-----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, Hnl/EcQMkhoZey4lvy8xYHGIbg+F3iwC0LUVkD2IRcpMbAaqlxZzp6z/dUwvRkjx OKkml7Ag8gWYC8YleWwPyw== 0000950116-96-001446.txt : 19961217 0000950116-96-001446.hdr.sgml : 19961217 ACCESSION NUMBER: 0000950116-96-001446 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961216 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NTN CANADA INC CENTRAL INDEX KEY: 0000797313 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 112805051 STATE OF INCORPORATION: NY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18066 FILM NUMBER: 96681151 BUSINESS ADDRESS: STREET 1: 14 METEOR DR CITY: ETOBOCOKE ONTARIO STATE: A6 BUSINESS PHONE: 4166756666 MAIL ADDRESS: STREET 1: 14 METEOR DR CITY: ETOBICOKE ONTARIO STATE: A6 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: August 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] the transition period from _________ to __________ Commission file number: 0-18066 NTN CANADA, INC. (Exact name of registrant as specified in its charter) New York 11-2805051 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Indentification No.) 14 Meteor Drive, Etobicoke, Ontario M9W 1A4 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (416) 675-6666 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value US$0.0467 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 such filing requirements for the past 90 days. Yes __ No _X_ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 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. [X] Aggregate market value (i.e., last price) of voting stock held by non-affiliates of the Registrant, as of November 19, 1996: US$9,024,135 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of November 19, 1996: 2,441,617 shares of common stock, par value US$.0467 per share DOCUMENTS INCORPORATED BY REFERENCE: NONE PART I EXCHANGE RATES The currency amounts in this Annual Report on Form 10-K, including the financial statements, are, unless otherwise indicated, expressed in Canadian dollars ("Cdn$"). This Form 10-K contains translations of certain amounts in Canadian dollars into United States dollars ("US$") based upon the exchange rate in effect at the end of the period to which the amount relates, or the exchange rate on the date specified. For such purposes, the exchange rate means the noon buying rate in New York City for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"). These translations should not be construed as representations that the Canadian dollar amounts actually represent such U.S. dollar amounts or that Canadian dollars could be converted into U.S. dollars at the rate indicated or at any other rate. The Noon Buying Rate at the end of each of the five years ended August 31, 1996, the average of the Noon Buying Rates on the last day of each month during each of such fiscal years and the high and low Noon Buying Rate for each of such fiscal year's were as follows:
August 31, ---------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- At end of period........... Cdn$1.3685 Cdn$1.3432 Cdn$1.3712 Cdn$1.3208 Cdn$1.1952 Average for period......... 1.3634 1.3742 1.3573 1.2718 1.1726 High for period............ 1.3815 1.4193 1.3890 1.3208 1.2048 Low for period............. 1.3401 1.3410 1.3095 1.1943 1.1203 On November 18, 1996 the Noon Buying Rate was Cdn$1.3419.
Item 1. Business. -------- Formation NTN Canada, Inc. (the "Company") was originally incorporated under the laws of the State of New York on May 12, 1986 under the name Triosearch Inc. On June 9, 1988, Triosearch changed its name to NTN Canada, Inc. The Company presently conducts its operations through a wholly owned subsidiary, NTN Interactive Network Inc. ("NTNIN") which is the principal operating company of the entity. On October 4, 1994, NetStar Enterprises Inc. ("NetStar") (formerly Labatt Communications Inc.), an integrated broadcasting and communications enterprise, acquired approximately 35% of the Company's outstanding common stock for Cdn$4,252,500 (US$3,150,000 on October 4, 1994). - 2 - Recent Developments On October 2, 1996, NTNIN acquired, effective October 1, 1996, all of the outstanding stock of Magic Lantern Communications Ltd. ("Magic"), pursuant to which Magic became a wholly-owned subsidiary of NTNIN. Magic conducts its operations directly and through its wholly owned subsidiaries 745695 Ontario Ltd. ("Custom Video"), and B.C. Learning Connection ("BCLC"), and its 75% ownership of the outstanding shares of Sonoptic Technologies Inc. ("Sonoptic"). On October 10, 1996, Magic acquired 50% of the outstanding shares of 1113659 Ontario Ltd. ("Viewer Services"), a joint venture operated with International Tele-Film Enterprises Ltd. Reference is hereby made to the Company's current report on Form 8-K, filed with the Securities and Exchange Commission on October 17, 1996, for further information with respect to the Company's acquisition of Magic. General Description of Business The Company, through NTNIN, currently provides its products and services through seven business units or subsidiaries. Of these seven, two are considered to be the traditional core of the Company's business, that is, directly related to multi-player interactive entertainment programs. The two traditional core business units are the Hospitality Group and the Corporate Events/Home Market Group. The other five units, collectively referred to as the "Magic Lantern Group," are (i) NTNIN's wholly-owned subsidiary Magic, which is involved in the marketing and distribution of Educational video and media resources, (ii) Magic's wholly-owned subsidiary Custom Video, which is involved in the manufacturing of videotape copies, (iii) Custom Video's wholly-owned subsidiary BCLC, which is involved in the marketing and fulfilment services of educational video titles, (iv) Magic's 75%-owned subsidiary Sonoptic, which is involved in the conversion of analog video to digital video formats, and (v) Magic's 50%-owned subsidiary Viewer Services, which is involved in the inbound telemarketing and fulfilment services for television broadcasters and others. The Hospitality Group is engaged in the marketing and distribution of NTN Entertainment Network services (the "Network") throughout the Dominion of Canada. These activities are being conducted through an exclusive license covering the Dominion of Canada granted to the Company by NTN Communications, Inc. of Carlsbad, California ("Communications"). The license grants NTNIN the right to market the products and programs of Communications throughout Canada for a 25 year term ending December 31, 2015. Communications does not have an equity position in the Company or in NTNIN. The President of Communications (Daniel C. Downs) is a director of the Company. The Network is designed to capitalize on the growing trend for more leisure activities through two-way interactive television ("IATV") communications. Programming can be offered 24 hours a day and consists of two-way interactive games. The Network features a wide variety of sports and game programs permitting viewer interaction and participation for 16 hours each day. It is currently available to over 3,100 subscriber sites (each a "Group Subscriber") across North America which are primarily hotels, restaurants, taverns, colleges, military bases and other group - 3 - viewing locations. Over 520 Group Subscribers are located in Canada. Designed to be hardware independent, the Network can be transmitted through a variety of techniques: direct satellite, cable, gateway service, FM sideband, Internet, TV vertical blanking interval, and telephone. The Company's revenues have traditionally been primarily derived from the delivery of Network programming to customer sites, typically by satellite ("broadcast services"), the rental and sale of equipment used in the reception of broadcast services and on-subscriber-site interactive participation in broadcasts over the Network, maintenance services, and event programming for corporate clients. Revenue from broadcast services was Cdn$3,520,814 (US$2,572,754) for the Company's fiscal year ended August 31, 1996 (the "1996 Fiscal Year"). Over the past two years, revenue from equipment sales has gradually decreased, while revenue from equipment rental has risen. These changes reflect the success of the system rental program introduced over two years ago. Revenue from equipment sales was Cdn$148,330 (US$108,389), while revenue from equipment rental was Cdn$959,153 (US$700,879) for the 1996 Fiscal Year. Revenues from maintenance services grows in proportion to the number of Hospitality Network customers, which pay a monthly fee based on the size of their system. These revenues were Cdn$476,533 (US$348,216) for the 1996 Fiscal Year. In common with many businesses, credit risk is dependent upon the type of customer which the Company supplies. A large percentage of the Company's customers are in the food and beverage industry which traditionally has a higher than average failure rate. This is reflected in the allowance for doubtful accounts of Cdn$39,000 (US$28,498) for the 1996 Fiscal Year. The Company does not anticipate any significant increases in bad debt expense as a percentage of revenue as a result of increased sales to the food and beverage industry. The Corporate Events/Home Market Group is engaged in developing and delivering interactive programs for corporate clients for use at sales and training meetings, trade shows, and special events. Revenue from the Corporate Events/Home Market Group's activities for the 1996 Fiscal Year were Cdn$518,275 (US$378,718). The expanding revenue base from Hospitality system clients in the 1996 Fiscal Year was the major contributor to net profit of Cdn$541,059 (US$395,366). Research and Development The Company has not been involved in basic or applied technology research. The Company's major contribution to the research and development efforts involving the Network has been to provide market feedback and recommendations to Communications on product and program developments which would improve marketing efforts in Canada. There is little, if any, direct expense incurred in this effort. - 4 - The Corporate Events/Home Market Group has begun business development and liaison activities which are expected to lead to the development, marketing, and delivery of interactive programs delivered to the home consumer market via third-party providers, through the Internet and distribution systems being developed by telephone and cable companies in Canada. The Company anticipates that it will increase its participation in Home Market product and program development in the future and there may be expenses associated with that effort in the Company's fiscal year ending August 31, 1997 (the "1997 Fiscal Year") and beyond. These expenditures will arise, and the projected amounts will be known, only after detailed plans are developed. The Company expects to take an increasingly active role in the development of Communications' products and services in the 1997 Fiscal Year. The nature of this role is presently being discussed with Communications. The Company is formulating a number of new product and service concepts for specific client applications. If the Company determines to take them beyond the concept phase, their development will be discussed with Communications and others to determine the roles, investment, and effort required of each party. The NTN Entertainment Network The products of Communications include hardware and software which enables groups of people to interact with programming delivered to television monitors. More than 3,100 restaurants, lounges, hotels, and other hospitality sites across North America have installed systems capable of receiving Network broadcasts ("Subscriber Systems"). The Subscriber Systems receive satellite broadcasts containing the Network interactive programs, such that thousands of patrons at Group Subscriber locations can interact with the same programs simultaneously. NTNIN markets the Network throughout Canada to the hospitality industry, installs the systems, and provides technical and marketing support to Network sites. The Network is owned and operated by Communications, a company based in Carlsbad, California. The Network uses existing technology to broadcast two-way interactive live events to Subscriber Systems. The Network provides digital data broadcast transmissions which enable equipment and software at Group Subscriber locations to display text and graphics programming and to interpret responses from Network viewers. All programming is produced at and transmitted from the NTN Broadcast Center in Carlsbad. This facility is equipped with video, satellite and communications equipment, and sophisticated multimedia computers. Communications 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 has no control of such facilities. Each Group Subscriber receives a Subscriber System which includes a satellite dish antenna, a signal decoder, a personal computer with fully integrated proprietary software, a base station, and multiple hand-held wireless response units ("Playmakers") used by customers for interactive play. - 5 - The computer in each Subscriber System controls the TV monitor display based upon instructions delivered to it over the Network. Viewer responses entered on the Playmakers are ordinarily processed and displayed within the Subscriber System without any need for communication to the Broadcast Center. The Subscriber System can communicate with the Broadcast Center, however, via modem when appropriate commands are sent over the Network, but the comparatively small amount of data traveling inward from the Subscriber System to the Broadcast Center makes it possible to operate the Network at minimal expense. In addition to tabulating local Playmaker responses and communicating with the Broadcast Center, the Subscriber System computer can generate local text inserts at the direction of the Group Subscriber, and can call up computer generated color graphics displays for various purposes, including advertisements sold for broadcast on the Network, all as directed by the Broadcast Center. Network Programming The two-way interactive programming currently featured over the Network includes a variety of interactive sports and trivia games. The broadcast schedule includes between 14 and 17 hours of interactive programs per day. All present Network programming is structured to provide time for national, regional and local advertisements, as well as for local inserts, which permit each Group Subscriber to display announcements of promotional prices or other events at its business location. Communications holds licenses with major sports leagues which enable it to produce and deliver interactive games played in conjunction with live broadcasts of sporting events. Licenses are in place with the National Football League, Canadian Football League, National Hockey League, and Major League Baseball. NTN Play-Along Games are played in conjunction with live, televised events. The best established of these is QB1, a game of football strategy which attracts over 30,000 participants each week across the Network. QB1 is designed to be played simultaneously with the broadcast of a live football game. In a typical Group Subscriber environment, QB1 players watch the televised football game and attempt to call the offensive play about to be played on the field. A QB1 player may enter his or her play selection from among 20 possible plays at any time up until the snap of the ball by pushing the appropriate keys on his Playmaker. As play unfolds on the field, a description of the play that actually takes place is transmitted by the Broadcast Center. The computer in the Subscriber System receives this information and compares it with the QB1 players' selections. Within seconds, it assigns a point value to each player's selection depending on the accuracy of the player's prediction. A dedicated local television monitor then displays that score, together with the names and rankings of the other QB1 players at the Group Subscriber location. The scores and rankings are updated after each play. DiamondBall is an interactive game played simultaneously with the broadcast of a live baseball game. With the use of the Playmaker, selections are made before the pitch which allow the - 6 - player to predict the outcome. Possible choices include fly balls, ground balls, the direction of hits, walks, strikeouts and home runs. Points are awarded for correct calls and are tabulated and posted in the same manner as in QB1. PowerPlay is an interactive hockey game. Played simultaneously with a live, televised hockey game broadcast, the object of PowerPlay is to predict play opportunities that will result in goals or shots on goal. The game is divided into six separate scoring segments, with the winner being determined by the total points scored in all six segments. Participants use their Playmakers to enter player selections as well as to choose play sequences they believe will result in either a goal or a shot on goal. NTN Fantasy Games are fantasy league games played in conjunction with sporting events or rotisserie leagues. These include DreamTeam, a baseball fantasy league which enables subscribers, through interactive television, to draft actual baseball players and create whole teams; Hoops, a fantasy game in which players "manage" a professional all-star basketball team; Brackets, a basketball or hockey tournament prediction game; and Football Challenge, in which players make a weekly selection of winners of college and professional football games. Players playing these programs gain points based upon the level of their players and teams. NTN Premium Trivia Games are promotion-oriented weekly game shows that usually require an hour of participation. Prizes are awarded to the top finishers. Games include the following: Showdown is designed for competition among all participating Group Subscriber locations for major prizes. Not only do players compete among themselves at each location, but the comparative scores of different locations are also displayed to enhance competition. Showdown is broadcast one night each week, 52 weeks a year. Each hour-long show includes five separate competitive segments. Sports Trivia Challenge is currently broadcast on Thursday evenings and follows a format similar to Showdown, but focussed on sports. Players are invited to play 60 minutes of sports trivia, competing with players in other establishments across the Network. Spotlight, broadcast on Friday evenings, quizzes players about the world of show business and celebrities. This innovative game tests players' knowledge of the entertainment world, and polls their opinions on current media topics. Playback, broadcast on Saturday evenings, challenges players to answer questions on music news, trivia, song titles, and topics from a variety of musical genders from classical to hip hop. Trivial Pursuit Interactive, scheduled on Tuesdays and Fridays, is the interactive television version of the popular trivia board game. - 7 - Sports IQ is a weekly sports trivia game featured on Monday evenings. Half-hour interactive trivia games comprise the majority of the Network's programming. Countdown and Wipeout are designed for fast competitive play among participants at each Group Subscriber location. The Network broadcasts Countdown and Wipeout daily in half-hour segments. To play the game, players must answer a series of questions using the Playmaker. The faster the questions are answered correctly, the more points the player receives. After each question, the correct answer is displayed on the monitors, together with each player's answer and total score. In addition, the players' rankings are displayed. Each half-hour segment is separate, so that the display of scores and names is reset before the next segment begins. Other Network trivia games include: Hockey Hall of Fame Trivia is a specialty sports trivia program developed by the Company for exclusive distribution in Canada. Similarly, Players Raceworld Trivia and 20th Anniversary Toronto Blue Jays Trivia were developed by the Company in conjunction with the Players Racing Team and the Toronto Blue Jays Baseball Club, respectively. These specialty sports trivia game are sponsored and distributed exclusively on the Canadian portion of the Network. NightSide is a variety show and trivia game dealing with adult topics. It is broadcast one night each week, but may be repeated several times a week. Played like other Network games, players use Playmakers to answer a series of questions which are followed by jokes, quotes and interesting information. NightSide focuses more on entertainment than on competition and the content of the game is designed to foster discussion among players. For subscribers who demand a more challenging trivia game, the Network offers Brainbusters, in which players are asked trivia questions of greater difficulty. Viewer's Revue is a program which features trivia questions submitted by Network viewers. Other trivia programs include Topix, half hour programs featuring new themes each day; Retroactive, featuring pop-culture trivia with 60s, 70s and 80s content; Football Trivia; and Football Weekend Roundup, a late evening football trivia game featured on Mondays. Hospitality Market The Hospitality market will remain the Company's largest traditional core business in the 1997 Fiscal Year. The Company positions the Network to prospects and clients as a means of attracting patrons (to play the games), retaining their patronage (as they return to play again), and increasing the length of time patrons stay in their establishment. As the number of repeat customers and their length of stay increases, the hospitality establishment has an increased opportunity to sell additional food and beverage. - 8 - During the 1996 Fiscal Year, a 40 Playmaker Subscriber System was introduced for the Hospitality market enabling locations to attract and satisfy larger playing audiences. Over 10% of Network locations in Canada now have the new 40 Playmaker Subscriber System. The Hospitality Group sales force targets the most potent Hospitality outlets in Canada, including a number of chain accounts. Attractive rental packages are in place to support the Company's sales efforts. The Company promotes the Network as one of the best and technically advanced forms of on-premises advertising to this market, offering long term repetitive exposure to a captive, attentive, and enthusiastic audience. Each hospitality end user receives the Subscriber System, including the equipment and license to the software, from the Company. In most instances, the customer rents the equipment from the Company. The Company, in turn, purchases equipment from several suppliers and the Playmaker devices from Communications. Following installation, each end user pays a monthly fee to the Company for the broadcast services. The Hospitality Group's key objective is to expand the Canadian Network by 80 sites in the 1997 Fiscal Year, providing a stronger core revenue base, with sufficient size to support major advertising and sponsorship program initiatives. The Network programming includes advertising, promotional spots (promoting Network competitions and special events), and public service announcements. Ten minutes each hour are available for advertising and promotional spots. Each of the spots are designed to be fifteen seconds in length for a total of 40 spots per hour. Communications, at the direction of the Company, can insert advertising messages into its Network programming for any number or combination of Canadian Group Subscriber locations. In addition, messages can be broadcast over the entire Network or custom-tailored for any specific location or for Canada only. The advertising sales staff within the Hospitality Group sells advertising in blocks of two-fifteen second ad spots per hour for a total of fourteen hours per day. Selected program sponsorships are also sold, in which event the Company's graphics artists incorporate advertisers' logos and messages within a program's content. For example, the Player's Raceworld Trivia shows provide 30 minutes of commercial exposure each week for the Player's Racing Team. Such sponsorships provide advertisers with premium exposure within a sponsored program. Advertising and sponsorship revenues for the 1996 Fiscal Year was Cdn$198,989 (US$145,407). Canadian Network sponsors also contributed prizes for Network game winners, with a total retail value in excess of Cdn$100,000 (US$73,073). Corporate Market The Corporate Events/Home Market Group continues to market, develop, and deliver a variety of corporate training, testing, and entertainment programs to a blue chip clientele across - 9 - Canada and abroad. The Company promotes its products and services to this market through a direct sales staff, as well as through event agencies whose sales forces sell NTNIN services as part of a full service offering. These agencies generated a number of events at national sales meetings and conferences during the 1996 Fiscal Year. Agents which sell or resell these services do not operate under contract to the Company or NTNIN and they are compensated, on a commission basis, when payment is received for their "sales". None of these firms have "exclusive" arrangements with the Company or NTNIN. It is anticipated that the marketing focus will change in the 1997 Fiscal Year in order to attract more extended and repeat corporate events. The Corporate Events/Home Market Group is targeting vertical markets, including the pharmaceutical, automotive, banking, and insurance industries. These industries have diversified workforces spread throughout the country, requiring effective and compelling communications tools, which Management believes the Company provides. The Group will also introduce a new product in the 1997 Fiscal Year targeted at the human resources departments of large corporations. This product will enable corporate trainers to develop interactive programs and operate the interactive systems on their own. The Group will have little or no direct "post-sale" involvement other than initial training. A monthly license fee will be charged to such clients and will be set at an affordable rate to attract volume sales. The Company has permanent systems installed at several high profile venues, including one in the exhibit area of the Hockey Hall of Fame in Toronto. At SkyDome in Toronto, a system enables patrons of the SkyBoxes to play interactive games while watching live events on the field. Another system in a large kiosk at GM Place in Vancouver quizzes passersby about the General Motors products being promoted. These popular installations support the Company's efforts to put its systems and programs into interesting, involving and profitable use in a variety of Corporate and Retail venues. Home Market The Corporate Events/Home Market Group has recently begun preparations to market programs, similar to those offered on the Network, to the home consumer market via the Internet and enhanced distribution systems being introduced by telephone companies and cable system operators. The home market programs are intended to provide multi-player interactive games through home computers and televisions with access to third party services such as gateway services, corporate and commercial World Wide Web sites, and interactive cable systems. The Company has recently entered into a contract with AOL Canada which is intended to lead to providing AOL Canada with a selection of Canadian oriented interactive game content for use by subscribers of this gateway service. AOL Canada has approximately 111,000 subscribers and expects its subscriber base will increase to 250,000 during the 1997 Fiscal Year. - 10 - The Company has also entered into agreements, together with Communications, to provide interactive game content for "tsn.ca", the World Wide Web site of TSN The Sports Network, the leading sports television specialty service in Canada, and to provide interactive game content for Bell Canada's broadband interactive television trials in London, Ontario and Repentigny, Quebec. Consumer trials are expected to be launched later in 1997. The Company has also entered into an agreement with Videoway Communications ("Videoway"), a cable service provider in Canada, pursuant to which the Company shall initially provide consulting services to Videoway and may result in the Company providing a selection of interactive games for use by Videoway's cable subscribers. Communications has considerable experience in providing interactive entertainment programming to the home market through its affiliation with GTE MainStreet, America OnLine, GEnie, and others. Communication's sizable catalogue of interactive games, exclusive licenses for the delivery of major league interactive sports, over eleven years of continuous development, programming, and broadcasting of IATV programs leads the Company to believe that both Communications and the Company are well positioned for the future in this market. Sales and Marketing The marketing of the Network in Canada is conducted by the Company's direct sales force and through two regional sublicensees. These sublicensees, in turn, are expected to market the system to end-users, primarily Group Subscribers. Sublicense agreements exist with the two sublicensees, one for the Province of Manitoba and one for the Province of British Columbia. The sublicensees receive commissions based solely upon their ability to market the Network within their exclusive territories. During the year ended August 31, 1996, commissions of Cdn$41,214 (US$30,116) were paid to the Manitoba sublicensee, and Cdn$167,564 (US$122,444) to the British Columbia sublicensee. Each sublicensee is responsible for marketing the Network to end-user establishments in its assigned territory in a manner consistent with the Company's policies and directives. The sublicense agreement is generally for a ten-year term and provides for the payment of a one-time sublicense fee and for the payment of commissions by the Company based upon Company Group Subscriber revenues derived from the sublicensee's exclusive region. In areas where the Company does not have exclusive sublicensees, the Company markets the Network directly. At present, Communications has distribution arrangements with gateway services, systems which operate in conjunction with home personal computers through telephone lines. These services currently have in excess of 15,070,000 subscribers worldwide, of which America OnLine (AOL) has approximately 7 million worldwide, and AOL Canada has approximately 111,000 in Canada. Prior to the 1997 Fiscal Year, the Company had no direct agreement or arrangements with - 11 - any provider of gateway services. The Company's revenues will include the Canadian portion of revenues received by Communications from gateway services. Education Communications has been active for several years in bringing interactive systems and services to the education field. Through its subsidiary LearnStar Corp. ("LearnStar"), Communications developed LearnStar, a system and curriculum software for distance learning and in-class use. LearnStar's products and services were introduced to the education market in the United States in early 1995 and has been licensed to approximately 110 schools to date. LearnStar's products and services are targeted at schools and teachers who are seeking an educational tool to increase student interest in learning via interactive competitions in the classroom. The system enables a school to evaluate the academic proficiency of the students, while creating an enjoyable environment in which students seem more apt to participate. Using similar technology to that used by the Network, the LearnStar interactive learning system can conduct academic competitions, collect data for surveys and provides local, regional and national testing capabilities. All of these products and services can be utilized within a single classroom, at one distinct site, or at multiple schools throughout the country, all with instantaneous feedback. The Company has continued to investigate market opportunities for LearnStar in Canada. Management believes the education market could become a significant growth area for the Company. Following the acquisition of the Magic Lantern Group in October 1996, the Company determined that plans for the introduction of LearnStar in Canada should be developed in concert with Magic and this process is presently underway. LearnStar has granted to the Company the exclusive license to market its products and services for educational applications throughout Canada. Other Markets Communications has created a wholly-owned subsidiary called IWN, Inc. ("IWN") which is developing interactive gaming applications. IWN's initial focus is on pari-mutuel wagering, with planned expansion into other gaming venues. The Company intends to periodically review IWN's development with Communications to clarify how the Company could benefit when interactive gaming begins in Canada. The Company has not invested any funds in the gaming application development project, has not evaluated the interactive gaming market in Canada, and has made no commitments or plans to expand into lotteries, casinos, and pari-mutuel betting. Dependency Upon NTN Communications, Inc. All programming for the Network is furnished by Communications and is supplied through independent transmission companies. In addition, Communications is the Company's sole supplier of selected components of Network subscriber systems including Playmakers. The Company has no equity interest in Communications and the long term viability of the Company's Network - 12 - business is dependent upon the continued availability of broadcast services originating at Communications' Broadcast Center. If Communications ceases operations or terminates broadcast services, the Company believes, but cannot assure, that services of the nature, quantity, and quality currently provided by Communications would become available from others. Any interruption in broadcast services would result in an interruption in those broadcast services normally delivered to Group Subscriber. Other Company services would continue, including the availability of interactive programmes and games. The Company has not formulated plans for action which would be taken should Communications cease operations or alter the availability or terms of continued availability of broadcast services. Accordingly, the Company is substantially dependent upon the continued existence of Communications. Based upon its Annual Report on Form 10-K for its fiscal year ended December 31, 1995, Communications reported a net income (loss) of approximately US$(3,948,000), US$707,000 and US$(1,301,000) for the years ended December 31, 1995, 1994 and 1993, respectively. According to its latest Quarterly Report on Forms 10-Q, Communications reported a net (loss) of approximately US($4,101,000) for the nine months ended September 30, 1996 and had shareholders' equity of US$27,837,000 and working capital of US$9,132,000 at September 30, 1996. Competition The Company currently operates in a number of markets. The traditional core businesses focus on the Hospitality industry, to which the Company markets the Network as a revenue generating marketing tool; and the broader corporate market, to which the Company offers its technology and programs as an effective medium with which to deliver interactive training and testing programs, and as a compelling information and entertainment medium for corporate events and trade shows. During the 1996 Fiscal Year, the Hospitality Group became aware of a new entertainment system attempting to enter the Hospitality market. Called Sports Active, this system offers only two programs, a football game and a trivia game. The football game, for which players are charged a per game fee, can be played by only two customers at a time, is based on prerecorded game simulations between non-professional "generic" football teams, and lasts approximately 30 minutes. The trivia game is a variation of a CD-Rom based game released to the retail market approximately one year ago. While it is visually entertaining, it requires audio and the Company believes this is a significant drawback in the restaurant environment in which it is being marketed. Because Sports Active seeks long term leases from its Hospitality clients, and because there is a charge for players, the Company does not believe this will be a significant competitive entry. The Company has not experienced the impact of any direct competition in its corporate market to date. The Company defines "direct competition" as other providers of products or services which offer similar features and benefits to customers. The Company is not aware of other companies marketing interactive television services of a comparable nature, within its client base or target groups, in any manner which competes with the Company. NTNIN tries to position its - 13 - products and services so they are not directly comparable to any products or services available elsewhere. Magic Lantern Group The Magic Lantern Group of companies operates in five principal markets. Magic Lantern Communications Ltd. markets and distributes an exclusively licensed library of educational video titles to schools, school boards, and Ministries of Education across Canada. Compared to the total business volumes of the 28 members of the Canadian Media Producers and Distributors Association of Canada trade association, it is believed Magic has approximately a 20% share of the grades K-12 market, making it the dominant player in this, Magic's primary market. Magic's exclusive distribution rights enable it to not compete for the sale of specific titles, but for a share of the available media buying budget within each educational jurisdiction. Several years ago, Magic began accumulating digital delivery rights for the titles it distributes, and approximately 75% of all titles in its library include such rights. It is believed that this extensive library of titles with digital delivery rights will favorably position Magic as distribution technologies and delivery systems migrate to digital formats - a process which is already underway in Canada. Custom Video provides video dubbing and conversion services, primarily in the Southern Ontario market. Dozens of competitors exist in this area, and Custom Video's market share is unknown. Approximately 45-50% of Custom Video's current business is from Magic and its subsidiary, BCLC. The remainder is from a growing number of repeat commercial clients which rely on Custom Video to provide timely delivery of quality duplications at competitive prices, and from a small amount of walk-in business traffic. In the past twelve months, Custom Video has upgraded and increased its capacity in order to ensure it satisfies the steady increase in demand for its services. B.C. Learning Connection has traditionally operated under an exclusive arrangement with the British Columbia Ministry of Education to provide marketing and fulfilment services for educational videos in the B.C. school system. The Company is presently negotiating to extend the term of this arrangement. Sonoptic Technologies Inc., located in Saint John, New Brunswick, operates a digital video facility which converts analog video to digital video formats suitable for distribution through the Internet, as well as through broadband distribution networks being established by telephone and cable companies in Canada and elsewhere. This is a relatively new type of business and, while there are numerous "low-end" service providers entering the market in North America, there are no clear leaders or dominant players which have emerged. Sonoptic has been granted preferential supplier status by NBTel, the provincial telephone company in New Brunswick, for the conversion of video materials which will be delivered on its broadband network, now being introduced in the province. Sonoptic is also positioning itself as the premier source for digital video consulting and conversion services within the key markets which are expected to emerge in the next two to three years. - 14 - Viewer Services, a new joint venture company 50% owned by Magic, was created to assume the inbound telemarketing and product fulfilment business previously operated by TVOntario, the provincial educational television broadcaster in Ontario. Viewer Services begins its operation in November 1996 and will initially focus on assuming and building the fulfilment services associated with TVOntario programming. In this regard it has no direct competition. Employees The Company has 68 employees in the five subsidiaries (excluding Viewer Services), consisting of eight executives, ten salespersons, 23 persons involved in technical and warehouse services, four involved in graphic development, six clerical staff, nine in marketing and eight individuals involved in finance and administration. During the 1997 Fiscal Year, the Company anticipates hiring an additional five persons in various capacities to assist in the Company's growth and development. Employee relationships are satisfactory and the Company believes its planned staff to be adequate for its anticipated needs. Item 2. Properties. In November 1994, the Company acquired an approximately 25,000 square foot parcel of land in Etobicoke, Ontario, Canada, on which a 12,500 square foot free-standing, one story building was previously erected. The Company presently utilizes this building as its principal place of business. The Company owns the Etobicoke property and building free of any liens, the purchase mortgage for the property having been paid in full and satisfied on October 2, 1995. Magic owns three office units, comprising an aggregate 8,000 square feet of office space, in a building located in Oakville, Ontario, Canada. These properties, which collectively serve as Magic's principal executive offices, are secured by a debenture due on demand with an outstanding principal amount of Cdn$652,407 (US$486,399) as of November 25, 1996. Magic and its subsidiaries also lease (or are negotiating leases for) additional properties as follows:
Lease Square Expiration Location Purpose Feet Date Annual Rent -------- ------- ---- ---- ----------- Saint John, New Brunswick Offices 2,342 5/31/00 Cdn$35,130 US$25,670 Burnaby, British Columbia Offices and warehouse 2,000 6/30/97 19,200 14,030 Langley, British Columbia Offices 1,048 12/31/97 8,400 6,138 Oakville, Ontario Offices and warehouse 4,000 * 15,970 11,670 - ---------- * Under negotiation for future term.
The Company believes that the facilities of the Company and Magic are adequate for their present requirements. - 15 - Item 3. Legal Proceedings. Set forth below is a description of material pending litigation to which the Company is a party. (a) On June 12, 1992, the Company, together with Communications and NTNIN, commenced a lawsuit against Interactive Network, Inc. ("Interactive") and its president, David Lockton, in the Federal Court of Canada, Trial Division, in Montreal, Quebec, under the title NTN Communications, Inc., NTN Sports, Inc. and NTN Canada, Inc. v. David Lockton and Interactive Network, Inc. (the "Company Action"). The Company Action seeks a declaration of non-infringement with respect to Canadian Patent No. 1,274,903 held by Interactive (the "Interactive Patent") and to establish that the Company, Communications and NTNIN have properly done business in Canada since the fall of 1986. The basis for the Company's claim in the Company Action is that the systems used by the Company to produce interactive programming are not within the scope of the claims of the Interactive Patent. The Company thereafter amended its complaint to include a claim of invalidity of the Interactive Patent based upon untrue and materially misleading claims made by Interactive in its petition for the Interactive Patent. Except for the aforementioned pleadings, no proceedings or discovery have been undertaken in the Company Action. (b) Subsequent to the commencement of the Company Action, and on June 18, 1992, Interactive commenced a lawsuit against the Company, Communications and NTNIN in the Federal Court of Canada, Trial Division, Montreal, Quebec, under the titled Interactive Network, Inc. v. NTN Communications, Inc., NTN Sports, Inc. and NTN Canada, Inc. (the "Interactive Action"). The Interactive Action alleges that Interactive granted Communications the right to use the Interactive Patent, which right Communications then improperly licensed to the Company and NTNIN. Interactive alleges that the license agreement between Communications and the Company and NTNIN infringes upon the Interactive Patent. The Interactive Action seeks a declaration of the validity of the Interactive Patent, an injunction restraining the Company from further infringement, and either damages (in an unspecified amount) or an accounting of profits derived from certain games used in Canada. Except for the aforementioned pleadings, no proceedings or discovery have been undertaken in the Interactive Actions. Management believes that the licenses granted to the Company by Communications are valid and that the patent infringement claims underlying the Interactive Action will ultimately be proven to be unfounded. The Company intends to vigorously defend its position in the Interactive Action and to prosecute its position in the Company Action; however, there can be no assurance that any or all of these actions will be decided in favor of the Company. The Company believes, based - 16 - in part upon the advice of outside, independent counsel, that the costs of defending and prosecuting these actions will not have a material adverse effect upon the Company's financial position. In its Quarterly Report on Form 10-Q, for the quarter ended September 30, 1996, Communications stated that "[w]ith the courts [sic] assistance, [Communications] and [Interactive] 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." The disputes referred to in the Communications Form 10-Q involved litigation in the United States involving allegations similar to the allegations underlying the Company Action and Interactive Action. In the Communication Form 10-Q, Communications also noted that "no substantive action has been taken in the furtherance of" the Company Action or Interactive Action. The Company and its property are not a party or subject to any other material pending legal proceedings, other than ordinary routine litigation incidental to its business. To the knowledge of the Company no proceedings of a material nature have been or are contemplated against the Company. Item 4. Submission of Matters to a Vote of Security Holders. The Company did not submit any matters to a vote of its security holders during the quarter ended August 31, 1996. - 17 - PART II Item 5. Market Price for the Registrant's Common Equity and Related Stockholder Matters. Market Information The common stock of the Company, par value $.0467 per share (the "Common Stock"), is traded in the over-the-counter market and is quoted on the Nasdaq SmallCap Market ("Nasdaq"), under the symbol "NTNC." Set forth below is the range of high and low bid prices for shares of Common Stock for each full quarterly period within the Company's two most recent fiscal years, as derived from reports furnished by the National Association of Securities Dealers, Inc., as adjusted to give retroactive effect to the Company's three-for-two (3:2) stock split made effective August 15, 1996. The information reflects inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. Bid Prices ----------------------------------------- Quarters Ended High Low - -------------- ---- --- November 30, 1994................ US$6-1/12 US$4-1/2 February 28, 1995................ 4-5/6 4 May 31, 1995..................... 4-5/6 3 August 31, 1995.................. 4-5/6 3-1/6 November 30, 1995................ 4-5/12 3-1/4 February 29, 1996................ 5-1/12 3-1/12 May 31, 1996..................... 6-1/2 4-7/12 August 31, 1996.................. 7-1/8 4-1/4 Holders As of the close of business on November 14, 1996, there were 379 holders of record of Common Stock. The Company believes that there are approximately 600 beneficial holders of Common Stock. Dividends Since its inception in 1987, the Company has not paid any cash dividends on its Common Stock. However, the Company has, in the past, declared certain stock dividends and stock splits. The Company intends to retain earnings, if any, to finance operations and, therefore, does not expect to declare or pay any cash dividends on the Common Stock in the foreseeable future. - 18 - Item 6. Selected Financial Data. The following table sets forth a summary of selected financial information regarding the Company and its subsidiaries, consolidated, for each of the five fiscal years ended August 31, 1996. For the convenience of the reader, the selected financial information is also given in U.S. dollars, converted at the Noon Buying Rate in effect at the end of the period to which the amount relates. (For applicable Noon Buying Rates, see "Exchange Rates" preceding Item 1 above.) Statement of Operations Data (Canadian Dollars):
Year Ended August 31, -------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Operating revenues........... Cdn$6,318,251 Cdn$4,559,382 Cdn$3,147,980 Cdn$2,770,479 Cdn$2,456,031 Cost of sales................ 2,505,673 1,852,561 1,291,863 1,268,250 1,116,302 Gross profit................. 3,812,578 2,706,821 1,856,117 1,502,229 1,339,729 Net income (loss)............ 541,059 357,535 75,694 55,811 (319,540) Net income (loss) per share.. .23 .17 .05 .07 (.42) Weighted average number of shares outstanding.......... 2,392,548 2,146,226 1,517,348 779,097 755,871 Balance Sheet Data (Canadian Dollars): August 31, -------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Total assets................. Cdn$9,883,093 Cdn$8,352,670 Cdn$3,575,115 Cdn$3,043,832 Cdn$2,796,337 Long-term obligations........ -0- -0- -0- 18,804 -0- Shareholders' equity......... 8,877,434 7,536,411 2,338,277 2,148,719 1,445,097 Statement of Operations Data (United States): Year Ended August 31, -------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Operating revenues........... US$4,616,917 US$3,394,418 US$2,295,785 US$2,097,576 US$2,054,912 Cost of sales................ 1,830,963 1,379,215 942,140 960,214 933,988 Gross profit................. 2,785,954 2,015,203 1,353,645 1,137,363 1,120,924 Net income (loss)............ 395,366 266,182 55,203 42,255 (267,353) Net income (loss) per share.. .17 .12 .04 .05 (.35) Weighted average number of shares outstanding.......... 2,392,548 2,146,226 1,517,348 779,097 755,871 Balance Sheet Data (United States Dollars): August 31, -------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Total assets................. US$7,221,844 US$6,218,486 US$2,607,289 US$2,304,537 US$2,339,639 Long-term obligations........ -0- -0- -0- 14,237 -0- Shareholders' equity......... 6,486,981 5,610,788 1,705,278 1,626,831 1,209,084
No cash dividends have been declared for any of the fiscal years presented above. - 19 - Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations. ------------- Introduction The financial statements of the Company and the information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are expressed in Canadian dollars. For the convenience of the reader, in this Management's Discussion and Analysis, certain financial amounts are also given in U.S. dollars, converted at the Noon Buying Rate in effect at the end of the period to which the amount relates, or the exchange rate on the date specified herein. (For applicable Noon Buying Rates, see "Exchange Rates" preceding Item 1 above.) As the Noon Buying Rate fluctuates daily, financial comparisons between periods expressed in U.S. dollars do not accurately reflect the true difference in the Company's financial position or results of operations between periods. Accordingly, the comparisons between periods presented below, both in dollar amounts and as percentages from prior periods, are expressed in Canadian dollars only. Results of Operations Year Ended August 31, 1996 Compared to Year Ended August 31, 1995 Revenues. Revenues from program content services for the 1996 Fiscal Year were Cdn$3,520,814 (US$2,572,754), compared to Cdn$2,772,319 (US$2,063,966) for the Company's fiscal year ended August 31, 1995 (the "1995 Fiscal Year"), an increase of Cdn$748,495 or 27%. This increase is primarily the result of a net increase of 100 Network locations during the year. Revenues from equipment rental were Cdn$959,153 (US$700,879), compared to Cdn$517,950 (US$385,609) for the 1995 Fiscal Year, an increase of Cdn$441,203 or 85.2%. This increase is primarily the result of an increase in the number of rental systems and an increase in the number of Playmakers per system installed in Group Subscriber locations. Revenues from event programming for the 1996 Fiscal Year were Cdn$518,275 (US$378,718), compared to Cdn$373,477 (US$278,050) for the 1995 Fiscal Year, an increase of Cdn$144,798 or 38.8%. This increase is primarily the result of sales efforts leading to a greater number of higher revenue-producing events. Revenues from maintenance services were Cdn$476,533 (US$348,216), compared to Cdn$381,008 (US$283,657) for the 1995 Fiscal Year, an increase of Cdn$95,525 or 25.1%. This increase is primarily the result of an increase in the number of systems and rental Playmakers installed in Group Subscriber locations. Revenues from equipment sales were Cdn$148,330 (US$108,389), compared to Cdn$215,152 (US$160,179) for the 1995 Fiscal Year, a decrease of Cdn$66,822 or 31.1%. This decrease is primarily the result of a majority of Group Subscribers preferring the system rental program which was begun two years earlier, as evidenced by the increase in revenues from equipment rental. Other revenues, consisting primarily of advertising and sponsorship revenue, and interest income, were Cdn$695,146 (US$507,962), compared to Cdn$299,476 (US$222,957) for the 1995 Fiscal Year, an increase of Cdn$395,670 or 132.1%. This increase is primarily the result of increased advertising and sponsorship revenues from a larger number of advertisers. - 20 - As a result of the foregoing, the Company's total revenues were Cdn$6,318,251 (US$4,616,917), compared to Cdn$4,559,382 (US$3,394,418) for the 1995 Fiscal Year, an increase of Cdn$1,758,869 or 38.6%. Cost of Sales. Commissions for the 1996 Fiscal Year were Cdn$1,549,729 (US$1,132,429), compared to Cdn$1,340,196 (US$997,764) for the 1995 Fiscal Year, an increase of Cdn$209,533 or 15.6%. As a percentage of the Company's total revenues, such costs decreased to 24.5% for the 1996 Fiscal Year from 29.4% for the 1995 Fiscal Year. This decrease is primarily the result of an increase in sales which are not commissionable, including sales made by the Company's direct sales force who do not receive commission. Equipment costs were Cdn$298,243 (US$217,934), compared to Cdn$198,344 (US$147,665) for the 1995 Fiscal Year, an increase of Cdn$99,899 or 50.4%. As a percentage of the Company's total revenues, such costs increased to 4.7% for the 1996 Fiscal Year from 4.4% for the 1995 Fiscal Year. This increase, both in total amount and as a percentage of total revenue, is primarily the result of increased refurbishing costs related to equipment at Group Subscriber locations. Depreciation costs for the 1996 Fiscal Year were Cdn$281,757 (US$205,887), compared to Cdn$150,932 (US$112,367) for the 1995 Fiscal Year, an increase of Cdn$130,825 or 86.7%. As a percentage of the Company's total revenues, such costs increased to 4.5% for the 1996 Fiscal Year from 3.3% for the 1995 Fiscal Year. This increase is primarily the result of the growing number of rental systems in the field. Other costs were Cdn$375,944 (US$274,712), compared to Cdn$163,089 (US$121,418) for the 1995 Fiscal Year, an increase of Cdn$212,855 or 130.5%. As a percentage of the Company's total revenues, such costs increased to 6.0% for the 1996 Fiscal Year from 3.6% for the 1995 Fiscal Year. This increase is primarily the result of costs associated with advertising and sponsorships and event programming which were new in the 1996 Fiscal Year. As a result of the foregoing, the Company's total costs of sales were Cdn$2,505,673 (US$1,830,963), compared to Cdn$1,852,561 (US$1,379,215) for the 1995 Fiscal Year, an increase of Cdn$653,112 or 35.3%, and total gross margins improved to 60.3% in the 1996 Fiscal Year from 59.4% in the 1995 Fiscal Year. Expenses. Selling, general and administrative expenses for the 1996 Fiscal Year were Cdn$2,642,853 (US$1,931,204), compared to Cdn$2,043,369 (US$1,521,269) for the 1995 Fiscal Year, an increase of Cdn$599,484 or 29.3%. As a percentage of the Company's total revenues, such expenses decreased to 41.8% for the 1996 Fiscal Year from 44.8% for the 1995 Fiscal Year. This decrease in percentage is primarily the result of improved utilization of staff and resources, as well as the Company's existing physical premises having the capacity to serve it without additional cost as revenues increased. Bad debts expense was Cdn$54,990 (US$40,183), compared to Cdn$57,653 (US$42,922) for the 1995 Fiscal Year, a decrease of Cdn$2,663 or 4.6%. As a percentage of the Company's total revenues, such costs decreased to 0.9% for the 1996 Fiscal Year from 1.3% for the 1995 Fiscal Year. This decrease is primarily the result of an overall improvement in the management of the Company's accounts receivables. Depreciation and amortization for the 1996 Fiscal Year were Cdn$102,019 (US$74,548), compared to Cdn$80,853 (US$60,194) for the 1995 Fiscal Year, an increase of Cdn$21,166 or 26.2%. As a percentage of the Company's total revenues, such costs - 21 - decreased to 1.6% for the 1996 Fiscal Year from 1.8% for the 1995 Fiscal Year. Interest and bank charges for the 1996 Fiscal Year were Cdn$8,657 (US$6,326), compared to Cdn$28,311 (US$21,077) for the 1995 Fiscal Year, an decrease of Cdn$19,654 or 69.4%. As a percentage of the Company's total revenues, such costs decreased to 0.14% for the 1996 Fiscal Year from 0.62% for the 1995 Fiscal Year. This decrease is primarily the result of the full payment of a mortgage on the Company's building in October 1995. As a result of the foregoing, the Company's total expenses were Cdn$2,808,519 (US$2,052,261), compared to Cdn$2,210,186 (US$1,645,463) for the 1995 Fiscal Year, an increase of Cdn$598,333 or 27.1%. However, as a percentage of the Company's total revenues, such these expenses decreased to 44.5% for the 1996 Fiscal Year from 48.5% for the 1995 Fiscal Year. Income Taxes. Provision for income taxes were Cdn$463,000 (US$338,327) for the 1996 Fiscal Year, compared to Cdn$139,100 (US$103,559) for the 1995 Fiscal Year, an increase of Cdn$323,900 or 232.9%. The effective tax rate was 46.1% in the 1996 Fiscal Year, compared to 28.0% in the 1995 Fiscal Year. The change in the effective tax rate reflects the utilization of prior years' losses in the 1995 Fiscal Year. Net Income. As a result of all of the above, the Company's net income for the 1996 Fiscal Year was Cdn$541,059 (US$395,366), compared to Cdn$357,535 (US$266,182) for the 1995 Fiscal Year, an increase of Cdn$183,524 or 51.3%. This represents an increase in net income as a percentage of total revenues to 8.6% in the 1996 Fiscal Year from 7.8% in the 1995 Fiscal Year. Year Ended August 31, 1995 Compared to Year Ended August 31, 1994 Revenues. Revenues from program content services for the 1995 Fiscal Year were Cdn$2,772,319 (US$2,063,966), compared to Cdn$2,023,722 (US$1,475,877) for the Company's fiscal year ended August 31, 1994 (the "1994 Fiscal Year"), an increase of Cdn$748,597 or 37.0%. This increase is primarily the result of a net increase of 97 Network locations during the year. Revenues from equipment rental were Cdn$517,950 (US$385,609), compared to Cdn$144,016 (US$105,029) for the 1994 Fiscal Year, an increase of Cdn$373,934 or 259.6%. This increase is primarily the result of an increase in the number of rental systems installed in Network locations. Revenues from event programming for the 1995 Fiscal Year were Cdn$373,477 (US$278,050), compared to Cdn$348,427 (US$254,104) for the 1994 Fiscal Year, an increase of Cdn$25,050 or 7.2%. This increase is primarily the result of an increase in the number of events sold. Revenues from maintenance services were Cdn$381,008 (US$283,657), compared to Cdn$257,594 (US$187,860) for the 1995 Fiscal Year, an increase of Cdn$123,414 or 47.9%. This increase is primarily the result of an increase in the number of systems and rental Playmakers installed in Group Subscriber locations. Revenues from equipment sales were Cdn$215,152 (US$160,179), compared to Cdn$235,321 (US$171,617) for the 1994 Fiscal Year, a decrease of Cdn$20,169 or 8.6%. This decrease is primarily the result of the market acceptance of the systems rental program introduced two years earlier. Other revenues, consisting primarily of interest income, were Cdn$299,476 (US$222,957), compared to Cdn$138,900 (US$101,298) for the 1994 Fiscal Year, an increase of - 22 - Cdn$160,576 or 115.6%. This increase is primarily the result of increased interest income from the investment of funds raised from the issue of common stock. As a result of the foregoing, the Company's total revenues were Cdn$4,559,382 (US$3,394,418), compared to Cdn$3,147,980 (US$2,295,785) for the 1994 Fiscal Year, an increase of Cdn$1,411,402 or 44.8%. Cost of Sales. Commissions for the 1995 Fiscal Year were Cdn$1,340,196 (US$997,764), compared to Cdn$972,292 (US$709,081) for the 1994 Fiscal Year, an increase of Cdn$367,904 or 37.8%. This increase is primarily the result of an increase in revenues on which Commissions are based. As a percentage of the Company's total revenues, such costs decreased to 29.4% for the 1995 Fiscal Year from 30.9% for the 1994 Fiscal Year. This decrease is primarily the result of increase in revenues on which Commissions are not based. Equipment costs were Cdn$198,344 (US$147,665), compared to Cdn$153,417 (US$111,885) for the 1994 Fiscal Year, an increase of Cdn$44,927 or 29.3%. This increase is primarily the result of an increase in the number of systems installed during the year. As a percentage of the Company's total revenues, such costs decreased to 4.4% for the 1995 Fiscal Year from 4.9% for the 1994 Fiscal Year. This decrease is primarily the result of an increase in revenues which are not related to equipment costs. Depreciation costs for the 1995 Fiscal Year were Cdn$150,932 (US$112,367), compared to Cdn$47,401 (US$34,569) for the 1994 Fiscal Year, an increase of Cdn$103,531 or 218.4%. As a percentage of the Company's total revenues, such costs increased to 3.3% for the 1995 Fiscal Year from 1.5% for the 1994 Fiscal Year. This increase is primarily the result of an increased number of installed rental systems. Other costs were Cdn$163,089 (US$121,418), compared to Cdn$118,752 (US$86,604) for the 1994 Fiscal Year, an increase of Cdn$44,337 or 37.3%. As a percentage of the Company's total revenues, such costs decreased to 3.6% for the 1995 Fiscal Year from 3.8% for the 1994 Fiscal Year. As a result of the foregoing, the Company's total costs of sales were Cdn$1,852,561 (US$1,379,215), compared to Cdn$1,291,862 (US$942,140) for the 1994 Fiscal Year, an increase of Cdn$560,699 or 43.4%, and total gross margins improved to 59.4% in the 1995 Fiscal Year from 59.0% in the 1994 Fiscal Year. Expenses. Selling, general and administrative expenses for the 1995 Fiscal Year were Cdn$2,043,369 (US$1,521,269), compared to Cdn$1,607,766 (US$1,172,525) for the 1994 Fiscal Year, an increase of Cdn$435,603 or 27.1%. As a percentage of the Company's total revenues, such expenses decreased to 44.8% for the 1995 Fiscal Year from 51.1% for the 1994 Fiscal Year. This decrease in percentage is primarily the result of these expenses not being directly related to sales. Bad debts expense was Cdn$57,653 (US$42,922), compared to Cdn$47,350 (US$34,532) for the 1994 Fiscal Year, an increase of Cdn$10,303 or 21.8%. As a percentage of the Company's total revenues, such costs decreased to 1.26% for the 1995 Fiscal Year from 1.5% for the 1994 Fiscal Year. This decrease is primarily the result of an overall improvement in the management of the Company's accounts receivable. Depreciation and amortization for the 1995 Fiscal Year were Cdn$80,853 (US$60,194), compared to Cdn$60,822 (US$44,357) for the 1994 Fiscal Year, an increase of - 23 - Cdn$20,031 or 32.9%. As a percentage of the Company's total revenues, such costs decreased to 1.77% for the 1995 Fiscal Year from 1.9% for the 1994 Fiscal Year. Interest and bank charges for the 1995 Fiscal Year were Cdn$28,311 (US$21,077), compared to Cdn$11,993 (US$8,746) for the 1994 Fiscal Year, an increase of Cdn$16,318 or 136.1%. As a percentage of the Company's total revenues, such costs increased to 0.6% for the 1995 Fiscal Year from 0.4% for the 1994 Fiscal Year. This increase is primarily the result of interest charges on the mortgage assumed when the Company purchased its land and building. As a result of the foregoing, the Company's total expenses were Cdn$2,210,186 (US$1,645,463), compared to Cdn$1,727,931 (US$1,260,160) for the 1994 Fiscal Year, an increase of Cdn$482,255 or 27.9%. However, as a percentage of the Company's total revenues, such these expenses decreased to 48.5% for the 1995 Fiscal Year from 54.9% for the 1994 Fiscal Year. Income Taxes. Provision for income taxes was Cdn$139,100 (US$103,559) for the 1995 Fiscal Year, compared to Cdn$52,493 (US$38,283) for the 1994 Fiscal Year, an increase of Cdn$86,607 or 165.0%. The effective tax rate was 28% in the 1995 Fiscal Year, compared to 41% in the 1994 Fiscal Year. The change in the effective tax rate reflects the utilization of prior year's losses in the 1995 Fiscal Year. The tax benefit of these losses was not available in the 1994 Fiscal Year. Net Income. As a result of all of the above, the Company's net income for the 1995 Fiscal Year was Cdn$357,535 (US$266,182), compared to Cdn$75,694 (US$55,203) for the 1994 Fiscal Year, an increase of Cdn$281,841 or 372.3%. This represents an increase in net income as a percentage of total revenues to 7.8% in the 1995 Fiscal Year from 2.4% in the 1994 Fiscal Year. Liquidity and Capital Resources At August 31, 1996, the Company had working capital of Cdn$6,086,156 (US$4,447,319), an increase of Cdn$572,950 from working capital of Cdn$5,513,206 (US$4,104,531) at August 31, 1995. This increase is primarily due to the net income for the 1996 Fiscal Year and increases in inventory held for sale and rent. For the 1996 Fiscal Year, the Company had net decrease in cash flow of Cdn$1,320,251 (US$964,743), a decrease from its net positive cash flow of Cdn$1,486,036 for the 1995 Fiscal Year. Net positive cash flow for the 1994 Fiscal Year was Cdn$446,892 (US$325,913). The significant increase in net cash flow for the 1995 Fiscal Year is primarily due to the proceeds from the sale of Common Stock of Cdn$4,252,500 (US$3,150,000, on October 4, 1994) to NetStar during the 1995 Fiscal Year. Cash used by operating activities for the 1996 Fiscal Year was Cdn$354,143 (US$258,782) a decrease of Cdn$1,626,179 from cash used by operating activities for the 1995 Fiscal Year. The major factors contributing to this decrease from the 1995 Fiscal Year include an increase in net income of Cdn$183,524, as well as increases in accounts payable and accrued liabilities of - 24 - Cdn$251,329 resulting from growth in the Company's operations. Income taxes payable increased Cdn$162,294 for the 1996 Fiscal Year from income taxes payable in the 1995 Fiscal Year resulting from increased taxable income. These sources of operating cash were mitigated by the use of cash in increasing short-term investments by Cdn$1,525,770. Inventory increased during the 1996 Fiscal Year by Cdn$75,915, as required to service the increase in Group Subscriber locations. Accounts receivable increased by Cdn$99,184 in the 1996 Fiscal Year primarily due to increased sales levels. Cash used by operations for the 1995 Fiscal Year increased by Cdn$2,292,619 from the 1994 Fiscal Year, primarily due to an increase in short-term investments of Cdn$2,051,381; an increase in accounts receivable of Cdn$136,856 resulting from higher sales levels; an increase in prepaid expenses of Cdn$100,921 relating to property taxes and royalties paid to LearnStar; a decrease in accounts payable and accrued liabilities of Cdn$389,667 resulting from the Company's compliance with shorter payment terms then required by vendors. Cash used in investing activities in both the 1996 Fiscal Year and 1995 Fiscal Year was Cdn$1,521,849 (US$1,112,056) and Cdn$1,268,464 (US$944,360), respectively. Cash used in the 1996 Fiscal Year was greater than in the prior fiscal year primarily due to the Company advancing Cdn$350,000 (US$255,754) to Magic Lantern Communications Ltd. prior to the Company's purchase of Magic subsequent to the end of the 1996 Fiscal Year. Cash provided by financing activities in the 1996 Fiscal Year decreased by Cdn$4,179,081 from the amount provided by financing activities in the 1995 Fiscal Year primarily due to the investment by NetStar in the Company during the 1995 Fiscal Year. In the 1995 Fiscal Year a total of 1,006,901 shares of Common Stock were issued with the Company receiving net proceeds of Cdn$4,840,599 (US$3,603,781), compared to 385,386 shares with net proceeds of Cdn$799,964 (US$584,555) in the 1996 Fiscal Year. The Company believes that its working capital position provides the required liquidity on both a short and long term basis and that its will not require external financing for its operating activities during the 1997 Fiscal Year, as based upon the Company's present plans for the 1997 Fiscal Year. However, any changes in such plans may require the Company to seek outside financing. No arrangements are presently in place for outside financing should the need arise. Inflation The rate of inflation has had little impact on the Company's operations or financial position during the three fiscal years ended August 31, 1996, and inflation is not expected to have a significant impact on the Company's operations or financial position during the 1997 Fiscal Year. The Company pays a number of its suppliers, including its licensor and principal supplier, Communications, in US dollars. Therefore, fluctuations in the value of the Canadian dollar against the US dollar will have an impact on gross profit as well as the net income of the Company. If the value of the Canadian dollar falls against the US dollar, the cost of sales of the Company will - 25 - increase thereby reducing the Company's gross profit and net income. Conversely, if the value of the Canadian dollar rises against the US dollar, gross profit and net income will increase. Item 8. Financial Statements and Supplementary Data. Set forth below is a list of the consolidated financial statements of the Company being furnished in this Annual Report on Form 10-K pursuant to the instructions to Item 8 to Form 10-K and their respective locations herein. Financial Statement Location* - ------------------- -------- Report of Independent Certified Public Accountants.................... F - 1 Consolidated Balance Sheets........................................... F - 2 Consolidated Statements of Operations and Retained Earnings (Deficit). F - 3 Consolidated Statements of Cash Flows................................. F - 4 Notes to Consolidated Financial Statements............................ F - 5 - ---------- * Page F-1 follows page 38 to this Annual Report on Form 10-K. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures. On July 18, 1995, the Board of Directors of the Company determined to replace Madgett, Roberts, Marlow, Hurren & Partners ("Madgett, Roberts") as the independent accountants to audit the Company's financial statements and engage Ernst & Young as the Company's new independent accountants. The reports of Madgett, Roberts for either of the two fiscal years prior to replacement did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles. There were no disagreements with Madgett, Roberts requiring disclosure pursuant to Item 304(a)(1)(iv) of Regulation S-K, nor were there any reportable events requiring disclosure pursuant to Item 304(a)(1)(v) of Regulation S-K. - 26 - PART III Item 10. Directors and Executive Officers of the Registrant. -------------------------------------------------- The table below sets forth the names and ages of the directors and executive officers of the Company and its subsidiaries, all positions and offices held by such persons and, if applicable, their years of service as directors of the Company. All directors shall hold their positions until the next Annual Meeting of the Shareholders of the Company and until their successors are duly elected and qualified. Director Name Age Principal Positions with the Company Since - --- --- ------------------------------------ ----- Peter Rona 50 President, Chief Executive Officer, Principal 1987 Financial and Accounting Officer and Chairman of the Board of Directors of the Company David Auger 46 Secretary of the Company; Director of N/A Corporate Development of NTN Interactive Network Inc. Douglas R. Connolly 43 President of Magic Lantern 1996 Communications Ltd.; Director of the Company Daniel C. Downs 57 Director of the Company 1993 James R. Newell 39 Director of the Company 1994 Richard Peddie 49 Director of the Company 1994 Dale G. Smith 47 Director of the Company 1993 Adrian P. Towning 52 Director of the Company 1994 Peter Rona has been the President, Chief Executive Officer, Principal Financial and Accounting Officer and a director of the Company since September 1, 1987. He has been President of NTN Interactive Network, Inc. (formerly, NTN Sports, Inc. until 1993) from 1985 to 1991 and February 1993 to present. Mr. Rona has also been the President, sole director and sole shareholder of Anor Management, Ltd., a personal holding company since 1987. David Auger was appointed the Company's Secretary in April 1995. He has been Director of Corporate Development for NTNIN since November 1994. For the eleven years prior to his joining the Company, Mr. Auger acted as a consultant to the Company (June 1993 to October 1994) and others, providing consulting services in developing and marketing interactive programs and technologies to the hotel, hospitality, and financial markets. Douglas Connolly has been the President and a director of Magic Lantern Communications Ltd. (and its predecessor corporation) since 1985. On October 2, 1996, the - 27 - Company acquired all of the outstanding stock of Magic. Mr. Connolly also has been President, director and a principal shareholder of Connolly-Daw Holdings Inc. (since 1987) and 1199846 Ontario Ltd. (since September 1996), two personal holding companies. Daniel C. Downs has been Executive Vice-President (1983 to April 1994), Chief Operating Officer (1983 to October 1996), President (since April 1994) and a director (1985 to present) of NTN Communications, Inc., a developer and distributor of interactive programs. Under a License Agreement, dated March 23, 1990 (the "License Agreement"), between Communications and NTNIN, the Company, through NTNIN, holds the exclusive license to market the products and programs of Communications throughout Canada through December 31, 2015. Mr. Downs was an independent marketing consultant from 1981 to 1983, during which time he also worked on the development of the interactive game QB1. From 1979 to 1981, he served as Executive Vice-President and General Manager of Hollywood Park Race Course. From 1974 to 1979, he served as Executive and General Manager for the Southern California Racing Association at Los Alamitos Race Course. James R. Newell is the Senior Vice President of Finance and Chief Financial Officer (October 1993 to present) of NetStar Communications Inc. (formerly, Labatt Communications Inc.), a company involved in broadcast operations. Mr. Newell was the Assistant Treasurer (1986 to 1987), Treasurer (1987 to 1989) and Vice President of Finance and Chief Financial Officer (1989 to October 1993) of Gandalf Technologies Inc., a manufacturer of data communications products. He was an auditor with KPMG (formerly, Peat Marwick Mitchell), an international firm of chartered accountants from 1980 to 1986. Mr. Newell is currently a director of The Discovery Channel (since March 1995). Richard Peddie is the President and Chief Operating Officer (since May 1995) of NetStar Communications Inc. (formerly, Labatt Communications Inc.). Mr. Peddie was President and Chief Executive Officer of Stadium Corporation of Ontario from 1989 to April 1994. Mr. Peddie was President and Chief Executive Officer of Pillsbury Canada Limited (1985 to 1989). He was President of the Hostess Food Products division (1993 to 1985) and Vice President and General Manager - Cold Beverages and Cereals (1979 to 1983) of General Foods Limited. Mr. Peddie is a director of a number of companies and organizations, including Janes Family Foods and St. Clair Group. Dale G. Smith has been an officer and part owner of Montebello Farms Inc., the world's second largest breeders of Straight Egyptian Arabian Horses, since 1990. From 1988 to 1990, he was the President of Oden Capital Corporation, a privately owned venture capital company. From 1969 to 1988, he was a member of Deloitte & Touche, certified public accountants, having been elected a partner in 1980. Adrian P. Towning is a private, independent investor in several companies involved in the communications industry. As a result of his investments, he has served as a director of some of these companies, including Medical Communications Corporation ("MCC") (1994 to July 1996) and Faxcast Broadcasting Corporation (1991 to present), a public traded company on the London - 28 - Stock Exchange, which owns proprietary technology for the simultaneous broadcasting of data using airwaves, and takes an active part in their management decisions. On May 14, 1996, MCC filed a petition under Chapter 7 of the United States Bankruptcy Code and the Bankruptcy Court appointed a Trustee of MCC on July 11, 1996. On July 16, 1996, MCC was dissolved. From 1983 to 1989, he established and managed Anglo-Massachusetts Investments Incorporated, with offices in Boston and London, which was involved in providing financial advice to Europeans. Pursuant to a Designation Agreement, dated as of October 4, 1994, among the Company , NTNIN and NetStar, the Company has granted NetStar the right to designate one-third (1/3) of the members of the Company's Board of Directors so long as NetStar is the owner of at least 20% and not greater than 50% of the outstanding Common Stock. Should NetStar's ownership be at least 10% and less than 20% of the outstanding Common Stock, NetStar would be entitled to designate one-sixth (1/6) of the members of the Company's Board. Further, should NetStar's ownership exceed 50% of the outstanding Common Stock, NetStar shall be entitled to designate one-half (1/2) of the members of the Company's Board. In accordance with the terms of the Designation Agreement, James R. Newell and Richard Peddie have been designated by NetStar as directors of the Company. Pursuant to a Management Agreement, dated October 1, 1996 (the "Magic Lantern Management Agreement"), between Magic and Connolly-Daw, Magic recommended that Douglas Connolly be elected as a director of the Company. On November 25, 1996, the Board of Directors of the Company acted on such recommendation by expanding the size of the Board to seven members and elected Mr. Connolly as an additional director to fill the newly created directorship. In addition, the Employment Agreement, dated October 1, 1996 (the "D. Connolly Employment Agreement"), between Magic and Douglas Connolly, which covers the employment term of October 1, 1997 through September 30, 1999, contains a provision under which Magic is to recommend that Douglas Connolly be elected as a director of the Company. It is not known at this time how the Board of Directors will act on such recommendation once the D. Connolly Employment Agreement becomes effective. Item 11. Executive Compensation. Summary Compensation Table The following table sets forth information concerning the compensation paid or accrued by the Company during the three years ended August 31, 1996 to those individuals who served as Chief Executive Officer of the Company during the 1996 Fiscal Year and all other executive officers of the Company or any of its subsidiaries at August 31, 1996 who received total annual salary and bonuses in excess of $100,000 during the 1996 Fiscal Year (collectively, the "Named Executive Officers"). - 29 -
Long-Term Compensation ----------------- Annual Compensation Awards ------------------------------------------------------ ----------------- Securities Year Ended Other Annual Underlying Name and Principal Position August 31, Salary Bonus Compensation Options --------------------------- ---------- ------ ----- ------------ ------- Peter Rona, President and 1996 US$115,090 US$10,961 US$3,483 37,500 Chief Executive Officer 1995 111,674 11,167 -0- 75,000 1994 70,012 7,293 -0- -0-
During the three year period ended August 31, 1994, the Company did not grant any restricted stock awards or stock appreciation rights, nor did the Company have any long-term incentive plan. Additionally, all of the Company's group life, health, hospitalization, medical reimbursement or relocation plans, if any, do not discriminate in scope, terms or operation, in favor of the Named Executive Officers and are generally available to all salaried employees. Further, no Named Executive Officer received, in any of the periods specified in the Summary Compensation Table, perquisites and other personal benefits, securities or property in an aggregate amount in excess of the lesser of $50,000 or 10% of the total salary and bonus reported for the Named Executive Officer in the fiscal year in which such benefits were received, and no single type of perquisite or other personal benefits exceeded 25% of the total perquisites and other benefits reported for the Named Executive Officer in the applicable fiscal year. Option Grants Table The following table sets forth (a) the number of shares underlying options granted to each Named Executive Officer during the 1996 Fiscal Year, (b) the percentage the grant represents of the total number of options granted to all Company employees during the 1996 Fiscal Year, (c) the per share exercise price of each option, (d) the expiration date of each option, and (e) the potential realized value of each option based on: (i) the assumption of a five (5%) percent annualized compounded appreciation of the market price of the Common Stock from the date of the grant of the subject option to the end of the option term, and (ii) the assumption of a ten (10%) percent annualized compounded appreciation of the market price of the Common Stock from the date of the grant of the subject option to the end of the option term.
Potential Realized Value at Assumed Rates of Stock Price Appreciation for Option Term ----------------------------------- Percentage of Number of Total Options Shares Granted to Underlying Employees in Exercise Expiration Name Options Granted Fiscal Year Price Date 5% 10% - ---- --------------- ----------- ----- ---- -- --- Peter Rona 37,500 33.6% US$3.50 11/20/00 US$36,262 US$80,129
- 30 - Options Exercised and Remaining Outstanding Set forth in the table below is information, with respect to each of the Named Executive Officers, as to the (a) number of shares acquired during the 1996 Fiscal Year upon each exercise of options granted to such individuals, (b) the aggregate value realized upon each such exercise (i.e., the difference between the market value of the shares at exercise and their exercise price), (iii) the total number of unexercised options held on August 31, 1996, separately identified between those exercisable and those not exercisable, and (iv) the aggregate value of in-the-money, unexercised options held on August 31, 1996, separately identified between those exercisable and those not exercisable.
Value of Unexercised Number of Unexercised In-the-Money Options at Options at August 31, 1996 August 31, 1996 ---------------------------------- ---------------------------------- Shares Acquired Value Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- Peter Rona -0- -0- 123,750 18,750 US$299,688 US$60,938
Director's Remuneration Each director not otherwise a full time employee of the Company is eligible to receive Cdn$500 for each meeting of the Board of Directors or committee thereof which they attend, along with the reimbursement of their reasonable expenses incurred on the Company's behalf. The NetStar designees on the Company's Board have declined such compensation in the 1996 Fiscal Year and in previous fiscal years. On April 29, 1996, the following directors were awarded five-year options to purchase 1,500 shares of Common Stock each, at $4.67 per share: Daniel C. Downs, Dale G. Smith and Adrian P. Towning. Employment Contracts with Named Executive Officers Effective September 1, 1994, NTNIN entered into a three-year employment agreement (the "Rona Employment Agreement") with Peter Rona, its President and Chief Executive Officer. Mr. Rona is also the President, Chief Executive Officer, Chief Financial and Accounting Officer and Chairman of the Board of Directors of the Company. NTNIN's obligations under the Rona Employment Agreement have been guaranteed by the Company. Mr. Rona does not receive any compensation from the Company other than pursuant to the Rona Employment Agreement. The Rona Employment Agreement provides for an initial base compensation of Cdn$150,000 with annual increases to be subject to review by the Board of Directors, but in no event less than the proportional increase in the Consumer Price Index as published by Statistics Canada, plus a bonus equal to a percentage of the annual base compensation paid to Mr. Rona determined by - 31 - reference to the excess of NTNIN's actual net income before taxes over specified amounts set forth in the Rona Employment Agreement. The Rona Employment Agreement further provides for the granting to Mr. Rona of stock options at the discretion of the Board of Directors. For the 1996 Fiscal Year, Mr. Rona's base compensation was Cdn$157,500 (US$115,090), as a result of the Board's determination to increase Mr. Rona's compensation in excess of the amount otherwise required under the Rona Employment Agreement pursuant to the applicable increase in the Consumer Price Index; his bonus was Cdn$15,000 (US$10,961), determined in accordance with the terms of the Rona Employment Agreement; and the Board awarded him discretionary stock options to purchase 25,000 shares of Common Stock. Under the terms of the Rona Employment Agreement, if on or prior to August 31, 1996, NTNIN and Mr. Rona failed to extend the term of the Rona Employment Agreement for an additional three year term, NTNIN would have been required to pay Mr. Rona an amount equal to his base compensation and applicable bonus for the period of September 1, 1997 through August 31, 1998. NTNIN and Mr. Rona did not come to an agreement by August 31, 1996 with respect to the extension of the Rona Employment Agreement. However, the Board of Directors and Mr. Rona are in active negotiations with respect to an extension and modification of the Rona Employment Agreement, although no agreement as to the terms of such an extension and modification has been entered into as of the date of this Annual Report on Form 10-K. Pursuant to the Magic Lantern Management Agreement, Connolly-Daw has been retained to provide management services to Magic for an eleven month term terminating on August 31, 1997. Connolly-Daw agreed that the management services required by the Magic Lantern Management Agreement would be provided by Douglas Connolly and Wendy Connolly. Douglas Connolly became a director of the Company on November 25, 1997 and Wendy Connolly is the wife of Mr. Connolly. For its services, Connolly-Daw shall receive compensation in the amount of Cdn$197,450 (US$144,928 on October 1, 1996), inclusive of automotive expenses, plus reimbursement of out-of-pocket expenses and a bonus, not to exceed Cdn$26,813 (US$19,680), to be based upon the actual net income before taxes, if any, of Magic during the term of the Magic Lantern Management Agreement. Magic also has entered into two separate Employment Agreements, each dated October 1, 1996, with Douglas Connolly and Wendy Connolly. These Employment Agreements each have two year terms commencing on September 1, 1997 and terminating on August 31, 1999, and pursuant to which Mr. and Ms. Connolly shall receive annual base salaries of Cdn$125,000 (US$91,750 at October 1, 1996) and Cdn$70,000 (US$51,380), respectively, together with automotive expenses of Cdn$12,000 (US$8,808) and Cdn$8,400 (US$6,166), respectively. There is a provision in each Employment Agreement for a cost-of-living adjustment to their base salaries for the second year of the term. In addition, under their respective Employment Agreements, Mr. and Ms. Connolly shall each be entitled to a bonus, not to exceed Cdn$50,000 (US$36,700) and Cdn$28,000(US$20,552), respectively (subject to a cost-of living adjustment for the second year of their respective terms), to be based upon the actual net income before taxes, if any, of Magic during each year of the terms of the Employment Agreements. The D. Connolly Employment Agreement further provides for Mr. Connolly to serve as President and Chief Operating Officer of Magic during its term. - 32 - Neither the Company or NTNIN has any other employment agreement in effect with any other executive employee. Compensation Committee Interlocks and Insider Participation The Company's Audit and Compensation Committee currently consists of James Newell and Dale G. Smith. Neither Messrs. Newell or Smith are officers or employees of the Company, and have not served in such capacities in the past. No executive officer of the Company served as a director or member of the compensation committee (or group performing similar functions) of another entity, one of whose executive officers served on the Audit and Compensation Committee or as a director of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management. -------------------------------------------------------------- Set forth in the table below is information concerning the ownership, as of the close of business on November 14, 1996, of the Common Stock by each person who is known to the Company to be the beneficial owner of more than five (5%) percent of the Common Stock, the Company's directors and Named Executive Officers, and all directors and executive officers as a group.
Amount and Nature of Percent of Name and Address Beneficial Ownership Class (1) - ---------------- -------------------- --------- NetStar Enterprises Inc. (2).....................1,577,701 (3) 51.0% James R. Newell (4)..............................1,577,701 (5) 51.0 Richard Peddie (4)...............................1,577,701 (5) 51.0 Peter Rona (6)................................... 316,607 (7) 11.5 Anor Management Ltd. (8)......................... 192,857 (8) 7.3 Adrian P. Towning................................ 3,000 (9) 0.1 Daniel C. Downs.................................. -0- (9) 0.0 Douglas Connolly................................. -0- (10) 0.0 Dale G. Smith.................................... -0- (9) 0.0 All directors and executive officers as a group (7 persons)............................1,897,308(11) 55.6%
(1) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date on which beneficial ownership is to be determined, upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants and - 33 - convertible securities that are held by such person (but not those held by any other person) and which are exercisable within such 60 day period, have been exercised. (2) The address for NetStar Enterprises Inc. (formerly, Labatt Communications Inc.) ("NetStar") is 2225 Shappard Avenue East - Suite 100, North York, Ontario, Canada M2J 5C2. (3) Includes (a) 925,787 shares held of record by NetStar and (b) 651,914 shares (subject to adjustment) issuable upon exercise of an option (the "NetStar Option") granted pursuant to a Stock Purchase Agreement, dated as of October 4, 1994 (the "NetStar Agreement"), between the Company and NetStar. The NetStar Agreement also grants NetStar the right (the "NetStar Ownership Maintenance Right"), exercisable in the event the Company seeks to issue additional shares of Common Stock or any options, warrants, shares of preferred stock or other rights entitling the holder thereof to acquire Common Stock, to purchase from the Company such additional shares of Common Stock so as to permit NetStar to maintain the its then percentage ownership of outstanding Common Stock. The NetStar Option expires on April 4, 1998. The NetStar Ownership Maintenance Right is exercisable as long as NetStar owns any shares of Common Stock. (4) The address for Messrs. Newell and Peddie is c/o NetStar Communications Inc., 2225 Shappard Avenue East - Suite 100, North York, Ontario, Canada M2J 5C2. (5) Includes the 1,577,701 shares of Common Stock beneficially owned by NetStar, of which Mr. Newell is Senor Vice President of Finance and Chief Financial Officer and Mr. Peddie is President and Chief Operating Officer. (6) The address for Messrs. Rona is c/o NTN Canada, Inc., 14 Meteor Drive, Etobicoke, Ontario, Canada M9W 1A4. (7) Includes (a) 192,857 shares of Common Stock issuable upon conversion of the 900,000 shares of Convertible Preferred Stock held of record by Anor Management, Ltd. ("Anor") and (b) 123,750 shares issuable upon exercise of options granted to Mr. Rona which are exercisable within the next sixty days. Mr. Rona is the President, sole director and sole shareholder of Anor. Does not include an additional 18,750 shares underlying options which are not exercisable within the next 60 days. (8) The address for Anor is c/o Peter Rona, NTN Canada, Inc., 14 Meteor Drive, Etobicoke, Ontario, Canada M9W 1A4. Includes 192,857 shares of Common Stock issuable upon conversion of the 900,000 shares of Convertible Preferred Stock held of record by Anor. The 900,000 shares of Convertible Preferred Stock have the equivalent voting power to 192,857 shares of Common Stock. - 34 - (9) Does not include 1,500 shares of Common Stock issuable upon exercise of options granted to each of Messrs. Towning, Downs and Smith, which options are not exercisable within the next 60 days. (10) Does not include any of the 196,387 shares which may be issued in lieu of cash payments due under promissory notes payable to two entities controlled by Mr. Connolly. No payments under these promissory notes are due within the next 60 days. See (b) in Item 13 below. (11) Includes 968,521 shares issuable upon conversion of the Convertible Preferred Stock and the exercise of the options and rights referred to in notes (5) and (7) above. Item 13. Certain Relationships and Related Transactions. ----------------------------------------------- Set forth below is a description of certain transactions between the Company and its directors, executive officers, beneficial owners of five percent or more of the outstanding Common Stock, or member of the immediate family of any of the foregoing persons, as well as certain business relationships between the Company and its directors, which occurred or existed during the 1996 Fiscal Year. (a) During the 1996 Fiscal Year, both pursuant to the License Agreement and otherwise, the Company paid Communications an aggregate Cdn$1,339,263 (US$978,636) as commissions and for equipment purchases and maintenance fees. Under the License Agreement, the Company, through NTNIN, holds the exclusive license to market the products and programs of Communications throughout Canada through December 31. 2015. Daniel C. Downs, a director of the Company, is the President, Chief Operating Officer of Communications. (b) On October 2, 1996, pursuant to a Stock Purchase Agreement, dated October 1, 1996 (the "Magic Lantern Purchase Agreement"), the Company, through NTNIN, acquired all of the outstanding stock of Magic. As consideration for the purchase of such stock the Company delivered Cdn$200,000 (US$146,800 on October 1, 1996) and a Non-Negotiable Promissory Note (the "Connolly-Daw Note") in the principal amount of Cdn$703,133 (US$516,099) to Connolly-Daw Holdings Inc.("Connolly-Daw") and a Non-Negotiable Promissory Note (the "1199846 Note") in the principal amount of Cdn$546,867 (US$401,400) to 1199846 Ontario Ltd ("1199846"). The Connolly Note requires principal payments of Cdn$78,133 (US$57,350), Cdn$312,500 (US$229,375) and Cdn$312,500 (US$229,375) on August 31, 1998, 1999, and 2000, respectively. In lieu of such cash payments, the Company has the option to tender payment to Connolly-Daw, and Connolly-Daw has the option to demand payment, in the form of 12,276, 49,097 and 49,096 shares of Common Stock (collectively, the "Connolly-Daw Shares"), respectively. The 1199846 Note requires principal payments of Cdn$312,500 (US$229,375) and Cdn$234,367 (US$172,025) on August 31, 1997 and 1998, respectively. In lieu of such cash payments, the Company has the option to tender payment to - 35 - 1199846, and 1199846 has the option to demand payment, in the form of 49,097 and 36,821 shares of Common Stock (collectively, the "1199846 Shares"), respectively. Also pursuant to the Magic Lantern Purchase Agreement, Connolly- Daw, NTNIN and the Company entered into an Option Agreement, dated October 1, 1996, and 1199846, NTNIN and the Company entered into an Option Agreement, dated October 1, 1996 (together, the "Option Agreements"). Under the terms of the Option Agreements, in the event that either Magic or Mr. Connolly chooses not to extend the term of the D. Connolly Employment Agreement beyond its initial term expiring on August 31, 1999, on or after September 1, 1999 and on or before September 30, 1999, Connolly-Daw and 1199846 shall each have the right to cause the Company to purchase any of the Connolly-Daw Shares or 1199846 Shares, as the case may be, then held by Connolly-Daw or 1199846 at a price equal to 90% of the market value (as defined in the Option Agreements) of such shares (Connolly-Daw having been granted the right in this event to cause acceleration of the September 1, 2000 payment under the Connolly-Daw Note to August 31, 1999) and the Company shall have the right to cause the Connolly-Daw and 1199846 to sell to the Company any of the Connolly-Daw Shares or 1199846 Shares, as the case may be, then held by Connolly-Daw or 1199846 at a price equal to 110% of the market value (as defined in the Option Agreements) of such shares (Connolly-Daw having been granted the right in this event to cause acceleration of the September 1, 2000 payment under the Connolly-Daw Note to August 31, 1999). Douglas Connolly, a director of the Company and President of Magic, is the President and a principal shareholder of both Connolly-Daw and 1199846. (c) At the time of the Company's acquisition of Magic, Connolly-Daw was indebted to Magic in the amount of Cdn$160,000 (US$117,440 on October 1, 1996). This indebtedness is represented by a Promissory Note, dated October 1, 1996 (the "Magic Lantern Note"), in the principal amount of such indebtedness. The Magic Lantern Note is due on demand and bears interest, at a specified bank prime rate, payable monthly. - 36 - PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. - -------------------------------------------------------------------------- (a) The following financial statements and supplementary financial information are filed as part of this Annual Report on Form 10-K: Financial Documents Location* - ------------------- --------- 1. Financial Statements of the Company Report of Independent Certified Public Accountants............ F - 1 Consolidated Balance Sheets................................... F - 2 Consolidated Statements of Operations......................... F - 3 Consolidated Statement of Cash Flows.......................... F - 4 Notes to Consolidated Financial Statements.................... F - 5 - ---------- * Page F-1 follows page 38 to this Annual Report on Form 10-K. There are no financial statement schedules either applicable or required to be filed by the Company in this Annual Report on Form 10-K pursuant to the instructions to Item 14 of Form 10-K. (b) The Company did not file any Current Reports on Form 8-K during its fourth fiscal quarter ended August 31, 1996. (c) The following list sets forth the applicable exhibits (numbered in accordance with Item 601 of Regulation S-K) required to be filed with this Annual Report on Form 10-K: - 37 - Exhibit Number Title ------ ----- 2.1 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy Connolly and NTN Interactive Network Inc., minus Schedules thereto.+ 3.1 Certificate of Incorporation, as amended to date. 3.2 By-Laws, as amended to date. 4.1 Specimen Stock Certificate. 10.1 License Agreement, dated March 23, 1990, between NTN Communications, Inc. and NTN Interactive Network Inc.+ 10.2 Stock Purchase Agreement, dated as of October 4, 1994, between NTN Canada and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.).+ 10.3 Option, dated as of October 4, 1994, registered in the name of NetStar Enterprises Inc. (formerly, Labatt Communications Inc).+ 10.4 Designation Agreement, dated as of October 4, 1994, among NTN Canada, Inc., NTN Interactive Network Inc. and NetStar Enterprises Inc. (formerly Labatt Communications Inc.).+ 10.5 Registration Rights Agreement, dated as of October 4, 1994, between NTN Canada and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.).+ 10.6 Promissory Note of NTN Interactive Network Inc. registered in the name of Connolly-Daw Holdings, Inc.+ 10.7 Promissory Note of NTN Interactive Network Inc., registered in the name of 1199846 Ontario Ltd.+ 10.8 Option Agreement, dated October 1, 1996, among Connolly-Daw Holdings Inc., NTN Interactive Network Inc. and NTN Canada, Inc.+ 10.9 Option Agreement, dated October 1, 1996, among 1199846 Ontario Ltd., NTN Interactive Network Inc. and NTN Canada, Inc.+ 10.10 Registration Rights Agreement, dated October 1, 1996, among NTN Canada, Inc., Connolly-Daw Holdings Inc. and 1199846 Ontario Ltd.+ 10.11 Employment Agreement, dated as of August 31, 1994, between NTN Interactive Network Inc. and Peter Rona. 10.12 Management Agreement, dated October 1, 1996, between Magic Lantern Communications Ltd. and Connolly-Daw Holdings Inc. 10.13 Employment Agreement, dated October 1, 1996, between Magic Lantern Communications Ltd. and Douglas Connolly. 10.14 Employment Agreement, dated October 1, 1996, between Magic Lantern Communications Ltd. and Wendy Connolly. 22 List of Subsidiaries. 27 Financial Data Schedule. - ---------- + Incorporated by reference. See Exhibit Index. - 38 - ________________________________________________________________________________ REPORT OF INDEPENDENT AUDITORS ________________________________________________________________________________ To the Board of Directors and Shareholders of NTN Canada Inc. We have audited the accompanying consolidated balance sheets of NTN Canada Inc. as at August 31, 1996 and August 31, 1995 and the related consolidated statements of operations and retained earnings (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of NTN Canada Inc. for the year ended August 31, 1994 were audited by other auditors whose report dated October 25, 1994 expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 1996 and 1995 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as at August 31, 1996 and August 31, 1995 and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Ernst & Young Thornhill, Canada, October 25, 1996. Chartered Accountants ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. CONSOLIDATED BALANCE SHEETS [Expressed in Canadian dollars] ________________________________________________________________________________ As at August 31
1996 1995 $ $ - ------------------------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 1,777,889 3,098,140 Short-term investments [note 4] 3,577,151 2,051,381 Accounts receivable - trade [net of allowance for doubtful accounts of $39,000; 1995 - $47,834] 563,601 464,417 Note receivable [note 5] 350,000 -- Inventory 631,171 555,256 Prepaid expenses 162,003 150,271 - ------------------------------------------------------------------------------------------------- Total current assets 7,061,815 6,319,465 - ------------------------------------------------------------------------------------------------- Property and equipment, net [note 6] 2,447,937 1,620,995 License, net 237,549 250,051 Goodwill, net 135,792 162,159 - ------------------------------------------------------------------------------------------------- 9,883,093 8,352,670 ================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable - trade 574,590 228,722 Accrued liabilities 141,061 235,600 Income taxes payable [note 7] 260,008 97,714 Mortgage payable [note 8] -- 244,223 - ------------------------------------------------------------------------------------------------- Total current liabilities 975,659 806,259 - ------------------------------------------------------------------------------------------------- Deferred income taxes [note 7] 30,000 10,000 - ------------------------------------------------------------------------------------------------- Total liabilities 1,005,659 816,259 - ------------------------------------------------------------------------------------------------- Commitments [note 9] Shareholders' equity Share capital [note 10] Preferred shares [issued - 950,000] 11,523 11,523 Common shares [issued - 2,441,531; 1995 - 2,056,145] 150,187 125,573 Capital in excess of par value [note 10] 7,921,347 7,145,997 Retained earnings 794,377 253,318 - ------------------------------------------------------------------------------------------------- Total shareholders' equity 8,877,434 7,536,411 - ------------------------------------------------------------------------------------------------- 9,883,093 8,352,670 =================================================================================================
See accompanying notes On behalf of the Board: Director Director ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) [Expressed in Canadian dollars] _______________________________________________________________________________ Years ended August 31
1996 1995 1994 $ $ $ - ------------------------------------------------------------------------------------------------- REVENUES Program content services 3,520,814 2,772,319 2,023,722 Equipment rental 959,153 517,950 144,016 Event programming 518,275 373,477 348,427 Maintenance 476,533 381,008 257,594 Equipment sales 148,330 215,152 235,321 Other 695,146 299,476 138,900 - ------------------------------------------------------------------------------------------------- 6,318,251 4,559,382 3,147,980 - ------------------------------------------------------------------------------------------------- COST OF SALES Equipment 298,243 198,344 153,417 Commissions [note 9] 1,549,729 1,340,196 972,292 Depreciation 281,757 150,932 47,401 Other 375,944 163,089 118,752 - ------------------------------------------------------------------------------------------------- 2,505,673 1,852,561 1,291,862 - ------------------------------------------------------------------------------------------------- EXPENSES Selling, general and administrative 2,642,853 2,043,369 1,607,766 Bad debts 54,990 57,653 47,350 Depreciation and amortization 102,019 80,853 60,822 Interest and bank charges 8,657 28,311 11,993 - ------------------------------------------------------------------------------------------------- 2,808,519 2,210,186 1,727,931 - ------------------------------------------------------------------------------------------------- Income before income taxes 1,004,059 496,635 128,187 Provision for income taxes [note 7] 463,000 139,100 52,493 - ------------------------------------------------------------------------------------------------- Net income for the year 541,059 357,535 75,694 Retained earnings (deficit), beginning of year 253,318 (104,217) (179,911) - ------------------------------------------------------------------------------------------------- Retained earnings (deficit), end of year 794,377 253,318 (104,217) ================================================================================================= Earnings per share [note 12] Primary $0.23 $0.17 $0.05 Fully diluted $0.22 -- -- =================================================================================================
See accompanying notes ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS [Expressed in Canadian dollars] _______________________________________________________________________________ Years ended August 31
1996 1995 1994 $ $ $ - ---------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income for the year 541,059 357,535 75,694 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 383,776 231,785 108,223 Deferred income taxes 20,000 2,100 7,900 Changes in assets and liabilities Increase in short-term investments (1,525,770) (2,051,381) -- Increase in accounts receivable (99,184) (136,856) (55,773) Decrease (increase) in inventory (75,915) 34,318 (316,422) Decrease (increase) in prepaid expenses (11,732) (100,921) 8,850 Increase (decrease) in accounts payable and accrued liabilities 251,329 (389,667) 463,780 Increase in income taxes payable 162,294 72,765 20,045 - ---------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities (354,143) (1,980,322) 312,297 - ---------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property and equipment (1,171,849) (1,291,247) (557,982) Increase in note receivable (350,000) -- -- Sale of equipment -- -- 170,738 Proceeds on sale of investments -- -- 600,022 Deposit -- 22,783 (22,783) - ---------------------------------------------------------------------------------------------------- Cash provided by (used in) investing activities (1,521,849) (1,268,464) 189,995 - ---------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Change in bank loan to purchase temporary investments -- (350,000) (150,000) Mortgage payable (244,223) 244,223 -- Proceeds from sale of common shares, net of issuing costs [note 10] -- 4,252,500 94,600 Proceeds from exercise of warrants [note 10] 799,964 588,099 -- - ---------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities 555,741 4,734,822 (55,400) - ---------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents during the year (1,320,251) 1,486,036 446,892 Cash and cash equivalents, beginning of year 3,098,140 1,612,104 1,165,212 - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year 1,777,889 3,098,140 1,612,104 ==================================================================================================== Income taxes paid 277,334 81,764 46,634 ====================================================================================================
See accompanying notes ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 1. DESCRIPTION OF BUSINESS NTN Canada Inc. [the "Company"] was incorporated originally under the name Triosearch Inc. under the laws of the State of New York on May 12, 1986. On June 9, 1988, the Company changed its name to NTN Canada Inc. The Company is the holding company for NTN Interactive Network Inc. ["Interactive"] which is a wholly-owned operating company. Interactive is incorporated under the Canada Business Corporations Act and has signed with NTN Communications, Inc., an unrelated Delaware company, an agreement for exclusive representation of their interactive communications for all industry sectors in Canada. This interactive entertainment network allows viewers to participate actively in a variety of television programs, videotext services, trivia games, etc. Present subscribers to the Company's network are hotels, restaurants, bars and university clubs. In addition, there are subscribers through a number of gateway services. Each subscriber either purchases the system hardware directly or leases it, or rents the system from Interactive. Interactive purchases the subscriber system from NTN Communications, Inc. and various other suppliers. Following installation, each subscriber pays a monthly fee to Interactive for the program content and maintenance services, which range from $650 to $750. The monthly fees for rental systems range from approximately $255 to $290. 2. ECONOMIC DEPENDENCE Interactive is dependent upon NTN Communications, Inc. as its sole supplier for the transmission of program content to the Company's subscribers. In the event that NTN Communications, Inc. terminates the transmission of program content, the Company believes, but cannot assure, that such services are likely to be continued by others. As of September 30, 1996, NTN Communications, Inc. had shareholders' equity of $27,837,000 and working capital of $9,132,000 according to its unaudited balance sheet included in the Company's quarterly report. NTN Communications, Inc. has reported a quarterly net loss for September 1996 of $6,732,000 and quarterly net incomes for June 1996 of $2,358,000 and for March 1996 of $273,000, and a net loss for the year ended December 31, 1995 of $3,948,000. All such amounts are quoted in U.S. dollars [notes 9 and 11]. 1 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 3. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These consolidated financial statements have been expressed in Canadian dollars which is the currency of the country in which Interactive is incorporated and is the currency of its primary economic environment in which operations are conducted. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Basis of consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Interactive. All significant intercompany transactions have been eliminated. Foreign currency translation U.S. dollar accounts in these consolidated financial statements are translated into Canadian dollars on the following bases: [a] The assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet dates. [b] Revenues and expenses are translated at a rate approximating the rates of exchange prevailing on the dates of the transactions. [c] Gains and losses on translation of foreign currencies are included in operations. 2 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 Revenues Revenue from the sale of program content services are recognized on a monthly basis beginning when the system is installed on the subscriber's premises. Revenue from equipment rentals and maintenance is recognized on a monthly basis over the term of the contract. Revenue from event programming is recognized upon completion of the contract. Revenue from equipment sales is recognized upon the installation of the equipment. Cash and cash equivalents Cash and cash equivalents include cash, term deposits and government securities which mature in less than three months from the date of issue. The carrying value of term deposits and government securities approximates their fair values. Short-term investments Investments at August 31, 1996 and August 31, 1995 consist of money market funds, debt securities, and marketable equity securities. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ["SFAS 115"]. Pursuant to the provisions of SFAS 115, the Company has classified its investment portfolio as "trading." "Trading" securities are bought and held principally for the purpose of selling them in the near term and are recorded at fair value. Unrealized gains and losses on trading securities are included in the determination of net income. The fair value of these securities represent current quoted market offer prices. Inventory Inventory consists of finished goods held for sale or rent, which are valued at the lower of cost, using the first-in, first-out [FIFO] method, and net realizable value. 3 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 Property and equipment Property and equipment are stated at cost less accumulated depreciation. Equipment is depreciated using a declining balance rate of 20%. Automobiles are depreciated on a straight-line basis over 3 years, building and additions on a straight-line basis over 25 years, software is depreciated on a straight-line basis over 3 years and rental equipment on a straight-line basis over 5 years. On an ongoing basis, management reviews the valuation and depreciation of property and equipment, taking into consideration any events and circumstances which might have impaired the fair value. The Company assumes there is an impairment if the carrying amount is greater than the recoverable amount. The amount of impairment, if any, is measured based on projected discounted future cash flows, using a discount rate that reflects the Company's average cost of funds. License and goodwill License is stated at cost less accumulated amortization. Amortization is provided over a 24-year period using the straight-line basis to 2016. Accumulated amortization amounted to $75,001 [1995 - $62,499]. Goodwill is stated at cost less accumulated amortization. Amortization is provided using the straight-line basis over a 10-year period. Accumulated amortization amounted to $142,960 [1995 - $116,593]. On an ongoing basis, management reviews the valuation and amortization of license and goodwill, taking into consideration any events and circumstances which might have impaired the fair value. The Company assumes there is an impairment if the carrying amount is greater than the recoverable amount. The amount of impairment, if any, is measured based on projected discounted future cash flows, using a discount rate that reflects the Company's average cost of funds. Income taxes The Company accounts for deferred income tax liabilities and assets based on the difference between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 4 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 Employee stock options The Company accounts for its stock option plans and its employee stock purchase plan in accordance with the provisions of the Accounting Principles Board's Opinion No. 25, "Accounting For Stock Issued to Employees" ["APB 25"]. In October 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standard No. 123, "Accounting For Stock-Based Compensation" ["FAS 123"]. FAS 123 provides an alternative to APB 25 and is effective for fiscal years beginning after December 15, 1995. The Company expects to continue to account for its employee stock plans in accordance with the provisions of APB 25. Accordingly, FAS 123 is not expected to have a material impact on the Company's financial position or results of operation. Effective with the issuance of the Company's fiscal year 1997 consolidated financial statements, the Company will disclose proforma net income and net income per share amounts as if FAS 123 was applied. 4. SHORT-TERM INVESTMENTS Short-term investments consist of the following: 1996 1995 $ $ - --------------------------------------------------------------------------- Money market funds 1,182,328 70,426 - --------------------------------------------------------------------------- Debt securities U.S. treasury securities 402,823 -- Corporate debt securities 2,129,849 599,870 - --------------------------------------------------------------------------- Total debt securities 2,532,672 599,870 - --------------------------------------------------------------------------- Equity securities -- 1,381,085 - --------------------------------------------------------------------------- Less broker's margin account (137,849) -- - --------------------------------------------------------------------------- 3,577,151 2,051,381 =========================================================================== All investments are held in United States dollars except for $1,992,860 [1995 - $599,870] of corporate debt securities. 5 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 5. NOTE RECEIVABLE AND SUBSEQUENT EVENT The note receivable from Magic Lantern Communications Ltd. ["Magic Lantern"] is due thirty days after demand. The note bears interest at prime plus 2%, calculated and payable quarterly. Magic Lantern is a Canadian corporation which distributes educational videos and provides related services. The note was made available to Magic Lantern as part of an arrangement concluded on October 2, 1996, whereunder the Company acquired 100% of Magic Lantern and its subsidiaries for a purchase price of $1,531,000 effective October 1, 1996, on a discounted basis. The purchase price was satisfied by $450,000 in cash and the issue of two non-interest bearing promissory notes with a maturity value of $1,250,000. The first promissory note in the amount of $703,133 is repayable by cash payments of $78,133 on August 31, 1998, $312,500 on August 31, 1999 and $312,500 on August 31, 2000. Notwithstanding the foregoing, the Company has the right to elect up until June 30, 1998 to issue common shares in lieu of the aforesaid payments as follows: 12,276 shares on August 31, 1998, 49,097 shares on August 31, 1999 and 49,096 shares on August 31, 2000. Should the Company not elect to deliver common shares, the noteholder has the right, exercisable between July 1, 1998 and July 31, 1998, to require the Company to issue the common shares as described. The August 31, 1999 and 2000 payments may be accelerated at the option of the noteholder if certain arrangements pursuant to an employment agreement with a shareholder of the noteholder ["the employee"] do not extend beyond September 1, 1998. The second promissory note in the amount of $546,867 is repayable by cash payments of $312,500 on August 31, 1997 and $234,367 on August 31, 1998. Notwithstanding the foregoing, the Company has the right to elect up until June 30, 1997 to issue common shares in lieu of the aforesaid payments as follows: 49,097 shares on August 31, 1997 and 36,821 shares on August 31, 1998. Should the Company not elect to deliver common shares, the noteholder has the right, exercisable between July 1, 1997 and July 31, 1997 to require the Company to issue the common shares as described. Also pursuant to the share purchase agreement, the Company and the noteholders have entered into separate option agreements which provide for the repurchase of the shares received by the noteholders under the terms of the notes, should the term of employment of the employee not be extended beyond August 31, 1999. The repurchase price will be 90% of the average closing price of the common shares during the 20 days prior to the exercise of a put option by the noteholders, should the Company not wish to extend the term of employment. The repurchase price will be 110% of the average closing price of the common shares during the 20 days prior to the exercise of a call option by the Company should the employee not wish to extend the term of employment. 6 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 This acquisition will be accounted for as purchase in fiscal 1997. The allocation of the purchase price has not been determined. 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
1996 1995 -------------------------------- ------------------------------- Net Net Accumulated book Accumulated book Cost depreciation value Cost depreciation value $ $ $ $ $ $ - -------------------------------------------------------------------------------------------------- Land 238,500 -- 238,500 238,500 -- 238,500 Building 355,371 24,634 330,737 355,371 10,419 344,952 Rental equipment 1,978,263 365,931 1,612,332 1,037,432 167,211 870,221 Equipment 316,592 130,218 186,374 255,434 94,025 161,409 Software 53,249 5,916 47,333 -- -- -- Automobiles 41,364 8,703 32,661 7,884 1,971 5,913 - -------------------------------------------------------------------------------------------------- 2,983,339 535,402 2,447,937 1,894,621 273,626 1,620,995 ==================================================================================================
Depreciation on property and equipment was $344,907 [1995 - $192,916; 1994 - $69,209]. 7. INCOME TAXES AND DEFERRED INCOME TAXES The provision for income taxes consists of the following:
1996 1995 1994 $ $ $ - -------------------------------------------------------------------------------------------------- Current Canadian federal 216,800 89,259 29,059 Canadian provincial 116,800 47,741 15,534 Foreign 109,400 -- -- - -------------------------------------------------------------------------------------------------- 443,000 137,000 44,593 - -------------------------------------------------------------------------------------------------- Deferred Canadian federal 13,000 1,400 5,100 Canadian provincial 7,000 700 2,800 - -------------------------------------------------------------------------------------------------- 20,000 2,100 7,900 - -------------------------------------------------------------------------------------------------- 463,000 139,100 52,493 ==================================================================================================
7 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 The difference between the provision for income taxes and the amount computed by applying the combined basic federal and provincial income tax rate of 44.6% [1995 - 44.5%; 1994 - 43.5%] to income before income taxes is as set out below:
1996 1995 1994 $ $ $ - ------------------------------------------------------------------------------------------------- Statutory rate applied to pre-tax income 448,011 220,903 55,761 Benefit of prior years' losses not previously recognized (11,632) (83,680) -- Expenses not deductible for tax purposes 6,802 6,604 6,968 Other 19,819 (4,727) (10,236) - ------------------------------------------------------------------------------------------------- 463,000 139,100 52,493 =================================================================================================
Deferred income taxes result substantially from timing differences related to fixed assets. 8. MORTGAGE PAYABLE The mortgage payable relates to the land and building located in Etobicoke, Ontario which was purchased in October 1994. The mortgage bore interest at 8.25% with blended monthly payments of $2,186. The mortgage was retired on October 1, 1995. Interest on the mortgage for the year ended August 31, 1996 was $1,675 [1995 - $16,625; 1994 - nil]. 9. COMMITMENTS [a] Commissions expense to NTN Communications, Inc. Commissions paid to NTN Communications, Inc. are recognized when the related revenues are earned and represent U.S. $2,000 per year per subscriber [note 11]. [b] Commissions expense Commissions expense to sub-licensees is recognized when the related revenues are earned and are calculated as follows: [i] 30% of all fees received by Interactive under any Commercial User Agreement as then in effect if such agreement is executed through the efforts of the sub-licensee where the establishment subject to the Commercial User Agreement is located within the territory during the first term of any such agreement; [ii] 10% of all net fees received by Interactive from National Advertisers [sponsors] based on the number of Commercial User locations within the territory; and 8 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 [iii] 5% of all net fees received by Interactive under any Residential User Agreement within the territory, which may only be solicited by Interactive directly. All commission payments are made to sub-licensees no later than the 15th of the month immediately following the month in which user fees and sponsor fees, from which said commissions are earned, are received and collected by Interactive. [c] Lease commitments The future annual lease payments under operating leases for vehicles are as follows: $ - ----------------------------------------------------------------------- 1997 17,041 1998 10,050 1999 3,217 - ----------------------------------------------------------------------- 30,308 ======================================================================= 10. SHARE CAPITAL AND WARRANTS [a] Authorized shares The Company's authorized share capital comprises 20,000,000 common shares with a par value of $0.062 [U.S. $0.0467] per share and 1,500,000 preferred shares with a par value of $0.014 [U.S. $0.010] per share. The preferred shares are voting and convertible, such that 4.67 preferred shares are exchanged for 1 common share, at the option of the holders. On September 30, 1994, the Company received formal approval to increase its authorized share capital from 1,714,286 common shares to 20,000,000 common shares. [b] Issued and outstanding shares 950,000 preferred shares with a paid-up amount of $11,523 were issued and outstanding as at August 31, 1996, 1995, 1994 and 1993. 9 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 Effective August 15, 1996 the Company elected a three-for-two common shares stock split. This share split has been applied retroactively to all common share data presented in these consolidated financial statements. Common shares issued and outstanding for accounting purposes are as follows:
Common shares ----------------------- Capital in excess Number Amount of par value Total # $ $ $ - ------------------------------------------------------------------------------------------------- Issued and outstanding as at August 31, 1993 1,009,896 59,546 2,257,561 2,317,107 Shares issued on acquisition of marketing right 3,348 216 16,398 16,614 Exercise of 23,000 warrants [i] 34,500 2,207 92,393 94,600 Issue of common shares as employee stock bonus 1,500 93 2,557 2,650 - ------------------------------------------------------------------------------------------------- Balance as at August 31, 1994 1,049,244 62,062 2,368,909 2,430,971 Issue of common shares through private placement [ii] 790,901 49,789 4,202,711 4,252,500 Exercise of 144,000 warrants [i] 216,000 13,722 574,377 588,099 - ------------------------------------------------------------------------------------------------- Balance as at August 31, 1995 2,056,145 125,573 7,145,997 7,271,570 Issue of common shares through private placement [ii] 134,886 8,615 (8,615) -- Exercise of 167,000 warrants [i] 250,500 15,999 783,965 799,964 - ------------------------------------------------------------------------------------------------- Balance as at August 31, 1996 2,441,531 150,187 7,921,347 8,071,534 =================================================================================================
[i] In July 1993, 167,000 common shares and two separate warrant options were issued by a private placement for $646,802 [U.S. $501,000] [note 10[c]]. [ii] On October 4, 1994, NetStar Communications, Inc. ["NetStar"] - formerly Labatt Communications Inc. - acquired a 35% equity interest [674,594 common shares] in the Company for U.S. $3,150,000. Additional common shares were issued to NetStar as follows: August 31, 1995 - 116,307 March 31, 1996 - 22,617 August 31, 1996 - 112,269 These shares were issued in order to maintain NetStar's 35% equity position as the result of pre-existing warrants being exercised. NetStar also has the option, which expires April 1, 1998, to increase its equity interest to 51% at the then prevailing market price. 10 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 [c] Number of outstanding warrants Pursuant to a private offering in July 1993, the Company issued 167,000 "A" and 167,000 "B" warrants. All of the "A" warrants were exercised prior to August 31, 1995. All of the "B" warrants were exercised prior to July 30, 1996. [d] Long-Term Incentive Plan The Company has adopted a Long-Term Incentive Plan [the "Plan"] designed to compensate key employees of the Company for the performance of their corporate responsibilities. The benefits to employees under the Plan are dependent upon improvement in market value of the Company's common shares. The Plan offers selected key employees the opportunity to purchase common shares through the exercise of a non-qualified stock option. An option entitles the employee to purchase common shares from the Company at a price determined on the date the option is granted. The option price on the grant date is the average trading price of the stock over the five days prior to the grant date. The Plan also provides that selected key employees may retrieve common shares as an award of Restricted Stock. Restricted Stock consists of common shares that are awarded subject to certain conditions, such as continued employment with the Company or an affiliate for a specified period. Up to 525,000 common shares may be issued under the Plan. The following is a summary of outstanding stock options:
Exercise price Expiry date Total - -------------------------------------------------------------------------------------------------- # - -------------------------------------------------------------------------------------------------- Issued prior to year ended August 31, 1993 U.S.$5.83 March 1996 21,429 U.S.$2.33 May 20, 1998 30,000 - -------------------------------------------------------------------------------------------------- Balance as at August 31, 1993 51,429 Issued during year ended August 31, 1994 U.S.$3.33 December 31, 1998 7,500 - -------------------------------------------------------------------------------------------------- Balance as at August 31, 1994 58,929 Issued during year ended August 31, 1995 U.S.$5.33 October 5, 1999 75,000 U.S.$5.33 November 23, 1999 37,500 U.S.$4.33 April 4, 2000 15,000 - -------------------------------------------------------------------------------------------------- Balance as at August 31, 1995 186,429 Issued during year ended August 31, 1996 U.S.$3.50 November 20, 2000 111,750 U.S.$4.67 April 29, 2001 4,500 Expired during year ended August 31, 1996 U.S.$5.83 March 1996 (21,429) - -------------------------------------------------------------------------------------------------- Balance as at August 31, 1996 281,250 ==================================================================================================
11 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 As at August 31, 1996, 176,250 restricted common shares are issuable upon the exercise of the stock options outstanding in the above table. Non-restricted common shares are issuable for the remaining options outstanding. On December 23, 1992, 3,525 restricted common shares were issued to employees of the Company under the Plan. 11. AGREEMENTS WITH NTN COMMUNICATIONS, INC. Pursuant to an agreement dated March 23, 1990 and in consideration for the services granted to it, Interactive pays to NTN Communications, Inc. the amount of U.S. $2,000 per year per User Agreement executed by Interactive for every year of each User Agreement. Interactive also pays NTN Communications, Inc. a royalty fee equal to 25% of the net revenues as defined in the agreement derived from all services except for certain hospitality and Special Projects that existed at March 23, 1990; a royalty fee equal to the Production Quotation submitted by NTN Communications, Inc. plus 10% of the gross profit of Special Projects [special broadcasts for a non-continuous selective event]; and a one-time royalty fee equal to NTN Communications, Inc.'s production costs for any new programming developed by Interactive to be added to the existing programming schedule. The agreement expires on December 31, 2015. Total amounts expensed in the year under these agreements were $1,339,263 [1995 - - $1,082,634; 1994 - $758,870]. 12. EARNINGS PER SHARE Earnings per share were calculated based upon the weighted average number of common and equivalent shares and giving effect to the conversion of the preferred shares as follows: 1996 1995 1994 - -------------------------------------------------------------------- # # # - -------------------------------------------------------------------- Primary 2,392,548 2,146,226 1,517,348 Fully diluted 2,455,282 -- -- ==================================================================== 13. CONTINGENT LIABILITY On June 12, 1992, the Company filed a lawsuit against Interactive Network Inc. of Mountainview, California, U.S.A. and its president. The suit seeks a non-infringement with respect to a Canadian patent. 12 ________________________________________________________________________________ ________________________________________________________________________________ NTN Canada Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] ________________________________________________________________________________ August 31, 1996 On June 18, 1992, Interactive Network Inc. instituted proceedings against NTN Communications, Inc., NTN Interactive Network Inc. and the Company in the Federal Court of Canada and in the California Supreme Court claiming patent infringement. It is the opinion of the Company's management and its legal representatives that this patent infringement claim will be successfully defended. 14. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS The 1995 and 1994 comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 1996 consolidated financial statements. 15. RELATED PARTY TRANSACTIONS During the year, the Company had sales of $168,000 to corporations controlled by a shareholder. 13 ================================================================================ 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. NTN CANADA, INC. Date: November 27, 1996 By: /s/ Peter Rona ---------------------------------------------- Peter Rona, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report on has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Capacity Date --------- -------- ---- President, Chief Executive Officer, Principal Financial and Accounting Officer, Chairman of the Board and /s/ Peter Rona Director November 27, 1996 - ----------------------- Peter Rona /s/ Douglas Connolly Director November 27, 1996 - ----------------------- Douglas Connolly /s/ Daniel C. Downs Director November 27, 1996 - ----------------------- Daniel C. Downs /s/ James Newell Director November 27, 1996 - ----------------------- James Newell /s/ Richard Peddie Director November 27, 1996 - ----------------------- Richard Peddie /s/ Dale G. Smith Director November 27, 1996 - ----------------------- Dale G. Smith /s/ Adrian P. Towning Director November 27, 1996 - ----------------------- Adrian P. Towning - 56 - NTN CANADA, INC. ANNUAL REPORT ON FORM 10-K For Fiscal Year Ended August 31, 1996 EXHIBIT INDEX Exhibit Number Description of Exhibit Location - ------ ---------------------- -------- 2.1 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy Connolly and NTN Interactive Network Inc., minus Schedules thereto........+1, Exh. 10.1 3.1 Articles of Incorporation, as amended to date....................p. 59 3.2 By-Laws, as amended to date......................................p. 62 4.1 Specimen Stock Certificate.......................................p. 71 10.1 License Agreement, dated March 23, 1990, between NTN Communications, Inc. and NTN Interactive Network Inc..............................................+2, Exh. 10.9 10.2 Stock Purchase Agreement, dated as of October 4, 1994, between NTN Canada and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.)......................+3, Exh. A 10.3 Option, dated as of October 4, 1994, registered in the name of NetStar Enterprises Inc. (formerly, Labatt Communications Inc).........................................+3, Exh. B 10.4 Designation Agreement, dated as of October 4, 1994, among NTN Canada, Inc., NTN Interactive Network Inc. and NetStar Enterprises Inc. (formerly Labatt Communications Inc.)........................................+3, Exh. C 10.5 Registration Rights Agreement, dated as of October 4, 1994, between NTN Canada and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.)......................+3, Exh. D 10.6 Promissory Note of NTN Interactive Network Inc. registered in the name of Connolly-Daw Holdings, Inc.....+1, Exh. 10.2 10.7 Promissory Note of NTN Interactive Network Inc., registered in the name of 1199846 Ontario Ltd............+1, Exh. 10.3 10.8 Option Agreement, dated October 1, 1996, among Connolly-Daw Holdings Inc., NTN Interactive Network Inc. and NTN Canada, Inc.................................+1, Exh. 10.5 10.9 Option Agreement, dated October 1, 1996, among 1199846 Ontario Ltd., NTN Interactive Network Inc. and NTN Canada, Inc..........................................+1, Exh. 10.6 10.10 Registration Rights Agreement, dated October 1, 1996, among NTN Canada, Inc., Connolly-Daw Holdings Inc. and 1199846 Ontario Ltd..................................+1, Exh. 10.4 10.11 Employment Agreement, dated as of August 31, 1994, between NTN Interactive Network Inc. and Peter Rona..............p. 73 10.12 Management Agreement, dated October 1, 1996, between Magic Lantern Communications Ltd. and Connolly-Daw Holdings Inc........................................p. 81 10.13 Employment Agreement, dated October 1, 1996, between Magic Lantern Communications Ltd. and Douglas Connolly.........................................................p. 90 10.14 Employment Agreement, dated October 1, 1996, between Magic Lantern Communications Ltd. and Wendy Connolly........................................................p. 100 22 List of Subsidiaries............................................p. 110 27 Financial Data Schedule.............................................++ - ---------- +1 All Exhibits so indicated are incorporated herein by reference to the exhibit listed above in the Company's Current Report on Form 8-K (Date of Report: October 2, 1996) (File No. 0-18066), filed on October 17, 1996. +2 All Exhibits so indicated are incorporated herein by reference to the exhibit listed above in the Annual Report on Form 10-K of NTN Communications, Inc., for its fiscal year ended December 31, 1990) (File No. 2-91761-C), filed on April 1, 1991. +3 All Exhibits so indicated are incorporated herein by reference to the exhibit listed above in the Company's Current Report on Form 8-K (Date of Report: October 4, 1994) (File No. 0-18066), filed on October 18, 1994. ++ Filed electronically pursuant to Item 401 of Regulation S-T. - 57 - EX-3.1 2 RESTATED CERTIFICATE EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF NTN CANADA, INC. (As restated to include all amendments thru September 30, 1994) FIRST: The name of the corporation is NTN CANADA, INC. SECOND: The corporation is formed for the purpose of engaging in any lawful act or activity for which corporations may be organized pursuant to Article 4 of the Business Corporation Law in the State of New York. The corporation will not engage in any act or activity requiring the consent or approval of any state official, department, board, agency or other body without such consent or approval first having been obtained. In furtherance of the corporate purposes, the corporation shall have all of the powers conferred upon corporations organized under the Business Corporation Law, subject to any limitations thereof contained in this certificate of incorporation or in the laws of the State of New York. THIRD: The office of the corporation is to be located in the County of Suffolk, State of New York. FOURTH: The aggregate number of shares which this corporation shall have authority to issue is Twenty-One Million Five Hundred Thousand (21,500,000) shares, of which one million five hundred thousand (1,500,000) shares will be preferred shares having a par value of $.01 per share, and twenty million (20,000,000) shares having a par value of $.07 per share will be common shares. With respect to the preferred shares, the Board of Directors shall have the authority to cause the issuance, from time to time, of preferred shares in one or more series, for any proper purpose without further shareholder approval. Each series of preferred shares will be distinctly titled and will consist of the number of shares designated by the Board of Directors. The Board of Directors is expressly vested with the right to determine, with respect to the preferred shares and each series thereof, the following: (a) Whether such shares shall be granted voting rights, and, if so, to what extent, and upon what terms and conditions; (b) The rates and times at which, and the terms and conditions on which, dividends on such shares shall be paid and any dividend rights of cumulation; (c) Whether such shares shall be granted conversion rights, and, if so, upon what terms and conditions; (d) Whether the corporation shall have the - 1 - right to redeem such shares, and, if so, upon what terms and conditions; (e) The liquidation rights (if any) of such shares, including whether such shares shall enjoy any liquidation preferences; and (f) Such other designations, preferences, relative rights and limitations (if any) attaching to such shares. FIFTH: The Secretary of State is designated as the agent of the corporation upon whom process against the corporation may be served. The post office address within the State of New York to which the Secretary of State shall mail a copy of any process against the corporation served upon him is: TRIOSEARCH, Inc. c/o Moritt & Wolfeld, 600 Old Country Road, Garden City, New York 11530. SIXTH: The duration of the corporation is to be perpetual. SEVENTH: The following provisions are inserted for the regulation and conduct of the affairs of the corporation, and it is expressly provided that they are intended to be in furtherance and not in limitation or exclusion of the powers conferred by statute: (a) Meetings of the shareholders or directors of the corporation for all purposes may be held at its office or elsewhere within or without the State of New York, at such place or places as may from time to time be designated in the by-laws, or by unanimous resolution of the board of directors. (b) All corporate powers except those which by-law expressly require the consent of the stockholders shall be exercised by the board of directors. (c) The board of directors shall have the power from time to time to fix and determine and vary the amount of the working capital of the corporation, and to direct and determine the use and disposition of any surplus or net profits over and above its capital, and in its discretion, the board of directors may use and apply any such surplus or accumulated profits in purchasing or acquiring bonds or other obligations of the corporation or its own capital shares, to such extent and in such manner and upon such terms as the board of directors shall deem expedient, but any such capitals shares so purchased or acquired may be resold unless such shares shall have been retired in the manner provided by law for the purpose of decreasing the corporation's capital. (d) Any one or more or all of the directors may be removed for or without cause, at any time, by the vote of the shareholders holding a majority of the shares of the corporation entitled to vote at any special meeting, and thereupon the term of such director or directors who shall have been so removed shall forthwith terminate, and there shall be a vacancy or vacancies in the board of directors to be filled as provided in the by-laws. - 2 - (e) Subject always to the by-laws made by the shareholders, the board of directors may make by-laws and from time to time may alter, amend, or repeal any by-laws, but any by-laws made by the board of directors may be altered or repealed by the shareholders. (f) Any one or more members of the Board of Directors of the corporation or of any committee thereof may participate in a meeting of said Board or of any such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. EIGHTH: No holder of any of the shares of any class of the corporation shall be entitled as of right to subscribe for, purchase, or otherwise acquire any shares of any class of the corporation which the corporation proposes to issue or any rights or options which the corporation proposes to grant for the purchase of shares of any class of the corporation or for the purchase of any shares, bonds, securities, or obligations of the corporation which are convertible into or exchangeable for, or which carry any rights, to subscribe for, purchase or otherwise acquire shares of any class of the corporation; and any and all of such shares, bonds, securities, or obligations of the corporation, which now or are hereafter authorized or created, may be issued, or may be reissued or transferred if the same have been reacquired and have treasury status, and any and all of such rights and options may be granted by the Board of Directors to such persons, firms, corporations and associations, and for such lawful consideration, and on such terms as the Board of Directors in its discretion may determine, without first offering the same, or any thereof, to any said holder. Without limiting the generality of the foregoing stated denial of any and all preemptive rights, no holder of shares of any class of the corporation shall have any preemptive rights in respect of the matters, proceedings, or transaction specified in paragraphs (1) to (6) inclusive, of paragraph (e) of Section 622 of the Business Corporation Law. NINTH: Except as may otherwise be specifically provided in this certificate of incorporation, no provision of this certificate of incorporation is intended by the corporation to be construed as limiting, prohibiting, denying, or abrogating any of the general or specific powers or rights conferred under the Business Corporation Law upon the corporation, upon its shareholders, bondholders, and security holders, and upon its directors, officers, and other corporate personnel, including, in particular, the power of the corporation to furnish indemnification to directors and officers in the capacities defined and prescribed by the Business Corporation Law and the defined and prescribed rights of said persons to indemnification as the same are conferred by the Business Corporation Law. TENTH: No director of this corporation shall be personally liable to the corporation or any of its shareholders for damages for any breach of duty in such capacity except if a judgment or other final adjudication adverse to him establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of the law, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled or that his acts violated Section 719 of the New York Business Corporation Law. - 3 - EX-3.2 3 BY-LAWS EXHIBIT 3.2 BY-LAWS OF NTN CANADA, INC. (As Amended Through November 30, 1996) ARTICLE 1. SHAREHOLDERS' MEETING Section 1. - Annual Meeting: The annual meeting of the shareholders shall be held within five months after the close of the fiscal year of the Corporation, for the purpose of electing directors, and transacting such other business as may properly come before the meeting. Section 2 - Special Meetings: Special meetings of the shareholders may be called at any time by the Board of Directors or by the President or the Secretary at the written request of the holders of fifty per cent (50%) of the shares then outstanding and entitled to vote thereat, or as otherwise required under the provisions of the Business Corporation Law. Section 3 - Place of Meetings: All meetings of shareholders shall be held at the principal office of the Corporation, or at such other places within or without the State of New York as shall be designated in the notices or waivers of notice of such meetings. Section 4 - Notice of Meetings: (a) Written notice of each meeting of shareholders, whether annual or special, stating the time when and place where it is to be held, shall be served either personally or by mail, not less than ten or more then fifty days before the meeting, upon each shareholder of record entitled to vote at such meeting, and to any other shareholder to whom the giving of notice may be required by law. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called, and shall indicate that it is being issued by, or at the direction of, the person or persons calling the meeting. If, at any meeting, action is proposed to be taken that would, if taken, entitle shareholders to receive payment for their shares pursuant to the Business Corporation Law, the notice of such meeting shall include a statement of that purpose and to that effect. If mailed, such notice shall be directed to each such shareholder at his address, as it appears on the records of the shareholders of the Corporation, unless he shall have previously filed with the Secretary of the Corporation a written request that notices intended for him be mailed to some other address, in which case, it shall be mailed to the address designated in such request. (b) Notice of any meeting need not be given to any person who may become a shareholder of record after the mailing of such notice and prior to the meeting, or to any shareholder who attends such meeting, in person or by proxy, or to any shareholder who, in person or by proxy, submits a signed waiver of notice either before or after such meeting. Notice of any adjourned meeting of shareholders need not be given, unless otherwise required by statute. - 1 - Section 5 - Quorum: (a) Except as otherwise provided herein, or by statute, or in the Certificate of Incorporation (such Certificate and any amendments thereof being hereinafter collectively referred to as the "Certificate of Incorporation"), at all meetings of shareholders of the Corporation, the presence at the commencement of such meetings in person or by proxy of shareholders holding of record a majority of the total number of shares of the Corporation then issued and outstanding and entitled to vote, shall be necessary and sufficient to constitute a quorum for the transaction of any business. The withdrawal of any shareholder after the commencement of a meeting shall have no effect on the existence of a quorum, after a quorum has been established at such meeting. (b) Despite the absence of a quorum at any annual or special meeting of shareholders, the shareholders, by a majority of the votes cast by the holders of shares entitled to vote thereon, may adjourn the meeting. At any such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called if a quorum had been present. Section 6 - Voting: (a) Except as otherwise provided by statute or by the Certificate of Incorporation, any corporate action, other than the election of directors to be taken by vote of the shareholders, shall be authorized by a majority of votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. (b) Except as otherwise provided by statute or by the Certificate of Incorporation, at each meeting of shareholders, each holder of record of stock of the Corporation entitled to vote thereat, shall be entitled to one vote for each share of stock registered in his name on the books of the Corporation. (c) Each shareholder entitled to vote or to express consent or dissent without a meeting, may do so by proxy; provided, however, that the instrument authorizing such proxy to act shall have been executed in writing by the shareholder himself, or by his attorney-in-fact thereunto duly authorized in writing. No proxy shall be valid after the expiration of eleven months from the date of its execution, unless the persons executing it shall be specified therein the length of time it is to continue in force. Such instrument shall be exhibited to the Secretary at the meeting and shall be filed with the records of the Corporation. (d) Any resolution in writing, signed by all of the shareholders entitled to vote thereon, shall be and constitute action by such shareholders to the effect therein expressed, with the same force and effect as if the same had been duly passed by unanimous vote at a duly called meeting of shareholders and such resolution so signed shall be inserted in the Minute Book of the Corporation under its proper date. ARTICLE II. DIRECTORS Section 1. - Number: The affairs and the business of the Corporation, except as otherwise provided in the Certificate of Incorporation, shall be managed by the Board of Directors. The number of the directors of the Corporation shall be two (2), unless and until otherwise determined by vote of a majority of the entire Board of Directors. The number of Directors shall not be less than three, unless all of the outstanding shares are owned beneficially and of record by less than three shareholders, in which event the number of directors shall not be less than the number of shareholders. - 2 - Section 2. - How Elected: At the annual meeting of shareholders, the persons duly elected by the votes cast at the election held thereat shall become the directors for the ensuing year. Section 3. - Term of Office: The term of office of each of the directors shall be until the next annual meeting of shareholders and thereafter until a successor has been elected and qualified. Section 4. - Duties of Directors: The Board of Directors shall have the control and general management of the affairs and business of the Corporation unless otherwise provided in the certificate of Incorporation. Such directors shall in all cases act as a Board regularly convened by a majority, and they may adopt such rules and regulations for the conduct of their meetings, and the management and business of the Corporation as they may deem proper, not inconsistent with these By-Laws and the Laws of the State of New York. Section 5. - Directors' Meetings: Regular meetings of the Board of Directors shall be held immediately following the annual meetings of the shareholders, and at such other times as the Board of Directors may determine. Special meetings of the Board of Directors may be called by the President at any time and must be called by the President or the Secretary upon the written request of two Directors. Section 6. - Notice of Special Meetings: Notice of special meetings of the Board of Directors shall be served personally or by mail addressed to each Director at his past known address no less then five or more than twenty days prior to the date of such meeting. The notice of such meeting shall contain a statement of the business to be transacted thereat. No business other than that specified in the call for the meeting shall be transacted at any such special meeting. Notice of special meeting may be waived by any Director by written waiver or by personal attendance thereat without protest of lack of notice to him. Section 7. - Quorum: At any meeting of the Board of Directors, except as otherwise provided by the Certificate of Incorporation, or by these By-Laws, a majority of the Board of Directors shall constitute a quorum. however, a lesser number when not constituting a quorum may adjourn the meeting from time to time until a quorum shall be present or represented. Section 8. - Voting: Except as otherwise provided by statute, or by the Certificate of Incorporation, or by these By-Laws, the affirmative note of a majority of the Directors present at any meeting of the Board of Directors at which a quorum is present shall be necessary for the transaction of any item of business thereat. Any resolution in writing, signed by all of the directors entitled to vote thereon, shall be and constitute action by such directors to the effect therein expressed, with the same force and effect as if the same had been duly passed by unanimous vote at a duly called meeting of directors and such resolution so signed shall be inserted in the Minute Book of the Corporation under its proper date. - 3 - Section 9. - Vacancies: Unless otherwise provided in the Certificate of Incorporation, vacancies in the Board of Directors occurring between annual meetings of the shareholders shall be filled for the unexpired portion of the term by a majority vote of the remaining Directors, even though less than a quorum exists. Section 10. - Removal of Directors: Any or all of the directors may be removed, either with or without cause at any time by a vote of the shareholders at any meeting called for such purpose. Section 11. - Resignation: Any director may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the Corporation. Unless otherwise specified in such written notice, such resignation shall take effect upon receipt thereof by the Board of Directors or such officer, and the acceptance of such resignation shall not be necessary to make it effective. Section 12. - Salary: No stated salary shall be paid to directors, as such, for their services, but by resolution of the Board of Directors a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board; provided, however, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 13. - Contracts: (a) No contract or other transaction between this Corporation and any other Corporation shall be impaired, affected or invalidated, nor shall any director be liable in any way by reason of the fact that any one or more of the directors of this Corporation is or are interested in, or is a director or officer, or are directors or officers of such other Corporation, provided that such facts are disclosed or made known to the Board of Directors. (b) Any director, personally and individually, may be interested in any contract or transaction of this Corporation, and no director shall be liable in any way by reason of such interest, provided that the fact of such interest be disclosed or made known to the Board of Directors, and provided that the Board of Directors shall authorize, approve or ratify such contract or transaction by the vote (not counting the vote of any such director) of a majority of a quorum, notwithstanding the presence of any such director at the meeting at which such action is taken. Such director or directors may be counted in determining the presence of a quorum at such meeting. This Section shall not be construed to impair or invalidate or in any way affect any contract or other transaction which would otherwise be valid under the law (common, statutory or otherwise) applicable thereto. Section 14. - Committees: The Board of Directors, by resolution adopted by a majority of the entire Board, may from time to time designate from among its members an executive committee and such other committees, and alternate members thereof, as they deem desirable, each consisting of three or more members, with such powers and authority (to the extent permitted by law) as may be provided in such resolution. Each such committee shall serve at the pleasure of the Board. - 4 - ARTICLE III. OFFICERS Section 1. - Number of Officers: (a) The officers of the Corporation shall consist of a President, a Secretary, a Treasurer, and such other officers, including a Chairman of the Board of Directors, and one or more Vice Presidents, as the Board of Directors may from time to time deem advisable. Any officer other than the Chairman of the Board of Directors may be, but is not required to be, a director of the Corporation. Any officer may hold more than one office, except the same person may not hold the office of President and Secretary. Section 2. - Election of Officers: Officers of the Corporation shall be elected at the first meeting of the Board of Directors. Thereafter, and unless otherwise provided in the Certificate of Incorporation, the officers of the Corporation shall be elected annually by the Board of Directors at its meeting held immediately after the annual meeting of shareholders and shall hold office for one year and until their successors have been duly elected and qualified. Section 3. - Removal of Officers: Any officer elected by the Board of Directors may be removed, with or without cause, and a successor elected, by vote of the Board of Directors, regularly convened at a regular or special meeting. Any officer elected by the shareholders may be removed, with or without cause, and a successor elected, by vote of the shareholders, regularly convened at an annual or special meeting. Section 4. - President: The President shall be the chief executive officer of the Corporation and shall be general charge of the business, affairs and property thereof, subject to direction of the Board of Directors, and shall have general supervision over its officers and agents. He shall, if present, preside at all meetings of the Board of Directors in the absence of a Chairman of the Board and at all meetings of shareholders. He may do and perform all acts incident to the office of President. Section 5. - Vice-President: In the absence of or inability of the President to act, the Vice-President shall perform the duties and exercise the powers of the President and shall perform such other functions as the Board of Directors may from time to time prescribe. Section 6. - Secretary The secretary shall: (a) Keep the minutes of the meetings of the Board of Directors and of the shareholders in appropriate books. (b) Give and serve all notice of all meetings of the Corporation. (c) Be custodian of the records and of the seal of the Corporation and affix the latter to such instruments or documents as may be authorized by the Board of Directors. - 5 - (d) Keep the shareholders records in such a manner as to show at any time the amount of shares, the manner and the time the same was paid for, the names of the owners thereof alphabetically arranged and their respective places of residence, or their Post Office addresses, the number of shares owned by each of them and the time at which each person became owner, and keep such shareholder records available daily during the usual business hours at the office of the Corporation subject to the inspection of any person duly authorized, as prescribed by law. (e) Do and perform all other duties incident to the office of Secretary. Section 7. - Treasurer: The Treasurer shall: (a) Have the care and custody of and be responsible for all of the funds and securities of the Corporation and deposit of such funds in the name and to the credit of the Corporation in such a bank and safe deposit vaults as the Directors may be designate. (b) Exhibit at all reasonable times his books and accounts to any Director or shareholder of the Corporation upon application at the office of the Corporation during business hours. (c) Render a statement of the condition of the finances of the Corporation at each stated meeting of the Board of Directors if called upon to do so, and a full report at the annual meeting of shareholders. He shall keep at the office of the Corporation correct books of account of all of its business and transactions and such books of account as the Board of Directors may require. He shall do and perform all other duties incident to the office of Treasurer. Section 8. - Duties of Officers May Be Delegated: In the case of the absence of any officer of the Corporation, or for any reason the Board may deem sufficient, the Board may, except as otherwise provided in these By-Laws, delegate the powers or duties of such officers to any other office or any Director for the time being, provided a majority of the entire Board concur therein. Section 9. - Vacancies - How Filled: Should any vacancy in any office occur by death, resignation or otherwise, the same shall be filled, without undue delay, by the Board of Directors at its next regular meeting or at a special meeting called for that purpose, except as otherwise provided in the Certificate of Incorporation. Section 10. - Compensation of Officers: The officers shall receive such salary or compensation as may be fixed and determined by the Board of Directors, except as otherwise provided in the certificate of Incorporation. - 6 - ARTICLE III-A. INDEMNIFICATION Section 1. - Indemnification of Directors and Officers: The Board of Directors may authorize the corporation to pay expenses incurred by, or to satisfy a judgment or fine rendered or levied against, a present or former director, officer, or employee of this corporation in an action brought by a third party against such person, whether or not the Corporation is joined as a party defendant, to impose a liability or penalty or such person for an act alleged to have been committed by such person while a director, officer, or employee, or by the Corporation, or by both; provided, the Board of Directors determines in good faith that such director, officer, or employee was acting in good faith within what he reasonably believed to be the scope of his employment or authority and for a purpose which he reasonably believed to be in the best interests of the Corporation or its shareholders. Payments authorized hereunder include amounts paid and expenses incurred in settling any such action instituted or maintained in the right of the Corporation by a shareholder or holder of a voting trust certificate representing shares of the Corporation. The provisions of this Section shall apply to the Corporation. The provisions of this Section shall apply to the estate, executor, administrator, heirs, legatees, or devisees of a director, officer, or employee, and the term "person" where used in the foregoing Section shall include the estate, executor, administrator, heirs, legatees, or devisees of such person. ARTICLE IV. CERTIFICATES REPRESENTING SHARES Section 1. - Issue of Certificates Representing Shares: The President shall cause to be issued to each shareholder one or more certificates, under the seal of the Corporation, signed by the President (or Vice-President) and the Treasurer (or Secretary) certifying the number of shares owned by him in the Corporation. Section 2. - Lost or Destroyed Certificates: The holder of any certificate representing shares of the Corporation shall immediately notify the Corporation of any loss or destruction of the certificate representing the same. The Corporation may issue a new certificate in the place of any certificate theretofore issued by it, alleged to have been lost or destroyed. On production of such evidence of loss or destruction as the Board of Directors in its discretion may require, the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificates, or his legal representatives, to give the Corporation a bond in such sum as the Board may direct, and with such surety or sureties as may be satisfactory to the Board, to indemnify the Corporation against any claims, loss, liability of damage it may suffer on account of the issuance of the new certificate. A new certificate may be issued without requiring any such evidence or bond when, in the judgment of the Board of Directors, it is proper so to do. Section 3. - Transfers of Shares: (a) Transfers of shares of the Corporation shall be made on the shares records of the Corporation only by the holder of record thereof, in person or by his duly authorized attorney, upon surrender for cancellation of the certificate or certificates representing such shares, with an assignment or power of transfer endorsed thereon or delivered therewith, duly executed, with such proof of the authenticity of the signature and of authority to transfer and of payment of transfer taxes as the Corporation or its agents may require. - 7 - (b) The Corporation shall be entitled to treat the holder of record of any share or shares as the absolute owner thereof for all purposes and, accordingly, shall not be bound to recognize any legal, equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law. ARTICLE V. SEAL The seal of the Corporation shall be as follows: [Form of Seal] ARTICLE VI. DIVIDENDS OR OTHER DISTRIBUTIONS The Corporation, by vote of the Board of Directors, may declare and pay dividends or make other distributions in cash or its bonds or its property on its outstanding shares to the extent as provided and permitted by law, unless contrary to any restriction contained in the Certificate of Incorporation. ARTICLE VII. NEGOTIABLE INSTRUMENTS All checks, notes or other negotiable instruments shall be signed on behalf of this Corporation by such of the officers, agents and employees as the Board of Directors may from time to time designate, except as otherwise provided in the certificate of Incorporation. ARTICLE VIII. FISCAL YEAR The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. ARTICLE IX. AMENDMENTS Section 1. - By Shareholders: All by-laws of the Corporation shall be subject to alteration or repeal, and new by-laws may be made, by a majority vote of the shareholders at the time entitled to vote in the election of directors. Section 2. - By Directors The Board of directors shall have power to make, adopt, alter, amend and repeal, from time to time, by-laws of the Corporation; provided, however, that the shareholders entitled to vote with respect thereto as in this Article IX above-provided may alter, amend or repeal by-laws made by the Board of Directors, except that the Board of Directors shall have no power to change the quorum for meetings of shareholders or of the Board of Directors, or to change any provisions of the by-laws with respect to the removal of directors or the filling of vacancies in the Board resulting from the removal by the shareholders. If any by-law regulating an impending election of - 8 - directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of directors, the by-law so adopted, amended or repealed, together with a concise statement of the changes made. ARTICLE X. OFFICES The offices of the Corporation shall be located in the City, County and State designated in the Certificate of Incorporation. The Corporation may also maintain offices at such other places within or without the United States as the Board of Directors may, from time to time, determine. - 9 - EX-4.1 4 FORM OF STOCK CERTIFICATE EXHIBIT 4.1 [Form of Stock Certificate] NTN CANADA, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK [Certificate Number] Shares [# of shares] Cusip Number THIS CERTIFIES THAT is the owner of FULLY-PAID AND NON-ASSESSABLE COMMON SHARES, PAR VALUE $.046 EACH OF NTN CANADA, INC. (herein called the "Corporation"), transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: ----------------------- PRESIDENT [CORPORATE SEAL] ----------------------- SECRETARY COUNTERSIGNED: NORTH AMERICAN TRANSFER CO. FREEPORT, N.Y. 11520 TRANSFER AGENT AUTHORIZED SIGNATURE [REVERSE PAGE] The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM-as tenants in common UNIF GIFT MIN ACT-............Custodian........ TEN ENT-as tenants by the entireties (Cust) (Minor) JT TEN-as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act.................... in common (State) Additional abbreviations may also be used though not in the above list For value received_______________hereby sell, assign and transfer unto [social security or other identifying number] - ------------------------------------------------------------------------------ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ _______________________________________________________________________ shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint_____________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated_________________ - -------------------------------------------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. EX-10.11 5 EXHIBIT 10.11 EXHIBIT 10.11 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of the 31st day of August, 1994, B E T W E E N: NTN INTERACTIVE NETWORK INC., a corporation amalgamate under the laws of Canada, (hereinafter referred to as the "Employer", OF THE FIRST PART; - and - PETER RONA, of the City of Montreal, in the Province of Quebec, (hereinafter referred to as the "Executive"), OF THE SECOND PART. WHEREAS: 1. The Employer is engaged in the marketing and distribution of interactive television products, programming and services. 2. The Executive has been for the past nine years and is presently employed by the Employer; and 3. The Employer and the Executive have agreed to enter into a new employment relationship for their mutual benefit; NOW THEREFORE THIS AGREEMENT WITNESSETH that, in consideration of the sum of Ten ($10.00) Dollars now paid by each of the parties hereto to each of the other parties hereto and other good and valuable consideration (the receipt and sufficiency whereof by each of the parties hereto is hereby mutually acknowledged), the parties hereto hereby acknowledge and agree that the terms and conditions of the aforesaid new employment relationship shall be as follows: 1 1. DUTIES The Employer hereby appoints the Executive to undertake the duties and exercise the powers as President and Chief Executive Officer of the Employer as may be requested by the board of directors of the Employer, and the Executive hereby accepts such appointment upon and subject to the terms and conditions set forth in this agreement. 2. TERM Subject to the provisions of Article 8 herein, the appointment of the Executive hereunder shall be for a three year period commencing on September 1st, 1994 and continuing until August 31st, 1997 (hereinafter referred to as the "Term"). 3. COMPENSATION (1) The fixed remuneration of the Executive for his services hereunder shall be at the rate of $150,000.00 per annum for the first year of the Term. The fixed remuneration shall be reviewed on each anniversary of employment during the Term in order to determine the amount by which the fixed remuneration shall be increased. The review will be undertaken by assessing the Executive's achievement of the over-all objectives established by the Employer and by having regard to the market rates of remuneration paid in Canada for similar duties and responsibilities. In the event the Employer and the Executive are unable to agree upon the amount of the fixed remuneration for the second year of the Term, the fixed remuneration during paid year shall be the amount obtained by multiplying $150,000.00 by a fraction, the numerator of which shall be the Consumer Price Index published by Statistics Canada (or other similarly recognized Government Index) for the month of July, 1995, and the denominator of which shall be the Consumer Price Index for the month of September, 1994. In the event the Employer and the Executive are unable to agree upon the amount of the fixed remuneration for the third year of the Term, the fixed remuneration during said year shall be the amount obtained by multiplying $150,000.00 by a fraction, the numerator of which shall be the Consumer Price Index published by Statistics Canada (or other similarly recognized Government Index) for the month of July, 1996, and the denominator of which shall be the Consumer Price Index for the month of September, 1994. The fixed remuneration 2 shall be payable in equal installments, no less frequently than monthly. (2) In addition to the fixed remuneration, the Employer shall pay to the Executive a bonus (the "Bonus") at the end of each year of the Term in the event that during the said year the actual net income before taxes of the Employer as determined by the auditors or accountants of the Employer using generally accepted accounting principles applied on a basis consistent with those of previous years ("Actual Net Income Before Taxes'), exceeded the projected net income before taxes of the Employer as determined by the board of directors of the employer at the commencement of the said year ("Projected net Income Before Taxes"). The percentage amount of the excess of Actual Net Income Before Taxes over Projected net Income Before Taxes shall hereinafter be referred to as the "Excess". The amount of The Bonus for each year of the Term shall be calculated in accordance with the following formula: (a) In the event the Excess is greater than zero but less than 10%, the amount of the Bonus shall be equal to 10% of the fixed remuneration payable during the year in question; (b) In the event the Excess is equal to or greater than 10% but less than 20%, the amount of the Bonus shall be equal to 12.5% of the fixed remuneration payable during the year question; (c) In the event the Excess is equal to or greater than 20% but less than 30%, the amount of the Bonus shall be equal to 17.5% of the fixed remuneration payable during the year in question; (d) In the event the Excess is equal to or greater than 30% but less than 40%, the amount of the Bonus shall be equal to 25.5% of the fixed remuneration payable during the year in question; (e) In the event the Excess is equal to or greater than 40% but less than 50%, the amount of the Bonus shall be equal to 35.5% of the fixed remuneration payable during the year in question; and 3 (f) In the event the Excess is equal to or greater than 50%, the amount of the Bonus shall be equal to 50% of the fixed remuneration payable during the year in question. (3) In further addition to the fixed remuneration, the Employer shall give to the Executive, at no cost to the Executive, such stock options during each year of the Term, if any, as determined by the board of directors of the Employer. In the event the board of directors of the Employer determines to provide the Executive with such stock options, the said stock options shall be in the form of options to purchase common shares in the capital stock of NTN Canada, Inc. ("NTN Canada"), the parent company of the Employer. 4. BENEFITS (1) Automobile. The Executive shall be provided with an automobile mutually satisfactory to the Employer and the Executive. The Employer shall be responsible for payment of all expenses generated by the Executive's use of the automobile including but not limited to gas, insurance, maintenance and repairs. (2) Expenses. It is understood and agreed that the Executive will incur expenses in connection with his duties under this agreement. In respect thereof, the Employer shall provide the Executive with a company credit card. The Employer will also reimburse the Executive for any expenses paid for by the Executive provided that the Executive provides to the Employer an itemized written account and receipts acceptable to the Employer within thirty days after they have been incurred. (3) Benefit Plans. The Executive shall be entitled to participate in all existing and future benefit plans which the Employer provides, including medical/hospital and extended health care benefits and life insurance. In addition, the Executive consents to the Employer maintaining the existing $500,000.00 key-man insurance policy on the life of the Executive. (4) Club fees. Recognizing the extra requirement for customer entertainment by the Executive, the Employer will provide for initiation and annual dues payments at a private golf and country club mutually acceptable to the Employer and the Executive. 4 5. AUTHORITY (1) The Executive shall have, subject always to the general or specific instructions and directions of the board of directors of the Employer, full power and authority to manage and direct the business and affairs of the Employer (except only the matters and duties as by law must be transacted or performed by the board of directors of the Employer or by the shareholders of the Employer in general meetings), including power and authority to enter into contracts, engagements or commitments of every nature or kind in the name of and on behalf of the Employer and to engage and employ and to dismiss all managers and other employees and agents of the Employer other than officers of the Employer who have entered into written contracts of employment with the Employer. (2) The Executive shall conform to all lawful instructions and directors given to him by the board of directors of the Employer, and obey and carry out the by-laws of the Employer. 6. SERVICE (1) The Executive, throughout the Term, shall devote his full time and attention to the business and affairs of the Employer and its subsidiaries and shall not, without the consent in writing of the board of directors of the Employer undertake any other business or occupation or become an officer, employee or agent of any other company, firm or individual. The foregoing shall not prevent the Executive from being a director of any other company or firm provided such directorship does not interfere with the Executive's duties to the Employer under this agreement, nor shall the foregoing prevent the Executive from passively investing in any other company or firm. (2) The Executive shall well and faithfully serve the Employer and its subsidiaries and use his best efforts to promote the interests thereof and shall not disclose the private affairs or trade secrets of the Employer and its subsidiaries to any person other than the directors of the Employer or for any purposes other than those of the Employer any information he may acquire in relation to the Employer's business. 7. VACATION The Executive shall be entitled during each year of the Term to four weeks' vacation. The vacation shall be taken at such time or times as shall be mutually acceptable to the Employer and the 5 Executive. The Executive shall be allowed to carry forward up to two weeks of unused vacation during each year of the Term. If at the end of the Term the Executive shall have unused vacation time, the Employer shall pay to the Executive as compensation therefor an amount based on the fixed remuneration rate in effect during the third year of the Term. In addition to the foregoing, the Employer and the Executive acknowledge that the Executive has two weeks of unused vacation for the period ending August 31st, 1994 and agree that the Executive shall be entitled to utilize the said two weeks of unused vacation at any time prior to October 31st, 1994. 8. DISABILITY If the Executive shall at any time by reason of illness or mental or physical disability be incapacitated from performing his duties and at the request of the Employer, furnish to the Employer satisfactory evidence of the incapacity and the cause of it, he shall receive his full remuneration for the first six months or any shorter period and one-half of his full remuneration for the subsequent six consecutive months during which the incapacity shall continue. If the Executive shall continue to be incapacitated for a longer period than twelve consecutive months or if he shall be incapacitated at different times for more than twelve months during the Term, then in either case his employment and appointment shall, at the option of the Employer, immediately terminate. 9. EXTENSION OF TERM The Employer and the Executive shall, prior to the end of the second year of the Term, decide whether they wish to extend the Term for a further three years and the terms and conditions of the said extension. In the event the Term is not extended, for whatever reason, the Employer shall pay to the Executive, at the expiration of the Term, a lump sum payment equal to the fixed remuneration and Bonus payable to the Executive in respect of the third year of the Term. 10. STOCK OPTIONS - PAST SERVICES In consideration of past services rendered by the Executive to the Employer, the Employer shall give to the Executive, at no cost to the Executive, stock options to purchase 50,000 common shares in the capital stock of NTN Canada pursuant to the long term incentive plan of NTN Canada. The said stock options shall be given to the Executive the day next following the closing of the proposed transaction whereby Labatt Communications Inc. shall acquire 35% of the outstanding common shares of NTN Canada, which transaction is scheduled to close on or before September 30th, 1994. In the event the said transaction with Labatt Communications Inc. does not close, the aforesaid stock options shall be given to the Executive the day next following the day on which negotiations with Labatt Communications Inc. in connection with the said transaction are terminated. 6 11. ASSIGNMENT OF RIGHTS The rights which accrue to the Employer under this agreement shall pass to its successors or assigns. The rights of the Executive under this agreement are not assignable or transferable in any manner. 12. NOTICES (1) Any notice required or permitted to be given to the Executive shall be sufficiently given if delivered to the Executive personally or if mailed by registered mail to the Executive's address last known to the Employer. (2) Any notice required or permitted to be given to the Employer shall be sufficiently given if mailed by registered mail to the Employer's head office at its address last known to the Executive. 13. SEVERABILITY In the event that any provision or part of this agreement shall be deemed void or invalid by a court of competent jurisdiction, the remaining provisions or parts shall be and remain in full force and effect. 14. ENTIRE AGREEMENT This agreement constitutes the entire agreement between the parties with respect to the employment and appointment of the Executive and any and all previous agreements, written or oral, express or implied, between the parties or on their behalf, relating to the employment and appointment of the Executive by the Employer, are terminated and canceled and each of the parties releases and forever discharges the other of and from all manner of actions, causes of action, claims and demands whatsoever, under or in respect of any agreement. 15. MODIFICATION OF AGREEMENT Any modification to this agreement must be in writing and signed by the parties hereto or it shall have no effect and shall be void. 16. WAIVER No term or condition of this agreement shall be deemed waived unless such waiver is expressed in writing and signed by the parties hereto. Failure or delay on the part of any party to enforce any right hereunder shall not operate as a waiver hereof. 7 17. HEADINGS The headings used in this agreement are for convenience only and are not to be construed in any way as additions to or limitations of the covenants and agreements contained in this agreement. 18. GOVERNING LAW This agreement shall be construed and enforced in accordance with the laws of the Province of Ontario. Each of the parties hereto hereby irrevocably attorns to the jurisdiction of the courts of the Province of Ontario. IN WITNESS WHEREOF this agreement has been executed by the parties to it, the day, month and year first written above. NTN INTERACTIVE NETWORK INC. Per: /s/ Peter Rona --------------------------- President - Peter Rona Per: /s/ William Gilsig --------------------------- Vice President of Finance and Administration William Gilsig SIGNED, SEALED AND DELIVERED ) in the presence of ) ) /s/ William Gilsig ) /s/ Peter Rona 1/s - ---------------------------- ----------------------------- Witness PETER RONA 8 EX-10.12 6 MANAGEMENT AGREEMENT EXHIBIT 10.12 MANAGEMENT AGREEMENT THIS AGREEMENT made the 1st day of October, 1996, B E T W E E N: MAGIC LANTERN COMMUNICATIONS LTD., a corporation amalgamated pursuant to the laws of Canada, (hereinafter referred to as the "Corporation"), OF THE FIRST PART; - and - CONNOLLY-DAW HOLDINGS INC., a corporation incorporated under the laws of the Province of Ontario, (hereinafter referred to as "Connolly-Daw"), OF THE SECOND PART. WHEREAS the Corporation carries on businesses consisting of the marketing and distribution of video programming and other media resource material, the operation of a fulfillment service bureau, the operation of a video dubbing and production facility, and the operation of a digital conversion service bureau (collectively the "Business"); AND WHEREAS pursuant to a share purchase agreement between Connolly- Daw, 1199846 Ontario Ltd. ("1199846"), Douglas Connolly, Wendy Connolly and NTN Interactive Network Inc. ("NTN") dated October 1, 1996 (the "Share Purchase Agreement"), Connolly-Daw and 1199846 sold all of the issued and outstanding common shares in the capital of the Corporation to NTN and 1199846 sold 20.1% of the issued and outstanding shares in the capital of 745695 Ontario Ltd. to NTN; AND WHEREAS pursuant to the provisions of the Share Purchase Agreement, Douglas Connolly and Wendy Connolly entered into a non-competition agreement with the Corporation and NTN dated October 1, 1996 (the "Non-Competition Agreement"); AND WHEREAS pursuant to the provisions of the Share Purchase Agreement, the Corporation and Connolly-Daw are required to enter into this Agreement, wherein the Corporation agrees to retain Connolly-Daw to provide management services to the Corporation in connection with the Business and wherein Connolly-Daw agrees to provide such services to the Corporation; NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the completion of the transactions contemplated by the Share Purchase Agreement, the respective covenants and agreements of the parties contained herein, the sum of one dollar paid by each party hereto to the other party hereto and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, it is agreed as follows: ARTICLE ONE - MANAGEMENT SERVICES 1.1 Retainer - The Corporation hereby agrees to retain Connolly-Daw to provide the Corporation with such services as may be required from time to time for the effective operation of the Business, consisting of advising on distribution, sales and promotion, labour negotiations, contract negotiations, financial services, and such other management services as the Corporation may from time to time request (hereinafter collectively referred to as the "Services") and Connolly-Daw hereby agrees to provide the Services to the Corporation. 1.2 Term of Agreement - This Agreement shall remain in full force and effect from October 1, 1996 to August 31, 1997 (hereinafter referred to as the "Term"), subject to earlier termination as hereinafter provided. 1.3 Provision of Services - The Services to be provided hereunder to the Corporation by Connolly-Daw shall be provided by Douglas Connolly and Wendy Connolly (hereinafter collectively referred to as the "Managers"). The Managers shall devote their full time and efforts to managing the affairs of the Corporation. The foregoing shall not prevent the Managers from being officers or directors of any other companies or firms, provided such offices or directorships do not interfere with the Managers' duties to the Corporation under this Agreement. Notwithstanding the foregoing, the Managers shall be entitled to four weeks' vacation during the Term, such vacation to be taken at such time or times as shall be mutually acceptable to the Corporation and Connolly-Daw. 1.4 Board Policy and Instructions - Connolly-Daw covenants with the Corporation that it will act in accordance with any policy of and carry out all reasonable instructions of the board of directors of the Corporation. Connolly-Daw acknowledges that such policies and instructions may limit, restrict or remove any power or discretion which might otherwise have been exercised by Connolly-Daw. 1.5 Management Fees - In consideration for the services rendered by Connolly-Daw hereunder, the Corporation shall pay to Connolly-Daw management fees in the sum of Sixteen Thousand Two Hundred and Fifty Dollars ($16,250.00) per month (plus GST) during the Term (hereinafter referred to as the "Fixed Management Fees"). The Fixed Management Fees shall be paid in equal semi-monthly instalments, payable on the first and fifteenth days of each month. 1.6 Expenses - The Corporation shall pay to Connolly-Daw on the first day of each month during the Term the sum of Seventeen Hundred Dollars ($1,700.00) as full compensation for any and all automobile expenses (including but not limited to gas, insurance, maintenance and repairs) incurred by Connolly-Daw in providing the Services hereunder. Connolly-Daw shall be reimbursed on a monthly basis for all out-of-pocket expenses, including travel costs, actually and properly incurred by Connolly-Daw in connection with providing the Services hereunder provided that Connolly-Daw provides to the Corporation an itemized written account and receipts acceptable to the Corporation within 30 days after they have been incurred. 1.7 Performance Bonus - In addition to the Fixed Management Fees, the Corporation shall pay to Connolly-Daw a bonus (hereinafter referred to as the "Bonus") at the end of the Term in the event that during the Term the actual net income before taxes of the Corporation together with all of its subsidiaries (hereinafter collectively referred to as the "Magic Lantern Group of Companies") as determined by the auditors of the Corporation using generally accepted accounting principles applied on a basis consistent with those of previous years (hereinafter referred to as the "Actual Net Income Before Taxes"), exceeds the projected net income before taxes of the Magic Lantern Group of Companies as determined by the board of directors of the Corporation at the commencement of the Term (hereinafter referred to as the "Projected Net Income Before Taxes"). The percentage amount of the excess of Actual Net Income Before Taxes over Projected Net Income Before Taxes shall hereinafter be referred to as the "Excess". The amount of the Bonus for the Term shall be calculated in accordance with the following formula: (a) In the event the Excess is greater than zero but less than 10%, the amount of the Bonus shall be equal to 5% of the Fixed Management Fees; (b) In the event the Excess is equal to or greater than 10% but less than 20%, the amount of the Bonus shall be equal to 8% of the Fixed Management Fees; (c) In the event the Excess is equal to or greater than 20% but less than 30%, the amount of the Bonus shall be equal to 11% of the Fixed Management Fees; (d) In the event the Excess is equal to or greater than 30% but less than 40%, the amount of the Bonus shall be equal to 13% of the Fixed Management Fees; and (e) In the event the Excess is equal to or greater than 40%, the amount of the Bonus shall be equal to 15% of the Fixed Management Fees. 1.8 Stock Options - In further addition to the Fixed Management Fees, the Corporation shall give to Connolly-Daw, at no cost to Connolly-Daw, such stock options at the end of the Term, if any, as determined by the board of directors of the Corporation. In the event the board of directors of the Corporation determines to provide Connolly-Daw with such stock options, the said stock options shall be in the form of options to purchase common shares in the capital stock of NTN Canada, Inc., the parent company of NTN. 1.9 The Corporation will recommend to the board of directors of NTN Canada, Inc. that Douglas Connolly be added as a director to the said board of directors. ARTICLE TWO - COVENANTS 2.1 No Delegation of Services - Connolly-Daw covenants and agrees with the Corporation that it shall not delegate performance of the Services to any persons other than the Managers. 2.2 Provision of Amenities - The Corporation covenants and agrees with Connolly- Daw to provide, for the use of the Managers, reasonably furnished offices, and administrative and reception services at the offices of the Corporation. ARTICLE THREE - CONFIDENTIALITY AND NON-COMPETITION 3.1 Confidential Information - Connolly-Daw acknowledges that in providing its management services hereunder to the Corporation, Connolly-Daw will acquire information about certain matters and things which are confidential to the Corporation and the other Magic Lantern Group of Companies, and which information is the exclusive property of the Corporation and/or one or more of the other Magic Lantern Group of Companies including, without limitation: (a) list of present and prospective customers, and related information; (b) pricing and sales policies, techniques and concepts; (c) list of suppliers; and (d) trade secrets; (hereinafter collectively referred to as the "Confidential Information"). The term Confidential Information shall not include any information which becomes generally available to the public other than as a result of a disclosure by Connolly-Daw. Connolly-Daw acknowledges that the Confidential Information could be used to the detriment of the Corporation. Accordingly, Connolly-Daw covenants and agrees that it will not disclose to anyone any Confidential Information either prior to termination of this Agreement, except as may be necessary in properly providing its management services hereunder, or after the termination of this Agreement, however caused, except with the prior written consent of the board of directors of the Corporation. This obligation shall survive the expiry or termination of this Agreement. Connolly-Daw also agrees that the unauthorized disclosure of any Confidential Information during the Term will constitute a material breach of this Agreement, which breach will not be susceptible to adequate relief by way of monetary damages only, and the Corporation, in addition to any other remedies enjoyed by it under the terms hereof or at law, shall be entitled to obtain injunctive relief against Connolly-Daw in any court of competent jurisdiction. The aforesaid confidentiality obligation shall not be applicable in respect of Confidential Information disclosed by Connolly-Daw under compulsion of law. 3.2 Return of Property - Upon the expiry or termination of this Agreement, Connolly-Daw will return to the Corporation any property or documentation which is the property of the Corporation, including but not limited to the Confidential Information. 3.3 Promotion of the Corporation's Interests - Connolly-Daw shall well and faithfully serve the Corporation and the other Magic Lantern Group of Companies, shall use its best efforts to promote the interests thereof and shall not use any information it may acquire with respect to the business and affairs of the Corporation or any of the other Magic Lantern Group of Companies for its own purposes or for any purposes other than those of the Corporation or any of the other Magic Lantern Group of Companies. ARTICLE FOUR - CAPACITY 4.1 Capacity of Consultant - The Corporation and Connolly-Daw acknowledge that Connolly-Daw shall undertake its duties under this Agreement as an independent contractor and not as an agent of the Corporation except as otherwise expressly provided for herein. ARTICLE FIVE - TERMINATION 5.1 Termination of Agreement (Breach) - Connolly-Daw understands and agrees that the Corporation may terminate this Agreement without any notice or compensation in lieu thereof, upon the occurrence of any of the following events: (a) any material breach of the provisions of either the Share Purchase Agreement or the Non-Competition Agreement; (b) any material breach of the provisions of this Agreement. 5.2 Termination of Agreement (Death and Disability) - Connolly-Daw understands and agrees that if, during the Term, Connolly-Daw is unable to provide the services of either of the Managers, as a result of death or any mental or physical disability or illness which results in either of the Managers being unable to substantially perform their duties hereunder for a period of four consecutive months or for a total of four months during the Term, then the parties hereto shall, acting reasonably and in good faith, attempt to negotiate and agree upon such amendments to this Agreement as the Corporation determines are necessary as a result thereof, which amendments may include, without limitation, a replacement for one of the Managers and new Fixed Management Fees. If the parties are unable to agree upon such amendments, then the Corporation may terminate this Agreement without any notice or compensation in lieu thereof. ARTICLE SIX - GENERAL CONTRACT PROVISIONS 6.1 Notices - Any notice, direction or other document required or permitted to be given hereunder or for the purposes hereof (hereinafter in this Section 6.1 called a "notice") to any party shall be in writing and shall be sufficiently given if delivered personally or if sent by prepaid registered mail to such party: (a) in the case of a notice to Connolly-Daw, at: 49 Ennisclare Drive East Oakville, Ontario L6J 4N3 (b) in the case of a notice to the Corporation, at: Unit 38 775 Pacific Road Oakville, Ontario L6L 6M4 or at such other address as may be given by such party to the other party hereto in writing from time to time. All such notices shall be deemed to have been received when delivered or, if mailed, 48 hours after 12:01 a.m. on the day following the day of the mailing thereof. 6.2 Additional Considerations - The parties shall sign such further and other documents, cause such meetings to be held, resolutions passed and by-laws enacted, exercise their vote and influence, do and perform and cause to be done and performed such further and other acts and things as may be necessary or desirable in order to give full effect to this Agreement and every part thereof. 6.3 Time of the Essence - Time shall be of the essence of this Agreement and of every part hereof and no extension or variation of this Agreement shall operate as a waiver of this provision. 6.4 Entire Agreement - This Agreement constitutes the entire agreement between the parties with respect to all of the matters herein and its execution has not been induced by, nor do any of the parties rely upon or regard as material, any representations or writings whatsoever not incorporated herein and made a part hereof and may not be amended or modified in any respect except by written instrument signed by the parties hereto. Any and all previous agreements, written or oral, express or implied, between the parties or on their behalf, relating to the matters herein, including but not limited to a management agreement between Connolly-Daw and the Corporation dated July 1, 1989, are terminated and cancelled and each of the parties releases and forever discharges the other of and from all manner of actions, causes of action, claims, and demands whatsoever, under or in respect of any and all such previous agreements. 6.5 Modification of Agreement - Any modification to this Agreement must be in writing and signed by the parties hereto or it shall have no effect and shall be void. 6.6 Assignment and Enurement - Neither this Agreement nor any rights or obligations of Connolly-Daw under this Agreement shall be assignable by Connolly- Daw without the prior written consent of the Corporation. Subject to such consent, this Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 6.7 Currency - Unless otherwise provided for herein, all monetary amounts referred to herein shall refer to the lawful money of Canada. 6.8 Headings for Convenience Only - The division of this Agreement into articles and sections is for convenience of reference only and shall not affect the interpretation or construction of this Agreement. 6.9 Governing Law - This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein and each of the parties hereto hereby irrevocably attorns to the jurisdiction of the courts of such Province. 6.10 Waiver - No term or condition of this Agreement shall be deemed waived unless such waiver is expressed in writing and signed by the parties hereto. Failure or delay on the part of any party to enforce any right hereunder shall not operate as a waiver hereof. 6.11 Gender - In this Agreement, words importing the singular number shall include the plural and vice versa, and words importing the use of any gender shall include the masculine, feminine and neuter genders and the word "person" shall include an individual, a trust, a partnership, a body corporate, an association or other incorporated or unincorporated organization or entity. 6.12 Severability - If any article, section or any portion of any section of this Agreement is determined to be unenforceable or invalid for any reason whatsoever, that unenforceability or invalidity shall not affect the enforceability or validity of the remaining portions of this Agreement and such unenforceable or invalid article, section or portion thereof shall be severed from the remainder of this Agreement. IN WITNESS WHEREOF the parties have duly executed this Management Agreement. MAGIC LANTERN COMMUNICATIONS LTD. Per:_______________________________ Chairman Peter Rona CONNOLLY-DAW HOLDINGS INC. Per:_____________________________ President Wendy Connolly Per:_____________________________ Secretary Douglas Connolly EX-10.13 7 EXHIBIT 10.13 EXHIBIT 10.13 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made the 1st day of October, 1996, B E T W E E N: MAGIC LANTERN COMMUNICATIONS LTD., a corporation amalgamated pursuant to the laws of Canada, (hereinafter referred to as the "Employer"), OF THE FIRST PART; - and - DOUGLAS CONNOLLY, of the City of Oakville, in the Province of Ontario, (hereinafter referred to as the "Executive"), OF THE SECOND PART. WHEREAS: 1. The Employer carries on businesses consisting of the marketing and distribution of video programming and other media resource material, the operation of a fulfillment service bureau, the operation of a video dubbing and production facility, and the operation of a digital conversion service bureau (collectively the "Business"); 2. Pursuant to a share purchase agreement between Connolly-Daw Holdings Inc. ("Connolly-Daw"), 1199846 Ontario Ltd. ("1199846"), the Executive, Wendy Connolly and NTN Interactive Network Inc. ("NTN") dated October 1, 1996 (the "Share Purchase Agreement"), Connolly-Daw and 1199846 sold all of the issued and outstanding common shares in the capital of the Employer to NTN and 1199846 sold 20.1% of the issued and outstanding shares in the capital of 745695 Ontario Ltd. to NTN; 3. Pursuant to the provisions of the Share Purchase Agreement, the Executive and Wendy Connolly entered into a non-competition agreement with the Employer dated October 1, 1996 (the "Non-Competition Agreement"); 4. Pursuant to the provisions of the Share Purchase Agreement, Connolly-Daw entered into a management agreement with the Employer dated October 1, 1996 (the "Management Agreement"); 5. Pursuant to the provisions of the Share Purchase Agreement, the Employer and the Executive are required to enter into this Agreement, wherein the Employer and the Executive have agreed to enter into an employment relationship for their mutual benefit; NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the completion of the transactions contemplated by the Share Purchase Agreement, the respective covenants and agreements of the parties contained herein, the sum of One Dollar ($1.00) now paid by each party hereto to the other party hereto and other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto), the parties hereto hereby acknowledge and agree that the terms and conditions of the aforesaid employment relationship shall be as follows: 1. DUTIES The Employer hereby appoints the Executive to undertake the duties and exercise the powers as the President and Chief Operating Officer of the Employer as may be requested by the board of directors of the Employer, and the Executive hereby accepts such appointment upon and subject to the terms and conditions set forth in this Agreement. 2. TERM Subject to the provisions of Articles 8 and 9 herein, the appointment of the Executive hereunder shall be for a two year period commencing on September 1, 1997 and continuing until August 31, 1999 (hereinafter referred to as the "Term"). 3. COMPENSATION (1) The fixed remuneration of the Executive for his services hereunder (hereinafter referred to as the "Fixed Remuneration") for the first year of the Term shall be at the rate of $125,000.00 plus the amount obtained by multiplying $125,000.00 by a fraction, the numerator of which shall be the Consumer Price Index published by Statistics Canada (or other similarly recognized Government Index) for the month of July, 1997, and the denominator of which shall be the Consumer Price Index for the month of September, 1996. The Fixed Remuneration for the second year of the Term shall be at the rate of $125,000.00 plus the amount obtained by multiplying $125,000.00 by a fraction, the numerator of which shall be the Consumer Price Index published by Statistics Canada (or other similarly recognized Government Index) for the month of July, 1998, and the denominator of which shall be the Consumer Price Index for the month of September, 1996. The Fixed Remuneration shall be payable in equal instalments, no less frequently than semi-monthly. (2) In addition to the Fixed Remuneration, the Employer shall pay to the Executive a bonus (hereinafter referred to as the "Bonus") at the end of each year of the Term in the event that during the said year the actual net income before taxes of the Employer together with all of its subsidiaries (hereinafter collectively referred to as the "Magic Lantern Group of Companies") as determined by the auditors of the Employer using generally accepted accounting principles applied on a basis consistent with those of previous years (hereinafter referred to as the "Actual Net Income Before Taxes"), exceeds the projected net income before taxes of the Magic Lantern Group of Companies as determined by the board of directors of the Employer at the commencement of the said year (hereinafter referred to as the "Projected Net Income Before Taxes"). The percentage amount of the excess of Actual Net Income Before Taxes over Projected Net Income Before Taxes shall hereinafter be referred to as the "Excess". The amount of the Bonus for each year of the Term shall be calculated in accordance with the following formula: (a) In the event the Excess is greater than zero but less than 10%, the amount of the Bonus shall be equal to 5% of the Fixed Remuneration payable during the year in question; (b) In the event the Excess is equal to or greater than 10% but less than 20%, the amount of the Bonus shall be equal to 8% of the Fixed Remuneration payable during the year in question; (c) In the event the Excess is equal to or greater than 20% but less than 30%, the amount of the Bonus shall be equal to 11% of the Fixed Remuneration payable during the year in question; (d) In the event the Excess is equal to or greater than 30% but less than 40%, the amount of the Bonus shall be equal to 13% of the Fixed Remuneration payable during the year in question; and (e) In the event the Excess is equal to or greater than 40%, the amount of the Bonus shall be equal to 15% of the Fixed Remuneration payable during the year in question. (3) In further addition to the Fixed Remuneration, the Employer shall give to the Executive, at no cost to the Executive, such stock options during each year of the Term, if any, as determined by the board of directors of the Employer. In the event the board of directors of the Employer determines to provide the Executive with such stock options, the said stock options shall be in the form of options to purchase common shares in the capital stock of NTN Canada, Inc., the parent company of NTN. 4. BENEFITS (1) Automobile Expenses - The Employer shall pay the Executive the sum of $1,000.00 per month during the Term as full compensation for any and all automobile expenses (including but not limited to gas, insurance, maintenance and repairs) incurred by the Executive in fulfilling his duties under this Agreement. (2) Other Expenses - The Executive shall be reimbursed on a monthly basis for all out-of-pocket expenses, including travel costs, actually and properly incurred by the Executive in fulfilling his duties under this Agreement provided that the Executive provides to the Employer an itemized written account and receipts acceptable to the Employer within 30 days after they have been incurred. (3) Benefit Plans - The Executive shall be entitled to participate in all existing and future benefit plans which the Employer provides, including medical/hospital and extended health care benefits and life insurance. (4) Directorship - The Employer will recommend to the board of directors of NTN Canada, Inc. that the Executive be added as a director to the said board of directors. 5. SERVICE (1) The Executive, throughout the Term, shall devote his full time and attention to the business and affairs of the Employer and the other Magic Lantern Group of Companies and shall not, without the consent in writing of the board of directors of the Employer, undertake any other business or occupation or become an officer, employee or agent of any other company, firm or individual. The foregoing shall not prevent the Executive from being an officer or director of any other company or firm provided such office or directorship does not interfere with the Executive's duties to the Employer under this Agreement, nor shall the foregoing prevent the Executive from passively investing in any other company or firm. (2) The Executive shall act in accordance with any policy of and carry out all reasonable instructions of the board of directors of the Employer, and shall obey and carry out the by-laws of the Employer. (3) The Executive shall well and faithfully serve the Employer and the other Magic Lantern Group of Companies and shall use his best efforts to promote the interests thereof. 6. VACATION The Executive shall be entitled during each year of the Term to four weeks' vacation. The vacation shall be taken at such time or times as shall be mutually acceptable to the Employer and the Executive. 7. CONFIDENTIAL INFORMATION (1) The Executive acknowledges that as the President and Chief Operating Officer and in any other position as the Executive may hold, the Executive will acquire information about certain matters and things in regard to the Employer and/or the other Magic Lantern Group of Companies which are confidential to the Employer, and which information is the exclusive property of the Employer, including, without limitation: (a) names and addresses, buying habits and preferences of present customers, as well as prospective customers, and related information; (b) pricing and sales policies, techniques and concepts; (c) names and addresses of suppliers; and (d) trade secrets; (hereinafter collectively referred to as the "Confidential Information"). The term Confidential Information shall not include any information which becomes generally available to the public other than as a result of a disclosure by the Executive. (2) The Executive acknowledges that the Confidential Information could be used to the detriment of the Employer. Accordingly, the Executive covenants and agrees not to disclose any Confidential Information to any third party either during the term of the Executive's employment under this Agreement except as may be necessary in the proper discharge of his employment hereunder, or after the termination of his employment hereunder, however caused, except with the prior written consent of the board of directors of the Employer. This obligation shall survive the expiry or termination of this Agreement. The Executive also agrees that the unauthorized disclosure of any Confidential Information during the Term will constitute a material breach of this Agreement, which breach will not be susceptible to adequate relief by way of monetary damages only, and the Employer, in addition to any other remedies enjoyed by it under the terms hereof or at law, shall be entitled to obtain injunctive relief against the Executive in any court of competent jurisdiction. The aforesaid confidentiality obligation shall not be applicable in respect of Confidential Information disclosed by the Executive under compulsion of law. (3) The Executive covenants and agrees that he will not use any information he may acquire with respect to the business and affairs of the Employer and/or any of the other Magic Lantern Group of Companies for his own purposes or for any purposes other than those of the Employer or any of the other Magic Lantern Group of Companies. (4) Upon the expiry or termination of this Agreement, the Executive will return to the Employer any property or documentation which is the property of the Employer, including, without limitation, any Confidential Information. 8. DISABILITY If the Executive shall at any time by reason of illness or mental or physical disability be incapacitated from performing his duties and at the request of the Employer, furnish to the Employer satisfactory evidence of the incapacity and the cause of it, he shall receive his full remuneration for the first six months or any shorter period during which the incapacity shall continue. If the Executive shall continue to be incapacitated for a longer period than six consecutive months or if he shall be incapacitated at different times for more than six months during the Term, then in either case his employment and appointment shall, at the option of the Employer, immediately terminate without any notice or compensation in lieu thereof. 9. TERMINATION The Executive understands and agrees that the Employer may terminate this Agreement without any notice or compensation in lieu thereof, for cause. For the purposes of this Agreement, "cause" shall be limited to the following: (a) the wilful and continued malfeasance or gross negligence of the Executive in the performance of his duties and the failure by the Executive to remedy such conduct within 30 days of receipt of written notice from the Employer specifying particulars of the said conduct; (b) the Executive's actual fraud, intentional misappropriation of a corporate opportunity or of the Employer's funds, or embezzlement of the Employer's funds; (c) the wilful disregard by the Executive of a directive of the board of directors of the Employer and the failure by the Executive to remedy such conduct within 30 days of receipt of written notice from the Employer specifying particulars of the said conduct; (d) the conviction of the Executive of a criminal offence punishable by indictment; (e) any material breach of the provisions of the Share Purchase Agreement, the Management Agreement or the Non-Competition Agreement; (f) the disability of the Executive as set forth in Article 8 hereof; and (g) the death of the Executive. For the purposes hereof, no act or failure to act, on the Executive's part, shall be considered "wilful" or "intentional" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Employer. 10. EXTENSION OF TERM The Employer and the Executive shall, prior to the end of the first year of the Term, decide whether or not they wish to extend the Term for a further three years and the terms and conditions of the said extension. In the event the Term is not extended, for whatever reason, there shall be no compensation paid to the Executive as a result of the said decision not to extend the Term. 11. GENERAL PROVISIONS (1) Notices - Any notice, direction or other document required or permitted to be given hereunder or for the purposes hereof (hereinafter in this Article 11 called a "notice") to any party shall be in writing and shall be sufficiently given if delivered personally or if sent by prepaid registered mail to such party: (a) in the case of a notice to the Executive, at: 49 Ennisclare Drive East Oakville, Ontario L6J 4N3 (b) in the case of a notice to the Employer, at: Unit 38 775 Pacific Road Oakville, Ontario L6L 6M4 or at such other address as may be given by such party to the other party hereto in writing from time to time. All such notices shall be deemed to have been received when delivered or, if mailed, 48 hours after 12:01 a.m. on the day following the day of the mailing thereof. (2) Additional Considerations - The parties shall sign such further and other documents, cause such meetings to be held, resolutions passed and by-laws enacted, exercise their vote and influence, do and perform and cause to be done and performed such further and other acts and things as may be necessary or desirable in order to give full effect to this Agreement and every part thereof. (3) Time of the Essence - Time shall be of the essence of this Agreement and of every part hereof and no extension or variation of this Agreement shall operate as a waiver of this provision. (4) Entire Agreement - This Agreement constitutes the entire agreement between the parties with respect to all of the matters herein and its execution has not been induced by, nor do any of the parties rely upon or regard as material, any representations or writings whatsoever not incorporated herein and made a part hereof and may not be amended or modified in any respect except by written instrument signed by the parties hereto. Any and all previous agreements, written or oral, express or implied, between the parties or on their behalf, relating to the matters herein, are terminated and cancelled and each of the parties releases and forever discharges the other of and from all manner of actions, causes of action, claims, and demands whatsoever, under or in respect of any and all such previous agreements. (5) Modification of Agreement - Any modification to this Agreement must be in writing and signed by the parties hereto or it shall have no effect and shall be void. (6) Assignment and Enurement - Neither this Agreement nor any rights or obligations of the Executive under this Agreement shall be assignable by the Executive without the prior written consent of the Employer. Subject to such consent, this Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, successors and assigns. (7) Currency - Unless otherwise provided for herein, all monetary amounts referred to herein shall refer to the lawful money of Canada. (8) Headings for Convenience Only - The division of this Agreement into Articles and Sections is for convenience of reference only and shall not affect the interpretation or construction of this Agreement. (9) Governing Law - This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein and each of the parties hereto hereby irrevocably attorns to the jurisdiction of the courts of such Province. (10) Waiver - No term or condition of this Agreement shall be deemed waived unless such waiver is expressed in writing and signed by the parties hereto. Failure or delay on the part of any party to enforce any right hereunder shall not operate as a waiver hereof. (11) Gender - In this Agreement, words importing the singular number shall include the plural and vice versa, and words importing the use of any gender shall include the masculine, feminine and neuter genders and the word "person" shall include an individual, a trust, a partnership, a body corporate, an association or other incorporated or unincorporated organization or entity. (12) Severability - If any Article, Section or any portion of any Section of this Agreement is determined to be unenforceable or invalid for any reason whatsoever, that unenforceability or invalidity shall not affect the enforceability or validity of the remaining portions of this Agreement and such unenforceable or invalid Article, Section or portion thereof shall be severed from the remainder of this Agreement. IN WITNESS WHEREOF the parties hereto have duly executed this Agreement. MAGIC LANTERN COMMUNICATIONS LTD. Per:_____________________________ Chairman Peter Rona SIGNED, SEALED AND DELIVERED ) - in the presence of - ) ) ________________________ ) _________________________________ WITNESS ) DOUGLAS CONNOLLY EX-10.14 8 EMPLOYMENT AGREEMENT EXHIBIT 10.14 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made the 1st day of October, 1996, B E T W E E N: MAGIC LANTERN COMMUNICATIONS LTD., a corporation amalgamated pursuant to the laws of Canada, (hereinafter referred to as the "Employer"), OF THE FIRST PART; - and - WENDY CONNOLLY, of the City of Oakville, in the Province of Ontario, (hereinafter referred to as the "Executive"), OF THE SECOND PART. WHEREAS: 1. The Employer carries on businesses consisting of the marketing and distribution of video programming and other media resource material, the operation of a fulfillment service bureau, the operation of a video dubbing and production facility, and the operation of a digital conversion service bureau (collectively the "Business"); 2. Pursuant to a share purchase agreement between Connolly-Daw Holdings Inc. ("Connolly-Daw"), 1199846 Ontario Ltd. ("1199846"), the Executive, Douglas Connolly and NTN Interactive Network Inc. ("NTN") dated October 1, 1996 (the "Share Purchase Agreement"), Connolly-Daw and 1199846 sold all of the issued and outstanding common shares in the capital of the Employer to NTN and 1199846 sold 20.1% of the issued and outstanding shares in the capital of 745695 Ontario Ltd. to NTN; 2 3. Pursuant to the provisions of the Share Purchase Agreement, the Executive and Douglas Connolly entered into a non-competition agreement with the Employer dated October 1, 1996 (the "Non-Competition Agreement"); 4. Pursuant to the provisions of the Share Purchase Agreement, Connolly-Daw entered into a management agreement with the Employer dated October 1, 1996 (the "Management Agreement"); 5. Pursuant to the provisions of the Share Purchase Agreement, the Employer and the Executive are required to enter into this Agreement, wherein the Employer and the Executive have agreed to enter into an employment relationship for their mutual benefit; NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the completion of the transactions contemplated by the Share Purchase Agreement, the respective covenants and agreements of the parties contained herein, the sum of One Dollar ($1.00) now paid by each party hereto to the other party hereto and other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto), the parties hereto hereby acknowledge and agree that the terms and conditions of the aforesaid employment relationship shall be as follows: 1. DUTIES The Employer hereby appoints the Executive to undertake such duties and exercise such powers as may be requested by the board of directors of the Employer, and the Executive hereby accepts such appointment upon and subject to the terms and conditions set forth in this Agreement. 2. TERM Subject to the provisions of Articles 8 and 9 herein, the appointment of the Executive hereunder shall be for a two year period commencing on September 1, 1997 and continuing until August 31, 1999 (hereinafter referred to as the "Term"). 3. COMPENSATION (1) The fixed remuneration of the Executive for her services hereunder (hereinafter referred to as the "Fixed Remuneration") for the first year of the Term shall be at the rate of $70,000.00 plus the amount obtained by multiplying $70,000.00 by a fraction, the numerator of which shall be the Consumer Price Index published by Statistics Canada (or other similarly recognized Government Index) for the month of July, 1997, and the denominator of which shall be the 3 Consumer Price Index for the month of September, 1996. The Fixed Remuneration for the second year of the Term shall be at the rate of $70,000.00 plus the amount obtained by multiplying $70,000.00 by a fraction, the numerator of which shall be the Consumer Price Index published by Statistics Canada (or other similarly recognized Government Index) for the month of July, 1998, and the denominator of which shall be the Consumer Price Index for the month of September, 1996. The Fixed Remuneration shall be payable in equal instalments, no less frequently than semi-monthly. (2) In addition to the Fixed Remuneration, the Employer shall pay to the Executive a bonus (hereinafter referred to as the "Bonus") at the end of each year of the Term in the event that during the said year the actual net income before taxes of the Employer together with all of its subsidiaries (hereinafter collectively referred to as the "Magic Lantern Group of Companies") as determined by the auditors of the Employer using generally accepted accounting principles applied on a basis consistent with those of previous years (hereinafter referred to as the "Actual Net Income Before Taxes"), exceeds the projected net income before taxes of the Magic Lantern Group of Companies as determined by the board of directors of the Employer at the commencement of the said year (hereinafter referred to as the "Projected Net Income Before Taxes"). The percentage amount of the excess of Actual Net Income Before Taxes over Projected Net Income Before Taxes shall hereinafter be referred to as the "Excess". The amount of the Bonus for each year of the Term shall be calculated in accordance with the following formula: (a) In the event the Excess is greater than zero but less than 10%, the amount of the Bonus shall be equal to 5% of the Fixed Remuneration payable during the year in question; (b) In the event the Excess is equal to or greater than 10% but less than 20%, the amount of the Bonus shall be equal to 8% of the Fixed Remuneration payable during the year in question; (c) In the event the Excess is equal to or greater than 20% but less than 30%, the amount of the Bonus shall be equal to 11% of the Fixed Remuneration payable during the year in question; (d) In the event the Excess is equal to or greater than 30% but less than 40%, the amount of the Bonus shall be equal to 13% of the Fixed Remuneration payable during the year in question; and 4 (e) In the event the Excess is equal to or greater than 40%, the amount of the Bonus shall be equal to 15% of the Fixed Remuneration payable during the year in question. (3) In further addition to the Fixed Remuneration, the Employer shall give to the Executive, at no cost to the Executive, such stock options during each year of the Term, if any, as determined by the board of directors of the Employer. In the event the board of directors of the Employer determines to provide the Executive with such stock options, the said stock options shall be in the form of options to purchase common shares in the capital stock of NTN Canada, Inc., the parent company of NTN. 4. BENEFITS (1) Automobile Expenses - The Employer shall pay the Executive the sum of $700.00 per month during the Term as full compensation for any and all automobile expenses (including but not limited to gas, insurance, maintenance and repairs) incurred by the Executive in fulfilling her duties under this Agreement. (2) Other Expenses - The Executive shall be reimbursed on a monthly basis for all out-of-pocket expenses, including travel costs, actually and properly incurred by the Executive in fulfilling her duties under this Agreement provided that the Executive provides to the Employer an itemized written account and receipts acceptable to the Employer within 30 days after they have been incurred. (3) Benefit Plans - The Executive shall be entitled to participate in all existing and future benefit plans which the Employer provides, including medical/hospital and extended health care benefits and life insurance. 5. SERVICE (1) The Executive, throughout the Term, shall devote her full time and attention to the business and affairs of the Employer and the other Magic Lantern Group of Companies and shall not, without the consent in writing of the board of directors of the Employer, undertake any other business or occupation or become an officer, employee or agent of any other company, firm or individual. The foregoing shall not prevent the Executive from being an officer or director of any other company or firm provided such office or directorship does not interfere with the Executive's duties to the Employer under this Agreement, nor shall the foregoing prevent the Executive from passively investing in any other company or firm. 5 (2) The Executive shall act in accordance with any policy of and carry out all reasonable instructions of the board of directors of the Employer, and shall obey and carry out the by-laws of the Employer. (3) The Executive shall well and faithfully serve the Employer and the other Magic Lantern Group of Companies and shall use her best efforts to promote the interests thereof. 6. VACATION The Executive shall be entitled during each year of the Term to four weeks' vacation. The vacation shall be taken at such time or times as shall be mutually acceptable to the Employer and the Executive. 7. CONFIDENTIAL INFORMATION (1) The Executive acknowledges that as a result of her appointment hereunder to undertake such duties and exercise such powers as may be requested by the board of directors of the Employer, the Executive will acquire information about certain matters and things in regard to the Employer and/or the other Magic Lantern Group of Companies which are confidential to the Employer, and which information is the exclusive property of the Employer, including, without limitation: (a) names and addresses, buying habits and preferences of present customers, as well as prospective customers, and related information; (b) pricing and sales policies, techniques and concepts; (c) names and addresses of suppliers; and (d) trade secrets; (hereinafter collectively referred to as the "Confidential Information"). The term Confidential Information shall not include any information which becomes generally available to the public other than as a result of a disclosure by the Executive. (2) The Executive acknowledges that the Confidential Information could be used to the detriment of the Employer. Accordingly, the Executive covenants and agrees not to disclose any Confidential Information to any third party either during the term of the Executive's employment under this Agreement except as may be necessary in the proper discharge of her employment hereunder, or after the termination of her employment hereunder, however caused, except with the prior written consent of the board of directors of the Employer. This obligation shall survive the expiry or 6 termination of this Agreement. The Executive also agrees that the unauthorized disclosure of any Confidential Information during the Term will constitute a material breach of this Agreement, which breach will not be susceptible to adequate relief by way of monetary damages only, and the Employer, in addition to any other remedies enjoyed by it under the terms hereof or at law, shall be entitled to obtain injunctive relief against the Executive in any court of competent jurisdiction. The aforesaid confidentiality obligation shall not be applicable in respect of Confidential Information disclosed by the Executive under compulsion of law. (3) The Executive covenants and agrees that she will not use any information she may acquire with respect to the business and affairs of the Employer and/or any of the other Magic Lantern Group of Companies for her own purposes or for any purposes other than those of the Employer or any of the other Magic Lantern Group of Companies. (4) Upon the expiry or termination of this Agreement, the Executive will return to the Employer any property or documentation which is the property of the Employer, including, without limitation, any Confidential Information. 8. DISABILITY If the Executive shall at any time by reason of illness or mental or physical disability be incapacitated from performing her duties and at the request of the Employer, furnish to the Employer satisfactory evidence of the incapacity and the cause of it, she shall receive her full remuneration for the first six months or any shorter period during which the incapacity shall continue. If the Executive shall continue to be incapacitated for a longer period than six consecutive months or if she shall be incapacitated at different times for more than six months during the Term, then in either case her employment and appointment shall, at the option of the Employer, immediately terminate without any notice or compensation in lieu thereof. 9. TERMINATION The Executive understands and agrees that the Employer may terminate this Agreement without any notice or compensation in lieu thereof, for cause. For the purposes of this Agreement, "cause" shall be limited to the following: (a) the wilful and continued malfeasance or gross negligence of the Executive in the performance of her duties and the failure by the Executive to remedy such conduct within 30 days of receipt of written notice from the Employer specifying particulars of the said conduct; 7 (b) the Executive's actual fraud, intentional misappropriation of a corporate opportunity or of the Employer's funds, or embezzlement of the Employer's funds; (c) the wilful disregard by the Executive of a directive of the board of directors of the Employer and the failure by the Executive to remedy such conduct within 30 days of receipt of written notice from the Employer specifying particulars of the said conduct; (d) the conviction of the Executive of a criminal offence punishable by indictment; (e) any material breach of the provisions of the Share Purchase Agreement, the Management Agreement or the Non-Competition Agreement; (f) the disability of the Executive as set forth in Article 8 hereof; and (g) the death of the Executive. For the purposes hereof, no act or failure to act, on the Executive's part, shall be considered "wilful" or "intentional" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Employer. 10. EXTENSION OF TERM The Employer and the Executive shall, prior to the end of the first year of the Term, decide whether or not they wish to extend the Term for a further two years and the terms and conditions of the said extension. In the event the Term is not extended, for whatever reason, there shall be no compensation paid to the Executive as a result of the said decision not to extend the Term. 11. GENERAL PROVISIONS (1) Notices - Any notice, direction or other document required or permitted to be given hereunder or for the purposes hereof (hereinafter in this Article 11 called a "notice") to any party shall be in writing and shall be sufficiently given if delivered personally or if sent by prepaid registered mail to such party: (a) in the case of a notice to the Executive, at: 8 49 Ennisclare Drive East Oakville, Ontario L6J 4N3 (b) in the case of a notice to the Employer, at: Unit 38 775 Pacific Road Oakville, Ontario L6L 6M4 or at such other address as may be given by such party to the other party hereto in writing from time to time. All such notices shall be deemed to have been received when delivered or, if mailed, 48 hours after 12:01 a.m. on the day following the day of the mailing thereof. (2) Additional Considerations - The parties shall sign such further and other documents, cause such meetings to be held, resolutions passed and by-laws enacted, exercise their vote and influence, do and perform and cause to be done and performed such further and other acts and things as may be necessary or desirable in order to give full effect to this Agreement and every part thereof. (3) Time of the Essence - Time shall be of the essence of this Agreement and of every part hereof and no extension or variation of this Agreement shall operate as a waiver of this provision. (4) Entire Agreement - This Agreement constitutes the entire agreement between the parties with respect to all of the matters herein and its execution has not been induced by, nor do any of the parties rely upon or regard as material, any representations or writings whatsoever not incorporated herein and made a part hereof and may not be amended or modified in any respect except by written instrument signed by the parties hereto. Any and all previous agreements, written or oral, express or implied, between the parties or on their behalf, relating to the matters herein, are terminated and cancelled and each of the parties releases and forever discharges the other of and from all manner of actions, causes of action, claims, and demands whatsoever, under or in respect of any and all such previous agreements. (5) Modification of Agreement - Any modification to this Agreement must be in writing and signed by the parties hereto or it shall have no effect and shall be void. 9 (6) Assignment and Enurement - Neither this Agreement nor any rights or obligations of the Executive under this Agreement shall be assignable by the Executive without the prior written consent of the Employer. Subject to such consent, this Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, successors and assigns. (7) Currency - Unless otherwise provided for herein, all monetary amounts referred to herein shall refer to the lawful money of Canada. (8) Headings for Convenience Only - The division of this Agreement into Articles and Sections is for convenience of reference only and shall not affect the interpretation or construction of this Agreement. (9) Governing Law - This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein and each of the parties hereto hereby irrevocably attorns to the jurisdiction of the courts of such Province. (10) Waiver - No term or condition of this Agreement shall be deemed waived unless such waiver is expressed in writing and signed by the parties hereto. Failure or delay on the part of any party to enforce any right hereunder shall not operate as a waiver hereof. (11) Gender - In this Agreement, words importing the singular number shall include the plural and vice versa, and words importing the use of any gender shall include the masculine, feminine and neuter genders and the word "person" shall include an individual, a trust, a partnership, a body corporate, an association or other incorporated or unincorporated organization or entity. 10 (12) Severability - If any Article, Section or any portion of any Section of this Agreement is determined to be unenforceable or invalid for any reason whatsoever, that unenforceability or invalidity shall not affect the enforceability or validity of the remaining portions of this Agreement and such unenforceable or invalid Article, Section or portion thereof shall be severed from the remainder of this Agreement. IN WITNESS WHEREOF the parties hereto have duly executed this Agreement. MAGIC LANTERN COMMUNICATIONS LTD. Per:_____________________________ Chairman Peter Rona SIGNED, SEALED AND DELIVERED ) - in the presence of - ) ) - ---------------------------- ) --------------------------------- WITNESS ) WENDY CONNOLLY EX-22 9 LIST OF SUBSIDIARIES OF NTN CANADA Exhibit 22. List of Subsidiaries of NTN Canada, Inc. Name of Subsidiary (1) Jurisdiction of Incorporation - ---------------------- ----------------------------- B.C. Learning Connection, Inc. (2).......................British Columbia Magic Lantern Communications Ltd (3)...............................Canada NTN Interactive Network Inc........................................Canada 1113659 Ontario Ltd. (4)..........................................Ontario 745695 Ontario Ltd. (5)...........................................Ontario Sonoptic Technologies Inc. (6).....................................Canada - ---------- (1) Unless otherwise indicated, all named entities are wholly owned subsidiaries of NTN Canada, Inc. (2) Wholly owned subsidiary of 745695 Ontario Ltd. (3) Wholly owned subsidiary of NTN Interactive Network Inc. (4) Partially owned (50%) subsidiary of Magic Lantern Communications Ltd. (5) Wholly owned subsidiary of Magic Lantern Communications Ltd. (6) Majority owned (75%) subsidiary of Magic Lantern Communications Ltd. - 110 - EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED THEREIN. CANADIAN DOLLARS 12-MOS AUG-31-1996 SEP-1-1995 AUG-31-1996 1.3685 1,777,889 3,577,151 602,601 39,000 631,171 7,061,815 2,983,339 535,402 9,883,093 975,659 0 0 11,523 150,187 8,715,724 9,883,093 148,330 6,318,251 298,243 2,505,673 0 54,990 8,657 1,004,059 463,000 541,059 0 0 0 541,059 .23 .22
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