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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
_____________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1103425
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5966 LA PLACE COURT
CARLSBAD, CALIFORNIA 92008
(Address of Principal Executive Offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.005 par value American Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-12). Yes [X] No [ ]
The aggregate market value of the common stock held by non-affiliates of the
Registrant as of June 30, 2003, computed by reference to the closing sale price
of the common stock on the American Stock Exchange on June 30, 2003, was
approximately $73,708,479. Shares of common stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 5, 2004, Registrant had 52,611,430 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business....................................................... 1
2. Properties..................................................... 16
3. Legal Proceedings.............................................. 16
4. Submission of Matters to a Vote of Security Holders............ 16
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 17
6. Selected Financial Data........................................ 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation............................. 18
7A. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 37
8. Consolidated Financial Statements and Supplementary Data....... 37
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 37
9A. Controls and Procedures........................................ 37
PART III
10. Directors and Executive Officers of the Registrant............ 39
11. Executive Compensation........................................ 41
12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 44
13. Certain Relationships and Related Transactions................ 45
14. Principal Accountant Fees and Services ....................... 46
PART IV
15. Exhibits, Consolidated Financial Statement Schedule, and
Reports on Form 8-K........................................... 47
Index to Consolidated Financial Statements and Schedule....... F-1
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THE 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.
FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS AND ARE SUBJECT TO RISKS,
UNCERTAINTIES, AND ASSUMPTIONS THAT MAY BE DIFFICULT TO PREDICT. 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 THIS REPORT UNDER THE SECTION
ENTITLED "RISK FACTORS," AND IN OTHER REPORTS WE FILE WITH THE SECURITIES AND
EXCHANGE COMMISSION FROM TIME TO TIME. WE UNDERTAKE NO OBLIGATION TO REVISE OR
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENT FOR ANY REASON.
PART I
ITEM 1. BUSINESS
GENERAL
We operate principally through four business segments, the NTN Interactive
Television Network ("NTN iTV Network" or "iTV Network"), NTN Wireless
Communications ("NTN Wireless"), NTN Software Solutions ("Software Solutions"),
which combine to form our NTN Hospitality Technologies Division (formerly the
NTN Network Division), and our wholly owned subsidiary, Buzztime Entertainment,
Inc. ("Buzztime").
o The NTN iTV Network transmits a wide variety of popular interactive
games, advertisements and informational programming delivered daily to
consumers in approximately 3,500 restaurants, sports bars and taverns
throughout the United States and Canada, as well as hotels, airlines,
cruise ships and active adult communities.
o NTN Wireless offers a complete line of on site wireless communication
management products, including GuestCall(R) and ServerCall(R)paging
systems, repair and replace programs for pagers, and SurveyCheck
(trademark of Superb Serv LLC) electronic touch screen comment cards.
The hospitality product suite is built around the goal of using
technology to improve the customer experience and front-of-store
efficiencies. NTN Wireless also offers on site messaging solutions for
hospitals, church and synagogue nurseries, salons, business offices,
and retail establishments. More than 2,800 sites currently use NTN
Wireless products, including such national chains as Darden
Restaurant's Olive Garden, Logan's Roadhouse, O'Charley's, and more,
making NTN Wireless one of the top providers of hospitality management
products in North America.
o Software Solutions designs, develops, and markets innovative software
for the restaurant and hospitality industry. Software Solutions'
primary products include: NTN VISION(TM)- a Windows based POS
restaurant management system; NTN Enterprise(TM)- a web-based
enterprise management system; NTN ProHost(R), a Windows based seating
management system; NTN RSViP(R), a Windows based reservation
management system; as well as NTN Member Services - stored value gift
card and loyalty programs designed to increase customer retention.
More than 300 different companies in more than 3,300 locations in 43
countries are currently using our Software Solutions products.
Software Solutions customers include Bahama Breeze, Charlie Trotters,
Domino's Pizza, Gaylord Entertainment, MGM MIRAGE, Rainforest Cafe,
Tavern on the Green, and The Cheesecake Factory.
o Buzztime is a leading developer and distributor of real-time
interactive television entertainment programming. Our Buzztime(R)
trivia channel is the only 24-hour multiplayer, two-way game service
created exclusively for television audiences. The Buzztime channel
features play-along trivia games for players of all interests and
ability levels with real-time competition and rankings among
households.
Unless otherwise indicated, references herein to "NTN," "we," "us" and "our"
include NTN Communications, Inc. and its consolidated subsidiaries. Our
headquarters are located at 5966 La Place Court, Carlsbad, California 92008,
telephone (760) 438-7400. NTN Communications, Inc. was incorporated in Delaware
in 1984.
INDUSTRY SEGMENTS
Financial information for each of our business segments for each of the last
three fiscal years is contained in the Notes to the Consolidated Financial
Statements included in Item 15 of this Form 10-K.
BUSINESS STRATEGY
Our current strategy is to leverage our unique interactive entertainment as a
means of growing our business units. First, we intend to be a leading provider
of interactive communications and entertainment offerings to the hospitality
industry through the NTN Hospitality Technologies Division. Second, we plan to
be a leading developer and distributor of interactive entertainment for the
in-home market through interactive television and wireless devices via Buzztime.
To accomplish our objectives, we are pursuing strategies to:
o Increase the number of hospitality locations serviced by the NTN
Hospitality Technologies Division through its NTN iTV Network, NTN Wireless
and Software Solutions segments. 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 with the intent to become the first content provider to deploy a
digital interactive television entertainment channel. Currently we have
launched the Buzztime channel on Susquehanna Communications' York,
Pennsylvania and Williamsport, Pennsylvania systems. We have also launched
the Buzztime channel on Time Warner's Portland, Maine system and on Comcast
Cable's system in Baltimore, Maryland. We have adapted, or are planning to
adapt, our interactive trivia game show content and technology to the
leading interactive television platforms. We are also planning further
adaptations to other platforms, as needed, to gain market share by
partnering with major industry manufacturers and distributors, as well as
to utilize our broadcast interactive television studio as a development and
production facility to develop and deepen relationships with media-related
companies. We plan to continue our efforts in early-stage wireless
entertainment through partnerships with leading wireless distributors and
carriers.
o Increase revenues through current and new sources. The NTN Hospitality
Technologies Division receives revenues from three major areas:
subscription fees from out-of-home hospitality locations along with related
third-party advertising revenue and sales of pagers and restaurant
management products, including sales and support of software products. We
expect to continue generating revenue through these sources and, by growing
our customer base, we also expect to see revenue growth in service and
advertising revenue. Similarly, as Buzztime gains distribution with cable
and satellite television operators, we expect to increase revenue through
license fees paid by cable and satellite television operators, fees paid by
interactive television home subscribers for premium services or
pay-per-play transactions, and advertising revenue.
o Both the NTN Hospitality Technologies Division and Buzztime may also
explore market opportunities to acquire complementary businesses to
increase revenues and earnings. One example of a recent acquisition is NTN
Wireless, which generated over $4.7 million in revenues through sales of
restaurant pagers and related products during 2003. Another example is
Software Solutions, which we formed in July 2003 when we acquired the
assets and certain liabilities of Breakaway International, Inc. Finally, on
December 15, 2003, we acquired the assets of NTN Interactive Network, Inc.,
our Canadian licensee since 1985. This acquisition served to open the
Canadian territory for the marketing and sale of our products and services
and immediately provided us with an installed NTN iTV Network subscriber
base of approximately 400 sites.
We have incurred consolidated net losses in the last five years and expect
to incur consolidated losses through at least the end of 2004. Recent losses
have been primarily as a result of significant, planned development expenditures
related to Buzztime for which no significant revenues have yet been generated.
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THE NTN HOSPITALITY TECHNOLOGIES DIVISION
GENERAL
The NTN Hospitality Technologies division provides consumer-oriented
interactive communications and entertainment products to the out-of-home
hospitality industry including restaurants, sports bars, taverns, cruise ships,
hotels and active adult communities who are looking for a competitive
point-of-difference to attract and retain customers.
We have maintained a unique and preemptive position in the hospitality
industry for over 18 years as a platform for providing interactive trivia and
play-along sports programming. We believe that strong growth opportunities exist
by continuing to leverage our preeminent entertainment product and our installed
base of 3,125 United States venues to include other interactive communications
and entertainment services that effectively increase both breadth and depth of
their business in this segment.
We have adopted the mission to become the leader in providing distributed
network systems comprised of INTERACTIVE COMMUNICATION and ENTERTAINMENT (ICE)
services to the out-of-home market. As such, the division is evolving from one
that provides a single product--interactive entertainment located primarily in
the bar area--to a full-service provider of "front of the house" products and
services across the establishment. These products and services include on site
wireless commercial communication services, seating management, point of sale,
reservation system and enterprise software for the hospitality industry,
additional entertainment services and devices, interactive training and an
expanded set of member services--including emerging stored value gift and
loyalty card programs. Providing this expanded array of products will allow us
to offer additional value to, and grow revenues in, our primary markets, as well
as to expand the market to include hospitality venues such as fine dining and
family dining formats that are beyond our traditional customer base of casual
dining, sports bars and taverns.
The NTN Hospitality Technologies Division's operations can be divided into three
operating segments:
NTN iTV NETWORK SEGMENT
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Approximately 78% of our current revenues come from the operations of the
NTN iTV Network, the largest segment of NTN Hospitality Technologies. The NTN
iTV Network is the longest running out-of-home interactive television network in
the world. We receive service fees from hospitality venues that receive the
transmission of our interactive trivia quiz show and play-along sports
programming. We transmit through our iTV Network engaging, interactive game
content to the hospitality locations where patrons use our wireless interactive
game devices to interact with content displayed on television screens. Our NTN
iTV Network also earns revenues from advertising and marketing communications
services to companies seeking to reach the over 6 million unique out-of-home
consumers each month that visit the iTV Network's over 3,100 domestic
installations. Via an average of four dedicated television screens per location,
we provide advertisers with a targeted, cost-effective way to communicate their
brand message, obtain consumer feedback, and stimulate product trial.
During 2003, our iTV Network also received licensing royalty revenue from
NTN Interactive Network (NTNIN), a division of Chell Group Corporation, our
Canadian licensee, which maintained approximately 400 sites as of December 2003.
On December 15, 2003, we acquired most of the operating assets, certain
liabilities and the operations of NTNIN from Chell Group Corporation. We
acquired NTNIN's assets for $200,000 in cash, 238,300 shares of unregistered NTN
common stock valued at $3.70 per share, the contribution of $550,000 in unpaid
licensing royalties, $84,000 of transaction costs and the assumption of certain
liabilities. Total consideration for the acquisition was $1,786,000.
We also have granted an exclusive license to eBet Limited, an Australian
company, to distribute our games in commercial establishments and other public
places throughout Australia and New Zealand via eBet Limited's own licensed
network. Our Australian licensee currently broadcasts to approximately 20
hospitality locations.
NTN WIRELESS SEGMENT
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NTN Wireless earns revenue from the sale of on site wireless paging products
to restaurants and other hospitality locations. These products are provided to
customers while waiting for a table and will activate to let them know when
their table is ready as well as to restaurant staff to alert them to certain
issues, such as when hot food is ready to be served.
SOFTWARE SOLUTIONS SEGMENT
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Software Solutions earns revenue from the sale of seating management,
reservation systems, point of sale systems and enterprise management systems.
Software Solutions was formed in July 2003 when we acquired the assets and
certain liabilities of Breakaway International, Inc. Software Solutions also
derives some revenues from our stored value gift and loyalty card programs.
Loyalty card programs are becoming increasingly popular among restaurants and
other hospitality establishments as they provide incentives for customers to
return more frequently.
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PRINCIPAL PRODUCTS AND SERVICE:
NTN iTV NETWORK
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THE PRODUCT
Our NTN iTV Network broadcasts a wide variety of entertaining and popular
interactive play-along sports and trivia games to consumers in approximately
3,125 United States venues. Patrons play an estimated 17 million games per
month, using our wireless hand-held game device, called the Playmaker(R), which
allows them to compete locally and nationally with real-time scoring. We have
deployed approximately 50,000 Playmakers across our iTV Network in the United
States. In addition, our research indicates that an average of 4.3 patrons view
and participate in the game for every Playmaker in use. We believe that no other
company has created such broad hospitality industry relationships or captured
such a large and diverse out-of-home audience. The strong demand for our NTN iTV
Network is supported by third-party research indicating players stay longer,
spend more, return more frequently and refer others to an NTN iTV Network
establishment (source: Actionable Marketing Research, May 2000).
We target national and regional hospitality chains as well as local
independent venues that are looking for a competitive point-of-difference to
attract and retain customers. Our customers include leading companies in the
casual-dining restaurant segment such as TGIFriday's, Bennigan's Irish Grill,
Applebee's, Damon's Grill and Buffalo Wild Wings, as well as over 2,700
independent locations in North America.
Through the broadcast of engaging interactive content, our NTN iTV Network
enables single- and multi-player participation as part of local, regional,
national or international competitions supported with prizing and recognition.
Unlike coin-operated games, live entertainment and themed events which are
either single-player based, expensive and/or require effort to coordinate and
conduct, the NTN iTV Network offers a turnkey solution of unique multi-player,
multi-venue entertainment requiring virtually no employee involvement at a
fraction of the comparable cost.
Our NTN iTV Network is also the only interactive television network
providing advertising and other marketing communications services to companies
seeking to reach the over 6 million unique out-of-home consumers each month and
looking for a targeted, cost-effective way to communicate their brand message,
obtain consumer feedback and stimulate product trial. Unlike current out-of-home
advertising vehicles which are either static or lack multiple consumer exposure,
we provide, as part of the trivia quiz show and play-along sports broadcasts, an
end-to-end marketing communications solution comprised of full-motion video
commercials, promotional messages, advergaming contextual opportunities and
real-time interactive research capabilities at costs well below current media
and research alternatives.
Historically, our advertising clients have come primarily from the beer,
wine and spirits industries, reflecting the natural appeal of the NTN iTV
Network as a place-based advertising medium. However, beginning in 2001, we
began to take steps to broaden the client base beyond traditional alcoholic
beverage companies by securing the Dodge Division of Daimler-Chrysler to support
the launch of the new Ram Truck; Lions Gate Entertainment and Universal Pictures
to support motion picture and DVD releases; as well as University Games, one of
the top five board games companies, to support the introduction of one of its
more popular board games.
VALUE PROPOSITION
The NTN iTV Network has established itself as a cost-effective means of
generating traffic to our domestic hospitality locations, creating loyalty and
return on investment based on the ability to positively impact venue revenue
because players stay longer (39% compared to non-players); spend more (47% more
than non-players); return more often (72% more than non-players); and
demonstrate positive word-of-mouth (90% have or will recommend an NTN subscriber
venue to a friend) (source: Actionable Marketing Research, May 2000).
By distributing turnkey promotional and marketing support to these venues,
we provide a competitive advantage, as well as provide a cost-effective
entertainment option when compared to other alternatives such as live
entertainment, karaoke and food and drink discounts.
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Our NTN iTV Network provides a number of advertising units per hour to the
venue. These units may become a revenue and profit center to our customers by
allowing them to cross-promote internal programs and services, or to re-sell to
local area merchants to offset network subscription costs and/or generate
profit.
Our customers may employ our proprietary interactive polling service,
OMNIPoll(TM), in conjunction with network programming and our wireless Playmaker
units to regularly deliver custom player feedback on food, service and
promotions, allowing the venue to gauge customer satisfaction levels and make
adjustments if necessary.
NTN iTV Network's hospitality customers pay us an average of $531 per month
per venue to use our interactive technology, and to offer our game transmissions
to their patrons. We also historically have charged an additional subscription
fee of $750 per year for our popular QB1(R) Predict-The-Play(R) football game
played in conjunction with live, televised professional and college football
games. More recently, the QB1 game has been bundled into an increased base
package. NTN iTV Network venues enter into one- and two-year service agreements,
with the average customer life of an NTN iTV Network site/venue of approximately
three years.
TECHNOLOGY
The NTN iTV Network utilizes a proprietary delivery technology called DITV
(Digital Interactive Television). DITV uses the latest Windows-based development
tools and multimedia capabilities, resulting in enhanced, high-resolution
graphics and full-motion video. DITV makes the service more appealing to
advertisers as ads appear as TV commercials rather than static billboards--DITV
technology allows advertisers to use existing video footage in their ads on the
NTN iTV Network.
For ten years, the NTN iTV Network transmitted its data through an FM2
satellite platform and was received by a PC server (base station) installed at a
subscriber's hospitality venue which is configured with a special communications
card equipped for satellite data reception. That arrangement is scheduled to end
in February 2005. We have entered into equipment purchase and satellite service
agreements to convert the NTN iTV Network to a much higher speed, two-way VSAT
(Very Small Aperture Technology) satellite technology over the two-year period
ending February 2005. These agreements are with the same reseller of satellite
services that provided the FM2 satellite platform to us.
This anticipated conversion to the two-way satellite technology will require
us to utilize significant 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. At December 31, 2003,
approximately 23% 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, resulting from ancillary services enabled by the new technology.
END USER DEVICES
Our DITV system also uses a 900 MHz wireless Playmaker, which features a 900
MHz transceiver, a monochrome LCD display and sealed keypad. Our system does not
require the "wiring" of the establishment and the Playmakers have no breakable
exterior components. As a result, external interference and Playmaker failure
has been significantly reduced over previous versions. Our Playmakers are a
rugged combination of hardware and firmware optimized for hospitality
environments.
CONTENT SERVICES
The NTN iTV Network licenses game content (both trivia and play-along
sports) from Buzztime and third party content providers. Buzztime creates the
game content that we transmit to NTN iTV Network hospitality locations. Each
hospitality location is individually addressable, allowing us to send specific
content to selected sites. Hospitality locations throughout the United States
and Canada receive our content, in the form of broadcast programming, 15 hours
each day, 365 days each year.
GAME CONTENT & PROMOTION
Our primary product is the transmission of a variety of sports and
interactive trivia games that entertain and challenge a player's skill and
knowledge while creating significant customer loyalty.
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A core component of our content is QB1, a live, play-along football game in
which players predict the outcome of each play broadcast within professional and
collegiate football games. We have held a license with the NFL for 18 years in
conjunction with QB1.
We also offer a suite of Playmaker only games. This suite of games is
independent of the NTN iTV Network and may be played directly on our wireless
Playmakers. Players access the games by logging onto a Playmaker and following
the instructions on the Playmaker screen.
Playmaker Games:
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Acey Duecey Two cards are dealt face up. Players bet that the
third card will fall between the previous two
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Crystal Ball Ask the Crystal Ball a question and receive your
answer
---------------- --------------------------------------------------
Playmaker Poker Compete against the house in a game of
jacks-or-better poker
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Shark Attack Just like hangman, but with an oceanic twist
---------------- --------------------------------------------------
We provide premium trivia competitions during evening hours when the venues,
particularly restaurants and taverns, tend to be busiest. During these programs,
each venue system simultaneously displays selected trivia questions on
television monitors. Participants use Playmakers to enter their answers. Answers
are collected, transmitted and tabulated. We display the score of each
participant on the television monitors in our customer venues, along with
national, regional and local rankings, as applicable. Players compete for prizes
and merchandise in their local venues, as well as on a regional and national
scale. In addition to game interaction, other consumer features available on the
Playmaker include real-time sports scores transmitted directly to the units and
player chat.
COMPETITION
Currently, we have no direct competitors to the NTN iTV Network that furnish
live, multi-player interactive entertainment in a similar scope and nature.
While we have no direct competitors, we do compete for total entertainment
dollars in the marketplace. Other forms of entertainment provided in public
venues include music-based systems, live entertainment, cable and pay-per-view
programming, coin-operated single-player games/amusements and traffic-building
promotions like happy hour specials and buffets. However, none of the
alternatives provide the combination of live sports and trivia entertainment
broadcast 15 hours per day, 365 days per year, and most require some involvement
with the venue staff to be successful, which conflicts with the primary
responsibility of the staff.
NTN WIRELESS
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THE PRODUCT
To expand presence in the hospitality industry, during 2002 we completed the
acquisitions of the assets of each of ZOOM Communications and Hysen
Technologies, manufacturers and sellers of on-site wireless paging products.
On-site paging systems consist of guest paging systems designed to improve the
wait time for hospitality guests and server paging systems designed to alert
servers when prepared food is ready to be served. Our guest paging system,
GUESTCALL(R), is comprised of a tabletop transmitter and between 30-70
individual pagers that are distributed to guests upon arrival. The server paging
system, SERVERCALL(R), is made up of transmitter located in the kitchen area,
and between 12-36 individual pagers for the wait staff. Both systems may
vibrate, flash or both to indicate either the table or food are ready.
VALUE PROPOSITION
On-site paging systems are designed to improve table turnover and throughput
for a venue's operations. The sooner a guest is seated, and the quicker prepared
food is served, the faster a table can be effectively "turned" without
negatively impacting the customer experience. If a typical restaurant can add
just three parties of four during each waiting shift (defined as Thursday,
Friday and Saturday nights), with a $17.00 average per person check, the annual
incremental gross revenue to the venue over a three-year period would be
$121,000.
6
TECHNOLOGY
Onsite paging systems consist of a small tabletop transmitter or PC-based
software and transmitter communicating with a group of pager units in either
vibration flashing LED, or alpha-numeric combinations. These systems are defined
as "closed systems," meaning they work within a limited area for a specific
purpose. The transmitter and pagers are set to the same frequency, which
typically carries a range of between one-quarter and one-half mile. Most early
paging systems operated used either a 27 or 45 MHz (AM) frequency, which
demonstrated limited range and reliability. Recently, paging companies adopted a
newer standard, POGSAG, which operates a UHF frequency range of between 450-470
MHz. This higher frequency allows for wider range of transmission, as well as
the ability to provide signal transmission in venue environments characterized
by multi-floors and other construction obstacles like concrete walls.
COMPETITION
We are not aware of any industry figures for the hospitality paging segment.
Within the industry, it is estimated that JTech, based in Boca Raton, Florida,
holds a majority position of the hospitality paging market, JTech markets guest
paging and server paging systems, and has recently expanded their product mix to
include other operations-based products that integrate with a venue's POS system
for check management/paging and electronic guest survey cards. Long Range
Systems of Dallas, Texas, also markets products similar to ours and those of
JTech, including guest and server paging products and electronic guest survey
card systems.
NTN SOFTWARE SOLUTIONS
- ----------------------
THE PRODUCT
Our Software Solutions' products currently target the specific operational
and reporting requirements of the food service industry and include: NTN VISION,
NTN ENTERPRISE, NTN PROHOST, and NTN RSVIP. These products are developed using
the following Microsoft technologies: Visual Basic 6.0, Visual Basic Visual C++
6.0, ASP .NET, and SQL Server 2000. Our products are currently used by more than
300 companies in more than 3,300 locations in 43 countries. Our NTN Software
Solutions customers include Domino's Pizza, The Cheesecake Factory, MGM MIRAGE
and Gaylord Entertainment.
NTN VISION is our flagship point-of-sale and back office management system.
It is a multi-tier, 32-bit Windows application designed for use in quick service
and delivery-based operations. Order Entry takes advantage of touch screen
technology and provides a robust and easy-to-use interface. NTN VISION
accomplishes several important software development objectives such as: database
independence, multiple language support, locale independence, multiple currency
support, open system architecture, and the ability to handle multiple locations
or menu setups within one system installation. NTN VISION is capable of powerful
reporting and information analysis to provide management with the necessary
tools to decrease costs and increase profits.
NTN PROHOST is our guest and seating management application that coordinates
all activities with guests, tables, and servers. It is designed to get more
customers seated, served and satisfied. NTN PROHOST helps restaurants turn more
tables, more often, which means turning higher profits.
NTN RSViP is a reservations management solution designed to accept advance
reservations for single or multiple locations. RSVIP is a client/server
application which connects multiple users in a restaurant to a central database
server. NTN RSVIP provides powerful features that include: 1) quick capture of
complete guest information, 2) elimination of overbooking with manager override
functions, 3) ability to view repeat guest profiles and history, 4) tracking of
customer preferences, 5) tracking of specific "types" of guests for targeted
marketing programs, 6) automatic Microsoft Word mail-merge feature for mailing
campaigns, and 7) customizable reporting features.
NTN ENTERPRISE is an enterprise management solution that acts as a central
repository for all store data. NTN ENTERPRISE uses NTN VISION to transfer store
information to this repository through the Internet, and utilizes a web-based
portal interface for users to access store data and reports. These reports can
be viewed online, printed, or exported to multiple file formats. NTN ENTERPRISE
also includes a powerful communications forum that allows users to post and
reply to messages in a discussion format. Future releases planned for 2004 will
add centralized store setup and marketing capabilities.
NTN MEMBER SERVICES is a unit that was transferred to Software Solutions
following the Breakaway transaction. This unit markets a stored-value gift
loyalty card product line that we obtained as part of the ZOOM asset acquisition
in April 2002. We believe key opportunities exist on two fronts. First, by
linking this program with our 1.1 million Players Plus(R) loyal player database
to combine frequent purchases with game play to offer a unique, comprehensive
player loyalty program. Recent research indicates that our Players Plus members
prefer discounts on food and beverage over other alternatives; combining a
7
frequent diner program with a frequent player program as part of an expanded
Players Plus service enables us to market a meaningful loyalty program to our
customer base. In addition, the cost of designing and implementing a loyalty
program has been prohibitive to most small independent venues. By offering a
combined gift and loyalty program to the approximately 2,400 independent NTN iTV
Network venues, we are in a position to provide a unique service to this
constituent that would otherwise not have the financial wherewithal to develop
on their own.
The third party technology to support this program is established, requiring
either an integrated card reader installed via phone line, printer or,
alternatively, integration into the venue's existing POS system. In the case of
the former, costs and interface is established; the latter will require a
software interface written for the specific POS system. Currently, we have an
interface program written for common MICROS systems, a leading POS provider, and
will develop and bill for other systems on a project basis. The cards are
standard stored-value magnetic strip cards produced in association with two
third party system providers. We act as an intermediary and the transactions are
processed through the third party system providers.
COMPETITION
Software Solutions competes with a number of entities within the hospitality
point-of-sale arena, including the Aloha Technologies unit of Radiant Systems,
Inc., MICROS Systems, Inc. and InfoGenesis.
PROFESSIONAL SERVICES
In addition to software development, Software Solutions provides
professional services to its customers and partners including software support,
hardware configuration, systems staging, deployment, and training services.
Our technical support group provides all levels of technical support for
Software Solutions' software products and certain hardware configurations.
Engineering and onsite support for hardware is arranged through the manufacturer
or service organization providing onsite services. Software Solutions' hours of
operation for technical support are 8:30am to 2:00am Central Time, seven days
per week.
Our production group provides services associated with providing turnkey
systems to customers and partners. This includes inventory management, system
configuration, system testing (burn-in), and shipping services.
Our field services group provides complete management of the deployment
process and includes system installation, software setup, and training services.
Software Solutions does not provide site preparation services such as network
cabling, electrical, communications installation, and physical site preparation
for mounting and housing of various types of equipment.
NTN HOSPITALITY TECHNOLOGIES SALES & DISTRIBUTION
Currently we sell all products and services through direct sales employees
located in major metropolitan markets, with independent dealers and
representatives in smaller metro markets and rural areas. Our sales cycle varies
by customer type, requiring as little as one week for independent customers and
up to 18 months for national chain accounts. We seek to generate qualified leads
for a follow-up field presentation through our marketing and promotion efforts.
During the field presentation, our sales representative determines the
prospect's need and features possible solutions through the benefits of each
product or service presented, including an interactive demonstration, detailed
return on investment calculations, local advertising opportunities made
available through the NTN iTV Network and third party research results outlining
player purchase behavior and success stories from existing NTN iTV Network
subscribers. Occasionally, demonstration units are provided to validate the
system, with the intention to finalize the sale upon completion of the trial.
NTN HOSPITALITY TECHNOLOGIES MARKETING AND PROMOTION
We market our services to the industry primarily through advertising in
national trade periodicals, national and regional trade shows, telemarketing,
direct mail and direct contact through our field sales and marketing
representatives. We organize and track all sales prospects through our
distributed database software.
We have found the most effective trade periodicals for our marketing
purposes to be Nation's Restaurant News, Nightclub & Bar and Military
Hospitality. The key national and regional trade shows to us are the National
Restaurant Association Show, Nightclub & Bar Expo, Pizza Expo, FS/Tech, WestEx,
Northeast Foodservice, MMR and MUFSO. In addition, we participate in most of the
national chain conference shows. Our field representatives also participate in a
substantial number of smaller regional shows.
8
Another core element to our marketing is our Players Plus frequent player
program. Our Players Plus frequent player club, numbering over 1.1 million
current membership records, offers advertisers an effective tool for market
research and direct marketing. Players Plus members join by entering their name,
address, zip code and identification number into a Playmaker or at www.ntn.com,
which we then capture at our broadcast center. Members earn points each time
they play. Points earned by Players Plus members have no cash or redemption
value. Sponsors are capable of receiving feedback through interaction with
customers in the form of customer surveys on the NTN iTV Network or via email.
Our research indicates that players place a high value on recognition for
achievement and game play prowess. Achieving higher point levels earns the
Players Plus member a higher status within the NTN iTV Network rankings. We
broadcast the leading player names and rankings within their home location and
provide network-wide national exposure as well, which supports higher player
satisfaction levels and repeat game play. Finally, we use our installed base of
over 12,000 television screens to cross-sell other site/venue services,
including wireless paging systems and member services such as gift and loyalty
card programs.
NTN HOSPITALITY TECHNOLOGIES RAW MATERIALS
With the exception of our Playmakers, each system installed at a hospitality
location is assembled from off-the-shelf components available from a variety of
sources. We are responsible for the installation and maintenance of each system.
Our current Playmaker is a hand-held, 900 MHz radio frequency device used to
enter choices and selections by players and is manufactured by Climax
Technology, Ltd., a non-affiliated manufacturer in Taiwan.
Our NTN Wireless products are manufactured based on our specifications under
contract through a third party manufacturing company located in Seoul, Korea.
The contract expires in April 5, 2007. We believe the quality provided by this
manufacturer is superior to that provided by manufacturers located on mainland
China, and has become a competitive advantage. While sufficient alternative
supply chain capabilities exist, we would face business interruption if we were
to lose the existing manufacturer, and there are no assurances that we could
recover lost business in a timely manner.
NTN HOSPITALITY TECHNOLOGIES SEASONALITY
Our NTN iTV Network business has had some seasonal elements. While we bill
revenue monthly as service is provided to customers, three factors increase our
revenues in the second half of the year over the first half. First, sales to new
locations have traditionally been higher in the summer and early fall months
compared to the rest of the year. Second, existing customers pay an incremental
amount for our QB1 Predict the Play football game and order additional
Playmakers to meet their patrons' demands to play this game in late summer and
early fall. Third, we typically gain additional advertising customers who want
to participate in our football-oriented broadcasts. In the third quarter of
2003, and coinciding with the rollout of our new two way VSAT broadband
satellite platform, we have started bundling our QB1 Predict the Play football
game with our trivia game. This will likely reduce the seasonal elements of our
business.
The hospitality industry has historically experienced a relatively high
business failure rate. That factor combined with change in ownership and
non-renewal of contracts leads us to lose a certain amount of our customers each
year. We refer to this collective loss of customers as "churn." Our historical
churn experience has also been seasonal in that the percentage of churn has been
highest following the completion of the professional football season in
February, although churn occurs in all months. During our operating history,
approximately 18% to 30% of the existing NTN iTV Network customers at the
beginning of a year have churned by the end of that year. We believe the
introduction of the new digital network and 900 MHz Playmakers have reduced the
churn rate. The churn rate was 22% for 2003 and 19% for 2002.
NTN HOSPITALITY TECHNOLOGIES SIGNIFICANT CUSTOMERS
Our customers are diverse and varied in size as well as location. We are not
dependent on any one customer. We do not have any individual customer, including
chain locations, who accounted for 10% or more of our consolidated revenues in
2003, 2002 or 2001.
NTN HOSPITALITY TECHNOLOGIES BACKLOG
We historically have not had a significant backlog at any time because we
normally can deliver and install new systems at hospitality locations within the
delivery schedule requested by customers (generally, within two to three weeks).
Shipments of NTN Wireless products occur in most cases within 14 days of receipt
of order.
9
BUZZTIME ENTERTAINMENT, INC. SUBSIDIARY
GENERAL
Buzztime, our wholly owned subsidiary, was incorporated in the state of
Delaware in December 1999 with the objective of creating new revenue from
distributing our 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 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 interactive television
sports games and real-time viewer polls.
Currently we have launched the Buzztime channel on Susquehanna
Communications' York, Pennsylvania and Williamsport, Pennsylvania systems. We
have also launched the Buzztime channel on Time Warner's Portland, Maine system.
In November 2003, we also commenced a trial on Comcast's Baltimore, Maryland,
system. We believe these deployments were the first deployment of a real-time,
two-way game channel via cable TV in the U.S. that operates on commercially
deployed digital set-top boxes. In addition, Buzztime remains the primary
content provider to the NTN iTV Network and currently works with leading
companies such as Scientific-Atlanta, Inc., The National Football League (NFL),
Liberate Technologies, Media General and others to bring consumers real-time
interactive entertainment.
PRINCIPAL PRODUCTS/SERVICES AND DISTRIBUTION
There are three categories of Buzztime content: live, interactive trivia
game shows which are broadcast on the hour, quarter hour or half hour; real-time
predictive TV play-along sports games where viewers predict certain strategic
events while viewing live sports television broadcasts; and live viewer polls
which can be broadcast in conjunction with a live televised event. All of the
games listed below are played on the NTN iTV Network:
Prime Time Games
- ------------------------------------- ------------------------------------------
Passport(TM) Travel trivia
- ------------------------------------- ------------------------------------------
Playback(TM) Music trivia
- ------------------------------------- ------------------------------------------
Showdown(R) Advanced trivia challenge
- ------------------------------------- ------------------------------------------
SIX(R) General trivia
- ------------------------------------- ------------------------------------------
Spotlight(TM) Entertainment trivia
- ------------------------------------- ------------------------------------------
Sports IQ(TM) Sports Trivia
- ------------------------------------- ------------------------------------------
Sports Trivia Challenge(R) Sports Trivia
- ------------------------------------- ------------------------------------------
Featured Games
- ------------------------------------- -----------------------------------------
Abused News(R) Humorous trivia based on recent news
- ------------------------------------- ------------------------------------------
Battle of the Sexes(TM) Gender based trivia; created under license
from Imagination Entertainment Limited
- ------------------------------------- ------------------------------------------
BrainBuster(R) Difficult level general trivia
- ------------------------------------- ------------------------------------------
Get Reel(TM) Movie trivia
- ------------------------------------- ------------------------------------------
Glory Daze(TM) 60s and 70s trivia
- ------------------------------------- ------------------------------------------
Jukebox(TM) Music trivia
- ------------------------------------- ------------------------------------------
PasTimes(TM) History trivia
- ------------------------------------- ------------------------------------------
Retroactive(TM) TV trivia from 50s - 70s
- ------------------------------------- ------------------------------------------
SciFiles(TM) Science Fiction trivia
- ------------------------------------- ------------------------------------------
Speed(TM) Fast paced general trivia
- ------------------------------------- ------------------------------------------
Topix(TM) Theme based trivia
- ------------------------------------- ------------------------------------------
Triviaoke(R) Music trivia
- ------------------------------------- ------------------------------------------
Tuned In(TM) Television trivia
- ------------------------------------- ------------------------------------------
10
Regularly-Scheduled Programming
- ------------------------------------- ------------------------------------------
Appeteasers(TM) 15-minute general trivia
- ------------------------------------- ------------------------------------------
Countdown(R) General trivia
- ------------------------------------- ------------------------------------------
Wipeout(TM) General trivia
- ------------------------------------- ------------------------------------------
Selectable Games
- ------------------------------------- ------------------------------------------
Nightside(R) Adult-oriented trivia
- ------------------------------------- ------------------------------------------
Predict-the-Play Games
- ------------------------------------- ------------------------------------------
QB1(R) Interactive strategy game played in
conjunction with live telecasts of college
and professional football
- ------------------------------------- ------------------------------------------
Race Day(TM) A predictive game combined with auto
racing trivia played in conjunction with
stock car races
- ------------------------------------- ------------------------------------------
Classics
- ------------------------------------- ------------------------------------------
Bingo Interactive version of the classic game
- ------------------------------------- ------------------------------------------
MARKETING
Our current marketing efforts are concentrated on the cable and satellite
television markets to build awareness and distribution. Once the Buzztime trivia
channel has launched within cable and satellite systems, we will add
consumer-marketing efforts. Our intent is to take advantage of Buzztime's early
market advantage by securing trial agreements with as many large cable operators
as possible. Once each trial has successfully concluded, we intend to negotiate
carriage and licensing agreements with the cable operators. As distribution of
the Buzztime trivia channel increases, we will offer to sell premium and
pay-to-play services to the players and advertising and marketing opportunities
to marketing companies. Our business model is supported by strong market demand
for compelling content on emerging interactive television platforms and the
proven success of our content on existing platforms such as the NTN iTV Network.
Key to revenue growth includes the integration of interactive television
enabling technology in the cable systems, adoption of interactive television
services in the home, penetration of Buzztime content into the cable operators
and the ability to charge either the player/subscriber or the cable operator for
receiving the Buzztime trivia channel. We expect to sell advertising under a
standard cable television model once the content is exposed to a critical mass
of interactive television viewers.
RAW MATERIALS
For media platforms such as cable television, wireless platforms and online
services, we distribute our programs to the recipients who maintain their own
receiving, translation and re-broadcasting equipment. Accordingly, we currently
have no raw materials or equipment needs for these customers beyond our own
back-end servers. Although it is not certain, it is likely that Buzztime's
application will require a single hardware server at each cable operator's head
end system.
COMPETITION
On a broad basis, the consumer has, and will continue to have, many options
in the in-home entertainment market from which to choose. Our interactive
television offering will compete for a share of total home entertainment time
and dollars against broadcast television, pay-per-view and other content offered
on cable and satellite television. We will also compete with other programming
available to consumers through the Internet and online services such as America
Online.
Cable television, in its various forms, provides consumers the opportunity
to make viewing selections from 30 to over 100 free and pay channels, thus
limiting the amount of time devoted to any particular channel. To those
consumers who enjoy watching game shows, the offerings are plentiful from the
networks and the cable programmers. Shows like Jeopardy and Wheel of Fortune,
and those offered 24 hours per day on cable television such as Game Show
Network, are expected to continue to draw audiences. For the most part,
television is currently a passive medium, and does not offer the viewer the
opportunity to participate in its programming, and even less frequently does it
offer programming designed for interactive participation. Buzztime's offering
will differ from most television game programs in two major ways: it will allow
the home consumer to truly interact with the game shows via their remote control
and it will allow the home player to receive a "score" and be ranked both
locally and nationally, on screen for all players to see, in most games. We
believe this is a compelling characteristic that will draw players to the
Buzztime offering.
11
In-home online/Internet game sites will also compete with Buzztime's
interactive television channel. Dozens, if not hundreds, of these sites offer
either trivia game play or similarly styled social, non-violent game play such
as board or card games, games of chance, and strategy games. Internet and online
providers, such as America Online, can provide literally thousands of options
for content and entertainment. The number of Internet game sites competing for
consumers' attention has proliferated in recent years, and we expect the
competition to continue. We believe that our principal competitive factor is
that by offering our games almost solely in the cable space on digital set-top
boxes, Buzztime will attract and retain a large and broad player audience that
is different from the Internet/online audiences. Being on television in consumer
homes has long been considered the premium opportunity for game play, and we are
becoming one of the first game companies to be able to deliver content in that
medium. Because Internet and online services are either confined to a site's
subscriber base or found by only a subset of the game audience, interaction
among viewers is limited to the particular program as offered only on the
specific online service.
Finally, competition within the interactive television space comes from
three or four existing game providers that are also seeking to provide games on
digital set-top boxes, either as single play or networked games. These
competitors include Two-way TV, PlayJam (owned by OpenTV), Visiware, Pixel
Technologies and Zodiac Gaming. We believe we have several key advantages over
these companies. First, most of these competitors focus on stand-alone single
player games for set-tops that are currently deployed in North America. Second,
those that do allow competition with others have limited trivia content or games
in their offerings, and we believe trivia game shows will be one of the most
popular game categories for interactive television. Finally, none, that we are
aware of, has developed the level of field experience with the existing cable TV
platforms that only comes from being commercially deployed.
LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
Our sports games make use of simultaneous telecasts of sporting events.
Where we have a license with a sporting league, we are also permitted to utilize
the trademarks and logos of the teams and the leagues in connection with the
playing of an interactive game.
We are party to a license agreement with NFL Enterprises L.P. Our NFL
agreement grants us data broadcast rights to conduct interactive games on the
NTN iTV Network in conjunction with the broadcast of NFL football games, for
which we pay the NFL a flat royalty independent of revenues billed to
subscribers by the NTN iTV Network in connection with QB1 play. In November
2002, we renewed our license agreement with the NFL through August 6, 2005.
We keep confidential as trade secrets the software used in the production of
our programs. The hardware used in our operations is virtually off-the-shelf,
except for the Playmakers. We own copyrights to all of our programs, formats and
software. In addition to the registration of the trademark for QB1, we have
either received, or have applied for, trademark protection for the names of our
other proprietary programming, to the extent that trademark protection is
available for them. Our intellectual property assets are important to our
business and, accordingly, we maintain a program directed to the protection of
our intellectual property assets.
As of December 31, 2003, we owned one United States patent covering certain
aspects of technology related to an interactive learning system. This patent
will expire in 2017. As of December 31, 2003, we had applied for two additional
patents in the United States.
In June 2001, we entered into a contribution agreement with Buzztime,
effective retroactively to January 1, 2001, whereby we contributed some of our
assets to Buzztime. The assets we contributed to Buzztime included the
interactive trivia game show libraries, the play along sports game libraries and
related technology and intangible assets.
Further, in June 2001, we entered into a licensing and marketing agreement
with Buzztime, effective retroactively to January 1, 2001, whereby Buzztime
granted the NTN iTV Network an exclusive, royalty-free, perpetual license to the
game libraries and related technology for distribution to the commercial market
for group viewing audiences. Buzztime will continue to provide the NTN iTV
Network with new game content created by Buzztime during the ordinary course of
business, as well as maintenance and upgrades to existing content and related
technologies, through 2006. This obligation is subject to a termination right at
the option of Buzztime, upon one year's prior notice to the NTN iTV Network. In
addition, Buzztime will continue to produce Predict the Play applications for
the NTN Network through 2008. Pursuant to the terms of the agreement, the NTN
iTV Network will promote Buzztime during broadcasts of Buzztime programming on
the NTN iTV Network as long as Buzztime continues to supply new game content for
distribution by the NTN iTV Network. Buzztime shall promote the NTN iTV Network
to the best of its ability in the consumer market, including interactive
television and wireless devices.
12
GOVERNMENT CONTRACTS
We provide our broadcast services through the NTN iTV Network to a small
number of government agencies, usually military base recreation units. However,
the number of government customers is small compared to our overall customer
base. We provide our products and services to government agencies under
contracts with substantially the same terms and conditions as are in place with
other non-government customers.
RESEARCH AND DEVELOPMENT
During 2003, 2002 and 2001, we incurred approximately $329,000, $12,000 and
$101,000, respectively, related to research and development projects, including
projects performed by outside consultants. In 2003, our research and development
efforts were related to digital network, wireless and interactive applications.
Our level of research and development activity increased markedly in 2003
compared to 2002 as we began aggressive development efforts on new technology
enhancements including the adoption and rollout of VSAT two-way broadband
satellite technology, a more robust graphics engine for the entertainment
network, enhanced and improved hand-held Playmaker devices and next generation
wireless products.
There is no assurance that we will successfully complete current or planned
development projects or will do so within the prescribed time parameters and
budgets. There can be no assurance, furthermore, that a market will develop for
any product successfully developed.
ACQUISITIONS AND DIVESTITURES
BREAKAWAY INTERNATIONAL
On July 31, 2003, we acquired all of the assets and certain liabilities of
Breakaway International, Inc. (Breakaway), a privately held provider of
restaurant industry hardware and software enterprise solutions. We acquired
Breakaway's assets for $252,000 in cash, 1,292,614 shares of unregistered NTN
common stock, transaction costs and the assumption of certain liabilities. We
will pay additional contingent earn-out amounts in NTN common stock and/or cash
over the next three years, provided that certain targets over the relevant
trailing twelve month period 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 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 $3,623,000, which consisted of 1,292,614 shares
multiplied by the then publicly traded price of $2.44 per share, $252,000 in
cash and $217,000 of transaction costs, plus the assumption of liabilities. To
determine the fair value of the acquired intangible assets and the related
allocation of the purchase price, we commissioned a third party valuation
analysis. That third party analysis determined that the identified intangible
assets and the related useful lives are developed technology ($781,000, 6 year
life), customer relationships ($1,110,000, 6 year life) and non-competition
agreements ($30,000, 3 year life). Results of operations from the acquisition
have been included in our consolidated statements of operations since August 1,
2003 and include $135,000 of amortization of the identified intangibles based
upon the estimated lives.
13
BREAKAWAY INTERNATIONAL, INC.
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Accounts receivable, net $ 333,000
Inventory, net 35,000
Fixed assets, net 108,000
Developed technology 781,000
Customer relationships 1,110,000
Non-competition agreements 30,000
Goodwill 2,225,000
------------
Total assets acquired 4,622,000
------------
Accounts payable and accruals 479,000
Deferred revenue 520,000
------------
Total liabilities assumed 999,000
------------
------------
Net assets acquired $ 3,623,000
=============
NTN CANADA
On December 15, 2003, we acquired most of the operating assets, certain
liabilities and the operations of NTN Interactive Network, Inc. (NTNIN), our
long time Canadian licensee from its parent, Chell Group Corporation Inc. We
acquired NTNIN's assets for $200,000 in cash, 238,300 shares of unregistered NTN
common stock, the contribution of $550,000 in unpaid licensing royalties and the
assumption of certain liabilities.
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 approximately $1,786,000, which consisted of 238,300
shares multiplied by the then publicly traded price of $3.70 per share, $200,000
in cash, the contribution of $550,000 in unpaid licensing royalties, $84,000 of
transaction costs, plus the assumption of $70,000 in liabilities. There will be
a final calculation of the cash component of the purchase price based on the
final closing balance sheet. This calculation may increase the purchase price by
up to $50,000. We expect to conclude the final cost of the transaction during
the second fiscal quarter of 2004 once we finish the review of the closing
balance sheet and receive all transaction-related professional fees.
14
NTN CANADA
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Cash $ 20,000
Accounts receivable, net 235,000
Other current assets 50,000
Fixed assets, net 43,000
Customer relationships 720,000
Trivia database 345,000
Interactive events software 102,000
Trivia software 90,000
Licenses 23,000
Goodwill 875,000
------------
Total assets acquired $ 2,503,000
------------
Accounts payable and accruals 606,000
Leases 44,000
Deferred revenue 67,000
------------
Total liabilities assumed 717,000
------------
------------
Net assets acquired $ 1,786,000
============
To determine the fair value of the acquired intangible assets and the
related allocation of the purchase price, we commissioned a third party
valuation analysis. That third party analysis determined that the identified
intangible assets and the related useful lives are customer relationships
($720,000, 4 year life), trivia database ($345,000, 10 year life), interactive
events software ($102,000, 5 year life) and trivia software ($90,000, 5 year
life). Results of operations from the acquisition have been included in our
consolidated statements of operations since December 15, 2003 and include
$10,000 of amortization of the identified intangibles based upon the estimated
lives.
BUZZTIME
Buzztime once again became our wholly owned subsidiary on January 16, 2003
when we issued 1,000,000 shares of restricted NTN common stock to
Scientific-Atlanta, Inc. ("S-A") in exchange for the surrender by S-A of 636,943
shares of Buzztime Entertainment, Inc. Series A preferred stock pursuant to the
Right of First Refusal and Exchange Agreement entered into by and among NTN,
Buzztime and S-A as of June 8, 2001. S-A still holds warrants to obtain an
additional 159,236 shares of Buzztime's Series A Convertible Preferred Stock
(the "S-A Warrants"). The S-A warrants vest in 10% increments as cable system
operators sign on for the Buzztime game show channel. The exercise price of the
S-A warrants is $1.57 per share.
GOVERNMENT REGULATIONS
The cost of compliance with federal, state and local laws has not had a
material effect upon our capital expenditures, earnings or competitive position
to date. On June 16, 1998, we received approval from the Federal Communications
Commission for our new 900 MHz Playmakers. The 900-MHz Playmaker is an integral
component of our network.
EMPLOYEES
As of March 8, 2004, we employ approximately 235 people on a full-time basis
and 5 people on a part-time basis. We also utilize independent contractors for
specific projects and hire up to as many as 59 seasonal employees as needed to
produce our play along sports games during varying professional and collegiate
sports seasons. None of our employees are represented by a labor union and we
believe our employee relations are satisfactory.
15
ITEM 2. PROPERTIES
We lease approximately 39,000 square feet of office and warehouse space at
5966 La Place Court, Carlsbad, California for our corporate headquarters and
broadcast center. In July 2001, a new five-year lease for the property commenced
upon expiration of the prior lease term that expired in June 2001. Until March
2003, we sublet approximately 11,600 square feet of this office space to
WinResources Computing, Inc. under a sublease entered into in February 2001.
We also lease approximately 1,253 square feet of additional office space
located in San Francisco. This lease expires in April 2005. We sublease this
space to a subtenant for approximately the same amount as our monthly rent. That
sublease expires in April 2005. We also lease approximately 6,480 square feet of
additional office space in Atlanta, Georgia, expiring in September 2005,
approximately 16,981 square feet of additional office space in Arlington, Texas,
expiring in July 2005, and approximately 7,700 square feet in Toronto, Ontario,
Canada, expiring in March 2007. In addition, we lease additional office space in
Mill Valley, California. This lease expires in May 2004. In February 2004, we
entered into a lease agreement for an executive office in New York, New York.
The terms of this lease provide for an initial term of six months, with an
option to renew.
ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of our
business. There can be no assurance that any or all of the following claims will
be decided in our favor and we are not insured against all claims made. During
the pendency of such claims, we will continue to incur the costs of our legal
defense. Other than set forth below, there is no material litigation pending or
threatened against us.
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"). In 1996, 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 which were filed in Canada in 1992. The litigation
involves licensing and patent infringement issues. These actions relate only to
the transmission of the NTN iTV Network to subscribers in Canada 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 the
merger with IN, Two Way TV (US) now owns and controls all of IN's intellectual
property. The action is set for trial to commence April 19, 2004 and the trial
is expected to last 2 weeks. We intend 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. We were served with this
complaint on March 27, 2003. In February 2004, LRS amended their complaint to
eliminate certain allegations relating to infringement of its utility patent for
wireless pagers. This complaint relates to our repair and replacement activities
of LRS pagers, which is not a significant percentage of our NTN Wireless
business. We do not believe that this matter represents a significant level of
exposure and we intend to defend this action 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 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote by security holders during the fourth
quarter of the fiscal year ended December 31, 2003.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange ("AMEX") under the
symbol "NTN." Set forth below are the high and low sales prices for the common
stock as reported by the AMEX for the two most recent fiscal years:
COMMON STOCK
------------------
LOW HIGH
--- ----
2002
----
First Quarter................... $ 0.77 $ 1.10
Second Quarter.................. $ 1.04 $ 1.66
Third Quarter................... $ 0.81 $ 1.19
Fourth Quarter.................. $ 0.72 $ 1.20
2003
----
First Quarter................... $ 0.95 $ 1.75
Second Quarter.................. $ 1.48 $ 2.33
Third Quarter................... $ 1.91 $ 3.00
Fourth Quarter.................. $ 2.65 $ 4.11
2004
----
First Quarter (through 3/5/04).. $ 2.98 $ 4.25
On March 5, 2004, the closing price for our common stock as reported on the
AMEX was $3.82. As of March 5, 2004, there were approximately 1300 holders of
common stock.
To date, we have not declared or paid any cash dividends with respect to our
common stock, and the current policy of our Board of Directors is to retain
earnings, if any, after payment of dividends on the outstanding preferred stock
to provide for our growth. Consequently, no cash dividends are expected to be
paid on our common stock in the foreseeable future. Pursuant to the terms of our
line of credit, we may not pay or declare dividends without the prior written
consent of the lender.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS]
The following table sets forth as of December 31, 2003 our compensation
plans authorizing us to issue equity securities and the number of securities
issuable thereunder.
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS (A) WARRANTS AND RIGHTS (B) IN COLUMN (A))
------------- ------------------- ------------------- --------------
EQUITY COMPENSATION
PLANS APPROVED BY 9,673,914(1) $1.31 728,069(2)
SECURITY HOLDERS
EQUITY COMPENSATION
PLANS NOT APPROVED BY 1,632,833(4) $1.61 0
SECURITY HOLDERS
-------------- -------------
TOTAL 11,306,747 728,069(3)
============== =============
_______________
(1) Includes 9,173,914 shares issuable upon exercise of options granted
pursuant to the NTN Communications, Inc. 1995 Employee Stock Option Plan
and 500,000 shares issuable upon exercise of options granted pursuant to
the NTN Communications, Inc. 1996 Special Stock Option Plan.
(2) Remaining available for grant under the NTN Communications, Inc. 1995
Employee Stock Option Plan.
(3) Does not include 300,000 shares of Buzztime Entertainment, Inc. common
stock available for grant under the Buzztime Entertainment, Inc. 2001
Incentive Stock Option Plan. To date, no options have been granted under
the plan.
(4) The 1,632,833 shares issuable that are not pursuant to equity
compensation plans approved by security holders are all pursuant to
warrants granted in connection with consulting agreements with
non-employees or were warrants associated with equity financings.
Warrants to purchase 514,000 shares were granted in 2003, 685,000 shares
were granted in 2002 and 190,000 shares in 2001. The remaining warrants
were issued in 2000 or earlier. As of December 31, 2003, the range of
exercise prices and the weighted-average remaining contractual life of
outstanding warrants was $0.50 to $3.75 and 4 years, respectively.
17
On December 15, 2003 we issued approximately 238,300 shares of unregistered
common stock for the acquisition of most of the operating assets, certain
liabilities and operations of NTN Interactive Network, Inc. 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. For
more information regarding the NTN Interactive Network, Inc. acquisition, please
see the discussion under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operation" included elsewhere in this
document.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
included elsewhere in this document. The selected financial data for the years
ended December 31, 2003, 2002, 2001, 2000 and 1999 is derived from our audited
financial statements.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Total revenue .............................. $ 29,489 $ 25,610 $ 22,559 $ 22,048 $ 23,748
Total operating expenses ................... 32,035 27,465 25,493 30,249 27,549
--------- --------- --------- --------- ---------
Operating loss ............................. (2,546) (1,855) (2,934) (8,201) (3,801)
Other income (expense), net ................ (128) (505) (807) (940) 1,303
--------- --------- --------- --------- ---------
Loss from continuing operations ............ (2,674) (2,360) (3,741) (9,141) (2,498)
Income taxes ............................... (47) (41) -- -- --
Minority interest in loss of
consolidated subsidiary .................. 10 212 85 -- --
--------- --------- --------- --------- ---------
Loss before cumulative effect of
accounting change ........................ (2,711) (2,189) (3,656) (9,141) (2,498)
Cumulative effect of accounting change ..... -- -- -- (448) --
--------- --------- --------- --------- ---------
Net loss ................................... $ (2,711) $ (2,189) $ (3,656) $ (9,589) $ (2,498)
========= ========= ========= ========= =========
Basic and diluted net loss per common share:
Continuing operations ................... $ (.06) $ (.06) $ (.10) $ (.28) $ (.09)
Cumulative effect of accounting change .. -- -- -- (.01) --
--------- --------- --------- --------- ---------
Net loss ........................ $ (.06) $ (.06) $ (.10) $ (.29) $ (.09)
========= ========= ========= ========= =========
Weighted-average shares outstanding ........ 45,446 39,081 36,755 33,206 28,470
========= ========= ========= ========= =========
BALANCE SHEET DATA
(IN THOUSANDS)
DECEMBER 31,
-----------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Total current assets ......... $ 6,704 $ 4,184 $ 4,218 $ 5,808 $ 6,387
Total assets ................. 20,630 10,842 13,380 18,822 17,287
Total current liabilities .... 5,939 3,620 4,178 4,915 5,466
Total liabilities ............ 7,566 8,719 9,614 14,740 15,066
Total minority interest ...... -- 643 855 -- --
Shareholders' equity ......... 13,064 1,480 2,911 4,082 2,221
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The following management's discussion and analysis of financial condition
and results of operations discussion should be read in conjunction with the
consolidated financial statements provided under Part II, Item 8 of this Annual
Report on Form 10-K.
18
2003 HIGHLIGHTS
NTN's financial and operating results for the year ended December 31, 2003
included the following highlights:
o In the first quarter of 2003, we completed the rollout of our NTN Wireless
paging products across Darden Restaurants, Inc.'s Olive Garden chain. This
was the first rollout of our NTN Wireless products across a national
restaurant chain.
o On May 1, 2003, we received a letter from the American Stock Exchange (AMEX)
stating that we were now in compliance with AMEX listing standards.
o In May 2003, we began the process of converting our installed base of NTN
iTV Network customers from our one-way satellite technology, FM2, to our new
two-way VSAT technology.
o On May 5, 2003, Time Warner Cable launched the Buzztime channel on its
Portland, Maine cable system. This was our first deployment with a top 5
multiple system operator (MSO).
o On May 6, 2003, Media General, Inc., a communications company with interests
in newspapers, television stations, interactive media and diversified
information services, invested $3 million in exchange for 2 million shares
of our common stock and in a separate transaction, licensed the interactive
television (iTV) rights to their suite of Boxerjam games and puzzles in
exchange for 666,667 shares of our common stock and a warrant to purchase
Buzztime stock.
o In June 2003, Susquehanna Communications (SusCom) launched the Buzztime
channel on its cable television system in Williamsport, Pennsylvania. This
represented our second deployment with SusCom as we had launched on their
York, Pennsylvania system in June 2002.
o In July 2003, we partially paid down and then replaced our revolving line of
credit. Our previous lender, an asset based lender, had been seized by the
FDIC and our then existing $2.5 million credit line had been purchased by a
third party. We successfully entered into a $1 million revolving line of
credit with a new bank.
o On July 31, 2003, we acquired the assets, certain liabilities and operations
of Breakaway International, Inc., a privately held provider of restaurant
industry hardware and software enterprise solutions.
o In December 2003, Comcast Cable began to trial the Buzztime channel at its
cable television system in Baltimore, Maryland. This represented the second
installation with a top 5 MSO.
o On December 15, 2003, we acquired certain assets, certain liabilities and
operations of NTN Interactive Network, Inc., our long time Canadian licensee
for the NTN iTV Network.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. 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, 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 104 ("SAB 104"), 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.
19
o We incur a relatively significant level of depreciation expense in
relationship to our operating income. The amount of depreciation expense in
any fiscal year is largely related to the estimated life of handheld,
wireless Playmaker devices and computers located at our customer sites. The
Playmakers are depreciated over a four-year life and the computers over a
three-year life. The depreciable life of these assets was determined based
upon their estimated useful life which considers 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.
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. 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 which are so non-material to fall below the materiality
threshold of such item.
ASSESSMENTS OF FUNCTIONAL CURRENCIES. The U.S. dollar is the functional
currency of all of the Company's operations except for its newly acquired
Canadian operations.
BACKGROUND
Our business is developing and distributing interactive entertainment and
wireless information and communications products. We operate our business
principally through two operating units: the NTN Hospitality Technologies
Division and Buzztime. The NTN Hospitality Technologies Division includes the
NTN iTV Network, NTN Wireless and Software Solutions.
20
Revenues generated and operating income (loss) by our two business units
are illustrated below. The data presented below includes allocations of
corporate expenses.
YEARS ENDED DECEMBER 31
2003 2002 2001
---------------- ------------------ ------------------
Revenues
- --------
NTN Hospitality Technologies division.. $29,275,000 99% $25,465,000 99% $22,382,000 99%
Buzztime............................... 196,000 1% 128,000 1% 159,000 1%
Other.................................. 18,000 -- 17,000 -- 18,000 --
---------------- ------------------ ------------------
Total........................ $29,489,000 100% $25,610,000 100% $22,559,000 100%
================= ================== ==================
Operating Income (Loss)
- -----------------------
NTN Hospitality Technologies division.. $ 1,211,000 $ 1,699,000 $ 372,000
Buzztime............................... (3,757,000) (3,554,000) (3,306,000)
------------ ------------ ------------
Total........................ $(2,546,000) $(1,855,000) $(2,934,000)
============ ============ ============
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 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. 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.
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
operations for the three years ended December 31, 2003. We believe that
inflation has not had a material effect on the results of operations for the
periods presented.
YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Operations for 2003 resulted in a net loss of $2,711,000 compared to net
loss of $2,189,000 for 2002.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$3,811,000 or 15%, to $29,293,000 in 2003 from $25,482,000 in 2002. For the
purpose of this analysis, the NTN iTV Network's revenues include $18,000 and
$17,000 of "other" revenues for 2003 and 2002, respectively shown on our
consolidated statements of operations. The revenue contribution from the three
operating segments of the division for 2003 and 2002 are shown in the following
table:
----------------------------------------------------------------------------
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
----------------------------------------------------------------------------
2003 2002 Change
------------------------------ --------------- -------------- --------------
NTN iTV Network $23,024,000 $23,077,000 $ (53,000)
NTN Wireless 4,742,000 2,405,000 2,337,000
Software Solutions 1,527,000 -- 1,527,000
------------------------------ --------------- -------------- --------------
Total Revenue of Division $29,293,000 $25,482,000 $3,811,000
============================== =============== ============== ==============
Within the NTN iTV Network there are several revenue contributors, including
our core hospitality revenue, Canadian licensing revenue, installation revenue,
advertising revenue and as of December 15, 2003, revenue from our Canadian
operations. The primary revenue components are broken out in the following
table:
----------------------------------------------------------------------------
COMPONENTS OF NTN ITV NETWORK REVENUE
----------------------------------------------------------------------------
2003 2002 Change
------------------------------ --------------- -------------- --------------
Subscription Revenues $20,011,000 $19,165,000 $ 846,000
Canadian License Revenue 745,000 1,161,000 (416,000)
Revenue from Canadian Operations 167,000 -- 167,000
Advertising Revenue 878,000 959,000 (81,000)
Installation Revenue 1,223,000 1,792,000 (569,000)
------------------------------ --------------- -------------- --------------
NTN iTV Network $23,024,000 $23,077,000 $(53,000)
============================== =============== ============== ==============
As noted in the above table, our core hospitality revenues increased by
$846,000, or 4.4%, in 2003. Installation revenue associated with installing new
customer locations decreased approximately $569,000 as some of the deferred
revenue associated with prior year installations has become fully amortized.
21
Licensing revenues from our Canadian licensee decreased approximately
$416,000 in 2003 to $745,000 from $1,161,000 in 2002 due to a smaller customer
base in 2003 and to a cessation of the royalty stream in the fourth quarter as
we finalized the acquisition of the operations of the licensee. On December 15,
2003, we acquired the operations of our Canadian licensee, so in future years we
will show the overall revenues of the Canadian operation rather than the
previous license revenue.
In 2003, the NTN iTV Network generated revenue of approximately $878,000 in
national and regional advertising, comprised primarily of companies in the wine,
beer and spirits category compared to approximately $959,000 in 2002.
The NTN iTV Network customer site count in the United States at December 31,
2003 was 3,125. This was a decrease of 46 sites over December 31, 2002.
Buzztime service revenues increased $68,000, or 53.1%, to $196,000 in 2003
from $128,000 in 2002. The increase was due to revenues recognized under a trial
agreement with a major cable operator.
As a result of the above factors, NTN's consolidated revenues increased
$3,879,000, or 15.1%, to $29,489,000 in 2003 from $25,610,000 in 2002.
OPERATING EXPENSES
DIRECT OPERATING COSTS
Direct operating costs of services increased $1,428,000, or 14.7%, to
$11,146,000 in 2003 from $9,718,000 in 2002. A great deal of this increase was
because 2003 had a full year of operations of NTN Wireless compared to
approximately nine months in 2002. The following table compares the direct costs
for each of our operating segments between 2003 and 2002:
- --------------------------------------------------------------------------------
DIRECT OPERATING COSTS
- --------------------------------------------------------------------------------
2003 2002 Change
- ----------------------------------- -------------- -------------- --------------
NTN iTV Network $ 6,821,000 $ 7,276,000 $ (455,000)
NTN Wireless 2,952,000 1,515,000 1,437,000
Software Solutions 211,000 -- 211,000
- ----------------------------------- -------------- -------------- --------------
Hospitality Technologies
division 9,984,000 8,791,000 1,193,000
Buzztime 1,162,000 927,000 235,000
- ----------------------------------- -------------- -------------- --------------
Consolidated Company $ 11,146,000 $ 9,718,000 $ 1,428,000
=================================== ============== ============== ==============
As noted in the above table, the direct operating costs of our core NTN iTV
Network segment actually decreased by $455,000 in 2003 compared to 2002. These
savings largely arose from expense reductions in site visits, technical visits
and in depreciation expense associated with equipment at the sites. These
savings were achieved despite incurring operating costs of approximately
$500,000 related to the conversion of approximately 20% of our sites to our new
two-way VSAT technology in the second half of 2003. There was no such
VSAT-related expense in 2002.
The $1,437,000 increase in the NTN Wireless direct operating costs largely
related to the cost of goods sold associated with the NTN Wireless revenue
increase of $2,337,000 in 2003 noted above.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $2,992,000 or 19.1%, to
$18,632,000 in 2003 from $15,640,000 in 2002. A great deal of this increase was
due to the addition of the Software Solutions segment in August 2003 and the NTN
Wireless business in April 2002. The following table compares the selling,
general and administrative expenses for each of our operating segments between
2003 and 2002:
- --------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------------------------------------------
2003 2002 Change
- ----------------------------------- -------------- -------------- --------------
NTN iTV Network $ 12,606,000 $ 12,612,000 $ (6,000)
NTN Wireless 1,617,000 827,000 790,000
Software Solutions 1,802,000 -- 1,802,000
- ----------------------------------- -------------- -------------- --------------
Hospitality Technologies
division 16,025,000 13,439,000 2,586,000
Buzztime 2,607,000 2,201,000 406,000
- ----------------------------------- -------------- -------------- --------------
Consolidated Company $ 18,632,000 $ 15,640,000 $ 2,992,000
=================================== ============== ============== ==============
Selling, general and administrative (SG&A) expenses in 2003 included a full
year of SG&A expenses of NTN Wireless and five months of Software Solutions
compared to nine months of NTN Wireless and none of Software Solutions in 2002.
The SG&A increase in the NTN Wireless segment was largely due to increased
payroll of approximately $280,000, commission expenses of $162,000 and marketing
expenses of $96,000. However, these increases were partially due to the full
year of expenses compared to the nine month period in 2002. The SG&A increase in
the Buzztime segment was largely due to increased payroll of $128,000 and
increased marketing expenses of $167,000. SG&A expenses include an allocation of
our corporate SG&A to the segments based on a variety of factors, including
headcount, square footage of facilities and other factors.
Litigation, legal and professional fees increased $291,000, or 53.9%, to
$831,000 in 2003 compared to $540,000 in 2002. This increase relates to
additional legal fees for trademark registrations, certain litigation matters
and generally to an increase in the scope of our business.
Depreciation and amortization not related to direct operating costs
decreased $458,000, or 29.5%, to $1,097,000 in 2003 from $1,555,000 in 2002 due
to certain assets becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $317,000 to $329,000 in 2003
from $12,000 in 2002, due primarily to projects to develop new technologies for
the iTV network.
OTHER INCOME (EXPENSE):
INTEREST INCOME AND EXPENSE
Interest income decreased $1,000 to $5,000 in 2003, compared to $6,000 in
2002.
Interest expense decreased $273,000, or 53.4%, to $238,000 in 2003, compared
to $511,000 in 2002, due to the expiration of various capitalized leases as well
as to a lower average balance on our revolving line of credit.
OTHER INCOME
Other income reflected a gain on early extinguishment of debt of $105,000
that arose out of a discount recorded on the payoff of the line of credit with
GF Asset Management, LLC.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary decreased $202,000 to
$10,000 in 2003 compared to $212,000 in 2002. The 2002 minority interest figure
represented a full year's allocation of six percent of Buzztime's losses while
the 2003 figure represents an allocation of six percent of Buzztime's losses for
only the first half of the month of January 2003 since Scientific-Atlanta
converted their minority interest in the Buzztime subsidiary into NTN common
stock on January 16, 2003.
INCOME TAXES
The NTN Hospitality Technologies division had taxable income for the year
ended December 31, 2003. For federal income tax reporting purposes and in
unitary states where the NTN iTV Network may file on a combined basis, taxable
losses incurred by Buzztime should be sufficient to offset the division's
taxable income. In states where separate filing is required, the division will
likely incur a state tax liability. As a result, NTN Hospitality Technologies
recorded a state tax provision of $47,000 in 2003. This was a $6,000 increase
over the $41,000 provision for income taxes recorded in 2002.
23
EBITDA
Our earnings before interest, taxes, depreciation and amortization
("EBITDA") decreased by $1,816,000 to $1,466,000 in 2003 from EBITDA of
$3,282,000 in 2002. This EBITDA decrease was primarily due to the increased loss
in 2003 of $522,000 coupled with a decrease in depreciation expense of
$1,028,000.
EBITDA is not intended to represent a measure of performance in accordance
with accounting principles generally accepted in the United States ("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 it is a
measure of operating performance that financial analysts, lenders, investors and
other interested parties find to be a useful tool for analyzing 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:
YEAR ENDED
DECEMBER 31
-----------------------------
2003 2002
------------- -------------
EBITDA CALCULATION
Net loss per GAAP $ (2,711,000) $ (2,189,000)
Interest expense (net) 233,000 505,000
Depreciation and amortization 3,897,000 4,925,000
Income taxes 47,000 41,000
------------- -------------
EBITDA $ 1,466,000 $ 3,282,000
============= =============
On a segment basis, our segments generated EBITDA levels as presented below:
($000) YEAR ENDED
DECEMBER 31, 2003
---------------------------------------------------------------
EBITDA CALCULATION:
NTN iTV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,772 $ (171) $ (565) $ 1,036 $(3,747) $(2,711)
Interest expense (net) 232 1 -- 233 -- 233
Depreciation and amortization 3,057 138 164 3,359 538 3,897
Income taxes 47 -- -- 47 -- 47
-------- -------- -------- -------- -------- --------
EBITDA $ 5,108 $ (32) $ (401) $ 4,675 $(3,209) $ 1,466
======== ======== ======== ======== ======== ========
($000) YEAR ENDED
DECEMBER 31, 2002
---------------------------------------------------------------
EBITDA CALCULATION:
NTN iTV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,241 $ (88) $ -- $ 1,153 $(3,342) $(2,189)
Interest expense (net) 505 -- -- 505 -- 505
Depreciation and amortization 4,095 98 -- 4,193 732 4,925
Income taxes 41 -- -- 41 -- 41
-------- -------- -------- -------- -------- --------
EBITDA $ 5,882 $ 10 $ -- $ 5,892 $(2,612) $ 3,282
======== ======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Operations for 2002 resulted in a net loss of $2,189,000 compared to net
loss of $3,656,000 for 2001. The operating results for 2001 included non-cash
debt conversion costs of $189,000 related to the conversion of $2,000,000 on the
convertible senior subordinated notes.
24
REVENUES
NTN Hospitality Technologies' revenues increased $3,083,000, or 13.8%, to
$25,465,000 in 2002 from $22,382,000 in 2001. NTN Hospitality Technologies
division revenue included approximately $2,405,000 of revenue from NTN Wireless
business, which was acquired in April 2002. Revenues from the NTN iTV Network
increased by approximately $1,227,000 due to an increase in the number of
subscribing locations and the average billing rate per location. The NTN iTV
Network customer site count in the United States at December 31, 2002 was 3,171.
This was an increase of 65 sites over December 31, 2001. Installation revenue
associated with installing new customer locations decreased approximately
$451,000 as some of the deferred revenue associated with the installation has
become fully amortized. Included in NTN iTV Network revenues are revenues from
our Canadian licensee that decreased approximately $102,000 in 2002 to
$1,161,000 from $1,263,000 in 2001 due to a smaller customer base in 2002. In
2002, the NTN iTV Network generated revenue of approximately $959,000 in
national and regional advertising, comprised primarily of companies in the wine,
beer and spirits category compared to approximately $1,000,000 in 2001.
Buzztime service revenues decreased 19.5% to $128,000 in 2002 from $159,000
in 2001. The decrease was due to expiration of advertising contracts.
Other revenues decreased 5.6% to $17,000 in 2002 from $18,000 in 2001.
As a result of the above factors, NTN's consolidated revenues increased
$3,051,000, or 13.5%, to $25,610,000 in 2002 from $22,559,000 in 2001.
OPERATING EXPENSES
Direct operating costs of services increased $1,011,000, or 12.3%, to
$9,718,000 in 2002 from $8,241,000 in 2001. Direct operating costs included
approximately $1,513,000 for costs of goods sold from the NTN Wireless business
acquired in April 2002. Excluding the NTN Wireless cost of goods sold, for which
there was no comparable expense in 2001, our direct operating costs decreased by
$502,000 in 2002. Some of the primary factors that led to that $502,000 direct
operating cost reduction included:
o Communication charges decreased by approximately $348,000 due to a
change in vendors in July 2001, which generated a full year of related
cost savings in 2002 compared to a partial year of savings in 2001.
o Marketing site visits decreased approximately $98,000 due to a
restructuring of regularly scheduled visits to the sites.
Selling, general and administrative expenses increased $1,129,000, or 7.5%,
to $15,640,000 in 2002 from $14,977,000 in 2001. Selling, general and
administrative expenses in 2002 included an increase in payroll and related
expenses of approximately $1,022,000 as the head count increased, which includes
the addition of the NTN Wireless employees. Travel and entertainment increased
approximately $129,000 related to NTN Wireless and increased travel to support
the Buzztime initiatives. Marketing expenses increased approximately $69,000 due
to additional trade shows attended and increased marketing expenses associated
with our acquisition of ZOOM Communications, and subsequent introduction of our
new NTN Wireless subsidiary. Equipment leases increased approximately $100,000
due to the buy-out of equipment under capital leases. Consulting expenses
decreased approximately $490,000 due to the completion of various projects in
the past year and to the hiring of various consultants as employees.
Litigation, legal and professional fees increased $77,000, or 16.6%, to
$540,000 in 2002 compared to $463,000 in 2001. This increase relates to
additional legal fees for trademark registrations and employee matters.
Depreciation and amortization not related to direct operating costs
decreased $156,000, or 9.1%, to $1,555,000 in 2002 from $1,711,000 in 2001 due
to certain assets becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $89,000, or 88.1%, to $12,000 in
2002 from $101,000 in 2001, due primarily to the transition away from using
outside consultants in favor of expansion of internal development departments to
aggressively pursue ongoing research and development initiatives.
INTEREST INCOME AND EXPENSE
Interest income decreased $57,000, or 90.5%, to $6,000 in 2002, compared to
$63,000 in 2001, due to less cash on hand from capital raised in previous years.
25
Interest expense decreased $335,000, or 39.6%, to $511,000 in 2002, compared
to $846,000 in 2001, due to the expiration of various capitalized leases as well
as to a lower average balance on our revolving line of credit.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary increased $127,000 or
149.4% to $212,000 in 2002 compared to $85,000 in 2001. The 2002 minority
interest figure represented a full year's allocation of six percent of
Buzztime's losses while the 2001 figure represents an allocation of six percent
of Buzztime's losses for only the second half of 2001 as we received the
minority interest investment in Buzztime by Scientific-Atlanta, Inc. at the end
of June 2001.
INCOME TAXES
The division had taxable income for the year ended December 31, 2002. For
federal income tax reporting purposes and in unitary states where the NTN iTV
Network may file on a combined basis, taxable losses incurred by Buzztime should
be sufficient to offset the division's taxable income. In states where separate
filing is required, the division will likely incur a state tax liability. As a
result, Hospitality Technologies recorded a state tax provision of $41,000 in
2002.
EBITDA
Our earnings before interest, taxes, depreciation and amortization
("EBITDA") increased by $1,147,000 to $3,282,000 in 2002 from EBITDA of
$2,135,000 in 2001. This increase in EBITDA was primarily due to the reduced
loss in 2002.
EBITDA is not intended to represent a measure of performance in accordance
with accounting principles generally accepted in the United States ("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 it is a
measure of operating performance that financial analysts, lenders, investors and
other interested parties find to be a useful tool for analyzing 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:
YEAR ENDED
DECEMBER 31
-----------------------------
2002 2001
------------- -------------
EBITDA CALCULATION
Net loss per GAAP $ (2,189,000) $ (3,656,000)
Interest expense (net) 505,000 783,000
Depreciation and amortization 4,925,000 5,008,000
Income taxes 41,000 --
------------- -------------
EBITDA $ 3,282,000 $ 2,135,000
============= =============
On a segment basis, our segments generated EBITDA levels as presented below:
($000) YEAR ENDED
DECEMBER 31, 2002
---------------------------------------------------------------
EBITDA CALCULATION:
NTN iTV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,241 $ (88) $ -- $ 1,153 $(3,342) $(2,189)
Interest expense (net) 505 -- -- 505 -- 505
Depreciation and amortization 4,095 98 -- 4,193 732 4,925
Income taxes 41 -- -- 41 -- 41
-------- -------- -------- -------- -------- --------
EBITDA $ 5,882 $ 10 $ -- $ 5,892 $(2,610) $ 3,282
======== ======== ======== ======== ======== ========
26
($000) YEAR ENDED
DECEMBER 31, 2001
---------------------------------------------------------------
EBITDA CALCULATION:
NTN iTV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $ (418) $ -- $ -- $ (418) $(3,238) $(3,656)
Interest expense (net) 767 -- -- 767 16 783
Depreciation and amortization 4,242 -- -- 4,242 766 5,008
Income taxes -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
EBITDA $ 4,591 $ -- $ -- $ 4,591 $(2,456) $ 2,135
======== ======== ======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had cash and cash equivalents of $2,503,000 and
working capital (current assets in excess of current liabilities) of $765,000
compared to cash and cash equivalents of $577,000 and working capital of
$564,000 at December 31, 2002. Net cash provided by operations was $1,098,000 in
2003 and $1,131,000 in 2002. Our net loss from operations was more than offset
by depreciation, amortization and other non-cash charges in both years.
Net cash used in investing activities was $2,961,000 in 2003 and $1,551,000
in 2002. Included in net cash used in investing activities in 2003 were
approximately $1,664,000 in capital expenditures, $371,000 of software
development and $892,000 related to the Breakaway and NTN Canada acquisitions.
The acquisition-related expenditures and capital expenditures were significantly
higher than the comparable 2002 figures of $102,000 and $1,284,000,
respectively. The capital expenditure levels increased largely due to the
beginning of the process of converting our customer base to two way VSAT
satellite technology.
Net cash generated from (used in) financing activities was $3,789,000 in
2003 and $(299,000) in 2002. The cash provided by financing activities in 2003
included $3,712,000 of proceeds from issuance of common stock net of offering
expenses and $1,843,000 of proceeds from the exercise of options and warrants.
The $3,712,000 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 $1,550,000 of net principal
payments on the revolving line of credit and $216,000 of principal payments on
capital leases and notes payable for VSAT equipment. The cash used in financing
activities in 2002 included $222,000 of principal payments on capital leases,
and $212,000 of net payments on the revolving line of credit. The net cash used
in financing activities in 2002 was partially offset by $135,000 of proceeds
from the exercise of stock options and warrants.
CONTRACTUAL CASH OBLIGATIONS
A table recapping our contractual cash obligations as of December 31, 2003
is presented below:
PAYMENTS DUE BY PERIOD
------------------------------------
LESS THAN 2ND & 4TH, 5TH &
CONTRACTUAL OBLIGATION 1 YEAR 3RD YEARS 6TH YEARS TOTAL
---------- ---------- ---------- ----------
Revolving line of credit ... $ 0 $1,000,000 $ 0 $1,000,000
Capital lease obligations .. 222,000 194,000 18,000 434,000
Purchase commitments ....... 1,668,000 1,430,000 454,000 3,552,000
Operating leases, net of
subleases ................ 746,000 1,095,000 22,000 1,863,000
---------- ---------- ---------- ----------
Total ................. $2,636,000 $3,719,000 $ 494,000 $6,849,000
========== ========== ========== ==========
BENNETT INVESTMENT
On January 15, 2003, we issued and sold 1,000,000 shares of restricted
common stock along with fully vested warrants to purchase 500,000 shares of
common stock at $1.15 per share, exercisable through January 15, 2008 through a
private offering to Robert M. Bennett, one of our directors, at a price per
share of $1.00 for an aggregate amount of $1.0 million. No commissions or
placement agent fees were paid in connection with the offering.
CONVERTIBLE SENIOR SUBORDINATED NOTES
As of December 31, 2002, we had outstanding convertible senior subordinated
notes of $2,000,000, payable February 1, 2003 and bearing interest at 8% per
year. The notes permitted us to convert up to the full principal amount into
shares of our common stock at maturity. On February 1, 2003, the remaining
$2,000,000 of convertible senior subordinated notes converted into 1,568,627
shares of our common stock based on the agreed conversion price of $1.275 per
share.
27
REVOLVING LINE OF CREDIT
We have had a revolving line of credit with Coast Business Credit ("Coast")
since August 1999.
On February 7, 2003, Coast and its parent company, Southern Pacific Bank,
were seized by the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC
then sold off the portion of Coast's loan portfolio that contained our line of
credit to GF Asset Management, LLC (GF), a subsidiary of GE Capital. On July 17,
2003, we paid off our revolving line of credit with GF. The amount paid was
approximately $1,411,000 which is net of a 5% settlement discount of
approximately $105,000.
On July 16, 2003, we entered into a $1,000,000 line of credit arrangement
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 of 2003,
and originally was set to mature on July 16, 2004. The line of credit originally
contained one financial covenant based on our cash flow coverage of the balance
on the line of credit. On January 7, 2004, we amended the line of credit to
extend the expiration date of the facility to February 1, 2005 and to replace
the cash flow-based financial covenant with a balance sheet oriented financial
covenant that limits the ratio of our debt to tangible net worth to 2:1. We were
in compliance with that covenant as of December 31, 2003. The line is secured by
all inventories, equipment, accounts receivable and various other assets.
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 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 intention that 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.
28
BREAKAWAY INTERNATIONAL TRANSACTION
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 provider of restaurant industry hardware and software enterprise solutions.
We acquired Breakaway's assets for $252,000 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.
Total consideration for the acquisition was $3,623,000, which consisted of
1,292,614 shares multiplied by the then publicly traded price of $2.44 per
share, $252,000 in cash and $217,000 of transaction costs, plus the assumption
of liabilities. To determine the fair value of the acquired intangible assets
and the related allocation of the purchase price, we commissioned a third party
valuation analysis. That third party analysis determined that the identified
intangible assets and the related useful lives are developed technology
($781,000, 6 year life), customer relationships ($1,110,000, 6 year life) and
non-competition agreements ($30,000, 3 year life). Software Solutions' results
of operations have been included in our consolidated statements of operations
since August 1, 2003.
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.
NTN INTERACTIVE NETWORK TRANSACTION
On December 15, 2003, we acquired through NTN Canada, Inc. (NTN Canada), a
wholly owned Canadian subsidiary of NTN, most of the operating assets, certain
liabilities and the operations of NTN Interactive Network, Inc. (NTNIN), our
long time Canadian licensee from its parent, Chell Group Corporation Inc. We
acquired NTNIN's assets for $250,000 in cash, 238,300 shares of unregistered NTN
common stock and the assumption of certain liabilities.
Total consideration for the acquisition was $1,786,000, which consisted of
238,300 shares multiplied by the then publicly traded price of $3.70 per share,
$250,000 in cash, the contribution of $550,000 in unpaid licensing royalties and
$84,000 of transaction costs, plus the assumption of liabilities. To determine
the fair value of the acquired intangible assets and the related allocation of
the purchase price, we commissioned a third party valuation analysis. That third
party analysis determined that the identified intangible assets and the related
useful lives are customer relationships ($720,000, 4 year life), trivia database
($345,000, 10 year life), interactive events software ($102,000, 5 year life)
and trivia software ($90,000, 5 year life). NTN Canada's results of operations
have been included in our consolidated statements of operations since December
15, 2003.
JANUARY 2004 FINANCING
On January 30, 2004, we completed the sale of 3,943,661 shares of our common
stock at $3.55 per share, resulting in gross proceeds of approximately $14.0
million, pursuant to an existing shelf registration filed under the Securities
Act. Roth Capital Partners, LLC acted as placement agent in the offering. After
commissions and expenses, the net proceeds of this offering are expected to be
approximately $13.0 million. The offering was purchased primarily by a number of
institutional investors and by Media General, Inc., a related party, which
invested approximately $2.0 million.
FUTURE FINANCING NEEDS
In light of the recent completion of the January 2004 financing, it is
unlikely that we will require additional financing in 2004. Our capital
requirements in 2004 will depend upon the growth of our two business units. In
either a low growth scenario (for example, net site growth of 100 sites in the
NTN iTV Network and a couple of incremental commercial trials of the Buzztime
trivia channel) or a more rapid growth scenario in either or both business
units, utilization of our cash and existing line of credit is expected to be
sufficient to cover our financing requirements for 2004.
29
Our liquidity and capital resources, while stronger than in recent years,
remain limited and this may constrain our ability to operate and grow our
business.
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 $5 million in 2004 based on the above low
growth scenario. We expect the level of expenditures in Buzztime to increase
over 2004 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.
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 our U.S.
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. As of December 31, 2003, approximately
23% 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 also believe that NTN Canada will also require a significant amount of
capital investment. The previous owner did not convert the Canadian customer
base to DITV, so we plan to convert the customer base of approximately 400 sites
to both DITV and VSAT over the next 12 months. This investment may be on the
order of $1.4 million. However, we believe that the majority or perhaps all of
the Canadian capital expenditures will be financed through operating cash flow
we generate in Canada.
RISK FACTORS
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business, results of operation and financial condition could be
adversely affected by a number of factors, including the following:
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND WE EXPECT TO INCUR SIGNIFICANT NET
LOSSES IN THE FUTURE.
We have a history of significant losses, including net losses of $2,711,000
in 2003, $2,189,000 in 2002 and $3,656,000 in 2001, and an accumulated deficit
of $81,790,000 as of December 31, 2003. We expect to incur significant operating
and net losses for the next four quarters due primarily to our continued
development of Buzztime. Furthermore, we may never achieve profitability, and
even if we do, we may not sustain or increase profitability on a quarterly or
annual basis in the future.
OUR LIMITED LIQUIDITY AND CAPITAL RESOURCES MAY CONSTRAIN OUR ABILITY TO OPERATE
AND GROW OUR BUSINESS.
At December 31, 2003, our current assets exceeded our current liabilities
by approximately $765,000. Our liquidity and capital resources remain limited
and this may constrain our ability to operate and grow our business.
30
We have a revolving line of credit agreement with Pacific Mercantile Bank,
which provides for borrowings of up to $1,000,000 and which was originally to
expire in July 2004 by its terms. Effective January 7, 2004, we entered into an
agreement with Pacific Mercantile to extend the maturity date of the line of
credit to February 1, 2005. As of December 31, 2003, $1,000,000 was outstanding
under the line of credit. The line of credit is secured by substantially all of
our assets. Any reduction in availability under our line of credit may further
constrain our liquidity.
In January 2004, we completed an equity financing transaction resulting in
gross proceeds to us of approximately $14.0 million, pursuant to an existing
shelf registration filed under the Securities Act. We intend to use the funds to
implement our plan to significantly expand the digital interactive television
network, including our current two-way satellite rollout, and to develop
Buzztime into a leading content provider for interactive television platforms.
In light of the recent completion of the January 2004 financing, it is unlikely
that we will require additional financing in 2004 but we do not know if we will
require additional financing in 2005 and beyond.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE MAY RENDER OUR OPERATIONS OBSOLETE
OR NONCOMPETITIVE.
If we do not compete successfully in the development of new products and
keep pace with rapid technological change, we will be unable to achieve
profitability or sustain a meaningful market position. The interactive
entertainment and game industry, as well as the wireless paging and software
applications industries, are becoming highly competitive and subject to rapid
technological changes when compared to other industries. We are aware of other
companies that are introducing interactive game products on various platforms
that allow players to compete across the nation. We are also aware of other
companies that are developing and introducing wireless technology and software
applications that may be suitable for use in the hospitality industry. The
wireless paging industry is highly competitive; we may experience pricing
pressure in the wireless markets that could impact our margins with respect to
our wireless product line. Some of these companies have substantially greater
financial resources and organizational capital than we do, which could allow
them to identify emerging trends. In addition, changes in customer tastes may
render our network and its content, our technology and our wireless and software
products obsolete or noncompetitive.
The emergence of new entertainment products and technologies, changes in
consumer preferences and other factors may limit the life cycle of our
technologies and any future products and services we develop. Accordingly, our
future performance will depend on our ability to:
o identify emerging technological trends in our market;
o identify changing consumer needs, desires or tastes;
o develop and maintain competitive technology, including new product and
service offerings;
o improve the performance, features and reliability of our products and
services, particularly in response to technological changes and
competitive offerings; and
o bring technology to the market quickly at cost-effective prices.
We may not be successful in developing and marketing new products and services
that respond to technological and competitive developments and changing customer
needs. Such products and services may not gain market acceptance. Any
significant delay or failure in developing new or enhanced technology, including
new product and service offerings, could result in a loss of actual or potential
market share and a decrease in revenues.
WE MUST EFFECTIVELY COMPETE WITHIN THE HIGHLY COMPETITIVE SOFTWARE INDUSTRY.
The software industry is intensely competitive. Several large vendors
develop and market database management programs, business and management
applications, collaboration products and business intelligence products that
compete with our NTN Software Solutions offerings. Some of these competitors
have significantly greater financial and technical resources than we do. We
expect to continue to face intense competition in the software market in which
we compete. We could lose market share if our competitors introduce new
competitive products into one or more of our markets, add new functionality into
an existing competitive product, acquire a competitive product, reduce prices,
or form strategic alliances with other companies. In addition, because new
distribution methods and opportunities offered by the internet and electronic
commerce have removed many of the barriers to entry historically faced by small
and start-up companies in the software industry, we expect to face additional
future competition from these companies.
31
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY LOSE BUSINESS AND EXPERIENCE
REDUCED PROFITABILITY.
Continued implementation of our business plan requires an effective
planning and management process. Our anticipated future growth will continue to
place a significant strain on our management systems and resources. If we are to
grow successfully, we must:
o improve our operational, administrative and financial systems;
o expand, train and manage our workforce; and
o attract and retain qualified management and technical personnel.
THE INTERACTIVE GAMING AND ENTERTAINMENT INDUSTRY IS HIGHLY COMPETITIVE.
The entertainment business is highly competitive. We compete with other
companies for total entertainment related revenues in the marketplace. Our
network programming competes generally with broadcast television, direct
satellite programming, pay-per-view, other content offered on cable television,
and other forms of entertainment. Furthermore, certain of our competitors have
greater financial and other resources available to them. The entrance of motion
picture, cable and television companies in the interactive entertainment and
multimedia industries will likely intensify competition in the future. In
January 1999, The Walt Disney Company introduced interactive programming
broadcast in conjunction with live sporting and other events which competes
directly with our programming.
We also compete with other content and services available to consumers
through online services. The expanded use of online networks and the Internet
provide computer users with an increasing number of alternatives to video games
and entertainment software. With this increasing competition and rapidly
changing factors, we must be able to compete in terms of technology, content and
management strategy. If we fail to provide quality services and products, we
will lose revenues to other competitors in the entertainment industry. Increased
competition may also result in price reductions, fewer customer orders, reduced
gross margins, longer sales cycles, reduced revenues and loss of market share.
IF INTELLECTUAL PROPERTY LAW AND PRACTICE DO NOT ADEQUATELY PROTECT OUR
PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY, OUR BUSINESS COULD BE SERIOUSLY
DAMAGED.
We rely on a combination of trademarks, copyrights and trade secret laws to
protect our proprietary rights in some of our products. Furthermore, it is our
policy that all employees and consultants involved in research and development
activities sign nondisclosure agreements. Our competitors may, however,
misappropriate our technology or independently develop technologies that are as
good as or better than ours. Our competitors may also challenge or circumvent
our proprietary rights. If we have to initiate or defend against an infringement
claim in the future to protect our proprietary rights, the litigation over such
claims could be time-consuming and costly to us, adversely affecting our
financial condition.
From time to time, we hire or retain employees or external consultants who
may work for other companies developing products similar to those offered by us.
These former employers may claim that our products are based on their products
and that we have misappropriated their intellectual property. Any such
litigation could prevent us from exploiting our proprietary portfolio and cause
us to incur substantial costs, which in turn could materially adversely affect
our business.
We believe that the success of our business depends upon such factors as
the technical expertise, innovative skills and marketing and customer relations
abilities of our employees, as well as upon patents, copyrights, trade secrets
and other intellectual property rights. As of December 31, 2003, we owned one
United States patent covering certain aspects of technology related to an
interactive learning system. This patent will expire in 2017. As of December 31,
2003, we had applied for two additional patents in the United States.
Our pending patent applications and any future applications might not be
approved. Our patents might not provide us with competitive advantages. Third
parties might challenge our patents. In addition, patents held by third parties
might have an adverse effect on our ability to do business. Furthermore, third
parties might independently develop similar products, duplicate our products or,
to the extent patents are issued to us, design around those patents.
Others may have filed and in the future may file patent applications that
are similar or identical to those of ours. To determine the priority of
inventions, we may have to participate in interference proceedings declared by
the United States Patent and Trademark Office. Such interference proceedings
could result in substantial cost to us. Such third-party patent applications
might have priority over patent applications filed by us.
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WE MAY BE LIABLE FOR THE CONTENT WE MAKE AVAILABLE ON THE NTN ITV NETWORK, THE
BUZZTIME TRIVIA CHANNEL AND THE INTERNET.
We make content available on the NTN iTV Network, the Buzztime trivia
channel and the internet. The availability of this content could result in
claims against us based on a variety of theories, including defamation,
obscenity, negligence or copyright or trademark infringement. We could also be
exposed to liability for third party content accessed through the links from our
web sites to other web sites. We may incur costs to defend ourselves against
even baseless claims, and our financial condition could be materially adversely
affected if we are found liable for information that we make available.
Implementing measures to reduce our exposure may require us to spend substantial
resources and may limit the attractiveness of our services to users.
WE MAY FACE EXPOSURE ON SALES AND/OR USE TAXES IN VARIOUS STATES.
From time to time, state tax authorities will make inquiries as to whether
or not a portion of our services might require the collection of sales and use
taxes from customers in those states. In the current difficult economic climate,
many states are expanding their interpretation of their sales and use tax
statutes to derive additional revenue. While in the past our sales and use tax
expenses have not been material, it is likely that such expenses will grow in
the future.
OUR GAMES AND GAME SHOWS ARE SUBJECT TO GAMING REGULATIONS.
We operate games of skill and chance that, in some instances, reward
prizes. These games are regulated in many jurisdictions. The selection of
prizewinners is sometimes based on chance, although none of our games require
any form of monetary payment. The laws and regulations that govern these games,
however, are subject to differing interpretations in each jurisdiction and are
subject to legislative and regulatory change in any of the jurisdictions in
which we offer our games. If such changes were to happen, we may find it
necessary to eliminate, modify or cancel certain components of our products that
could result in additional development costs and/or the possible loss of
revenue.
WE ARE CURRENTLY INVOLVED IN LITIGATION MATTERS THAT COULD MATERIALLY IMPACT OUR
PROFITABILITY.
We are involved in litigation in Canada with Interactive Network, Inc. Both
NTN and Interactive Network, Inc. have asserted claims involving patent
infringement and validity and certain other proprietary rights. These actions
relate only to the broadcast of the NTN iTV Network to subscribers in Canada and
do not extend to our network operations in the United States or elsewhere. To
date, Interactive Network, Inc. has deposited a total of $140,000 in Canadian
dollars with the Canadian court in compliance with the court's order as security
for costs to be incurred by us in defense of the action. A trial date has been
established for April 2004. We intend to continue to defend the action
vigorously.
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 NTN Wireless. This complaint alleged trade dress and patent
infringement and unfair competition. This complaint relates to our repair and
replacement activities of LRS pagers, which is not a significant percentage of
our NTN Wireless business. On May 9, 2003, we filed with the court a motion to
dismiss the LRS complaint. The court denied our motion to dismiss and provided
LRS an opportunity to amend its complaint. LRS served the amended complaint on
July 24, 2003 and, in turn, we filed a motion to dismiss the amended complaint.
In February 2004, LRS amended their complaint to eliminate certain allegations
relating to infringement of its utility patent for wireless pagers. The court
recently appointed a special master to the case. The parties will commence
discovery.
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 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.
The foregoing claims may not be decided in our favor and we are not insured
against claims made. During the pendency of these claims, we will continue to
incur the costs of our legal defense.
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IF OUR CHIEF EXECUTIVE OFFICER WERE TO LEAVE US, OUR BUSINESS MAY BE ADVERSELY
AFFECTED.
Our success greatly depends on the efforts of our chief executive officer,
Stanley B. Kinsey. Our ability to operate successfully will depend significantly
on his services and contributions. Mr. Kinsey's employment agreement with NTN
was amended on May 21, 2003 to provide for an extended term ending January 31,
2004 as well as an increase in annual salary and a grant of options to purchase
up to 400,000 shares of common stock. Mr. Kinsey is presently discussing an
extension of his employment agreement with the compensation committee of our
board of directors. Our business and operations may be adversely affected if he
were to leave.
WE MAY HAVE DIFFICULTY RECRUITING PROFESSIONALS FOR OUR BUSINESS.
Our business requires experienced programmers, creative designers and
application developers. Our success will depend on identifying, hiring, training
and retaining such experienced, knowledgeable professionals. We must recruit
talented professionals in order for our business to grow. There is significant
competition for employees with the skills required to develop the products and
perform the services we offer. There can be no assurance that we will be able to
attract a sufficient number of qualified employees in the future to sustain and
grow our business, or that we will be successful in motivating and retaining the
employees we are able to attract. If we cannot attract, motivate and retain
qualified professionals, our business, financial condition and results of
operations will suffer.
FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD HARM OUR BUSINESS.
On December 15, 2003 we acquired, through NTN Canada, most of the operating
assets, certain liabilities and the operations of NTNIN from Chell Group
Corporation. This acquisition added an additional 400 customer sites that pay us
in Canadian dollars to use our interactive technology, and to receive our game
service. Since both the service fees and our Canadian subsidiary's operating
expenses are recognized in Canadian dollars, our financial results could be
significantly affected by fluctuations in foreign currency exchange rates or by
weak economic conditions in foreign markets.
RISK FACTORS ASSOCIATED WITH THE NTN iTV NETWORK
WE DEPEND ON A SINGLE SUPPLIER OF PLAYMAKERS(R).
We currently purchase our 900 MHz Playmakers from Climax Technology Co.
Ltd., an unaffiliated Taiwanese manufacturer. We are currently soliciting bids
from alternative suppliers for the manufacture of our Playmakers. Unless and
until we succeed in establishing additional manufacturing relationships, we will
continue to depend on our current sole source supplier of Playmakers. If we lose
our supplier, our growth may be slowed until an alternative supplier is
identified.
COMMUNICATION FAILURES WITH OUR SUBSCRIBER LOCATIONS COULD RESULT IN THE
CANCELLATION OF SUBSCRIBERS AND A DECREASE IN OUR REVENUES.
We rely on both satellite and telephone systems to communicate with our
subscriber locations. We currently transmit the majority of our data to our
hospitality customer sites via PanAmSat's Galaxy IIIR satellite and will rely
upon Galaxy IIIC for data transmission in connection with our new VSAT two-way
communication technology. We have currently converted 23% of our sites to the
VSAT technology. Interruption in communications with our subscriber locations
under either system could decrease customer loyalty and satisfaction and result
in a cancellation of our services. We are continually reviewing alternative
telephone service providers and establishing contingency plans; however, such
alternative providers and contingency plans have not been finalized.
In the event that we were forced to switch to another satellite, we would
incur significant costs associated with re-pointing our satellite receivers. In
addition, we could experience higher operating costs to transmit data to our
customers via telephone lines and the Internet during the transition period.
Another potential risk is the possibility that our government could
pre-empt our satellite for national security reasons, as the United States
satellite operators are federally licensed. This would appear to be unlikely as
our government has a strong communications infrastructure in place domestically.
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RISK FACTORS ASSOCIATED WITH BUZZTIME
WE MAY SELL EQUITY INTERESTS IN BUZZTIME TO THIRD PARTIES, WHICH COULD RESULT IN
THE LOSS OF CONTROL OF BUZZTIME OR DEVALUATION OF OUR EQUITY INTEREST IN
BUZZTIME.
In June 2001, we sold a 6% interest in Buzztime to an affiliate of
Scientific-Atlanta, a leading cable television set-top box manufacturer. While
Scientific-Atlanta's investment position was converted to our common stock in
January 2003, we believe there may be divergent investment preferences between
the strategies pursued by the NTN iTV Network and Buzztime and may decide in the
future to continue to raise additional financing by issuing and selling equity
interests in Buzztime to third parties. To enhance the ability of Buzztime to
raise such financing, we have previously contributed and may contribute in the
future some of our assets to Buzztime in order to allow the development of a
distinct identity that we believe is necessary for it to effectively grow as a
separate concern. These assets include our extensive trivia game show library
and our interactive play-along sports games and related intangible assets.
From an operational standpoint, we could lose control of Buzztime. If we
lose control, Buzztime may no longer provide adequate support and resources for
content and programming for the NTN iTV Network, affecting the ability of the
NTN iTV Network to continue its operations. From a financial viewpoint, we could
undervalue the stock of Buzztime when selling it to third parties or undervalue
assets transferred to Buzztime and this could devalue your holdings in NTN
because we would not receive the fair value for our interest in Buzztime.
IF OUR NEW BUZZTIME PROGRAMMING IS NOT ACCEPTED BY CONSUMERS, WE ARE NOT LIKELY
TO GENERATE SIGNIFICANT REVENUES OR BECOME PROFITABLE.
The new Buzztime channel faces risks as to whether consumers will accept
interactive television products and the trivia programming produced by Buzztime.
If interactive television does not become a successful, scaleable medium or if
consumers do not accept trivia and play-along sports games, then we will be
unable to draw revenues from advertising, direct-marketing of third-party
products, subscription fees and pay-per-play fees. Until a sufficient market
develops for the digital set-top boxes enabled to run our interactive television
game applications, our profit potential is uncertain and we may also face
competition from companies developing and marketing stand-alone game products
and services. We will also be unable to attract local cable operators to add
Buzztime programming as a channel to their service.
THE MARKET FOR INTERACTIVE TELEVISION GAMES AND SERVICES IS NEW AND MAY NOT
DEVELOP AS ANTICIPATED.
The interactive television market currently is small and emerging. The
success of Buzztime will depend on the growth and development of this market in
the United States and it will depend upon the commercialization and broad
acceptance by consumers and businesses of a wide variety of interactive
television products. Demand and market acceptance of recently introduced
products and services are subject to a high level of uncertainty and, as a
result, our profit potential is unproven. In addition, the potential size of
this new market opportunity and the timing of its development and deployment are
currently uncertain. Development schedules of interactive television offered by
our competitors have been delayed or refocused as the industry evolves. If the
market for interactive television does not develop or develops more slowly than
anticipated, our revenues will not grow as fast as anticipated, if at all.
THE ADOPTION OF INCOMPATIBLE STANDARDS COULD RENDER OUR PRODUCTS OBSOLETE OR
NON-COMPETITIVE.
If a new digital set-top box standard or middleware platform is defined, we
do not know whether Buzztime's products will be compatible with such standards
once defined. The establishment of multiple standards could hurt our business
and significantly increase our expenses, particularly if our products require
significant redevelopment in order to conform to the newly established
standards. Any delay or failure on our part to respond quickly, cost-effectively
and sufficiently to these developments could render our existing products and
services obsolete and cause us not to be competitive, resulting in a decrease in
our revenues without a corresponding decrease in our expenses. We may have to
incur substantial expenditures to modify or adapt our products or services to
respond to these developments. We must be able to incorporate new technologies
into the products we design and develop in order to address the increasingly
complex and varied needs of our customer base.
INCREASING GOVERNMENT REGULATION COULD CAUSE DEMAND FOR OUR PRODUCTS AND
SERVICES TO DECLINE SIGNIFICANTLY.
We are subject not only to regulations applicable to businesses generally,
but also laws and regulations that apply directly to the industry of interactive
television products. Although there are currently few such laws and regulations,
state and federal governments may adopt a number of these laws and regulations
governing any of the following issues:
o user privacy;
o copyrights;
o consumer protection;
o the media distribution of specific material or content; and
o the characteristics and quality of interactive television products and
services.
35
One or more states or the federal government could enact regulations aimed
at companies, like us, which provide interactive television products. The
likelihood of such regulation being enacted will increase as interactive
television becomes more pervasive and affects the daily lives of more people.
Any such legislation or regulation could dampen the growth of the industry of
interactive television. If such a reduction in growth occurs, demand for our
products and services may decline significantly.
On January 18, 2001, the Federal Communications Commission issued a notice
of inquiry concerning interactive television. The notice raised a series of
questions that suggest that cable systems might be regarded as essential, open
platforms of spectrum for non-discriminatory third-party access, rather than
facilities-based providers competing in a wider market. The notice sought
comments on the nature of interactive television and whether cable systems will
be a "superior platform" for providing interactive television. The outcome of
the inquiry will determine whether or not a subsequent rulemaking will be held
in order to create regulations for the interactive television industry. Any
regulation of this industry could impact on Buzztime and its operations.
RISK FACTORS ASSOCIATED WITH OUR COMMON STOCK
OUR COMMON STOCK COULD BE DELISTED OR SUSPENDED FROM TRADING ON THE AMERICAN
STOCK EXCHANGE.
On May 1, 2003, we received a letter from the American Stock Exchange
(AMEX) stating that we are now in compliance with AMEX listing standards. Prior
to that date we had been out of compliance since our shareholders' equity was
below $6 million, which was the minimum threshold established by AMEX for
companies with multiple years of losses. New AMEX rules effective January 2003
permit a company, such as NTN, to remain listed on AMEX if it has a total market
capitalization of at least $50 million, has at least 1.1 million shares publicly
held, has a market value of publicly held shares of at least $15 million and has
a minimum of 400 round lot shareholders.
Should, at some future date, we fall out of compliance with the new rules
(from subsequent changes in market capitalization or otherwise), we could remain
compliant by maintaining a level of shareholder's equity of $6 million. If we
otherwise fail to maintain compliance with the AMEX listing standards, our
common stock may not remain listed on AMEX or any other exchange or quotation
system in the future. If our common stock is delisted from AMEX, spreads can
often be higher for securities traded on the over-the-counter market and the
execution time for orders may be longer. Thus, removing our stock from AMEX may
result in decreased liquidity by making the trading of our stock less efficient.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND YOUR INVESTMENT COULD SUFFER A
DECREASE IN VALUE.
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. Our stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products and media properties
by us or our competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, and the market
prices for technology-related companies in particular, have experienced extreme
volatility that often has been unrelated to the operating performance of such
companies. These broad market and industry fluctuations may adversely affect the
price of our stock, regardless of our operating performance.
OUR CHARTER CONTAINS PROVISIONS THAT MAY HINDER OR PREVENT A CHANGE IN CONTROL
OF OUR COMPANY, WHICH COULD RESULT IN OUR INABILITY TO APPROVE A CHANGE IN
CONTROL AND POTENTIALLY RECEIVE A PREMIUM OVER THE CURRENT MARKET VALUE OF YOUR
STOCK.
Certain provisions of our certificate of incorporation could make it more
difficult for a third party to acquire control of us, even if such a change in
control would benefit our stockholders. For example, our certificate of
incorporation requires a supermajority vote of at least 80% of the total voting
power, voting together as a single class, to amend certain provisions of such
document, including those provisions relating to:
o the number, election and term of directors;
o the removal of directors and the filling of vacancies; and
o the supermajority voting requirements of our restated certificate of
incorporation.
36
These provisions could discourage third parties from taking over control of our
company. Such provisions may also impede a transaction in which you could
receive a premium over then current market prices and your ability to approve a
transaction that you consider in your best interests.
IF THE SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE ARE SOLD, THE MARKET
PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.
Future sales of substantial amounts of our common stock in the public
market or the anticipation of such sales could have a material adverse effect on
then-prevailing market prices. As of December 31, 2003, there were approximately
9,674,000 shares of common stock reserved for issuance upon the exercise of
outstanding stock options at exercise prices ranging from $0.45 to $6.38 per
share. As of December 31, 2003, there were also outstanding warrants to purchase
an aggregate of approximately 1,780,000 shares of common stock at exercise
prices ranging from $0.50 to $3.75 per share.
The foregoing options and warrants could adversely affect our ability to
obtain future financing or engage in certain mergers or other transactions,
since the holders of these options and warrants can be expected to exercise them
at a time when we would be able to obtain additional capital through a new
offering of securities on terms more favorable than those provided by such
options and warrants. For the life of such options and warrants, the holders are
given the opportunity to profit from a rise in the market price of our common
stock without assuming the risk of ownership. To the extent the trading price of
our common stock at the time of exercise of any such options or warrants exceeds
the exercise price, such exercise will have a dilutive effect on our
stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to currency exchange rates, stock market
fluctuations, and interest rates. As of December 31, 2003, we owned common stock
of an Australian company that is subject to market risk. At December 31, 2003,
the carrying value of this investment was $189,000, which is net of a $628,000
unrealized loss. This investment is exposed to further market risk in the future
based on the operating results of the Australian company and stock market
fluctuations. Additionally, the value of the investment is further subject to
changes in Australian currency exchange rates. At December 31, 2003, a
hypothetical 10% decline in the value of the Australian dollar would result in a
reduction of $19,000 in the carrying value of the investment.
We do not have any derivative financial instruments. Nor do we have any
speculative or hedging instruments.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule on page F-1, for
a listing of the Consolidated Financial Statements and Schedule filed with this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures", as such term is defined
under Exchange Act Rule 13a-14(c), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. We
have carried out an evaluation, within the 90 days prior to the date of filing
of this report, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon their evaluation and subject to the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that there were no
significant deficiencies or material weaknesses in the our disclosure controls
and procedures and therefore there were no corrective actions taken.
37
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date we
completed our evaluation.
38
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth as of March 5, 2004 certain information
regarding our directors and executive officers:
NAME AGE(4) POSITION(S) HELD
---- ------ ----------------
Stanley B. Kinsey(3).... 50 Chief Executive Officer and Chairman
of the Board
Gary Arlen(2)(3)........ 59 Director
Robert M. Bennett(1).... 74 Director
Barry Bergsman(1)(2).... 64 Director
Vincent A. Carrino(3)... 48 Director
Robert B. Clasen........ 59 Director
Michael Fleming(3)...... 52 Director
Neal Fondren............ 44 Director
Esther L. Rodriguez(1).. 62 Director
Mark deGorter........... 46 President and Chief Operating
Officer, NTN Network
James B. Frakes......... 47 Chief Financial Officer
V. Tyrone Lam........... 42 President and Chief Operating
Officer, Buzztime Entertainment, Inc.
_________
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Board of Directors, Buzztime Entertainment, Inc.
(4) As of March 5, 2004.
The following biographical information is furnished with respect to the
directors and executive officers:
STANLEY B. KINSEY has served as Chairman and Chief Executive Officer of NTN
since October 1998. Mr. Kinsey was appointed as a Director in November 1997 and
his current term expires in 2005. From 1980 to 1985, Mr. Kinsey was a senior
executive with the Walt Disney Company. In 1985, Mr. Kinsey left his position as
senior vice president of operations and new technologies for The Walt Disney
Studio to co-found IWERKS Entertainment, a high-technology entertainment
company. Mr. Kinsey was chairman and chief executive officer at IWERKS from
inception until 1995 when he resigned to spend more time with his family.
GARY ARLEN was appointed as a Director in August 1999 and his current term
expires in 2006. Since 1980, he has been president of Arlen Communications,
Inc., a research and consulting firm specializing in interactive information,
transactions, telecommunications and entertainment. Arlen Communications
provides research and analytical services to domestic and international
organizations in entertainment, media, telecommunications and Internet
industries. Mr. Arlen was a founder and board member of several interactive
media trade associations. He is a member of the Academy of Digital TV Pioneers
and the Cable TV Pioneers.
ROBERT M. BENNETT has been a Director since August 1996 and his current term
expires in 2004. Since 1989, Mr. Bennett has been chairman of the board of
Bennett Productions, Inc., a production company with experience in virtually all
areas of production including syndicated extreme sports and specialty
programming, music videos, commercial productions, home video, corporate
communications and feature films. Mr. Bennett was president of Metromedia
Broadcasting from 1982 until 1986. His career in broadcasting began at KTTV,
Metromedia's broadcast division. In 1972, Mr. Bennett joined Boston
Broadcasters, Inc. (BBI), serving as president and director from 1979 until
1982. In 1991, he acquired full ownership from his partners of Trans Atlantic
Entertainment, Inc., owner of film and video libraries. Mr. Bennett was named to
The Broadcasting and Cable Hall of Fame on November 7, 1994. Mr. Bennett serves
as President of the Muscular Dystrophy Association and as director on the board
of the American Film Institute.
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BARRY BERGSMAN has been a Director since August 1998 and his current term
expires in 2005. He is president of Baron Enterprises, Inc., a privately owned
consulting company established in 1965. As president of Intertel Communications,
Inc., from 1985 to 1998, Mr. Bergsman pioneered the use of the telephone and
interactive technology for promotion, entertainment and information. Prior to
1985, Mr. Bergsman was engaged in television production and syndication and was
an executive with CBS. He currently serves as a director and member of the
management team of Photogenesis, Inc., a private medical device and
biotechnology company.
VINCENT A. CARRINO was appointed as a Director in September 1999 and his
current term expires in 2006. Mr. Carrino is founder and president of Brookhaven
Capital Management, LLC, a private investment firm focusing on technology
companies, established by him in 1985. He also currently serves as executive
vice president and director of investments for Fidelity National Financial, a
title insurance and real estate services company. Prior to establishing
Brookhaven Capital Management, LLC, Mr. Carrino was an analyst with Alliance
Capital Management and was an investment banker with CitiBank in New York.
ROBERT B. CLASEN has been a Director since November 2001 and his current
term expires in 2004. Currently he is President of Sales and Marketing for Starz
Encore Media Group the largest provider of premium movie services in the United
States providing thirteen channels of movies to multichannel television homes.
He was appointed to this position in July 2003. For most of the past ten years,
Mr. Clasen has been President and CEO of Clasen Associates, an advisor to a
broad range of technology and service companies who operate in the broadband,
wireless and satellite sectors. In this capacity he often has served as an
interim executive. In January 2002, he was appointed Acting Chairman and Chief
Executive Officer of Inetcam, Inc., a privately held international streaming
media management software company, where he served for five months. From
September, 2002 through July, 2003, Mr. Clasen served as Interim Chief Strategy
Officer and director for Path 1 Network Technologies (PNWK), a publicly traded
provider of broadcast quality video over packet-based networks and he remains on
the Board. During this period he also served as Chairman for Broadband
Innovations and Lightwave Solutions, two San Diego companies providing
components to the cable television industry. From 1999 until June 2001, Mr.
Clasen served as Chairman and Chief Executive Officer of ICTV, an
interactive/internet television provider. From June 2001 until December, 2001,
Mr. Clasen remained as Chairman of the board at ICTV and, continued to serve as
a director for ICTV until July 2003. During 1997, Mr. Clasen served as President
and Chief Executive Officer of ComStream Corporation, an international provider
of digital transmission solutions for voice, data, imaging, audio and video
applications during the sale of the Company. Prior to 1997, Mr. Clasen held
positions as President of each of Comcast International Holdings, the
international division of Comcast Cable Communications, and Comcast Cable
Communications, one of the country's five largest cable television companies.
MICHAEL FLEMING was appointed a Director in November 2001 and his current
term expires in 2006. Since May 2002, he has also served as Chairman of the
Board of our Buzztime Entertainment, Inc. subsidiary. Mr. Fleming is currently
chairman and Chief Executive Officer of the Fleming Media Group, advising a
broad range of content and technology companies on interactive television,
broadband, wireless and other convergent technology opportunities. He is the
founder and recent past-President of Game Show Network, a satellite delivered
television programming service dedicated to the world of games and game play.
Mr. Fleming has held senior executive positions at Playboy Entertainment Group,
ESPN, Turner Broadcasting and Warner Amex Satellite Entertainment Company. He
was inducted into the Cable Pioneers in 1999.
NEAL FONDREN was appointed as a Director in May 2003 upon consummation of
the investment in NTN by Media General. His current term expires in 2005. Mr.
Fondren has served as Vice President of Media General and President of Media
General's Interactive Media Division since January 2001. Prior to joining Media
General, Mr. Fondren was a 20-year veteran of E.W. Scripps Co., where he was
vice president of new media from 1997 to 2000. Before that, he held a succession
of executive-level positions in Scripps' cable television division from 1982 to
1997.
ESTHER L. RODRIGUEZ has been a Director since September 1997 and her current
term expires in 2004. She served in various executive capacities since joining
General Instrument (now Motorola's Broadband Communications Division) from 1987
until her retirement in November 1996. As vice president of worldwide business
development for General Instrument, Ms. Rodriguez was instrumental in developing
the first nationwide home satellite pay-per-view business in the United States.
She was also general manager and chief operating officer of General Instrument's
Satellite Video Center, a General Instrument-Cable Data partnership, and was a
founding member of the Partnership Council. After leaving General Instrument,
she founded and continues to serve as chief executive officer of Rodriguez
Consulting Group, a business development consulting firm. Ms. Rodriguez has over
30 years of experience in the development and management of consumer and
commercial multi-national businesses, as well as entertainment and educational
networks and systems.
40
MARK DEGORTER was appointed President and Chief Operating Officer of the NTN
Network in January 2001. Prior to that time, Mr. deGorter served as Vice
President of Marketing of our Buzztime subsidiary. Further, during the third
quarter of 2000, Mr. deGorter assumed the additional role of Vice President of
Marketing for the NTN Network. Prior to joining Buzztime in April 2000, Mr.
deGorter had served as Vice President of Marketing for MET-Rx USA, a consumer
packaged goods company, since July 1997. From June 1994 until July 1997, Mr.
deGorter was a senior manager with ProShot Golf, Inc., a global positioning
satellite-based communications and information system for the golf industry.
During his career, Mr. deGorter has held key management positions with Bally's
Total Fitness, a public company operating commercial fitness centers in North
America; L.A. Gear, a licensor of trademarks and trade names for use in
conjunction with apparel, accessory and consumer-related products; and J. Walter
Thompson/USA, a multi-media advertising agency with worldwide operations.
JAMES B. FRAKES was appointed Chief Financial Officer and Secretary of NTN
in April 2001. Prior to joining us, Mr. Frakes was chief financial officer and a
director of Play Co. Toys, a publicly held chain of retail toy stores, where he
had been since 1997. On March 28, 2001, Play Co. Toys and its majority-owned
subsidiary, Toys International.com, Inc., filed a Chapter 11 petition under
federal bankruptcy laws in the Southern District in the State of New York. From
June 1990 to March 1997, Mr. Frakes was chief financial officer and a director
of Urethane Technologies, Inc., a publicly held specialty chemical company, and
two of its subsidiaries, Polymer Development Laboratories, Inc. and BMC
Acquisition, Inc., chemical companies focused on the polyurethane segment of the
plastics industry. From 1985 to 1990, Mr. Frakes was a manager at Berkeley
International Capital Corporation, an investment banking firm specializing in
later stage venture capital and leveraged buyout transactions. Mr. Frakes serves
on the Board of Youth Tennis San Diego, a nonprofit organization.
V. TYRONE LAM was appointed President of Buzztime Entertainment, Inc. in
December 1999, upon incorporation of the subsidiary. Prior to his current
appointment, Mr. Lam served as executive vice president of NTN, responsible for
sales, marketing and operations of the NTN Network. Before joining NTN in 1994,
he managed the development of iTV game and sports applications for EON
Corporation, formerly known as TV Answer, a pioneer in the interactive
television industry, from April 1992 until December 1994. Additionally, Mr. Lam
has served in sales and marketing management positions within the PC software
industry, is past chairman of the Interactive Services Association's Interactive
Television Council and is an author of articles on interactive television and
sales and marketing strategies.
AUDIT COMMITTEE FINANCIAL EXPERT
NTN has determined that Robert M. Bennett is an "audit committee financial
expert" within the meaning of the final rules implementing Section 406 and 407
of the Sarbanes-Oxley Act and independent as defined in Item 7(d)(3)(iv) of
Schedule 14A of the Securities Exchange Act.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under federal securities laws, our directors and officers and any persons
holding more than 10% of our common stock are required to report their
beneficial ownership of our common stock and any changes in that ownership to
the Securities and Exchange Commission. We believe that, based on the written
representations of our directors and officers and copies of reports filed with
the Commission in 2003, our directors, officers and holders of more than 10% of
our common stock complied with the requirements of Section 16(a).
CODE OF ETHICS
We have adopted a code of ethics that applies to our principal executive
officer, principal financial officer and controller which was filed on March 31,
2003 as an exhibit to our annual report for the year ended December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the compensation paid or accrued as of each of the
last three fiscal years to all individuals who served as our chief executive
officer during 2003 and the three other most highly compensated executive
officers who were serving as executive officers at the end of 2003 whose salary
and bonus exceeded $100,000 (collectively, the "Named Executive Officers"):
41
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION OPTIONS
- --------------------------- ---- --------- ----- ------------ -------
Stanley B. Kinsey(2)........ 2003 $ 339,834 -- -- 400,000
Chief Executive Officer 2002 313,542 24,000(3) -- 100,000
And Chairman of the Board 2001 305,386 -- -- 350,000
V. Tyrone Lam............... 2003 $ 250,288 $50,000(6) -- 100,000
President and Chief Operating Officer 2002 222,156 15,000(3) -- 100,000
Buzztime Entertainment, Inc. 2001 223,077 -- -- --
Mark deGorter(4)............ 2003 $ 249,615 $50,000(6) -- 100,000
President and Chief Operating Officer, 2002 222,538 60,000(3) -- 250,000
The NTN Network 2001 199,038 25,382(4) -- 150,000
James B. Frakes(5) ......... 2003 $ 189,103 -- -- 100,000
Chief Financial Officer 2002 159,000 20,000(3) -- --
2001 111,539 10,000 -- 250,000
_________
(1) Includes amounts, if any, deferred under NTN's 401(k) Plan.
(2) Mr. Kinsey waived compensation for serving as a director of NTN. Mr. Kinsey
received perquisites and personal benefits that did not exceed the lesser of
$50,000 or 10% of his annual salary and bonus.
(3) Represents bonus paid out pursuant to the 2002 performance-based bonus
program.
(4) Represents a bonus paid to Mr. deGorter in March 2002 based upon exceeding
established targets for the NTN Network for the fiscal year ended 2001.
(5) Mr. Frakes joined NTN in April 2001.
(6) Represents bonus to be paid out pursuant to the 2003 performance-based bonus
program.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning grants of stock options
during 2003 with respect to the Named Executive Officers:
INDIVIDUAL GRANTS
-----------------------------------------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR PRICE DATE VALUE(1)
- ---- ------- ----------- ----- ---- --------
Stanley B. Kinsey.. 400,000(2) 1.7% $1.10 02/17/13 $331,604
V. Tyrone Lam...... 100,000(3) * 1.10 01/30/13 87,631
Mark deGorter...... 100,000(3) * 1.10 01/30/13 87,631
James B. Frakes.... 100,000(3) * 1.10 01/30/13 87,631
- --------------------------------------------------------------------------------
*Less than one percent (1%)
(1) The present value of grant on the grant date was estimated using the Black
Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0%, risk-free interest rate of 2.858%,
expected volatility of 113.17%, and expected option life of 4.58 years.
(2) Represents options granted under the 1995 Stock Option Plan, which became
fully vested and exercisable as of January 31, 2004. The options were
granted to Mr. Kinsey in consideration of Mr. Kinsey's agreement to extend
the term of his employment agreement to January 31, 2004. The options were
priced at $1.10 per share in accordance with the terms of the Company's
broad-based employee stock option grant effective January 31, 2003. Such
options vested in twelve (12) equal installments on the last day of each
month commencing February 18, 2003.
(3) Represents options granted under the 1995 Stock Option Plan in accordance
with the Company's broad-based stock option grant effective January 31,
2003. Such options vest and become exercisable as to 25% of the total shares
on the first anniversary of the date of grant and will become exercisable as
to an additional 1/36 of the remaining shares on the last day of each of the
thirty-six (36) calendar months immediately following the first anniversary
of the grant date.
42
FISCAL YEAR-END OPTION VALUES
The following table contains information concerning stock options which were
unexercised at the end of 2003 with respect to the Named Executive Officers. No
stock options were exercised in 2003 by any Named Executive Officer.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY
AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END(1)
--------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Stanley B. Kinsey.. 2,716,667 33,333 $7,533,334 $86,666
V. Tyrone Lam...... 546,667 153,333 1,491,426 415,199
Mark deGorter...... 228,334 271,666 696,836 770,665
James B. Frakes.... 166,667 183,333 516,668 518,332
__________
(1) Represents the amount by which the aggregate market price on December 31,
2003 of the shares of our Common Stock subject to such options exceeded the
respective exercise prices of such options.
DIRECTOR COMPENSATION
During 2003, directors were entitled to receive cash compensation of $2,400
per month for their services as directors. Further, directors who serve on
either the audit or compensation committees or the board of directors of
Buzztime Entertainment, Inc. were entitled to receive an additional $3,000
annually for each such service. In 2003, Messrs. Bennett and Carrino have
elected to receive shares of common stock in lieu of a portion of the cash
component of director compensation. Directors are also eligible for the grant of
options to purchase common stock from time to time for services in their
capacity as directors.
Upon the date of commencement of a director's term of service, we grant to
each director options to purchase 20,000 shares of our common stock. These
options are priced at the closing market price of the common stock on the date
of grant. As of the date of grant, 10,000 options are fully vested and
exercisable; thereafter, the remaining 10,000 options vest and become
exercisable in equal installments each month immediately subsequent to the date
of grant and up to the date of the next annual meeting of shareholders. Further,
after the initial year of a director's term of service, options to purchase an
additional 20,000 shares of common stock shall be granted each year on the date
of our annual meeting of shareholders during the remainder of the term of
service. The additional options shall be priced at the closing market price of
the common stock on the date of grant and shall vest and become exercisable as
to 1/12 of the shares each month following the date of grant, subject to the
director's continuing service. A director who is re-elected for an additional
term of service will be granted options to purchase 20,000 shares of common
stock, priced at the closing market price of the common stock on the date of our
annual meeting of shareholders, subject to monthly vesting and continued
service. Finally, all options granted to directors as compensation for service
on the Board of Directors shall expire on the earlier of ten years from the date
of grant or two years from the date the director ceases to serve on the Board of
Directors. The options provide for immediate vesting in full in the event of a
change of control event.
EMPLOYMENT CONTRACTS
In October 1998, we entered into a written employment agreement pursuant to
which Mr. Kinsey is to receive a bonus under a bonus program that was to be
agreed upon by and between Mr. Kinsey and the compensation committee of our
board of directors. On October 7, 1999, we entered into an addendum to the
employment agreement with Mr. Kinsey setting forth the terms of the bonus
program. Under the bonus program, the options granted to Mr. Kinsey in October
1999 were granted at a preferred, below market, price of $0.98 per share, the
average closing price of our Common Stock during the three calendar quarters
immediately prior to the grant date. The options were granted to Mr. Kinsey
pursuant to our 1995 Employee Stock Option Plan and are subject to immediate
vesting upon the occurrence of a change of control event. In January 2001, we
amended the employment agreement with Mr. Kinsey to extend the duration of the
agreement by one year until October 6, 2002 and to award options for an
additional 350,000 shares of our Common Stock at an exercise price of $0.875 per
share. On October 7, 2002, Mr. Kinsey was granted options in exchange for his
agreement to reset the commencement of the renewal term of the employment
agreement to January 1, 2003. In February 2003, Mr. Kinsey accepted an
additional term of employment through January 31, 2004. In connection with the
extension, Mr. Kinsey was granted options to purchase 400,000 shares of Common
Stock at $1.10 per share in accordance with the terms of our broad-based
employee stock option grant effective January 31, 2003. All options granted to
Mr. Kinsey have been made at fair value as of the date of each grant. Mr. Kinsey
was also paid a cash bonus in accordance with our 2002 bonus plan. Mr. Kinsey
and the Compensation Committee are currently negotiating terms for an extension
of Mr. Kinsey's employment agreement.
43
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All compensation determinations for 2003 for our executive officers were
made by the Board of Directors as a whole upon the recommendation of the
Compensation Committee. During 2003, Mr. Arlen and Mr. Bergsman served on the
Compensation Committee. None of our directors or executive officers has served
on the board of directors or the compensation committee of any other company or
entity, any of whose officers served either on our Board of Directors or on our
Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 5, 2004 the number and percentage
ownership of common stock by (i) all persons known to us to own beneficially
more than 5% of the outstanding shares of Common Stock based upon reports filed
by each such person with the Securities and Exchange Commission, (ii) each of
our directors, (iii) each of the named executive officers, and (iv) all of the
named executive officers and directors as a group. Except as otherwise indicated
and subject to applicable community property and similar laws, each of the
persons named has sole voting and investment power with respect to the shares of
Common Stock shown. Except as otherwise indicated, the address for each person
is c/o NTN Communications, Inc., 5966 La Place Court, Carlsbad, California
92008. An asterisk denotes beneficial ownership of less than 1%.
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME OWNED COMMON STOCK(1)
- ---- ----- ---------------
Stanley B. Kinsey(2)...................... 2,874,333 5%
Gary Arlen(3)............................. 161,000 *
Robert M. Bennett(4)...................... 1,808,017 3%
Barry Bergsman(5)......................... 291,000 *
Vincent A. Carrino(6)..................... 5,904,831 11%
Robert B. Clasen(7)....................... 70,000 *
Michael Fleming(8)........................ 60,000 *
Neal Fondren(9) .......................... 1,320 *
Esther L. Rodriguez(10)................... 222,766 *
Mark deGorter(11)......................... 288,542 *
James B. Frakes(12) ...................... 182,292 *
V. Tyrone Lam(13)......................... 585,417 1%
Media General, Inc. (14) ................. 3,250,667 6%
==================================
All executive officers and directors
of NTN as a Group (12 Persons)(15)...... 12,449,518 21%
==================================
__________
(1) Included as outstanding for purposes of this calculation are 52,611,430
shares of Common Stock (the amount outstanding as of March 5, 2004) plus,
in the case of each particular holder, the shares of Common Stock subject
to currently exercisable options, warrants, or other instruments
exercisable for or convertible into shares of Common Stock (including such
instruments exercisable within 60 days after March 5, 2004) held by that
person, which instruments are specified by footnote. Shares issuable as
part or upon exercise of outstanding options, warrants, or other
instruments other than as described in the preceding sentence are not
deemed to be outstanding for purposes of this calculation.
(2) Includes 2,750,000 shares subject to currently exercisable options held by
Mr. Kinsey.
(3) Includes 160,000 shares subject to currently exercisable options held by
Mr. Arlen.
(4) Includes 160,000 shares subject to currently exercisable options and
500,000 shares subject to currently exercisable warrants held by Mr.
Bennett.
(5) Includes 160,000 shares subject to currently exercisable options and
20,000 shares subject to currently exercisable warrants held by Mr.
Bergsman.
(6) Includes 260,000 shares subject to currently exercisable options held by
Mr. Carrino. Also includes 332,386 shares owned directly by Mr. Carrino
and 5,312,445 shares owned, directly or indirectly, by investment advisory
clients of Brookhaven Capital Management, LLC, which in some cases has
sole voting and investment discretion over such shares. Mr. Carrino is the
sole owner and the Manager of Brookhaven Capital Management, LLC and, as
such, in some cases he may be deemed to beneficially own such shares. Mr.
Carrino disclaims such beneficial ownership. Brookhaven Capital Management
is located at 3000 Sand Hill Road, Menlo Park, CA 94205.
(7) Includes 60,000 shares subject to currently exercisable options held by
Mr. Clasen. Includes 10,000 owned by the Clasen Family Trust, of which Mr.
Clasen is co-trustee with members of his immediate family. As co-trustee,
Mr. Clasen shares voting and investment power with respect to the shares.
(8) Includes 60,000 shares subject to currently exercisable options held by
Mr. Fleming.
(9) Includes 500 shares owned by Mr. Fondren as custodian for his son.
Excludes shares subject to options issued to Media General for Mr.
Fondren's service as director.
44
(10) Includes 160,000 shares subject to currently exercisable options held by
Ms. Rodriguez. Also includes 1,000 shares owned by the Rodriguez Family
Trust, of which Ms. Rodriguez is a co-trustee with members of her
immediate family. As co- trustee, Ms. Rodriguez shares voting and
investment power with respect to the shares.
(11) Represents shares subject to currently exercisable options held by Mr.
deGorter.
(12) Represents shares subject to currently exercisable options held by Mr.
Frakes.
(13) Represents shares subject to currently exercisable options held by Mr.
Lam.
(14) Includes 564,000 shares acquired January 30, 2004 in a registered pubic
offering; 2,000,000 shares acquired pursuant to the Purchase Agreement
dated May 5, 2003; 666,667 shares acquired pursuant to the Licensing
Agreement dated May 7, 2003; and 20,000 shares subject to currently
exercisable options issued for Mr. Fondren's service as director.
(15) Includes 5,346,251 shares subject to currently exercisable options and
warrants held by executive officers and directors, including those
described in notes (2) through (13) above.
EQUITY COMPENSATION PLANS
The following table sets forth as of December 31, 2003 our compensation
plans authorizing us to issue equity securities and the number of securities
issuable thereunder.
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES REMAINING
BE ISSUED UPON EXERCISE EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY COMPENSATION PLANS
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS (EXCLUDING SECURITIES REFLECTED
(a) (b) IN COLUMN (a))
- ----------------------- ----------------------- -------------------- -------------------------------
EQUITY COMPENSATION
PLANS APPROVED BY 9,673,914(1) $1.31 728,069(2)
SECURITY HOLDERS
EQUITY COMPENSATION
PLANS NOT APPROVED BY 1,632,833(4) $1.61 0
SECURITY HOLDERS
--------------------------- ------------------------ ----------------------------------
TOTAL 11,306,747 728,069(3)
=========================== ======================== ==================================
__________
(1) Includes 9,173,914 shares issuable upon exercise of options granted
pursuant to the NTN Communications, Inc. 1995 Employee Stock Option Plan
and 500,000 shares issuable upon exercise of options granted pursuant to
the NTN Communications, Inc. 1996 Special Stock Option Plan.
(2) Remaining available for grant under the NTN Communications, Inc. 1995
Employee Stock Option Plan.
(3) Does not include 300,000 shares of Buzztime Entertainment, Inc. common
stock available for grant under the Buzztime Entertainment, Inc. 2001
Incentive Stock Option Plan. To date, no options have been granted under
the plan.
(4) The 1,632,833 shares issuable that are not pursuant to equity compensation
plans approved by security holders are all pursuant to warrants granted in
connection with consulting agreements with non-employees or to warrants
associated with equity offerings. Warrants to purchase 514,000 shares were
granted in 2003, 685,000 shares were granted in 2002 and 190,000 shares in
2001. The remainder of outstanding warrants were issued on or before 2000.
As of December 31, 2003, the range of exercise prices and the
weighted-average remaining contractual life of outstanding warrants was
$0.50 to $3.75 and 4 years, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING ARRANGEMENTS
On May 8, 2001, we entered into an advertising sales representative
agreement with Baron Enterprises, Inc., a corporation wholly-owned and operated
by Barry Bergsman, a member of our board of directors, pursuant to which Baron
provided advertising sales representation services to us under the direction of
the NTN Network's president and chief operating officer. For Baron's services
under the advertising sales representative agreement, we granted Baron a
three-year warrant to purchase 20,000 shares of Common Stock at an exercise
price of $0.50 per share. The warrant vested and became exercisable as to 1/12
of the total shares on the last business day of each of the twelve months
commencing April 2001, subject to Baron continuing to provide services to us. In
addition, Baron received a commission in the amount of 35% of net advertising
revenues received by the NTN Network from any advertising contract solicited by
Baron. We paid to Baron a monthly recoverable cash advance against commissions
to be earned in the amount of $5,000 per month, not to exceed an aggregate of
$60,000 per year. The advertising sales representative agreement expired on
45
April 1, 2002. An amendment to the agreement was entered into in October 2002,
to extend the contract to October 31, 2003, to reduce the rate of commission to
25% of net advertising revenues received by us and to include bartered
advertising. In September, 2003, we entered into a three year agreement with
Baron to negotiate on our behalf with a third party advertising representative.
Baron was to receive commissions of 3% to 10% based upon the period of time over
which the negotiated advertising would run and upon the related advertising
revenue. No commissions have been paid to date to Baron for this third party
work.
In May 2002, Michael Fleming was appointed Chairman of the Board of our
Buzztime subsidiary, after having served, since January 8, 2002, as an
independent consultant. Pursuant to the consulting arrangement, Mr. Fleming
provided general consulting services to us in connection with Buzztime's cable
television initiatives. We paid Mr. Fleming approximately $2,000 per month for
these consulting services. This arrangement was discontinued in September 2003.
In January 2002, we entered into a consulting agreement with Robert Clasen,
one of our directors, whereby Mr. Clasen provides consulting services to us with
respect to Buzztime's cable television initiatives. We paid Mr. Clasen $2,000
per month for the services provided under the consulting agreement. The initial
term of this agreement expired on December 31, 2002. We then continued the
consulting relationship on a month to month basis through June 2003 when we
mutually agreed to discontinue the arrangement.
INVESTMENT TRANSACTIONS
In connection with the investment by Media General, Inc., 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 board seat. 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.
On January 15, 2003, we issued and sold 1,000,000 shares of restricted
common stock along with fully vested warrants to purchase 500,000 shares of
common stock at $1.15 per share, exercisable through January 15, 2008 through a
private offering to Robert M. Bennett, one of our directors, at a price per
share of $1.00 for an aggregate amount of $1.0 million. No commissions or
placement agent fees were paid in connection with the offering.
INDEMNITY AGREEMENTS
We have entered into indemnity agreements with each of our directors and
executive officers. The indemnity agreements provide that we will indemnify
these individuals under certain circumstances against certain liabilities and
expenses they may incur in their capacities as directors or officers. We believe
that the use of such indemnity agreements is customary among corporations and
that the terms of the indemnity agreements are reasonable and fair, and are in
our best interests to retain experienced directors and officers.
CHANGE OF CONTROL ARRANGEMENTS
We have entered into change of control employment agreements with certain of
our executive officers. The agreements provide that, if the executive is
terminated other than for cause within one year after a change of control of the
Company, then the executive is entitled to receive a lump sum severance payment
equal to up to one year's base salary.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee has reviewed the advisability and acceptability of utilizing
the Company's external auditor KPMG LLP, for non-audit services. In reviewing
this area, the Committee focused on the ability of the external auditor to
maintain independence. Based on input from management and a review of procedures
established within the external audit firm, the Committee finds that it is both
advisable and acceptable to employ the external auditor for certain limited
non-audit services, from time-to-time. The Audit Committee reviews and approves
all services to be provided by KPMG LLP before the firm is retained.
AUDIT FEES
Fees for the fiscal year 2003 audit and quarterly reviews aggregate an amount of
$276,000, of which $48,000 was paid to KPMG, LLP as of December 31, 2003. Fees
for the fiscal year 2002 audit and quarterly reviews aggregated $129,000, of
which all has been paid. Fees included above related to audits of financial
statements of acquired Companies in accordance with Rule 3-05 totaled $78,000
for 2003 and $0 for 2002.
AUDIT-RELATED FEES
Aggregate fees billed for all other services for fiscal year 2003 and 2002 were
$0.
TAX FEES
Aggregated fees billed and paid for tax services for fiscal year 2003 were $0.
Aggregated fees billed and paid for tax services for fiscal year 2002 were $0.
OTHER FEES
No fees were billed or paid for fiscal year 2003 or 2002 relating to other
services. The Audit Committee has reviewed and approved the non-audit services
provided by KPMG LLP.
46
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE. The consolidated
financial statements and schedule of the Company and its consolidated
subsidiaries are set forth in the "Index to Consolidated Financial
Statements and schedule" on page F-1.
EXHIBITS. The following exhibits are filed as a part of this report:
EXHIBIT
NO. DESCRIPTION
3.1 -- Amended and Restated Certificate of Incorporation of the Company, as
amended (4)
3.2 -- Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (7)
3.3 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated March 22, 2000 (8)
3.4 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated March 24, 2000 (8)
3.5 -- By-laws of the Company (2)
3.6 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated May 27, 2003 (16)
4.1 -- Specimen Common Stock Certificate (10)
4.2* -- Stock Option Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
4.3* -- Stock Option Agreement, dated October 7, 1999, by and between NTN
Communications, Inc. and Stanley B. Kinsey (6)
4.4* -- Stock Option Agreement, dated January 26, 2001, by and between
NTN Communications, Inc. and Stanley B. Kinsey (12)
4.5 -- Warrant Certificate issued January 13, 2003 by NTN
Communications, Inc. to Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (19)
4.6 -- NTN Investor Rights Agreement, dated May 7, 2003, by and between
NTN Communications, Inc. and Media General, Inc. (18)
4.7 -- Buzztime Investor Rights Agreement, dated May 7, 2003, by and
among NTN Communications, Inc., Buzztime Entertainment, Inc. and
Media General, Inc. (18)
4.8 -- Common Stock Purchase Warrant dated May 7, 2003 issued to Media
General, Inc. exercisable for 500,000 shares of common stock of
Buzztime Entertainment, Inc. (18)
4.9 -- Form of Common Stock Purchase Warrant issued to Roth Capital
Partners (14)
10.1 -- License Agreement with NTN Canada (3)
10.2* -- Employment Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
10.3 -- Subscription Agreement dated January 13, 2003 between NTN
Communications, Inc. and Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (19)
10.4 -- Scientific-Atlanta Strategic Investments, L.L.C. Notice of
Exchange of Buzztime Preferred Stock for NTN Common Stock, dated
January 16, 2003 (19)
10.5 -- Securities Purchase Agreement dated May 5, 2003 by and among NTN
Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (18)
10.6 -- Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners and NTN Communications, Inc. (14)
10.7 -- Manufacturing Agreement, dated November 25, 1997, by and between
NTN Communications, Inc. and Climax Technology Co., Ltd. (9)
10.8 -- Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (11)
10.9 -- Asset Purchase Agreement dated July 30, 2003 by and among NTN
Software Solutions, Inc., NTN Communications, Inc., Breakaway
International, Inc. and the Seller Shareholders (17)
10.10 -- Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc. and Chell Group Corporation (15)
47
14.0 -- Code of Ethics for Senior Financial Officers (13)
21.1 -- Subsidiaries of Registrant (1)
23.1 -- Consent of KPMG LLP (1)
31 -- Certification of Officers pursuant to Rule 13a-14(a) (1)
32 -- Certification of Officers pursuant to Rule 13a-14(b) (20)
__________
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's registration statement on Form
S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to NTN's report on Form 10-K for the year
ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-69383, filed on December 28, 1998, and incorporated by
reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K dated December
31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 8-K dated November
7, 1997 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on
April 5, 2000 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 10-K/A dated March
5, 2001 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's registration statement on Form
8-A, File No. 0-19383, and incorporated by reference.
(11) Previously filed as an exhibit to NTN's report on Form 10-K dated December
31, 2000 and incorporated by reference.
(12) Previously filed as an exhibit to NTN's report on Form 10-Q dated March
31, 2001 and incorporated by reference.
(13) Previously filed as an exhibit to NTN's Form 10-K dated March 31, 2003 and
incorporated herein by reference.
(14) Previously filed as an exhibit to NTN's report on Form 8-K dated November
29, 2003 and incorporated herein by reference.
(15) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-111538, filed on December 24, 2003 and incorporated
herein by reference.
(16) Previously filed as an exhibit to NTN's Form 10-Q dated August 14, 2003
and incorporated herein by reference.
(17) Previously filed as an exhibit to NTN's report on Form 8-K dated November
29, 2003 and incorporated herein by reference.
(18) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-105429, filed on May 21, 2003 and incorporated herein by
reference.
(19) Previously filed as an exhibit to NTN's Form 10-Q dated May 15, 2003 and
incorporated herein by reference.
(20) Furnished concurrently herewith.
(b) Reports on Form 8-K.
On November 13, 2003, we filed a Current Report on Form 8-K (event date November
13, 2003) to report under Item 12. Results of Operations and Financial
Condition. The information in such report shall not be deemed to be "filed" for
purposes of Section 18 of the Exchange Act or otherwise subject to the
liabilities of that section.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NTN COMMUNICATIONS, INC.
By: /s/ James B. Frakes
---------------------------------
CHIEF FINANCIAL OFFICER
Dated: March 19, 2004
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose name
appears below appoints and constitutes Stanley B. Kinsey and James B. Frakes,
and each one of them, acting individually and without the other, as his or her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to execute any and all amendments to this Report on Form
10-K and to file the same, together with all exhibits thereto, with the
Securities and Exchange Commission, and such other agencies, offices and persons
as may be required by applicable law, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorney-in-fact and agent may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STANLEY B. KINSEY Chief Executive Officer and March 19, 2004
- ------------------------ Chairman of the Board
Stanley B. Kinsey
/s/ BARRY BERGSMAN Director March 19, 2004
- ------------------------
Barry Bergsman
/s/ ROBERT M. BENNETT Director March 19, 2004
- ------------------------
Robert M. Bennett
/s/ ESTHER L. RODRIGUEZ Director March 19, 2004
- ------------------------
Esther L. Rodriguez
/s/ GARY ARLEN Director March 19, 2004
- ------------------------
Gary Arlen
/s/ VINCENT A. CARRINO Director March 19, 2004
- ------------------------
Vincent A. Carrino
/s/ ROBERT B. CLASEN Director March 19, 2004
- ------------------------
Robert B. Clasen
/s/ NEAL FONDREN Director March 19, 2004
- ------------------------
Neal Fondren
/s/ MICHAEL FLEMING Director March 19, 2004
- ------------------------
Michael Fleming
49
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Independent Auditors' Report............................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as December 31, 2002 and 2001............... F-3
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001, and 2000........................................ F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2002, 2001, and 2000.................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000........................................ F-6
Notes to Consolidated Financial Statements................................. F-8
Financial Statement Schedule II-- Valuation and Qualifying Accounts........ F-32
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NTN Communications, Inc.:
We have audited the consolidated financial statements of NTN Communications,
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NTN
Communications, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/S/ KPMG LLP
San Diego, California
March 15, 2004
F-2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS (Pledged)
2003 2002
------------- -------------
Current Assets:
Cash and cash equivalents ........................................... $ 2,503,000 $ 577,000
Restricted cash ..................................................... -- 102,000
Accounts receivable, net of allowance for doubtful
accounts of $811,000 in 2003 and $437,000 in 2002 ................. 2,324,000 2,013,000
Inventory ........................................................... 404,000 241,000
Investments available-for-sale ...................................... 189,000 178,000
Deposits on broadcast equipment ..................................... 34,000 --
Deferred costs ...................................................... 493,000 492,000
Prepaid expenses and other current assets ........................... 757,000 581,000
------------- -------------
Total current assets ......................................... 6,704,000 4,184,000
Broadcast equipment and fixed assets, net ............................. 4,398,000 5,141,000
Software development costs, net of accumulated amortization
of $689,000 in 2003 and $405,000 in 2002 ............................ 676,000 591,000
Deferred costs ........................................................ 505,000 370,000
Goodwill .............................................................. 3,490,000 231,000
Intangible assets ..................................................... 4,800,000 267,000
Other assets .......................................................... 57,000 58,000
------------- -------------
Total assets ................................................. $ 20,630,000 $ 10,842,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................................... $ 612,000 $ 657,000
Accrued expenses .................................................... 3,174,000 1,177,000
Sales tax payable ................................................... 219,000 284,000
Income taxes payable ................................................ 39,000 30,000
Obligations under capital leases - current portion .................. 165,000 184,000
Revolving line of credit ............................................ -- 89,000
Equipment note payable - current portion ............................ 46,000 --
Deferred revenue .................................................... 1,478,000 1,199,000
Deferred revenue-Buzztime ........................................... 206,000 --
------------- -------------
Total current liabilities .................................... 5,939,000 3,620,000
Obligations under capital leases, excluding current portion ........... 181,000 199,000
Revolving line of credit .............................................. 1,000,000 2,250,000
Senior subordinated convertible notes ................................. -- 1,997,000
Deferred revenue ...................................................... 262,000 653,000
Other long-term liabilities ........................................... 184,000 --
------------- -------------
Total liabilities ............................................ 7,566,000 8,719,000
------------- -------------
Minority interest in consolidated subsidiary .......................... -- 643,000
------------- -------------
Commitments and contingencies
Shareholders' equity:
Series A 10% cumulative convertible preferred stock, $.005
par value, 5,000,000 shares authorized; 161,000 shares
issued and outstanding at December 31, 2003 and
December 31, 2002 ................................................. 1,000 1,000
Common stock, $.005 par value, 84,000,000 shares authorized;
48,623,000 and 39,381,000 shares issued and outstanding at
December 31, 2003 and December 31, 2002 respectively .............. 242,000 196,000
Additional paid-in capital .......................................... 95,239,000 81,211,000
Accumulated deficit ................................................. (81,790,000) (79,079,000)
Accumulated other comprehensive loss ................................ (628,000) (639,000)
Treasury stock, at cost, 0 and 49,000 shares at
December 31, 2003 and December 31, 2002, respectively ............. -- (210,000)
------------- -------------
Total shareholders' equity ................................... 13,064,000 1,480,000
------------- -------------
Total liabilities and shareholders' equity ................... $ 20,630,000 $ 10,842,000
============= =============
See accompanying notes to consolidated financial statements
F-3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------- ------------- -------------
Revenues:
NTN Network revenues ......................................... $ 29,275,000 $ 25,465,000 $ 22,382,000
Buzztime service revenues .................................... 196,000 128,000 159,000
Other revenues ............................................... 18,000 17,000 18,000
------------- ------------- -------------
Total revenues ....................................... 29,489,000 25,610,000 22,559,000
------------- ------------- -------------
Operating expenses:
Direct operating costs of services (includes depreciation
of $2,800,000, $3,370,000 and $3,297,000 for 2003, 2002
and 2001, respectively) ................................... 11,146,000 9,718,000 8,241,000
Selling, general and administrative ........................ 18,632,000 15,640,000 14,977,000
Litigation, legal and professional fees .................... 831,000 540,000 463,000
Depreciation and amortization .............................. 1,097,000 1,555,000 1,711,000
Research and development ................................... 329,000 12,000 101,000
------------- ------------- -------------
Total operating expenses ............................. 32,035,000 27,465,000 25,493,000
------------- ------------- -------------
Operating loss ................................................. (2,546,000) (1,855,000) (2,934,000)
------------- ------------- -------------
Other income (expense):
Interest income .............................................. 5,000 6,000 63,000
Interest expense ............................................. (238,000) (511,000) (846,000)
Debt conversion costs ........................................ -- -- (189,000)
Gain on early extinguishment of debt ......................... 105,000 -- --
Other ........................................................ -- -- 165,000
------------- ------------- -------------
Total other income (expense) ......................... (128,000) (505,000) (807,000)
------------- ------------- -------------
Loss before income taxes and minority
interest in loss of consolidated subsidiary .... (2,674,000) (2,360,000) (3,741,000)
Provision for income taxes ..................................... (47,000) (41,000) --
Minority interest in loss of consolidated ...................... 10,000 212,000 85,000
------------- ------------- -------------
Net loss ....................................................... $ (2,711,000) $ (2,189,000) $ (3,656,000)
============= ============= =============
Net loss per common share - basic and diluted .................. $ (0.06) $ (0.06) $ (0.10)
============= ============= =============
Weighted average shares outstanding-- basic and diluted ........ 45,446,000 39,081,000 36,755,000
============= ============= =============
See accompanying notes to consolidated financial statements
F-4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
SERIES A
CUMULATIVE
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
Balance, December 31, 2000 .................................. 161,000 $ 1,000 36,046,000 $ 179,000
Convertible note payable converted to common
stock ................................................... -- -- 1,639,000 8,000
Issuance of stock for exercise of warrants and
options ................................................. -- -- 104,000 1,000
Issuance of stock in lieu of interest ..................... -- -- 418,000 2,000
Issuance of stock in lieu of dividends .................... -- -- 24,000 --
Issuance of stock in payment of accrued board
compensation ............................................ -- -- -- --
Issuance of stock in private placement, net of
issuance costs .......................................... -- -- 396,000 2,000
Stock-based compensation .................................. -- -- -- --
Unrealized holding loss on investments
available-for-sale ...................................... -- -- -- --
Net loss .................................................. -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 2001 .................................. 161,000 $ 1,000 38,627,000 $ 192,000
Issuance of stock for exercise of warrants and
options ................................................. -- -- 191,000 1,000
Issuance of stock in lieu of interest ..................... -- -- 185,000 1,000
Issuance of stock in lieu of dividends .................... -- -- 14,000 --
Issuance of stock in payment of accrued board
compensation ............................................ -- -- -- --
Issuance of stock for acquisitions ........................ -- -- 364,000 2,000
Stock-based compensation .................................. -- -- -- --
Unrealized holding gain on investments
available-for-sale ...................................... -- -- -- --
Net loss .................................................. -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 2002 .................................. 161,000 $ 1,000 39,381,000 $ 196,000
Issuance of stock for exercise of warrants
and options ............................................ -- -- 1,414,000 7,000
Issuance of stock in lieu of interest ..................... -- -- 55,000 --
Issuance of stock in lieu of dividends .................... -- -- 6,000 --
Issuance of stock in payment of accrued board
compensation ............................................ -- -- -- --
Issuance of stock for acquisitions ........................ -- -- 1,531,000 8,000
Convertible note payable converted to common
stock ................................................... -- -- 1,569,000 8,000
Issuance of stock in private placement, net of
issuance costs .......................................... -- -- 3,667,000 18,000
Conversion of Buzztime preferred series A to
NTN common stock ........................................ -- -- 1,000,000 5,000
Stock-based compensation .................................. -- -- -- --
Unrealized holding gain on investments
available for sale ...................................... -- -- -- --
Net loss .................................................. -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 2003 .................................. 161,000 $ 1,000 48,623,000 $ 242,000
============= ============= ============= =============
continued on next page:
F-5a
continued from above:
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ACCUMULATED
ADDITIONAL OTHER
PAID-IN ACCUMULATED COMPREHENSIVE TREASURY
CAPITAL DEFICIT LOSS STOCK TOTAL
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2000 .......................... $ 78,153,000 $(73,234,000) $ (545,000) $ (472,000) $ 4,082,000
Convertible Note Payable converted to common
stock ........................................... 2,137,000 -- -- -- 2,145,000
Issuance of stock for exercise of warrants and
options ......................................... 92,000 -- -- -- 93,000
Issuance of stock in lieu of interest ............. 198,000 -- -- -- 200,000
Issuance of stock in lieu of dividends ............ -- -- -- -- --
Issuance of stock in payment of accrued board
compensation .................................... (71,000) -- -- 84,000 13,000
Issuance of stock in private placement, net of
issuance costs .................................. 11,000 -- -- -- 13,000
Stock-based compensation .......................... 119,000 -- -- -- 119,000
Unrealized holding loss on investments
available-for-sale .............................. -- -- (98,000) -- (98,000)
Net loss .......................................... -- (3,656,000) -- -- (3,656,000)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 .......................... $ 80,639,000 $(76,890,000) $ (643,000) $ (388,000) $ 2,911,000
Issuance of stock for exercise of warrants and
options ......................................... 134,000 -- -- -- 135,000
Issuance of stock in lieu of interest ............. 159,000 -- -- -- 160,000
Issuance of stock in lieu of dividends ............ -- -- -- -- --
Issuance of stock in payment of accrued board
compensation .................................... (135,000) -- -- 178,000 43,000
Issuance of stock for acquisitions ................ 318,000 -- -- -- 320,000
Stock-based compensation .......................... 96,000 -- -- -- 96,000
Unrealized holding gain on investments
available-for-sale .............................. -- -- 4,000 -- 4,000
Net loss .......................................... -- (2,189,000) -- -- (2,189,000)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002 .......................... $ 81,211,000 $(79,079,000) $ (639,000) $ (210,000) $ 1,480,000
Issuance of stock for exercise of warrants
and options ..................................... 1,836,000 -- -- -- 1,843,000
Issuance of stock in lieu of interest ............. 54,000 -- -- -- 54,000
Issuance of stock in lieu of dividends ............ -- -- -- -- --
Issuance of stock in payment of accrued board
compensation .................................... (156,000) -- -- 210,000 54,000
Issuance of stock for acquisitions ................ 4,028,000 -- -- -- 4,036,000
Convertible note payable converted to common
stock ........................................... 1,992,000 -- -- -- 2,000,000
Issuance of stock in private placement, net of
issuance costs .................................. 5,451,000 -- -- -- 5,469,000
Conversion of Buzztime preferred series A to
NTN common stock ................................ 591,000 -- -- -- 596,000
Stock-based compensation .......................... 232,000 -- -- -- 232,000
Unrealized holding gain on investments
available for sale .............................. -- -- 11,000 -- 11,000
Net loss .......................................... -- (2,711,000) -- -- (2,711,000)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 .......................... $ 95,239,000 $(81,790,000) $ (628,000) $ -- $ 13,064,000
============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements
F-5b
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------- ------------- -------------
Cash flows provided by operating activities:
Net loss ................................................ $ (2,711,000) $ (2,189,000) $ (3,656,000)
Adjustments to reconcile net loss to net cash provided by
operating activities (net of effects of acquisitions):
Depreciation and amortization ........................ 3,897,000 4,925,000 5,008,000
Provision for doubtful accounts ...................... 243,000 529,000 767,000
Gain on settlement of debt ........................... -- -- (146,000)
Debt conversion costs ................................ -- -- 189,000
Gain on early extinguishment of debt ................. (105,000) -- --
(Gain) loss from disposition of equipment and sale
of available-for-sale investments, net ............. 81,000 (52,000) 221,000
Stock-based compensation charges ..................... 232,000 96,000 119,000
Non-cash interest expense ............................ 14,000 160,000 170,000
Accreted interest expense ............................ 3,000 39,000 80,000
Minority interest in loss of subsidiary .............. (10,000) (212,000) (85,000)
Changes in assets and liabilities:
Restricted cash .................................... 102,000 (8,000) 108,000
Accounts receivable ................................ (536,000) (1,010,000) (454,000)
Inventory .......................................... (128,000) (152,000) --
Prepaid expenses and other assets .................. (128,000) (88,000) (29,000)
Accounts payable and accrued expenses .............. 764,000 (108,000) (567,000)
Income taxes payable ............................... 9,000 41,000 --
Deferred revenue and deferred costs ................ (629,000) (840,000) (243,000)
------------- ------------- -------------
Net cash provided by operating
activities .................................... 1,098,000 1,131,000 1,482,000
------------- ------------- -------------
Cash flows used in investing activities:
Capital expenditures .................................... (1,664,000) (1,284,000) (947,000)
Software development expenditures ....................... (371,000) (234,000) (324,000)
Deposits on broadcast equipment ......................... (34,000) 69,000 43,000
Acquisition of businesses, net of cash acquired.......... (892,000) (102,000) --
------------- ------------- -------------
Net cash used in investing
activities .................................... (2,961,000) (1,551,000) (1,228,000)
------------- ------------- -------------
Cash flows provided by (used in) financing activities:
Principal payments on capital leases .................... (216,000) (222,000) (576,000)
Borrowings from revolving line of credit ................ 16,631,000 24,614,000 20,694,000
Principal payments on note payable and revolving line
of credit ............................................ (18,181,000) (24,826,000) (22,159,000)
Proceeds from issuance of common stock and
preferred stock, net of issuance costs ............... 3,712,000 -- 802,000
Proceeds from exercise of warrants and options .......... 1,843,000 135,000 93,000
------------- ------------- -------------
Net cash provided by (used in) financing
activities .................................... 3,789,000 (299,000) (1,146,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ...... 1,926,000 (719,000) (892,000)
Cash and cash equivalents at beginning of year ............ 577,000 1,296,000 2,188,000
------------- ------------- -------------
Cash and cash equivalents at end of year .................. $ 2,503,000 $ 577,000 $ 1,296,000
============= ============= =============
F-6
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................................. $ 223,000 $ 313,000 $ 559,000
============ ============ ============
Income taxes .............................................. $ 38,000 $ 11,000 $ --
============ ============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest .............. $ 54,000 $ 160,000 $ 200,000
============ ============ ============
Issuance of treasury stock in payment of board
compensation .............................................. $ 54,000 $ 43,000 $ 13,000
============ ============ ============
Equipment acquired under capital leases ...................... $ 744,000 $ 327,000 $ 192,000
============ ============ ============
Convertible notes exchanged for common stock ................. $ 2,000,000 $ -- $ 2,000,000
============ ============ ============
Conversion of Buzztime preferred series A into common stock .. $ 596,000 $ -- $ --
============ ============ ============
Unrealized holding gain/(loss) on investments
available for sale ........................................ $ 11,000 $ 4,000 $ (98,000)
============ ============ ============
Issuance of common stock for licensed technology ............. $ 1,720,000 $ -- $ --
============ ============ ============
Supplemental non-cash disclosure of acquisition of businesses:
Accounts receivable (net) ................................... $ 18,000 $ 121,000 --
Inventory ................................................... 35,000 89,000 --
Prepaid expenses ............................................ 50,000 -- --
Fixed assets ................................................ 151,000 38,000 --
Goodwill and intangibles .................................... 6,301,000 521,000 --
Accounts payable and accrued liabilities .................... (1,155,000) (244,000) --
Deferred revenue ............................................ (587,000) (31,000) --
Capital lease obligations ................................... (44,000) -- --
Line of credit .............................................. -- (72,000) --
Common stock issued ......................................... (4,036,000) (320,000) --
See accompanying notes to consolidated financial statements
F-7
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
We 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 the Buzztime segment, the NTN Interactive Television Network ("NTN
iTV 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. Additional revenue is derived 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. Buzztime, our wholly-owned subsidiary formed in December
1999, owns the exclusive rights to one of the largest known digital trivia game
show libraries and many unique "TV Play-along" sports games. Buzztime's mission
is to deploy our interactive games in the home through digital cable television.
BASIS OF ACCOUNTING PRESENTATION
The consolidated financial statements include the accounts of NTN and its
wholly owned subsidiaries, IWN Inc. (IWN), IWN, L.P., Buzztime, NTN Canada,
Inc., NTN Software Solutions, Inc. and NTN Wireless Communications, Inc.
(collectively NTN or the Company). IWN and IWN, L.P. are dormant subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation. Unless otherwise indicated, references to "NTN", "we", "us" and
"our" include NTN and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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, 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. 104, 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 depreciable life of these
assets was determined based upon their estimated useful life which
considers 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.
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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. We also closely monitor all accounts over
90 days past due and reserve for estimated uncollectible accounts. 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.
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.
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 NOTE 15 - RELATED PARTIES or in NOTE18
-- SUBSEQUENT EVENTS or which are so non-material to fall below the
materiality threshold of such item.
CASH AND CASH EQUIVALENTS
For the purpose of financial statement presentation, we consider all highly
liquid investment instruments with original maturities of three months or less
to be cash equivalents. Cash equivalents at December 31, 2003 and 2002 consist
primarily of money market accounts.
INVENTORY
Inventory consists of wireless paging equipment and computer hardware and is
stated at the lower of cost (first-in, first-out basis) or market.
BROADCAST EQUIPMENT AND FIXED ASSETS
Broadcast equipment and fixed assets are stated at cost. Equipment under
capital leases is stated at the present value of future minimum lease payments.
Depreciation of fixed assets is computed using the straight-line method over the
estimated useful lives of the assets (three to seven years). Depreciation of
broadcast equipment is computed using the straight-line method over the
estimated useful lives of the assets (two to four years). Amortization of fixed
assets under capital leases is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the lease period, and is
included in depreciation expense.
F-9
REVENUE RECOGNITION
We recognize revenue from three sources: NTN Hospitality Technologies
division revenues, Buzztime service revenues, and other sources. Revenue is not
recognized until collectibility of fees is reasonably assured. To the extent our
arrangements contain multiple deliverables; we evaluate the criteria in EITF
Issue No. 00-21 to determine whether such deliverables represent separate units
of accounting. In order to be considered a separate unit of accounting the
delivered items in an arrangement must have stand alone value to the customer
and there must be objective and reliable evidence of fair value for any
undelivered elements. Our arrangements for the transmission of the NTN iTV
Network contain two deliverables; the installation of our equipment for which we
receive an upfront fee, and the transmission of our network content for which we
receive monthly broadcast fees. As the installation deliverable does not have
stand alone value to the customer, it does not represent a separate unit of
accounting and therefore all installation fees received are deferred and
recognized as revenue on a straight-line basis of 36 months, the estimated life
of the customer relationship. Installation fees not recognized in revenue have
been recorded as deferred revenue in the accompanying consolidated balance
sheets. In addition, the direct expenses of the installation, setup and training
are deferred and amortized on a straight-line basis over 36 months and are
classified as deferred costs on the accompanying consolidated balance sheets.
NTN iTV Network broadcast revenue is generated primarily from distributing
content and advertising. Revenues generated from transmitting content to
subscriber locations is recognized ratably over the contract term as the content
is broadcast 17 hours a day/seven days a week. Consistent with the terms of
advertising agreements, advertising is aired a specified number of times per
hour everyday and therefore, revenues are recognized ratable over the contract
term. Included in NTN Network revenues are amounts earned under a previous
license agreement with our Canadian licensee, which operated approximately 400
hospitality locations. Revenue under this license agreement was recognized on a
monthly basis as broadcast content was aired similar to NTN Network revenue. We
acquired the operations of our Canadian licensee on December 15, 2003 (see
Note 14 - Acquisitions).
Revenues from NTN Wireless consist primarily of sales of wireless paging
equipment. Wireless paging equipment revenue is recognized upon the shipment of
equipment to the customer.
Revenues from Software Solutions are recognized in accordance with Statement
of Position ("SOP") No. 97-2, "Software Revenue Recognition", as amended.
Software license fee revenue is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred at our customer's
location, the fee is fixed or determinable and collection is probable, provided
that vendor specific evidence exists for any undelivered elements, namely annual
support and maintenance. Along with the basic software license, our customers
are provided post contract support (PCS) for an additional fee, which is based
on a stipulated percentage of the license fee. PCS consists of technical support
as well as unspecified software upgrades and releases when and if made available
by us during the term of the support period. In order to continue to use the
licensed software, our 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 (license fee and PCS) on a straight-line
basis over the term of the contract.
If at the outset of an arrangement we determine that the arrangement fee is
not fixed or determinable, revenue is deferred until the arrangement fee becomes
due. If at the outset of an arrangement we determine that collectibility is not
probable, revenue is deferred until the earlier of when collectibility becomes
probable or the receipt of payment. If an arrangement provides allows for
customer acceptance, revenue is not recognized until the earlier of receipt of
customer acceptance or expiration of the acceptance period.
Additionally, we provide consulting and training services under both
hourly-based time and materials and fixed-priced contracts. Revenues from these
services are generally recognized as the services are performed.
Buzztime service revenues are recognized as the service is provided.
Other revenue is recognized when all material services or conditions
relating to the transaction have been performed or satisfied.
SOFTWARE DEVELOPMENT COSTS
We capitalize costs related to the development of certain software products.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE
MARKETED, capitalization of costs begins when technological feasibility has been
established and ends when the product is available for general release to
customers. Amortization of costs related to interactive programs is recognized
on a straight-line basis over three years.
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We capitalize web site development costs in accordance with Emerging Issues
Task Force Issue No. 00-02, ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS. Costs
incurred during the planning and operating stages are expensed as incurred while
costs incurred during the web site application and infrastructure development
stage are capitalized and amortized on a straight-line basis over their expected
useful life of three years. These costs are included in software development
costs on the accompanying consolidated balance sheets.
Amortization expense for software development costs was $284,000, $232,000
and $141,000 in 2003, 2002 and 2001, respectively.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF FASB STATEMENT NO. 123
(SFAS No. 148). SFAS 148 amends FASB Statement No. 123; ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 beginning with our
annual financial statements for the year ended December 31, 2002.
The per share weighted-average fair value of stock options granted during
2003, 2002 and 2001 was $1.106, $0.95 and $0.78, 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 2.858%, expected volatility of
113.17%, and expected life of 4.58 years, and 2002 -- dividend yield of 0%,
risk-free interest rate of 4.05%, expected volatility of 123%, and expected life
of 4.6 years; and 2001 -- dividend yield of 0%, risk-free interest rate of
4.50%, expected volatility of 131% and expected life of 4 years. In compliance
with APB No. 25, NTN expensed $6,000, $6,000 and $104,000 in 2003, 2002, and
2001, respectively, associated with the grants of 600,000 options in 1999 below
market value pursuant to the Option Plan. No options were granted below market
value in 2003, 2002 and 2001 pursuant to the Option Plan.
We apply APB Opinion No. 25 and related interpretations in accounting for
our stock option plans. Accordingly, no compensation cost has been recognized in
the consolidated financial statements for the issuance of options to employees
pursuant to the Special Plan and the Option Plan unless the grants were issued
with exercise prices below market value. Had compensation cost related to
employees for our stock-based compensation plans been determined consistent with
SFAS No. 123 as amended by SFAS No. 148, our net loss and net loss per share
applicable to common stock would have been increased to the pro forma amounts
indicated below.
2003 2002 2001
------------ ------------ ------------
Net loss As reported................................ $ 2,711,000 $ 2,189,000 $ 3,656,000
Add: stock-based employee compensation
expense included in reported net
loss, net of related tax effects....... (6,000) (6,000) (104,000)
Deduct: stock-based employee compensation
expense, net of related tax effects.... 1,284,000 1,203,000 1,475,000
------------ ------------ ------------
Pro forma.................................. $ 3,989,000 $ 3,386,000 $ 5,027,000
Basic and diluted net ============ ============ ============
loss per share As reported................................ $ 0.06 $ 0.06 $ 0.10
Pro forma.................................. $ 0.09 $ 0.09 $ 0.14
We account for options and warrants issued to non-employees in exchange for
services in accordance with SFAS No. 123 and EITF 96-18, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES. We estimate the fair value of
options and warrants using the Black-Scholes option-pricing model. For
agreements which require the achievement of specific performance criteria be met
in order for the options or warrants to vest, the measurement date is the date
at which the specific performance criteria are met. Prior to the measurement
date, options and warrants subject to vesting based on the achievement of
specific performance criteria that, based on different possible outcomes, result
in a range of aggregate fair values are measured at each financial reporting
period at their lowest aggregate then-current fair value, while options and
warrants which vest over the service period or at completion of the service
period are measured at each financial reporting period at their then-current
fair value, for purposes of recognition of costs during those periods. For
agreements which provide for services to be rendered without the requirement of
specific performance criteria, the company measures the fair value of the
options and warrants at the earlier of the date the services are completed or
the date the options and warrants vest and are non-forfeitable. Generally,
services are not rendered prior to the grant date and the related agreements do
not contain performance commitments. Accordingly, the measurement date for
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compensation expense occurs subsequent to the grant date. From the grant date to
the measurement date, compensation expense is estimated at each financial
reporting period and is recorded over the service period. The unvested options
and warrants continue to be remeasured at each financial reporting period until
they vest or until the services are completed. For agreements which provide
options and warrants for services already rendered, the options and warrants
immediately vest and the measurement date is the date of grant. Modifications
that increase the fair value of the warrants are treated as an exchange of the
original warrant for a new one. Additional compensation expense related to
modifications, if any, is recorded over the remaining service period.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. We adopted the provisions of SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS, as of January 1, 2002. Goodwill and intangible assets
acquired in a purchase combination that are determined to have an indefinite
useful life are not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, ACCOUNTING FOR
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Amortization expense for intangible
assets was $406,000, $104,000 and $15,000 in 2003, 2002 and 2001, respectively.
As of December 31, 2003 intangible assets were comprised of the following:
ACCUMULATED
COST AMORTIZATION NET
---------- ---------- ----------
Customer relationships ........... $1,980,000 $ 172,000 $1,808,000
License agreements ............... 1,761,000 126,000 1,635,000
Developed technology ............. 973,000 56,000 917,000
Trivia database .................. 345,000 1,000 344,000
Non-competition agreements ....... 30,000 4,000 26,000
Employment agreements ............ 140,000 123,000 17,000
Trademarks ....................... 149,000 96,000 52,000
---------- ---------- ----------
Total ................... $5,378,000 $ 578,000 $4,800,000
========== ========== ==========
As of December 31, 2002 intangible assets were comprised of the following:
ACCUMULATED
COST AMORTIZATION NET
---------- ---------- ----------
Customer relationships............ $ 150,000 $ 37,000 $ 113,000
Employment agreements............. 140,000 53,000 87,000
Trademarks........................ 149,000 82,000 67,000
---------- ---------- ----------
Total.................... $ 439,000 $ 172,000 $ 267,000
========== ========== ==========
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
INVESTMENTS AVAILABLE-FOR-SALE
Investment securities consist of equity securities, which are classified as
available-for-sale securities. Available-for-sale securities are recorded at
fair value and unrealized holding gains and losses are excluded from earnings
and are reported as a separate component of comprehensive income until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific-identification basis. A decline in the market value of
any available-for-sale security below cost that is deemed to be other than
temporary, results in a reduction in the carrying amount to fair value. Any
resulting impairment is charged to operations and a new cost basis for the
security is established.
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The one investment available-for-sale that we hold is a 2,518,260 share
investment in our Australian licensee, eBet Limited (eBet - an Australian gaming
technology corporation). Our cost basis in the eBet shares is AUD $0.50 per
share. Our initial investment in 1999 was for 4,000,000 shares and at various
points in 2000, we sold 1,481,740 eBet shares, leaving our existing holding of
2,518,260 shares, which represents approximately 1.6% of eBet's current shares
outstanding
eBet's stock price has traded below our AUD $0.50 cost since September 2000.
At December 31, 2003, their stock traded at AUD $0.10, which when combined with
the AUD/US$ exchange rate represented an unrealized loss of approximately US
$628,000, which is recorded as accumulated other comprehensive loss.
We have tracked eBet's performance since 1999 and remain in contact with
their management team. We believe that eBet's stock fell late in 2000 along with
many internet technology companies in the worldwide post-internet "bubble." We
believe that the impairment of our investment in eBet is temporary in nature for
several reasons, including:
1. They completed an acquisition of one of their competitors in
November 2002 and subsequently raised AUD$7 million to finance the
combined company. This acquisition increased both their technology
and revenues.
2. eBet's continuing business operations achieved profitability for the
first time ever in their first half year ended December 31, 2003.
eBet's management has also publicly forecasted that they will record
their first profitable year for the current year ending June 30,
2004.
3. eBet achieved profitable operations based on only a 10% penetration
of their gaming systems sales in their home state of New South Wales
coupled with sales into the state of Queensland, Australia and in
New Zealand. We believe this low level of market penetration in the
growing Australian gaming market represents significant upside to
their future revenues in their home market, which should ultimately
translate into a higher stock price.
4. eBet has made progress in its plans for entry into the US gaming
market where it intends to expand its product offering and vary its
business model to include participation options for casino
operators. In line with this, eBet management disclosed in March
2004 that it has entered into an exclusive licensing agreement with
TAB Limited (ASX: TAB) ("TAB") to exploit Tab's wide-area linked
jackpot brands.
The agreement, which has an initial 5-year term, provides eBet with
exclusive rights to exploit the brands, trade marks and associated
material and images in Native American casinos for supplying,
installing and operating gaming systems, software and games for
electronic gaming machines, including the operation of wide-area
linked jackpot systems such as those operated by Tab in Australia.
In a public release on the Australian Sock Exchange dated March 11,
2004, eBet management stated that while the timing and financial
impact of the eBet's move into the US remained subject to market
conditions and acceptance, they believe that it will present a
unique product offering and business proposition in the US that will
have strong market appeal.
We believe that the combination of eBet's recent emergence into
profitability, low but growing penetration of their core markets and their U.S.
opportunities provide evidence that the impairment is not other than temporary
in nature. However, we continue to track eBet's performance and if further
penetration of their home market and/or the U.S. casino market does not
materialize over the remainder of 2004, then we may determine that our
investment is not "other-than-temporarily impaired."
FAIR VALUE OF FINANCIAL INSTRUMENTS
We believe that the fair value of financial instruments approximate their
carrying value. The following methods and assumptions were used to estimate the
fair value of financial instruments:
The carrying values of cash and cash equivalents, restricted cash, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the short maturity of these instruments. The carrying value of the
revolving line of credit approximates its fair value because the interest rate
is indexed by current market rates, and the other terms are comparable to those
currently available in the market place. The carrying value of the convertible
notes approximates its fair value because the interest rate and other terms are
comparable to rates currently available in the market.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
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RESEARCH AND DEVELOPMENT AND ADVERTISING
Research and development costs and marketing-related advertising costs are
expensed as incurred. Research and development costs amounted to $329,000,
$12,000 and $101,000 in 2003, 2002 and 2001, respectively. Marketing-related
advertising costs amounted to $1,316,000, $1,065,000 and $939,000 in 2003, 2002
and 2001, respectively, and are included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.
CONCENTRATION OF CREDIT RISK
We provide services to group viewing locations, generally restaurants,
sports bars and lounges throughout the United States. In addition, we licensed
our technology and products to licensees outside of the United States.
Concentration of credit risk with respect to trade receivables is limited due to
the large number of customers comprising our customer base, and their dispersion
across many different industries and geographies. We perform ongoing credit
evaluations of our customers and generally require no collateral. We maintain an
allowance for doubtful accounts to provide for credit losses.
BASIC AND DILUTED EARNINGS PER COMMON SHARE
We compute basic and diluted earnings per share in accordance with SFAS No.
128, EARNINGS PER SHARE. Basic EPS excludes the dilutive effects of options,
warrants and other convertible securities. Diluted EPS reflects the potential
dilution of securities that could share in our earnings. Options, warrants,
convertible preferred stock and convertible notes representing approximately
11,453,000, 12,435,000 and 12,199,000 shares were excluded from the computations
of diluted net loss per common share for the years ended December 31, 2003, 2002
and 2001, respectively, as their effect is anti-dilutive.
RECLASSIFICATIONS
We have reclassified certain items in the 2002 and 2001 consolidated
financial statements to conform to the 2003 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (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. We adopted Statement 145 effective January 1, 2003
which did not have a material impact on our 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 adoption of this statement did not have a
material effect on our financial statements.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO.
5, 57 AND 107 AND A RESCISSION OF FASB INTERPRETATION NO. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on our financial statements. The
disclosure requirements are effective for financial statements of interim and
annual periods ending after December 15, 2002. To date, we have not entered into
any guarantees.
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In December 2003, the FASB issued FIN 46R, CONSOLIDATION OF VARIABLE
INTEREST ENTITIES (VIE'S). This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. FIN 46R replaces FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, which was issued in January 2003. The unmodified
provisions of the Interpretation to special-purpose entities must be applied by
the end of the first reporting period ending after December 15, 2003. The
revised Interpretation must be applied to all entities that are not
special-purpose entities by the end of the first reporting period beginning
after December 15, 2003. The adoption of this Interpretation is not expected to
have a material effect on our financial statements.
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The changes in this Statement improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. The adoption of this Interpretation did not have a material effect on
our financial statements.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS WITH BOTH LIABILITIES AND EQUITY. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The effective date for certain provisions of SFAS No. 150 has been
deferred indefinitely for specified mandatorily redeemable non-controlling
interests. The adoption of this statement is not expected to have a material
effect on our financial statements.
(2) BROADCAST EQUIPMENT AND FIXED ASSETS
Broadcast equipment and fixed assets are recorded at cost and consist of the
following:
2003 2002
------------- -------------
Broadcast equipment .......................... $ 11,531,000 $ 10,292,000
Furniture and fixtures ....................... 727,000 590,000
Machinery and equipment ...................... 9,131,000 8,339,000
Leasehold improvements ....................... 898,000 861,000
Equipment under capital lease:
Broadcast equipment ........................ 1,462,000 1,683,000
Machinery and equipment .................... 1,715,000 1,594,000
Other equipment ............................ 22,000 21,000
------------- -------------
25,486,000 23,380,000
Accumulated depreciation and amortization .... (21,088,000) (18,239,000)
------------- -------------
$ 4,398,000 $ 5,141,000
============= =============
(3) COMMON STOCK OPTIONS AND WARRANTS
OPTIONS
We have two active stock option plans. The 1995 Employee Stock Option Plan
(the "Option Plan") was approved by our shareholders in 1995 and was
subsequently amended. Under the Option Plan, options for the purchase of our
common stock may be granted to officers, directors and employees. Options may be
designated as incentive stock options or as nonqualified stock options and
generally vest over four years, except, the Board of Directors, at its
discretion, can authorize acceleration of vesting periods. Options under the
Option Plan, which have a term of up to ten years, are exercisable at a price
per share not less than the fair market value on the date of grant. The
aggregate number of shares authorized for issuance under the Option Plan as of
December 31, 2003 is 10,248,206.
F-15
In addition, we have issued options pursuant to a Special Stock Option Plan
("Special Plan"). Options issued under the Special Plan are made at the
discretion of the Board of Directors and are designated only as nonqualified
options. The options generally have a term of up to ten years, are exercisable
at a price per share not less than the fair market value on the date of grant
and vest over various terms. The aggregate number of shares issued and
outstanding under the Special Plan as of December 31, 2003 is 500,000.
On May 31, 2001, Buzztime adopted an incentive stock option plan. Pursuant
to the option plan, Buzztime may grant options to purchase Buzztime common
stock, subject to applicable share limits, upon terms and conditions specified
in the plan. To date, no options have been granted under the plan.
A summary of stock option activity during 2003, 2002 and 2001 is as follows:
SPECIAL PLAN OPTION PLAN
--------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
OUTSTANDING DECEMBER 31, 2000.... 704,000 2.81 6,709,000 1.69
Granted........................ -- -- 2,141,000 0.78
Exercised...................... -- -- (17,000) 0.63
Cancelled...................... (100,000) -- (1,365,000) 1.83
---------- -------- ------------ ---------
OUTSTANDING DECEMBER 31, 2001.... 604,000 2.81 7,468,000 1.40
Granted........................ -- -- 1,096,000 0.93
Exercised...................... -- -- (191,000) 0.70
Cancelled...................... (104,000) 2.81 (661,000) 2.54
---------- -------- ------------ ---------
OUTSTANDING DECEMBER 31, 2002.... 500,000 2.81 7,712,000 1.26
Granted........................ -- -- 2,311,000 1.43
Exercised...................... -- -- (643,000) 1.14
Cancelled...................... -- -- (206,000) 1.18
---------- -------- ------------ ---------
OUTSTANDING AS OF DECEMBER 31,
2003........................... 500,000 $ 2.81 9,174,000 $ 1.31
========== ======== ============ =========
A summary of options outstanding and exercisable by exercise price range at
December 31, 2003 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
Special Plan:
$2.81 500,000 3 years $ 2.81 500,000 $ 2.81
========== ==========
Option Plan:
$0.45-$1.50 6,907,000 7 years $ 0.92 4,611,000 $ 0.88
$1.51-$3.00 2,156,000 6 years $ 2.46 1,569,000 $ 2.53
$3.01-$6.38 111,000 4 years $ 3.54 93,000 $ 3.54
---------- ----------
9,174,000 6,273,000
========== ==========
WARRANTS
In 2003, 2002 and 2001, we granted 514,000, 685,000 and 190,000 warrants to
non-employees. We expensed $226,000, $90,000 and $15,000 in 2003, 2002 and 2001,
respectively, associated with the grant of these warrants.
F-16
The following summarizes warrant activity during 2003, 2002 and 2001:
OUTSTANDING WEIGHTED AVERAGE
WARRANTS EXERCISE PRICES
-------- ---------------
DECEMBER 31, 2000...................... 2,002,000 $ 1.94
Granted.............................. 190,000 0.72
Exercised............................ (87,000) 0.96
Canceled............................. (316,000) 0.96
----------- --------
DECEMBER 31, 2001...................... 1,789,000 2.03
Granted.............................. 685,000 0.98
Exercised............................ -- --
Canceled............................. (412,000) 2.05
----------- --------
DECEMBER 31, 2002...................... 2,062,000 1.68
Granted.............................. 514,000 1.15
Exercised............................ (771,000) 1.46
Canceled............................. (25,000) 2.38
----------- --------
DECEMBER 31, 2003...................... 1,780,000 $ 1.61
=========== ========
BALANCE EXERCISABLE AT DECEMBER 31, 2003 1,633,000 $ 1.67
=========== ========
At December 31, 2003, the range of exercise prices and the weighted-average
remaining contractual life of outstanding warrants was $0.50 to $3.75 and 4
years, respectively. The table above does not include warrants issued to S-A to
obtain an additional 159,236 shares of Buzztime's Series A Convertible Preferred
Stock (the "S-A Warrants"). The S-A warrants vest in 10% increments as cable
system operators sign on for the Buzztime channel. The exercise price of the S-A
warrants is $1.57 per share. Based on the two Buzztime deployments with SusCom,
20% of the warrants vested during 2003.
(4) CUMULATIVE CONVERTIBLE PREFERRED STOCK
We have authorized 10,000,000 shares of preferred stock. The preferred stock
may be issued in one or more series. The only series currently designated are a
series of 5,000,000 shares of Series A Cumulative Convertible Preferred Stock
("Series A Preferred Stock").
At December 31, 2003 and 2002, there were 161,000 shares of Series A
Preferred Stock issued and outstanding. The Series A Preferred Stock provides
for a cumulative annual dividend of 10 cents per share, payable in semi-annual
installments in June and December. Dividends may be paid in cash or with shares
of common stock. In 2003, 2002 and 2001, we issued approximately 6,000, 14,000
and 24,000 common shares, respectively, for payment of dividends. At December
31, 2003, the cumulative unpaid dividends for the Series A Preferred Stock was
approximately $2,200.
The Series A Preferred Stock has no voting rights and has a $1.00 per share
liquidation preference over common stock. The registered holder has the right at
any time to convert shares of Series A Preferred Stock into that number of
shares of our common stock that equals the number of shares of Series A
Preferred Stock that are surrendered for conversion divided by the conversion
rate. The conversion rate is subject to adjustment in certain events and is
established at the time of each conversion. During 2003, 2002 and 2001, there
were no conversions. There are no mandatory conversion terms or dates associated
with the Series A Preferred Stock.
(5) RETIREMENT AND SAVINGS PLANS
During 1994, we established a defined contribution plan which is organized
under Section 401(k) of the Internal Revenue Code, which allows employees who
have completed at least one month of service and have reached age 21 to defer up
to 20% of their pay on a pre-tax basis. In 2002, we amended the plan to permit
employees who have reached age 18 to defer up to 50% of their pay on a pre-tax
basis. We may at our discretion contribute to the plan. For the years ended
December 31, 2003, 2002 and 2001, we made no such contributions.
(6) INCOME TAXES
For each of the years ended December 31, 2003, 2002 and 2001, there was no
provision for current or deferred federal income taxes. Current tax provisions
of $47,000 and $41,000 were recorded for the years ended December 31, 2003 and
2002, respectively, for state taxes. No tax provision was recorded for state
taxes for the year ended December 31, 2001. The components that comprise
deferred tax assets and liabilities at December 31, 2003 and 2002 are as
follows:
F-17
2003 2002
------------- -------------
Deferred tax assets:
NOL carryforwards .......................... $ 20,515,000 $ 20,424,000
Legal and litigation accruals .............. 45,000 13,000
Allowance for doubtful accounts ............ 536,000 276,000
Compensation and vacation accrual .......... 258,000 151,000
Operating accruals ......................... 548,000 460,000
Allowance for equipment obsolescence ....... 21,000 --
Deferred revenue ........................... 34,000 343,000
Research and experimentation credit ........ 186,000 186,000
Amortization ............................... 183,000 122,000
Depreciation ............................... 1,220,000 1,288,000
Charitable contributions ................... 1,000 2,000
------------- -------------
Total gross deferred tax assets .... 23,547,000 23,265,000
Valuation allowance .......................... (22,909,000) (23,029,000)
------------- -------------
Deferred tax assets ................ 638,000 236,000
------------- -------------
Deferred tax liabilities:
Capitalized software ....................... 638,000 236,000
Depreciation ............................... -- --
------------- -------------
Total deferred liabilities ......... 638,000 236,000
------------- -------------
Net deferred taxes ................. $ -- $ --
============= =============
The reconciliation of computed expected income tax (benefit) to effective
income taxes by applying the federal statutory rate of 34% is as follows:
2003 2002 2001
------------ ------------ ------------
Tax at federal income tax rate ............... $ (909,000) $ (820,000) $(1,272,000)
State taxes net of federal benefit ........... (143,000) (115,000) (224,000)
Settlement warrants and SFAS 123 charges ..... -- -- 47,000
Change in valuation allowance ................ (120,000) 1,354,000 (770,000)
Change in beginning deferred tax assets ...... 256,000 (2,155,000) --
Expiration and adjustments of net operating
loss carryforwards ......................... 1,029,000 1,748,000 1,848,000
Other ........................................ (66,000) 11,000 371,000
------------ ------------ ------------
$ 47,000 $ 41,000 $ --
============ ============ ============
The net change in the total valuation allowance for the year ended December
31, 2003 was a decrease of $120,000. The net change in the total valuation
allowance for the year ended December 31, 2002 was an increase of $1,354,000. In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. We consider the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based on the level of historical operating
results and projections of taxable income for the future, we have determined
that it is more likely than not that the portion of deferred tax assets not
utilized through the reversal of deferred tax liabilities will not be realized.
Accordingly, we recorded a valuation allowance to reduce deferred tax assets to
the amount that is more likely than not to be realized. The valuation allowance
at December 31, 2003 includes approximately $333,000 related to stock option
deductions, the benefit of which will eventually be credited to shareholders
equity. There can be no assurance that we will ever be able to realize the
benefit of some or all of the federal and state loss carryforwards either due to
ongoing operating losses or due to ownership changes, which limit the usefulness
of the loss carryforwards.
At December 31, 2003, we have available net operating loss carryforwards of
approximately $58,968,000 for federal income tax purposes, which begin to expire
in 2004. The net operating loss carryforwards for state purposes, which begin to
expire in 2005, are approximately $7,766,000. Federal and state tax laws impose
restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" for tax purposes as defined
under Section 382 of the Internal Revenue Code. Although we do not anticipate
that such limitations will be material to our ability to use our net operating
losses and credit carryforwards, this conclusion was based upon a preliminary
analysis. Therefore, the extent of such limitations is not definitely known. We
intend to perform a complete analysis by early 2005.
F-18
(7) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We lease office and production facilities and equipment under agreements
which expire at various dates. Certain leases contain renewal provisions and
generally require us to pay utilities, insurance, taxes and other operating
expenses. Additionally, we entered into lease agreements for certain equipment
used in broadcast operations and the corporate computer network. Lease expense
under operating leases totaled $775,000, $725,000 and $656,000 in 2003, 2002 and
2001, respectively, net of sublease income of $156,000, $265,000 and $228,000 in
2003, 2002 and 2001, respectively.
Future minimum lease obligations under noncancelable operating leases, net
of contractual sublease payments, at December 31, 2003 are as follows:
YEAR LEASE SUBLEASE
ENDING PAYMENT PAYMENT NET
- ------ ----------- ----------- -----------
2004 ..................... $ 824,000 $ 78,000 $ 746,000
2005 ..................... 750,000 23,000 727,000
2006 ..................... 368,000 -- 368,000
2007 ..................... 21,000 -- 21,000
2008 ..................... 1,000 -- 1,000
----------- ----------- -----------
Total ................ $1,964,000 $ 101,000 $1,863,000
=========== =========== ===========
CAPITAL LEASES
We lease certain equipment under capital leases. Future minimum lease
payments under the capital leases together with the present value of the net
minimum lease payments as of December 31, 2003 are as follows:
YEAR ENDING TOTAL
- -------------------------------------------------------------- ----------
2004 ......................................................... $ 222,000
2005 ......................................................... 140,000
2006 ......................................................... 54,000
2007 ......................................................... 9,000
2008 ......................................................... 9,000
----------
Total minimum lease payments ....................... 434,000
Less: Amount representing interest ranging from
9.81 % to 29.95% ............................................. (88,000)
----------
Present value of net minimum lease payments .................. 346,000
Less current portion ......................................... (165,000)
----------
Long term portion .................................. $ 181,000
==========
Property held under capital leases is as follows:
2003 2002
------------ ------------
Equipment .............................. $ 3,199,000 $ 3,298,000
Accumulated amortization ............... (2,807,000) (2,879,000)
------------ ------------
$ 392,000 $ 419,000
============ ============
PURCHASE COMMITMENTS
We have a commitment under a long-term agreement to purchase satellite
equipment over a five year period which began in March 2003. Future minimum
payments under the agreement (assuming equal monthly purchases from April 2004
through the remainder of the contract) along with the present value of the net
minimum payments as of December 31, 2003 are as follows:
YEAR ENDING TOTAL
- ------------------------------------------------------------- ------------
2004 ........................................................ $ 1,668,000
2005 ........................................................ 1,067,000
2006 ........................................................ 363,000
2007 ........................................................ 363,000
2008 ........................................................ 91,000
------------
Total minimum payments ............................ 3,552,000
Less: Amount representing imputed interest at 9% ............ (192,000)
------------
Present value of net minimum payments ....................... $ 3,360,000
============
F-19
(8) DEBT
REVOLVING LINE OF CREDIT
In August 1999, we entered into an agreement with Coast Business Credit
("Coast") for a revolving line of credit not to exceed $4,000,000. Interest was
charged on the outstanding balance at a rate equal to the prime rate plus 1.5%
per annum, but could not be less than 9% per annum. The line of credit was
secured by substantially all of our assets. Total loan fees of $120,000 were
payable in three annual installments and were amortized over the life of the
loan, which originally matured on August 31, 2002. Our revolving line of credit
agreement with Coast was then amended in May 2001. The line of credit provided
for borrowings not to exceed the lesser of (i) a designated maximum amount, (ii)
three times trailing monthly collections, or (iii) three times annualized
trailing adjusted EBITDA. The amendment called for a gradual reduction in the
line from $4,000,000 on April 1, 2001 to $2,750,000 on December 31, 2001. We
completed that pay down process on December 31, 2001.
On February 25, 2002, we further amended our revolving line of credit to
extend the expiration date of the revolving line of credit to June 30, 2003. The
amendment also required further line reductions of $250,000 each on June 30,
2002, January 31, 2003, and on March 31, 2003. The amendment deleted our minimum
tangible effective net worth financial covenant and replaced it with two cash
flow-oriented covenants.
On February 4, 2003, we amended our revolving line of credit to extend the
maturity date on the line of credit to June 30, 2004. The amendment also struck
the previously scheduled March 31, 2003 $250,000 paydown on the line of credit,
deleted the trailing cash flow multiplier element of the borrowing base and
modified the cash flow oriented covenants.
On February 7, 2003, Coast and its parent company, Southern Pacific Bank,
were seized by the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC
then sold off the portion of Coast's loan portfolio that contained our line of
credit to GF Asset Management, LLC (GF), a subsidiary of GE Capital. On July 17,
2003, we paid off our revolving line of credit with GF. The amount paid was
approximately $1,411,000 which is net of a 5% settlement discount of
approximately $105,000.
On July 16, 2003, we entered into a $1,000,000 line of credit arrangement
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
(6.0% at December 31, 2003). 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 of 2003, and originally was
set to mature on July 16, 2004. The line of credit originally contained one
financial covenant based on our cash flow coverage of the balance on the line of
credit. On January 7, 2004, we amended the line of credit to extend the
expiration date of the facility to February 1, 2005 and to replace the cash
flow-based financial covenant with a balance sheet oriented financial covenant
that limits the ratio of our debt to tangible net worth to 2:1. We were in
compliance with that covenant as of December 31, 2003. The line is secured by
all inventories, equipment, accounts receivable and various other assets.
As we have refinanced the revolving line of credit, and have met the
criteria of Statement of Accounting Standard No. 6, CLASSIFICATION OF SHORT-TERM
OBLIGATIONS EXPECTED TO BE REFINANCED, the $1,000,000 in outstanding borrowings
under the line of credit at December 31, 2003 have been classified as noncurrent
in the consolidated balance sheet reflecting the extension of the maturity date
of the line through February 1, 2005.
8% SENIOR SUBORDINATED CONVERTIBLE NOTES
In 1999, we reacquired our Series B Preferred Stock in exchange for
convertible notes and warrants. The convertible notes, with a face value of
$5,913,000, were issued January 11, 1999 at the annual rate of 7% per annum.
Interest was due and payable in quarterly installments, in arrears. An
allocation was made between the convertible notes and the warrants based on the
relative fair values of the securities at the time of issuance. A discount of
approximately $464,000 was recorded against the convertible notes due to the
allocation. As a result of this allocation, we recorded interest expense, at an
effective interest rate of 11% per year, throughout the term of the convertible
notes, which began in the first quarter of 1999. Interest expense of
approximately $3,000, $39,000 and $80,000 has been accreted for the years ended
December 31, 2003, 2002 and 2001, respectively.
In January 2001, we reached agreement with the holders of our convertible
notes to extend the maturity date of the aggregate $4 million face value in
F-20
promissory notes from February 1, 2001 to February 1, 2003. The promissory notes
remained convertible at $1.275 per share, but the terms were modified to reduce
the interest rate from 7% to 4% and to permit us to convert up to the full
principal amount of the promissory notes into NTN common stock at maturity at a
conversion price of $1.275 per share. In addition, if our common stock closes
above $2.50 for more than 20 consecutive trading days, we can force conversion
of the promissory notes at $1.275 per share.
In December 2001, NTN reached an agreement with the holders of the
convertible notes to convert $2 million of the outstanding convertible notes
payable into approximately 1,639,000 of common stock at $1.22 per share and
increase the interest rate on the remaining notes payable to 8%. Upon conversion
of the principal, debt conversion costs of approximately $189,000 were recorded.
The balance of the convertible notes plus accreted interest at December 31,
2002 was $1,997,000.
On February 1, 2003 the outstanding balance of $2.0 million on the notes was
converted into 1,568,628 shares of common stock at a conversion price of $1.275
per share.
NOTE PAYABLE
In April 1999, we purchased Internet Stations equipment and game licenses
for $400,000 from Sikander, Inc. We issued a promissory note to Sikander, Inc.
for $360,000 along with a $40,000 cash payment. In December 1999, the payment
provisions were revised including issuance of a replacement promissory note for
$178,000. No payments were made after March 31, 2000 on the promissory note. In
June 2000, we commenced litigation against Sikander, Inc. and related
defendants. As of December 31, 2000, the note balance was approximately $171,000
including accrued interest. We reached an agreement with Sikander, Inc. on March
31, 2001 to settle the balance of the promissory note and accrued interest for
$25,000. The results of operations for the year ended December 31, 2001 include
an elimination of the balance of the promissory note and accrued interest
totaling $146,000, which is presented as other income in the statement of
operations.
(9) STRATEGIC PARTNERSHIP AND INVESTMENT IN BUZZTIME
On June 8, 2001, Buzztime entered into a development, license and marketing
agreement (the Marketing Agreement) with Scientific-Atlanta, Inc. (S-A) to
co-develop an application to enable the operation of a Buzztime interactive
trivia game show channel on S-A's Explorer digital interactive set-top network,
for distribution by cable operators to their subscribers. Buzztime will be
responsible for the trivia game channel content including ongoing programming
and player promotions. The channel will derive revenue from cable operator
license fees, premium subscription fees and advertising revenue. Under the
Marketing Agreement, Buzztime and S-A have predetermined commission arrangements
based on sales and support of Buzztime's products to the cable system operators.
In connection with the Marketing Agreement, Scientific-Atlanta Strategic
Investments, L.L.C., a Delaware limited liability company and affiliate of S-A,
invested $1.0 million in Buzztime for 636,943 shares of Buzztime's Series A
Convertible Preferred Stock, representing 6% of Buzztime's common shares
outstanding on an as-converted basis, and warrants to obtain an additional
159,236 shares of Series A Convertible Preferred Stock (the S-A Warrants). Each
share of preferred stock was convertible into one share of Buzztime's common
stock, subject to future adjustment, and entitled to a non-cumulative dividend
of 8%, if, when and as declared by Buzztime's board of directors. The $1.0
million investment may only be used towards development of the application for
S-A and fulfillment of Buzztime's obligations under the Marketing Agreement,
which are currently Buzztime's primary focus.
NTN granted S-A the right to exchange its shares of Buzztime's preferred
stock into shares of NTN common stock upon the earlier of (i) Buzztime being
unable to obtain additional equity financing of $2.0 million before June 8,
2002, (ii) the liquidation, dissolution or bankruptcy of Buzztime before June 8,
2002, (iii) the failure of Buzztime to conduct a qualified public offering by
June 8, 2004, or (iv) a change in control of Buzztime before June 8, 2002. The
exchange price was the 20-day average closing price of NTN's common stock
immediately preceding the date S-A gives notice of its intent to exercise its
rights.
The exercise price of the S-A warrants is $1.57 per share. The warrants vest
in 10% increments as cable system operators sign on for the Buzztime channel.
Based on the two Buzztime deployments with Susquehanna Cable (SusCom), 20% of
the warrants are vested as of December 31, 2003. No expense has been recorded
for the year ended December 31, 2003 as the fair value of the warrants is not
material.
F-21
On January 16, 2003, the 636,943 shares of Buzztime Series A Convertible
Preferred Stock were converted to 1,000,000 shares of NTN common stock. For
purposes of the exchange, the Series A liquidation preference was $1.57 per
share of Buzztime Series A preferred stock. The conversion price of the NTN
common stock was $1.00 per share.
(10) MINORITY INTEREST ACCOUNTING
We retained majority ownership of Buzztime and, as a result, will continue
to consolidate Buzztime's operations in our financial statements. No gain or
loss was recorded by us on this sale of Buzztime's shares in accordance with
Staff Accounting Bulletin Topic 5h - Miscellaneous Accounting, ACCOUNTING FOR
SALES OF STOCK IN A SUBSIDIARY, as the realization of the gain is not assured
given Buzztime's history of losses from operations, net operating loss
carryforwards, which are generally not available to offset capital gains, and
the start-up nature of Buzztime's products designed for the interactive
television market. In addition, the ongoing business relationship with S-A
through the Marketing Agreement and restrictions placed on the use of proceeds
were additional factors considered in accounting for the sale of Buzztime's
shares. As a result, the investment was reflected as a capital transaction.
The investment in Buzztime was presented as a minority interest in
consolidated subsidiary on our consolidated balance sheet until S-A converted
its Buzztime interest into NTN common stock in January 2003 (see Note 9 -
Strategic Partnership and Investment in Buzztime). As a result, there was no
minority interest account on our December 31, 2003 balance sheet. The minority
interest balance of $643,000 at December 31, 2002 was comprised of the S-A
investment, reduced by $60,000 of issuance costs, and by S-A's share of
Buzztime's net losses in the amount of $10,000, $212,000 and $85,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
(11) 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 year ended December 31,
2003, the cable operator paid us an initial non-refundable amount of $100,000
and an additional payment of $200,000 under the Trial Agreement. The $200,000
payment was related to entering a trial on one of the two specified technology
platforms. The cable operator has the right under the Trial Agreement to apply
50% of any amount paid under the agreement against future development and/or
license fees paid by that operator to us for the carriage of the Buzztime
channel through June 2004. During the year ended December 31, 2003, we
recognized $150,000 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).
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.
The amount billed under the agreement during the year ended December 31, 2003
was approximately $67,000. 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. We recognized approximately $11,000 of revenue during
the year ended December 31, 2003 and had deferred revenue of approximately
$56,000 at December 31, 2003.
(12) 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.
F-22
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 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. 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, that 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 15) and Scientific-Atlanta conversion shares (note 9) 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.
(13) CONTINGENCIES
We are subject to litigation from time to time in the ordinary course of our
business. There can be no assurance that any or all of the following claims will
be decided in our favor and we are not insured against all claims made. During
the pendency of such claims, we will continue to incur the costs of our legal
defense. Other than set forth below, there is no material litigation pending or
threatened against us.
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). In 1996, 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 (see
Note 14 -- Acquisitions) 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 iTV 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 and in particular their patent
portfolio. The Court has assigned a trial date of April 19, 2004. We intend to
continue to defend the action vigorously.
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.
F-23
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 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.
There can be no assurance that the foregoing claims will be decided in our
favor. We are not insured against all claims made. During the pendency of such
claims, we will continue to incur the costs of defense. Other than set forth
above, there is no material litigation pending or threatened against us.
In previous filings, we disclosed as a contingency that our Canadian
licensee was in discussions with the Canada Customs and Revenue Agency (CCRA)
regarding a liability relating to withholding tax on certain amounts previously
paid to us by our Canadian licensee. Our licensee was assessed approximately
$649,000 Canadian dollars by the CCRA and they had appealed the assessment. At
that time, it was unclear as to what, if any, liability we might have in the
matter. We had an understanding with our licensee that we would equally share
the eventual assessment, if any was assessed, at the end of the appeal process.
On December 15, 2003, through a newly formed subsidiary, NTN Canada, Inc., we
acquired the assets, the operations and a number of the liabilities of our
Canadian licensee including this withholding tax matter with the CCRA (see Note
14 -- Acquisitions). In February 2004, we entered into a settlement agreement
with the CCRA that reduced the assessment from Canadian $788,000 to Canadian
$443,000 (or approximately $609,000 to approximately $342,000 U.S. dollars).
That amount will be further reduced by approximately $80,000 for the application
of a partial refund from payments made during the period of January 2002 through
March 2003. To be consistent with our previous agreement, we recorded one-half
of this settlement as operating expense and recorded one-half as a liability
recorded through the purchase accounting when we acquired NTN Interactive
Network, Inc. (see Note 14 - Acquisitions).
In February 2002, a shareholder class action and derivative complaint was
filed in San Diego County Superior Court for the State of California by Steven
M. Mizel on behalf of himself and all NTN shareholders, naming Robert M.
Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H. Arlen,
Vincent A. Carrino and James B. Frakes as defendants with NTN Communications as
nominal defendant. The Mizel action alleged breach of fiduciary duty by
defendants in connection with our rejection of a proposal by a corporation to
purchase all of the outstanding shares of our common stock, as announced
publicly on February 21, 2002. In June 2002, in ruling on our motion, the court
found that Mizel's complaint failed to state a valid claim. The court gave Mizel
an opportunity to replead his case, but he declined to do so. On July 11, 2002,
the court formally dismissed the case and entered judgment in our favor.
Similarly, in March 2002, a shareholder class action and derivative complaint
was filed in San Diego County Superior Court for the State of California by
Robin Fernhoff on behalf of himself and all of NTN's shareholders naming Robert
M. Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H.
Arlen, Vincent A. Carrino, Robert B. Clasen, Michael K. Fleming and James B.
Frakes as defendants with NTN Communications as nominal defendant. The Fernhoff
action alleged breach of fiduciary duty, abuse of control and gross
mismanagement by defendants in connection with our rejection of a proposal by a
corporation to purchase all of the outstanding shares of our common stock, as
announced publicly on February 21, 2002. In July 2002, in light of the ruling on
Mizel, Fernhoff requested that the court dismiss his complaint.
Over the past several years, state tax authorities have made inquiries as to
whether our services might require the collection of sales and use taxes from
customers in those states. We evaluate such inquiries on a case-by-case basis
and have favorably resolved these tax issues in the past without any material
adverse consequences. During 2003, the state of Texas, our largest state in
terms of NTN Network sites, began a sales tax audit. They have concluded that
our services are subject to sales taxes on an amusement services basis and
assessed us for approximately $1,115,000 for the five year audit period ended
December 31, 2002. We have objected to this approach since our services are
provided to the consumers for free as a promotional service, which we believe
falls outside the definition of amusement services as defined by the Texas tax
code. We have successfully argued this position regarding amusement services
with other states. We have appealed the assessment and the matter is currently
at the administrative appeals level. We have retained a team of sales and use
tax specialists in Texas to assist us in this matter. If we are able to reach a
mutually agreeable conclusion at the administrative appeals level, we expect
that a conclusion may be reached by the end of 2004. In the event the matter is
not resolved at administrative appeals, we would take the matter before the
District Court. At the District Court level, we would anticipate a resolution no
earlier than 2005. While we believe that we have a strong position in this
matter, there can be no assurance that we will resolve this matter in our favor.
F-24
(14) ACQUISITIONS
ZOOM COMMUNICATIONS AND HYSEN TECHNOLOGIES
On April 5, 2002, through a newly formed subsidiary, NTN Wireless
Communications, Inc. (Wireless), we acquired the net assets of ZOOM
Communications (ZOOM), 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 business. Based out of suburban Atlanta,
Georgia, the Wireless segment now serves as a regional office and distribution
center for us.
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. The
agreement was cancelled on April 5, 2002 upon the acquisition of the assets of
ZOOM.
On May 17, 2002, we acquired the net assets of Hysen Technologies, Inc.
(Hysen), 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 2002 purchases was $581,000, which includes
$320,000 in common stock and $102,000 of transaction costs. In addition to the
above consideration, we entered into, in connection with the ZOOM purchase, an
earn-out arrangement with the two principals. The earn-out was paid to each
principal at 25% of the excess of which the adjusted gross profit exceeded
$900,000 for the twelve month period after the acquisition. The principals were
paid a combined earn-out amount of approximately $159,000 in 2003, which was
added to the purchase price of the ZOOM transaction.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Of the $680,000 of
acquired intangible assets, $390,000 was assigned to goodwill and is not subject
to amortization. $140,000 was assigned to employment agreements and we are
amortizing that over the estimated contractual life of 2 years. $150,000 was
assigned to customer lists and we are amortizing that 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. We performed step one of our annual
goodwill impairment test related to the Zoom/Hysen acquisitions in the fourth
quarter of 2003 and concluded that there was not an indication of impairment.
Accordingly, step two was not required.
ASSETS ACQUIRED AND LIABILITIES ASSUMED
ZOOM HYSEN TOTAL
COMMUNICATIONS TECHNOLOGIES ACQUISITIONS
------------ ----------- ------------
Accounts receivable, net $ 121,000 $ -- $ 121,000
Inventory 48,000 41,000 89,000
Fixed assets 38,000 -- 38,000
Goodwill 375,000 15,000 390,000
Intangibles assets 280,000 10,000 290,000
------------ ----------- ------------
Total assets acquired 862,000 66,000 928,000
------------ ----------- ------------
Accounts payable and accrued 244,000 31,000 275,000
liabilities
Line of credit 72,000 -- 72,000
------------ ----------- ------------
Total liabilities assumed 316,000 31,000 347,000
------------ ----------- ------------
Net assets acquired $ 546,000 $ 35,000 $ 581,000
============ =========== ============
F-25
If the acquisitions had occurred on January 1, 2002, our results of
operations for fiscal 2002 would not have been materially different from the
reported results and as such, no pro forma results of operations are included.
BREAKAWAY INTERNATIONAL
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 provider of restaurant industry hardware and software enterprise solutions.
We acquired Breakaway's assets for $252,000 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 $3,623,000, which consisted of 1,292,614 shares
multiplied by the then publicly traded price of $2.44 per share, $252,000 in
cash and $217,000 of transaction costs. To determine the fair value of the
acquired intangible assets and the related allocation of the purchase price, we
commissioned a third party valuation analysis. That third party analysis
determined that the identified intangible assets and the related useful lives
are developed technology ($781,000, 6 year life), customer relationships
($1,110,000, 6 year life) and non-competition agreements ($30,000, 3 year life).
Breakaway's results of operations have been included in our consolidated
statements of operations since August 1, 2003 and include $135,000 of
amortization of the identified intangibles based upon the estimated lives.
BREAKAWAY INTERNATIONAL, INC.
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Accounts receivable, net $ 333,000
Inventory, net 35,000
Fixed assets, net 108,000
Developed technology 781,000
Customer relationships 1,110,000
Non-competition agreements 30,000
Goodwill 2,225,000
-----------
Total assets acquired 4,622,000
-----------
Accounts payable and accruals 479,000
Deferred revenue 520,000
-----------
Total liabilities assumed 999,000
-----------
Net assets acquired $3,623,000
===========
F-26
NTN CANADA
On December 15, 2003, we acquired through NTN Canada, Inc. (NTN Canada), a
wholly owned Canadian subsidiary of NTN, most of the operating assets, certain
liabilities and the operations of NTN Interactive Network, Inc. (NTNIN), our
long time Canadian licensee from its parent, Chell Group Corporation Inc.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Total preliminary
consideration for the acquisition was approximately $1,786,000, which consisted
of 238,300 shares multiplied by the then publicly traded price of $3.70 per
share, $200,000 in cash, the contribution of $550,000 in unpaid licensing
royalties, $84,000 of transaction costs, plus the assumption of $70,000 in
liabilities. There will be a final calculation of the cash component of the
purchase price based on the final closing balance sheet. This calculation may
increase the purchase price by up to $50,000. We expect to finalize the purchase
price during the second fiscal quarter of 2004 once we finish the review of the
closing balance sheet and receive all transaction-related professional fees.
NTN CANADA
ASSETS ACQUIRED AND LIABILITIES ASSUMED
Cash $ 20,000
Accounts receivable, net 235,000
Other current assets 50,000
Fixed assets, net 43,000
Customer relationships 720,000
Trivia database 345,000
Interactive events software 102,000
Trivia software 90,000
Licenses 23,000
Goodwill 875,000
-----------
Total assets acquired $2,503,000
-----------
Accounts payable and accruals $ 606,000
Leases 44,000
Deferred revenue 67,000
-----------
Total liabilities assumed 717,000
-----------
Net assets acquired $1,786,000
===========
To determine the fair value of the acquired intangible assets and the
related allocation of the purchase price, we commissioned a third party
valuation analysis. That third party analysis determined that the identified
intangible assets and the related useful lives are customer relationships
($720,000, 4 year life), trivia database ($345,000, 10 year life), interactive
events software ($102,000, 5 year life) and trivia software ($90,000, 5 year
life). NTN Canada's results of operations have been included in our consolidated
statements of operations since December 15, 2003 and include $10,000 of
amortization of the identified intangibles based upon the estimated lives.
F-27
Our pro forma results of operations for fiscal 2003 and 2002 if we had owned
both the Breakaway and Canadian operations on January first of each of the years
presented would have been as follows:
2003 2002
------------- -------------
Revenues:
NTN actual revenues $ 29,489,000 $ 25,610,000
Incremental Breakaway revenues 2,332,000 4,432,000
Incremental Canadian revenues 4,288,000 4,818,000
------------- -------------
Pro forma revenues $ 36,109,000 $ 34,860,000
============= =============
Net loss:
NTN actual loss $ (2,711,000) $ (2,189,000)
Incremental Breakaway loss (579,000) (1,129,000)
Incremental Canadian income 284,000 381,000
------------- -------------
Pro forma loss $ (3,006,000) $ (2,937,000)
============= =============
Loss per share:
NTN actual loss per share $ (0.06) $ (0.06)
============= =============
Pro forma loss per share $ (0.06) $ (0.07)
============= =============
(15) RELATED PARTIES
On May 8, 2001, we entered into an advertising sales representative
agreement with Baron Enterprises, Inc., a corporation wholly-owned and operated
by Barry Bergsman, a member of our board of directors, pursuant to which Baron
provides advertising sales representation services to us under the direction of
the NTN Network's president and chief operating officer. For Baron's services
under the advertising sales representative agreement, we granted Baron a
three-year warrant to purchase 20,000 shares of Common Stock at an exercise
price of $0.50 per share. The warrant vests and becomes exercisable as to 1/12
of the total shares on the last business day of each of the twelve months
commencing April 2001, subject to Baron continuing to provide services to us. In
addition, Baron will receive a commission in the amount of 35% of net
advertising revenues received by the NTN Network from any advertising contract
solicited by Baron. We paid Baron a monthly recoverable cash advance against
commissions to be earned in the amount of $5,000 per month, not to exceed an
aggregate of $60,000 per year. The advertising sales representative agreement
expired on April 1, 2002. An amendment to the agreement was entered into in
October 2002, to extend the contract to October 31, 2003, to reduce the rate of
commission to 25% of net advertising revenues received by us and to include
bartered advertising. Under the amended agreement, Baron was paid $15,000 in
commissions in 2002. In September, 2003, we entered into a three year agreement
with Baron to negotiate on our behalf with a third party advertising
representative. Baron was to receive commissions of 3% to 10% based upon the
period of time over which the negotiated advertising would run and upon the
related advertising revenue. No commissions have been paid to date to Baron for
this third party work.
In May 2002, Michael Fleming was appointed Chairman of the Board of our
Buzztime subsidiary, after having served, since January 8, 2002, as an
independent consultant. Pursuant to the consulting arrangement, Mr. Fleming
provided general consulting services to us in connection with Buzztime's cable
television initiatives. We paid Mr. Fleming approximately $2,000 per month for
these consulting services. This arrangement was discontinued in September 2003.
In January 2002, we entered into a consulting agreement with Robert Clasen,
one of our directors, whereby Mr. Clasen provides consulting services to us with
respect to Buzztime's cable television initiatives. We paid Mr. Clasen $2,000
per month for the services provided under the consulting agreement. The initial
term of this agreement expired on December 31, 2002. We then continued the
consulting relationship on a month to month basis through June 2003 when we
mutually agreed to discontinue the arrangement.
On January 15, 2003, we issued and sold 1,000,000 shares of restricted
common stock through a private offering to Robert M. Bennett, one of our
F-28
directors, at a price per share of $1.00. Pursuant to the terms of the
transaction, upon receipt of $1.0 million from Mr. Bennett, we issued the
restricted shares along with fully vested warrants to purchase 500,000 shares of
common stock at $1.15 per share, exercisable through January 15, 2008. No
commissions or placement agent fees were paid in connection with the offering.
On January 30, 2004, Media General, Inc. (See Note 12 - Media General
Investment), a related party, purchased $2 million of our common stock as part
of a group of institutional investors that invested $14 million into our company
(see Note 18 - Subsequent Events). Media General invested on the same terms as
the other investors.
(16) 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 twelve months, we 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 December 31,
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 December 31, 2003, we had also met the
requirement of $6 million of shareholders' equity.
(17) SEGMENT INFORMATION
We operate our businesses principally through four reportable segments: the
NTN iTV Network, NTN Wireless and Software Solutions, which combine to form 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.
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 three segments within 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 year ended December 31, 2003.
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. Included in the operating loss and
depreciation and amortization for three segments included in the NTN Hospitality
Technologies Division and the Buzztime segment is an allocation of corporate
expenses, while the related corporate assets are not allocated to the segments.
F-29
The following tables set forth certain information regarding our segments
and other operations:
2003 2002 2001
------------- ------------- -------------
Revenues
NTN iTV Network (includes "other revenues") $ 23,024,000 $ 23,077,000 $ 22,400,000
NTN Wireless 4,742,000 2,405,000 --
NTN Software Solutions 1,527,000 -- --
------------- ------------- -------------
NTN Hospitality Technologies division 29,293,000 25,482,000 22,400,000
Buzztime 287,000 128,000 159,000
Eliminations (91,000) -- --
------------- ------------- -------------
Total revenue $ 29,489,000 $ 25,610,000 $ 22,559,000
============= ============= =============
Operating income (loss)
NTN iTV Network $ 1,946,000 $ 1,787,000 $ 372,000
NTN Wireless (170,000) (88,000) --
NTN Software Solutions (565,000) -- --
------------- ------------- -------------
NTN Hospitality Technologies division 1,211,000 1,699,000 372,000
Buzztime (3,757,000) (3,554,000) (3,306,000)
------------- ------------- -------------
Operating loss $ (2,546,000) $ (1,855,000) $ (2,934,000)
============= ============= =============
Net income (loss)
NTN iTV Network $ 1,772,000 $ 1,241,000 $ (418,000)
NTN Wireless (171,000) (88,000) --
NTN Software Solutions (565,000) -- --
------------- ------------- -------------
NTN Hospitality Technologies division 1,036,000 1,153,000 (418,000)
Buzztime (3,747,000) (3,342,000) (3,238,000)
------------- ------------- -------------
Net loss $ (2,711,000) $ (2,189,000) $ (3,656,000)
============= ============= =============
Total assets
NTN iTV Network $ 9,300,000 $ 7,655,000 $ 8,849,000
NTN Wireless 474,000 640,000 --
NTN Software Solutions 3,283,000 -- --
------------- ------------- -------------
NTN Hospitality Technologies division 13,057,000 8,295,000 8,849,000
Buzztime 2,640,000 790,000 1,395,000
Corporate 4,933,000 1,757,000 3,136,000
------------- ------------- -------------
Total assets $ 20,630,000 $ 10,842,000 $ 13,380,000
============= ============= =============
Capital expenditures and Software
Development Costs
NTN iTV Network $ 1,224,000 $ 1,205,000 $ 861,000
NTN Wireless 57,000 3,000 --
NTN Software Solutions 34,000 -- --
------------- ------------- -------------
NTN Hospitality Technologies division $ 1,315,000 $ 1,208,000 $ 861,000
Buzztime 529,000 237,000 300,000
Corporate 191,000 73,000 110,000
------------- ------------- -------------
Total Capital Expenditures and Software
Development Costs $ 2,035,000 $ 1,518,000 $ 1,271,000
============= ============= =============
Depreciation and Amortization
NTN iTV Network $ 3,057,000 $ 4,095,000 $ 4,242,000
NTN Wireless 138,000 98,000 --
NTN Software Solutions 164,000 -- --
------------- ------------- -------------
NTN Hospitality Technologies division $ 3,359,000 $ 4,193,000 $ 4,242,000
Buzztime 538,000 732,000 766,000
------------- ------------- -------------
Total Depreciation and Amortization $ 3,897,000 $ 4,925,000 $ 5,008,000
============= ============= =============
F-30
Interest Expense (net)
NTN iTV Network $ 232,000 $ 505,000 $ 767,000
NTN Wireless 1,000 -- --
NTN Software Solutions -- -- --
------------- ------------- -------------
NTN Hospitality Technologies division $ 233,000 $ 505,000 $ 767,000
Buzztime -- -- 16,000
------------- ------------- -------------
Total Interest Expense (net) $ 233,000 $ 505,000 $ 783,000
============= ============= =============
Income Taxes
NTN iTV Network $ 47,000 $ 41,000 $ --
NTN Wireless -- -- --
NTN Software Solutions -- -- --
------------- ------------- -------------
NTN Hospitality Technologies division $ 47,000 $ 41,000 $ --
Buzztime -- -- --
------------- ------------- -------------
Total Income Taxes $ 47,000 $ 41,000 $ --
============= ============= =============
F-31
(18) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (AMOUNTS IN THOUSANDS
EXCEPT PER SHARE)
THREE-MONTH PERIOD ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
2003 2003 2003 2003 2003
--------- --------- --------- --------- ---------
Total revenue ......................... $ 7,339 $ 6,701 $ 7,267 $ 8,182 $ 29,489
Total operating expenses .............. 7,511 7,463 8,048 9,013 32,035
--------- --------- --------- --------- ---------
Operating loss ........................ (172) (762) (781) (831) (2,546)
Other income (expense), net ........... (93) (71) 73 (37) (128)
--------- --------- --------- --------- ---------
Net loss before income taxes and
minority interest in loss of
consolidated subsidiary ............ (265) (833) (708) (868) (2,674)
Income taxes .......................... (8) (7) (8) (24) (47)
Minority interest in loss of
consolidated subsidiary ............ 10 -- -- -- 10
--------- --------- --------- --------- ---------
Net loss .............................. $ (263) $ (840) $ (716) $ (892) $ (2,711)
========= ========= ========= ========= =========
Per share amounts:
Net loss .................... $ (.01) $ (.02) $ (.02) $ (0.02) $ (.06)
========= ========= ========= ========= =========
Weighted-average shares outstanding ... 42,088 44,756 46,939 47,954 45,446
========= ========= ========= ========= =========
THREE-MONTH PERIOD ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
2002 2002 2002 2002 2002
--------- --------- --------- --------- ---------
Total revenue ......................... $ 5,897 $ 6,158 $ 6,516 $ 7,039 $ 25,610
Total operating expenses .............. 5,979 6,989 7,104 7,393 27,465
--------- --------- --------- --------- ---------
Operating loss ........................ (82) (831) (588) (354) (1,855)
Other income (expense), net ........... (129) (119) (125) (132) (505)
--------- --------- --------- --------- ---------
Net loss before income taxes and
minority interest in loss of
consolidated subsidiary ............ (211) (950) (713) (486) (2,360)
Income taxes .......................... -- -- (34) (7) (41)
Minority interest in loss of
consolidated subsidiary ............ 45 52 58 57 212
--------- --------- --------- --------- ---------
Net loss .............................. $ (166) $ (898) $ (689) $ (436) $ (2,189)
========= ========= ========= ========= =========
Per share amounts:
Net loss .................... $ (.00) $ (.02) $ (.02) $ (0.01) $ (.06)
========= ========= ========= ========= =========
Weighted-average shares outstanding ... 38,604 39,977 39,270 39,325 39,081
========= ========= ========= ========= =========
(19) SUBSEQUENT EVENTS
On January 30, 2004, we completed the sale of 3,943,661 shares of our common
stock at $3.55 per share, resulting in gross proceeds of approximately $14.0
million, pursuant to an existing shelf registration filed under the Securities
Act. Roth Capital Partners, LLC acted as placement agent in the offering. After
commissions and expenses, the net proceeds of this offering are expected to be
approximately $13.0 million. The offering was purchased primarily by a number of
institutional investors and by Media General, Inc. (see Note 12 - Media General
Investment), a related party, which invested approximately $2.0 million.
F-32
SCHEDULE II
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ADDITIONS BALANCE AT
ALLOWANCE FOR BALANCE AT CHARGED TO END OF
DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS(a) PERIOD
- ----------------- ----------- ----------- ----------- -----------
2003 .......... $ 437,000 243,000 (131,000) $ 811,000
2002 .......... $ 440,000 529,000 532,000 $ 437,000
2001 .......... $ 811,000 767,000 1,138,000 $ 440,000
__________
(a) Reflects trade accounts receivable written off during the year, net of
amounts recovered.
See accompanying independent auditors' report.
F-33
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------
3.1 -- Amended and Restated Certificate of Incorporation of the Company,
as amended (4)
3.2 -- Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (7)
3.3 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated March 22, 2000 (8)
3.4 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated March 24, 2000 (8)
3.5 -- By-laws of the Company (2)
3.6 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated May 27, 2003 (16)
4.1 -- Specimen Common Stock Certificate (10)
4.2* -- Stock Option Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
4.3* -- Stock Option Agreement, dated October 7, 1999, by and between NTN
Communications, Inc. and Stanley B. Kinsey (6)
4.4* -- Stock Option Agreement, dated January 26, 2001, by and between
NTN Communications, Inc. and Stanley B. Kinsey (12)
4.5 -- Warrant Certificate issued January 13, 2003 by NTN
Communications, Inc. to Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (19)
4.6 -- NTN Investor Rights Agreement, dated May 7, 2003, by and between
NTN Communications, Inc. and Media General, Inc. (18)
4.7 -- Buzztime Investor Rights Agreement, dated May 7, 2003, by and
among NTN Communications, Inc., Buzztime Entertainment, Inc. and
Media General, Inc. (18)
4.8 -- Common Stock Purchase Warrant dated May 7, 2003 issued to Media
General, Inc. exercisable for 500,000 shares of common stock of
Buzztime Entertainment, Inc. (18)
4.9 -- Form of Common Stock Purchase Warrant issued to Roth Capital
Partners (14)
10.1 -- License Agreement with NTN Canada (3)
10.2*-- Employment Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
10.3 -- Subscription Agreement dated January 13, 2003 between NTN
Communications, Inc. and Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (19)
10.4 -- Scientific-Atlanta Strategic Investments, L.L.C. Notice of
Exchange of Buzztime Preferred Stock for NTN Common Stock, dated
January 16, 2003 (19)
10.5 -- Securities Purchase Agreement dated May 5, 2003 by and among NTN
Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (18)
10.6 -- Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners and NTN Communications, Inc. (14)
10.7 -- Manufacturing Agreement, dated November 25, 1997, by and between
NTN Communications, Inc. and Climax Technology Co., Ltd. (9)
10.8 -- Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (11)
10.9 -- Asset Purchase Agreement dated July 30, 2003 by and among NTN
Software Solutions, Inc., NTN Communications, Inc., Breakaway
International, Inc. and the Seller Shareholders (17)
10.10-- Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc. and Chell Group Corporation (15)
14.0 -- Code of Ethics for Senior Financial Officers (13)
21.1 -- Subsidiaries of Registrant (1)
23.1 -- Consent of KPMG LLP (1)
31 -- Certification of Officers pursuant to Rule 13a-14(a) (1)
32 -- Certification of Officers pursuant to Rule 13a-14(b) (20)
__________
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's registration statement on Form
S-8, File No. 33-75732, and incorporated by reference.
F-34
(3) Previously filed as an exhibit to NTN's report on Form 10-K for the year
ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-69383, filed on December 28, 1998, and incorporated by
reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on
April 5, 2000 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 10-K/A dated
March 5, 2001 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's registration statement on Form
8-A, File No. 0-19383, and incorporated by reference.
(11) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 2000 and incorporated by reference.
(12) Previously filed as an exhibit to NTN's report on Form 10-Q dated March
31, 2001 and incorporated by reference.
(13) Previously filed as an exhibit to NTN's Form 10-K dated March 31, 2003
and incorporated herein by reference.
(14) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 29, 2003 and incorporated herein by reference.
(15) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-111538, filed on December 24, 2003 and incorporated
herein by reference.
(16) Previously filed as an exhibit to NTN's Form 10-Q dated August 14, 2003
and incorporated herein by reference.
(17) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 29, 2003 and incorporated herein by reference.
(18) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-105429, filed on May 21, 2003 and incorporated herein
by reference.
(19) Previously filed as an exhibit to NTN's Form 10-Q dated May 15, 2003 and
incorporated herein by reference.
(20) Furnished concurrently herewith.
F-35