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1
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
For the fiscal year ended December 31, 1998
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1103425
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(760) 438-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.005 PAR VALUE NAME OF EACH EXCHANGE ON
REDEEMABLE COMMON STOCK WHICH REGISTERED
PURCHASE WARRANTS AMERICAN STOCK EXCHANGE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ]
The aggregate market value of the Common Stock held by non-affiliates of
Registrant as of March 26, 1999, computed by reference to the closing sale price
of the Common Stock on the American Stock Exchange, was approximately
$18,308,497. (All directors and executive officers of Registrant are considered
affiliates for this purpose.)
As of March 26, 1999, Registrant had 28,086,306 shares of Common Stock, $.005
par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
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TABLE OF CONTENTS
Item Page
Part I
1. Business 4
2. Properties 15
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 17
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters 17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19
7A. Quantitative and Qualitative Disclosures About Market Risk 25
8. Consolidated Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 26
Part III
10. Directors and Executive Officers of the Registrant 26
11. Executive Compensation 27
12. Security Ownership of Certain Beneficial Owners and Management 30
13. Certain Relationships and Related Transactions 31
Part IV
14. Exhibits, Consolidated Financial Statement Schedule, and Reports on Form 8-K 32
Index to Consolidated Financial Statements and Schedule F-1
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This Report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements that include
the words "believes," "expects," "anticipates," "plans" or similar expressions
and statements relating to the Company's strategic plans, capital expenditures,
industry trends and prospects and the Company's financial position. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of the
Company to differ materially from those expressed or implied by such
forward-looking statements. Although the Company believes that its plans,
intentions and expectation reflected in such forward-looking statements are
reasonable, it can give no assurance that such plans, intentions or expectation
will be achieved. Important factors that could cause actual results to differ
materially from the Company's expectations are set forth in this Report.
PART I
ITEM 1. BUSINESS
GENERAL
NTN Communications, Inc. ("NTN" or the "Company") was originally
incorporated in the State of Delaware on April 13, 1984 under the name of Alroy
Industries.
In 1994, the Company formed LearnStar, Inc. ("LearnStar"), which
operated through June 1998 as a wholly-owned subsidiary of NTN. In June 1998,
the Company sold an 82.5% interest in LearnStar to NewStar Learning Systems,
L.L.C. ("NewStar").
In 1994, the Company also formed IWN, Inc. ("IWN"), which serves as
the general partner of IWN L.P., a limited partnership engaged in the
development of interactive technology for gaming applications. IWN has no
business or operations apart from its service as the general partner of IWN
L.P. On April 1, 1998, the Company reached an agreement in principal with
Omnigon, a California corporation, to sell up to 90% of the equity of IWN to
Omnigon on or before May 31, 1998. Omnigon paid the Company $100,000 in April
1998 and an additional $100,000 in May 1998 for the option to acquire IWN under
specific terms. Subsequently, however, the Company terminated negotiations with
Omnigon for the proposed sale of IWN. As agreed, the Company used the
non-refundable payments made by Omnigon to pay the operating expenses of IWN
prior to the cancellation of the proposed transaction. NTN redirected IWN's
business strategy toward the Australian, New Zealand and Asian marketplace, and
building upon its existing venture in that market with IWN Australasia Limited
(IWN-A). NTN and IWN-A, in which NTN holds a 25% equity interest, have agreed
that IWN will provide research and development and technical support for IWN-A
operations over the next several months. IWN-A will fund the development and
support activities.
Unless otherwise indicated, references herein to "NTN" or the
"Company" include NTN and its consolidated subsidiaries.
RECENT DEVELOPMENTS
Recent Management Personnel Changes
In October 1998, the Board of Directors of the Company appointed
Stanley B. Kinsey as Chairman and Chief Executive Officer. Mr. Kinsey has been
a director of the Company since November 1997. Gerald Sokol, Jr., formerly the
Chief Executive Officer, remained as the Company's President and Chief
Financial Officer until January 1999.
In June 1998, Edward C. Frazier, who served as a director of the
Company since August 1996, resigned his position as a director of the Company.
In August 1998, Barry Bergsman was appointed to the Board of Directors.
There can be no assurance that the new management of the Company,
under the supervision of the Board of Directors, will be able to operate the
Company more successfully than prior management or that additional management
changes will not be made in the future.
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Resignation Agreements
In January 1999, Gerald Sokol, Jr., the Company's President and Chief
Financial Officer, resigned as an executive officer and director of the
Company. The Company entered into a Resignation and General Release Agreement
("Resignation Agreement") with Mr. Sokol pursuant to which Mr. Sokol's
Employment Agreement, dated July 1, 1998, was terminated.
Pursuant to the Resignation Agreement, the Company paid $205,850 to
Mr. Sokol in settlement of his prior Employment Agreement and in consideration
of his agreement not to compete with the Company for a period of one year. In
further consideration, the Company paid Mr. Sokol an earned 1998 bonus of
$128,500.
In consideration of the cancellation of Mr. Sokol's February 2, 1998
Option Agreement which granted him the option, vesting over a period of four
years, to purchase an aggregate of 500,000 shares of common stock at an
exercise price of $1.00, the Company granted Mr. Sokol the fully vested right
and option to purchase 125,000 shares of common stock at an exercise price of
$1.00 per share, exercisable at any time prior to 12 months after the January
19, 1999 termination of Mr. Sokol's employment with the Company.
Recent Series B Preferred Stock Exchange Agreement
In October 1997, NTN sold and issued an aggregate of 35,000 shares of
Series B Preferred Stock each to two institutional purchasers (the "Investors")
for a total of $7,000,000. The sale of the Series B Preferred Stock was effected
pursuant to Regulation D under the Securities Act of 1993. The Company paid
$210,000 for financial advisory services in connection with the sale of the
Series B Preferred Stock.
As of October 5, 1998, 14,000 shares of the Series B Preferred Stock
(plus accrued dividends) had been converted into 2,430,000 shares of common
stock of the Company, leaving 56,000 shares of the Series B Preferred Stock
outstanding. On October 5, 1998, NTN entered into an Exchange Agreement with the
Investors pursuant to which they agreed to surrender for cancellation all their
shares of Series B Preferred Stock in exchange for warrants and convertible
notes as described below. Pending their surrender and cancellation, the dividend
rate on the Series B Preferred Stock was increased from 4% to 7% and the
conversion price of the Series B Preferred Stock was fixed at $1.275 per share
consistent with the interest rate and conversion price under the convertible
notes described below.
The Company also agreed to issue each of the Investors a 7%
Convertible Senior Subordinated Note of the Company in a principal amount equal
to the stated value of their Series B Preferred Stock, plus accrued and unpaid
dividends through the date of issuance of the convertible notes.
The convertible notes were issued January 11, 1999 and bear interest
at the annual rate of 7% per annum. Interest is due and payable in quarterly
installments, in arrears, and the entire principal amount will be due and
payable on February 1, 2001. Interest on the convertible notes may be paid in
cash or, at NTN's election, in shares of its common stock valued for this
purpose at 90% of the average closing bid price of the common stock during the
10 trading days preceding the interest payment date.
At any time after a period of 20 consecutive trading days during which
the daily "Market Price" (as defined) of the common stock equals or exceeds
$1.75 (subject to adjustment), the Company may elect upon 45 days prior written
notice to prepay all or any portion of the convertible notes at a price of 105%
of the outstanding principal amount, plus accrued and unpaid interest. The
convertible notes will continue to be convertible, however, at any time prior
to prepayment in full. The convertible notes must be prepaid in connection with
a merger or consolidation of the Company or other "Major Transaction" (as
defined) if the consideration per share of common stock in the Major
Transaction is at least $1.50. In such event, the prepayment price will be 105%
of the outstanding principal amount of the convertible notes, plus accrued and
unpaid interest.
The holders of the convertible notes may convert them at any time, in
whole or in part, at their option. The number of shares of common stock
issuable upon conversion of each convertible note will be determined by
dividing the outstanding principal amount to be converted, plus any accrued and
unpaid interest, by the conversion price then in effect. The conversion price
will be $1.275 per share, subject to adjustment if certain events, including
stock dividends or subdivisions or reclassifications of the common stock or
any sale or issuance of common stock (or of rights or options to subscribe for
or purchase common stock) for no consideration or for a consideration per share
less than the "Average Market Price" (as defined) of the common stock. The
actual number of shares of common stock issuable upon any conversion of the
convertible notes will depend on the conversion price in effect on the relevant
conversion date.
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The convertible notes are subordinate in right of payment to the prior
payment of all "Senior Debt" (as defined). The Company is restricted under the
terms of the convertible notes from incurring any Senior Debt in excess of
$10,000,000 or any other indebtedness (except Senior Debt and "Subordinated
Debt" (as defined)) in excess of $2,000,000 at any time.
The Company will be in default under the convertible notes if it fails
to pay any principal or interest on the convertible notes when due, and in
certain other events, including in the event of a material adverse change in
the condition, financial or otherwise, or operations of the Company as
determined by the holders of the convertible notes in their discretion. If the
Company defaults under the convertible notes, in the discretion of the holders
of the convertible notes, the entire outstanding principal amount of the
convertible notes and all accrued and unpaid interest will become immediately
due and payable in full.
On October 5, 1998, in consideration for their entering into the
Exchange Agreement, NTN issued to each of the Investors a warrant to purchase
500,000 shares of common stock at an initial purchase price of $1.25 per share.
The purchase price of shares of common stock under the warrants will be subject
to reduction based on the future "Market Price" (as defined) of the common stock
as follows: the purchase price will be (i) $0.75, if the daily Market Price on
each day during any 10 consecutive trading days shall be equal to or greater
than $1.75 but less than $2.00; (ii) $0.625, if the daily Market Price on each
day during any 10 consecutive trading days shall be equal to or greater than
$2.00 but less than $2.25; (iii) $0.50, if the daily Market Price on each day
during any 10 consecutive trading days shall be equal to or greater than $2.25
but less than $2.50; (iv) $0.375, if the daily Market Price on each day during
any 10 consecutive trading days shall be equal to or greater than $2.50 but less
than $3.00; (v) $0.25, if the daily Market Price on each day during any 10
consecutive trading days shall be equal to or greater than $3.00 but less than
$4.00; and (vi) $0.005, if the daily Market Price on each day during any 10
consecutive trading days shall be equal to or greater than $4.00. No adjustments
to the purchase price will be made to increase the purchase price in effect at
any time. The warrants are exercisable at any time on or before February 1,
2001. In the event, however, that a "Major Transaction" (as defined in the
convertible notes as described above) occurs, NTN may elect upon 30 days prior
written notice to the warrant holders to accelerate the expiration date of the
warrants so long as the consideration per share of common stock which would be
received by the warrant holders in the Major Transaction exceeds the
then-applicable purchase price per share under the warrants.
The warrants contain certain antidilution provisions that require
adjustments in the purchase price and the number of shares of common stock
purchasable in the event of a stock dividend, subdivision or combination of the
outstanding shares of common stock or in the event of a recapitalization of the
Company and certain similar events. In addition, the exercise price and number
of shares purchasable under the warrants are to be adjusted in the event the
Company issues additional shares of common stock (or rights or options to
subscribe for or purchase common stock) for no consideration, or for a
consideration per share of common stock less than the "Current Market Price"
(as defined) of the common stock under any employee stock option plan or other
employee plan approved by the Company's Board of Directors, provided that the
exercise or purchase price is not less than 85% of the fair market value on the
date of grant. The warrants allow for cashless exercises by means of the
Company's withholding of shares of common stock otherwise issuable to the
holder, which shares are to be valued for this purpose based on the market
price of the common stock at the time.
A registration statement on Form S-3 covering the shares of common
stock issuable upon conversion of the 7% convertible senior subordinated notes
and exercise of the warrants, was declared effective by the Securities and
Exchange Commission on January 8, 1999.
Recent Announcement of New Network
In February 1999, the Company introduced a second Network to be
broadcast for a fee to the Hospitality industry (the "New Network"). Deployment
of the New Network to subscriber locations is scheduled to begin in April 1999.
Beta testing has been in process since late 1998. This New Network will have
all the capabilities of the original NTN Network plus a more television-like
quality in advertisements and games. As part of the rollout of the New Network,
the "Playmaker"(TM) wireless input device has been enhanced in several ways:
(a) updated radio frequency technology mitigates the interference problems
common to the prior series; (b) a larger 8-line LCD display to allow for
several possible future features, including user "chat" from one unit to
another within the host premises and the display of information such as sports
scores and stock quotes; (c) a redesigned keypad conforms to the industry
standard QWERTY keyboard layout as well as utilizing a "play zone" to provide a
dedicated input area for the games (the participants also will use the keyboard
for entering personal information and to utilize the system's chat services)
(d) a longer battery life. Further, the Company has developed enhancements to
its interactive software, including a migration to a Windows(R)-based platform,
to allow full-motion video presentation. In all, the New Network will allow the
presentation of enhanced graphics and a broader array of game concepts, and
will allow advertisers to use video images to sell their products, which is not
possible on the original Network.
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PRINCIPAL SERVICES AND PRODUCTS
Since the Company substantially curtailed funding the operations of
its non-core subsidiary, IWN, the discussions throughout this report are
limited to the Company's core operations. Historical financial information
related to IWN and LearnStar is included as necessary to provide an
understanding of the Company's operations.
NTN develops and produces individual and multi-player interactive
programs for distribution to a variety of media platforms. These interactive
sports and trivia programs permit multiple viewers to simultaneously respond to
and participate with the programming content. NTN has a license arrangement
with the National Football League (NFL) which expires March 31, 2000, as well
as nonexclusive arrangements or agreements with the National Hockey League in
Canada and others, to provide the Company's QB1(R) football game and other
interactive play-along programming in conjunction with live televised
broadcasts. NTN broadcasts a wide variety of popular games, trivia and
informational programming to group viewing locations such as hotels, sports
bars and restaurants through the NTN Network(TM). In addition, NTN brings
multi-player interactive games into consumer households through America Online,
the Internet and interactive television services. Since we distribute our
programs via satellite, cable, telephone and wireless transmission
technologies, we are not dependent on any particular hardware or technical
platform.
NTN currently provides products and services to two principal markets,
each of which is directly related to multi-player interactive entertainment:
o Network Services is the interactive television network (the NTN
Network(TM)) featuring sports and trivia games which are
broadcast to restaurants and other group viewing environments.
o Online/Internet Services are live interactive sports and trivia
games, including those currently broadcast over the NTN
Network(TM), provided via America Online, the Internet and other
third-party providers for the home consumer market.
The following is a brief description of each of the Company's markets:
Network Services - Network Services represents the majority of the
Company's business, providing an interactive television broadcast network
featuring sports, trivia and informational programming to over 2,900
hospitality sites in the U.S. as of December 31, 1998. These sites include
restaurant chains (e.g., TGI Friday's, Damon's, Pizzeria Uno's), local and
regional bowling alleys, pizzerias, sports complexes, taverns and military
bases. Through various platforms including satellite, cable and wireless
transmission sources, Network Services can link its subscribers to encourage
local, regional and national competitions around its programming.
Online/Internet Services - The Company provides to the home consumer
market many of the same services as is available on the NTN Network, via
arrangements with online, cable delivery and internet services.
Online/Internet Services is not dependent on any particular technology
or method of transmission to deliver its programming. In addition to the same
sports and trivia games which are currently broadcast over the NTN Network,
Online/Internet Services includes other multi-player interactive games
expressly designed for the home environment. Currently, revenues are derived
from 1) subscription fees, in which third party companies pay monthly fees for
NTN programming, 2) revenue sharing, in which third party companies pay NTN a
portion of pay-per-play revenue that is generated and 3) information services
in which NTN provides value-added services to third parties. Customers include
AOL, GTE MainStreet and the NFL.
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MARKETING AND DISTRIBUTION OF SERVICES AND PRODUCTS
Network Services. Network Services are provided via the NTN Network,
which currently serves over 2,900 locations ("Locations") throughout all 50
States.
The NTN Network presently features from 14 to 17 hours, depending on
the time zone, of interactive sports and entertainment trivia game programming
on weekdays, with extended programming hours on weekends. The balance of
broadcast time is devoted to a non-audible graphics-based service transmitting
information, including sports scores and upcoming program promotions.
Original programming for the NTN Network is developed and produced at
the Company's corporate offices in Carlsbad, California, for distribution to
Locations. The Company's facilities are equipped with video, satellite and
communications equipment, and multimedia computers. The Company can provide
simultaneous transmission of up to 16 live events for interactive play and a
multitude of interactive games and other programs, allowing distribution of
different programs to customers in different geographical locations.
The Company uses two independent services to distribute NTN
programming via satellite to customers, although it is not dependent upon
either service because there are several other providers that offer similar
services. The Company attempts to use the most effective and least expensive
multiple data transmission techniques to distribute data from the Company's
facilities to customers, including direct connect, internet transmission, and
direct satellite broadcast.
Each Location is furnished with NTN proprietary equipment (a "Location
System") including a personal computer, a satellite data receiving unit
(usually a small satellite dish), and a minimum of five hand-held, portable
keypads ("Playmakers(R)") which players use to make their selections. During
live interactive programs, players participate in the play-along programs using
two television screens. One screen features the live broadcast from the
television network (e.g., ABC's Monday Night Football), while the second screen
displays the NTN Network program. Participants play the game by entering their
selection on Playmakers(R), which transmit a radio signal to the on-site
computer. At the conclusion of the broadcast, scores are calculated and top
scores are sent via phone lines to the NTN broadcast center (the "Broadcast
Center") in Carlsbad, California. Within seconds, rankings for each Location
are tabulated and displayed and rankings and scores for the top Locations are
transmitted back to all Locations via the NTN Network for display. This allows
players to compete not only with other patrons at their Location, but against
all players across the nation who are participating interactively on the NTN
Network. The following diagram depicts the transmissions for a typical
real-time, interactive game via satellite. Customers generally have executed a
one-year contract to obtain the Company's services and pay a monthly fee
generally ranging from $400 to $800.
[GRAPH OF NTN BROADCAST CENTER]
In addition to tabulating Playmaker(R) responses at the Location and
communicating with the Company's Broadcast Center, the Location System can
manipulate screens locally by calling up high-resolution computer generated
graphics and inserting the screens into the broadcast schedule. Accordingly,
the Company can offer both national and local advertising.
Interactive Game Programs. Network Services offers a variety of sports
and entertainment trivia games that challenge players' skill and knowledge and
create significant customer loyalty. An example of interactive sports
programming is QB1(R), the Company's first and most popular game program.
QB1(R) is an interactive football strategy game developed and broadcast under
an exclusive license from the NFL, which tests a player's ability to predict an
offensive team's plays during a live televised football game. Points are
awarded based on the accuracy of the player's prediction, rather than whether
the team scores or advances the ball. The Company broadcasts QB1(R) in
conjunction with every NFL game and selected Canadian Football League and
college football games. The NTN Network presently features the following
interactive sports games programs:
NTN Play-Along Games - Interactive games played in conjunction with
live, televised events. Games include the following:
Game Description
- - ---- -----------
QB1(R) NFL licensed interactive strategy game in
conjunction with live telecasts of
college and professional football games
DiamondBall Interactive strategy game played in
conjunction with live televised Major
league Baseball games
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NTN Fantasy Games - Fantasy league games played in conjunction with
sporting events or rotisserie leagues. Games include the following:
Game Description
- - ---- -----------
Brackets(TM) Basketball or hockey tournament prediction
game
Football Challenge(TM) Weekly selection of winners of college and
professional football games
Survivor(R) Weekly single elimination prediction game
for professional football
Interactive Trivia Game Programs. During trivia game programs, each
Location System simultaneously displays selected trivia questions which are
displayed on the NTN television monitor at each Location. Participants use the
Playmaker(R) to select answers, which are collected, transmitted and tabulated
in a similar manner to NTN's interactive sports games. Participants' scores are
displayed on the dedicated television monitors, along with national, regional
and local rankings, as applicable. While certain of the Company's sports games
are available only during the seasons when the respective sports are played,
trivia game programs allow the Company to offer year-round interactive
programming. The NTN Network generally provides the trivia programming during
evening hours, when Locations, particularly restaurants and taverns, tend to be
busiest. The NTN Network presently features the following interactive trivia
games programs:
NTN Premium Trivia Games - Promotion-oriented weekly game shows that
generally require 1-2 hours of participation. Prizes are awarded to the top
finishers, except where prohibited by law. Games include the following:
Game Description
- - ---- -----------
Trivial Pursuit Live(R) Interactive version of the famous Trivial
Pursuit game - licensed from Hasbro
Interactive.
Playback (TM) Music trivia
Showdown(R) Advanced trivia challenge
SportsIQ(TM) Weekly sports trivia game
Sports Trivia Challenge(R) Advanced sports trivia covering multiple
topics
Spotlight(TM) Entertainment and media based trivia game
(movies, music)
Glory Daze(TM) Trivia game focused on baby boomer topics
NTN Trivia Games - General-themed, standard games typically one-half
hour in length. Games include the following:
Game Description
- - ---- -----------
Brain Buster(R) Interactive trivia game covering esoteric
topics
Countdown(R) Interactive trivia game using word plays
Topix(TM) Theme driven trivia game played under
controlled timing
Wipeout(TM) Interactive trivia game eliminating
incorrect answers
Nightside(R) Adult oriented trivia
Sports Trivia(R) General trivia game covering sports topics
Retroactive(TM) Pop-culture trivia with 60's, 70's and
80's content
Football Weekend Roundup(TM) Football trivia game
Abused News(TM) Humorous trivia game focused on headline
news
Appeteasers(TM) Shorter version of humorous general trivia
game
Jukebox(TM) Music trivia based on category selected by
player
Triviaoke(TM) Music trivia game
Antagonist Trivia with an edge from Heckler's
Online
Zealot Futuristic trivia game from Heckler's
Online
Custom Games - Interactive games created specifically for media
companies such as Capital Cities/ABC for simultaneous broadcast with their live
telecasts.
Game Description
- - ---- -----------
NTN Awards Show(TM) Interactive game played in conjunction
with the Academy
Awards, Grammy Awards and other award shows
NTN Draft Show(TM) Interactive game played in conjunction
with the annual NFL draft
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Since 1987, Network Services has broadcast the NTN Awards Show(TM) to
all Locations in connection with the live Academy Awards telecast. The NTN
Awards Show(TM) contains movie trivia and biographical information on nominees
and allows players to select winners up to the actual announcement and compete
with other players via the NTN Network, in a manner similar to QB1(R).
Approximately 5,000 players participated in NTN's broadcast of the 1999 NTN
Awards Show(TM).
Information Programming. During the hours in which the Company is not
broadcasting interactive games, the Company uses its broadcast network to
transmit sports information as well as NTN Network programming information. The
Company obtains the majority of its sports information (for which it pays a
monthly fee) from Sportsticker wire service, electronically formats the
information and then retransmits it for broadcast to Locations.
Advertising. The NTN Network, in a manner similar to the television
broadcast medium, sets aside a number of minutes of a broadcast hour for
advertising, promotional spots (promoting NTN Network's competitions and
special events), "tune-in spots" (promoting NTN Network programming schedule),
and public service announcements.
The Company has currently set aside 14 minutes each hour for
advertising spots, promotional spots and "tune-in spots." Each spot, which can
be sold, is designed to be 15 seconds in length for a total of 56 spots per
hour. The Company can insert advertising messages into its interactive sports
and trivia programming at any number of Locations. Further, messages can be
broadcast over the NTN Network or custom-tailored for a specific Location or
several Locations. Sponsorships of programs are also available and provide
advertisers with specific premium exposure within a sponsorship program.
The NTN Network's Players Plus(R) ("Players Plus") frequent player
club, numbering over 450,000, offers advertisers an effective tool for market
research. Players Plus members join by entering their name, address, zip code
and identification number into a Playmaker(R), which is then captured at the
NTN Broadcast Center. Members earn points each time they play and also a chance
to win prizes in the monthly Players Plus(R) sweepstakes. Sponsors are capable
of receiving feedback through interaction with customers in the form of
customer surveys on the NTN Network or via email.
Online/Internet Services. The Company offers many of the same services
and programs as seen on the NTN Network to the home consumer market via
Online/Internet Services. NTN's Online/Internet Services are currently
dominated by a relationship with America Online ("AOL") from which NTN derives
the majority of its Online revenues. The existing agreement which runs through
1999 is a fixed monthly amount which has been decreasing incrementally over the
last 2 years. The Company had hoped to make up this staged decrease through
Online advertising and sponsorships. To date, we have not been successful in
this arena. We are aggressively exploring alternative Internet strategies in
conjunction with AOL in addition to opportunities elsewhere including:
broadcasters, portals and Internet content providers. In addition to the AOL
contract, the Company also produces and hosts Online games for various third
parties and portals. Revenues received include development fees and monthly
revenues. The Company's interactive sports and trivia games are maintained on
the Company's servers and are available online 24 hours a day, seven days a
week.
The Company's Online/Internet Services are unique since the programs
are not dependent upon, and consequently no bound by, any particular technology
or method of delivery. Regardless of which technology emerges as the primary
means of delivery to home users, management believes its programming content
will be available to the household.
Online/Internet Services are distributed to online networks, also
known as content distributors. These games, in turn, are made available to
their customer base for a fee. Companies of this type currently include GTE
MainStreet.
The diagram below depicts the transmissions necessary for a consumer
to use the Company's service in his or her home.
[GRAPH OF VIA CABLE/TELEPHONE]
Foreign Licensing. NTN has provided its services in certain foreign
markets through licensing agreements with foreign licensees. Generally, the
Company licenses its products in foreign countries by granting the rights to
use NTN's interactive broadcast technology. NTN provides licensees with
technological know-how and assistance to build a broadcast center, and to
develop interactive products and programs. For many years, NTN has provided
service to customers in Canada through its unaffiliated licensee, Networks
North, Inc.. In 1993, NTN issued a 20-year license to an unaffiliated company
in Australia ("NTN Australasia"), to create the first interactive television
network in Australia and New Zealand. In 1994, NTN issued a license to
MultiChoice Ltd., an unaffiliated company, to develop and operate an
interactive broadcast network in South Africa. The South African licensee
ceased its NTN-licensed operations in March 1998. Although the Company may
continue to engage in selective foreign licensing, these activities are not
expected to contribute significantly to revenues in the foreseeable future.
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MARKETING AND EXPANSION STRATEGY
Network Services. Network Services markets services to customers
primarily through advertising in national trade periodicals, national and
regional industry trade shows, telemarketing, direct mail and direct contact
through field representatives. All sales prospects are organized and tracked
through shared database software. Currently, services are sold through a
regional-based management team that utilizes direct salespersons as well as
independent representatives. The Company believes its in-house sales team will
be more successful in meeting its sales goals.
As discussed under "Recent Developments", in February 1999, the Company
introduced a second Network to be broadcast for a fee to the hospitality
industry. Deployment of the New Network to subscriber locations is scheduled to
begin in April 1999. The Company's plan is to continue to operate the current
network for approximately 18 months after the New Network is launched and allow
customers to convert to the New Network as they desire. Prospective new
customers will be offered the New Network only so that the Company eventually
will be operating only one network.
The Company's future business strategy related to Network Services is
to continue to increase available programming and market to additional group
viewing Locations. In addition, the Company continues to develop additional
revenue sources for Network Services such as local and regional advertising. No
assurance can be given that the Company will be successful in the
implementation of its business strategy.
Online/Internet Services. Since the end-user of Online/Internet
Services is the service provider's customer, the Company relies on the service
provider's marketing efforts to promote its products. However, the Company
works in conjunction with service providers to develop the promotions and
advertisements. For example, service providers such as AOL may include the
Company's game logo on an initial "start-up" screen which millions of its
subscribers can access at no expense to NTN. Subscribers generally pay the
service provider a flat fee or a fee based on the amount of time that the
subscriber has participated with the Company's games and services, and the
service provider pays NTN.
In the future, the Company expects its products to elicit more
exposure from the distributors as a result of increased brand recognition and
continued promotions. NTN will continue to take a proactive position with
respect to marketing products to each distributor to ensure inclusion in as
many of their promotional efforts as possible. The Company expects its direct
marketing costs to continue to be minimal. No assurance can be given as to
whether the Company will be successful in the implementation of its business
strategy.
SOURCES OF REVENUE
The following table sets forth certain information with respect to the
principal sources of the Company's revenues during the years ended December 31,
1998, 1997 and 1996.
YEARS ENDED DECEMBER 31
---------------------------
(Dollars in thousands)
1998 1997 1996
------- ------- -------
Network Services $18,785 19,009 19,269
Online/Internet Services 2,014 3,326 1,811
Advertising Revenue 896 772 1,590
Equipment Sales, net 499 475 1,757
Other Revenue 2,000 2,279 1,284
Network Services. The primary market for Network Services is comprised
of approximately 300,000 taverns and restaurants in North America. Other
potential Locations may also be found among hotels, military bases, college
campuses, hospitals, and other group viewing Locations such as country clubs,
fraternal organizations, and bowling centers.
To date, Network Services' customers have generally been public
viewing locations such as restaurant chains (e.g., TGI Friday's, Damon's,
Pizzeria Uno's), local and regional bowling alleys, pizzerias, sports
complexes, sports taverns and military bases. Many of the Company's customers
such as hotel and restaurant chains have multiple Locations. Locations
generally enter into a one-year broadcast service agreement with the Company
pursuant to which they pay a monthly broadcast fee of approximately $400-800
per Location. The Company currently serves over 2,900 Locations located in all
50 States.
As a percentage of total revenues, Network Services revenues amounted
to 78%, 74% and 75% in 1998, 1997 and 1996, respectively.
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Online/Internet Services. The Company provides its services to online
users pursuant to the agreements with various system providers such as AOL. The
online computer industry remains a fast-growing consumer market in terms of
subscribers. Fees from system providers are individually negotiated. Fees from
AOL are based on the fixed fees set forth in the Company's two year agreement
with AOL which expires in December 1999. Revenue from other service providers
is based on the actual use of the NTN interactive programs by their underlying
customers.
The Company has granted to Networks North, Inc. the exclusive right to
market NTN interactive services to online users in Canada. The Company is
entitled to receive a royalty equal to 25% of any revenues generated from
Canadian online customers. The Company has not received any revenues to date
relating to the Canadian online services, and no assurance can be given that
the Company will receive any such royalties in the future.
As a percentage of total revenue, Online/Internet Services revenues
amounted to 8%, 13% and 7% in 1998, 1997 and 1996, respectively.
Advertising Revenue. The Company sells advertising spots for broadcast
on the NTN Network as well as for Online/Internet Services. Advertisers can buy
time for promotional spots as well as sponsorship of specific events or
programs. As a percentage of total revenue, advertising revenues amounted to
4%, 3% and 6% in 1998, 1997 and 1996, respectively. The Company has retained
two independent advertising agencies to obtain additional advertising revenues
from certain industry sectors. Although the Company is confident in its ability
to attract substantial advertisers to the NTN Network, the advertising revenue
model on which advertising rates are based continues to evolve. No assurance
can be given that advertising revenues will contribute significantly to total
revenues in the foreseeable future.
Equipment Sales, Net. Typically, Location Systems are provided to
customers but ownership is maintained by the Company or is leased from third
parties. The Company sells interactive equipment, particularly Playmakers(R),
to its licensees in Canada and Australia. Equipment is generally sold to
customers with no return rights except in the case of defect. As a percentage
of total revenue, Equipment Sales amounted to 2%, 2%, and 7% in 1998, 1997 and
1996, respectively. Equipment sales are not expected to contribute
significantly to revenues in the foreseeable future.
Other Revenue. Other revenues consist primarily of revenue generated
pursuant to certain license agreements the Company has with independent
licensees, the most significant of which is Networks North, Inc. in Canada.
Pursuant to the license agreement, Networks North, Inc. solicits Locations to
the NTN Network in Canada. The Company provides NTN Network programs to
Networks North, Inc. in exchange for an annual license fee payable in monthly
installments based upon the number of Locations in Canada, which presently
number approximately 535.
RAW MATERIALS
For media platforms such as online services, the Company distributes
its programs to the recipients who maintain their own receiving, translation
and re-broadcasting equipment. Accordingly, the Company has no raw materials or
equipment needs for these customers beyond its own back-end servers.
For the NTN Network, the Location System is assembled from
off-the-shelf components available from a variety of sources, except for the
Playmaker(R) package. The Company is responsible for the installation and
maintenance of the Location Systems. The Playmaker(R) is a hand held ,
49-megahertz radio frequency device used to enter choices and selections by
players of QB1(R) and our other games and programming broadcast via the NTN
Network(TM) and is currently manufactured by a non-affiliated manufacturer in
Taiwan. Customers have experienced certain recurring problems with 49 megahertz
Playmakers(R) related to noise sensitivity and performance of the Playmaker's
rechargeable batteries. Equipment function problems have been a substantial
cause of customer contract terminations in the past. To address these problems,
the Company has designed a 900-megahertz Playmaker(R) in consultation with an
outside engineering firm. The redesigned Playmaker(R) is currently being
manufactured by the manufacturer of the 49-megahertz Playmaker and will be
deployed in the marketplace in conjunction with the launch of NTN's New
Network. There can be no assurance that equipment problems will not occur with
the redesigned Playmakers(R) and the continuance of such problems in the future
could adversely affect the results of operations.
LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
The Company's sports games make use of simultaneous telecasts of
sporting events. Where the Company has licenses with various sporting leagues,
the Company is also permitted to utilize the trademarks and logos of national
teams and leagues in connection with the playing of an interactive game.
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The Company is party to an agreement with the NFL, which grants the
Company the exclusive right to use the trademarks and service marks of the NFL
in connection with the playing and marketing of QB1(R). The NFL agreement
grants the Company the exclusive data broadcast rights to conduct interactive
games in conjunction with the broadcast of NFL football games, for which the
NFL receives a royalty based on revenues billed by the Company in connection
with QB1(R) play. The agreement with the NFL expires in March 2000. This most
recent agreement expands the Company's rights to include certain approved
online services to all territories in which such online services are accessible
and significantly includes the Internet. There can be no guarantee that the
Company will be able to renew the agreement in the future. Further, it is
unclear whether non-renewal of the agreement would have a material adverse
effect on the Company.
The Company keeps confidential as trade secrets the software used in
the production of its programs. The hardware used in the Company's operations
is virtually off-the-shelf, except for the Playmaker(R) keypads. The Company
owns copyrights to all of its programs. In addition to the registration of the
trademark for QB1(R), the Company has either received, or is presently applying
for, trademark protection for the names of its other proprietary programming,
to the extent that trademark protection is available for them. The Company's
intellectual property assets are important to the Company's business and,
accordingly, the Company maintains a program directed to the protection of its
intellectual property assets.
SEASONAL BUSINESS
Overall, the Company's business generally is not seasonal. Revenue is
billed monthly as service is provided to customers. However, sales of new
Locations have traditionally been higher in the summer and early fall months
compared to the rest of the year. This trend coincides with the start of the
NFL season in August.
The hospitality industry has historically experienced a relatively
high business failure rate. Likewise, the Company has lost customers due to the
failure of customer businesses; to change in ownership and non-renewal of
contracts, collectively referred to as "churn". The Company's historical
"churn" experience has also been seasonal in that the percentage of churn has
been highest following the completion of the NFL season in February, although
churn occurs in all months. During the Company's operating history,
approximately 25% - 30% of the existing Network Services customers at the
beginning of a year, have churned by the end of that year. The Company has
implemented marketing programs and other efforts to reduce the churn rate,
however no assurance can be given that such efforts will be successful.
Online/Internet Services are provided to consumers via online
distributors such as AOL and GTE Mainstreet. Revenue is primarily a flat
subscription fee to NTN with no seasonality.
WORKING CAPITAL
The discussion under "Liquidity and Capital Resources" included in
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", is incorporated herein by reference.
SIGNIFICANT CUSTOMERS
The Company's customers are diverse and varied in size as well as
location. The services are provided point to multi-point so that the Company is
not dependent on any one customer. The Company does not have any individual
customer who accounted for 10% or more of its consolidated revenues in 1998,
1997 or 1996.
BACKLOG
The Company historically has not had a significant backlog at any time
because the Company normally can deliver and install new Location Systems
within the delivery schedule requested by customers (generally, within two to
three weeks). With the introduction of the New Network, however, a backlog of
sales exists. In February 1999, the Company began to accept pre-orders of the
New Network to both new customers and existing customers. Deployment of the New
Network is scheduled to begin in April 1999. As of March 26, 1999 a total of
approximately 290 contracts, some of which are pending final credit approval,
had been back-logged related to the New Network. For other Online Services,
there is no backlog because services are generally distributed point to
multi-point and the Company does not have to provide specific equipment to the
customer, making it relatively simple to add new customers without any
significant delay.
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GOVERNMENT CONTRACTS
The Company provides its distribution services to a small number of
government agencies (usually military base recreation units); however, the
number of government customers is small compared to the Company's overall
customer base. Contracts with government agencies are provided under
substantially the same terms and conditions as other corporate customers.
COMPETITIVE CONDITIONS
The Interactive Entertainment industry is still evolving, but
currently may be divided into three major segments: (1) media distribution
services such as online services, telephone companies and cable television
companies and the NTN Network; (2) equipment providers such as computer and
peripheral equipment manufacturers; and (3) content and programming providers,
such as movie studios, NTN and software publishers. The Company does not act as
a direct provider of equipment to consumers. The Company operates as a media
distribution service through its own NTN Network. Also, the Company is a
program provider to an array of other media distribution services to consumers
utilizing a variety of equipment and delivery mechanisms.
The Company competes with other companies for total entertainment
dollars in the marketplace. The Company's programming competes generally with
broadcast television, pay-per-view, and other content offered on cable
television. On other mediums, the Company competes with other content and
services available to the consumer through online services. With the entrance
of motion picture, cable and TV companies, competition in the interactive
entertainment and multimedia industries will likely intensify in the future. In
January 1999, The Walt Disney Company introduced interactive programming
broadcast in conjunction with live sporting and other events which may compete
directly with QB-1(R) and our other programming. Moreover, the expanded use of
online networks and the Internet provide computer users an increasing number of
alternatives to video games and entertainment software. NTN seeks to compete by
providing high quality products at reasonable prices, thereby establishing a
favorable reputation among frequent buyers. There can be no assurance, however,
that NTN can compete effectively. The Company's programming is interactive in
nature, but is distinguishable from other forms of interactive programming by
its simultaneous multi-player format and the two-way interactive features.
Presently, the technological capabilities of transmitting entertainment
products to the consumer exceed the supply of quality programming and services
available on the existing delivery systems. The Company is able to utilize the
wide variety of services available for transmission of entertainment products
to the consumer by forming strategic alliances with service providers to supply
the Company's programs for re-transmission. The Company's programming is
available to the consumer over a multitude of media platforms and delivery
systems.
Network Services. Currently, Network Services on the NTN Network have
no competitors that furnish live, multi-player interactive entertainment
similar in scope and nature. Although the Company has no direct competitors in
this area, it does compete for total entertainment dollars in the marketplace.
Other forms of entertainment provided in public eating and drinking
establishments include music-based systems and cable and pay-per-view
television. However, evidence provided by customers indicates that patrons are
inclined to stay longer and consume more food and drink when NTN Network
interactive games are offered as the main source of entertainment. Accordingly,
Network Services customers generally tend to view these services as a profit
generator rather than a cost center.
Online/Internet Services. In the Online/Internet Services market, the
consumer has many entertainment options from which to choose, ranging from
cable television to telephone based services to computer online providers and
the Internet. The Company offers live, multi-player games and services which
are available to multiple interactive platforms in the home. Also, the Company
competes for a share of the total home entertainment dollars against broadcast
television, pay-per-view and other content offered on cable television. The
Company also competes with other programming available to consumers through
online services such as AOL. Cable television, in its various forms, provides
consumers the opportunity to make viewing selections from anywhere between 30
to 100 free and pay channels, thus limiting the amount of time devoted to any
particular channel. For the most part, cable television is predominantly a
passive medium, and does not offer the viewer the opportunity to participate in
its programming, and even less frequently, does it offer programming designed
for active participation. Online providers, such as AOL, can provide literally
thousands of options for content and entertainment, however, such online
services have traditionally been confined to that company's subscriber base.
Interaction among viewers is thus limited to the particular program as offered
only on the specific online service. The Company offers consumers the
opportunity to participate and compete against other viewers who are seeing the
identical program over several different technological media, including
interactive television, personal computers and/or the NTN Network.
RESEARCH AND DEVELOPMENT
During 1996, 1997 and 1998, the Company incurred approximately
$3,396,000, $1,600,000, and $714,000, respectively related to Company-sponsored
research and development projects, including projects performed by consultants
for the Company. In 1998, research and development efforts related to the
development of the New Network. The decrease in research and development from
1997 was due to certain research and development endeavors which began in 1997
that were completed by the end of 1997.
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These efforts included initial design and implementation of the Company's
website, redesign of the America Online site and content and other production
for third parties.
The Company has previously experienced problems in the performance of
its 49 megahertz Playmaker(R) device. In an effort to address these equipment
function problems, the Company developed a new 900 megahertz Playmaker(R)
device to augment its existing 49 megahertz Playmaker(R) device. The new device
is expected to be more reliable and will be deployed commercially in
conjunction with the launch of NTN's New Network. Further, the Company has
developed enhancements to its interactive software including a migration to a
"Windows"-based platform and continued research into new and enhanced graphics.
The Company continuously evaluates various methods of transmitting its programs
and services. There is no assurance that the Company will successfully complete
current or planned development projects or will do so within the prescribed
time parameters and budgets. There can be no assurance, furthermore, that a
market will develop for any product successfully developed.
The Company works closely with independent user groups in an attempt
to develop new and enhanced services and products in response to customer
needs.
GOVERNMENT REGULATIONS
The cost of compliance with federal, state and local laws has not had
a material effect upon the Company's capital expenditures, earnings or
competitive position to date.
On June 16, 1998 the Company received FCC approval for its new 900 MHz
Playmaker(R)keypad. The 900 MHz Playmaker is an integral component of the
Company's New Network.
EMPLOYEES
The Company and its subsidiaries employ approximately 124 people on a
full- time basis and 25 people on a part-time basis, and also utilize
independent contractors for specific projects. In addition, the Company retains
a number of non-affiliated programming and systems consultants. It is expected
that as the Company expands, additional employees and consultants will be
required. The Company believes that its present employees and consultants have
the technical knowledge necessary for the operation of the Company and that it
will experience no particular difficulties in engaging additional personnel
with the necessary technical skills when required. None of the Company's
employees are represented by a union and the Company believes its employee
relations are satisfactory.
ITEM 2. PROPERTIES
In 1997, the Company sold its interest in a limited liability company
that owns "The Campus", the three-building complex that houses the Company's
headquarters. The Company continues to lease space in The Campus pursuant to a
six-year lease for approximately 39,000 square feet of office and warehouse
space. The lease expires in June 2001 and the monthly rent is approximately
$37,000. In September 1998, the Company, as sublessor, entered into a sublease
agreement for office space in The Campus with WinResources Computing, Inc., as
sublessee. The sublease expires in June 2001 and the monthly rent is
approximately $12,200.
The Company also leased approximately 4,000 square feet of warehouse
space near the corporate headquarters, under a lease that expired in September
1998, at a rent of approximately $3,000 per month. The Company did not renew
this lease and does not anticipate leasing additional space in the next year.
ITEM 3. LEGAL PROCEEDINGS
In February 1998, the Company completed its previously announced
settlement of a class-action lawsuit pending against the Company since 1993.
The terms of the settlement were as follows: A settlement fund was established
consisting of $400,000 in cash plus 565,000 warrants to purchase the Common
Stock of the Company ("Settlement Warrants"). Each Settlement Warrant has a
term of three years from February 18, 1998. The Settlement Warrants were issued
on February 18, 1998 and entitle the holder of a Settlement Warrant to purchase
a share of Common Stock of the Company at a price of $0.96. During the period
from February 18, 2000 to February 18, 2001, the holders of Settlement Warrants
have the right, but not the obligation, to put the Settlement Warrants to the
Company for repurchase at a price of $3.25 per Settlement Warrant (the "Put
Right"), provided, however, that this Put Right shall expire, if at any time
after February 18, 1998 the closing price per share of the Company's Common
Stock on the American Stock Exchange is more than $4.22 on any seven trading
days, whether consecutive or not. Upon expiration of the Put Right, the Company
shall have no further obligation to repurchase the Settlement Warrants. In no
event shall the Company have any obligation to repurchase its Common Stock.
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Although the Put Right may expire based on the closing price of the
Common Stock over the next two years, the Company has recognized the potential
liability related to the Put Right. Accordingly, a charge of $1,291,000 for the
present value (discounted at 15%) and related interest expense for the Put
Right was recognized in 1996. The difference between the amount expensed and
the total potential liability, $545,000, will be accreted as interest expense
and charged over the period from September 1996 until February 18, 2000. In
1998, a total of $154,000 was charged to interest expense related to the Put
Right.
On April 18, 1995, a class action lawsuit was filed in United States
District Court for the Southern District of California entitled Lenora Isaacs,
on behalf of herself and all others similarly situated vs. NTN Communications
and Patrick J. Downs. The complaint alleged violations of federal securities
laws based upon the Company's projections for the fourth quarter of 1994 and
for the 1994 fiscal year, and further alleged that certain of the Company's
insiders sold stock on information not generally known to the public. In
September 1998, the Company issued a total of 1,200,000 shares of common stock,
issued at a fixed price of $1.00 per share, pursuant to the settlement of this
class action lawsuit which was approved by the court in January 1998.
On June 11, 1997, the Company was included as a defendant in a
class-action lawsuit, entitled Eliot Miller and Jay Iyer, shareholders on
behalf of themselves and all others similarly situated vs. NTN Communications,
Inc., Patrick J. Downs, Daniel C. Downs, Donald C. Klosterman, Ronald E. Hogan,
Gerald P. McLaughlin and KPMG Peat Marwick LLP, filed in the United States
District Court for the Southern District of California. The complaint alleges
violations of state and federal securities laws based upon purported omissions
from the Company's filings with the Securities and Exchange Commission. More
particularly, the complaint alleges that the directors and former officers
devised an "exit strategy" to provide themselves with undue compensation upon
their resignation from the Company. The plaintiffs further allege that
defendants made false statements about, and failed to disclose, contingent
liabilities (guaranteed compensation to management and the right of an investor
in IWN to require the Company to repurchase its investment during 1997) and
phantom assets (loans to management) in the Company's financial statements and
KPMG LLP's audit reports, all of which served allegedly to inflate the trading
price of the Company's Common Stock.
On November 7, 1997, the court granted KPMG Peat Marwick LLP's motion
to dismiss the plaintiffs' claims against it pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure for failure to state a claim upon which relief
may be granted.
On July 3, 1997, the Company filed a motion to dismiss the lawsuit. On
November 6, 1997, the Court dismissed all of the plaintiff's state law causes of
action against the Company but retained the plaintiff's federal law causes of
action. In February 1998, the attorneys representing the plaintiffs in this
litigation filed an action entitled Dorman vs. NTN Communications, Inc. in the
Superior Court of San Diego County, California in which they essentially replead
the state law causes of action dismissed in the federal lawsuit. The Company has
filed a motion for summary judgment in each action. In March 1999, the Court
issued a telephonic ruling granting the Company's motion in the Dorman matter;
however, judgment has not yet been entered. In the Company's opinion, the claims
in these two lawsuits are covered by directors and officers liability insurance
providing $15,000,000 of coverage. The Company has submitted these claims to its
directors and officers liability insurance underwriters, who have accepted such
claims subject to reservation of rights. The Company's deductible under the
insurance policy is $200,000.
The Company's Playmaker(R) systems which are installed in over 2,900
hospitality locations throughout the United States utilize the MS-DOS operating
system software. The Company does not have a license to use MS-DOS for this
purpose, and, in September 1998, the Company received correspondence from
counsel to Microsoft Corporation and related inquiries from the Business
Software Alliance and Software Publishers Association, two industry
associations, requesting information regarding the Company's use of MS-DOS. In
response, the Company conducted an internal audit and produced the results to
counsel to the three entities. Based on the audit results, it has been
determined that the Company has insufficient licensing for the MS-DOS in use in
the hospitality locations. Settlement negotiations are currently underway in an
effort to resolve this matter with the software publishing entities. It is
possible that the Company will be required to pay Microsoft for its prior use of
MS-DOS, and at present the Company cannot predict what effect this may have on
its future financial condition or results of operations. The Company believes
that its accrual for legal costs is adequate to cover any potential settlement
required to be paid.
The Company has been involved as a plaintiff or defendant in various
previously reported lawsuits in both the United States and Canada involving
Interactive Network, Inc. ("IN"). With the court's assistance, the Company and
IN have been able to reach a resolution of all pending disputes in the United
States and have agreed to private arbitration regarding any future licensing,
copyright or infringement issues which may arise between the parties. There
remain two lawsuits involving the Company, its unaffiliated Canadian licensee
and IN, which were filed in Canada in 1992. No action was taken in the Canadian
litigation until May 1998, when IN gave notice of its intention to proceed. In
November 1998, the Company and its Canadian licensee filed a counterclaim
against IN. These actions affect only the Canadian operations of the Company
and its Canadian licensee and do not extend to the Company's operations in the
United States or elsewhere. Although they cannot be estimated with certainty,
any damages the Company might incur are not expected to be material.
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In November, 1997, a former advertising manager brought a suit against
the Company alleging breach of an alleged employment contract and age
discrimination. The age discrimination claims were subsequently dismissed. The
court rendered judgment in the amount of $167,000 plus interest in favor of the
plaintiff. The Company has agreed to pay this judgment over a 12 month period
beginning March 5, 1999.
In March, 1998, the Company's former independent representative in the
State of Georgia filed suit against the Company in Atlanta, Georgia alleging
wrongful termination of its distributor agreement and other breaches of such
agreement. The Company has filed a motion to amend to bring a counterclaim
seeking damages for fraud and conversion against the former sales
representative. It is not anticipated at the present time that the outcome of
this lawsuit will have a material adverse effect on the financial position,
results of operations and liquidity of the Company.
In March 1998, the Company entered into a Compromise Settlement and
Mutual Release Agreement in settlement of a prior arrangement between the
Company and a former independent representative under which he and companies
affiliated with him acted as independent distributors of the NTN Network.
Pursuant to the Settlement Agreement, the Company paid $156,000 in cash and
issued 175,000 shares of common stock to the former independent representative.
There can be no assurance that any or all of the foregoing claims will
be decided in favor of the Company, which is not insured against all claims
made. During the pendency of such claims, the Company will continue to incur
the costs of defense of same. Other than set forth above, there is no material
litigation pending or threatened against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on August 28,
1998. The matter voted upon at such meeting was the election of two directors
to the Board of Directors.
The voting for the proposal was as set forth in the table below.
VOTES VOTES
Elections of Directors "FOR" "AGAINST" * ABSTENTIONS**
---------------------- ---------- ----------- -------------
Esther L. Rodriquez 22,839,100 404,752 --
Robert M. Bennett 22,839,599 404,253 --
* As to election of directors, represents shares where authority to vote for
the specified nominee was withheld.
** Abstentions include "broker non-votes", which are abstentions by nominee
holders on behalf of beneficial owners who have given no instruction to the
nominee holder. When no such instructions are received, such nominee holders
have no authority to vote even though present or represented at the meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock and warrants are listed on the American
Stock Exchange ("AMEX") under the symbols "NTN" and "NTNW", respectively.
Trading of the Company's redeemable common stock purchase warrants commenced on
the AMEX in February 1998. Set forth below are the high and low sales prices
for the common stock and warrants as reported by the AMEX for the two most
recent fiscal years.
Common Stock Warrants
1999 LOW HIGH LOW HIGH
---- --- ---- --- ----
First Quarter $0 - 9/16 $2 $1 - 7/8 $2 - 1/2
(through 3/15/99)
1998 LOW HIGH LOW HIGH
---- --- ---- --- ----
First Quarter $0 - 5/16 $1 - 1/16 $0 - 7/8 $1 - 5/16
Second Quarter 0 - 11/16 2 - 5/8 $0 - 1/2 $1 - 7/8
Third Quarter 0 - 5/8 1 - 1/4 $1 - 1/16 $1 - 1/4
Fourth Quarter 0 - 5/16 0 - 13/16 $1 - 1/16 $1 - 1/2
1997 LOW HIGH
---- --- ----
First Quarter $3 - 3/8 $4 - 7/16
Second Quarter 2 - 5/16 4 - 3/4
Third Quarter 2 - 3/16 4 - 7/16
Fourth Quarter 1 2 - 1/4
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On March 26, 1999, the closing price for the Common Stock reported on
the AMEX was $0.6875. On that date, there were approximately 2,083 record
owners of the Common Stock.
To date, the Company has not declared or paid any cash dividends with
respect to its Common Stock, and the current policy of the Board of Directors
is to retain earnings, if any, after payment of dividends on the outstanding
preferred stock to provide for the growth of the Company. Consequently, no cash
dividends are expected to be paid on the Company's common stock in the
foreseeable future. Further, there can be no assurance that the proposed
operations of the Company will generate the revenues and cash flow needed to
declare a cash dividend or that the Company will have legally available funds
to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following tables furnish information with respect to selected
consolidated financial data of the Company over the past five years.
STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Total revenue $ 24,194 25,861 25,711 20,082 16,146
Total operating expenses 27,641 38,668 51,566 25,508 16,102
-------- -------- -------- -------- --------
Operating income (loss) (3,447) (12,807) (25,855) (5,426) 44
Other income, net 1,654 350 1 1,409 412
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations (1,793) (12,457) (25,854) (4,017) 456
Net income (loss) from
discontinued operations -- -- (1,317) 69 251
Gain on sale of discontinued
operations -- -- 4,219 -- --
Income taxes -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ (1,793) (12,457) (22,952) (3,948) 707
======== ======== ======== ======== ========
Accretion of beneficial conversion
feature of preferred stock (758) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) available to
common shareholders $ (2,551) (12,457) (22,952) (3,948) 707
======== ======== ======== ======== ========
Basic and diluted net income
(loss) per common share:
Continuing operations $ (.10) (0.55) (1.15) (0.19) 0.02
Discontinued operations -- -- 0.13 -- 0.01
-------- -------- -------- -------- --------
Net income (loss) $ (.10) (0.55) (1.02) (0.19) 0.03
======== ======== ======== ======== ========
Weighted average equivalent
shares outstanding 26,078 22,696 22,568 20,301 21,124
======== ======== ======== ======== ========
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BALANCE SHEET DATA
(in thousands)
DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Total current assets $ 8,131 8,390 10,655 26,009 18,844
Total assets $16,767 20,271 28,504 41,221 31,239
Total current liabilities $ 5,731 8,373 12,775 6,541 4,958
Total liabilities $ 8,442 11,545 18,282 7,770 5,782
Shareholders' equity $ 8,325 8,726 10,222 33,451 25,457
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the selected financial
data and the consolidated financial statements and notes thereto included
elsewhere herein.
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
operations for the three years ended December 31, 1998. The Company believes
that inflation has not had a material effect on its operations to date.
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
The Company incurred a net loss of $12,457,000 for the year ended
December 31, 1997 as compared to a net loss of $1,793,000 for the year ended
December 31, 1998. The 1998 results includes an operating loss of $3,447,000
which was partially offset by a gain of $1,643,000 from the sale of an 82.5%
interest in a subsidiary. The 1997 results included charges totaling $4,998,000
related to a reorganization, a $2,543,000 charge related to shrinkage and
obsolete equipment and a $905,000 gain from the sale of an interest in real
estate.
Total revenues decreased from $25,861,000 in 1997 to $24,194,000 in
1998 due to declines in network services, Online/Internet services and other
revenues.
Network Services decreased 1% from $19,009,000 in 1997 to $18,785,000
in 1998 due primarily to a reduction in average billing rates during 1998.
Online/Internet services decreased 39% from $3,326,000 in 1997 to $2,014,000 in
1998 largely due to non-recurring revenue of $1,000,000 in 1997 from AOL
related to AOL's termination of its prior contract with the Company and the
recognition of revenue for production services in 1997 that did not recur in
1998. Advertising revenues increased 16% during the current year from $772,000
in 1997 to $896,000 in 1998 as a result of an increase in the number of
commercial spots sold.
Equipment Sales, net of cost of sales, during the current year
increased 5% from $475,000 in 1997 to $499,000 in 1998. Equipment sales in the
past have included sales to foreign licensees, which are subject to
outside influences and can occur unevenly throughout the year. Equipment sales
have been highly volatile in the past and are expected to remain so, as they
are dependent on the timing of expansion plans of the Company's foreign
licensees. In June 1998, the Company sold 82.5% of its interest in the
LearnStar operations. As a result, equipment sales to educational customers
are expected to decline in the future.
Direct Operating Expenses consist of direct incremental service costs
directly related to revenue sources. Direct Operating Expenses decreased 28%
from $6,565,000 in 1997 to $4,715,000 in 1998. The decrease relates to a
reduction in site visit fees, commissions and other field expenses due to (i)
the Company's decreased reliance on independent representatives in favor of
employed field and marketing personnel and (ii) a revision, effective January 1,
1998, in the Company's commission and bonus structure for all field personnel.
Selling, General and Administrative Expenses decreased 28% from
$16,244,000 in 1997 to $11,767,000 in 1998. Included in Selling, General and
Administrative Expenses for 1997 are charges for the management reorganization
totaling $4,813,000 and costs associated with the abandoned merger with GTECH
Corporation of $376,000. Exclusive of these charges, Selling, General and
Administrative Expenses increased $712,000 or 6%. This increase is primarily
due to an increase in employee-related costs associated with the shift from
independent representatives to employed field and marketing staff.
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Litigation, Legal and Professional expenses increased from $808,000 in
1997 to $1,658,000 in 1998. In the fourth quarter of 1997, the Company reduced
the accrual for a legal settlement which reduced legal expense by $1,350,000 as
result of this change in estimate. Expenses for 1998 include legal expenses
incurred in the ordinary course of business, as well as litigation expenses and
accruals.
Stock-based compensation decreased 89% from $3,205,000 in 1997 to
$353,000 in 1998. Stock-based compensation charges result from the issuance,
extension or modification of warrants or options to non-employees and can vary
from period to period. Charges in 1997 include $1,450,000 that resulted from
extension of the exercise period and reductions in the exercise price of
warrants owned by certain former officers pursuant to the management
reorganization in 1997.
Depreciation and Amortization Expense increased 21% from $5,305,000 in
1997 to $6,412,000 in 1998 due to additions of broadcast equipment and fixed
assets.
Bad Debt expense relates to trade receivables for Network Services,
Online/Internet services and advertising customers. Bad Debt expense decreased
42% from $1,462,000 in 1997 to $850,000 in 1998. The Company began to
experience reliability problems with its equipment in NTN Network Locations.
These problems led to an increase in bad debt expense in 1996 and 1997. In
1998, the equipment problems stabilized, resulting in a lower bad debt expense.
Equipment Charges decreased 91% from $2,543,000 in 1997 to $240,000 in
1998. Equipment Charges consist of charges for obsolescence and shrinkage of
the Company's stock of broadcast equipment. The Company performs periodic
reviews of its broadcast equipment. In connection with these reviews, the
Company identified equipment shrinkage and obsolescence primarily related to
terminated sites.
Research and development expenses decreased 55% from $1,600,000 in
1997 to $714,000 in 1998. The decrease was due to certain research and
development endeavors which began in early 1997 that were completed by the end
of 1997. These efforts included initial design and implementation of the
Company website, redesign of the America Online site and content and other
production for third parties. For 1998, the Company's research and development
efforts related to the development of the New Network.
Other Income (Expense) increased from $350,000 in 1997 to $1,654,000 in
1998. Other income in 1998 included a gain of $1,643,000 related to the sale of
an 82.5% interest in LearnStar in June 1998. Other income in 1997 included a
gain of $905,000 related to the sale of the Company's interest in an office
building. Interest Expense decreased 64% from $793,000 in 1997 to $289,000 in
1998 due to interest expense recorded in 1997 in conjunction with the Symphony
Put Option which was paid in full in 1997.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
In March 1997, the Company announced a reorganization (the
"Reorganization") of its executive management personnel as previously reported.
Charges for severance and other costs associated with the management
reorganization recorded in 1996 were $5,092,000. A charge for severance and
other costs associated with the management reorganization and other personnel
changes was $4,998,000 in 1997, including $185,000 of accreted interest expense.
The Company recorded the charges in 1996 and 1997 in accordance with Emerging
Issues Task Force Issues No. 94 - 3.
The Company incurred a net loss of $12,457,000 for the year ended
December 31, 1997 compared to a net loss of $22,952,000 for the year ended
December 31, 1996. The 1996 results include a net gain from the impact of
discontinuing the operations of the Company's former subsidiary, New World
Computing, Inc., of $2,902,000. The 1997 results include charges totaling
$4,998,000 related to the Reorganization and a $2,543,000 charge related to
shrinkage and obsolete equipment.
For the year ended December 31, 1997, total revenues increased
slightly from $25,711,000 to $25,861,000, primarily as a result of modest
growth in the Company's primary services which offset a significant decrease in
equipment sales and reduced advertising revenue. Since the Company no longer
entered into sale and leaseback financing arrangements, equipment sales have
became a minor revenue source in 1997. Total revenue for the year ended
December 31, 1997, excluding Equipment Sales, net, increased 6% over the prior
year.
Network Services decreased 1% from $19,269,000 in 1996 to $19,009,000
in 1997. The decrease was primarily due to a revised pricing structure.
Online/Internet Services increased 84% from $1,811,000 in 1996 to $3,326,000 in
1997 largely due to non-recurring revenue of $1,000,000 realized in 1997 from
AOL related to AOL's termination of its prior contract with the Company,
recognition of revenue for production services related to a large development
contract of $380,000 in 1997 and a modest increase in the basic services to
online customers. Although the hours of service have remained relatively
constant, the pricing structure
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20
continued in a downward pattern. Advertising revenues decreased 51% from
$1,590,000 in 1996 to $772,000 in 1997 due to a lesser number of commercial
spots sold.
Equipment Sales, net of cost of sales, decreased 73% from $1,757,000
in 1996 to $475,000 in 1997. Equipment Sales in the past included large sale
and leaseback transactions. In late 1996, the Company decided to no longer
enter into sale and leaseback financing arrangements. In 1997, equipment sales
primarily represented sales to educational customers through the LearnStar
subsidiary.
Operating Expenses consist of direct incremental service costs
directly related to revenue sources. Operating Expenses increased 7% from
$6,124,000 in 1996 to $6,565,000 in 1997. The increase in costs was primarily
due to a modest expansion in the number of subscribers and online services
contracting for services, increased field service costs, net of a reduction in
the sales commissions.
Selling, General and Administrative Expenses increased from
$15,259,000 to $16,244,000. Included in Selling, General and Administrative
Expenses for 1997 were charges for the management reorganization totaling
$4,813,000 and costs of $376,000 associated with the abandoned merger with
GTECH Corporation. The 1996 results included a charge of $840,000 related to a
charge of severance and a change in estimate for deferred advertising costs of
$222,000. Exclusive of these charges, Selling, General and Administrative
Expenses decreased $3,142,000, or 22%. This decrease was primarily due to
trimming the workforce and cost controls implemented in 1997. Charges in 1997
included $1,450,000 that resulted from extension of the exercise period and
reductions in the exercise price of warrants owned by certain former officers
pursuant to the management reorganization.
Stock-based compensation increased 68% from $1,910,000 in 1996 to
$3,205,000 in 1997. Charges in 1997 included $1,450,000 that resulted from
extension of the exercise period and reductions in the exercise price of
warrants owned by certain former officers pursuant to the management
reorganization in 1997.
Litigation, Legal and Professional expenses decreased from $6,484,000
in 1996 to $808,000 in 1997. The 1996 amount included charges for the settlement
of litigation of approximately $4,400,000. Charges for litigation in 1997 were
approximately $1,000,000. Included in the charges for 1996 were $2,800,000 for
the settlement of certain litigation, which was subsequently settled in 1997 for
$1,450,000. In the fourth quarter of 1997, the Company reduced the accrual for
the settlement and accordingly reduced its legal expense by $1,350,000 as a
result of the change in estimate related to the settlement.
Depreciation and Amortization Expense increased 134% from $2,265,000
to $5,305,000 due to depreciation charges resulting from the Company's buyout
of equipment lease commitments late in 1996. The Company now owns most of its
Broadcast equipment. Equipment Lease Expense decreased 86% from $6,837,000 to
$936,000 also due to the buyout of equipment leases in late 1996.
Bad Debt expense decreased 21% from $1,840,000 in 1996 to $1,462,000
in 1997. Beginning in 1996, the Company began to experience reliability
problems with its equipment in NTN Network Locations, which led to an increase
in bad debt expense as customers withheld payments. In 1997, the equipment
problems stabilized.
Equipment Charges increased 3% from $2,478,000 in 1996 to $2,543,000
in 1997. Equipment Charges consist of charges for obsolescence and shrinkage of
the Company's broadcast equipment. The Company performs periodic reviews of its
broadcast equipment. In connection with these reviews, the Company identified
equipment shrinkage and obsolescence primarily related to terminated sites.
Other Income (Expense) increased from $1,000 in 1996 to $350,000 in
1997. Interest Expense increased 103% from $390,000 to $793,000 largely due to
interest charges related to the repurchase of an the shares of IWN from
Symphony Management Associates, L.L.C., interest paid to GTECH Corporation, and
accretion of interest for the settlement warrant liability and the liability
for the management reorganization. In 1997, the Company sold its interest in
The Campus and recorded a gain of $905,000. There was no tax expense in 1997
and 1996 primarily due to taxable losses and offsetting temporary differences
in both years.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of
$4,560,000 and working capital (current assets in excess of current liabilities)
of $2,400,000, compared to cash and cash equivalents of $4,764,000 and working
capital of $17,000 at December 31, 1997. Net cash provided by operations was
$1,120,000 for the twelve months ended December 31, 1998 and net cash used in
operations was $1,004,000 for the twelve months ended December 31, 1997. The
principal uses of cash in 1998 were to fund the Company's net loss from
operations and severance payments totaling $819,000 in compliance with the
Reorganization
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agreements with former officers. These uses were more than offset by
depreciation, amortization and other noncash charges. Net cash used in investing
activities was $1,220,000 for the twelve months ended December 31, 1998 and
$3,315,000 for the twelve months ended December 31, 1997. Included in net cash
used in investing activities for the twelve months ended December 31, 1998 were
$3,002,000 in capital expenditures and $1,862,000 in proceeds from the sale of
an 82.5% interest in the Company's subsidiary, LearnStar, Inc. Net cash used in
financing activities was $104,000 for the twelve months ended December 31, 1998
related to principal payments under capital lease obligations compared to net
cash provided by financing activities of $2,504,000 for the twelve months ended
December 31, 1997.
In October 1998, the holders of the Company's outstanding Series B
Preferred Stock agreed to exchange their remaining $5,600,000 of Preferred Stock
(and accrued dividends) for 7% senior convertible subordinated notes due
February 1, 2001 with a fixed conversion price of $1.275 per common share. On
January 11, 1999, the exchange was completed and notes were issued in aggregate
principal amount of $5,912,834. On October 5, 1998, in consideration of the debt
for stock exchange, the Company issued the Preferred Stock holders warrants
expiring February 1, 2001 to purchase an aggregate of one million shares of
common stock. The warrants have an initial exercise price of $1.25 per common
share which will be subject to reduction in the event that the common stock
trades at levels significantly above the exercise price. As a result of this
exchange, the Company expects to incur additional interest expense beginning in
the first quarter of 1999.
The Company will be in default under the convertible notes, issued
under the Exchange Agreement in October 1998, if it fails to pay any principal
or interest on the convertible notes when due, and in certain other events,
including in the event of a material adverse change in the condition, financial
or otherwise, or operations of the Company as determined by the holders of the
convertible notes in their discretion. If the Company defaults under the
convertible notes, in the discretion of the holders of the convertible notes,
the entire outstanding principal amount of the convertible notes and all
accrued and unpaid interest will become immediately due and payable in full.
Although the Company has no material commitments for capital
expenditures, it anticipates purchasing approximately $5,600,000 of broadcast
equipment related to the New Network in 1999. The Company intends to finance
capital expenditures from cash on hand, leases from vendors and internally
generated funds, but there is no assurance that the Company will be able to do
so. The Company currently has no bank line of credit or other financing
arrangements in place. If there is a need to obtain additional financing there
is no assurance as to whether or on what terms any financing may be available.
YEAR 2000 COMPLIANCE
The Company, with the assistance of independent outside consultants,
has been assessing its "Year 2000" computer readiness and exposure to Year 2000
issues, which relates to the inability of computer software programs to
recognize the arrival of the year 2000 because of a common software design
feature that describes the current year by only its last two digits. In
connection with such assessment, the Company initiated a review of the
information technology systems utilized in the Company's business and
operations. Based on this review, the Company has segregated its systems into
two categories: mission critical and support systems. Mission critical systems
are characterized as hardware and applications contributing to the income of
the business. Support systems are characterized as systems that organize and
create efficiencies for the corporation but are not critical to its operations.
The Company is in the process of assessing these key systems for compliance.
The assessment phase is expected to be completed by the second quarter of 1999,
and the renovation phase completed by the third quarter.
The Company's mission critical systems are segregated into Location
deployed and back-end systems which support both the new and current networks,
for which the Company will incur expected costs of approximately $1,000,000 to
ensure Year 2000 compliancy. The Company is evaluating and testing Year 2000
compliance at the system BIOS, operating system and applications levels. The
Company has preliminarily determined that 25% of Location systems may not be
Year 2000 compliant due to the inaccurate roll over of the system BIOS which
could compromise content scheduling. The replacement of these systems is
estimated to be approximately $1,000 per Location. All systems in the New
Network are expected to be Year 2000 compliant. The Company has identified a few
key back-end systems that will require an upgrade of commercial hardware and
data base software. As can be determined thus far, the operating systems and
Company-developed applications are not affected but are being verified for
compliance. The Company intends to fund these costs with cash on hand, leases
from vendors and internally generated funds. The Company has also initiated a
review of Year 2000 compliance by its principal vendors, and this estimate
assumes that the Company will not incur significant Year 2000 related costs on
behalf of its vendors or other third parties.
Concerning the support systems, all corporate personal computers and
servers have been deemed Year 2000 compliant. The operating systems and
commercial software packages have been upgraded to compliant versions.
The Company's most likely worst case scenario is that the Company
would be unable to broadcast its programs to its network services customers.
Network services revenue represents 78% of total revenues for the year ended
December 31, 1998. The Company has not yet established a contingency plan in
the event that this occurs. As a result, a widespread or extended failure of
the
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Company's internal systems, or systems of third parties, to be Year 2000
compliant would have a material adverse effect on the Company's business,
financial condition or operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued a Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The SOP is effective
for financial statements for fiscal years beginning after December 15, 1998.
The adoption of this standard is not expected to have a material impact on
consolidated results, financial condition or long-term liquidity.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, results of operation and financial condition
would be adversely affected by a number of factors, including the following:
HISTORY OF SIGNIFICANT LOSSES; RECENT RESULTS OF OPERATIONS.
The Company has a history of significant losses, including net losses
of $1,793,000, $12,457,000 and $22,952,000 for the three years ended December
31, 1998, and an accumulated deficit of $61,147,000 as of December 31, 1998.
The results of operations during these periods included substantial charges
related to the resignation or termination of certain former executive officers,
write-downs of assets associated with discontinued business activities and
shrinkage and obsolescence of equipment, accruals for litigation settlement
costs and other litigation expenses, and charges relating to stock-based
compensation. The Company may incur similar charges in the future, and there is
no assurance that the Company will ever operate profitably. See "Liquidity and
Capital Resources" and "Selected Consolidated Financial Data" for more
information regarding the Company's financial condition.
PENDING LITIGATION PROCEEDINGS
See "Legal Proceedings" for a discussion of Pending Legal Proceedings.
RECENT EQUIPMENT PROBLEMS
The Playmaker(R) is a hand-held, 49-megahertz radio frequency device used
to enter choices and selections by players of QB1(R) and other games and
programming broadcast via the NTN Network(TM). Customers have experienced
certain recurring problems with Playmakers(R) related to noise sensitivity and
performance of the Playmaker's(R) rechargeable batteries. Management believes
these equipment problems contributed to higher than usual terminations and bad
debt experience during late 1997 and the first half of 1998. To address these
problems, the Company has designed a 900-megahertz Playmaker(R) in consultation
with an outside engineering consulting firm. The redesigned Playmaker(R) is
currently being manufactured by the manufacturer of the 49 megahertz Playmaker
and will be deployed in the marketplace in conjunction with the launch of NTN's
New Network. There can be no assurance that equipment problems will not occur
with the redesigned Playmakers and the continuance of such problems in the
future could adversely affect our results of operations.
DEPENDENCE ON LICENSES FOR BROADCAST RIGHTS; LACK OF CERTAIN LICENSES
NTN's interactive sports games are broadcast in conjunction with live
telecasts of football, baseball and hockey games and other events. Wherever
possible, the Company tries to obtain licenses from the owners of the broadcast
rights to the events to utilize such telecasts for our interactive game
programming. NTN's exclusive license with National Football League Properties,
Inc. ("NFLP") for QB1(R) expires in March 2000. The rights under the license
may not be transferred or assigned without the NFLP's consent, and an
assignment for this purpose includes, among other things, a merger or
consolidation of NTN or the termination of employment of any key management
personnel. NTN's agreement with Major League Baseball Properties, Inc. ("MLBP")
relating to Diamondball(R) expired December 31, 1996. Since then, the Company
has continued to broadcast Diamondball(R) without a license.
QB1(R)'s broadcast in conjunction with college football games is
without any license. Limitations on sports licenses or legal action by the
owners or licensees of broadcast rights to college football games or other
events for which NTN has no license could preclude NTN from broadcasting our
games in connection with these events or result in an award of monetary damages
against the Company. The Company has not experienced any such legal action to
date, and is unaware of any threatened action. There is no assurance, however,
that such actions will not be brought in the future.
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COMPETITION
The Company's programming competes generally with broadcast
television, pay-per-view and other content offered on cable television. In
other media, NTN competes with other content and services available to the
consumer through America Online and other online services.
With the entrance of motion picture, cable and TV companies,
competition in the interactive entertainment and multimedia industries will
likely intensify in the future. Recently, for example, The Walt Disney Company
introduced interactive programming broadcast in conjunction with live sporting
and other events which may compete directly with QB1(R) and our other
programming. Moreover, the expanded use of online networks and the Internet
provide computer users an increasing number of alternatives to video games and
entertainment software. NTN seeks to compete by providing high quality products
at reasonable prices, thereby establishing a favorable reputation among
frequent buyers. There can be no assurance, however, that the Company can
compete effectively.
POTENTIAL FOR TECHNOLOGICAL OBSOLESCENCE
The computer industry and related businesses are marked by rapid and
significant technological development and change. It is possible that the
Company's interactive technology and services will be rendered obsolete by
ongoing technological developments. There also is no assurance that NTN will be
able to respond effectively to technological changes.
UNCERTAIN PROPRIETARY PROTECTION; DEPENDENCE ON SOLE SOURCE OF SUPPLY
The Company regards the Playmaker(R) keyboard and other technology
utilized in the NTN Network(TM) as proprietary and relies on a combination of
trademark, copyright and trade secret laws and employee and third-party
nondisclosure agreements to protect our propriety rights. NTN has one patent
application pending for our proprietary interactive technology. There is no
assurance, however, that any patent will issue or that any issued patent will
provide significant competitive advantages. It is the Company's policy that all
employees and consultants involved in research and developmental activities sign
nondisclosure agreements; however, this may not afford sufficient protection for
know-how and proprietary information and products. Other parties may
independently develop similar or more advanced technologies.
As a number of software products in the interactive television
industry increases and increasingly become available in new delivery formats,
software developers and publishers may increasingly become subject to
infringement claims. Any such claims or litigation brought against the Company
could be costly and could have an adverse effect on the business and results or
operations.
The Fleetwood Group, Inc. of Holland, Michigan, has requested
assurance that NTN's 900 MHz Playmakers do not infringe on Fleetwood's patent
for a 900 MHz wireless communication system marketed as Reply(R) PS.
The Company currently purchases Playmaker(R) keyboards from a single,
unaffiliated Taiwanese manufacturer, and has regularly experienced delays in
obtaining new Playmakers(R). The Company recently designed a 900-megahertz
Playmaker(R) and have solicited bids for manufacture of the new Playmaker(R).
There can be no assurance, however, that we can secure additional sources of
supply of the redesigned Playmaker(R). Unless and until NTN succeeds in
establishing additional manufacturing relationships, NTN will continue to be
dependent on the current sole source of supply of Playmaker(R) and may continue
to experience delays and technical problems in Playmakers(R) shipments.
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VOLATILITY OF STOCK PRICE; RECENT TRADING PRICES
Historically, the trading price of the Company's common stock has
fluctuated widely, and it may be subject to similar future fluctuations in
response to quarter-to-quarter variations in operating results, announcements
regarding litigation, technological innovations or new products introduced by
NTN or our competitors, general industry conditions and other events or
factors, including factors such as analysts' expectations which are beyond
management's control. In addition, in recent years and months, broad stock
market indices, in general, and the securities of "small cap" companies such as
NTN, in particular, have experienced substantial price fluctuations. Such broad
market fluctuations also may adversely affect the future trading price of the
common stock.
The recent trading prices of the common stock have been at or near the
historical lows, and it is possible that the Company will experience further
declines in the trading price in the future. See "Market For Registrant's
Common Equity and Related Stockholder Matters" for more information on
historical trading prices of the common stock.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS
At March 26, 1999, there were approximately 6,668,930 shares of common
stock reserved for issuance upon the exercise of outstanding stock options at
exercise prices ranging from $0.5625 to $6.50 per share. At March 26, 1999,
there were also outstanding warrants to purchase an aggregate of approximately
2,902,966 shares of common stock at current exercise prices ranging from $0.96
to $7.50 per share. Substantially all of the shares underlying these outstanding
warrants are subject to currently effective registration statements covering the
resale of the underlying warrant shares by the holders.
The foregoing options and warrants could adversely affect our ability
to obtain future financing or engage in certain mergers or other transactions,
since the holders of those options and warrants can be expected to exercise
them at a time when we would be able to obtain additional capital through a new
offering of securities on terms more favorable than those provided by such
options and warrants. For the life of such options and warrants, the holders
are given the opportunity to profit from a rise in the market price of the
common stock without assuming the risk of ownership. To the extent the trading
price of the common stock at the time of exercise of any such options or
warrants exceeds the exercise price, such exercise will also have a dilutive
effect on our stockholders, including purchases of the offered shares.
The Company recently received a letter from certain investors to whom
the Company sold shares of common stock in a private placement in April 1995
claiming that they are entitled to receive additional shares of common stock as
a result of antidilution adjustments contained in their Stock Purchase
Agreements with NTN. Based on the Company's review of this matter, the Company
will be required to issue these investors 218,400 additional shares.
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 1,400,883 shares of common stock outstanding as of March
26, 1999 are "restricted securities," as that term is defined under Rule 144
promulgated under the Act. All or substantially all of such shares are covered
by currently effective registration statements and can be offered and sold
publicly by the beneficial owners at any time so long as registration
statements remain effective. Moreover, in general under Rule 144 as currently
in effect, subject to the satisfaction of certain conditions, if one year has
elapsed since the later of the date of acquisition of restricted shares from an
issuer or from an affiliate of an issuer, the acquiror or subsequent holder is
entitled to sell in the open market, within any three-month period, a number of
shares that does not exceed the greater of 1% of the outstanding shares of the
same class or the average weekly trading volume during the four calendar weeks
preceding the filing of the required notice of sale. A person who has not been
an affiliate of NTN for at least the three months immediately preceding the
sale and who has beneficially owned shares of common stock as described above
for at least two years is entitled to sell such shares under Rule 144(k)
without regard to any of the limitations described above.
No predictions can be made with respect to the effect that sales of
common stock in the market or the availability of shares of common stock for
sale pursuant to currently effective registration statements or under Rule 144
will have on the market price of common stock prevailing from time to time.
Nevertheless, the possibility that substantial amounts of common stock may be
sold in the public market may adversely affect prevailing market prices for the
common stock and could impair NTN's ability to raise capital through the sale
of equity securities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule on page
F-1, for a listing of the Consolidated Financial Statements and Schedule filed
with this report, which are incorporated herein by reference.
25
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth as of March 26, 1999 certain
information regarding the directors and executive officers of the Company:
Current
Director Term
Name Age Position(s) Held Since Expires
---- --- ---------------- -------- -------
Stanley B. Kinsey 45 Chief Executive Officer and 1997 1999
Chairman of the Board
Barry Bergsman(1) 62 Director 1998 1999
Robert M. Bennett(1) 72 Director 1997 2001
Donald C. Klosterman(2) 69 Director 1985 1999
Esther L. Rodriguez(2) 57 Director 1997 2001
V. Tyrone Lam 36 Executive Vice President
Kendra Berger 32 Chief Financial Officer and Secretary
Bennett Letwin 32 Vice President - Interactive Technologies and
Business Systems
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
The following biographical information is furnished with respect to the
directors and executive officers:
Stanley B. Kinsey was appointed as a director in November 1997. Mr.
Kinsey was appointed Chairman and Chief Executive Officer of the Company in
October 1998. From 1980 to 1985, Mr. Kinsey was a senior executive with the
Walt Disney Company. In 1985, Mr. Kinsey left his position as senior vice
president of operations and new technologies for the Walt Disney Studio to
co-found IWERKS Entertainment, a high-technology entertainment company. Mr.
Kinsey was chairman and Chief Executive Officer from inception until 1995, when
he resigned.
Barry Bergsman has been a director since August 1998. From 1985 to the
present, Mr. Bergsman has been president of Intertel Communications, Inc., a
company that p