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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 June 30, 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 August 4, 2004, the registrant had outstanding 52,852,000 shares of
common stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
JUNE 30,
2004 DECEMBER 31,
ASSETS (PLEDGED) (UNAUDITED) 2003
-------------- --------------
Current assets:
Cash and cash equivalents $ 10,817,000 $ 2,503,000
Accounts receivable, net 2,982,000 2,324,000
Investment available-for-sale 170,000 189,000
Inventory 446,000 404,000
Deposits on broadcast equipment 66,000 34,000
Deferred costs 692,000 493,000
Prepaid expenses and other current assets 1,027,000 757,000
-------------- --------------
Total current assets 16,200,000 6,704,000
Broadcast equipment and fixed assets, net 4,947,000 4,398,000
Software development costs, net 729,000 676,000
Deferred costs 617,000 505,000
Intangible assets, net 4,319,000 4,800,000
Goodwill 3,575,000 3,490,000
Other assets 57,000 57,000
-------------- --------------
Total assets $ 30,444,000 $ 20,630,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,497,000 $ 612,000
Accrued expenses 1,916,000 3,174,000
Sales tax payable 226,000 219,000
Income taxes payable 12,000 39,000
Obligations under capital leases 140,000 165,000
Equipment note payable 85,000 46,000
Deferred revenue - Buzztime 194,000 206,000
Deferred revenue 1,649,000 1,478,000
-------------- --------------
Total current liabilities 5,719,000 5,939,000
Obligations under capital leases, excluding current portion 118,000 181,000
Revolving line of credit -- 1,000,000
Deferred revenue, excluding current portion 294,000 262,000
Equipment note payable, excluding current portion 279,000 184,000
-------------- --------------
Total liabilities 6,410,000 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 June 30,
2004 and December 31, 2003 1,000 1,000
Common stock, $.005 par value, 84,000,000 shares
authorized; 52,832,000 and 48,623,000 shares issued and
outstanding at June 30, 2004 and December 31, 2003,
respectively 264,000 242,000
Additional paid-in capital 108,633,000 95,239,000
Accumulated deficit (84,158,000) (81,790,000)
Accumulated other comprehensive loss (706,000) (628,000)
-------------- --------------
Total shareholders' equity 24,034,000 13,064,000
-------------- --------------
Total liabilities and shareholders' equity $ 30,444,000 $ 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 SIX MONTHS ENDED
-------------------------------- --------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Hospitality Technologies revenues $ 8,477,000 $ 6,640,000 $ 17,276,000 $ 13,970,000
Buzztime service revenues 39,000 58,000 82,000 65,000
Other revenues 12,000 3,000 14,000 5,000
------------- ------------- ------------- -------------
Total revenues 8,528,000 6,701,000 17,372,000 14,040,000
------------- ------------- ------------- -------------
Operating expenses:
Direct operating costs (includes depreciation of
$636,000, $728,000, $1,240,000 and
$1,471,000 for the three months ended June 30,
2004 and 2003 and for the six months
ended June 30, 2004 and 2003, respectively) 2,821,000 2,488,000 5,922,000 5,492,000
Selling, general and administrative 6,585,000 4,631,000 13,162,000 8,739,000
Depreciation and amortization 316,000 257,000 652,000 579,000
Research and development 88,000 87,000 172,000 164,000
------------- ------------- ------------- -------------
Total operating expenses 9,810,000 7,463,000 19,908,000 14,974,000
------------- ------------- ------------- -------------
Operating loss (1,282,000) (762,000) (2,536,000) (934,000)
------------- ------------- ------------- -------------
Other income (expense):
Interest income 23,000 3,000 42,000 3,000
Interest expense (28,000) (74,000) (66,000) (167,000)
Other income 225,000 -- 225,000 --
------------- ------------- ------------- -------------
Total other income (expense) 220,000 (71,000) 201,000 (164,000)
------------- ------------- ------------- -------------
Loss before minority interest in loss of consolidated
subsidiary and income taxes (1,062,000) (833,000) (2,335,000) (1,098,000)
Minority interest in loss of consolidated subsidiary -- -- -- 10,000
------------- ------------- ------------- -------------
Net loss before income taxes (1,062,000) (833,000) (2,335,000) (1,088,000)
Provision for income taxes 12,000 7,000 33,000 15,000
------------- ------------- ------------- -------------
Net loss $ (1,074,000) $ (840,000) $ (2,368,000) $ (1,103,000)
============= ============= ============= =============
Net loss per common share - basic and diluted: $ (0.02) $ (0.02) $ (0.05) $ (0.03)
============= ============= ============= =============
Weighted average shares outstanding - basic and diluted 52,703,000 44,756,000 52,290,000 43,413,000
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003
------------- -------------
Cash flows provided by operating activities:
Net loss $ (2,368,000) $ (1,103,000)
Adjustments to reconcile net loss to
net cash provided (used in) by operating activities:
Depreciation and amortization 1,892,000 2,050,000
Provision for doubtful accounts 219,000 289,000
Non-cash stock-based compensation charges 94,000 91,000
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 18,000 43,000
Changes in assets and liabilities:
Restricted cash -- (169,000)
Accounts receivable (884,000) (30,000)
Inventory (42,000) (83,000)
Deferred costs (311,000) 106,000
Prepaid expenses and other assets (274,000) (139,000)
Accounts payable and accrued expenses (336,000) 358,000
Income taxes payable (27,000) (14,000)
Deferred revenue 193,000 (616,000)
------------- -------------
Net cash provided by (used in) operating activities (1,826,000) 790,000
------------- -------------
Cash flows from investing activities:
Capital expenditures (1,218,000) (632,000)
Acquisition of businesses (82,000) --
Software development expenditures (194,000) --
Deposits on broadcast equipment (32,000) (108,000)
------------- -------------
Net cash used in investing activities (1,526,000) (740,000)
------------- -------------
Cash flows from financing activities:
Principal payments on capital leases (86,000) (115,000)
Principal payments on equipment notes payable (571,000) (244,000)
Borrowings from revolving line of credit -- 13,260,000
Principal payments on revolving line of credit (1,000,000) (13,724,000)
Proceeds from issuance of common stock,
net of offering expenses 13,001,000 3,748,000
Proceeds from exercise of stock options and warrants 320,000 258,000
------------- -------------
Net cash provided by financing activities 11,664,000 3,183,000
------------- -------------
Net increase in cash and cash equivalents 8,312,000 3,233,000
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 $ 10,817,000 $ 3,810,000
============= =============
See accompanying notes to unaudited consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Continued)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003
-------------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 66,000 $ 152,000
=========== ===========
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 $ 674,000 $ 499,000
=========== ===========
Unrealized holding loss on investments $ 19,000 $ 10,000
=========== ===========
Issuance of treasury stock in payment of board compensation $ -- $ 44,000
=========== ===========
Issuance of common stock in payment of dividends $ 8,000 $ 8,000
=========== ===========
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
=========== ===========
Issuance of common stock for licensed technology $ -- $1,000,000
=========== ===========
Costs of acquisition $ 36,000 $ 633,000
=========== ===========
See accompanying notes to unaudited consolidated financial statements
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 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 and six months
ended June 30, 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. Pro forma compensation
expense 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss As reported...................................... $ 1,074,000 $ 840,000 $ 2,368,000 $ 1,103,000
Add: stock-based employee compensation expense
included in reported net loss, net of
related tax effects......................... -- (2,000) (2,000) (4,000)
Deduct: stock-based employee compensation
expense, net of related tax effects......... 417,000 256,000 777,000 542,000
------------- ------------- ------------- -------------
Pro forma net loss............................... $ 1,491,000 $ 1,094,000 $ 3,143,000 $ 1,641,000
Basic and diluted As reported...................................... $ 0.02 $ 0.02 $ 0.05 $ 0.03
net loss per share Pro forma........................................ $ 0.03 $ 0.02 $ 0.06 $ 0.04
6
The per share weighted-average fair value of stock options granted during
the three months ended June 30, 2004 and 2003 was $2.02, and $1.09,
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 3.29%, expected volatility of 88.25%, and expected life of 4.0 years;
and 2003 -- dividend yield of 0%, risk-free interest rate of 1.77%, expected
volatility of 90.90%, and expected life of 3.0 years. In compliance with APB No.
25, we expensed $0 and $2,000 for the three months ended June 30, 2004 and 2003,
associated with the grants of 80,000 options in 2000 below market value pursuant
to the Option Plan.
The per share weighted-average fair value of stock options granted during
the six months ended June 30, 2004 and 2003 was $2.61, 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: 2004 -- dividend yield of 0%, risk-free interest rate of 3.04%,
expected volatility of 90.86%, and expected life of 4.7 years; and 2003 --
dividend yield of 0%, risk-free interest rate of 2.68%, expected volatility of
112.2%, and expected life of 4.2 years. In compliance with APB No. 25, we
expensed $2,000 and $4,000 for the six months ended June 30, 2004 and 2003,
respectively, associated with the grants of 80,000 options in 2000 below market
value pursuant to the Option Plan.
3. LOSS PER SHARE
For the three months ended June 30, 2004 and 2003 and for the six months
ended June 30, 2004 and 2003, options, warrants, convertible preferred stock and
convertible notes representing approximately 12,095,000, 12,244,000, 11,936,000
and 12,100,000 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 Communications, Inc. ("NTN Wireless") and NTN
Software Solutions, Inc. ("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
our hardware and software enterprise solutions. NTN Hospitality Technologies
revenues comprised over 99% of our total revenue for the six months ended June
30, 2004. 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. 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.
7
The following tables set forth certain information regarding our segments
and other operations:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues
NTN iTV Network (includes "other revenues") $ 6,029,000 $ 5,728,000 $ 12,345,000 $ 11,222,000
NTN Wireless 1,551,000 915,000 3,090,000 2,753,000
Software Solutions 909,000 -- 1,855,000 --
------------- ------------- ------------- -------------
NTN Hospitality Technologies division 8,489,000 6,643,000 17,290,000 13,975,000
Buzztime 39,000 58,000 82,000 65,000
------------- ------------- ------------- -------------
Total revenue $ 8,528,000 $ 6,701,000 $ 17,372,000 $ 14,040,000
============= ============= ============= =============
Operating income (loss)
NTN iTV Network $ 212,000 $ 410,000 $ 458,000 $ 950,000
NTN Wireless 115,000 (224,000) 165,000 17,000
Software Solutions (510,000) -- (1,079,000) --
------------- ------------- ------------- -------------
NTN Hospitality Technologies division (183,000) 186,000 (456,000) 967,000
Buzztime (1,099,000) (948,000) (2,080,000) (1,901,000)
------------- ------------- ------------- -------------
Operating loss $ (1,282,000) $ (762,000) $ (2,536,000) $ (934,000)
============= ============= ============= =============
Net income (loss)
NTN iTV Network $ 420,000 $ 332,000 $ 626,000 $ 771,000
NTN Wireless 115,000 (224,000) 165,000 17,000
Software Solutions (510,000) -- (1,079,000) --
------------- ------------- ------------- -------------
NTN Hospitality Technologies division 25,000 108,000 (288,000) 788,000
Buzztime (1,099,000) (948,000) (2,080,000) (1,891,000)
------------- ------------- ------------- -------------
Net loss $ (1,074,000) $ (840,000) $ (2,368,000) $ (1,103,000)
============= ============= ============= =============
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. In March 2004, the Court ruled on the
motion filed by LRS to dismiss our complaint, 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 vigorously pursue the remaining claims.
8
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.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
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 amounts 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 December 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 included in deferred
revenue-Buzztime on the accompanying condensed consolidated balance sheet. The
other $44,000 of deferred revenue - Buzztime on the accompanying condensed
consolidated balance sheet relates to $24,000 of deferred revenue arising from
our agreement with Digeo Interactive LLC (Digeo) and $20,000 of deferred revenue
relating to our wireless cell phone agreement with Airborne Entertainment.
7. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other 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. Revenue and expenses were translated using the average exchange rates for
the reporting period. For the three and six month periods ended June 30, 2004
and 2003, the components of accumulated other comprehensive loss were as
follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Beginning balance $(633,000) $(635,000) $(628,000) $(639,000)
Unrealized loss in investment
available-for-sale (29,000) (14,000) (19,000) (10,000)
Foreign currency translation adjustments (44,000) -- (59,000) --
---------- ---------- ---------- ----------
Ending balance $(706,000) $(649,000) $(706,000) $(649,000)
========== ========== ========== ==========
The comprehensive losses for the three and six month periods ended June 30 was
as follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Net loss $(1,074,000) $ (840,000) $(2,368,000) $(1,103,000)
Comprehensive loss (73,000) (14,000) (78,000) (10,000)
------------ ------------ ------------ ------------
Comprehensive net loss $(1,147,000) $ (854,000) $(2,446,000) $(1,113,000)
============ ============ ============ ============
9
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. LITIGATION SETTLEMENT
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.
10
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 JUNE 30,
2004 2003
-------------------- ---------------------
Revenues
- --------
NTN Hospitality Technologies division (includes "other revenues") $ 8,489,000 99% $ 6,643,000 99%
Buzztime ........................................................ 39,000 1% 58,000 1%
----------- --- ----------- ---
Total ................................................. $ 8,528,000 100% $ 6,701,000 100%
=========== === =========== ===
Operating Income (Loss)
- -----------------------
NTN Hospitality Technologies division ........................... $ (183,000) $ 186,000
Buzztime ........................................................ (1,099,000) (948,000)
------------ ------------
Total ................................................. $(1,282,000) $ (762,000)
============ ============
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.
11
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:
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, developing
new dealer relationships 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 a multi-player interactive television entertainment
game 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
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 (loss). The amount of
depreciation expense in any fiscal year is largely related to the
estimated life of our handheld, wireless Playmaker(R) keypad 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.
12
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 inability 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 realizable 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 instances when
in order to continue to use the licensed software, customers are
required to annually renew the PCS contracts, since vendor specific
objective evidence does not exist for this PCS, we recognize the
entire arrangement fee ratably over the life of the contract. In
instances when customers are not required to annually renew the PCS
contracts in order to continue to use the licensed software, we
recognize the revenue from the software license at the time the
software is shipped to the customer and we recognize the revenue
associated with PCS ratably over the term of the support agreement.
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 NOTE
18 - 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 JUNE 30, 2004 AND JUNE 30, 2003
Operations for the three months ended June 30, 2004 resulted in a net loss
of $1,074,000 compared to a net loss of $840,000 for the three months ended June
30, 2003.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$1,846,000, or 27.8%, to $8,489,000 for the three months ended June 30, 2004
from $6,643,000 for the three months ended June 30, 2003. For the purpose of
this analysis, the NTN iTV Network's revenues include $12,000 and $3,000 of
"other" revenues for the three months ended June 30, 2004 and 2003,
respectively. The revenue contribution from the three operating segments of the
division for the three months ended June 30, 2004 and 2003 are shown in the
following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
Three Months Ended June 30,
---------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $6,029,000 $5,728,000 $ 301,000
NTN Wireless 1,551,000 915,000 636,000
Software Solutions 909,000 -- 909,000
---------- ---------- ----------
Total Revenue of Division $8,489,000 $6,643,000 $1,846,000
========== ========== ==========
13
Within the NTN iTV Network there are several revenue contributors,
including our subscription revenue from core hospitality operations, Canadian
license revenue (which ceased as of December 15, 2003), revenue from our
Canadian operations (which commenced on December 15, 2003), advertising revenue
and installation revenue. The primary revenue components are broken out in the
following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
Three Months Ended June 30,
---------------------------
2004 2003 Change
---- ---- ------
U.S. Subscription Revenues $5,084,000 $4,733,000 $ 351,000
Canadian License Revenue -- 235,000 (235,000)
Revenue from Canadian Operations 776,000 -- 776,000
Advertising Revenue 24,000 204,000 (180,000)
Installation Revenue 145,000 556,000 (411,000)
----------- ----------- -----------
NTN iTV Network $6,029,000 $5,728,000 $ 301,000
=========== =========== ===========
As noted in the above table, our subscription revenue from core hospitality
operations increased by $351,000, or 7.4%, in the second quarter of 2004 due to
an increase in net site count. 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 three months ended June 30, 2004, the NTN iTV Network generated
advertising revenue of approximately $24,000 compared to approximately $204,000
in the three months ended June 30, 2003. This decrease was due to a major
advertising campaign in the 2003 period without a comparable campaign in the
2004 period.
Installation revenue associated with installing new customer locations
decreased $411,000 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 estimated 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. In the three months
ended June 30, 2004, we added a net number of 79 new sites in the United States
compared to a net number of 4 new domestic sites in the three months ended June
30, 2003. This site count increase was the largest second quarter net addition
of sites in 9 years.
The NTN iTV Network customer site count in the United States at June 30,
2004 was 3,130. This was an increase of 68 sites over June 30, 2003. Our
Canadian site count at June 30, 2004 was approximately 338.
Revenues from NTN Wireless increased by $636,000 from $915,000 in the three
months ended June 30, 2003 to $1,551,000 in the three months ended June 30,
2004. This increase resulted from a general increase in customer activity.
Revenues from Software Solutions were $909,000 in the three months ended
June 30, 2004. There were no Software Solutions revenues in the comparable 2003
period since we acquired the operations of Breakaway International on July 31,
2003.
Buzztime service revenues decreased $19,000 to $39,000 in the three months
ended June 30, 2004 from $58,000 in the three months ended June 30, 2003. The
decrease was primarily due to $46,000 in revenues recognized under a development
agreement with a major cable operator in the three months ended June 30, 2003
without any corresponding revenues in the three months ended June 30, 2004.
Excluding revenues from the development agreement, Buzztime's service revenues
increased by $27,000. That pro forma increase was primarily due to revenues from
a Canadian satellite operator and licensing revenues from SusCom.
As a result of the above factors, NTN's consolidated revenues increased
$1,827,000, or 27.3%, to $8,528,000 in the three months ended June 30, 2004 from
$6,701,000 in the three months ended June 30, 2003.
14
OPERATING EXPENSES
Direct operating costs increased $333,000, or 13.4%, to $2,821,000 in the
three months ended June 30, 2004 from $2,488,000 in the three months ended June
30, 2003. The following table compares the direct costs for each of our
operating segments between the three months ended June 30, 2004 and 2003:
DIRECT OPERATING COSTS
Three Months Ended June 30,
---------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $1,714,000 $1,749,000 $ (35,000)
NTN Wireless 883,000 568,000 315,000
Software Solutions 46,000 -- 46,000
----------- ----------- -----------
Hospitality Technologies division 2,643,000 2,317,000 326,000
Buzztime 178,000 171,000 7,000
----------- ----------- -----------
Consolidated $2,821,000 $2,488,000 $ 333,000
=========== =========== ===========
The primary drivers in the $333,000 increase in our direct operating costs
were the $315,000 increase in NTN Wireless, the $46,000 increase in Software
Solutions and $35,000 decrease in NTN iTV Network. As noted above, we did not
operate the Software Solutions segment in the 2003 period.
The $315,000 increase in the direct operating costs of NTN Wireless was
largely related to the cost of goods sold associated with the NTN Wireless
revenue increase of $636,000 noted above. Our gross margin in the NTN Wireless
segment in the three months ended June 30, 2004 was 43%, a 5% increase over the
38% gross margin we recorded in the three months ended June 30, 2003. This gross
margin increase was due to reduced costs on our NTN Wireless inventories.
The $35,000 decrease in the direct operating costs of our core NTN iTV
Network segment was primarily due to an approximately $82,000 increase in direct
operating costs related to the ongoing conversion of our customer sites to our
new two-way Very Small Aperture Technology ("VSAT"). These VSAT-related expenses
were planned items. That $82,000 VSAT-related increase was offset by a variety
of other factors, including a reduction of telephone expenses of approximately
$130,000. 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 base to VSAT.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) increased $1,954,000 or
42.2%, to $6,585,000 in the three months ended June 30, 2004 from $4,631,000 in
the three months ended June 30, 2003. The following table compares the selling,
general and administrative expenses for each of our operating segments between
the three months ended June 30, 2004 and 2003:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended June 30,
---------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $ 3,949,000 $ 3,406,000 $ 543,000
NTN Wireless 533,000 538,000 (5,000)
Software Solutions 1,278,000 -- 1,278,000
------------ ------------ ------------
Hospitality Technologies division 5,760,000 3,944,000 1,816,000
Buzztime 825,000 687,000 138,000
------------ ------------ ------------
Consolidated $ 6,585,000 $ 4,631,000 $ 1,954,000
============ ============ ============
15
SG&A expenses in the three months ended June 30, 2004 included the SG&A
expenses of Software Solutions and NTN Canada compared to the three months ended
June 30, 2003, which did not include the operations of either of those units.
The $543,000 SG&A increase in the NTN iTV Network segment was partially due to
$338,000 of SG&A expenses in our new NTN Canada subsidiary. The remainder of the
SG&A increase of $205,000 in the NTN iTV Network came from a variety of items
including increased facilities expense, increased legal and professional fees,
including Sarbanes-Oxley-related costs, and increased salaries and benefits. The
increases in facilities expenses and salaries and related expenses were related
to the hiring of additional personnel in the United States.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
increased $59,000, or 23.0%, to $316,000 in the three months ended June 30, 2004
from $257,000 in the three months ended June 30, 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 $1,000 to $88,000 in the three
months ended June 30, 2004 from $87,000 in the three months ended June 30, 2003,
due primarily to projects to continue development of new technologies for the
iTV network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the three months ended June 30, 2004 was $23,000
compared to $3,000 in the three months ended June 30, 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.
Interest expense decreased $46,000, or 62.2%, to $28,000 in the three
months ended June 30, 2004, compared to $74,000 in the three months ended June
30, 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.
Other income was $225,000 in the three months ended June 30, 2004. This
other income arose from the settlement of a derivative securities lawsuit. There
was no other income in the three months ended June 30, 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 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 $12,000 in the three months ended
June 30, 2004. This was a $5,000 increase over the $7,000 provision for income
taxes recorded in the three months ended June 30, 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 $328,000 to negative $105,000 in the three months
ended June 30, 2004 from EBITDA of $223,000 in the three months ended June 30,
2003. This EBITDA decrease was primarily due to the $234,000 increase in our net
loss in 2004 coupled with a decrease in depreciation and amortization expense of
$33,000.
16
The following table reconciles our net loss per GAAP to EBITDA:
THREE MONTHS ENDED
JUNE 30
------------------------------
2004 2003
------------ ------------
EBITDA CALCULATION
Net loss per GAAP $(1,074,000) $ (840,000)
Interest expense (net) 5,000 71,000
Depreciation and amortization 952,000 985,000
Income taxes 12,000 7,000
------------ ------------
EBITDA $ (105,000) $ 223,000
============ ============
On a segment basis, our segments generated EBITDA levels as presented below:
THREE MONTHS ENDED
($000) JUNE 30, 2004
---------------------------------------------------------------------------
EBITDA CALCULATION: NTN ITV NTN SOFTWARE HOSP. TECH.
NETWORK WIRELESS SOLUTIONS DIV. BUZZTIME TOTAL
------- -------- --------- ---- -------- -----
Net income (loss) $ 420 $ 115 $ (510) $ 25 $(1,099) $(1,074)
Interest expense (net) 5 -- -- 5 -- 5
Depreciation and amortization 704 19 94 817 135 952
Income taxes 12 -- -- 12 -- 12
-------- -------- -------- -------- -------- --------
EBITDA $ 1,141 $ 134 $ (416) $ 859 $ (964) $ (105)
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED
($000) JUNE 30, 2003
---------------------------------------------------------------------
EBITDA CALCULATION: NTN ITV NTN SOFTWARE HOSP. TECH.
NETWORK WIRELESS SOLUTIONS DIV. BUZZTIME TOTAL
------- -------- --------- ---- -------- -----
Net income (loss) $ 332 $ (224) $ -- $ 108 $ (948) $ (840)
Interest expense (net) 71 -- -- 71 -- 71
Depreciation and amortization 804 34 -- 838 147 985
Income taxes 7 -- -- 7 -- 7
------- ------- ------ ------- ------- -------
EBITDA $1,214 $ (190) $ -- $1,024 $ (801) $ 223
======= ======= ====== ======= ======= =======
SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
Operations for the six months ended June 30, 2004 resulted in a net loss of
$2,368,000 compared to a net loss of $1,103,000 for the six months ended June
30, 2003.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$3,315,000, or 23.7%, to $17,290,000 for the six months ended June 30, 2004 from
$13,975,000 for the six months ended June 30, 2003. For the purpose of this
analysis, the NTN Hospitality Technologies division's revenues include $14,000
and $5,000 of "other" revenues for the six months ended June 30, 2004 and 2003,
respectively. The revenue contribution from the three operating segments of the
division for the six months ended June 30, 2004 and 2003 are shown in the
following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
Six Months Ended June 30,
-------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $12,345,000 $11,222,000 $ 1,123,000
NTN Wireless 3,090,000 2,753,000 337,000
Software Solutions 1,855,000 -- 1,855,000
----------- ----------- -----------
Total Revenue of Division $17,290,000 $13,975,000 $ 3,315,000
=========== =========== ===========
17
Within the NTN iTV Network there are several revenue contributors,
including our subscription revenue from core hospitality operations, Canadian
license revenue (which ceased as of December 15, 2003), revenue from our
Canadian operations (which commenced on December 15, 2003), advertising revenue
and installation revenue. The primary revenue components are broken out in the
following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
Six Months Ended June 30,
-------------------------
2004 2003 Change
---- ---- ------
U.S. Subscription Revenues $10,140,000 $ 9,598,000 $ 542,000
Canadian License Revenue -- 528,000 (528,000)
Revenue from Canadian Operations 1,693,000 -- 1,693,000
Advertising Revenue 194,000 223,000 (29,000)
Installation Revenue 318,000 873,000 (555,000)
------------ ------------ ------------
NTN iTV Network $12,345,000 $11,222,000 $ 1,123,000
============ ============ ============
As noted in the above table, our subscription revenue from core hospitality
operations increased by $542,000, or 5.6%, in the six months ended June 30, 2004
due to an increase in net site count. 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 six months of 2004, the NTN iTV Network generated advertising
revenue of approximately $194,000 compared to approximately $223,000 in the
first six months of 2003. This decrease was due to a major advertising campaign
in the 2003 period without a comparable campaign in the 2004 period. This
shortfall was partially offset by advertising revenues recorded by NTN Canada.
Installation revenue associated with installing new customer locations
decreased $555,000, or 63.6%. This was primarily due to deferred revenue
associated with prior year installations becoming fully amortized. To a lesser
extent, 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 in order to grow our customer base. 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 five net new sites in
the first six months of 2004 compared to a decrease of 109 net new sites in the
first six months of 2003.
Revenues from NTN Wireless increased by $337,000 from $2,753,000 in the
first six months of 2003 to $3,090,000 in the first six 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. This revenue growth resulted from a general increase in customer
activity.
Revenues from Software Solutions were $1,855,000 in the first six 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.
Buzztime service revenues increased $17,000 to $82,000 in the first six
months of 2004 from $65,000 in the first six 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
$3,333,000, or 23.7%, to $17,372,000 in the first six months of 2004 from
$14,040,000 in the first six months of 2003.
18
OPERATING EXPENSES
Direct operating costs increased $430,000, or 7.8%, to $5,922,000 in the
first six months of 2004 from $5,492,000 in the first six months of 2003. The
following table compares the direct operating costs for each of our operating
segments for the six months ended June 30, 2004 and 2003:
DIRECT OPERATING COSTS
Six Months Ended June 30,
-------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $3,486,000 $3,409,000 $ 77,000
NTN Wireless 1,893,000 1,737,000 156,000
Software Solutions 187,000 -- 187,000
----------- ----------- -----------
Hospitality Technologies division 5,566,000 5,146,000 420,000
Buzztime 356,000 346,000 10,000
----------- ----------- -----------
Consolidated $5,922,000 $5,492,000 $ 430,000
=========== =========== ===========
The three drivers in the $430,000 increase in our direct operating costs
were the $187,000 increase in Software Solutions, the $156,000 increase in NTN
Wireless and the $77,000 increase in the iTV Network. As noted above, we did not
operate the Software Solutions segment in the 2003 period.
The $156,000 increase in the direct operating costs of NTN Wireless was
largely related to the cost of goods sold associated with the NTN Wireless
revenue increase of $337,000 noted above. Our gross margin in the NTN Wireless
segment in the first six months of 2004 was 39%, a 2% increase over the 37%
gross margin we recorded in the first six months of 2003. This gross margin
increase was due to reduced costs on our NTN Wireless inventories.
The $77,000 increase in the direct operating costs of our NTN iTV Network
segment was primarily due to a $199,000 increase in direct operating costs
related to the ongoing conversion of our customer sites to our new two-way VSAT
technology. These VSAT-related expenses were planned items. The $199,000
VSAT-related increase was partially offset by a variety of other factors,
including a reduction of telephone expenses of approximately $227,000. 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 base to VSAT.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses increased $4,423,000 or
50.6%, to $13,162,000 in the first six months of 2004 from $8,739,000 in the
first six months of 2003. The following table compares the SG&A expenses for
each of our operating segments for the six months ended June 30, 2004 and 2003:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Six Months Ended June 30,
-------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $ 8,087,000 $ 6,478,000 $ 1,609,000
NTN Wireless 965,000 933,000 32,000
Software Solutions 2,556,000 -- 2,556,000
----------- ----------- -----------
Hospitality Technologies division 11,608,000 7,411,000 4,197,000
Buzztime 1,554,000 1,328,000 226,000
----------- ----------- -----------
Consolidated $13,162,000 $ 8,739,000 $ 4,423,000
=========== =========== ===========
19
SG&A expenses in the first six months of 2004 included the SG&A expenses of
Software Solutions and NTN Canada compared to the first six months of 2003,
which did not include the operations of either of those units as the units were
acquired in July and December, respectively. The $1,609,000 SG&A increase in the
NTN iTV Network segment was partially due to $759,000 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 of $650,000 in the NTN
iTV Network came from a variety of items including increased facilities expense,
increased legal and professional fees, including Sarbanes-Oxley-related costs,
and increased salaries and benefits. The increases in facilities expenses and
salaries and related expenses were related to the hiring of additional personnel
in the United States.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
increased $73,000, or 12.6%, to $652,000 in the first six months of 2004 from
$579,000 in the first six 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 $8,000 to $172,000 in the first
six months of 2004 from $164,000 in the first six months of 2003, due primarily
to projects to continue development of new technologies for the iTV network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the first six months of 2004 was $42,000 compared to
$3,000 in the first six 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.
Interest expense decreased $101,000, or 60.5%, to $66,000 in the first six
months of 2004, compared to $167,000 in the first six 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.
Other income was $225,000 in the six months ended June 30, 2004. This other
income arose from the settlement of a derivative securities lawsuit. There was
no other income in the six months ended June 30, 2003.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary was $10,000 in the
first six 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 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 $33,000 in the first six months
of 2004. This was an $18,000 increase over the $15,000 provision for income
taxes recorded in the first six 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
EBITDA is not intended to represent a measure of performance in accordance
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.
20
Our EBITDA decreased by $1,545,000 to negative $419,000 in the first six
months of 2004 from EBITDA of $1,126,000 in the first six months of 2003. This
EBITDA decrease was primarily due to the $1,265,000 increase in our net loss in
2004 coupled with a decrease in depreciation expense of $158,000.
The following table reconciles our net loss per GAAP to EBITDA:
SIX MONTHS ENDED
JUNE 30
------------------------------
2004 2003
------------ ------------
EBITDA CALCULATION
Net loss per GAAP $(2,368,000) $(1,103,000)
Interest expense (net) 24,000 164,000
Depreciation and amortization 1,892,000 2,050,000
Income taxes 33,000 15,000
------------ ------------
EBITDA $ (419,000) $ 1,126,000
============ ============
On a segment basis, our segments generated EBITDA levels as presented below:
SIX MONTHS ENDED
($000) JUNE 30, 2004
----------------------------------------------------------------------------
EBITDA CALCULATION: NTN ITV NTN SOFTWARE HOSP. TECH.
NETWORK WIRELESS SOLUTIONS DIV. BUZZTIME TOTAL
------- -------- --------- ---- -------- -----
Net income (loss) $ 626 $ 165 $(1,079) $ (288) $(2,080) $(2,368)
Interest expense (net) 24 -- -- 24 -- 24
Depreciation and amortization 1,389 55 192 1,636 256 1,892
Income taxes 33 -- -- 33 -- 33
-------- -------- -------- -------- -------- --------
EBITDA $ 2,072 $ 220 $ (887) $ 1,405 $(1,824) $ (419)
======== ======== ======== ======== ======== ========
SIX MONTHS ENDED
($000) JUNE 30, 2003
-------------------------------------------------------------------------
EBITDA CALCULATION: NTN ITV NTN SOFTWARE HOSP. TECH.
NETWORK WIRELESS SOLUTIONS DIV. BUZZTIME TOTAL
------- -------- --------- ---- -------- -----
Net income (loss) $ 771 $ 17 $ -- $ 788 $(1,891) $(1,103)
Interest expense (net) 164 -- -- 164 -- 164
Depreciation and amortization 1,692 67 -- 1,759 291 2,050
Income taxes 15 -- -- 15 -- 15
------- ------- ------ ------- ------- -------
EBITDA $ 2,642 $ 84 $ -- $ 2,726 $(1,600) $ 1,126
======= ======= ====== ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had cash and cash equivalents of $10,817,000 and
working capital (current assets in excess of current liabilities) of
$10,481,000, 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 $(1,826,000) for the six months ended June 30, 2004 and
$790,000 for the six months ended June 30, 2003. Depreciation, amortization and
other non-cash charges offset the net loss in each period.
Net cash used in investing activities was $1,526,000 for the six months
ended June 30, 2004 compared with $740,000 for the six months ended June 30,
2003. Included in net cash used in investing activities for the six months ended
June 30, 2004 were $1,218,000 in capital expenditures largely related to the
ongoing process of converting our NTN iTV Network installed customer base to the
new VSAT satellite technology and $194,000 of capitalized software development
expenditures. The two components of net cash used in investing activities for
the six months ended June 30, 2003 were $632,000 of capital expenditures and
$108,000 of deposits on broadcast equipment.
21
Net cash provided by financing activities was $11,664,000 for the six
months ended June 30, 2004 compared to $3,183,000 for the six months ended June
30, 2003. The cash provided by financing activities for the six months ended
June 30, 2004 included $13,001,000 of net proceeds from our equity offering in
January 2004 and $320,000 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, $571,000 of principal payments on equipment notes
payable and $86,000 of principal payments on capital leases. In the first six
months of 2003, we raised $3,748,000 in net proceeds from investments by Media
General, Inc. and Robert Bennett, both related parties and $258,000 from the
exercise of stock options and warrants. These proceeds were partially offset by
$464,000 of net principal payments on the revolving line of credit, $244,000 of
principal payments on equipment notes payable and $115,000 of principal payments
on capital leases.
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 and Exchange Act of 1934. 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.
While 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 MSOs 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
currently scheduled to end in February 2005; however, we are in negotiations to
extend the expiration date. We have entered into equipment purchase and
satellite service agreements to convert the division to a much higher speed,
two-way VSAT satellite technology over the two-year period ending February 2005.
We are also discussing the extension of this two-year conversion period. We
entered into these agreements with the same reseller of satellite services that
provided the FM2 satellite platform to us. This anticipated conversion of our
network transmissions from the one-way FM2 technology 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 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 June 30, 2004,
approximately 33% of U.S. 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.
22
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 that we generate in Canada.
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 historical
activities of the segment do not require significant fixed asset additions.
However, we recently entered 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 June 30, 2004, we owned common stock of
an Australian company that is subject to market risk. At June 30, 2004, the
carrying value of this investment was $170,000, which is net of a $637,000
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 June 30, 2004, a hypothetical
10% decline in the value of the Australian dollar would result in a reduction of
$17,000 in the carrying value of the investment. As of June 30, 2004 we also had
cash equivalents of approximately $9 million invested primarily in long-term
government bonds that is subject to market risk.
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.
23
INTERACTIVE NETWORK, INC.
On April 14, 2004, we reached a settlement in connection with two lawsuits
involving us and Interactive Network ("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 iTV 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. On April 2004, the parties
reached a settlement and the trial that was scheduled to begin on April 19, 2004
was canceled. Subsequent to the settlement, the court dismissed the action. 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. In March 2004, the Court ruled on the
motion filed by LRS to dismiss our complaint, 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 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.
PATRIOT PARTNERS DERIVATIVE LITIGATION
In June 2002, Patriot Partners, L.P. ("Plaintiff"), derivatively on behalf
of NTN, filed a complaint in the U.S. District Court, Southern District of New
York, against BayStar Capital, L.P., BayStar Capital Management, LLC, BayStar
International Management, LLC, BayStar International, Ltd., Stark International,
Shepherd Investments International, Ltd. and Shepherd Trading Ltd., Reliant
Trading, Brian J. Stark and Michael A. Roth ("Defendants"). By way of its
complaint, Plaintiff sought, on behalf of NTN, disgorgement of profits allegedly
received by Defendants in violation of Section 16(b), plus attorneys' fees and
pre-judgment interest. The parties reached a settlement of the matter which was
approved by the court. Upon full and final performance of the terms of the
settlement agreement, including an aggregate payment in the amount of $350,000,
a dismissal of the case with prejudice shall be filed with the court. >From the
settlement payment, counsel for plaintiffs shall receive approximately $123,000
for reimbursement of attorneys' fees and costs of suit and NTN shall receive the
remaining balance of $227,000. We realized net proceeds of $225,000 from the
settlement, after deducting attorney's fees incurred by us during the course of
the litigation.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our annual meeting of shareholders on April 23, 2004. The results
of the matters voted upon in that meeting were disclosed in our Form 10-Q for
the quarterly period ended March 31, 2004.
ITEM 5. OTHER INFORMATION
On May 20, 2004, Vincent Carrino resigned his service as a director on our
board of directors and as a director on the board of Buzztime Entertainment,
Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
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 (15)
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 (18)
4.6 NTN Investor Rights Agreement, dated May 7, 2003, by and
between NTN Communications, Inc. and Media General, Inc. (17)
4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and
among NTN Communications, Inc., Buzztime Entertainment, Inc.
and Media General, Inc. (17)
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. (17)
4.9 Form of Common Stock Purchase Warrant issued to Roth Capital
Partners (13)
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 (18)
10.4 Scientific-Atlanta Strategic Investments, L.L.C. Notice of
Exchange of Buzztime Preferred Stock for NTN Common Stock,
dated January 16, 2003 (18)
10.5 Securities Purchase Agreement dated May 5, 2003 by and among
NTN Communications, Inc., Buzztime Entertainment, Inc. and
Media General, Inc. (17)
10.6 Placement Agency Agreement dated January 26, 2004 by and
between Roth Capital Partners and NTN Communications, Inc.
(13)
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 (16)
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 (14)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (19)
- -------------
25
* 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 report on Form 8-K
dated November 29, 2003 and incorporated herein by reference.
(14) 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.
(15) Previously filed as an exhibit to NTN's Form 10-Q dated August
14, 2003 and incorporated herein by reference.
(16) Previously filed as an exhibit to NTN's report on Form 8-K
dated November 29, 2003 and incorporated herein by reference.
(17) 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.
(18) Previously filed as an exhibit to NTN's Form 10-Q dated May
15, 2003 and incorporated herein by reference.
(19) Furnished concurrently herewith.
(b) Reports on Form 8-K.
None.
26
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: August 9, 2004 By: /s/ James B. Frakes
-----------------------------------
James B. Frakes
Authorized Signatory and Chief
Financial Officer
27
INDEX TO EXHIBITS
EXHIBIT
NUMBER 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 (15)
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 (18)
4.6 NTN Investor Rights Agreement, dated May 7, 2003, by and
between NTN Communications, Inc. and Media General, Inc. (17)
4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and
among NTN Communications, Inc., Buzztime Entertainment, Inc.
and Media General, Inc. (17)
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. (17)
4.9 Form of Common Stock Purchase Warrant issued to Roth Capital
Partners (13)
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 (18)
10.4 Scientific-Atlanta Strategic Investments, L.L.C. Notice of
Exchange of Buzztime Preferred Stock for NTN Common Stock,
dated January 16, 2003 (18)
10.5 Securities Purchase Agreement dated May 5, 2003 by and among
NTN Communications, Inc., Buzztime Entertainment, Inc. and
Media General, Inc. (17)
10.6 Placement Agency Agreement dated January 26, 2004 by and
between Roth Capital Partners and NTN Communications, Inc.
(13)
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 (16)
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 (14)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (4)
* Management Contract or Compensatory Plan.
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(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 report on Form 8-K
dated November 29, 2003 and incorporated herein by reference.
(14) 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.
(15) Previously filed as an exhibit to NTN's Form 10-Q dated August
14, 2003 and incorporated herein by reference.
(16) Previously filed as an exhibit to NTN's report on Form 8-K
dated November 29, 2003 and incorporated herein by reference.
(17) 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.
(18) Previously filed as an exhibit to NTN's Form 10-Q dated May
15, 2003 and incorporated herein by reference.
(19) Furnished concurrently herewith.