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 March 31, 2003
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 May 12, 2003, the registrant had outstanding 45,741,000 shares of common
stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
MARCH 31,
2003 DECEMBER 31,
ASSETS (PLEDGED) (UNAUDITED) 2002
-------------- --------------
Current assets:
Cash and cash equivalents $ 1,929,000 $ 577,000
Restricted cash 241,000 102,000
Accounts receivable, net 1,765,000 2,013,000
Investment available for sale 182,000 178,000
Inventory 284,000 241,000
Deferred costs 382,000 492,000
Prepaid expenses and other current assets 582,000 581,000
-------------- --------------
Total current assets 5,365,000 4,184,000
Broadcast equipment and fixed assets, net 4,304,000 5,141,000
Software development costs, net 579,000 591,000
Deferred costs 380,000 370,000
Other assets 522,000 556,000
-------------- --------------
Total assets $ 11,150,000 $ 10,842,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 434,000 $ 657,000
Accrued expenses 1,317,000 1,177,000
Sales tax payable 325,000 284,000
Income taxes payable 9,000 30,000
Obligations under capital leases 151,000 184,000
Revolving line of credit -- 89,000
Deferred revenue -- Buzztime 96,000 --
Deferred revenue -- Network 995,000 1,199,000
-------------- --------------
Total current liabilities 3,327,000 3,620,000
Obligations under capital leases, excluding current 173,000 199,000
portion
Revolving line of credit 2,043,000 2,250,000
Senior subordinated convertible notes -- 1,997,000
Deferred revenue -- Network 628,000 653,000
-------------- --------------
Total liabilities 6,171,000 8,719,000
-------------- --------------
Minority interest in consolidated subsidiary -- 643,000
-------------- --------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock,
$.005 par value, 5,000,000 shares authorized; 161,000
shares issued and outstanding at March 31, 2003 and
December 31, 2002 1,000 1,000
Common stock, $.005 par value, 70,000,000 shares
authorized; 43,040,000 and 39,381,000 shares
issued and outstanding at March 31, 2003 and
December 31, 2002, respectively 214,000 196,000
Additional paid-in capital 84,817,000 81,211,000
Accumulated deficit (79,342,000) (79,079,000)
Accumulated other comprehensive loss (635,000) (639,000)
Treasury stock, at cost, 18,000 and 49,000 shares at
March 31, 2003 and December 31, 2002, respectively (76,000) (210,000)
-------------- --------------
Total shareholders' equity 4,979,000 1,480,000
-------------- --------------
Total liabilities and shareholders' equity $ 11,150,000 $ 10,842,000
============== ==============
See accompanying notes to unaudited consolidated financial statements
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
2003 2002
-------------- --------------
Revenues:
NTN Network division revenues $ 7,330,000 $ 5,839,000
Buzztime service revenues 7,000 56,000
Other revenues 2,000 2,000
-------------- --------------
Total revenues 7,339,000 5,897,000
-------------- --------------
Operating expenses:
Direct operating costs (includes depreciation of
$743,000 and $853,000 for the three months
ended March 31, 2003 and 2002, respectively) 3,004,000 2,170,000
Selling, general and administrative 4,108,000 3,409,000
Depreciation and amortization 322,000 397,000
Research and development 77,000 3,000
-------------- --------------
Total operating expenses 7,511,000 5,979,000
-------------- --------------
Operating loss (172,000) (82,000)
-------------- --------------
Other income (expense):
Interest income -- 4,000
Interest expense (93,000) (133,000)
-------------- --------------
Total other expense (93,000) (129,000)
-------------- --------------
Loss before minority interest in loss of (265,000) (211,000)
consolidated subsidiary and income taxes
Minority interest in loss of consolidated subsidiary 10,000 45,000
-------------- --------------
Net loss before income taxes (255,000) (166,000)
Income taxes 8,000 --
-------------- --------------
Net loss $ (263,000) $ (166,000)
============== ==============
Net loss per common share - basic and diluted $ (0.01) $ (0.00)
============== ==============
Weighted average shares outstanding-basic and diluted 42,088,000 38,604,000
============== ==============
See accompanying notes to unaudited consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
2003 2002
-------------- --------------
Cash flows provided by operating activities:
Net loss $ (263,000) $ (166,000)
Adjustments to reconcile net loss to net cash
provided by operating activities (net of effects
of acquisitions in 2002):
Depreciation and amortization 1,065,000 1,250,000
Provision for doubtful accounts 8,000 71,000
Non-cash stock-based compensation charges 41,000 23,000
Minority interest in loss of consolidated subsidiary (10,000) (45,000)
Non-cash interest expense 14,000 40,000
Accreted interest expense 3,000 10,000
Loss from disposition of equipment 32,000 31,000
Changes in assets and liabilities:
Restricted cash (139,000) (105,000)
Accounts receivable 240,000 (70,000)
Inventory (43,000) (27,000)
Deferred costs 100,000 49,000
Prepaid expenses and other assets -- (113,000)
Accounts payable and accrued expenses 7,000 (127,000)
Deferred revenue (133,000) (277,000)
-------------- --------------
Net cash provided by operating activities 922,000 544,000
-------------- --------------
Cash flows from investing activities:
Capital expenditures (154,000) (326,000)
Software development expenditures (61,000) (90,000)
Deposits on broadcast equipment -- 69,000
-------------- --------------
Net cash used in investing activities (215,000) (347,000)
-------------- --------------
Cash flows from financing activities:
Principal payments on capital leases (59,000) (59,000)
Borrowings from revolving line of credit 7,341,000 5,760,000
Principal payments on revolving line of credit (7,637,000) (5,604,000)
Proceeds from issuance of common and preferred
stock, net of offering expenses 975,000 --
Proceeds from exercise of stock options and warrants 25,000 8,000
-------------- --------------
Net cash provided by financing activities 645,000 105,000
-------------- --------------
Net increase in cash and cash equivalents 1,352,000 302,000
Cash and cash equivalents at beginning of period 577,000 1,296,000
-------------- --------------
Cash and cash equivalents at end of period $ 1,929,000 $ 1,598,000
============== ==============
See accompanying notes to unaudited consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Continued)
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
2003 2002
-------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 76,000 $ 83,000
============== ==============
Income taxes $ 29,000 $ --
============== ==============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest $ 54,000 $ 40,000
============== ==============
Equipment acquired under capital leases $ -- $ 74,000
============== ==============
Unrealized holding loss on investments $ 4,000 $ (102,000)
============== ==============
Issuance of treasury stock in payment of board
compensation $ 30,000 $ 16,000
============== ==============
Conversion of Senior Subordinated Notes into
common stock $ 2,000,000 $ --
============== ==============
Conversion of Buzztime Preferred Series A into
common stock $ 633,000 $ --
============== ==============
See accompanying notes to unaudited consolidated financial statements.
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2003
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, 2003.
The consolidated financial statements for the three months ended March 31,
2003 and 2002 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, 2002.
We have reclassified certain items in the prior period consolidated
financial statements to conform to the current period presentation.
2. CRITICAL ACCOUNTING POLICIES
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 U.S. generally accepted accounting principles. 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.
o 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 No. 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.
o 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. The
Playmakers are depreciated over a four-year life and the computers over a
three-year life. The estimated life of these assets was determined based
upon anticipated technology changes. 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.
o We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. The
allowance is determined based on reserving for all customers that have
terminated our service and all accounts over 90 days past due, plus five
percent of outstanding balances for all unreserved customer balances. 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.
6
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 or speculative or hedging instruments; or
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 or in the SUBSEQUENT EVENTS or in the RELATED PARTIES notes of
the audited financial statements in our Form 10-K for the year ended
December 31, 2002.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF FASB STATEMENT NO. 123
(SFAS No. 148). SFAS 148 amends FASB Statement No. 123; ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 beginning with our
annual financial statements for the year ended December 31, 2002.
We applied Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25) and related interpretations in
accounting for our stock options. No compensation expense has been recognized
for the options granted under the Special Plan and the Option Plan unless the
grants were issued at exercise prices below market value. Compensation cost is
based upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123. The following table represents the effect on net
loss and net loss per share if we had applied the fair value recognition
provisions of SFAS No. 123 as amended by SFAS No. 148.
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
------------ ------------
Net loss As reported................. $ 263,000 $ 166,000
Add: stock-based employee
compensation expense included
in reported net loss, net of
related tax effects 2,000 2,000
Deduct: stock-based employee
compensation expense, net of
related tax effects 287,000 268,000
------------ ------------
Pro forma............ $ 548,000 $ 432,000
Basic and diluted net As reported............ $ 0.01 $ 0.00
loss per share
Pro forma.............. $ 0.01 $ 0.01
The per share weighted-average fair value of stock options granted during
the three months ended March 31, 2003 and 2002 was $1.10, and $0.80,
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: 2003 -- dividend yield of 0%, risk-free interest
rate of 2.61%, expected volatility of 110%, and expected life of 4.0 years; and
2002 -- dividend yield of 0%, risk-free interest rate of 4.67%, expected
volatility of 124%, and expected life of 4.7 years. In compliance with APB No.
25, we expensed $2,000 for the three months ended March 31, 2003 and 2002,
associated with the grants of 80,000 options in 2000 below market value pursuant
to the Option Plan. No options were granted below market value in 2003 and 2002
pursuant to the Option Plan.
3. INCOME (LOSS) PER SHARE
For the three months ended March 31, 2003 and 2002, options, warrants,
convertible preferred stock and convertible notes representing approximately
12,407,000 and 12,443,000 potential common shares, respectively, have been
excluded from the computation of net loss per share, as their effect was
anti-dilutive.
7
4. SEGMENT INFORMATION
Our operations are to develop 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 and Buzztime divisions. NTN Network revenue is generated primarily
from broadcasting content to customer locations through two interactive
television networks, from advertising sold on the network and from its wireless
business with restaurant on-site paging systems, electronic gift cards, loyalty
programs and electronic data-managed comment cards. NTN Network revenues
comprise 99% of our total revenue for the three months ended March 31, 2003 and
2002. 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. 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 our segments and other operations:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002
------------ ------------
Revenues
Network (includes "other revenues") $ 5,494,000 $ 5,698,000
NTN Wireless 1,838,000 143,000
------------ ------------
NTN Network division 7,332,000 5,841,000
Buzztime 7,000 56,000
------------ ------------
Total revenue $ 7,339,000 $ 5,897,000
============ ============
Operating income (loss)
Network $ 540,000 $ 635,000
NTN Wireless 241,000 38,000
------------ ------------
NTN Network division 781,000 673,000
Buzztime (953,000) (755,000)
------------ ------------
Operating loss $ (172,000) $ (82,000)
============ ============
Net income (loss)
Network $ 439,000 $ 506,000
NTN Wireless 241,000 38,000
------------ ------------
NTN Network division 680,000 544,000
Buzztime (943,000) (710,000)
------------ ------------
Net loss $ (263,000) $ (166,000)
============ ============
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
$441,000 U.S. dollars as of March 31, 2003) by the 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. No amounts have been accrued relating to this contingent liability.
6. DEFERRED REVENUE - BUZZTIME
In February 2003, we entered into a Trial Agreement with a major cable
operator that involves developing the Buzztime channel for potential deployment
on two different cable technology platforms within that operator's system. The
Trial Agreement runs through December 2004. During the three months ended March
31, 2003, the cable operator paid us an initial non-refundable amount of
$100,000 and the Trial Agreement calls for two additional payments of
approximately $200,000 each if we enter into trials with the operator on each of
the two specified technology platforms. The cable operator has the right under
the Trial Agreement to apply 50% of any amount paid under the agreement against
future development and/or license fees paid by that operator to us for the
carriage of the Buzztime channel through June 2004. We are currently amortizing
the initial payment over the 23 month contract term and recognizing 50% of the
amortized amount as revenue in light of the operator's ability to apply 50% of
the amount paid against potential future license payments made to us. The
remaining 50% is reflected as deferred revenue on the accompanying consolidated
balance sheet. During the three months ended March 31, 2003, we recognized
$4,000 of revenue related to this agreement.
8
7. BENNETT INVESTMENT
On January 15, 2003, we issued and sold 1,000,000 shares of restricted
common stock through a private offering to Robert M. Bennett, one of our
directors, at a price per share of $1.00. Pursuant to the terms of the
transaction, upon receipt of $1.0 million from Mr. Bennett, we issued the
restricted shares along with fully vested warrants to purchase 500,000 shares of
common stock at $1.15 per share, exercisable through January 15, 2008.
8. BUZZTIME CONVERSION
On June 8, 2001, an affiliate of Scientific-Atlanta invested $1,000,000 in
Buzztime for 636,943 shares of its Series A preferred stock, representing 6% of
Buzztime's capitalization on an as-converted basis, and warrants to obtain an
additional 159,236 shares of its Series A preferred stock. Each share of Series
A preferred stock was initially convertible into one share of Buzztime common
stock and entitled to a non-cumulative dividend of 8%, if, and when as declared
by Buzztime's board of directors. The exercise price of the warrants for Series
A preferred stock is $1.57 per share. However, the warrants vest in 10%
increments only as cable system operators sign on by executing a distribution
agreement for the Buzztime channel.
We granted Scientific-Atlanta the right to exchange its shares of Series A
preferred stock into shares of NTN common stock if (i) Buzztime did 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. On January 16,
2003, Scientific-Atlanta converted its shares of Series A preferred stock into
1,000,000 shares of NTN common stock at a conversion price of $1.00 per share.
9. SENIOR SUBORDINATED NOTES CONVERSION
On February 1, 2003, $2,000,000 of convertible senior subordinated notes
converted into 1,568,628 shares of our common stock based on the agreed upon
conversion price of $1.275 per share.
10. SUBSEQUENT EVENTS
On May 1, 2003, we received a letter from the American Stock Exchange
(AMEX) stating that NTN is now in compliance with AMEX listing standards. In our
SEC filings over the past year, we have disclosed that we needed to achieve $6
million of shareholders' equity to be in compliance with AMEX listing standards.
However, as a result of new AMEX rules effective January 2003, we are now in
compliance. The new rules permit a company to remain listed on AMEX if it, like
NTN, has a total market capitalization of at least $50 million, has at least 1.1
million shares publicly held, has a market value of publicly held shares of at
least $15 million and has a minimum of 400 round lot shareholders.
In the event we no longer satisfy the requirements of the new rule (from
subsequent changes in market capitalization or otherwise), we would be subject
to other AMEX listing requirements for companies that have not reported profits
during the past five years, including a requirement of at least $6 million in
shareholders' equity. As of March 31, 2003, we would not satisfy such a
requirement, with only $5 million in shareholders' equity.
On May 2, 2003 at our Annual Shareholders' Meeting, a proposal to amend our
restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 70 million shares to 84 million shares was approved.
On May 7, 2003, Media General, Inc., a communications company with
interests in newspapers, television stations, interactive media and diversified
information services, made a $3 million strategic investment in NTN. This
investment provides us with additional capital. In return for the investment, we
issued and sold 2,000,000 shares of restricted NTN common stock through a
private offering to Media General at a price per share of $1.50. Pursuant to the
terms of the transaction, upon receipt of $3 million from Media General, we
issued the restricted shares along with fully vested warrants to purchase
500,000 shares of Buzztime common stock at $3.46 per share, exercisable through
May 7, 2007.
Additionally, we issued 666,667 shares of restricted NTN common stock,
valued at $1 million, to license selected technology and content from Media
General to add additional game content to the Buzztime interactive television
game channel. The license includes a 5-year exclusive interactive television
license to certain intellectual property, with options to extend the license.In
connection with the investment, we increased the size of our Board of Directors
to nine directors and appointed Neal F. Fondren, Vice President of Media General
and President of Media General's Interactive Media Division to the vacancy.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward Looking Statements
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 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. THESE
FORWARD-LOOKING STATEMENTS REFLECT FUTURE EVENTS, RESULTS, PERFORMANCE,
PROSPECTS AND OPPORTUNITIES, INCLUDING STATEMENTS RELATED TO OUR STRATEGIC
PLANS, CAPITAL EXPENDITURES, INDUSTRY TRENDS AND FINANCIAL POSITION OF NTN
COMMUNICATIONS, INC. AND ITS SUBSIDIARIES. FORWARD-LOOKING STATEMENTS ARE BASED
ON INFORMATION CURRENTLY AVAILABLE TO US AND OUR CURRENT EXPECTATIONS,
ESTIMATES, FORECASTS, AND PROJECTIONS ABOUT THE INDUSTRIES IN WHICH WE OPERATE
AND THE BELIEFS AND ASSUMPTIONS OF MANAGEMENT. WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "COULD," "TARGETS," "PROJECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," "MAY," "WILL," "WOULD," VARIATIONS OF SUCH WORDS, AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. IN
ADDITION, ANY STATEMENTS WHICH REFER TO PROJECTIONS OF OUR FUTURE FINANCIAL
PERFORMANCE, OUR ANTICIPATED GROWTH AND TRENDS IN OUR BUSINESSES, AND OTHER
CHARACTERIZATIONS OF FUTURE EVENTS OR CIRCUMSTANCES, ARE FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED THAT THESE FORWARD-LOOKING STATEMENTS ARE ONLY
PREDICTIONS AND ARE SUBJECT TO RISKS, UNCERTAINTIES, AND ASSUMPTIONS THAT MAY BE
DIFFICULT TO PREDICT. THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY AND
ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002 UNDER THE SECTION ENTITLED "RISK FACTORS," AND IN OTHER
REPORTS WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME.
WE UNDERTAKE NO OBLIGATION TO REVISE OR UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENT FOR ANY REASON.
GENERAL
We operate our businesses principally through two operating segments: the
NTN Network(R) division and our Buzztime Entertainment, Inc.(TM) subsidiary
("Buzztime"). The NTN Network division provides entertainment services and
on-site communications products to the hospitality industry. Buzztime operates
our live broadcast studio, produces our trivia and live sports "play-along"
content to both the NTN Network and new consumer interactive platforms, and is
developing the Buzztime(R) interactive television channel.
THE NTN NETWORK DIVISION
The NTN Network division ("the Division") is one of our two primary
business units. We provide consumer-oriented interactive communications and
entertainment products to the out-of-home hospitality industry including
restaurants, sports bars, taverns, cruise ships, hotels and active adult
communities who are looking for a competitive point-of-difference to attract and
retain customers.
We have maintained a unique and preemptive position in the hospitality
industry for over 18 years as a platform for providing interactive trivia and
play-along sports programming. We believe that strong growth opportunities exist
by continuing to leverage our preeminent entertainment product and our installed
base of 3,058 United States venues to include other interactive communications
and entertainment services that effectively increase both breadth and depth of
their business in this segment.
We have adopted the mission to become the leader in providing distributed
network systems comprised of interactive entertainment services to the
out-of-home commercial market, focusing first on the hospitality industry. As
such, the division is evolving from one that provides a single
product--interactive entertainment located primarily in the bar area--to one
that provides full-service "front of the house" products and services across the
establishment. These products and services include wireless commercial
communication services, additional entertainment services and devices,
interactive training and an expanded set of member services--including emerging
stored value gift and loyalty card programs. Providing this expanded array of
products will allow us to offer additional value to, and grow revenues in, our
primary markets, as well as to expand the market to include hospitality venues
such as fine dining, QSR (Quick Serve Restaurants, e.g. fast food) and family
dining formats that are beyond our traditional customer base of casual dining,
sports bars and taverns.
10
BUZZTIME ENTERTAINMENT
Buzztime, our wholly owned subsidiary, was incorporated in the state of
Delaware in December 1999 with the objective of creating new revenue from
distributing NTN's content library to several interactive consumer platforms,
with a primary focus on interactive television. Most of our interactive content
and interactive television technology is now owned or licensed by Buzztime.
Buzztime specializes in real-time, mass-participation games and entertainment
that are produced specifically for interactive television including the Buzztime
interactive trivia channel for cable television and satellite television
services. We manage one of the world's largest trivia game show libraries 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. Buzztime is developing and distributing the Buzztime Channel with the
intent to become the first broadly available interactive television game channel
on U.S. cable and satellite systems.
We launched the Buzztime trivia channel in June 2002 in York, Pennsylvania
on the Susquehana Cable ("SusCom") system. We believe this was the first
deployment of a real-time, two-way cable channel in the U.S. that operated on
commercially deployed digital set-top boxes. In April 2003, we launched the
second deployment of the channel in Portland, Maine on the Time Warner cable
system. In addition, Buzztime remains the primary content provider to the NTN
Network and currently works with leading companies such as Scientific-Atlanta,
Inc., The National Football League (NFL), Liberate Technologies, Microsoft
Corporation's MSNTV and others to bring consumers real-time interactive
entertainment.
Our objective is to leverage our unique interactive entertainment as a
means of growing our business units--first, as a leading provider of interactive
communications and entertainment offerings to the hospitality industry through
the NTN Network division. Second, as a leading developer and distributor of
interactive entertainment for the in-home market through interactive television
and wireless devices via Buzztime. To accomplish our objectives we are pursuing
strategies to:
BUSINESS STRATEGY
o Increase the number of hospitality locations serviced by the NTN Network
and our wholly owned subsidiary NTN Wireless Communications, Inc. ("NTN
Wireless"). 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 an
interactive television 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 early-stage
wireless entertainment through partnerships with leading wireless
distributors and carriers.
o Increase revenues through current and new revenue sources. The NTN Network
receives service revenue from subscribing out-of-home locations as well as
third-party advertising revenue and production services and royalty revenue
from our Canadian licensee. We expect to continue generating revenue
through these sources and, by growing our customer base, we also expect to
see revenue growth in service 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 may also explore market opportunities to acquire
complimentary businesses to increase revenues and earnings. An example of a
recent acquisition is NTN Wireless which generated approximately $2.4
million in revenues from April through December 2002 through sales of
restaurant pagers. NTN Wireless is part of our NTN Network business
segment.
There can be no assurance, however, that we will be successful in executing
this strategy.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
Operations for the three months ended March 31, 2003 resulted in a net loss
of $263,000 compared to a net loss of $166,000 for the three months ended March
31, 2002.
11
REVENUES
Total revenues increased by $1,442,000 or 24%, to $7,339,000 for the three
months ended March 31, 2003 from $5,897,000 for the three months ended March 31,
2002. This increase was primarily due to NTN Network division revenues as shown
in the following table (in thousands):
THREE MONTHS ENDED
MARCH 31
------------------
2003 2002
-------- --------
NTN Network Division Revenues $ 7,330 $ 5,839
Buzztime Revenues 7 56
Other Revenues 2 2
-------- --------
Total Revenues $ 7,339 $ 5,897
======== ========
NTN Network division revenues increased by $1,491,000 or 26%, to $7,330,000
for the three months ended March 31, 2003 from $5,839,000 for the three months
ended March 31, 2002. The increase in revenue was due to the contribution of the
NTN Wireless business formed in the second quarter of 2002 after we acquired the
assets of two companies in the restaurant wireless paging industry. NTN Network
division revenue included approximately $1,838,000 of revenue from NTN Wireless
business. Hospitality service revenues increased by approximately $144,000 due
to an increase in the average billing rate per site. The NTN Network U.S.
customer site count at March 31, 2003 was approximately 3,058. Installation
revenue associated with installing new customer sites decreased approximately
$203,000 as some of the deferred revenue associated with the installation has
become fully amortized. Advertising revenue decreased approximately $306,000.
Buzztime revenues were $7,000 for the three months ended March 31, 2003,
compared to $56,000 for the three months ended March 31, 2002 due to the
expiration of certain contracts during 2002.
OPERATING EXPENSES
Direct operating costs increased by $834,000 or 38%, to $3,004,000 for the
three months ended March 31, 2003 from $2,170,000 for the three months ended
March 31, 2002. Direct operating costs for the three months ended March 31, 2003
included approximately $1,169,000 for costs of goods sold from the NTN Wireless
business. Excluding the NTN Wireless cost of goods sold, our direct operating
costs decreased by $335,000 for the three months ended March 31, 2003. Marketing
site visits decreased approximately $121,000 due to a scheduled reduction in the
onsite visits to the sites. Depreciation expense decreased $110,000 due to some
of the digital broadcast equipment becoming fully depreciated, offset by an
increase in amortization for Buzztime software.
Selling, general and administrative expenses increased by $699,000 or 21%,
to $4,108,000 for the three months ended March 31, 2003 from $3,409,000 for the
three months ended March 31, 2002. Selling, general and administrative expenses
included an increase in payroll and related expenses of approximately $339,000
as the head count increased, which includes the addition of the NTN Wireless
employees and Buzztime employees to support their initiatives. Marketing
expenses increased $148,000 due to additional trade shows and advertising
materials for NTN Wireless in addition to other client promotions. Professional
fees increased approximately $92,000 due to an increase in legal expenses.
Travel and entertainment increased approximately $72,000 related to NTN Wireless
and increased travel to support the Buzztime initiatives and deploymentof the
Buzztime channel.
Depreciation and amortization not related to direct operating costs
decreased $75,000, or 19%, to $322,000 for the three months ended March 31, 2003
from $397,000 for the three months ended March 31, 2002 due to certain assets
becoming fully depreciated.
Research and development expenses increased $74,000 to $77,000 for the
three months ended March 31, 2003 compared to $3,000 for the three months ended
March 31, 2002, due primarily to the development of the digital network and
Internet initiatives.
INTEREST EXPENSE
Interest expense decreased 30% to $93,000 for the three months ended March
31, 2003, compared to $133,000 for the three months ended March 31, 2002,
primarily due to the conversion of the senior subordinated convertible notes on
February 1, 2003.
12
MINORITY INTEREST AND TAXES
Minority interest in loss of consolidated subsidiary decreased to $10,000
for the three months ended March 31, 2003, compared to $45,000 for the three
months ended March 31, 2002. On January 16, 2003 Scientific-Atlanta converted
its preferred stock investment into NTN common stock, thereby eliminating its
minority interest.
The NTN Network expects to report taxable income for the year ended
December 31, 2003. For federal income tax reporting purposes and in unitary
states where the NTN Network may file on a combined basis, taxable losses
incurred by Buzztime Entertainment should be sufficient to offset NTN Network's
taxable income. In states where separate filing is required, NTN Network will
likely incur a state tax liability. As a result, NTN Network recorded a state
tax provision of $8,000 in the first quarter of 2003. No state tax provision was
recorded in the first quarter of 2002.
EBITDA
Our earnings before interest, taxes, depreciation and amortization
("EBITDA") decreased by $310,000 to $903,000 for the three months ended March
31, 2003 from EBITDA of $1,213,000 for the three months ended March 31, 2002.
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,
lenders, investors and other interested parties find it to be a useful tool for
measuring the operating performance of companies like NTN that carry significant
levels of non-cash depreciation and amortization charges in comparison to their
GAAP earnings.
The following table reconciles our net loss per GAAP to EBITDA:
THREE MONTHS ENDED
MARCH 31
-----------------------------
2003 2002
------------- -------------
EBITDA CALCULATION
Net loss per GAAP $ (263,000) $ (166,000)
Interest expense (net) 93,000 129,000
Depreciation and amortization 1,065,000 1,250,000
Income taxes 8,000 --
------------- -------------
EBITDA $ 903,000 $ 1,213,000
============= =============
On a segment basis, our two segments generated EBITDA levels as presented below:
THREE MONTHS ENDED MARCH 31, 2003
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL
------------- ------------- -------------
Net income (loss) $ 680,000 $ (943,000) $ (263,000)
Interest expense (net) 93,000 -- 93,000
Depreciation and amortization 921,000 144,000 1,065,000
Income taxes 8,000 -- 8,000
------------- ------------- -------------
EBITDA $ 1,702,000 $ (799,000) $ 903,000
============= ============= =============
THREE MONTHS ENDED MARCH 31, 2002
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL
------------- ------------- -------------
Net income (loss) $ 544,000 $ (710,000) $ (166,000)
Interest expense (net) 129,000 -- 129,000
Depreciation and amortization 1,051,000 199,000 1,250,000
Income taxes -- -- --
------------- ------------- -------------
EBITDA $ 1,724,000 $ (511,000) $ 1,213,000
============= ============= =============
13
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had cash and cash equivalents of $1,929,000 and
working capital (current assets in excess of current liabilities) of $2,038,000,
compared to cash and cash equivalents of $577,000 and working capital of
$564,000 at December 31, 2002. Net cash provided by operations was $922,000 for
the three months ended March 31, 2003 and $544,000 for the three months ended
March 31, 2002. Depreciation, amortization and other non-cash charges offset the
net loss in each period.
Net cash used in investing activities was $215,000 for the three months
ended March 31, 2003 compared with $347,000 for the three months ended March 31,
2002. Included in net cash used in investing activities for the three months
ended March 31, 2003 was $154,000 in capital expenditures and $61,000 in
software development expenditures.
Net cash provided by financing activities was $645,000 for the three months
ended March 31, 2003 compared to $105,000 for the three months ended March 31,
2002. The cash provided by financing activities for the three months ended March
31, 2003 included $975,000 of proceeds from issuance of common stock net of
offering expenses and $25,000 of proceeds from the exercise of warrants. These
proceeds were partially offset by cash used in financing activities which
included $296,000 of net principal payments on the revolving line of credit and
$59,000 of principal payments on capital leases.
BENNETT INVESTMENT
On January 15, 2003, we issued and sold 1,000,000 shares of restricted
common stock through a private offering to Robert M. Bennett, one of our
directors, at a price per share of $1.00. Pursuant to the terms of the
transaction, upon receipt of $1.0 million from Mr. Bennett, we issued the
restricted shares along with fully vested warrants to purchase 500,000 shares of
common stock at $1.15 per share, exercisable through January 15, 2008.
CONVERTIBLE SENIOR SUBORDINATED NOTES
On February 1, 2003, $2,000,000 of convertible senior subordinated notes
converted into 1,568,628 shares of our common stock based on the agreed
conversion price of $1.275 per share.
REVOLVING LINE OF CREDIT
On February 4, 2003, we amended our revolving line of credit with Coast
Business Credit ("Coast") to extend the maturity date on the line of credit from
June 30, 2003 to June 30, 2004. The amendment also eliminated the previously
scheduled March 31, 2003 $250,000 paydown on the line of credit, deleted the
trailing cash flow multiplier element of the borrowing base and modified the
cash flow oriented covenants. We agreed to pay Coast a renewal fee of $30,000 on
July 1, 2003 in association with this amendment. There were no changes to the
interest rate in this amendment.
On February 7, 2003, Coast and its parent company, Southern Pacific Bank,
were seized by the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC
is currently acting as a trustee for Coast and is in the process of selling off
Coast's loan portfolio to other lending institutions. We were informed on May
14, 2003 that our credit line had been purchased by GF Asset Management, LLC, a
subsidiary of GE Capital. There could be some delays in funding during the
transition period, but we do not expect the delays to impact us significantly.
INVESTMENT IN BUZZTIME
On June 8, 2001, an affiliate of Scientific-Atlanta invested $1,000,000 in
Buzztime for 636,943 shares of its Series A preferred stock, representing 6% of
Buzztime's capitalization on an as-converted basis, and warrants to obtain an
additional 159,236 shares of its Series A preferred stock. Each share of Series
A preferred stock was initially convertible into one share of Buzztime common
stock and entitled to a non-cumulative dividend of 8%, if, and when as declared
by Buzztime's board of directors. The exercise price of the warrants for Series
A preferred stock is $1.57 per share. However, the warrants vest in 10%
increments only as cable system operators sign on by executing a distribution
agreement for the Buzztime channel.
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 were only to
14
be used towards development of the application for Scientific-Atlanta and
fulfillment of Buzztime's obligations under the development agreement. In March
2003, we entered into a letter agreement with Scientific-Atlanta, Inc. providing
for termination of certain provisions of the development, license and marketing
agreement as well as for the sale and license by Scientific-Atlanta to Buzztime
of certain equipment and related software and the provision by
Scientific-Atlanta to Buzztime of certain training and application developer
support services to enable Buzztime to develop and operate the Buzztime Channel
on Scientific-Atlanta's Explorer set-top network for distribution by cable
operators to their subscribers.
We granted Scientific-Atlanta the right to exchange its shares of Series A
preferred stock into shares of NTN common stock if (i) Buzztime did 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. On January 16,
2003, Scientific-Atlanta converted its shares of Series A preferred stock into
1,000,000 shares of NTN common stock at a conversion price of $1.00 per share.
LISTING ON AMERICAN STOCK EXCHANGE
On May 1, 2003, we received a letter from the American Stock Exchange
(AMEX) stating that NTN is now in compliance with AMEX listing standards. In our
SEC filings over the past year, we have disclosed that we needed to achieve $6
million of shareholders equity to be in compliance with AMEX listing standards.
However, as a result of new AMEX rules effective January 2003, we are now in
compliance. The new rules permit a company to remain listed on AMEX if, like
NTN, it has a total market capitalization of at least $50 million, has at least
1.1 million shares publicly held, has a market value of publicly held shares of
at least $15 million and has a minimum of 400 round lot shareholders.
In the event we no longer satisfy the requirements of the new rule (from
subsequent changes in market capitalization or otherwise), we would be subject
to other AMEX listing requirements for companies that have not reported profits
during the past five years, including a requirement of at least $6 million in
shareholders' equity. As of March 31, 2003, we would not satisfy such a
requirement, with only $5.0 million in shareholders' equity.
INCREASE IN AUTHORIZED SHARES
On May 2, 2003 at our Annual Shareholders' Meeting, a proposal to amend our
restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 70 million shares to 84 million shares was approved.
MEDIA GENERAL INVESTMENT
On May 7, 2003, Media General, Inc., a communications company with
interests in newspapers, television stations, interactive media and diversified
information services, made a $3 million strategic investment in NTN. This
investment provides us with additional capital. In return for the investment, we
issued and sold 2,000,000 shares of restricted NTN common stock through a
private offering to Media General at a price per share of $1.50. Pursuant to the
terms of the transaction, upon receipt of $3 million from Media General, we
issued the restricted shares along with fully vested warrants to purchase
500,000 shares of Buzztime common stock at $3.46 per share, exercisable through
May 7, 2007.
Additionally, we issued 666,667 shares of restricted NTN common stock,
valued at $1 million, to license selected technology and content from Media
General to add additional game content to the Buzztime interactive television
game channel. The license includes a 5-year exclusive interactive television
license to certain intellectual property, with options to extend the license. In
connection with the investment, we appointed Neal F. Fondren, Vice President of
Media General and President of Media General's Interactive Media Division to our
Board of Directors.
FUTURE FINANCING NEEDS
We believe that the recent $3 million investment by Media General will
satisfy our requirements for additional financing in 2003 and likely several
additional quarters. The investment raises currently available cash on hand to
over $5 million given the outstanding balance on our credit line of
approximately $2 million. Generally, our financing requirements will depend upon
the growth of our two business segments.
Future capital investment for our new satellite network, new installations
and for Buzztime may cause us to once again be a user of cash, though we
currently do not anticipate being a net user of greater than $2 million in 2003.
We expect the level of expenditures in
15
Buzztime to rise over 2003 as we have entered the deployment phase with SusCom
in York, Pennsylvania and Time Warner in Portland, Maine 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, the combination of the Media
General investment, the Bennett investment and our line of credit, will allow us
to continue to fund Buzztime at least through the third quarter of 2004 at
current operational levels. 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
to more quickly advance our distribution within the U.S. market, which likely
will require additional capital in 2004 and/or 2005. We also 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.
The NTN Network has transmitted its data through the FM2 satellite platform
for more than ten years. That arrangement is scheduled to end in February 2005.
We have entered into equipment purchase and satellite service agreements to
convert the NTN Network to a much higher speed, two-way VSAT (Very Small
Aperture Technology) satellite technology over the two-year period ending
February 2005. These agreements are with the same reseller of satellite services
that provided the FM2 satellite platform to us. This anticipated conversion to a
two-way satellite technology will be a significant use of capital resources. We
believe that the conversion of customer locations may require incremental
capital expenditures of $3.0 to $4.5 million and increased cash operating
expenses (including estimated installation costs) of $2.0 to $2.5 million over
the two-year conversion period, which will lower our historical positive cash
flow. During the two-year conversion period, we believe that this conversion
will also have a moderately adverse impact on our earnings when compared with
what earnings would be without the expenditures.
Following the two-year conversion period, we believe that the cost of
installing and operating the two-way satellite network will be offset both
through expense reductions and by revenue enhancements. In the longer term, we
believe that this conversion will increase our earnings potential.
We are also considering adding to our product line certain other business
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.
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 March 31, 2003, we owned common stock of
an Australian company that is subject to market risk. At March 31, 2003, the
carrying value of this investment was $182,000, which is net of a $635,000
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 March 31, 2003, a hypothetical
10% decline in the value of the Australian dollar would result in a reduction of
$18,000 in the carrying value of the investment.
We have outstanding 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 March 31, 2003, a hypothetical one-percentage point increase in the prime
rate would result in an increase of $20,000 in annual interest expense for line
of credit borrowings.
ITEM 4. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures", as such term is defined
under Exchange Act Rule 13a-14(c), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. We
have carried out an evaluation, within the 90 days prior to the date of filing
of this report, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon their evaluation and subject to the
16
foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that there were no significant deficiencies or material weaknesses in the our
disclosure controls and procedures and therefore there were no corrective
actions taken.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date we
completed our evaluation.
PART II. OTHER INFORMATION
ITEM 1. 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.
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. ("IN"). We reached a resolution with IN 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 us. 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 relate only to the broadcast of the NTN
Network to subscribers of our Canadian licensee and do not extend to our network
operations in the United States or elsewhere. In April 2002, Two Way TV (US),
Inc., was created as a joint venture between IN and Two Way TV Limited. Two Way
TV (US) was incorporated in Delaware on January 10, 2000 to develop and market
IN's patent portfolio and Two Way TV Limited's content, technology and patents
for digital interactive services. As a result of a merger with IN, Two Way TV
(US) now owns and controls all of IN's intellectual property. To date, IN has
deposited a total of $140,000 Canadian currency with the Canadian Court in
compliance with Court order as security for costs to be incurred by us in
defense of the action. We are awaiting assignment of a trial date and have been
advised that the Court is currently scheduling trials for the 2004 calendar. We
intend to continue to defend the action vigorously.
LONG RANGE SYSTEMS
On March 21, 2003, Long Range Systems, Inc. ("LRS") filed, in the United
States District Court, Northern District of Texas, a patent infringement
complaint against our NTN Wireless subsidiary. This complaint alleged trade
dress and patent infringement and unfair competition. This complaint relates
only to our repair and replacement activities of LRS pagers, which is not a
significant percentage of our NTN Wireless business. On May 9, 2003, we filed
with the court a motion to dismiss the LRS complaint. We do not believe that
this matter represents a significant level of exposure and intend to defend
vigorously.
On or about April 23, 2003, we filed a complaint in the Superior Court of
the State of California, County of San Diego, against LRS alleging defamation
and trade libel, intentional interference with prospective economic advantage,
Lanham Act (trademark violations) and California unfair competition. Our
complaint alleges that LRS made false statements in its complaint and press
release regarding our products infringing LRS patents, that LRS intentionally
made false statements to disrupt our business relationships with our clients,
and that LRS registered the domain name: WWW.NTNWIRELESS.COM in violation of our
trademark rights.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 4, 2003 and February 1, 2003, we issued approximately 40,000 and
15,000 shares of NTN common stock, respectively, to the holders of the
outstanding 8% senior convertible notes, as payment of interest of approximately
$54,000 on such notes.
On January 1, 2003 and February 1, 2003, we issued approximately 13,000 and
18,000 shares of treasury stock, respectively, in lieu of a cash payment of
approximately $30,000 for board of directors' compensation.
On January 15, 2003, we issued and sold 1,000,000 shares of restricted NTN
common stock through a private offering to Robert M. Bennett, one of our
directors, at a price per share of $1.00. Pursuant to the terms of the
transaction, upon receipt of $1.0 million from Mr. Bennett, we issued the
restricted shares along with fully vested warrants to purchase 500,000 shares of
NTN common stock at $1.15 per share, exercisable through January 15, 2008.
17
On January 16, 2003, the 636,943 shares of Buzztime Series A preferred
stock were converted to 1,000,000 shares of NTN common stock. For purposes of
the exchange, the liquidation preference was $1.57 per share of Buzztime Series
A preferred stock. The conversion price of the NTN common stock was $1.00 per
share.
On February 1, 2003, the remaining $2,000,000 of convertible senior
subordinated notes converted into 1,568,628 shares of NTN common stock based on
the agreed conversion price of $1.275 per share.
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 2, 2003. The following
matters were voted upon at such meeting:
1. To elect three directors to hold office until the 2006 annual meeting of
stockholders and until their respective successors are duly elected and
qualified:
GARY ARLEN
Votes in Favor.....31,623,447
Abstentions ................0
VINCENT A. CARRINO
Votes in Favor.....30,882,590
Abstentions ................0
MICHAEL FLEMING
Votes in Favor.....31,623,447
Abstentions ................0
Each of Mr. Arlen, Mr. Carrino and Mr. Fleming were elected as directors to
hold office until the annual meeting of stockholders in 2006 and until each of
their respective successors is duly elected and qualified. The following
directors were not subject to election and their term of office continued after
the meeting: Barry Bergsman, Robert M. Bennett, Robert Clasen, Stanley B. Kinsey
and Esther Rodriquez.
2. To amend our Restated Certificate of Incorporation to increase the authorized
number of shares of our capital stock:
Votes In Favor ..........27,074,377
Votes Against ............5,183,279
Abstentions .................15,298
The proposal to amend our Restated Certificate of Incorporation to increase the
authorized number of shares of our capital stock was approved.
3. To ratify the appointment of KPMG LLP as independent accountants of NTN for
the fiscal year ending December 31, 2003.
Votes In Favor ..........31,068,013
Votes Against ..............222,604
Abstentions ................279,877
The proposal for ratification of the appointment of KPMG LLP was approved.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.1 Warrant Certificate issued January 13, 2003 by NTN Communications, Inc. to
Robert M. and Marjie Bennett, Trustees The Bennett Family Trust dated
11-17-86 (1)
4.2 Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange of
Buzztime Preferred Stock for NTN Common Stock, dated January 16, 2003 (1)
10.1 Subscription Agreement dated January 13, 2003 between NTN Communications,
Inc. and Robert M. and Marjie Bennett, Trustees The Bennett Family Trust
dated 11-17-86 (1)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (1)
- -------------
(1) Filed herewith.
(b) Reports on Form 8-K.
On January 15, 2003, we filed a Current Report on Form 8-K (event date
January 15, 2003) to report under Item 5 (Other Events).
On January 22, 2003, we filed a Current Report on Form 8-K (event date
January 16, 2003) to report under Item 5 (Other Events).
On February 3, 2003 we filed a Current Report on Form 8-K (event date
February 1, 2003) to report under Item 5 (Other Events).
19
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: May 15, 2003 By: /S/ JAMES B. FRAKES
-----------------------------------
James B. Frakes
Authorized Signatory and Chief
Financial Officer
20
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULE 13A-14 OF THE EXCHANGE ACT OF 1934
I, Stanley B. Kinsey, Chief Executive Officer of NTN Communications, Inc. (the
"Company") certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
o presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003 /s/ STANLEY B. KINSEY
Stanley B. Kinsey,
Chairman and Chief Executive Officer
NTN Communications, Inc.
21
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULE 13A-14 OF THE EXCHANGE ACT OF 1934
I, James B. Frakes, Chief Financial Officer of NTN Communications, Inc. (the
"Company") certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
o presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003 /s/ JAMES B. FRAKES
James B. Frakes,
Chief Financial Officer
NTN Communications, Inc.
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
4.1 Warrant Certificate issued January 13, 2003 by NTN Communications, Inc. to
Robert M. and Marjie Bennett, Trustees The Bennett Family Trust dated
11-17-86 (1)
4.2 Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange of
Buzztime Preferred Stock for NTN Common Stock, dated January 16, 2003 (1)
10.1 Subscription Agreement dated January 13, 2003 between NTN Communications,
Inc. and Robert M. and Marjie Bennett, Trustees The Bennett Family Trust
dated 11-17-86 (1)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (1)
- ----------
(1) Filed herewith.
23