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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1103425
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(619) 438-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.005 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K (S 229.405 of this Chapter) is not contained herein and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [_]
The aggregate market value of the voting stock held by non-affiliates of
Registrant as of April 11, 1996, computed by reference to the closing sale price
of such stock on the American Stock Exchange, was approximately $89,000,000.
(All directors and executive officers of Registrant are considered affiliates.)
At April 11, 1996 Registrant had 23,899,145 shares of Common Stock, $.005 par
value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the period ended
December 31, 1995 are incorporated by reference into Part I of this Report.
Portions of Registrant's definitive Proxy Statement for its July 1996 meeting of
stockholders are incorporated by reference into Part III of this Report.
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TABLE OF CONTENTS
Item Page
- ---- ----
Part I
1. Business............................................................. 3
2. Properties........................................................... 23
3. Legal Proceedings.................................................... 23
4. Submission of Matters to a Vote of Security Holders.................. 24
Part II
5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................. 24
6. Selected Financial Data.............................................. 25
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 26
8. Consolidated Financial Statements and Supplementary Data............. 32
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................... 32
Part III
10. Directors and Executive Officers of the Registrant................... 32
11. Executive Compensation............................................... 32
12. Security Ownership of Certain Beneficial Owners and Management....... 32
13. Certain Relationships and Related Transactions....................... 32
Part IV
14. Exhibits, Consolidated Financial Statement Schedule,
and Reports on Form 8-K............................................. 33
Index to Consolidated Financial Statements and Schedule........................ F-0
2
PART I
ITEM 1. BUSINESS.
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FORMATION
NTN Communications, Inc. ("NTN") was originally incorporated in the State of
Delaware on April 13, 1984 under the name of Alroy Industries. Alroy completed
a public offering of its common stock on November 26, 1984. On April 15, 1985,
Alroy acquired all of the outstanding stock of National Telecommunicator
Network, Inc. In connection with the acquisition, Alroy changed its name to NTN
Communications, Inc. In 1993, NTN completed a merger with New World Computing,
Inc. ("New World") pursuant to which New World became a wholly-owned subsidiary
of NTN. In 1994, the Company formed LearnStar, Inc. (LearnStar) and IWN, Inc.
(IWN), both currently partially-owned subsidiaries. Unless otherwise indicated,
references herein to the "Company" include NTN and its consolidated
subsidiaries, including New World, LearnStar and IWN.
RECENT DEVELOPMENTS
A discussion of the general development of the Company for the fiscal year
ended December 31, 1995 is set forth in the letter to the Company's shareholders
contained in the Company's Annual Report to Shareholders and is incorporated
herein by reference. A copy of the Annual Report to Shareholders is included as
Exhibit 13 to this Report.
In 1995, the Company purchased the shares of LearnStar, Inc. owned by ACT III
Communications to increase its ownership in LearnStar Inc. to 100%. In
December, the Company sold a 45% interest in LearnStar to Associated Ventures
Management Inc., an unaffiliated company, for $2,500,000.
In December 1995 the Company sold a 10% interest in IWN, Inc. to Symphony
LLC, an unaffiliated company for $350,000. Symphony LLC also became a limited
partner in IWN L.P., an unconsolidated limited partnership in which
IWN, Inc. is the general partner by agreeing to contribute $2,650,000 to the
partnership.
PRINCIPAL SERVICES AND PRODUCTS
NTN Communications, Inc. ("NTN" or the "Company"), through its business units
and subsidiaries, develops, produces and distributes individual and multi-player
interactive programs to a variety of media platforms. These interactive sports,
trivia game and educational programs permit multiple viewers to simultaneously
respond to and participate with the programming content. NTN has exclusive
licensing agreements with the National Football League ("NFL"), Major League
Baseball, the National Hockey League and others to provide interactive play-
along programming, such as its proprietary QB1(R) football game, in conjunction
with live television events. The Company broadcasts a wide variety of popular
games, trivia and informational programming to group viewing locations such as
hotels, sports bars and restaurants through its own interactive NTN Network. In
addition, NTN brings multi-player interactive games into consumer households
through personal computer on-line services, the Internet and interactive
television services. NTN currently has two patents pending with respect to its
interactive technology systems. Since NTN distributes its programs via
satellite, cable, telephone and wireless transmission technologies, its
applications are independent of hardware or technical platforms.
The Company currently provides its products and services through six business
units or subsidiaries in various stages of development.
Of these six, three are considered to be the Core of the Company's business,
that is, directly related to multi-player interactive entertainment programs.
The three Core business units which will be used throughout this document are as
follows:
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CORE
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Hospitality Services ("Hospitality") - Interactive television network ("NTN
Network") featuring sports and trivia games which are broadcast to group
environments.
International Licensing ("International Licensing") - Providing the NTN
Network through exclusive licensing agreements internationally.
Home Interactive Services ("Home") - Marketing many of the same live
interactive sports and trivia games currently broadcast over the NTN Network to
the home consumer market via third-party providers.
Three others are considered to be Non-Core business units, that is, they are
indirectly related to the Core business but in different markets and/or in early
stages of development. The three Non-Core business units which will be used
throughout this document are as follows:
NON - CORE
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LearnStar, Inc. ("LearnStar") - Providing an interactive, multimedia,
curriculum-based educational system to schools.
IWN, Inc. ("IWN") - Developing, distributing and marketing interactive and
transaction processing software and technology for the gaming industry.
New World Computing, Inc. ("New World") - Designing, developing and
publishing interactive computer games in CD-ROM and floppy disk formats.
The following is a summary of the revenues, total expenses and operating
income for each of the Core and Non-Core business units followed by a brief
description of each:
TOTAL TOTAL OPERATING
CORE UNITS REVENUES EXPENSES INCOME (LOSS)
- ----------------- ----------- ----------- -------------
Hospitality $21,720,000 $18,173,000 $ 3,547,000
International 747,000 1,610,000 (863,000)
Home 690,000 1,532,000 (842,000)
TOTAL TOTAL OPERATING
NON-CORE UNITS REVENUES EXPENSES INCOME (LOSS)
- ----------------- ----------- ----------- -------------
LearnStar 1,095,000 3,244,000 (2,149,000)
IWN 600,000 0 600,000
New World 5,379,000 5,252,000 127,000
Hospitality--Hospitality represents the majority of the Company's business,
providing a 24-hour-a-day interactive television broadcast network featuring
sports, trivia and informational programming to over 3,000 hospitality sites in
the U.S. and Canada. These sites include bars, restaurant chains (e.g., TGI
Friday's, Ruby Tuesdays, Black Angus), national hotel chains (e.g., Hilton,
Holiday Inn, Marriott, Radisson, Sheraton), local and
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regional bowling alleys, pizzerias, sports complexes and military bases. Through
various platforms including satellite, cable and wireless transmission sources,
Hospitality can link its subscribers to encourage local, regional and national
competitions for its programming.
International Licensing--The Company has licensed independent companies to
broadcast in Australia/New Zealand and South Africa. Its exclusive licensees,
NTN Australasia, Ltd. and MultiChoice, Ltd., operate broadcast centers in
Australia/New Zealand, and South Africa, respectively. Further, the Company
licenses its programs and software to a company in Canada. Licensees, except in
Canada, operate their own broadcast center and produce interactive programs
specifically geared to the local culture and society. The Canadian licensee
uses the broadcast provided by the Company on the NTN Network.
Home--The Company provides to the home consumer market many of the same
services as Hospitality, via on-line services and interactive television
networks. Home is not dependent on any particular technology or method of
transmission to deliver its programming. For example, through an agreement with
America Online ("AOL"), NTN delivered QB1(R) to AOL customers during Super Bowl
XXX. In addition to the same sports and trivia games which are currently
broadcast over the NTN Network, Home provides other multi-player interactive
games expressly designed for the home environment. Home is divided into two
sub-markets, on-line services ("On-Line Services"), and interactive television
services ("ITV Services"). Currently, Home receives revenues from 1) play-along
services, in which NTN services are broadcast along with live events generating
subscription fees from interactive game participation, or "pay-per-play", and 2)
information services, where NTN'S database is provided as a value-added
information service to subscribers who want statistical data. Home's customers
include the AT&T Imagination Network, General Electric's GEnie, and GTE
MainStreet.
LearnStar--LearnStar, a partially-owned subsidiary of NTN, was formed in
1994. LearnStar owns the exclusive license for NTN's proprietary software
technology for educational applications in the United States. With a
comprehensive library of over 1,000 interactive academic competitions covering
16 subject areas, LearnStar offers teachers a new and exciting way to encourage
learning and motivation in kindergarten through 12th grade students.
IWN--IWN, a partially owned subsidiary of NTN, was established in 1993 to
develop, distribute and market interactive and transaction services for the
gaming industry. NTN has granted IWN the exclusive international license for
all software and technology developed by NTN for use in gaming applications.
IWN subsequently sold these rights to IWN L.P., an unconsolidated limited
partnership in which IWN is the general partner. IWN is currently pursuing its
business interests entirely through IWN, L.P. IWN, L.P. has two proprietary
software products, focusing on the pari-mutuel wagering industry which are, near
completion. Through IWN L.P., IWN is developing the IWN Gaming Host System
("Gaming Host System"), an on-line transaction processing engine that provides
security, administration, processing and switching services. The Gaming Host
System is designed to provide the back-end system and support for all of IWN's
products, regardless of market niche application or technical platform.
New World--New World is an internationally recognized designer, developer and
publisher of interactive computer games. New World has a portfolio of over 30
games for DOS, Windows and Macintosh applications in CD-ROM and floppy disk
formats. Popular titles include casino-themed games such as Vegas Games(TM),
fantasy role playing games such as Heroes of Might and Magic(TM), and strategy
adventure games such as Anvil of Dawn(TM). New World's products are designed
for general consumer use on a variety of home personal computers and console
entertainment systems, such as SEGA and Nintendo.
MARKETING AND DISTRIBUTION OF SERVICES AND PRODUCTS
Hospitality's NTN Network. The NTN Network is currently marketed primarily
to public viewing locations such as bars and lounges, that are principally
located in hotels and restaurants, as well as to military bases and country
clubs ("Locations"). The NTN Network serves over 3,000 locations throughout all
50 of the United States
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and in Canada. Locations in Canada are further served by the Company's
licensee, NTN Interactive Network ("NTN Canada").
The NTN Network presently features from 14 hours to 17 hours, depending on
the time zone, of interactive sports and entertainment trivia game programming
on weekdays, with extended programming hours on weekends. The balance of
broadcast time is devoted to an audible graphics-based service transmitting
information, including sports and upcoming program promotion.
Original programming for the NTN Network is developed and produced at the
Company's corporate offices in Carlsbad, California for distribution to
Locations. The Company's facilities are equipped with video, satellite and
communications equipment, and sophisticated multimedia computers. The Company
can provide simultaneous transmission of up to 16 live events for interactive
play and a multitude of interactive games and other programs, allowing
distribution of different programs to customers in different geographical
locations.
The Company uses two independent services to distribute NTN programming via
satellite to customers, although it is not dependent upon either service because
there are several other providers that offer similar services. The Company
attempts to use the most effective and least expensive multiple data
transmission techniques to distribute data from the Company's facilities to
customers, including FM radio transmission, direct satellite broadcast, and
television transmission via vertical blanking interval.
Each Location receives NTN proprietary equipment (a "Location System")
including a personal computer, a satellite data receiving unit (usually a small
satellite dish), and a minimum of ten hand-held, portable keypads
("Playmakers(TM)") which players use to make their selections. During live
interactive program, players participate in the play-along programs using two
television screens. One screen features the live broadcast from the television
network (e.g., ABC's Monday Night Football), while the second screen displays
the NTN Network program. Participants play the game by entering their selection
on Playmakers(TM), which transmit a radio signal to the on-site computer or
through connection to the NTN broadcast center (the "Broadcast Center") in
Carlsbad, California. At the conclusion of the broadcast, total scores are
calculated and sent via phone lines. Within seconds, results are tabulated and
scores at each participating Location are transmitted back to such Location via
the NTN Network. This allows players to compete not only with other patrons at
their Location, but against all players across the nation who are participating
interactively on the Network. The following diagram depicts the transmissions
for a typical real-time, interactive game via satellite.
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[SATELLITE FIGURE GOES HERE]
In addition to tabulating Playmaker(TM) responses at the Location and
communicating with the Company's offices, the Location System can manipulate
videotext inserts at the direction of the Location, and call up high-resolution
computer generated graphics as directed by the Company's computers.
Accordingly, the Company offers both national and local advertising.
Interactive Sports Game Programs. Hospitality offers a variety of sports and
entertainment trivia games that challenge players skill and knowledge and create
significant customer loyalty. An example of interactive sports programming is
QB1(R), the Company's first and most renowned game program. QB1(R) is an
interactive football strategy game exclusively licensed by the NFL which tests a
player's ability to predict an offensive team's plays during a live televised
football game. Points are awarded based on the accuracy of the player's
prediction, rather than whether the team scores or advances the ball. The
Company broadcasts QB1(R) in conjunction with every NFL game and selected
Canadian Football League games and college football games.
The NTN Network presently features the following interactive sports games
programs:
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NTN Play-Along Games--Interactive games played in conjunction with live,
televised events. Games include the following:
GAME DESCRIPTION
- ---------------------------- ------------------------------------------------
QB1(R) NFL licensed interactive strategy game in
conjunction with live telecasts of college and
professional football games
NTN DiamondBall(R) Major League Baseball licensed interactive
strategy in conjunction with live telecasts of
baseball games
Triples(TM) Interactive horse racing game in conjunction
with live telecasts of horse races
Uppercut(R) Interactive strategy game in conjunction with
live telecasts of boxing matches
NTN PowerPlay(R) National Hockey League licensed interactive
strategy game in conjunction with live telecasts
of hockey games
NTN Fantasy Games--Fantasy league games that are played in conjunction with
sporting events or rotisserie leagues. Games include the following:
GAME DESCRIPTION
- ---------------------------- ------------------------------------------------
Brackets(TM) Basketball or hockey tournament prediction game
Dream Team Baseball(TM) Managing a professional all-star baseball team
Football Challenge(TM) Weekly selection of winners of college and
professional football games
Football Fantasy(TM) Managing a professional all-star football team
Hockey Draft(TM) Managing a professional all-star hockey team
Hoops(R) Managing a professional all-star basketball team
Oddsmaker Challenge(TM) Weekly selection of winners of various sporting
events
Interactive Trivia Game Programs. During trivia game programs, each Location
System simultaneously displays selected trivia questions which are displayed on
the NTN television monitor at each Location. Participants use the Playmaker(TM)
to select answers, which are collected, transmitted and tabulated in a similar
manner to NTN's interactive sports games. Participants' scores are displayed on
the dedicated television monitors, along with national, regional and local
rankings, as applicable.
While certain of the Company's sports games are available only during the
seasons when the respective sports are played, the trivia game programs allow
the Company to offer year-round interactive programming. The NTN Network
generally provides the trivia programming during evening hours, when Locations,
particularly restaurants and bars, tend to be busiest. Currently, the Company
broadcasts between 14 and 17 hours of interactive programs per day. The NTN
Network presently features the following interactive trivia games programs:
NTN Premium Trivia Games--Promotion-oriented weekly game shows that generally
require 1-2 hours of participation. Prizes are awarded to the top finishers.
Games include the following:
GAME DESCRIPTION
- ---------------------------- ------------------------------------------------
Passport(TM) Travel oriented game with 3-D animated graphics
Playback(TM) Music trivia
Showdown(R) Advanced trivia challenge
SportsIQ(TM) Weekly sports trivia game
Sports Trivia Challenge(R) Advanced sports trivia covering multiple topics
Spotlight(TM) Entertainment and media based trivia game
(movies, music)
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NTN Trivia Games--General-themed, standard games typically one-half hour in
length. Games include the following:
GAME DESCRIPTION
- ---------------------------- ------------------------------------------------
Brain Buster(R) Interactive trivia game covering esoteric topics
Countdown(R) Interactive trivia game using word plays
Topix(TM) Theme driven trivia game played under controlled timing
Wipeout(TM) Interactive trivia game eliminating incorrect answers
Nightside(R) Adult oriented trivia
Sports Trivia(R) General trivia game covering sports topics
Undercover(R) Trivia/puzzle game
Viewer's Review(R) Audience-supplied content trivia game
Retroactive(TM) Pop-culture trivia with 60's, 70's and 80's content
Football Weekend Roundup(TM) Football trivia game
Custom Games--Interactive games created specifically for media companies such as
Capital Cities/ABC for simultaneous broadcast with their live telecasts.
GAME DESCRIPTION
- ---------------------------- ------------------------------------------------
NTN Awards Show(TM) Interactive game played in conjunction with the
Academy Awards, Grammy Awards and other award
shows
NTN Draft Show(TM) Interactive game played in conjunction with the
annual NFL draft
Reality Check Interactive game played in conjunction with
sports round table television broadcast in
conjunction with Prime Sports
Since 1987, Hospitality has broadcast the NTN Awards Show(TM) to all sites in
connection with the live Academy Awards telecast. The NTN Awards Show(TM)
contains movie trivia and biographical information on nominees and allows
players to predict winners up to the actual announcement and compete with other
players via the Network, in a manner similar to QB1(R).
Information Programming. During the hours in which the Company is not
broadcasting interactive games, the Company uses its broadcast network to
transmit sports information as well as NTN Network programming information. The
Company obtains the majority of its sports information (for which it pays a
monthly fee) from Sports Ticker wire service, electronically formats the
information and then retransmits it for broadcast to Locations.
Advertising. Hospitality operates in a manner similar to the television
broadcast medium in that a number of minutes of a broadcast hour are set aside
for advertising, promotional spots (promoting Hospitality's competitions and
special events), "tune-in spots" (promoting Hospitality's programming schedule),
and public service announcements.
Hospitality has currently set aside fourteen minutes each hour for
advertising, promotional spots and "tune-in spots." Each of the spots are
designed to be fifteen seconds in length for a total of 56 spots per hour.
Hospitality can insert advertising messages into its interactive sports and
trivia programming at any number of Locations. Further, messages can be
broadcast over the Network or custom-tailored for a specific Location or several
Locations.
Hospitality sells advertising in blocks of two-fifteen second ad spots per
hour for a total of fourteen hours per day. Hospitality has innovatively
blended programming content with the advertiser's logo and message. For
example, the Miller Lite Countdown(R) and Cuervo 1800 Countdown(R) Shows provide
30 minutes of commercial exposure to Miller and Cuervo products. Sponsorships
of programs are also available and provide advertisers with specific premium
exposure within a sponsored program.
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Advertisers are also given the opportunity to communicate directly with
Hospitality's Players Plus(R) ("Players Plus(R)") members, numbering over
250,000. Players Plus(R) is a frequent player club which members join by
entering their name, address, zip code and identification number into a
Playmaker(TM), which is then captured at the Broadcast Center. A member earns
points each time they play and also a chance to win prizes in the monthly
Players Plus(R) sweepstakes. Sponsors are capable of receiving feedback through
interaction with customers in the form of customer surveys.
Special Events. The Company provides interactive services to corporate
customers for special events such as trade shows, conventions, major sporting
events, polling, auctions, and corporate training. The NTN Special Event System
is highly portable and adaptable. It can be used in a variety of settings
including convention centers, theaters, conference centers, and major gathering
areas such as arenas and stadiums. Specific programs are tailored to the needs
of the customer for each special event, resulting in an attractive, high-tech
interactive production. The following is a partial list of customers and events
for which the NTN Special Event System was utilized in 1995:
National Football League - The NFL Experience
NFL Hall of Fame - Permanent Display
Major League Baseball - Fanfest
Major League Baseball - Hall of Fame Dinner
National Hockey League - Hockey Hall of Fame
Lexus-Toyota Motor Sales - Car Auctions
National Restaurant Association - Trade Show
Interactive Programming Under Development. The Company is continuing to
develop and market-test other interactive game programs. These include
interactive programming in conjunction with live broadcasts of basketball games
and award shows, as well as additional trivia and stand-alone interactive games.
The Company is also developing interactive games for broadcast with television
game shows, allowing NTN Network viewers to play a televised game show
simultaneously with studio contestants.
International Licensing. NTN continues to expand its international services
though licensing agreements. For many years, NTN has provided service to
customers in Canada through its unaffiliated licensee, NTN Canada. In 1993, NTN
issued a 20-year license to an unaffiliated company in Australia ("NTN
Australasia"), to create the first interactive television network in Australia
and New Zealand. In 1994, NTN issued a license to MultiChoice Ltd., an
unaffiliated company, to develop and operate an interactive broadcast network in
South Africa. Generally, the company licenses operations in foreign countries
by granting the rights to use NTN's exclusive interactive broadcast technology.
NTN provides licensees with technological know-how and assistance to build a
broadcast center, and to develop interactive products and programs.
Home. The Company provides many of the same services and programs as
Hospitality to the home consumer market via Home Interactive Services ("Home").
Home provides multi-player interactive games, which have already garnered brand
recognition via Hospitality, into the consumers' households through personal
computer on-line services and interactive television services. In addition,
Home provides other multi-player interactive games designed expressly for the
home environment. Home offers the games to end users via third party networks
such as America Online, ImagiNation Network, and GTE MainStreet. The Company
receives development fees and monthly broadcast revenues based upon usage and
certain minimum guarantees from these third-party networks. The end-user does
not pay NTN directly, but pays the distributor who is responsible for paying the
Company.
The current focus of home distribution is PC on-line services, such as AOL,
where a substantial customer base already exists. The Company's interactive
sports and trivia games are available on-line 24 hours a day, seven days a week.
The Company distributes games through PC on-line services in return for a share
of the customer revenue in excess of a minimum monthly fee. The end-user
purchases services from a distributor such as AOL who, in turn, pays NTN.
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Most of the interactive sports and trivia games currently broadcast over the
NTN Network into Hospitality locations are available directly to customers in
their homes through a variety of media, including computer on-line services and
ITV networks. Home is a unique content provider since its program is not
dependent upon, and consequently not bound by, any particular technology or
method of transmission. Regardless of which technology emerges as the primary
means of transmission on the "information highway", management believes Home's
programming content will be available to the household.
In addition to the games developed by Hospitality, Home currently offers
three on-line games: Hockey Trivia(TM), Baseball Trivia(TM), and Pigskin
Picks(TM), and four ITV games: Blackjack, Poker, Reversi and Checkers. In
1996, over two million households had access to play QB1(R) during Super Bowl
XXX. Further, the NTN Awards Show(TM) was available to over three million
households which could play along and predict the outcome of the 1996 Academy
Awards telecast.
Home distributes games to on-line and ITV networks, also known as content
distributors. These games, in turn, are made available to their customer base
for a fee. The diagram below depicts the transmissions necessary for a Home
customer to play a Home game.
[VIA CABLE/TELEPHONE FIGURE]
LearnStar. NTN formed and granted to LearnStar the exclusive license for its
proprietary technology for educational applications in the U.S. The LearnStar
teaching system (the "LearnStar System") was developed as a natural extension of
the Network and its Hospitality applications. The LearnStar System is targeted
at schools and teachers who are seeking an educational tool to increase student
interest in learning via interactive competitions in the classroom.
The LearnStar 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 for the NTN
Network, the LearnStar interactive learning system can conduct academic
competitions, collect data for
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surveys and provides local, regional and national testing capabilities. All of
these services can be utilized within a single classroom, at one distinct site,
or at multiple schools throughout the country, all with instantaneous feedback.
Students test their comprehension of material by viewing an academic
competition on a television screen, then answer questions interactively via
hand-held keypads that broadcast signals to and from the LearnStar System. The
questions are posed in a multiple choice format, similar to the nationally
administered Scholastic Aptitude Test. Many competitions feature full-motion
video, colorful graphics and sound. Students work individually or in teams to
answer the questions, with scores and team rankings displayed on the television
screen after each question. The LearnStar System offers flexibility - it can be
utilized as a stand-alone resource, moving on a portable cart from classroom to
classroom for use by the entire school, or the LearnStar System can be linked
via satellite on the NTN Network for live national competitions with schools
throughout the US. Teachers can also develop unique lesson plans by editing the
existing competitions or creating their own customized quizzes to include
current events and to highlight important information.
The LearnStar System includes a dedicated computer control system with
Pentium processor, CD-ROM unit, proprietary software, printer, satellite dish,
receiver, wireless keypad transceiver, classroom keypad pack with charging
trays, and LearnStar component cart. The LearnStar System allows teachers to
customize existing learning materials in the library to match their personal
lesson plans with proprietary editing software that allows the editing of
existing competitions, or creation of new competitions, utilizing either a PC or
Macintosh platform.
The multimedia, interactive LearnStar software features over 1,000 academic
competitions in 16 subject areas written by experienced educators, instructional
designers and software programmers. LearnStar academic competitions are
carefully written according to state guidelines, national standards, relevant
topics and age appropriateness.
IWN. IWN, a partially owned subsidiary of NTN, was established in 1993 to
develop, distribute and market interactive and transaction processing services
for the gaming wagering industry. IWN is a general partner in IWN L.P. which
has been granted the exclusive worldwide license for all existing and future
software and technology related to gaming applications. IWN, L.P. will continue
to develop its products and services for eventual mass marketing.
Initially, IWN focused on the domestic pari-mutuel market as the point of
entry due to the enabling legislation that already exists in several states.
This legislation currently allows racing fans to establish and fund an account
at the racetrack, and call in via telephone to either a live operator or an
interactive voice response unit to place their wager. New York and Connecticut
presently allow non-residents to establish accounts and place interstate
telephone wagers. Ohio and Pennsylvania are considering allowing non-resident
accounts and interstate telephone wagering.
IWN's first product, HomeStretch(TM), turns a personal computer into a
gateway for pari-mutuel wagering. The Windows 95-based product will allow
players to establish and fund an account at the racetrack, review race
information, and create wagers. Using a modem, the player will connect to IWN's
Gaming Host System, located in Carlsbad, California, which upon completion will
provide connectivity to the racetrack system, funds transfer system, and
information providers. The Gaming Host System will be an on-line transaction
processing engine that will provide the security, administration, financial
transaction processing services and switching capabilities necessary to support
interactive gaming and wagering from the home or virtually anywhere.
New World. New World was acquired in 1993 to broaden the Company's game
portfolio and to develop new platforms beyond TV to cable, satellite and
wireless networks. New World is an internationally recognized designer,
developer and publisher of interactive computer games, currently offering games
in CD-ROM and floppy disk formats. Since its inception, New World has published
over 30 titles for DOS, Windows and Macintosh applications in CD-ROM and floppy
disk formats emphasizing sequel-based fantasy role playing games. New World
primarily publishes games, most of which are developed under contract by
independent producers concentrating on original games.
12
MARKETING AND EXPANSION STRATEGY
Hospitality. Hospitality markets its services to customers primarily through
advertising in national trade periodicals, national and regional industry trade
shows, telemarketing, direct mail and direct contact through the field
representatives. All sales prospects are organized and tracked through
Hospitality's distributed database software. Hospitality utilizes a full-time
telemarketing staff to set appointments for field representatives, pursue trade
show and magazine inquiries and accommodate in-bound sales calls. The
telemarketing staff plans, organizes and implements the direct mail program and
the subsequent follow-up strategy. This staff also telemarkets to prospects
generated from industry lists acquired by hospitality. Currently Hospitality
sells its services through its two-person management team and utilizes direct
salespersons as well as over 30 independent representatives. The
representatives' agreements are typically three-year agreements, subject to
earlier termination by the Company in the event the representative does not meet
certain performance goals. Customers generally execute a renewable one-year
contract to obtain the Company's services and pay a monthly fee of approximately
$600.
The Company's future business strategy related to Hospitality is to continue
to increase available programming for the NTN Network and market the NTN Network
to additional group viewing Locations. In addition, the Company intends to
develop additional revenue sources for the NTN Network such as advertising, and
increase its special event services to other types of businesses. No assurance
can be given as to whether the Company will be successful in the implementation
of its business strategy.
Home. Since the end-user is technically the distributor's customer, Home
relies on the distributor's marketing efforts to promote its products. However,
home works in conjunction with distributors to develop the promotions and
advertisements. For example, AOL may include the Company's game logo on an
initial "start-up" screen which millions of its subscribers can access at no
expense to NTN. Furthermore, Home supplies distributors such as GTE MainStreet
with existing marketing materials used by Hospitality, but GTE MainStreet
absorbs the majority of the cost associated with promoting Home's games to GTE
MainStreet customers. The company has long-term agreements with its customers
to provide its services and products. Home's customers generally pay the
company a fee based on the amount of time that consumers have participated with
Home's games and services.
In the future, Home expects its products to elicit more exposure from the
distributors as a result of increased brand recognition and continued
promotions. Home will continue to take a proactive position with respect to
marketing products to each distributor to ensure inclusion in as many of their
promotional efforts as possible. Home expects its direct marketing costs to
continue to be minimal. No assurance can be given as to whether the Company
will be successful in the implementation of its business strategy.
LearnStar. To date, LearnStar has utilized a direct sales force to target
individual schools. In the future, management plans to increase the marketing
effort by targeting inner-city school districts, the nationwide Catholic
archdiocese school system and others. LearnStar is seeking sponsorship from
public and private foundations as well as funding from federal, state and local
government agencies. LearnStar derives its revenues from selling the LearnStar
system and a site license to its customers. Current prices for the LearnStar
system range from $18,000 to $23,000 dependent upon volume and other factors.
LearnStar also is pursuing corporate sponsorship, whereby corporations will
finance the costs of an academic competition in return for promotional
consideration. Marketing and sales efforts are focused on large population
centers in states with funds designated specifically for technology in
education. Sales efforts are currently underway in Mississippi, Georgia, North
Carolina, Pennsylvania, Ohio, Missouri, Illinois and Michigan. No assurance can
be given as to whether the Company will be successful in the implementation of
its business strategy.
IWN. IWN's marketing strategy is to promote the acceptance of interactive
applications to existing gaming and wagering enthusiasts, on-line services users
and interactive television participants. IWN's marketing strategy for
HomeStretch(TM) in the interactive pari-mutuel wagering market, is to target
both the racing organization and the
13
racing end-user. The development of this business will depend on the adoption of
enabling legislation in many states and countries. Utilizing database marketing,
IWN will initially target racing fans who currently use computers for
handicapping. This group has been identified as "early adopters". IWN intends to
expand the market to include on-line services users and other demographic groups
which are comfortable with technology and have an interest in sports. IWN will
seek to utilize resources from both the Hospitality and Home businesses to
generate potential customer lists. Targeted direct mail, on-line advertising and
telemarketing will all be utilized to promote the IWN services. IWN will
generate revenue through fees charged to process data including wagers and
switching and transfer services.
Promotion to the racing industry will be through trade shows and direct
sales. IWN's management team has over twenty-five years of combined experience
marketing services to the gaming and wagering industry. IWN has a relationship
with Autotote Corporation, a public company which processes approximately 75% of
the pari-mutuel handle in the U.S. and which is the exclusive licensee for
operating off-track betting establishments for the State of Connecticut. In
addition, IWN has a relationship with the Ontario Jockey Club, Canada's premier
racing organization, with plans to develop an interactive wagering system for
the Canadian market. Implementation is expected in the third quarter of 1996.
No assurance can be given as to whether the Company will be successful in the
implementation of its business strategy.
New World. Since its inception, New World has published over 30 titles for
DOS, Windows and Macintosh applications in CD-ROM and floppy disk formats
focusing on sequel-based fantasy role playing games ("RPGS"). New World
primarily publishes games, most of which are developed under contract by
independent producers, but also has an internal core group of professionals to
support developers and to produce a selected number of titles in-house. New
World focuses on bringing original games to market rather than paying premiums
to license TV or movie titles from outside parties as do many of its
competitors. The product development cycle normally takes between 12 and 18
months from concept to production. A large percentage of sales occur in the
last four months of the year during the peak Christmas holiday sales season.
The Company's current list of PC based, CD-ROM and entertainment center-based
game Products consists of the following:
Fantasy Games
-------------
Might and Magic I & II Combo
Might and Magic III, Isles of Terra
Might and Magic: Clouds of Xeen
Might and Magic: Darkside of Xeen
Might and Magic: World of Xeen
Heroes of Might and Magic
Might and Magic: Trilogy
Adventure/Strategy Games
-------------------------
Spaceward Ho!
Spaceward Ho! IV
Empire Deluxe
Empire Deluxe: The Scenarios.
Empire II
Iron Cross
Hammer of the Gods
Inherit the Earth
Zephyr
Wetlands
14
Entertainment Games
-------------------
Joe & Mac: Caveman Ninja
Vegas Games
More Vegas Games
Celebrity Poker
Mind Games
Family Card Games
Productivity/Connectivity Software
----------------------------------
MacIntercomm Lite
New World is involved solely in the software aspect of the computer and video
game industry. It is not involved in the manufacturing or sales/distribution of
computer hardware other than in the form of licensing and bundling Products with
hardware manufacturers. The Company's Products are sold through mass merchants
or retailers and subsequently installed directly onto the consumer's computer.
Technical support for questions relating to video game software is provided
to the consumer free of charge. In addition, consumers have access to the 24-
hour bulletin board system for video game hints and updates. To eliminate
technical problems, the Company employs several full-time quality control
personnel who conduct tests on the various aspects of each Product.
Advertising for computer games and video game software incorporates both
traditional and non-traditional media placements. Traditional media include
magazines, trade journals, direct mail, telemarketing and newspaper advertising.
Non-traditional media include on-line marketing (including the Internet),
encrypted CD-ROM marketing and trade show promotions. New World also utilizes
cooperative advertising in conjunction with retailers in order to capture end-
caps and shelf space. New World currently advertises in leading industry
publications such as Computer Gaming World, Computer Game Review, PC Go, PC Data
and PC News. New releases are promoted through advertisements as well as
reviews in these publications. Retail prices for New World games range from
$19.95 to $59.95.
New World distributes directly to its largest 50 customers through a three
person sales force that covers both domestic and international markets. All
other sales are made through distributors. Distributors are paid a 5%
commission for every title sold. The majority of sales are made by software
specialty retailers including Egghead, Electronics Boutique and Software Etc.
New World products are also distributed through computer superstores (CompUSA,
Computer City), warehouse clubs (Price/Costco, Sam's) and consumer electronics
retailers (Circuit City, Best Buy and Good Guys!).
New World software is also distributed through mail order catalogs such as
Mac/Micro Warehouse and PC MacConnection. New World recently expanded
distribution capabilities in Europe by entering into an arrangement with an
independent company to produce, market and distribute New World's products for
which it will receive royalties. As a result of this and other pending
arrangements, New World does not employ any sales representatives in foreign
countries.
New World's future business strategy related to the software development and
distribution segment, is to produce the highest quality, most entertaining
Products in the marketplace, and to expand its distribution, both domestically
and internationally. In this regard, New World intends to increase its product
line and release additional Products in 1996 and actively pursue publishing its
own video games on additional technical platforms including SONY Playstation
systems and SEGA Genesis systems. New World will also seek out further
opportunities to publish and distribute products developed by others, and other
development avenues. In furtherance of its business strategy, New World plans
to continue to research the needs of the consumer, develop innovative
technology, improve and enhance game design, graphics, sound and musical effects
and expand its
15
story lines. No assurance can be given as to whether the Company will be
successful in the implementation of its business strategy.
SOURCES OF REVENUE
The following table sets forth information with respect to the principal
sources of the Company's revenues during the years ended December 31, 1995, 1994
and 1993.
YEARS ENDED
DECEMBER 31
--------------------------------------
1995 1994 1993
----------- ----------- ----------
Distribution revenue - Domestic......... $16,411,000 $11,584,000 $6,198,000
Distribution revenue - Foreign.......... 896,000 660,000 580,000
Equipment sales - Domestic.............. 6,073,000 3,958,000 3,281,000
Equipment sales - Foreign............... 711,000 429,000 689,000
Licensing - Domestic.................. 672,000 1,083,000 0
Licensing - Foreign................... 1,495,000 851,000 802,000
Product sales - Domestic................ 3,884,000 5,052,000 5,468,000
Product sales - Foreign................. 0 211,000 0
Other................................... 1,629,000 818,000 240,000
Distribution Revenue. The primary market for the NTN Network has been the
Hospitality market comprised of approximately 330,000 bars and restaurants in
North America, but potential Locations may also be found among approximately
30,000 hotels, 800 military bases, 3,000 college campuses, 24,000 hospitals, and
100,000 other group viewing Locations such as country clubs, fraternal
organizations, and bowling centers.
To date, the NTN Network customers have generally been bars and lounges,
principally in hotels and restaurants. Many of the Company's Locations have
multiple sites such as hotel and restaurant chains. Locations generally enter
into a one-year broadcast service agreement with the Company pursuant to which
they pay a monthly broadcast fee of approximately $600 per Location. The
Company currently serves over 3,000 Locations located in all 50 States and in
Canada. Fees from distribution services account for approximately 50% of the
Company's revenue.
Through Home, the Company also provides its services to on-line users and ITV
services pursuant to the agreements with various system providers such as AOL,
GEnie, GTE and Imagination Network. The on-line computer industry is one of the
fastest growing consumer markets in terms of subscribers. Industry analysts
project that by 1999 more than 100 million consumers will be connected to on-
line computer services. Distribution fees from on-line services and ITV services
are based on the actual use of the NTN interactive programs by their underlying
customers. Revenues from these services were $690,000 in 1995.
In 1986, the Company entered into a license with NTN Canada (the "Canadian
License"), pursuant to which NTN Canada solicits Locations to the NTN Network in
Canada. Under the Canadian License, the Company broadcasts NTN Network programs
to Canadian Locations in exchange for an annual license fee payable in monthly
installments based upon the number of Locations in Canada, which presently
number approximately 450.
The Canadian License also grants NTN Canada the exclusive right to market NTN
interactive services to cable/on-line viewers in Canada. The Company is
entitled to receive a royalty equal to 25% of revenues generated from Canadian
home customers. There are as yet no cable/on-line customers in Canada, and no
assurance can be given that any such royalties will be received by the Company.
Equipment Sales. Equipment sales of Location Systems and LearnStar Systems
is a major source of revenue for the Company. Typically, Location Systems are
sold to leasing companies under sale and leaseback agreements,
16
and provided by the Company to Locations. The Company also sells interactive
equipment, particularly Playmakers(TM), to its licensees in Canada, Australia,
New Zealand and South Africa. LearnStar Systems are sold to schools and other
education providers. Equipment is generally sold to customers with no return
rights except in the case of defect.
Licensing of Technology. NTN has entered into license agreements with
unaffiliated companies in Australia/New Zealand and South Africa. Those license
agreements provide for the Company to assist licensees in establishing a
broadcast network, and for the company to receive a flat license fee. In
addition, a monthly fee based upon the number of Playmakers(TM) in use plus a
percentage of gross advertising revenue is earned by NTN. The Australia/New
Zealand licensee commenced operation of a broadcast network in 1993. The South
Africa licensee began operation of its broadcast center in 1995. In 1994 and
1995, IWN licensed IWN L.P., an affiliated unconsolidated limited partnership,
for worldwide rights to its interactive gaming technology. No assurances can be
given that any significant revenues to the Company will result from future
licensing activities.
Product Sales of Video Game Software. A majority of the Company's software
sales are through software specialty retailers, including Egghead, Electronics
Boutique, Software Etc., and Babbages. The Company has entered into
distribution arrangements with distributors who supply retailers.
The Company distributes its Products to computer superstores, such as
CompUSA, Computer City, Micro Center, Fry's Electronics and Future Shop
(Canada); warehouse clubs, such as Price/Cost Co., Inc. and Sam's; consumer
electronics retailers such as Best Buy, Inc. and Circuit City and mail order
catalogues, including Mac/Micro Warehouse, PC MacConnection, MAC Zones and
Multiple Zones. Additional orders are obtained through direct mail campaigns
through the Company's 800-sales line and product catalogues included in every
product box.
North American sales accounted for nearly all of video game Product sales for
the year ended December 31, 1995. The Company's video games are distributed in
Japan and other Asian countries through independent retailers and distributors
and in the United Kingdom, Europe and Asia by means of independent distributors
through license agreements.
RAW MATERIALS
For media platforms such as cable and on-line services, the Company
distributes its programs to the recipients who maintain their own receiving,
translation and re-broadcasting equipment. Accordingly, the Company has no raw
materials or equipment needs for these customers. For media platforms such as
the NTN Network and LearnStar applications, the System is assembled from off-
the-shelf components available from a variety of sources, except for the
Playmaker(TM) package. The Company installs and maintains service of the
Location Systems and LearnStar Systems. The Playmaker(TM) package is currently
manufactured to the Company's specifications by a non-affiliated manufacturer in
Taiwan. The Company believes that there are numerous other manufacturers who
could supply Playmakers(TM), although no assurances can be given that, if
necessary, such alternative sources could be secured at commercially reasonable
costs and without undue delay.
Computer and video game Products are manufactured by third-party fulfillment
houses using printed and pre-packaged materials, computer disks and compact
discs (CD's). These materials are readily available from a variety of sources
and the Company is not dependent on any one source for materials.
LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
The Company's sports games make use of simultaneous telecasts of sporting
events. The promoters of such events take the position that the use of
simultaneous telecasts requires express permission from the owners of the
pertinent rights. In addition, the Company believes that a license is required
to utilize the trademarks and logos of national teams and leagues in connection
with the playing of an interactive game.
17
The Company is party to an exclusive license from the NFL, which grants the
Company the exclusive right to use the trademarks and service marks of the NFL
in connection with the playing and marketing of QB1(R). The NFL license grants
the Company the exclusive data broadcast rights to conduct interactive games in
conjunction with the broadcast of NFL football games, for which the NFL receives
a royalty based on revenues billed by the Company in connection with QB1(R)
play. The agreement with the NFL had an initial term of five years which
expired in 1995. The Company's exclusive agreement with the NFL was extended
for two years and the parties are presently engaged in negotiations with respect
to their future relationship. There can be no guarantee that the Company will
be able to renew the license in the future. Further, it is uncertain as to
whether the Company's failure to renew the license will have a material adverse
effect on the Company.
In 1994, the Company entered into a three-year exclusive contract with the
Canadian Football League ("CFL") granting the Company the exclusive rights to
the simulcast of data accounts of the events occurring at CFL games, for which
the Company paid a royalty fee to the CFL. The license also includes the
exclusive right to use the CFL trademarks and logos for an interactive game in
connection with the playing and marketing of QB1(R).
The Company currently has non-exclusive licenses from Major League Baseball
and the National Hockey League to use live broadcasts of their respective games
in conjunction with broadcasts of "NTN DiamondBall(R)" and "NTN PowerPlay(R)" in
Canada. The Company does not possess such licenses with respect to the United
States and other territories. The Company may ultimately seek United States
licenses for "NTN DiamondBall(R)" and/or "NTN PowerPlay(R)", though under the
circumstances, no assurances can be given that the Company will be able to
secure such new licenses given the current moratorium, nor is it certain that
the Company will be able to secure new licenses on satisfactory terms.
No action has been brought against the Company by the owners of the
applicable rights with respect to any of the Company's broadcasts of interactive
games in conjunction with live sports events.
In connection with a settlement of a lawsuit that the Company brought in 1986
to challenge the validity of Interactive Network ("IN")'s US Patent, the Company
entered into an agreement with IN in 1987 to take a license under that Patent
which grants the Company an irrevocable, worldwide, royalty-free license for
QB1(R) such that IN cannot challenge QB1(R) as played on the NTN Network based
upon a claim of patent infringement. Non-live events in the United States, such
as the Company's popular trivia games, do not utilize IN's US Patent. In
addition, any of the Company's programming, as played on any of the on-line
services, similarly do not utilize the IN/US Patent. IN also holds the
IN/Canada Patent, issued in October, 1990, which, but for one additional claim,
is identical to the IN/US Patent. Since the issuance of the IN/Canada Patent,
the Company filed an action in Canada for a declaration that the Company's
operations in Canada do not infringe the IN/Canada Patent. In response, IN
instituted its own lawsuit in Canada seeking a declaration of infringement. The
existence of IN's claim against the Company has not precluded the Company from
broadcasting in Canada. In the event that it is determined that the Company's
programs do utilize the IN/Canada Patent, the Company could be required to pay
royalties for such programming, with the exception of QB1(R), for which the
Company has an irrevocable, worldwide and royalty-free license. Alternatively,
the Company can reconfigure the systems by which it distributes, stores,
processes or collects data to and from Canadian Locations in the course of its
interactive broadcasts at an insignificant cost. See "Legal Proceedings".
The Company keeps confidential as trade secrets the software used in the
production of its programs. The hardware used in the Company's operations is
virtually off-the-shelf, except for the Playmaker(TM) keypads. The Company owns
copyrights to all of its NTN Network programming. In addition to the
registration of the trademark for QB1(R), the Company has either received, or is
presently applying for, trademark protection for the names of its other
proprietary programming, to the extent that trademark protection is available
for same.
During 1994, the Company commenced a program directed to the protection of
its intellectual property assets. As part of this program, the Company
presently has two patents pending for an Interactive Learning System and
Automated System for Conducting Auctions with Participants in Remote Locations.
18
The Company has licensed certain of its out-of-print titles to others for
inclusion in packages along with other software titles on a domestic basis. The
Company also licenses out-of-print and current titles to publishers throughout
Europe and Asia. No assurance can be given that the Company will continue to
generate significant revenues from its out-of-print titles, domestically or
internationally.
"New World Computing, Inc." and its logo are registered trademarks of New
World, Inc., a wholly owned subsidiary of NTN. "LearnStar" and its logo are
registered trademarks of LearnStar, Inc. a partially owned subsidiary of NTN.
"IWN" and its logo are registered trademarks of IWN, Inc., a partially-owned
subsidiary of NTN. The Company actively trademarks and copyrights all of its
proprietary software, game titles, game logos and software tools.
SEASONAL BUSINESS
Overall, the Company's business is not generally seasonal. However, sales of
new Locations have traditionally been higher in the Summer and early Fall months
compared to the rest of the year. Revenue from Interactive Television and
Entertainment services is billed monthly based on broadcast and production
services as provided to customers. Sales of LearnStar Systems occurred for the
first time in 1995, but management believes that sales will be higher in the
early part of the year and at the traditional beginning of school in September
with little or no activity during the Summer break period. Sales of video game
Products have been more heavily weighted in the late third quarter and fourth
quarter for the past few years but can fluctuate based on the timing of the
release of new Products.
WORKING CAPITAL
The discussion under "Liquidity and Capital Resources" included in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, is incorporated herein by reference.
SIGNIFICANT CUSTOMERS
The Company's customers are diverse and varied in size as well as location.
The distribution services are provided point to multi-point so that the Company
is not dependent on any one, or a few customers. The Company does not have any
individual customers who accounted for 10% or more of its consolidated revenues
in 1995, 1994 or 1993.
BACKLOG
The Company generally does not have a significant backlog at any time because
the Company normally can deliver and install new Location Systems within the
delivery schedule requested by customers (generally within two weeks) related to
the NTN Network, with a similar delivery and installation pattern for the
LearnStar System. At December 31, 1995, the Company had a backlog of
uninstalled Location Systems of approximately 100 new Locations which were
installed in January and February, 1996. For other distribution platforms,
there is no backlog because services are generally distributed point to multi-
point and the Company does not have to provide specific equipment to the
customer, making it relatively simple to add new customers.
Products provided to retail outlets are not backlogged since the selling
season for any given video product is generally limited and production time to
create any additionally needed copies is very short. The Company uses a number
of fulfillment houses to duplicate disks and CD-ROM's.
19
GOVERNMENT CONTRACTS
The Company provides its distribution services to a small number of
government agencies (usually military base recreation units), however the number
of government customers is small compared to the overall customer base.
Contracts with government agencies are provided under the same terms and
conditions as other corporate customers and are not subject to renegotiation at
the election of the government agency.
COMPETITIVE CONDITIONS
The Interactive Entertainment industry is in its formative stage, but
currently may be divided into three major segments: (1) media distribution
services such as on-line services, telephone companies and cable television
companies and Hospitality's NTN Network; (2) equipment providers such as
computer and peripheral equipment manufacturers; and (3) content and programming
providers, such as movie studios, NTN, and software publishers. The Company does
not act as a direct provider of equipment to consumers. The Company operates as
a media distribution service through its own NTN Network. Also, the Company is
a program provider to an array of other media distribution services to consumers
utilizing a variety of equipment.
NTN has a growing number of competitors in the programming segment of the
Interactive Entertainment industry. The Company's programming content is not
dependent upon, and consequently not bound by, any particular technology or
method of distribution to the consumer. The Company's programming is,
therefore, readily available to consumers on a wide variety of entertainment and
media services including: the NTN Network; on-line services including America
Online, GEnie, and The ImagiNation Network; and cable television, including GTE
MainStreet, which is available to households in certain regions.
The Interactive Television industry is still in its infancy. Few companies
have developed the technological capabilities to broadcast Interactive
Entertainment to large audiences that can compare to the nature and scope of
programming broadcast on the NTN Network. Although few companies, if any, have
products or services identical to those provided by NTN, the Company does
compete with other companies for total entertainment dollars in the marketplace.
The Company's programming competes generally with broadcast television, pay-per-
view, and other content offered on cable television. On other mediums, the
Company competes with other content and services available to the consumer
through on-line services. The Company's programming is interactive in nature
but is distinguished from other forms of interactive programming by its
simultaneous multi-player format and the two-way interactive features.
Presently, the technological capabilities of transmitting entertainment products
to the consumer exceed the supply of quality programming and services available
on the existing delivery systems. The Company is able to utilize the wide
variety of services available for transmission of entertainment products to the
consumer by forming strategic alliances with service providers to supply the
Company's programs for re-transmission. The Company's programming thus becomes
available to the consumer over a multitude of media platforms and delivery
systems.
Hospitality. Currently, Hospitality has no competitors that furnish live,
multi-player interactive entertainment in a similar scope and nature as provided
by Hospitality. Although Hospitality has no direct competitors, it does compete
for total entertainment dollars in the marketplace. Other forms of
entertainment provided in public eating and drinking establishments include
music-based systems and cable and pay-per-view television. However, evidence
provided by customers indicates that patrons are inclined to stay longer and
consume more food and drink when Hospitality's interactive games are offered as
the main source of entertainment. Accordingly, Hospitality customers generally
tend to view Hospitality services as a profit generator rather than a cost
center.
Home. In Home's market, the consumer has a plethora of entertainment options
from which to choose, ranging from cable television to telephone based services
to computer on-line providers. Home offers the only live, multi-player games and
services which are broadcast to multiple interactive platforms in the home
today. However, Home competes for a share of the total home entertainment
dollars against broadcast television, pay-per-view and other content offered on
cable television. Home also competes with other programming available to
20
consumers through on-line services such as AOL and Prodigy. Cable television,
in its various forms, provides consumers the opportunity to make viewing
selections from anywhere between 30 to 100 free and pay channels, thus limiting
the amount of time devoted to any particular channel. For the most part, cable
television is predominantly a passive medium, and does not offer the viewer the
opportunity to participate in its programming, and even less frequently, does it
offer programming designed for active participation. On-line services, such as
AOL, can provide literally thousands of options for content and entertainment,
however, such on-line services have traditionally been confined to that
company's subscriber base. Interaction among viewers is thus limited to the
particular program as offered only on the specific on-line service. The
Company, on the other hand, offers consumers the opportunity to participate and
compete against other viewers who are seeing the identical program over several
different technological media, including interactive television, personal
computers and/or the NTN network.
LearnStar. Products and services to education customers utilizing the
LearnStar System were sold beginning in 1995. The Company competes with some
established businesses which offer educational products, however, the majority
of existing products in the marketplace are passive, rather than interactive.
Such companies include Jostens' Learning, C.C.C. and the Eduquest Division of
IBM. The competitive advantage of the LearnStar System is that it provides an
easy to use, two-way interactive learning method, is very competitively priced
and requires less equipment than traditional systems. Moreover, the LearnStar
System is adaptable to the particular needs of the individual users and is
designed such that it can be used for local, regional, and national competitions
on a mass basis utilizing existing satellite technology. Although the market
for providing learning services to schools is mature, the company believes that
the market for advanced educational products which use computers, interactive
software and satellite technology is embryonic.
IWN. The U.S. gaming industry is growing at a rapid pace. In 1994,
Americans wagered over $400 billion on legal commercial gaming compared to $126
billion in 1982. A 1995 survey showed that 61% of American adults wagered in
one or more types of government-approved gambling last year. In 1994, the total
handle for pari-mutuel was $16.6 billion, of which $10.2 billion was horse
racing. In comparison, $5.8 billion was spent at the cinema and $5.7 billion
was spent on spectator sports.
One of the reasons for the growth in gaming has been the favorable regulatory
and legislative environment. Many states have accepted gaming as a means to
raise tax revenue and encourage economic development. There are approximately
200-250 pari-mutuel facilities in the U.S., and seven states have legalized
account-based telephone wagering, including New York and Connecticut, which
allow interstate telephone wagering.
Pari-mutuel wagering is the fourth largest segment in the gaming industry.
Analysts estimate that in 1994 approximately $10.2 billion was wagered on U.S.
thoroughbred horse racing, compared with $9.6 billion in 1993.
While the overall growth of the pari-mutuel handle has been stagnant over the
last five years, particularly when compared to the significant growth in the
overall gaming industry, the shift from on-track wagering to off-track betting
is an important trend. With the total U.S. thoroughbred horse racing handle in
the $10 billion range, off-track betting increased from $2.2 billion in 1987 to
$4.5 billion in 1992 to $6.1 billion in 1994. Off-track betting is allowed in
20 of the 40 states where pari-mutuel wagering is legal and is an increasingly
important source of revenue for racetracks and state governments. IWN's
HomeStretch(TM) product is intended to leverage the trend to off-track wagering
by allowing fans to place wagers from virtually anywhere to their account at the
racetrack.
IWN will eventually compete for total entertainment dollars in the market
place. Within the gaming and wagering industry, competition for the pari-mutuel
wagering dollar comes from expanded alternative gaming opportunities. Outside
the industry, pari-mutuel wagering competes with all forms of entertainment
vying for consumer spending dollars. Potential competitors in the interactive
pari-mutuel wagering and gaming market include:
21
COMPANY DESCRIPTION
- ---------------------------- ------------------------------------------------
On Demand Services Originally part of United Video. Developed a
proprietary set-top box to deliver interactive
television racing and wagering.
Simulcast Racing Network Plans to broadcast a pay-per-view racing channel
with interactive wagering.
Gaming and Entertainment Plans to offer the hotel and sports bar markets
Television closed circuit pay-per-view and sports fantasy
leagues with participant wagering.
New World. The video game and entertainment software industry is very
competitive. Competitive factors include access to licenses, brand name
recognition, product features and quality, access to distribution channels and
price. New World competes with other developers of PC and video game
entertainment software. Competitors vary in size from small companies with
limited resources to very large companies such as Microsoft, Broderbund Software
and Electronic Arts.
The industry has evolved into a very large and fragmented market in which New
World is a small competitor. Most of the industry leaders produce CD-ROM titles
and most have greater financial and marketing capabilities than New World.
However, the market is still relatively young, especially for CD-ROM technology,
and is likely to continue to grow rapidly as PC's increase their household
penetration.
With the entrance of motion picture, cable and TV companies, competition in
the Interactive Entertainment and multimedia industries will likely intensify in
the future. Moreover, new technologies, such as on-line networks and the
Internet, provide computer users an alternative to video games and entertainment
software, but also offer companies like New World an opportunity to deliver
product via new media. The Company seeks to compete by providing high quality
products at reasonable prices, thereby establishing a favorable reputation among
frequent buyers, thus providing repeat sales on sequels and other products
manufactured and/or distributed by the Company. Many companies compete in the
arena due to the relative ease of production and distribution of the products,
but no one company dominates or has a market share in excess of ten percent
(10%).
RESEARCH AND DEVELOPMENT
During the three years ended December 31, 1995, the Company expended
$1,471,000, $1,972,000, and $1,073,000 respectively, on Company-sponsored
research and development projects, including projects performed by consultants
for the Company.
The Company is currently engaged in the development of enhancements to its
interactive software for several media platforms and continues its research into
new and enhanced graphics of software for video game products. There is no
assurance that the Company will successfully complete current or planned
development projects or will do so within the time parameters and budgets
established by the Company, and there is no assurance that a market will develop
for any product successfully developed.
The Company works closely with independent user groups in an attempt to
develop enhancements and new services and products in response to customer
needs.
GOVERNMENT REGULATIONS
Compliance with federal, state and local laws have not had a material effect
upon the Company's capital expenditures, earnings or competitive position to
date. The Company does not anticipate that it will have to incur any material
expenses in the future in order to comply with federal, state or local laws
because of the nature of its current services and products. Gaming laws in many
states currently restrict the ability of individuals to place wagers off-site
from a regulated wagering facility. The ability of IWN to carry out its
business objective will be dependent upon enabling legislation in states and
other countries.
22
EMPLOYEES
The Company and its subsidiaries employ approximately 215 people on a full-
time basis and 60 people on a part-time basis, and utilizes independent
contractors on a project basis. In addition, NTN retains a number of non-
affiliated programming and systems consultants. It is expected that as the
Company expands, additional employees and consultants will be required. The
Company believes that its present employees and consultants have the technical
knowledge necessary for the operation of the Company and that it will experience
no particular difficulties in engaging additional personnel with the necessary
technical skills when required. None of the Company's employees are represented
by a union and the Company believes its employee relations are satisfactory.
ITEM 2. PROPERTIES.
-----------
The Company has a membership in a limited liability company that owns "The
Campus", the three-building complex that houses the Company's headquarters.
The Company has a six-year lease for approximately 39,000 square feet of office
and warehouse space, at a rent of approximately $23,000 per month. The Company
also leases approximately 10,000 square feet of space under a lease that runs
through September, 1998, at a rent of approximately $15,000 per month. The
Company does not anticipate leasing additional space in the next year.
The Company maintains its offices for its computer and video software
division (New World) at 29800 Agoura Road, Suite 200, Agoura Hills, California.
The Company leases approximately 12,000 square feet of office space, under a
lease that runs through March, 1999, at a rent of approximately $10,000 per
month.
ITEM 3. LEGAL PROCEEDINGS.
------------------
1. NTN Communications, Inc. vs. Interactive Network, United States District
------------------------------------------------
Court for the Northern District of California, filed June 11, 1992 and related
award of attorneys' fees.
2. NTN Communications, Inc. vs. Interactive Network, filed in the Superior
------------------------------------------------
Court for the County of Santa Clara, California, on April 28, 1993.
3. Interactive Network vs. NTN Communications, Inc., filed in the Superior
------------------------------------------------
Court for the County of Santa Clara, California, on February 28, 1994.
4. NTN Communications, Inc., NTN Sports, Inc. and NTN Canada, Inc. vs.
-------------------------------------------------------------------
David Lockton and Interactive Network, Inc., filed in the Federal Court of
- -------------------------------------------
Canada, Trial Division, on June 12, 1992.
5. Interactive Network vs. NTN Communications, Inc., NTN Sports, Inc. and
----------------------------------------------------------------------
NTN Canada, filed in the Federal Court of Canada, Trial Division, on June 18,
- ----------
1992.
All litigation between the Company and Interactive Network has been
suspended pending substantive discussions regarding a global resolution of all
disputes.
The Company is also defending litigation filed by various shareholders of
the Company. The case, originally filed in June, 1993, in the United States
District Court for the Southern District of California (San Diego), is a
consolidation of four lawsuits seeking class action status to recover
unspecified damages for a drop in the market price of the Company's common stock
following an announcement that an anticipated agreement under which the Company
would sell certain equipment and services to an arm of the Mexican government
may be put out for bid. Whereas the Company has vigorously defended this
litigation and believes, in part, based upon the opinion of outside counsel, in
the merits of its defense, the Company has entered into substantive negotiations
to resolve this matter out-of-court to avoid costly and protracted litigation,
in the best interests of its shareholders. A
23
preliminary framework for such a resolution has been reached, however, any
proposed settlement between the parties will be subject to notification to each
of the class members and final court approval.
On April 18, 1995, a class action lawsuit was filed in the United States
District Court for the Southern District of California (San Diego). The lawsuit
seeks unspecified damages and alleges violations of securities laws based upon
the Company's projections for the fourth quarter of 1994 and for fiscal year
1994, and further alleges that certain insiders sold stock on information not
generally known to the public. The Company has denied liability based upon the
allegations contained in the Complaint which does not contain any statement or
demand for a specific amount of damages. Much discovery has been undertaken
and, at this time, the Company intends to continue to vigorously contest the
matter.
On July 3, 1995, a single shareholder filed a separate lawsuit in Texas
containing allegations essentially identical to those raised in the shareholder
lawsuit filed in April, 1995. The Company denies the allegations in the
complaint and has filed its own counterclaim against third parties for
indemnification. Upon the Company's motion, this case has been transferred from
Texas to California, where no action has been taken since the date of transfer.
There can be no assurance that any or all of the preceding actions will be
decided in favor of the Company. The Company believes, based in part on the
advice of outside, independent counsel, that the costs of defending and
prosecuting these actions will not have a material adverse effect on the
Company's financial position or results of operations and that any adverse
outcome of the litigation involving IN also will not result in a material
adverse effect on the Company's financial position or results of operation, or
the Company's position in the interactive industry.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
-------------------------------------------------
No matters were submitted to a vote of security holders through the
solicitations of proxies or otherwise during the fourth quarter of the fiscal
year ended December 31, 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS.
--------
The Company's Common Stock is listed on the American Stock Exchange, under
the symbol "NTN." The prices below are the high and low sales prices for the
Common Stock reported by the American Stock Exchange for the two most recent
fiscal years.
1995 LOW HIGH
- ----------------- --------- ----------
First Quarter $5 - 5/8 $8 - 1/4
Second Quarter 4 - 7/16 5 - 13/16
Third Quarter 4 - 3/8 6 - 1/8
Fourth Quarter 4 - 1/8 5 - 3/16
1994 LOW HIGH
- ----------------- --------- ----------
First Quarter $6 - 00 $10 - 1/8
Second Quarter 4 - 5/8 7 - 1/2
Third Quarter 6 - 3/8 8 - 1/2
Fourth Quarter 5 - 3/4 7 - 7/8
On April 11, 1996, the closing price for the Common Stock reported on the
American Stock Exchange was $4-1/16. On that date, there were 3,999 record
owners of the Common Stock.
To date, the Company has not declared or paid any cash dividends with respect
to its Common Stock, and the current policy of the Board of Directors is to
retain earnings, if any, after payment of dividends on the Preferred Stock to
provide for the growth of the Company. Consequently, no cash dividends are
expected to be paid on the Company's Common Stock in the foreseeable future.
Further, there can be no assurance that the proposed
24
operations of the Company will generate the revenues and cash flow needed to
declare a cash dividend or that the Company will have legally available funds to
pay dividends.
ITEM 6. SELECTED FINANCIAL DATA.
------------------------
The following table furnishes information with respect to selected
consolidated financial data of the Company over the past five years.
STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
Years Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Total revenue $31,771 $24,646 $17,258 $10,702 $ 5,853
Total cost of sales 15,581 9,453 7,514 4,200 2,411
------- ------- ------- ------- -------
Gross profit 16,190 15,193 9,744 6,502 3,442
Total operating expenses 20,160 14,898 11,198 8,636 5,260
Investment (income) expense, net (22) (412) (434) --- 576
Income taxes --- --- 281 106 ---
------- ------- ------- ------- -------
Earnings (loss) before extraordinary (3,948) 707 (1,301) (2,240) (2,394)
item ------- ------- ------- ------- -------
Extraordinary item(2) --- --- --- --- 3,889
------- ------- ------- ------- -------
Net earnings (loss) $(3,948) $ 707 $(1,301) $(2,240) $ 1,495
======= ======= ======= ======= =======
Earnings (loss) per share before
extraordinary item (1) $(.19) $.03 $(.08) $(.20) $(.38)
Net earnings (loss) per share (1) $(.19) $.03 $(.08) $(.20) $.24
======= ======= ======= ======= =======
Weighted average equivalent
shares outstanding (1) 20,301 21,124 17,135 11,344 6,263
======= ======= ======= ======= =======
BALANCE SHEET DATA
(in thousands)
December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Total current assets $26,680 $18,844 $23,102 $ 9,004 $ 5,119
Total assets 42,813 31,239 27,240 10,171 5,604
Total current liabilities 8,114 4,958 2,933 2,554 2,810
Long-term debt, less current portion 2 8 163 18 91
Shareholders' equity $33,451 $25,457 $23,653 $ 7,432 $ 2,703
(1) Adjusted for a 1-for-20 reverse stock split effective June 14, 1991.
(2) At June 14, 1991, the Company realized an extraordinary gain on debt
restructuring, net of tax, of $3,889,000.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
GENERAL
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected financial data and
consolidated financial statements and notes thereto included elsewhere herein.
The Company uses existing technology to develop, produce and distribute two-
way multi-player interactive live events and also produces and distributes its
own original interactive programs. The Company's principal sources of revenue
from distribution activities are derived from (a) distribution fees in the
United States; (b) advertising fees, (c) sales of equipment; (d) distribution
fees from foreign licensees; (e) licensing fees from foreign and domestic
licensees; and (f) the licensing of the Company's technology and equipment sales
to other users.
The Company also develops and publishes interactive entertainment software
and video games for general consumer use on a variety of home personal computers
and console entertainment systems. The principal sources of revenue from
software and video game activities are derived from (a) domestic retail sales
through mass merchants, warehouse clubs, general retailers and mail order
catalogues, and (b) license fees and royalties from international licensees who
translate and publish the video games in over a dozen countries around the
world.
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
operations for the last three years ended December 31, 1995. The Company
believes that inflation has not had a material effect on its operations to date.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
The Company reported a net loss of $3,948,000 for the year ended December
31, 1995 compared to net earnings of $707,000 for the year ended December 31,
1994.
In 1994, the Company formed LearnStar to pursue interactive educational
applications in the United States. Most of 1994 was devoted to beta testing the
product and conducting preliminary market tests. In 1995, LearnStar began
marketing and selling its product on a full-time basis. Due to start-up costs
and relatively higher marketing costs during the first year of operations,
LearnStar recognized a net loss of $2,149,000 for the year ended December 31,
1995.
In late 1995 the Company entered into a sale and purchase agreement to sell
45% of the stock of its subsidiary, LearnStar, Inc. Although the sale was
legally consummated, the recognition of the gain of $3,354,000 was deferred in
accordance with generally accepted accounting principles and will be recognized
when principal payments are received in 1996 and 1997. Also in late 1995, the
Company set up a allowance of $1,000,000 for inventory in connection with the
upgrading of its broadcast distribution system and expensed $754,000 of costs
incurred in connection with the development of the market in Mexico. Further, in
1995 the Company experienced a substantial increase in legal expenses due to
increased activities in litigation and other legal matters along with increased
costs of developing and providing products and services, and increased marketing
expenditures. Total revenues increased 29% from $24,646,000 to $31,771,000. This
increase is the result of growth in many of the Company's principal revenue
activities.
Distribution and Production Services increased 41% from $12,244,000 to
$17,307,000. The increase in broadcast revenue is primarily due to an expansion
in the number of subscriber locations and on-line customers contracting for
services from the Company.
Equipment Sales increased 55% from $4,387,000 to $6,784,000. Equipment sales
include both sale and leaseback transactions and direct sales to the Company's
customers. Equipment sales have been highly volatile in the past and are
expected to remain so, as they are dependent on the Company's ability to engage
in lease financing, the timing of expansion plans of the Company's foreign
licensees and, its educational subscribers. As of
26
December 31, 1995, the Company had sold and leased back subscriber systems in
place at a majority of the United States subscriber locations. The Company's
ability to make additional sales will be dependent on increases in the number of
subscriber locations, as well as the availability of financing, as to which
there can be no assurance.
Product Sales related to video and computer games decreased 26% from
$5,263,000 to $3,884,000. Sales of video and computer game products are
typically seasonal and will vary with the number of new products released in any
period. The decrease in net revenue is primarily due to the glut of competing
products in the market, the timing of new products released during the year and
the use of more conservative amounts provided for potential returns.
License Fees and Royalties increased 12% from $1,934,000 in 1994 to
$2,167,000 in 1995. License Fees in 1994 predominantly relate to NTN's
Hospitality and International Licensing operations whereas in 1995 license
revenues predominantly relate to the Company's New World operations. Licensing
arrangements are not dependent upon seasonal forces and will vary in type and
amount from period to period.
Other Revenue increased from $818,000 to $1,629,000 in the current year's
period. Other revenue in 1995 relates to a gain from the sale of a 10% interest
in the IWN subsidiary of $329,000 and reimbursement of previously incurred legal
expenses from the Company's insurance carrier of approximately $1,000,000.
Other Revenue in 1994 primarily consisted of inventory transferred to the
Company by its United Kingdom licensee in exchange for release from a license
agreement. Other Revenue has historically varied widely.
Cost of Services-Distribution and Production Services, which increased 68%
from $5,198,000 in the prior year to $8,756,000 in the current year, reflects
increased costs of equipment leases and other costs associated with the
expansion in the number of subscribers contracting for distribution services.
The gross margin on distribution and production services decreased from 58% to
49% as a result of increased costs related to commissions, service fees and
increased costs of equipment leases. Cost of Sales - Product Sales relates to
the Company's video game products increased from $1,502,000 to $1,844,000 or
23%. These costs vary depending upon the timing of products released, the volume
of products sold, the complexity of the games and the development costs
associated with each product. The gross margin on product sales decreased from
71% to 53% as the result of amortizing deferred development costs related to
specific products sold in 1995. The increase in Cost of Sales-Equipment from
$2,753,000 to $4,981,000, an increase of 81%, is due to the increase in
equipment sales, which can vary from period to period. Before the one-time
charge to earnings of $1,000,000 to upgrade the broadcast distribution system,
the gross margin from equipment sales increased from 37% to 41% due to lower
costs associated with certain equipment, but after consideration of this charge,
the gross margin decreased to 27%.
Operating Expenses rose from $14,898,000 in the prior year to $20,160,000 in
the current year, an increase of 35%. Legal and Professional Fees increased
214% from $590,000 to $1,851,000 due to substantial legal expenses incurred
relating to litigation and other legal matters. Selling, General and
Administrative expenses increased 36% from $12,336,000 to $16,838,000 due to an
increase in the number of employees hired to develop and produce new products
and services and large increases in marketing activities related to the
development of the LearnStar products and services. Research and Development
expense decreased from $1,972,000 to $1,471,000, or 25% as the Company increased
its efforts in projects in current production.
Net Investment Income decreased from $412,000 to $22,000 as a result of
decreased interest-bearing investments, the addition of new debt and the losses
attributed to the IWN L.P. limited partnership allocated to the Company as the
general partner of $286,000. Income Tax expense was zero in both years. The
lack of tax expense is due to the losses, the nature of revenues and expenses in
each year and net operating loss carryforwards available to the Company. The
Company currently has available approximately $26,000,000 of net operating loss
carryovers for federal tax purposes.
27
YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
The Company reported net income of $707,000 for the year ended December 31,
1994 and a net loss $1,301,000 for the year ended December 31, 1993.
For the year ended 1994, revenues grew 43% to $24,646,000 from $17,258,000
for the year ended 1993. This increase is the result of growth in the number of
Locations contracting for the Company's distribution services, license fee
revenue and royalties from licensees and increased equipment sales.
Distribution revenues from Locations increased 81% to $12,244,000 in 1994 from
$6,778,000 in 1993 and equipment sales increased 11% to $4,387,000 in 1994 from
$3,970,000 in 1993. License fees and royalties in 1994 were $1,934,000 compared
to $802,000 in 1993, an increase of 141%, which resulted from new licenses
granted to both foreign and domestic companies. Retail sales of Products
decreased 4% to $5,263,000 from $5,468,000 due to the glut of competing products
on the market and the timing of new Product releases by the Company during the
year.
Total Cost of Sales grew to $9,453,000 in 1994 from $7,514,000 in 1993, an
increase of 26%, a result of increased sales. The Company improved its gross
margin on equipment sales to 37% from 32% as a result of Management's continuing
efforts in controlling equipment costs and higher marginal sales. The rise in
Cost of Services - Distribution and Production Services of $1,937,000 to
$5,198,000 in 1994 from $3,261,000 in 1993 is due to the greater number of
subscribers served. The Company improved its gross margin on Distribution and
Production Services to 58% from 52% as the result of decreasing costs associated
with service fees, equipment rentals and freight charges.
The Company's total operating expenses increased 33% to $14,898,000 in 1994
from $11,198,000 in 1993 as a result of the Company's expanding its overall
activities. Selling, General and Administrative expenses increased 32% to
$12,336,000 in 1994 from $9,347,000 in 1993 as the result of an increase in the
number of employees and continuing increased marketing and sales activities.
Research and Development expenses increased 84% to $1,972,000 in 1994 from
$1,073,000 in 1993 as the Company increased its research and development
efforts. The Company also expended $3,264,000 on software development projects
qualifying for capitalization in 1994 compared to $726,000 in the prior year.
Interest expense of $54,000 for the year ended December 31, 1994 was reduced
from $71,000 for the year ended December 31, 1993. Interest income in 1994
totaled $466,000 compared to $505,000 in 1993. The decrease in net interest
income resulted from the use of funds for operations and investments in
developed software in 1994.
Income tax expense was zero in 1994 compared to $281,000 in 1993. The
decrease in tax expense was due to the nature of the revenues and expenses in
each year and net operating loss carryforwards available to the Company.
LIQUIDITY AND CAPITAL RESOURCES
Following is a discussion of the Company's recent and future sources of and
demands on liquidity, as well as an analysis of liquidity levels.
28
Expenditures have exceeded revenues from operations through most of the
Company's history and may do so in the future. The Company plans to fund any
such deficiency from its existing cash and, if necessary, from other sources, as
discussed below.
Total assets increased 37% from $31,239,000 to $42,813,000 from December 31,
1994 to December 31, 1995. Cash and Marketable Securities - Available for Sale
increased from $3,429,000 to $6,475,000 at December 31, 1995. The change
reflects additional cash proceeds from debt and equity sources net of cash used
to fund operations and invest in the development of future products and services
for the NTN Network and video game products.
The 11% decrease in Accounts Receivable - Trade from $5,881,000 to $5,247,000
at December 31, 1995, reflects an enhancement in the collection efforts as well
as an increase in the allowance for returns and doubtful accounts. Accounts
Receivable -Other increased from $600,000 to $1,750,000, primarily the result of
a large equipment sale transaction in the third quarter. The increase in
Inventory from $4,628,000 to $6,503,000 is primarily the result continued
expansion of the NTN Network and development of additional video game Products.
Prepaid Expenses increased from $1,769,000 to $2,325,000 from December 31, 1994
to December 31, 1995 primarily due to increased prepaid expenses, and security
deposits held by the Company.
Interest bearing Security Deposits (both current and non-current) increased
18% from $3,200,000 to $3,525,000 as the result of increased leasing
transactions related to the increase in new Locations. Software Development
Costs (both current and non-current) increased 66% from $3,405,000 to $5,669,000
as the result of substantial investments made in the development of new software
and Products. Net Fixed Assets increased 49% primarily due to the move to the
new headquarters and expansion of the NTN Broadcast Center. Notes Receivable
(both current and long term) increased from $3,262,000 to $5,206,000 or 60%
primarily as the result of finalizing terms related to the sales of LearnStar of
IWN and the sale of a license to IWN L.P.
Total liabilities increased 62% from $5,782,000 to $9,362,000 from December
31, 1994 to December 31, 1995. The increase in Accounts Payable and Accrued
Liabilities from $2,744,000 to $3,713,000 reflects the overall growth of the
Company and the timing of payments. Customer Deposits increased from $1,006,000
to $1,284,000 from December 31, 1994 to December 31, 1995 due to deposits
received from new customers throughout the year.
The increase in aggregate Deferred Revenue (long-term and current) from
$1,556,000 to $2,270,000 reflects additional deferred gains on the sale of the
equipment involved in lease transactions, which are amortized to revenue over
three-year periods Debt (long-term and current) increased from
$476,000 to $2,095,000 as a result of additional borrowings to augment working
capital needed for operational expenses, new software and product development,
marketing of services and purchase of broadcast-related equipment.
The increase in Common Stock and Additional Paid-in-Capital reflects the
issuance of 3,000,000 shares of Common Stock and conversion of preferred stock
and the exercise of warrants during 1995. In late 1995 the Company began to
repurchase its own shares and at year end had 50,000 shares of treasury stock.
Overall, shareholders' equity increased $7,994,000 due to equity contributions
of $12,164,000, less $222,000 for treasury stock purchases and the net loss of
$3,948,000.
Overall, the Company's working capital increased from $13,886,000 at December
31, 1994 to $18,566,000 at December 31, 1995, primarily due to significant
proceeds from financing activities. The Company may continue to require
additional working capital for operational expenses, new software and product
development, marketing of services and purchase of hardware components relating
to its services. There can be no assurance that the Company's currently
available resources will be sufficient to allow the Company to support its
operations until such time, if any, as its internally generated cash flow is
able to consistently sustain the Company.
The Company is exploring alternative capital financing possibilities that may
include (i) additional lines of credit, (ii) lease financing of equipment the
Company furnishes to subscribers, (iii) licensing of the Company's technology,
(iv) sale of interests in subsidiaries, or (v) sale of additional debt or equity
securities. With respect to lease financing, the Company has
29
leased for three-year terms expiring in various amounts over the next three
years, the Location Systems at a majority of its United States Locations. The
Company has issued licenses and has received revenue for certain products and
services for Australia, South Africa and Canada. The Company will continue to
negotiate for additional lease financing and additional foreign licensing.
MARKETING AND EXPANSION PLAN
The Company's plan to maintain profitability includes the following elements:
(i) increasing sales staff; (ii) increasing advertising sales on the NTN
Network; (iii) expanding Company services to corporate and education customers;
(iv) pursuit of additional foreign licensing opportunities; (v) increasing use
of distributors who service retailers, (vi) sale of interests in subsidiaries,
and (vii) expanding products and services to a wider variety of technological
platforms.
Throughout the Company's history, the principal component of its revenues has
been derived from distribution services from Locations in the Hospitality
industry (restaurants, bars and hotels). Management believes that this
component will continue to grow in total revenues within the next year, but may
decline as a percentage of the Company's total revenues. To increase the number
of Locations, the Company has taken several steps. It increased its sales staff
to accommodate the growth in 1995 and the anticipated growth in 1996. The
Company offers sales and technical support to its independent distributors, who
are responsible for marketing the Company's services to potential Locations. In
1996, the Company will continue to attend national and regional hospitality
industry trade shows and has increased its budget for advertising in trade
publications.
In 1995, the Company enhanced its graphics capabilities and obtained
additional advertising revenues from national advertisers. The Company has a
full-time Director of Advertising Sales and is currently negotiating with
several potential advertisers for commercial spots on the NTN Network.
The Company has produced special event and corporate training programs in
which the customer uses the Company's interactive equipment to increase
participant interest in training and product knowledge and to communicate
rapidly with a large number of participants. Management believes special event
and corporate training may offer an opportunity for growth, and has a full-time
Director of Sales for special event and corporate training. In addition, the
Company has commenced the development of marketing materials and a direct mail
campaign for corporate training services. To enhance the Company's capabilities
for use in special events and corporate training, the Company has developed a
system that allows up to 800 Playmakers(TM) to be used at a single event.
Revenues from sales of equipment used in Locations has historically been a
material component of the Company's revenue. Potential growth in this area,
however, is largely dependent on the Company's success in increasing the number
of Locations and the business of the Company's foreign licensees.
Management believes that another market segment with potential for long-term
growth is the market for interactive television services in the home. The
Company expects to remain a provider of specialized programming to networks
operated by other organizations, such as cable networks, computer on-line
systems and wireless or telephone-based communication networks. The Company
expects to deliver the video portion of its programming directly to cable
television systems, with viewer responses using equipment developed by others.
In light of this, the Company expects that any significant revenues from home
use of the Company's services will be dependent upon an expansion in the overall
home viewer market for home interactive information and entertainment services.
The Company maintains excellent working relationships with major providers of
home interactive information and entertainment services. As the market for home
interactive information and entertainment services expands, the Company will
seek to capitalize on this market. Revenues to date from in-home programming
have not been significant.
The Company has plans to expand its penetration in the education sector as
well. Currently, the LearnStar System is operational at over 100 schools
throughout the nation. In 1995, the Company will focus efforts to expand into
additional schools in many states. Revenues from these sources have not been
significant in the past and no assurance can be given that plans to expand the
education market will be successful.
30
Revenues from Product sales of interactive software and video games have been
fairly consistent over the past few years. In 1996, the Company plans to expand
its available Products through the publication of software developed by
independent sources and by continuing to internally create new games and
Products. Further, the Company intends to publish Products on additional
technological platforms such as the SONY Playstation and other similar type
entertainment systems. Further, the Company intends to offer its services and
Products to new media platforms such as on-line services and the Internet.
Although there can be no assurance that the Company will prove to be
successful in implementing its marketing and expansion plan, Management believes
that the Company's prospects have been materially improved by the growth of the
core business units and increased customer awareness.
The Company has several lawsuits pending as previously described in "Legal
Proceedings." There can be no assurance that any or all of the described
actions will be decided in favor of the Company. The Company believes, based in
part on the advice of outside, independent counsel, that the costs of defending
and prosecuting these actions will not have a material adverse effect on the
Company's financial position or results of operations and that any adverse
outcome of the litigation involving IN also will not result in a material
adverse effect on the Company's financial position or results of operation, or
the Company's position in the interactive industry.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires
that impairment losses for long lived assets be recognized if the estimated
undiscounted future cash flows, without interest, is less than the carrying
amount of the asset. The standard also requires that assets designated to be
disposed of are to be recorded at the lower of the asset carrying value or fair
value less cost to sell. The Company has not adopted SFAS 121. The adoption of
SFAS 121 is not expected to have a material impact on the Company's financial
position or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS 123"), effective for fiscal years beginning after December
31, 1995. SFAS 123 establishes the fair value method of accounting for stock-
based compensation arrangements, under which compensation cost is determined
using the fair value of the stock option at the grant date and the number of
options vested, and is recognized over the period in which the related services
are rendered. If the Company were to retain its current intrinsic value based
method, as allowed by SFAS 123, it will be required to disclose the pro forma
effect of adopting the fair value based method. The Company will adopt SFAS 123
using the pro forma disclosure method.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
---------------------------------------------------------
See Index to Consolidated Financial Statements and Schedule on page F-0,
which is incorporated herein by reference, for a listing of the Consolidated
Financial Statements and Schedule filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
Incorporated by reference to Registrant's definitive Proxy Statement for its
July, 1996 meeting of stockholders, which will be filed with the Securities and
Exchange Commission within 120 days from December 31, 1995.
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
Incorporated by reference to Registrant's definitive Proxy Statement for its
July, 1996 meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
31
Incorporated by reference to Registrant's definitive Proxy Statement for its
July, 1996 meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
Incorporated by reference to Registrant's definitive Proxy Statement for its
July, 1996 meeting of stockholders.
32
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
-------------------------------------------------------------------
FORM 8-K.
---------
(a) The following documents are filed as a part of this report:
1,2. Consolidated Financial Statements and Schedule.
The consolidated financial statements and schedule of the Company and its
consolidated subsidiaries are set forth in the "Index to Consolidated Financial
Statements" on page F-0.
3. Exhibits. The following exhibits are filed as a part of this report:
10.1 Certificate of Incorporation of the Company (1)
10.2 By-laws of the Company (2)
10.3 1985 Incentive Stock Option Plan, as amended (2)
10.4 VTV Entertainment UK Licensing Agreement (3)
10.5 Agreement with TWIN (4)
10.6* Form of Employment Agreements dated as of January 1, 1990 between the
Company and Patrick Downs, Daniel Downs, Gerald McLaughlin and Ronald
Hogan (4)
10.7* 1985 Nonqualified Stock Option Plan, as amended (4)
10.8 Lease of Executive Offices (4)
10.9 License Agreement with NTN Canada (4)
10.10 National Football League License Agreement (4)
10.11* Promissory Notes issued June 15, 1993 between the Company and
Patrick Downs, Daniel Downs, Donald Klosterman, Ronald Hogan and
Gerald McLaughlin Agreement and the Tax Indemnity and Loan dated June 6,
1993 (6)
10.12* Warrants dated January 15, 1993 issued by the Company in favor of
Patrick Downs, Daniel Downs, Mike Downs and the Oracle Group (6)
10.13 Registration Rights Agreement dated December 30, 1993 between the
Company and Jon Van Caneghem (5)
33
10.14* Employment Agreement dated as of January 3, 1994 among the Company, New
World Computing, Inc. and Jon Van Caneghem (5)
10.15 Revolving Line of Credit Agreement between New World Computing, Inc.
and Merrill Lynch Business Financial Services, Inc. (7)
10.16 The Campus Limited Liability Company Agreement (7)
10.17 Lease of Office with The Campus L.L.C. (7)
10.18 Investment Agreement, dated as of December 31, 1995, among NTN
Communications, Inc., IWN, Inc. and Symphony Management Associates,
Inc., without exhibits
10.19 Third Amended and Restated Agreement of Limited Partnership of IWN,
L.P., dated as of Decmber 31, 1995.
10.20 First Amendment to the Third Amended and Restated Agreement of Limited
Partnership of IWN, L.P., dated as of March 11, 1996.
10.21 Stock Purchase Agreement, dated as of December 31, 1995, between NTN
Communications Inc., IWN, Inc. and Symphony Management Associates, Inc.
10.22 Stockholders Agreement, dated as of December 31, 1995, between NTN
Communications Inc., and Symphony Management Associates, Inc.
10.23 Registration Rights Agreement, dated as of December 31, 1995, between
NTN Communications Inc., and Symphony Management Associates, Inc.
10.24 Guaranty, dated as of December 31, 1995, from Symphony Management
Associates, Inc. in favor of IWN, Inc. and IWN, L.P.
10.25 Amended and Restated Technology and Trademark License Agreement, dated
as of December 31, 1995, between NTN Communication, Inc. and IWN, Inc.
10.26 Amended and Restated Technology and Trademark Sub-license Agreement,
dated as of December 31, 1995, between IWN, Inc. and IWN, L.P.
10.27 Worldwide Technology and Trademark Agreement, dated as of December 31,
1995, between IWN, Inc. and IWN, L.P.
10.28 Non-competition Agreement, dated as of December 31, 1995, between IWN,
Inc. and IWN, L.P.
34
10.29 Non-competition Agreement, dated as of December 31, 1995, between IWN,
L.P. in favor of NTN Communications, Inc. and IWN, Inc.
10.30 Composite copy of Investment Agreements, dated as of April 24, 1995,
between NTN Communications, Inc. and the investors named therein
10.31 Composite copy of Investment Agreements, dated as of September 29,
1995, between NTN Communications, Inc. and the investors named therein
10.32 Composite copy of Investment Agreements, dated as of October 4, 1995
between NTN Communications, Inc. and the investors named therin.
10.33 Stock Purchase Agreement by and between NTN Communications, Inc. and
Associated Ventures Management, Inc., dated as of December 22, 1995
10.34 Non Recourse Secured Promissory Note issued by the Company to
Associated Ventures Management, Inc., dated December 22, 1995
10.35* Management Agreement between NTN Communications, Inc. and Associated
Ventures Management, Inc., dated December 22, 1995
23.00 Consent of KPMG Peat Marwick LLP, incorporated by reference.
27 Financial Data Schedule.
- ----------------------------
* Management Contract or Compensatory Plan.
(1) Previously filed as an exhibit to the Company's report on Form 10-Q for the
quarter ended June 30, 1991, and incorporated by reference.
(2) Previously filed as an exhibit to the Company's registration statement on
Form S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1989, and incorporated by reference.
(4) Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1990, and incorporated by reference.
(5) Previously filed as an exhibit to the Company's report on Form 8-K dated
December 31, 1993, and incorporated by reference.
(6) Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1993, and incorporated herein by reference.
35
(7) Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1994, and incorporated herein by reference.
(b) Reports on Form 8-K.
None.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATED: April 11, 1996 NTN COMMUNICATIONS, INC.
By: /s/ PATRICK J. DOWNS
------------------------------------
Patrick J. Downs, Chairman and Chief
Executive Officer
By: /s/ RONALD E. HOGAN
------------------------------------
Ronald E. Hogan, Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ PATRICK J. DOWNS Chief Executive Officer April 11, 1996
- ----------------------------- and Chairman of the Board
Patrick J. Downs (Principal Executive Officer)
/s/ DANIEL C. DOWNS President, Chief Operating April 11, 1996
- ----------------------------- Officer and Director
Daniel C. Downs
/s/ ALVIN R. ROZELLE Director April 11, 1996
- -----------------------------
Alvin R. Rozelle
/s/ DONALD C. KLOSTERMAN Director April 11, 1996
- -----------------------------
Donald C. Klosterman
/s/ ALAN P. MAGERMAN Director April 11, 1996
- -----------------------------
Alan P. Magerman
/s/ KENNETH HAMLET Director April 11, 1996
- -----------------------------
Kenneth Hamlet
37
MTN COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Independent Auditors' Report........................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as December 31, 1995 and 1994...... F-3
Consolidated Statements of Operations for the years
ended December 31, 1995, 1994 and 1993...................... F-4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993........ F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993...................... F-6
Notes to Consolidated Financial Statements............................. F-8
Schedule II............................................................F-20
F-0
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
NTN Communications, Inc.:
We have audited the accompanying consolidated balance sheets of NTN
Communications, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in Item 14 a(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NTN Communications,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investments in debt and equity securities
in 1994.
San Diego, California
April 12, 1996 KPMG Peat Marwick LLP
F-2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
ASSETS 1995 1994
------------ -----------
Current assets:
Cash and cash equivalents $ 6,475,000 2,429,000
Marketable securities -
available for sale -- 1,000,000
Interest-bearing security
deposits (note 14) 1,575,000 1,225,000
Accounts receivable - trade,
net of allowance for returns
and doubtful accounts
of $1,417,000 in 1995 and
$1,097,000 in 1994 (Note 6) 5,247,000 5,881,000
Accounts receivable -
officers and directors 100,000 100,000
Accounts receivable - other 1,750,000 600,000
Notes receivable, related
parties (note 4) 1,030,000 --
Software development costs,
net of accumulated amortization
of $787,000 in 1995 and
$177,000 in 1994 1,525,000 1,212,000
Inventory, net 6,503,000 4,628,000
Prepaid expenses and other
current assets 2,325,000 1,769,000
------------ -----------
Total current assets 26,530,000 18,844,000
Fixed assets, net (note 5) 2,100,000 1,405,000
Interest-bearing security deposits
(note 14) 2,200,000 1,975,000
Software development costs, net of
accumulated amortization of $1,014,000
in 1995 and $408,000 in 1994 4,144,000 2,193,000
Notes receivable, related parties (note 4) 4,176,000 3,262,000
Deposits and other assets (note 6) 3,663,000 3,560,000
------------ -----------
Total assets $ 42,813,000 31,239,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued 3,713,000 2,744,000
liabilities
Short-term borrowings and current
portion of long-term debt (note 6) 2,093,000 468,000
Deferred revenue 1,024,000 740,000
Customer deposits 1,284,000 1,006,000
------------ -----------
Total current liabilities 8,114,000 4,958,000
Deferred revenue 1,246,000 816,000
Long-term debt, excluding current 2,000 8,000
portion (note 6)
------------ -----------
Total liabilities 9,362,000 5,782,000
------------ -----------
Shareholders' equity (notes 8, 9 and 10):
10% Cumulative convertible
preferred stock, $.005 par
value, 10,000,000 shares
authorized; issued and
outstanding 162,612 in 1995
and 197,612 in 1994
(liquidating preference $1 per share) 1,000 1,000
Common stock, $.005 par
value, 50,000,000 shares
authorized; shares issued
and outstanding 22,502,707
in 1995 and 19,178,060 in
1994 112,000 96,000
Additional paid-in capital 56,747,000 44,599,000
Accumulated deficit (23,187,000) (19,239,000)
------------ -----------
33,673,000 25,457,000
Less 50,000 shares of
treasury stock, at cost (222,000) --
------------ -----------
Total shareholders' equity 33,451,000 25,457,000
------------ -----------
Commitments and contingencies (notes 14
and 15)
Total liabilities and
shareholders' equity $ 42,813,000 31,239,000
============ ===========
See accompanying notes to consolidated financial statements.
F-3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ---------- ----------
(note 2)
Distribution and production services $ 17,307,000 12,244,000 6,778,000
Product sales 3,884,000 5,263,000 5,468,000
Equipment sales 6,784,000 4,387,000 3,970,000
License fees and royalties 2,167,000 1,934,000 802,000
Other revenue 1,629,000 818,000 240,000
------------ ---------- ----------
Total revenue 31,771,000 24,646,000 17,258,000
------------ ---------- ----------
Cost of distribution and
production services 8,756,000 5,198,000 3,261,000
Cost of product sales 1,844,000 1,502,000 1,537,000
Cost of equipment sales 4,981,000 2,753,000 2,716,000
------------ ---------- ----------
Total cost of sales 15,581,000 9,453,000 7,514,000
------------ ---------- ----------
Gross profit 16,190,000 15,193,000 9,744,000
------------ ---------- ----------
Operating expenses:
Selling, general and administrative 16,838,000 12,336,000 9,347,000
Legal and professional fees 1,851,000 590,000 778,000
Research and development 1,471,000 1,972,000 1,073,000
------------ ---------- ----------
Total operating expenses 20,160,000 14,898,000 11,198,000
------------ ---------- ----------
Operating income (loss) (3,970,000) 295,000 (1,454,000)
Investment income, net of
interest expense of $170,000,
$54,000 and $71,000 in 1995,
1994 and 1993, respectively 22,000 412,000 434,000
------------ ---------- ----------
Earnings (loss) before income taxes (3,948,000) 707,000 (1,020,000)
Income taxes (note 7) -- -- 281,000
------------ ---------- ----------
Net earnings (loss) $ (3,948,000) 707,000 (1,301,000)
============ ========== ==========
Net earnings (loss) per share $ (0.19) 0.03 (0.08)
============ ========== ==========
Weighted average number of shares
outstanding 20,301,000 21,124,000 17,135,000
============ ========== ==========
See accompanying notes to consolidated financial statements.
F-4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1995, 1994 and 1993
10% CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ---------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------- --------- ---------- ---------- ----------- ------------ ------------ -----------
Balance, 12/31/92 392,498 $ 2,000 13,214,597 $ 66,000 $26,009,000 $(18,645,000) $ -- $ 7,432,000
Issuance of stock in
conversion of debt -- -- 29,646 -- 75,000 -- -- 75,000
Issuance of stock for
exercise of warrants and
options, net of issuance
costs -- -- 5,572,868 28,000 17,419,000 -- -- 17,447,000
Conversion of preferred
stock to common stock (137,498) (1,000) 38,439 -- 1,000 -- -- --
Net loss -- -- -- -- -- (1,301,000) -- (1,301,000)
------- --------- ---------- ---------- ----------- ------------ ----------- -----------
Balance, 12/31/93 255,000 1,000 18,855,550 94,000 43,504,000 (19,946,000) -- 23,653,000
Issuance of stock for
exercise of warrants and
options, net of issuance
costs -- -- 306,440 2,000 1,095,000 -- -- 1,097,000
Conversion of preferred
stock to common stock (57,388) -- 16,070 -- -- -- -- --
Net earnings -- -- -- -- -- 707,000 -- 707,000
------- --------- ---------- ---------- ---------- ------------ ----------- -----------
Balance, 12/31/94 197,612 $ 1,000 19,178,060 $ 96,000 44,599,000 (19,239,000) -- 25,457,000
Issuance of stock for
exercise of warrants and
options, net of issuance
costs -- -- 314,843 1,000 679,000 -- -- 680,000
Conversion of preferred
stock to common stock (35,000) -- 9,804 -- -- -- -- --
Issuance of stock in
private offerings, net
of issuance costs -- -- 3,000,000 15,000 11,469,000 -- -- 11,484,000
Acquisition of 50,000
common shares -- -- -- -- -- -- (222,000) (222,000)
Net loss -- -- -- -- -- (3,948,000) -- (3,948,000)
------- --------- ---------- ---------- ----------- ------------ ----------- -----------
Balance, 12/31/95 162,612 $ 1,000 22,502,707 $ 112,000 $56,747,000 $(23,187,000) $ (222,000) $33,451,000
======= ========= ========== ========== =========== ============ =========== ===========
See accompanying notes to consolidated financial statements.
F-5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ --------- ----------
(note 2)
Cash flows from operating activities:
Net earnings (loss) $ (3,948,000) 707,000 (1,301,000)
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 2,150,000 837,000 282,000
Provision for returns and
doubtful accounts 983,000 1,037,000 206,000
Loss on sale of
marketable securities -
available for sale 70,000 -- --
Amortization of deferred
gain on sale and leaseback
transactions (1,316,000) (1,300,000) (900,000)
(Increase) decrease in:
Accounts receivable - trade (349,000) (3,430,000) (3,094,000)
Software development costs, net (1,033,000) (1,983,000) --
Inventory, net (1,875,000) (872,000) (2,265,000)
Prepaid expenses and other assets (1,729,000) (1,413,000) (1,096,000)
Increase (decrease) in:
Accounts payable and
accrued liabilities, net
of amounts paid in stock 969,000 1,076,000 (80,000)
Customer deposits 278,000 356,000 368,000
------------ --------- ----------
Net cash used in
operating activities (5,800,000) (4,985,000) (7,880,000)
------------ --------- ----------
Cash flows from investing activities:
Capital expenditures (1,196,000) (898,000) (699,000)
Notes receivable (1,944,000) (406,000) (2,653,000)
Software development costs, net (2,857,000) (1,281,000) (726,000)
Purchases of other investments (103,000) (823,000) (807,000)
Purchases of marketable
securities - available for sale -- -- (4,515,000)
Proceeds from maturities of
marketable securities -
available for sale -- 2,554,000 961,000
Proceeds from sales of
marketable securities
- available for sale 930,000 -- --
Proceeds from sale and
leaseback transactions 4,500,000 4,250,000 3,500,000
Deposits related to sale and
leaseback transactions (575,000) (2,100,000) (800,000)
------------ --------- ----------
Net cash provided by
(used in) investing
activities (1,245,000) 1,296,000 (5,739,000)
------------ --------- ----------
See accompanying notes to consolidated financial statements.
F-6
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ --------- ----------
Cash flows from financing activities:
Principal payments on debt $ (1,031,000) (557,000) (237,000)
Proceeds from issuance of debt 2,650,000 633,000 375,000
Purchase of equipment related
to sale and leaseback
transactions (2,470,000) (2,263,000) (2,103,000)
Proceeds from issuance of
common stock, less issuance
costs paid in cash 12,164,000 1,097,000 17,447,000
Payments for purchase of
treasury stock (222,000) -- --
------------ --------- ----------
Net cash provided by
(used in) financing
activities 11,091,000 (1,090,000) 15,482,000
------------ --------- ----------
Net increase (decrease) in cash and
cash equivalents 4,046,000 (4,779,000) 1,863,000
Cash and cash equivalents at beginning
of year 2,429,000 7,208,000 5,345,000
------------ --------- ----------
Cash and cash equivalents at end of year $ 6,475,000 2,429,000 7,208,000
============ ========= ==========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 59,000 54,000 38,000
============ ========= ==========
Income taxes $ -- 399,000 62,000
============ ========= ==========
Supplemental schedule of
noncash investing and
financing activities - stock
issued upon conversion of
debt, net of issuance costs $ -- -- 75,000
============ ========= ==========
See accompanying notes to consolidated financial statements.
F-7
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994 and 1993
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
NTN Communications, Inc. and subsidiaries ("The Company") was organized
under the laws of the state of Delaware in 1984 for the purpose of
investing in various business ventures. The Company, through its
business units and subsidiaries develops, produces and distributes
individual and multi-player interactive entertainment and education
programs to a variety of media platforms.
The Company is also engaged in the development and distribution of
interactive video game software. The Company operates under several
distribution and license agreements in the United States, United Kingdom,
Australia, Germany, France and Switzerland. These products are sold
primarily to wholesale distributors. Royalties result from licensing
rights sold to foreign publishers.
BASIS OF ACCOUNTING PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, National Telecommunicator Network,
Inc. and New World Computing, Inc., and its partially-owned subsidiaries
IWN Corporation, Inc. and LearnStar Inc. (LearnStar). During most of
1995, the Company owned 50% of LearnStar, however the Company funded all
operations of LearnStar, and accordingly LearnStar has been consolidated
as if it were wholly-owned. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For the purpose of financial statement presentation, the Company
considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents. Cash and cash equivalents
at December 31, 1995 and 1994, consist of operational cash accounts and
certificates of deposit with original maturities of three months or less.
MARKETABLE SECURITIES - AVAILABLE FOR SALE
Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). The
Company has classified applicable investments as "available for sale".
Securities available for sale are carried at fair value with unrealized
gains and losses, net of tax, reported as a separate component of
shareholders' equity. The cost of securities sold is based on the
specific identification method.
At December 31, 1994 marketable securities available for sale consisted
of mutual funds invested in government-backed debt instruments. The fair
value of available for sale securities approximated cost.
Proceeds from the sale of investment securities available for sale was
$930,000 in 1995 and gross realized losses included in income in 1995 was
$70,000.
F-8
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
DEPRECIATION
Depreciation of fixed assets is computed using the straight-line method
over the estimated useful lives of the assets (three to five years).
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or market
and consists principally of finished goods and equipment.
DEPOSITS AND OTHER ASSETS
Deposits and other assets include long-term life insurance contracts
and other assets. These contracts are carried at cost which
approximates market value.
REVENUE RECOGNITION
Distribution and Production Services Revenue: Revenue is recognized as
the service is provided by the Company.
Product Sales: Revenue is recognized when the product is shipped. Subject
to limitations, the Company permits customers to obtain exchanges within
certain specified periods, and provides price protection on certain unsold
merchandise. Revenue is reflected net of an allowance for returns.
Equipment Sales: Revenue is recognized when equipment is shipped or
transferred to the purchaser.
License Fees and Royalties: For those agreements which provide the customers
the right to multiple copies in exchange for guaranteed amounts, revenue is
recognized upon execution of the agreement since the Company has no remaining
obligations or incremental costs. Per copy royalties on sales that exceed
the guarantee are recognized as earned. For those agreements which provide
for the marketing rights and the future use of the Company's name, technology
and trademarks, revenue is recognized when all material services or
conditions relating to the sale have been performed or satisfied.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
VALUATION OF STOCK TRANSACTIONS
For stock issued in return for services, the transactions have been
recorded at the value of the services received, if determinable; if such
value was not determinable, the transactions were recorded at the fair
market value of the stock issued.
F-9
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs related to the development of certain
software products. In accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Cost of Computer Software to be
Sold, Leased or Otherwise Marketed," capitalization of costs begins when
technological feasibility has been established and ends when the product
is available for general release to customers. Amortization of costs for
specific products is recognized on the relative value basis over the
estimated economic life of each specific product, generally within one
year. Amortization of costs related to interactive programs is
recognized on a straight line basis over three to five years.
ADVERTISING COSTS
The Company accounts for advertising costs in accordance with SOP No. 93-7,
Reporting on Advertising Costs. Direct response advertising is capitalized
only if customer sales can be directly correlated to the advertising costs
and if future benefit can be demonstrated. Capitalized advertising costs
are amortized using the straight-line method over the estimated benefit
period. Advertising expense for 1995, 1994 and 1993 was $290,000, $136,000,
and $172,000, respectively. Amounts capitalized at December 31, 1995 and
1994 was $310,000 and $243,000, respectively.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
EARNINGS (LOSS) PER SHARE
Earnings per share amounts are computed by dividing net earnings
increased by preferred dividends resulting from the assumed exercise of
stock options and warrants and the assumed conversion of convertible
preferred shares, by the weighted average number of common and common
equivalent shares outstanding during the period. Common stock
equivalents represent the dilutive effect of the assumed exercise of
certain outstanding options and warrants and preferred stock. The impact
of the outstanding stock options and warrants and conversion of preferred
stock would have had an anti-dilutive effect in years where losses are
reported, and accordingly, have not been included in the computation.
RECLASSIFICATIONS
Certain items in the 1994 and 1993 consolidated financial statements have
been reclassified to conform to the 1995 presentation.
(2) MERGER
On December 31, 1993, a subsidiary of the Company completed its merger
with New World Computing, Inc. (New World), a developer and distributor
of interactive video game software. The Company issued 1,025,000 shares
of common stock for all of the outstanding common stock of New World.
The transaction was accounted for as a pooling of interests. The
consolidated financial statements for 1993 were restated to reflect the
merger.
F-10
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) SALE OF SUBSIDIARY INTERESTS
In December 1995 the Company purchased the shares of LearnStar owned by
ACT III Communications to increase its ownership in LearnStar to 100%.
Also in December 1995, the Company sold a 45% interest in LearnStar to an
unaffiliated company for $2,500,000 in return for a note receivable in
the amount of $2,500,000. As the Company's basis in LearnStar is
negative, the gain on the sale of the stock was $3,354,000. The gain was
deferred and will be recognized as the Company receives proceeds on the
note receivable arising from the sale.
In December 1995, the Company entered into a sale and purchase agreement to
sell 10% of its interest in IWN Inc. to an unaffiliated company for
$350,000 A gain of $329,000 was recognized upon consummation of the sale.
(4) NOTES RECEIVABLE - RELATED PARTIES
Notes receivable - related parties is as follows:
1995 1994
------------ ---------
6% unsecured notes from
officers and directors.
Revised in April 1996 to
mature in three annual
installments beginning in
April 1997 of 10%, 30% and
60%, respectively. Payable
either in cash or through
redemption of Company shares
at fair market value. $ 3,438,000 2,947,000
Non-interest bearing note of
$2,500,000 from unaffiliated
company due $400,000 in 1996
and $2,100,000 in 1997, net of
deferred gain secured by common
stock. -- --
6% - 8% unsecured notes from
officers and directors. Due
in December 1996. 680,000 315,000
Non-interest bearing unsecured
note. Payment received in
March 1996. 350,000 --
5% unsecured note. Due from
IWN L.P. an unconsolidated
limited partnership in which
the Company is a general
partner. Due March 2000 or
earlier to the extent of
available cash as provided in
the limited partnership
agreement. 738,000 --
------------ ---------
Total 5,206,000 3,262,000
Current portion (1,030,000) --
------------ ---------
$ 4,176,000 3,262,000
============ =========
F-11
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes receivable from officers and directors include amounts advanced to
officers and directors to obtain a federal or state income tax deduction
for the Company. In 1993, the Company obtained a deduction of $6,900,000
related to compensation to officers and directors in prior years. The
amount has been recorded as an addition to the Company's existing net
operating loss carryforward. In order to obtain the deduction, the Company
was required to withhold and to deposit amounts with the appropriate
government taxing authorities on behalf of the officers and directors. In
1995, the Company converted $435,000 of accrued unpaid interest to
principal.
In 1995, the Company entered into a sale agreement to sell 45% of its
shares in LearnStar in exchange for a note of $2,500,000. The gain has been
deferred and will be recognized as the company receives proceeds on the
note receivable rising from the sale.
(5) FIXED ASSETS
Fixed assets are recorded at cost and consist of the following:
1995 1994
------------ ----------
Furniture and fixtures $ 767,000 271,000
Equipment 2,917,000 2,217,000
Automobile 47,000 47,000
------------ ----------
3,731,000 2,535,000
Accumulated depreciation (1,631,000) (1,130,000)
------------ ----------
$ 2,100,000 1,405,000
============ ==========
(6) SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings and long-term
debt is as follows:
1995 1994
------------ ----------
$750,000 variable rate line of
credit (30-day commercial
paper rate plus 2.9%, 8.7% at
December 31, 1995). Matures
in October 1996. Secured by
accounts receivable. $ 722,000 445,000
Variable rate loan (8.4% at
December 31, 1995), due in
May 1996, secured by life
insurance policies. 1,356,000 --
Other 17,000 31,000
------------ ----------
Total 2,095,000 476,000
Current portion of long-term
debt (2,093,000) (468,000)
------------ ----------
$ 2,000 8,000
============ ==========
F-12
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The aggregate maturities of long-term debt for years subsequent to
December 31, 1995 are as follows: 1996, $2,093,000; 1997, $2,000.
(7) INCOME TAXES
The company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS 109"). Under the assets and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax balances.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company has no net taxable temporary differences which would require
recognition of deferred tax liabilities, and due to the uncertainty of
future realizability has recorded a valuation allowance against any
deferred tax assets for deductible temporary differences and tax operating
loss carryforwards, and accordingly, no deferred taxes are contained in the
accompanying consolidated financial statements. The Company increased its
valuation allowance by approximately $1,300,000 and $300,000 for the
years ended December 31, 1995 and 1994, respectively, primarily as a result
of the increase in tax operating loss carryforwards.
At December 31, 1995, the Company has available net operating loss
carryforwards of approximately $26,000,000 for federal income tax purposes,
which begin to expire in 2006. The net operating loss carryforwards for
state purposes, which begin to expire in 1996 are less than 50% of
the federal tax amounts. The Company may have additional net operating loss
carryforwards available subject to annual limitations under Internal
Revenue Code 382.
In 1995, the Company did not recognize income tax expense as a result of
their utilization of net operating loss carryforwards. Due to certain tax
regulations relating to the merger completed in 1993, the Company was
unable to utilize its net operating loss carryforwards to offset earnings
of its subsidiary, New World, in 1993. Income taxes for 1993 resulted from
the operations of New World, and amounted to $281,000.
(8) COMMON STOCK AND COMMON STOCK OPTIONS
In 1995, The Company sold and issued an aggregate of 3,000,000 shares of
common stock. In September and October 1995, 2,400,000 of these shares were
issued at an initial price of $4.00 per share to certain institutional
investors (Investors). Pursuant to the terms of the sale, the initial
purchase price paid by the Investors is subject to adjustment based on the
average of the closing prices ("Average Share Price") of the Common Stock
for all trading days during the 60-day period commencing on January 15,
1996 ("Valuation Period"). Under the agreement, if the Average Share Price
during the Valuation Period is less than $4.70, the Company will issue to
the Investors, at no additional cost to the Investors, additional shares of
common stock so as to result in a purchase price per share of common stock
equal to 85% of the Average Share Price. Conversely, if the Average Sales
Price exceeded $4.70 during the Valuation Period, the Investors are
obligated to pay to the Company the dollar amount by which the product of
85% of the Average Share Price during the Valuation Period and 2,400,000
exceeds the amount provided to the Company. As a result of these terms, the
Company anticipates that it will issue approximately 1,200,000 additional
shares to the Investors in 1996.
F-13
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company has a qualified incentive stock option plan under which
2,000,000 restricted common shares are authorized for grant. Options
granted in or after 1993 generally vest 33% annually, commencing one year
from the date of grant and expire five years from the date of final
vesting. A summary of the status of the Company's qualified incentive stock
option plan follows:
OUTSTANDING OPTION PRICE EXERCISABLE
OPTIONS PER SHARE OPTIONS
----------- -------------- -----------
December 31, 1993 715,097 $ 2.25 - 8.25 317,897
Options granted 705,450 5.75 - 8.25 90,000
Options that became exercisable -- 6.50 - 8.25 133,400
Options exercised (8,867) 2.25 - 6.50 (8,867)
Options lapsed and canceled (19,900) 6.38 - 6.50 --
---------- -------------- ----------
December 31, 1994 1,391,780 2.25 - 8.25 532,430
Options granted 1,691,600 4.00 - 8.00 530,000
Options that became exercisable -- 6.38 - 8.25 369,450
Options exercised (10,500) 2.25 - 6.50 (10,500)
Options lapsed and canceled (62,550) 4.50 - 6.50 (62,550)
---------- -------------- ----------
December 31, 1995 3,010,330 $ 2.25 - 8.25 1,358,830
========== ============== ==========
The Company previously had a non-qualified stock option plan under which
1,455,000 restricted common shares were granted. Non-qualified options vest
50% annually, commencing one year from the date of grant and expire five
years from the date of grant. A summary of the status of the non-qualified
stock options follows:
OUTSTANDING OPTION PRICE EXERCISABLE
OPTIONS PER SHARE OPTIONS
----------- ------------- -----------
December 31, 1993 1,260,000 $ 2.00 - 8.25 460,000
Options granted 195,000 5.75 - 8.25 --
Options that became exercisable -- -- 400,000
Options exercised -- -- --
Options lapsed and canceled -- -- --
---------- ------------- ----------
December 31, 1994 1,455,000 2.00 - 8.25 860,000
Options granted -- -- --
Options that became exercisable -- 5.75 - 8.25 497,500
Options exercised -- -- --
Options lapsed and canceled -- -- --
---------- ------------- ----------
December 31, 1995 1,455,000 $ 2.00 - 8.25 1,357,500
========== ============= =========
F-14
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company has authorized 10,000,000 shares of 10% cumulative convertible
preferred stock, of which 162,612 and 197,612 were issued and outstanding
at December 31, 1995 and 1994, respectively. The stock has no voting
rights. At December 31, 1995, each share is currently convertible into
.2801 shares of common stock at the option of the holder. During 1995,
35,000 shares of cumulative convertible preferred stock converted into
9,804 shares of common stock.
(10) WARRANTS
The Company has issued various warrants to purchase common stock, all of
which are exercisable as of December 31, 1995. The following summarizes
warrants issued and outstanding:
OUTSTANDING WARRANT PRICE EXERCISABLE
WARRANTS PER SHARE WARRANTS
----------- -------------- -----------
December 31, 1993 3,245,121 $ 2.00 - 20.00 3,245,121
Warrants granted 437,500 5.13 - 7.50 437,500
Warrants that became exercisable -- -- --
Warrants exercised (297,573) 2.00 - 3.70 (297,573)
Warrants lapsed and canceled (3,119) 20.00 (3,119)
----------- --------------- ---------
December 31, 1994 3,381,929 2.00 - 8.00 3,381,929
Warrants granted 733,500 4.00 - 6.13 733,500
Warrants that became exercisable -- -- --
Warrants exercised (225,600) 2.00 - 3.70 (225,600)
Warrants lapsed and canceled -- -- --
----------- --------------- ---------
December 31, 1995 3,889,829 2.00 - 8.00 3,889,829
=========== =============== =========
F-15
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) BUSINESS SEGMENT AND EXPORT SALES DATA
Operating results and other financial data are presented for the
principal business segments of the Company for the years ended December
31, 1995, 1994 and 1993. The Company's principal business units are its
Hospitality Network (Hospitality Interactive Services), Learnstar, Inc.
(Education Interactive Services) and New World (Software Development and
Distribution). Corporate and Other includes other smaller segments and
the corporate operations.
1995 1994 1993
------------- ---------- ----------
Net Sales
Hospitality Interactive Services $ 21,720,000 16,710,000 8,970,000
Education Interactive Services 1,095,000 -- --
Software Development and Distribution 5,379,000 5,747,000 6,135,000
Corporate and Other 3,577,000 2,189,000 2,153,000
------------- ---------- ----------
Total 31,771,000 24,646,000 17,258,000
============= ========== ==========
Operating Income (Loss)
Hospitality Interactive Services 3,547,000 2,839,000 1,461,000
Education Interactive Services (2,149,000) -- --
Software Development and Distribution 127,000 251,000 633,000
Corporate and Other (5,495,000) (2,795,000) (3,548,000)
------------- ---------- ----------
Total (3,970,000) 295,000 (1,454,000)
============= ========== ==========
Identifiable Assets
Hospitality Interactive Services 28,125,000 20,246,000 21,787,000
Education Interactive Services 1,320,000 1,104,000 --
Software Development and Distribution 6,152,000 4,856,000 1,706,000
Corporate and Other 7,216,000 5,033,000 3,747,000
------------- ---------- ----------
Total 42,813,000 31,239,000 27,240,000
============= ========== ==========
Capital Expenditures
Hospitality Interactive Services 945,000 763,000 629,000
Education Interactive Services 116,000 -- --
Software Development and Distribution 30,000 51,000 --
Corporate and Other 105,000 84,000 70,000
------------- ---------- ----------
Total 1,196,000 898,000 699,000
============= ========== ==========
Depreciation and Amortization
Hospitality Interactive Services 965,000 499,000 249,000
Education Interactive Services 78,000 -- --
Software Development and Distribution 1,071,000 310,000 18,000
Corporate and Other 36,000 28,000 15,000
------------- ---------- ----------
Total 2,150,000 837,000 282,000
============= ========== ==========
F-16
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Sales to foreign customers are as
follows:
1995 1994 1993
------------ --------- ---------
Distribution and production $ 896,000 660,000 580,000
services
Equipment sales 711,000 429,000 689,000
License fees and royalties 1,521,000 851,000 802,000
------------ --------- ---------
Total $ 3,128,000 1,940,000 2,071,000
============ ========= =========
(12) RETIREMENT AND SAVINGS PLANS
DEFINED BENEFIT PENSION PLAN
The Company has established a non-qualified, con-contributory pension
plan covering certain key executives. This plan is subject to
modification at any time. The plan provides retirement benefits based on
years of service and compensation. Net pension expense was $7,000 and
$5,000 in 1995 and 1994 respectively. Accrued pension liability totaled
$12,000 and $5,000 at December 31, 1995 and 1994, respectively.
DEFINED CONTRIBUTION PLAN
During 1994, the Company also established a defined contribution plan
which is organized under Section 401(k) of the Internal Revenue Code,
which allows employees who have completed at least six months of service
or reached age 21, whichever is later, to defer up to 15% of their pay on
a pre-tax basis. The Company, at its discretion, may contribute to the
plan. For the year ended December 31, 1995 and 1994 the Company made no
such contributions.
DEFERRED COMPENSATION PLAN
The Company also maintains an unfunded, non-qualified deferred
compensation plan, which was created in 1994 for certain members of
management. This plan allows participants to defer a minimum of $5,000
up to limits set by the Internal Revenue Code.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The Company
believes that the fair value of financial instrument assets and financial
instrument liabilities approximate their carrying value, except
that the carrying value of notes receivable at December 31, 1995 exceeds
the fair value by approximately $250,000. The following methods and
assumptions were used to estimate the fair value of financial
instruments:
The carrying values of cash and cash equivalents, marketable securities,
accounts receivable, other assets, accounts payable and accrued
liabilities and short-term borrowings approximates fair value because of
the short maturity of those instruments. The fair value of notes
receivable and interest-bearing security deposits are determined as the
present value of expected future cash flows discounted at the interest
rate currently offered by the Company which approximates rates currently
offered by local lending institutions for instruments of similar terms
and risks.
F-17
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) COMMITMENTS AND CONTINGENCIES
The Company leases office and production facilities and equipment under
agreements which expire at various dates. In 1995, the Company entered
into a noncancelable operating lease with an entity which is partially
owned by the Company. The Company incurred no lease expense under the
lease in 1994 and 1993. Certain leases contain renewal provisions and
generally require the Company to pay utilities, insurance, taxes and
other operating expenses. Additionally, the Company has entered into
agreements for the sale and leaseback of certain equipment used in
broadcast operations. Deferred gains on sale and leaseback transactions
is amortized to operations over the three year lease terms. Each lease
provides an option to the Company to repurchase the equipment at the
estimated fair market value at the end of the lease terms. Included in
assets are interest-bearing security deposits totaling $3,775,000
relating to these agreements. Lease expense under operating leases
totaled $4,763,000, $3,272,000 and $1,425,000 in 1995, 1994 and 1993,
respectively.
Future minimum lease obligations under noncancelable operating leases at
December 31, 1995 are as follows:
YEARS ENDING RELATED PARTY OTHER
------------ ------------- ---------
1996 $ 285,000 4,822,000
1997 314,000 3,179,000
1998 350,000 1,198,000
1999 373,000 162,000
2000 378,000 161,000
Thereafter 189,000 12,000
---------- ---------
Total $1,889,000 9,534,000
========== =========
The Company provides services to group viewing locations, generally bars
and lounges, and to third party distributors primarily throughout the
United States. In addition, the Company licenses its technology and
products to licensees outside of the United States. Concentration of
credit risk with respect to trade receivables are limited due to the
large number of customers comprising the Company's customer base, and
their dispersion across many different industries and geographies. The
Company performs ongoing credit evaluations of its customers financial
condition and, generally, requires deposits from its customers. At
December 31, 1995, the Company had no significant concentration of credit
risk.
(15) LEGAL ACTIONS
Beginning in 1992 the Company has been involved in various lawsuits with
Interactive Network, Inc. The remaining lawsuits have all been suspended
pending substantive discussions regarding a global resolution of all
disputes. The Company believes, based in part on the advice of outside
independent counsel, that these actions and possible resolutions will not
have a material adverse effect on the Company's financial position or
results of operations.
The Company is also defending litigation filed by various shareholders of
the Company. The class action suit seeks to recover unspecified damages
for a drop in the market price of the Company's Common Stock following an
announcement that an anticipated agreement under which the Company would
sell certain equipment and services to an arm of the Mexican Government
may be put out for bid. Whereas the Company has vigorously defended this
litigation and believes, in part, based upon the opinion of outside
counsel, on the merits of its defense, the Company has
F-18
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
entered into substantive negotiations to resolve this matter out-of-court
to avoid costly and protracted litigation, in the best interests of its
shareholders. A preliminary framework for such a resolution has been
reached, however, any proposed settlement between the parties will be
subject to notification to each of the class members and final court
approval.
In April 1995, a second class action lawsuit was filed against the
Company. The lawsuit seeks unspecified damages and alleges violations of
securities laws based upon the Company's projections for the fourth
quarter of 1994 and for fiscal year 1994, and further alleges that
certain insiders sold stock on information not generally known to the
public. In July 1995, a single shareholder filed a separate lawsuit in
Texas containing allegations essentially identical to those raised in the
shareholder lawsuit filed in April, 1995. The Company denies the
allegations in the complaints and has filed its own counterclaim against
third parties for indemnification. The Company has denied liability based
upon the allegations contained in the complaints which do not contain any
statement or demand for a specific amount of damages. Much discovery has
been undertaken and, at this time, the Company intends to continue to
vigorously contest these matters.
There can be no assurance that any or all of the preceding actions will
be decided in favor of the Company. The Company believes, based in part
on the advice of outside, independent legal counsel, that the costs of
defending and prosecuting these actions will not have a material adverse
effect on the Company's financial position or results of operations.
F-19
Schedule II
-----------
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
ADDITIONS BALANCE
ALLOWANCE FOR BALANCE AT CHARGED TO AT END
DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS (a) OF PERIOD
- ------------------- ------------- ---------- -------------- ---------
1993 $ 70,000 206,000 96,000 180,000
1994 $ 180,000 375,000 120,000 435,000
1995 $ 435,000 987,000 663,000 759,000
(a) Reflects trade accounts receivable written off during the year.
ADDITIONS BALANCE
ALLOWANCE FOR BALANCE AT OFFSET TO AT END
SALES RETURNS BEGINNING REVENUE DEDUCTIONS (b) OF PERIOD
- --------------- ------------- --------- -------------- ---------
1993 $ - - - -
1994 $ - 1,261,000 599,000 662,000
1995 $ 662,000 1,186,000 1,190,000 658,000
(b) Reflects actual returns and allowances charged against the allowance during
the year.
F-20