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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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 (Zip Code)
Offices)
(760) 438-7400
(Registrant's telephone number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.005 par value American Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of
Registrant as of February 19, 2002, computed by reference to the closing sale
price of the common stock on the American Stock Exchange, was approximately
$32,818,084. Shares of common stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. The determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 19, 2002, Registrant had 38,681,020 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business................................................. 1
2. Properties............................................... 11
3. Legal Proceedings........................................ 11
4. Submission of Matters to a Vote of Security Holders...... 12
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 12
6. Selected Financial Data.................................. 13
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation....................... 13
7A. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 26
8. Consolidated Financial Statements and Supplementary Data. 26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 27
PART III
10. Directors and Executive Officers of the Registrant....... 27
11. Executive Compensation................................... 29
12. Security Ownership of Certain Beneficial Owners and
Management............................................... 32
13. Certain Relationships and Related Transactions........... 33
PART IV
14. Exhibits, Consolidated Financial Statement Schedule,
and Reports on Form 8-K.................................. 33
Index to Consolidated Financial Statements and Schedule.. F-1
PART I
ITEM 1. BUSINESS
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 THAT REFLECT OUR CURRENT ESTIMATES, EXPECTATIONS AND
PROJECTIONS ABOUT OUR FUTURE RESULTS, PERFORMANCE, PROSPECTS AND OPPORTUNITIES,
INCLUDING STATEMENTS RELATED TO OUR STRATEGIC PLANS, CAPITAL EXPENDITURES,
INDUSTRY TRENDS AND FINANCIAL POSITION. IN SOME CASES, YOU CAN IDENTIFY THESE
STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "COULD,"
"ESTIMATE," "EXPECT," "INTEND," "MAY," "SHOULD," "WILL," "PLAN," "WOULD" AND
SIMILAR EXPRESSIONS. FORWARD-LOOKING STATEMENTS ARE BASED ON INFORMATION
CURRENTLY AVAILABLE TO US AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND OTHER
FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR
EXPECTATIONS ARE SET FORTH IN THIS REPORT UNDER THE CAPTION "RISK FACTORS THAT
MAY AFFECT FUTURE RESULTS."
GENERAL
NTN Communications, Inc., based in Carlsbad, California, develops and
distributes interactive entertainment and owns and operates the largest
"out-of-home" interactive consumer marketing television network in North
America.
We operate our businesses principally through two operating segments: The
NTN Network(R) division and Buzztime Entertainment, Inc.(TM) subsidiary
("Buzztime"). The NTN Network operates two interactive television networks: our
newer digital network (DITV) introduced in April 1999, to which approximately
95% of our U.S. sites subscribe, and our original DOS-based network, which is
primarily broadcast to sites in Canada on behalf of our Canadian licensee. Both
networks broadcast daily a wide variety of popular interactive games,
advertisements and informational programming to consumers in approximately 3,600
restaurants, sports bars and taverns throughout North America. Buzztime, our
94%-owned subsidiary, was formed in December 1999 to be the ownership entity for
our broadcast studio and game content; to develop new multiplayer interactive
entertainment content; and to distribute our trivia and live sports "play-along"
content to both the NTN Network and new consumer interactive platforms.
Unless otherwise indicated, references herein to "NTN," "we," "us" and
"our" include NTN and its consolidated subsidiaries.
INDUSTRY SEGMENTS
Financial information for each of our business segments for each of the
last three fiscal years is contained in the Notes to the Consolidated Financial
Statements included in Item 14 of this Form 10-K.
BUSINESS STRATEGY
Our objective is to grow our businesses as a leading developer and
distributor of interactive entertainment and communication products and services
across several interactive platforms, including our out-of-home network,
interactive television ("iTV") and wireless devices. To accomplish our
objectives we are pursuing strategies to:
o Increase the number of out-of-home locations serviced by the NTN
Network. We intend to accomplish this increase by expanding our
product offerings to include more value-added services, adding
personnel to our sales force and providing new and updated content on
a regular basis.
o Develop and distribute the BUZZTIME trivia channel to cable and
satellite operators with the intent to become the first content
provider to deploy a live interactive television, sometimes referred
to as iTV, entertainment channel. We have adapted or are planning to
adapt our interactive trivia game show content and technology to the
leading interactive television platforms, to gain market share by
partnering with major industry manufacturers and distributors, and to
utilize our broadcast interactive television studio as a development
and production facility to develop and deepen relationships with
media-related companies. We also plan to continue to support our
efforts in the early-stage wireless entertainment market through
partnerships with leading wireless distributors and carriers.
o Increase revenues through current and new revenue sources. The NTN
Network earns subscription revenue from subscribing out-of-home
locations and third-party advertising revenue as well as production
services and license fee revenue from
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Buzztime. We expect to continue generating revenue through these
sources and, by growing our customer base, we also expect to see
revenue growth in subscription and advertising revenue. Similarly, as
Buzztime gains distribution with cable television operators, we expect
to increase revenue through three sources: license fees paid by local
cable television operators; fees paid by interactive television home
subscribers for premium services or pay-per-play transactions; and
advertising revenue. Both business units will also be exploring market
opportunities to acquire complimentary businesses to increase revenues
and earnings.
We have incurred net losses in the last five years and expect to incur
losses through at least the end of 2002. Recent losses have been primarily as a
result of significant expenditures related to the Buzztime initiatives for which
no significant revenues have yet been generated.
THE NTN NETWORK
General
The NTN Network is North America's largest "out-of-home" interactive
television network. Our unique private network broadcasts a variety of
interactive multi-player sports and trivia games from 15 to 17 hours a day,
depending on the time zone, 365 days per year to hospitality locations such as
restaurants, sports bars, hotels, clubs and military bases totaling
approximately 3,600 locations in North America as of February 12, 2002. The NTN
Network earns revenue from delivering entertainment content to hospitality
locations for a monthly fee, including installation revenue. The NTN Network
also generates advertising revenue from third party advertisers on the NTN
Network and license fee revenue from our Canadian licensee.
The NTN Network is the only interactive television network that is
specifically designed to entertain the out-of-home viewer. Patrons use our
hand-held wireless Playmaker devices to interact with trivia and sports games
displayed on television screens in the hospitality location. Our content is
designed to promote social interaction and stimulate conversation among the
patrons. Hospitality locations pay to use our interactive technology and to
receive our entertainment broadcast. Our games are broadcast to be easily viewed
from a distance of over 15 feet and are not dependent upon audio, so they do not
interfere with the location's own sound system or with patrons' conversations.
Independent research confirms that NTN players stay longer, spend more and
visit more frequently than non-players, supporting the value proposition to
subscribing locations.
In April 1999, we began upgrading the NTN Network by introducing our
"Digital Interactive TV" system to replace our decade-old DOS-based system. The
DITV system contains many new features, including a Windows-based platform with
full-motion video capabilities and high-resolution graphics to allow more
compelling content and better advertising opportunities. In addition, we
introduced new, more consumer friendly Playmaker(R) wireless game appliances
that operate at 900 megahertz to increase transmission range and have a longer
battery life. The new Playmakers also feature a larger, eight line LCD screen
that displays sports scores and other ticker information and enable electronic,
text-based chat between patrons.
Currently, the NTN Network operates two parallel networks to broadcast our
interactive game content. The more dynamic DITV digital network has largely
supplanted the original DOS-based platform. As of the end of 2001, all but 159
of the U.S. sites had converted to the DITV network. Our Canadian licensee also
has not yet converted any of its subscribers to the DITV network. The DITV
system provides greater growth and revenue opportunities due to its MPEG full
motion video capability, allowing for dynamic presentation of enhanced on-screen
interactive game programming and full motion advertising capabilities. The DITV
system also features a more robust 900-megahertz Playmaker that facilitates
consumer interaction with the network.
Principal Products and Services
Entertainment Programming
The NTN Network broadcasts a variety of sports and interactive trivia
games, primarily developed by Buzztime, that entertain and challenge a player's
skill and knowledge while creating significant customer loyalty. Our customers,
typically casual dining restaurants and sports bars, generally execute a
one-year contract to obtain our services and pay a monthly fee ranging from $400
to $800, with an average of approximately $530. Each subscribing hospitality
location is furnished with our proprietary equipment, including a
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customized site server computer, a satellite data-receiving unit (usually a
small satellite dish), and an average of 14 Playmakers, which players use to
enter their game play selections.
The NTN Network features games licensed pursuant to a perpetual
non-exclusive license agreement from Buzztime. We generally broadcast "premium"
trivia competitions during weekday evening hours and live interactive
sports-oriented play-along games on weekends. Key premium games include the
90-minute game, "Showdown", broadcast every Tuesday evening. For the past three
years, our popular "QB1 Predict-the-Play" football game has been the only sports
game broadcast on a regular basis, and is available only during the football
season. Selected one-time games, such as "Brackets", a prediction game for the
college basketball tournament, and "The Annual NTN Awards Show", predicting the
live outcome of the Academy Awards, have also been popular. In spring 2002, the
network will also launch "The Million Dollar Match" as a seasonal promotional
premium game.
During "live" interactive sports and awards programs, players participate
in the play-along programs using two television screens. One screen features the
live broadcast from the television network (for example, an NFL football game),
while the second screen displays the NTN Network program. Participants play the
game by entering their selection on the Playmakers, which then transmit a radio
signal to the on-site computer. The NTN Network's interactive programming
permits players to compete in real-time within each location and to be ranked
against players in all locations throughout North America. At the conclusion of
each game broadcast, players' scores are calculated and top scores are sent via
phone lines to our broadcast center in Carlsbad, California. Within minutes,
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 ranking feature enables each location to create on-premise
promotions to increase patron loyalty as well as positioning us to capture
national sponsors who want to use the competitions as a promotional tool.
In between these premium and sports games, as part of our daily broadcast,
the NTN Network broadcasts 30-minute general interest trivia games which start
every half-hour and also include local and national rankings. The programming is
created to build a sense of community within each location by providing its
customers the opportunity to compete against one another as well as against
consumers in other locations across the country. The unique community created
through competition, intellectual challenge and personal recognition received by
players on the NTN Network encourages patrons to stay longer at locations and
return more often, enabling the locations to increase sales.
During the hours the NTN Network is not broadcasting interactive games, we
use our broadcast network to transmit sports information as well as NTN Network
programming and other relevant information to location employees. We obtain the
majority of our sports information (for which we pay a monthly fee) from
Sportsticker wire service, which we electronically reformat and retransmit as
part of our broadcast to our customers.
Our programming will begin to evolve beyond trivia and play-along sports
and entertainment events to include offerings designed to appeal to broader
consumer segments and provide additional entertainment value to existing
consumers. We have introduced three non-trivia game concepts: BINGO, designed to
appeal to a different demographic than typical trivia players; the "Playmaker
Zone", a suite of Playmaker-only games; and have also tested live action video
concepts to broaden our programming mix. We are also considering adding certain
other wireless applications that are relevant to the hospitality industry to our
product line. We may add these incremental hospitality products through reseller
arrangements or through acquisition.
Advertising
The NTN Network, in a manner similar to the television broadcast medium,
sets aside a number of minutes of each broadcast hour for paid advertisements,
spots for the NTN Network's competitions and special events, "tune-in spots"
promoting the NTN Network programming schedule, and public service
announcements.
The NTN Network allocates 14 minutes each hour for advertising spots,
promotional spots and "tune-in spots." Each spot is designed to be 15 seconds in
length for a total of 56 spots per hour, and, if necessary, we can broaden the
commercial units to 30 seconds to accommodate advertiser campaigns. We can
insert advertising messages into our interactive sports and trivia programming
at any number of specific locations. Further, we have the capability to
broadcast advertising messages over the NTN Network to all of our customers or
customize messages for broadcast to a specific customer location or to several
locations. Sponsorships of programs are also available and provide advertisers
with specific premium exposure within a sponsorship program.
Of the 56 available spots per hour, we reserve 28 for national advertisers
with 20 additional spots reserved for regional advertisers that are priced on a
supply versus demand basis. Using audience estimates and our regular,
non-discounted rates, we have approximately $32.2 million in annual inventory to
support national and regional advertising. The remaining eight spots are offered
to
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the individual site for local promotion and direct revenue opportunity. However,
we may discount the advertising rates by as much as 25%. In 2001, we sold
approximately $1.0 million in national and regional advertising primarily to
companies in the wine, beer and spirits category, as well as in the
entertainment and automotive categories. We believe more opportunities exist to
build business with these and other advertisers.
Distribution
We develop and produce original programming at our facilities in Carlsbad,
California for distribution to our sites. Our facilities are equipped with
video, satellite and communications equipment, and our proprietary "I.C.E. Box"
multimedia site server computers. We 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.
We use either satellite or Internet service providers to distribute our
programming to our customers. We are not dependent upon either service because
there are several other providers that offer similar services. We endeavor to
use the most effective and least expensive multiple data transmission techniques
to distribute data from our facilities to customers.
We have granted an exclusive license to NTN Interactive Networks, a
Canadian company, to conduct all business relating to our content and hardware
products throughout Canada. We currently distribute programming from our
broadcast center to approximately 500 hospitality locations in Canada on behalf
of our licensee.
We also granted an exclusive license to eBet Limited, an Australian
company, to distribute our games in commercial establishments and other public
places throughout Australia and New Zealand via eBet Limited's own licensed
network. Our Australian licensee currently broadcasts to approximately 20
hospitality locations.
Marketing
We market our services to potential hospitality customers primarily through
advertising in national industry trade periodicals, national and regional
industry trade shows, telemarketing, direct mail and direct contact through our
field representatives. All sales prospects are organized and tracked through
shared database software and managed through our regional-based sales management
organization utilizing direct salespersons in key markets combined with
independent representatives who sell, service and support the hospitality
industry in markets outside major metropolitan areas.
To generate and maintain consumer demand, we schedule and run ongoing
promotions, player, and location-based competitions on a local, regional,
national and international basis (through our licensees). These competitions are
scheduled nightly as part of the NTN Network trivia programming and throughout
the NFL football season.
In addition to delivering a highly desirable entertainment seeking
demographic group through network advertising, the NTN Network provides
value-added marketing tools for the advertiser. OmniPoll, our interactive
research polling tool, utilizes the Playmaker and information on the screens to
acquire both broad and discrete demographic and psychographic information
regarding consumer's attitudes, awareness and purchase intent for network
sponsors' products and services. In addition, by combining the data available
through our database, we can provide a complete interactive marketing
communications solution that incorporates brand exposure, on-site promotion,
quantitative and qualitative research and follow-up communication via email.
Frequent Player Program
Another core element to our marketing is our PlayersPlus-(R) frequent
player program. The NTN Network's PlayersPlus frequent player club, numbering
over 1.1 million current members, offers advertisers an effective tool for
market research and direct marketing. Players Plus members join by entering
their name, address, zip code and identification number into a Playmaker, which
is then captured at our broadcast center. Members earn points each time they
play and also may have a chance to win prizes in the monthly Players Plus
sweepstakes. Points earned by Players Plus members have no cash or redemption
value. Sponsors are capable of receiving feedback through interaction with
customers in the form of customer surveys on the NTN Network or via email.
Our research indicates that players place a high value on recognition for
achievement and game play prowess. Achieving higher point levels earns the
PlayersPlus member a higher status within the NTN Network rankings. We broadcast
the leading player names and rankings within their home location and provide
network-wide national exposure as well, which supports higher player
satisfaction levels and repeat game play.
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Based on a study we conducted in December 2000, 18% of these registered
players engage in our network games everyday, 32% play once or twice a week, and
12% play once or twice a month. To further support our growth objectives, we are
currently expanding database capabilities that will enable cross promotion
between all NTN interactive platforms, whether they are in or out of the home.
As an example of this focus, we are enhancing our corporate web site,
www.ntn.com, to provide expanded services for customers including site
statistical information on game play, direct point-of-sale/marketing material
ordering, special services and employee contests and information regarding
special events, programming and promotions. To keep NTN players engaged, the
site will feature player profile updates, special "game within game"
competitions, news, information and a "site-finder" to enable consumers to find
the nearest NTN Network location while traveling.
We are enhancing PlayersPlus to increase data mining capabilities by
enabling registration of more players and increasing our database of names,
email addresses and demographic information. We use this information to expand
direct marketing opportunities, as well as no-cost internal research for new
product development, new game concepts and player satisfaction studies.
Raw Materials
Each system installed at a hospitality location is assembled from
off-the-shelf components available from a variety of sources, except for the
Playmakers. We are responsible for the installation and maintenance of each
system. Our current Playmaker is a hand-held, 900-megahertz radio frequency
device used to enter choices and selections by players and is manufactured by
Climax Technology, Ltd., a non-affiliated manufacturer in Taiwan. Before
conversion to the DITV network, we had previously experienced problems in the
performance of our 49-megahertz Playmaker device. In an effort to address these
equipment function problems, we developed and introduced the current
900-megahertz Playmaker. The new device has proven more reliable than the
previous Playmaker.
The servers we maintain to store and distribute our online services
include:
o Web servers. These servers are used to connect the user to our web
sites.
o Login and registration servers. These servers allow a user to register
and/or log in to our web sites.
o Game servers. These servers execute the games and collect user
statistics from our web site.
o Backend servers. These servers receive the data from the game servers
and update the players' database, including producing reports on the
game results and other statistical information.
o Database servers. These servers host the player, game schedule and
accounting databases.
Seasonality
Our business has some seasonal elements. While we bill revenue monthly as
service is provided to customers, three factors increase our revenues in the
second half of the year over the first half. First, sales of new locations have
traditionally been higher in the summer and early fall months compared to the
rest of the year. Second, existing customers pay an incremental amount for our
QB1 Predict the Play football game and order additional Playmakers to meet their
patrons' demands to play that game. Third, we typically gain additional
advertising customers that want to participate in our football-oriented
broadcasts.
The hospitality industry has historically experienced a relatively high
business failure rate. That factor combined with change in ownership and
non-renewal of contracts leads to a loss of a certain amount of our customers
each year. We refer to this collective loss of customers as "churn." Our
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 our operating history, approximately
18% to 30% of the existing NTN Network customers at the beginning of a year have
churned by the end of that year. We believe the introduction of the new digital
network and 900 megahertz Playmakers have reduced the churn rate. The churn rate
of 18% for 2001 was the lowest in our history and represents a 2% improvement
over 2000, which was 20% in the aggregate.
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Significant Customers
Our customers are diverse and varied in size as well as location. We are
not dependent on any one customer. We do not have any individual customer,
including chain locations, who accounted for 10% or more of our consolidated
revenues in 2001, 2000 or 1999.
Backlog
We historically have not had a significant backlog at any time because we
normally can deliver and install new systems at hospitality locations within the
delivery schedule requested by customers (generally, within two to three weeks).
Competition
Pay-to-play, single-player interactive games from Merit Industries, Inc.,
Incredible Technologies, Inc. and uWink, Inc.--all of whom offer coin-operated
stand-alone game machines--compete minimally with NTN in the entertainment
category. However, this form of entertainment lacks the unique, live,
multi-player aspect of NTN Network games and requires fees to play. Although we
have few direct competitors in this area, we do compete for total entertainment
dollars in the marketplace such as live musicians and karaoke. Other forms of
entertainment provided in public eating and drinking establishments include
music-based systems and cable and pay-per-view television. However, informal
feedback provided by customers indicates that patrons are inclined to stay
longer and consume more food and beverage when NTN Network interactive games are
offered as the main source of entertainment. Accordingly, NTN Network customers
generally tend to view these services as a profit generator rather than a cost
center.
BUZZTIME ENTERTAINMENT, INC.
General
Buzztime Entertainment, Inc., our 94%-owned subsidiary, was incorporated in
the state of Delaware in December 1999 with the intent of creating new revenue
from distributing NTN's content library to several interactive consumer
platforms, with a primary focus on interactive television. Buzztime specializes
in real-time, mass-participation games and entertainment that are produced
specifically for interactive television including BUZZTIME, the interactive
trivia channel for cable television and satellite television services. We manage
the world's largest trivia game show library from our interactive television
broadcast studio where we also produce our live, Predict the Play interactive
television sports games and real-time viewer polls.
In 2001, Buzztime received an investment from Scientific-Atlanta, Inc., a
leading manufacturer of cable set-top boxes. We plan to introduce the BUZZTIME
trivia channel on Scientific-Atlanta cable systems beginning in the Spring of
2002. In November 2001, we signed a Letter of Understanding ("LOU") with
Susquehana Cable ("SusCom") to deploy the BUZZTIME channel to SusCom's digital
subscribers in the first quarter of 2002. In addition, Buzztime remains the
primary content provider to the NTN Network and currently works with leading
companies such as the National Football League, National Hockey League,
Nickelodeon, Warner Brothers, Airborne Entertainment and others to bring
consumers real-time interactive entertainment.
Principal Products/Services and Distribution
Buzztime specializes in real-time, mass-participation games and
entertainment that are produced specifically for interactive television yet also
work on other interactive platforms such as the Internet and mobile devices.
There are three categories of Buzztime content: live, interactive trivia game
shows which are broadcast on the hour, quarter hour or half hour; real-time
predictive TV play-along sports games where viewers predict certain strategic
events while viewing live sports television broadcasts; and live viewer polls
which can be broadcast in conjunction with a live televised event.
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Interactive Sports Game Programs:
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 played in
Predict the Play Football(TM) conjunction with live telecasts of college and
professional football games
NTN PowerPlay (R);.................. Real-time interactive strategy game played in
Predict the Play Hockey (TM) conjunction with live televised hockey games
NTN Diamondball(R);................. Real-time interactive strategy game played in
Predict the Play Baseball (TM) conjunction with live televised baseball games
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:
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
- ---- -----------
Passport............................ Travel trivia
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
SIX(TM)............................. Six categories of trivia in one game
Restore Order (TM) ................. A game asking players to put answers in proper order
fling(TM)........................... Interactive compatibility test
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(R)...................... 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
Get Reel(TM)........................ Movie trivia
PasTimes(TM)........................ History trivia
SciFiles(TM)........................ Science fiction trivia
Kids Trivia(TM)..................... Kids trivia game featuring children's topics
Bach to Rock(TM).................... Music trivia
Tube Topics(TM)..................... Television trivia
Red Carpet Q&A...................... Entertainment trivia
Diamondball Trivia(TM).............. Baseball trivia
Sports Trivia....................... Sports trivia
Hut, Hut, Huh?(TM).................. Football trivia
Rink Think(TM)...................... Hockey trivia
Reel Knowledge(TM).................. Movie trivia
Swish!(TM).......................... Basketball trivia
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Custom Games -- Interactive games for simultaneous broadcast with live
telecasts.
GAME DESCRIPTION
- ---- -----------
NTN Awards Show(TM)................. Interactive game played in conjunction with the Academy Awards Show
NTN Draft Show(TM).................. Interactive game played in conjunction with the annual NFL draft
Classic Games -- Interactive games available to players at subscribing
locations to our digital network.
GAME DESCRIPTION
- ---- -----------
Bingo............................... Interactive version of the classic game
Distribution
Buzztime has entered into and extended distribution agreements as follows:
Interactive Television
Buzztime entered into a multiyear development, licensing and marketing
agreement with Scientific-Atlanta in June 2001. The agreement calls for
Scientific-Atlanta to provide development and marketing resources to develop and
promote the BUZZTIME trivia channel specifically for their digital set-top
boxes. In return, we will pay to Scientific-Atlanta a portion of any licensing
revenue received from cable operators distributing the BUZZTIME trivia channel
during the first five years after launch of the service.
Our LOU with SusCom provides the BUZZTIME trivia channel for their cable
systems. The LOU calls for SusCom to distribute the BUZZTIME channel to each of
its digital subscribers and to pay us a monthly license fee per subscriber.
Buzztime entered into an agreement with WebTV Networks, Inc. for
integration of the Buzztime trivia content into the WebTV Network product. The
one-year agreement, which expired September 2001, gave Web TV subscribers access
to Buzztime's trivia games via a customized Buzztime website.
Wireless
In December 2000, we entered into a licensing and promotion agreement with
Sprint PCS for the purpose of testing its trivia game shows in the wireless
consumer market. In October 2001, we cancelled the agreement.
In August 2001, we entered into a licensing and marketing agreement with
Airborne Entertainment, Inc. whereby Airborne is responsible for hosting,
distributing and marketing our content on wireless carriers in the United
States. We receive a portion of the revenue derived from distribution of our
game content against a guaranteed license fee. Airborne has exclusive wireless
distribution rights to the Buzztime branded trivia games.
Internet
In October 2000, Buzztime entered into a two-year licensing and promotion
agreement with Yahoo! Inc., a leading global Internet communications, commerce
and media company for integration of our trivia game content into the Yahoo!
games application which is accessible via the Yahoo! Games area within their
website. As part of the agreement, Buzztime receives promotional links within
Yahoo! Games which are used to promote NTN Network locations and the BUZZTIME
interactive television channel.
In July 2000, we entered into an agreement with Warner Brothers Online for
development, design and implementation of a 24-hour trivia game powered by our
proprietary game engine to run continuously on the WB Online Network. In
addition, the agreement provides that we produce a minimum of four premium
online games per month. The agreement renewed for an additional term to expire
on April 15, 2002.
Marketing
Our current marketing efforts are concentrated on the cable television
industry to build awareness and distribution. Once the BUZZTIME channel has
launched within cable and satellite systems, we will add consumer-marketing
efforts. Our intent is to take
8
advantage of BUZZTIME's early market advantage by securing trial agreements with
as many large cable operators as possible. Once each trial has successfully
concluded, we intend to negotiate carriage and licensing agreements with the
cable operators. As distribution of the BUZZTIME channel increases, we will
offer to sell premium and pay-to-play services to the players and advertising
and marketing opportunities to marketing companies. Our business model is
supported by strong market demand for compelling content on emerging interactive
television platforms and the proven success of our content on existing platforms
such as the NTN Network and mobile telephones.
The adoption of interactive television services in the home will be key to
revenue growth, penetration of Buzztime content into the cable operators and the
ability to charge either the player/subscriber or the cable operator for
receiving the BUZZTIME interactive television channel. We expect to sell
advertising under a standard cable television model once the content is exposed
to a critical mass of interactive television viewers.
Raw Materials
For media platforms such as cable television, wireless platforms and online
services, we distribute our programs to the recipients who maintain their own
receiving, translation and re-broadcasting equipment. Accordingly, we currently
have no raw materials or equipment needs for these customers beyond our own
back-end servers. Because the interactive television technology is still under
development by numerous software and hardware companies, it is not clear at this
time whether Buzztime's application will require additional hardware for
interactive television installation by each cable operator.
Competition
On a broad basis, the consumer has, and will continue to have, many options
in the in-home entertainment market from which to choose. Our interactive
television offering will compete for a share of total home entertainment dollars
against broadcast television, pay-per-view and other content offered on cable
and satellite television. We will also compete with other programming available
to consumers through the Internet and online services such as America Online.
Cable television, in its various forms, provides consumers the opportunity
to make viewing selections from 30 to over 100 free and pay channels, thus
limiting the amount of time devoted to any particular channel. To those
consumers who enjoy watching game shows, the offerings are plentiful from the
networks and the cable programmers. Shows like Jeopardy and Wheel of Fortune,
and those offered 24 hours per day on cable interactive television Game Show
Network, are expected to continue to draw audiences. For the most part,
television is currently 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 interactive participation. Buzztime's offering
will differ from most television game programs in two major ways: it will allow
the home consumer to truly interact with the game shows via their remote control
and it will allow the home player to actually receive a "score" and be ranked
both locally and nationally, on screen for all players to see, in each game. We
believe this is a compelling characteristic that will draw players to the
Buzztime offering.
The in-home online/Internet game sites will also compete with Buzztime's
interactive television channel. Dozens, if not hundreds, of these sites offer
either trivia game play or similarly styled social, non-violent game play such
as board or card games, games of chance, and strategy games. Internet and online
providers, such as America Online, can provide literally thousands of options
for content and entertainment. The number of Internet game sites competing for
consumers' attention has proliferated in recent years, and we expect the
competition to continue to intensify. We believe that our principal competitive
factor is that by offering our games almost solely in the cable space on digital
set top boxes, Buzztime will attract and retain a large and broad player
audience that is different from the Internet/online audiences. Being on
televisions in consumer homes has long been considered the premium opportunity
for game play, and we are becoming one of the first game companies to be able to
deliver content in that medium. Because Internet and online services are either
confined to a site's subscriber base or found by only a subset of the game
audience, interaction among viewers is limited to the particular program as
offered only on the specific online service.
Finally, competition within the interactive television space comes from
three or four existing game providers that are also seeking to provide games on
digital set top boxes, either as single play or networked games. These
competitors include Two-way TV, PlayJam (owned by OpenTV), GameWorld, and ZAQ.
We believe we have several key advantages over these companies. First, most of
these competitors can only offer stand-alone single player games on current
set-tops. Second, those that do allow competition with others have no trivia
channel in their offerings, and we believe trivia game shows will be one of the
most popular games. Third, several require additional software, or middle-ware,
to run. And, finally, none that we are aware of has a direct relationship with
set-top box manufacturer that gives the product a technical endorsement.
9
LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
Our sports games make use of simultaneous telecasts of sporting events.
Where we have a license with a sporting league, we are also permitted to utilize
the trademarks and logos of national teams and leagues in connection with the
playing of an interactive game.
We are party to a license agreement with the NFL. The NFL agreement grants
us data broadcast rights to conduct interactive games on the NTN Network in
conjunction with the broadcast of NFL football games, for which we pay the NFL a
flat royalty independent of revenues billed to subscribers by the NTN Network in
connection with QB1 play. In August 2001, we renewed our license agreement with
the NFL through August 6, 2003.
We keep confidential as trade secrets the software used in the production
of our programs. The hardware used in our operations is virtually off-the-shelf,
except for the Playmakers. We own copyrights to all of our programs and
software. In addition to the registration of the trademark for QB1, we have
either received, or have applied for, trademark protection for the names of our
other proprietary programming, to the extent that trademark protection is
available for them. Our intellectual property assets are important to our
business and, accordingly, we maintain a program directed to the protection of
our intellectual property assets.
GOVERNMENT CONTRACTS
We provide our broadcast services through the NTN Network to a small number
of government agencies, usually military base recreation units. However, the
number of government customers is small compared to our overall customer base.
Contracts with government agencies are provided under substantially the same
terms and conditions as to other corporate customers.
RESEARCH AND DEVELOPMENT
During 2001, 2000 and 1999, we incurred approximately $101,000, $430,000,
and $842,000, respectively, related to research and development projects,
including projects performed by outside consultants. In 2001, our research and
development efforts related to digital network and wireless and interactive
applications.
We have developed enhancements to our interactive software including a
migration to a Windows-based platform and continued research into new and
enhanced graphics. We continuously evaluate various methods of transmitting our
programs and services. Research and development is also underway to migrate the
current network technology to off-the-shelf Internet technology. By doing so, we
can more easily integrate third party content, technology and hardware solutions
into our network systems.
There is no assurance that we 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.
ACQUISITIONS AND DIVESTITURES
In April 1999, we acquired the assets and rights to certain technology,
hardware and video games used in the Internet game business from Sikander, Inc.
We paid $40,000 in cash and issued a promissory note to Sikander for the assets.
The technology acquired from Sikander enabled us to link the users on our
existing network to players on coin-operated or pay-per-play Internet stations
at other remote locations. We are currently not making use of this technology
and wrote down the value of the assets to zero in 2000.
In 1994, we formed IWN, Inc., which served as the general partner of IWN
L.P., a limited partnership engaged in the development of interactive technology
for gaming applications. IWN, Inc. has no business or operations apart from its
service as the general partner of IWN L.P. In August 1999, the assets of IWN
L.P., which included its interactive wagering technology and a 25% interest in
eBet Online Limited, were sold to eBet for $1,227,000 in cash and 4,000,000
shares of eBet common stock. eBet is a publicly traded company listed on the
Australian Stock Exchange. IWN, Inc. and IWN, L.P. remain as legal entities, but
they are not engaged in any business activities. We sold the assets of IWN, L.P.
in June 1999 in an effort to focus on our two core business segments.
In June 2001, we entered into a contribution agreement with Buzztime,
effective retroactively to January 1, 2001, whereby we contributed some of our
assets to Buzztime. The assets contributed to Buzztime included the interactive
trivia game show libraries, the play along sports game libraries and related
technology and intangible assets.
10
Further, in June 2001, we entered into a licensing and marketing agreement
with Buzztime, effective retroactively to January 1, 2001, whereby Buzztime
granted the NTN Network an exclusive, royalty-free, perpetual license to the
game libraries and related technology for distribution to the commercial market.
Buzztime will continue to provide us with new game content created during the
ordinary course of business, as well as maintenance and upgrades to existing
content and related technologies, during the next five years. This obligation is
subject to a termination right at the option of Buzztime, upon one year's prior
notice to us. In addition, Buzztime will continue to produce Predict the Play
applications for the NTN Network during the next five years. Pursuant to the
terms of the agreement, the NTN Network will promote Buzztime during broadcasts
of Buzztime programming on the NTN Network as long as Buzztime continues to
supply new game content for distribution by us. Buzztime shall promote the NTN
Network to the best of its ability in the consumer market, including interactive
television and wireless devices.
GOVERNMENT REGULATIONS
The cost of compliance with federal, state and local laws has not had a
material effect upon our capital expenditures, earnings or competitive position
to date. On June 16, 1998, we received approval from the Federal Communications
Commission for our new 900 megahertz Playmakers. The 900-megahertz Playmaker is
an integral component of our new digital network.
EMPLOYEES
As of February 19, 2002, we employ approximately 142 people on a full-time
basis and 11 people on a part-time basis, and also utilize independent
contractors for specific projects. None of our employees are represented by a
labor union, and we believe our employee relations are satisfactory.
ITEM 2. PROPERTIES
We lease approximately 39,000 square feet of office and warehouse space at
5966 La Place Court, Carlsbad, California for our corporate headquarters and
broadcast center. In July 2001, a new five-year lease for the property commenced
upon expiration of the prior lease term that expired in June 2001. We sublease
approximately 11,600 square feet of this office space to WinResources Computing,
Inc. In February 2001, we entered into a new sublease agreement with
WinResources Computing, Inc. that expires in June 2003.
Our lease for approximately 3,600 square feet of warehouse space near our
corporate headquarters expired in December 2001 and our lease for approximately
2,900 square feet of additional office space adjacent to our corporate
headquarters expired in June 2001.
We also lease approximately 1,253 square feet of additional office space
located in San Francisco. This lease expires in April 2005. We sublease this
space for approximately the same amount as our monthly rent. That sublease
expires in April 2005. We also lease approximately 660 square feet of additional
office space in Northern California. This lease expires in April 2002.
ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of
our business. There can be no assurance that any or all of the following claims
will be decided in our favor and we are not insured against all claims made.
During the pendency of such claims, we will continue to incur the costs of our
legal defense. Other than set forth below, there is no material litigation
pending or threatened against us.
Dorman v. NTN Communications, Inc.
In February 1998, an action entitled Dorman vs. NTN Communications, Inc.
was filed in the Superior Court of San Diego County for the State of California
alleging a fraud and negligent misrepresentation claim based upon purported
omissions from our filings with the Securities and Exchange Commission. In March
1999, the court granted our motion for summary judgment in the Dorman matter
and, on May 13, 1999, denied plaintiff's motion for new trial. On August 20,
1999, plaintiffs filed an appeal of the summary judgment in the Fourth Appellate
District of the Court of Appeals for the State of California. The Court of
Appeals reversed the Superior Court's decision and sent the case back to the
Superior Court. On May 3 and 4, 2001, the parties participated in a mediation
with a court-appointed mediator during which the parties reached an agreement to
settle the litigation. Pursuant to the settlement, we paid to Dorman the sum of
$42,000 which was fully covered by insurance.
11
Interactive Network, Inc.
We have been involved as a plaintiff or defendant in various previously
reported lawsuits in both the United States and Canada involving Interactive
Network, Inc. We have reached a resolution with Interactive Network of all
pending disputes in the United States and agreed to private arbitration
regarding any future licensing, copyright or infringement issues which may arise
between the parties. There remain two lawsuits involving us, our unaffiliated
Canadian licensee and Interactive Network, which were filed in Canada in 1992.
The litigation involves licensing and patent infringement issues. These actions
affect only the operations of our Canadian licensee and do not extend to our
operations in the United States or elsewhere. In January 2002, plaintiffs
submitted a request to the Federal Court of Canada, Trial Division, in
accordance with the court-ordered deadline, for assignment of a pre-trial
conference date in May 2002.
Steven M. Mizel, et. al
On February 22, 2002, a shareholder class action and derivative complaint
was filed in San Diego County Superior Court for the State of California by
Steven M. Mizel on behalf of himself and all of our shareholders naming Robert
M. Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H.
Arlen, Vincent A. Carrino and James B. Frakes as defendants with NTN
Communications as nominal defendant. The Mizel action alleges breach of
fiduciary duty by defendants in connection with NTN's rejection of a proposal by
a corporation to purchase all of the outstanding shares of our common stock, as
announced publicly on February 21, 2002. Plaintiffs request the court issue an
injunction requiring defendants to fully and fairly negotiate the highest
possible offer to purchase NTN, award attorney's fees, and grant such other
relief as the court may find just and proper. We believe this action is without
merit and we intend to vigorously contest this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote by security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange ("AMEX") under
the symbol "NTN." Trading of our redeemable common stock purchase warrants
listed under the symbol "NTN/WS," commenced on the AMEX in February 1998 and
expired on February 20, 2001. 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
------------------- -------------------
LOW HIGH LOW HIGH
-------- -------- -------- --------
2000
- ----
First Quarter....................... $ 2.5000 $ 6.5000 $ 2.7500 $ 5.5000
Second Quarter...................... $ 1.9375 $ 4.3750 $ 1.1250 $ 3.3750
Third Quarter....................... $ 2.1875 $ 3.1250 $ 0.7500 $ 2.2500
Fourth Quarter...................... $ 0.5625 $ 2.5000 $ 1.5000 $ 0.0630
2001
- ----
First Quarter....................... $ 0.5000 $ 1.2000 $ 0.0200 $ 0.0300
Second Quarter...................... $ 0.4500 $ 0.9300 $ -- $ --
Third Quarter....................... $ 0.6400 $ 0.9100 $ -- $ --
Fourth Quarter...................... $ 0.5900 $ 0.9300 $ -- $ --
2002
- ----
First Quarter(through 2/19/02)...... $ 0.7800 $ 0.8500 $ -- $ --
On February 19, 2002, the closing price for our common stock as reported on
the AMEX was $0.79. As of February 19, 2002, there were approximately 1,429
holders of common stock.
12
To date, we have not declared or paid any cash dividends with respect to
our common stock, and the current policy of our Board of Directors is to retain
earnings, if any, after payment of dividends on the outstanding preferred stock
to provide for our growth. Consequently, no cash dividends are expected to be
paid on our common stock in the foreseeable future. Pursuant to the terms of our
line of credit, we may not pay or declare dividends without the prior written
consent of the lender.
In December 2001, the holders of the senior subordinated convertible notes
agreed to convert $2 million of the outstanding principal into approximately
1,639,000 shares of common stock at $1.22 per share and we agreed to increase
the interest rate on the remaining principal amount outstanding on the notes to
8% per year. We expensed non-cash debt conversion costs of approximately
$189,000 related to this transaction. The issuance of the shares of common stock
was exempt from registration under Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
included elsewhere in this document. The selected financial data for the years
ended December 31, 2001, 2000, 1999, 1998 and 1997 is derived from our audited
financial statements.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Total revenue.............................. $ 22,559 $ 22,048 $ 23,748 $ 24,194 $ 25,861
Total operating expenses................... 25,493 30,249 27,549 27,641 38,668
--------- --------- --------- --------- ---------
Operating loss............................. (2,934) (8,201) (3,801) (3,447) (12,807)
Other income (expense), net................ (807) (940) 1,303 1,654 350
--------- --------- --------- --------- ---------
Loss from continuing operations............ (3,741) (9,141) (2,498) (1,793) (12,457)
Income taxes............................... -- -- -- -- --
--------- --------- --------- --------- ---------
Loss before cumulative effect of
accounting change.......................... (3,741) (9,141) (2,498) (1,793) (12,457)
Cumulative effect of accounting change..... -- (448) -- -- --
Minority interest in loss of
consolidated subsidiary.................. 85 -- -- -- --
--------- --------- --------- --------- ---------
Net loss................................... $ (3,656) $ (9,589) $ (2,498) $ (1,793) $(12,457)
Accretion of beneficial conversion
feature of preferred stock................. -- -- -- (758) --
--------- --------- --------- --------- ---------
Net loss available to common
shareholders............................. $ (3,656) $ (9,589) $ (2,498) $ (2,551) $(12,457)
========= ========= ========= ========= =========
Basic and diluted net loss per common
share:
Continuing operations.................... $ (.10) $ (.28) $ (.09) $ (.10) $ (0.55)
Cumulative effect of accounting change... -- (.01) -- -- --
--------- --------- --------- --------- ---------
Net loss......................... $ (.10) $ (.29) $ (.09) $ (.10) $ (0.55)
========= ========= ========= ========= =========
Weighted-average shares outstanding........ 36,755 33,206 28,470 26,078 22,696
========= ========= ========= ========= =========
BALANCE SHEET DATA
(IN THOUSANDS)
DECEMBER 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Total current assets....................... $ 4,218 $ 5,808 $ 6,387 $ 8,131 $ 8,390
Total assets............................... 13,380 18,822 17,287 16,767 20,271
Total current liabilities.................. 4,178 4,915 5,466 5,731 8,373
Total liabilities.......................... 9,614 14,740 15,066 8,442 11,545
Total minority interest.................... 855 -- -- -- --
Shareholders' equity....................... 2,911 4,082 2,221 8,325 8,726
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The following management's discussion and analysis of financial condition
and results of operations discussion should be read in conjunction with the
consolidated financial statements provided under Part II, Item 8 of this Annual
Report on Form 10-K.
13
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 THAT REFLECT OUR CURRENT ESTIMATES, EXPECTATIONS AND
PROJECTIONS ABOUT OUR FUTURE RESULTS, PERFORMANCE, PROSPECTS AND OPPORTUNITIES,
INCLUDING STATEMENTS RELATED TO OUR STRATEGIC PLANS, CAPITAL EXPENDITURES,
INDUSTRY TRENDS AND FINANCIAL POSITION. IN SOME CASES, YOU CAN IDENTIFY THESE
STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "COULD,"
"ESTIMATE," "EXPECT," "INTEND," "MAY," "SHOULD," "WILL," "PLAN," "WOULD" AND
SIMILAR EXPRESSIONS. FORWARD-LOOKING STATEMENTS ARE BASED ON INFORMATION
CURRENTLY AVAILABLE TO US AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND OTHER
FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR
EXPECTATIONS ARE SET FORTH IN THIS REPORT UNDER THE CAPTION "RISK FACTORS THAT
MAY AFFECT FUTURE RESULTS."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to deferred costs and revenues, depreciation of broadcast
equipment and other fixed assets, bad debts, investments, intangible assets,
financing operations, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We record deferred costs and revenues related to the costs
and related installation revenue associated with installing new customer sites.
Based on Staff Accounting Bulletin 101 ("SAB 101"), we amortize these amounts
over an estimated three-year average life of a customer relationship. If a
significant number of our customers leave us before the estimated life of each
customer is attained, amortization of those deferred costs and revenues would
accelerate, which would result in net incremental revenue. We incur a relatively
significant level of depreciation expense in relationship to our operating
income. The amount of depreciation expense in any fiscal year is largely related
to the estimated life of handheld, wireless Playmaker devices and computers
located at our customer sites. If our Playmakers and servers turn out to have a
longer life, on average, than estimated, our depreciation expense would be
significantly reduced in those future periods. Conversely, if the Playmakers and
servers turn out to have a shorter life, on average, than estimated, our
depreciation expense would be significantly increased in those future periods.
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
We do not have any of the following:
o Off-balance sheet arrangements
o Certain trading activities that include non-exchange traded contracts
accounted for at fair value.
o Relationships and transactions with persons or entities that derive
benefits from any non-independent relationship other than the related
party transactions discussed in ITEM 13. Certain Relationships and
Related Transactions.
BACKGROUND
Our business is developing and distributing interactive entertainment. We
operate our businesses principally through two operating segments: the NTN
Network and Buzztime. The NTN Network operates two interactive television
networks: our original DOS-based network and our digital network introduced in
April 1999. Both networks broadcast daily a wide variety of popular interactive
games, advertisements and informational programming to consumers in
approximately 3,600 restaurants, sports bars and taverns throughout North
America. Buzztime, our 94%-owned subsidiary, was formed in December 1999 to
distribute our trivia and live sports "play-along" content to new consumer
interactive platforms and continue to develop new multiplayer interactive
entertainment content.
14
Revenues generated and operating income (loss) by segment by our two
business segments are illustrated below. The segment data presented below
includes allocations of corporate expenses.
YEARS ENDED DECEMBER 31
2001 2000 1999
------------------- ------------------- -----------
Revenues
- --------
NTN Network..................$ 22,382,000 99% $ 21,406,000 98% $ 22,250,000 96%
Buzztime..................... 159,000 1% 540,000 2% 983,000 4%
------------ ----- ------------- ----- ------------- ----
Total..............$ 22,541,000 100% $ 21,946,000 100% $ 23,233,000 100%
============ ===== ============= ===== ============= ====
Operating Income (Loss)
- -----------------------
NTN Network..................$ 372,000 $ (2,162,000) $ (1,446,000)
Buzztime..................... (3,306,000) (6,039,000) (2,305,000)
IWN.......................... -- -- (50,000)
------------ ------------- -------------
Total..............$ (2,934,000) $ (8,201,000) $ (3,801,000)
============ ============= =============
NTN Network revenues are generated primarily from broadcasting content and
advertising to customer locations. The direct costs associated with these
revenues include the cost of installing the equipment at the customer location,
marketing visits, technical service, freight, telecommunications, sales
commission, parts, repairs, and depreciation of the equipment placed in service
and materials.
Buzztime revenues are generated primarily from advertising and production
services. The direct costs associated with these revenues are license fees and
server hosting fees.
NTN Network revenues increased 5% in 2001 over 2000 as hospitality
subscription revenues increased by approximately $796,000 due to an increase in
the number of sites and the average billing rate per site. This increase was
also due to amortization of previously deferred fees for installation, training
and setup. NTN Network revenues decreased 4% in 2000 over 1999 primarily due to
the implementation of SAB 101, which resulted in a reduction of revenue of
$844,000. Excluding the impact of SAB 101, NTN Network revenues would have
increased by less than 1%.
Buzztime revenues decreased 71% in 2001 over 2000 due to the expiration of
advertising contracts. Buzztime revenues decreased 45% in 2000 over 1999 due to
a reduction in the fees earned from America Online of $600,000 from a contract
that expired on December 1, 1999.
NTN Network operating income increased $2.5 million in 2001 over 2000
primarily due to a $976,000 increase in revenues, which in turn, was due to an
increase in the number of sites and the average billing rate per site and to a
decrease in operating expenses that arose out of general cost cutting measures
that have been implemented in 2001 compared to 2000.
NTN Network operating loss was $0.7 million higher in 2000 over 1999, due
to the implementation of SAB 101 which resulted in a decrease to operating
income of $1.1 million, offset by a decrease in operating expenses as less sites
were installed in 2000 compared to 1999.
Buzztime operating loss was $2.7 million lower in 2001 over 2000. Operating
expenses decreased as the focus on Buzztime initiatives shifted from the
Internet web site to interactive television.
Buzztime operating loss was $3.7 million higher in 2000 over 1999. Selling,
general and administrative expenses increased due to a strengthened focus on
Buzztime initiatives as a result of increased technology personnel costs related
to the Internet web site Buzztime.com and other web and interactive television
initiatives.
RESULTS OF OPERATION
Following is a comparative discussion by fiscal year of the results of
operation for the three years ended December 31, 2001. We believe that inflation
has not had a material effect on the results of operations for the periods
presented.
15
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Operations for 2001 resulted in a net loss of $3,656,000 compared to net
loss of $9,589,000 for 2000. The operating results for 2001 included non-cash
debt conversion costs of $189,000 related to the conversion of $2,000,000 on the
convertible senior subordinated notes. The operating results for 2000 also
included the implementation of SAB 101 related to the recognition of
installation, training and set up revenues, which resulted in a reduction in
revenues of $845,000, an increase in related expenses of $282,000 and the
cumulative effect on prior years of approximately $448,000. It also includes a
charge for the impairment of assets for certain web development costs and
Internet game stations equipment, license and related goodwill in the amount of
$1,362,000.
Revenues
NTN Network revenues increased $976,000, or 5%, to $22,382,000 in 2001 from
$21,406,000 in 2000. Hospitality subscription revenues increased by
approximately $862,000 due to an increase in the number of sites and the average
billing rate per site. During 2001, approximately 697 sites were installed. This
increase was also due in part to installation, training and setup revenue which
increased approximately $438,000 due to an increase in amortization of
previously deferred fees. Other production revenues of approximately $83,000
were recorded in 2001. Included in NTN Network revenues are revenues from our
Canadian licensee totaling $1,263,000 in 2001 and $1,266,000 in 2000. In 2001,
the NTN Network generated revenue of approximately $1,0000,000 in national and
regional advertising, comprised primarily of companies in the wine, beer and
spirits category compared to approximately $1,400,000 in 2000.
Buzztime service revenues decreased 71% to $159,000 in 2001 from $540,000
in 2000. The decrease was due to expiration of advertising contracts.
Other revenue decreased 82% to $18,000 in 2001 from $102,000 in 2000.
Operating Expenses
Direct operating costs of services decreased $2,222,000, or 20%, to
$8,876,000 in 2001 from $11,098,000 in 2000. This is primarily due to a decrease
in depreciation and amortization of approximately $1,184,000 due to our
DOS-based network equipment being fully depreciated by June 2000. That decrease
was partially offset by an increase in depreciation for capitalized broadcast
equipment associated with the digital network. Communication charges decreased
by approximately $586,000 due to technical changes made in 2000 and a change in
vendors during the second half of 2001. Freight expenses decreased by
approximately $148,000 due to 545 less installations of the digital equipment
and less incoming shipments of Playmakers in 2001. Advertising and network
commissions also decreased approximately $590,000 partially as a result of our
decision to transition advertising sales in-house. Playmaker repairs increased
by approximately $335,000 in 2001 due to the expiration of warranties on some of
the Playmakers. At December 31, 2001 there were approximately 3,106 digital and
DOS sites compared to 2,963 sites at December 31, 2000.
Selling, general and administrative expenses decreased $728,000, or 5%, to
$14,342,000 in 2001 from $15,070,000 in 2000. Selling, general and
administrative expense in 2001 included a decrease in payroll and related
expenses of approximately $189,000 relating to a decrease in the number of
employees. Consulting expenses decreased approximately $427,000 due to hiring of
fewer consultants for technology and Buzztime during 2001. Stock-based
compensation decreased $566,000 due to the impact of marking warrants to market,
in accordance with variable accounting, and awards granted and fully expensed in
2000. Supplies, printing costs and seminars decreased approximately $261,000 due
to general cost cutting measures and fewer new employees in 2001. Various other
expenses decreased due to general cost cutting measures that have been
implemented. Marketing expenses increased approximately $260,000 due to an
effort to increase site count and to introduce new games in 2001. Bad debt
expense increased $325,000 due to reassessment of the allowance in 2000 and
increased collections in 2000, which lowered bad debt expense in the prior
period compared to 2001.
Litigation, legal and professional fees decreased $11,000, or 2%, to
$463,000 in 2001 compared to $474,000 in 2000.
Depreciation and amortization not related to direct operating costs
decreased $104,000, or 6%, to $1,711,000 in 2001 from $1,815,000 in 2000 due to
certain assets becoming fully depreciated.
16
As the focus of Buzztime changed to other interactive initiatives,
impairment charges totaled $1,362,000 in 2000 due to the write-off of certain
web development costs for the Internet web site Buzztime.com and Internet game
station assets, license and related goodwill on the basis that the assets are
not recoverable through future cash flows.
Research and development expenses decreased $329,000, or 77%, to $101,000
in 2001 from $430,000 in 2000. The current period expenses resulted from our
research and development efforts related to the digital network and interactive
television initiatives. In 2000, our research and development efforts related to
the digital network and Internet initiatives. This $329,000 decrease was largely
due to the cessation of our Internet initiatives in late 2000.
Interest expense decreased $285,000, or 25%, to $846,000 in 2001, compared
to $1,131,000 in 2000, due to the expiration of various capitalized leases, the
decrease in the interest rate on our convertible senior subordinated notes from
7% to 4% during the period January 2001 through November 2001 and to lower
outstanding balances on our line of credit in 2001. The conversion of half of
the principal outstanding of our convertible senior subordinated notes in
December 2001 will have no impact on interest expense in 2002 as we agreed to
double the interest rate from 4% to 8% on the remaining half.
YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Operations for 2000 resulted in a net loss of $9,589,000 compared to a net
loss of $2,498,000 in 1999. The operating results for 2000 include the
implementation of SAB 101 related to the recognition of installation, training
and set up revenues, which resulted in a reduction in revenues of $845,000, an
increase in related expense of $282,000 and the cumulative effect on prior years
of approximately $448,000. It also includes a charge for the impairment of
assets for certain web development costs and Internet game stations equipment,
license and related goodwill in the amount of $1,362,000. The operating results
for 1999 included a gain of $2,254,000 related to the sale of the assets of our
wholly-owned subsidiary, IWN, L.P., to eBet Limited for $1,227,000 in cash and
4,000,000 shares of eBet Online stock.
Revenues
Total revenues decreased $1,700,000, or 7%, to $22,048,000 in 2000 from
$23,748,000 in 1999. This occurred primarily due to decreases in NTN Network
revenues, America Online fees, equipment sales and other revenues, which were
partially offset by an increase in Buzztime service revenues.
NTN Network revenues decreased $844,000, or 4%, to $21,406,000 in 2000 from
$22,250,000 in 1999. This decrease is primarily due to an accounting policy
change in revenue recognition under SAB 101, which decreased revenue by
$845,000. Excluding the impact of SAB 101, NTN Network revenue would have
increased by less than 1%. During 2000, approximately 1,300 digital systems were
installed. Included in NTN Network revenues are revenues from our Canadian
licensee totaling $1,266,000 in 2000 and $1,292,000 in 1999. NTN Network
revenues also include advertising fees. In 2000, we generated revenue of
$1,400,000 in national and regional advertising, comprised primarily of
companies in the wine, beer and spirits category compared to $892,000 in 1999.
Buzztime service revenues increased $157,000, or 41%, to $540,000 in 2000
from $383,000 in 1999. The increase was due to new advertising contracts in
2000.
America Online fees were zero in 2000 compared to $600,000 in 1999. America
Online fees relate to the fees paid by America Online in connection with an
exclusive agreement whereby we provided trivia content in exchange for a fee.
There are no direct costs related to these fees. Our contract with America
Online expired on December 1, 1999, at which time a new contract was signed,
under which we did not generate revenue from America Online. Under the terms of
the new nonexclusive contract, we had access to America Online's 25 million
subscribers allowing promotion of the Buzztime web site on several America
Online channels. The new contract with America Online expired on November 30,
2000.
Equipment sales were zero in 2000 compared to $84,000 in 1999. This
decrease was due to the conclusion of the recognition of deferred revenue
associated with prior equipment sale-leasebacks in 1999. Equipment sales are
sales of our broadcast equipment to customers and foreign licensees. Prior to
1999, we sold equipment to our customers at their option.
Other revenue decreased $329,000, or 76%, to $102,000 in 2000 from $431,000
in 1999. Other revenue in 1999 included $302,000 of revenue recorded by IWN,
Inc. Due to the sale of the IWN assets in August 1999, no such revenue was
recorded in 2000.
17
Operating Expenses
Direct operating costs of services decreased $71,000, or 1%, to $11,098,000
in 2000 from $11,169,000 in 1999. Excluding the increase in expenses related to
the SAB 101 adjustment of $282,000, direct cost of services decreased 3% to
$10,816,000. This is due to a decrease in depreciation and amortization of
approximately $706,000 due to the DOS-based network equipment being fully
depreciated by June 2000, which is offset by an increase in depreciation for the
capitalized purchases of broadcast equipment associated with the digital
network. Installation fees, sales commissions and freight expense decreased an
aggregate of approximately $371,000 due to approximately 200 fewer installations
in 2000 compared to 1999. Technical site service and Playmaker repairs decreased
an aggregate of $497,000 due to fewer repairs needed on the newer digital
broadcast equipment. At December 31, 2000 there were approximately 2,598 digital
sites installed compared to 1,493 sites at December 31, 1999. These decreases
were offset by an increase in Internet service provider charges of approximately
$248,000 due to additional services needed to support the digital network
compared to the DOS-based network. Advertising commissions also increased
approximately $287,000 partly due to an increase in advertising revenue and also
due to the recognition of non-refundable advances upon cancellation of a
contract. License fees increased approximately $219,000 due to the renewed
contract with the NFL, which was approximately $50,000 more in fees than in
1999, and also due to the reversal of an accrued liability and the related
expense in 1999 of $180,000 in relation to a legal settlement. Hosting fees
increased approximately $360,000 due to the development of Buzztime.com in 2000.
Miscellaneous parts expense increased by approximately $139,000 due to
additional repairs needed on intelligent data receiver cards and due to less
conversions of sites to the digital network compared to 1999. Some of the parts
for DOS-based equipment were reused on the digital network, which lowered costs
for parts in 1999.
Selling, general and administrative expenses increased $1,460,000, or 11%,
to $15,070,000 in 2000 from $13,610,000 in 1999. Selling, general and
administrative expense in 2000 included an increase in payroll and related
expenses of approximately $2,467,000 relating to an increase in the number of
employees for the development and launch of the Internet web site, interactive
television and wireless applications. Office lease expense increased
approximately $149,000 due to additional space leased for the sales offices in
Carlsbad and San Francisco and warehouse space in Carlsbad. Stock based
compensation increased approximately $393,000 due to the issuance of options and
warrants to employees and non-employees. These increased expenses were offset by
a decrease in equipment leases of approximately $684,000 due to the expiration
of the leases in 1999. Consulting expenses decreased approximately $148,000 due
to Year 2000 remediation efforts in 1999 offset by an increase in consultants
for technology and Buzztime. Marketing expenses decreased approximately $374,000
due to additional expenses incurred in 1999 to promote the digital network.
Additionally, bad debt expense decreased approximately $304,000 due to improved
collections.
Litigation, legal and professional fees decreased $84,000, or 15%, to
$474,000 in 2000 compared to $558,000 in 1999 due to additional expense recorded
in 1999 for the settlement of litigation.
Depreciation and amortization not related to direct operating costs
increased $445,000, or 32%, to $1,815,000 in 2000 from $1,370,000 in 1999 due to
increased purchases of computer equipment and software placed in service in
2000.
As the focus of Buzztime changed to other interactive initiatives,
impairment charges totaled $1,362,000 in 2000 due to the write-off of certain
web development costs for the Internet web site Buzztime.com and Internet game
station assets, license and related goodwill on the basis that the assets are
not recoverable through future cash flows.
Research and development expenses decreased $412,000, or 49%, to $430,000
in 2000 from $842,000 in 1999. The current period expenses result from our
research and development related to the next generation of the digital network,
wireless and interactive applications and Internet stations. In 1999, our
research and development efforts related to the second generation of the digital
network, Internet stations, and future Internet web sites.
Interest expense increased $81,000, or 8%, to $1,131,000 in 2000 from
$1,050,000 in 1999 primarily due to interest expense recorded for additional
capitalized leases acquired in 2000 and interest on the revolving line of
credit.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had cash and cash equivalents of $1,296,000 and
working capital (current assets in excess of current liabilities) of $40,000
compared to cash and cash equivalents of $2,188,000 and working capital of
$893,000 at December 31, 2000. Net cash provided by operations was $1,482,000 in
2001 and $404,000 in 2000. Our net loss from operations was more than offset by
depreciation, amortization and other non-cash charges in both years.
18
Net cash used in investing activities was $1,228,000 in 2001 and $7,570,000
in 2000. Included in net cash used in investing activities in 2001 were
approximately $1,271,000 in capital expenditures, software and web site
development, which were partially offset by a reduction in deposits on equipment
of $43,000.
Net cash used in financing activities was $1,146,000 in 2001 compared to
net cash provided by financing activities of $8,310,000 in 2000. The cash used
in financing activities in 2001 included $576,000 of principal payments on
capital leases, $25,000 in principal payments on a note payable, and $1,440,000
of net payments on the revolving line of credit. The net cash used in financing
activities was offset by $93,000 of proceeds from the exercise of stock options
and warrants and by $1,000,000 raised by Buzztime in a preferred stock offering,
which, in turn, was partially counterbalanced by issuance costs of $59,000 and
by issuance costs of $139,000 related to capital raised in November 2000.
Contractual Cash Obligations
A table recapping our contractual cash obligations is presented below:
PAYMENTS DUE BY PERIOD
---------------------------------------------
CONTRACTUAL OBLIGATION Less than 1 year 1-3 years 4-5 years
- ---------------------- ---------------- ------------ ----------
Revolving line of credit................$ -- $ 2,479,000 $ --
Capital lease Obligations............... 217,000 117,000 8,000
Operating leases........................ 550,000 1,153,000 825,000
Other long-term obligations............. -- 12,000 --
---------------- ------------ -----------
Total.............................. $767,000 $ 3,761,000 $ 833,000
================ ============ ===========
The convertible senior subordinated notes are not included in the table as
they are convertible into NTN common stock at maturity.
Convertible Senior Subordinated Notes
As of December 31, 2001, we had outstanding convertible senior subordinated
notes of $2,000,000, payable February 1, 2003 and bearing interest at 8% per
year. The notes permit us to convert up to the full principal amount into shares
of our common stock at maturity at a conversion price of $1.275 per share. In
addition, if our common stock closes above $2.50 for more than 20 consecutive
trading days, we can force conversion of the notes at $1.275 per share. If we
default under the notes, the holders of the convertible notes could declare the
entire outstanding principal amount and all accrued and unpaid interest
immediately due and payable in full.
The convertible senior subordinated notes were originally issued in January
2001 for a principal amount of $4,000,000 and carried an interest rate of 4% in
exchange for our outstanding 7% convertible senior subordinated notes of
$3,987,000 payable on February 1, 2001. Effective on December 11, 2001, we
agreed to permit the holders of the notes to convert $2,000,000 of the
outstanding principal amount into shares of our common stock at a conversion
price of $1.22 per share in order to increase our stockholder equity. As a
result, the holders received an aggregate amount of 1,639,344 shares of our
common stock. In connection with the conversion, we agreed to increase the
interest rate on the remaining outstanding principal of the convertible notes
was increased to 8% from 4% per year.
Revolving Line of Credit
In August 1999, we entered into an agreement with Coast Business Credit for
a revolving line of credit not to exceed $4,000,000. Interest is charged on the
outstanding balance at a rate equal to the prime rate plus 1.5% per annum, but
cannot be less than 9% per annum. The line of credit is secured by substantially
all of our assets. Total loan fees of $120,000 were payable in three annual
installments and are being amortized over the life of the loan, which originally
matured on August 31, 2002.
Our revolving line of credit agreement with Coast Business Credit was
amended in May 2001. The line of credit provides for borrowings not to exceed
the lesser of (i) a designated maximum amount, (ii) three times trailing monthly
collections, or (iii) three times annualized trailing adjusted EBITDA. The
amendment called for a gradual reduction in the line from $4,000,000 on April 1,
2001 to $2,750,000 on December 31, 2001. We completed that pay down process on
December 31, 2001. As of December 31, 2001, we had $271,000 available under the
revolving line of credit. Our availability under the revolving line of credit
may be further reduced if our monthly collections or operating income falls
below certain levels.
The amendment to our revolving line of credit in May 2001 also allowed
equity raised by us to be added to the EBITDA calculation and permit us to
exclude the effect of SAB 101 for 2000. The May 2001 amendment also required us
to raise $1,000,000 in
19
equity by June 30, 2001, maintain a minimum cash level of $400,000 each month
and limited our cash burn to not more than $1,000,000 from April 1, 2001 onward
without receiving additional equity. The maturity date on the line of credit was
also moved forward by two months to June 30, 2002 as part of the May 2001
amendment. The investment in Buzztime by an affiliate of Scientific-Atlanta in
June 2001 satisfied the $1,000,000 equity requirement.
On February 25, 2002, we further amended our revolving line of credit. The
amendment extended the expiration date of the revolving line of credit to June
30, 2003. The amendment also requires further line reductions of $250,000 each
on June 30, 2002, January 31, 2003, and on March 31, 2003. The amendment deleted
our minimum tangible effective net worth financial covenant and replaced it with
two cash flow-oriented covenants. In return for the extension, Coast Business
Credit will receive a loan fee of $40,000 on July 1, 2002.
Investment in Buzztime
On June 8, 2001, an affiliate of Scientific-Atlanta invested $1,000,000 in
Buzztime for 636,943 shares of its preferred stock, representing 6% of
Buzztime's capitalization on an as-converted basis, and warrants to obtain an
additional 159,236 shares of its preferred stock. Each share of Buzztime
preferred stock is initially convertible into one share of Buzztime common stock
and entitled to a non-cumulative dividend of 8%, if, when and as declared by
Buzztime's board of directors.
In connection with the investment, Buzztime entered into a development,
license and marketing agreement with Scientific-Atlanta to co-develop an
application to enable operation of a Buzztime interactive trivia game show
channel on Scientific-Atlanta's Explorer digital interactive set-top network for
distribution by cable operators to their subscribers. The $1,000,000 in net
proceeds may only be used towards development of the application for
Scientific-Atlanta and fulfillment of Buzztime's obligations under the
development agreement.
We granted Scientific-Atlanta the right to exchange its shares of Buzztime
preferred stock into shares of NTN common stock if (i) Buzztime does not obtain
additional equity financing of $2,000,000 before June 8, 2002, (ii) the
liquidation, dissolution or bankruptcy of Buzztime before June 8, 2002, (iii)
the failure of Buzztime to conduct a qualified public offering by June 8, 2004,
or (iv) a change in control of Buzztime before June 8, 2002. The exchange price
will be the 20-day average closing price of NTN's common stock immediately
preceding the date Scientific-Atlanta gives notice of its intent to exercise its
rights.
The exercise price of the Scientific-Atlanta warrants is $1.57 per share.
However, the warrants vest in 10% increments only as cable system operators sign
on for the Buzztime game show channel.
Future Financing Needs
Our requirements for additional financing in 2002 will depend upon the
growth of our two business segments. In a low growth scenario (for example, net
site growth of 100 sites in the NTN Network and a number of commercial trials of
the Buzztime initiative), utilization of our existing line of credit is expected
to be sufficient to cover our financing requirements. If we face more rapid
growth in either or both segments, then we will require additional financing in
2002. If we are unsuccessful in obtaining financing, some initiatives relating
to those higher growth opportunities may have to be curtailed or deferred. We
may not be able to obtain additional financing on terms favorable to us or at
all.
We are also considering adding to our product line certain other wireless
applications that are relevant to the hospitality industry. We may add these
incremental hospitality products through reseller arrangements or through
acquisition. Our limited capital resources may prevent us from making such an
acquisition on a cash basis.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests. Other intangible assets will
continue to be amortized over their useful lives. The amortization provisions of
SFAS No. 142 apply to goodwill and intangible assets acquired after June 30,
2001. The adoption did not have a material impact on our financial condition or
our results of operations at January 1, 2002.
20
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, we
will recognize a gain or loss on settlement.
We are required and plan to adopt the provisions of SFAS No. 143 during the
quarter ending March 31, 2003. To accomplish this, we must identify all legal
obligations for asset retirement obligations, if any, and determine the fair
value of these obligations on the date of adoption. The determination of fair
value is complex and will require us to gather market information and develop
cash flow models. Additionally, we will be required to develop processes to
track and monitor these obligations. We currently do not expect SFAS No. 143 to
have a material impact.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business (as previously defined in that Opinion). SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with Statement 121. For example, SFAS No. 144 provides guidance on
how a long-lived asset that is used as part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is held for sale,
and prescribes the accounting for a long-lived asset that will be disposed of
other than by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on
how to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142, Goodwill and Other Intangible Assets.
We are required to adopt SFAS No. 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions during the quarter
ending March 31, 2002. Management does not expect the adoption of SFAS No. 144
for long-lived assets held for use to have a material impact on our financial
statements because the impairment assessment under SFAS No. 144 is largely
unchanged from SFAS No. 121. The provisions of the statement for assets held for
sale or other disposal generally are required to be applied prospectively after
the adoption date to newly initiated disposal activities. Therefore, management
cannot determine the potential effects that adoption of SFAS No. 144 will have
on our financial statements.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business, results of operation and financial condition could be
adversely affected by a number of factors, including the following:
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND WE EXPECT TO INCUR SIGNIFICANT NET
LOSSES IN THE FUTURE.
We have a history of significant losses, including net losses of $3,656,000
in 2001, $9,589,000 in 2000 and $2,498,000 in 1999 and an accumulated deficit of
$76,890,000 as of December 31, 2001. We expect to incur significant operating
and net losses for the next four quarters due primarily to our continued
development of Buzztime.
OUR LIMITED LIQUIDITY AND CAPITAL RESOURCES MAY CONSTRAIN OUR ABILITY TO OPERATE
AND GROW OUR BUSINESS.
At December 31, 2001, our current assets exceeded our current liabilities
by approximately $40,000. We currently have a revolving line of credit
agreement, which provides for borrowings of up to $2,750,000 and which expires
on June 30, 2003. Our availability under the revolving line of credit may be
reduced if our monthly collections or operating income falls below certain
levels. As of December 31, 2001, the maximum of $2,750,000 was available to us
and approximately $2,479,000 was outstanding under the line. The maximum amount
of the line of credit will be subsequently reduced to $2,500,000 on June 30,
2002, $2,250,000 on January 31,
21
2003, and $2,000,000 on March 31, 2003. The line of credit is secured by
substantially all of our assets. Our liquidity and capital resources remain
limited and this may constrain our ability to operate and grow our business. Any
reduction in availability under our revolving line of credit may further
constrain our liquidity.
We will require additional financing to implement our plan to significantly
expand the digital network and to develop Buzztime into a leading content
provider for interactive television platforms. Our requirements for additional
financing in 2002 will depend upon the growth of our two business segments. In a
low growth scenario (for example, net site growth of 100 sites in the NTN
Network and a number of commercial trials of the Buzztime initiative),
utilization of our existing line of credit is expected to be sufficient to cover
our financing requirements. If we face more rapid growth in either or both
segments, then we will require additional financing in 2002. If we are
unsuccessful in obtaining financing, some initiatives relating to those higher
growth opportunities may have to be curtailed or deferred. We may not be able to
obtain additional financing on terms favorable to us or at all. If we receive
additional equity financing, it could be dilutive to our stockholders.
WE DO NOT COMPLY WITH THE AMERICAN STOCK EXCHANGE GUIDELINES AND MAY BE DELISTED
OR SUSPENDED FROM TRADING.
AMEX has published a set of continued listing guidelines that it follows to
determine whether an AMEX-listed company should be allowed to continue the
trading or listing of its securities on the exchange. Under these guidelines,
AMEX will consider suspending or "delisting" a company's securities from the
exchange if it has sustained operating or net losses in its five most recent
fiscal years and if shareholders' equity falls below $4.0 million. We incurred a
net loss of $3,656,000 in 2001, representing our seventh consecutive year of
losses. As such, we are technically not in compliance with the continued listing
guidelines of AMEX. Our equity is approximately $2,911,000 at December 31, 2001
and is expected to decrease with anticipated losses in 2002.
In January 2002 we received correspondence from AMEX indicating that,
despite the fact that NTN does not currently meet the guidelines, AMEX will
continue the listing of our common stock pending periodic reviews by AMEX of our
quarterly and annual SEC filings and certain other financial information. Our
most recent meeting with AMEX officials was in March 2001. To date, AMEX has not
taken any action regarding delisting. Still, our common stock may not remain
listed on AMEX or any other exchange or quotation system in the future. If our
common stock is delisted from AMEX, spreads can often be higher for securities
traded on the over-the-counter market and the execution time for orders may be
longer. Thus, removing our stock from AMEX may result in decreased liquidity by
making the trading of our stock less efficient.
WE ARE CURRENTLY INVOLVED IN LITIGATION MATTERS THAT COULD MATERIALLY IMPACT OUR
PROFITABILITY.
We are involved in two pending lawsuits in Canada, both involving
Interactive Network, Inc. Both NTN and Interactive Network have asserted claims
involving patent infringement and validity and certain other proprietary rights.
In January 2002, plaintiffs submitted a request to the Federal Court of Canada,
Trial Division, in accordance with the court-ordered deadline, for assignment of
a pre-trial conference date in May 2002. The request is currently pending with
the court. These actions affect only the operations of our Canadian licensee and
do not extend to our operations in the United States or elsewhere.
On February 22, 2002, a shareholder class action and derivative complaint
was filed in San Diego County Superior Court for the State of California by
Steven M. Mizel on behalf of himself and all of our shareholders naming Robert
M. Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H.
Arlen, Vincent A. Carrino and James B. Frakes as defendants with NTN
Communications as nominal defendant. The Mizel action alleges breach of
fiduciary duty by defendants in connection with NTN's rejection of a proposal by
a corporation to purchase all of the outstanding shares of our common stock, as
announced publicly on February 21, 2002. Plaintiffs request the court issue an
injunction requiring defendants to fully and fairly negotiate the highest
possible offer to purchase NTN, award attorney's fees, and grant such other
relief as the court may find just and proper. We believe this action is without
merit and we intend to vigorously contest this action.
The foregoing claims may not be decided in our favor and we are not insured
against claims made. During the pendency of these claims, we will continue to
incur the costs of our legal defense.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE MAY RENDER OUR OPERATIONS OBSOLETE
OR NONCOMPETITIVE.
If we do not compete successfully in the development of new products and
keep pace with rapid technological change, we will be unable to achieve
profitability or sustain a meaningful market position. The interactive
entertainment and game industry is becoming highly competitive and subject to
rapid technological changes. We are aware of other companies that are
introducing interactive game products on interactive platforms that allow
players to compete across the nation. Some of these companies may have
substantially
22
greater financial resources and organizational capital than we do, which could
allow them to identify emerging trends. In addition, changes in customer tastes
may render our network, its content and our technology obsolete or
noncompetitive.
The emergence of new entertainment products and technologies, changes in
consumer preferences and other factors may limit the life cycle of our
technologies and any future products and services we develop. Accordingly, our
future performance will depend on our ability to:
o identify emerging technological trends in our market;
o identify changing consumer needs, desires or tastes;
o develop and maintain competitive technology, including new product and
service offerings;
o improve the performance, features and reliability of our products and
services, particularly in response to technological changes and compe-
titive offerings; and
o bring technology to the market quickly at cost-effective prices.
We may not be successful in developing and marketing new products and
services that respond to technological and competitive developments and changing
customer needs. Such products and services may not gain market acceptance. Any
significant delay or failure in developing new or enhanced technology, including
new product and service offerings, could result in a loss of actual or potential
market share and a decrease in revenues.
WE MAY SELL EQUITY INTERESTS IN BUZZTIME TO THIRD PARTIES, WHICH COULD RESULT IN
THE LOSS OF CONTROL OF BUZZTIME OR DEVALUATION OF OUR EQUITY INTEREST IN
BUZZTIME.
In June 2001 we sold a 6% interest in Buzztime to an affiliate of
Scientific-Atlanta, a leading cable television set-top box manufacturer. We
believe there may be divergent investment preferences between the strategies
pursued by the NTN Network and Buzztime and may decide in the future to continue
to raise additional financing by issuing and selling equity interests in
Buzztime to third parties. To enhance the ability of Buzztime to raise such
financing, we have previously contributed and may contribute in the future some
of our assets to Buzztime in order to allow the development of a distinct
identity that we believe is necessary for it to effectively grow as a separate
concern. These assets include our extensive trivia game show library and our
interactive play-along sports games and related intangible assets.
From an operational standpoint, we could lose control in Buzztime. If we
lose control, Buzztime may no longer provide adequate support and resources for
content and programming for the NTN Network affecting the ability of the NTN
Network to continue its operations. From a financial viewpoint, we could
undervalue the stock of Buzztime when selling it to third parties or undervalue
assets transferred to Buzztime and this could devalue your holdings in NTN,
because we would not receive the fair value for our interest in Buzztime.
IF OUR INTELLECTUAL PROPERTY DOES NOT ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS
AND INTELLECTUAL PROPERTY, OUR BUSINESS COULD BE SERIOUSLY DAMAGED.
We rely on a combination of trademarks, copyrights and trade secret laws to
protect our proprietary rights in some of our products. Furthermore, it is our
policy that all employees and consultants involved in research and development
activities sign nondisclosure agreements. Our competitors may, however,
misappropriate our technology or independently develop technologies that are as
good as or better than ours. Our competitors may also challenge or circumvent
our proprietary rights. If we have to initiate or defend against an infringement
claim in the future to protect our proprietary rights, the litigation over such
claims could be time-consuming and costly to us, adversely affecting our
financial condition.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY LOSE BUSINESS AND EXPERIENCE
REDUCED PROFITABILITY.
Continued implementation of our business plan requires an effective
planning and management process. Our anticipated future growth will continue to
place a significant strain on our management systems and resources. If we are to
grow successfully, we must:
o improve our operational, administrative and financial systems;
o expand, train and manage our workforce; and
o attract and retain qualified management and technical personnel.
23
WE MAY BE LIABLE FOR THE CONTENT WE MAKE AVAILABLE ON THE INTERNET.
We make content available on our web sites and on the web sites of our
advertisers and distribution partners. The availability of this content could
result in claims against us based on a variety of theories, including
defamation, obscenity, negligence or copyright or trademark infringement. We
could also be exposed to liability for third party content accessed through the
links from our web sites to other web sites. We may incur costs to defend
ourselves against even baseless claims, and our financial condition could be
materially adversely affected if we are found liable for information that we
make available. Implementing measures to reduce our exposure may require us to
spend substantial resources and may limit the attractiveness of our services to
users.
IF OUR CHIEF EXECUTIVE OFFICER LEAVES US, OUR BUSINESS MAY BE ADVERSELY
AFFECTED.
Our success greatly depends on the efforts of our chief executive officer.
Our ability to operate successfully will depend significantly on his services
and contributions. Our business and operations may be adversely affected if he
were to leave. In January 2001, we extended his employment agreement through
October 6, 2002.
RISKS ASSOCIATED WITH INTERACTIVE TELEVISION
OUR PROSPECTS FOR GROWTH DEPEND ON OUR IMPLEMENTATION AND USE OF OUR NEW DIGITAL
NETWORK.
Our digital network, introduced in April 1999, has been installed in
approximately 2,947 subscriber locations in the United States as of December 31,
2001. An additional 159 locations in the United States and approximately 500
locations in Canada continue to subscribe to the original DOS-based NTN Network.
We currently plan to continue operating our original NTN Network and the digital
network in the United States concurrently. Our immediate prospects for growth
depend, in part, on our ability to add new product offerings and our sales
effort.
THE INTERACTIVE GAMING AND ENTERTAINMENT INDUSTRY IS HIGHLY COMPETITIVE.
The entertainment business is highly competitive. We compete with other
companies for total entertainment related revenues in the marketplace. Our
network programming competes generally with broadcast television, direct
satellite programming, pay-per-view, other content offered on cable television,
and other forms of entertainment. Furthermore, certain of our competitors have
greater financial and other resources available to them. With the entrance of
motion picture, cable and television 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 competes
directly with our programming. We do not know of any direct impact on our
operations to date.
We also compete with other content and services available to consumers
through online services. Moreover, the expanded use of online networks and the
Internet provide computer users with an increasing number of alternatives to
video games and entertainment software. With this increasing competition and
rapidly changing factors, we must be able to compete on technology, content and
management strategy. If we fail to provide the quality services and products, we
will lose revenues to other competitors in the entertainment industry.
WE DEPEND ON A SINGLE SUPPLIER OF PLAYMAKERS(R).
We currently purchase our 900-megahertz Playmakers from Climax Technology
Co. Ltd., an unaffiliated Taiwanese manufacturer. We are currently soliciting
bids for the manufacture of our Playmakers. Unless and until we succeed in
establishing additional manufacturing relationships, we will continue to depend
on our current sole source supplier of Playmakers. If we lose our supplier, our
growth will slow until an alternative supplier is identified.
COMMUNICATION FAILURES WITH OUR SUBSCRIBER LOCATIONS COULD RESULT IN THE
CANCELLATION OF SUBSCRIBERS AND A DECREASE IN OUR REVENUES.
We rely on both satellite and telephone systems to communicate with our
subscriber locations. Interruption in communications with our subscriber
locations under either system could decrease customer loyalty and satisfaction
and result in a cancellation of our services. We are continually reviewing
alternative telephone service providers and establishing contingency plans;
however, such alternative providers and contingency plans have not been
finalized.
24
We transmit our data to our hospitality customer sites via PanAmSat's
Galaxy IIIR ("GIIIR") satellite. We were notified by the reseller through which
we contract this service that PanAmSat's GIIIR satellite experienced a failure
of its primary Satellite Control Processor, or SCP. The SCP is the principal
computer for command and control of the satellite. As expected and planned for
in this event, the secondary SCP took over control of the satellite with minimal
interruption.
The satellite is currently operating normally and is stable but now has
only one operable SCP. If the secondary SCP were to fail, PanAmSat would lose
control of GIIIR and it would become unusable. Also, GIIIR is the in-orbit spare
for another satellite, Galaxy VIIIi. If Galaxy VIIIi were to fail, it is
possible that NTN could lose the use of GIIIR.
Our reseller states that PanAmSat has made it clear to them that it expects
GIIIR to continue operating normally until it is replaced in the second quarter
of 2002 and that it has a contingency plan for making replacement capacity
available to us on another satellite in its fleet if GIIIR were to become
unavailable.
In the event that we were forced to switch to another satellite, we would
incur significant costs associated with re-pointing its satellite receivers. In
addition, we could experience higher operating costs to transmit data to our
customers via telephone lines and the Internet during the transition period.
In order to provide some historical context to this risk, in 1998, we were
forced to switch from the satellite that we were then using to PanAmSat GIIIR
since the previous satellite became inoperable. That transition was completed in
approximately two weeks.
Another potential risk, as our country is at war, is the possibility that
our government could pre-empt a satellite for national security reasons, as the
United States satellite operators are federally licensed. This would appear to
be unlikely as our government has a strong communications infrastructure in
place domestically. Also, it is likely the satellite would not be at risk of
being damaged by any of the physical aspects of the war due to the fact that the
satellite orbits over 22,000 miles above the earth.
OUR GAMES AND GAME SHOWS ARE SUBJECT TO GAMING REGULATIONS.
We operate online games of skill and change that, in some instance, reward
prizes. These games are regulated in many jurisdictions. The selection of
prizewinners is sometimes based on chance, although none of our games require
any form of monetary payment. The laws and regulations that govern these games,
however, are subject to differing interpretations in each jurisdiction and are
subject to legislative and regulatory change in any of the jurisdictions in
which we offer our games. If such changes were to happen, we may find it
necessary to eliminate, modify or cancel certain components of our products that
could result in additional development costs and/or the possible loss of
revenue.
IF OUR NEW BUZZTIME PROGRAMMING IS NOT ACCEPTED BY CONSUMERS, WE ARE NOT LIKELY
TO GENERATE SIGNIFICANT REVENUES OR BECOME PROFITABLE.
The new BUZZTIME trivia channel programming faces risks as interactive
television products and whether the market accepts interactive television. If
interactive television does not become a successful, scalable medium or if the
market does not accept trivia and play-along sports games, then we will be
unable to draw revenues from advertising, direct-marketing of third-party
products, subscription fees and pay-per-play fees. We will also be unable to
attract local cable operators to add BUZZTIME programming as a channel to their
service.
RISKS ASSOCIATED WITH OUR COMMON STOCK
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND YOUR INVESTMENT COULD SUFFER A
DECREASE IN VALUE.
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. The stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products and media properties
by us or our competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, and the market
prices for Internet-related companies in particular, have experienced extreme
volatility that often has been unrelated to the operating performance of such
companies. These broad market and industry fluctuations may adversely affect the
price of our stock, regardless of our operating performance.
25
OUR CHARTER CONTAINS PROVISIONS THAT MAY HINDER OR PREVENT A CHANGE IN CONTROL
OF OUR COMPANY, WHICH COULD RESULT IN OUR INABILITY TO APPROVE A CHANGE IN
CONTROL AND POTENTIALLY RECEIVE A PREMIUM OVER THE CURRENT MARKET VALUE OF YOUR
STOCK.
Certain provisions of our certificate of incorporation could make it more
difficult for a third party to acquire control of us, even if such a change in
control would benefit our stockholders. For example, our certificate of
incorporation requires a supermajority vote of at least 80% of the total voting
power, voting together as a single class, to amend certain provisions of such
document, including those provisions relating to:
o the number, election and term of directors;
o the removal of directors and the filling of vacancies; and
o the supermajority voting requirements of our Certificate of Incorp-
oration.
These provisions could discourage third parties from taking over control of
our company. Such provisions may also impede a transaction in which you could
receive a premium over then current market prices and your ability to approve a
transaction that you consider in your best interests.
IF THE SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE ARE SOLD, THE MARKET
PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.
Future sales of substantial amounts of our common stock in the public
market or the anticipation of such sales could have a material adverse effect on
then-prevailing market prices. As of February 19, 2002, there were approximately
8,533,000 shares of common stock reserved for issuance upon the exercise of
outstanding stock options at exercise prices ranging from $0.45 to $6.375 per
share. As of February 19, 2002, there were also outstanding warrants to purchase
an aggregate of approximately 1,790,000 shares of common stock at exercise
prices ranging from $0.50 to $3.75 per share. As of February 19, 2002, there
were approximately 1,569,000 shares of common stock reserved for the issuance
upon the conversion of the senior convertible subordinated notes at a conversion
price of $1.275. At February 19, 2002, there were approximately 637,000 shares
of Buzztime's preferred stock that can be converted into NTN common stock at an
exchange price of the 20-day average closing price of NTN's common stock
immediately preceding the date of notice to convert. Additionally, we have
approximately $14 million of common stock remaining under our existing shelf
registration for possible future sale.
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 these 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 our common
stock without assuming the risk of ownership. To the extent the trading price of
our common stock at the time of exercise of any such options or warrants exceeds
the exercise price, such exercise will have a dilutive effect on our
stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to currency exchange rates, stock market
fluctuations, and interest rates. As of December 31, 2001, we owned common stock
of an Australian company that is subject to market risk. At December 31, 2001,
the carrying value of this investment was $174,000, which is net of a $643,000
unrealized loss. This investment is exposed to further market risk in the future
based on the operating results of the Australian company and stock market
fluctuations. Additionally, the value of the investment is further subject to
changes in Australian currency exchange rates. At December 31, 2001, a
hypothetical 10% decline in the value of the Australian dollar would result in a
reduction of $17,000 in the carrying value of the investment.
We have outstanding convertible notes which bear interest at 8% per annum
and line of credit borrowings which bear a rate equal to the prime rate plus
1.5% per annum, which cannot be less than 9% per annum. At December 31, 2001, a
hypothetical one-percentage point increase in the prime rate would result in an
increase of $25,000 in annual interest expense.
We do not have derivative financial instruments.
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.
26
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 February 19, 2002 certain information
regarding our directors and executive officers:
NAME AGE(4) POSITION(S) HELD
- ------------------------- ------ ---------------------------------------------
Stanley B. Kinsey(3)..... 47 Chief Executive Officer and Chairman of the
Board
Barry Bergsman(1)(2)..... 65 Director
Robert M. Bennett(1)..... 74 Director
Robert B. Clasen......... 57 Director
Michael Fleming.......... 51 Director
Esther L. Rodriguez(1)... 60 Director
Gary Arlen(2)(3)......... 57 Director
Vincent A. Carrino(3).... 46 Director
Mark deGorter............ 44 President and Chief Operating Officer, NTN
Network
V. Tyrone Lam............ 40 President, Buzztime Entertainment, Inc.
James B. Frakes.......... 45 Chief Financial Officer
- ----------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Board of Directors, Buzztime Entertainment, Inc.
(4) As of February 19, 2002.
The following biographical information is furnished with respect to the
directors and executive officers:
Stanley B. Kinsey has served as Chairman and Chief Executive Officer of NTN
since October 1998. Mr. Kinsey was appointed as a Director in November 1997 and
his current term expires in 2002. 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, where he served as chairman and chief executive officer from inception
until 1995 when he resigned to spend more time with his family.
Barry Bergsman has been a Director since August 1998 and his current term
expires in 2002. From 1985 to the present, Mr. Bergsman has been president of
Intertel Communications, Inc., a company that pioneered the use of the telephone
and interactive technology for promotion, entertainment and information. Prior
to 1985, Mr. Bergsman was engaged in television production and syndication and
was an executive with CBS. He currently serves as a director and member of the
management team of Photogenesis, Inc., a medical device and biotechnology
company.
Robert M. Bennett has been a Director since August 1996 and his current
term expires in 2004. Since 1989, Mr. Bennett has been chairman of the board of
Bennett Productions, Inc., a production company with experience in virtually all
areas of production including syndicated sports and specialty programming, music
videos, commercial productions, home video, corporate communications and feature
films. Mr. Bennett was president of Metromedia Broadcasting from 1982 until
1986. His career in broadcasting began at KTTV, Metromedia's broadcast division.
In 1972, Mr. Bennett joined Boston Broadcasters, Inc. (BBI), serving as
president and director from 1979 until 1982. In 1991, he acquired full ownership
from his partners of Trans Atlantic Entertainment, Inc., owner of film and video
libraries. Mr. Bennett was named to The Broadcasting and Cable Hall of Fame on
November 7, 1994.
27
Robert B. Clasen has been a Director since November 2001 and his current
term expires in 2004. In January 2002, he was appointed Chairman and Chief
Executive Officer of Inetcam, Inc., a privately held international streaming
media management software company that develops and globally distributes
high-performance multimedia webcasting solutions. From 1999 until June 2001, Mr.
Clasen served as Chairman and Chief Executive Officer of ICTV, an
interactive/internet television provider. From June 2001 until December 2001,
Mr. Clasen remained as Chairman of the board at ICTV and, since December 2001,
he has continued to serve as a director for ICTV. From 1997 until 1998, Mr.
Clasen served as President and Chief Executive Officer of ComStream Corporation,
an international provider of digital transmission solutions for voice, data,
imaging, audio and video applications. Prior to 1997, Mr. Clasen held positions
as President of each of ComCast International Holdings, the international
division of ComCast Cable Communications, and Comcast Cable Communications, one
of the country's five largest cable television companies. For the past ten
years, Mr. Clasen has also been President and CEO of Clasen Associates, advisors
to a broad range of technology and service companies who operate in the
broadband, wireless and satellite sectors.
Michael Fleming was appointed a Director in November 2001 and his current
term expires in 2003. Mr. Fleming is currently chairman and Chief Executive
Officer of the Fleming Media Group, advising a broad range of content and
technology companies on interactive television, broadband, wireless and other
convergent technology opportunities. He is the founder and recent past-President
of Game Show Network, a satellite delivered television programming service
dedicated to the world of games and game play. Mr. Fleming has held senior
executive positions at Playboy Entertainment Group, ESPN, Turner Broadcasting
and Warner Amex Satellite Entertainment Company. He was inducted into the Cable
Pioneers in 1999. Mr. Fleming also serves as a director on the boards of Mixed
Signals Technologies, Pacific Ceramics, Bold Ventures and non-profits Cable
Advertising Bureau (CAB), Cable Positive, Los Angeles Regional Arts Council and
the Alex Theatre.
Esther L. Rodriguez was appointed as a Director in September 1997 and her
current term expires in 2004. She served as a vice president of Next Level
Communications, Inc. (formerly General Instrument), a public telecommunications
company, until November 1996 after having served in various executive capacities
since joining General Instrument in 1987. At General Instrument, Ms. Rodriguez
served as vice president of worldwide business development and was instrumental
in developing the first home satellite pay-per-view business. She was also
general manager and chief operating officer of General Instrument's Satellite
Video Center. After leaving General Instrument, she founded and continues to
serve as chief executive officer of Rodriguez Consulting Group, a business
development consulting firm. Ms. Rodriguez has over 20 years of worldwide
experience in the development and management of consumer, commercial, business
and educational network systems.
Gary Arlen was appointed as a Director in August 1999 and his current term
expires in 2003. Since 1980, he has been president of Arlen Communications,
Inc., a research and consulting firm specializing in interactive information,
transactions, telecommunications and entertainment. Arlen Communications
provides research and analytical services to domestic and international
organizations in entertainment, media, telecommunications and Internet
industries. In 1981, Mr. Arlen, an interactive media analyst, founded the
Internet Alliance, an industry group representing the interest of online content
and service suppliers.
Vincent A. Carrino was appointed as a Director in September 1999 and his
current term expires in 2003. Mr. Carrino is founder and president of Brookhaven
Capital Management, LLC, a private investment firm focusing on technology
companies, established by him in 1985. Prior to establishing Brookhaven Capital
Management, LLC, Mr. Carrino was an analyst with Alliance Capital Management and
was an investment banker with CitiBank in New York. Mr. Carrino serves on the
board of directors of Cash Technologies, a company focused on ATM-based Internet
Commerce.
Mark deGorter was appointed President and Chief Operating Officer of the
NTN Network in January 2001. Prior to that time, Mr. deGorter served as Vice
President of Marketing of NTN's Buzztime subsidiary. In addition, during the
third quarter of 2000, Mr. deGorter assumed the additional role of Vice
President of Marketing for the NTN Network. Prior to joining Buzztime in April
2000, Mr. deGorter had served as Vice President of Marketing for MET-Rx USA, a
sports nutrition company, since July 1997. From June 1994 until July 1997, Mr.
deGorter was a senior manager with ProShot Golf, Inc., a global positioning
satellite-based communications and information system for the golf industry.
During his career, Mr. deGorter has held key management positions with Bally's
Total Fitness, a public company operating commercial fitness centers in North
America; L.A. Gear, a licensor of trademarks and trade names for use in
conjunction with apparel, accessory and consumer-related products; and J. Walter
Thompson/USA, a multi-media advertising agency with worldwide operations.
V. Tyrone Lam was appointed President of Buzztime Entertainment, Inc. in
December 1999, after serving as Executive Vice President of NTN since September
1998. He was appointed Vice President and General Manager of the NTN Network in
September 1997. Prior to this time he served as Associate Vice President of
Marketing from February 1997. Mr. Lam joined NTN in December
28
1994 in a marketing position. From April 1992 to December 1994, Mr. Lam managed
the interactive television sports and games development for the EON Corporation
and has held other sales and marketing positions in the computer software
industry.
James B. Frakes was appointed Chief Financial Officer and Secretary of NTN
in April 2001. Prior to joining NTN, Mr. Frakes was chief financial officer and
a director of Play Co. Toys, a publicly held chain of retail toy stores, where
he had been since 1997. On March 28, 2001, Play Co. Toys and its majority-owned
subsidiary, Toys International.com, Inc., filed a Chapter 11 petition under
federal bankruptcy laws in the Southern District in the State of New York. From
June 1990 to March 1997, Mr. Frakes was chief financial officer and a director
of Urethane Technologies, Inc., a publicly held specialty chemical company, and
two of its subsidiaries, Polymer Development Laboratories, Inc. and BMC
Acquisition, Inc., chemical companies focused on the polyurethane segment of the
plastics industry. From 1985 to 1990, Mr. Frakes was a manager at Berkeley
International Capital Corporation, an investment banking firm specializing in
later stage venture capital and leveraged buyout transactions. Mr. Frakes serves
on the board of Shopnet.com, Inc., a designer and distributor of swimsuits.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under federal securities laws, our directors and officers and any persons
holding more than 10% of our common stock are required to report their
beneficial ownership of our common stock and any changes in that ownership to
the Securities and Exchange Commission. Specific due dates for these reports
have been established, and we are required to report any failure to file by
these dates. We believe that, based on the written representations of its
directors and officers and copies of reports filed with the Commission in 2001,
our directors, officers and holders of more than 10% of our common stock
complied with the requirements of Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the compensation paid or accrued as of each of
the last three fiscal years to all individuals who served as our chief executive
officer during 2001 and the four other most highly compensated executive
officers who were serving as executive officers at the end of 2001 whose salary
and bonus exceeded $100,000 (collectively, the "Named Executive Officers"):
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION OPTION
- ---------------------------- ---- ------------ ------------ ------------ ------------
Stanley B. Kinsey(2)...................... 2001 $ 305,386 -- -- 350,000
Chief Executive Officer 2000 295,057 -- -- --
And Chairman of the Board 1999 286,835 32,500(3) -- 500,000
V. Tyrone Lam............................. 2001 $ 223,077 -- -- --
President, Buzztime Entertainment, Inc 2000 198,077 -- -- --
1999 175,000 -- -- --
Mark deGorter(4).......................... 2001 $ 199,038 -- -- 150,000
President and Chief Operating Officer 2000 127,212 -- -- 250,000
The NTN Network 1999 -- -- -- --
James B. Frakes(5)........................ 2001 $ 111,539 $ 10,000(6) -- 250,000
Chief Financial Officer 2000 -- -- -- --
1999 -- -- -- --
Steve Riccabona(7)........................ 2001 $ 180,000 -- -- 100,000
Senior Vice President, Sales and Markeing 2000 83,077 -- -- 200,000
The NTN Network 1999 -- -- -- --
- ----------
(1) Includes amounts, if any, deferred under NTN's 401(k) Plan.
(2) Mr. Kinsey waived compensation for serving as a director of NTN. Mr. Kinsey
received perquisites and personal benefits that did not exceed the lesser
of $50,000 or 10% of his annual salary and bonus.
(3) Represents vested value of options granted October 7, 1999 at below market
exercise price, pursuant to his employment agreement and related bonus
program.
29
(4) Mr. deGorter joined NTN in April 2000.
(5) Mr. Frakes joined NTN in April 2001.
(6) Represents a one-time signing bonus paid to Mr. Frakes on August 1, 2001.
(7) Mr. Riccabona joined NTN in July 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning grants of stock options
during fiscal 2001 with respect to the Named Executive Officers:
INDIVIDUAL GRANTS
-----------------------------------------------------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR PRICE DATE VALUE(1)
- ----------------- ---------- ------------- ---------- ------------ -------------
Stanley B. Kinsey..... 350,000(2) 16% $0.875 01/25/11 $262,531
Mark deGorter......... 150,000(3) 7% 0.50 01/08/11 64,055
James B. Frakes....... 250,000(3) 12% 0.58 04/30/11 128,556
Steve Riccabona....... 100,000(4) 5% 0.45 04/03/11 38,477
- ----------
(1) The present value of grant on the grant date was estimated using the Black
Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0%, risk-free interest rate of 4.87%,
expected volatility of 124.91%, and expected option life of 5 years.
(2) Represents options granted pursuant to the First Amendment to Employment
Agreement dated January 26, 2001 entered into by and between Mr. Kinsey and
us. The options vest and become exercisable as to 1/12 of the total shares
on the last business day of each calendar month immediately following
October 6, 2001, the date of commencement of Mr. Kinsey's extended term of
employment.
(3) Represents options granted under the 1995 Stock Option Plan which become
exercisable as to 25% of the total shares on the first anniversary of the
date of grant and will become exercisable as to an additional 1/36 of the
remaining shares on the last day of each of the thirty-six (36) calendar
months immediately following the first anniversary of the grant date.
(4) Represents options granted under NTN's 1995 Stock Option Plan which vested
and became exercisable as to 50% of the total shares on December 31, 2001
and would have vested and become exercisable as to an additional 25% had
the NTN Network reached an aggregate 3,450 subscriber installations in 2001
and as to the final 25% had the NTN Network reached an aggregate 3,840
subscriber installations in 2001. The unvested options terminated at
December 31, 2001.
FISCAL YEAR-END OPTION VALUES
The following table contains information concerning stock options which
were unexercised at the end of 2001 with respect to the named executive
officers. No stock options were exercised in 2001 by any named executive
officer.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY
AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END(1)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- --------------- --------------- --------------- ---------------
Stanley B. Kinsey... 1,958,333 291,667 $180,209 $7,291
V. Tyrone Lam....... 446,875 53,125 32,656 8,594
Mark deGorter....... 114,583 285,417 -- 60,000
James B. Frakes..... -- 250,000 -- 80,000
Steve Riccabona..... 118,333 131,667 22,500 --
- ----------
(1) Represents the amount by which the aggregate market price on December 31,
2001 of the shares of our common stock subject to such options exceeded the
respective exercise prices of such options. An asterisk denotes that the
respective exercise prices of the options shown exceeded the market price
of the underlying shares of common stock at December 31, 2001.
30
DIRECTOR COMPENSATION
During 2001, directors were entitled to receive cash compensation of $2,400
per month for their services as directors. Further, directors who serve on
either the audit or compensation committees or the board of directors of
Buzztime Entertainment, Inc. were entitled to receive an additional $3,000
annually. Directors are also eligible for the grant of options to purchase
common stock from time to time for services in their capacity as directors.
Upon the date of commencement of a director's term of service, we grant to
each director options to purchase 20,000 shares of our common stock. These
options are priced at the closing market price of the common stock on the date
of grant. As of the date of grant, 10,000 options are fully vested and
exercisable; thereafter, the remaining 10,000 options vest and become
exercisable in equal installments each month immediately subsequent to the date
of grant and up to the date of the next annual meeting of shareholders. Further,
after the initial year of a director's term of service, options to purchase an
additional 20,000 shares of common stock shall be granted each year on the date
of our annual meeting of shareholders during the remainder of the term of
service. The additional options shall be priced at the closing market price of
the common stock on the date of grant and shall vest and become exercisable as
to 1/12 of the shares each month following the date of grant, subject to the
director's continuing service. A director who is re-elected for an additional
term of service will be granted options to purchase 20,000 shares of common
stock, priced at the closing market price of the common stock on the date of our
annual meeting of shareholders, subject to monthly vesting and continued
service. Finally, all options granted to directors as compensation for service
on the Board of Directors shall expire on the earlier of ten years from the date
of grant or two years from the date the director ceases to serve on the Board of
Directors. The options provide for immediate vesting in full in the event of a
change of control event.
EMPLOYMENT CONTRACTS
In October 1998, we entered into a written employment agreement pursuant to
which Mr. Kinsey is to receive a bonus under a bonus program that was to be
agreed upon by and between Mr. Kinsey and the compensation committee of our
board of directors. On October 7, 1999, Mr. Kinsey and we entered into an
addendum to the employment agreement setting forth the terms of the bonus
program. Under the bonus program, the options granted to Mr. Kinsey in October
1999 were granted at a preferred, below market, price of $0.98 per share, the
average closing price of our common stock during the three calendar quarters
immediately prior to the grant date. The options were granted to Mr. Kinsey
pursuant to our 1995 Stock Option Plan and are subject to immediate vesting upon
the occurrence of a change of control event. In January 2001, we amended the
employment agreement with Mr. Kinsey to extend the duration of the agreement by
one year until October 6, 2002 and to award options for an additional 350,000
shares of our common stock at an exercise price of $0.875 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All compensation determinations for 2001 for our executive officers were
made by the Board of Directors as a whole upon the recommendation of the
Compensation Committee. Until May 31, 2001, Ms. Rodriguez served on the
Compensation Committee. Commencing June 2001, Mr. Bergsman was appointed to
serve on the Compensation Committee along with Mr. Arlen. None of our directors
or executive officers has served on the board of directors or the compensation
committee of any other company or entity, any of whose officers served either on
our Board of Directors or on our Compensation Committee.
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 19, 2002 the number and
percentage ownership of common stock by (i) all persons known to us to own
beneficially more than 5% of the outstanding shares of common stock based upon
reports filed by each such person with the Securities and Exchange Commission,
(ii) each of our directors, (iii) each of the named executive officers, and (iv)
all of the executive officers and directors as a group. Except as otherwise
indicated and subject to applicable community property and similar laws, each of
the persons named has sole voting and investment power with respect to the
shares of common stock shown. Except as otherwise indicated, the address for
each person is c/o NTN Communications, Inc., 5966 La Place Court, Carlsbad,
California 92008. An asterisk denotes beneficial ownership of less than 1%.
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME OWNED COMMON STOCK(1)
- ---------------------------------------------------- ----------------- ----------------
Gary Arlen(2)...................................... 82,667 *
Robert M. Bennett(3)............................... 226,737 1%
Barry Bergsman(4).................................. 210,000 1%
Vincent A. Carrino(5).............................. 5,695,768 15%
Robert B. Clasen(6)................................ 25,000 *
Michael Fleming(7)................................. 15,000 *
Esther L. Rodriguez(8)............................. 177,776 *
Stanley B. Kinsey(9)............................... 2,199,333 5%
V. Tyrone Lam(10).................................. 481,250 1%
Mark deGorter(11).................................. 183,334 *
James B. Frakes.................................... -- *
Steve Riccabona(12)................................ 135,000 *
----------------- -----------------
All executive officers and directors of NTN as a
Group (11 persons)(13)............................. 9,431,865 24%
================= =================
- ----------
(1) Included as outstanding for purposes of this calculation are 38,681,020
shares of common stock (the amount outstanding as of February 19, 2002)
plus, in the case of each particular holder, the shares of common stock
subject to currently exercisable options, warrants, or other instruments
exercisable for or convertible into shares of common stock (including such
instruments exercisable within 60 days after February 19, 2002) held by
that person, which instruments are specified by footnote. Shares issuable
as part or upon exercise of outstanding options, warrants, or other
instruments other than as described in the preceding sentence are not
deemed to be outstanding for purposes of this calculation.
(2) Includes 81,667 shares subject to currently exercisable options held by Mr.
Arlen.
(3) Includes 115,000 shares subject to currently exercisable options held by
Mr. Bennett.
(4) Includes 115,000 shares subject to currently exercisable options and 56,000
shares subject to currently exercisable warrants held by Mr. Bergsman.
(5) Includes 181,667 shares subject to currently exercisable options held by
Mr. Carrino. Also includes 201,656 owned directly by Mr. Carrino and
5,312,445 shares owned, directly or indirectly, by investment advisory
clients of Brookhaven Capital Management, LLC, which in some cases has sole
voting and investment discretion over such shares. Mr. Carrino is the sole
owner and the Manager of Brookhaven Capital Management, LLC and, as such,
in some cases he may be deemed to beneficially own such shares. Mr. Carrino
disclaims such beneficial ownership. Brookhaven Capital Management is
located at 3000 Sand Hill Road, Menlo Park, CA 94205.
(6) Includes 15,000 shares subject to currently exercisable options held by Mr.
Clasen. Includes 10,000 owned by the Clasen Family Trust, of which Mr.
Clasen is co-trustee with members of his immediate family. As co-trustee,
Mr. Clasen shares voting and investment power with respect to the shares.
(7) Includes 15,000 shares subject to currently exercisable options held by Mr.
Fleming.
(8) Includes 115,000 shares subject to currently exercisable options held by
Ms. Rodriguez. Also includes 1,000 shares owned by the Rodriguez Family
Trust, of which Ms. Rodriguez is a co-trustee with members of her immediate
family. As co-trustee, Ms. Rodriguez shares voting and investment power
with respect to the shares.
(9) Includes 2,075,000 shares subject to currently exercisable options held by
Mr. Kinsey.
(10) Represents shares subject to currently exercisable options held by Mr. Lam.
(11) Represents shares subject to currently exercisable options held by Mr.
deGorter.
(12) Represents shares subject to currently exercisable options held by Mr.
Riccabona.
(13) Includes shares subject to currently exercisable options and warrants held
by executive officers and directors, including those described in notes (2)
through (12) above.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING ARRANGEMENTS
On May 8, 2001, we entered into an advertising sales representative
agreement with Baron Enterprises, Inc., a corporation wholly-owned and operated
by Barry Bergsman, a member of our board of directors, pursuant to which Baron
will provide advertising sales representation services to us under the direction
of the NTN Network's president and chief operating officer. For Baron's services
under the advertising sales representative agreement, we granted Baron a
three-year warrant to purchase 20,000 shares of NTN common stock at an exercise
price of $0.50 per share. The warrant vests and becomes exercisable as to 1/12
of the total shares on the last business day of each of the twelve months
commencing April 2001, subject to Baron continuing to provide services to us. In
addition, Baron will receive a commission in the amount of 35% of net
advertising revenues received by the NTN Network from any advertising contract
solicited by Baron. We will pay to Baron a monthly recoverable cash advance
against commissions to be earned in the amount of $5,000 per month, not to
exceed an aggregate of $60,000 per year. The advertising sales representative
agreement expires on April 1, 2002.
INDEMNITY AGREEMENTS
We have entered into indemnity agreements with each of our directors and
executive officers. The indemnity agreements provide that we will indemnify
these individuals under certain circumstances against certain liabilities and
expenses they may incur in their capacities as directors or officers. We believe
that the use of such indemnity agreements is customary among corporations and
that the terms of the indemnity agreements are reasonable and fair, and are in
its best interests to retain experienced directors and officers.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
Consolidated Financial Statements and Schedule. The consolidated
financial statements and schedule of the Company and its consolidated
subsidiaries are set forth in the "Index to Consolidated Financial
Statements and schedule" on page F-1.
Exhibits. The following exhibits are filed as a part of this report:
EXHIBIT
NO. DESCRIPTION
--------- --------------------------------------------------------------------
3.1 -- Amended and Restated Certificate of Incorporation of the
Company, as amended(5)
3.2 -- Certificate of Designations, Rights and Preferences of
Series B Convertible Preferred Stock(9)
3.3 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 22, 2000(10)
3.4 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 24, 2000(10)
3.5 -- By-laws of the Company(2)
4.1 -- Specimen Common Stock Certificate(14)
4.2 -- Securities Purchase Agreement, dated November 14,2000, by
and among NTN Communications, Inc. and the Buyers, as
defined therein(12)
4.3 -- Registration Rights Agreement, dated November 14, 2000, by
and among NTN Communications, Inc.and the Buyers, as
defined therein(12)
4.4 -- First Amendment to Securities Purchase Agreement, dated
January 26, 2001, by and among NTN Communications, Inc.
and the Buyers, as defined therein.(13)
4.5 -- Form of Amended and Restated Common Stock Purchase Warrants
of NTN Communications, Inc., dated January 26, 2001(13)
4.6* -- Stock Option Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(6)
4.7* -- Stock Option Agreement, dated October 7, 1999, by and
between NTN Communications, Inc. and Stanley B. Kinsey(8)
4.8* -- Stock Option Agreement, dated January 26, 2001, by and
between NTN Communications, Inc. and Stanley B. Kinsey(16)
10.1 -- License Agreement with NTN Canada(3)
33
EXHIBIT
NO. DESCRIPTION
--------- --------------------------------------------------------------
10.2* -- Employment Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(6)
10.3 -- Loan and Security Agreement, dated August 6, 1999, by and
between NTN Communications, Inc. and Coast Business Credit,
a division of Southern Pacific Bank.(7)
10.4 -- First Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (7)
10.5 -- Second Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (16)
10.6 -- Third Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (16)
10.7 -- Fourth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit(1)
10.8 -- Manufacturing Agreement, dated November 25, 1997, by and
between NTN Communications, Inc. and Climax Technology
Co., Ltd.(11)
10.9 -- Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (15)
21.1 -- Subsidiaries of Registrant (1)
23.1 -- Consent of KPMG LLP(1)
- ----------
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's registration statement on Form S-8,
File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to NTN's report on Form 10-K for the year
ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's report on Form 10-K for the year
ended December 31, 1994, and incorporated by reference.
(5) Previously filed as an exhibit to NTN's registration statement on Form S-3,
File No. 333-69383, filed on December 28, 1998, and incorporated by
reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-K dated December
31, 1998 and incorporated by reference.
(7) Previously filed as an exhibit to NTN's report on Form 10-Q dated September
30, 1999 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 10-Q dated September
31, 1999 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 8-K dated November
7, 1997 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on
April 5, 2000 and incorporated herein by reference.
(11) Previously filed as an exhibit to NTN's report on Form 10-K/A dated March
5, 2001 and incorporated herein by reference.
(12) Previously filed as an exhibit to NTN's registration statement on Form S-3,
filed on December 11, 2000, and incorporated by reference.
(13) Previously filed as an exhibit to NTN's registration statement on Form
S-3/A, filed on March 5, 2001, and incorporated by reference.
(14) Previously filed as an exhibit to NTN's registration statement on Form 8-A,
File No. 0-19383, and incorporated by reference.
(15) Previously filed as an exhibit to NTN's report on Form 10-K dated December
31, 2000 and incorporated by reference.
(16) Previously filed as an exhibit to NTN's report on Form 10-Q dated March 31,
2001 and incorporated by reference.
(b) Reports on Form 8-K.
On December 14, 2001, we filed a Current Report on Form 8-K (event date
December 11, 2001)to report under Item 5 (Other Events)the conversion
by the holders of our 7% convertible senior subordinated notes of
$2.0 million of the outstanding $4.0 million principal amount into
1,639,344 shares of the Company's common stock. We also reported the
interest rate on the remaining outstanding principal of the notes was
increased from 4% to 8%.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NTN COMMUNICATIONS, INC.
By: /s/ James B. Frakes
----------------------------------------
Chief Financial Officer
Dated: March 6, 2002
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose names
appear below appoint and constitute Stanley B. Kinsey and James B. Frakes, and
each one of them, acting individually and without the other, as his or her true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to execute any and all amendments to this Report on Form
10-K and to file the same, together with all exhibits thereto, with the
Securities and Exchange Commission, and such other agencies, offices and persons
as may be required by applicable law, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorney-in-fact and agent may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STANLEY B. KINSEY Chief Executive Officer March 6, 2002
-------------------------------------- and Chairman of the Board
Stanley B. Kinsey
/s/ BARRY BERGSMAN Director March 6, 2002
--------------------------------------
Barry Bergsman
/s/ ROBERT M. BENNETT Director March 6, 2002
--------------------------------------
Robert M. Bennett
/s/ ESTHER L. RODRIGUEZ Director March 6, 2002
--------------------------------------
Esther L. Rodriguez
/s/ GARY ARLEN Director March 6, 2002
--------------------------------------
Gary Arlen
/s/ VINCENT A. CARRINO Director March 6, 2002
--------------------------------------
Vincent A. Carrino
/s/ ROBERT B. CLASEN Director March 6, 2002
--------------------------------------
Robert B. Clasen
/s/ MICHAEL FLEMING Director March 6, 2002
--------------------------------------
Michael Fleming
35
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
Independent Auditors' Report.............................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as December 31, 2001 and
2000................................................. F-3
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000, and 1999.............. F-4
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 2001, 2000, and 1999.... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000, and 1999.............. F-6
Notes to Consolidated Financial Statements................ F-8
Financial Statement Schedule II-- Valuation and
Qualifying Accounts..................................... F-24
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NTN Communications, Inc.:
We have audited the consolidated financial statements of NTN
Communications, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NTN
Communications, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
San Diego, California
February 25, 2002
F-2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS
2001 2000
------------- -------------
Current Assets:
Cash and cash equivalents................................... $ 1,296,000 $ 2,188,000
Restricted cash............................................. 94,000 202,000
Accounts receivable, net of allowance for doubtful
accounts of $440,000 in 2001 and $811,000 in 2000......... 1,411,000 1,724,000
Investments available-for-sale.............................. 174,000 272,000
Deposits on broadcast equipment............................. 69,000 112,000
Deferred costs.............................................. 675,000 772,000
Prepaid expenses and other current assets................... 499,000 538,000
------------- -------------
Total current assets................................. 4,218,000 5,808,000
Broadcast equipment and fixed assets, net..................... 8,029,000 11,963,000
Software development costs, net of accumulated amortization
of $173,000 in 2001 and $32,000 in 2000..................... 588,000 405,000
Deferred costs................................................ 411,000 565,000
Other assets.................................................. 134,000 81,000
------------- -------------
Total assets......................................... $ 13,380,000 $ 18,822,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 906,000 $ 816,000
Accrued expenses............................................ 889,000 1,351,000
Accrual for litigation costs................................ 44,000 57,000
Accrual for sales tax....................................... 163,000 399,000
Obligations under capital leases............................ 168,000 579,000
Deferred revenue............................................ 2,008,000 1,575,000
Note payable................................................ -- 138,000
------------- -------------
Total current liabilities..................... 4,178,000 4,915,000
Obligations under capital leases,excluding current portion.... 110,000 83,000
Revolving line of credit...................................... 2,479,000 3,919,000
Senior subordinated convertible notes......................... 1,958,000 3,987,000
Deferred revenue.............................................. 877,000 1,804,000
Other long-term liabilities and note payable, excluding
current portion............................................. 12,000 32,000
------------- -------------
Total liabilities.................................... 9,614,000 14,740,000
------------- -------------
Minority interest in consolidated subsidiary.................. 855,000 --
------------- -------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock, $.005
par value, 5,000,000 shares authorized; 161,000 shares
issued and outstanding at December 31, 2001 and
December 31, 2000......................................... 1,000 1,000
Common stock, $.005 par value, 70,000,000 shares
authorized; 38,627,000 and 36,046,000 shares issued and
outstanding at December 31, 2001 and December 31,
2000, respectively........................................ 192,000 179,000
Additional paid-in capital.................................. 80,639,000 78,153,000
Accumulated deficit......................................... (76,890,000) (73,234,000)
Accumulated other comprehensive loss........................ (643,000) (545,000)
Treasury stock, at cost, 91,000 and 111,000 shares at
December 31, 2001 and December 31, 2000................... (388,000) (472,000)
------------- -------------
Total shareholders' equity........................... 2,911,000 4,082,000
------------- -------------
Total liabilities and shareholders' equity........... $ 13,380,000 $ 18,822,000
============= =============
See accompanying notes to consolidated financial statements
F-3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ -------------
Revenues:
NTN Network revenues.......................... $ 22,382,000 $ 21,406,000 $ 22,250,000
Buzztime service revenues..................... 159,000 540,000 383,000
America Online fees........................... -- -- 600,000
Equipment sales, net of cost of sales of
$208,000 in 1999............................ -- -- 84,000
Other revenues................................ 18,000 102,000 431,000
------------- ------------- -------------
Total revenues........................ 22,559,000 22,048,000 23,748,000
------------- ------------- -------------
Operating expenses:
Direct operating costs of services (includes
depreciation of $3,297,000,$4,481,000 and
$5,187,000 for 2001, 2000 and 1999
respectively)................................ 8,876,000 11,098,000 11,169,000
Selling, general and administrative........... 14,342,000 15,070,000 13,610,000
Litigation, legal and professional fees....... 463,000 474,000 558,000
Depreciation and amortization................. 1,711,000 1,815,000 1,370,000
Impairment charges............................ -- 1,362,000 --
Research and development...................... 101,000 430,000 842,000
------------- ------------- -------------
Total operating expenses.............. 25,493,000 30,249,000 27,549,000
------------- ------------- -------------
Operating loss.................................. (2,934,000) (8,201,000) (3,801,000)
------------- ------------- -------------
Other income (expense):
Interest income............................... 63,000 72,000 116,000
Interest expense.............................. (846,000) (1,131,000) (1,050,000)
Debt conversion costs......................... (189,000) -- --
Gain on sale of assets of subsidiary.......... -- -- 2,254,000
Other......................................... 165,000 119,000 (17,000)
------------- ------------- -------------
Total other income (expense).......... (807,000) (940,000) 1,303,000
------------- ------------- -------------
Loss before income taxes, minority interest
in loss of consolidated subsidiary and
cumulative effect of accounting change........ (3,741,000) (9,141,000) (2,498,000)
Provision for income taxes...................... -- -- --
Minority interest in loss of consolidated
subsidiary.................................... 85,000 -- --
------------- ------------- -------------
Loss before cumulative effect of accounting
change........................................ (3,656,000) (9,141,000) (2,498,000)
Cumulative effect of accounting change.......... -- (448,000) --
------------ ------------ ------------
Net loss available to common shareholders....... $ (3,656,000) $ (9,589,000) $ (2,498,000)
============ ============ ============
Loss per common share--basic and diluted loss
before cumulative effect of accounting change. $ (0.10) $ (0.28) $ (0.09)
Cumulative effect of accounting change.......... $ -- $ (0.01) $ --
------------- ------------- -------------
Net loss........................................ $ (0.10) $ (0.29) $ (0.09)
============= ============= =============
Weighted average shares outstanding-- basic and
diluted....................................... 36,755,000 33,206,000 28,470,000
============= ============= =============
See accompanying notes to consolidated financial statements
F-4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
SERIES A AND B
CUMULATIVE
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK
----------------------- ------------------------ ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ---------- ----------- ----------- -------------
Balance, December 31, 1998............................. 217,000 $ 2,000 28,086,000 $ 140,000 $ 70,733,000
Conversion of Series B Preferred Stock to
Convertible Note Payable........................... (56,000) (1,000) -- -- (5,448,000)
Convertible Note Payable converted to Common Stock -- -- 793,000 4,000 1,008,000
Issuance of stock for exercise of warrants
and options........................................ -- -- 334,000 2,000 345,000
Issuance of Treasury Stock pursuant to anti-dilution
provision.......................................... -- -- -- -- (931,000)
Issuance of stock in lieu of interest................ -- -- 435,000 2,000 295,000
Issuance of stock in lieu of dividends............... -- -- 13,000 -- --
Issuance of stock in payment of accrued board
compensation....................................... -- -- 253,000 1,000 246,000
Stock options granted below market................... -- -- -- -- 38,000
Warrants granted to non-employees.................... -- -- -- -- 262,000
Unrealized holding loss on investments
available-for-sale................................. -- -- -- -- --
Net loss............................................. -- -- -- -- --
----------- ---------- ----------- ----------- -------------
Balance, December 31, 1999.......................... 161,000 $ 1,000 29,914,000 $ 149,000 $ 66,548,000
Convertible Note Payable converted to Common Stock... -- -- 719,000 4,000 913,000
Issuance of stock for exercise of warrants and
options............................................ -- -- 2,069,000 9,000 881,000
Issuance of stock in lieu of interest................ -- -- 115,000 1,000 321,000
Issuance of stock in lieu of dividends............... -- -- 10,000 -- --
Issuance of stock in private placements, net of
issuance costs..................................... -- -- 3,219,000 16,000 7,012,000
Stock-based compensation............................. -- -- -- -- 685,000
Unrealized holding loss on investments
available-for-sale................................. -- -- -- -- --
Expiration of settlement warrant obligation.......... -- -- -- -- 1,793,000
Net loss............................................. -- -- -- -- --
----------- ---------- ----------- ----------- -------------
Balance, December 31, 2000............................. 161,000 $ 1,000 36,046,000 $ 179,000 $ 78,153,000
Convertible Note Payable converted to Common Stock... -- -- 1,639,000 8,000 2,137,000
Issuance of stock for exercise of warrants and
options................................................ -- -- 104,000 1,000 92,000
Issuance of stock in lieu of interest................ -- -- 418,000 2,000 198,000
Issuance of stock in lieu of dividends............... -- -- 24,000 -- --
Issuance of stock in payment of accrued board
compensation....................................... -- -- -- -- (71,000)
Issuance of stock in private placement, net of
issuance costs..................................... -- -- 396,000 2,000 11,000
Stock-based compensation............................. -- -- -- -- 119,000
Unrealized holding loss on investments
available-for-sale................................. -- -- -- -- --
Net loss............................................. -- -- -- -- --
----------- ---------- ----------- ----------- -------------
Balance, December 31, 2001............................. 161,000 $ 1,000 38,627,000 $ 192,000 $ 80,639,000
=========== ========== =========== =========== =============
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE TREASURY
DEFICIT LOSS STOCK TOTAL
-------------- ------------- ------------ ------------
Balance, December 31, 1998............................. $(61,147,000) -- (1,403,000) $ 8,325,000
Conversion of Series B Preferred Stock to
Convertible Note Payable........................... -- -- -- (5,449,000)
Convertible Note Payable converted to Common Stock -- -- -- 1,012,000
Issuance of stock for exercise of warrants
and options........................................ -- -- -- 347,000
Issuance of Treasury Stock pursuant to anti-dilution
provision.......................................... -- -- 931,000 --
Issuance of stock in lieu of interest................ -- -- -- 297,000
Issuance of stock in lieu of dividends............... -- -- -- --
Issuance of stock in payment of accrued board
compensation....................................... -- -- -- 247,000
Stock options granted below market................... -- -- -- 38,000
Warrants granted to non-employees.................... -- -- -- 262,000
Unrealized holding loss on investments
available-for-sale................................. -- (360,000) -- (360,000)
Net loss............................................. (2,498,000) -- -- (2,498,000)
-------------- ------------- ------------ ------------
Balance, December 31, 1999.......................... $(63,645,000) $ (360,000) $ (472,000) $ 2,221,000
Convertible Note Payable converted to Common Stock... -- -- -- 917,000
Issuance of stock for exercise of warrants and
options............................................ -- -- -- 890,000
Issuance of stock in lieu of interest................ -- -- -- 322,000
Issuance of stock in lieu of dividends............... -- -- -- --
Issuance of stock in private placements, net of
issuance costs..................................... -- -- -- 7,028,000
Stock-based compensation............................. -- -- -- 685,000
Unrealized holding loss on investments
available-for-sale................................. -- (185,000) -- (185,000)
Expiration of settlement warrant obligation.......... -- -- -- 1,793,000
Net loss............................................. (9,589,000) -- -- (9,589,000)
-------------- ------------- ------------ ------------
Balance, December 31, 2000............................. $(73,234,000) $ (545,000) $ (472,000) $ 4,082,000
Convertible Note Payable converted to Common Stock... -- -- -- 2,145,000
Issuance of stock for exercise of warrants and
options................................................ -- -- -- 93,000
Issuance of stock in lieu of interest................ -- -- -- 200,000
Issuance of stock in lieu of dividends............... -- -- -- --
Issuance of stock in payment of accrued board
compensation....................................... -- -- 84,000 13,000
Issuance of stock in private placement, net of
issuance costs..................................... -- -- -- 13,000
Stock-based compensation............................. -- -- -- 119,000
Unrealized holding loss on investments
available-for-sale................................. -- (98,000) -- (98,000)
Net loss............................................. (3,656,000) -- -- (3,656,000)
-------------- ------------- ------------ ------------
Balance, December 31, 2001............................. $(76,890,000) $ (643,000) $ (388,000) $ 2,911,000
============== ============= ============ ============
See accompanying notes to consolidated financial statements
F-5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------- ------------- ------------
Cash flows provided by operating activities:
Net loss....................................... $ (3,656,000) $ (9,589,000) $ (2,498,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization............... 5,008,000 6,296,000 6,557,000
Provision for doubtful accounts............. 767,000 442,000 746,000
Impairment charges.......................... -- 1,362,000 --
Cumulative effect of accounting change...... -- 448,000 --
Gain on settlement of debt.................. (146,000) -- --
Debt conversion costs....................... 189,000 -- --
Loss from disposition of equipment and sale
of available-for-sale investments, net... 221,000 6,000 (6,000)
Stock-based compensation charges............ 119,000 685,000 292,000
Non-cash interest expense................... 170,000 309,000 395,000
Accreted interest expense................... 80,000 206,000 459,000
Minority interest in loss of subsidiary..... (85,000) -- --
Amortization of deferred revenue............ -- -- (85,000)
Gain on sale of assets of subsidiary........ -- -- (2,254,000)
Changes in assets and liabilities:
Restricted cash........................... 108,000 37,000 (239,000)
Accounts receivable....................... (454,000) 375,000 (816,000)
Prepaid expenses and other assets......... (29,000) 476,000 (423,000)
Accounts payable and accrued expenses..... (567,000) (558,000) (604,000)
Deferred revenue.......................... (243,000) 515,000 236,000
Management severance and other long-term
liabilities............................ -- (606,000) (955,000)
------------- ------------- ------------
Net cash provided by operating
activities........................... 1,482,000 404,000 805,000
------------- ------------- ------------
Cash flows used in investing activities:
Capital expenditures........................... (947,000) (7,188,000) (6,814,000)
Software development expenditures.............. (324,000) (1,557,000) --
Deposits on broadcast equipment................ 43,000 499,000 (374,000)
Notes receivable............................... -- 138,000 70,000
Proceeds from sale of investments.............. -- 538,000 --
Proceeds from sale of assets of subsidiary..... -- -- 1,227,000
Proceeds from sale of equipment................ -- -- 45,000
------------- ------------- ------------
Net cash used in investing
activities........................... (1,228,000) (7,570,000) (5,846,000)
------------- ------------- ------------
Cash flows provided by (used in)financing activities:
Principal payments on capital leases........... (576,000) (932,000) (1,125,000)
Borrowings from revolving line of credit....... 20,694,000 26,624,000 11,175,000
Principal payments on note payable and
revolving line of credit.................... (22,159,000) (25,300,000) (8,872,000)
Proceeds from issuance of common stock and
preferred stock, net of issuance costs...... 802,000 7,028,000 --
Proceeds from exercise of warrants and options. 93,000 890,000 347,000
------------- ------------- ------------
Net cash provided by (used in) financing
activities........................... (1,146,000) 8,310,000 1,525,000
------------- ------------- ------------
Net increase (decrease)in cash and cash
equivalents.................................... (892,000) 1,144,000 (3,516,000)
Cash and cash equivalents at beginning of year... 2,188,000 1,044,000 4,560,000
------------- ------------- ------------
Cash and cash equivalents at end of year......... $ 1,296,000 $ 2,188,000 $ 1,044,000
============= ============= ============
F-6
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------- ------------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................... $ 559,000 $ 602,000 $ 249,000
============= ============= ============
Income taxes................................ $ -- $ -- $ --
============= ============= ============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of treasury stock pursuant to
anti-dilution provision..................... $ -- $ -- $ 931,000
============= ============= ============
Issuance of common stock in payment of
interest.................................... $ 200,000 $ 322,000 $ 297,000
============= ============= ============
Issuance of common stock in payment of board
compensation................................ $ 13,000 $ -- $ 247,000
============= ============= ============
Equipment acquired under capital leases........ $ 192,000 $ 379,000 $1,767,000
============= ============= ============
Equipment and license acquired by issuing note
payable..................................... $ -- $ -- $ 361,000
============= ============= ============
Exchange of preferred stock for convertible
notes and warrants.......................... $ -- $ -- $5,449,000
============= ============= ============
Exchange of convertible notes for common stock. $2,000,000 $ 917,000 $1,012,000
============= ============= ============
Unrealized holding loss on investments
available for sale.......................... $ 98,000 $ 185,000 $ 360,000
============= ============= ============
Sale of assets of subsidiary for cash of
$1,227,000 and stock of eBet Online......... $ -- $ -- $1,297,000
============= ============= ============
Expiration of settlement warrant obligation.... $ -- $1,793,000 $ --
============= ============= ============
See accompanying notes to consolidated financial statements
F-7
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
NTN operates its businesses through two operating segments: Buzztime
Entertainment, Inc.(TM) (Buzztime) and The NTN Network(TM). Buzztime, NTN's
94%-owned subsidiary formed in December 1999, owns the exclusive rights to the
largest known digital trivia game show library and many unique "TV Play-along"
sports games. The NTN Network operates two interactive television (ITV)
networks: its original NTN Network and its new Digital Interactive Television
(DITV) Network. Both networks broadcast daily a wide variety of popular
interactive games, advertisements and informational programming to consumers in
approximately 3,600 restaurants, sports bars and taverns throughout North
America.
Basis of Accounting Presentation
The consolidated financial statements include the accounts of NTN and its
subsidiaries, IWN Inc. ("IWN"), IWN, L.P. and Buzztime (collectively "NTN" or
the "Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
On June 16, 1998, NTN sold an 82.5% interest in its subsidiary LearnStar,
Inc. (LearnStar) to NewStar Learning Systems, L.L.C. (NewStar) for $1,862,000.
The transaction resulted in a gain of $1,643,000, which is included in other
income for the year ended December 31, 1998. In 1994, NTN formed IWN to serve 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. In August of 1999, the assets of IWN, L.P. were sold to eBet Limited for
$1,227,000 in cash and 4,000,000 shares of eBet Online stock which resulted in a
gain of $2,254,000.
Critical Accounting Policies and Estimates
The preparation of these financial statements requires NTN to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, NTN evaluates its estimates, including those
related to deferred costs and revenues, depreciation of broadcast equipment and
other fixed assets, bad debts, investments, intangible assets, financing
operations, and contingencies and litigation. NTN bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
NTN believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. NTN records deferred costs and revenues related to the
costs and related installation revenue associated with installing new customer
sites. Based on Staff Accounting Bulletin 101, NTN amortizes these amounts over
an estimated three year average life of a customer relationship. If a
significant number of its customers leave NTN before the estimated life of each
customer is attained, amortization of those deferred costs and revenues would
accelerate, which would result in net incremental revenue. NTN incurs a
relatively significant level of depreciation expense in relationship to its
operating income. The amount of depreciation expense in any year is largely
related to the estimated life of handheld, wireless Playmaker devices and
computers located at our customer sites. If the Playmakers and servers turn out
to have a longer life, on average, than estimated, NTN depreciation expense
would be significantly reduced in those future periods. Conversely, if the
Playmakers and servers turn out to have a shorter life, on average, than
estimated, NTN depreciation expense would be significantly increased in those
future periods. NTN maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of NTN's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
F-8
Cash and Cash Equivalents
For the purpose of financial statement presentation, NTN considers all
highly liquid investment instruments with original maturities of three months or
less to be cash equivalents. Cash equivalents at December 31, 2001 and 2000
consists primarily of money market accounts.
Restricted Cash
Under the revolving line of credit agreement, all cash receipts are
required to be deposited into a restricted cash account. The restricted cash is
then transferred to pay down the line of credit.
Broadcast Equipment and Fixed Assets
Broadcast equipment and fixed assets are stated at cost. Equipment under
capital leases is stated at the present value of minimum lease payments.
Depreciation of fixed assets is computed using the straight-line method over the
estimated useful lives of the assets (three to seven years). Depreciation of
broadcast equipment is computed using the straight-line method over the
estimated useful lives of the assets (two to four years). Amortization of fixed
assets under capital leases is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the lease period, and is
included in depreciation expense.
Revenue Recognition
NTN recognizes revenue from five sources: NTN Network revenues, Buzztime
service revenues, America Online revenues, equipment sales, and other sources.
Revenue is not recognized until collectibility of fees is reasonably assured.
NTN Network revenue is generated primarily from broadcasting content and
advertising. Revenues generated from broadcasting content to subscriber
locations is recognized ratably over the contract term as the content is
broadcast 17 hours a day/seven days a week. Consistent with the terms of
advertising agreements, advertising is aired a specified number of times per
hour everyday and therefore, revenues are recognized ratable over the contract
term. Included in NTN Network revenues are amounts earned under a license
agreement with our Canadian licensee, who operates approximately 500 hospitality
locations. Revenue under this license agreement is recognized on a monthly basis
as broadcast content is aired similar to NTN Network revenue.
Buzztime service and America Online revenues are recognized as the service
is provided by NTN.
Equipment sales are recognized when equipment is shipped or transferred to
the purchaser.
Other revenue is recognized when all material services or conditions
relating to the transaction have been performed or satisfied.
In the fourth quarter of 2000, NTN changed its method of accounting for NTN
Network installation, setup and training fees ("installation fees") received
from customers, retroactively effective as of January 1, 2000, in accordance
with Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements, which provides guidance related to revenue recognition
based on interpretations and practices followed by the SEC. Previously, NTN
recognized approximately one-half of the installation fees upon customer setup
to cover direct expenses of the installation, setup and training and the balance
over the life of the contract which generally is one year. Under the new method,
all installation fees billed are deferred and recognized as revenue on a
straight-line basis over 36 months, the estimated life of the customer
relationship. Installation fees not recognized in revenue have been recorded as
deferred revenue in the accompanying consolidated balance sheets. In addition,
the direct expenses of the installation, setup and training are deferred and
amortized on a straight-line basis over 36 months and are classified as deferred
costs on the accompanying consolidated balance sheets. Included in 2000 is
revenue of $780,000 and direct expenses of $843,000, that was previously
recognized in 1999, 1998 and 1997 under the old method. The pro forma effect of
retroactive application on the results of operations for the years ended
December 31, 2000, and 1999 is shown below:
2000 1999
----------- -----------
Net loss As reported............. $ 9,589,000 $ 2,498,000
Pro forma............... $ 9,141,000 $ 3,951,000
Net loss per share As reported............. $ 0.29 $ 0.09
Pro forma............... $ 0.28 $ 0.14
F-9
Software Development Costs
NTN capitalizes costs related to the development of certain software
products. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed" capitalization of costs begins when technological
feasibility has been established and ends when the product is available for
general release to customers. Amortization of costs related to interactive
programs is recognized on a straight-line basis over three years.
Website Development Costs
NTN capitalizes web site development costs in accordance with Emerging
Issues Task Force Issue No. 00-02, Accounting for Web Site Development Costs.
Costs incurred during the planning and operating stages are expensed as incurred
while costs incurred during the web site application and infrastructure
development stage are capitalized and amortized on a straight-line basis over
their expected useful life of three years.
Stock-Based Compensation
On January 1, 1996, NTN adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period, the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees," and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1996 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. NTN has elected to continue to apply the provisions of APB No. 25 and
related interpretations and provide the pro forma disclosure provisions of SFAS
No. 123.
The company accounts for options and warrants issued to non-employees in
exchange for services in accordance with SFAS No. 123 and EITF 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. The Company estimates the fair
value of options and warrants using the Black Scholes option-pricing model. For
agreements which require the achievement of specific performance criteria be met
in order for the options or warrants to vest, the measurement date is the date
at which the specific performance criteria is met. Prior to the measurement
date, options and warrants subject to vesting based on the achievement of
specific performance criteria that, based on different possible outcomes, result
in a range of aggregate fair values are measured at each financial reporting
period at their lowest aggregate then-current fair value, while options and
warrants which vest over the service period or at completion of the service
period are measured at each financial reporting period at their then-current
fair value, for purposes of recognition of costs during those periods. For
agreements which provide for services to be rendered without the requirement of
specific performance criteria, the company measures the fair value of the
options and warrants at the earlier of the date the services are completed or
the date the options and warrants vest and are non-forfeitable. Generally,
services are not rendered prior to the grant date and the related agreements do
not contain performance commitments. Accordingly, the measurement date for
compensation expense occurs subsequent to the grant date. From the grant date to
the measurement date, compensation expense is estimated at each financial
reporting period and is recorded over the service period. The unvested options
and warrants continue to be remeasured at each financial reporting period until
they vest or until the services are completed. For agreements which provide
options and warrants for services already rendered, the options and warrants
immediately vest and the measurement date is the date of grant. Modifications
that increase the fair value of the warrants are treated as an exchange of the
original warrant for a new one. Additional compensation expense related to
modifications, if any, is recorded over the remaining service period.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
F-10
Investments Available-for-Sale
Investment securities consist of equity securities, which are classified as
available-for-sale securities. Available-for-sale securities are recorded at
fair value and unrealized holding gains and losses are excluded from earnings
and are reported as a separate component of comprehensive income until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific-identification basis. A decline in the market value of
any available-for-sale security below cost that is deemed to be other than
temporary, results in a reduction in the carrying amount to fair value. The
impairment is charged to operations and a new cost basis for the security is
established.
Fair Value of Financial Instruments
NTN believes that the fair value of financial instruments approximate their
carrying value. The following methods and assumptions were used to estimate the
fair value of financial instruments:
The carrying values of cash and cash equivalents, restricted cash,
investments available-for-sale, accounts receivable, accounts payable and
accrued liabilities approximate fair value because of the short maturity of
these instruments. The carrying value of the revolving line of credit
approximates its fair value because the interest rate is indexed by current
market rates, and the other terms are comparable to those currently available in
the market place. The carrying value of the convertible notes approximates its
fair value because the interest rate and other terms are comparable to rates
currently available in the market.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Research and Development and Advertising
Research and development and advertising are expensed as incurred. Research
and development costs amounted to $101,000, $430,000 and $842,000 in 2001, 2000
and 1999, respectively. Advertising costs amounted to $939,000, $403,000 and
$343,000 in 2001, 2000 and 1999, respectively, and are included in selling,
general and administrative expenses in the accompanying statements of
operations.
Concentration of Credit Risk
NTN provides services to group viewing locations, generally bars and
lounges, and to third party distributors, primarily throughout the United
States. In addition, NTN licenses its technology and products to licensees
outside of the United States. Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising NTN's
customer base, and their dispersion across many different industries and
geographies. NTN performs ongoing credit evaluations of its customers and
generally requires no collateral. NTN maintains an allowance for doubtful
accounts to provide for credit losses.
Basic and Diluted Earnings Per Common Share
NTN computes basic and diluted earnings per share in accordance with SFAS
No. 128, "Earnings per Share." Basic EPS excludes the dilutive effects of
options, warrants and other convertible securities. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of NTN.
Options, warrants, convertible preferred stock and convertible notes
representing approximately 12,199,000, 12,614,000 and 15,306,000 shares were
excluded from the computations of diluted net loss per common share for the
years ended December 31, 2001, 2000 and 1999, respectively, as their effect is
anti-dilutive.
Reclassifications
Certain items in the 2000 and 1999 consolidated financial statements have
been reclassified to conform to the 2001 presentation.
F-11
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests. Other intangible assets will
continue to be amortized for their useful lives. The amortization provisions of
SFAS No. 142 apply to goodwill and intangible assets acquired after June 30,
2001. The adoption did not have a material impact on our financial condition or
our results of operations at January 1, 2002.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement.
The Company is required and plans to adopt the provisions of SFAS No. 143
during the quarter ending March 31, 2003. To accomplish this, the Company must
identify all legal obligations for asset retirement obligations, if any, and
determine the fair value of these obligations on the date of adoption. The
determination of fair value is complex and will require the Company to gather
market information and develop cash flow models. Additionally, the Company will
be required to develop processes to track and monitor these obligations. We
currently do not expect SFAS No. 143 to have a material impact.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business (as previously defined in that Opinion). SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with Statement 121. For example, SFAS No. 144 provides guidance on
how a long-lived asset that is used as part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is held for sale,
and prescribes the accounting for a long-lived asset that will be disposed of
other than by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on
how to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt SFAS No. 144 no later than the year
beginning after December 15, 2001, and plans to adopt its provisions during the
quarter ending March 31, 2002. Management does not expect the adoption of SFAS
No. 144 for long-lived assets held for use to have a material impact on the
Company's financial statements because the impairment assessment under SFAS No.
144 is largely unchanged from SFAS No. 121. The provisions of the statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
SFAS No. 144 will have on the Company's financial statements.
F-12
(2) BROADCAST EQUIPMENT AND FIXED ASSETS
Broadcast equipment and fixed assets are recorded at cost and consist of the
following:
2001 2000
------------- -------------
Broadcast equipment................... $ 19,591,000 $ 19,149,000
Furniture and fixtures................ 580,000 574,000
Machinery and equipment............... 8,154,000 7,878,000
Leasehold improvements................ 821,000 820,000
Equipment under capital lease:
Broadcast equipment................. 1,745,000 1,654,000
Machinery and equipment............. 1,298,000 1,217,000
Other equipment..................... 21,000 --
Other equipment....................... -- 9,000
------------- -------------
32,210,000 31,301,000
Accumulated depreciation and
amortization........................ (24,181,000) (19,338,000)
------------- -------------
$ 8,029,000 $ 11,963,000
============= =============
(3) ASSET IMPAIRMENT
The internet site Buzztime.com was developed with the intent of registering
a large number of consumers at little cost and converting these registrations
into revenue through direct marketing to the member database, sponsorship, ad
revenues, subscriptions and third party licensing. However, in the fourth
quarter of 2000, NTN shifted its focus from the Internet initiatives to ITV
opportunities and decided not to pursue the direct marketing application of
Buzztime.com. As a result, the use of Buzztime.com as a direct marketing
database was abandoned resulting in an impairment charge of $1,131,000 during
the fourth quarter of 2000.
In addition to the write-off of certain web development costs, NTN also
wrote off $231,000 associated with the Internet game station licenses,
equipment, and related goodwill on the basis that assets are not recoverable
through future cash flows.
(4) COMMON STOCK OPTIONS AND WARRANTS
Options
NTN has two active stock option plans. The 1995 Employee Stock Option Plan
(the "Option Plan") was approved by the shareholders in 1995 and was
subsequently amended. Under the Option Plan, options for the purchase of NTN's
common stock may be granted to officers, directors and employees. Options may be
designated as incentive stock options or as nonqualified stock options and
generally vest over four years, except, the Board of Directors, at its
discretion, can authorize acceleration of vesting periods. Options under the
Option Plan, which have a term of up to ten years, are exercisable at a price
per share not less than the fair market value on the date of grant. The
aggregate number of shares authorized for issuance under the Option Plan as of
December 31, 2001 is 10,478,970.
In addition, NTN has issued options pursuant to a Special Stock Option Plan
("Special Plan"). Options issued under the Special Plan are made at the
discretion of the Board of Directors and are designated only as nonqualified
options. The options generally have a term of up to ten years, are exercisable
at a price per share not less than the fair market value on the date of grant
and vest over various terms. The aggregate number of shares authorized for
issuance under the Special Plan as of December 31, 2001 is 604,000.
On May 31, 2001, Buzztime adopted an incentive stock option plan. Pursuant
to the option plan, Buzztime may grant options to purchase Buzztime common
stock, subject to applicable share limits, upon terms and conditions specified
in the plan. To date, no options have been granted under the plan.
The per share weighted-average fair value of stock options granted during
2001, 2000 and 1999 was $0.78, $2.45, and $0.92, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: 2001 --
dividend yield of 0%, risk-free interest rate of 4.5%, expected volatility of
131%, and expected life of 4 years; 2000 -- dividend yield of 0%, risk-free
interest rate of 6.30%, expected volatility of 129%, and expected life of 4
years; and 1999 -- dividend yield of 0%, risk-free interest rate of 5.28%,
expected volatility of 125%, and expected life of 3.6 years. In compliance with
APB No. 25, NTN expensed $104,000, $134,000, and $38,000 in 2001, 2000, and 1999
F-13
respectively, associated with the grants of 600,000 options in 1999 below market
value pursuant to the Option Plan. No options were granted below market value in
2001 pursuant to the Option Plan.
NTN applies APB Opinion No. 25 and related interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized in the consolidated financial statements for the issuance of options
to employees pursuant to the Special Plan and the Option Plan unless the grants
were issued at exercise prices below market value. Had compensation cost related
to employees for NTN's stock-based compensation plans been determined consistent
with SFAS No. 123, NTN's net loss and net loss per share applicable to Common
stock would have been increased to the pro forma amounts indicated below.
2001 2000 1999
------------ ----------- ----------
Net loss As reported............ $ 3,656,000 $ 9,589,000 $2,498,000
Pro forma.............. $ 5,131,000 $11,509,000 $3,514,000
Net loss per share As reported............ $ 0.10 $ 0.29 $ 0.09
Pro forma.............. $ 0.14 $ 0.35 $ 0.12
A summary of stock option activity during 2001, 2000 and 1999 is as
follows:
SPECIAL PLAN OPTION PLAN
----------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ----------- -----------------
OUTSTANDING DECEMBER 31, 1998. 704,000 $ 2.81 4,657,000 $ 1.58
Granted..................... -- -- 3,179,000 0.92
Exercised................... -- -- (325,000) 1.04
Canceled.................... -- -- (1,030,000) 0.95
-------- ------ ----------- ------
OUTSTANDING DECEMBER 31, 1999. 704,000 2.81 6,481,000 1.38
Granted..................... -- -- 1,851,000 2.45
Exercised................... -- -- (546,000) 1.01
Canceled.................... -- -- (1,077,000) 1.52
-------- ------ ----------- ------
OUTSTANDING DECEMBER 31, 2000. 704,000 2.81 6,709,000 1.69
Granted..................... -- -- 2,141,000 0.78
Exercised................... -- -- (17,000) 0.63
Canceled.................... (100,000) 2.81 (1,365,000) 1.83
-------- ------ ----------- ------
OUTSTANDING DECEMBER 31, 2001. 604,000 $ 2.81 7,468,000 $ 1.40
======== ====== =========== ======
EXERCISABLE AS OF DECEMBER 31,
2001........................ 604,000 $ 2.81 5,278,000 $ 1.55
======== ====== =========== ======
A summary of options outstanding and exercisable by exercise price range at
December 31, 2001 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ------------------- ---------------- ----------- -----------------
Special Plan:
$2.81 604,000 4 years $ 2.81 604,000 $ 2.81
Option Plan:
$0.45-$1.50 5,221,000 8 years $ 0.83 3,429,000 $ 0.87
$1.51-$3.00 1,936,000 6 years $ 2.55 1,555,000 $ 2.61
$3.01-$6.38 311,000 3 years $ 3.83 294,000 $ 3.84
F-14
Warrants
In 2001, 2000 and 1999, NTN granted 190,000, 885,000 and 1,191,000 warrants
to non-employees. The warrants were granted under consulting agreements. NTN
expensed $15,000, $373,000 and $262,000 in 2001, 2000 and 1999, respectively,
associated with the grant of these warrants.
The following summarizes warrant activity during 2001, 2000 and 1999:
OUTSTANDING WEIGHTED AVERAGE
WARRANTS EXERCISE PRICES
----------- ----------------
DECEMBER 31, 1998...................... 2,903,000 2.49
Granted.............................. 1,191,000 1.00
Exercised............................ (9,000) 0.96
Canceled............................. (938,000) 2.63
--------- ------
DECEMBER 31, 1999...................... 3,147,000 1.89
Granted.............................. 885,000 1.79
Exercised............................ (1,626,000) 0.36
Canceled............................. (404,000) 4.53
--------- ------
DECEMBER 31, 2000...................... 2,002,000 1.94
Granted.............................. 190,000 0.72
Exercised............................ (87,000) 0.96
Canceled............................. (316,000) 0.96
--------- ------
DECEMBER 31, 2001...................... 1,789,000 $ 2.03
========= ======
BALANCE EXERCISABLE AT DECEMBER 31, 2001 1,689,000 $ 2.11
========= ======
At December 31, 2001, the range of exercise prices and the weighted-average
remaining contractual life of outstanding warrants was $0.50 to $3.75 and 3
years, respectively.
(5) CUMULATIVE CONVERTIBLE PREFERRED STOCK
NTN has authorized 10,000,000 shares of preferred stock. The preferred
stock may be issued in one or more series. The only series currently designated
are a series of 5,000,000 shares of Series A Cumulative Convertible Preferred
Stock ("Series A Preferred Stock") and a series of 85,000 shares of Series B
Preferred Stock.
Series A
At December 31, 2001 and 2000, there were 161,000 shares of Series A
Preferred Stock issued and outstanding. The Series A Preferred Stock provides
for a cumulative annual dividend of 10 cents per share, payable in semi-annual
installments in June and December. Dividends may be paid in cash or with shares
of Common stock. In 2001, 2000 and 1999, NTN issued approximately 24,000, 10,000
and 13,000 common shares, respectively, for payment of dividends. At December
31, 2001, the cumulative unpaid dividends for the Series A Preferred Stock was
approximately $1,300.
The Series A Preferred Stock has no voting rights and has a $1.00 per share
liquidation preference over Common stock. The registered holder has the right at
any time to convert shares of Series A Preferred Stock into that number of
shares of NTN Common stock that equals the number of shares of Series A
Preferred Stock that are surrendered for conversion divided by the conversion
rate. The conversion rate is subject to adjustment in certain events and is
established at the time of each conversion. During 2001, 2000 and 1999, there
were no conversions. There are no mandatory conversion terms or dates associated
with the Series A Preferred Stock.
Series B
In October 1997, NTN sold and issued 35,000 shares of Series B Preferred
Stock each to two institutional purchasers ("the Investors") for a total of
$7,000,000. 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 NTN, leaving 56,000 shares of the Series B Preferred Stock outstanding.
On October 5, 1998, NTN entered into an Exchange Agreement with the Investors
pursuant to which they agreed to surrender for cancellation their remaining
shares of Series B Preferred Stock in exchange for warrants and 7% senior
subordinated convertible notes (see Note 9). The convertible notes were issued
January 11, 1999. The Series B Preferred Stock was retired in June 1999.
F-15
Settlement Warrants
The results for year ended December 31, 2000 include the reclassification
of an accrued liability of approximately $1,793,000 to additional paid-in
capital for a potential redemption obligation, relating to warrants issued in
connection with the settlement of litigation in 1996 (Settlement Warrants),
which expired in February 2000. The Settlement Warrants entitled the holder of a
Settlement Warrant to purchase a share of Common Stock at a price of $0.96
during the period ending February 18, 2001. During the period from February 18,
2000 to February 18, 2001, the holders of the Settlement Warrants were to have
the right to cause the Company to redeem the Settlement Warrants for a
redemption price of $3.25 per Warrant (the "Put Right"); however, this Put Right
expired by its terms on February 17, 2000 when the closing price per share of
the Company's Common Stock on the American Stock Exchange reached $4.22 or above
for the seventh trading day since the Settlement Warrants were issued. The
Company has no further obligation to redeem or repurchase the Settlement
Warrants.
(6) RETIREMENT AND SAVINGS PLANS
During 1994, NTN established a defined contribution plan which is organized
under Section 401(k) of the Internal Revenue Code, which allows employees who
have completed at least one month of service and have reached age 21 to defer up
to 20% of their pay on a pre-tax basis. NTN at its discretion may contribute to
the plan. For the years ended December 31, 2001, 2000 and 1999, we made no such
contributions.
(7) INCOME TAXES
For each of the years ended December 31, 2001, 2000 and 1999, there was no
provision for current or deferred income taxes. The components that comprise
deferred tax assets and liabilities at December 31, 2001 and 2000 are as
follows:
2001 2000
------------- -------------
Deferred tax assets:
NOL carryforwards..................... $ 21,522,000 $ 19,710,000
Legal and litigation accruals......... 18,000 20,000
Allowance for doubtful accounts....... 176,000 324,000
Compensation and vacation accrual..... 115,000 141,000
Operating accruals.................... 65,000 160,000
Allowance for equipment obsolescense.. 36,000 --
Deferred revenue...................... 720,000 1,838,000
Research and experimentation credit... 199,000 221,000
Amortization.......................... 104,000 111,000
Charitable contributions.............. 3,000 7,000
------------- -------------
Total gross deferred tax assets. 22,958,000 22,532,000
Valuation allowance..................... (21,675,000) (22,445,000)
------------- -------------
Deferred tax assets............. 1,283,000 87,000
------------- -------------
Deferred tax liabilities:
Capitalized software.................. 235,000 --
Depreciation.......................... 1,048,000 87,000
------------- -------------
Total deferred liabilities 1,283,000 87,000
------------- -------------
Net deferred taxes.............. $ -- $ --
============= =============
The reconciliation of computed expected income taxes to effective income
taxes by applying the federal statutory rate of 34% is as follows:
2001 2000 1999
------------ ------------ -----------
Tax at federal income tax rate............. $(1,272,000) $(3,260,000) $ (849,000)
State taxes net of federal benefit......... (224,000) (575,000) (150,000)
Settlement warrants and SFAS 123 charges... 47,000 274,000 99,000
Change in valuation allowance.............. (770,000) 2,531,000 (789,000)
Expiration and adjustments of net
operating loss carryforwards............. 1,848,000 952,000 1,384,000
Other...................................... 371,000 78,000 305,000
------------ ------------ -----------
$ -- $ -- $ --
============ ============ ===========
The net change in the total valuation allowance for the year ended December
31, 2001 was an decrease of $770,000. The net change in the total valuation
allowance for the years ended December 31, 2000 and 1999 was an increase of
$2,531,000, and a decrease of $789,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.
F-16
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based on the level of historical operating results and projections
for the taxable income for the future, management has determined that it is more
likely than not that the portion of deferred tax assets not utilized through the
reversal of deferred tax liabilities will not be realized. Accordingly, NTN has
recorded a valuation allowance to reduce deferred tax assets to the amount that
is more likely than not to be realized.
At December 31, 2001, the Company has available net operating loss
carryforwards of approximately $61,406,000 for federal income tax purposes,
which will begin to expire in 2002. The net operating loss carryforwards for
state purposes, which will begin to expire in 2002, are approximately
$10,731,000.
(8) COMMITMENTS AND CONTINGENCIES
Operating Leases
NTN leases office and production facilities and equipment under agreements
which expire at various dates. Certain leases contain renewal provisions and
generally require NTN to pay utilities, insurance, taxes and other operating
expenses. Additionally, NTN entered into lease agreements for certain equipment
used in broadcast operations and the corporate computer network. Any deferred
gains on sale and leaseback transactions were amortized over the three-year
lease terms. Each lease provides an option to NTN to repurchase the equipment at
the estimated fair market value at the end of the lease term. All sale and
leaseback transactions were terminated during 1999 at which time the equipment
was purchased. Lease expense under operating leases totaled $656,000, $475,000
and $1,007,000, in 2001, 2000 and 1999, respectively, net of sublease income of
$228,000, $149,000 and $157,000 in 2001, 2000 and 1999, respectively.
Future minimum lease obligations under noncancelable operating leases, net
of contractual sublease payments, at December 31, 2001 are as follows:
YEAR LEASE SUBLEASE
ENDING PAYMENT PAYMENTS NET
- ------------- ----------- ---------- ------------
2002......... $ 550,000 $ 246,000 $ 304,000
2003......... 567,000 162,000 405,000
2004......... 586,000 78,000 508,000
2005......... 554,000 23,000 531,000
2006......... 271,000 -- 271,000
----------- ---------- ------------
Total... $2,528,000 $ 509,000 $2,019,000
=========== ========== ============
Capital Leases
NTN leases certain equipment under capital leases. Future minimum lease
payments under the capital leases together with the present value of the net
minimum lease payments as of December 31, 2001 are as follows:
YEAR ENDING TOTAL
- -------------------------------------------------------------- -----------
2002.......................................................... $ 217,000
2003.......................................................... 112,000
2004.......................................................... 5,000
2005.......................................................... 5,000
2006.......................................................... 3,000
-----------
Total minimum lease payments............................. 342,000
Less: Amount representing interest ranging from 10.7% to 23.7% (64,000)
-----------
Present value of net minimum lease payments................... 278,000
Less current portion.......................................... (168,000)
-----------
Long term portion................................... $ 110,000
===========
Property held under capital leases is as follows:
2001 2000
------------ ------------
Equipment................. $ 3,064,000 $ 2,871,000
Accumulated amortization.. (2,442,000) (1,594,000)
------------ ------------
$ 622,000 $ 1,277,000
============ ============
F-17
(9) DEBT
Revolving Line Of Credit
NTN has an agreement with Coast Business Credit for a revolving line of
credit, which was amended in May 2001. The line of credit provides for
borrowings not to exceed the lesser of a designated maximum amount or three
times trailing monthly collections or three times annualized trailing adjusted
EBITDA. The maximum line of credit was gradually reduced from $4,000,000 at
April 1, 2001 to $2,750,000 at December 31, 2001. Interest is charged on the
outstanding balance at a rate equal to the prime rate plus 1.5% per annum
(effective rate of interest is 9.0% at December 31, 2001), but cannot be less
than 9% per annum. The line of credit is secured by substantially all of NTN's
assets. Total loan fees of $120,000 are payable in three annual installments and
are being amortized over the life of the loan. The unused portion on the line of
credit at December 31, 2001 was $271,000.
On February 25, 2002, NTN signed the Fourth Amendment to the Loan and
Security Agreement with Coast. This amendment extended the maturity date on the
line of credit to June 30, 2003. The amendment calls for three separate $250,000
reductions in the maximum borrowing amount under the line on June 30, 2002 (from
$2.75 million to $2.5 million), on January 31, 2003 (from $2.5 million to $2.25
million), and on March 31, 2003 (from $2.25 million to $2 million).
The amendment also deleted the minimum tangible effective net worth
covenant and added two new cash flow oriented covenants; a senior debt to EBITDA
ratio test and a debt service coverage ratio test. NTN agreed to pay Coast a
renewal fee of $40,000 on July 1, 2002 in association with this amendment. There
were no changes to the interest rate in this amendment.
As the Company has refinanced the revolving line of credit, and has met the
criteria of Statement of Accounting Standard No. 6, Classification of Short-Term
Obligations Expected to be Refinanced, it has been classified as noncurrent in
the consolidated balance sheet.
8% Senior Subordinated Convertible Notes
In 1999, NTN reacquired the Series B Preferred Stock in exchange for
convertible notes and warrants. The convertible notes, with a face value of
$5,913,000, 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 was due and payable on February 1, 2001.
Interest on the convertible notes may be paid in cash or, at NTN's election, in
shares of its common stock valued for this purpose at 90% of the average closing
bid price of the common stock during the 10 trading days preceding the interest
payment date.
At any time after a period of 20 consecutive trading days during which the
daily "Market Price" (as defined in the Exchange Agreement) of the common stock
equals or exceeds $1.75 (subject to adjustment), NTN 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 NTN or other "Major Transaction"
(as defined in the Exchange Agreement) if the consideration per share of common
stock in the Major Transaction is at least $1.50. In such event, the prepayment
price will be 105% of the outstanding principal amount of the convertible notes,
plus accrued and unpaid interest.
The holders of the convertible notes may convert them at any time, in whole
or in part, at their option. The number of shares of common stock issuable upon
conversion of each convertible note will be determined by dividing the
outstanding principal amount to be converted, plus any accrued and unpaid
interest, by the conversion price then in effect. The conversion price will be
$1.275 per share, subject to adjustment if certain events, including stock
dividends or subdivisions or reclassifications of the common stock or any sale
or issuance of common stock (or of rights or options to subscribe for or
purchase common stock) for no consideration or for a consideration per share
less than the "Average Market Price" (as defined in the Exchange Agreement) of
the common Stock. The actual number of shares of common Stock issuable upon any
conversion of the convertible notes will depend on the conversion price in
effect on the relevant conversion date. On November 20, 1999, $1,000,000 of
principal plus accrued interest was converted into approximately 793,000 shares
of common Stock. On March 16 and July 13, 2000, $200,000 and $717,000,
respectively, of principal plus accrued interest was converted into
approximately 159,000 and 560,000 share of common stock, respectively. An
additional $22,000 and $45,000 of interest expense in 2000 and 1999,
respectively, related to the unamortized discount on the converted notes was
recognized upon conversion of the principal.
The convertible notes are subordinate in right of payment to the prior
payment of all "Senior Debt" (as defined in the Exchange Agreement). NTN is
restricted under the terms of the convertible notes from incurring any Senior
Debt in excess of $10,000,000 or
F-18
any other indebtedness (except senior debt and "subordinated debt" (as defined
in the Exchange Agreement)) in excess of $2,000,000 at any time.
NTN 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 NTN as determined by the holders of the
convertible notes in their discretion. If NTN 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
exercise price was subject to adjustment based on future changes in the price of
the common stock. The warrants were exercisable at any time on or before
February 1, 2001.
The warrants contain certain antidilution provisions that require
adjustments. The warrants were exercised on March 24, 2000 in a cashless
exercise at a purchase price of $0.005 as the daily Market Price on each day
during any 10 consecutive trading days was equal to or greater than $4.00. Upon
exercise of the warrants, 999,096 shares of common stock were issued.
An allocation has been made between the convertible notes and the warrants
based on the relative fair values of the securities at the time of issuance. A
discount of approximately $464,000 has been recorded against the convertible
notes due to the allocation. As a result of this allocation, NTN is recording
interest expense, at an effective interest rate of 11% per year, throughout the
term of the convertible notes, which began in the first quarter of 1999.
Interest expense of approximately $14,000 and $195,000 has been accreted for the
years ended December 31, 2001 and 2000, respectively.
In January 2001, NTN reached agreement with the holders of the convertible
notes to extend the maturity date of the aggregate $4 million face value in
promissory notes from February 1, 2001 to February 1, 2003. The promissory notes
remain convertible at $1.275 per share, but the terms were modified to reduce
the interest rate from 7% to 4% and to permit NTN to convert up to the full
principal amount of the promissory notes into NTN common stock at maturity at a
conversion price of $1.275 per share. In addition, if NTN's common stock closes
above $2.50 for more than 20 consecutive trading days, NTN can force conversion
of the promissory notes at $1.275 per share.
In December 2001, NTN reached an agreement with the holders of the
convertible notes to convert $2 million of the outstanding convertible notes
payable into approximately 1,639,000 of common stock at $1.22 per share and
increase the interest rate on the remaining notes payable to 8%. Upon conversion
of the principal, debt conversion costs of approximately $189,000 were recorded.
The balance of the convertible notes plus accreted interest at December 31,
2001 is $1,958,000.
A registration statement on Form S-3 covering 4,637,516 shares of common
Stock, some or all of which may be issuable upon conversion of the convertible
notes, was declared effective by the Securities and Exchange Commission on
January 8, 1999.
Note Payable
In April 1999, we purchased Internet Stations equipment and game licenses
for $400,000 from Sikander, Inc. We issued a promissory note to Sikander, Inc.
for $360,000 along with a $40,000 cash payment. In December 1999, the payment
provisions were revised including issuance of a replacement promissory note for
$178,000. No payments were made after March 31, 2000 on the promissory note. In
June 2000, we commenced litigation against Sikander, Inc. and related
defendants. As of December 31, 2000, the note balance was approximately $171,000
including accrued interest. We reached an agreement with Sikander, Inc. on March
31, 2001 to settle the balance of the promissory note and accrued interest for
$25,000. The results of operations for the year ended December 31, 2001 include
an elimination of the balance of the promissory note and accrued interest
totaling $146,000, which is presented as other income in the statement of
operations.
(10) CONTINGENT LIABILITY
Our Canadian licensee is currently in discussions with the Canada Customs
and Revenue Agency regarding a liability relating to withholding tax on certain
amounts previously paid to NTN by the Canadian licensee. Our licensee has been
assessed approximately $649,000 Canadian dollars (equivalent to approximately
$408,000 U.S. dollars as of December 31, 2001) by Canada Customs and
F-19
Revenue Agency, but is in the process of appealing the assessment. If the appeal
is unsuccessful, it is unclear as to what, if any, liability NTN might have in
this matter.
(11) STRATEGIC PARTNERSHIP AND INVESTMENT IN BUZZTIME
On June 8, 2001, Buzztime entered into a development, license and marketing
agreement (the "Marketing Agreement") with Scientific-Atlanta, Inc. ("S-A") to
co-develop an application to enable the operation of a Buzztime interactive
trivia game show channel on S-A's Explorer digital interactive set-top network,
for distribution by cable operators to their subscribers. Buzztime will be
responsible for the trivia game channel content including ongoing programming
and player promotions. The channel will derive revenue from cable operator
license fees, premium subscription fees and advertising revenue. Under the
Marketing Agreement, Buzztime and S-A have predetermined commission arrangements
based on sales and support of Buzztime's products to the cable system operators.
In connection with the Marketing Agreement, Scientific-Atlanta Strategic
Investments, L.L.C., a Delaware limited liability company and affiliate of S-A,
invested $1.0 million in Buzztime for 636,943 shares of Buzztime's Series A
Convertible Preferred Stock, representing 6% of Buzztime's common shares
outstanding on an as-converted basis, and warrants to obtain an additional
159,236 shares of Series A Convertible Preferred Stock (the "S-A Warrants").
Each share of preferred stock is convertible into one share of Buzztime's common
stock, subject to future adjustment, and entitled to a non-cumulative dividend
of 8%, if, when and as declared by Buzztime's board of directors. The $1.0
million investment may only be used towards development of the application for
S-A and fulfillment of Buzztime's obligations under Marketing Agreement, which
are currently Buzztime's primary focus.
NTN granted S-A the right to exchange its shares of Buzztime's preferred
stock into shares of NTN common stock upon the earlier of (i) Buzztime is unable
to obtain additional equity financing of $2.0 million before June 8, 2002, (ii)
the liquidation, dissolution or bankruptcy of Buzztime before June 8, 2002,
(iii) the failure of Buzztime to conduct a qualified public offering by June 8,
2004, or (iv) a change in control of Buzztime before June 8, 2002. The exchange
price will be the 20-day average closing price of NTN's common stock immediately
preceding the date S-A gives notice of its intent to exercise its rights.
The exercise price of the S-A warrants is $1.57 per share. The warrants
vest in 10% increments as cable system operators sign on for the Buzztime game
show channel. No compensation expense has been recorded for the year ended
December 31, 2001 as the warrants vesting provisions are contingent upon
specified performance-based conditions and the low end of the range of the
aggregate fair value of the warrants is zero as of December 31, 2001.
(12) MINORITY INTEREST ACCOUNTING
NTN retained majority ownership of Buzztime and, as a result, will continue
to consolidate Buzztime's operations in its financial statements. No gain or
loss was recorded by NTN on this sale of Buzztime's shares in accordance with
Staff Accounting Bulletin Topic 5h - Miscellaneous Accounting, "Accounting for
Sales of Stock in a Subsidiary", as the realization of the gain is not assured
given Buzztime's history of losses from operations, net operating loss
carryforwards, which are generally not available to offset capital gains, and
the start-up nature of Buzztime's products designed for the interactive
television market. In addition, the ongoing business relationship with S-A
through the Marketing Agreement and restrictions placed on the use of proceeds
were additional factors considered in accounting for the sale of Buzztime's
shares. As a result, the investment was reflected as a capital transaction.
The investment in Buzztime is presented as a minority interest in
consolidated subsidiary on NTN's consolidated balance sheet. The minority
interest balance of $855,000, is comprised of the S-A investment, reduced by
$60,000 of issuance costs, and by S-A's share of Buzztime's net loss in the
amount of $85,000 for the year ended December 31, 2001.
(13) LEGAL ACTIONS
In February 1998, an action entitled Dorman vs. NTN Communications, Inc.
was filed in the Superior Court of San Diego County for the State of California
alleging a fraud and negligent misrepresentation claim based upon purported
omissions from our filings with the Securities and Exchange Commission. In March
1999, the court granted our motion for summary judgment in the Dorman matter
and, on May 13, 1999, denied plaintiff's motion for new trial. On August 20,
1999, plaintiffs filed an appeal of the summary judgment in the Fourth Appellate
District of the Court of Appeals for the State of California. The Court of
Appeals reversed the Superior Court's decision and sent the case back to the
Superior Court. On May 3 and 4, 2001, the parties participated in a mediation
with a court-appointed mediator during which the parties reached an agreement to
settle the litigation. Pursuant to the settlement, we paid to Dorman the sum of
$42,000, which was fully covered by insurance.
F-20
We have 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, NTN and IN reached a
resolution of all pending disputes in the United States and agreed to private
arbitration regarding any future licensing, copyright or infringement issues
which may arise between the parties. There remain two lawsuits involving us, our
unaffiliated Canadian licensee and IN, which were filed in Canada in 1992. The
litigation involves licensing and patent infringement issues. These actions
affect only our Canadian operations and our Canadian licensee and do not extend
to our operations in the United States or elsewhere. In January 2002, plaintiffs
submitted a request to the Federal Court of Canada, Trial Division, in
accordance with the Court-ordered deadline, for assignment of a pre-trial
conference date in May 2002. The request is currently pending with the Court.
Although they cannot be estimated with certainty, any damages NTN might incur
are not expected to be material.
On February 22, 2002, a shareholder class action and derivative complaint
was filed in San Diego County Superior Court for the State of California by
Steven M. Mizel on behalf of himself and all NTN shareholders naming Robert M.
Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H. Arlen,
Vincent A. Carrino and James B. Frakes as defendants with NTN Communications as
nominal defendant. The Mizel action alleges breach of fiduciary duty by
defendants in connection with NTN's rejection of a proposal by a corporation to
purchase all of the outstanding shares of NTN common stock, as announced
publicly on February 21, 2002. Plaintiffs request the court issue an injunction
requiring defendants to fully and fairly negotiate the highest possible offer to
purchase NTN, award attorney's fees, and grant such other relief as the court
may find just and proper. We believe this action is without merit and we intend
to vigorously contest this action.
There can be no assurance that the foregoing claims will be decided in our
favor. We are not insured against all claims made. During the pendency of such
claims, we will continue to incur the costs of defense. Other than set forth
above, there is no material litigation pending or threatened against us.
(14) MANAGEMENT REORGANIZATION
On March 5, 1997, NTN announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board and Daniel C. Downs resigned as President. In
addition, three other officers resigned or were terminated in connection with
the reorganization ("Reorganization"). NTN entered into separate agreements
("Agreements") with each of the former officers setting out the terms on which
their existing employment contracts with NTN would be settled. In compliance
with the Agreements, NTN was to continue to pay the former officers their
current annual salaries and other benefits for the remaining terms of their
employment agreements with NTN, which were to expire on or before December 31,
1999.
In March 1998, NTN and three of the former officers agreed to an amendment
of the Agreements. The Agreements were modified to extend the payment term an
additional year to December 31, 2000 and provided for reductions of amounts to
be paid in 1998 and 1999 totaling $272,000 and $355,000, respectively. All
payments under the agreements have been paid in full at December 31, 2000.
Interest expense totaling $34,000 and $56,000 was incurred in 2000, and 1999,
respectively, related to the Agreements.
(15) RELATED PARTY
On May 8, 2001, we entered in an Advertising Sales Representative Agreement
with Baron Enterprises, Inc. ("Baron"), a corporation wholly-owned and operated
by Barry Bergsman, a member of our board of directors, pursuant to which Baron
will provide advertising sales representation services to us under the direction
of the NTN Network's president and chief operating officer. For Baron's services
under the Advertising Sales Representative Agreement, we granted Baron a
three-year warrant to purchase 20,000 shares of NTN common stock at an exercise
price of $0.50 per share. The warrant vests and becomes exercisable as to 1/12
of the total shares on the last business day of each of the twelve months
commencing April 2001, subject to Baron continuing to provide services to us. In
addition, Baron will receive a commission in the amount of 35% of net
advertising revenues received by the NTN Network from any advertising contract
solicited by Baron. We will pay to Baron a monthly recoverable cash advance
against commissions to be earned in the amount of $5,000 per month, not to
exceed an aggregate of $60,000 per year. The Advertising Sales Representative
Agreement expires on April 1, 2002.
F-21
(16) SEGMENT INFORMATION
NTN's operations are to develop and distribute interactive entertainment.
NTN's reportable segments have been determined based on the nature of the
services offered to customers, which include, but are not limited to, revenue
from the NTN Network and Buzztime divisions. NTN Network revenue is generated
primarily from broadcasting content to customer locations through two
interactive television networks. NTN Network revenues comprise 99% of NTN's
total revenue. Revenue from Buzztime is primarily generated from the
distribution of its digital trivia game show content and "Play-Along" sports
games as well as revenue related to production services for third parties and
also includes fees generated from the America Online contract that expired in
November 1999. Included in the operating loss and depreciation and amortization
for both the NTN Network and Buzztime is an allocation of corporate expenses,
while the related corporate assets are not allocated to the segments. The
following tables set forth certain information regarding NTN's segments and
other operations:
2001 2000 1999
------------- ------------- -------------
Revenues:
NTN Network................................... $ 22,382,000 $ 21,406,000 $ 22,250,000
Buzztime...................................... 159,000 540,000 983,000
IWN........................................... -- -- 302,000
Other......................................... 18,000 102,000 213,000
------------- ------------- -------------
Total Revenues........................ $ 22,559,000 $ 22,048,000 $ 23,748,000
============= ============= =============
Operating Income (Loss):
NTN Network................................... $ 372,000 $ (2,162,000) $ (1,446,000)
Buzztime...................................... (3,306,000) (6,039,000) (2,305,000)
IWN........................................... -- -- (50,000)
------------- ------------- -------------
Total Operating Loss.................. $ (2,934,000) $ (8,201,000) $ (3,801,000)
============= -============ =============
Total Assets:
NTN Network................................... $ 8,849,000 $ 14,012,000 $ 12,547,000
Buzztime...................................... 1,395,000 1,776,000 230,000
IWN........................................... -- -- 118,000
Corporate..................................... 3,136,000 3,034,000 4,392,000
------------- ------------- -------------
Total Assets.......................... $ 13,380,000 $ 18,822,000 $ 17,287,000
============= ============= =============
Capital Expenditures and Software Development
Costs:
NTN Network................................... $ 861,000 $ 5,138,000 $ 5,174,000
Buzztime...................................... 300,000 2,623,000 --
Corporate..................................... 110,000 984,000 1,640,000
------------- ------------- -------------
Total Capital Expenditures and Software
Development Costs................... $ 1,271,000 $ 8,745,000 $ 6,814,000
============= ============= =============
Depreciation and Amortization:
NTN Network................................... $ 4,242,000 $ 5,668,000 $ 5,478,000
Buzztime...................................... 766,000 628,000 1,065,000
IWN........................................... -- -- 14,000
------------- ------------- -------------
Total Depreciation and Amortization... $ 5,008,000 $ 6,296,000 $ 6,557,000
============= ============= =============
F-22
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The fourth quarter of 2001 reflects debt conversions costs of approximately
$189,000 due to the conversion of $2.0 million of principal on the convertible
notes payable into common stock.
THREE-MONTH PERIOD ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
2001 2001 2001 2001 2001
---------- ------------ ------------- ------------- -----------
Total revenue................... $ 5,285 $ 5,350 $ 5,664 $ 6,260 $ 22,559
Total operating expenses........ 6,812 6,077 6,185 6,419 25,493
---------- ------------ ------------- ------------- -----------
Operating loss.................. (1,527) (727) (521) (159) (2,934)
Other income (expense), net..... (51) (222) (251) (283) (807)
---------- ------------ ------------- ------------- -----------
Net loss before income taxes and
minority interest in loss of
consolidated subsidiary...... (1,578) (949) (772) (442) (3,741)
Minority interest in loss of
consolidated subsidiary...... -- -- 40 45 85
---------- ------------ ------------- ------------- -----------
Net loss........................ $ (1,578) $ (949) $ (732) $ (397) $ (3,656)
========== ============ ============= ============= ===========
Per share amounts:
Net loss.............. $ (.04) $ (.03) $ (.02) $ (0.01) $ (.10)
========== ============ ============= ============= ===========
Weighted-average shares
outstanding......... ........ 36,335 36,660 36,775 37,239 36,755
========== ============ ============= ============= ===========
The fourth quarter of 2000 reflects impairment charges of $1,362,000 due to
the write-off of certain web development costs of the Internet web site,
Buzztime.com, and Internet game stations equipment, license and related
goodwill.
THREE-MONTH PERIOD ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
2000 2000 2000 2000 2000
---------- ------------ ------------- ------------- -----------
Total revenue................... $ 5,441 $ 5,225 $ 5,613 $ 5,769 $ 22,048
Total operating expenses........ 7,702 7,832 6,735 7,980 30,249
---------- ------------ ------------- ------------- -----------
Operating loss.................. (2,261) (2,607) (1,122) (2,211) (8,201)
Other income (expense), net..... (158) (213) (260) (309) (940)
---------- ------------ ------------- ------------- -----------
Net loss before income taxes and
cumulative effect of accounting
change........................ (2,419) (2,820) (1,382) (2,520) (9,141)
Cumulative effect of accounting
change........................ (448) -- -- -- (448)
---------- ------------ ------------- ------------- -----------
Net loss........................ $ (2,867) $ (2,820) $ (1,382) $ (2,520) $ (9,589)
========== ============ ============= ============= ===========
Per share amounts:
Loss before cumulative effect
of accounting change......... $ (.08) $ (.09) $ (.04) $ (.07) $ (.28)
Cumulative effect of accounting
change..................... (.01) -- -- -- (.01)
---------- ------------ ------------- ------------- -----------
Net loss.............. $ (.09) $ (.09) $ (.04) $ (0.07) $ (.29)
========== ============ ============= ============= ===========
Weighted-average shares
outstanding.................. 30,500 33,061 34,237 35,328 33,206
========== ============ ============= ============= ===========
F-23
SCHEDULE II
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ADDITIONS BALANCE AT
ALLOWANCE FOR BALANCE AT CHARGED TO END OF
DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS(A) PERIOD
- ------------------ ----------- ------------ -------------------- -----------
2001.............. $ 811,000 767,000 1,138,000 $ 440,000
2000.............. $2,148,000 442,000 1,779,000 $ 811,000
1999.............. $1,720,000 746,000 318,000 $2,148,000
- ----------
(a) Reflects trade accounts receivable written off during the year, net of
amounts recovered.
See accompanying independent auditors' report.
F-24
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
--------- --------------------------------------------------------------------
3.1 -- Amended and Restated Certificate of Incorporation of the
Company, as amended(5)
3.2 -- Certificate of Designations, Rights and Preferences of
Series B Convertible Preferred Stock(9)
3.3 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 22, 2000(10)
3.4 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 24, 2000(10)
3.5 -- By-laws of the Company(2)
4.1 -- Specimen Common Stock Certificate(14)
4.2 -- Securities Purchase Agreement, dated November 14,2000, by
and among NTN Communications, Inc. and the Buyers, as
defined therein(12)
4.3 -- Registration Rights Agreement, dated November 14, 2000, by
and among NTN Communications, Inc.and the Buyers, as
defined therein(12)
4.4 -- First Amendment to Securities Purchase Agreement, dated
January 26, 2001, by and among NTN Communications, Inc.
and the Buyers, as defined therein.(13)
4.5 -- Form of Amended and Restated Common Stock Purchase Warrants
of NTN Communications, Inc., dated January 26, 2001(13)
4.6* -- Stock Option Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(6)
4.7* -- Stock Option Agreement, dated October 7, 1999, by and
between NTN Communications, Inc. and Stanley B. Kinsey(8)
4.8* -- Stock Option Agreement, dated January 26, 2001, by and
between NTN Communications, Inc. and Stanley B. Kinsey(16)
10.1 -- License Agreement with NTN Canada(3)
10.2* -- Employment Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(6)
10.3 -- Loan and Security Agreement, dated August 6, 1999, by and
between NTN Communications, Inc. and Coast Business Credit,
a division of Southern Pacific Bank.(7)
10.4 -- First Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (7)
10.5 -- Second Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (16)
10.6 -- Third Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (16)
10.7 -- Fourth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit(1)
10.8 -- Manufacturing Agreement, dated November 25, 1997, by and
between NTN Communications, Inc. and Climax Technology
Co., Ltd.(11)
10.9 -- Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (15)
21.1 -- Subsidiaries of Registrant (1)
23.1 -- Consent of KPMG LLP(1)
- ----------
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's registration statement on Form S-8,
File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to NTN's report on Form 10-K for the year
ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's report on Form 10-K for the year
ended December 31, 1994, and incorporated by reference.
(5) Previously filed as an exhibit to NTN's registration statement on Form S-3,
File No. 333-69383, filed on December 28, 1998, and incorporated by
reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-K dated December
31, 1998 and incorporated by reference.
F-25
(7) Previously filed as an exhibit to NTN's report on Form 10-Q dated September
30, 1999 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 10-Q dated September
31, 1999 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 8-K dated November
7, 1997 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on
April 5, 2000 and incorporated herein by reference.
(11) Previously filed as an exhibit to NTN's report on Form 10-K/A dated March
5, 2001 and incorporated herein by reference.
(12) Previously filed as an exhibit to NTN's registration statement on Form S-3,
filed on December 11, 2000, and incorporated by reference.
(13) Previously filed as an exhibit to NTN's registration statement on Form
S-3/A, filed on March 5, 2001, and incorporated by reference.
(14) Previously filed as an exhibit to NTN's registration statement on Form 8-A,
File No. 0-19383, and incorporated by reference.
(15) Previously filed as an exhibit to NTN's report on Form 10-K dated December
31, 2000 and incorporated by reference.
(16) Previously filed as an exhibit to NTN's report on Form 10-Q dated March 31,
2001 and incorporated by reference.
(b) Reports on Form 8-K.
On December 14, 2001, we filed a Current Report on Form 8-K (event date
December 11, 2001)to report under Item 5 (Other Events)the conversion
by the holders of our 7% convertible senior subordinated notes of
$2.0 million of the outstanding $4.0 million principal amount into
1,639,344 shares of the Company's common stock. We also reported the
interest rate on the remaining outstanding principal of the notes was
increased from 4% to 8%.
F-26