-----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, FcJWUsLt9fYT3tB0b09xMDDvIEriTUKp1GMSk5WWXr0Oz3rwJJ089nW/BKFT1Jp0 jyJZC3behDiMl+gQ7KjWEQ== 0000950134-99-002449.txt : 19990409 0000950134-99-002449.hdr.sgml : 19990409 ACCESSION NUMBER: 0000950134-99-002449 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NTN COMMUNICATIONS INC CENTRAL INDEX KEY: 0000748592 STANDARD INDUSTRIAL CLASSIFICATION: 4833 IRS NUMBER: 311103425 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11460 FILM NUMBER: 99584067 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-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K --------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 COMMISSION FILE NUMBER 1-11460 NTN COMMUNICATIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 31-1103425 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (760) 438-7400 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS COMMON STOCK, $.005 PAR VALUE NAME OF EACH EXCHANGE ON REDEEMABLE COMMON STOCK WHICH REGISTERED PURCHASE WARRANTS AMERICAN STOCK EXCHANGE 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 [ ] -------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of the Common Stock held by non-affiliates of Registrant as of March 26, 1999, computed by reference to the closing sale price of the Common Stock on the American Stock Exchange, was approximately $18,308,497. (All directors and executive officers of Registrant are considered affiliates for this purpose.) As of March 26, 1999, Registrant had 28,086,306 shares of Common Stock, $.005 par value, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Not Applicable 2 TABLE OF CONTENTS
Item Page Part I 1. Business 4 2. Properties 15 3. Legal Proceedings 15 4. Submission of Matters to a Vote of Security Holders 17 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 6. Selected Financial Data 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 7A. Quantitative and Qualitative Disclosures About Market Risk 25 8. Consolidated Financial Statements and Supplementary Data 25 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26 Part III 10. Directors and Executive Officers of the Registrant 26 11. Executive Compensation 27 12. Security Ownership of Certain Beneficial Owners and Management 30 13. Certain Relationships and Related Transactions 31 Part IV 14. Exhibits, Consolidated Financial Statement Schedule, and Reports on Form 8-K 32 Index to Consolidated Financial Statements and Schedule F-1
3 3 This Report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements that include the words "believes," "expects," "anticipates," "plans" or similar expressions and statements relating to the Company's strategic plans, capital expenditures, industry trends and prospects and the Company's financial position. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to differ materially from those expressed or implied by such forward-looking statements. Although the Company believes that its plans, intentions and expectation reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectation will be achieved. Important factors that could cause actual results to differ materially from the Company's expectations are set forth in this Report. PART I ITEM 1. BUSINESS GENERAL NTN Communications, Inc. ("NTN" or the "Company") was originally incorporated in the State of Delaware on April 13, 1984 under the name of Alroy Industries. In 1994, the Company formed LearnStar, Inc. ("LearnStar"), which operated through June 1998 as a wholly-owned subsidiary of NTN. In June 1998, the Company sold an 82.5% interest in LearnStar to NewStar Learning Systems, L.L.C. ("NewStar"). In 1994, the Company also formed IWN, Inc. ("IWN"), which serves as the general partner of IWN L.P., a limited partnership engaged in the development of interactive technology for gaming applications. IWN has no business or operations apart from its service as the general partner of IWN L.P. On April 1, 1998, the Company reached an agreement in principal with Omnigon, a California corporation, to sell up to 90% of the equity of IWN to Omnigon on or before May 31, 1998. Omnigon paid the Company $100,000 in April 1998 and an additional $100,000 in May 1998 for the option to acquire IWN under specific terms. Subsequently, however, the Company terminated negotiations with Omnigon for the proposed sale of IWN. As agreed, the Company used the non-refundable payments made by Omnigon to pay the operating expenses of IWN prior to the cancellation of the proposed transaction. NTN redirected IWN's business strategy toward the Australian, New Zealand and Asian marketplace, and building upon its existing venture in that market with IWN Australasia Limited (IWN-A). NTN and IWN-A, in which NTN holds a 25% equity interest, have agreed that IWN will provide research and development and technical support for IWN-A operations over the next several months. IWN-A will fund the development and support activities. Unless otherwise indicated, references herein to "NTN" or the "Company" include NTN and its consolidated subsidiaries. RECENT DEVELOPMENTS Recent Management Personnel Changes In October 1998, the Board of Directors of the Company appointed Stanley B. Kinsey as Chairman and Chief Executive Officer. Mr. Kinsey has been a director of the Company since November 1997. Gerald Sokol, Jr., formerly the Chief Executive Officer, remained as the Company's President and Chief Financial Officer until January 1999. In June 1998, Edward C. Frazier, who served as a director of the Company since August 1996, resigned his position as a director of the Company. In August 1998, Barry Bergsman was appointed to the Board of Directors. There can be no assurance that the new management of the Company, under the supervision of the Board of Directors, will be able to operate the Company more successfully than prior management or that additional management changes will not be made in the future. 4 4 Resignation Agreements In January 1999, Gerald Sokol, Jr., the Company's President and Chief Financial Officer, resigned as an executive officer and director of the Company. The Company entered into a Resignation and General Release Agreement ("Resignation Agreement") with Mr. Sokol pursuant to which Mr. Sokol's Employment Agreement, dated July 1, 1998, was terminated. Pursuant to the Resignation Agreement, the Company paid $205,850 to Mr. Sokol in settlement of his prior Employment Agreement and in consideration of his agreement not to compete with the Company for a period of one year. In further consideration, the Company paid Mr. Sokol an earned 1998 bonus of $128,500. In consideration of the cancellation of Mr. Sokol's February 2, 1998 Option Agreement which granted him the option, vesting over a period of four years, to purchase an aggregate of 500,000 shares of common stock at an exercise price of $1.00, the Company granted Mr. Sokol the fully vested right and option to purchase 125,000 shares of common stock at an exercise price of $1.00 per share, exercisable at any time prior to 12 months after the January 19, 1999 termination of Mr. Sokol's employment with the Company. Recent Series B Preferred Stock Exchange Agreement In October 1997, NTN sold and issued an aggregate of 35,000 shares of Series B Preferred Stock each to two institutional purchasers (the "Investors") for a total of $7,000,000. The sale of the Series B Preferred Stock was effected pursuant to Regulation D under the Securities Act of 1993. The Company paid $210,000 for financial advisory services in connection with the sale of the Series B Preferred Stock. As of October 5, 1998, 14,000 shares of the Series B Preferred Stock (plus accrued dividends) had been converted into 2,430,000 shares of common stock of the Company, leaving 56,000 shares of the Series B Preferred Stock outstanding. On October 5, 1998, NTN entered into an Exchange Agreement with the Investors pursuant to which they agreed to surrender for cancellation all their shares of Series B Preferred Stock in exchange for warrants and convertible notes as described below. Pending their surrender and cancellation, the dividend rate on the Series B Preferred Stock was increased from 4% to 7% and the conversion price of the Series B Preferred Stock was fixed at $1.275 per share consistent with the interest rate and conversion price under the convertible notes described below. The Company also agreed to issue each of the Investors a 7% Convertible Senior Subordinated Note of the Company in a principal amount equal to the stated value of their Series B Preferred Stock, plus accrued and unpaid dividends through the date of issuance of the convertible notes. The convertible notes were issued January 11, 1999 and bear interest at the annual rate of 7% per annum. Interest is due and payable in quarterly installments, in arrears, and the entire principal amount will be due and payable on February 1, 2001. Interest on the convertible notes may be paid in cash or, at NTN's election, in shares of its common stock valued for this purpose at 90% of the average closing bid price of the common stock during the 10 trading days preceding the interest payment date. At any time after a period of 20 consecutive trading days during which the daily "Market Price" (as defined) of the common stock equals or exceeds $1.75 (subject to adjustment), the Company may elect upon 45 days prior written notice to prepay all or any portion of the convertible notes at a price of 105% of the outstanding principal amount, plus accrued and unpaid interest. The convertible notes will continue to be convertible, however, at any time prior to prepayment in full. The convertible notes must be prepaid in connection with a merger or consolidation of the Company or other "Major Transaction" (as defined) if the consideration per share of common stock in the Major Transaction is at least $1.50. In such event, the prepayment price will be 105% of the outstanding principal amount of the convertible notes, plus accrued and unpaid interest. The holders of the convertible notes may convert them at any time, in whole or in part, at their option. The number of shares of common stock issuable upon conversion of each convertible note will be determined by dividing the outstanding principal amount to be converted, plus any accrued and unpaid interest, by the conversion price then in effect. The conversion price will be $1.275 per share, subject to adjustment if certain events, including stock dividends or subdivisions or reclassifications of the common stock or any sale or issuance of common stock (or of rights or options to subscribe for or purchase common stock) for no consideration or for a consideration per share less than the "Average Market Price" (as defined) of the common stock. The actual number of shares of common stock issuable upon any conversion of the convertible notes will depend on the conversion price in effect on the relevant conversion date. 5 5 The convertible notes are subordinate in right of payment to the prior payment of all "Senior Debt" (as defined). The Company is restricted under the terms of the convertible notes from incurring any Senior Debt in excess of $10,000,000 or any other indebtedness (except Senior Debt and "Subordinated Debt" (as defined)) in excess of $2,000,000 at any time. The Company will be in default under the convertible notes if it fails to pay any principal or interest on the convertible notes when due, and in certain other events, including in the event of a material adverse change in the condition, financial or otherwise, or operations of the Company as determined by the holders of the convertible notes in their discretion. If the Company defaults under the convertible notes, in the discretion of the holders of the convertible notes, the entire outstanding principal amount of the convertible notes and all accrued and unpaid interest will become immediately due and payable in full. On October 5, 1998, in consideration for their entering into the Exchange Agreement, NTN issued to each of the Investors a warrant to purchase 500,000 shares of common stock at an initial purchase price of $1.25 per share. The purchase price of shares of common stock under the warrants will be subject to reduction based on the future "Market Price" (as defined) of the common stock as follows: the purchase price will be (i) $0.75, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $1.75 but less than $2.00; (ii) $0.625, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $2.00 but less than $2.25; (iii) $0.50, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $2.25 but less than $2.50; (iv) $0.375, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $2.50 but less than $3.00; (v) $0.25, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $3.00 but less than $4.00; and (vi) $0.005, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $4.00. No adjustments to the purchase price will be made to increase the purchase price in effect at any time. The warrants are exercisable at any time on or before February 1, 2001. In the event, however, that a "Major Transaction" (as defined in the convertible notes as described above) occurs, NTN may elect upon 30 days prior written notice to the warrant holders to accelerate the expiration date of the warrants so long as the consideration per share of common stock which would be received by the warrant holders in the Major Transaction exceeds the then-applicable purchase price per share under the warrants. The warrants contain certain antidilution provisions that require adjustments in the purchase price and the number of shares of common stock purchasable in the event of a stock dividend, subdivision or combination of the outstanding shares of common stock or in the event of a recapitalization of the Company and certain similar events. In addition, the exercise price and number of shares purchasable under the warrants are to be adjusted in the event the Company issues additional shares of common stock (or rights or options to subscribe for or purchase common stock) for no consideration, or for a consideration per share of common stock less than the "Current Market Price" (as defined) of the common stock under any employee stock option plan or other employee plan approved by the Company's Board of Directors, provided that the exercise or purchase price is not less than 85% of the fair market value on the date of grant. The warrants allow for cashless exercises by means of the Company's withholding of shares of common stock otherwise issuable to the holder, which shares are to be valued for this purpose based on the market price of the common stock at the time. A registration statement on Form S-3 covering the shares of common stock issuable upon conversion of the 7% convertible senior subordinated notes and exercise of the warrants, was declared effective by the Securities and Exchange Commission on January 8, 1999. Recent Announcement of New Network In February 1999, the Company introduced a second Network to be broadcast for a fee to the Hospitality industry (the "New Network"). Deployment of the New Network to subscriber locations is scheduled to begin in April 1999. Beta testing has been in process since late 1998. This New Network will have all the capabilities of the original NTN Network plus a more television-like quality in advertisements and games. As part of the rollout of the New Network, the "Playmaker"(TM) wireless input device has been enhanced in several ways: (a) updated radio frequency technology mitigates the interference problems common to the prior series; (b) a larger 8-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 (the participants also will use the keyboard for entering personal information and to utilize the system's chat services) (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 all, the New Network will allow the presentation of enhanced graphics and a broader array of game concepts, and will allow advertisers to use video images to sell their products, which is not possible on the original Network. 6 6 PRINCIPAL SERVICES AND PRODUCTS Since the Company substantially curtailed funding the operations of its non-core subsidiary, IWN, the discussions throughout this report are limited to the Company's core operations. Historical financial information related to IWN and LearnStar is included as necessary to provide an understanding of the Company's operations. NTN develops and produces individual and multi-player interactive programs for distribution to a variety of media platforms. These interactive sports and trivia programs permit multiple viewers to simultaneously respond to and participate with the programming content. NTN has a license arrangement with the National Football League (NFL) which expires March 31, 2000, as well as nonexclusive arrangements or agreements with the National Hockey League in Canada and others, to provide the Company's QB1(R) football game and other interactive play-along programming in conjunction with live televised broadcasts. NTN broadcasts a wide variety of popular games, trivia and informational programming to group viewing locations such as hotels, sports bars and restaurants through the NTN Network(TM). In addition, NTN brings multi-player interactive games into consumer households through America Online, the Internet and interactive television services. Since we distribute our programs via satellite, cable, telephone and wireless transmission technologies, we are not dependent on any particular hardware or technical platform. NTN currently provides products and services to two principal markets, each of which is directly related to multi-player interactive entertainment: o Network Services is the interactive television network (the NTN Network(TM)) featuring sports and trivia games which are broadcast to restaurants and other group viewing environments. o Online/Internet Services are live interactive sports and trivia games, including those currently broadcast over the NTN Network(TM), provided via America Online, the Internet and other third-party providers for the home consumer market. The following is a brief description of each of the Company's markets: Network Services - Network Services represents the majority of the Company's business, providing an interactive television broadcast network featuring sports, trivia and informational programming to over 2,900 hospitality sites in the U.S. as of December 31, 1998. These sites include restaurant chains (e.g., TGI Friday's, Damon's, Pizzeria Uno's), local and regional bowling alleys, pizzerias, sports complexes, taverns and military bases. Through various platforms including satellite, cable and wireless transmission sources, Network Services can link its subscribers to encourage local, regional and national competitions around its programming. Online/Internet Services - The Company provides to the home consumer market many of the same services as is available on the NTN Network, via arrangements with online, cable delivery and internet services. Online/Internet Services is not dependent on any particular technology or method of transmission to deliver its programming. In addition to the same sports and trivia games which are currently broadcast over the NTN Network, Online/Internet Services includes other multi-player interactive games expressly designed for the home environment. Currently, revenues are derived from 1) subscription fees, in which third party companies pay monthly fees for NTN programming, 2) revenue sharing, in which third party companies pay NTN a portion of pay-per-play revenue that is generated and 3) information services in which NTN provides value-added services to third parties. Customers include AOL, GTE MainStreet and the NFL. 7 7 MARKETING AND DISTRIBUTION OF SERVICES AND PRODUCTS Network Services. Network Services are provided via the NTN Network, which currently serves over 2,900 locations ("Locations") throughout all 50 States. The NTN Network presently features from 14 to 17 hours, depending on the time zone, of interactive sports and entertainment trivia game programming on weekdays, with extended programming hours on weekends. The balance of broadcast time is devoted to a non-audible graphics-based service transmitting information, including sports scores and upcoming program promotions. Original programming for the NTN Network is developed and produced at the Company's corporate offices in Carlsbad, California, for distribution to Locations. The Company's facilities are equipped with video, satellite and communications equipment, and multimedia computers. The Company can provide simultaneous transmission of up to 16 live events for interactive play and a multitude of interactive games and other programs, allowing distribution of different programs to customers in different geographical locations. The Company uses two independent services to distribute NTN programming via satellite to customers, although it is not dependent upon either service because there are several other providers that offer similar services. The Company attempts to use the most effective and least expensive multiple data transmission techniques to distribute data from the Company's facilities to customers, including direct connect, internet transmission, and direct satellite broadcast. Each Location is furnished with NTN proprietary equipment (a "Location System") including a personal computer, a satellite data receiving unit (usually a small satellite dish), and a minimum of five hand-held, portable keypads ("Playmakers(R)") which players use to make their selections. During live interactive programs, players participate in the play-along programs using two television screens. One screen features the live broadcast from the television network (e.g., ABC's Monday Night Football), while the second screen displays the NTN Network program. Participants play the game by entering their selection on Playmakers(R), which transmit a radio signal to the on-site computer. At the conclusion of the broadcast, scores are calculated and top scores are sent via phone lines to the NTN broadcast center (the "Broadcast Center") in Carlsbad, California. Within seconds, rankings for each Location are tabulated and displayed and rankings and scores for the top Locations are transmitted back to all Locations via the NTN Network for display. This allows players to compete not only with other patrons at their Location, but against all players across the nation who are participating interactively on the NTN Network. The following diagram depicts the transmissions for a typical real-time, interactive game via satellite. Customers generally have executed a one-year contract to obtain the Company's services and pay a monthly fee generally ranging from $400 to $800. [GRAPH OF NTN BROADCAST CENTER] In addition to tabulating Playmaker(R) responses at the Location and communicating with the Company's Broadcast Center, the Location System can manipulate screens locally by calling up high-resolution computer generated graphics and inserting the screens into the broadcast schedule. Accordingly, the Company can offer both national and local advertising. Interactive Game Programs. Network Services offers a variety of sports and entertainment trivia games that challenge players' skill and knowledge and create significant customer loyalty. An example of interactive sports programming is QB1(R), the Company's first and most popular game program. QB1(R) is an interactive football strategy game developed and broadcast under an exclusive license from the NFL, which tests a player's ability to predict an offensive team's plays during a live televised football game. Points are awarded based on the accuracy of the player's prediction, rather than whether the team scores or advances the ball. The Company broadcasts QB1(R) in conjunction with every NFL game and selected Canadian Football League and college football games. The NTN Network presently features the following interactive sports games programs: NTN Play-Along Games - Interactive games played in conjunction with live, televised events. Games include the following:
Game Description - - ---- ----------- QB1(R) NFL licensed interactive strategy game in conjunction with live telecasts of college and professional football games DiamondBall Interactive strategy game played in conjunction with live televised Major league Baseball games
8 8 NTN Fantasy Games - Fantasy league games played in conjunction with sporting events or rotisserie leagues. Games include the following:
Game Description - - ---- ----------- Brackets(TM) Basketball or hockey tournament prediction game Football Challenge(TM) Weekly selection of winners of college and professional football games Survivor(R) Weekly single elimination prediction game for professional football
Interactive Trivia Game Programs. During trivia game programs, each Location System simultaneously displays selected trivia questions which are displayed on the NTN television monitor at each Location. Participants use the Playmaker(R) to select answers, which are collected, transmitted and tabulated in a similar manner to NTN's interactive sports games. Participants' scores are displayed on the dedicated television monitors, along with national, regional and local rankings, as applicable. While certain of the Company's sports games are available only during the seasons when the respective sports are played, trivia game programs allow the Company to offer year-round interactive programming. The NTN Network generally provides the trivia programming during evening hours, when Locations, particularly restaurants and taverns, tend to be busiest. The NTN Network presently features the following interactive trivia games programs: NTN Premium Trivia Games - Promotion-oriented weekly game shows that generally require 1-2 hours of participation. Prizes are awarded to the top finishers, except where prohibited by law. Games include the following:
Game Description - - ---- ----------- Trivial Pursuit Live(R) Interactive version of the famous Trivial Pursuit game - licensed from Hasbro Interactive. Playback (TM) Music trivia Showdown(R) Advanced trivia challenge SportsIQ(TM) Weekly sports trivia game Sports Trivia Challenge(R) Advanced sports trivia covering multiple topics Spotlight(TM) Entertainment and media based trivia game (movies, music) Glory Daze(TM) Trivia game focused on baby boomer topics
NTN Trivia Games - General-themed, standard games typically one-half hour in length. Games include the following:
Game Description - - ---- ----------- Brain Buster(R) Interactive trivia game covering esoteric topics Countdown(R) Interactive trivia game using word plays Topix(TM) Theme driven trivia game played under controlled timing Wipeout(TM) Interactive trivia game eliminating incorrect answers Nightside(R) Adult oriented trivia Sports Trivia(R) General trivia game covering sports topics Retroactive(TM) Pop-culture trivia with 60's, 70's and 80's content Football Weekend Roundup(TM) Football trivia game Abused News(TM) Humorous trivia game focused on headline news Appeteasers(TM) Shorter version of humorous general trivia game Jukebox(TM) Music trivia based on category selected by player Triviaoke(TM) Music trivia game Antagonist Trivia with an edge from Heckler's Online Zealot Futuristic trivia game from Heckler's Online
Custom Games - Interactive games created specifically for media companies such as Capital Cities/ABC for simultaneous broadcast with their live telecasts.
Game Description - - ---- ----------- NTN Awards Show(TM) Interactive game played in conjunction with the Academy Awards, Grammy Awards and other award shows NTN Draft Show(TM) Interactive game played in conjunction with the annual NFL draft
9 9 Since 1987, Network Services has broadcast the NTN Awards Show(TM) to all Locations in connection with the live Academy Awards telecast. The NTN Awards Show(TM) contains movie trivia and biographical information on nominees and allows players to select winners up to the actual announcement and compete with other players via the NTN Network, in a manner similar to QB1(R). Approximately 5,000 players participated in NTN's broadcast of the 1999 NTN Awards Show(TM). Information Programming. During the hours in which the Company is not broadcasting interactive games, the Company uses its broadcast network to transmit sports information as well as NTN Network programming information. The Company obtains the majority of its sports information (for which it pays a monthly fee) from Sportsticker wire service, electronically formats the information and then retransmits it for broadcast to Locations. Advertising. The NTN Network, in a manner similar to the television broadcast medium, sets aside a number of minutes of a broadcast hour for advertising, promotional spots (promoting NTN Network's competitions and special events), "tune-in spots" (promoting NTN Network programming schedule), and public service announcements. The Company has currently set aside 14 minutes each hour for advertising spots, promotional spots and "tune-in spots." Each spot, which can be sold, is designed to be 15 seconds in length for a total of 56 spots per hour. The Company can insert advertising messages into its interactive sports and trivia programming at any number of Locations. Further, messages can be broadcast over the NTN Network or custom-tailored for a specific Location or several Locations. Sponsorships of programs are also available and provide advertisers with specific premium exposure within a sponsorship program. The NTN Network's Players Plus(R) ("Players Plus") frequent player club, numbering over 450,000, offers advertisers an effective tool for market research. Players Plus members join by entering their name, address, zip code and identification number into a Playmaker(R), which is then captured at the NTN Broadcast Center. Members earn points each time they play and also a chance to win prizes in the monthly Players Plus(R) sweepstakes. Sponsors are capable of receiving feedback through interaction with customers in the form of customer surveys on the NTN Network or via email. Online/Internet Services. The Company offers many of the same services and programs as seen on the NTN Network to the home consumer market via Online/Internet Services. NTN's Online/Internet Services are currently dominated by a relationship with America Online ("AOL") from which NTN derives the majority of its Online revenues. The existing agreement which runs through 1999 is a fixed monthly amount which has been decreasing incrementally over the last 2 years. The Company had hoped to make up this staged decrease through Online advertising and sponsorships. To date, we have not been successful in this arena. We are aggressively exploring alternative Internet strategies in conjunction with AOL in addition to opportunities elsewhere including: broadcasters, portals and Internet content providers. In addition to the AOL contract, the Company also produces and hosts Online games for various third parties and portals. Revenues received include development fees and monthly revenues. The Company's interactive sports and trivia games are maintained on the Company's servers and are available online 24 hours a day, seven days a week. The Company's Online/Internet Services are unique since the programs are not dependent upon, and consequently no bound by, any particular technology or method of delivery. Regardless of which technology emerges as the primary means of delivery to home users, management believes its programming content will be available to the household. Online/Internet Services are distributed to online networks, also known as content distributors. These games, in turn, are made available to their customer base for a fee. Companies of this type currently include GTE MainStreet. The diagram below depicts the transmissions necessary for a consumer to use the Company's service in his or her home. [GRAPH OF VIA CABLE/TELEPHONE] Foreign Licensing. NTN has provided its services in certain foreign markets through licensing agreements with foreign licensees. Generally, the Company licenses its products in foreign countries by granting the rights to use NTN's interactive broadcast technology. NTN provides licensees with technological know-how and assistance to build a broadcast center, and to develop interactive products and programs. For many years, NTN has provided service to customers in Canada through its unaffiliated licensee, Networks North, Inc.. In 1993, NTN issued a 20-year license to an unaffiliated company in Australia ("NTN Australasia"), to create the first interactive television network in Australia and New Zealand. In 1994, NTN issued a license to MultiChoice Ltd., an unaffiliated company, to develop and operate an interactive broadcast network in South Africa. The South African licensee ceased its NTN-licensed operations in March 1998. Although the Company may continue to engage in selective foreign licensing, these activities are not expected to contribute significantly to revenues in the foreseeable future. 10 10 MARKETING AND EXPANSION STRATEGY Network Services. Network Services markets services to customers primarily through advertising in national trade periodicals, national and regional industry trade shows, telemarketing, direct mail and direct contact through field representatives. All sales prospects are organized and tracked through shared database software. Currently, services are sold through a regional-based management team that utilizes direct salespersons as well as independent representatives. The Company believes its in-house sales team will be more successful in meeting its sales goals. As discussed under "Recent Developments", in February 1999, the Company introduced a second Network to be broadcast for a fee to the hospitality industry. Deployment of the New Network to subscriber locations is scheduled to begin in April 1999. The Company's plan is to continue to operate the current network for approximately 18 months after the New Network is launched and allow customers to convert to the New Network as they desire. Prospective new customers will be offered the New Network only so that the Company eventually will be operating only one network. The Company's future business strategy related to Network Services is to continue to increase available programming and market to additional group viewing Locations. In addition, the Company continues to develop additional revenue sources for Network Services such as local and regional advertising. No assurance can be given that the Company will be successful in the implementation of its business strategy. Online/Internet Services. Since the end-user of Online/Internet Services is the service provider's customer, the Company relies on the service provider's marketing efforts to promote its products. However, the Company works in conjunction with service providers to develop the promotions and advertisements. For example, service providers such as AOL may include the Company's game logo on an initial "start-up" screen which millions of its subscribers can access at no expense to NTN. Subscribers generally pay the service provider a flat fee or a fee based on the amount of time that the subscriber has participated with the Company's games and services, and the service provider pays NTN. In the future, the Company expects its products to elicit more exposure from the distributors as a result of increased brand recognition and continued promotions. NTN will continue to take a proactive position with respect to marketing products to each distributor to ensure inclusion in as many of their promotional efforts as possible. The Company expects its direct marketing costs to continue to be minimal. No assurance can be given as to whether the Company will be successful in the implementation of its business strategy. SOURCES OF REVENUE The following table sets forth certain information with respect to the principal sources of the Company's revenues during the years ended December 31, 1998, 1997 and 1996.
YEARS ENDED DECEMBER 31 --------------------------- (Dollars in thousands) 1998 1997 1996 ------- ------- ------- Network Services $18,785 19,009 19,269 Online/Internet Services 2,014 3,326 1,811 Advertising Revenue 896 772 1,590 Equipment Sales, net 499 475 1,757 Other Revenue 2,000 2,279 1,284
Network Services. The primary market for Network Services is comprised of approximately 300,000 taverns and restaurants in North America. Other potential Locations may also be found among hotels, military bases, college campuses, hospitals, and other group viewing Locations such as country clubs, fraternal organizations, and bowling centers. To date, Network Services' customers have generally been public viewing locations such as restaurant chains (e.g., TGI Friday's, Damon's, Pizzeria Uno's), local and regional bowling alleys, pizzerias, sports complexes, sports taverns and military bases. Many of the Company's customers such as hotel and restaurant chains have multiple Locations. Locations generally enter into a one-year broadcast service agreement with the Company pursuant to which they pay a monthly broadcast fee of approximately $400-800 per Location. The Company currently serves over 2,900 Locations located in all 50 States. As a percentage of total revenues, Network Services revenues amounted to 78%, 74% and 75% in 1998, 1997 and 1996, respectively. 11 11 Online/Internet Services. The Company provides its services to online users pursuant to the agreements with various system providers such as AOL. The online computer industry remains a fast-growing consumer market in terms of subscribers. Fees from system providers are individually negotiated. Fees from AOL are based on the fixed fees set forth in the Company's two year agreement with AOL which expires in December 1999. Revenue from other service providers is based on the actual use of the NTN interactive programs by their underlying customers. The Company has granted to Networks North, Inc. the exclusive right to market NTN interactive services to online users in Canada. The Company is entitled to receive a royalty equal to 25% of any revenues generated from Canadian online customers. The Company has not received any revenues to date relating to the Canadian online services, and no assurance can be given that the Company will receive any such royalties in the future. As a percentage of total revenue, Online/Internet Services revenues amounted to 8%, 13% and 7% in 1998, 1997 and 1996, respectively. Advertising Revenue. The Company sells advertising spots for broadcast on the NTN Network as well as for Online/Internet Services. Advertisers can buy time for promotional spots as well as sponsorship of specific events or programs. As a percentage of total revenue, advertising revenues amounted to 4%, 3% and 6% in 1998, 1997 and 1996, respectively. The Company has retained two independent advertising agencies to obtain additional advertising revenues from certain industry sectors. Although the Company is confident in its ability to attract substantial advertisers to the NTN Network, the advertising revenue model on which advertising rates are based continues to evolve. No assurance can be given that advertising revenues will contribute significantly to total revenues in the foreseeable future. Equipment Sales, Net. Typically, Location Systems are provided to customers but ownership is maintained by the Company or is leased from third parties. The Company sells interactive equipment, particularly Playmakers(R), to its licensees in Canada and Australia. Equipment is generally sold to customers with no return rights except in the case of defect. As a percentage of total revenue, Equipment Sales amounted to 2%, 2%, and 7% in 1998, 1997 and 1996, respectively. Equipment sales are not expected to contribute significantly to revenues in the foreseeable future. Other Revenue. Other revenues consist primarily of revenue generated pursuant to certain license agreements the Company has with independent licensees, the most significant of which is Networks North, Inc. in Canada. Pursuant to the license agreement, Networks North, Inc. solicits Locations to the NTN Network in Canada. The Company provides NTN Network programs to Networks North, Inc. in exchange for an annual license fee payable in monthly installments based upon the number of Locations in Canada, which presently number approximately 535. RAW MATERIALS For media platforms such as online services, the Company distributes its programs to the recipients who maintain their own receiving, translation and re-broadcasting equipment. Accordingly, the Company has no raw materials or equipment needs for these customers beyond its own back-end servers. For the NTN Network, the Location System is assembled from off-the-shelf components available from a variety of sources, except for the Playmaker(R) package. The Company is responsible for the installation and maintenance of the Location Systems. The Playmaker(R) is a hand held , 49-megahertz radio frequency device used to enter choices and selections by players of QB1(R) and our other games and programming broadcast via the NTN Network(TM) and is currently manufactured by a non-affiliated manufacturer in Taiwan. Customers have experienced certain recurring problems with 49 megahertz Playmakers(R) related to noise sensitivity and performance of the Playmaker's rechargeable batteries. Equipment function problems have been a substantial cause of customer contract terminations in the past. To address these problems, the Company has designed a 900-megahertz Playmaker(R) in consultation with an outside engineering firm. The redesigned Playmaker(R) is currently being manufactured by the manufacturer of the 49-megahertz Playmaker and will be deployed in the marketplace in conjunction with the launch of NTN's New Network. There can be no assurance that equipment problems will not occur with the redesigned Playmakers(R) and the continuance of such problems in the future could adversely affect the results of operations. LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS The Company's sports games make use of simultaneous telecasts of sporting events. Where the Company has licenses with various sporting leagues, the Company is also permitted to utilize the trademarks and logos of national teams and leagues in connection with the playing of an interactive game. 12 12 The Company is party to an agreement with the NFL, which grants the Company the exclusive right to use the trademarks and service marks of the NFL in connection with the playing and marketing of QB1(R). The NFL agreement grants the Company the exclusive data broadcast rights to conduct interactive games in conjunction with the broadcast of NFL football games, for which the NFL receives a royalty based on revenues billed by the Company in connection with QB1(R) play. The agreement with the NFL expires in March 2000. This most recent agreement expands the Company's rights to include certain approved online services to all territories in which such online services are accessible and significantly includes the Internet. There can be no guarantee that the Company will be able to renew the agreement in the future. Further, it is unclear whether non-renewal of the agreement would have a material adverse effect on the Company. The Company keeps confidential as trade secrets the software used in the production of its programs. The hardware used in the Company's operations is virtually off-the-shelf, except for the Playmaker(R) keypads. The Company owns copyrights to all of its programs. In addition to the registration of the trademark for QB1(R), the Company has either received, or is presently applying for, trademark protection for the names of its other proprietary programming, to the extent that trademark protection is available for them. The Company's intellectual property assets are important to the Company's business and, accordingly, the Company maintains a program directed to the protection of its intellectual property assets. SEASONAL BUSINESS Overall, the Company's business generally is not seasonal. Revenue is billed monthly as service is provided to customers. However, sales of new Locations have traditionally been higher in the summer and early fall months compared to the rest of the year. This trend coincides with the start of the NFL season in August. The hospitality industry has historically experienced a relatively high business failure rate. Likewise, the Company has lost customers due to the failure of customer businesses; to change in ownership and non-renewal of contracts, collectively referred to as "churn". The Company's historical "churn" experience has also been seasonal in that the percentage of churn has been highest following the completion of the NFL season in February, although churn occurs in all months. During the Company's operating history, approximately 25% - 30% of the existing Network Services customers at the beginning of a year, have churned by the end of that year. The Company has implemented marketing programs and other efforts to reduce the churn rate, however no assurance can be given that such efforts will be successful. Online/Internet Services are provided to consumers via online distributors such as AOL and GTE Mainstreet. Revenue is primarily a flat subscription fee to NTN with no seasonality. WORKING CAPITAL The discussion under "Liquidity and Capital Resources" included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", is incorporated herein by reference. SIGNIFICANT CUSTOMERS The Company's customers are diverse and varied in size as well as location. The services are provided point to multi-point so that the Company is not dependent on any one customer. The Company does not have any individual customer who accounted for 10% or more of its consolidated revenues in 1998, 1997 or 1996. BACKLOG The Company historically has not had a significant backlog at any time because the Company normally can deliver and install new Location Systems within the delivery schedule requested by customers (generally, within two to three weeks). With the introduction of the New Network, however, a backlog of sales exists. In February 1999, the Company began to accept pre-orders of the New Network to both new customers and existing customers. Deployment of the New Network is scheduled to begin in April 1999. As of March 26, 1999 a total of approximately 290 contracts, some of which are pending final credit approval, had been back-logged related to the New Network. For other Online Services, there is no backlog because services are generally distributed point to multi-point and the Company does not have to provide specific equipment to the customer, making it relatively simple to add new customers without any significant delay. 13 13 GOVERNMENT CONTRACTS The Company provides its distribution services to a small number of government agencies (usually military base recreation units); however, the number of government customers is small compared to the Company's overall customer base. Contracts with government agencies are provided under substantially the same terms and conditions as other corporate customers. COMPETITIVE CONDITIONS The Interactive Entertainment industry is still evolving, but currently may be divided into three major segments: (1) media distribution services such as online services, telephone companies and cable television companies and the NTN Network; (2) equipment providers such as computer and peripheral equipment manufacturers; and (3) content and programming providers, such as movie studios, NTN and software publishers. The Company does not act as a direct provider of equipment to consumers. The Company operates as a media distribution service through its own NTN Network. Also, the Company is a program provider to an array of other media distribution services to consumers utilizing a variety of equipment and delivery mechanisms. The Company competes with other companies for total entertainment dollars in the marketplace. The Company's programming competes generally with broadcast television, pay-per-view, and other content offered on cable television. On other mediums, the Company competes with other content and services available to the consumer through online services. With the entrance of motion picture, cable and TV companies, competition in the interactive entertainment and multimedia industries will likely intensify in the future. In January 1999, The Walt Disney Company introduced interactive programming broadcast in conjunction with live sporting and other events which may compete directly with QB-1(R) and our other programming. Moreover, the expanded use of online networks and the Internet provide computer users an increasing number of alternatives to video games and entertainment software. NTN seeks to compete by providing high quality products at reasonable prices, thereby establishing a favorable reputation among frequent buyers. There can be no assurance, however, that NTN can compete effectively. The Company's programming is interactive in nature, but is distinguishable from other forms of interactive programming by its simultaneous multi-player format and the two-way interactive features. Presently, the technological capabilities of transmitting entertainment products to the consumer exceed the supply of quality programming and services available on the existing delivery systems. The Company is able to utilize the wide variety of services available for transmission of entertainment products to the consumer by forming strategic alliances with service providers to supply the Company's programs for re-transmission. The Company's programming is available to the consumer over a multitude of media platforms and delivery systems. Network Services. Currently, Network Services on the NTN Network have no competitors that furnish live, multi-player interactive entertainment similar in scope and nature. Although the Company has no direct competitors in this area, it does compete for total entertainment dollars in the marketplace. Other forms of entertainment provided in public eating and drinking establishments include music-based systems and cable and pay-per-view television. However, evidence provided by customers indicates that patrons are inclined to stay longer and consume more food and drink when NTN Network interactive games are offered as the main source of entertainment. Accordingly, Network Services customers generally tend to view these services as a profit generator rather than a cost center. Online/Internet Services. In the Online/Internet Services market, the consumer has many entertainment options from which to choose, ranging from cable television to telephone based services to computer online providers and the Internet. The Company offers live, multi-player games and services which are available to multiple interactive platforms in the home. Also, the Company competes for a share of the total home entertainment dollars against broadcast television, pay-per-view and other content offered on cable television. The Company also competes with other programming available to consumers through online services such as AOL. Cable television, in its various forms, provides consumers the opportunity to make viewing selections from anywhere between 30 to 100 free and pay channels, thus limiting the amount of time devoted to any particular channel. For the most part, cable television is predominantly a passive medium, and does not offer the viewer the opportunity to participate in its programming, and even less frequently, does it offer programming designed for active participation. Online providers, such as AOL, can provide literally thousands of options for content and entertainment, however, such online services have traditionally been confined to that company's subscriber base. Interaction among viewers is thus limited to the particular program as offered only on the specific online service. The Company offers consumers the opportunity to participate and compete against other viewers who are seeing the identical program over several different technological media, including interactive television, personal computers and/or the NTN Network. RESEARCH AND DEVELOPMENT During 1996, 1997 and 1998, the Company incurred approximately $3,396,000, $1,600,000, and $714,000, respectively related to Company-sponsored research and development projects, including projects performed by consultants for the Company. In 1998, research and development efforts related to the development of the New Network. The decrease in research and development from 1997 was due to certain research and development endeavors which began in 1997 that were completed by the end of 1997. 14 14 These efforts included initial design and implementation of the Company's website, redesign of the America Online site and content and other production for third parties. The Company has previously experienced problems in the performance of its 49 megahertz Playmaker(R) device. In an effort to address these equipment function problems, the Company developed a new 900 megahertz Playmaker(R) device to augment its existing 49 megahertz Playmaker(R) device. The new device is expected to be more reliable and will be deployed commercially in conjunction with the launch of NTN's New Network. Further, the Company has developed enhancements to its interactive software including a migration to a "Windows"-based platform and continued research into new and enhanced graphics. The Company continuously evaluates various methods of transmitting its programs and services. There is no assurance that the Company will successfully complete current or planned development projects or will do so within the prescribed time parameters and budgets. There can be no assurance, furthermore, that a market will develop for any product successfully developed. The Company works closely with independent user groups in an attempt to develop new and enhanced services and products in response to customer needs. GOVERNMENT REGULATIONS The cost of compliance with federal, state and local laws has not had a material effect upon the Company's capital expenditures, earnings or competitive position to date. On June 16, 1998 the Company received FCC approval for its new 900 MHz Playmaker(R)keypad. The 900 MHz Playmaker is an integral component of the Company's New Network. EMPLOYEES The Company and its subsidiaries employ approximately 124 people on a full- time basis and 25 people on a part-time basis, and also utilize independent contractors for specific projects. In addition, the Company retains a number of non-affiliated programming and systems consultants. It is expected that as the Company expands, additional employees and consultants will be required. The Company believes that its present employees and consultants have the technical knowledge necessary for the operation of the Company and that it will experience no particular difficulties in engaging additional personnel with the necessary technical skills when required. None of the Company's employees are represented by a union and the Company believes its employee relations are satisfactory. ITEM 2. PROPERTIES In 1997, the Company sold its interest in a limited liability company that owns "The Campus", the three-building complex that houses the Company's headquarters. The Company continues to lease space in The Campus pursuant to a six-year lease for approximately 39,000 square feet of office and warehouse space. The lease expires in June 2001 and the monthly rent is approximately $37,000. In September 1998, the Company, as sublessor, entered into a sublease agreement for office space in The Campus with WinResources Computing, Inc., as sublessee. The sublease expires in June 2001 and the monthly rent is approximately $12,200. The Company also leased approximately 4,000 square feet of warehouse space near the corporate headquarters, under a lease that expired in September 1998, at a rent of approximately $3,000 per month. The Company did not renew this lease and does not anticipate leasing additional space in the next year. ITEM 3. LEGAL PROCEEDINGS In February 1998, the Company completed its previously announced settlement of a class-action lawsuit pending against the Company since 1993. The terms of the settlement were as follows: A settlement fund was established consisting of $400,000 in cash plus 565,000 warrants to purchase the Common Stock of the Company ("Settlement Warrants"). Each Settlement Warrant has a term of three years from February 18, 1998. The Settlement Warrants were issued on February 18, 1998 and entitle the holder of a Settlement Warrant to purchase a share of Common Stock of the Company at a price of $0.96. During the period from February 18, 2000 to February 18, 2001, the holders of Settlement Warrants have the right, but not the obligation, to put the Settlement Warrants to the Company for repurchase at a price of $3.25 per Settlement Warrant (the "Put Right"), provided, however, that this Put Right shall expire, if at any time after February 18, 1998 the closing price per share of the Company's Common Stock on the American Stock Exchange is more than $4.22 on any seven trading days, whether consecutive or not. Upon expiration of the Put Right, the Company shall have no further obligation to repurchase the Settlement Warrants. In no event shall the Company have any obligation to repurchase its Common Stock. 15 15 Although the Put Right may expire based on the closing price of the Common Stock over the next two years, the Company has recognized the potential liability related to the Put Right. Accordingly, a charge of $1,291,000 for the present value (discounted at 15%) and related interest expense for the Put Right was recognized in 1996. The difference between the amount expensed and the total potential liability, $545,000, will be accreted as interest expense and charged over the period from September 1996 until February 18, 2000. In 1998, a total of $154,000 was charged to interest expense related to the Put Right. On April 18, 1995, a class action lawsuit was filed in United States District Court for the Southern District of California entitled Lenora Isaacs, on behalf of herself and all others similarly situated vs. NTN Communications and Patrick J. Downs. The complaint alleged 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 alleged that certain of the Company's insiders sold stock on information not generally known to the public. In September 1998, the Company issued a total of 1,200,000 shares of common stock, issued at a fixed price of $1.00 per share, pursuant to the settlement of this class action lawsuit which was approved by the court in January 1998. On June 11, 1997, the Company was included as a defendant in a class-action lawsuit, entitled Eliot Miller and Jay 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, filed in the United States District Court for the Southern District of California. The complaint alleges violations of state and federal securities laws based upon purported omissions from the Company's filings with the Securities and Exchange Commission. More particularly, the complaint alleges that the 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 defendants made false statements about, and failed to disclose, contingent liabilities (guaranteed compensation to management and the right of an investor in IWN to require the Company to repurchase its investment during 1997) and phantom assets (loans to management) in the Company's financial statements and KPMG LLP's audit reports, all of which served allegedly to inflate the trading price of the Company's Common Stock. On November 7, 1997, the court granted KPMG Peat Marwick LLP's motion to dismiss the plaintiffs' claims against it pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief may be granted. On July 3, 1997, the Company filed a motion to dismiss the lawsuit. On November 6, 1997, the Court dismissed all of the plaintiff's state law causes of action against the Company but retained the plaintiff's federal law causes of action. In February 1998, the attorneys representing the plaintiffs in this litigation filed an action entitled Dorman vs. NTN Communications, Inc. in the Superior Court of San Diego County, California in which they essentially replead the state law causes of action dismissed in the federal lawsuit. The Company has filed a motion for summary judgment in each action. In March 1999, the Court issued a telephonic ruling granting the Company's motion in the Dorman matter; however, judgment has not yet been entered. In the Company's opinion, the claims in these two lawsuits are covered by directors and officers liability insurance providing $15,000,000 of coverage. The Company has submitted these claims to its directors and officers liability insurance underwriters, who have accepted such claims subject to reservation of rights. The Company's deductible under the insurance policy is $200,000. The Company's Playmaker(R) systems which are installed in over 2,900 hospitality locations throughout the United States utilize the MS-DOS operating system software. The Company does not have a license to use MS-DOS for this purpose, and, in September 1998, the Company received correspondence from counsel to Microsoft Corporation and related inquiries from the Business Software Alliance and Software Publishers Association, two industry associations, requesting information regarding the Company's use of MS-DOS. In response, the Company conducted an internal audit and produced the results to counsel to the three entities. Based on the audit results, it has been determined that the Company has insufficient licensing for the MS-DOS in use in the hospitality locations. Settlement negotiations are currently underway in an effort to resolve this matter with the software publishing entities. It is possible that the Company will be required to pay Microsoft for its prior use of MS-DOS, and at present the Company cannot predict what effect this may have on its future financial condition or results of operations. The Company believes that its accrual for legal costs is adequate to cover any potential settlement required to be paid. The Company has been involved as a plaintiff or defendant in various previously reported lawsuits 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 involving the Company, its unaffiliated Canadian licensee and IN, which were filed in Canada in 1992. No action was taken in the Canadian litigation until May 1998, when IN gave notice of its intention to proceed. In November 1998, the Company and its Canadian licensee filed a counterclaim against IN. 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 are not expected to be material. 16 16 In November, 1997, a former advertising manager brought a suit against the Company alleging breach of an alleged employment contract and age discrimination. The age discrimination claims were subsequently dismissed. The court rendered judgment in the amount of $167,000 plus interest in favor of the plaintiff. The Company has agreed to pay this judgment over a 12 month period beginning March 5, 1999. In March, 1998, the Company's former independent representative in the State of Georgia filed suit against the Company in Atlanta, Georgia alleging wrongful termination of its distributor agreement and other breaches of such agreement. The Company has filed a motion to amend to bring a counterclaim seeking damages for fraud and conversion against the former sales representative. It is not anticipated at the present time that the outcome of this lawsuit will have a material adverse effect on the financial position, results of operations and liquidity of the Company. In March 1998, the Company entered into a Compromise Settlement and Mutual Release Agreement in settlement of a prior arrangement between the Company and a former independent representative under which he and companies affiliated with him acted as independent distributors of the NTN Network. Pursuant to the Settlement Agreement, the Company paid $156,000 in cash and issued 175,000 shares of common stock to the former independent representative. There can be no assurance that any or all of the foregoing claims will be decided in favor of the Company, which is not insured against all claims made. During the pendency of such claims, the Company will continue to incur the costs of defense of same. Other than set forth above, there is no material litigation pending or threatened against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on August 28, 1998. The matter voted upon at such meeting was the election of two directors to the Board of Directors. The voting for the proposal was as set forth in the table below.
VOTES VOTES Elections of Directors "FOR" "AGAINST" * ABSTENTIONS** ---------------------- ---------- ----------- ------------- Esther L. Rodriquez 22,839,100 404,752 -- Robert M. Bennett 22,839,599 404,253 --
* As to election of directors, represents shares where authority to vote for the specified nominee was withheld. ** Abstentions include "broker non-votes", which are abstentions by nominee holders on behalf of beneficial owners who have given no instruction to the nominee holder. When no such instructions are received, such nominee holders have no authority to vote even though present or represented at the meeting. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock and warrants are listed on the American Stock Exchange ("AMEX") under the symbols "NTN" and "NTNW", respectively. Trading of the Company's redeemable common stock purchase warrants commenced on the AMEX in February 1998. Set forth below are the high and low sales prices for the common stock and warrants as reported by the AMEX for the two most recent fiscal years.
Common Stock Warrants 1999 LOW HIGH LOW HIGH ---- --- ---- --- ---- First Quarter $0 - 9/16 $2 $1 - 7/8 $2 - 1/2 (through 3/15/99) 1998 LOW HIGH LOW HIGH ---- --- ---- --- ---- First Quarter $0 - 5/16 $1 - 1/16 $0 - 7/8 $1 - 5/16 Second Quarter 0 - 11/16 2 - 5/8 $0 - 1/2 $1 - 7/8 Third Quarter 0 - 5/8 1 - 1/4 $1 - 1/16 $1 - 1/4 Fourth Quarter 0 - 5/16 0 - 13/16 $1 - 1/16 $1 - 1/2 1997 LOW HIGH ---- --- ---- First Quarter $3 - 3/8 $4 - 7/16 Second Quarter 2 - 5/16 4 - 3/4 Third Quarter 2 - 3/16 4 - 7/16 Fourth Quarter 1 2 - 1/4
17 17 On March 26, 1999, the closing price for the Common Stock reported on the AMEX was $0.6875. On that date, there were approximately 2,083 record owners of the Common Stock. To date, the Company has not declared or paid any cash dividends with respect to its Common Stock, and the current policy of the Board of Directors is to retain earnings, if any, after payment of dividends on the outstanding preferred stock to provide for the growth of the Company. Consequently, no cash dividends are expected to be paid on the Company's common stock in the foreseeable future. Further, there can be no assurance that the proposed operations of the Company will generate the revenues and cash flow needed to declare a cash dividend or that the Company will have legally available funds to pay dividends. ITEM 6. SELECTED FINANCIAL DATA The following tables furnish information with respect to selected consolidated financial data of the Company over the past five years. STATEMENT OF OPERATIONS DATA (in thousands, except per share data)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Total revenue $ 24,194 25,861 25,711 20,082 16,146 Total operating expenses 27,641 38,668 51,566 25,508 16,102 -------- -------- -------- -------- -------- Operating income (loss) (3,447) (12,807) (25,855) (5,426) 44 Other income, net 1,654 350 1 1,409 412 -------- -------- -------- -------- -------- Net income (loss) from continuing operations (1,793) (12,457) (25,854) (4,017) 456 Net income (loss) from discontinued operations -- -- (1,317) 69 251 Gain on sale of discontinued operations -- -- 4,219 -- -- Income taxes -- -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) $ (1,793) (12,457) (22,952) (3,948) 707 ======== ======== ======== ======== ======== Accretion of beneficial conversion feature of preferred stock (758) -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) available to common shareholders $ (2,551) (12,457) (22,952) (3,948) 707 ======== ======== ======== ======== ======== Basic and diluted net income (loss) per common share: Continuing operations $ (.10) (0.55) (1.15) (0.19) 0.02 Discontinued operations -- -- 0.13 -- 0.01 -------- -------- -------- -------- -------- Net income (loss) $ (.10) (0.55) (1.02) (0.19) 0.03 ======== ======== ======== ======== ======== Weighted average equivalent shares outstanding 26,078 22,696 22,568 20,301 21,124 ======== ======== ======== ======== ========
18 18 BALANCE SHEET DATA (in thousands)
DECEMBER 31, --------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Total current assets $ 8,131 8,390 10,655 26,009 18,844 Total assets $16,767 20,271 28,504 41,221 31,239 Total current liabilities $ 5,731 8,373 12,775 6,541 4,958 Total liabilities $ 8,442 11,545 18,282 7,770 5,782 Shareholders' equity $ 8,325 8,726 10,222 33,451 25,457
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the selected financial data and the consolidated financial statements and notes thereto included elsewhere herein. RESULTS OF OPERATIONS Following is a comparative discussion by fiscal year of the results of operations for the three years ended December 31, 1998. The Company believes that inflation has not had a material effect on its operations to date. YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 The Company incurred a net loss of $12,457,000 for the year ended December 31, 1997 as compared to a net loss of $1,793,000 for the year ended December 31, 1998. The 1998 results includes an operating loss of $3,447,000 which was partially offset by a gain of $1,643,000 from the sale of an 82.5% interest in a subsidiary. The 1997 results included charges totaling $4,998,000 related to a reorganization, a $2,543,000 charge related to shrinkage and obsolete equipment and a $905,000 gain from the sale of an interest in real estate. Total revenues decreased from $25,861,000 in 1997 to $24,194,000 in 1998 due to declines in network services, Online/Internet services and other revenues. Network Services decreased 1% from $19,009,000 in 1997 to $18,785,000 in 1998 due primarily to a reduction in average billing rates during 1998. Online/Internet services decreased 39% from $3,326,000 in 1997 to $2,014,000 in 1998 largely due to non-recurring revenue of $1,000,000 in 1997 from AOL related to AOL's termination of its prior contract with the Company and the recognition of revenue for production services in 1997 that did not recur in 1998. Advertising revenues increased 16% during the current year from $772,000 in 1997 to $896,000 in 1998 as a result of an increase in the number of commercial spots sold. Equipment Sales, net of cost of sales, during the current year increased 5% from $475,000 in 1997 to $499,000 in 1998. Equipment sales in the past have included 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. In June 1998, the Company sold 82.5% of its interest in the LearnStar operations. As a result, equipment sales to educational customers are expected to decline in the future. Direct Operating Expenses consist of direct incremental service costs directly related to revenue sources. Direct Operating Expenses decreased 28% from $6,565,000 in 1997 to $4,715,000 in 1998. The decrease relates to a reduction in site visit fees, commissions and other field expenses due to (i) the Company's decreased reliance on independent representatives in favor of employed field and marketing personnel and (ii) a revision, effective January 1, 1998, in the Company's commission and bonus structure for all field personnel. Selling, General and Administrative Expenses decreased 28% from $16,244,000 in 1997 to $11,767,000 in 1998. Included in Selling, General and Administrative Expenses for 1997 are charges for the management reorganization totaling $4,813,000 and costs associated with the abandoned merger with GTECH Corporation of $376,000. Exclusive of these charges, Selling, General and Administrative Expenses increased $712,000 or 6%. This increase is primarily due to an increase in employee-related costs associated with the shift from independent representatives to employed field and marketing staff. 19 19 Litigation, Legal and Professional expenses increased from $808,000 in 1997 to $1,658,000 in 1998. In the fourth quarter of 1997, the Company reduced the accrual for a legal settlement which reduced legal expense by $1,350,000 as result of this change in estimate. Expenses for 1998 include legal expenses incurred in the ordinary course of business, as well as litigation expenses and accruals. Stock-based compensation decreased 89% from $3,205,000 in 1997 to $353,000 in 1998. Stock-based compensation charges result from the issuance, extension or modification of warrants or options to non-employees and can vary from period to period. Charges in 1997 include $1,450,000 that resulted from extension of the exercise period and reductions in the exercise price of warrants owned by certain former officers pursuant to the management reorganization in 1997. Depreciation and Amortization Expense increased 21% from $5,305,000 in 1997 to $6,412,000 in 1998 due to additions of broadcast equipment and fixed assets. Bad Debt expense relates to trade receivables for Network Services, Online/Internet services and advertising customers. Bad Debt expense decreased 42% from $1,462,000 in 1997 to $850,000 in 1998. The Company began to experience reliability problems with its equipment in NTN Network Locations. These problems led to an increase in bad debt expense in 1996 and 1997. In 1998, the equipment problems stabilized, resulting in a lower bad debt expense. Equipment Charges decreased 91% from $2,543,000 in 1997 to $240,000 in 1998. Equipment Charges consist of charges for obsolescence and shrinkage of the Company's stock of broadcast equipment. The Company performs periodic reviews of its broadcast equipment. In connection with these reviews, the Company identified equipment shrinkage and obsolescence primarily related to terminated sites. Research and development expenses decreased 55% from $1,600,000 in 1997 to $714,000 in 1998. The decrease was due to certain research and development endeavors which began in early 1997 that were completed by the end of 1997. These efforts included initial design and implementation of the Company website, redesign of the America Online site and content and other production for third parties. For 1998, the Company's research and development efforts related to the development of the New Network. Other Income (Expense) increased from $350,000 in 1997 to $1,654,000 in 1998. Other income in 1998 included a gain of $1,643,000 related to the sale of an 82.5% interest in LearnStar in June 1998. Other income in 1997 included a gain of $905,000 related to the sale of the Company's interest in an office building. Interest Expense decreased 64% from $793,000 in 1997 to $289,000 in 1998 due to interest expense recorded in 1997 in conjunction with the Symphony Put Option which was paid in full in 1997. YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 In March 1997, the Company announced a reorganization (the "Reorganization") of its executive management personnel as previously reported. Charges for severance and other costs associated with the management reorganization recorded in 1996 were $5,092,000. A charge for severance and other costs associated with the management reorganization and other personnel changes was $4,998,000 in 1997, including $185,000 of accreted interest expense. The Company recorded the charges in 1996 and 1997 in accordance with Emerging Issues Task Force Issues No. 94 - 3. The Company incurred a net loss of $12,457,000 for the year ended December 31, 1997 compared to a net loss of $22,952,000 for the year ended December 31, 1996. The 1996 results include a net gain from the impact of discontinuing the operations of the Company's former subsidiary, New World Computing, Inc., of $2,902,000. The 1997 results include charges totaling $4,998,000 related to the Reorganization and a $2,543,000 charge related to shrinkage and obsolete equipment. For the year ended December 31, 1997, total revenues increased slightly from $25,711,000 to $25,861,000, primarily as a result of modest growth in the Company's primary services which offset a significant decrease in equipment sales and reduced advertising revenue. Since the Company no longer entered into sale and leaseback financing arrangements, equipment sales have became a minor revenue source in 1997. Total revenue for the year ended December 31, 1997, excluding Equipment Sales, net, increased 6% over the prior year. Network Services decreased 1% from $19,269,000 in 1996 to $19,009,000 in 1997. The decrease was primarily due to a revised pricing structure. Online/Internet Services increased 84% from $1,811,000 in 1996 to $3,326,000 in 1997 largely due to non-recurring revenue of $1,000,000 realized in 1997 from AOL related to AOL's termination of its prior contract with the Company, recognition of revenue for production services related to a large development contract of $380,000 in 1997 and a modest increase in the basic services to online customers. Although the hours of service have remained relatively constant, the pricing structure 20 20 continued in a downward pattern. Advertising revenues decreased 51% from $1,590,000 in 1996 to $772,000 in 1997 due to a lesser number of commercial spots sold. Equipment Sales, net of cost of sales, decreased 73% from $1,757,000 in 1996 to $475,000 in 1997. Equipment Sales in the past included large sale and leaseback transactions. In late 1996, the Company decided to no longer enter into sale and leaseback financing arrangements. In 1997, equipment sales primarily represented sales to educational customers through the LearnStar subsidiary. Operating Expenses consist of direct incremental service costs directly related to revenue sources. Operating Expenses increased 7% from $6,124,000 in 1996 to $6,565,000 in 1997. The increase in costs was primarily due to a modest expansion in the number of subscribers and online services contracting for services, increased field service costs, net of a reduction in the sales commissions. Selling, General and Administrative Expenses increased from $15,259,000 to $16,244,000. Included in Selling, General and Administrative Expenses for 1997 were charges for the management reorganization totaling $4,813,000 and costs of $376,000 associated with the abandoned merger with GTECH Corporation. The 1996 results included a charge of $840,000 related to a charge of severance and a change in estimate for deferred advertising costs of $222,000. Exclusive of these charges, Selling, General and Administrative Expenses decreased $3,142,000, or 22%. This decrease was primarily due to trimming the workforce and cost controls implemented in 1997. Charges in 1997 included $1,450,000 that resulted from extension of the exercise period and reductions in the exercise price of warrants owned by certain former officers pursuant to the management reorganization. Stock-based compensation increased 68% from $1,910,000 in 1996 to $3,205,000 in 1997. Charges in 1997 included $1,450,000 that resulted from extension of the exercise period and reductions in the exercise price of warrants owned by certain former officers pursuant to the management reorganization in 1997. Litigation, Legal and Professional expenses decreased from $6,484,000 in 1996 to $808,000 in 1997. The 1996 amount included charges for the settlement of litigation of approximately $4,400,000. Charges for litigation in 1997 were approximately $1,000,000. Included in the charges for 1996 were $2,800,000 for the settlement of certain litigation, which was subsequently settled in 1997 for $1,450,000. In the fourth quarter of 1997, the Company reduced the accrual for the settlement and accordingly reduced its legal expense by $1,350,000 as a result of the change in estimate related to the settlement. Depreciation and Amortization Expense increased 134% from $2,265,000 to $5,305,000 due to depreciation charges resulting from the Company's buyout of equipment lease commitments late in 1996. The Company now owns most of its Broadcast equipment. Equipment Lease Expense decreased 86% from $6,837,000 to $936,000 also due to the buyout of equipment leases in late 1996. Bad Debt expense decreased 21% from $1,840,000 in 1996 to $1,462,000 in 1997. Beginning in 1996, the Company began to experience reliability problems with its equipment in NTN Network Locations, which led to an increase in bad debt expense as customers withheld payments. In 1997, the equipment problems stabilized. Equipment Charges increased 3% from $2,478,000 in 1996 to $2,543,000 in 1997. Equipment Charges consist of charges for obsolescence and shrinkage of the Company's broadcast equipment. The Company performs periodic reviews of its broadcast equipment. In connection with these reviews, the Company identified equipment shrinkage and obsolescence primarily related to terminated sites. Other Income (Expense) increased from $1,000 in 1996 to $350,000 in 1997. Interest Expense increased 103% from $390,000 to $793,000 largely due to interest charges related to the repurchase of an the shares of IWN from Symphony Management Associates, L.L.C., interest paid to GTECH Corporation, and accretion of interest for the settlement warrant liability and the liability for the management reorganization. In 1997, the Company sold its interest in The Campus and recorded a gain of $905,000. There was no tax expense in 1997 and 1996 primarily due to taxable losses and offsetting temporary differences in both years. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had cash and cash equivalents of $4,560,000 and working capital (current assets in excess of current liabilities) of $2,400,000, compared to cash and cash equivalents of $4,764,000 and working capital of $17,000 at December 31, 1997. Net cash provided by operations was $1,120,000 for the twelve months ended December 31, 1998 and net cash used in operations was $1,004,000 for the twelve months ended December 31, 1997. The principal uses of cash in 1998 were to fund the Company's net loss from operations and severance payments totaling $819,000 in compliance with the Reorganization 21 21 agreements with former officers. These uses were more than offset by depreciation, amortization and other noncash charges. Net cash used in investing activities was $1,220,000 for the twelve months ended December 31, 1998 and $3,315,000 for the twelve months ended December 31, 1997. Included in net cash used in investing activities for the twelve months ended December 31, 1998 were $3,002,000 in capital expenditures and $1,862,000 in proceeds from the sale of an 82.5% interest in the Company's subsidiary, LearnStar, Inc. Net cash used in financing activities was $104,000 for the twelve months ended December 31, 1998 related to principal payments under capital lease obligations compared to net cash provided by financing activities of $2,504,000 for the twelve months ended December 31, 1997. In October 1998, the holders of the Company's outstanding Series B Preferred Stock agreed to exchange their remaining $5,600,000 of Preferred Stock (and accrued dividends) for 7% senior convertible subordinated notes due February 1, 2001 with a fixed conversion price of $1.275 per common share. On January 11, 1999, the exchange was completed and notes were issued in aggregate principal amount of $5,912,834. On October 5, 1998, in consideration of the debt for stock exchange, the Company issued the Preferred Stock holders warrants expiring February 1, 2001 to purchase an aggregate of one million shares of common stock. The warrants have an initial exercise price of $1.25 per common share which will be subject to reduction in the event that the common stock trades at levels significantly above the exercise price. As a result of this exchange, the Company expects to incur additional interest expense beginning in the first quarter of 1999. The Company will be in default under the convertible notes, issued under the Exchange Agreement in October 1998, if it fails to pay any principal or interest on the convertible notes when due, and in certain other events, including in the event of a material adverse change in the condition, financial or otherwise, or operations of the Company as determined by the holders of the convertible notes in their discretion. If the Company defaults under the convertible notes, in the discretion of the holders of the convertible notes, the entire outstanding principal amount of the convertible notes and all accrued and unpaid interest will become immediately due and payable in full. Although the Company has no material commitments for capital expenditures, it anticipates purchasing approximately $5,600,000 of broadcast equipment related to the New Network in 1999. The Company intends to finance capital expenditures from cash on hand, leases from vendors and internally generated funds, but there is no assurance that the Company will be able to do so. The Company currently has no bank line of credit or other financing arrangements in place. If there is a need to obtain additional financing there is no assurance as to whether or on what terms any financing may be available. YEAR 2000 COMPLIANCE The Company, with the assistance of independent outside consultants, has been assessing its "Year 2000" computer readiness and exposure to Year 2000 issues, which relates to the inability of computer software programs to recognize the arrival of the year 2000 because of a common software design feature that describes the current year by only its last two digits. In connection with such assessment, the Company initiated a review of the information technology systems utilized in the Company's business and operations. Based on this review, the Company has segregated its systems into two categories: mission critical and support systems. Mission critical systems are characterized as hardware and applications contributing to the income of the business. Support systems are characterized as systems that organize and create efficiencies for the corporation but are not critical to its operations. The Company is in the process of assessing these key systems for compliance. The assessment phase is expected to be completed by the second quarter of 1999, and the renovation phase completed by the third quarter. The Company's mission critical systems are segregated into Location deployed and back-end systems which support both the new and current networks, for which the Company will incur expected costs of approximately $1,000,000 to ensure Year 2000 compliancy. The Company is evaluating and testing Year 2000 compliance at the system BIOS, operating system and applications levels. The Company has preliminarily determined that 25% of Location systems may not be Year 2000 compliant due to the inaccurate roll over of the system BIOS which could compromise content scheduling. The replacement of these systems is estimated to be approximately $1,000 per Location. All systems in the New Network are expected to be Year 2000 compliant. The Company has identified a few key back-end systems that will require an upgrade of commercial hardware and data base software. As can be determined thus far, the operating systems and Company-developed applications are not affected but are being verified for compliance. The Company intends to fund these costs with cash on hand, leases from vendors and internally generated funds. The Company has also initiated a review of Year 2000 compliance by its principal vendors, and this estimate assumes that the Company will not incur significant Year 2000 related costs on behalf of its vendors or other third parties. Concerning the support systems, all corporate personal computers and servers have been deemed Year 2000 compliant. The operating systems and commercial software packages have been upgraded to compliant versions. The Company's most likely worst case scenario is that the Company would be unable to broadcast its programs to its network services customers. Network services revenue represents 78% of total revenues for the year ended December 31, 1998. The Company has not yet established a contingency plan in the event that this occurs. As a result, a widespread or extended failure of the 22 22 Company's internal systems, or systems of third parties, to be Year 2000 compliant would have a material adverse effect on the Company's business, financial condition or operating results. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee (AcSEC) issued a Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of this standard is not expected to have a material impact on consolidated results, financial condition or long-term liquidity. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's business, results of operation and financial condition would be adversely affected by a number of factors, including the following: HISTORY OF SIGNIFICANT LOSSES; RECENT RESULTS OF OPERATIONS. The Company has a history of significant losses, including net losses of $1,793,000, $12,457,000 and $22,952,000 for the three years ended December 31, 1998, and an accumulated deficit of $61,147,000 as of December 31, 1998. The results of operations during these periods included substantial charges related to the resignation or termination of certain former executive officers, write-downs of assets associated with discontinued business activities and shrinkage and obsolescence of equipment, accruals for litigation settlement costs and other litigation expenses, and charges relating to stock-based compensation. The Company may incur similar charges in the future, and there is no assurance that the Company will ever operate profitably. See "Liquidity and Capital Resources" and "Selected Consolidated Financial Data" for more information regarding the Company's financial condition. PENDING LITIGATION PROCEEDINGS See "Legal Proceedings" for a discussion of Pending Legal Proceedings. RECENT EQUIPMENT PROBLEMS The Playmaker(R) is a hand-held, 49-megahertz radio frequency device used to enter choices and selections by players of QB1(R) and other games and programming broadcast via the NTN Network(TM). Customers have experienced certain recurring problems with Playmakers(R) related to noise sensitivity and performance of the Playmaker's(R) rechargeable batteries. Management believes these equipment problems contributed to higher than usual terminations and bad debt experience during late 1997 and the first half of 1998. To address these problems, the Company has designed a 900-megahertz Playmaker(R) in consultation with an outside engineering consulting firm. The redesigned Playmaker(R) is currently being manufactured by the manufacturer of the 49 megahertz Playmaker and will be deployed in the marketplace in conjunction with the launch of NTN's New Network. There can be no assurance that equipment problems will not occur with the redesigned Playmakers and the continuance of such problems in the future could adversely affect our results of operations. DEPENDENCE ON LICENSES FOR BROADCAST RIGHTS; LACK OF CERTAIN LICENSES NTN's interactive sports games are broadcast in conjunction with live telecasts of football, baseball and hockey games and other events. Wherever possible, the Company tries to obtain licenses from the owners of the broadcast rights to the events to utilize such telecasts for our interactive game programming. NTN's exclusive license with National Football League Properties, Inc. ("NFLP") for QB1(R) expires in March 2000. The rights under the license may not be transferred or assigned without the NFLP's consent, and an assignment for this purpose includes, among other things, a merger or consolidation of NTN or the termination of employment of any key management personnel. NTN's agreement with Major League Baseball Properties, Inc. ("MLBP") relating to Diamondball(R) expired December 31, 1996. Since then, the Company has continued to broadcast Diamondball(R) without a license. QB1(R)'s broadcast in conjunction with college football games is without any license. Limitations on sports licenses or legal action by the owners or licensees of broadcast rights to college football games or other events for which NTN has no license could preclude NTN from broadcasting our games in connection with these events or result in an award of monetary damages against the Company. The Company has not experienced any such legal action to date, and is unaware of any threatened action. There is no assurance, however, that such actions will not be brought in the future. 23 23 COMPETITION The Company's programming competes generally with broadcast television, pay-per-view and other content offered on cable television. In other media, NTN competes with other content and services available to the consumer through America Online and other online services. With the entrance of motion picture, cable and TV companies, competition in the interactive entertainment and multimedia industries will likely intensify in the future. Recently, for example, The Walt Disney Company introduced interactive programming broadcast in conjunction with live sporting and other events which may compete directly with QB1(R) and our other programming. Moreover, the expanded use of online networks and the Internet provide computer users an increasing number of alternatives to video games and entertainment software. NTN seeks to compete by providing high quality products at reasonable prices, thereby establishing a favorable reputation among frequent buyers. There can be no assurance, however, that the Company can compete effectively. POTENTIAL FOR TECHNOLOGICAL OBSOLESCENCE The computer industry and related businesses are marked by rapid and significant technological development and change. It is possible that the Company's interactive technology and services will be rendered obsolete by ongoing technological developments. There also is no assurance that NTN will be able to respond effectively to technological changes. UNCERTAIN PROPRIETARY PROTECTION; DEPENDENCE ON SOLE SOURCE OF SUPPLY The Company regards the Playmaker(R) keyboard and other technology utilized in the NTN Network(TM) as proprietary and relies on a combination of trademark, copyright and trade secret laws and employee and third-party nondisclosure agreements to protect our propriety rights. NTN has one patent application pending for our proprietary interactive technology. There is no assurance, however, that any patent will issue or that any issued patent will provide significant competitive advantages. It is the Company's policy that all employees and consultants involved in research and developmental activities sign nondisclosure agreements; however, this may not afford sufficient protection for know-how and proprietary information and products. Other parties may independently develop similar or more advanced technologies. As a number of software products in the interactive television industry increases and increasingly become available in new delivery formats, software developers and publishers may increasingly become subject to infringement claims. Any such claims or litigation brought against the Company could be costly and could have an adverse effect on the business and results or operations. The Fleetwood Group, Inc. of Holland, Michigan, has requested assurance that NTN's 900 MHz Playmakers do not infringe on Fleetwood's patent for a 900 MHz wireless communication system marketed as Reply(R) PS. The Company currently purchases Playmaker(R) keyboards from a single, unaffiliated Taiwanese manufacturer, and has regularly experienced delays in obtaining new Playmakers(R). The Company recently designed a 900-megahertz Playmaker(R) and have solicited bids for manufacture of the new Playmaker(R). There can be no assurance, however, that we can secure additional sources of supply of the redesigned Playmaker(R). Unless and until NTN succeeds in establishing additional manufacturing relationships, NTN will continue to be dependent on the current sole source of supply of Playmaker(R) and may continue to experience delays and technical problems in Playmakers(R) shipments. 24 24 VOLATILITY OF STOCK PRICE; RECENT TRADING PRICES Historically, the trading price of the Company's common stock has fluctuated widely, and it may be subject to similar future fluctuations in response to quarter-to-quarter variations in operating results, announcements regarding litigation, technological innovations or new products introduced by NTN or our competitors, general industry conditions and other events or factors, including factors such as analysts' expectations which are beyond management's control. In addition, in recent years and months, broad stock market indices, in general, and the securities of "small cap" companies such as NTN, in particular, have experienced substantial price fluctuations. Such broad market fluctuations also may adversely affect the future trading price of the common stock. The recent trading prices of the common stock have been at or near the historical lows, and it is possible that the Company will experience further declines in the trading price in the future. See "Market For Registrant's Common Equity and Related Stockholder Matters" for more information on historical trading prices of the common stock. EFFECT OF OUTSTANDING OPTIONS AND WARRANTS At March 26, 1999, there were approximately 6,668,930 shares of common stock reserved for issuance upon the exercise of outstanding stock options at exercise prices ranging from $0.5625 to $6.50 per share. At March 26, 1999, there were also outstanding warrants to purchase an aggregate of approximately 2,902,966 shares of common stock at current exercise prices ranging from $0.96 to $7.50 per share. Substantially all of the shares underlying these outstanding warrants are subject to currently effective registration statements covering the resale of the underlying warrant shares by the holders. The foregoing options and warrants could adversely affect our ability to obtain future financing or engage in certain mergers or other transactions, since the holders of those options and warrants can be expected to exercise them at a time when we would be able to obtain additional capital through a new offering of securities on terms more favorable than those provided by such options and warrants. For the life of such options and warrants, the holders are given the opportunity to profit from a rise in the market price of the common stock without assuming the risk of ownership. To the extent the trading price of the common stock at the time of exercise of any such options or warrants exceeds the exercise price, such exercise will also have a dilutive effect on our stockholders, including purchases of the offered shares. The Company recently received a letter from certain investors to whom the Company sold shares of common stock in a private placement in April 1995 claiming that they are entitled to receive additional shares of common stock as a result of antidilution adjustments contained in their Stock Purchase Agreements with NTN. Based on the Company's review of this matter, the Company will be required to issue these investors 218,400 additional shares. SHARES ELIGIBLE FOR FUTURE SALE Approximately 1,400,883 shares of common stock outstanding as of March 26, 1999 are "restricted securities," as that term is defined under Rule 144 promulgated under the Act. All or substantially all of such shares are covered by currently effective registration statements and can be offered and sold publicly by the beneficial owners at any time so long as registration statements remain effective. Moreover, in general under Rule 144 as currently in effect, subject to the satisfaction of certain conditions, if one year has elapsed since the later of the date of acquisition of restricted shares from an issuer or from an affiliate of an issuer, the acquiror or subsequent holder is entitled to sell in the open market, within any three-month period, a number of shares that does not exceed the greater of 1% of the outstanding shares of the same class or the average weekly trading volume during the four calendar weeks preceding the filing of the required notice of sale. A person who has not been an affiliate of NTN for at least the three months immediately preceding the sale and who has beneficially owned shares of common stock as described above for at least two years is entitled to sell such shares under Rule 144(k) without regard to any of the limitations described above. No predictions can be made with respect to the effect that sales of common stock in the market or the availability of shares of common stock for sale pursuant to currently effective registration statements or under Rule 144 will have on the market price of common stock prevailing from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market may adversely affect prevailing market prices for the common stock and could impair NTN's ability to raise capital through the sale of equity securities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements and Schedule on page F-1, for a listing of the Consolidated Financial Statements and Schedule filed with this report, which are incorporated herein by reference. 25 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III MANAGEMENT ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth as of March 26, 1999 certain information regarding the directors and executive officers of the Company:
Current Director Term Name Age Position(s) Held Since Expires ---- --- ---------------- -------- ------- Stanley B. Kinsey 45 Chief Executive Officer and 1997 1999 Chairman of the Board Barry Bergsman(1) 62 Director 1998 1999 Robert M. Bennett(1) 72 Director 1997 2001 Donald C. Klosterman(2) 69 Director 1985 1999 Esther L. Rodriguez(2) 57 Director 1997 2001 V. Tyrone Lam 36 Executive Vice President Kendra Berger 32 Chief Financial Officer and Secretary Bennett Letwin 32 Vice President - Interactive Technologies and Business Systems
(1) Member of Audit Committee. (2) Member of Compensation Committee. The following biographical information is furnished with respect to the directors and executive officers: Stanley B. Kinsey was appointed as a director in November 1997. Mr. Kinsey was appointed Chairman and Chief Executive Officer of the Company in October 1998. From 1980 to 1985, Mr. Kinsey was a senior executive with the Walt Disney Company. In 1985, Mr. Kinsey left his position as senior vice president of operations and new technologies for the Walt Disney Studio to co-found IWERKS Entertainment, a high-technology entertainment company. Mr. Kinsey was chairman and Chief Executive Officer from inception until 1995, when he resigned. Barry Bergsman has been a director since August 1998. From 1985 to the present, Mr. Bergsman has been president of Intertel Communications, Inc., a company that pioneered the use of the telephone and interactive technology for promotion, entertainment and information. Prior to 1985, Mr. Bergsman held positions as president of a television production and syndication company and as an executive with CBS. Robert M. Bennett has been a director since August 1996. Since 1989, Mr. Bennett has been the Chairman of the Board of Bennett Productions, Inc., a production company with experience in virtually all areas of production including syndicated sports and specialty programming, music videos, commercial productions, home video, corporate communications and feature films. Donald C. Klosterman has been a director of the Company (or its predecessor) since 1985. He served as the President of Pacific Casino Management, Inglewood, California from June 1994 to November 1995 and is currently a director of Aldila Shaft Manufacturer. Mr. Klosterman served as Chairman of the Board of the Company from 1985 until April 1994. From 1990 until March 1994, he also has acted as a consultant to the Company. Esther L. Rodriguez was appointed as a director of NTN in September 1997. She retired as a Vice President of Next Level Systems, Inc. (formerly General Instrument), a telecommunications company, in November 1996 after having served in various executive capacities since joining General Instrument in 1987. For the two years prior to her retirement, Ms. Rodriguez served as head of worldwide business development and sales teams for private commercial business and educational network systems. Following her retirement, she founded and has served as Chief Executive Officer of Rodriguez Consulting Group, a private management consulting 26 26 firm. Ms. Rodriguez has over 25 years' experience in general management, business development and marketing, including 17 years' experience in worldwide telecommunications. V. Tyrone Lam has served as Executive Vice President of the Company since September 1998. He was appointed Vice President and General Manager of the NTN Network in September 1997. Prior to this time he served as Associate Vice President of Marketing from February 1997. Mr. Lam joined NTN in December 1994 in a marketing position. From April 1992 to December 1994, Mr. Lam managed the interactive television sports and games development for the EON Corporation and has held other sales and marketing positions in the computer software industry. Kendra Berger was appointed Vice President, Finance and Controller in July 1998. In February 1999, she was appointed Chief Financial Officer and Corporate Secretary. Ms. Berger previously served as a controller for FPA Medical Management, Inc., a public national healthcare company. From August 1989 to July 1996, Ms. Berger, certified public accountant, held key positions with the public accounting firm, Price Waterhouse LLP. Bennett Letwin joined NTN in November 1998 as Vice President of Interactive Technologies and Business Systems. Prior to this time, Mr. Letwin was the architect for some of the earliest electronic malls, electronic software distribution systems, and live Internet video broadcast platform for Global 2000 clients at General Electric Information Services. Section 16(a) Beneficial Ownership Reporting Compliance Under the federal securities laws, the Company's directors and officers and any persons holding more than 10% of the Company's common stock are required to report their ownership of the Company's common stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established, and the Company is required to report any failure to file by these dates. During 1998, its directors, officers and 10% stockholders satisfied all of these filing requirements. ITEM 11. EXECUTIVE COMPENSATION The following Summary Compensation Table shows the compensation paid or accrued as of each of the last three fiscal years to all individuals who served as the Chief Executive Officer of the Company during 1998 and to the one other most highly compensated executive officer of the Company who was serving as an executive officer at the end of 1998 and whose total annual salary and bonus exceeded $100,000 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards ------------------- ----------------------------- Name and Principal Position Year Salary(1) Bonus Other Annual Compensation Securities Underlying option - - --------------------------- ---- ---------- ----- ------------------------- ----------------------------- Gerald Sokol, Jr.(2) 1998 $265,528 $231,791 $ 153,775(3) 500,000 President and Chief 1997 240,662 335,500(4) 16,749(5) 600,000 Financial Officer 1996 87,423 -- 14,480(6) 875,000 Stanley B. Kinsey(7) 1998 $63,577 -- -- 1,300,000 Chief Executive Officer 1997 -- -- -- -- and Chairman of the 1996 -- -- -- -- Board V. Tyrone Lam(8) 1998 $147,115 $ 2,959 -- 285,000 Executive Vice President 1997 105,367 -- 4,575(9) 165,000 1996 75,177 -- 4,319 --
(1) Includes amounts, if any, deferred under the Company's 401(k) Plan. (2) Mr. Sokol resigned from the Company in January 1999. (3) Includes compensation for directors fees of $24,000 and insurance premium payments, adjusted for taxes, totaling $129,775 paid by the Company. (4) Includes a $150,000 home loan made to Mr. Sokol in August 1996, which in accordance with its terms was forgiven in March 1997, and bonuses aggregating $185,500. (5) Includes group insurance premiums and compensation of $12,000 for director's fees. See "Directors' Compensation". (6) Represents moving expenses paid or reimbursed by NTN in connection with Mr. Sokol's joining NTN. (7) Mr. Kinsey was appointed Chief Executive Officer of the Company in October 1998. (8) Mr. Lam was an employee of the Company in previous years but was not an Executive Officer until 1997. (9) Represents group medical insurance premiums. 27 27 Stock Option Grants The following table contains information concerning grants of stock options during fiscal 1998 with respect to the Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants ----------------- Number of Shares % of Total Options Value of Grant Underlying Options Granted to employees Exercise at Date of Name Granted in Fiscal Year Price Expiration Date Grant (1) - - ---- ------------------ -------------------- -------- --------------- -------------- Gerald Sokol, Jr. 500,000(2)(6) 15.20% $ 1.00 02/01/08 $502,250 Stanley B. Kinsey 650,000(3) 19.76% $ 1.00 10/06/08 $383,793 650,000(3) 19.76% $ 0.625 10/06/08 $377,891 V. Tyrone Lam 135,000(2) 4.10% $ 1.375 04/07/08 $ 99,772 150,000(2) 4.56% $ 0.625 09/03/08 $ 92,735 215,000(5) 6.53% $ 1.000 04/07/08 $159,244
(1) The value of grant at date of grant was estimated using the Black Scholes option-pricing model with the following assumptions: dividend yield 0% risk-free interest rates ranging from 4.15% to 5.26%, expected volatility of 188% and expected option lives ranging from 3 years to 7 years. (2) Represents options granted under NTN's 1995 Option Plan which become exercisable as to 25% of the total shares on the first anniversary of the date of grant and will become exercisable as to an additional 1/36 of the remaining shares at the end of each calendar month following the first anniversary of the date of grant. All of the options shown are subject to accelerated vesting in the event of a change in control of the Company. See "Employment Agreements". (3) Represents options granted under NTN's 1995 Option Plan which become exercisable in three equal installments on each of the first, second and third anniversaries of the dates of grant. (4) Represents options granted under NTN's 1995 Option Plan which were immediately exercisable on the date of grant. (5) Represents options issued in exchange for various previously granted options with exercise prices ranging from $2.00 to $4.50. (6) These options were subsequently canceled pursuant to the Resignation Agreement entered into with Mr. Sokol. STOCK OPTION EXERCISES AND OPTION VALUES The following table contains information concerning stock options exercised during 1998 and stock options which were unexercised at the end of fiscal 1998 with respect to the Named Executive Officers. No stock options were exercised in 1998 by any Named Executive Officers. 28 28 \ AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money Options At Fiscal Year-End Options at Fiscal Year-End(1) -------------------------- --------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Gerald Sokol, Jr 1,175,000 800,000 * * Stanley B. Kinsey 33,333 1,366,667 * * V. Tyrone Lam -- 500,000 * *
(1) Represents the amount by which the aggregate market price on December 31, 1998 of the shares of the Company's Common Stock subject to such options exceeded the respective exercise prices of such options. An asterisk denotes that the respective exercise prices of the options shown exceeded the market price of the underlying shares of Common Stock at December 31, 1998. OPTION REPRICINGS In April 1998, the Board approved the amendment of certain stock options previously granted to the Company's employees, including Mr. Lam, to reduce the exercise price of such options to $1.00 per share. The option repricing was approved by the Board in light of the precipitous decline in the market value of the Common Stock that had occurred since the options were originally granted. The Board believed that the drop was due to conditions and factors beyond the control or responsibility of the employees and the result of the drop in the market price was that the options were no longer affording a significant incentive to them to deal with these preexisting factors and conditions. The Board intends to consider additional repricings as appropriate to afford NTN's executive officers and other employees incentives to continue to work to improve the performance of NTN. The following table sets forth certain information with respect to the repricing of Mr. Lam's options and other repricings of options held by its named executive officers over the past ten years. Ten Year Option Repricings
Length of Number of Original Securities Market Price Exercise Option Term Underlying of Stock at Price at Remaining at Options Time of Time of New Date of Repriced or Repricing or Repricing or Exercise Repricing or Name Date Amended Amendment Amendment Price Amendment ---- ---- ----------- ------------- ------------ -------- ------------ V. Tyrone Lam Executive Vice President 04/08/98 65,000 $0.75 $3.25 $1.00 9 years 04/08/98 40,000 0.75 2.81 1.00 9 years 04/08/98 5,000 0.75 4.50 1.00 5 years 04/08/98 5,000 0.75 3.50 1.00 9 years 04/08/98 100,000 0.75 2.00 1.00 10 years Gerald Sokol, Jr. 01/14/97 221,260 2.81 5.00 2.81 9 years Chief Executive Officer, 05/14/97 400,000 2.81 5.00 2.81 9 years President and Chief 05/14/97 78,740 2.81 5.08 2.81 9 years Financial Officer 05/14/97 175,000 2.81 3.50 2.81 10 years 05/14/97 600,000 2.81 4.00 2.81 10 years
DIRECTOR COMPENSATION During 1998, directors were entitled to receive compensation of $2,000 per month for their services as directors. In December 1997, the Board elected to pay the 1998 fees in shares of treasury stock which were valued for this purpose at $1.125 per share, the price of the common stock at that time. In 1999, the directors compensation was increased to $2,100 per month. It is anticipated that the 1999 compensation will be paid in cash or shares. Directors are also eligible for the grant of options or warrants to purchase Common Stock from time to time for services in their capacity as directors. Upon joining the Board in August 1998, Mr. Bergsman was granted options to purchase 100,000 shares each at an exercise price of $0.8125 per share. These options will become vested as to one-third of the shares covered thereby on the first anniversary of grant date and will become vested and exercisable as to the balance of the covered shares in two equal installments on the second and third anniversaries of the grant date, subject to Mr. Bergsman remaining as a director. The options provide for immediate vesting in full in the event of a "Change of Control Event" as defined. EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS In January 1999, Gerald Sokol, Jr., the Company's President and Chief Financial Officer, resigned as an executive officer and director of the Company. The Company entered into a Resignation and General Release Agreement ("Resignation Agreement") with Mr. Sokol pursuant to which Mr. Sokol's Employment Agreement, dated July 1, 1998, was terminated. Pursuant to the Resignation Agreement, the Company paid $205,850 to Mr. Sokol in settlement of his prior Employment Agreement and in consideration of his agreement not to compete with the Company for a period of one year. In further consideration, the Company paid Mr. Sokol an earned 1998 bonus of $128,500. In consideration of cancellation of Mr. Sokol's February 2, 1998 Option Agreement which granted him the option, vesting over a period of four years, to purchase an aggregate of 500,000 shares of common stock at an exercise price of $1.00, the Company granted Mr. Sokol the fully vested right and option to purchase 125,000 shares of common stock at an exercise price of $1.00 per share, exercisable at any time prior to 12 months after the January 19, 1999 termination of Mr. Sokol's employment with the Company. In October 1998, the Company entered into a written Employment Agreement with Stanley B. Kinsey under which Mr. Kinsey agreed to serve as Chairman and Chief Executive Officer of the Company for a period of three years ending October 6, 2001. Under the Employment Agreement, Mr. Kinsey is to receive an annual salary of $285,000, which will increase in proportion to any increase in the consumer price index on the anniversary date each year during the term of employment. Mr. Kinsey also is entitled to an annual bonus pursuant to a bonus program to be agreed upon by Mr. Kinsey and the Compensation Committee of the Board of Directors. 29 29 NTN also has agreed pursuant to the Employment Agreement to provide Mr. Kinsey and his dependents certain medical insurance and to maintain $1,000,000 of term life insurance ($2,000,000 in the event of accidental death or dismemberment) on Mr. Kinsey payable to his beneficiaries. Mr. Kinsey's Employment Agreement may be terminated by NTN in the event of his disability, in which event Mr. Kinsey or his representatives will be entitled to be paid severance in an amount equal to 75% of his compensation (including the annual bonus calculated pursuant to the bonus program) for the remainder of the term of the Employment Agreement. The Employment Agreement also may be terminated by NTN in the event of Mr. Kinsey's personal dishonesty, willful misconduct or breach of fiduciary duty, or if he breaches the Employment Agreement and fails to cure the breach within 30 days. In the event NTN terminates the Employment Agreement without cause, attempts to reassign Mr. Kinsey's duties or to change his duties without cause, Mr. Kinsey will be entitled to a liquidated amount equal to his entire compensation under the Employment Agreement for the remainder of its term. Either Mr. Kinsey or NTN may terminate the Employment Agreement at any time following a "Change of Control Event" as defined. In the event Mr. Kinsey or NTN terminates Mr. Kinsey's employment following a Change of Control Event, he will be entitled to receive severance in an amount equal to one year's salary, a pro rata portion of the bonus earned to the date of termination of employment and continuation of employee benefits for a period of one year. In connection with his agreeing to join NTN as its Chief Executive Officer, Mr. Kinsey was granted options to purchase an aggregate of up to 1,300,000 shares of Common Stock. The exercise price of options to purchase 650,000 shares is $.625 per share and the exercise price of options to purchase 650,000 shares is $1.00 per share. On October 7, 1999, the Company will grant Mr. Kinsey an option to purchase 500,000 shares of the Company's common stock at the closing price as of the issue date. The Company will not be obligated to grant such 500,000 share option to the extent a Change of Control Event has occurred before such date. All options were granted to Mr. Kinsey pursuant to the NTN 1995 Stock Option Plan and are subject to immediate vesting upon the occurrence of a Change of Control Event. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION All compensation determinations for 1998 for NTN's executives were made by the Board of Directors of NTN as a whole upon the advice of the Compensation Committee of the Board. None of the directors or executive officers of NTN has served on the Board of Directors or the compensation committee of any other company or entity, any of whose officers served either on the Board of Directors or on the Compensation Committee of the Board. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of March 26, 1999 the number and percentage ownership of Common Stock by (i) all persons known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock based upon reports filed by each such person with the Securities and Exchange Commission ("Commission"), (ii) each director of the Company, (iii) each of the Named Executive Officers, and (iv) all of the executive officers and directors of the Company as a group. Except as otherwise indicated, and subject to applicable community property and similar laws, each of the persons named has sole voting and investment power with respect to the shares of Common Stock shown. An asterisk denotes beneficial ownership of less than 1%.
Number of Shares Percent of Name Beneficially Owned Common Stock (1) - - ---- ------------------ ---------------- Gerald Sokol, Jr.(2) 1,362,000 4.9% Robert M. Bennett(3) 174,000 * Barry Bergsman(4) 20,000 * Donald C. Klosterman(5) 849,082 3.0% Esther L. Rodriguez(6) 55,666 * Stanley B. Kinsey(7) 124,666 * V. Tyrone Lam -- * All executive officers and directors of the Company as a group 2,585,414 11.7% (7 persons)(8)
(1) Included as outstanding for purposes of this calculation are 28,086,306 shares of Common Stock (the amount outstanding as of March 26, 1999) plus, in the case of each particular holder, the shares of Common Stock subject to currently exercisable options, warrants, or other instruments exercisable for or convertible into shares of Common Stock (including such instruments exercisable within 60 days after March 26, 1999) held by that person, which instruments are specified by footnote. Shares issuable as part or upon exercise of outstanding options, warrants, or other instruments other than as described in the preceding sentence are not deemed to be outstanding for purposes of this calculation. 30 30 (2) Includes 1,300,000 shares subject to currently exercisable options held by Mr. Sokol. (3) Includes 66,667 shares subject to currently exercisable options held by Mr. Bennett. (4) Includes 3,000 shares subject to currently exercisable warrants held by Mr. Bergsman. (5) Includes 200,000 shares subject to currently exercisable warrants and 150,000 shares subject to currently exercisable options held by Mr. Klosterman. (6) Includes 33,333 shares subject to currently exercisable options held by Ms. Rodriguez. Also includes 1.000 shares owned by the Rodriguez Family Trust, of which Ms. Rodriguez is a co-trustee with members of her immediate family. As co- trustee, Ms. Rodriguez shares voting and investment power with respect to the shares (7) Includes 33,333 shares subject to currently exercisable options held by Mr. Kinsey. (8) Includes 1,583,333 shares subject to currently exercisable options and, 200,000 shares subject to currently exercisable warrants held by executive officers and directors, including those described in notes (2) through (7) above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CONSULTING ARRANGEMENTS In March 1997, NTN entered into a separate Consulting Agreement with Mr. Frazier, under which he agreed to spend on average seven days a month consulting with management of NTN regarding NTN's operations and serving as a consultant to NTN's President and as a member of NTN's Executive Advisory Board, which had just been created by NTN's Board of Directors. The Executive Advisory Board was subsequently disbanded. The Consulting Agreement was to expire in March 1999, unless sooner terminated. In consideration for his services under the foregoing Consulting Agreement, Mr. Frazier was granted a five-year, nonqualified stock option to purchase 250,000 shares of Common Stock at an exercise price of $4.50 per share, which was to vest in 24 monthly installments of approximately 10,416 shares each, subject to Mr. Frazier remaining as a consultant, and was to become exercisable on and after February 28, 1999. NTN also agreed to reimburse Mr. Frazier for certain expenses relating to his consulting services. In May 1997, Mr. Frazier's option was amended to reduce the exercise price to $2.81 and to provide that it would become immediately exercisable in full in the event of a "Change of Control" (as defined) of NTN. In January 1998, the Board of Directors cancelled the Consulting Agreement and reduced the compensation to 104,167 options, which are 100% vested at March 31, 1998. In connection with the option granted to Mr. Frazier under the Consulting Agreement, NTN recorded a charge pursuant to SFAS No. 123 of $224,000 in 1997. An additional charge of $58,000 was recorded in 1998. In April 1997, NTN entered into another Consulting Agreement with Frazier/King, under which Frazier/King was engaged to review and consult with management of NTN regarding NTN's strategic business plan, current operations and future development and to devise and structure an appropriate plan to secure future financing for NTN. The Consulting Agreement was terminable by NTN any time upon ten days notice to Frazier/King in the event the Board of Directors as a whole determined in good faith that Frazier/King had failed materially to perform, or had breached its duties, under the Consulting Agreement. For Frazier/King's services under the foregoing Consulting Agreement, NTN granted Frazier/King a warrant to purchase 1,000,000 shares of Common Stock at an exercise price of $2.81, the approximate market value of the Common Stock on the date of the Consulting Agreement, and agreed to reimburse Frazier/King for expenses (other than normal operating expenses) incurred by it in performing its consulting services. Frazier/King's warrant was immediately vested and exercisable as to 200,000 shares of Common Stock covered thereby and was to become vested and exercisable as to the balance of 800,000 covered shares in quarterly installments of 100,000 shares each as of the 15th day of each July, October, January and April commencing July 15, 1997 and ending April 15, 1999, provided that the Board of Directors of NTN has determined that Frazier/King was performing satisfactorily under the Consulting Agreement. In January, 1998, the Board and Frazier/King agreed to terminate this consulting agreement and the number of warrants granted was reduced to 500,000, which were immediately vested. In connection with the warrant granted to Frazier/King, NTN recorded a charge pursuant to SFAS No. 123 of $1,401,000, in 1997. On February 1, 1999, NTN entered into a Consulting Agreement with Barry Bergsman pursuant to which Mr. Bergsman was engaged to actively provide consulting services to the Company under the direction of the Company's Chief Executive Officer. For Mr. Bergsman's services under the Consulting Agreement, NTN granted Mr. Bergsman a warrant to purchase 36,000 shares of common stock at an exercise price of $0.75 per share. The warrant is exercisable as to 3,000 shares on the first day of each of the twelve consecutive months commencing March 1, 1999. In addition, Mr. Bergsman will receive cash compensation of $3,500 per month. The Consulting Agreement expires on January 31, 2000. 31 31 INDEMNITY AGREEMENTS The Company has entered into indemnity agreements with each of its directors and executive officers. The indemnity agreements provide that the Company will indemnify these individuals under certain circumstances against certain liabilities and expenses they may incur in their capacities as directors of the Company. The Company believes that the use of such indemnity agreements is customary among corporations and that the terms of the indemnity agreements are reasonable and fair to the Company, and are in its best interests to retain experienced directors. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 1,2. Consolidated Financial Statements and Schedule. The consolidated financial statements and schedule of the Company and its consolidated subsidiaries are set forth in the "Index to Consolidated Financial Statements" on page F-1. 3. Exhibits. The following exhibits are filed as a part of this report: 10.1 Amended and Restated Certificate of Incorporation of the Company, as amended (13) 10.2 By-laws of the Company (2) 10.5 License Agreement with NTN Canada (4) 10.6 National Football League License Agreement (4) 10.7 Lease of Office with The Campus L.L.C. (7) 10.15* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Patrick J. Downs. (9) 10.16* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Daniel C. Downs. (9) 10.17* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Ronald E. Hogan (9) 10.18* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Gerald P. McLaughlin. (9) 10.19* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Michael J. Downs. (9) 10.20* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Robert Klosterman. (9) 10.21* Letter agreement, dated March 4, 1997, between NTN and Alan Magerman.(9) 10.22* Consulting Agreement, dated as of December 31, 1996, between NTN Communications Inc. and Patrick J. Downs. (9) 10.23* Consulting Agreement, dated as of December 31, 1996, between NTN Communications Inc. and Daniel C. Downs. (9) 10.24* Consulting Agreement, dated as of December 31, 1996, between NTN Communications Inc. and Ronald E. Hogan. (9) 10.25* Consulting Agreement, dated as of December 31, 1996, between NTN Communications Inc. and Gerald P. McLaughlin. (9) 10.26* Consulting Agreement, dated as of March 14, 1997, between NTN Communications Inc. and Donald Klosterman. (9) 10.27* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Patrick J Downs. (9) 10.28* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Daniel C. Downs. (9) 10.29* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Ronald E. Hogan. (9) 10.30* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Gerald P. McLaughlin. (9) 10.31* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Michael J. Downs. (9) 32 32 10.32* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Robert Klosterman. (9) 10.33* Special Stock Option dated August 18, 1996 between NTN Communications, Inc. and Gerald Sokol, Jr.(9) 10.34* Special Stock Option dated August 25, 1996 between NTN Communications, Inc. and Robert Bennett (9) 10.35* Special Stock Option dated August 30, 1996 between NTN Communications, Inc. and Edward C. Frazier (9) 10.36* Amendment to Nonqualified Stock Option Agreement, dated as of April 14, 1997, between NTN Communications, Inc. and Edward C. Frazier. (11) 10.41 Compromise Settlement and Mutual General Release by and between NTN Communications, Inc. and Interactive Entertainment Systems and Barry N. Hurley (13) 10.42 Warrant Agreement, dated as of February 18, 1998 between NTN Communications, Inc. and American Stock Transfer and Trust Company, as warrant agent, including a form of warrant certificate. (13) 10.44* Performance Incentive Stock Option Agreement dated November 4, 1996 by and between NTN Communications, Inc. and Gerald Sokol, Jr. (13) 10.45* Nonqualified Stock Option Agreement dated May 14, 1997 by and between NTN Communications, Inc. and Gerald Sokol, Jr. (13) 10.46 Exclusive Maintenance and Installation Agreement dated March 30, 1998 by and between NTN Communications, Inc. and Datatec Systems, Inc. (13) 10.47* Modification to Resignation Agreement, dated as of March 9, 1998 by and between NTN Communications, Inc. and Daniel C. Downs (13) 10.48* Modification to Resignation Agreement, dated as of March 9, 1998 by and between NTN Communications, Inc. and Patrick J. Downs (13) 10.49* Modification to Resignation Agreement, dated as of March 20, 1998 by and between NTN Communications, Inc. and Ronald E. Hogan (13) 10.50* Employment Agreement, dated July 1, 1998, by and between NTN Communications, Inc. and Gerald Sokol, Jr. 10.51 Sublease Agreement, dated August 20, 1998, between NTN Communications, Inc. and WinResources Computing, Inc. 10.52* Employment Agreement, dated October 7, 1998, by and between NTN Communications, Inc. and Stanley B. Kinsey 10.53* Stock Option Agreement, dated October 7, 1998, by and between NTN Communications, Inc. and Stanley B. Kinsey 10.54* Resignation and Release Agreement, dated February 18, 1999, by and between NTN Communications, Inc. and Gerald Sokol, Jr. 10.55 Exchange Agreement, dated October 5, 1998, by and between NTN Communications, Inc. and the Buyers (as defined) (13) 23.00 Consent of KPMG LLP. (1) 27.00 Financial Data Schedule. (1) * Management Contract or Compensatory Plan. (1) Filed herewith. (2) Previously filed as an exhibit to the Company's registration statement on Form S-8, File No. 33-75732, and incorporated by reference. (3) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1989, and incorporated by reference. (4) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1990, and incorporated by reference. (5) Previously filed as an exhibit to the Company's report on Form 8-K dated December 31, 1993, and incorporated by reference. (6) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 33 33 (7) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. (9) Previously filed as an exhibit to the Company's report on Form 8-K dated March 5, 1997 and incorporated by reference. (10) Previously filed as an exhibit to the Company's report on Form 8-K dated June 30, 1996 and incorporated by reference (11) Previously filed as an exhibit to the Company's report on Form 10-K dated December 31, 1996 and incorporated by reference. (12) Previously filed as an exhibit to the Company's report on Form 8-K dated November 7, 1997 and incorporated by reference. (13) Previously filed as an exhibit to the Company's registration statement on Form S-3, File No. 333-69383, and incorporated by reference. (14) Filed herewith. (b) Reports on Form 8-K. None. 34 34 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page ---- Independent Auditors' Report F-2 Consolidated Financial Statements: Consolidated Balance Sheets as December 31, 1998 and 1997 F-3 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-8 Financial Statement Schedule II - Valuation and Qualifying Accounts F-24
F-1 35 Independent Auditors' Report The Board of Directors NTN Communications, Inc.: We have audited the consolidated financial statements of NTN Communications, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NTN Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP San Diego, California March 29, 1999 F-2 36 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997
ASSETS 1998 1997 ------------ ------------ Current assets Cash and cash equivalents $ 4,560,000 $ 4,764,000 Accounts receivable - trade, net of allowance for doubtful accounts of $1,720,000 in 1998 and $1,313,000 in 1997 2,471,000 2,724,000 Prepaid expenses 846,000 521,000 Other current assets 254,000 381,000 ------------ ------------ Total current assets 8,131,000 8,390,000 Broadcast equipment and fixed assets, net 7,249,000 7,973,000 Software development costs, net of accumulated amortization of $5,447,000 in 1998 and $3,710,000 in 1997 1,141,000 3,697,000 Other assets 246,000 211,000 ------------ ------------ Total assets $ 16,767,000 $ 20,271,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 840,000 $ 914,000 Accrued expenses 2,328,000 2,393,000 Accrual for litigation costs 847,000 1,613,000 Accrual for management severance 866,000 1,154,000 Obligations under capital leases 205,000 46,000 Deferred revenue 645,000 2,253,000 ------------ ------------ Total current liabilities 5,731,000 8,373,000 Deferred revenue 12,000 84,000 Obligations under capital leases 380,000 179,000 Accrual for settlement warrants 1,670,000 1,516,000 Accrual for management severance 619,000 1,093,000 Accrual for litigation costs -- 300,000 Other long term liabilities 30,000 -- ------------ ------------ Total liabilities 8,442,000 11,545,000 ------------ ------------ Shareholders' equity: Series A 10% cumulative convertible preferred stock, $.005 par value, 5,000,000 shares authorized; shares issued and outstanding 161,000 in 1998 and 1997 1,000 1,000 Series B 7% cumulative convertible preferred stock, $.005 par value, 85,000 shares authorized; shares issued and outstanding 56,000 in 1998 and 70,000 in 1997 1,000 1,000 Common stock, $.005 par value, 50,000,000 shares authorized; shares issued and outstanding 28,086,000 in 1998 and 23,677,000 in 1997 140,000 118,000 Additional paid-in capital 70,733,000 70,541,000 Accumulated deficit (61,147,000) (58,596,000) ------------ ------------ 9,728,000 12,065,000 Less treasury stock, at cost, 329,000 shares in 1998 and 782,000 in 1997 (1,403,000) (3,339,000) ------------ ------------ Total shareholders' equity 8,325,000 8,726,000 ------------ ------------ Commitments and contingencies Total liabilities and shareholders' equity $ 16,767,000 $ 20,271,000 ============ ============
See accompanying notes to consolidated financial statements. F-3 37 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Revenue: Network services $ 18,785,000 $ 19,009,000 $ 19,269,000 Online/Internet services 2,014,000 3,326,000 1,811,000 Advertising revenue 896,000 772,000 1,590,000 Equipment sales, net of cost of sales of $208,000, $231,000 and $3,801,000 in 1998, 1997 and 1996, respectively 499,000 475,000 1,757,000 Other revenue 2,000,000 2,279,000 1,284,000 ------------ ------------ ------------ Total revenue 24,194,000 25,861,000 25,711,000 ------------ ------------ ------------ Operating expenses: Direct operating expenses 4,715,000 6,565,000 6,124,000 Selling, general and administrative 11,767,000 16,244,000 15,259,000 Litigation, legal and professional expenses 1,658,000 808,000 6,484,000 Equipment lease expense 932,000 936,000 6,837,000 Stock-based compensation 353,000 3,205,000 1,910,000 Depreciation and amortization 6,412,000 5,305,000 2,265,000 Bad debt expense 850,000 1,462,000 1,840,000 Equipment charges 240,000 2,543,000 2,478,000 Research and development 714,000 1,600,000 3,396,000 Cancellation of notes receivable - related parties -- -- 4,252,000 Other charges -- -- 721,000 ------------ ------------ ------------ Total operating expenses 27,641,000 38,668,000 51,566,000 ------------ ------------ ------------ Operating Loss (3,447,000) (12,807,000) (25,855,000) ------------ ------------ ------------ Other income (expense): Interest income 288,000 238,000 391,000 Interest expense (289,000) (793,000) (390,000) Gain on sale of interest in subsidiary 1,643,000 -- -- Other income, net 12,000 905,000 -- ------------ ------------ ------------ Total other income 1,654,000 350,000 1,000 ------------ ------------ ------------ Loss from continuing operations before income taxes (1,793,000) (12,457,000) (25,854,000) Income taxes -- -- -- ------------ ------------ ------------ Loss from continuing operations (1,793,000) (12,457,000) (25,854,000) Loss from discontinued operations -- -- (1,317,000) Gain on sale of discontinued operations, net of tax -- -- 4,219,000 ------------ ------------ ------------ Net loss $ (1,793,000) $(12,457,000) $(22,952,000) ============ ============ ============ Accretion of beneficial conversion feature on preferred stock (758,000) -- -- ------------ ------------ ------------ Net loss available to common shareholders $ (2,551,000) $(12,457,000) $(22,952,000) ============ ============ ============ Basic and diluted net income (loss) per common share: Continuing operations $ (.10) $ (.55) $ (1.15) Discontinued operations -- -- 0.13 ------------ ------------ ------------ Net loss $ (.10) $ (.55) $ (1.02) ============ ============ ============ Weighted-average shares outstanding 26,078,000 22,696,000 22,568,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 38 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the years ended December 31, 1998, 1997 and 1996
SERIES A AND B CUMULATIVE CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------------------- ---------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1995 163,000 $ 1,000 22,503,000 $ 112,000 $ 56,747,000 Issuance of stock for exercise of warrants and options -- -- 251,000 1,000 316,000 Issuance of stock in lieu of dividends -- -- 3,000 -- -- Conversion of Series A preferred stock to common stock (2,000) -- -- -- -- Issuance of stock in private offerings, net of issuance costs -- -- 420,000 3,000 610,000 Treasury stock purchased -- -- -- -- -- Warrants granted to non-employees -- -- -- -- 1,910,000 Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1996 161,000 $ 1,000 23,177,000 $ 116,000 $ 59,583,000 ------------ ------------ ------------ ------------ ------------ Issuance of stock for exercise of warrants and options -- -- 419,000 2,000 888,000 Issuance of Series B Preferred Stock in private offering, net of issuance costs 70,000 1,000 -- -- 6,706,000 Issuance of stock in lieu of dividends -- -- 8,000 -- -- Issuance and modifications of warrants granted to non-employees -- -- -- -- 3,205,000 Issuance of stock for settlement of litigation -- -- 73,000 -- 159,000 Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 231,000 $ 2,000 23,677,000 $ 118,000 $ 70,541,000 ------------ ------------ ------------ ------------ ------------ Issuance of stock in lieu of dividends -- -- 19,000 -- -- Issuance of treasury stock for settlement of litigation -- -- -- -- (622,000) Issuance of common stock for settlement of litigation -- -- 1,200,000 6,000 1,194,000 Conversion of Series B preferred stock to common stock (14,000) -- 2,430,000 12,000 (12,000) Issuance of common stock in exchange for cancellation of options and warrants -- -- 759,000 4,000 (4,000) Issuance of treasury stock in exchange for cancellation of options and warrants -- -- -- -- (1,181,000) Accretion of beneficial conversion feature on Series B preferred stock -- -- -- -- 758,000 Issuance of stock for exercise of warrants and options -- -- 1,000 -- 1,000 Warrants granted to non-employees -- -- -- -- 58,000 Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 217,000 $ 2,000 28,086,000 $ 140,000 $ 70,733,000 ============ ============ ============ ============ ============ ACCUMULATED TREASURY DEFICIT STOCK TOTAL ------------ ------------ ------------ Balance, December 31, 1995 $(23,187,000) $ (222,000) $ 33,451,000 Issuance of stock for exercise of warrants and options -- -- 317,000 Issuance of stock in lieu of dividends -- -- -- Conversion of Series A preferred stock to common stock -- -- -- Issuance of stock in private offerings, net of issuance costs -- -- 613,000 Treasury stock purchased -- (3,117,000) (3,117,000) Warrants granted to non-employees -- -- 1,910,000 Net loss (22,952,000) -- (22,952,000) ------------ ------------ ------------ Balance, December 31, 1996 $(46,139,000) $ (3,339,000) $ 10,222,000 ------------ ------------ ------------ Issuance of stock for exercise of warrants and options -- -- 890,000 Issuance of Series B Preferred Stock in private offering, net of issuance costs -- -- 6,707,000 Issuance of stock in lieu of dividends -- -- -- Issuance and modifications of warrants granted to non-employees -- -- 3,205,000 Issuance of stock for settlement of litigation -- -- 159,000 Net loss (12,457,000) -- (12,457,000) ------------ ------------ ------------ Balance, December 31, 1997 $(58,596,000) $ (3,339,000) $ 8,726,000 ------------ ------------ ------------ Issuance of stock in lieu of dividends -- -- -- Issuance of treasury stock for settlement of litigation -- 755,000 133,000 Issuance of common stock for settlement of litigation -- -- 1,200,000 Conversion of Series B preferred stock to common stock -- -- -- Issuance of common stock in exchange for cancellation of options and warrants -- -- -- Issuance of treasury stock in exchange for cancellation of options and warrants -- 1,181,000 -- Accretion of beneficial conversion feature on Series B preferred stock -- -- 758,000 Issuance of stock for exercise of warrants and options -- -- 1,000 Warrants granted to non-employees -- -- 58,000 Net loss (2,551,000) -- (2,551,000) ------------ ------------ ------------ Balance, December 31, 1998 $(61,147,000) $ (1,403,000) $ 8,325,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 39 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Net loss $ (1,793,000) $(12,457,000) $(22,952,000) Gain on sale of discontinued operations -- -- (4,219,000) Gain on sale of interest in subsidiary (1,643,000) -- -- Provision for loss from disposition of broadcast 240,000 2,543,000 2,478,000 equipment Depreciation and amortization 6,412,000 5,305,000 2,265,000 Bad debt expense 850,000 1,462,000 1,840,000 Non-cash stock compensation charges 353,000 3,205,000 1,910,000 Accreted interest expense 211,000 410,000 57,000 Amortization of deferred revenue (1,022,000) (719,000) (898,000) Gain on sale of interest in building -- (905,000) -- Stock issued in settlement of litigation -- 159,000 -- Loss from discontinued operations -- -- 1,317,000 Loss from cancellation of notes receivable -- -- 4,252,000 Loss from buyout of lease commitments -- -- 2,007,000 Charge for settlement warrants -- -- 1,234,000 Change in discontinued operations -- -- (2,761,000) Change in assets and liabilities: Accounts receivable - trade (627,000) (1,956,000) 448,000 Prepaid expenses and other assets (724,000) 3,542,000 1,430,000 Accounts payable, accrued expenses and Other accrued liabilities 64,000 (108,000) 3,305,000 Deferred revenue (382,000) 523,000 (1,106,000) Accruals for management severance and Long-term liabilities (819,000) (2,008,000) 3,216,000 ------------ ------------ ------------ Net cash provided by (used in) operating activities 1,120,000 (1,004,000) (6,177,000) ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures (3,002,000) (3,700,000) (4,411,000) Proceeds from sale of interest in subsidiary 1,862,000 -- -- Notes receivable (70,000) -- 216,000 Software development costs (10,000) (1,020,000) (2,274,000) Proceeds from sale of interest in building -- 1,405,000 -- Proceeds from sale and leaseback transactions -- -- 3,553,000 Proceeds from sale of discontinued operations -- -- 10,223,000 ------------ ------------ ------------ Net cash (used in) provided by investing activities (1,220,000) (3,315,000) 7,307,000 ------------ ------------ ------------
F-6 40 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ----------- ----------- ----------- Cash flows from financing activities: Principal payments under capital lease obligations $ (104,000) -- -- Principal payments on debt -- $(9,563,000) -- Proceeds from issuance of debt -- 4,470,000 $ 3,704,000 Purchase of equipment related to sale and leaseback transactions -- -- (2,553,000) Proceeds from issuance of common and preferred stock, less issuance costs paid in cash -- 7,597,000 930,000 Repurchase of common stock -- -- (3,117,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities (104,000) 2,504,000 (1,036,000) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (204,000) (1,815,000) 94,000 Cash and cash equivalents at beginning of year 4,764,000 6,579,000 6,485,000 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 4,560,000 $ 4,764,000 $ 6,579,000 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 121,000 $ 367,000 $ -- =========== =========== =========== Income taxes $ -- $ -- $ -- =========== =========== =========== Supplemental disclosure of non-cash investing and financing activities: Equipment acquired under capital leases $ 464,000 $ 258,000 $ -- =========== =========== =========== Transfer of assets previously categorized as Inventory, a current asset, to Broadcast Equipment, a non-current asset $ -- $ -- $ 5,618,000 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-7 41 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the years ended December 31, 1998, 1997 and 1996 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS NTN Communications, Inc. ("NTN") develops, produces and distributes individual and multi-player interactive entertainment programs to a variety of media platforms. NTN broadcasts a wide variety of games trivia and informational programming, to group viewing locations such as hotels, sports taverns and restaurants through its own interactive NTN Network. In addition, NTN brings multi-player interactive games into consumer households through its arrangement with personal computer on-line services and interactive television services. BASIS OF ACCOUNTING PRESENTATION The consolidated financial statements include the accounts of NTN and its wholly-owned subsidiaries, IWN Inc. ("IWN") and IWN, L.P. ("the Company"). On June 16, 1998, the Company sold an 82.5% interest in LearnStar, Inc. (LearnStar) to NewStar Learning Systems, L.L.C. (NewStar) for $1,862,000. The transaction resulted in a gain of $1,643,000, which is included in other income for the year ended December 31, 1998. Sally A. Zoll, President of LearnStar, and Joe King, a partner with former NTN Director Ed Frazier in Frazier/King Media Holding, each hold an equity interest in NewStar. Upon closing of the transaction, Ed Frazier resigned from the Board of Directors of NTN in order to avoid any perception of a conflict of interest between his ongoing business relationship with Mr. King and NTN's continued minority interest in LearnStar. In 1994, the Company also formed IWN, Inc. ("IWN"), which serves as the general partner of IWN, L.P., a limited partnership engaged in the development of interactive technology for gaming applications. IWN has no business or operations apart from its service as the general partner of IWN L.P. On April 1, 1998, the Company reached an agreement in principal with Omnigon, a California corporation, to sell up to 90% of the equity of IWN to Omnigon on or before May 31, 1998. Onmigon paid the Company $100,000 in April 1998 and an additional $100,000 in May 1998 for the option to acquire IWN under specific terms. Subsequently, however, the Company terminated negotiations with Omnigon for the proposed sale of IWN. As agreed, the Company used the non-refundable payments made by Omnigon to pay the operating expenses of IWN prior to the cancellation of the proposed transaction. NTN redirected IWN's business strategy toward the Australian, New Zealand and Asian marketplace, and building upon its existing venture in that market with IWN Australasia Limited (IWN-A). NTN and IWN-A, in which NTN holds a 25% equity interest, have agreed that IWN will provide research and development and technical support for IWN-A operations over the next several months. IWN-A will fund the development and support activities. CASH AND CASH EQUIVALENTS For the purpose of financial statement presentation, the Company considers all highly liquid investment instruments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of operational cash accounts and money market accounts with original maturities of three months or less. Included in cash and cash equivalents is $466,000 which is segregated in accordance with terms of operating lease agreements. BROADCAST EQUIPMENT AND FIXED ASSETS Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the assets (three to five years). Depreciation of broadcast equipment is computed using the straight-line method over the estimated useful lives of the assets (two to four years). Amortization of fixed assets under capital leases is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the lease period. REVENUE RECOGNITION Network and Online/Internet Services: Revenue is recognized as the service is provided by the Company. Advertising: Revenue for advertising is recognized ratably over the contract period as advertisements are broadcast or displayed. Equipment Sales: Revenue is recognized when equipment is shipped or transferred to the purchaser. Other Revenue: Revenue is recognized when all material services or conditions relating to the transaction have been performed or satisfied. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-8 42 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 SOFTWARE DEVELOPMENT COSTS The Company capitalizes costs related to the development of certain software products. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" capitalization of costs begins when technological feasibility has been established and ends when the product is available for general release to customers. Amortization of costs related to interactive programs is recognized on a straight line basis over three years. STOCK-BASED COMPENSATION Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period, the fair value of all stock- based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock options grants made in 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Under SFAS No. 123, options or warrants issued to non-employees in exchange for goods or services received are recorded at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company believes that the fair value of financial instruments approximate their carrying value. The following methods and assumptions were used to estimate the fair value of financial instruments: The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short maturity of these instruments. The fair value of the accrual for settlement warrants and other long-term liabilities are determined using the present value of expected future cash flows discounted at the interest rate currently available to the Company. F-9 43 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 CONCENTRATION OF CREDIT RISK The Company provides services to group viewing locations, generally bars and lounges, and to third party distributors, primarily throughout the United States. In addition, the Company licenses its technology and products to licensees outside of the United States. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different industries and geographies. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. The Company maintains an allowance for doubtful accounts to provide for credit losses. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. BASIC AND DILUTED EARNINGS PER COMMON SHARE The Company computes basic and diluted earnings per share in accordance with SFAS No. 128, "Earnings per Share". Basic EPS excludes the dilutive effects of options, warrants and other convertible securities. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company. Options, warrants and convertible preferred stock representing approximately 5,569,000, 17,630,000 and 1,078,000 shares were excluded from the computations of net loss per common share for the years ended December 31, 1998, 1997 and 1996, respectively, as their effect is anti-dilutive. The Company anticipates issuing 218,400 additional shares of common stock to investors pursuant to certain anti-dilution provisions. Reflected in the net loss available to common shareholders for the year ended December 31, 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 June 30, 1998. As described in Note 7 to the consolidated financial statements, the Company entered into an exchange agreement with the holders of the Series B Preferred Stock. RECLASSIFICATIONS Certain items in the 1997 and 1996 consolidated financial statements have been reclassified to conform to the 1998 presentation. (2) DISCONTINUED OPERATIONS - NEW WORLD COMPUTING On June 30, 1996, the Company sold all of the assets and business of its New World Computing subsidiary ("New World") to the 3DO Company ("3DO") for approximately $13,600,000. In consideration of the sale, 3DO issued to the Company approximately 1,018,000 shares of its common stock and assumed approximately $1,600,000 of liabilities of New World. 3DO guaranteed that the cash value realized by the Company upon sale of the shares would not be less than $10.04 per share, notwithstanding the market price of such shares. The Company sold all of the 3DO shares in 1996 and obtained payment of $3,877,000 from 3DO pursuant to the guarantee. The disposal of New World has been classified as discontinued operations in the accompanying consolidated financial statements for the year ended December 31, 1996. The Company recorded a gain on the sale of New World of $4,219,000, net of tax of $16,000. New World's revenue through the sale date was $2,085,000. F-10 44 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 (3) MANAGEMENT REORGANIZATION On March 5, 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 addition, three other officers resigned or were terminated in connection with the reorganization ("Reorganization"). The Company entered into separate agreements ("Agreements") with each of the former officers setting out the terms on which their existing employment contracts with the Company would be settled. In compliance with the Agreements, the Company continues to pay the former officers their current annual salaries and other benefits for the remaining terms of their employment agreements with the Company, which expire on or before December 31, 1999. In March 1998, the Company and three of the former officers agreed to an amendment of the Agreements. The Agreements were modified to extend the payment term an additional year to December 31, 2000 and provided for reductions of amounts to be paid in 1998 and 1999 totaling $272,000 and $355,000, respectively. Medical and life insurance benefits pursuant to the Agreements were also extended to December 31, 2000. Pursuant to the Agreements, in 1997 the Company canceled an aggregate of 2,325,000 of outstanding warrants and options to purchase Common Stock of the Company previously issued to the former officers. In addition, the Company agreed to extend the exercise period and reduce the exercise price of certain other warrants and options retained by the former officers. Total charges related to the Reorganization are comprised of the following:
1997 1996 ---------- ---------- Contractual payments for Agreements, net of discount $3,128,000 $ 840,000 Cancellation of notes receivable and related accrued interest of $216,000 from former officers -- 4,252,000 Cancellation of note receivable from President 150,000 -- Bonus granted to President 85,000 -- Charge related to extension of the exercise period and reduction in the exercise price of certain warrants and options 1,450,000 -- ---------- ---------- Total charges $4,813,000 $5,092,000 ========== ==========
Interest expense totaling $56,000 and $185,000 was incurred in 1998 and 1997, respectively, related to the Agreements. Effective December 31, 1996, as a result of the Reorganization, a total of $4,252,000 of loans to former officers and the related interest were cancelled including personal loans made to Alan Magerman, a former director and Patrick J. Downs of $185,000 and $251,000, respectively. Upon joining the Company as Chief Financial Officer, Gerald Sokol, Jr. (Mr. Sokol is no longer with the Company) was granted a total of 700,000 options to purchase Common Stock at prices ranging from $5.00 to $5.08 per share. The options were exercisable as follows: 100,000 upon grant, 200,000 in three equal annual installments and 400,000 exercisable only if the closing price of the Common Stock was at least $11 per share for ten consecutive days prior to August 15, 1998. All of the options were subject to acceleration in the event of a "Change in Control Event" as defined. Such a Change of Control Event occurred in March 1997 as a consequence of the Reorganization and all the options became vested and exercisable in full at that time. Also as a result of the Reorganization in 1997, the Board of Directors granted Gerald Sokol Jr. an additional 600,000 options to purchase the Common Stock of the Company. F-11 45 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 (4) BROADCAST EQUIPMENT AND FIXED ASSETS Broadcast equipment and fixed assets are recorded at cost and consist of the following:
1998 1997 ----------- ------------ Broadcast equipment $ 9,243,000 $ 8,602,000 Furniture and fixtures 294,000 296,000 Machinery and equipment 3,958,000 3,463,000 Leasehold Improvements 472,000 472,000 Equipment under capital lease 724,000 258,000 Other equipment 36,000 181,000 ------------ ------------ 14,727,000 13,272,000 Accumulated depreciation (7,478,000) (5,299,000) ------------ ------------ $ 7,249,000 $ 7,973,000 ============ ============
In February 1999, the Company introduced a second network to be broadcast for a fee to the Hospitality industry. Deployment of the New Network to subscriber locations is scheduled to begin in April 1999. The Company currently plans to operate the current network for approximately 18 more months. The Company has evaluated the estimated useful lives of the equipment and technology relating to the existing network. Accordingly, beginning in February 1999, the Company will depreciate these amounts over the estimated remaining life of 18 months. Beginning in 1993 and through June 30, 1996, the Company had entered into various sale and leaseback arrangements. In the fourth quarter of 1996, the Company completed a plan to repurchase equipment related to the prior years' lease arrangements. The Company recorded a charge of approximately $2,007,000 related to the termination of these lease arrangements. This charge is included in equipment lease expense in 1996. Management does not intend to use sale and leaseback arrangements as a method of financing in future periods and does not intend to purchase equipment to be held as inventory for sale. Accordingly, in the fourth quarter of 1996, the Company reclassified all remaining inventory to broadcast equipment and began recording depreciation charges on all assets placed in service. (5) SHORT-TERM BORROWINGS In December 1995, the Company entered into a sale, purchase and investment agreement ("Agreement") with Symphony LLC ("Symphony"), an unaffiliated company whereby Symphony purchased 10% interest in IWN for $350,000 and would make capital contributions totaling $2,650,000 to IWN L.P., a limited partnership of which IWN is the general partner. In accordance with the Agreement, the Company issued to Symphony a warrant to purchase 400,000 shares of the Company's Common Stock, exercisable at $4.125 per share. The Agreement included a provision whereby Symphony had the option to put ("Put Option") its partnership interest in IWN L.P. and its shares of IWN to the Company during the period from April 1, 1997 through December 1, 1997 for certain consideration. The amount contributed by Symphony was recorded as a short-term borrowing and the Company has consolidated the accounts and results of operations of IWN L.P. in the financial statements. On April 8, 1997, Symphony exercised the Put Option. In June 1997, the Company paid Symphony $3,556,000 in full payment of the Put Option. Included in this amount was accrued interest of $261,000 and an additional capital contribution made in 1997 by Symphony of $400,000. In addition, the warrant to purchase 400,000 shares of the Company's Common Stock was cancelled. In June 1997, the Company borrowed $3,700,000 from GTECH Corp. ("GTECH"), with whom it had agreed in principle to enter into a merger agreement. Of this amount, $3,556,000 was used to pay Symphony as noted above. The merger agreement was terminated in August 1997. The loan bore interest at the rate of 13% per year and was secured by a pledge of all of the capital stock of IWN Inc. and a collateral assignment of the Company's partnership interest in IWN L.P. On November 3, 1997, the Company repaid the entire outstanding principal and accrued interest of $3,883,000 to GTECH with a portion of the proceeds of a private placement of preferred stock. (6) COMMON STOCK OPTIONS AND WARRANTS The Company has two active stock option plans. The 1995 Employee Stock Option Plan (the "Option Plan") was approved by the shareholders in 1995 and was subsequently amended. Under the Option Plan, options for the purchase of the Company's common stock may be granted to officers, directors and employees. Options may be designated as incentive stock options or as nonqualified stock options and generally vest over four years, except, the Board of Directors, at its discretion, can authorize acceleration of vesting periods. Options under the Option Plan, which have a term of up to ten years, are exercisable at a price per share not less than the fair market value on the date of grant. The aggregate number of shares authorized for issuance under the Option Plan is 7,000,000. In addition, the Company has issued options pursuant to a Special Stock Option Plan ("Special Plan"). Options issued under the Special Plan are made at the discretion of the Board of Directors and are designated only as nonqualified options. The options generally have a term of up to ten years, are exercisable at a price per share not less than the fair market value on the date of grant and vest over various terms. A summary of the status of the Company's two active stock option plans as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below. F-12 46 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996
Special Plan Option Plan ------------------------------ -------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ---------- ----------------- ---------- ---------------- Outstanding December 31, 1995 -- -- 4,540,000 $ 5.84 Granted 600,000 $ 5.00 2,398,000 3.69 Exercised -- -- (29,000) 3.07 Canceled -- -- (220,000) 5.52 ---------- ---------- ---------- ---------- Outstanding December 31, 1996 600,000 5.00 6,689,000 5.09 Granted 430,000 3.30 1,947,000 2.66 Exercised -- -- (45,000) 2.08 Canceled -- -- (3,503,000) 5.58 ---------- ---------- ---------- ---------- Outstanding December 31, 1997 1,030,000 3.01 5,088,000 3.47 Granted 104,000 2.81 3,290,000 0.93 Exercised -- -- -- -- Canceled (430,000) 3.30 (3,721,000) 3.59 ---------- ---------- ---------- ---------- Outstanding December 31, 1998 704,000 $ 2.81 4,657,000 $ 1.58 ========== ========== ========== ========== Exercisable as of December 31, 1996 -- -- 3,534,000 $ 6.04 Exercisable as of December 31, 1997 740,000 $ 3.09 3,080,000 $ 3.96 Exercisable as of December 31, 1998 638,000 $ 2.81 1,091,000 $ 3.04
In April 1998, the Board of Directors approved the issuance of 564,000 options with exercise price of $1.00 in exchange for the cancellation of various prior employee options under the Option Plan with exercise prices ranging from $2.00 to $6.50. No compensation expense was recorded as a result of the issuance. In May 1997, the Board of Directors approved a modification to previously issued options under the Special and Option Plans whereby the exercise price of 1,612,000 options issued to certain members of the Board of Directors, management and employees was reduced to $2.81. The previous exercise prices ranged from $3.50 to $5.08. No compensation expense was recorded as a result of the modification. In January 1998, the Company issued approximately 759,000 shares of Common Stock in exchange for the surrender and cancellation of certain previously outstanding warrants and options to purchase approximately 2,578,000 shares of Common Stock at exercise prices ranging from $2.00 to $5.75 per share. The fair market value of the shares issued was approximately $900,000, which was less than the fair value of the warrants and options received in the exchange. In March 1998, the Company issued approximately 277,000 shares of Common Stock to two former officers in exchange for the surrender and cancellation of certain previously outstanding warrants and options to purchase 1,500,000 shares of Common Stock at exercise prices ranging from $2.00 to $4.75 per share. The fair market value of the shares issued was approximately $242,000, which was less than the fair value of the warrants and options received in the exchange. A summary of options exercisable and the weighted average fair value of options issued in 1998 and 1997 are as follows:
1998 1997 ------------- ------------- Special Plan: Options exercisable at end of year 638,000 740,000 ============= ============= Weighted average fair value of options granted during the year $ 0.85 $ 3.74 ============= ============= Option Plan: Options exercisable at end of year 1,091,000 3,080,000 ============= ============= Weighted average fair value of options granted during the year $ 0.72 $ 2.58 ============= =============
F-13 47 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 The following table summarizes information about the Special Plan and the Option Plan as of December 31, 1998.
Options Outstanding Options Exercisable Weighted Average Range of Number Remaining Weighted Average Number Weighted Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ---------------- ----------- ---------------- ---------------- ----------- ---------------- Special Plan: $2.81 704,000 5 years $2.81 638,000 $2.81 Option Plan: $0.56 - $1.50 3,095,000 10 years $0.90 -- $ -- $1.51 - $3.00 1,289,000 7 years $2.70 851,000 $2.76 $3.01 - $6.50 273,000 4 years $3.96 240,000 $4.02
The Company has issued various options pursuant to the Special Plan to non-employees to purchase common stock in 1997, the majority of which were exercisable as of December 31, 1997. In compliance with SFAS No. 123, the Company expensed $354,000 in 1997 associated with the grant of 134,000 options in 1997. The fair value of each grant in 1997 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0% percent, risk-free interest rate of 6.5%, expected volatility of 179%, and an expected option life of 5 years. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized in the consolidated financial statements for the issuance of options to employees pursuant to the Special Plan and the Option Plan. Had compensation cost related to employees for the Company's stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net loss and net loss per share applicable to common stock would have been increased to the pro forma amounts indicated below.
1998 1997 1996 ---- ---- ---- Net loss As reported $2,551,000 $12,457,000 $22,952,000 Pro forma $4,365,000 $16,733,000 $27,823,000 Net loss per share As reported $ 0.10 $ 0.55 $ 1.02 Pro forma $ 0.17 $ 0.74 $ 1.23
Pro forma net loss reflects only options granted in 1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost for options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above since compensation cost is reflected over the option vesting periods and compensation cost for options granted prior to January 1, 1996 are not considered. The fair value of each option grant in 1998, 1997 and 1996 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1998 - dividend yield of 0% percent, risk-free interest rates ranging from 4.15% to 5.26%, expected volatility of 188%, and expected option lives ranging from 3 years to 7 years; 1997 - dividend yield of 0%, risk-free interest rate of 6.5%, expected volatility of 179%, and expected option lives ranging from 5 years to 10 years; 1996 - dividend yield of 0%, risk-free interest rates ranging from 6.5% to 6.8%, expected volatility of 90%, and expected option lives ranging from 5 years to 10 years. The weighted average fair value of warrants granted during 1998, 1997 and 1996 was $0.50, $1.83 and $3.11, respectively. In compliance with SFAS No. 123, the Company expensed $1,401,000 in 1997 and $1,910,000 in 1996 associated with the grant of 1,065,000 warrants in 1997 and 616,000 warrants in 1996, respectively. F-14 48 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 At December 31, 1998, 1997 and 1996, the weighted average exercise price of exercisable warrants was $2.49, $3.63 and $4.10 respectively. The fair value of each warrant grant in 1998, 1997 and 1996 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1998 - dividend yield of 0% percent, risk- free interest rate of 4.23%, expected volatility of 188%, and an expected warrant life of 2.3 years; 1997 - dividend yield of 0% percent, risk-free interest rate of 6.5%, expected volatility of 179%, and an expected warrant life of 10 years; 1996 - dividend yield of 0% percent, risk-free interest rates ranging from 5.3% to 6.5%, expected volatility of 90%, and an expected warrant live of 5 years. The following summarizes warrants issued and outstanding and weighted average exercise prices:
OUTSTANDING WEIGHTED AVERAGE WARRANTS EXERCISE PRICES ----------- ---------------- December 31, 1995 4,189,000 3.95 Granted 616,000 4.45 Exercised (224,000) 2.34 Canceled -- ---------- December 31, 1996 4,581,000 4.10 Granted 1,065,000 1.83 Exercised (374,000) 2.07 Canceled (1,078,000) 4.39 ---------- December 31, 1997 4,194,000 3.63 Granted 1,000,000 1.25 Exercised -- -- Canceled (2,291,000) 4.02 ---------- December 31, 1998 2,903,000 2.49 ==========
(7) CUMULATIVE CONVERTIBLE PREFERRED STOCK The Company has authorized 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series. The only series currently designated are a series of 5,000,000 shares of Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock") and a series of 85,000 shares of Series B Preferred Stock. Series A At December 31, 1998 and 1997, there were 161,000 shares of Series A Preferred Stock issued and outstanding. The Series A Preferred Stock provides for a cumulative annual dividend of 10%, payable in semi-annual installments in June and December. Dividends may be paid in cash or with shares of common stock. In 1998, 1997 and 1996, the Company issued approximately 19,000, 8,000 and 3,000 common shares, respectively, for payment of dividends. At December 31, 1998, the cumulative unpaid dividends for the Series A Preferred Stock was approximately $1,300. The Series A Preferred Stock has no voting rights and has a $1.00 per share liquidation preference over common stock. The registered holder has the right at any time to convert shares of Series A Preferred Stock into that number of shares of NTN Common Stock that equals the number of shares of Series A Preferred Stock that are surrendered for conversion divided by the conversion rate. The conversion rate is subject to adjustment in certain events and is established at the time of each conversion. During 1998 and 1997, there were no conversions. During 1996, approximately 2,000 shares of Series A Preferred Stock converted into approximately 400 shares of Common Stock. There are no mandatory conversion terms or dates associated with the Series A Preferred Stock. F-15 49 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 Series B In October 1997, NTN sold and issued 35,000 shares of Series B Preferred Stock each to two institutional purchasers ("the Investors") for a total of $7,000,000. The sale of the Series B Preferred Stock was effected pursuant to Regulation D of the Securities and Exchange Commission under the Securities Act of 1993 as amended. The Company paid $210,000 in financial advisory services in connection with the sale of the Series B Preferred Stock. A portion of the net proceeds from the private placement was used to repay indebtedness and accrued interest to GTECH totaling $3,883,000. The balance was used for general working capital purposes. As of October 5, 1998, 14,000 shares of the Series B Preferred Stock (plus accrued dividends) had been converted into 2,430,000 shares of common stock of the Company, leaving 56,000 shares of the Series B Preferred Stock outstanding. On October 5, 1998, NTN entered into an Exchange Agreement with the Investors pursuant to which they agreed to surrender for cancellation their remaining shares of Series B Preferred Stock in exchange for warrants and convertible notes as described below. Pending their surrender and cancellation, the dividend rate on the Series B Preferred Stock was increased from 4% to 7% and the conversion price of the Series B Preferred Stock was fixed at $1.275 per share consistent with the interest rate and conversion price under the convertible notes described below. The Company also agreed to issue each of the Investors a 7% Convertible Senior Subordinated Note of the Company in a principal amount equal to the stated value of their Series B Preferred Stock, plus accrued and unpaid dividends through the date of issuance of the convertible notes. The convertible notes were issued January 11, 1999 and bear interest at the annual rate of 7% per annum. Interest is due and payable in quarterly installments, in arrears, and the entire principal amount will be due and payable on February 1, 2001. Interest on the convertible notes may be paid in cash or, at NTN's election, in shares of its common stock valued for this purpose at 90% of the average closing bid price of the common stock during the 10 trading days preceding the interest payment date. At any time after a period of 20 consecutive trading days during which the daily "Market Price" (as defined in the Exchange Agreement) of the common stock equals or exceeds $1.75 (subject to adjustment), the Company may elect upon 45 days prior written notice to prepay all or any portion of the convertible notes at a price of 105% of the outstanding principal amount, plus accrued and unpaid interest. The convertible notes will continue to be convertible, however, at any time prior to prepayment in full. The convertible notes must be prepaid in connection with a merger or consolidation of the Company or other "Major Transaction" (as defined in the Exchange Agreement) if the consideration per share of common stock in the Major Transaction is at least $1.50. In such event, the prepayment price will be 105% of the outstanding principal amount of the convertible notes, plus accrued and unpaid interest. The holders of the convertible notes may convert them at any time, in whole or in part, at their option. The number of shares of common stock issuable upon conversion of each convertible note will be determined by dividing the outstanding principal amount to be converted, plus any accrued and unpaid interest, by the conversion price then in effect. The conversion price will be $1.275 per share, subject to adjustment if certain events, including stock dividends or subdivisions or reclassifications of the common stock or any sale or issuance of common stock (or of rights or options to subscribe for or purchase common stock) for no consideration or for a consideration per share less than the "Average Market Price" (as defined in the Exchange Agreement) of the common stock. The actual number of shares of common stock issuable upon any conversion of the convertible notes will depend on the conversion price in effect on the relevant conversion date. The convertible notes are subordinate in right of payment to the prior payment of all "Senior Debt" (as defined in the Exchange Agreement). The Company is restricted under the terms of the convertible notes from incurring any Senior Debt in excess of $10,000,000 or any other indebtedness (except Senior Debt and "Subordinated Debt" (as defined in the Exchange Agreement)) in excess of $2,000,000 at any time. The Company will be in default under the convertible notes if it fails to pay any principal or interest on the convertible notes when due, and in certain other events, including in the event of a material adverse change in the condition, financial or otherwise, or operations of the Company as determined by the holders of the convertible notes in their discretion. If the Company defaults under the convertible notes, in the discretion of the holders of the convertible notes, the entire outstanding principal amount of the convertible notes and all accrued and unpaid interest will become immediately due and payable in full. F-16 50 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 On October 5, 1998, in consideration for their entering into the Exchange Agreement on October 5, 1998, NTN issued to each of the Investors a warrant to purchase 500,000 shares of common stock at an initial purchase price of $1.25 per share. The purchase price of shares of common stock under the warrants will be subject to reduction based on the future "Market Price" (as defined) of the common stock as follows: the purchase price will be (i) $0.75, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $1.75 but less than $2.00; (ii) $0.625, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $2.00 but less than $2.25; (iii) $0.50, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $2.25 but less than $2.50; (iv) $0.375, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $2.50 but less than $3.00; (v) $0.25, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $3.00 but less than $4.00; and (vi) $0.005, if the daily Market Price on each day during any 10 consecutive trading days shall be equal to or greater than $4.00. No adjustments to the purchase price will be made to increase the purchase price in effect at any time. The warrants are exercisable at any time on or before February 1, 2001. In the event, however, that a "Major Transaction" (as defined in the Convertible Notes) occurs, NTN may elect upon 30 days prior written notice to the warrant holders to accelerate the expiration date of the warrants so long as the consideration per share of common stock which would be received by the warrant holders in the Major Transaction exceeds the then-applicable purchase price per share under the warrants. The warrants contain certain antidilution provisions that require adjustments in the purchase price and the number of shares of common stock purchasable in the event of a stock dividend, subdivision or combination of the outstanding shares of common stock or in the event of a recapitalization of the Company and certain similar events. In addition, the exercise price and number of shares purchasable under the warrants are to be adjusted in the event the Company issues additional shares of common stock (or rights or options to subscribe for or purchase common stock) for no consideration, or for a consideration per share of common stock less than the "Current Market Price" (as defined) of the common stock under any employee stock option plan or other employee plan approved by the Company's Board of Directors, provided that the exercise or purchase price is not less than 85% of the fair market value on the date of grant. The warrants allow for cashless exercises by means of the Company's withholding of shares of common stock otherwise issuable to the holder, which shares are to be valued for this purpose based on the market price of the common stock at the time. A registration statement on Form S-3 covering 4,637,516 shares of common stock, some or all of which may be issuable upon conversion of the 7% convertible senior subordinated notes, was declared effective by the Securities and Exchange Commission on January 8, 1999. (8) RETIREMENT AND SAVINGS PLANS DEFINED CONTRIBUTION PLAN During 1994, the Company established a defined contribution plan which is organized under Section 401(k) of the Internal Revenue Code, which allows employees who have completed at least six months of service or reached age 21, whichever is later, to defer up to 15% of their pay on a pre-tax basis. The Company, at its discretion, may contribute to the plan. For the years ended December 31, 1998, 1997 and 1996, the Company made no such contributions. DEFINED BENEFIT PENSION PLAN In connection with the Reorganization in 1997, the Company terminated a non-qualified, non-contributory pension plan that covered certain former officers. There were no accrued pension benefits payable to any participants upon termination of the plan. The plan was secured by whole- life insurance policies for certain former officers. The Company had previously borrowed funds against these assets. Upon termination, the loans were repaid and the net assets were liquidated. F-17 51 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 DEFERRED COMPENSATION PLAN In connection with the Reorganization in 1997, the Company terminated an unfunded, non-qualified deferred compensation plan that covered certain former officers. The accrued plan benefits of $580,000 included in accrued expenses as of December 31, 1996 were substantially paid to participants in 1997. Unpaid benefits at December 31, 1998 and 1997 were $29,000 and $58,000, respectively. (9) INCOME TAXES For each of the years ended December 31, 1998, 1997 and 1996, there was no provision for current or deferred income taxes. The components that comprise deferred tax assets and liabilities at December 31, 1998 and 1997 are as follows:
1998 1997 ------------ ------------ Deferred tax assets: NOL carryforwards $ 17,295,000 $ 14,527,000 Legal and litigation accruals 361,000 1,465,000 Allowance for doubtful accounts 719,000 549,000 Compensation and vacation accrual 779,000 1,021,000 Accrued Expenses 1,032,000 240,000 Sale and leaseback transactions -- 119,000 Allowance for equipment obsolescence 133,000 333,000 Deferred revenue 280,000 396,000 Research and experimentation credit 247,000 247,000 Depreciation 376,000 -- Charitable contributions 12,000 -- Other -- 73,000 ------------ ------------ Total gross deferred tax assets 21,234,000 18,970,000 Valuation allowance (20,703,000) (17,572,000) ------------ ------------ Net deferred tax assets 531,000 1,398,000 ------------ ------------ Deferred tax liabilities: Capitalized software 457,000 1,263,000 Amortization 55,000 -- Depreciation -- 135,000 Other 19,000 -- ------------ ------------ Total gross deferred liabilities 531,000 1,398,000 ------------ ------------ Net deferred taxes $ -- $ -- ============ ============
The reconciliation of computed expected income taxes to effective income taxes by applying the federal statutory rate is as follows:
1998 1997 1996 ----------- ----------- ----------- Tax at federal income tax rate $ (610,000) $(4,235,000) $(7,804,000) State taxes net of federal benefit (105,000) (142,000) 139,000 Settlement warrants and SFAS 123 charges 84,000 1,109,000 650,000 Nondeductible expenses of IWN 299,000 -- -- Sale of LearnStar (559,000) -- -- Change in valuation allowance 3,131,000 2,768,000 3,077,000 Adjustments of net operating loss carryforwards (2,313,000) 563,000 3,694,000 Other 73,000 (63,000) 244,000 ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== ===========
F-18 52 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 The net change in the total valuation allowance for the years ended December 31, 1998, 1997 and 1996 was an increase of $3,131,000, $2,768,000 and $3,077,000, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical operating results and projections for the taxable income for the future, management has determined that it is more likely than not that the portion of deferred tax assets not utilized through the reversal of deferred tax liabilities will not be realized. Accordingly, the Company has recorded a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. At December 31, 1998, the Company has available net operating loss carryforwards of approximately $48,387,000 for federal income tax purposes, which begin to expire in 2006. The net operating loss carryforwards for state purposes, which began expiring in 1998 are approximately $9,547,000. (10) COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases office and production facilities and equipment under agreements which expire at various dates. Certain leases contain renewal provisions and generally require the Company to pay utilities, insurance, taxes and other operating expenses. Additionally, the Company has entered into lease agreements for certain equipment used in broadcast operations, some of which involve sale and leaseback transactions. Any deferred gains on sale and leaseback transactions are amortized over the three year lease terms. Each lease provides an option to the Company to repurchase the equipment at the estimated fair market value at the end of the lease term. Included in other current assets at December 31, 1998 and in other assets at December 31, 1997 are security deposits totaling $184,000 relating to these agreements. Lease expense under operating leases totaled $1,505,000, 1,299,000 and $5,648,000, in 1998, 1997 and 1996, respectively, net of sublease income of $46,000 in 1998. In November 1997, the Company sold its interest in a LLC that owns the building containing the Company's corporate office. A gain of $905,000 was recognized in 1997. Future minimum lease obligations under noncancelable operating leases, net of expected sublease payments of $148,000 in 1999, $154,000 in 2000 and $79,000 in 2001, at December 31, 1998 are as follows:
YEARS ENDING TOTAL ------------ ---------- 1999 $ 831,000 2000 322,000 2001 15,000 ---------- Total $1,168,000 ==========
CAPITAL LEASES The Company entered into capital leases for the purchase of new equipment. Future minimum lease payments under the capital leases together with the present value of the net minimum lease payments as of December 31, 1998 are as follows: F-19 53 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996
YEAR ENDING TOTAL ----------- --------- 1999 $ 263,000 2000 263,000 2001 134,000 2002 21,000 2003 17,000 --------- Total minimum lease payments 698,000 Less: Amount representing interest ranging from 9.25% to 23.9% (113,000) --------- Present value of net minimum lease payments 585,000 Less current portion (205,000) --------- Long term portion $ 380,000 =========
Property under capital leases follows:
1998 1997 -------- ------- Equipment 724,000 258,000 Accumulated depreciation (159,000) (23,000) -------- -------- $565,000 $235,000 ======== ========
(11) LEGAL ACTIONS The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position taken as a whole. In February 1998, the Company completed its previously announced settlement of a class-action lawsuit pending against the Company since 1993. The terms of the settlement were as follows: A settlement fund was established consisting of $400,000 in cash plus 565,000 warrants to purchase the Common Stock of the Company ("Settlement Warrants"). Each Settlement Warrant has a term of three years from February 18, 1998. The Settlement Warrants were issued on February 18, 1998 and entitle the holder of a Settlement Warrant to purchase a share of Common Stock of the Company at a price of $0.96. During the period from February 18, 2000 to February 18, 2001, the holders of Settlement Warrants have the right, but not the obligation, to put the Settlement Warrants to the Company for repurchase at a price of $3.25 per Settlement Warrant (the "Put Right"), provided, however, that this Put Right shall expire, if at any time after February 18, 1998 the closing price per share of the Company's Common Stock on the American Stock Exchange is more than $4.21 on any seven trading days, whether consecutive or not. Upon expiration of the Put Right, the Company shall have no further obligation to repurchase the Settlement Warrants. In no event shall the Company have any obligation to repurchase its Common Stock. Although the Put Right may expire based on the closing price of the Common Stock over the next two years, the Company has recognized the potential liability related to the Put Right. Accordingly, a charge of $1,291,000 for the present value (discounted at 15%) and related interest expense for the Put Right was recognized in 1996. The difference between the amount expensed and the total potential liability, $545,000, will be accreted as interest expense and charged over the period from September 1996 until February 18, 2000. A total of $154,000 and $225,000 was charged to interest expense related to the Put Right in 1998 and 1997, respectively. F-20 54 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 On April 18, 1995, a class action lawsuit was filed in United States District Court for the Southern District of California 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. As previously reported, the Company has agreed to a settlement having a total value of $1,450,000. The settlement which was approved by the Court in January 1998, 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. A change of $2,800,000 was recorded in 1996 for the estimated settlement. In the fourth quarter of 1997, the Company reduced the accrual for the settlement and accordingly reduced its legal expense by $1,350,000 as a result of the change in estimate related to the settlement. In September 1998, the Company issued a total of 1,200,000 shares of common stock, issued at a fixed price of $1.00 per share, pursuant to the settlement of this class action lawsuit which was approved by the court in January 1998. On June 11, 1997, the Company was included as a defendant in a class-action lawsuit, entitled Eliot Miller and Jay 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, filed in the United States District Court for the Southern District of California. The complaint alleges violations of state and federal securities laws based upon purported omissions from the Company's filings with the Securities and Exchange Commission. More particularly, the complaint alleges that the 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 defendants made false statements about, and failed to disclose, contingent liabilities (guaranteed compensation to management and the right of an investor in IWN to require the Company to repurchase its investment during 1997) and phantom assets (loans to management) in the Company's financial statements and KPMG LLP's audit reports, all of which served allegedly to inflate the trading price of the Company's Common Stock. On November 7, 1997, the court granted KPMG LLP's motion to dismiss the plaintiffs' claims against it pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief may be granted. On July 3, 1997, the Company filed a motion to dismiss the lawsuit. On November 6, 1997, the Court dismissed all of the plaintiff's state law causes of action against the Company but retained the plaintiff's federal law causes of action. In February 1998, the attorneys representing the plaintiffs in this litigation filed an action entitled Dorman vs. NTN Communications, Inc. in the Superior Court of San Diego County, California in which they essentially replead the state law causes of action dismissed in the federal lawsuit. The Company has filed a motion for summary judgment in each action. In March 1999, the Court issued a telephonic ruling granting the Company's motion in the Dorman matter; however, judgment has not yet been entered. In the Company's opinion, the claims in these two lawsuits are covered by directors and officers liability insurance providing $10,000,000 of coverage. The Company has submitted these claims to its directors and officers liability insurance underwriters, who have accepted such claims subject to reservation of rights. The Company's deductible under the insurance policy is $200,000 per claim. The Company has been involved as a plaintiff or defendant in various previously reported lawsuits 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 involving the Company, its unaffiliated Canadian licensee and IN, which were filed in Canada in 1992. No action was taken in the Canadian litigation until May 1998, when IN gave notice of its intention to proceed. In November 1998, the Company and its Canadian licensee filed a counterclaim against IN. 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 are not expected to be material. In November, 1997, a former advertising manager brought a suit against the Company alleging breach of an alleged employment contract and age discrimination. The age discrimination claims were subsequently dismissed. The court rendered judgment in the amount of $167,000 plus interest in favor of the plaintiff. The Company has agreed to pay this judgment over a twelve month period beginning March 5, 1999. In March, 1998, the Company's former independent representative in the State of Georgia filed suit against the Company in Atlanta, Georgia alleging wrongful termination of its distributor agreement and other breaches of such agreement. The Company has filed a motion to amend to bring a counterclaim seeking damages for fraud and conversion against the former sales representative. It is not anticipated at the present time that the outcome of this lawsuit will have a material adverse effect on the financial position of the Company taken as a whole. F-21 55 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued For the years ended December 31, 1998, 1997 and 1996 In March 1998, the Company entered into a Compromise Settlement and Mutual Release Agreement in settlement of a prior arrangement between the Company and a former independent representative under which he and companies affiliated with him acted as independent distributors of the NTN Network. Pursuant to the Settlement Agreement, the Company paid $156,000 in cash and issued 175,000 shares of common stock to the former independent representative. The Company's Playmaker(R) systems which are installed in over 2,900 hospitality locations throughout the United States utilize the MS-DOS operating system software. NTN does not have a license to use MS-DOS for this purpose, and, in September 1998, the Company received correspondence from counsel to Microsoft Corporation and related inquires from the Business Software Alliance and Software Publishers Association, two industry associations, requesting information regarding our use of MS-DOS. In response, NTN conducted an internal audit and produced the results to counsel to the three entities. Based on the audit results, it has been determined that NTN has insufficient licensing for the MS-DOS in use in the hospitality locations. Settlement negotiations are currently underway in an effort to resolve this matter with the software publishing entities. It is possible that NTN will be required to pay Microsoft for its prior use of MS-DOS, and at present the Company cannot predict what effect this may have on its future financial condition or results of operations. The Company believes that its accrual for litigation costs is adequate to cover any potential settlement required to be paid. There can be no assurance that any or all of the foregoing claims will be decided in favor of the Company, which is not insured against all claims made. During the pendency of such claims, the Company will continue to incur the costs of defense of same. Other than set forth above, there is no material litigation pending or threatened against the Company. F-22 56 (12) SEGMENT INFORMATION The Company analyzes segment performance based on revenue. Network Services comprise 78% of the Company's total revenue and is the only reportable segment. The following tables set forth certain information regarding the Company's segments and other operations:
1998 1997 1996 ------------ ------------ ------------ Revenues: Network Services $ 18,785,000 $ 19,009,000 $ 19,269,000 Other 5,409,000 6,852,000 6,442,000 ------------ ------------ ------------ Total Revenues $ 24,194,000 $ 25,861,000 $ 25,711,000 ============ ============ ============ Operating income (loss): Network Services $ 7,093,000 $ 13,680,000 $ 12,291,000 Other 2,317,000 4,573,000 543,000 Corporate (12,857,000) (31,060,000) (38,689,000) ------------ ------------ ------------ Operating Loss $ (3,447,000) $(12,807,000) (25,855,000) ============ ============ ============ Total Assets: Network Services $ 6,963,000 $ 10,510,000 $ 11,897,000 Other 1,403,000 1,971,000 2,152,000 Corporate 8,401,000 7,790,000 14,455,000 ------------ ------------ ------------ Total Assets $ 16,767,000 $ 20,271,000 28,504,000 ============ ============ ============ Capital Expenditures and Software Development Costs: Network Services $ 2,383,000 $ 4,050,000 $ 5,844,000 Other -- -- -- Corporate 629,000 670,000 841,000 ------------ ------------ ------------ Capital Expenditures and Software Development Costs $ 3,012,000 $ 4,720,000 6,685,000 ============ ============ ============ Depreciation and amortization: Network Services 4,815,000 4,730,000 1,614,000 Other 232,000 -- 129,000 Corporate 1,365,000 575,000 522,000 ------------ ------------ ------------ Total depreciation and amortization 6,412,000 5,305,000 2,265,000 ============ ============ ============
F-23 57 Schedule II NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts(a) Years ended December 31, 1998, 1997 and 1996
ADDITIONS BALANCE ALLOWANCE FOR BALANCE AT CHARGED TO AT END DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS(b) OF PERIOD ----------------- ---------- ---------- -------------- ---------- 1996 $ 558,000 1,840,000 835,000 $1,563,000 1997 $1,563,000 1,462,000 1,712,000 $1,313,000 1998 $1,313,000 850,000 443,000(c) $1,720,000
(a) On June 30, 1996, the Company sold all of the assets and business of its New World Computing subsidiary. The disposal of New World has been classified as a discontinued operation in the accompanying consolidated financial statements and the consolidated financial statement schedule above for all prior periods. (b) Reflects trade accounts receivable written off during the year. (c) In June 1998, the Company sold 82.5% of its interest in LearnStar, Inc. The deductions for 1998 include $379,000 related to the allowance for LearnStar, Inc. at the time of the sale. See accompanying independent auditors report. F-24 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: March 29, 1999 NTN COMMUNICATIONS, INC. By: /s/ KENDRA BERGER --------------------------- Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ STANLEY B. KINSEY Chief Executive Officer and March 29, 1999 - - ---------------------------- Chairman of the Board Stanley B. Kinsey /s/ BARRY BERGSMAN Director March 29, 1999 - - ---------------------------- Barry Bergsman /s/ ROBERT M. BENNETT Director March 29, 1999 - - ---------------------------- Robert M. Bennett /s/ DONALD C. KLOSTERMAN Director March 29, 1999 - - ---------------------------- Donald C. Klosterman /s/ ESTHER L. RODRIGUEZ Director March 29, 1999 - - ---------------------------- Esther L. Rodriguez
59 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 10.1 Amended and Restated Certificate of Incorporation of the Company, as amended (13) 10.2 By-laws of the Company (2) 10.5 License Agreement with NTN Canada (4) 10.6 National Football League License Agreement (4) 10.7 Lease of Office with The Campus L.L.C. (7) 10.15* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Patrick J. Downs. (9) 10.16* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Daniel C. Downs. (9) 10.17* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Ronald E. Hogan (9) 10.18* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Gerald P. McLaughlin. (9) 10.19* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Michael J. Downs. (9) 10.20* Resignation and General Release Agreement, dated December 31, 1996 between NTN Communications, Inc. and Robert Klosterman. (9) 10.21* Letter agreement, dated March 4, 1997, between NTN and Alan Magerman.(9) 10.22* Consulting Agreement, dated as of December 31, 1996, between NTN Communications Inc. and Patrick J. Downs. (9) 10.23* Consulting Agreement, dated as of December 31, 1996, between NTN Communications Inc. and Daniel C. Downs. (9) 10.24* Consulting Agreement, dated as of December 31, 1996, between NTN Communications Inc. and Ronald E. Hogan. (9) 10.25* Consulting Agreement, dated as of December 31, 1996, between NTN Communications Inc. and Gerald P. McLaughlin. (9) 10.26* Consulting Agreement, dated as of March 14, 1997, between NTN Communications Inc. and Donald Klosterman. (9) 10.27* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Patrick J Downs. (9) 10.28* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Daniel C. Downs. (9) 10.29* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Ronald E. Hogan. (9) 10.30* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Gerald P. McLaughlin. (9) 10.31* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Michael J. Downs. (9)
60 10.32* General Release, dated as of December 31, 1996, between NTN Communications Inc. and Robert Klosterman. (9) 10.33* Special Stock Option dated August 18, 1996 between NTN Communications, Inc. and Gerald Sokol, Jr.(9) 10.34* Special Stock Option dated August 25, 1996 between NTN Communications, Inc. and Robert Bennett (9) 10.35* Special Stock Option dated August 30, 1996 between NTN Communications, Inc. and Edward C. Frazier (9) 10.36* Amendment to Nonqualified Stock Option Agreement, dated as of April 14, 1997, between NTN Communications, Inc. and Edward C. Frazier. (11) 10.41 Compromise Settlement and Mutual General Release by and between NTN Communications, Inc. and Interactive Entertainment Systems and Barry N. Hurley (13) 10.42 Warrant Agreement, dated as of February 18, 1998 between NTN Communications, Inc. and American Stock Transfer and Trust Company, as warrant agent, including a form of warrant certificate. (13) 10.44* Performance Incentive Stock Option Agreement dated November 4, 1996 by and between NTN Communications, Inc. and Gerald Sokol, Jr. (13) 10.45* Nonqualified Stock Option Agreement dated May 14, 1997 by and between NTN Communications, Inc. and Gerald Sokol, Jr. (13) 10.46 Exclusive Maintenance and Installation Agreement dated March 30, 1998 by and between NTN Communications, Inc. and Datatec Systems, Inc. (13) 10.47* Modification to Resignation Agreement, dated as of March 9, 1998 by and between NTN Communications, Inc. and Daniel C. Downs (13) 10.48* Modification to Resignation Agreement, dated as of March 9, 1998 by and between NTN Communications, Inc. and Patrick J. Downs (13) 10.49* Modification to Resignation Agreement, dated as of March 20, 1998 by and between NTN Communications, Inc. and Ronald E. Hogan (13) 10.50* Employment Agreement, dated July 1, 1998, by and between NTN Communications, Inc. and Gerald Sokol, Jr. 10.51 Sublease Agreement, dated August 20, 1998, between NTN Communications, Inc. and WinResources Computing, Inc. 10.52* Employment Agreement, dated October 7, 1998, by and between NTN Communications, Inc. and Stanley B. Kinsey 10.53* Stock Option Agreement, dated October 7, 1998, by and between NTN Communications, Inc. and Stanley B. Kinsey 10.54* Resignation and Release Agreement, dated February 18, 1999, by and between NTN Communications, Inc. and Gerald Sokol, Jr. 10.55 Exchange Agreement, dated October 5, 1998, by and between NTN Communications, Inc. and the Buyers (as defined) (13) 23.00 Consent of KPMG LLP. (1) 27.00 Financial Data Schedule. (1)
* Management Contract or Compensatory Plan. (1) Filed herewith. (2) Previously filed as an exhibit to the Company's registration statement on Form S-8, File No. 33-75732, and incorporated by reference. (3) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1989, and incorporated by reference. (4) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1990, and incorporated by reference. (5) Previously filed as an exhibit to the Company's report on Form 8-K dated December 31, 1993, and incorporated by reference. (6) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 61 (7) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. (9) Previously filed as an exhibit to the Company's report on Form 8-K dated March 5, 1997 and incorporated by reference. (10) Previously filed as an exhibit to the Company's report on Form 8-K dated June 30, 1996 and incorporated by reference (11) Previously filed as an exhibit to the Company's report on Form 10-K dated December 31, 1996 and incorporated by reference. (12) Previously filed as an exhibit to the Company's report on Form 8-K dated November 7, 1997 and incorporated by reference. (13) Previously filed as an exhibit to the Company's registration statement on Form S-3, File No. 333-69383, and incorporated by reference. (14) Filed herewith. EX-10.50 2 EMNPLOYMENT AGREEMENT GERALD SOKOL 1 EXHIBIT 10.50 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated July 1, 1998 by and between NTN COMMUNICATIONS, INC., a Delaware corporation (the "Company"), and Gerald Sokol, Jr. (the "Executive"). 1. Term of Employment ------------------ Subject to the provisions of Section 10 below, the Company shall employ the Executive, and the Executive shall serve the Company in the capacity of President and Chief Executive Officer for a term of two (2) years commencing as of July 1, 1998 and ending June 30, 2000 (the "Term of Employment"). 2. Duties ------ During the Term of Employment, the Executive will serve the Company faithfully, diligently, and competently and to the best of his ability, will devote full regular working time to his employment with management and executive authority and responsibility for the business, affairs and operations of the Company any subsidiaries thereof, subject to the terms of this Agreement and the direction and control of the Board of Directors. 3. Compensation ------------ During the Term of Employment, the Company shall pay to the Executive as compensation for the performance of his duties and obligations hereunder a salary at the rate of $262,500 per annum during the first year and the term of this Agreement. After the first year, the Executive's salary shall be increased on the anniversary date each year during the Term of Employment in proportion to any upward changes in Consumer Price Index of the U.S. Bureau of Labor Statistics of Urban Wage Earners and Clerical Workers, U.S. City Average (1967=100) during the calendar year immediately preceding each such anniversary date (in the event that such index shall be changed or discontinued, the index published by the United States Government which is most nearly the same as such index shall be used to make the foregoing calculations). In addition, Executive will be paid a bonus for the 1998 fiscal year based upon the "Operating Cash Flow" of the Company for 1998. Operating Cash Flow is defined herein to mean revenue less operating and SG&A expenses, excluding depreciation, amortization, interest expense and any one time or extraordinary charges. Operating Cash Flow shall exclude all business activity (including charges associated with the acquisition or sale) of any entity which is acquired by, or which acquires, the Company. Such bonus shall be paid within 60 days after the determination of Operating Cash Flow. A schedule setting forth the formula for calculating such bonus is attached hereto as Exhibit A. The Compensation Committee of the Board of Directors and the Executive will mutually agree on a bonus program for the period of this Agreement occurring after December 1998. 2 4. Expenses and Other Benefits. ---------------------------- All travel, entertainment and other reasonable business expenses incident to the rendering of services by the Executive hereunder will be promptly paid or reimbursed by the Company subject to submission by the Executive in accordance with the Company's policies in effect from time to time. The Executive shall be entitled during the Term of Employment to participate in employee benefit and welfare plans and programs of the Company including any employee incentive stock option plans, qualified or unqualified, to the extent that any other executives or officers of the Company or its subsidiaries are eligible to participate and subject to the provisions, rules, regulations, and laws applicable thereto. Notwithstanding the foregoing, the Company shall provide the Executive, at a minimum, with the following benefits: (a) Coverage, at no expense to the Executive, of the Executive, his wife, if any, and those of his children who qualify as his dependents under Section 152 of the Internal Revenue code of 1954, under a major medical insurance program with an annual cumulative deductible amount of no more than $500; (b) Coverage of the Executive by life insurance, payable to his designated beneficiary, in the amount of $1,000,000 and, in the event of accidental death or dismemberment, in the amount of $2,000,000. Coverage shall begin the first day of the Term of Employment hereunder and shall continue throughout the Term of Employment; and (c) A paid vacation of four (4) weeks, in addition to any authorized holidays of the Company, during each 12-month period during the Term of Employment. 5. Death or Disability ------------------- This Agreement shall be terminated by the death of the Executive and also may be terminated by the Board of Directors of the Company if the Executive shall be rendered incapable by illness or any physical or mental disability (individually, a "disability") from substantially complying with the terms, conditions and provisions to be observed and performed on his part for a period in excess of six months (whether or not consecutive) during any 12 months during the Term of Employment. If this Agreement is to be terminated by reason of illness, or any physical or mental disability of the Executive, the Company shall give thirty days' written notice to that effect to the Executive in the manner provided herein and the Executive shall be entitled to 75% of the Executive's compensation that was to accrue during the balance of the Term of Employment, including those benefits described in Sections 4(a) and (b) hereof. 6. Disclosure of Information; Inventions and Discoveries ----------------------------------------------------- The Executive shall promptly disclose to the Company all processes, trademarks, inventions, improvements, discoveries and other information (collectively, "developments") directly related to the business of the Company conceived, developed or acquired by him alone or with others during the Term of Employment or during any earlier or later period of employment by the Company, whether or not during regular working hours or through the use 2 3 of material or facilities of the Company. For the purpose of Sections 6, 7 and 8 hereof, the business of the Company includes without limitation the fields of electronically simulated sports games or interactive television applications. All such developments shall be the sole and exclusive property of the Company, and upon request the Executive shall deliver to the Company all drawings, sketches, models and other data and records relating to such development. In the event any such development shall be deemed by the Company to be patentable, the Executive shall, at the expense of the Company, assist the Company in obtaining a patent or patents thereon and execute all documents and do all other things necessary or proper to obtain letters patent and invest the Company with full title thereto. 7. Non-Competition --------------- The Company and the Executive agree that the services rendered by the Executive hereunder are unique and irreplaceable. During his employment by the Company and for a period of one year thereafter, the Executive shall not become an executive officer (other than an officer whose function substantially relates to financial matters) of any business in the fields of electronically simulated sports games or interactive television, which in the judgment of the Company is, or as a result of the Executive's engagement or participation would become, directly competitive with any aspect of the business of the Company. 8. Non-Disclosure -------------- The Executive will not at any time after the date of this Employment Agreement divulge, furnish or make accessible to anyone (otherwise than in the regular course of business of the Company) any knowledge or information with respect to confidential or secret processes, inventions, discoveries, improvements, formulas, plans, material, devices, ideas or other know-how, whether patentable or not, with respect to any confidential or secret engineering, development or research work or with respect to any other confidential or secret aspect of the business of the Company (including, without limitation, customer lists, supplier lists and pricing arrangements with customers or suppliers). 9. Remedies -------- The Company may pursue any appropriate legal, equitable or other remedy, including injunctive relief, in respect of any failure by the Executive to comply with the provisions of Section 6, 7 or 8 hereof, it being acknowledged by the Executive that the remedy at law for any such failure would be inadequate. If the Company shall have failed to cure any material breach by the Company of any material provision of this Agreement within 30 days after notice by the Executive to the Company specifying such breach with particularity, the Executive may, in addition to other remedies, give notice to the Company of acceleration of the entire amount of compensation which was to accrue to the Executive during the balance of the Term of Employment, and such amount shall be immediately due and payable to the Executive. 3 4 10. Termination ----------- Executive's employment with the Company may be terminated by the Board of Directors of the Company (i) upon three (3) days' notice to the Executive in the event of the Executive's personal dishonesty, willful misconduct or breach of fiduciary duty or (ii) upon thirty (30) days' notice to the Executive if the Executive shall be in material breach of any material provision of this Employment Agreement other than as provided in clause (i) above and shall have failed to cure such breach during such thirty day period. Any such notice to the Executive shall specify with particularity the reason for termination or proposed termination. In the event of termination under this Section 10 or under Section 5 (except as provided therein), the Company's unaccrued obligations under this Agreement shall cease and the Executive Shall forfeit all right to receive any unaccrued compensation or benefits hereunder but shall have the right to reimbursement of expenses already incurred. Notwithstanding any termination of the Agreement pursuant to this Section 10 or by reason of disability under Section 5, the Executive, in consideration of his employment hereunder to the date of such termination, shall remain bound by the provisions of Section 6, 7 and 8 (unless this Agreement is terminated on account of the breach hereof by the Company) of this Agreement except that if this Agreement is terminated following a Change in Control Event (as defined below) then Executive shall remain bound only by the provisions of Sections 6 and 8. Termination without cause or any attempt by the Board of Directors of the Company to reassume any of the responsibilities or duties from the Executive or to change the duties of the Executive without cause shall be deemed a breach of this Agreement by the Company without cause and shall immediately entitle the Executive, as liquidated damages therefore, to the entire remaining balance due him as compensation pursuant to this Agreement. Executive's employment with the Company may be terminated at any time by Executive upon sixty (60) days' notice to the Company (which period shall not be shortened by the Board of Directors). In the event Executive performs his duties hereunder in good faith during such sixty (60) day period, Executive shall be entitled to receive twelve (12) months salary but, if Executive's employment is terminated prior to the end of the Company's fiscal year, Executive shall not be entitled to receive a pro rata portion of the bonus to which Executive would otherwise have been entitled had he remained employed by the Company. Notwithstanding anything to the contrary contained herein, Executive or the Company shall have the option to terminate this Agreement at any time following a "Change in Control Event." In the event of such termination by Executive following a Change in Control Event, Executive shall be entitled to receive [one] year's salary as provided in Section 3 together with a pro rata portion of the bonus to which Executive would have been entitled. In the event of such termination by the Company following a Change in Control Event Executive shall be entitled to receive the greater of (i) one year's salary together with a pro rata portion of the bonus to which Executive would have been entitled; or (ii) the entire remaining balance due Executive as compensation pursuant to this Agreement. A "Change in Control Event" shall mean: (a) The acquisition by any individual entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of beneficial ownership of 50% or more of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding 4 5 Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control Event: (A) any acquisition by the Company or (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company. (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual who becomes a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation (a "transaction"), unless, following such transaction in each case, more than 50% of, respectively, the then outstanding shares of common stock of the Company resulting from such transaction and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entitles who were the beneficial owners, respectively, of the outstanding Common stock and Outstanding Voting Securities immediately prior to such transaction; or (d) Approval by the shareholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company unless such assets are sold to a corporation and following such sale or other disposition, the condition described in paragraph (c) above is satisfied. 11. Resignation ----------- In the event that the Executive's services hereunder are terminated under Section 5 or 10 of this Agreement (except by death), the Executive agrees that he will deliver his written resignation as an officer of the Company and/or Director of the Company to the Board of Directors, such resignation to become effective immediately. 12. Data ---- Upon expiration of the Term of Employment or termination pursuant to Section 5 or 10 hereof, the Executive or his personal representative shall promptly deliver to the Company all books, memoranda, plans, records and written data of every kind relating to the business and affairs of the Company which are then in his possession on account of his employment hereunder, but excluding all such materials in the Executive's possession on account of his past or current status as a director or shareholder of the Company. 5 6 13. Arbitration ----------- Any dispute or controversy arising under this Agreement or relating to its interpretation or the breach hereof, including the arbitrability of any such dispute or controversy, shall be determined and settled by arbitration in San Diego, California pursuant to the Rules then obtaining of the American Arbitration Association. Any award rendered herein shall be final and binding on each and all of the parties, and judgment may be entered thereon in any court of competent jurisdiction. 14. Insurance --------- The Company shall have the right at its own cost and expense to apply for and to secure in its own name, or otherwise, life, health or accident insurance or any or all of them covering the Executive, and the Executive agrees to submit to any usual and customary medical examination and otherwise to cooperate with the Company in connection with the procurement of any such insurance, and any claims thereunder. 15. Waiver of Breach ---------------- Any waiver of any breach of this Employment Agreement shall not be construed to be a continuing waiver or consent to any subsequent breach on the part either of the Executive or of the Company. 16. Assignment ---------- Neither party hereto may assign his or its rights or delegate his or its duties under this Employment Agreement without the prior written consent of the other party; provided, however, that this Agreement shall inure to the benefit of and be binding upon the successors and assignees of the Company, all as though such successors and assignees of the Company and their respective successors and assignees were of the Company, upon (a) a sale of all or substantially all of the Company's assets, or upon merger or consolidation of the Company with or into any other corporation, and (b) upon delivery on the effective day of such sale, merger or consolidation to the Executive of a binding instrument of assumption by such successors and assigns of the rights and liabilities of the Company under this Agreement. 17. Notices ------- Any notice required or desired to be given hereunder shall be in writing and shall be deemed sufficiently given when delivered or 3 days after mailing in United States certified or registered mail, postage prepaid, to the party for whom intended at the following address: The Company: NTN COMMUNICATIONS, INC. 5966 La Place Court Suite 100 Carlsbad, CA 92008 6 7 The Executive: Gerald Sokol, Jr. 2220 Sara Way Carlsbad, CA 92008 or to such other address as either party may from time to time designate by like notice to the other. 18. General ------- The terms and provisions of this Agreement shall constitute the entire agreement by the Company and the Executive with respect to the subject matter hereof, and shall supersede any and all prior agreements or understandings between the Executives and the Company, whether written or oral. This Agreement may be amended or modified only by a written instrument executed by the Executive and the Company, and any such amendment or modification or any termination of this Agreement shall become effective only after written approval thereof has been received by the Executive. This Agreement shall be governed by and construed in accordance with California law. In the event that any terms or provisions of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect the validity or enforceability of the remaining terms and provisions hereof. In the event of any judicial, arbitral or other proceeding between the parties hereto with respect to the subject matter hereof, the prevailing party shall be entitled, in addition to all other relief, to reasonable attorneys' fees and expenses and court costs. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. NTN COMMUNICATIONS, INC. By: /s/ F. Kevin Loughran ----------------------- Vice President AGREED TO AND ACCEPTED: By: /s/ Gerald Sokol, Jr. -------------------------- Gerald Sokol, Jr. 7 EX-10.51 3 SUBLEASE AGREEMENT 1 [LOGO] [RICHARD ELLIS LETTERHEAD] 1. PARTIES. This Sublease, dated August 20, 1998, is made between NTN COMMUNICATIONS, Inc., a Delaware Corporation ("Sublessor"), and WIRESOURCES COMPUTING, INC., a California Corporation ("Sublessee"). 2. MASTER LEASE. Sublessor is the lessee under a written lease dated November 23, 1994. Liability Co. wherein PPAP, Successor In Interest to The Campus, L.L.C., a California Limited/("Lessor") leased to Sublessor the real property located in the City of Carlsbad, County of San Diego, State of California describes as approximately 39,397 square feet of space in the building at 5966 La Place Court, Carlsbad, California ("Master Premises"), Said lease has been amended by the following amendments None known, said lease and amendments are herein collectively referred to as the "Master Lease" and are attached hereto as Exhibit "A". 3. PREMISES. Sublessor hereby subleases to Sublessee on the terms and conditions set forth in this Sublease the following portion of the Master Premises ("Premises"). Approximately 11,631 rentable square feet located on the second floor of 5966 La Place Court, Suite 200, Carlsbad, California, 92008 - Exhibit "A". 4. WARRANTY BY SUBLESSOR. Sublessor warrants and represents to Sublessee that the Master Lease attached as Exhibit "B" has not been amended or modified except as expressly set forth herein, that Sublessor is not now, and as of the commencement of the Term hereof will not be, in default or breach of any of the provisions of the Master Lease, and that Sublessor has no knowledge of any claim by Lessor that sublessor is in default or breach of any of the provisions of the Master Lease. 5. TERM. The Term of this Sublease shall commence on September 1, 1998 ("Commencement Date"), or when Lessor consents to this Sublease (if such consent is required under the Master Lease), whichever shall last occur, and end on June 30, 2001, (RWK) ("Termination Date"), unless otherwise sooner terminated in accordance with the provisions of this Sublease. In the event the Term commences on a date other than the Commencement Date, Sublessor and Sublessee shall execute a memorandum setting forth the actual date of commencement of the Term. Possession of the Premises ("Possession") shall be delivered to Sublessee on the commencement of the Term. If for any reason Sublessor does not deliver Possession to Sublessee on the commencement of the Term, Sublessor shall not be subject to any liability for such failure, the Termination Date shall not be extended by the delay, and the validity of this Sublease shall not be impaired, but rent shall abate until delivery of Possession. Notwithstanding the foregoing, if Sublessor has not delivered Possession to Sublessee within thirty (30) days after the Commencement Date, then at any time thereafter and before delivery of Possession, Sublessee may give written notice to Sublessor of Sublessee's intention to cancel this Sublease. Said notice shall set forth an effective date for such cancellation which shall be at least ten (10) days after delivery of said notice to Sublessor. If Sublessor delivers Possession to Sublessee on or before such effective date, this Sublease shall remain in full force and effect. If Sublessor fails to deliver Possession to Sublessee on or before such effective date, this Sublease shall be cancelled, in which case all consideration previously paid by Sublessee to Sublessor on account of this Sublease shall be returned to Sublessee, this Sublease shall thereafter be of no further force or effect, and Sublessor shall have no further liability to Sublessee on account of such delay or cancellation. If Sublessor permits Sublessee to take Possession prior to the commencement of the Term, such early Possession shall not advance the Termination Date and shall be subject to the provisions of this Sublease, including without limitation the payment of rent. 6. RENT 6.1 Minimum Rent. Sublease shall pay to Sublessor as minimum rent, without deduction, setoff, notice, or demand, at 5966 La Place Court, Suite 100, Carlsbad, CA 92008 or at such other place as Sublessor shall designate from time to time by notice to Sublessee, the sum of Twelve Thousand Two Hundred Seventeen and 20/100 -- Dollars ($12,217.20) per month, in advance on the first day of each month of the Term. Sublessee shall pay to Sublessor upon execution of this Sublease the sum of Twelve Thousand Two Hundred Seventeen and 20/100 --- Dollars ($12,217.20) as rent for December 1998. If the Term begins or ends on a day other than the first or last day of a month, the rent for the partial months shall be prorated on a per diem basis. Additional provisions: Base rent shall be abated by Sublessor for September, October and November 1998. 6.2 Operating Costs. If the Master Lease requires Sublessor to pay to Lessor all or a portion of the expenses of operating the building and/or project of which the Premises are a part ("Operating Costs"), including but not limited to taxes, utilities, or insurance, then Sublessee shall pay to Sublessor as additional rent Eighteen and 45/100 percent (18.45%) of the amounts payable by Sublessor for Operating Costs incurred during the Term. Such 2 additional rent shall be payable and when Operating Costs are payable from Sublessor to Lessor. If the Master Lease provides for the payment by Sublessor of Operating Costs on the basis of an estimate thereof, then as and when adjustments between estimated and actual Operating Costs are made under the Master Lease, the obligations of Sublessor and Sublessee hereunder shall be adjusted in a like manner, and if any such adjustment shall occur after the expiration or earlier termination of the Term, then the obligations of Sublessor and Sublessee under this Subsection 6.2 shall survive such expiration or termination. Sublessor shall, upon request by Sublessee, furnish Sublessee with copies of all statements submitted by Lessor of actual or estimated Operating Costs during the Term. 7. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution of this Sublease the sum of Twelve Thousand Two Hundred Seventeen and 20/100 Dollars ($12,217.20) as security for Sublessee's faithful performance of Sublessee's obligations hereunder ("Security Deposit"). If Sublessee fails to pay rent or other charges when due under this Sublease, or fails to perform any of its other obligations hereunder, Sublessor may use or apply all or any portion of the Security Deposit for the payment of any rent or other amount then due hereunder and unpaid, for the payment of any other sum for which Sublessor may become obligated by reason of Sublessee's default or breach, or for any loss or damage sustained by Sublessor as a result of Sublessee's default or breach. If Sublessor so uses any portion of the Security Deposit, Sublessee shall, within ten (10) days after written by Sublessor, restore the Security Deposit to the full amount originally deposited, and Sublessee's failure to do so shall constitute a default under this Sublease. Sublessor shall not be required to keep the Security Deposit separate from its general accounts, and shall have no obligation or liability for payment of interest on the Security Deposit. In the event Sublessor assigns its interest in this Sublease, Sublessor shall deliver to its assignee so much of the Security Deposit as is then held by Sublessor. Within ten (10) days after the Term has expired, or Sublessee has vacated the Premises, or any final adjustment pursuant to Subsection 6.2 hereof has been made, whichever shall last occur, and provided Sublessee is not then in default of any of its obligations hereunder, the Security Deposit, or so much thereof as had not theretofore been applied by Sublessor, shall be returned to Sublessee or to the last assignee, if any, of Sublessee's interest hereunder. 8. USE OF PREMISES. The Premises shall be used and occupied only for general office only, and for no other use or purpose. 9. ASSIGNMENT AND SUBLETTING. Sublessee shall not assign this Sublease or further sublet all or any part of the Premises without the prior written consent of Sublessor (and the consent of Lessor, if such is required under the terms of the Master Lease). 10. OTHER PROVISIONS OF SUBLEASE. All applicable terms and conditions of the Master Lease are incorporated into and made a part of this Sublease as if Sublessor were the lessor thereunder, Sublessee the lessee thereunder, and the Premises the Master Premises, except for the following: SEE ATTACHED ADDENDUM. --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- Sublessee assumes and agrees to perform the lessee's obligations under the Master Lease during the Term to the extent that such obligations are applicable to the Premises, except that the obligation to pay rent to Lessor under the Master Lease shall be considered performed by Sublessee to the extent and in the amount rent is paid to Sublessor in accordance with Section 6 of this Sublease. Sublessee shall not commit or suffer any act or omission that will violate any of the provisions of the Master Lease. Sublessor shall exercise due diligence in attempting to cause Lessor to perform its obligations under the Master Lease for the benefit of Sublessee. If the Master Lease terminates, this Sublease shall terminate and the parties shall be relieved of any further liability or obligation under this Sublease, provided however, that if the Master Lease terminates as a result of a default or breach by Sublessor or Sublessee under this Sublease and/or the Master Lease, then the defaulting party shall be liable to the nondefaulting party for the damage suffered as a result of such termination. Notwithstanding the foregoing, if the Master Lease gives Sublessor any right to terminate the Master Lease in the event of the partial or total damage, destruction, or condemnation of the Master Premises or the building or project of which the Master Premises are a part, the exercise of such right by Sublessor shall not constitute a default or breach hereunder. 11. ATTORNEY'S FEES. If Sublessor, Sublessee, or Broker shall commence an action against the other ____ out of or in connection with this Sublease, the prevailing party shall be entitled to recover its costs of suit and reasonable attorney's fees. 12. AGENCY DISCLOSURE: Sublessor and Sublessee each warrant that they have dealt with no other real estate broker in connection with this transaction except: CB Richard Ellis, Inc. who represents SUBLESSOR and COLLIERS INTERNATIONAL, who represents SUBLESSEE. In the event that CB Richard Ellis, Inc. represents both Sublessor and Sublessee, Sublessor and Sublessee hereby confirm that they were timely advised of the dual representation and that they consent to the same, and that they do not expect said broker to disclose to either of them the confidential information of the other party. 13. COMMISSION. Upon execution of this Sublease, and consent thereto by Lessor (if such consent is required under the terms of the Master Lease), Sublessor shall pay Broker a real estate brokerage commission in accordance with Sublessor's contract with Broker for the subleasing of the Premises, if any, and otherwise in the amount of Twenty three thousand six hundred and thirty nine 82/100 Dollars ($23,639.82), for services rendered in effecting this Sublease. Broker is hereby made a third party beneficiary of this Sublease for the purpose of enforcing its right to said commission. 14. NOTICES. All notices and demands which may or are to be required or permitted to be given by either party on the other hereunder shall be in writing. All notices and demands by the Sublessor to Sublessee shall be sent by United States Mail, postage prepaid, addressed to the Sublessee at the Premises, and to the address hereinbelow, or to such other place as Sublessee may from 3 time to time designate in a notice to Sublessor. All notices and demands by the Sublessees to Sublessor shall be sent by United States Mail, postage prepaid, addressed to the Sublessor at the address set forth herein, and to such other person or place as the Sublessor may from time to time designate in notice to the Sublessee. To Sublessor: 5966 La Place Court, Suite 100, Carlsbad, CA 92008 To Sublessee: 5966 La Place Court, Suite 200, Carlsbad, California 92008 15. CONSENT BY LESSOR. THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY LESSOR WITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH CONSENT IS REQUIRED UNDER THE TERMS OF THE MASTER LEASE. 16. COMPLIANCE. The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property or the subject matter of this Agreement, including, but not limited to, the 1984 Civil Rights Act and all amendments thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive Environmental Response Compensation and Liability Act, and The Americans With Disabilities Act. Sublesser: NTN COMMUNICATIONS, INC. Sublessee: WINRESOURCES COMPUTING, INC. --------------------------------- ----------------------------------- By: /s/ F. KEVIN LOUGHRAN By: /s/ ROBERT W. KARGE ---------------------------------------- ------------------------------------------ F. Kevin Loughran Title: Vice President and General Counsel Title: President ------------------------------------- --------------------------------------- By: By: ---------------------------------------- ------------------------------------------ Title: Title: ------------------------------------- --------------------------------------- Date: Date: 8/24/98 -------------------------------------- ----------------------------------------
LESSOR'S CONSENT TO SUBLEASE Undersigned ("Lessor"), lessor under the Master Lease, hereby consents to the foregoing Sublease without waiver of any ??? in the Master Lease concerning further assignment or subletting. Lessor certifies that, as of the date of Lessor's ???? hereof. Sublessor is not in default or breach of any of the provisions of the Master Lease, and that the Master Lease have not been amended or modified except as expressly set forth in the foregoing Sublease. - - ------------------------------------------ - - ------------------------------------------ - - ------------------------------------------ - - ------------------------------------------ - - ------------------------------------------ - - ------------------------------------------ CONSULT YOUR ADVISORS - This document has been prepared for approval by your attorney. No representation or recommendation is made by Broker as to the legal sufficiency or tax consequences of this document or the transaction to which it relates. These are questions for your attorney. Any real estate transaction, it is recommended that you consult with a professional, such as a civil engineer, industrial ????? or other person, with experience in evaluating the condition of the property, including the possible presence of ???, hazardous materials and underground storage tanks. 4 ADDENDUM NO. 1 TO SUBLEASE DATED AUGUST 11, 1998, BY AND BETWEEN NTN COMMUNICATIONS, INC. ("SUBLESSOR") AND WINRESOURCES COMPUTING, INC., ("SUBLESSEE"). - - ------------------------------------------------------------------------------- 1. Provided that the sublease documents are executed by all parties on or before August 21, 1998, Sublessor shall vacate the entire second floor by September 1, 1998, consisting of 11,631 rentable square feet as referenced in Paragraph 3, "Premises" of the Sublease. 2. Sublessor shall deliver possession of the premises on or before September 1, 1998, provided that the Sublease has been executed and approved by the Master Lessor on or before August 21, 1998. Landlord shall abate the Base Rent and Additional Rent due from the time possession of the premises is delivered to the Sublessee through November 30, 1998. Any abated rent shall become immediately due and payable should Sublessee continue to monetarily and materially default under the terms of the Sublease for thirty (30) days or more. In the event the premises are not made available by Sublessor, rental abatement shall be adjusted to remain at a full three (3) months. 3. RENT. The Base Rent schedule shall be as follows:
MONTHS BASE RENT ------ --------- October 1, 1998 through November 30, 1998 Rent abated by Landlord December 1, 1998 through September 30, 1999 $12,217.00 per month October 1, 1999 through September 30, 2000 $12,726.00 per month October 1, 2000 through June 30, 2001 $13,235.00 per month
The Base Rent shall be paid as per the terms of the sublease plus the allocation of Additional Rent per Article 1.1 of the Master Lease on a proportionate share basis. Sublessee shall be responsible for a proportionate share of the following costs as noted in the Master Lease: Property taxes (5.2) insurance charges (5.3), common area maintenance charges (5.4). All such proportional charges shall be made payable to Sublessor in monthly installments on the first day of the month. Sublessee shall also be responsible for its own separately metered utilities and janitorial service. 7. Tenant Improvements. Sublessor shall deliver the space in "AS IS" condition with the following exceptions: (a) Ground level common corridor area shall be demised per a plan to be mutually agreed upon by Sublessor and Sublessee and Master Lessor, per attached Exhibit A; (b) Sublessor shall deliver the heating, ventilating and air-conditioning, plumbing and electrical systems in good working order. 8. PARKING. Sublessee shall be entitled to a prorate portion of the unreserved parking stalls allotted for the premises free of charge for the term of the Sublease, not to exceed a ratio of 4 cars per 1,000 usable square feet. 9. SIGNAGE. Sublessee may install, at its sole cost and expense and subject to the express written consent of Sublessor, signage visible from the elevator lobby on the first floor. In addition, Sublessor shall provide, at Sublessee's sole cost and expense, signage that is mutually acceptable within the second floor elevator lobby indicating the location of the Premises. All of the foregoing signage (whether installed by Sublessor or Sublessee) shall also be subject to the express written consent of Master Lessor, as provided in the Master Lease. 10. ASSIGNMENT AND SUBLETTING. Per the terms of the Master Lease. 11. ATTORNEY'S FEE. In respect to the attached sublease, there shall be no cost to Sublessee for Master Lessor's legal (or other) expenses to review this lease in connection with obtaining the consent of Master Lessor, nor shall Sublessee be liable for legal costs incurred for matters between Master Lessor and Sublessor that are not related to Sublessor and this sublease. The foregoing shall not be construed as a limitation on any of Master Lessor's rights and remedies against Sublessor related to legal costs incurred for matters between Master Lessor and Sublessor, including without limitation, termination of the Master Lease, or as limitation on the effect that such a termination would have on this sublease. 12. INSURANCE. Sublessee shall maintain policies of insurance not less than $1,000,000.00 as required by Section 12 of the Master Lease. Each such policy shall name Sublessor as an additional insured. Sublessee shall provide to Sublessor, prior to September 1, 1998, certificates evidencing such coverage and providing that no modification 5 ADDENDUM NO. 1 TO SUBLEASE DATED AUGUST 11, 199 , BY AND BETWEEN NTN COMMUNICATIONS, INC. ("SUBLESSOR") AND WINRESOURCES COMPUTING, INC., ("SUBLESSEE"). ================================================================================ or cancellation of such coverage shall be effective unless Sublessor has received no less than thirty (30) days notice of such modification or cancellation. 13. ASSIGNMENT OF SUBLEASE AND DEFAULT. a) If Sublessee pays directly to Master Lessor, per Section 13 of this sublease. Sublessor shall credit Sublessee for any payments made, and Sublessor shall remain liable to Sublessee for any and all "Additional Rent" or other charges Sublessee is required to pay on behalf of Sublessor. b) Neither this sublease, not Sublessor's vacation of the Premises governed by this sublease in order to deliver possession thereof to Sublessee, shall constitute an "abandonment" of such premises in the sense of the Master Lease. c) Should Sublessor file for bankruptcy protection and should Master Lessor, thereof, declare a default under the Master Lease and terminate the Master Lease on account thereof, then Master Lessor shall require Sublessee to attorn to Master Lessor, which Sublessee shall promptly do, and Master Lessor shall undertake the obligations of Sublessor under this sublease as more particularly described in this sublease. In order that such bankruptcy by Sublessor shall not affect Sublessee's quiet enjoyment of this sublease. In addition, any security deposits held by Sublessor on behalf of Sublessee, shall be transferred immediately to Master Lessor. 14. DEFAULT In the event of any default by Sublessor of monetary payments to Master Lessor, Sublessor shall be required to notify Sublessee of any non-payment or actions on behalf of Landlord. SUBLESSOR: NTN COMMUNICATIONS, INC. SUBLESSEE: WINRESOURCES COMPUTING By: /s/ F. KEVIN LOUGHRAN By: /s/ ROBERT W. KARP ---------------------------------------- -------------------------------- F. Kevin Loughran Robert W. Karp Title: Vice President and General Counsel Title: President ------------------------------------- ----------------------------- LESSOR: PRENTISS PROPERTIES, INC. By: ---------------------------------------- Title: ------------------------------------- EX-10.52 4 EMPLOYMENT AGREEMENT STANLEY KINSEY 1 EXHIBIT 10.52 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated October 7, 1998 by and between NTN COMMUNICATIONS, INC., a Delaware corporation (the "Company"), and Stanley B. Kinsey (the "Executive"). 1. Term of Employment ------------------ Subject to the provisions of Section 10 below, the Company shall employ the Executive, and the Executive shall serve the Company in the capacity of Chief Executive Officer for a term of three (3) years commencing as of October 7, 1998 and ending October 6, 2001 (the "Term of Employment"). Such term shall be automatically extended for an additional one year unless either party provides the other party with notice of intent not to renew by June 30 of the year of expiration of the Term of Employment. 2. Duties ------ During the Term of Employment, the Executive will serve as the Company's Chief Executive Officer and will report directly to the Board of Directors. Executive will serve the Company faithfully, diligently, and competently and to the best of his ability. During the Term of Executive's employment under this Agreement, the Company will use its best efforts to cause the Executive to be a member of the Company's Board of Directors. 3. Compensation ------------ During the Term of Employment, the Company shall pay to the Executive as compensation for the performance of his duties and obligations hereunder a salary at the rate of $285,000 per annum during each year of the term of this Agreement. Such salary shall be paid bi-weekly. After the first year, the Executive's salary shall be increased on the anniversary date each year during the Term of Employment in proportion to any upward changes in the Consumer Price Index of the U.S. Bureau of Labor Statistics of Urban Wage Earners and Clerical Workers, U.S. City Average (1967=100) during the calendar year immediately preceding each such anniversary date (in the event that such index shall be changed or discontinued, the index published by the United States Government which is most nearly the same as such index shall be used to make the foregoing calculations). In addition, on or before January 15, 1999, the Executive and the Compensation Committee of the Board of Directors of the Company shall agree upon a bonus program for the Executive. 4. Expenses and Other Benefits. ---------------------------- All travel, entertainment and other reasonable business expenses incident to the rendering of services by the Executive hereunder will be promptly paid or reimbursed by the Company 2 subject to submission by the Executive in accordance with the Company's policies in effect from time to time. The Executive shall be entitled during the Term of Employment to participate in employee benefit and welfare plans and programs of the Company including any employee incentive stock option plans, qualified or unqualified, to the extent that any other executives or officers of the Company or its subsidiaries are eligible to participate and subject to the provisions, rules, regulations, and laws applicable thereto. Notwithstanding the foregoing, the Company shall provide the Executive, at a minimum, with the following benefits: (a) Coverage, at no expense to the Executive, of the Executive, his wife, if any, and those of his children who qualify as his dependents under Section 152 of the Internal Revenue code of 1954, under a major medical insurance program with an annual cumulative deductible amount of no more than $500; (b) Coverage of the Executive by term life insurance, payable to his designated beneficiary, in the amount of $1,000,000, and, in the event of accidental death or dismemberment, in the amount of $2,000,000. The premium relating to such coverage shall not exceed $4,000 per year. Coverage shall begin the first day of the Term of Employment hereunder and shall continue throughout the Term of Employment; and (c) A paid vacation of five (5) weeks, in addition to any authorized holidays of the Company, during each 12-month period during the Term of Employment. The Company will grant the Executive options to purchase 1,300,000 shares of the Company's Common Stock. The exercise price of options to purchase 650,000 shares shall be $.625 per share and the exercise price of options to purchase 650,000 shares shall be $1.00 per share. The form of such options is attached hereto as Exhibit A. In addition, on October 7, 1999 the Company will grant the Executive an option to purchase 500,000 shares of the Company's Common Stock at the closing price as of such date. Such option will be substantially in the form attached hereto as Exhibit A. The Company will not be obligated to grant such 500,000 share option to the extent a Change of Control Event has occurred by such date. Notwithstanding anything to the contrary contained in the options, all of the Executive's options will immediately vest upon a "Change of Control Event," as defined in Section 10 hereof. 5. Death or Disability ------------------- This Agreement shall be terminated by the death of the Executive and also may be terminated by the Board of Directors of the Company if the Executive shall be rendered incapable by illness or any physical or mental disability (individually, a "disability") from substantially complying with the terms, conditions and provisions to be observed and performed on his part for a period in excess of six months (whether or not consecutive) during any 12 months during the Term of Employment. If this Agreement is to be terminated by reason of illness, or any physical or mental disability of the Executive, the Company shall give thirty days' written notice to that effect to the Executive in the manner provided herein and the Executive shall be entitled to 75% of the Executive's compensation that was to accrue during the balance of the Term of Employment, including those benefits described in Sections 4(a) and (b) hereof. 2 3 6. Disclosure of Information; Inventions and Discoveries ----------------------------------------------------- Except as provided in the California Labor Code, the Executive shall promptly disclose to the Company all processes, trademarks, inventions, improvements, discoveries and other information (collectively, "developments") directly related to the business of the Company conceived, developed or acquired by him alone or with others during the Term of Employment by the Company, whether or not during regular working hours or through the use of material or facilities of the Company. For the purpose of Sections 6, 7 and 8 hereof, the business of the Company includes without limitation the fields of electronically simulated sports games or interactive television applications. All such developments shall be the sole and exclusive property of the Company, and upon request the Executive shall deliver to the Company all drawings, sketches, models and other data and records relating to such development. In the event any such development shall be deemed by the Company to be patentable, the Executive shall, at the expense of the Company, assist the Company in obtaining a patent or patents thereon and execute all documents and do all other things necessary or proper to obtain letters patent and invest the Company with full title thereto. 7. Non-Competition --------------- The Company and the Executive agree that the services rendered by the Executive hereunder are unique and irreplaceable. During his employment by the Company and to the extent permitted by law, for a period of one year thereafter, the Executive shall not become an executive officer (other than an officer whose function substantially relates to financial matters) of any business in the fields of electronically simulated sports games or interactive television, which in the judgment of the Company is, or as a result of the Executive's engagement or participation would become, directly competitive with any aspect of the business of the Company. 8. Non-Disclosure -------------- The Executive will not at any time after the date of this Employment Agreement divulge, furnish or make accessible to anyone (otherwise than in the regular course of business of the Company) any knowledge or information with respect to confidential or secret processes, inventions, discoveries, improvements, formulas, plans, material, devices, ideas or other know-how, whether patentable or not, with respect to any confidential or secret engineering, development or research work or with respect to any other confidential or secret aspect of the business of the Company (including, without limitation, customer lists, supplier lists and pricing arrangements with customers or suppliers), except to the extent such disclosure is (a) in the performance of his duties under this Agreement, (b) required by applicable law, (c) lawfully obtainable from other sources, (d) authorized in writing by the Company, or (e) when required to do so by legal process, that requires him to divulge, disclose or make accessible such information. 9. Remedies -------- The Company may pursue any appropriate legal, equitable or other remedy, including injunctive relief, in respect of any failure by the Executive to comply with the provisions of 3 4 Section 6, 7 or 8 hereof, it being acknowledged by the Executive that the remedy at law for any such failure would be inadequate. If the Company shall have failed to cure any material breach by the Company of any material provision of this Agreement within 30 days after notice by the Executive to the Company specifying such breach with particularity, the Executive may, in addition to other remedies, give notice to the Company of acceleration of the entire amount of compensation which was to accrue to the Executive during the balance of the Term of Employment, and such amount shall be immediately due and payable to the Executive. 10. Termination ----------- The Executive's employment with the Company may be terminated by the Board of Directors of the Company (i) upon three (3) days' notice to the Executive in the event of the Executive's personal dishonesty, willful misconduct or breach of fiduciary duty or (ii) upon thirty (30) days' notice to the Executive if the Executive shall be in material breach of any material provision of this Employment Agreement other than as provided in clause (i) above and shall have failed to cure such breach during such thirty day period. Any such notice to the Executive shall specify with particularity the reason for termination or proposed termination. In the event of termination under this Section 10 or under Section 5 (except as provided therein), the Company's unaccrued obligations under this Agreement shall cease and the Executive Shall forfeit all right to receive any unaccrued compensation or benefits hereunder but shall have the right to reimbursement of expenses already incurred. Notwithstanding any termination of the Agreement pursuant to this Section 10 or by reason of disability under Section 5, the Executive, in consideration of his employment hereunder to the date of such termination, shall remain bound by the provisions of Section 6, 7 and 8 (unless this Agreement is terminated on account of the breach hereof by the Company) of this Agreement except that if this Agreement is terminated following a Change in Control Event (as defined below) then the Executive shall remain bound only by the provisions of Sections 6 and 8. Termination without cause or any attempt by the Board of Directors of the Company to reassume any of the responsibilities or duties from the Executive or to change the duties of the Executive without cause shall be deemed a breach of this Agreement by the Company without cause and shall immediately entitle the Executive, as liquidated damages therefore, to the entire remaining balance due him as compensation pursuant to this Agreement. Subject to the provisions set forth in the immediately following paragraph, notwithstanding anything contained herein to the contrary, if the Company terminates the Executive's employment other than for cause, the Executive shall only be entitled to receive the lesser of (i) one year's salary or (ii) the remaining salary due the Executive pursuant to the Term of Employment. Notwithstanding anything to the contrary contained herein, the Executive or the Company shall have the option to terminate this Agreement at any time following a "Change in Control Event." In the event of such termination either by the Company or by the Executive following a Change in Control Event, the Executive shall be entitled to receive one year's salary, a pro rata portion of the bonus earned by the Executive to the date of termination of employment and continuation of employee benefits for one year. A "Change in Control Event" shall mean: 4 5 (a) The acquisition by any individual entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of beneficial ownership of 50% or more of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities") or any approval of such acquisition by the Board of Directors of the Company, provided that such acquisition is accomplished within six months of such approval; provided, however, that the following acquisitions shall not constitute a Change in Control Event: (A) any acquisition by the Company or (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company. (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual who becomes a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation (a "transaction"), unless, following such transaction in each case, more than 50% of, respectively, the then outstanding shares of common stock of the Company resulting from such transaction and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entitles who were the beneficial owners, respectively, of the outstanding Common stock and Outstanding Voting Securities immediately prior to such transaction; or (d) Approval by the shareholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company unless such assets are sold to a corporation and following such sale or other disposition, the condition described in paragraph (c) above is satisfied. 11. Resignation ----------- In the event that the Executive's services hereunder are terminated under Section 5 or 10 of this Agreement (except by death), the Executive agrees that he will deliver his written resignation as a Director of the Company to the Board of Directors, such resignation to become effective immediately. 5 6 12. Data ---- Upon expiration of the Term of Employment or termination pursuant to Section 5 or 10 hereof, the Executive or his personal representative shall promptly deliver to the Company all books, memoranda, plans, records and written data of every kind relating to the business and affairs of the Company which are then in his possession on account of his employment hereunder, but excluding all such materials in the Executive's possession which are personal and not property of the Company or which he holds on account of his past or current status as a director or shareholder of the Company. 13. Arbitration ----------- Any dispute or controversy arising under this Agreement or relating to its interpretation or the breach hereof, including the arbitrability of any such dispute or controversy, shall be determined and settled by arbitration in San Diego, California pursuant to the Rules then obtaining of the American Arbitration Association. Any award rendered herein shall be final and binding on each and all of the parties, and judgment may be entered thereon in any court of competent jurisdiction. 14. Insurance --------- The Company shall have the right at its own cost and expense to apply for and to secure in its own name, or otherwise, life, health or accident insurance or any or all of them covering the Executive, and the Executive agrees to submit to any usual and customary medical examination and otherwise to cooperate with the Company in connection with the procurement of any such insurance, and any claims thereunder. 15. Waiver of Breach ---------------- Any waiver of any breach of this Employment Agreement shall not be construed to be a continuing waiver or consent to any subsequent breach on the part either of the Executive or of the Company. 16. Assignment ---------- Neither party hereto may assign his or its rights or delegate his or its duties under this Employment Agreement without the prior written consent of the other party; provided, however, that this Agreement shall inure to the benefit of and be binding upon the successors and assignees of the Company, all as though such successors and assignees of the Company and their respective successors and assignees were of the Company, upon (a) a sale of all or substantially all of the Company's assets, or upon merger or consolidation of the Company with or into any other corporation, and (b) upon delivery on the effective day of such sale, merger or consolidation to the Executive of a binding instrument of assumption by such successors and assigns of the rights and liabilities of the Company under this Agreement, provided, however, that no such assignment or transfer will relieve the Company from its payment obligations hereunder in the event the transferee or assignee fails to timely discharge them. No rights or obligations of the Executive under this Agreement may be assigned or transferred other than 6 7 his rights to compensation and benefits, which may be transferred by will or operation of law or as otherwise specifically provided or permitted hereunder or under the terms of any applicable employee benefit plan. 17. Notices ------- Any notice required or desired to be given hereunder shall be in writing and shall be deemed sufficiently given when delivered or 3 days after mailing in United States certified or registered mail, postage prepaid, to the party for whom intended at the following address: The Company: NTN COMMUNICATIONS, INC. 5966 La Place Court Suite 100 Carlsbad, CA 92008 The Executive: Stanley B. Kinsey P. O. Box 3050 6821 Farms View Court Rancho Santa Fe, CA 92067 or to such other address as either party may from time to time designate by like notice to the other. 18. General ------- The terms and provisions of this Agreement shall constitute the entire agreement by the Company and the Executive with respect to the subject matter hereof, and shall supersede any and all prior agreements or understandings between the Executive and the Company, whether written or oral. This Agreement may be amended or modified only by a written instrument executed by the Executive and the Company, and any such amendment or modification or any termination of this Agreement shall become effective only after written approval thereof has been received by the Executive. This Agreement shall be governed by and construed in accordance with California law. In the event that any terms or provisions of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect the validity or enforceability of the remaining terms and provisions hereof. In the event of any judicial, arbitral or other proceeding between the parties hereto with respect to the subject matter hereof, the prevailing party shall be entitled, in addition to all other relief, to reasonable attorneys' fees and expenses and court costs. 7 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. NTN COMMUNICATIONS, INC. By: /s/ William D. Gould -------------------------------- Secretary AGREED TO AND ACCEPTED: By: /s/ Stanley B. Kinsey -------------------------- Stanley B. Kinsey 8 EX-10.53 5 STOCK OPTION AGREEMENT STANLEY KINSEY 1 EXHIBIT 10.53 NTN COMMUNICATIONS, INC. STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as of October 7, 1998 by and between NTN COMMUNICATIONS, INC., a Delaware corporation (the "Company"), and Stanley B. Kinsey, an individual (the "Optionee"). W I T N E S S E T H WHEREAS, the Company's Board of Directors authorized the grant to the Optionee pursuant to the Company's 1995 Stock Option Plan, as amended, of an option (the "Option") to purchase all or any part of 1,300,000 shares of Common Stock, $.005 par value, of the Company (the "Common Stock") upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee the right and option to purchase, in accordance with the terms and conditions of this Agreement, an aggregate of 1,300,000 shares of Common Stock of which 650,000 will be exercisable at $1.00 per share and 650,000 will be exercisable at $.625 per share (the "Price"), exercisable prior to the close of business on October 6, 2008 (the "Expiration Date"). 2. Vesting and Exercisability of Option. The Option will become vested and exercisable as to one-third of the shares of the Common Stock on the first anniversary of the Date of Grant, and as to an additional one-third on the second anniversary of the Date of Grant, and as to the final one-third on the third anniversary of the date hereof. The right to purchase any or all of such shares will terminate on the close of business on October 6, 2008; provided, however, that the right to exercise this Option is subject to early termination upon the Optionee's "Termination of Employment" (as defined in the Plan). In the event of the Optionee's Termination of Employment (other than by reason of death or termination by the Company without cause) this Option may only be exercised by Optionee, to the extent exercisable at Termination of Employment, at any time prior to 60 days after Termination of Employment. 3. Corporate Transaction. In the event of a Corporate Transaction (as defined below), the Committee administering the Plan shall notify the Optionee at least 30 days prior thereto. To the extent not previously exercised, the Option shall terminate immediately prior to the consummation of such Corporate Transaction unless the Committee administering the Plan determines otherwise in the exercise of its sole discretion, provided, however, that such Committee may permit exercise of the Option prior to its termination, even if the Option would not otherwise have been exercisable. A "Corporate Transaction" means a liquidation or dissolution of the Company, a merger or consolidation of the company with or into another corporation or entity, a sale of all or substantially all of the assets of the Company, or a purchase of more than 50 percent of the outstanding capital stock of the Company in a single transaction or a series of related transactions by one person or more than one person acting in concert. 1. 2 4. Method of Exercise of Option and Payment of Purchase Price. Each exercise of the Option shall be by means of a written notice of exercise delivered to the Company and specifying the number of whole shares with respect to which the Option is being exercised, together with any written statements required pursuant to Section 9 below and payment of the Price in full in cash or by check payable to the order of the Company; provided that so-called cashless exercises may be permitted in the discretion of the Committee administering the Plan. The delivery of shares pursuant to an exercise of this Option will be conditional upon payment by the Optionee of amounts sufficient to enable the Company to pay all applicable federal, state and local withholding taxes. 5. Effect of Death of Optionee. The Option and all other rights hereunder, to the extent such rights shall not have been exercised, shall, unless sooner terminated pursuant to the Plan, terminate and become null and void at the end of twelve months following the Optionee's death. During the twelve-month period after death, the Option may, to the extent exercisable on the date of death (or earlier termination), be exercised by the executor of the Optionee's will or the administrator of the holder's estate; provided that in no event may the Option be exercised by any person after the Expiration Date. 6. Non-Assignability of Option. Subject to the provisions of the Plan, the Option and the rights and privileges conferred hereby are not transferable or assignable and may not be of fered, sold, pledged, hypothecated or otherwise disposed of in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment, garnishment, levy or similar process. During the Optionee's lifetime, the Option may be exercised only by the Optionee, or, subject to the provisions of Section 5, within twelve months after his death by the executor of his will or the administrator of his estate, and not otherwise, regardless of any community property or other interest therein of the Optionee's spouse or such spouse's successor in interest. In the event that the spouse of the Optionee shall have acquired a community property interest in the Option, the Optionee, or such transferees, may exercise it on behalf of the spouse of the Optionee or such spouse successor in interest. 7. Adjustments and Other Rights. The rights of the Optionee hereunder will be subject to adjustments and modifications in certain circumstances and upon occurrence of certain events including a reorganization, merger, combination, recapitalization, reclassification, stock split, reverse stock split, stock dividend or stock consolidation, as set forth in the Plan. 8. Optionee Not A Stockholder. Neither the Optionee nor any other person entitled to exercise the Option shall have any of the rights or privileges of a shareholder of the Company as to any shares of Common Stock not actually issued and delivered to him. No adjustment will be made for dividends or other rights for which the record date is prior to the date on which such stock certificate or certificates are issued even if such record date is subsequent to the date upon which notice of exercise was delivered and the tender of payment was accepted. 9. Application of Securities Laws. No shares of Common Stock may be purchased pursuant to the Option unless and until any then applicable requirements of the Securities and Exchange Commission, the California Department of Corporations and any other regulatory agencies, including any other state securities law commissioners having jurisdiction over the Company or such issuance, and any exchanges upon which the Common Stock may be listed, shall have been fully satisfied. The Optionee represents, agrees and certifies that: 2. 3 (a) If the Optionee exercises the Option in whole or in part at a time when there is not in effect under the Securities Act of 1933, as amended (the "Act"), a registration statement relating to the Common Stock issuable upon exercise and available for delivery to him a prospectus meeting the requirements of Section 10(a)(3) of the Act, the Optionee will acquire the Common Stock issuable upon such exercise for the purpose of investment and not with a view to resale or distribution and that, as a condition to each such exercise, he or she will furnish to the Company a written statement to such effect, satisfactory in form and substance to the Company, which statement also acknowledges that the Option shares have not been registered under the Act and are "restricted securities" within the meaning of Rule 144 under the Act and are subject to restrictions on transfer; and (b) If and when the Optionee proposes to publicly offer or sell the Common Stock issued to him upon exercise of the Option, the Optionee will notify the Company prior to any such offering or sale and will abide by the opinion of counsel to the Company as to whether and under what conditions and circumstances, if any, he or she may offer and sell such shares. The Optionee understands that the certificate or certificates representing the Common Stock acquired pursuant to the Option may bear a legend referring to the foregoing matters and any limitations under the Act and state securities laws with respect to the transfer of such Common Stock, and the Company may impose stop transfer instructions to implement such limitations, if applicable. Any person or persons entitled to exercise the Option under the provisions of Section 5 above shall be bound by and obligated under the provisions of this Section 9 to the same extent as is the Optionee. 10. Notices. Any notice to be given under the terms of this Agreement or pursuant to the Plan shall be in writing and addressed to the Secretary of the Company at its principal office and any notice to be given to the Optionee shall be addressed to him at the address given beneath the Optionee's signature hereto, or at such other address as either party may hereafter designate in writing to the other party. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope addressed as aforesaid, registered or certified, and depos ited (postage and registry or certification fee prepaid) in a post office or branch post office regularly maintained by the United States Government. 11. Effect of Agreement. This Agreement shall be assumed by, be binding upon and inure to the benefit of any successor or successors of the Company to the extent set forth herein. 12. Withholding. The provisions of the Plan shall govern any withholding that the Company is required to make with respect to the exercise of the Option. 13. Applicability of the Plan. The Option and this Agreement will subject to, and the Company and the Optionee agree to be bound by, all of the terms and conditions of the Plan. The rights of the Optionee will be subject to limitations, adjustments, modifications, suspension and termination in certain circumstances and upon the occurrence of certain conditions as set forth in the Plan as originally adopted, but shall not be adversely affected by any future amendments to the Plan. 14. Laws Applicable to Construction. The Option has been granted, executed and delivered as of the day and year first above written in Carlsbad, California, and the interpretation, 3. 4 performance and enforcement of the Option and this Agreement shall be governed by the internal laws of the State of California. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by a duly authorized officer and the Optionee has hereunto set his hand as of the day and year first above written. NTN COMMUNICATIONS, INC., a Delaware corporation By: /s/ William D. Gould -------------------------------- Secretary OPTIONEE /s/ Stanley B. Kinsey ------------------------------- Stanley B. Kinsey 6821 Farms View Court Rancho Santa Fe, CA 92067 4. EX-10.54 6 RESIGNATION AGREEMENT GERALD SOKOL 1 EXHIBIT 10.54 RESIGNATION AND GENERAL RELEASE AGREEMENT ----------------------------------------- This Resignation and General Release Agreement ("Agreement"), effective as of this 18th day of February 1999, by and between Gerald Sokol, Jr., an individual ("Sokol"), and NTN Communications, Inc., a corporation ("Company"), is a resignation agreement which includes a general release of claims. In consideration of the covenants undertaken and the releases contained in this Agreement, Sokol and Company agree as follows: 1. Sokol resigns in all capacities as an officer, director and employee of Company and each of its subsidiaries and affiliates, such resignations to be effective as of January 19, 1999. 2. Company and Sokol agree to the following actions immediately following the complete execution of this Agreement in full and complete discharge of any and all of Company's obligations to Sokol, except those described in Paragraph 11, including, without limitation, all obligations under Sokol's Employment Agreement dated July 1, 1998 (the "Employment Agreement"), and the Stock Option Agreement dated February 2, 1998: a. Future Salary. Company will pay Sokol $262,500, equal to his salary for 12 months, less $56,650 for the life insurance overpayment as described in paragraph 2d below, for a net payment of $205,850, in exchange for Sokol's agreement not to compete with Company for one year, pursuant to paragraph 22 below. b. Bonus. Company will pay Sokol his full bonus of $128,500 through December 1998 in cash. c. Option to Purchase Stock. At Sokol's option, to be exercised within 15 days from the date hereof, Sokol shall have the right to purchase shares of common stock of Company at a purchase price of $.85 per share up to an amount equal to the aggregate amount of payments made to Sokol pursuant to paragraphs 2a and 2b hereof. In the event Sokol exercises this option, Company agrees to use its best efforts to register the stock so purchased by Sokol within 90 days of the issuance of the stock to Sokol. All of the securities of Company (all common stock and options) presently owned by Sokol are set forth in the Ownership of Securities attached as Exhibit A hereto. d. Life Insurance. Company will allow Sokol to keep the $1 million whole life insurance policy, and will pay Sokol $2,000 as the equivalent of a one-year premium for term life insurance for Sokol; nevertheless, Company will deduct an insurance gross-up payment made for Sokol's benefit of $56,650 from the future salary payment described in paragraph 2a above. 1. 2 e. Director Fees. Company will pay Sokol in stock, as previously agreed, for his director fees through January 1999. This stock will be in the same monthly amounts as Company distributes to all of its directors; however, fees for the months of September 1998 through January 1999 shall be paid in stock at a price of $.625 per share. Company will use its best efforts to register this stock within 90 days of the effective date of this Agreement. Sokol must resign as an Company director, concurrent with the execution of this Agreement; f. Stock Options. Company will grant to Sokol the fully vested right and option to purchase 125,000 shares of Company common stock at the price of $1.00 per share, exercisable at any time prior to twelve months after the January 19, 1999 termination of Sokol's employment. This grant shall be in lieu of and shall supersede any and all rights Sokol may have had under the February 2, 1998 Stock Option Agreement, which shall be null and void. g. Attorneys' Fees. Company will pay Sokol or directly pay to Sokol's attorney $12,500 in partial reimbursement for his actual attorneys' fees incurred in his negotiation with Company and in documenting the settlement. 3. Sokol shall return to Company and shall not take or copy in any form or manner lists of customers, prices, engineering plans, and similar confidential and proprietary materials or information. Sokol represents to Company that all documents pertaining to Company, inclusive of existing and past subsidiaries, but exclusive of personal items, in his possession whether located on Company premises, at Sokol's home or elsewhere, have been returned to Company and that he has retained no copies in any form. This representation applies to all forms of written materials, including but not limited to schematics, diagrams, formulations, tapes, descriptions of inventions and products, operator manuals, maintenance manuals, training manuals, software manuals, software code, technical memoranda, research bulletin, financial information, marketing plans, identities of customers and vendors, contract terms and information obtained in confidence from customers and vendors. Sokol hereby reaffirms his obligation, as set forth in his employment agreement, confidentiality and work for hire agreement and any other legal documents that he signed either before or during his employment with Company not to disclose any confidential or trade secret information to any third party and not to use the information for any purpose whatsoever except as expressly authorized in writing by an authorized representative of Company, and except as necessary or appropriate in fulfilling his responsibilities as a member of the Board of Directors of the Company. 4. Company expressly denies any violation of any of its policies, procedures, state or federal laws or regulations. Accordingly, while this Agreement resolves all issues between Company and Sokol relating to any alleged violation of Company policies or procedures or any state or federal law or regulation, this Agreement does not constitute an adjudication or finding on the merits and it is not, and shall not be construed as, an admission by Company of any violation of its policies, procedures, state 2. 3 or federal laws or regulations. Moreover, neither this Agreement nor anything in this Agreement shall be construed to be or shall be admissible in any proceeding as evidence of or an admission of liability by either party for any purpose. This Agreement may be introduced, however, in any proceeding to enforce the Agreement. Such introduction shall be pursuant to an order protecting its confidentiality. 5. Except for those obligations created by or arising out of this Agreement for which receipt or satisfaction has not been acknowledged herein, Sokol on behalf of himself, his descendants, dependents, heirs, executors, administrators, assigns, and successors, and each of them, hereby covenants not to sue and fully releases and discharges Company, its directors, officers, agents, attorneys, insurers, employees, stockholders, representatives, assigns and successors, past and present, and each of them, hereinafter together and collectively referred to as "Releasees," with respect to and from any and all claims, wages, demands, rights, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, debts, costs, expenses, attorneys' fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which he now owns or holds or he has at any time heretofore owned or held as against said Releasees, arising out of or in any way connected with his employment or other relationships with Company or his resignation from employment or any other transactions, occurrences, acts or omissions or any loss, damage or injury whatever, known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of said Releasees, or any of them, committed or omitted prior to the date of this Agreement including, without limiting the generality of the foregoing, any claim under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act of 1993, the California Fair Employment and Housing Act, the California Family Rights Act, or any claim for severance pay, bonus, sick leave, holiday pay, vacation pay, life insurance, health or medical insurance or any other fringe benefit, workers' compensation or disability. 6. Except as to Company's rights under this Agreement, Company for itself, its officers, directors, shareholders, employees, agents, attorneys, joint venturers, successors and assigns, hereby discharges and releases Sokol and his employees, agents, joint venturers, successors and assigns from any and all claims, damages, actions, judgments, obligations, attorneys' fees, indemnities, subrogation, duties, demands, controversies and liabilities of every nature, at law or in equity, known or unknown, matured or unmatured, foreseeable or unforeseeable which Company now has, ever had, or may have, against Sokol by reason of any matter whatsoever occurring or existing up to the date of this Release. Company hereby covenants with Sokol that it will forever refrain from instituting, pursuing, or in any way aiding any claim or demand arising out of, in any way related to, or hereafter to arise out of, any matters hereinbefore referred to and that this Release may be pleaded as a full and complete defense to any claim, demand, action or other proceeding which may be brought by, or on behalf of, Company against Sokol. 3. 4 7. It is the intention of the parties in executing this instrument that the same shall be effective as a bar to each and every claim, demand and cause of action hereinabove specified. In furtherance of this intention, Company and Sokol hereby expressly waive any and all rights and benefits conferred upon them by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE and expressly consent that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those related to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demands and causes of action hereinabove specified. SECTION 1542 provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASES, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." Sokol and Company acknowledge that they may hereafter discover claims or facts in addition to or different from those which they now know or believe to exist with respect to the subject matter of this Agreement and which, if known or suspected at the time of executing this Agreement, may have materially affected this settlement. Nevertheless, Company and Sokol hereby waive any right, claim or cause of action that might arise as a result of such different or additional claims or facts. Company and Sokol acknowledge that they understand the significance and consequences of such release and such specific waiver of SECTION 1542. 8. Sokol acknowledges that by reason of his position with Company he has been given access to lists of customers, prices, engineering plans, and similar confidential or proprietary materials or information respecting Company's business affairs. Sokol represents that he has held all such information confidential and will continue to do so, and that he will not use such confidential information for any business (which term herein includes a partnership, firm, corporation or any other entity) without the prior written consent of Company. 9. Each party agrees that the terms and conditions of this Agreement shall remain confidential as between the parties and neither party shall disclose them to any other person except for its attorneys and tax advisors or except as otherwise required by law or in the event of any required public disclosure of such matters by Company. Without limiting the generality of the foregoing, neither party will respond to or in any way participate in or contribute to any public discussion, notice or other publicity concerning, or in any way relating to, execution of this Agreement or the events (including any negotiations) which led to its execution. Without limiting the generality of the foregoing, each party specifically agrees that it shall not disclose information regarding this Agreement to any current or former employee of the Company or any prospective employer of Sokol. Each party hereby agrees that disclosure by it of any of 4. 5 the terms and conditions of the Agreement in violation of the foregoing shall constitute and be treated as a material breach of this Agreement. 10. Sokol and Company warrant and represent that they have not heretofore assigned or transferred to any person not a party to this Agreement any released matter or any part or portion thereof and Company and Sokol shall defend, indemnify and hold each other harmless from and against any claim (including the payment of attorneys' fees and costs actually incurred whether or not litigation is commenced) based on or in connection with or arising out of any such assignment or transfer made, purported or claimed. 11. Sokol and Company acknowledge that any employment or contractual relationship between them terminated on January 19, 1999, and that they have no further employment or contractual relationship except as may arise out of this Agreement, including the Indemnity Agreement between Sokol and the Company and the Stock Option Agreements pursuant to which the stock options described in Exhibit A were granted, as amended. 12. All payments hereunder shall be reduced by federal and state income tax withholding, if required, and other applicable withholding taxes. Sokol shall be exclusively liable (except for payroll taxes actually withheld by the Company) for the payment of all federal and state taxes which may be due as the result of the consideration received as set forth herein and Sokol hereby represents that Sokol shall make payments on such taxes at the time and in the amount required of Sokol. In addition, Sokol hereby agrees fully to defend, indemnify and hold harmless Releasees and each of them from payment of taxes, interest and/or penalties that are required of them (other than those payroll taxes which are the Company's obligation to pay) by any government agency at any time as the result of payment of the consideration set forth herein. 13. This instrument constitutes and contains the entire agreement and understanding concerning Sokol's employment, resignation from the same and the other subject matters addressed herein between the parties, and supersede and replace all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matters hereof. These are integrated documents. This Agreement may be modified only by a writing signed by the parties. 14. If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of the Agreement which can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared to be severable. 15. This Agreement shall be deemed to have been executed and delivered within the State of California, and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with, and governed by, the laws of the State of California. 5. 6 16. This Agreement may be executed in counterparts. 17. Company agrees to continue to indemnify Sokol to the extent set forth in the existing Bylaws of Company and the Indemnity Agreement between Company and Sokol. In the event of a conflict between the Indemnity Agreement and the Bylaws, the provisions providing Sokol with the greatest rights and remedies with respect to indemnification shall control. 18. Any dispute or controversy between Sokol, on the one hand, and Company (or any Releasee), on the other hand, in any way arising out of, related to, or connected with this Agreement or the subject matter thereof, otherwise in any way arising out of, related to, or connected with Sokol's employment with Company, shall be resolved through final and binding arbitration in San Diego, California, pursuant to California Civil Procedure Code ss.ss. 1282-1284.2. The arbitration shall be before the American Arbitration Association Employee Dispute Panel and shall be governed by the National Rules for the Resolution of Employment Disputes promulgated by the American Arbitration Association. In the event of such arbitration, the prevailing party shall be entitled to recover all reasonable costs and expenses incurred by such party in connection therewith, including attorneys' fees. The nonprevailing party shall also be solely responsible for all costs of the arbitration, including, but not limited to, the arbitrator's fees, court reporter fees, and any and all other administrative costs of the arbitration, and promptly shall reimburse the prevailing party for any portion of such costs previously paid by the prevailing party. Any dispute as to the reasonableness of costs and expenses shall be determined by the arbitrator. 19. In entering this Agreement, the parties represent that they have relied upon the advice of their attorneys, who are attorneys of their own choice, and that the terms of this Agreement have been completely read and explained to them by their attorneys, and that those terms are fully understood and voluntarily accepted by them. 20. All parties agree to cooperate fully and to execute any and all supplementary documents and to take all additional actions that may be necessary or appropriate to give full force to the basic terms and intent of this Agreement and which are not inconsistent with its terms. 21. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. 22. In consideration of the payment of $205,850 pursuant to paragraph 2(a) above, Sokol agrees that for a period of 12 months from the date hereof Sokol shall not, directly or indirectly, without the prior written consent of Company: a. solicit, entice, persuade or induce any employee, consultant, agent or independent consultant of Company, or of any of the subsidiaries or affiliates of Company to terminate his or her employment with Company, or such subsidiary or 6. 7 affiliate, to become employed by any person, firm or corporation other than Company, or such subsidiary or affiliate or approach any such employee, consultant, agent or independent contractor for any of the foregoing purposes, or authorize or assist in the taking of any such actions by any third party; or b. directly or indirectly own, manage, control, invest, or participate in any way in (other than as an officer whose function primarily relates to financial matters), consult with or render services for any person or entity or any of the subsidiaries or affiliates of Company engaged in any business in the fields of electronically simulated sports games or interactive television, which in the judgment of Company is, or as a result of Sokol's engagement or participation would become, directly competitive with any aspect of the business of Company. Notwithstanding anything in this Section 22b to the contrary, nothing in this Agreement shall limit Sokol's right to become the Vice President of International Finance for American Online, Inc., or to hold and make passive investments not in excess of 2 1/2% of the outstanding Common Stock of any publicly traded entity. 23. This Agreement embodies the entire agreement of the parties and supersedes any other prior oral or written agreements, arrangements or understandings between Sokol and Company. This Agreement may not be changed or terminated orally but only by an agreement in writing signed by the parties hereto. 24. The waiver by Company of a breach of any provision of this Agreement by Sokol shall not operate or be construed as a waiver of any subsequent breach by him. The waiver by Sokol of a breach of any provision of this Agreement by Company shall not operate or be construed as a waiver of any subsequent breach by Company. 25. In any construction to be made of this Agreement, the same shall not be construed against any party on the basis that the party was the drafter. I have read the foregoing Agreement and I accept and agree to the provisions it contains and hereby execute it voluntarily with full understanding of its consequences. 7. 8 EXECUTED as of this 18th day of February 1999 in San Diego County, California. /s/ Gerald Sokol, Jr. -------------------------------- Gerald Sokol, Jr. NTN COMMUNICATIONS, INC. By: /s/ Stanley B. Kinsley ----------------------------- Its: CEO 8. EX-23.0 7 CONSENT OF KPMG 1 [KPMG LETTERHEAD] 750 B Street San Diego, CA 92101 CONSENT OF INDEPENDENT AUDITORS The Board of Directors NTN Communications, Inc.: We consent to incorporation by reference in the registration statements (No. 333-17247 and No. 333-12777) on Form S-8 and in the registration statements (No. 333-69383, No. 333-40625, No. 333-14129, No. 33-42350, No. 33-77826, No. 33-97780, No. 33-64417 and No. 333-03805) on Form S-3 of NTN Communications, Inc. of our report dated March 29, 1999, relating to the consolidated balance sheets of NTN Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, and the related financial statement schedule, which report appears in the December 31, 1998 annual report on Form 10-K of NTN Communications, Inc. /s/ KPMG LLP San Diego, California March 31, 1999 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 4,560,000 0 4,191,000 1,720,000 0 8,131,000 14,727,000 7,478,000 16,767,000 5,731,000 0 0 2,000 140,000 8,183,000 16,767,000 24,194,000 24,194,000 4,715,000 27,641,000 0 0 289,000 (1,793,000) 0 (1,793,000) 0 0 0 (1,793,000) (0.10) (0.10)
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