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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1103425
(State of incorporation) (I.R.S. Employer
Identification No.)
THE CAMPUS 5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
At July 19, 2002, the registrant had outstanding 39,316,000 shares of common
stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
JUNE 30,
2002 DECEMBER 31,
Assets (UNAUDITED) 2001
Current assets:
Cash and cash equivalents $ 1,130,000 $ 1,296,000
Restricted cash 114,000 94,000
Accounts receivable, net 1,605,000 1,411,000
Investment available for sale 241,000 174,000
Inventory 113,000 --
Deposits on broadcast equipment -- 69,000
Deferred costs 584,000 675,000
Prepaid expenses and other current assets 452,000 499,000
------------ ------------
Total current assets 4,239,000 4,218,000
Broadcast equipment and fixed assets, net 6,191,000 8,029,000
Software development costs, net 641,000 588,000
Deferred costs 380,000 411,000
Other assets 634,000 134,000
------------ ------------
Total assets $ 12,085,000 $ 13,380,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,054,000 $ 906,000
Accrued expenses 969,000 1,096,000
Obligations under capital leases 181,000 168,000
Revolving line of credit 2,351,000 --
Deferred revenue 1,462,000 2,008,000
------------ ------------
Total current liabilities 6,017,000 4,178,000
Obligations under capital leases, excluding current portion 80,000 110,000
Revolving line of credit -- 2,479,000
Senior subordinated convertible notes 1,977,000 1,958,000
Deferred revenue 711,000 877,000
Other long-term liabilities 12,000 12,000
------------ ------------
Total liabilities 8,797,000 9,614,000
------------ ------------
Minority interest in consolidated subsidiary 758,000 855,000
------------ -------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock,
$.005 par value, 5,000,000 shares authorized;
161,000 shares issued and outstanding atJune 30, 2002
and December 31, 2001 1,000 1,000
Common stock, $.005 par value, 70,000,000 shares
authorized; 39,281,000 and 38,627,000 shares issued
and outstanding at June 30, 2002 and
December 31, 2001, respectively 195,000 192,000
Additional paid-in capital 81,123,000 80,639,000
Accumulated deficit (77,954,000) (76,890,000)
Accumulated other comprehensive loss (576,000) (643,000)
Treasury stock, at cost, 61,000 and 91,000 shares at
June 30, 2002 and December 31, 2001, respectively (259,000) (388,000)
------------ ------------
Total shareholders' equity 2,530,000 2,911,000
------------ ------------
Total liabilities and shareholders' equity $ 12,085,000 $ 13,380,000
============ ============
See accompanying notes to unaudited consolidated financial statements
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
NTN Network division revenues $ 6,128,000 $ 5,342,000 $ 11,967,000 $ 10,557,000
Buzztime service revenues 27,000 3,000 83,000 66,000
Other revenues 3,000 5,000 5,000 12,000
------------ ------------ ------------ ------------
Total revenues 6,158,000 5,350,000 12,055,000 10,635,000
------------ ------------ ------------ ------------
Operating expenses:
Direct operating costs (includes depreciation of
$842,000 and $816,000, $1,695,000 and $1,620,000
for the three months ended June 30, 2002 and 2001
and for the six months ended June 30, 2002 and 2001,
respectively) 2,502,000 1,973,000 4,573,000 4,049,000
Selling, general and administrative 4,100,000 3,647,000 7,608,000 7,888,000
Depreciation and amortization 381,000 432,000 778,000 869,000
Research and development 6,000 35,000 9,000 96,000
------------ ------------ ------------ ------------
Total operating expenses 6,989,000 6,087,000 12,968,000 12,902,000
------------ ------------ ------------ ------------
Operating loss (831,000) (737,000) (913,000) (2,267,000)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 2,000 12,000 6,000 38,000
Interest expense (121,000) (228,000) (254,000) (452,000)
Other -- 4,000 -- 154,000
------------ ------------ ------------ ------------
Total other expense (119,000) (212,000) (248,000) (260,000)
------------ ------------ ------------ ------------
Loss before minority interest in loss of
consolidated subsidiary (950,000) (949,000) (1,161,000) (2,527,000)
Minority interest in loss of consolidated subsidiary 52,000 -- 97,000 --
------------ ------------ ------------ ------------
Net loss $ (898,000) $ (949,000) $ (1,064,000) $ (2,527,000)
============ ============ ============ ============
Net loss per common share - basic and diluted $ (0.02) $ (0.03) $ (0.03) $ (0.07)
============ ============ ============ ============
Weighted average shares outstanding - basic
and diluted 39,977,000 36,660,000 39,294,000 36,499,000
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ -----------
Cash flows provided by operating activities:
Net loss $ (898,000) $ (949,000) $ (1,064,000) $(2,527,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,223,000 1,248,000 2,473,000 2,489,000
Provision for doubtful accounts 100,000 73,000 171,000 265,000
Non-cash stock-based compensation charges 32,000 52,000 55,000 54,000
Minority interest in loss of consolidated subsidiary (52,000) -- (97,000) --
Non-cash interest expense 40,000 50,000 80,000 120,000
Accreted interest expense 9,000 19,000 19,000 44,000
Gain on settlement of debt -- -- -- (146,000)
Loss from disposition of equipment 59,000 58,000 90,000 82,000
Changes in assets and liabilities:
Restricted cash 85,000 (29,000) (20,000) (40,000)
Accounts receivable (174,000) 103,000 (244,000) 292,000
Inventory 3,000 -- (24,000) --
Deferred costs 73,000 133,000 122,000 239,000
Prepaid expenses and other assets 155,000 85,000 42,000 (130,000)
Accounts payable and accrued expenses (69,000) (448,000) (193,000) (570,000)
Deferred revenue (466,000) (76,000) (743,000) (54,000)
------------ ------------ ------------ -----------
Net cash provided by operating activities 120,000 319,000 667,000 118,000
------------ ------------ ------------ -----------
Cash flows from investing activities:
Capital expenditures (212,000) (280,000) (628,000) (629,000)
Acquisition of businesses (101,000) -- (101,000) --
Deposits on broadcast equipment -- 161,000 69,000 112,000
------------ ------------ ------------ -----------
Net cash used in investing activities (313,000) (119,000) (660,000) (517,000)
------------ ------------ ------------ -----------
Cash flows from financing activities:
Principal payments on capital leases (45,000) (183,000) (104,000) (367,000)
Borrowings from revolving line of credit 1,765,000 5,168,000 11,551,000 10,895,000
Principal payments on revolving line of credit (2,121,000) (5,385,000) (11,751,000) (11,083,000)
Proceeds from issuance of common and preferred
stock, net of offering expenses -- 860,000 -- 810,000
Principal payments on note payable -- -- -- (25,000)
Proceeds from exercise of stock options and warrants 126,000 4,000 131,000 92,000
------------ ------------ ------------ -----------
Net cash provided by (used in)financing activities (275,000) 464,000 (173,000) 322,000
------------ ------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents (468,000) 664,000 (166,000) (77,000)
Cash and cash equivalents at beginning of period 1,598,000 1,447,000 1,296,000 2,188,000
------------ ------------ ------------ -----------
Cash and cash equivalents at end of period $ 1,130,000 $ 2,111,000 $ 1,130,000 $ 2,111,000
============ ============ ============ ===========
See accompanying notes to unaudited consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Continued)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
--------- ---------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 72,000 $ 167,000 $ 155,000 $ 304,000
========= ========== ========== ==========
Income taxes $ -- $ -- $ -- $ --
========= ========== ========== ==========
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of common stock in payment of interest $ 40,000 $ 50,000 $ 80,000 $ 120,000
========= ========== ========== ==========
Equipment acquired under capital leases $ 13,000 $ -- $ 87,000 $ 81,000
========= ========== ========== ==========
Unrealized holding loss on investments $ 35,000 $ (81,000) $ (67,000) $ (56,000)
========= ========== ========== ==========
Issuance of treasury stock in payment of board compensation $ 13,000 $ -- $ 30,000 $ --
========= ========== ========== ==========
Issuance of common stock in payment of dividends $ 8,000 $ 8,000 $ 8,000 $ 8,000
========= ========== ========== ==========
Supplemental non-cash disclosure of acquisition of
businesses:
Accounts receivable (net) $ 121,000 -- $121,000 --
Inventory 89,000 -- 89,000 --
Fixed assets 38,000 -- 38,000 --
Other assets 419,000 -- 419,000 --
Accounts payable & accrued liabilities (244,000) -- (244,000) --
Deferred revenue (31,000) -- (31,000) --
Line of Credit (72,000) -- (72,000) --
Common Stock issued (320,000) -- (320,000) --
See accompanying notes to unaudited consolidated financial statements.
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2002
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and its majority-owned
subsidiaries (collectively, "we" or "NTN") and the results of operations and
cash flows of NTN for the interim periods presented. Management has elected to
omit substantially all notes to our consolidated financial statements as
permitted by the rules and regulations of the Securities and Exchange
Commission. The results of operations for the interim periods are not
necessarily indicative of results to be expected for any other interim period or
for the year ending December 31, 2002.
The consolidated financial statements for the three months and six months
ended June 30, 2002 and 2001 are unaudited and should be read in conjunction
with the consolidated financial statements and notes thereto included in our
Form 10-K for the year ended December 31, 2001.
We have reclassified certain items in the prior period consolidated
financial statements to conform to the current period presentation.
2. CRITICAL ACCOUNTING POLICIES
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 their estimated life 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.
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 of our Form 10-K for the year ended December 31, 2001.
6
3. INCOME (LOSS) PER SHARE
For the three months ended June 30, 2002 and 2001 and for the six months
ended June 30, 2002 and 2001, options, warrants, convertible preferred stock and
convertible notes representing approximately 12,426,000, 13,175,000, 12,248,000
and 13,141,000 potential common shares, respectively, have been excluded from
the computation of net loss per share, as their effect was anti-dilutive.
4. SEGMENT INFORMATION
We develop, produce and distribute interactive entertainment. Our 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(R), and Buzztime(R) divisions. NTN Network division revenue is generated
primarily from broadcasting content to customer locations through two
interactive television networks, from advertising sold on the networks and from
its wireless segment with restaurant on-site paging systems, electronic gift
cards, loyalty programs and electronic data-managed comment cards. NTN Network
division revenues comprised over 99% of our total revenue for the six months
ended June 30, 2002. For purposes of presentation, revenues for the NTN Network
included "Other Revenues" of NTN as listed on the consolidated statement of
operations. Buzztime generates revenue primarily from the distribution of its
digital trivia game show content and "play-along" sports games as well as from
production services provided to third parties. Included in the operating loss
for both the NTN Network division and Buzztime is an allocation of corporate
expenses. The following tables set forth certain information regarding our
segments and other operations:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues
Network $ 5,513,000 $ 5,347,000 $11,211,000 $10,569,000
NTN Wireless 618,000 -- 761,000 --
----------- ----------- ----------- -----------
NTN Network division 6,131,000 5,347,000 11,972,000 10,569,000
Buzztime 27,000 3,000 83,000 66,000
----------- ----------- ----------- -----------
Total revenue $ 6,158,000 $ 5,350,000 $12,055,000 $10,635,000
=========== =========== =========== ===========
Operating income (loss)
Network $ 35,000 $ (3,000) $ 670,000 $ (389,000)
NTN Wireless -- -- 38,000 --
----------- ----------- ----------- -----------
NTN Network division 35,000 (3,000) 708,000 (389,000)
Buzztime (866,000) (734,000) (1,621,000) (1,878,000)
----------- ----------- ----------- -----------
Operating loss $ (831,000) $ (737,000) $ (913,000) $(2,267,000)
=========== =========== =========== ===========
Net income (loss)
Network $ (84,000) $ (212,000) $ 422,000 $ (624,000)
NTN Wireless -- -- 38,000 --
----------- ----------- ----------- -----------
NTN Network division (84,000) (212,000) 460,000 (624,000)
Buzztime (814,000) (737,000) (1,524,000) (1,903,000)
----------- ------------ ------------ -----------
Net loss $ (898,000) $ (949,000) $(1,064,000) $(2,527,000)
=========== =========== =========== ===========
5. 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 us by the Canadian licensee. Our licensee has been
assessed approximately $649,000 Canadian dollars (equivalent to approximately
$427,000 U.S. dollars as of June 30, 2002) by Canada Customs and 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 we might have in this
matter.
6. SENIOR SUBORDINATED CONVERTIBLE NOTES
Our senior subordinated convertible notes ("Convertible Notes") have a
maturity date of February 1, 2003. These Convertible Notes have a principal
amount of $2 million. We have the ability to convert the Convertible Notes to
common stock at maturity at a fixed conversion rate of $1.275 per share. We
currently intend to exercise that conversion option and convert the Convertible
Notes to
7
common stock at that time. Since that conversion will not require the use of our
working capital, the Convertible Notes are not presented as a current liability
even though the maturity date is one year or less from the balance sheet date.
7. ACQUISITIONS
On April 5, 2002, through a newly formed subsidiary, NTN Wireless
Communications, Inc. ("Wireless"), we acquired the assets of ZOOM
Communications, a company in the restaurant wireless paging industry, from
Brandmakers, Inc. We entered into separate 2-year employment contracts with each
of ZOOM's two principals to join NTN as Vice President of Operations and Vice
President of Sales in the Wireless segment. Based out of suburban Atlanta,
Georgia, the Wireless segment now serves as a regional office and distribution
center for NTN.
We had also entered into a distribution agreement on March 11, 2002 with
Brandmakers, Inc., for the non-exclusive right to sell and service certain
products relating to the manufacture, service and distribution of wireless
paging systems and stored value gift and loyalty card programs for ZOOM
Communications. The agreement was cancelled on April 5, 2002 upon the
acquisition of the assets of ZOOM Communications.
On May 17, 2002, we acquired the assets of Hysen Technologies, Inc., another
company in the hospitality paging industry. The assets acquired included Hysen's
existing inventory and intellectual property, including Hysen's customer base.
The assets of Hysen were combined into the Wireless segment.
Total consideration for the purchases is $421,000, which is, comprised of
$320,000 in common stock and $101,000 for transaction costs. In consideration
for the Zoom Communications purchase, we issued 349,614 restricted shares of our
common stock to all parties valued at an aggregate of $300,000 and paid $86,000
of transaction fees. We used the lowest closing price of the common stock for
the twenty days immediately prior to March 22, 2002 to issue 329,412 shares and
the average closing price of the common stock for the five trading days
immediately prior to March 22, 2002 for the balance of 20,202 shares issued. In
consideration for the Hysen Technologies purchase, we issued 14,388 restricted
shares of our common stock valued at $20,000 and paid $15,000 in transaction
fees. The number of shares issued was determined by the using the average
closing price of the common stock for the five trading days ending on the
closing date of May 17, 2002.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Of the $520,000 of
acquired intangible assets, $230,000 was assigned to goodwill and is not subject
to amortization. $140,000 was assigned to employment agreements and will be
amortized over the estimated contractual life of 2 years. $150,000 was assigned
to customer lists and will be amortized over the estimated useful life of 3
years. The line of credit of $72,000 was paid in full immediately after the
closing date of April 5, 2002.
Assets acquired and liabilities assumed
Zoom Hysen Total
Communications Technologies Acquisitions
-------------- ------------ ------------
Accounts receivable, net $ 121,000 $ -- $ 121,000
Inventory 48,000 41,000 89,000
Fixed assets 38,000 -- 38,000
Goodwill 215,000 15,000 230,000
Intangibles assets 280,000 10,000 290,000
-------------- ------------ ------------
Total assets acquired 702,000 66,000 768,000
-------------- ------------ ------------
Accounts payable & accrued liabilities 244,000 31,000 275,000
Line of credit 72,000 -- 72,000
-------------- ------------ ------------
Total liabilities assumed 316,000 31,000 347,000
-------------- ------------ ------------
Net assets acquired $ 386,000 $ 35,000 $ 421,000
============== ============ ============
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
This Quarterly 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, including cash needs, competition, market acceptance 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 detailed in our Securities and Exchange Commission filings,
including our Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
GENERAL
We develop, produce and distribute interactive entertainment. We operate our
businesses principally through two operating units, our NTN Network division and
our 94%-owned subsidiary, Buzztime Entertainment, Inc. ("Buzztime").
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 June 30, 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(R) 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.
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. As the Playmakers and other digital equipment
ages, we believe the costs of servicing and repairing the equipment will
increase. We are currently working on various solutions to keep service and
repair costs at a minimum.
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 June 30, 2002, all but 102 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 the more robust 900-megahertz Playmaker that facilitates
consumer interaction with the network.
On April 5, 2002, through a newly formed subsidiary, NTN Wireless
Communications, Inc. ("Wireless"), we acquired the assets of ZOOM
Communications, a company in the restaurant wireless paging industry, from
Brandmakers, Inc. We entered into separate 2-year employment contracts with each
of ZOOM's two principals to join NTN as Vice President of Operations and Vice
President of Sales in the Wireless segment. Based out of suburban Atlanta,
Georgia, the Wireless segment now serves as a regional office and distribution
center for NTN.
9
On May 17, 2002, we acquired the assets of Hysen Technologies, Inc., another
company in the hospitality paging industry. The assets acquired included Hysen's
existing inventory and intellectual property, including Hysen's customer base.
The assets of Hysen were combined into the Wireless segment.
Through our NTN Wireless segment, we sell wireless paging systems to the
restaurant industry. The Wireless segment also sells stored value cards, such as
gift cards and loyalty cards, to the restaurant industry. It is our objective to
introduce and sell Wireless paging and stored value card products to our NTN
Network customers and to introduce the Network to our Wireless customers. We
also intend, where possible, to link stored value cards for interested Network
customer sites with the Players Plus members that play our games at that site.
This program would allow our Players Plus members to receive food or beverage
credit for their game play and food/beverage purchases, and would allow those
sites to quantify the return on investment they receive from the NTN Network.
Buzztime 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 the BUZZTIME channel, 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(R) 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.
The first commercial deployment of the BUZZTIME channel occurred in June
2002, when Susquehanna Cable ("SusCom") made the BUZZTIME channel available to
all 16,000 of the digital subscribers on its York, Pennsylvania system. This
deployment followed a technical field trial that began in March 2002. We believe
that this deployment was the first live, 2-way multi-player interactive
television entertainment channel integrated into a digital set top box in the
United States. In addition, Buzztime remains the primary content provider to the
NTN Network and currently works with leading companies such as the National
Football League, Microsoft Corporation's MSN(R)TV service, Liberate
Technologies, Airborne Entertainment and others to bring consumers real-time
interactive entertainment.
Our objective is to grow both of 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 channel to cable and satellite
operators. 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 interactive
television broadcast studio as a development and production facility to
build and deepen relationships with media-related companies. We also
plan to continue to support our efforts in the early-stage wireless
entertainment market through alliances 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 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.
There can be no assurance, however, that we will be successful in executing
this strategy.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
Operations for the three months ended June 30, 2002 resulted in a net loss
of $898,000 compared to a net loss of $949,000 for the three months ended June
30, 2001.
Revenues
Total revenues increased by $808,000 or 15%, to $6,158,000 for the three
months ended June 30, 2002 from $5,350,000 for the three months ended June 30,
2001. This increase was primarily due to NTN Network division revenues as shown
in the following table (in thousands):
THREE MONTHS ENDED
JUNE 30
---------------------
2002 2001
-------- --------
NTN Network Division Revenues $ 6,128 $ 5,342
Buzztime Revenues 27 3
Other Revenues 3 5
-------- --------
Total Revenues $ 6,158 $ 5,350
======== ========
NTN Network division revenues increased by $786,000 or 15%, to $6,128,000
for the three months ended June 30, 2002 from $5,342,000 for the three months
ended June 30, 2001. NTN Network division revenue included approximately
$618,000 of revenue from the newly acquired Wireless segment. Hospitality
subscription revenues increased by approximately $305,000 due to an increase in
the number of sites and the average billing rate per site. The total number of
sites as of June 30, 2002 was approximately 3,625, representing a net increase
of 125 sites compared to June 30, 2001. At June 30, 2002, approximately 97% of
the U.S. sites have been converted to the digital network compared to
approximately 92% of the U.S. sites converted as of June 30, 2001. Advertising
revenue decreased by approximately $85,000 due to fewer advertising contracts
for the three months ended June 30, 2002.
Buzztime revenues were $27,000 for the three months ended June 30, 2002,
compared to $3,000 for the three months ended June 30, 2001.
Operating Expenses
Direct operating costs increased by $529,000 or 27%, to $2,502,000 for the
three months ended June 30, 2002 from $1,973,000 for the three months ended June
30, 2001. Direct operating costs included approximately $356,000 for goods sold
from the newly acquired Wireless segment. Playmaker repairs increased by
approximately $99,000 as the manufacturer warranties continue to expire on some
of the Playmakers. Miscellaneous parts for the equipment increased approximately
$54,000 for replacement of various equipment parts that need to be replaced as
the digital equipment ages. Freight also increased by approximately $57,000
directly due to the increase in Playmaker and digital equipment repairs.
Selling, general and administrative expenses increased by $453,000 or 12%,
to $4,100,000 for the three months ended June 30, 2002 from $3,647,000 for the
three months ended June 30, 2001. Selling, general and administrative expense
included an increase in payroll and related expenses of approximately $282,000
as the head count increased by 24 employees, which includes the addition of the
Wireless employees. Marketing expenses increased approximately $165,000 due to
the attendance at additional trade shows in 2002 and additional advertising for
"Hospitality 360" which incorporates the new Wireless products. Equipment leases
increased by approximately $56,000 due to the buy-out of equipment under
capitalized leases. Various other expenses increased due to the acquisition of
Wireless and a general increase in supplies. Consulting expenses decreased by
approximately $146,000 due to various projects reaching completion in the past
year and the hiring of various consultants as employees.
Depreciation and amortization expense decreased 12% to $381,000 for the
three months ended June 30, 2002 from $432,000 for the three months ended June
30, 2001, due to certain assets becoming fully depreciated.
Research and development expenses were not significant for the three months
ended June 30, 2002, compared to $35,000 for the three months ended June 30,
2001. For the three-month period ended June 30, 2001, our research and
development efforts focused primarily on the upgrade of the NTN Network and
interactive television initiatives.
11
Interest expense decreased 47% to $121,000 for the three months ended June
30, 2002, compared to $228,000 for the three months ended June 30, 2001, due to
the expiration of various capitalized leases as well as to a lower average
balance on our revolving line of credit in the second quarter of 2002 compared
to the second quarter of 2001.
Minority interest in loss of consolidated subsidiary was $52,000 for the
three months ended June 30, 2002. We received the investment from
Scientific-Atlanta, Inc. at the end June 2001, so there is no related credit for
the three months ended June 30, 2001.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
Operations for the six months ended June 30, 2002 resulted in a net loss of
$1,064,000 compared to a net loss of $2,527,000 for the six months ended June
30, 2001.
Revenues
Total revenues increased by $1,420,000 or 13%, to $12,055,000 for the six
months ended June 30, 2002 from $10,635,000 for the six months ended June 30,
2001. This increase was primarily due to NTN Network division revenues as shown
in the following table (in thousands):
SIX MONTHS ENDED
JUNE 30
---------------------
2002 2001
-------- --------
NTN Network Division Revenues $ 11,967 $ 10,557
Buzztime Revenues 83 66
Other Revenues 5 12
-------- --------
Total Revenues $ 12,055 $ 10,635
======== ========
NTN Network division revenues increased by $1,410,000 or 13%, to $11,967,000
for the six months ended June 30, 2002 from $10,557,000 for the six months ended
June 30, 2001. NTN Network division revenue included approximately $761,000 of
revenue from the newly acquired Wireless segment. The acquisition was not in
effect until the second quarter of 2002, but revenue was recorded in the
Wireless segment during the first quarter of 2002 under the distribution
agreement. Hospitality subscription revenues increased by approximately $587,000
due to an increase in the number of sites and the average billing rate per site.
Advertising revenue increased by approximately $109,000 primarily due to a
higher level of advertising revenue being recognized in the first quarter of
2002 compared to the first quarter of 2001. Installation revenue associated with
installing new customer sites decreased approximately $84,000 as some of the
deferred revenue associated with the installation has become fully amortized
over the estimated three-year life of a customer.
Buzztime revenues were $83,000 for the six months ended June 30, 2002,
compared to $66,000 for the six months ended June 30, 2001.
Operating Expenses
Direct operating costs increased by $524,000 or 13%, to $4,573,000 for the
six months ended June 30, 2002 from $4,049,000 for the six months ended June 30,
2001. Direct operating costs included approximately $426,000 for goods sold from
the newly acquired Wireless segment. Playmaker repairs increased by
approximately $161,000 as the manufacturer warranties continue to expire on some
of the Playmakers. Miscellaneous parts for the equipment increased approximately
$79,000 for replacement of various equipment parts that need to be replaced as
the digital equipment ages. Freight also increased by approximately $52,000
directly due to the increase in Playmaker and digital equipment repairs.
Depreciation and amortization increased by approximately $76,000 for the
capitalized purchases of broadcast equipment associated with the digital
network. Communication charges decreased by approximately $163,000 due to a
change in vendors in 2001. Hosting fees also decreased approximately $102,000
due to the consolidation of equipment at two separate locations to one location
in 2001.
12
Selling, general and administrative expenses decreased by $280,000 or 4%, to
$7,608,000 for the six months ended June 30, 2002 from $7,888,000 for the six
months ended June 30, 2001. Consulting expenses decreased by approximately
$377,000 due to various projects reaching completion in the past year and the
hiring of various consultants as employees. Marketing expenses increased
approximately $85,000 due to the attendance at additional trade shows in 2002
and additional advertising for "Hospitality 360" which incorporates the new
Wireless products. Equipment leases increased by approximately $56,000 due to
the buy-out of equipment under capitalized leases.
Depreciation and amortization expense decreased $91,000 or 10% to $778,000
for the six months ended June 30, 2002 from $869,000 for the six months ended
June 30, 2001, due to certain assets becoming fully depreciated.
Research and development expenses were not significant for the six months
ended June 30, 2002, compared to $96,000 for the six months ended June 30, 2001.
For the six month period ended June 30, 2001, our research and development
efforts focused primarily on the upgrade of the NTN Network and interactive
television initiatives.
Interest expense decreased 44% to $254,000 for the six months ended June 30,
2002, compared to $452,000 for the six months ended June 30, 2001, due to the
expiration of various capitalized leases as well as to a lower average balance
on our revolving line of credit in the first half of 2002 compared to the second
half of 2001.
Other income was not significant for the six months ended June 30, 2002
compared to $154,000 for the six months ended June 30, 2001 due to the
elimination of the balance of a promissory note and accrued interest upon
settlement of the debt.
Minority interest in loss of consolidated subsidiary was $97,000 for the six
months ended June 30, 2002. We received the investment from Scientific-Atlanta,
Inc. at the end June 2001, so there is no related credit for the six months
ended June 30, 2001.
EBITDA
Our earnings before interest, taxes, depreciation and amortization
("EBITDA") decreased by $71,000 to $444,000 for the three months ended June 30,
2002 from EBITDA of $515,000 for the three months ended June 30, 2001. EBITDA
increased by $1,281,000 to $1,657,000 for the six months ended June 30, 2002
from EBITDA of $376,000 for the six months ended June 30, 2001.
EBITDA is not intended to represent a measure of performance in accordance
with generally accepted accounting principles ("GAAP"). Nor should EBITDA be
considered as an alternative to statements of cash flows as a measure of
liquidity. EBITDA is included herein because we believe that financial analysts,
investors and other interested parties find it to be a useful tool for measuring
our performance.
The following table reconciles our net loss per GAAP to EBITDA:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ---------------------------
2002 2001 2002 2001
----------- ------------ ------------ ------------
EBITDA Calculation
Net loss per GAAP $ (898,000) $ (949,000) $ (1,064,000) $ (2,527,000)
Interest expense (net) 119,000 216,000 248,000 414,000
Depreciation and amortization 1,223,000 1,248,000 2,473,000 2,489,000
----------- ------------ ------------ ------------
EBITDA $ 444,000 $ 515,000 $ 1,657,000 $ 376,000
=========== ============ ============ ============
13
On a segment basis, our two segments generated EBITDA levels as presented below:
THREE MONTHS ENDED JUNE 30, 2002 SIX MONTHS ENDED JUNE 30, 2002
EBITDA Calculation: Network Buzztime Total Network Buzztime Total
----------- ---------- ---------- ----------- ------------ ------------
Net income (loss) $ (84,000) $ (814,000) $ (898,000) $ 460,000 $ (1,524,000) $ (1,064,000)
Interest expense (net) 119,000 -- 119,000 248,000 -- 248,000
Depreciation and amortization 1,067,000 156,000 1,223,000 2,118,000 355,000 2,473,000
----------- ---------- ---------- ----------- ------------ ------------
EBITDA $ 1,102,000 $ (658,000) $ 444,000 $ 2,826,000 $ (1,169,000) $ 1,657,000
=========== ========== ========== =========== ============ ============
THREE MONTHS ENDED JUNE 30, 2001 SIX MONTHS ENDED JUNE 30, 2001
EBITDA Calculation: Network Buzztime Total Network Buzztime Total
----------- ---------- ---------- ----------- ------------ ------------
Net income (loss) $ (212,000) $ (737,000) $ (949,000) $ (624,000) $ (1,903,000) $ (2,527,000)
Interest expense 213,000 3,000 216,000 390,000 24,000 414,000
Depreciation and amortization 1,048,000 200,000 1,248,000 2,111,000 378,000 2,489,000
----------- ---------- ---------- ----------- ------------ ------------
EBITDA $ 1,049,000 $ (534,000) $ 515,000 $ 1,877,000 $ (1,501,000) $ 376,000
=========== ========== ========== =========== ============ ============
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had cash and cash equivalents of $1,130,000 and a
working capital deficit (current liabilities in excess of current assets) of
$1,778,000, compared to cash and cash equivalents of $1,296,000 and working
capital of $40,000 at December 31, 2001. The primary reason for the working
capital deficit was the reclassification of the revolving line of credit from a
long-term liability to a short-term liability as the line of credit matures on
June 30, 2003. Net cash provided by operations was $667,000 for the six months
ended June 30, 2002 and $118,000 for the six months ended June 30, 2001.
Depreciation, amortization and other non-cash charges offset the net loss in
each period.
Net cash used in investing activities was $660,000 for the six months ended
June 30, 2002 compared with $517,000 for the six months ended June 30, 2001.
Included in net cash used in investing activities for the six months ended June
30, 2002 was $500,000 in capital expenditures, $128,000 in capital software
expenditures and $101,000 of professional fees related to the recent
acquisitions, which were partially offset by $69,000 for deposits on broadcast
equipment received.
Net cash used in financing activities was $173,000 for the six months ended
June 30, 2002 compared to net cash provided by financing activities of $322,000
for the six months ended June 30, 2001. The cash provided by financing
activities for the six months ended June 30, 2002 included $200,000 of net
principal payments on the revolving line of credit and $104,000 of principal
payments on capital leases offset by $131,000 of proceeds from the issuance of
stock options.
Our revolving line of credit agreement is with Coast Business Credit and
presently expires on June 30, 2003. 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. Our intention is to either further extend the expiration date of the
existing facility or to find a replacement facility with an alternate lender.
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. As of June 30, 2002, the maximum
amount outstanding under the line of credit was $2,500,000. Further reductions
in the maximum amount of $250,000 each will occur on January 31, 2003, and on
March 31, 2003. As of June 30, 2002, we had $149,000 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.
Our liquidity and capital resources remain limited and this may constrain
our ability to operate and grow our business. For the first six months of 2002,
we generated free cash flow (defined as EBITDA less net interest expense, cash
used in investing activities and cash used in financing activities) of $576,000,
which has covered our business requirements over that period. We believe that we
should continue to be cash positive from operating activities in the second six
months of 2002. Our operational 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 to 150 sites in the NTN Network
during 2002 and a number of commercial trials of the Buzztime initiative),
utilization of our existing line of credit may be sufficient to cover our
financing requirements. If we face more rapid growth in either
14
or both segments, then we will require additional financing over the next 12
months. 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
product additions or acquisitions on a cash basis.
We expect the level of expenditures in Buzztime to rise over the remainder
of 2002 as we have entered the deployment phase with SusCom and continue in the
testing phase with certain other cable operators. However, subject to any
unexpected changes in our business that may occur as a result of a continued
economic slowdown, and unless we incur unanticipated expenses, we believe we
will continue generating adequate cash from the operation of the NTN Network
which, when combined with cash resources on hand and our line of credit, will
allow us to continue to fund Buzztime at least through December 2002 at current
operational levels assuming that Buzztime remains in the testing phase with
certain cable operators for the remainder of the year. If current BUZZTIME
channel sales efforts to major cable system operators (the largest cable system
operators in the United States) succeed as planned and we enter into field
trials with those cable operators, management intends to aggressively increase
Buzztime sales and marketing efforts late in the year to more quickly advance
its distribution within the U.S. market, which will require additional capital.
We believe that Buzztime's success in entering into those field trials with
major cable system operators may enhance our ability to raise additional capital
at favorable pricing although there can be no assurance that will happen.
Based upon current sales targets of achieving commercial deployment of the
BUZZTIME Channel with several major cable system operators over the next several
quarters, we anticipate that Buzztime will require an additional $1,000,000 in
financing per quarter commencing with the second quarter of 2003. The timing of
this capital requirement is largely dependent on the timing of the commercial
deployment. The sooner we achieve commercial deployment, the sooner this capital
requirement would arise. If additional financing is not obtained, our
accelerated growth plans may have to be deferred. If cash generated by the NTN
Network is insufficient to cover Buzztime's expenses and if additional financing
for Buzztime is not obtained and we cannot reduce cash expenditures at Buzztime
to a sufficient level, we may not be able to sustain the operations of Buzztime
beyond December 2002.
The American Stock Exchange (AMEX) recently adopted several new listing
standards. One new standard was established for listed companies that had at
least five consecutive years of losses as we do. This new standard is that such
companies must maintain shareholders' equity of at least $6 million. We
submitted a plan to achieve compliance with that standard to AMEX, which they
approved with the understanding that such compliance would be demonstrated on or
about mid-November, 2002. That plan was to increase our shareholders' equity
through a combination of conversion of equity-like instruments on our balance
sheet and by raising additional equity.
One such equity-like instrument is in Scientific-Atlanta's (S-A) investment
in Buzztime preferred shares. S-A has an option to exchange the S-A shares of
Buzztime's preferred stock into shares of NTN common stock if Buzztime did not
obtain additional equity financing of $2,000,000 by June 8, 2002. We did not
obtain such capital at the Buzztime subsidiary level by that date and have given
S-A an extension on the decision to convert until August 8, 2002.
Another equity-like instrument on our balance sheet is our $2 million of
Convertible Notes. We have the ability to convert those Convertible Notes to
common stock at a fixed conversion price of $1.275 per share at maturity on
February 1, 2003. While that date is outside of the timeframe allowed under our
plan with AMEX, such conversion will allow us to bolster our shareholders'
equity by $2 million, which will allow us to maintain continued compliance with
the new AMEX listing guideline.
We believe that we will be able to raise the additional equity capital
needed to comply with our plan with AMEX. Our initial objective is to raise that
equity capital from strategic investors that can help us make progress with our
Buzztime initiative. However, there can be no assurance that we will be able to
obtain additional equity financing on terms favorable to us or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. Statement 145 updates, clarifies and simplifies existing accounting
pronouncements including: rescinding Statement No. 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect and
amending Statement No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-
15
leaseback transactions. Statement 145 is effective for fiscal years beginning
after May 15, 2002, with early adoption of the provisions related to the
rescission of Statement No. 4 encouraged. We do not expect the adoption of this
statement to have a material impact on its financial position or results of
operations.
ITEM 3. 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 June 30, 2002, we owned common stock of
an Australian company that is subject to market risk. At June 30, 2002, the
carrying value of this investment was $241,000, which is net of a $576,000
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 June 30, 2002, a hypothetical
10% decline in the value of the Australian dollar would result in a reduction of
$24,000 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 interest at a rate equal to the higher
of the prime rate plus 1.5% per annum, or 9% per annum. At June 30, 2002, a
hypothetical one-percentage point increase in the prime rate would result in an
increase of $24,000 in annual interest expense for line of credit borrowings.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 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 alleged 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. In June 2002, in ruling on a motion by NTN, the
court found that Mizel's complaint failed to state a valid claim. The court gave
Mizel an opportunity to replead his case, but he declined to do so. On July 11,
2002, the court formally dismissed the case and entered judgment in our favor.
Robin Fernhoff, et. Al
On March 19, 2002, a shareholder class action and derivative complaint was
filed in San Diego County Superior Court for the State of California by Robin
Fernhoff 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, Robert B. Clasen, Michael K. Fleming and James B. Frakes as
defendants with NTN Communications as nominal defendant. The Fernhoff action
alleged breach of fiduciary duty, abuse of control and gross mismanagement 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. In July 2002, in light of the ruling on Mizel,
Fernhoff requested that the court dismiss his complaint.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On April 5, 2002, we issued 349,614 shares of restricted common stock valued
at $300,000 in aggregate in connection with the acquisition of Zoom
Communications, Inc.
On April 9, 2002, we issued approximately 46,000 shares of common stock, to
the holders of the outstanding 8% senior convertible notes, in a private
transaction in payment of interest of approximately $40,000 on such notes.
On April 19, 2002, we issued approximately 12,000 shares of treasury stock
in lieu of a cash payment of approximately $13,000 for board of directors'
compensation.
On May 21, 2002, we issued 14,388 shares of restricted common stock valued
at $20,000 in aggregate in connection with the purchase of assets of Hysen
Technologies, Inc.
16
Each offering and transaction was made without registration under the
Securities Act of 1933, as amended (the "Act") in reliance upon the exemption
from registration afforded by Section 4(2) of the Act and Rule 506 of Regulation
D promulgated thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our annual meeting of shareholders on May 31, 2002. The following
matters were voted upon at such meeting:
1. To elect two directors to hold office until the 2005 annual meeting of
stockholders and until their respective successors are duly elected and
qualified:
BARRY BERGSMAN
Votes in Favor.....32,601,063
Abstentions.................0
STANLEY B. KINSEY
Votes in Favor.....32,601,052
Abstentions.................0
Both Mr. Bergsman and Mr. Kinsey were elected as directors to hold office
until the annual meeting of stockholders in 2005 and until each respective
successor is duly elected and qualified. The following directors were not
subject to election and their term of office continued after the meeting:
Gary H. Arlen, Robert M. Bennett, Robert Clasen, Vincent A. Carrino, Michael
Fleming and Esther Rodriquez.
2. To ratify the appointment of KPMG LLP as independent accountants of NTN for
the fiscal year ending December 31, 2002.
Votes In Favor ....33,595,484
Votes Against .........52,445
Abstentions ...........22,239
The proposal for ratification of the appointment of KPMG LLP was approved.
ITEM 5. OTHER INFORMATION.
On May 13, 2002, Michael K. Fleming, a member of our board of directors, was
named chairman of Buzztime Entertainment Inc. board of directors and will
receive $150,000 per year for his service.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Sixth Amendment to Loan and Security Agreement, dated as of May 1, 2002,
by and between NTN Communications, Inc. and Coast Business Credit
10.2 Seventh Amendment to Loan and Security Agreement, dated as of July 1,
2002, by and between NTN Communications, Inc. and Coast Business Credit
(b) Reports on Form 8-K
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: August 6, 2002 By: /s/ James Frakes
----------------------------------
James Frakes
Authorized Signatory and Chief
Financial Officer
19
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
10.1 Sixth Amendment to Loan and Security Agreement, dated as of May 1,
2002, by and between NTN Communications, Inc. and Coast Business Credit
(1)
10.2 Seventh Amendment to Loan and Security Agreement, dated as of July 1,
2002, by and between NTN Communications, Inc. and Coast Business Credit
(1)
- ----------
(1) Filed herewith.
20