UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 Commission file number 1-11460 NTN COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Delaware 31-1103425 (State of incorporation) (I.R.S. Employer Identification No.) The Campus 5966 La Place Court, Carlsbad, California 92008 (Address of principal executive offices) (Zip Code) (760) 438-7400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. YES [X] NO [_] At November 11, 1999 the registrant had 28,930,000 shares of common stock, $.005 par value, outstanding.
PART I--FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS. 2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets <TABLE> <CAPTION> September 30, 1999 December 31, (Unaudited) 1998 ------------ ------------ <S> <C> <C> Assets Current Assets: Cash and cash equivalents $ 3,069,000 $ 4,560,000 Accounts receivable, net 2,165,000 2,471,000 Investments available for sale 887,000 - Prepaid expenses and other current assets 1,270,000 1,100,000 ------------ ------------ Total current assets 7,391,000 8,131,000 Broadcast equipment and fixed assets, net 9,521,000 7,249,000 Software development costs, net 352,000 1,141,000 Note receivable 14,000 70,000 Other assets 71,000 176,000 ------------ ------------ Total assets $ 17,349,000 $ 16,767,000 ============ ============ Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 1,214,000 $ 840,000 Accrued expenses 2,233,000 3,175,000 Accrual for management severance 768,000 866,000 Obligations under capital leases 624,000 205,000 Deferred revenue 677,000 645,000 Other short-term liabilities 120,000 - ------------ ------------ Total current liabilities 5,636,000 5,731,000 Deferred revenue 12,000 12,000 Obligations under capital leases 514,000 380,000 Accrual for settlement warrants 1,785,000 1,670,000 Accrual for management severance 13,000 619,000 Revolving line of credit 1,257,000 - 7% senior convertible notes 5,606,000 - Other long-term liabilities 210,000 30,000 ------------ ------------ Total liabilities 15,033,000 8,442,000 ------------ ------------ Shareholders' equity: Series A 10% cumulative convertible preferred stock, $.005 par value, 5,000,000 shares authorized; 161,000 shares issued and outstanding at September 30, 1999 and December 31, 1998 1,000 1,000 Series B 7% cumulative convertible preferred stock, $.005 par value, 85,000 shares authorized; 0 and 56,000 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively - 1,000 Common stock, $.005 par value, 50,000,000 shares authorized; 28,833,000 and 28,086,000 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 143,000 140,000 Additional paid-in capital 65,001,000 70,733,000 Accumulated deficit (61,946,000) (61,147,000) Accumulated other comprehensive loss (410,000) - Treasury stock, at cost, 111,000 and 329,000 shares at September 30, 1999 and December 31, 1998, respectively (473,000) (1,403,000) ------------ ------------ Total shareholders' equity 2,316,000 8,325,000 ------------ ------------ Total liabilities and shareholders' equity $ 17,349,000 $ 16,767,000 ============ ============ </TABLE> See accompanying notes to unaudited consolidated financial statements 3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------------------ ----------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 -------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Revenues: Network services $ 5,038,000 $ 4,565,000 $ 14,708,000 $ 13,975,000 Online/Internet services 222,000 506,000 800,000 1,680,000 Advertising revenues 199,000 226,000 468,000 642,000 Other revenues 428,000 506,000 1,409,000 1,607,000 -------------- ------------- ------------- ------------- Total revenues 5,887,000 5,803,000 17,385,000 17,904,000 -------------- ------------- ------------- ------------- Operating expenses: Direct operating costs 1,759,000 1,189,000 4,047,000 3,671,000 Selling, general and administrative 3,491,000 2,857,000 9,181,000 9,061,000 Litigation, legal and professional fees 57,000 231,000 542,000 887,000 Equipment lease expense 191,000 267,000 652,000 774,000 Stock-based compensation expense 35,000 - 91,000 165,000 Depreciation and amortization 1,623,000 1,314,000 4,763,000 4,075,000 Research and development 229,000 254,000 524,000 474,000 -------------- ------------- ------------- ------------- Total operating expenses 7,385,000 6,112,000 19,800,000 19,107,000 -------------- ------------- ------------- ------------- Operating loss (1,498,000) (309,000) (2,415,000) (1,203,000) -------------- ------------- ------------- ------------- Other income (expense): Interest income 13,000 101,000 86,000 228,000 Interest expense (262,000) (114,000) (699,000) (259,000) Gain on sale of interest in subsidiary - - - 1,643,000 Gain on sale of assets of subsidiary 2,254,000 - 2,254,000 - Other - - (25,000) - -------------- ------------- ------------- ------------- Total other income (expense) 2,005,000 (13,000) 1,616,000 1,612,000 -------------- ------------- ------------- ------------- Income (loss) before income taxes 507,000 (322,000) (799,000) 409,000 Provision for income taxes - - - - -------------- ------------- ------------- ------------- Net income (loss) $ 507,000 $ (322,000) $ (799,000) $ 409,000 ============== ============= ============= ============= Accretion of beneficial conversion feature on preferred stock - - - 758,000 -------------- ------------- ------------- ------------- Net income (loss) available to common shareholders $ 507,000 $ (322,000) $ (799,000) $ (349,000) ============== ============= ============= ============= Net income (loss) per common share - basic $ 0.02 $ (0.01) $ (0.03) $ (0.01) ============== ============= ============= ============= Net income (loss) per common share - diluted $ 0.02 $ (0.01) $ (0.03) $ (0.01) ============== ============= ============= ============= Weighted average shares outstanding - basic 28,573,000 26,857,000 28,235,000 25,516,000 ============== ============= ============= ============= Weighted average shares outstanding - diluted 35,294,000 26,857,000 28,235,000 25,516,000 ============== ============= ============= ============= </TABLE> See accompanying notes to unaudited consolidated financial statements 4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------------------ ----------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 -------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Cash flows provided by (used in) operating activities: Net Income (loss) $ 507,000 $ (322,000) $ (799,000) $ 409,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,623,000 1,314,000 4,763,000 4,075,000 Provision for doubtful accounts 209,000 - 594,000 625,000 (Gain) loss from disposition of equipment - 60,000 (6,000) 180,000 Non-cash compensation charges 35,000 - 91,000 165,000 Accreted interest expense 98,000 66,000 303,000 198,000 Amortization of deferred revenue - - (85,000) - Gain on sale of interest in subsidiary - - - (1,643,000) Gain on sale of assets of subsidiary (2,254,000) - (2,254,000) - Changes in assets and liabilities: Accounts receivable 330,000 24,000 (288,000) (458,000) Prepaid expenses and other assets 90,000 (237,000) (287,000) (171,000) Accounts payable and accrued expenses 626,000 (168,000) (158,000) (1,030,000) Deferred revenue (122,000) (164,000) 117,000 (779,000) Management severance and other liabilities (187,000) (362,000) (735,000) (996,000) -------------- ------------- ------------- ------------- Net cash provided by (used in) operating activities 955,000 211,000 1,256,000 575,000 -------------- ------------- ------------- ------------- Cash flows provided by (used in) investing activities: Capital expenditures (2,548,000) (992,000) (4,453,000) (2,404,000) Notes receivable 20,000 - 59,000 (70,000) Capital software expenditures (25,000) - (56,000) (22,000) Proceeds from sale of assets of subsidiary 1,227,000 - 1,227,000 - Proceeds from sale of equipment - - 45,000 - Proceeds from sale of subsidiary - - - 1,862,000 -------------- ------------- ------------- ------------- Net cash provided by (used in) investing activities (1,326,000) (992,000) (3,178,000) (634,000) -------------- ------------- ------------- ------------- Cash flows provided by (used in) financing activities: Principal payments on capital leases (282,000) (35,000) (916,000) (58,000) Net proceeds from line of credit 1,257,000 - 1,257,000 - Principal payments on note payable (60,000) - (60,000) - Exercise of stock options - - 150,000 - -------------- ------------- ------------- ------------- Net cash provided by (used in) financing activities 915,000 (35,000) 431,000 (58,000) -------------- ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 544,000 (816,000) (1,491,000) (117,000) -------------- ------------- ------------- ------------- Cash and cash equivalents at beginning of period 2,525,000 5,463,000 4,560,000 4,764,000 ============== ============= ============= ============= Cash and cash equivalents at end of period $ 3,069,000 $ 4,647,000 $ 3,069,000 $ 4,647,000 ============== ============= ============= ============= </TABLE> See accompanying notes to unaudited consolidated financial statements 5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------------------ ------------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 ------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 52,000 $ 8,000 $ 110,000 $ 13,000 Income taxes $ - $ - $ - $ - ============= ============== ============== ============== Supplemental disclosure of non-cash investing and financing activities: Issuance of treasury stock pursuant to anti-dilution provision $ - $ 1,200,000 $ 930,000 $ 1,332,000 ============= ============== ============== ============== Issuance of common stock in payment of interest $ 103,000 $ - $ 193,000 $ - ============= ============== ============== ============== Issuance of common stock in payment of accrued board compensation $ 247,000 $ - $ 247,000 $ - ============= ============== ============== ============== Equipment acquired under capital leases $ 328,000 $ - $ 1,469,000 $ 375,000 ============= ============== ============== ============== Equipment and license acquired by issuing note payable $ - $ - $ 360,000 $ - ============= ============== ============== ============== Exchange of preferred stock for convertible notes and warrants $ - $ - $ 5,449,000 $ - ============= ============== ============== ============== Preferred dividend paid in common stock $ - $ - $ 8,000 $ 8,000 ============= ============== ============== ============== Issuance of common stock in exchange for cancellation of options and warrants $ - $ - $ - $ 212,000 ============= ============== ============== ============== Unrealized loss on investments available for sale $ 410,000 $ - $ 410,000 $ - ============= ============== ============== ============== Sale of assets of subsidiary in exchange for cash of $1,227,000 and stock of eBet Online. $ 1,297,000 $ - $ 1,297,000 $ - ============= ============== ============== ============== </TABLE> See accompanying notes to unaudited consolidated financial statements 6
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation In the opinion of management, the accompanying consolidated financial statements include all adjustments that are necessary for a fair presentation of the financial position of NTN Communications, Inc. and subsidiaries (collectively "the Company") and the results of their operations and their cash flows for the interim periods presented. Management has elected to omit substantially all notes to the Company's consolidated financial statements as permitted by the rules and regulations of the Securities and Exchange Commission. Results of operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the year ended December 31, 1999. The consolidated financial statements for the three and nine months ended September 30, 1999 and 1998 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K, filed for the year ended December 31, 1998. Certain items in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. 2. Investments Available For Sale Investment securities at September 30, 1999 consist of equity securities, which are classified as available-for-sale securities. Available-for-sale securities are recorded at fair value and unrealized holding gains and losses are excluded from earnings and are reported as a separate component of comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. 3. Revolving Line of Credit In August 1999, the Company entered into an agreement with Coast Business Credit for a revolving line of credit not to exceed $4,000,000. Interest is charged on the outstanding balance at a rate equal to the Prime Rate plus 1.5% per annum, but cannot be less than 9% per annum. The line of credit is secured by substantially all of the Company's assets. Total loan fees of $120,000 are payable in three annual installments and are being amortized over the life of the loan which matures on August 31, 2002. 7
4. Earnings (Loss) Per Share Options, warrants, convertible preferred stock and convertible notes representing approximately 4,402,000, 3,901,000, 13,346,000 and 5,940,000, potentially dilutive common shares have been excluded from the computations of net income (loss) per share for the three months ended September 30, 1999 and 1998 and for the nine months ended September 30, 1999 and 1998, respectively, as their effect is anti-dilutive. <TABLE> <CAPTION> Three Months Ended Nine Months Ended --------------------------------- --------------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> Numerator for diluted earnings (loss) per share: Net income (loss) available to common shareholders $ 507,000 (322,000) (799,000) (349,000) Interest on 7% convertible notes 103,000 - - - --------------- --------------- --------------- --------------- 610,000 (322,000) (799,000) (349,000) =============== =============== =============== =============== Denominator: Denominator for basic earnings (loss) per share - Weighted average shares 28,573,000 26,857,000 28,235,000 25,516,000 Potential effect of dilutive securities: Employee stock options and director options 1,497,000 - - - Warrants 526,000 - - - Litigation settlements and management Severance - - - - Convertible preferred stock 61,000 - - - Convertible debt 4,637,000 - - - --------------- --------------- --------------- --------------- Potentially dilutive common shares 6,721,000 - - - --------------- --------------- --------------- --------------- Denominator for diluted earnings per share - Adjusted weighted average shares and assumed conversions 35,294,000 26,857,000 28,235,000 25,516,000 =============== =============== =============== =============== Basic earnings (loss) per common stock $ 0.02 (0.01) (0.03) (0.01) =============== =============== =============== =============== Diluted earnings (loss) per common stock $ 0.02 (0.01) (0.03) (0.01) =============== =============== =============== =============== </TABLE> Reflected in the net loss available to common shareholders for the nine months ended September 30, 1998 is the accretion of the beneficial conversion feature on the Series B Preferred Stock in the amount of $758,000. The amount of the beneficial conversion feature is measured at the date of issue of the convertible security as the difference between the conversion price and the market value of the common stock into which the security is convertible. This amount is accounted for as a non-cash dividend on the convertible preferred stock with the same amount credited to additional paid-in capital, allocated over the period from issuance to first convertibility. Therefore, there is no impact to shareholders' equity. The beneficial conversion feature was fully accreted as of September 30, 1998. 5. Segment Information The Company analyzes segment performance based on revenue. Hospitality revenues represent 93% of the Company's total revenue and is the only reportable segment for the nine months ended September 30, 1999. The following tables set forth certain information regarding the Company's segments and other operations: <TABLE> <CAPTION> Three Months Ended Nine Months Ended -------------------------------- ------------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 --------------- --------------- -------------- --------------- <S> <C> <C> <C> <C> Revenues: Hospitality $ 5,564,000 5,297,000 16,127,000 15,739,000 Other 323,000 506,000 1,258,000 2,165,000 --------------- --------------- -------------- --------------- Total revenues $ 5,887,000 5,803,000 17,385,000 17,904,000 =============== =============== ============== =============== Operating loss: Hospitality $ 932,000 1,509,000 3,206,000 4,708,000 Online/Internet services (507,000) 448,000 (1,366,000) 1,444,000 IWN, Inc. (16,000) (134,000) (44,000) (499,000) Corporate (1,907,000) (2,132,000) (4,211,000) (6,840,000) Other - - - (16,000) --------------- --------------- -------------- --------------- Operating loss $ (1,498,000) (309,000) (2,415,000) (1,203,000) =============== ============== =============== ============== </TABLE> 6. Sale of Assets of Subsidiary The results for the three and nine months ended September 30, 1999 include a gain of $2,254,000 related to the sale of the assets of its wholly-owned subsidiary, IWN, Inc., to eBet Limited in exchange for $1,227,000 in cash and 4,000,000 shares of eBet Online stock. 8
7. Subsequent Events The following legal proceeding developments occurred subsequent to the period ended September 30, 1999: The Company reached a tentative settlement agreement with the class of plaintiffs in Miller v. NTN Communications, et al.,filed in June 1997 whereby the Company is to pay $3.25 million, subject to agreement on documentation and preliminary and final approval by the U.S. District Court. The settlement payment is fully covered by the Company's liability insurance. The Company entered into a settlement agreement with the Business Software Alliance ("BSA") in connection with the Company's use of certain software products in the course of its business, with insufficient licenses for such use, prior to 1998. Pursuant to the settlement agreement, the Company will pay to BSA a total of $339,864 in ten equal monthly installments. The Company had previously accrued an amount sufficient to cover the settlement. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward Looking Statements This Quarterly Report contains forward looking statements, including statements relating to, among other things, the success of the DITV network, future growth of the Company's business and successful implementation of its Internet station strategy, which are subject to risks and uncertainties, including the impact of the Y2K remediation costs, product demand, market acceptance, and other risk factors detailed in the Company's Securities and Exchange Commission filings, including the Company's Report on Form 10-K for the fiscal year ended December 31, 1998 and its quarterly reports on Form 10-Q for the periods ended March 31, 1999 and June 30, 1999, which are incorporated herein by reference. General NTN Communications, Inc. develops, produces and distributes individual and multi-player interactive programs to a variety of media platforms. The Company broadcasts to a variety of delivery platforms 24 hours a day, providing entertainment and informational programming, including multi-player sports and trivia games. NTN networks distribute programming to more than 17.7 million viewer/participants per month in the United States through hospitality locations such as restaurants, bars and hotels. Additionally, NTN distributes programming to approximately 500 sites in Canada through its Canadian licensee. In February 1999, the Company introduced a second Network to be broadcast to the Hospitality industry. The Company installed the first of these Digital Interactive TV Systems ("DITV") in April 1999. As of November 5, 1999, the Company had received contracts for 1,412 sales of the DITV Network, of which 492 were new customers and 920 were conversions of customers from the original NTN Network to the DITV Network. Of the 1,412 total sales, 1,211 had been installed as of November 5, 1999. The DITV Network has all the capabilities of the original NTN Network plus a more television-like quality in advertisements and games. The new "Playmaker"(R) wireless input devices used with the DITV Network have been enhanced in several ways, including: (a) updated radio frequency technology mitigates the interference problems common to the prior series; (b) a larger eight-line LCD display to allow for several possible future features, including user "chat" from one unit to another within the host premises and the display of information such as sports scores and stock quotes; (c) a redesigned keypad conforms to the industry standard QWERTY keyboard layout as well as utilizing a "play zone" to provide a dedicated input area for the games; and (d) a longer battery life. Further, the Company has developed enhancements to its interactive software, including a migration to a Windows(R)-based platform, to allow full-motion video presentation. In April 1999, the Company acquired the assets and rights to certain technology, hardware and video games used in the Internet game business from Sikander, Inc., a Nevada corporation. The technology enables NTN to link the viewer/participants on its existing network to coin-operated Internet stations, thus providing out-of-home access to the Web and video games for patrons in restaurants, hotels and other public venues. The Company is currently deploying Internet Stations to various NTN locations in Southern California and Texas for beta testing. In addition to the introduction of NTN's DITV network and the purchase of the assets related to the Internet game business, the Company's Internet business plan will make it possible for consumers to access NTN's interactive content from a complete range of delivery systems, including NTN's two hospitality networks, the Internet, America Online, interactive cable services and other interactive delivery systems. 9
Results of Operations Three months ended September 30, 1999 and September 30, 1998 Operations for the three months ended September 30, 1999 resulted in a net income of $507,000 compared to a net loss of $322,000 for the three months ended September 30, 1998. The results for the third quarter of 1999 include a gain of $2,254,000 related to the sale of the assets of its wholly-owned subsidiary, IWN, Inc., to eBet Limited in exchange for $1,227,000 in cash and 4,000,000 shares of eBet Online stock. Total revenues increased 1% to $5,887,000 for the three months ended September 30, 1999 from $5,803,000 for the three months ended September 30, 1998. This occurred primarily due to an increase in network services revenue, which was partially offset by decreases in Online/Internet services revenues, advertising and other revenues. Network services revenue increased 10% to $5,038,000 for the three months ended September 30, 1999 from $4,565,000 for the three months ended September 30, 1998. This increase is primarily due to an increase in rates charged for the setup, installation and training for the DITV network as compared to the original network. During the three months ended September 30, 1999, 596 DITV systems were installed. Revenue from Online/Internet services decreased 56% to $222,000 for the three months ended September 30, 1999 from $506,000 for the three months ended September 30, 1998. The decrease was largely due to revenue recognized for production services provided in 1998 that did not occur in 1999. Additionally, revenue decreased $60,000 as a result of the contract with AOL which provides for reduced fees in the third quarter of 1999 compared to the third quarter of 1998. Advertising revenues decreased 12% to $199,000 for the three months ended September 30, 1999 from $226,000 for the three months ended September 30, 1998. The decrease is due to advertising contracts that ended in 1998 and did not recur in 1999. Other revenues decreased 16% to $428,000 for the three months ended September 30, 1999 from $506,000 for the three months ended September 30, 1998. Included in other revenue for the three months ended September 30, 1998 were equipment sales of $88,000. No such revenue was recorded for equipment sales in 1999. Direct operating costs increased 48% to $1,759,000 for the three months ended September 30, 1999 from $1,189,000 for the three months ended September 30, 1998. This increase was due to expenses of $266,000 associated with an increase in the number of sites installed, increased freight expenses associated with shipping equipment to the sites and an increase in the number of sales commissions paid in connection with the roll out of the DITV network for the three months ended September 30, 1999. Satellite transmissions costs and ISP charges increased $275,000 due to additional services needed to support the DITV network for the three months ended September 30, 1999. Selling, general and administrative expenses increased 22% to $3,491,000 for the three months ended September 30, 1999 from $2,857,000 for the three months ended September 30, 1998. Consulting expenses increased $315,000 related to Year 2000 efforts for the three months ended September 30, 1999. Bad debt expense was $209,000 for the three months ended September 30, 1999. No expense was incurred for bad debts for the three months ended September 30, 1998, as the allowance for bad debts as of September 30, 1998 was adequate. Additionally, marketing expenses increased related to the launch of the new DITV network for the three months ended September 30, 1999. Professional fees decreased due to the settlement of litigation for which the Company had accrued a liability for an amount which exceeded the settlement amount. As a result, the Company reduced the accrued expenses and litigation, legal and professional fee expenses by approximately $160,000 related to the settlement for the three months ended September 30, 1999. Equipment leases decreased $76,000 due to the payoff of such leases during the three months ended September 30, 1999. Stock-based compensation expense increased $35,000 for the three months ended September 30, 1999. There was no stock-based compensation for the three months ended September 30, 1998. The 1999 charges resulted from the issuance of warrants and options to non-employees, which can vary from period-to-period. Research and development expenses were $229,000 for the three months ended September 30, 1999, compared to $254,000 for the three months ended September 30, 1998. The current period expenses result from the Company's research and development efforts related to the next generation of the DITV network, Internet stations and future Internet web sites. For the three-month period ended September 30, 1998, the Company's research and development efforts focused primarily on the upgrade of the NTN network. 10
Interest expense increased 130% to $262,000 for the three months ended September 30, 1999 from $114,000 for the three months ended September 30, 1998. The increase was primarily due to interest expense recorded in 1999 related to its convertible notes, the revolving line of credit, other notes payable and additional capital leases for equipment acquisitions that did not exist in 1998. Nine months ended September 30, 1999 and September 30, 1998 Operations for the nine months ended September 30, 1999 resulted in a net loss of $799,000 compared to a net income of $409,000 for the nine months ended September 30, 1998. The operating results for the nine months ended September 30, 1999 include a gain of $2,254,000 related to the sale of the assets of its wholly-owned subsidiary, IWN, Inc., to eBet Limited in exchange for $1,227,000 in cash and 4,000,000 shares of eBet Online stock. The operating results for the nine months ended September 30, 1998 include a gain of $1,643,000 related to the sale of a majority interest in one of the Company's subsidiaries. Total revenues decreased 3% to $17,385,000 for the nine months ended September 30, 1999 from $17,904,000 for the nine months ended September 30, 1998. This occurred primarily due to decreases in Online/Internet revenues, advertising and other revenues offset by increases in network services revenue. Network service revenue increased 5% to $14,708,000 for the nine months ended September 30, 1999 from $13,975,000 for the nine months ended September 30, 1998. This increase is primarily due to an increase in rates charged for the setup, installation and training for the DITV network as compared to the original network. During the nine months ended September 30, 1999, 936 DITV systems were installed. Revenue from Online/Internet services decreased 52% to $800,000 for the nine months ended September 30, 1999 from $1,680,000 for the nine months ended September 30, 1998. The decrease was largely due to revenue recognized for production services provided in 1998 that did not occur in 1999. Additionally, the Company entered into a new contract in the second quarter of 1998 with its Internet partner, America Online. The contract provides for a flat monthly fee rather than fees based on AOL member usage of the Company's content, which resulted in a reduction of revenue of $165,000 for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. Advertising revenues decreased 27% to $468,000 for the nine months ended September 30, 1999 from $642,000 for the nine months ended September 30, 1998. The decrease is due to advertising contracts that ended in 1998 and did not recur in 1999. Other revenues decreased 12% to $1,409,000 for the nine months ended September 30, 1999 from $1,607,000 for the nine months ended September 30, 1998. Other revenues for the nine months ended September 30, 1998 included approximately $285,000 in sales generated by LearnStar, Inc. (LearnStar). As a result of the sale of an 82.5% interest in LearnStar in June 1998, no such revenue was recorded for the nine months ended September 30, 1999. This decrease was partially offset by an increase in revenue from the Company's Canadian licensee for the nine months ended September 30, 1999. Direct operating costs increased 10% to $4,047,000 for the nine months ended September 30, 1999 from $3,671,000 for the nine months ended September 30, 1998. This increase was due to expenses of $393,000 associated with an increase in the number of sites installed, increased freight expenses associated with shipping equipment to the sites and an increase in the number of sales commissions paid in connection with the roll out of the DITV network for the nine months ended September 30, 1999. Satellite transmissions costs and ISP charges increased $449,000 due to additional services needed to support the DITV network for the nine months ended September 30, 1999. These increases were offset somewhat by the settlement of an accrued liability for license fees that was less than had been estimated. As a result, the Company reduced the accrued expenses and direct operating costs by approximately $180,000 related to the settlement for the nine months ended September 30, 1999. Additionally, the results for the nine months ended September 30, 1998, included approximately $360,000 in costs related to the realignment of the satellite dishes at hospitality locations in order to receive broadcast transmissions from the Galaxy III-R satellite when the PanAmSat Galaxy IV satellite failed to operate in May 1998. Selling, general and administrative expenses increased 1% to $9,181,000 for the nine months ended September 30, 1999 from $9,061,000 for the nine months ended September 30, 1998. The nine months ended September 30, 1999 included an increase in consulting expenses of approximately $356,000 relating to Year 2000 remediation efforts. Marketing expenses also increased approximately $236,000 related to the new DITV network for the nine months ended September 30, 1999. These increases were partially offset by approximately $276,000 in selling, general and administrative expenses incurred by LearnStar for the nine months ended September 30, 1998. As a result of the sale of an 82.5% interest in LearnStar in June 1998, no such expenses were recorded for the nine months ended September 30, 1999. Office lease expenses also decreased due to the sublet of office space beginning in September 1998 which was previously occupied by the Company. 11
Professional fees decreased due to the settlement of litigation for which the Company had accrued a liability for an amount which exceeded the settlement amount. As a result, the Company reduced the accrued expenses and litigation, legal and professional fee expenses by approximately $160,000 related to the settlement for the nine months ended September 30, 1999. Equipment leases decreased approximately $122,000 due to the payoff of such leases during the nine months ended September 30, 1999. Stock-based compensation expense decreased 45% to approximately $91,000 for the nine months ended September 30, 1999 compared to $165,000 for the nine months ended September 30, 1998. The 1999 charges resulted from the issuance of warrants and options to non-employees and can vary from period-to-period. Research and development expenses were $524,000 for the nine months ended September 30, 1999, compared to approximately $474,000 for the nine months ended September 30, 1998. The current period expenses result from the Company's research and development efforts related to the next generation of the DITV network, Internet stations, and future Internet web sites. For the nine-month period ended September 30, 1998, the Company's research and development efforts focused primarily on the upgrade of the NTN network. Interest expense increased 170% to $699,000 for the nine months ended September 30, 1999 from $259,000 for the nine months ended September 30, 1998. The increase was primarily due to interest expense recorded in 1999 related to its convertible notes, the revolving line of credit, other notes payable and additional capital leases for equipment acquisitions that did not exist in 1998. Liquidity and Capital Resources At September 30, 1999, the Company had cash and cash equivalents of $3,069,000 and working capital (current assets in excess of current liabilities) of $1,755,000, compared to cash and cash equivalents of $4,560,000 and working capital of $2,400,000 at December 31, 1998. Net cash provided by operations was $1,256,000 for the nine months ended September 30, 1999 and $575,000 for the nine months ended September 30, 1998. The principal uses of cash for the nine months ended September 30, 1999 were to fund the Company's net loss and for severance payments made by the Company in compliance with management resignation agreements with former officers totaling $735,000. Depreciation, amortization and other non-cash charges offset the uses. Net cash used in investing activities was $3,178,000 for the nine months ended September 30, 1999 and $634,000 for the nine months ended September 30, 1998. Included in net cash used in investing activities for the nine months ended September 30, 1999 were approximately $4,453,000 in capital expenditures offset by proceeds from the sale of assets of a subsidiary of approximately $1,227,000 for the nine months ended September 30, 1999. Net cash provided by financing activities was approximately $431,000 for the nine months ended September 30, 1999. Net cash used in financing activities was $58,000 for the nine months ended September 30, 1998. Net cash provided by financing activities for the nine months ended September 30, 1999 included $1,257,000 of proceeds from the revolving line of credit, net of principal payments, and $916,000 for principal payments on capital leases. In August 1999, the Company entered into an agreement with Coast Business Credit for a revolving line of credit not to exceed $4,000,000. Interest is charged on the outstanding balance at a rate equal to the Prime Rate plus 1.5% per annum, but cannot be less than 9% per annum. The line of credit is secured by substantially all of the Company's assets. Total loan fees of $120,000 are payable in three annual installments and are being amortized over the life of the loan which matures on August 31, 2002. The line of credit is expected to be used primarily for capital expenditures related to the launch of DITV. The Company believes that its cash on hand and anticipated cash flows from its operations and the line of credit will be sufficient to meet its operating needs through 1999. It is likely, however, the Company will require additional financing in 2000 to completely implement its plan to convert its entire existing customer base to the new DITV network, to expand the DITV network, implement the Company's Internet station strategy and expand the Company's Internet business. The Company has no agreement or commitment for any such additional financing and there can be no assurance whether, or on what terms, such financing will be available to the Company. Year 2000 The Company, with the assistance of independent outside consultants, has been assessing its "Year 2000" computer readiness and exposure to Year 2000 issues, which relates to the inability of computer software programs to recognize the arrival of the Year 2000, because of a common software design feature that describes the current year by only its last two digits. In connection with such assessment, the Company initiated a review of the information technology systems utilized in the Company's business and operations. Based on this review, the Company has segregated its systems into two categories: mission critical and support systems. Mission critical systems are characterized as hardware and applications contributing to the income of the business. Support systems are 12
characterized as systems that organize and create efficiencies for the corporation, but are not critical to its operations. The Company has completed the assessment and remediation of all its computers, operating systems and commercial off the shelf software packages. The Company's proprietary software programs are being assessed by an independent outside consulting firm to establish its ability to process future critical dates. The compliance audit and remediation of the Company's proprietary software programs are expected to be completed by the beginning of December. The Company has incurred costs specific to remediation efforts of approximately $400,000 through September 30, 1999. Certain compliance issues have been eliminated as a result of the DITV network and the new equipment purchased related to DITV including back-end equipment. All location systems in the DITV network are Year 2000 compliant. The Company has upgraded key back-end systems with compliant commercial hardware, operating system and commercial off the shelf software. The Company reviewed the Year 2000 compliance by its principal vendors, and expects that the Company will not incur significant Year 2000 related costs on behalf of its vendors or other third parties. The worst-case scenario would be if the Company were unable to broadcast its program to its network services customers. Network services revenue represents 85% of total revenues for the nine months ended September 30, 1999. The Company has developed a contingency plan in the event that this occurs. However, a widespread or extended failure of the Company's internal systems, or systems of third parties, to be Year 2000 compliant, could potentially have a material adverse effect on the Company's business, financial condition or operating results. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to risks related to currency exchange rates, stock market fluctuations, and interest rates. As of September 30, 1999, the Company owned an investment available for sale which is common stock of an Australian company that is subject to market risk. At September 30, 1999, the Company recorded an unrealized loss of $410,000 associated with the investment. The Company has convertible notes which bear interest at 7% per annum and a line of credit at a rate equal to the Prime Rate plus 1.5% per annum, which cannot be less than 9% per annum. A significant increase in interest rates could have an adverse affect on the Company's financial condition or results of operations. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The following legal proceeding developments occurred subsequent to the period ended September 30, 1999: The Company reached a tentative settlement agreement with the class of plaintiffs in Miller v. NTN Communications, et al.,filed in June 1997 whereby the Company is to pay $3.25 million, subject to agreement on documentation and preliminary and final approval by the U.S. District Court. The settlement payment is fully covered by the company's liability insurance. The Company entered into a settlement agreement the Business Software Alliance ("BSA") in connection with the Company's use of certain software products in the course of its business, with insufficient licenses for such use, prior to 1998. Pursuant to the settlement agreement, the Company will pay to BSA a total of $339,864 in ten equal monthly installments. The company had previously reserved an amount sufficient to cover the expense of the settlement. The payments will therefore have no adverse impact on the company's future operating results. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. The Company issued 253,323 shares of common stock in August 1999 to the board of directors in lieu of cash compensation. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on August 27, 1999. The following matters were voted upon at the meeting: 13
1. Election of three Directors to hold office for the term expiring 2002: Name of Director Elected Shares Voting in Favor Shares Withheld - ------------------------ ---------------------- --------------- Barry Bergsman 22,296,737 232,123 Stanley B. Kinsey 22,296,987 232,123 Donald C. Klosterman 22,294,935 232,123 The following individual is a continuing director with a term expiring in 2000: Gary Arlen. The following individuals are continuing directors with terms expiring in 2001: Robert Bennett and Esther Rodriguez. 2. Stockholder proposal submitted pursuant to Rule 14a-8 promulgated under the Securities and Exchange Act of 1934, as amended, urging the Board of Directors to arrange for the prompt sale of the Company to the highest bidder: Votes In Favor: 2,570,098 Votes Against 19,989,634 Abstentions 232,123 The stockholder proposal was defeated. 3. Stockholder motion to initiate search to replace Chief Executive Officer of the Company: Votes In Favor 64,765 Votes Against 22,727.090 The motion was defeated. 14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.1 Loan and Security Agreement, dated August 6, 1999, by and between NTN Communications, Inc. and Coast Business Credit, a division of Southern Pacific Bank. 10.2 Settlement Agreement, dated November 1, 1999, between the Business Software Alliance and NTN Communications, Inc. 27. Financial Data Schedule. (b) Reports on Form 8-K None 15
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NTN COMMUNICATIONS, INC. Date: November 12, 1999 By: /s/ Kendra Berger ------------------ Kendra Berger Chief Financial Officer 16
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 10.1 Loan and Security Agreement, dated August 6, 1999, by and between NTN Communications, Inc. and Coast Business Credit, a division of Southern Pacific Bank. 10.2 Settlement Agreement, dated November 1, 1999, between the Business Software Alliance and NTN Communications, Inc. 27. Financial Data Schedule. 17