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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 September 30, 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
At October 31, 2003, the registrant had outstanding 47,473,000 shares of
common stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
SEPTEMBER 30,
2003 DECEMBER 31,
ASSETS (PLEDGED) (UNAUDITED) 2002
------------- -------------
Current assets:
Cash and cash equivalents $ 2,499,000 $ 577,000
Restricted cash -- 102,000
Accounts receivable, net 2,617,000 2,013,000
Inventory 438,000 241,000
Investment available for sale 168,000 178,000
Deferred costs 407,000 492,000
Prepaid expenses and other current assets 648,000 581,000
------------- -------------
Total current assets 6,777,000 4,184,000
Broadcast equipment and fixed assets, net 4,752,000 5,141,000
Software development costs, net 676,000 591,000
Deferred costs 443,000 370,000
Intangible assets 6,005,000 499,000
Other assets 57,000 57,000
------------- -------------
Total assets $ 18,710,000 $ 10,842,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,265,000 $ 657,000
Accrued expenses 1,879,000 1,177,000
Sales tax payable 298,000 284,000
Income taxes payable 14,000 30,000
Obligations under capital leases 147,000 184,000
Equipment note payable 45,000 --
Revolving line of credit 1,000,000 89,000
Deferred revenue - Hospitality Technologies 1,695,000 1,199,000
Deferred revenue -- Buzztime 226,000 --
------------- -------------
Total current liabilities 6,569,000 3,620,000
Obligations under capital leases, excluding current portion 160,000 199,000
Revolving line of credit -- 2,250,000
8% Senior subordinated convertible notes -- 1,997,000
Deferred revenue - Hospitality Technologies 274,000 653,000
Equipment note payable 191,000 --
------------- -------------
Total liabilities 7,194,000 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
September 30, 2003 and December 31, 2002 1,000 1,000
Common stock, $.005 par value, 84,000,000 and
70,000,000 shares authorized; 47,473,000 and
39,381,000 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively 236,000 196,000
Additional paid-in capital 92,826,000 81,211,000
Accumulated deficit (80,898,000) (79,079,000)
Accumulated other comprehensive loss (649,000) (639,000)
Treasury stock, at cost, 0 and 49,000 shares at
September 30, 2003 and December 31, 2002, respectively -- (210,000)
------------- -------------
Total shareholders' equity 11,516,000 1,480,000
------------- -------------
Total liabilities and shareholders' equity $ 18,710,000 $ 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 NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues:
Hospitality Technologies revenues $ 7,157,000 $ 6,491,000 $21,127,000 $18,458,000
Buzztime service revenues 107,000 23,000 172,000 106,000
Other revenues 3,000 2,000 8,000 7,000
------------- ------------- ------------- -------------
Total revenues 7,267,000 6,516,000 21,307,000 18,571,000
------------- ------------- ------------- -------------
Operating expenses:
Direct operating costs (includes depreciation
of $652,000, $846,000, $2,123,000 and
$2,541,000 for the three months ended
September 30, 2003 and 2002 and for the nine
months ended September 30, 2003 and 2002,
respectively) 2,817,000 2,494,000 8,309,000 7,281,000
Selling, general and administrative 4,822,000 4,191,000 13,561,000 11,585,000
Depreciation and amortization 329,000 417,000 908,000 1,195,000
Research and development 80,000 2,000 244,000 11,000
------------- ------------- ------------- -------------
Total operating expenses 8,048,000 7,104,000 23,022,000 20,072,000
------------- ------------- ------------- -------------
Operating loss (781,000) (588,000) (1,715,000) (1,501,000)
------------- ------------- ------------- -------------
Other income (expense):
Interest income 1,000 -- 4,000 6,000
Interest expense (33,000) (125,000) (200,000) (379,000)
Gain on early extinguishment of debt 105,000 -- 105,000 --
------------- ------------- ------------- -------------
Total other income (expense), net 73,000 (125,000) (91,000) (373,000)
------------- ------------- ------------- -------------
Loss before minority interest in loss of
consolidated subsidiary and income taxes (708,000) (713,000) (1,806,000) (1,874,000)
Minority interest in loss of consolidated
subsidiary -- 58,000 10,000 155,000
------------- ------------- ------------- -------------
Loss before income taxes (708,000) (655,000) (1,796,000) (1,719,000)
Provision for income taxes 8,000 34,000 23,000 34,000
------------- ------------- ------------- -------------
Net loss $ (716,000) $ (689,000) $(1,819,000) $(1,753,000)
============= ============= ============= =============
Net loss per common share - basic and diluted: $ (0.02) $ (0.02) $ (0.04) $ (0.04)
============= ============= ============= =============
Weighted average shares outstanding - basic and
diluted 46,939,000 39,270,000 44,601,000 38,999,000
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
Cash flows provided by operating activities:
Net loss $ (1,819,000) $ (1,753,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 3,031,000 3,736,000
Provision for doubtful accounts 254,000 311,000
Non-cash stock-based compensation charges 153,000 71,000
Gain on early extinguishment of debt (105,000) --
Minority interest in loss of consolidated subsidiary (10,000) (155,000)
Non-cash interest expense 14,000 120,000
Accreted interest expense 3,000 29,000
Loss from disposition of equipment 62,000 114,000
Changes in assets and liabilities, net of
effects of acquisitions:
Restricted cash 102,000 (51,000)
Accounts receivable (497,000) (532,000)
Inventory (151,000) (34,000)
Deferred costs 12,000 159,000
Prepaid expenses and other assets (69,000) 45,000
Accounts payable and accrued expenses 886,000 (169,000)
Income taxes payable (16,000) 23,000
Deferred revenue (136,000) (812,000)
------------- -------------
Net cash provided by operating activities 1,714,000 1,102,000
------------- -------------
Cash flows from investing activities:
Capital expenditures and software development (1,611,000) (1,058,000)
Acquisition of businesses (570,000) (102,000)
Deposits on broadcast equipment -- 31,000
------------- -------------
Net cash used in investing activities (2,181,000) (1,129,000)
------------- -------------
Cash flows from financing activities:
Principal payments on capital leases (163,000) (152,000)
Principal payments on notes payable for VSAT equipment (310,000) --
Borrowings from revolving line of credit 15,631,000 17,660,000
Principal payments on revolving line of credit (16,865,000) (18,243,000)
Proceeds from issuance of common stock,
net of offering expenses 3,723,000 --
Proceeds from exercise of stock options and warrants 373,000 133,000
------------- -------------
Net cash provided by (used in) financing activities 2,389,000 (602,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents 1,922,000 (629,000)
Cash and cash equivalents at beginning of period 577,000 1,296,000
------------- -------------
Cash and cash equivalents at end of period $ 2,499,000 $ 667,000
============= =============
See accompanying notes to unaudited consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Continued)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 200,000 $ 229,000
============= =============
Income taxes $ 39,000 $ --
============= =============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest $ 54,000 $ 120,000
============= =============
Equipment acquired under capital leases and notes payable $ 696,000 $ 87,000
============= =============
Unrealized holding loss on investments $ (10,000) $ (24,000)
============= =============
Issuance of treasury stock in payment of board compensation $ 55,000 $ 43,000
============= =============
Issuance of common stock in payment of dividends $ 8,000 $ 8,000
============= =============
Conversion of Senior Subordinated Notes into common stock $ 2,000,000 $ --
============= =============
Conversion of Buzztime Preferred Series A into common stock $ 633,000 $ --
============= =============
Issuance of common stock for licensed technology $ 1,720,000 $ --
============= =============
Supplemental non-cash disclosure of acquisition of
businesses:
Accounts receivable (net) $ 361,000 $ 121,000
Inventory 46,000 89,000
Fixed assets 108,000 38,000
Intangible assets 3,840,000 521,000
Accounts payable & accrued liabilities (697,000) (244,000)
Deferred revenue (479,000) (31,000)
Line of credit -- (72,000)
Common stock issued (3,154,000) (320,000)
See accompanying notes to unaudited consolidated financial statements
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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 wholly-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 and nine months
ended September 30, 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 our
handheld, wireless Playmaker(R) devices and computer servers located at
our customer sites. The Playmakers are depreciated over a four-year life
and the servers 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
o We assess our inventory for estimated obsolescence or unmarketable
inventory and write down the difference between the cost of inventory
and the estimated market value based upon assumptions about future sales
and supply on-hand. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may be
required.
o Revenues from sales of software generally contain multiple elements, and
are recognized in accordance with Statement of Position ("SOP") No.
97-2, "SOFTWARE REVENUE RECOGNITION", as amended. Along with the basic
software license agreement purchase, customers generally are provided
annual support and maintenance (PCS) for an additional fee based on a
stipulated percentage of the license fee. In order to continue to use
the licensed software, customers are required to annually renew the PCS
contracts. As vendor specific objective evidence does not exist for this
PCS, we recognize the entire arrangement fee ratably over the life of
the contract.
o Revenue from development services consists of customizations and,
therefore, we recognize revenue from development services as the
services are performed under the agreements. We recognize revenues from
post-contract customer support, such as maintenance, on a straight-line
basis over the term of the contract.
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 No. 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, SFAS No. 148 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 apply 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. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net loss As reported........................ $ 716,000 $ 689,000 $ 1,819,000 $ 1,753,000
Add: stock-based employee
compensation expense included
in reported net loss, net of
related tax effects 1,000 1,000 5,000 5,000
Deduct: stock-based employee
compensation expense using fair
value method, net of related
tax effects 303,000 194,000 845,000 655,000
------------- ------------- ------------- -------------
Pro forma.......................... $ 1,018,000 $ 882,000 $ 2,659,000 $ 2,403,000
Basic and diluted As reported........................ $ 0.02 $ 0.02 $ 0.04 $ 0.04
net loss per share
Pro forma.......................... $ 0.02 $ 0.02 $ 0.06 $ 0.06
7
The per share weighted-average fair value of stock options granted during
the three months ended September 30, 2003 and 2002 was $1.51 and $0.65,
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 2.65%, expected volatility of 97%, and expected life of 3.8 years; and
2002 -- dividend yield of 0%, risk-free interest rate of 2.55%, expected
volatility of 108%, and expected life of 3.0 years. In compliance with APB No.
25, we expensed $1,000 for the three months ended September 30, 2003 and 2002,
associated with the grants of 80,000 options in 2000 at exercise prices below
market value pursuant to the Option Plan. No options were granted at exercise
prices below market value in 2003 and 2002 pursuant to the Option Plan.
The per share weighted-average fair value of stock options granted during
the nine months ended September 30, 2003 and 2002 was $0.98 and $0.79,
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 2.62%, expected volatility of 109%, and expected life of 4.2 years; and
2002 -- dividend yield of 0%, risk-free interest rate of 4.25%, expected
volatility of 124%, and expected life of 4.7 years. In compliance with APB No.
25, we expensed $5,000 for the nine months ended September 30, 2003 and 2002,
associated with the grants of 80,000 options in 2000 at exercise prices below
market value pursuant to the Option Plan. No options were granted at exercise
prices below market value in 2003 and 2002 pursuant to the Option Plan.
3. INCOME (LOSS) PER SHARE
For the three months and nine months ended September 30, 2003 and 2002,
options, warrants, convertible preferred stock and convertible notes
representing approximately 12,376,000, 12,151,000, 12,255,000 and 12,278,000
potential common shares, respectively, have been excluded from the computation
of net loss per share, as their effect was anti-dilutive.
4. SEGMENT INFORMATION
Our operations are to develop and distribute interactive communications and
entertainment products for the home and for the hospitality industry. 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
Buzztime segment and the NTN Network, NTN Wireless and NTN Software Solutions
segments, which combine to form the NTN Hospitality Technologies division. NTN
Hospitality Technologies revenue is generated primarily from providing an
interactive entertainment service which serves as a marketing and promotional
vehicle for the hospitality industry, from advertising sold for distribution via
the interactive entertainment service, from its wireless business with
restaurant on-site paging systems, stored-value gift cards and loyalty programs
and electronic data-managed comment cards and from its hardware and software
enterprise solutions. NTN Hospitality Technologies revenues comprise 99% of our
total revenue for the three months and nine months ended September 30, 2003 and
2002. Buzztime's revenue is primarily generated from the distribution of its
digital trivia game show content and "Play-Along" sports games as well as
revenue related to production services for third parties and from performance
under a Trial Agreement with a major cable operator (see Note 6). Included in
the operating loss and depreciation and amortization for both NTN Hospitality
Technologies 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:
8
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
-------------- ------------- ------------- -------------
Revenues
NTN Network (includes "other revenues") $ 5,614,000 $ 5,802,000 $16,836,000 $17,013,000
NTN Wireless 962,000 691,000 3,715,000 1,452,000
NTN Software Solutions 584,000 -- 584,000 --
-------------- ------------- ------------- -------------
NTN Hospitality Technologies division 7,160,000 6,493,000 21,135,000 18,465,000
Buzztime 133,000 23,000 198,000 106,000
Eliminations (26,000) -- (26,000) --
-------------- ------------- ------------- -------------
Total revenue $ 7,267,000 $ 6,516,000 $21,307,000 $18,571,000
============== ============= ============= =============
Operating income (loss)
NTN Network $ 504,000 $ 446,000 $ 1,453,000 $ 1,115,000
NTN Wireless (96,000) (65,000) (79,000) (26,000)
NTN Software Solutions (321,000) -- (321,000) --
-------------- ------------- ------------- -------------
NTN Hospitality Technologies division 87,000 381,000 1,053,000 1,089,000
Buzztime (868,000) (969,000) (2,768,000) (2,590,000)
-------------- ------------- ------------- -------------
Operating loss $ (781,000) $ (588,000) $(1,715,000) $(1,501,000)
============== ============= ============= =============
Net income (loss)
NTN Network $ 569,000 $ 287,000 $ 1,340,000 $ 708,000
NTN Wireless (96,000) (65,000) (80,000) (26,000)
NTN Software Solutions (321,000) -- (321,000) --
-------------- ------------- ------------- -------------
NTN Hospitality Technologies division 152,000 222,000 939,000 682,000
Buzztime (868,000) (911,000) (2,758,000) (2,435,000)
-------------- ------------- ------------- -------------
Net loss $ (716,000) $ (689,000) $(1,819,000) $(1,753,000)
============== ============= ============= =============
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
Total assets
NTN Network $11,820,000 $ 9,380,000
NTN Wireless 550,000 672,000
NTN Software Solutions 3,637,000 --
------------- -------------
NTN Hospitality Technologies division 16,007,000 10,052,000
Buzztime 2,703,000 790,000
------------- -------------
Total assets $18,710,000 $10,842,000
============= =============
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
$480,000 U.S. dollars as of September 30, 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. 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. A payment of $200,000 was received during the
three months ended September 30, 2003. 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. During the three and nine
month periods ended September 30, 2003, we recognized $100,000 and $150,000,
respectively, of revenue related to this agreement. The remaining 50% of the two
payments received to date, or $150,000, is reflected as deferred
revenue-Buzztime on the accompanying consolidated balance sheet. The remainder
of the deferred revenue - Buzztime on the accompanying consolidated balance
sheet relates to deferred revenue arising from our agreement with Digeo
Interactive LLC (Digeo).
9
In March 2003, we entered into an agreement with Digeo, a producer and
distributor of interactive television (iTV) products and services to provide
three one-way, single-player games to the subscribers of Charter Digital Cable.
We received an initial payment of $26,000 under the agreement during the three
months ended June 30, 2003. Following the delivery and acceptance of the three
games, we received an additional $26,000. We also received an additional $15,000
for a fourth game produced in the three months ended September 30, 2003. We
began to recognize this revenue ratably over the two-year life of the Digeo
agreement upon delivery and acceptance of the three games in September 2003.
7. BENNETT INVESTMENT
On January 15, 2003, we issued and sold 1,000,000 shares of unregistered
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
unregistered 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. Based on the two Buzztime deployments with
SusCom, 20% of the warrants are vested as of September 30, 2003.
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 occurred 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 occurred 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. MEDIA GENERAL INVESTMENT
On May 6, 2003, Media General, Inc., a communications company with interests
in newspapers, television stations, interactive media and diversified
information services, made a $3.0 million investment in NTN. In return for the
investment, we issued and sold 2,000,000 shares of unregistered NTN common stock
through a private offering to Media General. Pursuant to the terms of the
transaction, upon receipt of $3.0 million from Media General, we issued the
unregistered 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. In
connection with the Buzztime common stock, the parties agreed that Media General
would have co-sale rights and NTN would have certain drag-along rights. Media
General has the right to convert each share of Buzztime common stock into two
shares of NTN common stock (subject to adjustment ) on the second and fourth
anniversaries of the transaction date, in the event of a sale of NTN, upon
certain bankruptcy and other insolvency proceedings of Buzztime, and in certain
circumstances if NTN exercises its drag-along rights. Media General has the
further right to convert the warrant to purchase 500,000 shares of Buzztime
common stock into a warrant to purchase 1,000,000 shares of NTN common stock at
$1.73 per NTN share (subject to adjustment) in the event of bankruptcy or
insolvency of Buzztime. NTN has the right to require Media General to convert
its equity interests in Buzztime into equity interests in NTN if there is a sale
of NTN.
Simultaneous with the transaction described above, we issued 666,667 shares
of unregistered NTN common stock to license selected technology and content
(Boxerjam games) from Media General to add additional game content to the
Buzztime interactive television game channel and the NTN Network. The license
includes a 5-year exclusive interactive television license of certain
intellectual property, with options to extend the license for an additional 5
years. In September 2003, we entered into an amendment to the Boxerjam games
license with Media General pursuant to which we agreed to pay to Media General a
license fee in the amount
10
of $150,000 (or $50,000 more than the original amount of $100,000) in exchange
for the unilateral right to exercise the option to extend the Boxerjam games
license for an additional 5 years following the initial 5 year term on a
non-exclusive basis. Previously, that non-exclusive right was at Media General's
option. The renewal license fee may be paid to Media General in shares of NTN
common stock or, in the event Buzztime's common stock is publicly traded at the
time of such renewal, Buzztime shall issue a number of shares of Buzztime common
stock with an aggregate value of $150,000.
We recorded both transactions at the fair value of the consideration
exchanged on May 6, 2003, and utilized a third party valuation. We used the
publicly traded stock price, as of the date of the transactions, of $1.77 per
share to determine the $4,720,000 fair value of the shares issued. The
consideration allocated to the acquired Boxerjam game license was valued at
$1.72 million and is being amortized over the estimated contractual life of 10
years, which assumes, based on management's intent, we will exercise our five
year renewal option. We determined that, based on the lack of marketability of
Buzztime common stock and limited convertibility into NTN common stock, the fair
value of the Buzztime warrants was not material and no allocation of fair value
was made.
The terms of the transaction called for us to file a resale registration
statement with the Securities and Exchange Commission (SEC) to register the
2,666,667 shares issued to Media General. Subsequent to the transaction, we
filed the resale registration statement on which we also registered the Bennett
shares (note 7) and Scientific-Atlanta conversion shares (note 8) and the SEC
declared effective the resale registration statement in June 2003.
Also in connection with the investment, we agreed to increase the size of
our Board of Directors and appoint Neal F. Fondren, Vice President of Media
General and President of Media General's Interactive Media Division to fill the
vacancy. Media General's ability to maintain that seat on our Board of Directors
is subject to Media General retaining ownership of certain percentages of the
shares they purchased. Media General also received preemptive rights to purchase
on a pro rata basis any new securities that NTN or Buzztime may subsequently
offer. The preemptive rights also are dependent upon Media General maintaining
ownership of certain percentages of the shares they purchased.
11. AMERICAN STOCK EXCHANGE LISTING
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, the AMEX
determined that we were in compliance with their listing standards. 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. As of September 30,
2003, we had satisfied these requirements.
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. As of September 30, 2003, we had also met the
requirement of $6 million of shareholders' equity.
12. LINE OF CREDIT
On July 17, 2003 we paid off our revolving line of credit with GF Asset
Management, LLC, a subsidiary of GE Capital. The amount paid was approximately
$1,411,000 which is net of a 5% settlement discount of approximately $105,000,
which is recorded as a gain on early extinguishment of debt in the consolidated
statements of operations.
The existing line of credit was replaced on July 16, 2003 with a line of
credit of $1,000,000 with Pacific Mercantile Bank. Interest on the line is based
on an independent index which is the highest rate on corporate loans posted by
at least 75% of the USA's thirty largest banks known as The Wall Street
Journal's Prime rate (4% as of November 11, 2003). The interest rate to be
applied to the unpaid principal balance is 2% over the index, with an initial
rate of interest of 6%. The entire outstanding principal balance on the line
must be repaid for a period of thirty consecutive days during each fiscal year,
which was completed during the 3rd quarter, and matures on July 16, 2004. The
line of credit contains one financial covenant based on our cash flow coverage
of the balance on the line of credit. We were in compliance with that covenant
as of September 30, 2003. The line is secured by all inventories, equipment,
accounts receivable and various other assets.
11
13. ACQUISITION
On July 31, 2003, we acquired, through NTN Software Solutions, Inc.
(Software Solutions), a wholly owned subsidiary of NTN, all of the assets and
certain liabilities of Breakaway International, Inc. (Breakaway), a privately
held leading provider of restaurant industry hardware and software enterprise
solutions. We acquired Breakaway's assets for $25,000 in cash, 1,292,614 shares
of unregistered NTN common stock and the assumption of certain liabilities. NTN
will pay additional contingent earn-out amounts in NTN common stock and/or cash
over the next three years, provided that certain targets for earnings before
taxes are met for the acquired assets. The targeted amounts increase by 25% each
year. NTN also entered into employment agreements with five of the executives of
Breakaway.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Total consideration
for the acquisition was $3,338,000 which consists of 1,292,614 shares multiplied
by the then publicly traded price of $2.44 per share, $25,000 in cash and
$159,000 of transactions costs. A final allocation of the purchase price is
expected to be completed in the fourth quarter of 2003, upon receipt of the
third party valuation analysis. The final allocation is expected to include
adjustments to purchased software, customer list, non-compete agreement,
goodwill and deferred revenue. Breakaway's results of operations have been
included in NTN's consolidated statements of operations since August 1, 2003 and
include $90,000 of amortization of the estimated intangibles based upon
estimated lives of three to four years depending upon the asset. The notes
payable to related parties of $227,000 was paid in full as part of the agreement
after the closing date of July 31, 2003.
ASSETS ACQUIRED AND
LIABILITIES ASSUMED
BREAKAWAY INTERNATIONAL
-----------------------
Accounts receivable, net $ 361,000
Inventory 46,000
Fixed assets 108,000
Intangible assets 3,840,000
-------------
Total assets acquired 4,355,000
-------------
Accounts payable & accrued liabilities 470,000
Notes payable-related parties 227,000
Deferred revenue 479,000
-------------
Total liabilities assumed 1,179,000
-------------
Net assets acquired $ 3,179,000
=============
14. SUBSEQUENT EVENTS
On November 12, 2003, we signed a Letter of Intent to acquire the assets
and assume certain of the liabilities of our Canadian licensee, NTN Interactive
Network Inc., a wholly owned subsidiary of Chell Group Corporation. This
transaction is subject to the completion of definitive documentation, including
an Asset Purchase Agreement.
On November 13, 2003, NorthBay Opportunities, L.P. (formerly known as
BayStar Capital, L.P.) and NorthBay International Opportunities, Ltd. (formerly
known as BayStar International, Ltd.) exercised warrants to purchase shares of
our common stock in the amounts of 493,827 and 123,456 shares, respectively.
Those firms paid us approximately $1 million on November 13, 2003 in order to
exercise those warrants. These warrants were existing instruments that were
issued as part of a previous financing by those firms. The warrants were
scheduled to expire on November 14, 2003.
12
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 AND REGISTRATION STATEMENTS THAT 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 Hospitality Technologies division and our Buzztime Entertainment, Inc.
subsidiary ("Buzztime"). The NTN Hospitality Technologies division provides
entertainment promotional services and on-site communications and management
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 selling the Buzztime(R)
interactive television channel to U.S. cable TV operators.
THE NTN HOSPITALITY TECHNOLOGIES DIVISION
The NTN Hospitality Technologies division (the "Division") represents the
combination of the NTN Network, NTN Wireless and NTN Software Solutions
segments. 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 promotional platform providing interactive
trivia and play-along sports programming. Having now diversified our product
line, we believe that strong growth opportunities exist by offering our
interactive communications and entertainment services across an installed client
base of nearly 10,000 customers.
We have adopted the mission to become the leader in providing distributed
network systems comprised of interactive entertainment and marketing
communications 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 a full-service suite of products and services
across the establishment. These products and services include wireless
commercial communication services, hardware and software enterprise solutions,
additional entertainment services and devices, interactive employee 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.
A secondary aspect of our business involves selling advertising and other
marketing communications services to national, regional and local advertisers
that wish to reach restaurant patrons who are either playing or watching NTN's
interactive content.
13
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 Play Along TV(R) 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 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 June 2003,
we launched our third deployment on SusCom's Williamsport, Pennsylvania system.
In November 2003, we launched our fourth deployment on part of Comcast Cable's
Baltimore, Maryland cable system.
In addition, Buzztime remains the primary content provider to the NTN
Hospitality Technologies division and currently works with leading companies
such as Scientific-Atlanta, Inc., Media General, Inc., The National Football
League (NFL), Liberate Technologies, Microsoft Corporation's MSNTV and others to
bring consumers real-time interactive entertainment.
CORPORATE BUSINESS STRATEGIES
Our objective is to leverage our unique interactive entertainment as a means
of growing our two business segments--first, through the NTN Hospitality
Technologies division, as a leading provider of interactive communications and
entertainment offerings to the hospitality industry and second, via Buzztime, as
a leading developer and distributor of interactive entertainment for the in-home
market through interactive television and wireless devices. To accomplish our
objectives:
o We are pursuing strategies to increase revenues through current and
new revenue sources. The NTN Hospitality Technologies division
receives service revenue from subscribing out-of-home locations,
advertising and licensing revenue from third parties, and revenue from
the sale of communications products. We expect to continue generating
revenue through these sources by growing our customer base,
cross-selling our products to our nearly 10,000 customers, and
providing new and updated products and services on a regular basis.
o We plan to further develop and distribute the Buzztime Channel to
cable and satellite operators with the intent to become the first
nationally deployed interactive television game channel. As we gain
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. Having now become the first U.S. content provider
to deploy a two-way interactive television entertainment channel, we
have adapted or are planning to adapt our interactive trivia game show
content and technology to all 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 Both business segments may also explore market opportunities to
acquire complementary businesses to increase revenues and earnings. An
example is our 2002 acquisitions that created NTN Wireless, which
generated approximately $2.4 million in revenues from April through
December 2002 through sales of restaurant pagers; and our recent
acquisition of the assets of Breakaway International. Both entities
are now part of our NTN Hospitality Technologies division business
segment.
There can be no assurance, however, that we will be successful in executing
this strategy.
14
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
Operations for the three months ended September 30, 2003 resulted in a net
loss of $716,000 compared to a net loss of $689,000 for the three months ended
September 30, 2002.
REVENUES
Total revenues increased by $751,000 or 12%, to $7,267,000 for the three
months ended September 30, 2003 from $6,516,000 for the three months ended
September 30, 2002. This increase was primarily due to increases in NTN
Hospitality Technologies division revenues as shown in the following table:
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2003 2002
------------- --------------
NTN Hospitality Technologies Division Revenues $ 7,157,000 $ 6,491,000
Buzztime Revenues 107,000 23,000
Other Revenues 3,000 2,000
------------- --------------
Total Revenues $ 7,267,000 $ 6,516,000
============= ==============
NTN Hospitality Technologies division revenues increased by $666,000 or 10%,
to $7,157,000 for the three months ended September 30, 2003 from $6,491,000 for
the three months ended September 30, 2002. The increase is primarily related to
an increase in NTN Wireless sales of approximately $266,000 and includes
$584,000 in revenue from the newly acquired Software Solutions business. These
increases are offset by a $245,000 decrease in installation revenue due to
deferred revenue relating to installations becoming fully amortized over the
estimated three-year average life of a customer relationship.
Buzztime revenues were $107,000 for the three months ended September 30,
2003, compared to $23,000 for the three months ended September 30, 2002 due to
the recognition of revenue in 2003 under a Trial Agreement with a major cable
operator.
OPERATING EXPENSES
Direct operating costs increased by $323,000 or 13%, to $2,817,000 for the
three months ended September 30, 2003 from $2,494,000 for the three months ended
September 30, 2002. The significant component in the increase was the NTN
Wireless cost of goods sold, which increased by approximately $135,000 due to
the increase in NTN Wireless revenue. $70,000 of the increase was related to the
newly acquired Software Solutions business. Within the NTN Network unit, freight
and communications charges increased by $205,000 due to the first full quarter
of the deployment of VSAT equipment. Playmaker charges increased $58,000 due to
the start of the football season during which time more Playmakers are in use.
These increases were offset by a depreciation expense decrease of $194,000 due
to some of the digital broadcast equipment becoming fully depreciated, which, in
turn, was offset by an increase in amortization for Buzztime software. Marketing
site visits also decreased approximately $79,000 due to a scheduled reduction in
the onsite visits to the sites.
Selling, general and administrative expenses increased by $631,000 or 15%,
to $4,822,000 for the three months ended September 30, 2003 from $4,191,000 for
the three months ended September 30, 2002. Selling, general and administrative
expenses included an increase in payroll and related expenses of approximately
$662,000 as the head count increased, which includes the addition of the NTN
Wireless employees and Buzztime employees to support their initiatives as well
as the newly acquired Software Solutions business. Bad debt expense decreased
$175,000 due to payments being received by slow paying customers. Office lease
expenses increased $61,000 due to the expiration of our tenant sublease on our
facilities in Carlsbad on June 30, 2003 and also for the additional facilities
for Software Solutions. Various other expenses increased due to the expanded
facilities and business units.
Depreciation and amortization not related to direct operating costs
decreased $88,000, or 21%, to $329,000 for the three months ended September 30,
2003 from $417,000 for the three months ended September 30, 2002 due to certain
assets becoming fully depreciated.
Research and development expenses increased $78,000 to $80,000 for the three
months ended September 30, 2003 compared to $2,000 for the three months ended
September 30, 2002, due primarily to the development of the digital network and
VSAT initiatives.
15
INTEREST EXPENSE AND OTHER INCOME
Interest expense decreased 74% to $33,000 for the three months ended
September 30, 2003, compared to $125,000 for the three months ended September
30, 2002, primarily due to the conversion of the senior subordinated convertible
notes on February 1, 2003 and a reduction in the outstanding balance on the line
of credit.
Gain on early extinguishment of debt of $105,000 in the three months ended
September 30, 2003 arose out of a discount recorded on the payoff of the line of
credit with GF Asset Management, LLC.
MINORITY INTEREST AND TAXES
On January 16, 2003 Scientific-Atlanta converted its Buzztime preferred
stock investment into NTN common stock, thereby eliminating its minority
interest. Minority interest in loss of consolidated subsidiary was $58,000 for
the three months ended September 30, 2002.
The NTN Hospitality Technologies division expects to report taxable income
for the year ending December 31, 2003. For federal income tax reporting purposes
and in unitary states where NTN Hospitality Technologies may file on a combined
basis, taxable losses incurred by Buzztime should be sufficient to offset NTN
Hospitality Technologies' taxable income. In states where separate filing is
required, NTN Hospitality Technologies will likely incur a state tax liability.
As a result, NTN Hospitality Technologies recorded a state tax provision of
$8,000 in the third quarter of 2003. A state tax provision of $34,000 was
recorded in the third quarter of 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
Operations for the nine months ended September 30, 2003 resulted in a net
loss of $1,819,000 compared to a net loss of $1,753,000 for the nine months
ended September 30, 2002.
REVENUES
Total revenues increased by $2,736,000 or 15%, to $21,307,000 for the nine
months ended September 30, 2003 from $18,571,000 for the nine months ended
September 30, 2002. This increase was primarily due to NTN Hospitality
Technologies division revenues as shown in the following table:
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2003 2002
------------- --------------
NTN Hospitality TechnologiesDivision Revenues $ 21,127,000 $ 18,458,000
Buzztime Revenues 172,000 106,000
Other Revenues 8,000 7,000
------------- --------------
Total Revenues $ 21,307,000 $ 18,571,000
============= ==============
NTN Hospitality Technologies division revenues increased by $2,669,000 or
14%, to $21,127,000 for the nine months ended September 30, 2003 from
$18,458,000 for the nine months ended September 30, 2002. The increase is
primarily related to an increase in sales of $2.3 million by the NTN Wireless
business formed in the second quarter of 2002 and $584,000 in sales by the
Software Solutions business acquired on July 31, 2003. NTN Hospitality
Technologies site revenues increased by approximately $386,000 due to an
increase in the average billing rate per site. Advertising revenue decreased
approximately $400,000 for the nine months ended September 30, 2003 compared to
the nine months ended September 30, 2002.
Buzztime revenues were $172,000 for the nine months ended September 30,
2003, compared to $106,000 for the nine months ended September 30, 2002 due to
the recognition of revenue in 2003 under a Trial Agreement with a major cable
operator and to the expiration of certain contracts during 2002.
16
OPERATING EXPENSES
Direct operating costs increased by $1,028,000 or 14%, to $8,309,000 for the
nine months ended September 30, 2003 from $7,281,000 for the nine months ended
September 30, 2002. The increase is primarily due to an increase in NTN Wireless
cost of goods sold of approximately $1.4 million which is consistent with the
increase in NTN Wireless revenue and $70,000 from the newly acquired Software
Solutions business. Freight and communications charges increased by $263,000 due
to the deployment of VSAT equipment beginning in the second quarter of 2003.
Marketing site visit expense decreased by $293,000 due to a scheduled reduction
in the onsite visits to the sites. Depreciation expense decreased $418,000 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 $1,976,000 or 17%,
to $13,561,000 for the nine months ended September 30, 2003 from $11,585,000 for
the nine months ended September 30, 2002. Selling, general and administrative
expenses included an increase in payroll and related expenses of approximately
$1,000,000 as the head count increased, which includes the addition of the NTN
Wireless employees and Buzztime employees to support their initiatives as well
as the newly acquired Software Solutions business. Marketing expenses increased
$187,000 due to additional trade shows and advertising materials for NTN
Wireless and Software Solutions in addition to other client promotions.
Professional fees increased approximately $226,000 due to an increase in legal
expenses. Office lease expenses increased $61,000 due to the expiration of our
tenant sublease on our facilities in Carlsbad on June 30, 2003 and also for the
additional facilities for Software Solutions. Various other expenses increased
due to the expanded facilities and business units.
Depreciation and amortization not related to direct operating costs
decreased $287,000, or 24%, to $908,000 for the nine months ended September 30,
2003 from $1,195,000 for the nine months ended September 30, 2002 due to certain
assets becoming fully depreciated.
Research and development expenses increased $233,000 to $244,000 for the
nine months ended September 30, 2003, compared to $11,000 for the nine months
ended September 30, 2002, due primarily to the development of the digital
network and VSAT initiatives.
INTEREST EXPENSE AND OTHER INCOME
Interest expense decreased 47% to $200,000 for the nine months ended
September 30, 2003, compared to $379,000 for the nine months ended September 30,
2002, primarily due to the conversion of the senior subordinated convertible
notes on February 1, 2003 and a reduction in the outstanding balance on the line
of credit.
Gain on early extinguishment of debt of $105,000 in the three months ended
September 30, 2003 arose out of a discount recorded on the payoff of the line of
credit with GF Asset Management, LLC.
MINORITY INTEREST AND TAXES
Minority interest in loss of consolidated subsidiary decreased to $10,000
for the nine months ended September 30, 2003, compared to $155,000 for the nine
months ended September 30, 2002. On January 16, 2003 Scientific-Atlanta
converted its Buzztime preferred stock investment into NTN common stock, thereby
eliminating its minority interest.
NTN Hospitality Technologies expects to report taxable income for the year
ended December 31, 2003. For federal income tax reporting purposes and in
unitary states where NTN Hospitality Technologies may file on a combined basis,
taxable losses incurred by Buzztime should be sufficient to offset NTN
Hospitality Technologies' taxable income. In states where separate filing is
required, NTN Hospitality Technologies will likely incur a state tax liability.
As a result, NTN Hospitality Technologies recorded a state tax provision of
$23,000 for the nine months ended September 30, 2003, compared to $34,000 for
the nine months ended September 30, 2002.
EBITDA
Our earnings before interest, taxes, depreciation and amortization
("EBITDA") decreased by $428,000 to $305,000 for the three months ended
September 30, 2003 from EBITDA of $733,000 for the three months ended September
30, 2002. Our EBITDA decreased by $959,000 to $1,431,000 for the nine months
ended September 30, 2003 from EBITDA of $2,390,000 for the nine months ended
September 30, 2002.
17
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
EBITDA CALCULATION
Net loss per GAAP $ (716,000) $ (689,000) $ (1,819,000) $ (1,753,000)
Interest expense (net) 32,000 125,000 196,000 373,000
Depreciation and amortization 981,000 1,263,000 3,031,000 3,736,000
Income taxes 8,000 34,000 23,000 34,000
------------- ------------- ------------- --------------
EBITDA $ 305,000 $ 733,000 $ 1,431,000 $ 2,390,000
============= ============= ============= ==============
On a segment basis, our two segments generated EBITDA levels as presented below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
---------------------------------------- -----------------------------------------
EBITDA CALCULATION: HOSPITALITY HOSPITALITY
TECHNOLOGIES BUZZTIME TOTAL TECHNOLOGIES BUZZTIME TOTAL
------------ ------------ ------------ ------------ ------------ -------------
Net income (loss) $ 152,000 $ (868,000) $ (716,000) $ 939,000 $(2,758,000) $ (1,819,000)
Interest expense (net) 32,000 -- 32,000 196,000 -- 196,000
Depreciation and amortization 858,000 123,000 981,000 2,618,000 413,000 3,031,000
Income taxes 8,000 -- 8,000 23,000 -- 23,000
------------ ------------ ------------ ------------ ------------ -------------
EBITDA $ 1,050,000 $ (745,000) $ 305,000 $ 3,776,000 $(2,345,000) $ 1,431,000
============ ============ ============ ============ ============ =============
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
---------------------------------------- -----------------------------------------
EBITDA CALCULATION: HOSPITALITY HOSPITALITY
TECHNOLOGIES BUZZTIME TOTAL TECHNOLOGIES BUZZTIME TOTAL
------------ ------------ ------------ ------------ ------------ -------------
Net income (loss) $ 222,000 $ (911,000) $ (689,000) $ 682,000 $(2,435,000) $ (1,753,000)
Interest expense (net) 125,000 -- 125,000 373,000 -- 373,000
Depreciation and amortization 1,073,000 190,000 1,263,000 3,191,000 545,000 3,736,000
Income taxes 34,000 -- 34,000 34,000 -- 34,000
------------ ------------ ------------ ------------ ------------ -------------
EBITDA $ 1,454,000 $ (721,000) $ 733,000 $ 4,280,000 $(1,890,000) $ 2,390,000
============ ============ ============ ============ ============ =============
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had cash and cash equivalents of $2,499,000 and
working capital (current assets in excess of current liabilities) of $208,000,
compared to cash and cash equivalents of $577,000 and working capital of
$564,000 at December 31, 2002. At September 30, 2003, the $1 million balance on
our revolving line of credit was classified as a current liability due to its
expiration date of July 2004 compared to only $89,000 of the balance on our line
at December 31, 2002. This classification of all of the balance on our revolving
line of credit as a current liability as of September 30, 2003, in effect,
reduced our working capital position by $356,000 compared to December 31, 2002.
Net cash provided by operations was $1,714,000 for the nine months ended
September 30, 2003 and $1,102,000 for the nine months ended September 30, 2002.
Depreciation, amortization and other non-cash charges offset the net loss in
each period.
Net cash used in investing activities was $2,181,000 for the nine months
ended September 30, 2003 compared with $1,129,000 for the nine months ended
September 30, 2002. Included in net cash used in investing activities for the
nine months ended September 30, 2003 was $1,415,000 in capital expenditures,
$196,000 in capitalized software development expenditures and $570,000 for
acquisition of businesses.
18
Net cash provided by financing activities was $2,389,000 for the nine months
ended September 30, 2003 and net cash used in financing activities was $602,000
for the nine months ended September 30, 2002. The cash provided by financing
activities for the nine months ended September 30, 2003 included $3,723,000 of
proceeds from issuance of common stock net of offering expenses and $373,000 of
proceeds from the exercise of options. The $3,723,000 was raised in private
offerings with Robert M. Bennett, one of our directors, and Media General, Inc.
These proceeds were partially offset by cash used in financing activities which
included $1,234,000 of net principal payments on the revolving line of credit
and $473,000 of principal payments on capital leases and notes payable for VSAT
equipment.
REVOLVING LINE OF CREDIT
On July 17, 2003 we paid off our revolving line of credit with GF Asset
Management, LLC (GF), a subsidiary of GE Capital. GF had acquired our prior line
of credit from Coast Business Credit, which was seized by the Federal Deposit
Insurance Corporation in February 2003. The amount paid was approximately
$1,411,000 which is net of a 5% settlement discount of approximately $105,000.
The existing line of credit was replaced on July 16, 2003 with a $1,000,000
line of credit with Pacific Mercantile Bank. Interest on the line is based on an
independent index which is the highest rate on corporate loans posted by at
least 75% of the USA's thirty largest banks known as The Wall Street Journal's
Prime rate. The interest rate to be applied to the unpaid principal balance is
2% over the index, with an initial rate of interest of 6%. The entire
outstanding principal balance on the line must be repaid for a period of thirty
consecutive days during each fiscal year, which was completed during the third
quarter, and matures on July 16, 2004. The line of credit contains one financial
covenant based on our cash flow coverage of the balance on the line of credit.
We were in compliance with that covenant as of September 30, 2003. The line is
secured by all inventories, equipment, accounts receivable and various other
assets.
BREAKAWAY INTERNATIONAL TRANSACTION
On July 31, 2003, we acquired all of the assets and certain liabilities of
Breakaway International, Inc., a privately held leading provider of restaurant
industry hardware and software enterprise solutions. We acquired Breakaway's
assets for $25,000 in cash, 1,292,614 shares of our unregistered common stock
and the assumption of certain liabilities. We will pay additional contingent
earn-out amounts in unregistered shares of our common stock and/or cash over the
next three years, provided that certain targets for earnings before taxes are
met for the acquired assets. The targeted amounts increase by 25% each year. We
also entered into employment agreements with five of the former executives of
Breakaway.
WARRANT EXERCISE
On November 13, 2003, NorthBay Opportunities, L.P. (formerly known as
BayStar Capital, L.P.) and NorthBay International Opportunities, Ltd. (formerly
known as BayStar International, Ltd.) exercised warrants to purchase shares of
our common stock in the amounts of 493,827 and 123,456 shares, respectively. The
warrant exercise price for both firms was $1.62 per share. Those firms paid us
approximately $1 million on November 13, 2003 in order to exercise those
warrants. These warrants were existing instruments that were issued as part of a
previous financing by those firms. The warrants were scheduled to expire on
November 14, 2003.
FUTURE FINANCING NEEDS
We believe that the recent $3 million investment by Media General, as well
as the additional $1 million in warrant proceeds from the NorthBay entities,
will satisfy our requirements for additional financing for the next twelve
months. Generally, our financing requirements will depend upon the growth of our
four business segments.
19
Future capital investment for our new satellite network and for new site
installations, cash used for acquisitions and expenditures for Buzztime will
likely cause our cash expenditures to exceed cash inflows, though we currently
do not anticipate using more than $2 million in 2003. We expect the level of
expenditures in Buzztime to increase over the remainder of 2003 as we are
field-testing the channel with Time Warner in Portland, Maine and now with
Comcast Cable in Baltimore, Maryland. We also continue in the pre-field testing
phase with certain other cable operators. However, subject to any unexpected
changes in our business that may occur as a result of an economic slowdown, and
unless we incur unanticipated expenses, we believe we will continue generating
adequate cash from the operation of the NTN Hospitality Technologies division
which, when combined with cash resources on hand, the Media General investment,
the Bennett investment, the $1 million received form the recent warrant exercise
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 cable MSOs (the largest Multiple System
Operators in the United States) succeed as planned and we enter into additional
field trials or national agreements 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 any
additional success that Buzztime achieves in entering into additional 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 Hospitality Technologies division 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 Division 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 require a
significant use of capital resources. We believe that the conversion of customer
locations may require incremental capital expenditures of up to $4.5 million and
increased cash operating expenses (including estimated installation costs) of up
to $2.5 million over the two-year conversion period, which will lower our
historical positive cash flow. The third quarter of 2003 was our first full
quarter of rolling out the VSAT technology and we ended the quarter with
approximately 10% of our sites converted to the two-way technology. As of
November 13, approximately 20% of sites had been converted to VSAT. During the
two-year conversion period, we believe that this upgrade will have a moderately
adverse impact on our earnings when compared with what earnings would have been
without the expenditures. The offsetting benefits of the installation include
the elimination, at completion, of telecom costs that currently average
approximately $660,000 per year and an expected increase of revenues from the
sites.
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 products through reseller arrangements or through acquisition. We
currently expect the recently completed Breakaway transaction (which is now our
new NTN Software Solutions, Inc. subsidiary) to add positively to our cash flow
in 2004. However, amortization of components of intangible assets will reduce
reported earnings from the Software Solutions unit for several years. We may
also invest in certain integration related items that are not expected to exceed
$200,000. We also entered into a letter of intent to acquire the assets and
selected liabilities of NTN Interactive, Inc., our Canadian licensee. This
potential transaction remains subject to a number of contingencies, including
the completion of definitive documentation. Our limited capital resources may
prevent us from making future 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 September 30, 2003, we owned common
stock of an Australian company that is subject to market risk. At September 30,
2003, the carrying value of this investment was $168,000, which is net of a
$649,000 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 September 30, 2003,
a hypothetical 10% decline in the value of the Australian dollar would result in
a reduction of $17,000 in the carrying value of the investment.
We have outstanding line of credit borrowings, which bear interest at a rate
equal to the prime rate plus 2.0% per annum, currently equal to 6% per annum. At
September 30, 2003, a hypothetical one-percentage point increase in the prime
rate with the maximum level of $1 million outstanding on our credit line would
result in an increase of $10,000 in annual interest expense for line of credit
borrowings.
20
ITEM 4. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures", as such term is defined
under Exchange Act Rule 13a-15(e), 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. As
of September 30, 2003, we have carried out an evaluation 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 foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that there were no significant deficiencies or material
weaknesses in our disclosure controls and procedures and therefore there were no
corrective actions taken.
There have been no significant changes in our internal controls over
financial reporting 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. The Court has assigned a trial date of April 19, 2004. 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 and relates to our repair
and replacement activities of LRS pagers, which do not constitute a significant
percentage of our NTN Wireless business. On May 9, 2003, we filed with the court
a motion to dismiss the LRS complaint. The court denied our motion to dismiss
and provided LRS an opportunity to amend its complaint. LRS served the amended
complaint in July 2003 and, in turn, we filed a motion to dismiss the amended
complaint. We are awaiting the court's ruling on our pending motion to dismiss.
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. The case
was subsequently transferred to the United States District Court, Southern
District of California. Our complaint alleges that LRS made false statements in
its complaint and press release regarding our products
21
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. LRS has recently
agreed to transfer ownership of the WWW.NTNWIRELESS.COM domain name to us. LRS
filed a motion for change of venue seeking to have the matter transferred to
Texas and a motion to strike under California's Anti-SLAPP statute. Both motions
remain pending the court's ruling.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 1, 2003, we issued approximately 1,292,614 shares of restricted
common stock for the acquisition of Breakaway International.
This 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2.1 Asset Purchase Agreement by and among NTN Software Solutions, Inc., NTN
Communications, Inc., Breakaway International, Inc., and the Seller
Shareholders dated as of July 31, 2003 (2)
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 13a-14 of the Securities Exchange Act
of 1934 (1)
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 13a-14 of the Securities Exchange Act
of 1934 (1)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
and Section 906 of the Sarbanes-Oxley Act of 2002 (1)
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
and Section 906 of the Sarbanes-Oxley Act of 2002 (1)
- -------------
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's Current Report on Form 8-K filed on
August 14, 2003, and incorporated by reference.
(b) Reports on Form 8-K.
On August 8, 2003, we filed a Current Report on Form 8-K (event date August 6,
2003) to report under Item 12. Results of Operations and Financial Condition.
On August 14, 2003 we filed a Current Report on Form 8-K (event date July 31,
2003) to report under Item 2. Acquisition or Disposition of Assets our
acquisition of all of the assets and certain liabilities of Breakaway
International, Inc.
On October 14, 2003 we filed a Form 8-K/A to amend our Current Report on Form
8-K dated August 14, 2003 (event date July 31, 2003) to include under Item 7.
financial statements and pro forma financial information of Breakaway
International, Inc.
22
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: November 13, 2003 By: /S/ JAMES B. FRAKES
--------------------------------------------
James B. Frakes
Authorized Signatory and Chief
Financial Officer
23
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULE 13A-14 OF THE SECURITIES 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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(f)) for the registrant and have:
o designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
o disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: November 13, 2003 /s/ STANLEY B. KINSEY
Stanley B. Kinsey,
Chairman and Chief Executive Officer
NTN Communications, Inc.
24
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULE 13A-14 OF THE SECURITIES 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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(f)) for the registrant and have:
o designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
o disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: November 13, 2003 /s/ JAMES B. FRAKES
James B. Frakes,
Chief Financial Officer
NTN Communications, Inc.
25
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Stanley B. Kinsey, Chief Executive Officer of NTN Communications, Inc. (the
"Company"), hereby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The accompanying quarterly report on Form 10-Q of the Company for the
fiscal quarter ended September 30, 2003 fully complies with the
requirements of Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934, as amended; and
2. The information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: November 13, 2003 /s/ STANLEY B. KINSEY
Stanley B. Kinsey,
Chairman and Chief Executive Officer
NTN Communications, Inc.
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of this report.
26
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, James B. Frakes, Chief Financial Officer of NTN Communications, Inc. (the
"Company"), hereby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The accompanying quarterly report on Form 10-Q of the Company for the
fiscal quarter ended September 30, 2003 fully complies with the
requirements of Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934, as amended; and
2. The information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: November 13, 2003 /s/ JAMES B. FRAKES
James B. Frakes,
Chief Financial Officer
NTN Communications, Inc.
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of this report.
27
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement by and among NTN Software Solutions, Inc., NTN
Communications, Inc., Breakaway International, Inc., and the Seller
Shareholders dated as of July 31, 2003 (2)
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 13a-14 of the Securities Exchange Act
of 1934 (1)
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 13a-14 of the Securities Exchange Act
of 1934 (1)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
and Section 906 of the Sarbanes-Oxley Act of 2002 (1)
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
and Section 906 of the Sarbanes-Oxley Act of 2002 (1)
- ----------
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's Current Report on Form 8-K, filed
August 14, 2003, and incorporated by reference.