 1996 were $5,092,000. A charge for severance and other costs associated with the Reorganization was $5,252,000 in 1997, including accreted interest expense. The Company has recorded the charges in 1996 and 1997 in accordance with Emerging Issues Task Force Issues No. 94 - 3. 10 The Company incurred a net loss of $8,575,000 for the six months ended June 30, 1997 compared to a net loss of $2,147,000 for the six months ended June 30, 1996. The 1996 results include a gain from discontinued operations related to the sale of New World of $1,918,000. The 1997 results include significant charges totaling $5,252,000 related to the Reorganization, a $650,000 charge related to defective equipment and a $400,000 charge related to the possible settlement of litigation. For the six months ended June 30, 1997 period, total revenues decreased 3% from $13,245,000 to $12,801,000, primarily as a result of a large decrease in equipment sales. In conjunction with the Company's decision to no longer enter into sale and leaseback financing arrangements, equipment sales have become a minor activity under current operations. Total revenue for the six months ended June 30, 1997, excluding Net Equipment Sales, increased 7% over the corresponding prior year period. Network Services increased slightly for the current six-month period over 1996 from $10,044,000 to $10,056,000. This is primarily due to a lower pricing strategy, offset by a growth in the number of subscriber locations contracting for services. Online/Internet Services increased 116% from $683,000 to $1,475,000 due to an increasing number of on-line customers, including America On-Line. Advertising revenues decreased 12% during the current six-month period from $494,000 to $434,000 due to a smaller number of commercial spots sold. Equipment Sales, net of cost of sales during the current six-month period decreased 85% from $1,509,000 to $227,000. Equipment sales are predominantly due to sales to foreign licensees which are subject to outside influences and can occur unevenly throughout the year. Equipment sales have been highly volatile in the past and are expected to remain so, as they are dependent on the timing of expansion plans of the Company's foreign licensees and its educational customers. Operating Expenses related to Network Services and Online/Internet Services rose from $2,799,000 in the prior year's period to $4,028,000 in the current year's period, an increase of 44%. The increase is largely attributable to a charge of $650,000 for the replacement and repair of defective equipment, to a slight expansion in the number of subscribers and online services contracting for services, and a reduction in the rate structure for commissions and service fees paid to sales and service reps. Selling, General and Administrative Expenses increased 26% from $10,452,000 to $13,144,000. Included in Selling, General and Administrative Expenses are charges for the Reorganization totaling $3,277,000. Also included are stock-based compensation charges made in compliance with the new accounting standards prescribed by SFAS 123 which were $2,513,000 in 1997 compared to $1,617,000 in 1996. Stock-based compensation charges result from the issuance of warrants or options to non- employees and will vary from period to period. Charges in 1997 include $1,450,000 that resulted from extension of the exercise period of warrants owned by certain former officers pursuant to the Reorganization. Exclusive of these specific charges, Selling, General and Administrative Expenses decreased 17% over the previous year's period largely due to personnel cutbacks. Deprecation and Amortization Expense increased 214% from $773,000 to $2,424,000 due to depreciation charges resulting from the buyout of equipment lease commitments late in 1996 in which the Company now owns most of its Broadcast equipment. Equipment Lease Expense decreased 80% from $2,290,000 to $466,000 also due to the buyout of equipment leases in late 1996. Interest Expense increased 256% from $113,000 to $402,000 largely due to interest charges related to the IWN Put Option, and accretion of interest for the settlement warrant liability and the liability for the Reorganization that was discounted when recorded. Material Changes in Financial Condition - --------------------------------------- The following analysis compares information as of the most recent unaudited balance sheet date of June 30, 1997 to the prior year-end audited balance sheet dated December 31, 1996. Total assets decreased 26% from $28,504,000 to $21,146,000 from December 31, 1996 to June 30, 1997. The decrease in assets is primarily due to losses and the reduction in the retirement assets used to repay related loans. Cash decreased from $6,579,000 to $3,045,000 at June 30, 1997 due primarily to 11 $1,813,000 in cash needed to fund operations. The decrease was attributable, in part, to approximately $813,000 used for initial payments related to the Reorganization and $522,000 paid to former officers under an existing deferred compensation plan. The Company also expended $1,394,000 to develop new software and purchase capital assets. Accounts Receivable - Trade increased 36% from $2,031,000 to $2,767,000 at June 30, 1997. The Company's receivables from Network Services customers grew substantially because many customers delayed payment as a result of technical problems with equipment that was addressed beginning in 1997. Prepaid expenses and retirement plan assets decreased from $4,373,000 to $1,024,000 due to termination of the retirement plan in connection with the Reorganization. There were no accrued benefits due to employees under the plan. Broadcast Equipment decreased from $10,103,000 to $9,445,000 as the result of depreciation of assets, a charge to write-off and repair certain equipment of $650,000, net of additions for new Network Services subscribers. Total liabilities decreased 11% from $18,282,000 to $16,213,000 from December 31, 1996 to June 30, 1997. The decrease in Accounts Payable and Accrued Liabilities from $6,182,000 to $5,884,000 reflects the use of cash to pay down liabilities following year end, offset by accrual of charges for settlement of new litigation and the current portion of recently announced settlements. Short- term borrowings decreased from $5,060,000 to $3,960,000 due to payoff of the amount due pursuant to the IWN Put Option, payoff of the loan associated with the retirement plan net of a new borrowing from GTECH Corp. In June 1997, the Company borrowed $3.7 million form GTECH Corp, with whom it has agreed in principle to enter into a merger agreement. The funds were used to pay Symphony for its interest in IWN. Other long-term liabilities decreased 15% from $3,216,000 to $2,726,000 due to legal liabilities transferred to current liabilities, net of an increase of certain liabilities related to the Reorganization. Overall, the Company's working capital deficit increased $2,453,000 from December 31, 1996 to June 30, 1997, primarily the result of the use of cash to fund operations and charges and activity related to the Reorganization. Management has implemented an organizational and strategic restructuring aimed at reducing overhead expenses by 20% and focusing on the Company's core business units. This involved a workforce reduction, including five senior officers, the buyout of many high-rate lease commitments, and restructuring its management personnel and responsibilities. Management believes that these factors will contribute toward achieving profitability and improving cash flow. The Company has $3,045,000 of cash available at June 30, 1997. In 1996, the Company completed a plan to repurchase equipment related to certain lease obligations. This transaction has resulted in improved cash flow due to the elimination of the lease payments. Further, following the Reorganization, the Company implemented an organization and strategic restructuring plan aimed at reducing overhead expenses, which included a workforce reduction and re-focusing on immediate goals designed to generate immediate results. The Company has both short-term and long-term needs for cash outside of its normal operating needs. In recent months, the Company has experienced technical problems related to its Playmaker(R) device. Further, the Company has also experienced a high rate of customers discontinuing service. A task force has been assembled to review the issue and to make recommendations to improve Playmaker(R) performance. Based on preliminary data, the Company believes that any required changes can be effected within the next year. The costs are estimated to be less than $1 million and are expected to be funded through current operational cash flow. The Company anticipates that the number of customers discontinuing service due to technical problems may decrease once the Playmaker(R) performance has been improved, although no assurances can be given that a solution can be reached without undue delay or cost. If the technical problems persist for an extended period of time, it may negatively impact the Company's cash flow from operations. As noted earlier, the Company completed a reorganization of its management team that will require the payment to former officers over the next three years. These payments include contractual amounts under employment agreements and payment for unused vacation leave. Further, payments in 1997 include amounts due for previously deferred compensation of approximately $500,000. The Company has specific assets identified that were liquidated to pay-off the deferred compensation obligation; therefore, no current cash assets were utilized for that portion of the obligation. All other obligations owing to former officers are expected to be funded through operations through 1999. The Company has several lawsuits pending. In 1996, the Company settled one lawsuit by establishing a settlement fund consisting of $400,000 in cash and 565,000 warrants to purchase the common stock of the Company. This settlement minimizes the amount of cash used and provides for possible future inflow of cash if the warrants are exercised. The Company is currently attempting to settle other lawsuits and may settle these using a similar format of minimal cash and equity instruments. As part of the Reorganization, the Company terminated the pension and deferred compensation plan that benefited only former officers. The termination of these plans generated approximately $500,000 in cash, after payment of related loans against these assets. In the past, the Company has been able to fund its operations and improve its working capital position by sales of Common Stock, upon exercise of warrants and options, by leasing transactions for equipment in use at subscriber locations, and by licensing its technology to foreign licensees. The Company is exploring alternative capital financing possibilities which may include (i) licensing and related royalties of the Company's technology and products; (ii) borrowing arrangements under fixed and revolving credit agreements; or (iii) sale of additional equity securities. The Company may negotiate for additional lease and debt financing and additional foreign licensing, however, the extent to which any of the foregoing may be accomplished, if at all, cannot be predicted at this time. The Company has certain lawsuits pending as described in this report. To avoid the expense and disruption of protracted litigation the Company has settled certain cases and may continue to attempt to settle others. The Company has recorded a liability of $400,000 for the Company's best estimate of a settlement costs and related legal expenses. There can be no assurances that the Company will be successful in settling or defending such actions or that any or all actions would be decided in favor of the Company or that the continued cost of defending and prosecuting these actions will not have a material adverse effect on the Company's financial position or results of operations. 12 PART II OTHER INFORMATION ----------------- Item 1. LEGAL PROCEEDINGS. A description of certain legal proceedings is contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 under the caption "Legal Proceedings". In May 1997, a shareholder derivative complaint was filed in Superior Court of California, North Country Branch. The complaint, which seeks injunctive relief and an unspecified amount of damages, was brought by a current shareholder against NTN and certain officers and directors and alleges that the Company was injured by a lack of independence and breach of business judgment by virtue of certain agreements entered into in connection with the recent Reorganization. The Company believes that the lawsuit is without merit and intends to vigorously defend against the action. The Company has not formerly responded due to the fact that the action was only recently filed. In connection with the resolution of litigation entitled Sahba Azar, et al. On Behalf of Themselves and All Others Similarly Situated vs. NTN Communications, Inc., Donald C. Klosterman, Patrick J. Downs, Daniel C. Downs and Alan P. Magerman, with which four other related actions were ultimately consolidated, the Company has entered into a Stipulation of Settlement Agreement. The terms of the settlement are set forth in greater detail in the Company's prior public filings and more specifically, in the Form 8-K dated June 24, 1996. As of the date of this filing, the registration statement relating to the shares of the Company's common stock underlying the warrants has not yet become effective. On April 18, 1995, a class action lawsuit was filed in United States District Court entitled Lenora Isaacs, On behalf of Herself and All Others Similarly Situated vs. NTN Communications and Patrick J. Downs. The complaint alleges violations of federal securities laws based upon the Company's projections for the fourth quarter of 1994 and for the 1994 fiscal year, and further alleges that certain of the Company's insiders sold stock on information not generally known to the public. The Company, which has assumed the defense of this matter on behalf of all defendants, has denied liability based upon the allegations contained in the complaint. Plaintiffs have claimed to be entitled to damages between $8 million and $10 million. The Company believes, based in part on the advice of outside counsel, that the actual damages, if any, would be substantially less than such amount. As previously announced, in order to avoid the costs and expenses associated with complex litigation including attorney fees, expert fees and costs, analyses which must be conducted and other costs necessary to prepare to defend this case at trial and perhaps through the appeals process, in addition to the business disruption occasioned by such protracted litigation, the Company has agreed to an out-of-court settlement having a total value of $1,450,000. The settlement, which is subject to final court approval, consists of $250,000 in cash with the remaining balance of $1,200,000 being payable with the Company's common stock or in cash, at the Company's election. The Company had previously established reserves to cover the Settlement. In May 1997, a shareholder derivative complaint was filed in the Superior Court of California, San Diego, North County Branch. The complaint, which sought injunctive relief and an unspecified amount of damages, was brought by a current shareholder against the Company and certain officers and directors. More specifically, the plaintiff alleged that the Company was injured by a lack of independence and breach of business judgment by virtue of certain agreements entered into in connection with the recent management reorganization. The Company believed that the lawsuit was without merit and conveyed its position to plaintiffs' counsel. On June 10, 1997, the plaintiff voluntarily dismissed the lawsuit without any payment whatsoever from the Company. On June 11, 1997, the Company was included as a defendant in the litigation entitled Elliot Miller and Jan Iyer, shareholders on behalf of themselves and all others similarly situated vs. NTN Communications, Inc., Patrick J. Downs, Daniel C. Downs, Donald C. Klosterman, Ronald E. Hogan, Gerald P. McLaughlin and KPMG Peat Marwick LLP, which complaint was filed by the same lead plaintiff and lead attorneys as in the previously dismissed derivative action. The new complaint alleges violations of state and federal securities laws based upon purported omissions from NTN's filings with the Securities and Exchange Commission. More particularly, the complaint alleges that the directors and former officers 13 devised an "exit strategy" to provide themselves with undue compensation upon their resignation from NTN. Plaintiffs further allege that defendants made false statements about, and failed to disclose, contingent liabilities (guaranteed compensation to management and the "Put" due to Symphony IWN Investment LLC) and phantom assets (loans to management) in NTN's financial statements and Peat Marwick's audit reports, all of which served allegedly to inflate the trading price of NTN's common stock. On July 3, 1997, the Company and the named directors and officers filed a motion to dismiss the lawsuit. The motion is scheduled to be heard by the District Court on October 27, 1997. All proceedings in the case are stayed pending resolution of the Company's motion. The Company has submitted this claim to its insurance carriers, however, there can be no assurances that the insurance carriers will accept coverage or that if coverage is accepted, it will be without a reservation of rights by the insurance carriers. On July 1, 1997, the Company and its subsidiary, IWN, Inc., filed a lawsuit against Symphony Management Associates, Inc. Symphony IWN Investment, LLC and Frank Scarpa in the Superior Court of California for the County of San Diego, North County Branch. The complaint contains claims for breach of contract, specific performance, declaratory relief and intentional interference with economic relations and includes a claim for punitive damages and the recovery of attorneys' fees. The complaint arises out of the Investment Agreement dated as of December 31, 1995 entered into between Symphony Management Associates, Inc ("SMA") and IWN, Inc. and NTN Communications, Inc. Under the Investment Agreement, the Company granted Symphony IWN Investment LLC ("LLC"), an affiliate of SMA, a "Put Option", which entitled LLC to elect to cause the Company to repurchase SMA's shares of IWN, Inc. and limited partner interest in IWN, L.P. during a limited period of time, for specified consideration. As previously announced by the Company, in April 1997, LLC notified the Company of its election to exercise the Put Option. On June 18, 1997, the Company paid LLC approximately $3,556,000 with funds loaned to the Company by GTECH Corporation. Though LLC retained all sums paid by Company, LLC claims it is entitled to approximately $1,000,000 in additional funds and a greater number of warrants to purchase the Company's stock based on anti-dilution provisions in its warrants. The claims of SMA and LLC were set forth in a subsequent lawsuit filed by SMA and LLC in Delaware on July 3, 1997 against the Company and IWN, Inc. More specifically, the lawsuit seeks specific performance by the Company to deliver a secured promissory note, declaratory relief with respect to LLC's right to additional warrants based upon alleged dilution and attorneys' fees. The Company and IWN, Inc. have filed a motion to dismiss the Delaware lawsuit, and all proceedings in the lawsuit are precluded pending resolution of the Company's motion. The Company intends to vigorously prosecute its California action and defend against the Delaware lawsuit filed by SMA and LLC. In the meantime, however, in the interest of avoiding the expense of legal fees and costs inherent in such litigation, and accomplishing a prompt resolution of such claims, the Company has been engaged in settlement negotiations with SMA and LLC. There can be no assurance that such litigation can be amicably resolved without the need for further litigation, nor can there be any assurance that if the litigation does proceed, the Company will be the prevailing party. Item 2. CHANGE IN SECURITIES. In April 1977, the Company granted a warrant to purchase 1,000,000 common shares to Frazier/King Media Holding Co. The warrant was granted pursuant to a consulting agreement whereby Frazier/King agreed to provide financial and management consulting services to the Company. The warrant is exercisable at $2.81 and is immediately exercisable as to 200,000 shares and generally will become exercisable as to the balance of the shares in installments of 100,000 shares on each of the following dates, July 15, 1997, October 15, 1997, January 15, 1998, April 15, 1998, July 15, 1998, October 15, 1997 and January 15, 1999. In the event of a change of control (as defined) of NTN, the warrant will become immediately exercisable in full. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 14 None. Item 6. EXHIBITS AND REPORTS ON REPORT 8-K. None. 15 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NTN COMMUNICATIONS, INC. Date: December 15, 1997 By: /s/GERALD SOKOL, JR. ---------------------- Gerald Sokol, Jr., President and Chief Executive Officer 16 -----END PRIVACY-ENHANCED MESSAGE-----