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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, 2002
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1103425
(State of incorporation) (I.R.S. Employer
Identification No.)
THE CAMPUS 5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
At November 4, 2002, the registrant had outstanding 39,372,000 shares of
common stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
SEPTEMBER 30,
2002 DECEMBER 31,
ASSETS (UNAUDITED) 2001
Current assets: -------------- --------------
Cash and cash equivalents $ 667,000 $ 1,296,000
Restricted cash 145,000 94,000
Accounts receivable, net 1,753,000 1,411,000
Investment available for sale 198,000 174,000
Inventory 123,000 --
Deposits on broadcast equipment 38,000 69,000
Deferred costs 525,000 675,000
Prepaid expenses and other current assets 450,000 499,000
-------------- --------------
Total current assets 3,899,000 4,218,000
Broadcast equipment and fixed assets, net 5,424,000 8,029,000
Software development costs, net 597,000 588,000
Deferred costs 402,000 411,000
Other assets 588,000 134,000
-------------- --------------
Total assets $ 10,910,000 $- 13,380,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 695,000 $ 906,000
Accrued expenses 1,362,000 1,096,000
Obligations under capital leases 156,000 168,000
Revolving line of credit 1,968,000 --
Deferred revenue 1,418,000 2,008,000
-------------- --------------
Total current liabilities 5,599,000 4,178,000
Obligations under capital leases, excluding current portion 57,000 110,000
Revolving line of credit -- 2,479,000
Senior subordinated convertible notes 1,987,000 1,958,000
Deferred revenue 686,000 877,000
Other long-term liabilities 12,000 12,000
-------------- --------------
Total liabilities 8,341,000 9,614,000
-------------- --------------
Minority interest in consolidated subsidiary 700,000 855,000
-------------- --------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock,
$.005 par value, 5,000,000 shares authorized; 161,000
shares issued and outstanding at September 30, 2002 and
December 31, 2001 1,000 1,000
Common stock, $.005 par value, 70,000,000 shares
authorized; 39,323,000 and 38,627,000 shares issued and
outstanding at September 30, 2002 and December 31, 2001,
respectively 195,000 192,000
Additional paid-in capital 81,145,000 80,639,000
Accumulated deficit (78,643,000) (76,890,000)
Accumulated other comprehensive loss (619,000) (643,000)
Treasury stock, at cost, 49,000 and 91,000 shares at
September 30, 2002 and December 31, 2001, respectively (210,000) (388,000)
-------------- --------------
Total shareholders' equity 1,869,000 2,911,000
-------------- --------------
Total liabilities and shareholders' equity $ 10,910,000 $ 13,380,000
============== ==============
See accompanying notes to unaudited consolidated financial statements
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues:
NTN Network division revenues $ 6,491,000 $ 5,627,000 $ 18,458,000 $ 16,184,000
Buzztime service revenues 23,000 36,000 106,000 102,000
Other revenues 2,000 1,000 7,000 13,000
------------- ------------- ------------- -------------
Total revenues 6,516,000 5,664,000 18,571,000 16,299,000
------------- ------------- ------------- -------------
Operating expenses:
Direct operating costs (includes depreciation of
$846,000 and $838,000, $2,541,000 and
$2,458,000 for the three months ended
September 30, 2002 and 2001 and for the nine
months ended September 30, 2002 and 2001,
respectively) 2,369,000 2,135,000 6,942,000 6,184,000
Selling, general and administrative 4,316,000 3,674,000 11,924,000 11,562,000
Depreciation and amortization 417,000 423,000 1,195,000 1,292,000
Research and development 2,000 -- 11,000 96,000
------------- ------------- ------------- -------------
Total operating expenses 7,104,000 6,232,000 20,072,000 19,134,000
------------- ------------- ------------- -------------
Operating loss (588,000) (568,000) (1,501,000) (2,835,000)
------------- ------------- ------------- -------------
Other income (expense):
Interest income -- 16,000 6,000 54,000
Interest expense (125,000) (227,000) (379,000) (679,000)
Other -- 7,000 -- 161,000
------------- ------------- ------------- -------------
Total other expense (125,000) (204,000) (373,000) (464,000)
------------- ------------- ------------- -------------
Loss before minority interest in loss of (713,000) (772,000) (1,874,000) (3,299,000)
consolidated subsidiary and income taxes
Minority interest in loss of consolidated subsidiary 58,000 40,000 155,000 40,000
------------- ------------- ------------- -------------
Net loss before income taxes (655,000) (732,000) (1,719,000) (3,259,000)
Income taxes 34,000 -- 34,000 --
------------- ------------- ------------- -------------
Net loss $ (689,000) $ (732,000) $ (1,753,000) $(3,259,000)
============= ============= ============= =============
Net loss per common share - basic and diluted $ (0.02) $ (0.02) $ (0.04) $ (0.09)
============= ============= ============= =============
Weighted average shares outstanding - basic and
diluted 39,270,000 36,775,000 38,999,000 36,592,000
============= ============= ============= =============
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,
2002 2001
------------- -------------
Cash flows provided by operating activities:
Net loss $ (1,753,000) $ (3,259,000)
Adjustments to reconcile net loss to
net cash provided by operating
activities (net of effects of acquisitions):
Depreciation and amortization 3,736,000 3,750,000
Provision for doubtful accounts 311,000 500,000
Provision for deferred income taxes 23,000 --
Non-cash stock-based compensation charges 71,000 101,000
Minority interest in loss of consolidated subsidiary (155,000) (40,000)
Non-cash interest expense 120,000 130,000
Accreted interest expense 29,000 63,000
Gain on settlement of debt -- (146,000)
Loss from disposition of equipment 114,000 157,000
Changes in assets and liabilities:
Restricted cash (51,000) (14,000)
Accounts receivable (532,000) (293,000)
Inventory (34,000) --
Deferred costs 159,000 245,000
Prepaid expenses and other assets 45,000 (58,000)
Accounts payable and accrued expenses (169,000) (506,000)
Deferred revenue (812,000) (88,000)
------------- -------------
Net cash provided by operating activities 1,102,000 542,000
------------- -------------
Cash flows from investing activities:
Capital expenditures (1,058,000) (979,000)
Acquisition of businesses (102,000) --
Deposits on broadcast equipment 31,000 112,000
------------- -------------
Net cash used in investing activities (1,129,000) (867,000)
------------- -------------
Cash flows from financing activities:
Principal payments on capital leases (152,000) (512,000)
Borrowings from revolving line of credit 17,660,000 15,668,000
Principal payments on revolving line of credit (18,243,000) (16,225,000)
Proceeds from issuance of common and preferred
stock, net of offering expenses -- 802,000
Principal payments on note payable -- (25,000)
Proceeds from exercise of stock options and warrants 133,000 92,000
------------- -------------
Net cash used in financing activities (602,000) (200,000)
------------- -------------
Net decrease in cash and cash equivalents (629,000) (525,000)
Cash and cash equivalents at beginning of period 1,296,000 2,188,000
------------- -------------
Cash and cash equivalents at end of period $ 667,000 $ 1,663,000
============= =============
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,
2002 2001
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 229,000 $ 460,000
============= =============
Income taxes $ -- $ --
============= =============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest $ 120,000 $ 160,000
============= =============
Equipment acquired under capital leases $ 87,000 $ 126,000
============= =============
Unrealized holding loss on investments $ (24,000) $ 48,000
============= =============
Issuance of treasury stock in payment of board compensation $ 43,000 $ --
============= =============
Issuance of common stock in payment of dividends $ 8,000 $ 8,000
============= =============
Supplemental non-cash disclosure of acquisition of
businesses:
Accounts receivable (net) $ 121,000 --
Inventory 89,000 --
Fixed assets 38,000 --
Other assets 521,000 --
Accounts payable and accrued liabilities (244,000) --
Deferred revenue (31,000) --
Line of credit (72,000) --
Common stock issued (320,000) --
See accompanying notes to unaudited consolidated financial statements.
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and its majority-owned
subsidiaries (collectively, "we" or "NTN") and the results of operations and
cash flows of NTN for the interim periods presented. Management has elected to
omit substantially all notes to our consolidated financial statements as
permitted by the rules and regulations of the Securities and Exchange
Commission. The results of operations for the interim periods are not
necessarily indicative of results to be expected for any other interim period or
for the year ending December 31, 2002.
The consolidated financial statements for the three months and nine months
ended September 30, 2002 and 2001 are unaudited and should be read in
conjunction with the consolidated financial statements and notes thereto
included in our Form 10-K for the year ended December 31, 2001.
We have reclassified certain items in the prior period consolidated
financial statements to conform to the current period presentation.
2. CRITICAL ACCOUNTING POLICIES
The preparation of these financial statements requires 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 we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We record deferred costs and revenues related to the costs
and related installation revenue associated with installing new customer sites.
Based on Staff Accounting Bulletin 101, 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 their estimated life is attained,
amortization of those deferred costs and revenues would accelerate, which would
result in net incremental revenue. We incur a relatively significant level of
depreciation expense in relationship to our operating income. The amount of
depreciation expense in any year is largely related to the estimated life of
handheld, wireless Playmaker devices and computers located at our customer
sites. If the Playmakers and servers turn out to have a longer life, on average,
than estimated, our depreciation expense would be significantly reduced in those
future periods. Conversely, if the Playmakers and servers turn out to have a
shorter life, on average, than estimated, our depreciation expense would be
significantly increased in those future periods. We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
6
We do not have any of the following:
o Off-balance sheet arrangements
o Certain trading activities that include non-exchange traded contracts
accounted for at fair value.
o Relationships and transactions with persons or entities that derive
benefits from any non-independent relationship other than the related party
transactions discussed in ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS of our Form 10-K for the year ended December 31, 2001 and with
Michael Fleming, a Company director who joined Buzztime Entertainment, Inc.
as Chairman in May 2002. Mr. Fleming has drawn a salary for part-time
employment since May. We are in the process of negotiating an Employment
Agreement with Mr. Fleming that will contain a stock-based compensation
element. However, to date, that Employment Agreement has not yet been
consummated.
3. INCOME (LOSS) PER SHARE
For the three months ended September 30, 2002 and 2001 and for the nine
months ended September 30, 2002 and 2001, options, warrants, convertible
preferred stock and convertible notes representing approximately 12,151,000,
13,257,000, 12,278,000 and 13,180,000 potential common shares, respectively,
have been excluded from the computation of net loss per share, as their effect
was anti-dilutive.
4. SEGMENT INFORMATION
We develop, produce and distribute interactive entertainment. Our
reportable segments have been determined based on the nature of the services
offered to customers, which include, but are not limited to, revenue from the
NTN Network(R), and Buzztime(R) divisions. NTN Network division revenue is
generated primarily from broadcasting content to customer locations through two
interactive television networks, from advertising sold on the networks and from
its wireless segment with restaurant on-site paging systems, electronic gift
cards, loyalty programs and electronic data-managed comment cards. NTN Network
division revenues comprised over 99% of our total revenue for the nine months
ended September 30, 2002. For purposes of presentation, revenues for the NTN
Network included "Other Revenues" of NTN as listed on the consolidated statement
of operations. Buzztime generates revenue primarily from the distribution of its
digital trivia game show content and "play-along" sports games as well as from
production services provided to third parties. Included in the operating loss
for both the NTN Network division and Buzztime is an allocation of corporate
expenses. The following tables set forth certain information regarding our
segments and other operations:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues
Network $ 5,802,000 $ 5,628,000 $ 17,013,000 $ 16,197,000
NTN Wireless 691,000 -- 1,452,000 --
------------- ------------- ------------- -------------
NTN Network division 6,493,000 5,628,000 18,465,000 16,197,000
Buzztime 23,000 36,000 106,000 102,000
------------- ------------- ------------- -------------
Total revenue $ 6,516,000 $ 5,664,000 $ 18,571,000 $ 16,299,000
============= ============= ============= =============
Operating income (loss)
Network $ 446,000 $ 110,000 $ 1,115,000 $ (279,000)
NTN Wireless (65,000) -- (26,000) --
------------- ------------- ------------- -------------
NTN Network division 381,000 110,000 1,089,000 (279,000)
Buzztime (969,000) (678,000) (2,590,000) (2,556,000)
------------- ------------- ------------- -------------
Operating loss $ (588,000) $ (568,000) $ (1,501,000) $ (2,835,000)
============= ============= ============= =============
Net income (loss)
Network $ 287,000 $ (99,000) $ 708,000 $ (722,000)
NTN Wireless (65,000) -- (26,000) --
------------- ------------- ------------- -------------
NTN Network division 222,000 (99,000) 682,000 (722,000)
Buzztime (911,000) (633,000) (2,435,000) (2,537,000)
------------- ------------- ------------- -------------
Net loss $ (689,000) $ (732,000) $ (1,753,000) $ (3,259,000)
============= ============= ============= =============
7
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
$411,000 U.S. dollars as of September 30, 2002) by Canada Customs and Revenue
Agency, but is in the process of appealing the assessment. If the appeal is
unsuccessful, it is unclear as to what, if any, liability we might have in this
matter. No amounts have been accrued relating to this contingent liability.
6. SENIOR SUBORDINATED CONVERTIBLE NOTES
Our senior subordinated convertible notes ("Convertible Notes") have a
maturity date of February 1, 2003. These Convertible Notes have a principal
amount of $2 million. We have the ability to convert the Convertible Notes to
common stock at maturity at a fixed conversion rate of $1.275 per share. We
currently intend to exercise that conversion option and convert the Convertible
Notes to common stock at that time. Since that conversion will not require the
use of our working capital, the Convertible Notes are not presented as a current
liability even though the maturity date is less than one year from the balance
sheet date.
7. ACQUISITIONS
On April 5, 2002, through a newly formed subsidiary, NTN Wireless
Communications, Inc. ("Wireless"), we acquired the net assets of ZOOM
Communications, a company in the restaurant wireless paging industry, from
Brandmakers, Inc. We entered into separate 2-year employment contracts with each
of ZOOM's two principals to join NTN as Vice President of Operations and Vice
President of Sales in the Wireless segment. Based out of suburban Atlanta,
Georgia, the Wireless segment now serves as a regional office and distribution
center for NTN.
We also entered into a distribution agreement on March 11, 2002 with
Brandmakers, Inc., for the non-exclusive right to sell and service certain
products relating to the manufacture, service and distribution of wireless
paging systems and stored value gift and loyalty card programs for ZOOM
Communications. The agreement was cancelled on April 5, 2002 upon the
acquisition of the assets of ZOOM Communications.
On May 17, 2002, we acquired the net assets of Hysen Technologies, Inc.,
another company in the hospitality paging industry. The assets acquired included
Hysen's existing inventory and intellectual property, including Hysen's customer
base. The assets of Hysen were combined into the Wireless segment.
Total consideration for the purchases was $422,000, which is comprised of
$320,000 in common stock and $102,000 for transaction costs. In consideration
for the ZOOM Communications purchase, we issued 349,614 unregistered shares of
our common stock to all parties valued at an aggregate of $300,000 and paid
$87,000 in transaction fees. We used the lowest closing price of the common
stock for the twenty days immediately prior to March 22, 2002 to issue 329,412
shares and the average closing price of the common stock for the five trading
days immediately prior to March 22, 2002 for the balance of 20,202 shares
issued. In consideration for the Hysen Technologies purchase, we issued 14,388
unregistered shares of our common stock valued at $20,000 and paid $15,000 in
transaction fees. The number of shares issued was determined by the using the
average closing price of the common stock for the five trading days ending on
the closing date of May 17, 2002.
8
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Of the $520,000 of
acquired intangible assets, $231,000 was assigned to goodwill and is not subject
to amortization. $140,000 was assigned to employment agreements and will be
amortized over the estimated contractual life of 2 years. $150,000 was assigned
to customer lists and will be amortized over the estimated useful life of 3
years. The line of credit of $72,000 was paid in full immediately after the
closing date of April 5, 2002.
ASSETS ACQUIRED AND LIABILITIES ASSUMED
ZOOM COMMUNICATIONS HYSEN TECHNOLOGIES TOTAL ACQUISITIONS
------------------- -----------------
Accounts receivable, net $ 121,000 $ -- $ 121,000
Inventory 48,000 41,000 89,000
Fixed assets 38,000 -- 38,000
Goodwill 216,000 15,000 231,000
Intangibles assets 280,000 10,000 290,000
-------------- ----------- ---------------
Total assets acquired 703,000 66,000 769,000
-------------- ----------- ---------------
Accounts payable and accrued liabilities 244,000 31,000 275,000
Line of credit 72,000 -- 72,000
-------------- ----------- ---------------
Total liabilities assumed 316,000 31,000 347,000
-------------- ----------- ---------------
Net assets acquired $ 387,000 $ 35,000 $ 422,000
============== =========== ==============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
This Quarterly Report contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that reflect our current estimates, expectations
and projections about our future results, performance, prospects and
opportunities, including statements related to our strategic plans, capital
expenditures, industry trends and financial position. In some cases, you can
identify these statements by forward-looking words such as "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "should," "will,"
"plan," "would" and similar expressions. Forward-looking statements are based on
information currently available to us and are subject to risks and
uncertainties, including cash needs, competition, market acceptance and other
factors that may cause our actual results, performance or achievements to differ
materially from those expressed or implied by such forward-looking statements.
Important factors that could cause actual results to differ materially from our
expectations are detailed in our Securities and Exchange Commission filings,
including our Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
GENERAL
We develop, produce and distribute interactive entertainment. We operate
our businesses principally through two operating units, our NTN Network division
and our 94%-owned subsidiary, Buzztime Entertainment, Inc. ("Buzztime").
The NTN Network is North America's largest "out-of-home" interactive
television network. Our unique private network broadcasts a variety of
interactive multi-player sports and trivia games from 15 to 17 hours a day,
depending on the time zone, 365 days per year to hospitality locations such as
restaurants, sports bars, hotels, clubs and military bases totaling
approximately 3,610 locations in North America as of September 30, 2002. The NTN
Network earns revenue from delivering entertainment content to hospitality
locations for a monthly fee, including installation revenue. The NTN Network
also generates advertising revenue from third party advertisers on the NTN
Network and license fee revenue from our Canadian licensee.
9
The NTN Network is the only interactive television network that is
specifically designed to entertain the out-of-home viewer. Patrons use our
hand-held wireless Playmaker devices to interact with trivia and sports games
displayed on television screens in the hospitality location. Our content is
designed to promote social interaction and stimulate conversation among the
patrons. Hospitality locations pay to use our interactive technology and to
receive our entertainment broadcast. Our games are broadcast to be easily viewed
from a distance of over 15 feet and are not dependent upon audio, so they do not
interfere with the location's own sound system or with patrons' conversations.
In April 1999, we began upgrading the NTN Network by introducing our
"Digital Interactive TV" system to replace our decade-old DOS-based system. The
DITV system contains many new features, including a Windows-based platform with
full-motion video capabilities and high-resolution graphics to allow more
compelling content and better advertising opportunities. In addition, we
introduced new, more consumer friendly Playmaker(R) wireless game appliances
that operate at 900 megahertz to increase transmission range and have a longer
battery life. The new Playmakers also feature a larger, eight line LCD screen
that displays sports scores and other ticker information and enable electronic,
text-based chat between patrons. As the Playmakers and other digital equipment
ages, we believe the costs of servicing and repairing the equipment will
increase. We are currently working on various solutions to keep service and
repair costs at a minimum.
Currently, the NTN Network operates two parallel networks to broadcast our
interactive game content. The more dynamic DITV digital network has largely
supplanted the original DOS-based platform. As of September 30, 2002, all but 73
of the U.S. sites had converted to the DITV network. Our Canadian licensee also
has not yet converted any of its subscribers to the DITV network. The DITV
system provides greater growth and revenue opportunities due to its MPEG full
motion video capability, allowing for dynamic presentation of enhanced on-screen
interactive game programming and full motion advertising capabilities. The DITV
system also features the more robust 900-megahertz Playmaker that facilitates
consumer interaction with the network.
On April 5, 2002, through a newly formed subsidiary, NTN Wireless
Communications, Inc. ("Wireless"), we acquired the assets of ZOOM
Communications, a company in the restaurant wireless paging industry, from
Brandmakers, Inc. We entered into separate 2-year employment contracts with each
of ZOOM's two principals to join NTN as Vice President of Operations and Vice
President of Sales in the Wireless segment. Based out of suburban Atlanta,
Georgia, the Wireless segment now serves as a regional office and distribution
center for NTN.
On May 17, 2002, we acquired the assets of Hysen Technologies, Inc.,
another company in the hospitality paging industry. The assets acquired included
Hysen's existing inventory and intellectual property, including Hysen's customer
base. The assets of Hysen were combined into the Wireless segment.
Through our NTN Wireless segment, we sell wireless paging systems to the
restaurant industry. The Wireless segment also sells stored value cards, such as
gift cards and loyalty cards, to the restaurant industry. It is our objective to
introduce and sell Wireless paging and stored value card products to our NTN
Network customers and to introduce the Network to our Wireless customers. We
also intend, where possible, to link stored value cards for interested Network
customer sites with the Players Plus members that play our games at that site.
Based on adopting any of a variety of plans under consideration, this program
would allow our Players Plus members to receive promotional consideration for
their game play and food/beverage purchases, and would allow those sites an
additional measure to quantify the return on investment they receive from the
NTN Network.
The recently acquired Wireless segment recorded an operating loss in the
three months ended September 30, 2002 with an allocation of corporate overhead.
This loss was incurred as a result of a reduction in gross margin due to
promotional activity designed to aggressively gain market share coupled with
increased marketing and staffing expenses associated with relaunching and
rebranding the business under the NTN umbrella. We expect the Wireless segment
to contribute to our earnings in 2003.
Buzztime was incorporated in the state of Delaware in December 1999 with
the intent of creating new revenue from distributing NTN's content library to
several interactive consumer platforms, with a primary focus on interactive
television. Buzztime specializes in real-time, mass-participation games and
entertainment that are produced specifically for interactive television
including the BUZZTIME channel, the interactive trivia channel for cable
television and satellite television services. We manage the world's largest
trivia game show library from our interactive television broadcast studio where
we also produce our live, Predict the Play(R) interactive television sports
games and real-time viewer polls. In 2001, Buzztime received an investment from
Scientific-Atlanta, Inc., a leading manufacturer of cable set-top boxes.
10
The first commercial deployment of the BUZZTIME channel occurred in June
2002, when Susquehanna Cable ("SusCom") made the BUZZTIME channel available to
all 16,000 of the digital subscribers on its York, Pennsylvania system. This
deployment followed a technical field trial that began in March 2002. We believe
that this deployment was the first live, 2-way multi-player interactive
television entertainment channel integrated into a digital set top box in the
United States.
In addition, Buzztime remains the primary content provider to the NTN
Network and currently works with leading companies such as the National Football
League, Microsoft Corporation's MSN(R)TV service, Liberate Technologies,
Airborne Entertainment and others to bring consumers real-time interactive
entertainment.
Our objective is to grow both of our businesses as a leading developer and
distributor of interactive entertainment and communication products and services
across several interactive platforms, including our out-of-home network,
interactive television ("iTV") and wireless devices. To accomplish our
objectives we are pursuing strategies to:
o Increase the number of out-of-home locations serviced by the NTN Network.
We intend to accomplish this increase by expanding our product offerings to
include more value-added services, adding personnel to our sales force and
providing new and updated content on a regular basis.
o Develop and distribute the BUZZTIME channel to cable and satellite
operators. We have adapted or are planning to adaptour interactive trivia
game show content and technology to the leading interactive television
platforms, to gain market share by partnering with major industry
manufacturers and distributors, and to utilize our interactive television
broadcast studio as a development and production facility to build and
deepen relationships with media-related companies. We also plan to continue
to support our efforts in the early-stage wireless entertainment market
through alliances with leading wireless distributors and carriers.
o Increase revenues through current and new revenue sources. The NTN Network
earns subscription revenue from subscribing out-of-home locations and
third-party advertising revenue as well as production services and license
fee revenue from Buzztime. We expect to continue generating revenue through
these sources and, by growing our customer base, we also expect to see
revenue growth in subscription and advertising revenue. Similarly, as
Buzztime gains distribution with cable television operators, we expect to
increase revenue through three sources: license fees paid by local cable
television operators; fees paid by interactive television home subscribers
for premium services or pay-per-play transactions; and advertising revenue.
Both business units will also be exploring market opportunities to acquire
complimentary businesses to increase revenues and earnings.
There can be no assurance, however, that we will be successful in executing
this strategy.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
Operations for the three months ended September 30, 2002 resulted in a net
loss of $689,000 compared to a net loss of $732,000 for the three months ended
September 30, 2001.
REVENUES
Total revenues increased by $852,000 or 15%, to $6,516,000 for the three
months ended September 30, 2002 from $5,664,000 for the three months ended
September 30, 2001. This increase was primarily due to NTN Network division
revenues as shown in the following table (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30
------------------
2002 2001
------- -------
NTN Network Division Revenues $ 6,491 $ 5,627
Buzztime Revenues 23 36
Other Revenues 2 1
------- -------
Total Revenues $ 6,516 $ 5,664
======= =======
11
NTN Network division revenues increased by $864,000 or 15%, to $6,491,000
for the three months ended September 30, 2002 from $5,627,000 for the three
months ended September 30, 2001. NTN Network division revenue included
approximately $691,000 of revenue from the newly acquired Wireless segment.
Hospitality subscription revenues increased by approximately $317,000 due to an
increase in the number of sites and the average billing rate per site. The NTN
Network United States customer site count at September 30, 2002 was
approximately 3,146. This was an increase of 90 sites over September 2001. Our
Canadian licensee ended the period with 464 sites, a decrease of 55 sites
compared to the third quarter of 2001. At September 30, 2002, approximately 98%
of the U.S. sites have been converted to the digital network compared to
approximately 93% of the U.S. sites converted as of September 30, 2001.
Installation revenue associated with installing new customer sites decreased
approximately $140,000 as some of the deferred revenue associated with the
installation has become fully amortized.
Buzztime revenues were $23,000 for the three months ended September 30,
2002, compared to $36,000 for the three months ended September 30, 2001.
OPERATING EXPENSES
Direct operating costs increased by $234,000 or 11%, to $2,369,000 for the
three months ended September 30, 2002 from $2,135,000 for the three months ended
September 30, 2001. Direct operating costs included approximately $431,000 for
goods sold from the newly acquired Wireless segment. The increase in direct
expenses was offset by a decrease in communication charges of approximately
$93,000 due to a change in vendors in the third quarter of 2001. Playmaker
repairs and miscellaneous parts decreased by approximately $45,000 as more
repairs were completed in-house instead of sending to an outside vendor.
Selling, general and administrative expenses increased by $642,000 or 17%,
to $4,316,000 for the three months ended September 30, 2002 from $3,674,000 for
the three months ended September 30, 2001. Selling, general and administrative
expense included an increase in payroll and related expenses of approximately
$459,000 as the head count increased, which includes the addition of the
Wireless employees. Professional fees increased approximately $116,000 due to an
increase in legal expenses. Travel and entertainment increased approximately
$55,000 related to Wireless and increased travel to support the Buzztime
initiatives. Equipment leases increased by approximately $37,000 due to the
buy-out of equipment under capitalized leases.
INTEREST EXPENSE
Interest expense decreased 45% to $125,000 for the three months ended
September 30, 2002, compared to $227,000 for the three months ended September
30, 2001, due to the expiration of various capitalized leases as well as to a
lower average balance on our revolving line of credit in the third quarter of
2002 compared to the third quarter of 2001.
MINORITY INTEREST AND TAXES
Minority interest in loss of consolidated subsidiary increased 45% to
$58,000 for the three months ended September 30, 2002, compared to $40,000 for
the three months ended September 30, 2001. The increase is due to an increase in
the net loss for Buzztime for the three months ended September 30, 2002.
The NTN Network expects to report taxable income for the year ended
December 31, 2002. For federal income tax reporting purposes and in unitary
states where the NTN Network may file on a combined basis, taxable losses
incurred by Buzztime Entertainment should be sufficient to offset NTN Network's
taxable income. In states where separate filing is required, NTN Network will
likely incur a state tax liability. As a result, NTN Network recorded a state
tax provision of $34,000 in the third quarter.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
Operations for the nine months ended September 30, 2002 resulted in a net
loss of $1,753,000 compared to a net loss of $3,259,000 for the nine months
ended September 30, 2001.
12
REVENUES
Total revenues increased by $2,272,000 or 14%, to $18,571,000 for the nine
months ended September 30, 2002 from $16,299,000 for the nine months ended
September 30, 2001. This increase was primarily due to NTN Network division
revenues as shown in the following table (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30
------------------
2002 2001
------- -------
NTN Network Division Revenues $18,458 $16,184
Buzztime Revenues 106 102
Other Revenues 7 13
------- -------
Total Revenues $18,571 $16,299
======= =======
NTN Network division revenues increased by $2,274,000 or 14%, to
$18,458,000 for the nine months ended September 30, 2002 from $16,184,000 for
the nine months ended September 30, 2001. NTN Network division revenue included
approximately $1,452,000 of revenue from the newly acquired Wireless segment.
Hospitality subscription revenues increased by approximately $921,000 due to an
increase in the number of sites and the average billing rate per site.
Advertising revenue increased by approximately $110,000 primarily due to a
higher level of advertising revenue being recognized in the first quarter of
2002 compared to the first quarter of 2001. Installation revenue associated with
installing new customer sites decreased approximately $224,000 as some of the
deferred revenue associated with the installation has become fully amortized
over the estimated three-year life of a customer.
Buzztime revenues were $106,000 for the nine months ended September 30,
2002, compared to $102,000 for the nine months ended September 30, 2001.
OPERATING EXPENSES
Direct operating costs increased by $758,000 or 12%, to $6,942,000 for the
nine months ended September 30, 2002 from $6,184,000 for the nine months ended
September 30, 2001. Direct operating costs included approximately $857,000 for
goods sold from the newly acquired Wireless segment. Playmaker repairs increased
by approximately $146,000 as the manufacturer warranties continue to expire on
some of the Playmakers. Miscellaneous parts for the equipment increased
approximately $40,000 for replacement of various equipment parts that need to be
replaced as the digital equipment ages. Freight also increased by approximately
$69,000 directly due to the increase in Playmaker and digital equipment repairs.
Depreciation and amortization increased by approximately $80,000 for the
capitalized purchases of broadcast equipment associated with the digital
network. Communication charges decreased by approximately $256,000 due to a
change in vendors in 2001. Hosting fees also decreased approximately $94,000 due
to the consolidation of equipment at two separate locations to one location in
2001.
Selling, general and administrative expenses increased by $362,000 or 3%,
to $11,924,000 for the nine months ended September 30, 2002 from $11,562,000 for
the nine months ended September 30, 2001. Selling, general and administrative
expense included an increase in payroll and related expenses of approximately
$495,000 as the head count increased, which includes the addition of the
Wireless employees. Marketing expenses increased approximately $85,000 due to
the attendance at additional trade shows in 2002 and additional advertising for
the NTN Network division's "Hospitality 360" initiative, which incorporates the
new Wireless products. Travel and entertainment increased approximately $50,000
related to Wireless and increased travel to support the Buzztime initiatives.
Equipment lease expense increased by approximately $93,000 due to the buy-out of
equipment under capitalized leases. Various other expenses increased due to
general expenses associated with Wireless. Consulting expenses decreased by
approximately $429,000 due to various projects reaching completion in the past
year and the hiring of various consultants as employees.
Depreciation and amortization expense decreased $97,000 or 8% to $1,195,000
for the nine months ended September 30, 2002 from $1,292,000 for the nine months
ended September 30, 2001, due to certain assets becoming fully depreciated.
Research and development expenses were not significant for the nine months
ended September 30, 2002, compared to $96,000 for the nine months ended
September 30, 2001. For the nine month period ended September 30, 2001, our
research and development efforts focused primarily on the upgrade of the NTN
Network and interactive television initiatives.
13
INTEREST EXPENSE AND OTHER INCOME
Interest expense decreased 44% to $379,000 for the nine months ended
September 30, 2002, compared to $679,000 for the nine months ended September 30,
2001, due to the expiration of various capitalized leases as well as to a lower
average balance on our revolving line of credit in 2002 compared to 2001.
Other income was not significant for the nine months ended September 30,
2002 compared to $161,000 for the nine months ended September 30, 2001 due to
the elimination of the balance of a promissory note and accrued interest upon
settlement of the debt.
MINORITY INTEREST AND TAXES
Minority interest in loss of consolidated subsidiary was $155,000 for the
nine months ended September 30, 2002 compared to $40,000 for the nine months
ended September 30, 2001. We received the investment from Scientific-Atlanta,
Inc. at the end June 2001, so there is no related allocation of Buzztime's
losses for the first six months of 2001.
The NTN Network expects to report taxable income for the year ended
December 31, 2002. For federal income tax reporting purposes and in unitary
states where the NTN Network may file on a combined basis, taxable losses
incurred by Buzztime Entertainment should be sufficient to offset NTN Network's
taxable income. In states where separate filing is required, NTN Network will
likely incur a state tax liability. As a result, NTN Network recorded a state
tax provision of $34,000 in the third quarter.
EBITDA
Our earnings before interest, taxes, depreciation and amortization
("EBITDA") decreased by $7,000 to $733,000 for the three months ended September
30, 2002 from EBITDA of $740,000 for the three months ended September 30, 2001.
EBITDA increased by $1,274,000 to $2,390,000 for the nine months ended September
30, 2002 from EBITDA of $1,116,000 for the nine months ended September 30, 2001.
EBITDA is not intended to represent a measure of performance in accordance
with generally accepted accounting principles ("GAAP"). Nor should EBITDA be
considered as an alternative to statements of cash flows as a measure of
liquidity. EBITDA is included herein because we believe that financial analysts,
investors and other interested parties find it to be a useful tool for measuring
our performance.
The following table reconciles our net loss per GAAP to EBITDA:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ------------ ------------
EBITDA CALCULATION
Net loss per GAAP $ (689,000) $ (732,000) $(1,753,000) $(3,259,000)
Interest expense (net) 125,000 211,000 373,000 625,000
Depreciation and amortization 1,263,000 1,261,000 3,736,000 3,750,000
Income taxes ----------- ----------- ------------ -----------
34,000 -- 34,000 --
----------- ----------- ------------ ------------
EBITDA $ 733,000 $ 740,000 $ 2,390,000 $ 1,116,000
=========== =========== ============ ============
On a segment basis, our two segments generated EBITDA levels as presented below:
THREE MONTHS ENDED SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTEMBER 30, 2002
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL NETWORK 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
============ ============ ============ ============ ============= =============
14
THREE MONTHS ENDED SEPTEMBER 30, 2001 NINE MONTHS ENDED SEPTEMBER 30, 2001
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL NETWORK BUZZTIME TOTAL
------------ ------------ ------------ ------------ ------------- -------------
Net loss $ (99,000) $ (633,000) $ (732,000) $ (722,000) $ (2,537,000) $ (3,259,000)
Interest expense (net) 216,000 (5,000) 211,000 606,000 19,000 625,000
Depreciation and amortization 1,071,000 190,000 1,261,000 3,182,000 568,000 3,750,000
Income taxes -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------- -------------
EBITDA $ 1,188,000 $ (448,000) $ 740,000 $ 3,066,000 $ (1,950,000) $ 1,116,000
============ ============ ============ ============ ============= =============
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had cash and cash equivalents of $667,000 and a
working capital deficit (current liabilities in excess of current assets) of
$1,700,000, compared to cash and cash equivalents of $1,296,000 and working
capital of $40,000 at December 31, 2001. The primary reason for the working
capital deficit was the reclassification of the revolving line of credit from a
long-term liability to a short-term liability as the line of credit matures on
June 30, 2003. Net cash provided by operations was $1,102,000 for the nine
months ended September 30, 2002 and $542,000 for the nine months ended September
30, 2001. Depreciation, amortization and other non-cash charges offset the net
loss in each period.
Net cash used in investing activities was $1,129,000 for the nine months
ended September 30, 2002 compared with $867,000 for the nine months ended
September 30, 2001. Included in net cash used in investing activities for the
nine months ended September 30, 2002 was $895,000 in capital expenditures,
$163,000 in capital software expenditures and $102,000 of professional fees
related to the recent acquisitions, which were partially offset by $31,000 for
deposits on broadcast equipment received.
Net cash used in financing activities was $602,000 for the nine months
ended September 30, 2002 compared to $200,000 for the nine months ended
September 30, 2001. The cash used in financing activities for the nine months
ended September 30, 2002 included $583,000 of net principal payments on the
revolving line of credit and $152,000 of principal payments on capital leases
offset by $133,000 of proceeds from the issuance of stock options.
Our revolving line of credit agreement is with Coast Business Credit and
presently expires on June 30, 2003. Interest is charged on the outstanding
balance at a rate equal to the prime rate plus 1.5% per annum, but cannot be
less than 9% per annum. The line of credit is secured by substantially all of
our assets. Our intention is to either further extend the expiration date of the
existing facility or to find a replacement facility with an alternate lender.
The line of credit provides for borrowings not to exceed the lesser of a
designated maximum amount or three times trailing monthly collections or three
times annualized trailing adjusted EBITDA. As of September 30, 2002, the maximum
amount outstanding under the line of credit was $2,500,000. Further reductions
in the maximum amount of $250,000 each will occur on January 31, 2003, and on
March 31, 2003. As of September 30, 2002, we had $532,000 available under the
revolving line of credit. Our availability under the revolving line of credit
may be further reduced if our monthly collections or operating income falls
below certain levels.
Our liquidity and capital resources remain limited and this may constrain
our ability to operate and grow our business. For the first nine months of 2002,
we generated free cash flow (defined as EBITDA less cash interest expense, cash
used in investing activities and cash used in financing activities) of $430,000,
which has covered our business requirements over that period. We believe that we
should continue to be cash positive from operating activities in the fourth
quarter of 2002.
Our operational requirements for additional financing through mid-2003 will
depend upon the growth of our two business segments. In a low growth scenario
(for example, annual net site growth of 100 to 150 sites in the NTN Network and
a number of commercial trials of the Buzztime initiative), utilization of our
existing line of credit, which matures on June 30, 2003, may be sufficient to
cover our financing requirements. If we face more rapid growth in either or both
segments, then we will require additional financing over the next 12 months. If
we are unsuccessful in obtaining financing in addition to the extension or
replacement of our line of credit facility, some initiatives relating to those
higher growth opportunities may have to be curtailed or deferred.
We have entered into discussions with our current lender regarding an
extension of the line of credit. In addition to discussing a potential extension
with our current lender, we may also seek a replacement lender. However, we may
not be able to obtain additional or replacement (in the case of our credit line)
financing on terms favorable to us or at all.
15
We are also considering adding to our product line certain other wireless
applications that are relevant to the hospitality industry. We may add these
incremental hospitality products through reseller arrangements or through
acquisition. Our limited capital resources may prevent us from making such
product additions or acquisitions on a cash basis.
We expect the level of expenditures in Buzztime to rise over the remainder
of 2002 as we have entered the deployment phase with SusCom and continue in the
testing phase with certain other cable operators. However, subject to any
unexpected changes in our business that may occur as a result of a continued
economic slowdown, and unless we incur unanticipated expenses, we believe we
will continue generating adequate cash from the operation of the NTN Network
which, when combined with cash resources on hand and our line of credit, will
allow us to continue to fund Buzztime at least through December 2002 at current
operational levels assuming that Buzztime remains in the testing phase with
certain cable operators for the remainder of the year. If current BUZZTIME
channel sales efforts to major cable system operators (the largest cable system
operators in the United States) succeed as planned and we enter into field
trials with those cable operators, management intends to aggressively increase
Buzztime sales and marketing efforts late in the year to more quickly advance
its distribution within the U.S. market, which will require additional capital.
We believe that Buzztime's success in entering into those field trials with
major cable system operators may enhance our ability to raise additional capital
at favorable pricing although there can be no assurance that will happen.
Based upon current sales targets of achieving commercial deployment of the
BUZZTIME Channel with several major cable system operators over the next several
quarters, we anticipate that Buzztime will require an additional $1,000,000 in
financing per quarter commencing with the second quarter of 2003. The timing of
this capital requirement is largely dependent on the timing of the commercial
deployment. The sooner we achieve commercial deployment, the sooner this capital
requirement would arise. If additional financing is not obtained, our
accelerated growth plans may have to be deferred. If cash generated by the NTN
Network is insufficient to cover Buzztime's expenses and if additional financing
for Buzztime is not obtained and we cannot reduce cash expenditures at Buzztime
to a sufficient level, we may not be able to sustain the operations of Buzztime
beyond March 2003.
The American Stock Exchange (AMEX) recently adopted several new listing
standards. One new standard was established for listed companies that had at
least five consecutive years of losses as we do. This new standard is that such
companies must maintain shareholders' equity of at least $6 million. We
submitted a plan to achieve compliance with that standard to AMEX, which they
approved with the understanding that such compliance would be demonstrated on or
about mid-November, 2002. That plan was to increase our shareholders' equity
through a combination of conversion of equity-like instruments on our balance
sheet and by raising additional equity.
One such equity-like instrument is in Scientific-Atlanta's (S-A) investment
in Buzztime preferred shares. S-A has an option to exchange the S-A shares of
Buzztime's preferred stock into shares of NTN common stock.
Another equity-like instrument on our balance sheet is our $2 million of
Convertible Notes. We have the ability to convert those Convertible Notes to
common stock at a fixed conversion price of $1.275 per share at maturity on
February 1, 2003. While that date is outside of the timeframe allowed under our
plan with AMEX, such conversion will allow us to bolster our shareholders'
equity by $2 million, which will allow us to maintain continued compliance with
the new AMEX listing guideline. We currently intend to exercise that conversion
option and convert the Convertible Notes to common stock at that time.
To date, we have not raised additional equity. We remain in discussions
with several strategic investors as well as financial investors that we have
contacted through an investment-banking firm. From our informal discussions with
the AMEX Listings Qualifications Department we believe that if we have failed to
achieve compliance with the new $ 6 million net worth standard within
approximately one month of filing this document, we will likely enter into a
process of letters and hearings regarding our continued listing. We believe that
process will take several months. We continue to believe that we will be able to
raise the additional equity capital needed to comply with our plan with AMEX
during the extended time period afforded by the AMEX hearing process. This time
period is expected to extend beyond February 1, 2003, at which time we expect to
exercise our right to convert our $2 million convertible note into equity at a
price of $1.275 per share, raising our net worth by $2 million. However, there
can be no assurance that we will be able to obtain additional equity financing
on terms favorable to us or at all.
During the third quarter PanAmSat successfully repositioned a new
satellite, PanAmSat GIIIR, that took the place of our previous satellite
PanAmSat GIIIC. As we previously disclosed, the GIIIC had been operating with
only one of two transponders functioning for a number of months. That transition
was accomplished seamlessly.
16
The NTN Network has transmitted its data through the FM2 satellite platform
for more than ten years. That arrangement is scheduled to end in February 2005.
We are currently negotiating with the reseller through which we purchase our
satellite capacity to convert the NTN Network to a much higher speed, two-way
VSAT satellite technology over the two-year period ending February 2005.This
anticipated conversion to a two-way satellite technology will be a significant
use of capital resources. We believe that the conversion of our customer
locations may require incremental capital expenditures of $3 to $4.5 million and
increased cash operating expenses (including estimated installation costs) of $2
to $2.5 million over the two-year conversion period. We believe that the cost of
installing and operating the two-way satellite network will be offset both
through expense reductions and by revenue enhancements following the two-year
conversion period. During the two-year conversion period, we believe that this
conversion will have a moderately adverse impact on our earnings in addition to
the use of capital involved. In the longer term, we believe that this conversion
will increase our earnings potential.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. Statement 145 updates, clarifies and simplifies existing accounting
pronouncements including: rescinding Statement No. 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect and
amending Statement No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. Statement 145 is effective for
fiscal years beginning after May 15, 2002, with early adoption of the provisions
related to the rescission of Statement No. 4 encouraged. We do not expect the
adoption of this statement to have a material impact on its financial position
or results of operations.
In July 2002, the FASB issued Statement No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 nullifies EITF Issue No. 94-3, LIABILITY RECOGNITION
FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The principal difference
between SFAS No. 146 and Issue No. 94-3 relates to the recognition of a
liability for a cost associated with an exit or disposal activity. SFAS No. 146
requires that a liability be recognized for those costs only when the liability
is incurred, that is, when it meets the definition of a liability in the FASB's
conceptual framework. In contrast, under Issue No. 94-3, a company recognized a
liability for an exit cost when it committed to an exit plan. SFAS No. 146 also
establishes fair value as the objective for initial measurement of liabilities
related to exit or disposal activities. The Statement is effective for exit or
disposal activities that are initiated after December 31, 2002 although earlier
application is encouraged. The Company is unable to determine the impact on its
financial position or results of operations from the adoption of this statement.
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, 2002, we owned common
stock of an Australian company that is subject to market risk. At September 30,
2002, the carrying value of this investment was $198,000, which is net of a
$619,000 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, 2002,
a hypothetical 10% decline in the value of the Australian dollar would result in
a reduction of $20,000 in the carrying value of the investment.
We have outstanding convertible notes, which bear interest at 8% per annum
and line of credit borrowings, which bear interest at a rate equal to the higher
of the prime rate plus 1.5% per annum, or 9% per annum. At September 30, 2002, a
hypothetical one-percentage point increase in the prime rate would result in an
increase of $20,000 in annual interest expense for line of credit borrowings.
ITEM 4. CONTROLS AND PROCEDURES
In the 90-day period before the filing of this report, our chief executive
officer and chief financial officer (collectively, the "Certifying Officers")
have evaluated the effectiveness of our disclosure controls and procedures.
These disclosure controls and procedures are designed to ensure that the
information required to be disclosed by us in our periodic reports filed with
the Securities and Exchange Commission (the "Commission") is recorded,
processed, summarized and reported, within the time periods specified by the
Commission's rules and forms, and that the information is communicated to the
certifying officers on a timely basis.
17
The Certifying Officers concluded, based on their evaluation, that our
disclosure controls and procedures are effective for NTN, taking into
consideration the size and nature of our business and operations.
No significant changes in the Company's internal controls or in other
factors were detected that could significantly affect our internal controls
subsequent to the date when the internal controls were evaluated.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
INTERACTIVE NETWORK
We have been involved as a plaintiff or defendant in various previously
reported lawsuits in both the United States and Canada involving Interactive
Network, Inc. We reached a resolution with Interactive Network of all pending
disputes in the United States and agreed to private arbitration regarding any
future licensing, copyright or infringement issues which may arise between the
parties. There remain two lawsuits involving us, our unaffiliated Canadian
licensee and Interactive Network, which were filed in Canada in 1992. The
litigation involves licensing and patent infringement issues. These actions
affect only the operations of our Canadian licensee and do not extend to our
operations in the United States or elsewhere. In October 2002, we filed a motion
with the Federal Court of Canada, Trial Division, seeking an Order that
Interactive Network post an additional Canadian $289,976 (equal to approximately
U.S. $196,427) as security for costs based upon our estimate of costs that we
may incur in preparing for and conducting trial of the matter. A hearing on the
motion is scheduled for November 18, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 2, 2002, we issued approximately 40,000 shares of common stock, to
the holders of the outstanding 8% senior convertible notes, in a private
transaction in payment of interest of approximately $40,000 on such notes.
On July 18, 2002, we issued approximately 12,000 shares of treasury stock
in lieu of a cash payment of approximately $13,000 for board of directors'
compensation.
On September 25, 2002, we entered into a three-year agreement with Allen &
Company LLC establishing Allen & Co. as our financial advisor to advise us with
respect to acquisitions, joint ventures, strategic alliances, financing
alternatives and other growth strategies. In connection with the agreement, we
issued warrants to purchase up to 600,000 shares of common stock to Allen & Co.
for services to be provided over a three-year period. The warrants are priced at
$1.00 per share and shall vest and become exercisable as to: i) 200,000 shares
in increments of 1/12 at the end of each three month period immediately
subsequent to September 25, 2002; and ii) 400,000 shares upon consummation of
one or more private placements resulting in at least $4 million in gross
proceeds to us. The warrants shall expire on September 25, 2009.
Each offering and transaction was made without registration under the
Securities Act of 1933, as amended (the "Act") in reliance upon the exemption
from registration afforded by Section 4(2) of the Act and Rule 506 of Regulation
D promulgated thereunder.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.1 NTN Communications, Inc. Warrant Certificate, issued September 25,
2002, to Allen & Company LLC.
(b) Reports on Form 8-K
None.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: November 14, 2002 By: /S/ JAMES FRAKES
-----------------------------------
James Frakes
Authorized Signatory and Chief
Financial Officer
20
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULE 13A-14 OF THE EXCHANGE ACT OF 1934
I, Stanley B. Kinsey, Chief Executive Officer of NTN Communications, Inc. (the
Company) certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
o presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ STANLEY B. KINSEY
Stanley B. Kinsey,
Chairman and Chief Executive Officer
NTN Communications, Inc.
21
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULE 13A-14 OF THE EXCHANGE ACT OF 1934
I, James B. Frakes, Chief Financial Officer of NTN Communications, Inc. (the
Company) certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
o designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
o evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
o presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ JAMES B. FRAKES
James B. Frakes,
Chief Financial Officer
NTN Communications, Inc.
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------
4.1 NTN Communications, Inc. Warrant Certificate, issued
September 25, 2002, to Allen & Company LLC.
- ----------
(1) Filed herewith.
23