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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1103425
(State of incorporation) (I.R.S. Employer
Identification No.)
THE CAMPUS 5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
At May 3, 2004, the registrant had outstanding 52,647,000 shares of common
stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
MARCH 31,
2004 DECEMBER 31,
ASSETS (PLEDGED) (UNAUDITED) 2003
-------------- --------------
Current assets:
Cash and cash equivalents $ 12,498,000 $ 2,503,000
Accounts receivable, net 3,011,000 2,324,000
Investment available for sale 199,000 189,000
Inventory 358,000 404,000
Deposits on broadcast equipment 75,000 34,000
Deferred costs 551,000 493,000
Prepaid expenses and other current assets 908,000 757,000
-------------- --------------
Total current assets 17,600,000 6,704,000
Broadcast equipment and fixed assets, net 4,542,000 4,398,000
Software development costs, net 670,000 676,000
Deferred costs 502,000 505,000
Intangible assets, net 4,553,000 4,800,000
Goodwill 3,610,000 3,490,000
Other assets 57,000 57,000
-------------- --------------
Total assets $ 31,534,000 $ 20,630,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,087,000 $ 612,000
Accrued expenses 2,621,000 3,174,000
Sales tax payable 245,000 219,000
Income taxes payable 6,000 39,000
Obligations under capital leases 155,000 165,000
Equipment note payable 63,000 46,000
Deferred revenue - Buzztime 206,000 206,000
Deferred revenue 1,592,000 1,478,000
-------------- --------------
Total current liabilities 5,975,000 5,939,000
Obligations under capital leases, excluding current portion 147,000 181,000
Revolving line of credit -- 1,000,000
Deferred revenue 263,000 262,000
Equipment note payable, excluding current portion 228,000 184,000
-------------- --------------
Total liabilities 6,613,000 7,566,000
-------------- --------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock,
$.005 par value, 5,000,000 shares authorized;
161,000 shares issued and outstanding at
March 31, 2004 and December 31, 2003 1,000 1,000
Common stock, $.005 par value, 84,000,000 shares
authorized; 52,646,000 and 48,623,000 shares
issued and outstanding at March 31, 2004 and
December 31, 2003, respectively 262,000 242,000
Additional paid-in capital 108,375,000 95,239,000
Accumulated deficit (83,084,000) (81,790,000)
Accumulated other comprehensive loss (633,000) (628,000)
-------------- --------------
Total shareholders' equity 24,921,000 13,064,000
-------------- --------------
Total liabilities and shareholders' equity $ 31,534,000 $ 20,630,000
============== ==============
See accompanying notes to unaudited consolidated financial statements
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
2004 2003
------------- -------------
Revenues:
NTN Network division revenues $ 8,799,000 $ 7,330,000
Buzztime service revenues 43,000 7,000
Other revenues 2,000 2,000
------------- -------------
Total revenues 8,844,000 7,339,000
------------- -------------
Operating expenses:
Direct operating costs (includes depreciation of
$604,000 and $743,000 for the three months
ended March 31, 2004 and 2003, respectively) 3,102,000 3,004,000
Selling, general and administrative 6,576,000 4,108,000
Depreciation and amortization 336,000 322,000
Research and development 84,000 77,000
------------- -------------
Total operating expenses 10,098,000 7,511,000
------------- -------------
Operating loss (1,254,000) (172,000)
------------- -------------
Other income (expense):
Interest income 19,000 --
Interest expense (38,000) (93,000)
------------- -------------
Total other expense (19,000) (93,000)
------------- -------------
Loss before minority interest in loss of
consolidated subsidiary and income taxes (1,273,000) (265,000)
Minority interest in loss of consolidated subsidiary -- 10,000
------------- -------------
Net loss before income taxes (1,273,000) (255,000)
Income taxes 21,000 8,000
------------- -------------
Net loss $ (1,294,000) $ (263,000)
============= =============
Net loss per common share - basic and diluted $ (0.02) $ (0.01)
============= =============
Weighted average shares outstanding-basic and diluted 51,871,000 42,088,000
============= =============
See accompanying notes to unaudited consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
2004 2003
------------- -------------
Cash flows from operating activities:
Net loss $ (1,294,000) $ (263,000)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 940,000 1,065,000
Provision for doubtful accounts 57,000 8,000
Non-cash stock-based compensation charges 54,000 41,000
Minority interest in loss of consolidated subsidiary -- (10,000)
Non-cash interest expense -- 14,000
Accreted interest expense -- 3,000
Loss from disposition of equipment 3,000 32,000
Changes in assets and liabilities:
Restricted cash -- (139,000)
Accounts receivable (744,000) 240,000
Inventory 46,000 (43,000)
Deferred costs (55,000) 100,000
Prepaid expenses and other assets (152,000) --
Accounts payable and accrued expenses (73,000) 7,000
Deferred revenue 115,000 (133,000)
------------- -------------
Net cash provided by (used in) operating activities (1,103,000) 922,000
------------- -------------
Cash flows from investing activities:
Capital expenditures (494,000) (154,000)
Acquisition of businesses (92,000) --
Software development expenditures (59,000) (61,000)
Deposits on broadcast equipment (41,000) --
------------- -------------
Net cash used in investing activities (686,000) (215,000)
------------- -------------
Cash flows from financing activities:
Principal payments on capital leases (44,000) (59,000)
Principal payments on notes payable (276,000) --
Borrowings from revolving line of credit -- 7,341,000
Principal payments on revolving line of credit (1,000,000) (7,637,000)
Proceeds from issuance of common
stock, net of offering expenses 13,001,000 975,000
Proceeds from exercise of stock options and warrants 101,000 25,000
------------- -------------
Net cash provided by financing activities 11,782,000 645,000
------------- -------------
Net increase in cash and cash equivalents 9,993,000 1,352,000
Effect of exchange rate on cash 2,000 --
------------- -------------
Cash and cash equivalents at beginning of period 2,503,000 577,000
------------- -------------
Cash and cash equivalents at end of period $ 12,498,000 $ 1,929,000
============= =============
See accompanying notes to unaudited consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Continued)
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2004 2003
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 38,000 $ 76,000
============ ============
Income taxes $ 72,000 $ 29,000
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock in payment of interest $ -- $ 54,000
============ ============
Equipment acquired under capital leases and notes payable $ 306,000 $ --
============ ============
Unrealized holding gain on investments $ (10,000) $ (4,000)
============ ============
Issuance of treasury stock in payment of board compensation $ -- $ 30,000
============ ============
Issuance of warrants in association with equity offering $ 655,000 $ 460,000
============ ============
Conversion of Senior Subordinated Notes into common stock $ -- $ 2,000,000
============ ============
Conversion of Buzztime Preferred Series A into common stock $ -- $ 633,000
============ ============
Costs of acquisition $ 48,000 $ 633,000
============ ============
See accompanying notes to unaudited consolidated financial statements.
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and its majority-owned
subsidiaries (collectively, "we" or "NTN") and the results of operations and
cash flows of NTN for the interim periods presented. Management has elected to
omit substantially all notes to our consolidated financial statements as
permitted by the rules and regulations of the Securities and Exchange
Commission. The results of operations for the interim periods are not
necessarily indicative of results to be expected for any other interim period or
for the year ending December 31, 2004.
The consolidated financial statements for the three months ended March 31,
2004 and 2003 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto included in our Form 10-K
for the year ended December 31, 2003.
We have reclassified certain items in the prior period consolidated
financial statements to conform to the current period presentation.
2. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF FASB STATEMENT NO. 123
(SFAS No. 148). SFAS 148 amends FASB Statement No. 123; ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 beginning with our
annual financial statements for the year ended December 31, 2002.
We applied Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25) and related interpretations in accounting for
our stock options. No compensation expense has been recognized for the options
granted under the Special Plan and the Option Plan unless the grants were issued
at exercise prices below market value. Compensation cost is based upon the fair
value at the grant date consistent with the methodology prescribed under SFAS
No. 123. The following table represents the effect on net loss and net loss per
share if we had applied the fair value recognition provisions of SFAS No. 123 as
amended by SFAS No. 148.
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------- -------------
Net loss As reported....................... $ 1,294,000 $ 263,000
Add: stock-based employee
compensation expense included
in reported net loss, net of
related tax effects........... (2,000) (2,000)
Deduct: stock-based employee
compensation expense, net
of related tax effects........ 332,000 287,000
------------- -------------
Pro forma......................... $ 1,624,000 $ 548,000
Basic and diluted net As reported....................... $ 0.02 $ 0.01
loss per share Pro forma......................... $ 0.03 $ 0.01
6
The per share weighted-average fair value of stock options granted during
the three months ended March 31, 2004 and 2003 was $2.78, and $1.10,
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: 2004 -- dividend yield of 0%, risk-free interest
rate of 2.96%, expected volatility of 91.61%, and expected life of 4.88 years;
and 2003 -- dividend yield of 0%, risk-free interest rate of 2.61%, expected
volatility of 110%, and expected life of 4.0 years. In compliance with APB No.
25, we expensed $2,000 for the three months ended March 31, 2004 and 2003,
associated with the grants of 80,000 options in 2000 below market value pursuant
to the Option Plan. No options were granted below market value in 2003 and 2002
pursuant to the Option Plan.
3. INCOME (LOSS) PER SHARE
For the three months ended March 31, 2004 and 2003, options, warrants,
convertible preferred stock and convertible notes representing approximately
12,045,000 and 12,407,000 potential common shares, respectively, have been
excluded from the computation of net loss per share, as their effect was
anti-dilutive.
4. SEGMENT INFORMATION
We 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
iTV 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.
The following tables set forth certain information regarding our segments
and other operations:
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2004 2003
------------ ------------
Revenues
NTN iTV Network (includes "other revenues") $ 6,316,000 $ 5,494,000
NTN Wireless 1,539,000 1,838,000
Software Solutions 946,000 --
------------ ------------
NTN Hospitality Technologies division 8,801,000 7,332,000
Buzztime 43,000 7,000
------------ ------------
Total revenue $ 8,844,000 $ 7,339,000
============ ============
Operating income (loss)
NTN iTV Network $ 236,000 $ 540,000
NTN Wireless 56,000 241,000
Software Solutions (564,000) --
------------ ------------
NTN Hospitality Technologies division (272,000) 781,000
Buzztime (982,000) (953,000)
------------ ------------
Operating loss $(1,254,000) $ (172,000)
============ ============
Net income (loss)
NTN iTV Network $ 197,000 $ 439,000
NTN Wireless 55,000 241,000
Software Solutions (564,000) --
------------ ------------
NTN Hospitality Technologies division (312,000) 680,000
Buzztime (982,000) (943,000)
------------ ------------
Net loss $(1,294,000) $ (263,000)
============ ============
7
5. CONTINGENCIES
Over the past several years, state tax authorities have made inquiries as to
whether our NTN iTV Network 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 iTV 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 network 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.
On March 21, 2003, Long Range Systems, Inc. ("LRS") filed, in the United
States District Court, Northern District of Texas, a patent infringement
complaint against our NTN Wireless subsidiary. This complaint alleged trade
dress and patent infringement and unfair competition. This complaint relates
only to our repair and replacement activities of LRS pagers, which is not a
significant percentage of our NTN Wireless business. In February 2004, LRS
amended their complaint to eliminate certain allegations relating to
infringement of its utility patent for wireless pagers. We do not believe that
this matter represents a significant level of exposure and intend to defend
vigorously.
On or about April 23, 2003, we filed a complaint in the Superior Court of
the State of California, County of San Diego, against LRS alleging defamation
and trade libel, intentional interference with prospective economic advantage,
Lanham Act (trademark violations) and California unfair competition. The case
was subsequently transferred to the United States District Court, Southern
District of California. Our complaint alleges that LRS made false statements in
its complaint and press release regarding our products 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 agreed to
relinquish its rights to the domain name and we subsequently secured
registration of www.ntnwireless.com. LRS filed a motion for change of venue
seeking to have the matter transferred to the Northern District of Texas, as
well as a motion to dismiss and a motion to strike under California's Anti-SLAPP
statute. In March 2004, the Court ruled on the motions, denying the motions to
transfer and to strike under Anti-SLAPP. Further, the Court ruled on the motion
to dismiss, granting in part dismissal of the defamation, trade libel and
intentional interference with prospective economic advantage claims and denying
the motion to dismiss on the Lanham Act and unfair competition allegations. We
intend to continue to vigorously pursue the remaining claims.
In March 2004, we received correspondence from Open Table, Inc. ("Open
Table") alleging breach of the non-compete provisions of the Asset Purchase
Agreement entered into by and between Open Table and Breakaway International,
Inc. ("Breakaway") in February 2002. Our NTN Software Solutions, Inc. subsidiary
assumed certain obligations of Breakaway pursuant to the Asset Purchase
Agreement we entered into with Breakaway in July 2003. In March 2004, we
acknowledged receipt of the Open Table correspondence and advised Open Table
that we were investigating the allegations set forth in such correspondence. On
April 23, 2004, Open Table filed a complaint in the Superior Court of the State
of California, County of San Francisco, against NTN Communications, Inc. f/k/a
Breakaway International, Inc., alleging breach of contract, breach of implied
covenant of good faith and fair dealing, intentional interference with economic
relationship, negligent interference with economic relationship, fraud,
accounting, constructive trust and declaratory relief. We intend to complete our
investigation and to defend the action accordingly.
8
6. DEFERRED REVENUE - BUZZTIME
In February 2003, we entered into a Trial Agreement with a major cable
operator that involves developing the Buzztime channel for potential deployment
on two different cable technology platforms within that operator's system. The
Trial Agreement runs through December 2004. During the 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 other
$56,000 of deferred revenue - Buzztime on the accompanying consolidated balance
sheet relates to $32,000 of deferred revenue arising from our agreement with
Digeo Interactive LLC (Digeo), $20,000 of deferred revenue relating to our
wireless cell phone agreement with Airborne Entertainment and to $4,000 of
miscellaneous items.
7. ACCUMULATED COMPREHENSIVE LOSS
Accumulated comprehensive loss is the combination of accumulated net
unrealized losses on investment available for sale and the accumulated gains or
losses from foreign currency translation adjustments. We translated the assets
and liabilities of NTN Canada into U.S. dollars using the period end exchange
rate. Income and expenses were translated using the average exchange rates for
the reporting period. For the three month periods ended March 31, 2004 and 2003,
the components of accumulated other comprehensive loss were as follows:
Three Months Ended
--------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Beginning balance $ (628,000) $ (639,000)
Unrealized gain in investment available for sale 10,000 4,000
Foreign currency translation adjustments (15,000) --
-------------- --------------
Ending balance $ (633,000) $ (635,000)
============== ==============
The comprehensive loss for each three month period ended March 31 was as
follows:
Three Months Ended
--------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Net loss $ (1,294,000) $ (263,000)
Comprehensive income (loss) (5,000) 4,000
-------------- --------------
Comprehensive net loss $ (1,299,000) $ (259,000)
============== ==============
8. EQUITY PLACEMENT
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 (Roth) acted as placement
agent in the offering. After commissions and expenses, the net proceeds of this
offering were 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. Roth received a warrant for
236,619 shares with an exercise price of $3.91 per share as part of their
compensation as underwriter of this offering. The shares underlying this warrant
have not yet been registered.
9. SUBSEQUENT EVENTS
On April 14, 2004, we settled the lawsuit filed against us in 1992 by
Interactive Network, Inc. (now Two Way TV (US), Inc.) The litigation involved
licensing and patent infringement issues in Canada. These actions related to the
broadcast of the NTN iTV Network to subscribers of our former Canadian licensee
(we acquired our licensee's operations in December 2003) and did not extend to
our network operations in the United States or elsewhere. We settled the matter
for $116,500. We recorded expense related to this matter in the first quarter of
2004, including the settlement amount, totaling approximately $200,000.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE
FORWARD-LOOKING STATEMENTS REFLECT FUTURE EVENTS, RESULTS, PERFORMANCE,
PROSPECTS AND OPPORTUNITIES, INCLUDING STATEMENTS RELATED TO OUR STRATEGIC
PLANS, CAPITAL EXPENDITURES, INDUSTRY TRENDS AND FINANCIAL POSITION OF NTN
COMMUNICATIONS, INC. AND ITS SUBSIDIARIES. FORWARD-LOOKING STATEMENTS ARE BASED
ON INFORMATION CURRENTLY AVAILABLE TO US AND OUR CURRENT EXPECTATIONS,
ESTIMATES, FORECASTS, AND PROJECTIONS ABOUT THE INDUSTRIES IN WHICH WE OPERATE
AND THE BELIEFS AND ASSUMPTIONS OF MANAGEMENT. WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "COULD," "TARGETS," "PROJECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," "MAY," "WILL," "WOULD," VARIATIONS OF SUCH WORDS, AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. IN
ADDITION, ANY STATEMENTS WHICH REFER TO PROJECTIONS OF OUR FUTURE FINANCIAL
PERFORMANCE, OUR ANTICIPATED GROWTH AND TRENDS IN OUR BUSINESSES, AND OTHER
CHARACTERIZATIONS OF FUTURE EVENTS OR CIRCUMSTANCES, ARE FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED THAT THESE FORWARD-LOOKING STATEMENTS ARE ONLY
PREDICTIONS AND ARE SUBJECT TO RISKS, UNCERTAINTIES, AND ASSUMPTIONS THAT MAY BE
DIFFICULT TO PREDICT. THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY AND
ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2003 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.
OVERVIEW
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 segments.
Revenues generated and operating income (loss) by our two business units
are illustrated below. The data presented below includes allocations of
corporate expenses.
THREE MONTHS ENDED MARCH 31,
2004 2003
Revenues -------------------- --------------------
- --------
NTN Hospitality Technologies division (includes "other revenues") $ 8,801,000 99 % $ 7,332,000 99%
Buzztime.............................. 43,000 1% 7,000 1%
-------------------- --------------------
Total....................... $ 8,844,000 100% $ 7,339,000 100%
==================== ====================
Operating Income (Loss)
- -----------------------
NTN Hospitality Technologies division. $ (272,000) $ 781,000
Buzztime.............................. (982,000) (953,000)
------------- -------------
Total....................... $ (1,254,000) $ (172,000)
============= =============
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, 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.
Our objective is to leverage our unique interactive entertainment as a means
of growing our business units--first, as a leading provider of interactive
communications, entertainment and software offerings to the hospitality industry
through the NTN Hospitality Technologies division. Second, as a leading
developer and distributor of interactive entertainment for the in-home market
through interactive television and wireless devices via Buzztime. To accomplish
our objectives we are pursuing business strategies to:
10
o Increase the number of hospitality locations serviced by the NTN iTV
Network, NTN Wireless and Software Solutions. We intend to accomplish
this increase by expanding our product offerings to include more
value-added services, adding personnel to our sales force and providing
new and updated content on a regular basis.
o Develop and distribute the Buzztime trivia channel to cable and
satellite operators with the intent to become the first content provider
to deploy an interactive television entertainment channel. We have
adapted or are planning to adapt our interactive trivia game show
content and technology to the leading interactive television platforms,
to gain market share by partnering with major industry manufacturers and
distributors, and to utilize our broadcast interactive television studio
as a development and production facility to develop and deepen
relationships with media-related companies. We also plan to continue to
support our efforts in early-stage wireless entertainment through
partnerships with leading wireless distributors and carriers.
o Increase revenues through current and new revenue sources. The NTN iTV
Network receives service revenue from subscribing out-of-home locations
as well as third-party advertising revenue and production services. We
expect to continue generating revenue through these sources and, by
growing our customer base, we also expect to see revenue growth in
service and advertising revenue. Similarly, as Buzztime gains
distribution with cable television operators, we expect to increase
revenue through three sources: license fees paid by local cable
television operators; fees paid by interactive television home
subscribers for premium services or pay-per-play transactions; and
advertising revenue. Both business units may also explore market
opportunities to acquire complimentary businesses to increase revenues
and earnings. To that end, we acquired the operations of Zoom
Communications in April 2002 (now NTN Wireless), Breakaway International
in July 2003 (now Software Solutions) and NTN Interactive Network (now
NTN Canada) in December 2003.
There can be no assurance, however, that we will be successful in executing
this strategy.
CRITICAL ACCOUNTING POLICIES
The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to deferred
costs and revenues, depreciation of broadcast equipment, 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.
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.
11
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 notes of the audited financial statements in our
Form 10-K for the year ended December 31, 2003.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
Operations for the three months ended March 31, 2004 resulted in a net loss
of $1,294,000 compared to a net loss of $263,000 for the three months ended
March 31, 2003.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$1,469,000, or 20%, to $8,801,000 for the three months ended March 31, 2004 from
$7,332,000 for the three months ended March 31, 2003. For the purpose of this
analysis, the NTN iTV Network's revenues include $2,000 of "other" revenues for
both 2004 and 2003. The revenue contribution from the three operating segments
of the division for the three months ended March 31, 2004 and 2003 are shown in
the following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
-------------------------------------------------------
Three Months Ended March 31,
-----------------------------
2004 2003 Change
------------- ------------- -------------
NTN iTV Network $ 6,316,000 $ 5,494,000 $ 822,000
NTN Wireless 1,539,000 1,838,000 (299,000)
Software Solutions 946,000 -- 946,000
------------- ------------- -------------
Total Revenue of Division $ 8,801,000 $ 7,332,000 $ 1,469,000
============= ============= =============
Within the NTN iTV Network there are several revenue contributors, including
our subscription revenue from core hospitality operations, Canadian license
revenue, as of December 15, 2003, revenue from our Canadian operations,
advertising revenue and installation revenue. The primary revenue components are
broken out in the following table:
12
COMPONENTS OF NTN ITV NETWORK REVENUE
-------------------------------------
Three Months Ended March 31,
-----------------------------
2004 2003 Change
------------- ------------- -------------
U.S. Subscription Revenues $ 5,056,000 $ 4,865,000 $ 191,000
Canadian License Revenue -- 293,000 (293,000)
Revenue from Canadian Operations 868,000 -- 868,000
Advertising Revenue 219,000 19,000 200,000
Installation Revenue 173,000 317,000 (144,000)
------------- ------------- -------------
NTN iTV Network $ 6,316,000 $ 5,494,000 $ 822,000
============= ============= =============
As noted in the above table, our subscription revenue from core hospitality
operations increased by $191,000, or 3.9%, in the first three months of 2004.
Licensing revenues from our Canadian licensee ceased in the fourth quarter of
2003 as we finalized the acquisition of the operations of the licensee. On
December 15, 2003, we acquired the operations of our Canadian licensee, so we
now show the overall revenues of the Canadian operation rather than the previous
license revenue.
In the first three months of 2004, the NTN iTV Network generated advertising
revenue of approximately $219,000 compared to approximately $19,000 in the first
three months of 2003. This increase was due an improved performance domestically
and to $49,000 in advertising revenues recorded by NTN Canada.
Installation revenue associated with installing new customer locations
decreased $144,000 as some of the deferred revenue associated with prior year
installations has become fully amortized. Over the past two years we have
adopted a strategy of charging new sites a lower installation fee and higher
recurring monthly fees than our previous pricing. This strategy has had the
beneficial impact of increasing our subscription revenues as noted in the above
chart but it has also reduced the amount of deferred revenue that is recognized
as installation revenue over an average customer life of three years. This trend
coupled with the falloff of amortization of deferred revenue from prior years
led to this lower level of installation revenue. We added 151 new sites in the
first three months of 2004 compared to 119 new sites in the first three months
of 2003.
The NTN iTV Network customer site count in the United States at March 31,
2004 was 3,047. This was a decrease of 11 sites over March 31, 2003. Our
Canadian site count at March 31, 2004 was approximately 400.
Revenues from NTN Wireless declined by $299,000 from $1,838,000 in the first
three months of 2003 to $1,539,000 in the first three months of 2004. The
revenues in the 2003 period included the majority of the revenues that we
derived from the chain wide rollout of our paging products at Darden's Olive
Garden chain. There was no such chain wide rollout by a significant national
chain in the 2004 period.
Revenues from Software Solutions were $946,000 in the first three months of
2004. There were no Software Solutions revenues in the comparable 2003 period
since we acquired the operations of Breakaway International on July 31, 2003. We
deferred approximately $88,000 of software-related revenues that were booked in
the three months ended March 31, 2004 in compliance with our software revenue
recognition policies. That deferred revenue will be recognized over the ensuing
twelve months.
Buzztime service revenues increased $36,000 to $43,000 in the first three
months of 2004 from $7,000 in the first three months of 2003. The increase was
primarily due to revenues recognized under an agreement with a Canadian
satellite operator and licensing revenues from SusCom.
As a result of the above factors, NTN's consolidated revenues increased
$1,505,000, or 20.5%, to $8,844,000 in the first three months of 2004 from
$7,339,000 in the first three months of 2003.
13
OPERATING EXPENSES
Direct operating costs increased $98,000, or 3.3%, to $3,102,000 in the
first three months of 2004 from $3,004,000 in the first three months of 2003.
The following table compares the direct costs for each of our operating segments
between the first three months of 2004 and 2003:
DIRECT OPERATING COSTS
----------------------
Three Months Ended March 31,
-----------------------------
2004 2003 Change
------------- ------------- -------------
NTN iTV Network $ 1,635,000 $ 1,590,000 $ 45,000
NTN Wireless 1,010,000 1,169,000 (159,000)
Software Solutions 173,000 -- 173,000
------------- ------------- -------------
Hospitality Technologies division 2,818,000 2,759,000 59,000
Buzztime 284,000 245,000 39,000
------------- ------------- -------------
Consolidated Company $ 3,102,000 $ 3,004,000 $ 98,000
============= ============= =============
The two primary drivers in the $98,000 increase in our direct operating
costs were the $173,000 increase in Software Solutions and the $159,000 decrease
in NTN Wireless. As noted above, we did not operate the Software Solutions
segment in the 2003 period. Excluding that new segment, our operating costs
would have decreased by $75,000.
The $159,000 decrease in the direct operating costs of NTN Wireless was
largely related to the cost of goods sold associated with the NTN Wireless
revenue decrease of $299,000 noted above. This decrease was expected since we
did not have a chain-wide rollout of a national restaurant chain in the first
three months of 2004 as we had with the Olive Garden chain in the first three
months of 2003. Our gross margin in the NTN Wireless segment in the first three
months of 2004 was 34.4%, a 2.0% decrease from the 36.4% gross margin we
recorded in the first quarter of 2003. This gross margin decrease was due to
increased competitive activities in the wireless market place.
The $45,000 increase in the direct operating costs of our core NTN iTV
Network segment was primarily due to approximately $236,000 of direct operating
costs related to the ongoing conversion of our customer sites to our new two-way
VSAT technology. There was no such VSAT-related expense in the first three
months of 2003. This VSAT-related expenses were planned items. That $236,000
VSAT-related increase was partially offset by a variety of other factors,
including a reduction of telephone expenses of approximately $97,000. The
reduction in telephone expenses was due to a decline in our phone rates and to
the conversion of a portion of our installed customer bases to VSAT.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) increased $2,468,000 or
60.1%, to $6,576,000 in the first three months of 2004 from $4,108,000 in the
first three months of 2003. The following table compares the selling, general
and administrative expenses for each of our operating segments between the first
three months of 2004 and 2003:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Three Months Ended March 31,
-----------------------------
2004 2003 Change
------------- ------------- -------------
NTN iTV Network $ 4,148,000 $ 3,073,000 $ 1,075,000
NTN Wireless 427,000 395,000 32,000
Software Solutions 1,272,000 -- 1,272,000
------------- ------------- -------------
Hospitality Technologies division 5,847,000 3,468,000 2,379,000
------------- ------------- -------------
Buzztime 729,000 640,000 89,000
------------- ------------- -------------
Consolidated Company $ 6,576,000 $ 4,108,000 $ 2,468,000
============= ============= =============
SG&A expenses in the first three months of 2004 included the SG&A expenses
of Software Solutions and NTN Canada compared to the first three months of 2003,
which did not include the operations of either of those units. The $1,075,000
SG&A increase in the NTN iTV Network segment was partially due to $421,000 of
SG&A expenses in our new NTN Canada subsidiary. Another significant factor was
approximately $200,000 of expenses related to the costs and eventual settlement
of the Two Way TV litigation in Canada. The remainder of the SG&A increase in
the NTN iTV Network came from a variety of items including: bad debt expense (up
$68,000), marketing expenses (up $45,000), facilities expenses (up $23,000) and
increases in salaries and related expenses (up $250,000). Bad debt expense
increased as function of the receivables growth associated with our revenue
increase noted above. Marketing expenses increased due to trade show activity
and the stepped up production of marketing materials. The increases in
facilities expenses and salaries and related expenses were partially related to
the operations of NTN Canada and to the hiring of additional personnel in the
United States. 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.
14
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
increased $14,000, or 4.4%, to $336,000 in the first three months of 2004 from
$322,000 in the first three months of 2003. This increase was due to
amortization of intangible assets that we added as a result of the Software
Solutions and NTN Canada transactions in the second half of 2003.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $7,000 to $84,000 in the first
three months of 2004 from $77,000 in the first three months of 2003, due
primarily to projects to develop new technologies for the iTV network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the first three months of 2004 was $19,000 while we did
not have any interest income in the first three months of 2003. The interest
income in 2004 arose from investing the proceeds of our January 2004 equity
offering into short term United States governmental agency securities. We had no
interest income in the first three months of 2003 because we were a net borrower
at that time.
Interest expense decreased $55,000, or 59.1%, to $38,000 in the first three
months of 2004, compared to $93,000 in the first three months of 2003, due
primarily to the paydown of the balance on our revolving line of credit
following the completion of our equity offering in January 2004.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary was $10,000 in the
first three months of 2003, which represented 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 is expected to report taxable
income for the year ended December 31, 2004. 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 $21,000 in the first three months
of 2004. This was a $13,000 increase over the $8,000 provision for income taxes
recorded in the first three months of 2003. The primary factor in the increase
is due to the expected profitability of NTN Wireless in 2004 compared to a loss
in 2003.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
not intended to represent a measure of performance in accordance with accounting
principles generally accepted in the United States of America ("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.
Our EBITDA decreased by $1,217,000 to negative $314,000 in the first three
months of 2004 from EBITDA of $903,000 in the first three months of 2003. This
EBITDA decrease was primarily due to the increase in our net loss of $1,031,000
in 2004 coupled with a decrease in depreciation expense of $125,000.
15
The following table reconciles our net loss per GAAP to EBITDA:
THREE MONTHS ENDED
MARCH 31
-------------------------------
2004 2003
------------ ------------
EBITDA CALCULATION
Net loss per GAAP $(1,294,000) $ (263,000)
Interest expense (net) 19,000 93,000
Depreciation and amortization 940,000 1,065,000
Income taxes 21,000 8,000
------------ ------------
EBITDA $ (314,000) $ 903,000
============ ============
On a segment basis, our segments generated EBITDA levels as presented below:
($000) THREE MONTHS ENDED
MARCH 31, 2004
EBITDA CALCULATION: -------------------------------------------------------------
NTN iTV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $ 197 $ 55 $ (564) $ (312) $ (982) $(1,294)
Interest expense (net) 19 -- -- 19 -- 19
Depreciation and amortization 686 36 97 819 121 940
Income taxes 21 -- -- 21 -- 21
-------- -------- -------- -------- -------- --------
EBITDA $ 923 $ 91 $ (467) $ 547 $ (861) $ (314)
======== ======== ======== ======== ======== ========
($000) THREE MONTHS ENDED
MARCH 31, 2003
EBITDA CALCULATION: -------------------------------------------------------------
NTN iTV NTN iTV SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $ 439 $ 241 $ -- $ 680 $ (943) $ (263)
Interest expense (net) 93 -- -- 93 -- 93
Depreciation and amortization 889 32 -- 921 144
Income taxes 8 -- -- 8 -- 8
-------- -------- -------- -------- -------- --------
EBITDA $ 1,429 $ 273 $ -- $ 1,702 $ (799) $ 903
======== ======== ======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had cash and cash equivalents of $12,498,000 and
working capital (current assets in excess of current liabilities) of
$11,625,000, compared to cash and cash equivalents of $2,503,000 and working
capital of $765,000 at December 31, 2003. Net cash provided by (used in)
operating activities was $(1,103,000) for the three months ended March 31, 2004
and $922,000 for the three months ended March 31, 2003.
Net cash used in investing activities was $686,000 for the three months
ended March 31, 2004 compared with $215,000 for the three months ended March 31,
2003. Included in net cash used in investing activities for the three months
ended March 31, 2004 was $494,000 in capital expenditures largely related to the
ongoing process of converting our NTN iTV Network installed customer base to the
new VSAT satellite technology. The two components of net cash used in investing
activities for the three months ended March 31, 2003 were $154,000 of capital
expenditures and $61,000 of software development expenditures.
Net cash provided by financing activities was $11,782,000 for the three
months ended March 31, 2004 compared to $645,000 for the three months ended
March 31, 2003. The cash provided by financing activities for the three months
ended March 31, 2004 included $13,001,000 of proceeds from our equity offering
in January 2004 and $101,000 from the exercise of stock options and warrants.
These proceeds were partially offset by $1,000,000 of principal payments on the
revolving line of credit, $276,000 of principal payments on notes payable and
$44,000 of principal payments on capital leases. In the first three months of
2003, we raised $975,000 in net proceeds from an investment by Robert Bennett, a
related party and $25,000 from the exercise of stock options and warrants.
16
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 (Roth) acted as placement
agent in the offering. After commissions and expenses, the net proceeds of this
offering were 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. Roth received a warrant for
236,619 shares with an exercise price of $3.91 per share as part of their
compensation as underwriter of this offering. The shares underlying this warrant
have not yet been registered.
FUTURE FINANCING NEEDS
In light of the recent completion of the January 2004 financing, it is
unlikely that we will require additional financing in the next twelve months.
Our capital requirements over the next twelve months 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 the next twelve months.
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 over the next twelve months based
on the above low growth scenario. We expect the level of expenditures in
Buzztime to increase over the next twelve months 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 of our network transmissions 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
March 31, 2004, approximately 26% 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 require a significant amount of capital
investment. The previous owner did not convert the Canadian customer base from
the older, DOS-based platform to our newer, Windows-based DITV Network, which we
believe adversely affected growth and licensing revenue in that market. To
address future growth strategies in Canada, 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.
17
We believe that NTN Wireless will continue to generate working capital
requirements to purchase inventories in advance of projected sales. No
significant levels of fixed asset additions are expected in this segment for the
next twelve months. Given the assumption that this segment's current level of
profitability continues over the next twelve months, this segment should cover
its working capital requirements over that period.
Software Solutions currently requires ongoing capital resources to cover its
operating losses. It is likely that Software Solutions will require $1 to $2
million of working capital over the next twelve months. The current activities
of the segment do not require significant fixed asset additions. However, we are
considering entering into a trial agreement with a customer to handle an
expanded set of support services. This trial agreement carries capital
requirements of approximately $200,000 and, if successful, should increase the
profitability of this segment in 2005 and beyond.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to, stock market fluctuations, interest
rates and currency exchange rates. As of March 31, 2004, we owned common stock
of an Australian company that is subject to market risk. At March 31, 2004, the
carrying value of this investment was $199,000, which is net of a $618,000
unrealized loss. This investment is exposed to further market risk in the future
based on the operating results of the Australian company and stock market
fluctuations. Additionally, the value of the investment is further subject to
changes in Australian currency exchange rates. At March 31, 2004, a hypothetical
10% decline in the value of the Australian dollar would result in a reduction of
$20,000 in the carrying value of the investment.
ITEM 4. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures", as such term is defined
under Exchange Act Rule 13a-14(c), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. We
have carried out an evaluation, within the 90 days prior to the date of filing
of this report, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon their evaluation and subject to the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that there were no
significant deficiencies or material weaknesses in the our disclosure controls
and procedures and therefore there were no corrective actions taken.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date we
completed our evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to litigation from time to time in the ordinary course of
our business. There can be no assurance that any or all of the following claims
will be decided in our favor and we are not insured against all claims made.
During the pendency of such claims, we will continue to incur the costs of our
legal defense.
18
INTERACTIVE NETWORK, INC.
We have been involved as a plaintiff or defendant in various previously
reported lawsuits in both the United States and Canada involving Interactive
Network, Inc. ("IN"). We reached a resolution with IN of all pending disputes in
the United States and agreed to private arbitration regarding any future
licensing, copyright or infringement issues which may arise between us. On April
14, 2004, we reached a settlement in connection with two lawsuits involving us,
our unaffiliated Canadian licensee and IN, which were filed in Canada in 1992.
The litigation involved licensing and patent infringement issues. These actions
related only to the broadcast of the NTN Network to subscribers of our Canadian
licensee and did 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. The parties have negotiated the terms of a settlement and
the trial that was scheduled to begin on April 19, 2004 has been canceled. We
recorded expense related to this matter in the first quarter of 2004, including
the settlement amount, totaling approximately $200,000.
LONG RANGE SYSTEMS
On March 21, 2003, Long Range Systems, Inc. ("LRS") filed, in the United
States District Court, Northern District of Texas, a patent infringement
complaint against our NTN Wireless subsidiary. This complaint alleged trade
dress and patent infringement and unfair competition. This complaint relates
only to our repair and replacement activities of LRS pagers, which is not a
significant percentage of our NTN Wireless business. In February 2004, LRS
amended their complaint to eliminate certain allegations relating to
infringement of its utility patent for wireless pagers. We do not believe that
this matter represents a significant level of exposure and intend to defend
vigorously.
On or about April 23, 2003, we filed a complaint in the Superior Court of
the State of California, County of San Diego, against LRS alleging defamation
and trade libel, intentional interference with prospective economic advantage,
Lanham Act (trademark violations) and California unfair competition. The case
was subsequently transferred to the United States District Court, Southern
District of California. Our complaint alleges that LRS made false statements in
its complaint and press release regarding our products 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 agreed to
relinquish its rights to the domain name and we subsequently secured
registration of www.ntnwireless.com. LRS filed a motion for change of venue
seeking to have the matter transferred to the Northern District of Texas, as
well as a motion to dismiss and a motion to strike under California's Anti-SLAPP
statute. In March 2004, the Court ruled on the motions, denying the motions to
transfer and to strike under Anti-SLAPP. Further, the Court ruled on the motion
to dismiss, granting in part dismissal of the defamation, trade libel and
intentional interference with prospective economic advantage claims and denying
the motion to dismiss on the Lanham Act and unfair competition allegations. We
intend to continue to vigorously pursue the remaining claims.
OPEN TABLE
In March 2004, we received correspondence from Open Table, Inc. ("Open
Table") alleging breach of the non-compete provisions of the Asset Purchase
Agreement entered into by and between Open Table and Breakaway International,
Inc. ("Breakaway") in February 2002. Our NTN Software Solutions, Inc. subsidiary
assumed certain obligations of Breakaway pursuant to the Asset Purchase
Agreement we entered into with Breakaway in July 2003. In March 2004, we
acknowledged receipt of the Open Table correspondence and advised Open Table
that we were investigating the allegations set forth in such correspondence. On
April 23, 2004, Open Table filed a complaint in the Superior Court of the State
of California, County of San Francisco, against NTN Communications, Inc. f/k/a
Breakaway International, Inc., alleging breach of contract, breach of implied
covenant of good faith and fair dealing, intentional interference with economic
relationship, negligent interference with economic relationship, fraud,
accounting, constructive trust and declaratory relief. We intend to complete our
investigation and to defend the action accordingly.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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 were 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. Roth Capital Partners, LLC received a warrant for
236,619 shares with an exercise price of $3.91 per share as part of their
compensation as underwriter of this offering. The shares underlying this warrant
have not yet been registered.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our annual meeting of shareholders on April 23, 2004. The following
matters were voted upon at such meeting:
1. To elect three directors to hold office until the 2007 annual meeting of
stockholders and until their respective successors are duly elected and
qualified:
ROBERT M. BENNETT
Votes in Favor.............45,084,938
Abstentions ........................0
ROBERT B. CLASEN
Votes in Favor.............40,904,338
Abstentions ........................0
ESTHER L. RODRIGUEZ
Votes in Favor.............33,469,816
Abstentions ........................0
Each of Mr. Bennett, Mr. Clasen and Ms. Rodriguez were elected as directors
to hold office until the annual meeting of stockholders in 2007 and until each
of their respective successors is duly elected and qualified. The following
directors were not subject to election and their term of office continued after
the meeting: Gary Arlen, Barry Bergsman, Vincent Carrino, Michael Fleming, Neal
Fondren and Stanley B. Kinsey.
2. To adopt the NTN Communications, Inc. 2004 Performance Incentive Plan:
Votes In Favor .............8,779,226
Votes Against .............10,544,692
Abstentions ..................566,288
Broker Non-Votes...........26,107,031
The proposal to adopt the NTN Communications, Inc. 2004 Performance
Incentive Plan was defeated.
3. To ratify the appointment of KPMG LLP as independent accountants of NTN
for the fiscal year ending December 31, 2004.
Votes In Favor ............45,149,776
Votes Against .................94,564
Abstentions ..................752,897
The proposal for ratification of the appointment of KPMG LLP was approved.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.1 Form of Common Stock Warrant by and between Roth Capital Partners,
LLC and NTN Communications, Inc. (2)
10.1 Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners and NTN Communications, Inc. (2)
10.2 Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc., and Chell Group Corporation (3)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (4)
_____________
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN Communication, Inc.'s report on
Form 8-K dated January 29, 2004 and incorporated herein by reference.
(3) Previously filed as an exhibit to NTN Communication, Inc.'s
registration statement on Form S-3, File No. 333-111538, filed on
December 24, 2003 and incorporated herein by reference.
(4) Furnished concurrently herewith.
(b) Reports on Form 8-K.
On January 7, 2004, we filed a current report on Form 8K (event date January
6, 2004) to report under Item 5. Other Events that our Buzztime Entertainment,
Inc. subsidiary and EchoStar Communications Corporation entered into an
agreement to offer Buzztime interactive TV trivia games on a subscription basis
in 2004.
On January 29, 2004, we filed a report on Form 8K (event date January 26,
2004) to report under Item 5. Other Events that we entered into a placement
agency agreement with Roth Capital Partners, LLC with respect to the offer and
sale of up to 3,943,661 shares of common stock, par value $0.005 per share, to
selected investors, which resulted in net proceeds of approximately $13.0
million, after deduction of expenses of the offering, including placement agent
fees and expenses.
On March 16, 2004, we filed a current report on Form 8K (event date March
15, 2004) to report under Item 12. Results of Operations and Financial
Conditions. The information in such report shall not be deemed "filed" with the
Securities and Exchange Commission for purposes of Section 18 of the Securities
Exchange Act of 1934 nor otherwise subject to the liabilities of that section.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: May 10, 2004 By: /s/ James B. Frakes
-------------------------------
James B. Frakes
Authorized Signatory and Chief
Financial Officer
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------
4.1 Form of Common Stock Warrant by and between Roth Capital Partners,
LLC and NTN Communications, Inc. (2)
10.1 Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners and NTN Communications, Inc. (2)
10.2 Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc., and Chell Group Corporation (3)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (4)
_____________
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN Communication, Inc.'s report on
Form 8-K dated January 29, 2004 and incorporated herein by reference.
(3) Previously filed as an exhibit to NTN Communication, Inc.'s
registration statement on Form S-3, File No. 333-111538, filed on
December 24, 2003 and incorporated herein by reference.
(4) Furnished concurrently herewith.