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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1103425
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5966 LA PLACE COURT
CARLSBAD, CALIFORNIA 92008
(Address of Principal Executive (Zip Code)
Offices)
(760) 438-7400
(Registrant's telephone number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.005 par value American Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] Items 10-14???
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-12). Yes [X] No [ ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant as of June 30, 2004, computed by reference to the closing sale
price of the common stock on the American Stock Exchange on June 30, 2004, was
approximately $132,660,049. Shares of common stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 9, 2004, Registrant had 53,326,464 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of NTN Communications, Inc. will be
subsequently filed with the Securities and Exchange Commission as to Part III
Item Numbers 10, 11, 12, 13 and 14, in each case as specifically referenced
herein.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business............................................................ 1
2. Properties.......................................................... 14
3. Legal Proceedings................................................... 15
4. Submission of Matters to a Vote of Security Holders................. 15
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 15
6. Selected Financial Data............................................. 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation............................... 17
7A. Quantitative and Qualitative Disclosures About Market Risk.......... 39
8. Consolidated Financial Statements and Supplementary Data............ 39
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 39
9A. Controls and Procedures............................................. 39
PART III
10. Directors and Executive Officers of the Registrant.................. 40
11. Executive Compensation.............................................. 40
12. Security Ownership of Certain Beneficial Owners and Management...... 40
13. Certain Relationships and Related Transactions...................... 40
14. Principal Accountant Fees and Services ............................. 40
PART IV
15. Exhibits and Financial Statement Schedules.......................... 40
Index to Consolidated Financial Statements and Schedule............. F-1
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE
FORWARD-LOOKING STATEMENTS REFLECT FUTURE EVENTS, RESULTS, PERFORMANCE,
PROSPECTS AND OPPORTUNITIES, INCLUDING STATEMENTS RELATED TO OUR STRATEGIC
PLANS, CAPITAL EXPENDITURES, INDUSTRY TRENDS AND FINANCIAL POSITION OF NTN
COMMUNICATIONS, INC. AND ITS SUBSIDIARIES. FORWARD-LOOKING STATEMENTS ARE BASED
ON INFORMATION CURRENTLY AVAILABLE TO US AND OUR CURRENT EXPECTATIONS,
ESTIMATES, FORECASTS, AND PROJECTIONS ABOUT THE INDUSTRIES IN WHICH WE OPERATE
AND THE BELIEFS AND ASSUMPTIONS OF MANAGEMENT. WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "COULD," "TARGETS," "PROJECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," "MAY," "WILL," "WOULD," VARIATIONS OF SUCH WORDS, AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS AND ARE SUBJECT TO RISKS,
UNCERTAINTIES, AND ASSUMPTIONS THAT MAY BE DIFFICULT TO PREDICT. ACTUAL RESULTS
MAY DIFFER MATERIALLY AND ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS REPORT UNDER THE SECTION
ENTITLED "RISK FACTORS," AND IN OTHER REPORTS WE FILE WITH THE SECURITIES AND
EXCHANGE COMMISSION FROM TIME TO TIME. WE UNDERTAKE NO OBLIGATION TO REVISE OR
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENT FOR ANY REASON.
PART I
ITEM 1. BUSINESS
GENERAL
We operate principally through four business segments, the NTN Interactive
Television Network (NTN iTV Network or iTV Network), NTN Wireless Communications
(NTN Wireless), NTN Software Solutions (Software Solutions), which combine to
form our NTN Hospitality Technologies Division (formerly the NTN Network
Division), and our wholly owned subsidiary, Buzztime Entertainment, Inc.
(Buzztime).
o The NTN iTV Network transmits a wide variety of popular interactive
games, advertisements and informational programming delivered daily to
consumers in approximately 3,660 restaurants, sports bars and taverns
throughout the United States and Canada and to 11 pubs in the United
Kingdom.
o NTN Wireless offers a complete line of on site wireless communication
management products, including GuestCall(R) and ServerCall(R) paging
systems, repair and replace programs for pagers, and SurveyCheck
(trademark of Superb Serv LLC) electronic touch screen comment cards.
The hospitality product suite is built around the goal of using
technology to improve the customer experience and front-of-store
efficiencies. NTN Wireless also offers on site messaging solutions for
hospitals, church and synagogue nurseries, salons, business offices,
and retail establishments. More than 2,800 restaurants currently use
NTN Wireless products, including such national chains as Buffalo Wild
Wings, Darden Restaurant's Olive Garden and Smokey Bones, Fazoli's,
Logan's Roadhouse, O'Charley's, and more, making NTN Wireless one of
the top providers of hospitality management products in North America.
o Software Solutions designs, develops, and markets innovative software
for the restaurant and hospitality industry. Software Solutions'
primary products include: NTN ProHost(R), a Windows based seating
management system and NTN RSViP(R), a Windows based reservation
management system. More than 300 different companies in more than
3,300 locations in 43 countries are currently using our Software
Solutions products. Software Solutions customers include Bahama
Breeze, Charlie Trotters, Domino's Pizza, Gaylord Entertainment,
Harrah's, MGM MIRAGE, Rainforest Cafe, Tavern on the Green, and The
Cheesecake Factory.
o Buzztime is a developer and distributor of multiplayer interactive
television games and technology. Our Buzztime(R) Trivia Channel is the
first continuous multiplayer, game service created exclusively for
U.S. digital cable TV audiences. Buzztime features play-along trivia
games for players of all interests and ability levels with real-time
competition and rankings among households and across cable TV systems.
Unless otherwise indicated, references herein to "NTN," "we," "us" and "our"
include NTN Communications, Inc. and its consolidated subsidiaries. Our
headquarters are located at 5966 La Place Court, Carlsbad, California 92008,
telephone (760) 438-7400. NTN Communications, Inc. was incorporated in Delaware
in 1984.
SECURITIES AND EXCHANGE COMMISSION REPORTING
We file reports with the Securities and Exchange Commission (SEC). The
public may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC (http://www.sec.gov). Our internet site is
www.ntn.com. Copies of our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available
free of charge on our website.
INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
Financial information for each of our business segments for each of the
last three fiscal years is contained in the Notes to the Consolidated Financial
Statements included in Item 15 of this Form 10-K. Approximately 90% of all our
revenue is attributable to customers in the United States, and substantially all
of the remaining 10% is attributable to customers in Canada.
BUSINESS STRATEGY
Our current strategy is to leverage our unique interactive entertainment as a
means of growing our business units. First, we intend to be a leading provider
of interactive communications and entertainment offerings to the hospitality
industry through the NTN Hospitality Technologies Division. Second, we plan to
be a leading developer and distributor of interactive entertainment for the
in-home market through interactive television and wireless devices via Buzztime.
To accomplish our objectives, we are pursuing strategies to:
o Increase the number of hospitality locations serviced by the NTN
Hospitality Technologies Division through its NTN iTV Network, NTN Wireless
and Software Solutions segments. We intend to accomplish this increase by
expanding our product offerings to include more value-added services,
adding independent dealers to our existing sales force and providing new
and updated content on a regular basis, including our recently introduced
multiplayer card games such as Blackjack and Texas Hold `Em poker.
o Launch the deployment of the NTN iTV Network in the United Kingdom (UK). We
are seeking to do this via an initial 90-day trial at eleven pubs in the UK
which commenced on March 1, 2005. Two major pub groups are involved in the
trial. There are over 60,000 pubs in the UK and we understand from our
research and experience that verbally-presented "pub quizzes" are often
presented to patrons. We therefore believe that our networked quiz product
may become very successful in this market. It will not be known for several
months or longer if the trial will lead to substantial orders to install
the Network at other UK sites. The Network is being termed "The Buzztime
Network" for the UK market and being operated through NTN Buzztime, Ltd.,
our UK subsidiary.
o Develop and distribute the Buzztime Channel to cable operators with the
intent to become the first to deploy an interactive television games
channel to installed digital cable set-top boxes. We have launched the
Buzztime Channel on Time Warner's systems in Portland, Maine, LaPlace,
Louisiana and Dothan, Alabama and on Comcast Cable's systems in Baltimore,
Maryland, Prince William County, Virginia and Alexandria/Arlington,
Virginia. We have also launched the Buzztime Channel on Susquehanna
Communications' York, Pennsylvania and Williamsport, Pennsylvania systems.
We have additionally launched a one-way Buzztime game service on Echostar's
Dish Network on a subscription basis. Finally, we have begun to deploy
Buzztime on advanced cell phones through several carriers, including
Verizon.
o Increase revenues through current and new sources. The NTN Hospitality
Technologies Division receives revenues from three major areas:
subscription fees from out-of-home hospitality locations along with related
third-party advertising revenue and sales of pagers and restaurant
management products, including sales and support of software products. We
expect to continue generating revenue through these sources and, by growing
our customer base, we also expect to see revenue growth in service and
advertising revenue. Similarly, as Buzztime gains distribution with cable
and satellite television operators, we expect to increase revenue through
license fees paid by cable and satellite television operators, fees paid by
interactive television home subscribers for premium services or
pay-per-play transactions, and advertising revenue. We have also taken
steps to establish the Buzztime name as a brand through licensing
arrangements with a toy manufacturer and with a provider of airline
in-flight entertainment.
2
o Both the NTN Hospitality Technologies Division and Buzztime may also
explore market opportunities to acquire complementary businesses to
increase revenues and earnings. One example of a recent acquisition is NTN
Wireless, which generated over $5.3 million in revenues through sales of
restaurant pagers and related products during 2004. Another example is
Software Solutions, which we formed in July 2003 when we acquired the
assets and certain liabilities of Breakaway International, Inc. Software
Solutions generated approximately $4.0 million in revenues in 2004.
Finally, on December 15, 2003, we acquired the assets of NTN Interactive
Network, Inc., our Canadian licensee since 1985. This acquisition served to
open the Canadian territory for the marketing and sale of our products and
services and immediately provided us with an installed NTN iTV Network
subscriber base which now approximates 350 sites.
We have incurred consolidated net losses in the last five years and expect
to incur consolidated losses through at least the end of 2005. Recent losses
have been primarily as a result of significant, planned development expenditures
related to Buzztime for which no significant revenues have yet been generated
and in our Software Solutions segment.
THE NTN HOSPITALITY TECHNOLOGIES DIVISION
GENERAL
The NTN Hospitality Technologies division provides consumer-oriented
interactive communications and entertainment products to the out-of-home
hospitality industry including restaurants, sports bars and other establishments
that are looking for a competitive point-of-difference to attract and retain
customers.
We have maintained a unique and preemptive position in the hospitality
industry for over 19 years as a platform for providing interactive trivia and
play-along sports programming. We believe that strong growth opportunities exist
by continuing to leverage our preeminent entertainment product and our installed
base of 3,309 United States venues to include other interactive communications
and entertainment services that effectively increase both breadth and depth of
their business in this segment.
We have adopted the mission to become the leader in providing distributed
network systems comprised of INTERACTIVE COMMUNICATION and ENTERTAINMENT
services to the out-of-home market. As such, the division has evolved from one
that provides a single product--interactive entertainment located primarily in
the bar area--to a full-service provider of "front of the house" products and
services across the establishment. These products and services include on-site
wireless commercial communication services, seating management and reservation
systems for the hospitality industry, additional entertainment services and
devices and interactive entertainment for corporate events. Providing this
expanded array of products will allow us to offer additional value to, and grow
revenues in, our primary markets, as well as to expand the market to include
hospitality venues such as fine dining and family dining formats that are beyond
our traditional customer base of casual dining, sports bars and taverns.
The NTN Hospitality Technologies Division's operations can be divided into
three operating segments:
NTN ITV NETWORK SEGMENT
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Approximately 73% of our current revenues come from the operations of the
NTN iTV Network, the largest segment of NTN Hospitality Technologies. The NTN
iTV Network is the longest running out-of-home interactive television network in
the world. We receive service fees from hospitality venues that receive the
transmission of our interactive trivia quiz show, play-along sports programming
and our new NTN Blast channel. We transmit through our iTV Network engaging,
interactive game content to the hospitality locations where patrons use our
wireless game devices to interact with content displayed on television screens.
Our NTN iTV Network also earns revenues from advertising and marketing
communications services to companies seeking to reach the over 6 million unique
out-of-home consumers each month that visit the iTV Network's 3,309 domestic
venues and 351 Canadian venues. Via an average of four dedicated television
screens per location, we provide advertisers with a targeted, cost-effective way
to communicate their brand message, obtain consumer feedback, and stimulate
product trial.
3
Up through 2003, our iTV Network also received licensing royalty revenue
from NTN Interactive Network (NTNIN), a division of Chell Group Corporation, our
Canadian licensee, which maintained approximately 400 sites as of December 2003.
On December 15, 2003, we acquired most of the operating assets, certain
liabilities and the operations of NTNIN from Chell Group Corporation. We
acquired NTNIN's assets for $200,000 in cash, 238,300 shares of unregistered NTN
common stock valued at $3.70 per share, the contribution of $550,000 in unpaid
licensing royalties, $84,000 of transaction costs and the assumption of certain
liabilities. Total consideration for the acquisition was $1,823,000.
We also have granted an exclusive license to eBet Limited, an Australian
company, to distribute our games in commercial establishments and other public
places throughout Australia and New Zealand via eBet Limited's own licensed
network. Our Australian licensee currently operates in approximately 20
hospitality locations.
NTN WIRELESS SEGMENT
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NTN Wireless earns revenue from the sale of on site wireless paging
products to restaurants and other hospitality locations. These products are
provided to customers while waiting for a table and will activate to let them
know when their table is ready as well as to restaurant staff to alert them to
certain issues, such as when hot food is ready to be served.
SOFTWARE SOLUTIONS SEGMENT
--------------------------
Software Solutions earns revenue from the licensing of seating management
and reservation systems software as well as providing professional services to
Domino's Pizza LLC and to other customers. Software Solutions was formed in July
2003 when we acquired the assets and certain liabilities of Breakaway
International, Inc.
PRINCIPAL PRODUCTS AND SERVICE:
NTN ITV NETWORK
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THE PRODUCT
Our NTN iTV Network broadcasts a wide variety of entertaining and popular
multiplayer interactive games, including play-along sports games, trivia games
and card games to consumers in 3,309 United States venues and 351 Canadian
venues. Patrons play an estimated 17 million games per month, using our wireless
hand-held game device, called the Playmaker(R), which allows them to compete
locally and nationally with real-time scoring. We have deployed approximately
57,000 Playmakers across our iTV Network in the United States. In addition, our
research indicates that an average of 4.3 patrons view and participate in the
game for every Playmaker in use. We believe that no other company has created
such broad hospitality industry relationships or captured such a large and
diverse out-of-home audience. The strong demand for our NTN iTV Network is
supported by third-party research indicating players stay longer, spend more,
return more frequently and refer others to an NTN iTV Network establishment
(source: Actionable Marketing Research, May 2000).
We target national and regional hospitality chains as well as local
independent venues that are looking for a competitive point-of-difference to
attract and retain customers. Our customers include leading companies in the
casual-dining restaurant segment such as TGIFriday's, Bennigan's Irish Grill,
Applebee's, Damon's Grill and Buffalo Wild Wings, as well as over 2,700
independent locations in North America.
Through the transmission of engaging interactive content, stored on a site
server at each location, our NTN iTV Network enables single- and multi-player
participation as part of local, regional, national or international competitions
supported with prizing and player recognition. Unlike coin-operated games, live
entertainment and themed events which are either single-player based, expensive
and/or require effort to coordinate and conduct, the NTN iTV Network offers a
turnkey solution of unique multi-player, multi-venue entertainment requiring
virtually no site staff involvement at a fraction of the comparable cost.
Our NTN iTV Network is also the only out-of-home interactive television
network providing advertising and other marketing communications services to
companies seeking to reach the over 6 million unique consumers each month and
looking for a targeted, cost-effective way to communicate their brand message,
obtain consumer feedback and stimulate product trial. Unlike current out-of-home
advertising vehicles which are either static or lack multiple consumer exposure,
we provide, as part of our game show formats, an end-to-end marketing
communications solution comprised of full-motion video commercials, promotional
messages, advergaming contextual opportunities and real-time interactive
research capabilities at costs well below current media and research
alternatives.
4
VALUE PROPOSITION
The NTN iTV Network has established itself as a cost-effective means of
generating traffic to our hospitality locations, creating loyalty and return on
investment based on the ability to positively impact venue revenue because
players stay longer (39% compared to non-players); spend more (47% more than
non-players); return more often (72% more than non-players); and demonstrate
positive word-of-mouth (90% have or will recommend an NTN subscriber venue to a
friend) (source: Actionable Marketing Research, May 2000).
By distributing turnkey promotional and marketing support to these venues,
we provide a competitive advantage, as well as provide a cost-effective
entertainment option when compared to other alternatives such as live
entertainment, karaoke and food and drink discounts.
Our NTN iTV Network provides eight advertising units per hour to the venue.
These units may become a revenue and profit center to our customers by allowing
them to cross-promote internal programs and services, or to re-sell to local
area merchants to offset network subscription costs and/or generate profit.
Our customers may employ our proprietary interactive polling service,
OMNIPoll(TM), in conjunction with network programming and our wireless Playmaker
units to regularly deliver custom player feedback on food, service and
promotions, allowing the venue to gauge customer satisfaction levels and make
adjustments if necessary.
In 2004, NTN iTV Network's domestic hospitality customers paid us an
average of $544 per month per venue to use our interactive technology, and to
offer our game transmissions to their patrons. NTN iTV Network venues enter into
one- and two-year service agreements, with the average customer life of an NTN
iTV Network site/venue of approximately three years.
TECHNOLOGY
The NTN iTV Network utilizes a proprietary delivery technology called DITV
(Digital Interactive Television). DITV uses the latest Windows-based development
tools and multimedia capabilities, resulting in enhanced, high-resolution
graphics and full-motion video. DITV technology allows advertisers to use
existing video footage in their ads on the NTN iTV Network.
For ten years, the NTN iTV Network transmitted its data through an FM2
satellite platform and was received by a PC server (base station) installed at a
subscriber's hospitality venue which was configured with a special
communications card equipped for satellite data reception. That arrangement was
originally scheduled to end in February 2005. We entered into equipment purchase
and satellite service agreements to convert the NTN iTV Network to a much higher
speed, two-way VSAT (Very Small Aperture Technology) satellite technology over a
two-year period ending February 2005. These agreements were with the same
reseller of satellite services that provided the FM2 satellite platform to us.
We recently amended the agreements with the reseller of satellite services to
push out the expiration date on the FM2 satellite platform to February 2007 and
to modify the VSAT equipment purchase and satellite service agreements. The
modification to the equipment purchase agreement eliminates the requirement to
purchase and install a specific amount of VSAT equipment. It is possible that we
may have to pay some amount of penalties in connection with the reduced amount
of purchases. This flexibility may also enable us to utilize non-satellite based
data transmission platforms, such as digital subscriber lines, wireless
connectivity or cable modems, for customer sites where such platforms may be
appropriate.
The amendment to the FM2 data transmission agreement and the revisions to
the VSAT equipment purchase and satellite service agreements allow us to spread
any conversions to the new VSAT platform over the remainder of the VSAT
satellite services agreement, which is now scheduled to end in April 2009. The
amendments also allow us the flexibility to keep existing FM2 sites on the
existing platform for another two years and do not require us to have defined
levels of VSAT sites by any certain date.
Conversion to the two-way satellite technology requires us to utilize
significant capital resources. At December 31, 2004, approximately 41% of sites
had been converted to VSAT.
END USER DEVICES
Our DITV system also uses a 900 MHz wireless Playmaker, which features a
900 MHz transceiver, a monochrome LCD display and sealed keypad. Our system does
not require the "wiring" of the establishment and the Playmakers have no
breakable exterior components. As a result, external interference and Playmaker
failure has been significantly reduced over previous versions. Our Playmakers
are a rugged combination of hardware and firmware optimized for hospitality
environments. We are also in the process of developing a more advanced 2.4 GHz
Playmaker that we currently intend to put into service in the second half of
2005.
5
CONTENT SERVICES
The NTN iTV Network licenses game content (both trivia and play-along
sports) from Buzztime and third party content providers. Buzztime creates the
game content that we transmit to NTN iTV Network hospitality locations. Each
hospitality location is individually addressable, allowing us to send specific
content to selected sites. Hospitality locations throughout the United States
and Canada receive our content, in the form of programming, 15 hours each day,
365 days each year.
GAME CONTENT & PROMOTION
Our primary product is the transmission of a variety of multiplayer
interactive games that entertain and challenge a player's skill and knowledge
while creating significant customer loyalty. Historically, our technology
limited us to one "channel" of programming that revolved around our sports and
trivia games. Over 2003 and 2004, we developed our new iTV2 technology to
operate a second "channel" of programming. Over that same period of time we
developed a diverse line of games and other content for that second channel that
we call our NTN BlastTM channel.
Trivia Games
We provide premium trivia competitions during evening hours when the
venues, particularly restaurants and taverns, tend to be busiest. During these
programs, each venue system simultaneously displays selected trivia questions on
television monitors. Participants use Playmakers to enter their answers. Answers
are collected, transmitted and tabulated. We display the score of each
participant on the television monitors in our customer venues, along with
national, regional and local rankings, as applicable. Players can compete for
prizes and merchandise in their local venues, as well as on a regional and
national scale. In addition to game interaction, other consumer features
available on the Playmaker include real-time sports scores transmitted directly
to the units and player chat. For a list of our trivia games, please see the
Principal Products/Services section of the business description of our Buzztime
segment in this report.
Sports Games
A core component of our content is QB1, a live, play-along football game in
which players predict the outcome of each play broadcast within professional and
collegiate football games. We have held a license with the NFL for 19 years in
conjunction with QB1.
Currently, our other sports games include Brackets and Race Day. In
Brackets, our players try to guess which teams will advance in the annual
postseason men's college basketball tournament after the collegiate basketball
selection committee sets the field of 64 teams. Race Day, an auto racing game,
includes two elements; one predictive before the race and one trivia during the
race. Points from both elements will be added together for a final score.
NTN BLAST
Designed with today's young adults in mind, NTN Blast brings interactivity
to action sports and movies based on content licensed from Zobmondo!, Rip Curl
and Atom Films. NTN Blast also includes multiplayer card games including
Blackjack and Texas Hold `Em poker. NTN Blast was developed to secure
subscription contracts with new hospitality sites that might not be attracted to
our core trivia and sports products, as well as retaining existing hospitality
sites with the expanded content offering by driving a broader group of consumers
into our subscribing sites, based on varied tastes in interactive entertainment.
Playmaker Games:
We also offer a suite of Playmaker only games. This suite of games is
independent of the NTN iTV Network and they are played directly on our wireless
Playmakers rather than on one of the television screens in the hospitality
venue. Players access the games by logging onto a Playmaker and following the
instructions on the Playmaker screen. Currently, we have the following Playmaker
only games:
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Acey Duecey Two cards are dealt face up. Players bet that the third
card will fall between the previous two
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Crystal Ball Ask the Crystal Ball a question and receive your answer
--------------------------------------------------------------------------
Playmaker Poker Compete against the house in a game of jacks-or-better
poker
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Shark Attack Just like hangman, but with an oceanic twist
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6
COMPETITION
Currently, we have no direct competitors to the NTN iTV Network that
furnish live, multi-player interactive entertainment in a similar scope and
nature. While we have no direct competitors, we do compete for total
entertainment dollars in the marketplace. Other forms of entertainment provided
in public venues include music-based systems, live entertainment, cable and
pay-per-view programming, coin-operated single-player games/amusements and
traffic-building promotions like happy hour specials and buffets. However, none
of the alternatives provide the combination of live sports and trivia
entertainment broadcast 15 hours per day, 365 days per year, and most require
some involvement with the venue staff to be successful, which conflicts with the
primary responsibility of the staff.
NTN WIRELESS
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THE PRODUCT
To expand our presence in the hospitality industry, during 2002 we
completed the acquisitions of the assets of each of ZOOM Communications and
Hysen Technologies, manufacturers and sellers of on-site wireless paging
products. On-site paging systems consist of guest paging systems designed to
improve the wait time for hospitality guests and server paging systems designed
to alert servers when prepared food is ready to be served. Our guest paging
system, GUESTCALL(R), is comprised of a tabletop transmitter and between 30-70
individual pagers that are distributed to guests upon arrival. The server paging
system, SERVERCALL(R), is made up of a transmitter located in the kitchen area,
and between 12-36 individual pagers for the wait staff. Both systems may
vibrate, flash or both to indicate either the table or food are ready. We also
sell our paging products into non-hospitality vertical markets such as retail
stores, hospitals and churches.
In 2004, we introduced two new NTN Wireless products, PlayCall(TM) and
SmartCallTM. PlayCall offers all the functionality and quality of our standard
GUESTCALL coaster pager, combined with five fun, easy-to-play games that guests
of all ages will enjoy. SmartCall pagers provide dynamically updated wait times
based on ProHost's (see our Software Solutions segment) ongoing analysis of
seating trends and table turns. Instead of standing around wondering whether
their name has been called, guests are free to relax at the bar, take a stroll
outside, do a little window shopping --anything in up to a two-mile range. Both
PlayCall game pagers and SmartCall pagers work with our GUESTCALL(R) paging
system.
VALUE PROPOSITION
On-site paging systems are designed to address a key industry initiative
surrounding "Speed of Service", by improving table turnover and throughput for a
venue's operations. The sooner a guest is seated, and the quicker prepared food
is served, the faster a table can be effectively "turned" without negatively
impacting the customer experience. If a typical restaurant can add just three
parties of four during each waiting shift (defined as Thursday, Friday and
Saturday nights), with a $17.00 average per person check, the annual incremental
gross revenue to the venue over a three-year period would be $121,000.
TECHNOLOGY
On-site paging systems consist of a small tabletop transmitter or PC-based
software and transmitter communicating with a group of pager units in either
vibration flashing LED, or alpha-numeric combinations. These systems are defined
as "closed systems," meaning they work within a limited area for a specific
purpose. The transmitter and pagers are set to the same frequency, which
typically carries a range of between one-quarter and one-half mile.
COMPETITION
We are not aware of any industry statistics for the hospitality paging
market. Within the industry, it is estimated that JTech, based in Boca Raton,
Florida, holds a majority position of the hospitality paging market, JTech
markets guest paging and server paging systems, and has recently expanded their
product mix to include other operations-based products that integrate with a
venue's POS system for check management/paging. JTech was recently acquired by
MICROS Systems, Inc., a leading player in the hospitality point of sale
industry. Long Range Systems of Dallas, Texas, also markets products similar to
ours and those of JTech, including guest and server paging products and
electronic guest survey card systems.
7
NTN SOFTWARE SOLUTIONS
- ----------------------
THE PRODUCTS
Our Software Solutions' group provides a turnkey solution that augments our
Wireless products to deliver the "Speed of Service" industry initiative by
facilitating a database driven reservation management solution as well as a
dynamic table management/waitlist management solution. Both solutions currently
target the specific operational and reporting requirements of the food service
industry effectively minimizing the costs and level of expertise required to
manage the guest experience while providing greater intelligence about the
customer base. Our primary Software Solutions products, NTN PROHOST AND NTN
RSVIP, combine with our NTN Wireless products to form a business intelligence
solution in the hospitality market. These products are developed using the
following Microsoft technologies: Visual Basic 6.0, Visual Basic .NET, Visual
C++ 6.0, ASP .NET, SQL Server 2000, Visual C#.NET and Visual Studio.NET 2003.
Our products are currently used by more than 300 companies in more than 3,300
locations in 43 countries. Our NTN Software Solutions customers include The
Cheesecake Factory, MGM MIRAGE, Darden Restaurants and Gaylord Entertainment.
NTN PROHOST is our guest and seating management application that
coordinates all activities with guests, tables, and servers and integrates to
POS solutions and NTN Wireless solutions. PROHOST and wireless provide a
real-time business intelligence and decision making tool to a restaurant
community. The software is designed to increase the number of guests that a
restaurant can seat, serve and satisfy, and thereby help restaurants achieve
higher profits. PROHOST solves the complex problem of managing the guest before,
during and after they sit at the table, and adds systems and processes where
restaurants typically have none. NTN PROHOST also assists restaurant managers by
providing flash operational data, many operational alerts, and staff performance
reporting.
NTN RSVIP is a reservations management solution designed to accept advance
reservations for single or multiple locations. RSVIP is a client/server
application which connects multiple users in a restaurant to a central database
server. With RSVIP, reservations can be centralized for restaurant groups, made
by phone, through the web, and on public or private websites providing
restaurants with a level of service and flexibility they currently cannot offer.
NTN RSVIP provides powerful customer relationship management (CRM) features that
include guest tracking and preferences, guest history and marketing tools, and
sophisticated reporting.
On February 4, 2005, we entered into an Asset Purchase Agreement with
Intura Solutions LP (Intura), a Texas limited partnership, pursuant to which we
sold the point of sale software products developed and maintained by our
Software Solutions segment. In accordance with the asset purchase transaction,
Gary Peek terminated his position as vice president and general manager of our
Software Solutions segment and immediately thereafter commenced his position
with Intura to oversee business operations. The primary software products sold
by us to Intura were Vision, Relief Manager Plus (RMP), Store Link Plus (SLP),
Sell More Pizzas and other legacy products as well as a non-exclusive right to
develop and market the Enterprise software. See Acquisitions and Divestitures
for more information on this transaction.
COMPETITION
Software Solutions competes with and/or complements a number of entities
within the hospitality point-of-sale arena that either have partnered with or
plan to partner with other companies that have table management and reservation
products. Our competitors include Open Table, MICROS Systems, Inc. and
InfoGenesis.
PROFESSIONAL SERVICES
In addition to software development, Software Solutions provides
professional services to its customers and partners including software support,
hardware configuration, systems staging, deployment, and training services. In
addition to co-developing the Dominos Pizza Pulse POS, we provide a wide range
of Help Desk services to include all levels of support 24/7/365, in both English
and Spanish. We also provide pre-deployment support services such as legacy POS
extraction for software conversion, as well as proactive support for issues
pending development.
Our field services group provides complete management of the deployment
process and includes system installation, software setup, and training services.
Software Solutions does not provide site preparation services such as network
cabling, electrical, communications installation, and physical site preparation
for mounting and housing of various types of equipment.
8
NTN Hospitality Technologies Sales & Distribution
- -------------------------------------------------
Currently we sell all products and services through direct sales employees
organized by regions throughout the United States and focusing primarily on
major metropolitan markets and/or national chain accounts, as well as through
independent dealers and representatives in smaller metro markets and rural areas
focusing on smaller chains and/or independent restaurants. Our sales cycle
varies by customer type, requiring as little as one week for independent
customers and up to 18 months for national chain accounts. We seek to generate
qualified leads for a follow-up field presentation through our marketing and
promotion efforts. In most cases, the products can be sold over the telephone
but occasionally may require a field presentation. During the field
presentation, our sales representative determines the prospect's requirements
and presents possible solutions through the benefits of each product or service
presented, including an interactive demonstration, detailed return on investment
calculations, local advertising opportunities made available through the NTN iTV
Network and third party research results outlining player purchase behavior and
success stories from existing NTN iTV Network subscribers. Occasionally,
demonstration units are provided to validate the system, with the intention to
finalize the sale upon completion of the trial.
NTN Hospitality Technologies Marketing and Promotion
- ----------------------------------------------------
We market our services to the industry primarily through advertising in
national trade periodicals, national and regional trade shows, telemarketing,
direct mail and direct contact through our field sales and marketing
representatives. We organize and track all sales prospects through our
distributed database software.
We have found the most effective trade periodicals for our marketing
purposes to be Nation's Restaurant News, Nightclub & Bar and Military
Hospitality. The key national and regional trade shows to us are the National
Restaurant Association Show, Nightclub & Bar Expo, FS/Tech, WestEx, Northeast
Foodservice, MMR and MUFSO. In addition, we participate in most of the national
chain conference shows. Our field representatives also participate in a
substantial number of smaller regional shows.
NTN HOSPITALITY TECHNOLOGIES EQUIPMENT
With the exception of our Playmakers, each system installed at a
hospitality location is assembled from off-the-shelf components available from a
variety of sources. We are responsible for the installation and maintenance of
each system, which we continue to own. Our current Playmaker is a hand-held, 900
MHz radio frequency device used to enter choices and selections by players and
is manufactured by Climax Technology, Ltd., a non-affiliated manufacturer in
Taiwan.
The majority of our NTN Wireless products are manufactured based on our
specifications under contract through a third party manufacturing company
located in Seoul, Korea. The contract expires on April 5, 2007. We believe the
quality provided by this manufacturer is superior to that provided by
manufacturers located in mainland China, and has become a competitive advantage
for us. While sufficient alternative supply chain capabilities exist, we would
face business interruption if we were to lose this existing manufacturer, and
there are no assurances that we could recover lost business in a timely manner.
NTN HOSPITALITY TECHNOLOGIES SEASONALITY
Our NTN iTV Network business has some seasonal elements. While we bill
revenue monthly as service is provided to customers, three factors increase our
revenues in the second half of the year over the first half. First, sales to new
locations have traditionally been higher in the summer and early fall months
compared to the rest of the year, driven primarily by the start of the
professional and college football season and the availability of our play-along
football game, QB1. Second, some older customers pay an incremental amount for
our QB1 Predict the Play football game and many customers order additional
Playmakers to meet their patrons' demands to play this game in late summer and
early fall. Third, we typically gain additional advertising customers who want
to participate in our football-oriented games. In the third quarter of 2003, we
started bundling our QB1 Predict the Play football game with our trivia content.
This has reduced and will likely continue to reduce the seasonal elements of our
business over time.
9
The hospitality industry has historically experienced a relatively high
business failure rate. That factor combined with change in ownership and
non-renewal of contracts leads us to lose a certain amount of our customers each
year. We refer to this collective loss of customers as "churn." Our historical
churn experience has also been seasonal in that the percentage of churn has been
highest following the completion of the professional football season in
February, although churn occurs in all months. During our operating history,
approximately 18% to 30% of the existing NTN iTV Network customers at the
beginning of a year have churned by the end of that year. The churn rate was 21%
for 2004 and 22% for 2003.
NTN HOSPITALITY TECHNOLOGIES SIGNIFICANT CUSTOMERS
Our customers are diverse and varied in size as well as location. We are
not dependent on any one customer. We do not have any individual customer,
including chain locations, who accounted for 10% or more of our consolidated
revenues in 2004, 2003 or 2002.
NTN HOSPITALITY TECHNOLOGIES BACKLOG
We historically have not had a significant backlog at any time because we
normally can deliver and install new systems at hospitality locations within the
delivery schedule requested by customers (generally, within three to four
weeks). Shipments of NTN Wireless products occur in most cases within 20 days of
receipt of order.
BUZZTIME ENTERTAINMENT, INC. SUBSIDIARY
GENERAL
Buzztime, our wholly owned subsidiary, was incorporated in the state of
Delaware in December 1999 with the objective of creating new revenue from
distributing our content library to interactive consumer platforms, with a
primary focus on interactive television. Buzztime specializes in real-time,
mass-participation games and entertainment including the Buzztime Trivia Channel
for cable television services. We manage one of the world's largest trivia game
show libraries from our interactive broadcast studio where we also produce our
live, Predict the Play interactive television sports prediction games, real-time
viewer polls and advertising.
The Buzztime Trivia Channel was launched on cable TV in June 2002 to
Susquehanna Communications' (SusCom) York, Pennsylvania digital cable
subscribers. We believe this was the first deployment of a real-time, two-way
game channel via digital cable TV in the U.S. that operates on commercially
deployed digital set-top boxes. The Buzztime Trivia Channel is now available to
over 250,000 Comcast, Time Warner and SusCom digital cable subscribers within
cable TV systems in Pennsylvania, Virginia, Maryland, Maine and Louisiana.
Buzztime also has trivia games deployed on satellite TV through Echostar's DISH
Network in the United States and Bell ExpressVu in Canada as well as to major
North American wireless carriers through a partnership with Airborne
Entertainment. In addition, Buzztime remains the primary content provider to the
NTN iTV Network and currently works with leading companies such as Media
General, Scientific-Atlanta, The National Football League, Liberate
Technologies, Airborne Entertainment, Cadaco, DTI Software and others to bring
consumers real-time interactive entertainment.
Buzztime's revenue is derived from license fees to distributors and
end-users, royalties from third-party manufacturers and development fees. It is
also our plan to sell advertising when we achieve a critical mass of
subscribers--particularly via cable TV distribution.
PRINCIPAL PRODUCTS/SERVICES AND DISTRIBUTION
Buzztime develops, produces and distributes single and multiplayer games
for both one-way and two-way consumer platforms with a primary focus on
interactive television. The games are designed for general audiences and include
trivia quiz shows, sports prediction competitions that are played along with
live sporting events as well as card, arcade, puzzle and board games. The
Buzztime games are distributed through several platforms including the NTN iTV
Network, cable television, satellite television, mobile phones and airlines.
MARKETING
Buzztime's sales and marketing efforts have been focused on gaining
distribution to cable operators in North America. For the cable systems that are
deployed, we operate regular competitions and promotions to drive consumer
awareness and usage of our games. As distribution of the Buzztime Channel
increases, we plan to sell subscription services to the players and advertising
and to marketing companies. Our business model is supported by strong market
demand for compelling content on emerging interactive television platforms and
the proven success of our content on existing platforms such as the NTN iTV
Network.
10
Key drivers to revenue growth include the integration of interactive
television enabling technology into the cable systems, adoption of interactive
television services in the home, penetration of Buzztime games into the cable
operators, the ability to charge the cable operator for receiving the Buzztime
Channel, the ability to charge the end-user for additional games or services and
the ability to sell advertising within our games.
EQUIPMENT
The primary product that Buzztime produces is software code and graphics
that enable the Buzztime games. For networked distribution such as cable
television, satellite television and mobile platforms, we primarily rely on the
distribution partners' technology for distribution of our games to the end
users. These partners maintain their own receiving, translation and
re-broadcasting equipment as part of the normal business. Buzztime maintains
server facilities in Carlsbad, California and a co-located facility in Orange
County, California. For cable television distribution, Buzztime may install a
server in the local cable system facility (head-end).
COMPETITION
On a broad basis, the consumer has, and will continue to have, many options
for electronic entertainment and game play. Within each network or platform that
Buzztime distributes through, there are numerous options for entertainment. For
example, there are hundreds of channels of programming on cable and satellite TV
and there are a growing number of choices of entertainment on mobile phones.
Specifically within the games category, there are hundreds of game producers
that produce thousands of games for interactive platforms such as the internet,
game consoles and mobile devices. There are also numerous game companies
developing various games for interactive television platforms such as the ones
that Buzztime is either operating on or has plans to operate on.
Specific to interactive television on cable TV, there are significant
barriers-to-entry for game developers. First, the technology necessary to enable
games, especially two-way games such as Buzztime's games, is in its early stages
and, in some cases, still being developed. This requires the game developers to
devote human resources that have experience in not only games, but interactive
television platforms. Second, not all games are suited for the television and
remote control. Many popular games on non-TV platforms are dependent upon
keyboards, a mouse and advanced game controllers to function properly. Third,
there are only a few cable operators that control the majority of the
decision-making for carriage of interactive applications such as games. The
smaller cable operators will follow the largest cable companies' lead in
selecting game technology and content. If a game company does not have success
in gaining distribution via a major cable operator, they have little chance of
success in the North American cable market.
Buzztime has developed technology, which we promote as Play Along TV(R)
Technology, which we believe enables the deployment of one-way and two-way games
on iTV platforms. Buzztime, with the support of the NTN iTV Network, has an
existing cross-platform promotional network to promote the iTV games and drive
competitions. Buzztime's games have been designed and produced specifically for
the television and remote control and are compatible with the cable and
satellite technology. Finally, due to deployed field trials with Comcast Cable
and Time Warner Cable, we have working relationships with the various
departments within these cable companies that manage iTV application development
and deployment.
LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
We keep confidential as trade secrets our technology and software. The
hardware used in our operations is purchased from outside vendors. We own
copyrights to all of our programs and formats. We have either received, or have
applied for, trademark protection for the names of our proprietary programming,
to the extent that trademark protection is available for them. Our intellectual
property assets are important to our business and, accordingly, we maintain a
program directed to the protection of our intellectual property assets,
including regular intellectual property protection meetings and ongoing internal
education on the protection of intellectual property.
As of December 31, 2004, we owned one United States patent covering certain
aspects of technology related to an interactive learning system. This patent
will expire in 2017. As of December 31, 2004, we had applied for two additional
patents in the United States.
In June 2001, Buzztime Entertainment entered into a contribution agreement
with NTN Communications, effective retroactively to January 1, 2001, whereby NTN
contributed some of our assets to Buzztime including all company-owned games and
related content, trivia game show library, interactive broadcast studio and
related technology and intangible assets.
11
Further, in June 2001, NTN entered into a licensing and marketing agreement
with Buzztime, effective retroactively to January 1, 2001, whereby Buzztime
granted the NTN iTV Network an exclusive, royalty-free, perpetual license to the
game libraries and related technology for distribution to the commercial market
for group viewing audiences. Buzztime will continue to provide the NTN iTV
Network with new game content created by Buzztime during the ordinary course of
business, as well as maintenance and upgrades to existing content and related
technologies, through 2006. This obligation is subject to a termination right at
the option of Buzztime, upon one year's prior notice to the NTN iTV Network. In
addition, Buzztime will continue to produce live sports prediction games, such
as QB1, for the NTN iTV Network through 2008. Pursuant to the terms of the
agreement, the NTN iTV Network will promote Buzztime during broadcasts of
Buzztime programming on the NTN iTV Network as long as Buzztime continues to
supply new game content for distribution by the NTN iTV Network. Buzztime shall
promote the NTN iTV Network to the best of its ability in the consumer market,
including interactive television and wireless devices.
On May 6, 2003, Buzztime entered into an agreement with Media General, Inc.
to license its Boxerjam game content and selected technology. The license
includes a five year exclusive interactive television license of certain
intellectual property, with options to extend the license for an additional five
years.
We are party to a license agreement with NFL Enterprises L.P. Our NFL
agreement grants us data broadcast rights to conduct interactive games on the
NTN iTV Network in conjunction with the broadcast of NFL football games, for
which we pay the NFL a flat royalty independent of revenues billed to
subscribers by the NTN iTV Network in connection with QB1 play. Under the terms
of the license, we are also permitted to utilize the trademarks and logos of the
teams and the leagues in connection with the playing of an interactive game. In
November 2002, we renewed our license agreement with the NFL through August 6,
2005.
GOVERNMENT CONTRACTS
We provide our broadcast services through the NTN iTV Network to a small
number of government agencies, usually military base recreation units. However,
the number of government customers is small compared to our overall customer
base. We provide our products and services to government agencies under
contracts with substantially the same terms and conditions as are in place with
other non-government customers.
RESEARCH AND DEVELOPMENT
During 2004, 2003 and 2002, we incurred approximately $329,000, $329,000
and $12,000, respectively, related to research and development projects,
including projects performed by outside consultants. In 2004, our research and
development efforts were related to digital network, wireless and interactive
applications.
There is no assurance that we will successfully complete current or planned
development projects or will do so within the prescribed time parameters and
budgets. There can be no assurance, furthermore, that a market will develop for
any product successfully developed.
ACQUISITIONS AND DIVESTITURES
BREAKAWAY INTERNATIONAL
On July 31, 2003, we acquired all of the assets and certain liabilities of
Breakaway International, Inc. (Breakaway), a privately held provider of
restaurant industry hardware and software enterprise solutions. We acquired
Breakaway's assets for $252,000 in cash, 1,292,614 shares of unregistered NTN
common stock, transaction costs and the assumption of certain liabilities. We
may pay additional contingent earn-out amounts in NTN common stock and/or cash
over the first three years following the acquisition, provided that certain
targets over the relevant trailing twelve month period for earnings before taxes
are met for the acquired assets. The targeted amounts increase by 25% each year.
No earn-out amounts were earned in the first twelve month period following the
acquisition. We also entered into employment agreements with five of the
executives of Breakaway.
12
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Total consideration
for the acquisition was $3,630,000, which consisted of 1,292,614 shares
multiplied by the then publicly traded price of $2.44 per share, $252,000 in
cash and $224,000 of transaction costs, plus the assumption of liabilities. To
determine the fair value of the acquired intangible assets and the related
allocation of the purchase price, we commissioned a third party valuation
analysis. That third party analysis determined that the identified intangible
assets and the related useful lives are developed technology ($781,000, 6 year
life), customer relationships ($1,110,000, 6 year life) and non-competition
agreements ($30,000, 3 year life). Results of operations from the acquisition
have been included in our consolidated statements of operations since August 1,
2003 and include $461,000 of amortization of the identified intangibles based
upon the estimated lives.
BREAKAWAY INTERNATIONAL, INC.
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Accounts receivable, net $ 333,000
Inventory, net 35,000
Fixed assets, net 108,000
Developed technology 781,000
Customer relationships 1,110,000
Non-competition agreements 30,000
Goodwill 2,235,000
-------------
Total assets acquired $ 4,632,000
=============
Accounts payable and accruals $ 482,000
Deferred revenue 520,000
-------------
Total liabilities assumed 1,002,000
-------------
Net assets acquired $ 3,630,000
=============
The above amounts have changed from our initial purchase accounting as
follows: goodwill has increased by $10,000 to reflect $7,000 of additional
transaction costs and $3,000 of additional liabilities that were recorded,
accounts payable and accruals increased by $3,000 to reflect the additional
liabilities that were recorded and, as a result, the overall purchase price
increased by $7,000 from the initial amount of $3,623,000 to $3,630,000.
NTN CANADA
On December 15, 2003, we acquired most of the operating assets, certain
liabilities and the operations of NTN Interactive Network, Inc. (NTNIN), our
long time Canadian licensee from its parent, Chell Group Corporation Inc.
(Chell). We acquired NTNIN's assets for $233,000 in cash, 238,300 shares of
unregistered NTN common stock, the contribution of $550,000 in unpaid licensing
royalties and the assumption of certain liabilities.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Total consideration
for the acquisition was approximately $1,823,000, which consisted of 238,300
shares multiplied by the then publicly traded price of $3.70 per share, $233,000
in cash, the contribution of $550,000 in unpaid licensing royalties, $122,000 of
transaction costs, plus the assumption of liabilities.
NTN INTERACTIVE NETWORK, INC.
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Cash $ 20,000
Accounts receivable, net 235,000
Other current assets 21,000
Fixed assets, net 43,000
Customer relationships 720,000
Trivia database 345,000
Interactive events software 102,000
Trivia software 90,000
Licenses 12,000
Goodwill 974,000
-------------
Total assets acquired $ 2,562,000
-------------
Accounts payable and accruals $ 628,000
Leases 44,000
Deferred revenue 67,000
-------------
Total liabilities assumed 739,000
-------------
Net assets acquired $ 1,823,000
=============
13
To determine the fair value of the acquired intangible assets and the
related allocation of the purchase price, we commissioned a third party
valuation analysis. That third party analysis determined that the identified
intangible assets and the related useful lives are customer relationships
($720,000, 4 year life), trivia database ($345,000, 10 year life), interactive
events software ($102,000, 5 year life) and trivia software ($90,000, 5 year
life). Results of operations from the acquisition have been included in our
consolidated statements of operations since December 15, 2003 and include
$203,000 of amortization of the identified intangibles based upon the estimated
lives.
The above amounts have changed from our initial purchase accounting as
follows: (1) goodwill has increased by $99,000 to reflect a variety of factors
including the final calculation of the cash component of the purchase price
based on the final closing balance sheet, which generated an additional payment
to Chell of approximately $10,000 and a payment to the president of NTNIN on
behalf of Chell of approximately $23,000, (2) the final calculation of the
transaction costs (an increase of $38,000), (3) recording $12,000 of additional
liabilities, and (4) making $16,000 of other adjustments to the final balance
sheet. The overall purchase price increased by $37,000 from the initial amount
of $1,786,000 to $1,823,000.
VISION PRODUCT LINE
On February 4, 2005, we entered into an Asset Purchase Agreement with
Intura Solutions LP (Intura), a Texas limited partnership, pursuant to which we
sold the point of sale software products developed and maintained by our
Software Solutions segment. In accordance with the asset purchase transaction,
Gary Peek terminated his position as vice president and general manager of our
Software Solutions segment and immediately thereafter commenced his position
with Intura to oversee business operations.
The primary software products sold by us to Intura were Vision, Relief
Manager Plus (RMP), Store Link Plus (SLP), Sell More Pizzas and other legacy
products as well as a non-exclusive right to develop and market the Enterprise
software. We received a non-dilutable 10% partnership interest in Intura in the
transaction and will receive 20% of Intura's revenues received during the next
two years, up to a maximum of $100,000. Further, Intura will provide software
development maintenance services for the RMP software for two years (we continue
to retain the rights to the maintenance and support revenue from the legacy
products).
GOVERNMENT REGULATIONS
The cost of compliance with federal, state and local laws has not had a
material effect upon our capital expenditures, earnings or competitive position
to date. On June 16, 1998, we received approval from the Federal Communications
Commission for our 900 MHz Playmakers. The 900-MHz Playmaker is an integral
component of our network.
EMPLOYEES
As of February 3, 2005, we employ approximately 218 people on a full-time
basis and 50 people on a part-time or seasonal basis. We also utilize
independent contractors for specific projects and hire up to as many as 59
seasonal employees as needed to produce our play along sports games during
varying professional and collegiate sports seasons. None of our employees are
represented by a labor union and we believe our employee relations are
satisfactory.
ITEM 2. PROPERTIES
We lease approximately 39,000 square feet of office and warehouse space at
5966 La Place Court, Carlsbad, California for our corporate headquarters and
broadcast center. In July 2001, a five-year lease renewal for the property
commenced upon expiration of the prior lease term that expired in June 2001.
Until March 2003, we sublet approximately 11,600 square feet of this office
space to WinResources Computing, Inc. under a sublease entered into in February
2001.
We also lease approximately 1,253 square feet of additional office space
located in San Francisco. This lease expires in April 2005. We sublease this
space to a subtenant for approximately the same amount as our monthly rent. That
sublease expires in April 2005. We also lease approximately 6,480 square feet of
additional office space in Atlanta, Georgia, expiring in September 2005,
approximately 16,981 square feet of additional office space in Arlington, Texas,
expiring in July 2005, and approximately 5,400 square feet in Toronto, Ontario,
Canada, expiring in December 2014. In addition, we lease additional office space
in Mill Valley, California. This lease expired in May 2004 and is now on a month
to month basis. In February 2004, we entered into a lease agreement for an
executive office in New York, New York. That lease expired in June 2004 and is
now on a month to month basis.
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ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of
our business. There currently is no material litigation pending or threatened
against us.
INTERACTIVE NETWORK, INC.
On April 14, 2004, we settled the lawsuit filed against us in 1992 by IN
(now Two Way TV (US), Inc.) The litigation involved licensing and patent
infringement issues in Canada. These actions related to the delivery 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, including the settlement
amount, of approximately $200,000 in the first quarter of 2004 and we recorded
further legal fees of approximately $92,000 relating to this matter in the third
quarter of 2004.
LONG RANGE SYSTEMS
On March 21, 2003, Long Range Systems, Inc. (LRS) filed in the United
States District Court, Northern District of Texas, a patent infringement
complaint against our NTN Wireless subsidiary. This complaint alleged trade
dress and patent infringement and unfair competition. We were served with this
complaint on March 27, 2003. In February 2004, LRS amended their complaint to
eliminate certain allegations relating to infringement of its utility patent for
wireless pagers. This complaint related to our repair and replacement activities
of LRS pagers, which is not a significant percentage of our NTN Wireless
business.
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 alleged 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.
On February 28, 2005, we agreed with LRS to settle and dismiss both
lawsuits and the joint request for dismissal was filed with the court, although
at the date of the filing the settlement agreement had not been fully executed.
Under the terms of the settlement, NTN and LRS each agreed to settle and dismiss
the two lawsuits without liability or any payment to the other party. Each party
is responsible for its own legal costs. On March 2, 2005, the court dismissed
the LRS lawsuit based on this agreement.
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. In December 2004, we
agreed with Open Table to settle and dismiss this lawsuit. We paid Open Table
$15,000 under the terms of the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote by security holders during the fourth
quarter of the fiscal year ended December 31, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange (AMEX) under the
symbol "NTN." Set forth below are the high and low sales prices for the common
stock as reported by the AMEX for the two most recent fiscal years:
15
COMMON STOCK
---------------
LOW HIGH
------ ------
2003
----
First Quarter .............................. $ 0.95 $ 1.75
Second Quarter ............................. $ 1.48 $ 2.33
Third Quarter .............................. $ 1.91 $ 3.00
Fourth Quarter ............................. $ 2.65 $ 4.11
2004
----
First Quarter .............................. $ 2.51 $ 4.25
Second Quarter ............................. 2.51 3.19
Third Quarter .............................. 1.62 3.20
Fourth Quarter ............................. 2.40 3.24
On March 9, 2005, the closing price for our common stock as reported on the
AMEX was $2.83. As of March 9, 2005, there were approximately 1,259 holders of
common stock.
To date, we have not declared or paid any cash dividends with respect to
our common stock, and the current policy of our Board of Directors is to retain
earnings, if any, after payment of dividends on the outstanding preferred stock
to provide for our growth. Consequently, no cash dividends are expected to be
paid on our common stock in the foreseeable future. Pursuant to the terms of our
line of credit, we may not pay or declare dividends without the prior written
consent of the lender.
We have 161,000 shares of Series A Preferred Stock issued and outstanding.
The Series A Preferred Stock provides for a cumulative annual dividend of 10
cents per share, payable in semi-annual installments in June and December.
Dividends may be paid in cash or with shares of common stock. In 2004, we issued
approximately 6,000 common shares for payment of these dividends. At December
31, 2004, the cumulative unpaid dividends for the Series A Preferred Stock was
approximately $1,300.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth as of December 31, 2004 our compensation
plans authorizing us to issue equity securities and the number of securities
issuable thereunder.
(A) NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
PLAN CATEGORY
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS 10,443,000(1) $1.46 2,071,177(2)
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS 1,941,000(4) $1.61 0
---------------------- ------------------
TOTAL 12,384,000 2,071,177(3)
====================== ==================
- ----------
(1) Includes 9,485,305 shares issuable upon exercise of options granted
pursuant to the NTN Communications, Inc. 1995 Employee Stock Option Plan,
458,000 shares issuable upon exercise of options and rights granted
pursuant to the NTN Communications, Inc. 2004 Performance Incentive Plan
and 500,000 shares issuable upon exercise of options granted pursuant to
the NTN Communications, Inc. 1996 Special Stock Option Plan.
(2) Remaining available for grant under the NTN Communications, Inc. 2004
Performance Incentive Plan. The 2004 Performance Incentive Plan became
effective on September 30, 2004. No additional awards were, or shall be,
granted under the 1995 Plan from and after the effective date of the 2004
Plan. The number of shares of common stock that remained available for
award grants under the 1995 Plan immediately prior to the effectiveness of
the 2004 Plan became available for award grants under the 2004 Plan.
(3) Does not include 300,000 shares of Buzztime Entertainment, Inc. common
stock available for grant under the Buzztime Entertainment, Inc. 2001
Incentive Stock Option Plan. To date, no options have been granted under
the plan.
16
(4) The 1,941,000 shares issuable that are not pursuant to equity compensation
plans approved by security holders are all pursuant to warrants granted in
connection with consulting agreements with non-employees or were warrants
associated with equity financings. Warrants to purchase 236,619 shares were
granted in 2004, 514,000 shares were granted in 2003 and 685,000 shares
were granted in 2002. The remaining warrants were issued in 2001 or
earlier. As of December 31, 2004, the range of exercise prices and the
weighted-average remaining contractual life of outstanding warrants was
$0.50 to $3.91 and 4 years, respectively.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
included elsewhere in this document. The selected financial data for the years
ended December 31, 2004, 2003, 2002, 2001 and 2000 is derived from our audited
financial statements.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Total revenue .......................................... $ 35,655 $ 29,489 $ 25,610 $ 22,559 $ 22,048
Total operating expenses ............................... 40,711 32,035 27,465 25,493 30,249
---------- ---------- ---------- ---------- ----------
Operating loss ......................................... (5,056) (2,546) (1,855) (2,934) (8,201)
Other income (expense), net ............................ 171 (128) (505) (807) (940)
---------- ---------- ---------- ---------- ----------
Loss from continuing operations ........................ (4,885) (2,674) (2,360) (3,741) (9,141)
Income taxes ........................................... (94) (47) (41) -- --
Minority interest in loss of consolidated subsidiary ... -- 10 212 85 --
---------- ---------- ---------- ---------- ----------
Loss before cumulative effect of accounting change ..... (4,979) (2,711) (2,189) (3,656) (9,141)
Cumulative effect of accounting change ................. -- -- -- -- (448)
---------- ---------- ---------- ---------- ----------
Net loss ............................................... $ (4,979) $ (2,711) $ (2,189) $ (3,656) $ (9,589)
Basic and diluted net loss per common share:
Continuing operations ................................ $ (.09) $ (.06) $ (.06) $ (.10) $ (.28)
Cumulative effect of accounting change ............... -- -- -- -- (.01)
---------- ---------- ---------- ---------- ----------
Net loss ..................................... $ (.09) $ (.06) $ (.06) $ (.10) $ (.29)
========== ========== ========== ========== ==========
Weighted-average shares outstanding .................... 52,599 45,446 39,081 36,755 33,206
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(IN THOUSANDS)
DECEMBER 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Total current assets .................... $ 13,506 $ 6,704 $ 4,184 $ 4,218 $ 5,808
Total assets ............................ 29,388 20,630 10,842 13,380 18,822
Total current liabilities ............... 6,862 5,939 3,620 4,178 4,915
Total liabilities ....................... 7,353 7,566 8,719 9,614 14,740
Total minority interest ................. -- -- 643 855 --
Shareholders' equity .................... 22,035 13,064 1,480 2,911 4,082
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The following management's discussion and analysis of financial condition
and results of operations discussion should be read in conjunction with the
consolidated financial statements provided under Part II, Item 8 of this Annual
Report on Form 10-K.
17
2004 HIGHLIGHTS
NTN's financial and operating results for the year ended December 31, 2004
included the following highlights:
o 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. 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.
o In April 2004, Time Warner Cable launched the Buzztime channel as part
of its interactive television games channel in La Place, Louisiana.
o In July 2004, we launched our new NTN Blast channel on the NTN iTV
Network. NTN Blast was developed to help land as customers new
hospitality sites that might not be attracted to our core trivia and
sports products and to retain existing hospitality sites with the
expanded content offering. NTN Blast is played on our new underlying
iTV2 technology, which enables us to display two video channels on the
NTN iTV Network.
o In November 2004, Comcast Cable launched the Buzztime channel in its
Alexandria/Arlington system and Prince William system. Both cable
television systems service portions of the Northern Virginia area.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to deferred costs and revenues, depreciation of broadcast equipment, bad
debts, investments, intangible assets, financing operations, and contingencies
and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o We record deferred costs and revenues related to the costs and related
installation revenue associated with installing new customer sites.
Based on Staff Accounting Bulletin 104 (SAB 104), we amortize these
amounts over an estimated three-year average life of a customer
relationship.
o We incur a relatively significant level of depreciation expense in
relationship to our operating income. The amount of depreciation
expense in any fiscal year is largely related to the estimated life of
handheld, wireless Playmaker devices, VSAT satellite dishes and
associated electronics and the computers located at our customer
sites. The Playmakers are depreciated over a four-year life, VSAT
dishes and associated electronics over a four-year life and the
computers over a three-year life. The depreciable life of these assets
was determined based upon their estimated useful life which considers
anticipated technology changes. If our Playmakers, VSAT dishes and
associated electronics and the computers turn out to have longer
lives, on average, than estimated, our depreciation expense would be
significantly reduced in those future periods. Conversely, if the
Playmakers, VSAT dishes and associated electronics and the computers
turn out to have shorter lives, on average, than estimated, our
depreciation expense would be significantly increased in those future
periods.
18
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
domestic customers that have terminated our iTV Network service plus
five percent of outstanding balances for all unreserved customer
balances across all of our domestic businesses and, for Canadian
customers, all accounts over 90 days past due. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances
may be required.
o We assess our inventory for estimated obsolescence or unmarketable
inventory and write down the difference between the cost of inventory
and the estimated market value based upon assumptions about future
sales and supply on-hand. If actual market conditions are less
favorable than those projected by management, additional inventory
write-downs may be required.
o Revenues from Software Solutions are recognized in accordance with
Statement of Position (SOP) No. 97-2, "Software Revenue Recognition",
as amended. Software license fee revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product has
occurred at our customer's location, the fee is fixed or determinable
and collection is probable, provided that vendor specific evidence
exists for any undelivered elements, namely annual support and
maintenance. Along with the basic software license, our customers are
provided post contract support (PCS) for an additional fee, which is
based on a stipulated percentage of the license fee. PCS consists of
technical support as well as unspecified software upgrades and
releases when and if made available by us during the term of the
support period.
If at the outset of an arrangement we determine that the arrangement
fee is not fixed or determinable, revenue is deferred until the
arrangement fee becomes due. If at the outset of an arrangement we
determine that collectibility is not probable, revenue is deferred
until the earlier of when collectibility becomes probable or the
receipt of payment. If an arrangement allows for customer acceptance,
revenue is not recognized until the earlier of receipt of customer
acceptance or expiration of the acceptance period.
Additionally, we provide consulting and training services under both
hourly-based time and materials and fixed-priced contracts. Revenues
from these services are generally recognized as the services are
performed.
o We have a significant amount of goodwill and intangible assets on our
balance sheet related to acquisitions. At December 31, 2004 the net
amount of $7,669,000 of goodwill and intangible assets represented
26.1% of total assets. Goodwill represents the excess of costs over
fair value of assets of businesses acquired. We adopted the provisions
of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, as of January
1, 2002. Goodwill and intangible assets acquired in a purchase
combination determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS.
We annually perform tests for goodwill impairment as required by SFAS
142. We continually monitor for any potential indicators of impairment
of goodwill and intangible assets and we have determined that no such
indicators have arisen to date. Any impairment loss could have a
material adverse impact on our financial condition and results of
operations.
o In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment," a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation" and superseding APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123R requires the Company to
expense grants made under the stock option and employee stock purchase
plan programs. That cost will be recognized over the vesting period of
the plans. SFAS No. 123R is effective for the first interim or annual
period beginning after June 15, 2005. Upon adoption of SFAS No. 123R,
amounts previously disclosed under SFAS No.123 will be recorded in the
consolidated income statement. We are evaluating the alternatives
allowed under the standard, which we are required to adopt beginning
in the third quarter of 2005. We believe that this new standard will
increase our operating losses in the future but that increase will be
of a non-cash nature.
19
We do not have any of the following:
o Off-balance sheet arrangements except for purchase orders and
commitments and operating leases;
o Certain trading activities that include non-exchange traded contracts
accounted for at fair value or speculative or hedging instruments; or
o Relationships and transactions with persons or entities that derive
benefits from any non-independent relationship other than the related
party transactions discussed in ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS (which item is incorporated by reference to our
definitive proxy statement) or which are so non-material to fall below
the materiality threshold of such item.
ASSESSMENTS OF FUNCTIONAL CURRENCIES. The U.S. dollar is the functional
currency of all of the Company's operations except for its newly acquired
Canadian operations.
BACKGROUND
Our business is developing and distributing interactive entertainment and
wireless information and communications products. We operate our business
principally through two operating units: the NTN Hospitality Technologies
Division and Buzztime. The NTN Hospitality Technologies Division includes the
NTN iTV Network, NTN Wireless and Software Solutions.
Revenues generated and operating income (loss) by our two business units
are illustrated below. The data presented below includes allocations of
corporate expenses and elimination of intercompany charges.
YEARS ENDED DECEMBER 31
2004 2003 2002
---- ---- ----
Revenues
NTN Hospitality Technologies division .. $ 35,274,000 99% $ 29,275,000 99% $ 25,465,000 99%
Buzztime ............................... 359,000 1% 196,000 1% 128,000 1%
Other .................................. 22,000 - 18,000 - 17,000 -
------------ ------ ------------ ------ ------------ ------
Total ........................ $ 35,655,000 100% $ 29,489,000 100% $ 25,610,000 100%
============ ====== ============ ====== ============ ======
Operating Income (Loss)
NTN Hospitality Technologies division .. (1,097,000) $ 1,211,000 $ 1,699,000
Buzztime ............................... (3,959,000) (3,757,000) (3,554,000)
------------ ------------ ------------
Total ........................ $ (5,056,000) $ (2,546,000) $ (1,855,000)
============ ============ ============
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 electronic data-managed comment cards and from its
hardware and software enterprise solutions. Buzztime's revenue is primarily
generated from the distribution of its digital trivia game show content as well
as revenue related to production services for third parties and from performance
under a Trial Agreement with a major cable operator.
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
operations for the three years ended December 31, 2004. We believe that
inflation has not had a material effect on the results of operations for the
periods presented.
YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
Operations for 2004 resulted in a net loss of $4,979,000 compared to net
loss of $2,711,000 for 2003.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$6,003,000 or 20.5%, to $35,296,000 in 2004 from $29,293,000 in 2003. 2004
included twelve months of operations of the Software Solutions segment and the
NTN Canada unit while 2003 included only five months and two weeks of operations
from those entities, respectively.
20
For the purpose of this analysis, the NTN iTV Network's revenues include
$22,000 and $18,000 of "other" revenues for 2004 and 2003, respectively shown on
our consolidated statements of operations. The revenue contribution from the
three operating segments of the division for 2004 and 2003 are shown in the
following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
2004 2003 Change
---- ---- ------
NTN iTV Network $25,925,000 $23,024,000 $2,901,000
NTN Wireless 5,337,000 4,742,000 595,000
Software Solutions 4,034,000 1,527,000 2,507,000
------------ ------------ ------------
Total Revenue of Division $35,296,000 $29,293,000 $6,003,000
============ ============ ============
Within the NTN iTV Network there are several revenue contributors,
including our core subscription revenue, Canadian licensing revenue (in 2003),
installation revenue, advertising revenue and since December 15, 2003, revenue
from our Canadian operations. The primary revenue components are broken out in
the following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
2004 2003 Change
---- ---- ------
Subscription Revenues $20,885,000 $20,011,000 $874,000
Canadian License Revenue -- 745,000 (745,000)
Subscription and Installation
Revenue from Canadian
Operations 3,644,000 167,000 3,477,000
Advertising Revenue - United States 602,000 868,000 (266,000)
Advertising Revenue - Canada 163,000 10,000 153,000
Installation Revenue 631,000 1,223,000 (592,000)
------------ ------------ ------------
NTN iTV Network $25,925,000 $23,024,000 $2,901,000
============ ============ ============
As noted in the above table, our subscription revenue from core hospitality
operations increased by $874,000, or 4.4%, due to an increase in net site count
and average per site revenue. 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 2004, the NTN iTV Network generated domestic advertising revenue of
approximately $602,000 compared to approximately $868,000 in 2003. This $266,000
decrease was due to several advertising campaigns in the 2003 period that ended
without comparable campaigns in the 2004 period.
Installation revenue associated with installing new customer locations
decreased $592,000, or 48.4%. 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 from those new
sites 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.
However, we believe this move to a lower installation fee coupled with higher
recurring fees has a greater long-term financial benefit to NTN. We added 184
net new domestic sites in 2004 compared to a decrease of 46 net new domestic
sites in 2003. This domestic site count increase was the largest annual net
addition of sites in 7 years.
The NTN iTV Network customer site count in the United States at December
31, 2004 was 3,309. This was an increase of 184 sites over the December 31, 2003
United States site count of 3,125. Our Canadian site count at December 31, 2004
was 351. This was a decrease of 49 sites from the December 31, 2003 Canadian
site count of approximately 400.
Buzztime service revenues increased $163,000, or 83.2%, to $359,000 in 2004
from $196,000 in 2003. The primary factor in the increase was $150,000 from
United States and Canadian satellite operators for distribution of Buzztime
trivia to their users on a subscription basis. There was no comparable
satellite-related revenue in 2003. 2004 included $130,000 in revenues recognized
under a development agreement with a major cable operator compared to $170,000
in 2003. The remainder of the revenue growth came from a variety of sources
including increases in license revenue from SusCom, Digeo and ICTV.
21
As a result of the above factors, NTN's consolidated revenues increased
$6,166,000, or 20.9%, to $35,655,000 in 2004 from $29,489,000 in 2003.
OPERATING EXPENSES
DIRECT OPERATING COSTS
Direct operating costs of services increased $1,111,000, or 10.0%, to
$12,257,000 in 2004 from $11,146,000 in 2003. A significant amount of this
increase was because 2004 had a full year of operations of Software Solutions
compared to approximately five months in 2003 and because we operated NTN Canada
for a full year in 2004 compared to two weeks in 2003. The following table
compares the direct costs for each of our operating segments between 2004 and
2003:
DIRECT OPERATING COSTS
2004 2003 Change
---- ---- ------
NTN iTV Network $7,006,000 $6,821,000 $185,000
NTN Wireless 3,304,000 2,952,000 352,000
Software Solutions 656,000 211,000 445,000
------------ ------------ ------------
Hospitality Technologies division 10,966,000 9,984,000 982,000
Buzztime 1,291,000 1,162,000 129,000
------------ ------------ ------------
Consolidated Company $12,257,000 $11,146,000 $1,111,000
============ ============ ============
Our direct operating costs in the NTN iTV Network increased by $185,000 in
2004. This increase was due to a $748,000 increase in our direct operating costs
with NTN Canada. That $748,000 increase in Canadian direct costs was partially
offset by a $563,000 decrease in domestic direct operating costs. This $563,000
decrease was primarily due to a $457,000 decrease in direct depreciation, which,
in turn, was caused by an increasing level of fully depreciated broadcast
equipment at our customer sites and to a $71,000 reduction of communication
expenses.
The $445,000 increase in Software Solutions' direct operating costs largely
related to the cost of goods sold associated with twelve months of operations in
that segment in 2004 compared to five months in 2003. The gross margin of
Software Solutions in 2004 was 83.7%, a 2.5% decrease from the 2003 gross margin
of 86.2%. The gross margin decline was due to a larger hardware component as a
percentage of revenue in 2004 than in 2003 and greater license expense relating
to certain Microsoft products imbedded in our software. Our hardware revenues
typically carry lower margins than our software revenues.
The $352,000 increase in the NTN Wireless direct operating costs largely
related to the cost of goods sold associated with the NTN Wireless revenue
increase of $595,000 in 2004 noted above. The gross margin of NTN Wireless was
comparable in both years with a gross margin of 38.1% in 2004 and a gross margin
of 37.7% in 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $6,436,000 or 35.0%,
to $24,836,000 in 2004 from $18,400,000 in 2003. A great deal of this increase
was because 2004 had a full year of operations of Software Solutions compared to
approximately five months in 2003 and a full year of operations of NTN Canada in
2004 compared to two weeks in 2003. The following table compares the selling,
general and administrative expenses for each of our operating segments between
2003 and 2002:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2004 2003 Change
---- ---- ------
NTN iTV Network $15,214,000 $12,374,000 $2,840,000
NTN Wireless 1,575,000 1,617,000 (42,000)
Software Solutions 5,153,000 1,802,000 3,351,000
------------ ------------ ------------
Hospitality Technologies division 21,942,000 15,793,000 6,149,000
Buzztime 2,894,000 2,607,000 287,000
------------ ------------ ------------
Consolidated Company $24,836,000 $18,400,000 $6,436,000
============ ============ ============
22
The $2,840,000 SG&A increase in the NTN iTV Network segment was largely due
to $1,504,000 of SG&A expenses in our new NTN Canada subsidiary compared to
$162,000 in 2003, or a $1,342,000 increase. The remainder of the SG&A increase
of $1,498,000 in the NTN iTV Network's domestic operations came from a variety
of items including increased salaries and benefits of approximately $800,000,
increased office rental expense of $111,000, increased telephone expense of
$176,000, increased marketing expenses of $229,000 and increased repairs and
maintenance expense of approximately $125,000. The increases in salaries and
related expenses were related to the hiring of additional personnel.
SG&A expenses decreased $42,000 in the NTN Wireless segment largely due to
a combination of factors including reduced bad debt expense. The $287,000 SG&A
increase in the Buzztime segment was largely due to increased payroll of
$476,000 partially offset by a decrease in marketing expenses of $142,000. SG&A
expenses include an allocation of our corporate SG&A to the segments based on a
variety of factors, including headcount, square footage of facilities and other
factors.
STOCK BASED COMPENSATION EXPENSE
Stock based compensation expense increased by $61,000, or 26.3%, to
$293,000 in 2004 compared to $232,000 in 2003. This increase largely arises from
recognition of non-cash expense associated with the grants of certain deferred
stock units to our executives in 2004 under the 2004 Performance Incentive Plan.
LITIGATION, LEGAL AND PROFESSIONAL FEES
Litigation, legal and professional fees increased $810,000, or 97.5%, to
$1,641,000 in 2004 compared to $831,000 in 2003. This increase relates to
$369,000 of Sarbanes-Oxley-related expenses, an increase of $227,000 in legal
fees related to the Long Range Systems litigation in our Wireless segment, an
increase of $67,000 in audit fees, additional legal fees for trademark
registrations and generally to an increase in the scope of our business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization not related to direct operating costs
increased $258,000, or 23.5%, to $1,355,000 in 2004 from $1,097,000 in 2003 due
to increases in amortization expense in Software Solutions and NTN Canada of
$183,000 and $258,000, respectively. Those increases reflected a full year of
amortization related to identified intangible assets compared to five months of
amortization with Software Solutions and two weeks of amortization with NTN
Canada. The combined amortization increase of $441,000 in Software Solutions and
NTN Canada was partially offset by lower levels of depreciation and amortization
throughout the remainder of NTN largely due to certain assets becoming fully
depreciated
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $329,000 in both 2004 and 2003.
Research and development expenses, which are salary expense, primarily related
to projects to develop new technologies for the iTV network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income increased $93,000 to $98,000 in 2004, compared to $5,000 in
2003. This increase was due to a larger amount of cash invested in short-term
marketable securities in 2004 than in 2003.
Interest expense decreased $86,000, or 36.1%, to $152,000 in 2004, compared
to $238,000 in 2003, due to the expiration of various capitalized leases and a
paid down line of credit for the majority of the year, partially offset by the
imputed interest associated with the equipment notes payable.
OTHER INCOME
Other income was $225,000 in 2004. This other income arose from the
settlement of a derivative securities lawsuit. In 2003, we recorded $105,000 of
other income that arose from a gain on early extinguishment of debt.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary decreased $10,000 to
zero in 2004 compared to $10,000 in 2003. The 2003 figure 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.
23
INCOME TAXES
For the year ended December 31, 2004, the NTN Hospitality Technologies
division had taxable income in Canada and a loss in the United States. In states
where separate filing is required, the division will incur a state tax
liability. As a result, NTN Hospitality Technologies recorded a tax provision of
$94,000 in 2004. This was a $47,000 increase over the $47,000 provision for
income taxes recorded in 2003.
EBITDA
Our earnings before interest, taxes, depreciation and amortization (EBITDA)
decreased by $2,364,000 to $(898,000) in 2004 from EBITDA of $1,466,000 in 2003.
This EBITDA decrease was primarily due to the increased loss in 2004 of
$2,268,000.
EBITDA is not intended to represent a measure of performance in accordance
with accounting principles generally accepted in the United States (GAAP). Nor
should EBITDA be considered as an alternative to statements of cash flows as a
measure of liquidity. EBITDA is included herein because we believe it is a
measure of operating performance that financial analysts, lenders, investors and
other interested parties find to be a useful tool for analyzing companies like
NTN that carry significant levels of non-cash depreciation and amortization
charges in comparison to their GAAP earnings.
The following table reconciles our net loss per GAAP to EBITDA:
YEAR ENDED
DECEMBER 31
----------------------------
2004 2003
------------ ------------
EBITDA CALCULATION
Net loss per GAAP $ (4,979,000) $ (2,711,000)
Interest expense (net) 54,000 233,000
Depreciation and amortization 3,933,000 3,897,000
Income taxes 94,000 47,000
------------ ------------
EBITDA $ (898,000) $ 1,466,000
============ ============
On a segment basis, our segments generated EBITDA levels as presented below:
($000) YEAR ENDED
DECEMBER 31, 2004
-------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $1,122 $(64) $(2,074) $(1,016) $(3,963) $(4,979)
Interest expense (net) 49 1 -- 50 4 54
Depreciation and amortization 2,881 100 392 3,373 560 3,933
Income taxes 94 -- -- 94 -- 94
-------- -------- -------- -------- -------- --------
EBITDA $4,146 $37 $(1,682) $2,501 $(3,399) $(898)
======== ======== ======== ======== ======== ========
($000) YEAR ENDED
DECEMBER 31, 2003
-------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN ITV SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $1,772 $(171) $(565) $1,036 $(3,747) $(2,711)
Interest expense (net) 232 1 -- 233 -- 233
Depreciation and amortization 3,057 138 164 3,359 538 3,897
Income taxes 47 -- -- 47 -- 47
-------- -------- -------- -------- -------- --------
EBITDA $5,108 $(32) $(401) $4,675 $(3,209) $1,466
======== ======== ======== ======== ======== ========
24
YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Operations for 2003 resulted in a net loss of $2,711,000 compared to net
loss of $2,189,000 for 2002.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$3,811,000 or 15%, to $29,293,000 in 2003 from $25,482,000 in 2002. For the
purpose of this analysis, the NTN iTV Network's revenues include $18,000 and
$17,000 of "other" revenues for 2003 and 2002, respectively shown on our
consolidated statements of operations. The revenue contribution from the three
operating segments of the division for 2003 and 2002 are shown in the following
table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
2003 2002 Change
---- ---- ------
NTN iTV Network $23,024,000 $23,077,000 $(53,000)
NTN Wireless 4,742,000 2,405,000 2,337,000
Software Solutions 1,527,000 -- 1,527,000
------------ ------------ ------------
Total Revenue of Division $29,293,000 $25,482,000 $3,811,000
============ ============ ============
Within the NTN iTV Network there are several revenue contributors,
including our core subscription revenue, Canadian licensing revenue,
installation revenue, advertising revenue and as of December 15, 2003, revenue
from our Canadian operations. The primary revenue components are broken out in
the following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
2003 2002 Change
---- ---- ------
Subscription Revenues $20,011,000 $19,165,000 $846,000
Canadian License Revenue 745,000 1,161,000 (416,000)
Subscription and Installation
Revenue from Canadian Operations 167,000 -- 167,000
Advertising Revenue - United States 868,000 959,000 (91,000)
Advertising Revenue - Canada 10,000 -- 10,000
Installation Revenue 1,223,000 1,792,000 (569,000)
----------- ----------- -----------
NTN iTV Network $23,024,000 $23,077,000 $(53,000)
=========== =========== ===========
As noted in the above table, our core hospitality revenues increased by
$846,000, or 4.4%, in 2003. Installation revenue associated with installing new
customer locations decreased approximately $569,000 as some of the deferred
revenue associated with prior year installations has become fully amortized.
Licensing revenues from our Canadian licensee decreased approximately
$416,000 in 2003 to $745,000 from $1,161,000 in 2002 due to a smaller customer
base in 2003 and to a cessation of the royalty stream in the fourth quarter as
we finalized the acquisition of the operations of the licensee. On December 15,
2003, we acquired the operations of our Canadian licensee, so in future years we
will show the overall revenues of the Canadian operation rather than the
previous license revenue.
In 2003, the NTN iTV Network generated revenue of approximately $878,000 in
national and regional advertising, including a $10,000 contribution in the two
weeks that we owned NTN Canada, compared to approximately $959,000 in 2002.
The NTN iTV Network customer site count in the United States at December
31, 2003 was 3,125. This was a decrease of 46 sites over December 31, 2002.
Buzztime service revenues increased $68,000, or 53.1%, to $196,000 in 2003
from $128,000 in 2002. The increase was due to revenues recognized under a trial
agreement with a major cable operator.
As a result of the above factors, NTN's consolidated revenues increased
$3,879,000, or 15.1%, to $29,489,000 in 2003 from $25,610,000 in 2002.
OPERATING EXPENSES
DIRECT OPERATING COSTS
Direct operating costs of services increased $1,428,000, or 14.7%, to
$11,146,000 in 2003 from $9,718,000 in 2002. A great deal of this increase was
because 2003 had a full year of operations of NTN Wireless compared to
approximately nine months in 2002. The following table compares the direct costs
for each of our operating segments between 2003 and 2002:
25
DIRECT OPERATING COSTS
2003 2002 Change
---- ---- ------
NTN iTV Network $6,821,000 $7,276,000 $(455,000)
NTN Wireless 2,952,000 1,515,000 1,437,000
Software Solutions 211,000 -- 211,000
----------- ----------- -----------
Hospitality Technologies division 9,984,000 8,791,000 1,193,000
Buzztime 1,162,000 927,000 235,000
----------- ----------- -----------
Consolidated Company $11,146,000 $9,718,000 $1,428,000
=========== =========== ===========
As noted in the above table, the direct operating costs of our core NTN iTV
Network segment actually decreased by $455,000 in 2003 compared to 2002. These
savings largely arose from expense reductions in site visits, technical visits
and in depreciation expense associated with equipment at the sites. These
savings were achieved despite incurring operating costs of approximately
$500,000 related to the conversion of approximately 20% of our sites to our new
two-way VSAT technology in the second half of 2003. There was no such
VSAT-related expense in 2002.
The $1,437,000 increase in the NTN Wireless direct operating costs largely
related to the cost of goods sold associated with the NTN Wireless revenue
increase of $2,337,000 in 2003 noted above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $2,856,000 or 18.4%, to
$18,400,000 in 2003 from $15,544,000 in 2002. A great deal of this increase was
due to the addition of the Software Solutions segment in August 2003 and the NTN
Wireless business in April 2002. The following table compares the selling,
general and administrative expenses for each of our operating segments between
2003 and 2002:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2003 2002 Change
---- ---- ------
NTN iTV Network $12,374,000 $12,516,000 $(142,000)
NTN Wireless 1,617,000 827,000 790,000
Software Solutions 1,802,000 -- 1,802,000
----------- ----------- -----------
Hospitality Technologies division 15,793,000 13,343,000 2,450,000
Buzztime 2,607,000 2,201,000 406,000
----------- ----------- -----------
Consolidated Company $18,400,000 $15,544,000 $2,856,000
=========== =========== ===========
Selling, general and administrative (SG&A) expenses in 2003 included a full
year of SG&A expenses of NTN Wireless and five months of Software Solutions
compared to nine months of NTN Wireless and none of Software Solutions in 2002.
The SG&A increase in the NTN Wireless segment was largely due to increased
payroll of approximately $280,000, commission expenses of $162,000 and marketing
expenses of $96,000. However, these increases were partially due to the full
year of expenses compared to the nine month period in 2002. The SG&A increase in
the Buzztime segment was largely due to increased payroll of $128,000 and
increased marketing expenses of $167,000. SG&A expenses include an allocation of
our corporate SG&A to the segments based on a variety of factors, including
headcount, square footage of facilities and other factors.
STOCK BASED COMPENSATION EXPENSE
Stock based compensation expense increased by $136,000, or 141.7%, to
$232,000 in 2003 compared to $96,000 in 2002. This increase largely arises from
recognition of non-cash expense associated with fair value of the grant of a
warrant to an investment banking firm.
LITIGATION, LEGAL AND PROFESSIONAL FEES
Litigation, legal and professional fees increased $291,000, or 53.9%, to
$831,000 in 2003 compared to $540,000 in 2002. This increase relates to
additional legal fees for trademark registrations, certain litigation matters
and generally to an increase in the scope of our business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization not related to direct operating costs
decreased $458,000, or 29.5%, to $1,097,000 in 2003 from $1,555,000 in 2002 due
to certain assets becoming fully depreciated.
26
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $317,000 to $329,000 in 2003
from $12,000 in 2002, due primarily to projects to develop new technologies for
the iTV network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income decreased $1,000 to $5,000 in 2003, compared to $6,000 in
2002.
Interest expense decreased $273,000, or 53.4%, to $238,000 in 2003,
compared to $511,000 in 2002, due to the expiration of various capitalized
leases as well as to a lower average balance on our revolving line of credit.
OTHER INCOME
Other income reflected a gain on early extinguishment of debt of $105,000
that arose out of a discount recorded on the payoff of the line of credit with
GF Asset Management, LLC.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary decreased $202,000 to
$10,000 in 2003 compared to $212,000 in 2002. The 2002 minority interest figure
represented a full year's allocation of six percent of Buzztime's losses while
the 2003 figure represents an allocation of six percent of Buzztime's losses for
only the first half of the month of January 2003 since Scientific-Atlanta
converted their minority interest in the Buzztime subsidiary into NTN common
stock on January 16, 2003.
INCOME TAXES
The NTN Hospitality Technologies division had taxable income for the year
ended December 31, 2003. For federal income tax reporting purposes and in
unitary states where the NTN iTV Network may file on a combined basis, taxable
losses incurred by Buzztime should be sufficient to offset the division's
taxable income. In states where separate filing is required, the division will
incur a state tax liability. As a result, NTN Hospitality Technologies recorded
a state tax provision of $47,000 in 2003. This was a $6,000 increase over the
$41,000 provision for income taxes recorded in 2002.
EBITDA
Our earnings before interest, taxes, depreciation and amortization (EBITDA)
decreased by $1,816,000 to $1,466,000 in 2003 from EBITDA of $3,282,000 in 2002.
This EBITDA decrease was primarily due to the increased loss in 2003 of $522,000
coupled with a decrease in depreciation expense of $1,028,000.
EBITDA is not intended to represent a measure of performance in accordance
with accounting principles generally accepted in the United States (GAAP). Nor
should EBITDA be considered as an alternative to statements of cash flows as a
measure of liquidity. EBITDA is included herein because we believe it is a
measure of operating performance that financial analysts, lenders, investors and
other interested parties find to be a useful tool for analyzing companies like
NTN that carry significant levels of non-cash depreciation and amortization
charges in comparison to their GAAP earnings.
The following table reconciles our net loss per GAAP to EBITDA:
YEAR ENDED
DECEMBER 31
--------------------------
2003 2002
----------- -----------
EBITDA CALCULATION
Net loss per GAAP $(2,711,000) $(2,189,000)
Interest expense (net) 233,000 505,000
Depreciation and amortization 3,897,000 4,925,000
Income taxes 47,000 41,000
----------- -----------
EBITDA $ 1,466,000 $ 3,282,000
=========== ===========
27
On a segment basis, our segments generated EBITDA levels as presented below:
($000) YEAR ENDED
DECEMBER 31, 2003
------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $1,772 $(171) $(565) $1,036 $(3,747) $(2,711)
Interest expense (net) 232 1 -- 233 -- 233
Depreciation and amortization 3,057 138 164 3,359 538 3,897
Income taxes 47 -- -- 47 -- 47
-------- -------- -------- -------- -------- --------
EBITDA $5,108 $(32) $(401) $4,675 $(3,209) $1,466
======== ======== ======== ======== ======== ========
($000) YEAR ENDED
DECEMBER 31, 2002
------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN ITV SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $1,241 $(88) $ -- $1,153 $(3,342) $(2,189)
Interest expense (net) 505 -- -- 505 -- 505
Depreciation and amortization 4,095 98 -- 4,193 732 4,925
Income taxes 41 -- -- 41 -- 41
-------- -------- -------- -------- -------- --------
EBITDA $5,882 $10 $ -- $5,892 $(2,610) $3,282
======== ======== ======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had cash and cash equivalents of $6,710,000 and
working capital (current assets in excess of current liabilities) of $6,644,000
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) operations was
$(2,556,000) in 2004 and $1,098,000 in 2003, a $3,654,000 increase in the use of
cash. The primary reason for the $3,654,000 decrease in cash provided by our
operations was the increase in our net loss of $2,268,000, an increase in cash
tied up in accounts receivable of $946,000 and a reduction in the amount of cash
that we carried in accounts payable and accrued expenses of $545,000.
Net cash used in investing activities was $4,056,000 in 2004 and $2,961,000
in 2003. Included in net cash used in investing activities in 2004 were
approximately $2,986,000 in capital expenditures, $476,000 of software
development, $492,000 in deposits on broadcast equipment and $102,000 related to
the acquisitions completed in prior years. The capital expenditure levels and
related deposits on broadcast equipment increased largely due to our site count
growth noted above and the process of converting our Canadian customer base to
updated NTN iTV Network technology.
Net cash provided by financing activities was $10,766,000 in
2004 and $3,789,000. The cash provided by financing activities in 2004 included
$13,001,000 in net proceeds from our public offering and $497,000 in proceeds
from exercise of options and warrants. Those cash inflows were partially offset
by $2,548,000 in principal payments on our equipment notes payable and our
revolving line of credit as well as $184,000 in principal payments on our
capital leases.
The cash provided by financing activities in 2003 included $3,712,000 of
proceeds from issuance of common stock net of offering expenses and $1,843,000
of proceeds from the exercise of options and warrants. The $3,712,000 was raised
in private offerings with Robert M. Bennett, one of our directors, and Media
General, Inc. These proceeds were partially offset by cash used in financing
activities which included $1,550,000 of net principal payments on the revolving
line of credit and $216,000 of principal payments on capital leases and notes
payable for VSAT equipment.
28
CONTRACTUAL CASH OBLIGATIONS
A table recapping our contractual cash obligations as of December 31, 2004
is presented below:
PAYMENTS DUE BY PERIOD
---------------------------------------------------------
CONTRACTUAL OBLIGATION LESS THAN 1 YEAR 2ND & 3RD YEARS 4TH, 5TH & 6TH YEARS TOTAL
- ---------------------- ---------------- --------------- -------------------- -----------
Revolving line of credit ... $ -- $ -- $ -- $ --
Equipment note payable ..... 620,000 -- -- 620,000
Capital lease obligations .. 176,000 132,000 8,000 316,000
Purchase commitments ....... 683,000 531,000 -- 1,214,000
Operating leases, net of
subleases ............... 823,000 648,000 774,000 2,245,000
----------- ----------- ----------- -----------
Total ................. $ 2,302,000 $ 1,311,000 $ 782,000 $ 4,395,000
=========== =========== =========== ===========
BENNETT INVESTMENT
On January 15, 2003, we issued and sold 1,000,000 shares of restricted
common stock along with fully vested warrants to purchase 500,000 shares of
common stock at $1.15 per share, exercisable through January 15, 2008 through a
private offering to Robert M. Bennett, one of our directors, at a price per
share of $1.00 for an aggregate amount of $1.0 million. No commissions or
placement agent fees were paid in connection with the offering.
CONVERTIBLE SENIOR SUBORDINATED NOTES
As of December 31, 2002, we had outstanding convertible senior subordinated
notes of $2,000,000, payable February 1, 2003 and bearing interest at 8% per
year. The notes permitted us to convert up to the full principal amount into
shares of our common stock at maturity. On February 1, 2003, the
$2,000,000 of convertible senior subordinated notes converted into 1,568,627
shares of our common stock based on the agreed conversion price of $1.275 per
share.
REVOLVING LINE OF CREDIT
On July 16, 2003, we entered into a $1,000,000 line of credit arrangement
with Pacific Mercantile Bank (PMB). Interest on the line is based on an
independent index which is the highest rate on corporate loans posted by at
least 75% of the USA's thirty largest banks known as The Wall Street Journal's
Prime rate. The interest rate to be applied to the unpaid principal balance is
2% over the index. The line originally was set to mature on July 16, 2004 and
contained one financial covenant based on our cash flow coverage of the balance
on the line of credit. On January 7, 2004, we amended the line of credit to
extend the expiration date of the facility to February 1, 2005 and to replace
the cash flow-based financial covenant with a balance sheet oriented financial
covenant that limits the ratio of our debt to tangible net worth to 2:1. We were
in compliance with that covenant as of December 31, 2004. The line was then
amended again on February 11, 2005 to extend the expiration date of the line to
February 11, 2006. The line is secured by all inventories, equipment, accounts
receivable and various other assets.
Prior to establishing our line of credit with PMB, we had a line of credit
with Coast Business Credit (Coast) since August 1999. On February 7, 2003, Coast
and its parent company, Southern Pacific Bank, were seized by the Federal
Deposit Insurance Corporation (the FDIC). The FDIC then sold off the portion of
Coast's loan portfolio that contained our line of credit to GF Asset Management,
LLC (GF), a subsidiary of GE Capital. On July 17, 2003, we paid off our
revolving line of credit with GF. The amount paid was approximately $1,411,000
which is net of a 5% settlement discount of approximately $105,000.
MEDIA GENERAL INVESTMENT
On May 6, 2003, Media General, Inc., a communications company with
interests in newspapers, television stations, interactive media and diversified
information services, made a $3.0 million investment in NTN. In return for the
investment, we issued and sold 2,000,000 shares of unregistered NTN common stock
through a private offering to Media General. Pursuant to the terms of the
transaction, upon receipt of $3.0 million from Media General, we issued the
unregistered shares along with fully vested warrants to purchase 500,000 shares
of Buzztime common stock at $3.46 per share, exercisable through May 7, 2007. In
connection with the Buzztime common stock, the parties agreed that Media General
would have co-sale rights and NTN would have certain drag-along rights. Media
General has the right to convert each share of Buzztime common stock into two
shares of NTN common stock (subject to adjustment) on the second and fourth
anniversaries of the transaction date, in the event of a sale of NTN, upon
certain bankruptcy and other insolvency proceedings of Buzztime, and in certain
circumstances if NTN exercises its drag-along rights. Media General has the
further right to convert the warrant to purchase 500,000 shares of Buzztime
common stock into a warrant to purchase 1,000,000 shares of NTN common stock at
$1.73 per NTN share (subject to adjustment) in the event of bankruptcy or
insolvency of Buzztime. NTN has the right to require Media General to convert
its equity interests in Buzztime into equity interests in NTN if there is a sale
of NTN.
29
Simultaneous with the transaction described above, we issued 666,667 shares
of unregistered NTN common stock to license selected technology and content
(Boxerjam games) from Media General to add additional game content to the
Buzztime interactive television game channel and the NTN Network. The license
includes a 5-year exclusive interactive television license of certain
intellectual property, with options to extend the license for an additional 5
years. In September 2003, we entered into an amendment to the Boxerjam games
license with Media General pursuant to which we agreed to pay to Media General a
license fee in the amount of $150,000 (or $50,000 more than the original amount
of $100,000) in exchange for the unilateral right to exercise the option to
extend the Boxerjam games license for an additional 5 years following the
initial 5 year term on a non-exclusive basis. Previously, that non-exclusive
right was at Media General's option. The renewal license fee may be paid to
Media General in shares of NTN common stock or, in the event Buzztime's common
stock is publicly traded at the time of such renewal, Buzztime shall issue a
number of shares of Buzztime common stock with an aggregate value of $150,000.
We recorded both transactions at the fair value of the consideration
exchanged on May 6, 2003, and utilized a third party valuation. We used the
publicly traded stock price, as of the date of the transactions, of $1.77 per
share to determine the $4,720,000 fair value of the shares issued. The
consideration allocated to the acquired Boxerjam game license was valued at
$1.72 million and is being amortized over the estimated contractual life of 10
years, which assumes, based on management's intention that we will exercise our
five year renewal option. We determined that, based on the lack of marketability
of Buzztime common stock and limited convertibility into NTN common stock, the
fair value of the Buzztime warrants was not material and no allocation of fair
value was made.
On January 30, 2004, Media General invested approximately $2.0 million as
one of the purchasers in the sale of 3,943,661 shares of our common stock at
$3.55 per share. Media General participated on the same terms as the other
investors in the financing.
BREAKAWAY INTERNATIONAL TRANSACTION
On July 31, 2003, we acquired all of the assets and certain liabilities of
Breakaway International, Inc. (Breakaway), a privately held provider of
restaurant industry hardware and software enterprise solutions. We acquired
Breakaway's assets for $252,000 in cash, 1,292,614 shares of unregistered NTN
common stock, transaction costs and the assumption of certain liabilities. We
may pay additional contingent earn-out amounts in NTN common stock and/or cash
over the first three years following the acquisition, provided that certain
targets over the relevant trailing twelve month period for earnings before taxes
are met for the acquired assets. The targeted amounts increase by 25% each year.
No earn-out amounts were earned in the first twelve month period following the
acquisition. We also entered into employment agreements with five of the
executives of Breakaway.
Total consideration for the acquisition was $3,630,000, which consisted of
1,292,614 shares multiplied by the then publicly traded price of $2.44 per
share, $252,000 in cash and $224,000 of transaction costs, plus the assumption
of liabilities. To determine the fair value of the acquired intangible assets
and the related allocation of the purchase price, we commissioned a third party
valuation analysis. That third party analysis determined that the identified
intangible assets and the related useful lives are developed technology
($781,000, 6 year life), customer relationships ($1,110,000, 6 year life) and
non-competition agreements ($30,000, 3 year life). Results of operations from
the acquisition have been included in our consolidated statements of operations
since August 1, 2003.
WARRANT EXERCISE
On November 13, 2003, NorthBay Opportunities, L.P. (formerly known as
BayStar Capital, L.P.) and NorthBay International Opportunities, Ltd. (formerly
known as BayStar International, Ltd.) exercised warrants to purchase shares of
our common stock in the amounts of 493,827 and 123,456 shares, respectively. The
warrant exercise price for both firms was $1.62 per share. Those firms paid us
approximately $1 million on November 13, 2003 in order to exercise those
warrants. These warrants were existing instruments that were issued as part of a
previous financing by those firms. The warrants were scheduled to expire on
November 14, 2003.
NTN INTERACTIVE NETWORK TRANSACTION
On December 15, 2003, we acquired most of the operating assets, certain
liabilities and the operations of NTN Interactive Network, Inc. (NTNIN), our
long time Canadian licensee from its parent, Chell Group Corporation Inc.
(Chell). We acquired NTNIN's assets for $233,000 in cash, 238,300 shares of
unregistered NTN common stock, the contribution of $550,000 in unpaid licensing
royalties and the assumption of certain liabilities.
30
Total consideration for the acquisition was approximately $1,823,000, which
consisted of 238,300 shares multiplied by the then publicly traded price of
$3.70 per share, $233,000 in cash, the contribution of $550,000 in unpaid
licensing royalties, $122,000 of transaction costs, plus the assumption of
liabilities. To determine the fair value of the acquired intangible assets and
the related allocation of the purchase price, we commissioned a third party
valuation analysis. That third party analysis determined that the identified
intangible assets and the related useful lives are customer relationships
($720,000, 4 year life), trivia database ($345,000, 10 year life), interactive
events software ($102,000, 5 year life) and trivia software ($90,000, 5 year
life). NTN Canada's results of operations have been included in our consolidated
statements of operations since December 15, 2003.
JANUARY 2004 FINANCING
On January 30, 2004, we completed the sale of 3,943,661 shares of our
common stock at $3.55 per share, resulting in gross proceeds of approximately
$14.0 million, pursuant to an existing shelf registration filed under the
Securities Act. Roth Capital Partners, LLC acted as placement agent in the
offering. After commissions and expenses, the net proceeds of this offering 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.
FUTURE FINANCING NEEDS
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.
In 2004 we experienced the most significant increase in iTV site sales in
seven years, with 1,000 site sales compared with an average of less than 700 per
year over the previous six years. We believe this sales increase can be
attributed in large part to our announcement in February 2004 of the planned
deployment of a wireless electronic multi-player version of the popular poker
game, Texas Hold `Em, on our iTV Network in early 2005. Additionally, we are
half way through the conversion of approximately 350 Canadian iTV Network sites
to our newest iTV2 technology, which allows the play of Texas Hold `Em, as well
as other new game content.
On February 6, 2005, we announced the deployment of Texas Hold `Em to all
of our iTV2 sites, which numbered about 900 in North America. Over the first two
months of 2005, we have witnessed continued strong growth of sales for the NTN
iTV Network. At the Nightclub and Bar trade show in early March 2005, which is
one of our strongest trade shows, we had continued strong sales success. We see
no signs of this sales growth abating. Each new site requires a capital
investment of approximately $5,000 when connected to the iTV Network via VSAT
satellite technology. Thus, even though we believe there is a high likelihood
that we have sufficient cash to operate our businesses through 2005, we may
decide to bolster cash reserves during the year due to the capital requirements
associated with the equipment installations arising out of these high sales
levels being achieved.
Capital requirements in 2005 will additionally depend upon two other growth
initiatives. The first is the launch of our iTV Network in the UK, beginning
with an initial trial of eleven iTV Network sites that began on March 1, 2005.
We believe that a significant growth opportunity exists in the UK for our iTV
product, and success in sales would require substantial capital for any level of
significant deployments. The second is the intended broad distribution of the
Buzztime Channel in digital cable television systems as sales efforts continue
to focus on cable MSOs (the largest multiple system operators in the United
States). With eight current sites in operation, if this initiative succeeds as
planned and we enter into national agreements with those cable operators, we
intend to aggressively increase Buzztime sales and marketing efforts to more
quickly advance our distribution within the U.S. market.
A primary driver of capital use over the past two years has been the cost
of deploying the VSAT technology in our NTN iTV Network. For more than ten
years, we transmitted our data through the FM2 satellite one-way platform. In
2003, we were informed that this platform would no longer be available to us
after February 2005. After considering several alternative delivery channels, we
entered into equipment purchase and satellite service agreements in 2003 to
convert the Network to a much higher speed, two-way VSAT (Very Small Aperture
Technology) satellite technology over the two-year period ending February 2005.
These agreements were with the same reseller of satellite services that provided
the FM2 satellite platform to us. The VSAT technology is more expensive than
FM2, and, with our strong sales in 2004, our cash usage increased to fund the
new installations.
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On January 20, 2005, after learning that the FM2 platform life was being
extended, we amended our agreements with our satellite services provider to push
out the expiration date on the FM2 satellite platform to February 2007 and to
modify our VSAT equipment purchase and satellite service agreements. The
amendments will help us in three ways: First, the modification to the equipment
purchase agreement eliminates the requirement to purchase and install a specific
amount of VSAT equipment. Second, the flexibility will enable us to utilize
non-satellite based data transmission platforms, such as digital subscriber
lines (DSL), wireless connectivity or cable modems, for customer sites where
such platforms may be appropriate. The Company has begun installing some sites
with DSL connectivity in areas that cannot be reached by VSAT, which lowers the
cost of the installations by a significant amount of approximately $1,800 per
site. Third, the amendment allows us to slow our rate of converting sites from
the FM2 system to the new VSAT platform over the remainder of the amended FM2
satellite services agreement, which is now scheduled to end in February 2007. As
of December 31, 2004, approximately 41% of our domestic sites had been converted
to VSAT equipment. We anticipate that with the extension of FM2 sites, an
increasing number of DSL installations and the revised VSAT agreement, North
America installation costs overall and installation costs per site over the
coming years will trend down from what was seen in 2003 and 2004.
We also believe that, as in 2004, NTN Canada will continue to require a
significant amount of capital investment. We acquired the NTN Canada Network
assets of our Canadian licensee in December 2003. The previous owner had not
converted the Canadian customer base to DITV during the 1999 to 2001 period when
our domestic sites were converted, and the Canadian Network had become
antiquated and was rapidly losing customers. Following the purchase, we have
been in the process of upgrading the technology for all 350 active sites there.
Through December 31, 2004, approximately 51% of the Canadian sites had been
converted to iTV2, our newest technology platform, and connected via either VSAT
or DSL communication platforms. Over the next 12 months we plan to convert the
remaining 49% of our current customer base at a cost on the order of $500,000.
However, we believe that these Canadian capital expenditures will be financed
through the operating cash flow we generate in Canada.
Beyond the capital requirements generated by growth issues discussed above,
if we generate operating losses in 2005 (excluding non-cash charges) that are
similar in size to the operating losses we produced in 2004 (excluding non-cash
charges) and if our capital expenditure levels are comparable in 2005 to the
capital expenditure levels in 2004; then we will deplete much of our cash
reserve and would likely either raise additional capital or constrain our growth
to generate sufficient cash to operate the business. There can be no assurance
that we will be able to raise capital on acceptable terms or at all.
We also have taken actions to reduce our operating losses in two of the
segments that produced losses in 2004 as follows:
Software Solutions Segment - We reduced the workforce by 7 employees in
December 2004 and, in February 2005, we sold off the Vision/point of sale
product line, which had produced losses, to a new venture formed by the former
President of Breakaway International. We retained a 10% ownership in that new
venture.
Wireless Segment - This segment would have been profitable in 2004 if it
had not borne the costs of the Long Range Systems ("LRS") litigation. We
recently settled that litigation and we believe that segment should produce
operating profits going forward although that segment is very competitive and
the gross margins of that segment remain under pressure.
RISK FACTORS
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business, results of operation and financial condition could be
adversely affected by a number of factors, including the following:
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND WE EXPECT TO INCUR SIGNIFICANT NET
LOSSES IN THE FUTURE.
We have a history of significant losses, including net losses of $4,979,000
in 2004, $2,711,000 in 2003 and $2,189,000 in 2002, and an accumulated deficit
of $86,769,000 as of December 31, 2004. We expect to incur significant operating
and net losses for the next four quarters due primarily to our continued
development of Buzztime. Furthermore, we may never achieve profitability, and
even if we do, we may not sustain or increase profitability on a quarterly or
annual basis in the future.
OUR LIMITED LIQUIDITY AND CAPITAL RESOURCES MAY CONSTRAIN OUR ABILITY TO OPERATE
AND GROW OUR BUSINESS.
At December 31, 2004, our current assets exceeded our current liabilities
by approximately $6,644,000. Our liquidity and capital resources remain limited
and this may constrain our ability to operate and grow our business.
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We have a revolving line of credit agreement with Pacific Mercantile Bank,
which provides for borrowings of up to $1,000,000 and which was originally to
expire in July 2004 by its terms. Effective January 7, 2004, we entered into an
agreement with Pacific Mercantile to extend the maturity date of the line of
credit to February 1, 2005. We subsequently extended the expiration date of the
line to February 11, 2006. As of December 31, 2004, we had no amounts
outstanding under the line of credit. The line of credit is secured by
substantially all of our assets. Any reduction in availability under our line of
credit may further constrain our liquidity.
Capital requirements in 2005 will depend primarily upon the growth of our
two business units. We have three growth initiatives underway, any one of which
could drive the need for additional capital. These initiatives are the potential
sales growth of North American iTV Network sites beyond our historical annual
average sales level of approximately 700 sites due to the launch of our Texas
Hold `Em game; UK iTV Network growth as a result of the launch of eleven iTV
Network trials that began there on March 1, 2005; and potential installations of
the Buzztime Network if a broad deployment agreement is reached with a cable
operator. If the Company follows a low growth scenario, utilization of our cash
and existing $1 million line of credit is expected to be sufficient to cover our
financing requirements for 2005. However, our iTV Network sales were strong
through 2004 and through the first two months of 2005, therefore we may decide
to bolster cash reserves during the year through an equity offering.
Beyond the capital requirements generated by growth issues discussed above,
if we generate operating losses in 2005 (excluding non-cash charges) that are
similar in size to the operating losses we produced in 2004 (excluding non-cash
charges) and if our capital expenditure levels are comparable in 2005 to the
capital expenditure levels in 2004; then we will require additional capital or
will be forced to constrain our growth to generate sufficient cash to operate
the business. There can be no assurance that we will be able to raise capital on
acceptable terms or at all.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE MAY RENDER OUR OPERATIONS OBSOLETE
OR NONCOMPETITIVE.
If we do not compete successfully in the development of new products and
keep pace with rapid technological change, we will be unable to achieve
profitability or sustain a meaningful market position. The interactive
entertainment and game industry, as well as the wireless paging and software
applications industries, are becoming highly competitive and subject to rapid
technological changes when compared to other industries. We are aware of other
companies that are introducing interactive game products on various platforms
that allow players to compete across the nation. We are also aware of other
companies that are developing and introducing wireless technology and software
applications that may be suitable for use in the hospitality industry. The
wireless paging industry is highly competitive; we may experience pricing
pressure in the wireless markets that could impact our margins with respect to
our wireless product line. Some of these companies have substantially greater
financial resources and organizational capital than we do, which could allow
them to identify emerging trends. In addition, changes in customer tastes may
render our network and its content, our technology and our wireless and software
products obsolete or noncompetitive.
The emergence of new entertainment products and technologies, changes in
consumer preferences and other factors may limit the life cycle of our
technologies and any future products and services we develop. Accordingly, our
future performance will depend on our ability to:
o identify emerging technological trends in our market;
o identify changing consumer needs, desires or tastes;
o develop and maintain competitive technology, including new product and
service offerings;
o improve the performance, features and reliability of our products and
services, particularly in response to technological changes and
competitive offerings; and
o bring technology to the market quickly at cost-effective prices.
We may not be successful in developing and marketing new products and
services that respond to technological and competitive developments and changing
customer needs. Such products and services may not gain market acceptance. Any
significant delay or failure in developing new or enhanced technology, including
new product and service offerings, could result in a loss of actual or potential
market share and a decrease in revenues.
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WE MUST EFFECTIVELY COMPETE WITHIN THE HIGHLY COMPETITIVE SOFTWARE INDUSTRY.
The software industry is intensely competitive. Several large vendors
develop and market database management programs, business and management
applications, collaboration products and business intelligence products that
compete with our NTN Software Solutions offerings. Some of these competitors
have significantly greater financial and technical resources than we do. We
expect to continue to face intense competition in the software market in which
we compete. We could lose market share if our competitors introduce new
competitive products into one or more of our markets, add new functionality into
an existing competitive product, acquire a competitive product, reduce prices,
or form strategic alliances with other companies. In addition, because new
distribution methods and opportunities offered by the internet and electronic
commerce have removed many of the barriers to entry historically faced by small
and start-up companies in the software industry, we expect to face additional
future competition from these companies.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY LOSE BUSINESS AND EXPERIENCE
REDUCED PROFITABILITY.
Continued implementation of our business plan requires an effective
planning and management process. Our anticipated future growth will continue to
place a significant strain on our management systems and resources. If we are to
grow successfully, we must:
o improve our operational, administrative and financial systems;
o expand, train and manage our workforce; and
o attract and retain qualified management and technical personnel.
THE INTERACTIVE GAMING AND ENTERTAINMENT INDUSTRY IS HIGHLY COMPETITIVE.
The entertainment business is highly competitive. We compete with other
companies for total entertainment related revenues in the marketplace. Our
network programming competes generally with broadcast television, direct
satellite programming, pay-per-view, other content offered on cable television,
and other forms of entertainment. Furthermore, certain of our competitors have
greater financial and other resources available to them. The entrance of motion
picture, cable and television companies in the interactive entertainment and
multimedia industries will likely intensify competition in the future.
We also compete with other content and services available to consumers
through online services. The expanded use of online networks and the internet
provide computer users with an increasing number of alternatives to video games
and entertainment software. With this increasing competition and rapidly
changing factors, we must be able to compete in terms of technology, content and
management strategy. If we fail to provide quality services and products, we
will lose revenues to other competitors in the entertainment industry. Increased
competition may also result in price reductions, fewer customer orders, reduced
gross margins, longer sales cycles, reduced revenues and loss of market share.
IF INTELLECTUAL PROPERTY LAW AND PRACTICE DO NOT ADEQUATELY PROTECT OUR
PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY, OUR BUSINESS COULD BE SERIOUSLY
DAMAGED.
We rely on a combination of trademarks, copyrights and trade secret laws to
protect our proprietary rights in some of our products. Furthermore, it is our
policy that all employees and consultants involved in research and development
activities sign nondisclosure agreements. Our competitors may, however,
misappropriate our technology or independently develop technologies that are as
good as or better than ours. Our competitors may also challenge or circumvent
our proprietary rights. If we have to initiate or defend against an infringement
claim in the future to protect our proprietary rights, the litigation over such
claims could be time-consuming and costly to us, adversely affecting our
financial condition.
From time to time, we hire or retain employees or external consultants who
may work for other companies developing products similar to those offered by us.
These former employers may claim that our products are based on their products
and that we have misappropriated their intellectual property. Any such
litigation could prevent us from exploiting our proprietary portfolio and cause
us to incur substantial costs, which in turn could materially adversely affect
our business.
We believe that the success of our business depends upon such factors as
the technical expertise, innovative skills and marketing and customer relations
abilities of our employees, as well as upon patents, copyrights, trade secrets
and other intellectual property rights. As of December 31, 2004, we owned one
United States patent covering certain aspects of technology related to an
interactive learning system. This patent will expire in 2017. As of December 31,
2004, we had applied for two additional patents in the United States.
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Our pending patent applications and any future applications might not be
approved. Our patents might not provide us with competitive advantages. Third
parties might challenge our patents. In addition, patents held by third parties
might have an adverse effect on our ability to do business. Furthermore, third
parties might independently develop similar products, duplicate our products or,
to the extent patents are issued to us, design around those patents.
Others may have filed and in the future may file patent applications that
are similar or identical to those of ours. To determine the priority of
inventions, we may have to participate in interference proceedings declared by
the United States Patent and Trademark Office. Such interference proceedings
could result in substantial cost to us. Such third-party patent applications
might have priority over patent applications filed by us.
WE MAY BE LIABLE FOR THE CONTENT WE MAKE AVAILABLE ON THE NTN ITV NETWORK, THE
BUZZTIME TRIVIA CHANNEL AND THE INTERNET.
We make content available on the NTN iTV Network, the Buzztime trivia
channel and the internet. The availability of this content could result in
claims against us based on a variety of theories, including defamation,
obscenity, negligence or copyright or trademark infringement. We could also be
exposed to liability for third party content accessed through the links from our
web sites to other web sites. We may incur costs to defend ourselves against
even baseless claims, and our financial condition could be materially adversely
affected if we are found liable for information that we make available.
Implementing measures to reduce our exposure may require us to spend substantial
resources and may limit the attractiveness of our services to users.
WE MAY FACE EXPOSURE ON SALES AND/OR USE TAXES IN VARIOUS STATES.
From time to time, state tax authorities will make inquiries as to whether
or not a portion of our services might require the collection of sales and use
taxes from customers in those states. In the current difficult economic climate,
many states are expanding their interpretation of their sales and use tax
statutes to derive additional revenue. While in the past our sales and use tax
assessments have not been significant to our operations, it is likely that such
expenses will grow in the future.
OUR GAMES AND GAME SHOWS ARE SUBJECT TO GAMING REGULATIONS.
We operate games of skill and chance that, in some instances, reward
prizes. These games are regulated in many jurisdictions. The selection of
prizewinners is sometimes based on chance, although none of our games require
any form of monetary payment. We also operate interactive skill card games, such
as Texas Hold 'Em poker and Blackjack. These skill card games are restricted in
several jurisdictions. The laws and regulations that govern these games,
however, are subject to differing interpretations in each jurisdiction and are
subject to legislative and regulatory change in any of the jurisdictions in
which we offer our games. If such changes were to happen, we may find it
necessary to eliminate, modify or cancel certain components of our products that
could result in additional development costs and/or the possible loss of
revenue.
IF OUR CHIEF EXECUTIVE OFFICER WERE TO LEAVE US, OUR BUSINESS MAY BE ADVERSELY
AFFECTED.
Our success greatly depends on the efforts of our chief executive officer. Our
ability to operate successfully will depend significantly on his services and
contributions. Therefore, we entered into an employment agreement with Mr.
Stanley B. Kinsey on September 9, 2004 to provide for an extended term of his
services as NTN CEO through February 28, 2005. This employment agreement
included an increase in annual salary, a grant of 50,000 deferred stock units
under the NTN Communications, Inc. 2004 Performance Incentive Plan, and a grant
of options to purchase up to 300,000 shares of common stock. Mr. Kinsey
continues to discharge his obligations under the September 9, 2004 agreement
while the extension of this agreement is being negotiated between Mr. Kinsey and
the compensation committee of our board of directors. The negotiation is
expected to conclude by the end of April 2005. However, our business and
operations may be adversely affected if he were to leave Before his employment
agreement is renewed.
WE MAY HAVE DIFFICULTY RECRUITING PROFESSIONALS FOR OUR BUSINESS.
Our business requires experienced programmers, creative designers and
application developers. Our success will depend on identifying, hiring, training
and retaining such experienced, knowledgeable professionals. We must recruit
talented professionals in order for our business to grow. There is significant
competition for employees with the skills required to develop the products and
perform the services we offer. There can be no assurance that we will be able to
attract a sufficient number of qualified employees in the future to sustain and
grow our business, or that we will be successful in motivating and retaining the
employees we are able to attract. If we cannot attract, motivate and retain
qualified professionals, our business, financial condition and results of
operations will suffer.
35
FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD HARM OUR BUSINESS.
On December 15, 2003 we acquired, through NTN Canada, most of the operating
assets, certain liabilities and the operations of NTNIN from Chell Group
Corporation. This acquisition added an additional 350 customer sites that pay us
in Canadian dollars to use our interactive technology, and to receive our game
service. Since both the service fees and our Canadian subsidiary's operating
expenses are recognized in Canadian dollars, our financial results could be
significantly affected by fluctuations in foreign currency exchange rates or by
weak economic conditions in foreign markets.
As we are currently beginning a trial of the iTV Network in the United
Kingdom, our exposure to foreign currency exchange rates may continue to
increase in the future.
COMMUNICATION FAILURES WITH OUR SUBSCRIBER LOCATIONS COULD RESULT IN THE
CANCELLATION OF SUBSCRIBERS AND A DECREASE IN OUR REVENUES.
We rely on both satellite and telephone systems to communicate with our
subscriber locations. We currently transmit the majority of our data to our
hospitality customer sites via PanAmSat's Galaxy IIIR satellite and will rely
upon Galaxy IIIC for data transmission in connection with our new VSAT two-way
communication technology. We have currently converted approximately 41% of our
domestic sites to the VSAT technology. Interruption in communications with our
subscriber locations under either system could decrease customer loyalty and
satisfaction and result in a cancellation of our services. We are continually
reviewing alternative telephone service providers and establishing contingency
plans; however, such alternative providers and contingency plans have not been
finalized.
In the event that we were forced to switch to another satellite, we would
incur significant costs associated with re-pointing our satellite receivers. In
addition, we could experience higher operating costs to transmit data to our
customers via telephone lines and the internet during the transition period.
Another potential risk is the possibility that our government could
pre-empt our satellite for national security reasons, as the United States
satellite operators are federally licensed. This would appear to be unlikely as
our government has a strong communications infrastructure in place domestically.
RISK FACTORS ASSOCIATED WITH BUZZTIME
WE MAY SELL EQUITY INTERESTS IN BUZZTIME TO THIRD PARTIES, WHICH COULD RESULT IN
THE LOSS OF CONTROL OF BUZZTIME OR DEVALUATION OF OUR EQUITY INTEREST IN
BUZZTIME.
In June 2001, we sold a 6% interest in Buzztime to an affiliate of
Scientific-Atlanta, a leading cable television set-top box manufacturer. While
Scientific-Atlanta's investment position was converted to our common stock in
January 2003, we believe there may be divergent investment preferences between
the strategies pursued by the NTN iTV Network and Buzztime and may decide in the
future to continue to raise additional financing by issuing and selling equity
interests in Buzztime to third parties. To enhance the ability of Buzztime to
raise such financing, we have previously contributed and may contribute in the
future some of our assets to Buzztime in order to allow the development of a
distinct identity that we believe is necessary for it to effectively grow as a
separate concern. These assets include our extensive trivia game show library
and our interactive play-along sports games and related intangible assets.
From an operational standpoint, we could lose control of Buzztime. If we
lose control, Buzztime may no longer provide adequate support and resources for
content and programming for the NTN iTV Network, affecting the ability of the
NTN iTV Network to continue its operations. From a financial viewpoint, we could
undervalue the stock of Buzztime when selling it to third parties or undervalue
assets transferred to Buzztime and this could devalue your holdings in NTN
because we would not receive the fair value for our interest in Buzztime.
IF OUR NEW BUZZTIME PROGRAMMING IS NOT ACCEPTED BY CONSUMERS, WE ARE NOT LIKELY
TO GENERATE SIGNIFICANT REVENUES OR BECOME PROFITABLE.
The new Buzztime channel faces risks as to whether consumers will accept
interactive television products and the trivia programming produced by Buzztime.
If interactive television does not become a successful, scaleable medium or if
consumers do not accept trivia and play-along sports games, then we will be
unable to draw revenues from advertising, direct-marketing of third-party
products, subscription fees and pay-per-play fees. Until a sufficient market
develops for the digital set-top boxes enabled to run our interactive television
game applications, our profit potential is uncertain. We may also be unable to
attract local cable operators to add Buzztime programming as a channel to their
service.
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THE MARKET FOR INTERACTIVE TELEVISION GAMES AND SERVICES IS NEW AND MAY NOT
DEVELOP AS ANTICIPATED.
The interactive television market currently is small and emerging. The
success of Buzztime will depend on the growth and development of this market in
the United States and it will depend upon the commercialization and broad
acceptance by consumers and businesses of a wide variety of interactive
television products. Demand and market acceptance of recently introduced
products and services are subject to a high level of uncertainty and, as a
result, our profit potential is unproven. In addition, the potential size of
this new market opportunity and the timing of its development and deployment are
currently uncertain. Development schedules of interactive television offered by
our competitors have been delayed or refocused as the industry evolves. If the
market for interactive television does not develop or develops more slowly than
anticipated, our revenues will not grow as fast as anticipated, if at all.
COMPETITION MAY INCREASE IN THE INTERACTIVE TELEVISION INDUSTRY
The number of competitors in the game portion of the interactive television
industry may increase as the industry matures. Some of those competitors may be
larger and better capitalized than we are.
THE ADOPTION OF INCOMPATIBLE STANDARDS COULD RENDER OUR PRODUCTS OBSOLETE OR
NON-COMPETITIVE.
If a new digital set-top box standard or middleware platform is defined, we
do not know whether Buzztime's products will be compatible with such standards
once defined. The establishment of multiple standards could hurt our business
and significantly increase our expenses, particularly if our products require
significant redevelopment in order to conform to the newly established
standards. Any delay or failure on our part to respond quickly, cost-effectively
and sufficiently to these developments could render our existing products and
services obsolete and cause us not to be competitive, resulting in a decrease in
our revenues without a corresponding decrease in our expenses. We may have to
incur substantial expenditures to modify or adapt our products or services to
respond to these developments. We must be able to incorporate new technologies
into the products we design and develop in order to address the increasingly
complex and varied needs of our customer base.
INCREASING GOVERNMENT REGULATION COULD CAUSE DEMAND FOR OUR PRODUCTS AND
SERVICES TO DECLINE SIGNIFICANTLY.
We are subject not only to regulations applicable to businesses generally,
but also laws and regulations that apply directly to the industry of interactive
television products. Although there are currently few such laws and regulations,
state and federal governments may adopt a number of these laws and regulations
governing any of the following issues:
o user privacy;
o copyrights;
o consumer protection;
o the media distribution of specific material or content; and
o the characteristics and quality of interactive television products and
services.
One or more states or the federal government could enact regulations aimed
at companies, like us, which provide interactive television products. The
likelihood of such regulation being enacted will increase as interactive
television becomes more pervasive and affects the daily lives of more people.
Any such legislation or regulation could dampen the growth of the industry of
interactive television. If such a reduction in growth occurs, demand for our
products and services may decline significantly.
On January 18, 2001, the Federal Communications Commission issued a notice
of inquiry concerning interactive television. The notice raised a series of
questions that suggest that cable systems might be regarded as essential, open
platforms of spectrum for non-discriminatory third-party access, rather than
facilities-based providers competing in a wider market. The notice sought
comments on the nature of interactive television and whether cable systems will
be a "superior platform" for providing interactive television. The outcome of
the inquiry will determine whether or not a subsequent rulemaking will be held
in order to create regulations for the interactive television industry. Any
regulation of this industry could impact on Buzztime and its operations.
RISK FACTORS ASSOCIATED WITH OUR COMMON STOCK
37
OUR COMMON STOCK COULD BE DELISTED OR SUSPENDED FROM TRADING ON THE AMERICAN
STOCK EXCHANGE.
On May 1, 2003, we received a letter from the American Stock Exchange
(AMEX) stating that we are now in compliance with AMEX listing standards. Prior
to that date we had been out of compliance since our shareholders' equity was
below $6 million, which was the minimum threshold established by AMEX for
companies with multiple years of losses. New AMEX rules effective January 2003
permit a company, such as NTN, to remain listed on AMEX if it has a total market
capitalization of at least $50 million, has at least 1.1 million shares publicly
held, has a market value of publicly held shares of at least $15 million and has
a minimum of 400 round lot shareholders.
Should, at some future date, we fall out of compliance with the new rules
(from subsequent changes in market capitalization or otherwise), we could remain
compliant by maintaining a level of shareholders' equity of $6 million. If we
otherwise fail to maintain compliance with the AMEX listing standards, our
common stock may not remain listed on AMEX or any other exchange or quotation
system in the future. If our common stock is delisted from AMEX, spreads can
often be higher for securities traded on the over-the-counter market and the
execution time for orders may be longer. Thus, removing our stock from AMEX may
result in decreased liquidity by making the trading of our stock less efficient.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND YOUR INVESTMENT COULD SUFFER A
DECREASE IN VALUE.
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. Our stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products and media properties
by us or our competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, and the market
prices for technology-related companies in particular, have experienced extreme
volatility that often has been unrelated to the operating performance of such
companies. These broad market and industry fluctuations may adversely affect the
price of our stock, regardless of our operating performance.
OUR CHARTER CONTAINS PROVISIONS THAT MAY HINDER OR PREVENT A CHANGE IN CONTROL
OF OUR COMPANY, WHICH COULD RESULT IN OUR INABILITY TO APPROVE A CHANGE IN
CONTROL AND POTENTIALLY RECEIVE A PREMIUM OVER THE CURRENT MARKET VALUE OF YOUR
STOCK.
Certain provisions of our certificate of incorporation could make it more
difficult for a third party to acquire control of us, even if such a change in
control would benefit our stockholders. For example, our certificate of
incorporation requires a supermajority vote of at least 80% of the total voting
power, voting together as a single class, to amend certain provisions of such
document, including those provisions relating to:
o the number, election and term of directors;
o the removal of directors and the filling of vacancies; and
o the supermajority voting requirements of our restated certificate of
incorporation.
These provisions could discourage third parties from taking over control of
our company. Such provisions may also impede a transaction in which you could
receive a premium over then current market prices and your ability to approve a
transaction that you consider in your best interests.
IF THE SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE ARE SOLD, THE MARKET
PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.
Future sales of substantial amounts of our common stock in the public
market or the anticipation of such sales could have a material adverse effect on
then-prevailing market prices. As of December 31, 2004, there were approximately
10,293,000 shares of common stock reserved for issuance upon the exercise of
outstanding stock options at exercise prices ranging from $0.45 to $4.94 per
share. As of December 31, 2004, there were also outstanding warrants to purchase
an aggregate of approximately 1,941,000 shares of common stock at exercise
prices ranging from $0.77 to $3.91 per share.
The foregoing options and warrants could adversely affect our ability to
obtain future financing or engage in certain mergers or other transactions,
since the holders of these options and warrants can be expected to exercise them
at a time when we would be able to obtain additional capital through a new
offering of securities on terms more favorable than those provided by such
options and warrants. For the life of such options and warrants, the holders are
given the opportunity to profit from a rise in the market price of our common
stock without assuming the risk of ownership. To the extent the trading price of
our common stock at the time of exercise of any such options or warrants exceeds
the exercise price, such exercise will have a dilutive effect on our
stockholders.
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to currency exchange rates, stock market
fluctuations, and interest rates. As of December 31, 2004, we owned common stock
of an Australian company that is subject to market risk. At December 31, 2004,
the carrying value of this investment was $304,000, which is net of a $513,000
unrealized loss. This investment is exposed to further market risk in the future
based on the operating results of the Australian company and stock market
fluctuations. Additionally, the value of the investment is further subject to
changes in Australian currency exchange rates. At December 31, 2004, a
hypothetical 10% decline in the value of the Australian dollar would result in a
reduction of $30,000 in the carrying value of the investment.
We do not have any derivative financial instruments. Nor do we have any
speculative or hedging instruments.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule on page F-1,
for a listing of the Consolidated Financial Statements and Schedule filed with
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As noted in our SEC filings, we changed our independent public accountants
in third quarter 2004 from KPMG LLP (KPMG) to Haskell & White LLP. We have
agreed to indemnify and hold KPMG LLP harmless against and from any and all
legal costs and expenses incurred by KPMG in successful defense of any legal
action or proceeding that arises as a result of KPMG's consent to the
incorporation by reference of its audit report on the Company's past financial
statements into our Registration Statements on Form S-8 and Form S-3.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures", as such term is defined
under Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed, in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. We
have carried out an evaluation as of the end of the period covered by 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, that such disclosure controls and procedures were effective as
of the end of the period covered by this report in providing reasonable
assurance of achieving the desired control objectives, and therefore there were
no corrective actions taken.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been no change in our internal control over financial reporting
identified in connection with our management's evaluation of any change in our
internal control over financial reporting that occurred during the fourth fiscal
quarter in 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management's Annual Report on Internal Control over Financial Reporting and
an attestation report of Haskell & White LLP, our independent registered public
accounting firm, with respect to Management's Report, has been omitted from this
Annual Report in reliance on the extension of time to file such report and
attestation granted by Securities Exchange Act Release No. 50754 (November 30,
2004). We will file the Management Report and attestation not later than April
30, 2005.
39
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information responsive to Part III, Item 10 is included in the Proxy
Statement, to be filed by Registrant with the SEC pursuant to Regulation 14A,
under the captions therein entitled "Election of Directors" and "Executive and
Director Compensation" and is incorporated herein by reference pursuant to
General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to Part III, Item 11 is included in the Proxy
Statement to be filed by Registrant with the SEC pursuant to Regulation 14A,
under the captions therein entitled "Election of Directors", "Executive and
Director Compensation" and "Equity Compensation Plan Information" and is
incorporated herein by reference pursuant to General Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information responsive to Part III, Item 12 is included in the Proxy
Statement, to be filed by Registrant with the SEC pursuant to Regulation 14A,
under the captions therein entitled "Election of Directors" and "Executive and
Director Compensation" and is incorporated herein by reference pursuant to
General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to Part III, Item 13 is included in the Proxy
Statement, to be filed by Registrant with the SEC pursuant to Regulation 14A,
under the caption therein entitled "Election of Directors" and is incorporated
herein by reference pursuant to General Instruction G(3).
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information responsive to Part III, Item 14 is included in the Proxy
Statement, to be filed by Registrant with the SEC pursuant to Regulation 14A,
under the caption therein entitled "Principal Accounting Firm Fees" and is
incorporated herein by reference pursuant to General Instruction G(3).
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE. The consolidated
financial statements and schedule of the Company and its consolidated
subsidiaries are set forth in the "Index to Consolidated Financial
Statements and schedule" on page F-1.
EXHIBITS. The following exhibits are filed as a part of this report:
EXHIBIT NO. DESCRIPTION
3.1 -- Amended and Restated Certificate of Incorporation of the Company,
as amended (4)
3.2 -- Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (7)
3.3 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated March 22, 2000 (8)
3.4 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated March 24, 2000 (8)
3.5 -- By-laws of the Company (2)
3.6 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated May 27, 2003 (16)
4.1 -- Specimen Common Stock Certificate (10)
40
4.2* -- Stock Option Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
4.3* -- Stock Option Agreement, dated October 7, 1999, by and between NTN
Communications, Inc. and Stanley B. Kinsey (6)
4.4* -- Stock Option Agreement, dated January 26, 2001, by and between NTN
Communications, Inc. and Stanley B. Kinsey (12)
4.5 -- Warrant Certificate issued January 13, 2003 by NTN Communications,
Inc. to Robert M. and Marjie Bennett, Trustees The Bennett Family
Trust dated 11-17-86 (19)
4.6 -- NTN Investor Rights Agreement, dated May 7, 2003, by and between
NTN Communications, Inc. and Media General, Inc. (18)
4.7 -- Buzztime Investor Rights Agreement, dated May 7, 2003, by and among
NTN Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (18)
4.8 -- Common Stock Purchase Warrant dated May 7, 2003 issued to Media
General, Inc. exercisable for 500,000 shares of common stock of
Buzztime Entertainment, Inc. (18)
4.9 -- Form of Common Stock Purchase Warrant by and between Roth Capital
Partners, LLC and NTN Communications, Inc. (14)
10.1 -- License Agreement with NTN Canada (3)
10.2* -- Employment Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
10.3 -- Subscription Agreement dated January 13, 2003 between NTN
Communications, Inc. and Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (19)
10.4 -- Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange
of Buzztime Preferred Stock for NTN Common Stock, dated January 16,
2003 (19)
10.5 -- Securities Purchase Agreement dated May 5, 2003 by and among NTN
Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (18)
10.6 -- Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners, LLC and NTN Communications, Inc. (14)
10.7 -- Manufacturing Agreement, dated November 25, 1997, by and between
NTN Communications, Inc. and Climax Technology Co., Ltd. (9)
10.8 -- Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (11)
10.9 -- Asset Purchase Agreement dated July 30, 2003 by and among NTN
Software Solutions, Inc., NTN Communications, Inc., Breakaway
International, Inc. and the Seller Shareholders (17)
10.10 -- Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc. and Chell Group Corporation (15)
10.11* -- Employment Agreement, dated September 9, 2004, by and between NTN
Communications, Inc. and Stanley B. Kinsey (20)
14.0 -- Code of Ethics for Senior Financial Officers (13)
16.1 -- Letter, dated August 20, 2004, from KPMG to the Securities and
Exchange Commission regarding change in certifying accountant of
NTN (21)
21.1 -- Subsidiaries of Registrant (1)
23.1 -- Consent of HASKELL & WHITE LLP (1)
23.2 -- Consent of KPMG LLP (1)
31 -- Certification of Officers pursuant to Rule 13a-14(a) (1)
32 -- Certification of Officers pursuant to Rule 13a-14(b) (22)
- ----------
* 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 fiscal
year ended December 31, 1990, and incorporated by reference.
41
(4) Previously filed as an exhibit to NTN's report on Form 10-K for the fiscal
year ended December 31, 1997 and incorporated by reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K for the fiscal
year ended December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-K for the fiscal
year ended December 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 8-K dated October
31, 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 filed on
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 for the fiscal
year ended December 31, 2000 and incorporated by reference.
(12) Previously filed as an exhibit to NTN's report on Form 10-Q for the
quarterly period ended March 31, 2001 and incorporated by reference.
(13) Previously filed as an exhibit to NTN's Form 10-K dated for the fiscal year
ended December 31, 2002 and incorporated herein by reference.
(14) Previously filed as an exhibit to NTN's report on Form 8-K filed on January
29, 2004 and incorporated herein by reference.
(15) Previously filed as an exhibit to NTN's registration statement on Form S-3,
File No. 333-111538, filed on December 24, 2003 and incorporated herein by
reference.
(16) Previously filed as an exhibit to NTN's Form 10-Q for the quarterly period
ended June 30, 2003 and incorporated herein by reference.
(17) Previously filed as an exhibit to NTN's report on Form 8-K dated July 31,
2003 and incorporated herein by reference.
(18) Previously filed as an exhibit to NTN's registration statement on Form S-3,
File No. 333-105429, filed on May 21, 2003 and incorporated herein by
reference.
(19) Previously filed as an exhibit to NTN's Form 10-Q for the quarterly period
ended March 31, 2003 and incorporated herein by reference.
(20) Previously filed as an exhibit to NTN's Form 10-Q for the quarterly period
ended September 30, 2004, and incorporated herein by reference.
(21) Previously filed as an exhibit to NTN's report on Form 8-K dated August 23,
2004 and incorporated herein by reference.
(22) Furnished concurrently herewith.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NTN COMMUNICATIONS, INC.
By: /s/ James B. Frakes
----------------------------
CHIEF FINANCIAL OFFICER
Dated: March 16, 2005
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose name
appears below appoints and constitutes Stanley B. Kinsey and James B. Frakes,
and each one of them, acting individually and without the other, as his or her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to execute any and all amendments to this Report on Form
10-K and to file the same, together with all exhibits thereto, with the
Securities and Exchange Commission, and such other agencies, offices and persons
as may be required by applicable law, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorney-in-fact and agent may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STANLEY B. KINSEY Chief Executive Officer and March 16, 2005
- ----------------------------- Chairman of the Board
Stanley B. Kinsey
/S/ BARRY BERGSMAN Director March 16, 2005
- -----------------------------
Barry Bergsman
/S/ ROBERT M. BENNETT Director March 16, 2005
- -----------------------------
Robert M. Bennett
/S/ ESTHER L. RODRIGUEZ Director March 16, 2005
- -----------------------------
Esther L. Rodriguez
/S/ GARY ARLEN Director March 16, 2005
- -----------------------------
Gary Arlen
/S/ ROBERT B. CLASEN Director March 16, 2005
- -----------------------------
Robert B. Clasen
/S/ NEAL FONDREN Director March 16, 2005
- -----------------------------
Neal Fondren
/S/ MICHAEL FLEMING Director March 16, 2005
- -----------------------------
Michael Fleming
43
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Reports of Independent Registered Public Accounting Firms............... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as December 31, 2004 and
2003............................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002.................................. F-5
Statements of Comprehensive Income (Loss) for the years ended
December 31, 2004, 2003, and 2002.................................. F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2004, 2003, and 2002...................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002.................................. F-7
Notes to Consolidated Financial Statements.............................. F-9
Financial Statement Schedule II -- Valuation and
Qualifying Accounts................................................... F-36
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
NTN Communications, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of NTN
Communications, Inc. and subsidiaries as of December 31, 2004 and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity, and cash flows for the year ended December 31, 2004. In
connection with our audit of the consolidated financial statements, we have also
audited the financial statement schedule for the year ended December 31, 2004.
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of NTN Communications,
Inc. and subsidiaries at December 31, 2004, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related 2004 information in the financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ HASKELL & WHITE LLP
Irvine, California
March 11, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
NTN Communications, Inc.:
We have audited the accompanying consolidated balance sheet of NTN
Communications, Inc. and subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 2003. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule for each of the years in the two-year period ended December 31, 2003.
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NTN Communications,
Inc. and subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related 2003 and 2002 information in the
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
San Diego, California
March 15, 2004
F-3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS (Pledged)
2004 2003
------------- -------------
Current Assets:
Cash and cash equivalents ....................................... $ 6,710,000 $ 2,503,000
Restricted cash ................................................. 66,000 --
Accounts receivable, net of allowance for doubtful accounts
of $762,000 in 2004 and $811,000 in 2003 ..................... 3,405,000 2,324,000
Inventory ....................................................... 399,000 404,000
Investments available-for-sale .................................. 304,000 189,000
Deposits on broadcast equipment ................................. 534,000 34,000
Deferred costs .................................................. 960,000 493,000
Prepaid expenses and other current assets ....................... 1,128,000 757,000
------------- -------------
Total current assets ..................................... 13,506,000 6,704,000
Broadcast equipment and fixed assets, net ......................... 6,451,000 4,398,000
Software development costs, net of accumulated amortization
of $993,000 in 2004 and $689,000 in 2003 ........................ 763,000 676,000
Deferred costs .................................................... 922,000 505,000
Goodwill .......................................................... 3,658,000 3,490,000
Intangible assets, net ............................................ 4,011,000 4,800,000
Other assets ...................................................... 77,000 57,000
------------- -------------
Total assets ............................................. $ 29,388,000 $ 20,630,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................ $ 1,590,000 $ 612,000
Accrued expenses ................................................ 1,125,000 2,270,000
Sales tax payable ............................................... 465,000 219,000
Accrued salaries ................................................ 447,000 375,000
Accrued vacation ................................................ 635,000 529,000
Income taxes payable ............................................ 93,000 39,000
Obligations under capital leases - current portion .............. 148,000 165,000
Equipment note payable - current portion ........................ 620,000 46,000
Deferred revenue ................................................ 1,448,000 1,478,000
Deferred revenue-Buzztime ....................................... 291,000 206,000
------------- -------------
Total current liabilities ................................ 6,862,000 5,939,000
Obligations under capital leases, excluding current portion ....... 123,000 181,000
Revolving line of credit .......................................... -- 1,000,000
Deferred revenue .................................................. 368,000 262,000
Other long-term liabilities ....................................... -- 184,000
------------- -------------
Total liabilities ........................................ 7,353,000 7,566,000
------------- -------------
Commitments and contingencies
Shareholders' equity:
Series A 10% cumulative convertible preferred
stock, $.005 par value, $161,000 liquidation
preference, 5,000,000 shares authorized;
161,000 shares issued and outstanding at
December 31, 2004 and December 31, 2003 ....................... 1,000 1,000
Common stock, $.005 par value, 84,000,000 shares
authorized; 53,026,000 and 48,623,000 shares
issued and outstanding at December 31, 2004
and December 31, 2003,
respectively .................................................. 264,000 242,000
Additional paid-in capital ...................................... 109,008,000 95,239,000
Accumulated deficit ............................................. (86,769,000) (81,790,000)
Accumulated other comprehensive loss ............................ (469,000) (628,000)
------------- -------------
Total shareholders' equity ............................... 22,035,000 13,064,000
------------- -------------
Total liabilities and shareholders' equity ............... $ 29,388,000 $ 20,630,000
============= =============
See accompanying notes to consolidated financial statements
F-4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------- ------------- -------------
Revenues:
NTN Hospitality Technologies revenues ........................... $ 35,274,000 $ 29,275,000 $ 25,465,000
Buzztime service revenues ....................................... 359,000 196,000 128,000
Other revenues .................................................. 22,000 18,000 17,000
------------- ------------- -------------
Total revenues .......................................... 35,655,000 29,489,000 25,610,000
------------- ------------- -------------
Operating expenses:
Direct operating costs of services (includes depreciation of
$2,578,000, $2,800,000 and $3,370,000 for 2004, 2003 and
2002, respectively) ......................................... 12,257,000 11,146,000 9,718,000
Selling, general and administrative ........................... 24,836,000 18,400,000 15,544,000
Litigation, legal and professional fees ....................... 1,641,000 831,000 540,000
Stock based compensation ...................................... 293,000 232,000 96,000
Depreciation and amortization ................................. 1,355,000 1,097,000 1,555,000
Research and development ...................................... 329,000 329,000 12,000
------------- ------------- -------------
Total operating expenses ................................ 40,711,000 32,035,000 27,465,000
------------- ------------- -------------
Operating loss .................................................... (5,056,000) (2,546,000) (1,855,000)
------------- ------------- -------------
Other income (expense):
Interest income ................................................. 98,000 5,000 6,000
Interest expense ................................................ (152,000) (238,000) (511,000)
Gain on early extinguishment of debt ............................ -- 105,000 --
Gain from litigation settlement ................................. 225,000 -- --
------------- ------------- -------------
Total other income (expense) ............................ 171,000 (128,000) (505,000)
------------- ------------- -------------
Loss before income taxes and minority interest in loss of
consolidated subsidiary ........................................ (4,885,000) (2,674,000) (2,360,000)
Provision for income taxes ........................................ (94,000) (47,000) (41,000)
Minority interest in loss of consolidated subsidiary .............. -- 10,000 212,000
------------- ------------- -------------
Net loss .......................................................... $ (4,979,000) $ (2,711,000) $ (2,189,000)
============= ============= =============
Net loss per common share - basic and diluted ..................... $ (0.09) $ (0.06) $ (0.06)
============= ============= =============
Weighted average shares outstanding -- basic and
diluted ......................................................... 52,599,000 45,446,000 39,081,000
============= ============= =============
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------- ------------- -------------
Net loss .......................................................... $ (4,979,000) $ (2,711,000) $ (2,189,000)
------------- ------------- -------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments........................ 44,000 -- --
Unrealized holding gain in investment-available-for-sale........ 115,000 11,000 4,000
------------- ------------- -------------
Other comprehensive income......................................... 159,000 11,000 4,000
------------- ------------- -------------
Comprehensive net loss............................................. $ (4,820,000) $ (2,700,000) $ (2,185,000)
============= ============= =============
See accompanying notes to consolidated financial statements
F-5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
SERIES A
CUMULATIVE
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
Balance, December 31, 2001 ...................................... 161,000 $ 1,000 38,627,000 $ 192,000
Issuance of stock for exercise of warrants and options ........ -- -- 191,000 1,000
Issuance of stock in lieu of interest ......................... -- -- 185,000 1,000
Issuance of stock in lieu of dividends ........................ -- -- 14,000 --
Issuance of stock in payment of accrued board
compensation ................................................ -- -- -- --
Issuance of stock for acquisitions ............................ -- -- 364,000 2,000
Stock-based compensation ...................................... -- -- -- --
Unrealized holding gain on investments
available-for-sale .......................................... -- -- -- --
Net loss ...................................................... -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 2002 ...................................... 161,000 $ 1,000 39,381,000 $ 196,000
Issuance of stock for exercise of warrants and options ........ -- -- 1,414,000 7,000
Issuance of stock in lieu of interest ......................... -- -- 55,000 --
Issuance of stock in lieu of dividends ........................ -- -- 6,000 --
Issuance of stock in payment of accrued board
compensation ................................................ -- -- -- --
Issuance of stock for acquisitions ............................ -- -- 1,531,000 8,000
Convertible note payable converted to common stock ............ -- -- 1,569,000 8,000
Issuance of stock in private placement, net of issuance
costs ....................................................... -- -- 3,667,000 18,000
Conversion of Buzztime preferred series A to NTN common
stock ....................................................... -- -- 1,000,000 5,000
Stock-based compensation ...................................... -- -- -- --
Unrealized holding gain on investments available for sale ..... -- -- -- --
Net loss ...................................................... -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 2003 ...................................... 161,000 $ 1,000 48,623,000 $ 242,000
Issuance of stock for exercise of warrants and options ........ -- -- 453,000 2,000
Issuance of stock in lieu of dividends ........................ -- -- 6,000 --
Issuance of stock in public offering, net of issuance costs ... -- -- 3,944,000 20,000
Stock options granted below market ............................ -- -- -- --
Options and warrants granted to non-employees ................. -- -- -- --
Deferred stock units granted to employees ..................... -- -- -- --
Accumulated other comprehensive loss .......................... -- -- -- --
Net loss ...................................................... -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 2004 ...................................... 161,000 $ 1,000 53,026,000 $ 264,000
============= ============= ============= =============
Table continued on next page
F-6a
Table continued from above
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
ACCUMULATED
ADDITIONAL OTHER
PAID-IN ACCUMULATED COMPREHENSIVE TREASURY
CAPITAL DEFICIT LOSS STOCK TOTAL
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 ...................... $ 80,639,000 $ (76,890,000) $ (643,000) $ (388,000) $ 2,911,000
Issuance of stock for exercise of warrants
and options ................................ 134,000 -- -- -- 135,000
Issuance of stock in lieu of interest ......... 159,000 -- -- -- 160,000
Issuance of stock in lieu of dividends ........ -- -- -- -- --
Issuance of stock in payment of accrued board
compensation ............................... (135,000) -- -- 178,000 43,000
Issuance of stock for acquisitions ............ 318,000 -- -- -- 320,000
Stock-based compensation ...................... 96,000 -- -- -- 96,000
Unrealized holding gain on investments
available-for-sale ......................... -- -- 4,000 -- 4,000
Net loss ...................................... -- (2,189,000) -- -- (2,189,000)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002 ...................... $ 81,211,000 $ (79,079,000) $ (639,000) $ (210,000) $ 1,480,000
Issuance of stock for exercise of warrants
and options ................................ 1,836,000 -- -- -- 1,843,000
Issuance of stock in lieu of interest ......... 54,000 -- -- -- 54,000
Issuance of stock in lieu of dividends ........ -- -- -- -- --
Issuance of stock in payment of accrued
board compensation ......................... (156,000) -- -- 210,000 54,000
Issuance of stock for acquisitions ............ 4,028,000 -- -- -- 4,036,000
Convertible note payable converted to
common stock ............................... 1,992,000 -- -- -- 2,000,000
Issuance of stock in private placement,
net of issuance costs ...................... 5,451,000 -- -- -- 5,469,000
Conversion of Buzztime preferred series A
to NTN common stock ........................ 591,000 -- -- -- 596,000
Stock-based compensation ...................... 232,000 -- -- -- 232,000
Unrealized holding gain on investments
available for sale ......................... -- -- 11,000 -- 11,000
Net loss ...................................... -- (2,711,000) -- -- (2,711,000)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 ...................... $ 95,239,000 $ (81,790,000) $ (628,000) $ -- $ 13,064,000
Issuance of stock for exercise of warrants
and options ................................ 495,000 -- -- -- 497,000
Issuance of stock in lieu of dividends ........ -- -- -- -- --
Issuance of stock in public offering, net
of issuance costs .......................... 12,981,000 -- -- -- 13,001,000
Stock options granted below market ............ 2,000 -- -- -- 2,000
Options and warrants granted to
non-employees .............................. 151,000 -- -- -- 151,000
Deferred stock units granted to employees ..... 140,000 -- -- -- 140,000
Accumulated other comprehensive loss .......... -- -- 159,000 -- 159,000
Net loss ...................................... -- (4,979,000) -- -- (4,979,000)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 ...................... $ 109,008,000 $ (86,769,000) $ (469,000) $ -- $ 22,035,000
============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements
F-6b
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------- ------------- -------------
Cash flows (used in) provided by operating activities:
Net loss ........................................................ $ (4,979,000) $ (2,711,000) $ (2,189,000)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities (net of effects of acquisitions):
Depreciation and amortization ................................ 3,933,000 3,897,000 4,925,000
Provision for doubtful accounts .............................. 436,000 243,000 529,000
Provision for obsolete inventory ............................. (16,000) -- --
Provision for warranty reserve ............................... 17,000 -- --
Gain on early extinguishment of debt ......................... -- (105,000) --
(Gain) loss from disposition of equipment .................... 164,000 81,000 (52,000)
Stock-based compensation charges ............................. 293,000 232,000 96,000
Non-cash interest expense .................................... -- 14,000 160,000
Accreted interest expense .................................... -- 3,000 39,000
Minority interest in loss of subsidiary ...................... -- (10,000) (212,000)
Changes in assets and liabilities:
Restricted cash ............................................ (66,000) 102,000 (8,000)
Accounts receivable ........................................ (1,482,000) (536,000) (1,010,000)
Inventory .................................................. 21,000 (128,000) (152,000)
Prepaid expenses and other assets .......................... (383,000) (128,000) (88,000)
Accounts payable and accrued expenses ...................... 219,000 764,000 (108,000)
Income taxes payable ....................................... 13,000 9,000 41,000
Deferred costs ............................................. (883,000) (136,000) 224,000
Deferred revenue ........................................... 157,000 (493,000) (1,064,000)
------------- ------------- -------------
Net cash (used in) provided by operating
activities ............................................ (2,556,000) 1,098,000 1,131,000
------------- ------------- -------------
Cash flows used in investing activities:
Capital expenditures ............................................ (2,986,000) (1,664,000) (1,284,000)
Software development expenditures ............................... (476,000) (371,000) (234,000)
Deposits on broadcast equipment ................................. (492,000) (34,000) 69,000
Acquisition of businesses, net of cash acquired ................. (102,000) (892,000) (102,000)
------------- ------------- -------------
Net cash used in investing
activities ............................................ (4,056,000) (2,961,000) (1,551,000)
------------- ------------- -------------
Cash flows provided by (used in) financing activities:
Principal payments on capital leases ............................ (184,000) (216,000) (222,000)
Borrowings from revolving line of credit ........................ -- 16,631,000 24,614,000
Principal payments on note payable and revolving line
of credit .................................................... (2,548,000) (18,181,000) (24,826,000)
Proceeds from issuance of common stock, net of issuance costs ... 13,001,000 3,712,000 --
Proceeds from exercise of warrants and options .................. 497,000 1,843,000 135,000
------------- ------------- -------------
Net cash provided by (used in) financing
activities ............................................ 10,766,000 3,789,000 (299,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents .............. 4,154,000 1,926,000 (719,000)
Effect of exchange rate on cash ................................... 53,000 -- --
Cash and cash equivalents at beginning of year .................... 2,503,000 577,000 1,296,000
------------- ------------- -------------
Cash and cash equivalents at end of year .......................... $ 6,710,000 $ 2,503,000 $ 577,000
============= ============= =============
See accompanying notes to consolidated financial statements
F-7
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ....................................................... $ 152,000 $ 223,000 $ 313,000
============ ============ ============
Income taxes ................................................... $ 57,000 $ 38,000 $ 11,000
============ ============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest ................... $ -- $ 54,000 $ 160,000
============ ============ ============
Issuance of treasury stock in payment of board
compensation ................................................... $ -- $ 54,000 $ 43,000
============ ============ ============
Equipment acquired under capital leases and notes payable ......... $ 2,003,000 $ 744,000 $ 327,000
============ ============ ============
Convertible notes exchanged for common stock ...................... $ -- $ 2,000,000 $ --
============ ============ ============
Conversion of Buzztime preferred series A into common stock ....... $ -- $ 596,000 $ --
============ ============ ============
Unrealized holding gain/(loss) on investments available for sale .. $ 115,000 $ 11,000 $ 4,000
============ ============ ============
Issuance of common stock for licensed technology .................. $ -- $ 1,720,000 $ --
============ ============ ============
Issuance of common stock in payment of dividends .................. $ 16,000 $ 16,000 $ 16,000
============ ============ ============
Supplemental non-cash disclosure of acquisition of businesses:
Accounts receivable (net) ........................................ $ -- $ 18,000 $ 121,000
Inventory ........................................................ -- 35,000 89,000
Prepaid expenses ................................................. -- 50,000 --
Fixed assets ..................................................... -- 151,000 38,000
Goodwill and intangibles ......................................... 25,000 6,301,000 521,000
Accounts payable and accrued liabilities ......................... -- (1,155,000) (244,000)
Deferred revenue ................................................. -- (587,000) (31,000)
Capital lease obligations ........................................ -- (44,000) --
Line of credit ................................................... -- -- (72,000)
Common stock issued .............................................. -- (4,036,000) (320,000)
See accompanying notes to consolidated financial statements
F-8
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
We develop and distribute interactive communications and entertainment
products for the home and for the hospitality industry. Our reportable segments
have been determined based on the nature of the services offered to customers,
which include the Buzztime segment, the NTN Interactive Television Network (NTN
iTV Network), NTN Wireless and NTN Software Solutions segments, which combine to
form the NTN Hospitality Technologies division. NTN Hospitality Technologies
revenue is generated primarily from providing an interactive entertainment
service which serves as a marketing and promotional vehicle for the hospitality
industry. Additional revenue is derived from advertising sold for distribution
via the interactive entertainment service, from its wireless business with
restaurant on-site paging systems and from its hardware and software enterprise
solutions. Buzztime, our wholly-owned subsidiary formed in December 1999, owns
the exclusive rights to one of the largest known digital trivia game show
libraries and many unique "TV Play-along" sports games. Buzztime's mission is to
deploy our interactive games in the home through digital cable television.
BASIS OF ACCOUNTING PRESENTATION
The consolidated financial statements include the accounts of NTN and its
wholly owned subsidiaries, IWN Inc. (IWN), IWN, L.P., Buzztime, NTN Canada,
Inc., NTN Software Solutions, Inc. and NTN Wireless Communications, Inc.
(collectively NTN or the Company). IWN and IWN, L.P. are dormant subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation. Unless otherwise indicated, references to "NTN", "we", "us" and
"our" include NTN and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to deferred
costs and revenues, depreciation of broadcast equipment, bad debts, investments,
intangible assets, financing operations, and contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o We record deferred costs and revenues related to the costs and related
installation revenue associated with installing new customer sites.
Based on Staff Accounting Bulletin No. 104, we amortize these amounts
over an estimated three-year average life of a customer relationship.
If a significant number of our customers leave us before the estimated
life of each customer is attained, amortization of those deferred
costs and revenues would accelerate, which would result in net
incremental revenue.
o We incur a relatively significant level of depreciation expense in
relationship to our operating income. The amount of depreciation
expense in any fiscal year is largely related to the estimated life of
handheld, wireless Playmaker devices, VSAT satellite dishes and
associated electronics and the computers located at our customer
sites. The Playmakers are depreciated over a four-year life, VSAT
dishes and associated electronics over a four-year life and the
computers over a three-year life. The depreciable life of these assets
was determined based upon their estimated useful life which considers
anticipated technology changes. If our Playmakers, VSAT dishes and
associated electronics and the computers turn out to have longer
lives, on average, than estimated, our depreciation expense would be
significantly reduced in those future periods. Conversely, if the
Playmakers, VSAT dishes and associated electronics and the computers
turn out to have shorter lives, on average, than estimated, our
depreciation expense would be significantly increased in those future
periods.
F-9
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
domestic customers that have terminated our iTV Network service plus
five percent of outstanding balances for all unreserved customer
balances across all of our domestic businesses and, for Canadian
customers, all accounts over 90 days past due. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances
may be required.
o We assess our inventory for estimated obsolescence or unmarketable
inventory and write down the difference between the cost of inventory
and the estimated market value based upon assumptions about future
sales and supply on-hand. If actual market conditions are less
favorable than those projected by management, additional inventory
write-downs may be required.
o Revenues from sales of software generally contain multiple elements,
and are recognized in accordance with Statement of Position (SOP) No.
97-2, "SOFTWARE REVENUE RECOGNITION", as amended. Along with the basic
software license agreement purchase, customers generally are provided
annual support and maintenance (PCS) for an additional fee based on a
stipulated percentage of the license fee. In order to continue to use
the licensed software, customers are required to annually renew the
PCS contracts.
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.
o We have a significant amount of goodwill and intangible assets on our
balance sheet related to acquisitions. At December 31, 2004 the net
amount of $7,669,000 of goodwill and intangible assets represented
26.1% of total assets. Goodwill represents the excess of costs over
fair value of assets of businesses acquired. We adopted the provisions
of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, as of January
1, 2002. Goodwill and intangible assets acquired in a purchase
combination determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS.
We performed our annual test for goodwill impairment as required by
SFAS 142 for our Software Solutions segment and our NTN Canada unit
subsequent to the end of the third quarter in conjunction with the
preparation of the September 30, 2004 financial statements. We
retained a third-party valuation firm to assist in calculating the
fair values of Software Solutions and NTN Canada. The analysis was
based upon consideration of (1) the market value of comparable
publicly traded companies, (2) the market value of similar companies
involved in business combinations, and (3) an income approach of
discounting the projected cash flows of operations. The projections of
those units involved a number of assumptions and estimates, including
revenue growth and operating margins, which management believes are
reasonable based upon existing operations and prospective business
opportunities. We completed our evaluation and concluded that goodwill
was not impaired as the fair value of Software Solutions and NTN
Canada exceeded their carrying value, including goodwill. The amount
of goodwill as of December 31, 2004 was $3,658,000. Future events
could cause us to conclude that impairment indicators exist and that
goodwill and other intangible assets associated with our acquired
businesses are impaired.
We performed step one of our annual goodwill impairment test related
to the Wireless segment in the fourth quarter of 2004 and concluded
that there was not an indication of impairment. Accordingly, step two
was not required.
We continually monitor for any potential indicators of impairment of
goodwill and intangible assets and we have determined that no such
indicators have arisen to date. Any impairment loss could have a
material adverse impact on our financial condition and results of
operations.
F-10
We do not have any of the following:
o Off-balance sheet arrangements except for purchase orders and
commitments and operating leases
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 16 - Related Parties or in Note
21 -- Subsequent Events or which are immaterial.
CASH AND CASH EQUIVALENTS
For the purpose of financial statement presentation, we consider all highly
liquid investment instruments with original maturities of three months or less
to be cash equivalents. Cash equivalents at December 31, 2004 and 2003 consist
primarily of investments in short term debt instruments of United States
government agencies and money market accounts.
RESTRICTED CASH
The restricted cash balance at December 31, 2004 represents cash invested
in an interest bearing restricted account at a Canadian bank that collateralizes
a letter of credit issued by that bank in favor of the landlord of our Canadian
office.
INVENTORY
Inventory consists of wireless paging equipment and computer hardware and
is stated at the lower of cost (weighted average cost basis, which approximates
FIFO) or market.
BROADCAST EQUIPMENT AND FIXED ASSETS
Broadcast equipment and fixed assets are stated at cost. Equipment under
capital leases is stated at the present value of future minimum lease payments.
Depreciation of fixed assets is computed using the straight-line method over the
estimated useful lives of the assets (three to seven years). Depreciation of
broadcast equipment is computed using the straight-line method over the
estimated useful lives of the assets (two to four years). Depreciation of fixed
assets under capital leases is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the lease period, and is
included in depreciation expense.
REVENUE RECOGNITION
We recognize revenue from three sources: NTN Hospitality Technologies
division revenues, Buzztime service revenues, and other sources. Revenue is not
recognized until collectibility of fees is reasonably assured. To the extent our
arrangements contain multiple deliverables; we evaluate the criteria in EITF
Issue No. 00-21 to determine whether such deliverables represent separate units
of accounting. In order to be considered a separate unit of accounting the
delivered items in an arrangement must have stand alone value to the customer
and there must be objective and reliable evidence of fair value for any
undelivered elements. Our arrangements for the transmission of the NTN iTV
Network contain two deliverables; the installation of our equipment for which we
receive an upfront fee, and the transmission of our network content for which we
receive monthly broadcast fees. As the installation deliverable does not have
stand alone value to the customer, it does not represent a separate unit of
accounting and therefore all installation fees received are deferred and
recognized as revenue on a straight-line basis of 36 months, the estimated life
of the customer relationship. Installation fees not recognized in revenue have
been recorded as deferred revenue in the accompanying consolidated balance
sheets. In addition, the direct expenses of the installation, setup and training
are deferred and amortized on a straight-line basis over 36 months and are
classified as deferred costs on the accompanying consolidated balance sheets.
NTN iTV Network revenue is generated primarily from distributing content
and advertising. Revenues generated from transmitting content to subscriber
locations is recognized ratably over the contract term as the content is
broadcast 15 hours a day/seven days a week. Consistent with the terms of
advertising agreements, advertising is aired a specified number of times per
hour everyday and therefore, revenues are recognized ratable over the contract
term. Included in NTN Network revenues are amounts earned under a previous
license agreement with our Canadian licensee, which operated approximately 350
hospitality locations. Revenue under this license agreement was recognized on a
monthly basis as broadcast content was aired similar to NTN Network revenue. We
acquired the operations of our Canadian licensee on December 15, 2003 (see Note
15 - Acquisitions).
F-11
Revenues from NTN Wireless consist primarily of sales of wireless paging
equipment. Wireless paging equipment revenue is recognized upon the shipment of
equipment to the customer.
Revenues from Software Solutions are recognized in accordance with
Statement of Position (SOP) No. 97-2, "Software Revenue Recognition", as
amended. Software license fee revenue is recognized when persuasive evidence of
an arrangement exists, delivery of the product has occurred at our customer's
location, the fee is fixed or determinable and collection is probable, provided
that vendor specific evidence exists for any undelivered elements, namely annual
support and maintenance. Along with the basic software license, our customers
are provided post contract support (PCS) for an additional fee, which is based
on a stipulated percentage of the license fee. PCS consists of technical support
as well as unspecified software upgrades and releases when and if made available
by us during the term of the support period.
If at the outset of an arrangement we determine that the arrangement fee is
not fixed or determinable, revenue is deferred until the arrangement fee becomes
due. If at the outset of an arrangement we determine that collectibility is not
probable, revenue is deferred until the earlier of when collectibility becomes
probable or the receipt of payment. If an arrangement allows for customer
acceptance, revenue is not recognized until the earlier of receipt of customer
acceptance or expiration of the acceptance period.
Additionally, we provide consulting and training services under both
hourly-based time and materials and fixed-priced contracts. Revenues from these
services are generally recognized as the services are performed.
Buzztime service revenues are recognized as the service is provided.
Other revenue is recognized when all material services or conditions
relating to the transaction have been performed or satisfied.
SOFTWARE DEVELOPMENT COSTS
We capitalize costs related to the development of certain software
products. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR
OTHERWISE MARKETED, capitalization of costs begins when technological
feasibility has been established and ends when the product is available for
general release to customers. Amortization of costs related to interactive
programs is recognized on a straight-line basis over three years.
We capitalize web site development costs in accordance with Emerging Issues
Task Force Issue No. 00-02, ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS. Costs
incurred during the planning and operating stages are expensed as incurred while
costs incurred during the web site application and infrastructure development
stage are capitalized and amortized on a straight-line basis over their expected
useful life of three years. These costs are included in software development
costs on the accompanying consolidated balance sheets.
Amortization expense for software development costs was $597,000, $284,000
and $232,000 in 2004, 2003 and 2002, respectively.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF FASB STATEMENT NO. 123
(SFAS No. 148). SFAS 148 amends FASB Statement No. 123; ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 beginning with our
annual financial statements for the year ended December 31, 2002.
The per share weighted-average fair value of stock options granted during
2004, 2003 and 2002 was $1.874, $1.106 and $0.95, 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 3.24%, expected volatility of
93.91%, and expected life of 4.73 years and 2003 - dividend yield of 0%,
risk-free interest rate of 2.86%, expected volatility of 113.17%, and expected
life of 4.58 years, and 2002 -- dividend yield of 0%, risk-free interest rate of
4.05%, expected volatility of 123%, and expected life of 4.6 years. In
compliance with APB No. 25, NTN expensed $2,000, $6,000 and $6,000 in 2004,
2003, and 2002, respectively, associated with the grants of 600,000 options in
1999 below market value pursuant to the Option Plan. No options were granted
below market value in 2004, 2003 and 2002 pursuant to the Option Plan.
F-12
We apply APB Opinion No. 25 and related interpretations in accounting for
our stock option plans. Accordingly, no compensation cost has been recognized in
the consolidated financial statements for the issuance of options to employees
pursuant to the Special Plan and the Option Plan unless the grants were issued
with exercise prices below market value. Had compensation cost related to
employees for our stock-based compensation plans been determined consistent with
SFAS No. 123 as amended by SFAS No. 148, our net loss and net loss per share
applicable to common stock would have been increased to the pro forma amounts
indicated below.
2004 2003 2002
------------ ------------ ------------
Net loss As reported ................................ $ 4,979,000 $ 2,711,000 $ 2,189,000
Add: stock-based employee compensation
expense included in reported net
loss, net of related tax effects ...... (2,000) (6,000) (6,000)
Deduct: stock-based employee compensation
expense, net of related tax effects ... 1,523,000 1,284,000 1,203,000
------------ ------------ ------------
Pro forma .................................. $ 6,500,000 $ 3,989,000 $ 3,386,000
============ ============ ============
Basic and diluted net loss As reported ................................ $ 0.09 $ 0.06 $ 0.06
per share
Pro forma .................................. $ 0.12 $ 0.09 $ 0.09
We account for options and warrants issued to non-employees in exchange for
services in accordance with SFAS No. 123 and EITF 96-18, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES. We estimate the fair value of
options and warrants using the Black-Scholes option-pricing model. For
agreements which require the achievement of specific performance criteria be met
in order for the options or warrants to vest, the measurement date is the date
at which the specific performance criteria are met. Prior to the measurement
date, options and warrants subject to vesting based on the achievement of
specific performance criteria that, based on different possible outcomes, result
in a range of aggregate fair values are measured at each financial reporting
period at their lowest aggregate then-current fair value, while options and
warrants which vest over the service period or at completion of the service
period are measured at each financial reporting period at their then-current
fair value, for purposes of recognition of costs during those periods. For
agreements which provide for services to be rendered without the requirement of
specific performance criteria, the company measures the fair value of the
options and warrants at the earlier of the date the services are completed or
the date the options and warrants vest and are non-forfeitable. Generally,
services are not rendered prior to the grant date and the related agreements do
not contain performance commitments. Accordingly, the measurement date for
compensation expense occurs subsequent to the grant date. From the grant date to
the measurement date, compensation expense is estimated at each financial
reporting period and is recorded over the service period. The unvested options
and warrants continue to be remeasured at each financial reporting period until
they vest or until the services are completed. For agreements which provide
options and warrants for services already rendered, the options and warrants
immediately vest and the measurement date is the date of grant. Modifications
that increase the fair value of the warrants are treated as an exchange of the
original warrant for a new one. Additional compensation expense related to
modifications, if any, is recorded over the remaining service period.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. We adopted the provisions of SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS, as of January 1, 2002. Goodwill and intangible assets
acquired in a purchase combination that are determined to have an indefinite
useful life are not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, ACCOUNTING FOR
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Amortization expense for intangible
assets was $842,000, $406,000 and $104,000 in 2004, 2003 and 2002, respectively.
F-13
As of December 31, 2004 intangible assets were comprised of the following:
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
Customer relationships ........ $ 1,980,000 $ 587,000 $ 1,393,000
License agreements ............ 1,739,000 298,000 1,441,000
Developed technology .......... 1,047,000 232,000 815,000
Trivia database ............... 345,000 36,000 309,000
Non-competition agreements .... 30,000 14,000 16,000
Employment agreements ......... 140,000 140,000 --
Trademarks .................... 149,000 112,000 37,000
------------ ------------ ------------
Total ................ $ 5,430,000 $ 1,419,000 $ 4,011,000
============ ============ ============
As of December 31, 2003 intangible assets were comprised of the following:
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
Customer relationships ........ $ 1,980,000 $ 172,000 $ 1,808,000
License agreements ............ 1,761,000 126,000 1,635,000
Developed technology .......... 973,000 56,000 917,000
Trivia database ............... 345,000 1,000 344,000
Non-competition agreements .... 30,000 4,000 26,000
Employment agreements ......... 140,000 123,000 17,000
Trademarks .................... 149,000 96,000 53,000
------------ ------------ ------------
Total ................ $ 5,378,000 $ 578,000 $ 4,800,000
============ ============ ============
The estimated aggregate amortization expense relating to our intangible
assets for each of the five succeeding years is as follows:
Year 2005 2006 2007 2008 2009
- ---- ---- ---- ---- ---- ----
Estimated aggregate amortization expense $801,000 $776,000 $757,000 $567,000 $392,000
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
INVESTMENTS AVAILABLE-FOR-SALE
Investment securities consist of equity securities, which are classified as
available-for-sale securities. Available-for-sale securities are recorded at
fair value and unrealized holding gains and losses are excluded from earnings
and are reported as a separate component of comprehensive income until realized
(See Note 17). Realized gains and losses from the sale of available-for-sale
securities are determined on a specific-identification basis. A decline in the
market value of any available-for-sale security below cost that is deemed to be
other than temporary, results in a reduction in the carrying amount to fair
value. Any resulting impairment is charged to operations and a new cost basis
for the security is established.
The one investment available-for-sale that we hold is a 2,518,260 share
investment in our Australian licensee, eBet Limited (eBet - an Australian gaming
technology corporation). Our cost basis in the eBet shares is AUD $0.50 per
share. Our initial investment in 1999 was for 4,000,000 shares and at various
points in 2000, we sold 1,481,740 eBet shares, leaving our existing holding of
2,518,260 shares, which represents less than 1.6% of eBet's current shares
outstanding.
eBet's stock price has traded below our AUD $0.50 cost since September
2000. At December 31, 2004, their stock traded at AUD $0.17, which when combined
with the AUD/US$ exchange rate represented an unrealized loss of approximately
US $513,000, which is recorded as accumulated other comprehensive loss. On March
11, 2005, their stock price had further recovered to AUD $0.28.
We have tracked eBet's performance since 1999 and remain in contact with
their management team. We believe that eBet's stock fell late in 2000 along with
many internet technology companies in the worldwide post-internet "bubble." We
believe that the impairment of our investment in eBet is temporary in nature for
several reasons, including:
1. eBet's continuing business operations achieved profitability for the
first time ever in their first half year ended December 31, 2003 and
also for their fiscal year ended June 30, 2004.
F-14
2. eBet achieved profitable operations based on only a 10% penetration of
their gaming systems sales in their home state of New South Wales
coupled with sales into the state of Queensland, Australia and in New
Zealand. We believe this low level of market penetration in the
growing Australian gaming market represents significant upside to
their future revenues in their home market, which should ultimately
translate into a higher stock price.
3. eBet has made progress in its plans for entry into the US gaming
market where it intends to expand its product offering and vary its
business model to include participation options for casino operators.
In line with this, eBet management disclosed in March 2004 that it has
entered into an exclusive licensing agreement with TAB Limited (ASX:
TAB) (TAB) to exploit TAB's wide-area linked jackpot brands.
The agreement, which has an initial 5-year term, provides eBet with
exclusive rights to exploit the brands, trade marks and associated
material and images in Native American casinos for supplying,
installing and operating gaming systems, software and games for
electronic gaming machines, including the operation of wide-area
linked jackpot systems such as those operated by TAB in Australia.
They have also begun to deploy their gaming technology in several
casinos in Russia.
In a public release on the Australian Sock Exchange dated February 21,
2005, eBet management stated that they had launched their Maximillion$
Wide Area Link Progressive Jackpot System in two Native American
casinos in California. While the timing and financial impact of the
eBet's move into the US remains subject to market conditions and
acceptance, they believe that it will present a unique product
offering and business proposition in the US that will have strong
market appeal.
We believe that the combination of eBet's recent emergence into
profitability, low but growing penetration of their core markets and their
Russian and U.S. opportunities provide evidence that the impairment is not other
than temporary in nature. However, we continue to track eBet's performance and
if further penetration of their home market, the Russian casino market and/or
the U.S. casino market does not materialize over the remainder of 2005, then we
may determine that our investment is not "other-than-temporarily impaired."
FAIR VALUE OF FINANCIAL INSTRUMENTS
We believe that the fair value of financial instruments approximate their
carrying value. The following methods and assumptions were used to estimate the
fair value of financial instruments:
The carrying values of cash and cash equivalents, restricted cash, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the short maturity of these instruments. The carrying value of the
revolving line of credit approximates its fair value because the interest rate
is indexed by current market rates, and the other terms are comparable to those
currently available in the market place.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
RESEARCH AND DEVELOPMENT AND ADVERTISING
Research and development costs and marketing-related advertising costs are
expensed as incurred. Research and development costs amounted to $329,000,
$329,000 and $12,000 in 2004, 2003 and 2002, respectively. Marketing-related
advertising costs amounted to $1,575,000, $1,316,000 and $1,065,000 in 2004,
2003 and 2002, respectively, and are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
F-15
CONCENTRATION OF CREDIT RISK
In our iTV Network segment, which represented 77% of our overall revenues
in 2004, we provide services to group viewing locations, generally restaurants,
sports bars and lounges throughout North America. Concentration of credit risk
with respect to trade receivables is limited due to the large number of
customers comprising our customer base, and their dispersion across many
different geographies. We perform ongoing credit evaluations of our customers
and generally require no collateral. We maintain an allowance for doubtful
accounts to provide for credit losses.
BASIC AND DILUTED EARNINGS PER COMMON SHARE
We compute basic and diluted earnings per share in accordance with SFAS No.
128, EARNINGS PER SHARE. Basic EPS excludes the dilutive effects of options,
warrants and other convertible securities. Diluted EPS reflects the potential
dilution of securities that could share in our earnings. Options, warrants,
convertible preferred stock, deferred stock units and convertible notes
representing approximately 12,384,000, 11,453,000 and 12,435,000 shares were
excluded from the computations of diluted net loss per common share for the
years ended December 31, 2004, 2003 and 2002, respectively, as their effect is
anti-dilutive.
RECLASSIFICATIONS
We have reclassified certain items in the 2003 and 2002 consolidated
financial statements to conform to the 2004 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The changes in this Statement improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. The adoption of this Interpretation did not have a material effect on
our financial statements.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS WITH BOTH LIABILITIES AND EQUITY. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The effective date for certain provisions of SFAS No. 150 has been
deferred indefinitely for specified mandatorily redeemable non-controlling
interests. The adoption of this statement is not expected to have a material
effect on our financial statements.
In December 2003, the FASB issued FIN 46R, Consolidation of Variable
Interest Entities (VIE's). This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. FIN 46R replaces FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, which was issued in January 2003. The unmodified
provisions of the Interpretation to special-purpose entities must be applied by
the end of the first reporting period ending after December 15, 2003. The
revised Interpretation must be applied to all entities that are not
special-purpose entities by the end of the first reporting period beginning
after December 15, 2003. The adoption of this Interpretation did not have a
material effect on our financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an
amendment of ARB No. 43, Chapter 4," to amend the guidance in Accounting
Research Bulletin, or ARB, No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This Statement amends Paragraph 5 of ARB
43, Chapter 4, which previously stated that "...under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period
charges..." This Statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We believe there
will be no material effect on our financial statements upon adoption of this
statement.
F-16
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," a
revision of SFAS No. 123, "Accounting for Stock-Based Compensation" and
superseding APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires the Company to expense grants made under the stock option and
employee stock purchase plan programs. That cost will be recognized over the
vesting period of the plans. SFAS No. 123R is effective for the first interim or
annual period beginning after June 15, 2005. Upon adoption of SFAS No. 123R,
amounts previously disclosed under SFAS No.123 will be recorded in the
consolidated income statement. We are evaluating the alternatives allowed under
the standard, which we are required to adopt beginning in the third quarter of
2005. We believe that this new standard will increase our operating losses but
that increase will be of a non-cash nature.
(2) BROADCAST EQUIPMENT AND FIXED ASSETS
Broadcast equipment and fixed assets are recorded at cost and consist of
the following:
2004 2003
------------- -------------
Broadcast equipment .......................... $ 15,139,000 $ 11,531,000
Furniture and fixtures ....................... 745,000 727,000
Machinery and equipment ...................... 9,840,000 9,131,000
Leasehold improvements ....................... 978,000 898,000
Equipment under capital lease:
Broadcast equipment ........................ 1,127,000 1,462,000
Machinery and equipment .................... 1,715,000 1,715,000
Other equipment ............................ 108,000 22,000
------------- -------------
29,652,000 25,486,000
Accumulated depreciation and amortization .... (23,201,000) (21,088,000)
------------- -------------
$ 6,451,000 $ 4,398,000
============= =============
(3) COMMON STOCK OPTIONS, WARRANTS AND DEFERRED STOCK UNITS
OPTIONS
We have two active stock option plans. The 2004 Performance Incentive Plan
(the "2004 Plan") was approved by our shareholders in September 2004 in a
Special Meeting of Shareholders (Special Meeting). Our previous plan (the 1995
Plan) had approximately 77,000 available for grant in September 2004. As noted
in our Proxy for the Special Meeting, the number of shares of Common Stock that
remained available for award grants under the 1995 Plan immediately prior to the
Special Meeting became available for award grants under the 2004 Plan. Under the
2004 Plan, options for the purchase of our common stock or other instruments
such as deferred stock units may be granted to officers, directors and
employees. Options may be designated as incentive stock options or as
nonqualified stock options and generally vest over four years, except, the Board
of Directors, at its discretion, can authorize acceleration of vesting periods.
Options under the Option Plan, which have a term of up to ten years, are
exercisable at a price per share not less than the fair market value on the date
of grant. The aggregate number of shares authorized for issuance under the 2004
Plan as of December 31, 2004 was 2,577,000. As of the effective date of the 2004
Plan, a total of 9,946,000 shares of Common Stock were then subject to
outstanding awards granted under the 1995 Plan and any such awards that expire,
are cancelled or otherwise terminate after will also be available for award
grant purposes under the 2004 Plan.
In addition, we have issued options pursuant to a Special Stock Option Plan
(Special Plan). Options issued under the Special Plan are made at the discretion
of the Board of Directors and are designated only as nonqualified options. The
options generally have a term of up to ten years, are exercisable at a price per
share not less than the fair market value on the date of grant and vest over
various terms. The aggregate number of shares issued and outstanding under the
Special Plan as of December 31, 2004 is 500,000.
On May 31, 2001, Buzztime adopted an incentive stock option plan. Pursuant
to the option plan, Buzztime may grant options to purchase Buzztime common
stock, subject to applicable share limits, upon terms and conditions specified
in the plan. There are 300,000 shares authorized under this plan. To date, no
options have been granted under the plan.
A summary of stock option activity during 2004, 2003 and 2002 is as
follows:
F-17
SPECIAL PLAN OPTION PLAN
---------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ----------- ---------------
OUTSTANDING DECEMBER 31, 2001 ......... 604,000 2.81 7,468,000 1.40
Granted ............................. -- -- 1,096,000 0.93
Exercised ........................... -- -- (191,000) 0.70
Cancelled ........................... (104,000) 2.81 (661,000) 2.54
----------- ----------- ----------- -----------
OUTSTANDING DECEMBER 31, 2002 ......... 500,000 2.81 7,712,000 1.26
Granted ............................. -- -- 2,311,000 1.43
Exercised ........................... -- -- (643,000) 1.14
Cancelled ........................... -- -- (206,000) 1.18
----------- ----------- ----------- -----------
OUTSTANDING DECEMBER 31, 2003 ........ 500,000 $2.81 9,174,000 $1.31
Granted ............................. -- -- 1,221,000 2.53
Exercised ........................... -- -- (384,000) 1.07
Cancelled ........................... -- -- (218,000) 1.85
----------- ----------- ----------- -----------
OUTSTANDING AS OF DECEMBER 31, 2004 .. 500,000 $2.81 9,793,000 $1.46
=========== =========== =========== ===========
A summary of options outstanding and exercisable by exercise price range at
December 31, 2004 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
Special Plan:
$2.81 500,000 2 years $ 2.81 500,000 $ 2.81
=========== ===========
Option Plan:
$0.45-$1.50 6,468,000 6 years $ 0.91 5,655,000 $ 0.90
$1.51-$3.00 3,073,000 6 years $ 2.45 2,122,000 $ 2.44
$3.01-$4.94 252,000 7 years $ 3.36 92,000 $ 3.53
----------- -----------
9,793,000 7,869,000
=========== ===========
DEFERRED STOCK UNITS
In 2004, we granted 150,000 deferred stock units to certain employees.
These grants of stock units will be paid in an equal number of shares of Common
Stock on the vesting date of the award, subject to any deferred payment date
that the holder may elect. A stock unit award will be paid only to the extent
vested. Vesting generally requires the continued employment by the award
recipient through the respective vesting date, subject to accelerated vesting in
certain circumstances. The measurement date for these initial stock unit grants
was the September 30, 2004 date of the Special Meeting of Stockholders.
Since the deferred stock units are to be paid in an equal number of shares of
Common Stock without any kind of offsetting payment by the employee, the
measurement of cost should be based on the quoted market price of the stock at
the measurement date, which was $2.60.
WARRANTS
In 2004, 2003 and 2002, we granted 236,000, 514,000 and 685,000 warrants to
non-employees. The warrant issued in 2004 was an underwriter's warrant that was
issued to Roth Capital Partners, LLC in connection with our public offering in
January 2004 and was valued at approximately $655,000. Since that warrant was
issued in connection with the public offering the cost of this warrant was
accounted for as a deduction from equity. We expensed $0, $226,000 and $90,000
in 2004, 2003 and 2002, respectively, associated with the grant of these
warrants.
The following summarizes warrant activity during 2004, 2003 and 2002:
OUTSTANDING WEIGHTED AVERAGE
WARRANTS EXERCISE PRICES
----------- ----------------
DECEMBER 31, 2001 .......................... 1,789,000 2.03
Granted .................................. 685,000 0.98
Exercised ................................ -- --
Canceled ................................. (412,000) 2.05
----------- -------
DECEMBER 31, 2002 .......................... 2,062,000 1.68
Granted .................................. 514,000 1.15
Exercised ................................ (771,000) 1.46
Canceled ................................. (25,000) 2.38
----------- -------
DECEMBER 31, 2003 .......................... 1,780,000 $ 1.61
Granted .................................. 236,000 3.91
Exercised ................................ (70,000) 1.25
Canceled ................................. (5,000) 1.30
----------- -------
DECEMBER 31, 2004 .......................... 1,941,000 $ 1.91
=========== =======
BALANCE EXERCISABLE AT DECEMBER 31, 2004 ... 1,891,000 $ 1.93
=========== =======
F-18
A summary of warrants outstanding and exercisable by exercise price range
at December 31, 2004 is as follows:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------------------------------------- -------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$0.45-$0.99 70,000 1 year $0.84 70,000 $0.84
$1.00-$1.30 1,100,000 4 years $1.07 1,050,000 $1.07
$1.31-$3.91 771,000 3 years $3.20 771,000 $3.20
------------- -------------
1,941,000 1,891,000
============= =============
At December 31, 2004, the range of exercise prices and the weighted-average
remaining contractual life of outstanding warrants were $0.77 to $3.91 and 3
years, respectively. The table above does not include warrants issued to S-A to
obtain an additional 159,236 shares of Buzztime's Series A Convertible Preferred
Stock (the "S-A Warrants"). The S-A warrants vest in 10% increments as cable
system operators sign on for the Buzztime channel. The exercise price of the S-A
warrants is $1.57 per share. Based on the two Buzztime deployments with SusCom,
20% of the warrants vested during 2003.
(4) COMMON STOCK
On January 30, 2004, we completed the sale of 3,943,661 shares of our
common stock at $3.55 per share, resulting in gross proceeds of approximately
$14.0 million, pursuant to an existing shelf registration filed under the
Securities Act. Roth Capital Partners, LLC acted as placement agent in the
offering. After commissions and expenses, the net proceeds of this offering were
approximately $13.0 million. The offering was purchased primarily by a number of
institutional investors and by Media General, Inc. (see Note 12 - Media General
Investment), a related party, which invested approximately $2.0 million.
(5) CUMULATIVE CONVERTIBLE PREFERRED STOCK
We have authorized 10,000,000 shares of preferred stock. The preferred
stock may be issued in one or more series. The only series currently designated
are a series of 5,000,000 shares of Series A Cumulative Convertible Preferred
Stock (Series A Preferred Stock).
At December 31, 2004 and 2003, there were 161,000 shares of Series A
Preferred Stock issued and outstanding. The Series A Preferred Stock provides
for a cumulative annual dividend of 10 cents per share, payable in semi-annual
installments in June and December. Dividends may be paid in cash or with shares
of common stock. In 2004, 2003 and 2002, we issued approximately 6,000, 6,000
and 14,000 common shares, respectively, for payment of dividends. At December
31, 2004, the cumulative unpaid dividends for the Series A Preferred Stock was
approximately $1,300.
The Series A Preferred Stock has no voting rights and has a $1.00 per share
liquidation preference over common stock. The registered holder has the right at
any time to convert shares of Series A Preferred Stock into that number of
shares of our common stock that equals the number of shares of Series A
Preferred Stock that are surrendered for conversion divided by the conversion
rate. The conversion rate is subject to adjustment in certain events and is
established at the time of each conversion. During 2004, 2003 and 2002, there
were no conversions. There are no mandatory conversion terms or dates associated
with the Series A Preferred Stock.
(6) RETIREMENT AND SAVINGS PLANS
During 1994, we established a defined contribution plan which is organized
under Section 401(k) of the Internal Revenue Code, which allows employees who
have completed at least one month of service and have reached age 21 to defer up
to 20% of their pay on a pre-tax basis. In 2002, we amended the plan to permit
employees who have reached age 18 to defer up to 50% of their pay on a pre-tax
basis. We may at our discretion contribute to the plan. For the years ended
December 31, 2004, 2003 and 2002, we made no such contributions.
F-19
(7) INCOME TAXES
For each of the years ended December 31, 2004, 2003 and 2002, there was no
provision for current deferred U.S. federal income taxes. Current state and
foreign tax provisions and foreign deferred tax assets were recorded for the
years ended December 31, 2004 and 2003 as follows:
2004 2003 2002
--------- --------- ---------
Current Tax Provision:
Federal -- -- --
State 25,000 47,000 41,000
Foreign 86,000 -- --
--------- --------- ---------
Total 111,000 47,000 41,000
Deferred Tax Asset:
Federal -- -- --
State -- -- --
Foreign (17,000) -- --
--------- --------- ---------
Total (17,000) -- --
Total Tax Provision:
Federal -- -- --
State 25,000 47,000 41,000
Foreign 69,000 -- --
--------- --------- ---------
Total 94,000 47,000 41,000
The components that comprise deferred tax assets and liabilities at
December 31, 2004 and 2003 are as follows:
2004 2003
------------- -------------
Deferred tax assets:
NOL carryforwards ......................... $ 22,246,000 $ 20,515,000
Legal and litigation accruals ............. 11,000 45,000
Allowance for doubtful accounts ........... 148,000 536,000
Compensation and vacation accrual ......... 325,000 258,000
Operating accruals ........................ 172,000 548,000
Allowance for equipment obsolescence ...... -- 21,000
Deferred revenue .......................... 176,000 34,000
Research and experimentation credit ....... 186,000 186,000
Amortization .............................. 631,000 183,000
Depreciation .............................. 1,008,000 1,220,000
Foreign ................................... 18,000 --
Charitable contributions .................. 2,000 1,000
------------- -------------
Total gross deferred tax assets ... 24,923,000 23,547,000
Valuation allowance ......................... (24,239,000) (22,909,000)
------------- -------------
Deferred tax assets ............... 684,000 638,000
------------- -------------
Deferred tax liabilities:
Capitalized software ...................... 296,000 638,000
Deferred revenue .......................... 306,000 --
Amortization .............................. 64,000 --
------------- -------------
Total deferred liabilities ........ 666,000 638,000
------------- -------------
Net deferred tax assets ........... $ 18,000 $ --
============= =============
The reconciliation of computed expected income tax (benefit) to effective
income taxes by applying the federal statutory rate of 34% is as follows:
2004 2003 2002
------------ ------------ ------------
Tax at federal income tax rate .............. $ (1,660,000) $ (909,000) $ (802,000)
State taxes net of federal benefit .......... (257,000) (143,000) (115,000)
Foreign Income .............................. 103,000 -- --
Change in valuation allowance ............... 1,330,000 (120,000) 1,354,000
Change in beginning deferred tax assets ..... -- 256,000 (2,155,000)
Expiration and adjustments of net operating
loss carryforwards ....................... 568,000 1,029,000 1,748,000
Other ....................................... 10,000 (66,000) 11,000
------------ ------------ ------------
$ 94,000 $ 47,000 $ 41,000
============ ============ ============
F-20
In assessing the realizability of deferred tax assets, we consider whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. We consider the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based on the level of historical
operating results and projections of taxable income for the future, we have
determined that it cannot be determined more likely than not that the portion of
deferred tax assets not utilized through the reversal of deferred tax
liabilities will be realized. Accordingly, we recorded a valuation allowance to
reduce domestic deferred tax assets to the amount of deferred tax liabilities.
Approximately $508,000 of the valuation allowance, if realized, will be
recognized as a credit to paid in capital. There can be no assurance that we
will be able to realize the benefit of some or all of the federal and state loss
carryforwards either due to ongoing operating losses, expiry of the carryforward
period or due to ownership changes, which may limit the usefulness of the loss
carryforwards.
At December 31, 2004, we have available net operating loss carryforwards of
approximately $62,450,000 for federal income tax purposes, which begin to expire
in 2005. The net operating loss carryforwards for state purposes, which begin to
expire in 2005, are approximately $16,875,000. Federal and state tax laws impose
restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" for tax purposes as defined
under Section 382 of the Internal Revenue Code. Although we do not anticipate
that such limitations will be material to our ability to use our net operating
losses and credit carryforwards, this conclusion was based upon a preliminary
analysis. Therefore, the extent of such limitations is not definitely known.
(8) COMMITMENTS
OPERATING LEASES
We lease office and production facilities and equipment under agreements
which expire at various dates. Certain leases contain renewal provisions and
generally require us to pay utilities, insurance, taxes and other operating
expenses. Additionally, we entered into lease agreements for certain equipment
used in broadcast operations and the corporate computer network. Lease expense
under operating leases totaled $962,000, $775,000 and $725,000 in 2004, 2003 and
2002, respectively, net of sublease income of $78,000, $156,000 and $265,000 in
2004, 2003 and 2002, respectively.
Future minimum lease obligations under noncancelable operating leases, net
of contractual sublease payments, at December 31, 2004 are as follows:
YEAR LEASE SUBLEASE
ENDING PAYMENT PAYMENT NET
------ ----------- ----------- -----------
2005 .......... $ 846,000 $ 23,000 $ 823,000
2006 .......... 462,000 -- 462,000
2007 .......... 186,000 -- 186,000
2008 .......... 180,000 -- 180,000
2009 .......... 149,000 -- 149,000
Thereafter .... 445,000 -- 445,000
----------- ----------- -----------
Total ....... $ 2,267,000 $ 23,000 $ 2,245,000
=========== =========== ===========
CAPITAL LEASES
We lease certain equipment under capital leases. Future minimum lease
payments under the capital leases together with the present value of the net
minimum lease payments as of December 31, 2004 are as follows:
YEAR ENDING TOTAL
--------------------------------------------------- ------------
2005 .............................................. $ 176,000
2006 .............................................. 100,000
2007 .............................................. 32,000
2008 .............................................. 8,000
2009 .............................................. --
-----------
Total minimum lease payments ................ 316,000
Less: Amount representing interest ranging from
9.81 % to 29.95% ............................ (45,000)
Present value of net minimum lease payments ....... 271,000
Less current portion .............................. (148,000)
-----------
Long term portion ....................... $ 123,000
===========
F-21
Property held under capital leases is as follows:
2004 2003
------------ ------------
Equipment .................. $ 2,950,000 $ 3,199,000
Accumulated depreciation ... (2,624,000) (2,807,000)
------------ ------------
$ 326,000 $ 392,000
============ ============
PURCHASE COMMITMENTS
We have a commitment under a long-term agreement to purchase equipment over
a three year period which began in March 2004. Future minimum payments under the
agreement are as follows:
YEAR ENDING TOTAL
--------------------------------------------------- -----------
2005............................................... $ 683,000
2006............................................... 531,000
-----------
Total of net minimum payments...................... $ 1,214,000
===========
(9) DEBT
REVOLVING LINE OF CREDIT
Prior to establishing our line of credit with PMB, we had a line of credit
with Coast Business Credit (Coast). In August 1999, we entered into an agreement
with Coast for a revolving line of credit not to exceed $4,000,000. Interest was
charged on the outstanding balance at a rate equal to the prime rate plus 1.5%
per annum, but could not be less than 9% per annum. The line of credit was
secured by substantially all of our assets. Total loan fees of $120,000 were
payable in three annual installments and were amortized over the life of the
loan, which originally matured on August 31, 2002. Our revolving line of credit
agreement with Coast was then amended in May 2001. The line of credit provided
for borrowings not to exceed the lesser of (i) a designated maximum amount, (ii)
three times trailing monthly collections, or (iii) three times annualized
trailing adjusted EBITDA. The amendment called for a gradual reduction in the
line from $4,000,000 on April 1, 2001 to $2,750,000 on December 31, 2001. We
completed that pay down process on December 31, 2001.
On February 25, 2002, we further amended our revolving line of credit to
extend the expiration date of the revolving line of credit to June 30, 2003. The
amendment also required further line reductions of $250,000 each on June 30,
2002, January 31, 2003, and on March 31, 2003. The amendment deleted our minimum
tangible effective net worth financial covenant and replaced it with two cash
flow-oriented covenants.
On February 4, 2003, we amended our revolving line of credit to extend the
maturity date on the line of credit to June 30, 2004. The amendment also struck
the previously scheduled March 31, 2003 $250,000 paydown on the line of credit,
deleted the trailing cash flow multiplier element of the borrowing base and
modified the cash flow oriented covenants.
On February 7, 2003, Coast and its parent company, Southern Pacific Bank,
were seized by the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC
then sold off the portion of Coast's loan portfolio that contained our line of
credit to GF Asset Management, LLC (GF), a subsidiary of GE Capital. On July 17,
2003, we paid off our revolving line of credit with GF. The amount paid was
approximately $1,411,000 which is net of a 5% settlement discount of
approximately $105,000.
On July 16, 2003, we entered into a $1,000,000 line of credit arrangement
with Pacific Mercantile Bank (PMB). Interest on the line is based on an
independent index which is the highest rate on corporate loans posted by at
least 75% of the USA's thirty largest banks known as The Wall Street Journal's
Prime rate. The interest rate to be applied to the unpaid principal balance is
2% over the index. The arrangement precludes us from paying cash dividends.
The PMB line originally was set to mature on July 16, 2004 and contained
one financial covenant based on our cash flow coverage of the balance on the
line of credit. On January 7, 2004, we amended the line of credit to extend the
expiration date of the facility to February 1, 2005 and to replace the cash
flow-based financial covenant with a balance sheet oriented financial covenant
that limits the ratio of our debt to tangible net worth to 2:1. We were in
compliance with that covenant as of December 31, 2004. The line was then amended
again on February 11, 2005 to extend the expiration date of the line to February
11, 2006. The line is secured by all inventories, equipment, accounts receivable
and various other assets.
F-22
AMENDMENTS TO SATELLITE AGREEMENTS
On January 20, 2005 but effective as of December 31, 2004, we amended our
agreements with our satellite services provider to push out the expiration date
on the FM2 satellite platform to February 2007 and to modify our VSAT equipment
purchase and satellite service agreements. The modification to the equipment
purchase agreement eliminates the requirement to purchase and install a specific
amount of VSAT equipment. The amendment to the equipment purchase agreement also
called for us to pay off immediately approximately $278,000 of the equipment
notes payable to the satellite services provider, which we paid in January 2005,
and the remaining $342,000 of the equipment notes payable over 2005. This
flexibility may also enable us to utilize non-satellite based data transmission
platforms, such as digital subscriber lines, wireless connectivity or cable
modems, for customer sites where such platforms may be appropriate.
The amendment to FM2 data transmission agreement and the revisions to the
VSAT equipment purchase and satellite service agreements allow us to spread any
conversions to the new VSAT platform over the remainder of the VSAT satellite
services agreement, which is now scheduled to end in April 2009. The amendments
also allow us the flexibility to keep existing FM2 sites on the existing
platform for another two years and they do not require us to have defined levels
of VSAT sites by any certain date.
8% SENIOR SUBORDINATED CONVERTIBLE NOTES
In 1999, we reacquired our Series B Preferred Stock in exchange for
convertible notes and warrants. The convertible notes, with a face value of
$5,913,000, were issued January 11, 1999 at the annual rate of 7% per annum.
Interest was due and payable in quarterly installments, in arrears. An
allocation was made between the convertible notes and the warrants based on the
relative fair values of the securities at the time of issuance. A discount of
approximately $464,000 was recorded against the convertible notes due to the
allocation. As a result of this allocation, we recorded interest expense, at an
effective interest rate of 11% per year, throughout the term of the convertible
notes, which began in the first quarter of 1999. Interest expense of
approximately $3,000 and $39,000 has been accreted for the years ended December
31, 2003 and 2002, respectively.
In January 2001, we reached agreement with the holders of our convertible
notes to extend the maturity date of the aggregate $4 million face value in
promissory notes from February 1, 2001 to February 1, 2003. The promissory notes
remained convertible at $1.275 per share, but the terms were modified to reduce
the interest rate from 7% to 4% and to permit us to convert up to the full
principal amount of the promissory notes into NTN common stock at maturity at a
conversion price of $1.275 per share. In addition, if our common stock closes
above $2.50 for more than 20 consecutive trading days, we can force conversion
of the promissory notes at $1.275 per share.
In December 2001, NTN reached an agreement with the holders of the
convertible notes to convert $2 million of the outstanding convertible notes
payable into approximately 1,639,000 of common stock at $1.22 per share and
increase the interest rate on the remaining notes payable to 8%. Upon conversion
of the principal, debt conversion costs of approximately $189,000 were recorded.
The balance of the convertible notes plus accreted interest at December 31,
2002 was $1,997,000.
On February 1, 2003 the outstanding balance of $2.0 million on the notes
was converted into 1,568,628 shares of common stock at a conversion price of
$1.275 per share.
(10) STRATEGIC PARTNERSHIP AND INVESTMENT IN BUZZTIME
On June 8, 2001, Buzztime entered into a development, license and marketing
agreement (the Marketing Agreement) with Scientific-Atlanta, Inc. (S-A) to
co-develop an application to enable the operation of a Buzztime interactive
trivia game show channel on S-A's Explorer digital interactive set-top network,
for distribution by cable operators to their subscribers. Buzztime will be
responsible for the trivia game channel content including ongoing programming
and player promotions. The channel will derive revenue from cable operator
license fees, premium subscription fees and advertising revenue. Under the
Marketing Agreement, Buzztime and S-A have predetermined commission arrangements
based on sales and support of Buzztime's products to the cable system operators.
F-23
In connection with the Marketing Agreement, Scientific-Atlanta Strategic
Investments, L.L.C., a Delaware limited liability company and affiliate of S-A,
invested $1.0 million in Buzztime for 636,943 shares of Buzztime's Series A
Convertible Preferred Stock, representing 6% of Buzztime's common shares
outstanding on an as-converted basis, and warrants to obtain an additional
159,236 shares of Series A Convertible Preferred Stock (the S-A Warrants). Each
share of preferred stock was convertible into one share of Buzztime's common
stock, subject to future adjustment, and entitled to a non-cumulative dividend
of 8%, if, when and as declared by Buzztime's board of directors. The $1.0
million investment may only be used towards development of the application for
S-A and fulfillment of Buzztime's obligations under the Marketing Agreement,
which are currently Buzztime's primary focus.
NTN granted S-A the right to exchange its shares of Buzztime's preferred
stock into shares of NTN common stock upon the earlier of (i) Buzztime being
unable to obtain additional equity financing of $2.0 million before June 8,
2002, (ii) the liquidation, dissolution or bankruptcy of Buzztime before June 8,
2002, (iii) the failure of Buzztime to conduct a qualified public offering by
June 8, 2004, or (iv) a change in control of Buzztime before June 8, 2002. The
exchange price was the 20-day average closing price of NTN's common stock
immediately preceding the date S-A gives notice of its intent to exercise its
rights.
The exercise price of the S-A warrants is $1.57 per share. The warrants
vest in 10% increments as cable system operators sign on for the Buzztime
channel. Based on the two Buzztime deployments with Susquehanna Cable (SusCom),
20% of the warrants are vested as of December 31, 2003. No expense has been
recorded for the year ended December 31, 2003 as the fair value of the warrants
is not material.
On January 16, 2003, the 636,943 shares of Buzztime Series A Convertible
Preferred Stock were converted to 1,000,000 shares of NTN common stock. For
purposes of the exchange, the Series A liquidation preference was $1.57 per
share of Buzztime Series A preferred stock. The conversion price of the NTN
common stock was $1.00 per share.
(11) MINORITY INTEREST ACCOUNTING
We retained majority ownership of Buzztime following the S-A investment
and, as a result, continued to consolidate Buzztime's operations in our
financial statements. No gain or loss was recorded by us on this sale of
Buzztime's shares in accordance with Staff Accounting Bulletin Topic 5h -
Miscellaneous Accounting, ACCOUNTING FOR SALES OF STOCK IN A SUBSIDIARY, as the
realization of the gain is not assured given Buzztime's history of losses from
operations, net operating loss carryforwards, which are generally not available
to offset capital gains, and the start-up nature of Buzztime's products designed
for the interactive television market. In addition, the ongoing business
relationship with S-A through the Marketing Agreement and restrictions placed on
the use of proceeds were additional factors considered in accounting for the
sale of Buzztime's shares. As a result, the investment was reflected as a
capital transaction.
The investment in Buzztime was presented as a minority interest in
consolidated subsidiary on our consolidated balance sheet until S-A converted
its Buzztime interest into NTN common stock in January 2003 (see Note 10 -
Strategic Partnership and Investment in Buzztime). As a result, there was no
minority interest account on our balance sheet on December 31, 2003 or December
31, 2004. Prior to S-A's conversion of its interest from Buzztime into NTN
common stock in January 2003, the minority interest balance was reduced by S-A's
share of Buzztime's net losses in the amount of $10,000 and $212,000 for the
years ended December 31, 2003 and 2002, respectively.
(12) MEDIA GENERAL INVESTMENT
On May 6, 2003, Media General, Inc., a communications company with
interests in newspapers, television stations, interactive media and diversified
information services, made a $3.0 million investment in NTN. In return for the
investment, we issued and sold 2,000,000 shares of unregistered NTN common stock
through a private offering to Media General. Pursuant to the terms of the
transaction, upon receipt of $3.0 million from Media General, we issued the
unregistered shares along with fully vested warrants to purchase 500,000 shares
of Buzztime common stock at $3.46 per share, exercisable through May 7, 2007. In
connection with the Buzztime common stock, the parties agreed that Media General
would have co-sale rights and NTN would have certain drag-along rights. Media
General has the right to convert each share of Buzztime common stock into two
shares of NTN common stock (subject to adjustment ) on the second and fourth
anniversaries of the transaction date, in the event of a sale of NTN, upon
certain bankruptcy and other insolvency proceedings of Buzztime, and in certain
circumstances if NTN exercises its drag-along rights. Media General has the
further right to convert the warrant to purchase 500,000 shares of Buzztime
common stock into a warrant to purchase 1,000,000 shares of NTN common stock at
$1.73 per NTN share (subject to adjustment) in the event of bankruptcy or
insolvency of Buzztime. NTN has the right to require Media General to convert
its equity interests in Buzztime into equity interests in NTN if there is a sale
of NTN.
F-24
Simultaneous with the transaction described above, we issued 666,667 shares
of unregistered NTN common stock to license selected technology and content
(Boxerjam games) from Media General to add additional game content to the
Buzztime interactive television game channel and the NTN Network. The license
includes a 5-year exclusive interactive television license of certain
intellectual property, with options to extend the license for an additional 5
years. In September 2003, we entered into an amendment to the Boxerjam games
license with Media General pursuant to which we agreed to pay to Media General a
license fee in the amount of $150,000 (or $50,000 more than the original amount
of $100,000) in exchange for the unilateral right to exercise the option to
extend the Boxerjam games license for an additional 5 years following the
initial 5 year term on a non-exclusive basis. Previously, that non-exclusive
right was at Media General's option. The renewal license fee may be paid to
Media General in shares of NTN common stock or, in the event Buzztime's common
stock is publicly traded at the time of such renewal, Buzztime shall issue a
number of shares of Buzztime common stock with an aggregate value of $150,000.
We recorded both transactions at the fair value of the consideration
exchanged on May 6, 2003. We used the publicly traded stock price, as of the
date of the transactions, of $1.77 per share to determine the $4,720,000 fair
value of the shares issued. The consideration allocated to the acquired Boxerjam
game license was valued at $1.72 million and is being amortized over the
estimated contractual life of 10 years, which assumes, based on management's
intent, that we will exercise our five year renewal option. We determined that,
based on the lack of marketability of Buzztime common stock and limited
convertibility into NTN common stock, the fair value of the Buzztime warrants
was not material and no allocation of fair value was made.
The terms of the transaction called for us to file a resale registration
statement with the Securities and Exchange Commission (SEC) to register the
2,666,667 shares issued to Media General. Subsequent to the transaction, we
filed the resale registration statement on which we also registered the Bennett
shares (Note 16) and Scientific-Atlanta conversion shares (Note 10) and the SEC
declared effective the resale registration statement in June 2003.
Also in connection with the investment, we agreed to increase the size of
our Board of Directors and appoint Neal F. Fondren, Vice President of Media
General and President of Media General's Interactive Media Division to fill the
vacancy. Media General's ability to maintain that seat on our Board of Directors
is subject to Media General retaining ownership of certain percentages of the
shares they purchased. Media General also received preemptive rights to purchase
on a pro rata basis any new securities that NTN or Buzztime may subsequently
offer. The preemptive rights also are dependent upon Media General maintaining
ownership of certain percentages of the shares they purchased.
(13) CONTINGENCIES
We are subject to litigation from time to time in the ordinary course of
our business. There can be no assurance that any or all of the following claims
will be decided in our favor and we are not insured against all claims made.
During the pendency of such claims, we will continue to incur the costs of our
legal defense. Other than set forth below, there is no material litigation
pending or threatened against us.
INTERACTIVE NETWORK, INC.
On April 14, 2004, we settled the lawsuit filed against us in 1992 by IN
(now Two Way TV (US), Inc.) The litigation involved licensing and patent
infringement issues in Canada. These actions related to the delivery 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, including the settlement
amount, of approximately $200,000 in the first quarter of 2004 and we recorded
further legal fees of approximately $92,000 relating to this matter in the third
quarter of 2004.
LONG RANGE SYSTEMS
On March 21, 2003, Long Range Systems, Inc. (LRS) filed in the United
States District Court, Northern District of Texas, a patent infringement
complaint against our NTN Wireless subsidiary. This complaint alleged trade
dress and patent infringement and unfair competition. We were served with this
complaint on March 27, 2003. In February 2004, LRS amended their complaint to
eliminate certain allegations relating to infringement of its utility patent for
wireless pagers. This complaint related to our repair and replacement activities
of LRS pagers, which is not a significant percentage of our NTN Wireless
business.
F-25
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 alleged 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.
On February 28, 2005, we agreed with LRS to settle and dismiss both
lawsuits. Under the terms of the settlement, NTN and LRS each agreed to settle
and dismiss the two lawsuits without liability or any payment to the other
party. Each party is responsible for its own legal costs. On March 2, 2005, the
court dismissed the LRS lawsuit based on this agreement.
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. On December 2004, we
agreed with Open Table to settle and dismiss this lawsuit. We paid Open Table
$15,000 under the terms of the settlement.
There is no material litigation currently pending or threatened against us.
CANADIAN TAX MATTER
In previous filings, we disclosed as a contingency that our Canadian
licensee was in discussions with the Canada Customs and Revenue Agency (CCRA)
regarding a liability relating to withholding tax on certain amounts previously
paid to us by our Canadian licensee. Our licensee was assessed approximately
$649,000 Canadian dollars by the CCRA and they had appealed the assessment. At
that time, it was unclear as to what, if any, liability we might have in the
matter. We had an understanding with our licensee that we would equally share
the eventual assessment, if any was assessed, at the end of the appeal process.
On December 15, 2003, through a newly formed subsidiary, NTN Canada, Inc., we
acquired the assets, the operations and a number of the liabilities of our
Canadian licensee including this withholding tax matter with the CCRA (see Note
15 -- Acquisitions). In February 2004, we entered into a settlement agreement
with the CCRA that reduced the assessment from Canadian $788,000 to Canadian
$443,000 (or approximately $609,000 to approximately $342,000 U.S. dollars).
That amount will be further reduced by approximately $80,000 for the application
of a partial refund from payments made during the period of January 2002 through
March 2003. To be consistent with our previous agreement, we recorded one-half
of this settlement as operating expense and recorded one-half as a liability
recorded through the purchase accounting when we acquired NTN Interactive
Network, Inc. (see Note 15 - Acquisitions).
SALES AND USE TAX
From time to time, state tax authorities will make inquiries as to whether
or not a portion of our services might require the collection of sales and use
taxes from customers in those states. In the current difficult economic climate,
many states are expanding their interpretation of their sales and use tax
statutes to derive additional revenue. While in the past our sales and use tax
assessments have not been significant to our operations, it is likely that such
expenses will grow in the future.
F-26
We evaluate such inquiries on a case-by-case basis and have favorably
resolved these tax issues in the past without any material adverse consequences.
During 2003, the state of Texas, our largest state in terms of NTN Network
sites, began a sales tax audit. They concluded that our services are subject to
sales taxes on an amusement services basis. On January 12, 2004, the state
assessed us for approximately $1,115,000 for the five year audit period ended
December 31, 2002. We have objected to this approach since our services are
provided to the consumers for free as a promotional service, which we believe
falls outside the definition of amusement services as defined by the Texas tax
code. We have successfully argued this position regarding amusement services
with other states. We have appealed the assessment and the matter is currently
at the administrative appeals level. We have retained a team of sales and use
tax specialists in Texas to assist us in this matter. If we are able to reach a
mutually agreeable conclusion at the administrative appeals level, we expect
that a conclusion may be reached by the end of 2005. In the event the matter is
not resolved at administrative appeals, we would likely take the matter before
the District Court. At the District Court level, we would anticipate a
resolution no earlier than 2006. 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.
(14) 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 2005. During the year ended December 31,
2003, the cable operator paid us an initial non-refundable amount of $100,000
and an additional payment of $200,000 under the Trial Agreement. The $200,000
payment was related to entering a trial on one of the two specified technology
platforms. The cable operator has the right under the Trial Agreement to apply
50% of any amount paid under the agreement against future development and/or
license fees paid by that operator to us for the carriage of the Buzztime
channel. 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, was reflected as deferred revenue-Buzztime on the
accompanying December 31, 2003 consolidated balance sheet.
During the year ended December 31, 2004, the cable operator paid us an
additional payment of $200,000 under the Trial Agreement and we recognized 50%
of that payment as revenue and the other 50% was recorded as deferred
revenue-Buzztime. As of December 31, 2004, we carried $250,000 in deferred
revenue-Buzztime related to the Trial Agreement.
We had $291,000 of deferred revenue related to Buzztime on December 31,
2004. As noted above, $250,000 of that amount related to the Trial Agreement.
The remaining $41,000 of the deferred revenue - Buzztime on the accompanying
consolidated balance sheet relates to deferred revenue arising from our
agreements with Digeo Interactive LLC (Digeo), Airborne Entertainment Inc. and
ICTV, Inc.
(15) ACQUISITIONS
ZOOM COMMUNICATIONS AND HYSEN TECHNOLOGIES
On April 5, 2002, through a newly formed subsidiary, NTN Wireless
Communications, Inc. (Wireless), we acquired the net assets of ZOOM
Communications (ZOOM), a company in the restaurant wireless paging industry,
from Brandmakers, Inc. We entered into separate 2-year employment contracts with
each of ZOOM's two principals to join NTN as Vice President of Operations and
Vice President of Sales in the Wireless business. Based out of suburban Atlanta,
Georgia, the Wireless segment now serves as a regional office and distribution
center for us.
We also entered into a distribution agreement on March 11, 2002 with
Brandmakers, Inc., for the non-exclusive right to sell and service certain
products relating to the manufacture, service and distribution of wireless
paging systems and stored value gift and loyalty card programs for ZOOM. The
agreement was cancelled on April 5, 2002 upon the acquisition of the assets of
ZOOM.
On May 17, 2002, we acquired the net assets of Hysen Technologies, Inc.
(Hysen), another company in the hospitality paging industry. The assets acquired
included Hysen's existing inventory and intellectual property, including Hysen's
customer base. The assets of Hysen were combined into the Wireless segment.
F-27
Total consideration for the 2002 purchases was $655,000, which includes
$320,000 in common stock and $102,000 of transaction costs. In addition to the
above consideration, we entered into, in connection with the ZOOM purchase, an
earn-out arrangement with the two principals. The earn-out was paid to each
principal at 25% of the excess of which the adjusted gross profit exceeded
$900,000 for the twelve month period after the acquisition. As this calculation
included the collection of the accounts receivable related to the sales and
gross profit over that twelve month earn-out period, the final calculation of
the earn-out amount was delayed to allow for either the collection (or lack
thereof) of those receivables. The principals were paid a combined final
earn-out amount of approximately $218,000 over 2003 and 2004, which was added to
the purchase price of the ZOOM transaction by increasing the amount of goodwill
to $449,000.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition. Of the $754,000 of acquired
intangible assets, $464,000 was assigned to goodwill and is not subject to
amortization. $140,000 was assigned to employment agreements and we are
amortizing that over the estimated contractual life of 2 years. $150,000 was
assigned to customer lists and we are amortizing that over the estimated useful
life of 3 years. The line of credit of $72,000 was paid in full immediately
after the closing date of April 5, 2002.
ASSETS ACQUIRED AND LIABILITIES ASSUMED
ZOOM HYSEN TOTAL
COMMUNICATIONS TECHNOLOGIES ACQUISITIONS
-------------- ------------ ------------
Accounts receivable, net $ 121,000 $ -- $ 121,000
Inventory 48,000 41,000 89,000
Fixed assets 38,000 -- 38,000
Goodwill 449,000 15,000 464,000
Intangibles assets 280,000 10,000 290,000
----------- ----------- -----------
Total assets acquired 936,000 66,000 1,002,000
----------- ----------- -----------
Accounts payable and accrued
liabilities 244,000 31,000 275,000
Line of credit 72,000 -- 72,000
----------- ----------- -----------
Total liabilities assumed 316,000 31,000 347,000
----------- ----------- -----------
Net assets acquired $ 620,000 $ 35,000 $ 655,000
=========== =========== ===========
If the acquisitions had occurred on January 1, 2002, our results of
operations for fiscal 2002 would not have been materially different from the
reported results and as such, no pro forma results of operations are included.
BREAKAWAY INTERNATIONAL
On July 31, 2003, we acquired, through NTN Software Solutions, Inc.
(Software Solutions), a wholly owned subsidiary of NTN, all of the assets and
certain liabilities of Breakaway International, Inc. (Breakaway), a privately
held provider of restaurant industry hardware and software enterprise solutions.
We acquired Breakaway's assets for $252,000 in cash, 1,292,614 shares of
unregistered NTN common stock, transaction costs and the assumption of certain
liabilities. We may pay additional contingent earn-out amounts in NTN common
stock and/or cash over the first three years following the acquisition, provided
that certain targets for earnings before taxes are met for the acquired assets.
The targeted amounts increase by 25% each year. No earn-out amounts were earned
in the first twelve month period following the acquisition. NTN also entered
into employment agreements with five of the executives of Breakaway.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Total consideration
for the acquisition was $3,630,000, which consisted of 1,292,614 shares
multiplied by the then publicly traded price of $2.44 per share, $252,000 in
cash and $224,000 of transaction costs. To determine the fair value of the
acquired intangible assets and the related allocation of the purchase price, we
commissioned a third party valuation analysis. Based upon that third party
analysis, we determined that the identified intangible assets and the related
useful lives are developed technology ($781,000, 6 year life), customer
relationships ($1,110,000, 6 year life) and non-competition agreements ($30,000,
3 year life). Breakaway's results of operations have been included in our
consolidated statements of operations since August 1, 2003 and include $461,000
of amortization of the identified intangibles based upon the estimated lives.
F-28
BREAKAWAY INTERNATIONAL, INC.
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Accounts receivable, net $ 333,000
Inventory, net 35,000
Fixed assets, net 108,000
Developed technology 781,000
Customer relationships 1,110,000
Non-competition agreements 30,000
Goodwill 2,235,000
-----------
Total assets acquired $ 4,632,000
===========
Accounts payable and accruals $ 482,000
Deferred revenue 520,000
-----------
Total liabilities assumed 1,002,000
-----------
Net assets acquired $ 3,630,000
===========
The above amounts have changed from our initial purchase accounting as
follows: goodwill has increased by $10,000 to reflect $7,000 of additional
transaction costs and $3,000 of additional liabilities that were recorded,
accounts payable and accruals increased by $3,000 to reflect the additional
liabilities that were recorded and, as a result, the overall purchase price
increased by $7,000 from the initial amount of $3,623,000 to $3,630,000.
NTN CANADA
On December 15, 2003, we acquired most of the operating assets, certain
liabilities and the operations of NTN Interactive Network, Inc. (NTNIN), our
long time Canadian licensee from its parent, Chell Group Corporation Inc.
(Chell). We acquired NTNIN's assets for $233,000 in cash, 238,300 shares of
unregistered NTN common stock, the contribution of $550,000 in unpaid licensing
royalties and the assumption of certain liabilities.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Total consideration
for the acquisition was approximately $1,823,000, which consisted of 238,300
shares multiplied by the then publicly traded price of $3.70 per share, $233,000
in cash, the contribution of $550,000 in unpaid licensing royalties, $122,000 of
transaction costs, plus the assumption of liabilities.
NTN INTERACTIVE NETWORK, INC.
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Cash $ 20,000
Accounts receivable, net 235,000
Other current assets 21,000
Fixed assets, net 43,000
Customer relationships 720,000
Trivia database 345,000
Interactive events software 102,000
Trivia software 90,000
Licenses 12,000
Goodwill 974,000
-----------
Total assets acquired $ 2,562,000
-----------
Accounts payable and accruals $ 628,000
Leases 44,000
Deferred revenue 67,000
-----------
Total liabilities assumed 739,000
-----------
Net assets acquired $ 1,823,000
===========
To determine the fair value of the acquired intangible assets and the
related allocation of the purchase price, we commissioned a third party
valuation analysis. Based upon that third party analysis, we determined that the
identified intangible assets and the related useful lives are customer
relationships ($720,000, 4 year life), trivia database ($345,000, 10 year life),
interactive events software ($102,000, 5 year life) and trivia software
($90,000, 5 year life). Results of operations from the acquisition have been
included in our consolidated statements of operations since December 15, 2003
and include $203,000 of amortization of the identified intangibles based upon
the estimated lives.
F-29
The above amounts have changed from our initial purchase accounting as
follows: (1) goodwill has increased by $99,000 to reflect a variety of factors
including the final calculation of the cash component of the purchase price
based on the final closing balance sheet, which generated an additional payment
to Chell of approximately $10,000 and a payment to the president of NTNIN on
behalf of Chell of approximately $23,000, (2) the final calculation of the
transaction costs (an increase of $38,000), (3) recording $12,000 of additional
liabilities, and (4) making $16,000 of other adjustments to the final balance
sheet. The overall purchase price increased by $37,000 from the initial amount
of $1,786,000 to $1,823,000.
Our pro forma results of operations for fiscal 2002 and 2003 if we had
owned both the Breakaway and Canadian operations in those years would have been
as follows:
2003 2002
------------- -------------
Revenues:
NTN actual revenues $ 29,489,000 $ 25,610,000
Incremental Breakaway revenues 2,332,000 4,432,000
Incremental Canadian revenues 4,288,000 4,818,000
------------- -------------
Pro forma revenues $ 36,109,000 $ 34,860,000
============= =============
Net loss:
NTN actual loss $ (2,711,000) $ (2,189,000)
Incremental Breakaway loss (579,000) (1,129,000)
Incremental Canadian income 284,000 381,000
------------- -------------
Pro forma loss $ (3,006,000) $ (2,937,000)
============= =============
Loss per share:
NTN actual loss per share $ (0.06) $ (0.06)
============= =============
Pro forma loss per share $ (0.06) $ (0.07)
============= =============
(16) RELATED PARTIES
On May 8, 2001, we entered into an advertising sales representative
agreement with Baron Enterprises, Inc., a corporation wholly-owned and operated
by Barry Bergsman, a member of our board of directors, pursuant to which Baron
provides advertising sales representation services to us under the direction of
the NTN Network's president and chief operating officer. For Baron's services
under the advertising sales representative agreement, we granted Baron a
three-year warrant to purchase 20,000 shares of Common Stock at an exercise
price of $0.50 per share. The warrant vests and becomes exercisable as to 1/12
of the total shares on the last business day of each of the twelve months
commencing April 2001, subject to Baron continuing to provide services to us. In
addition, Baron will receive a commission in the amount of 35% of net
advertising revenues received by the NTN Network from any advertising contract
solicited by Baron. We paid Baron a monthly recoverable cash advance against
commissions to be earned in the amount of $5,000 per month, not to exceed an
aggregate of $60,000 per year. The advertising sales representative agreement
expired on April 1, 2002. An amendment to the agreement was entered into in
October 2002, to extend the contract to October 31, 2003, to reduce the rate of
commission to 25% of net advertising revenues received by us and to include
bartered advertising. Under the amended agreement, Baron was paid $15,000 in
commissions in 2002. In September, 2003, we entered into a three year agreement
with Baron to negotiate on our behalf with a third party advertising
representative. Baron was to receive commissions of 3% to 10% based upon the
period of time over which the negotiated advertising would run and upon the
related advertising revenue. This arrangement has been extinguished.
In May 2002, Michael Fleming was appointed Chairman of the Board of our
Buzztime subsidiary, after having served, since January 8, 2002, as an
independent consultant. Pursuant to the consulting arrangement, Mr. Fleming
provided general consulting services to us in connection with Buzztime's cable
television initiatives. We paid Mr. Fleming approximately $2,000 per month for
these consulting services. This arrangement was discontinued in September 2003.
In January 2002, we entered into a consulting agreement with Robert Clasen,
one of our directors, whereby Mr. Clasen provides consulting services to us with
respect to Buzztime's cable television initiatives. We paid Mr. Clasen $2,000
per month for the services provided under the consulting agreement. The initial
term of this agreement expired on December 31, 2002. We then continued the
consulting relationship on a month to month basis through June 2003 when we
mutually agreed to discontinue the arrangement.
F-30
On January 15, 2003, we issued and sold 1,000,000 shares of restricted
common stock through a private offering to Robert M. Bennett, one of our
directors, at a price per share of $1.00. Pursuant to the terms of the
transaction, upon receipt of $1.0 million from Mr. Bennett, we issued the
restricted shares along with fully vested warrants to purchase 500,000 shares of
common stock at $1.15 per share, exercisable through January 15, 2008. No
commissions or placement agent fees were paid in connection with the offering.
On January 30, 2004, Media General, Inc. (see Note 12 - Media General
Investment), a related party, purchased $2 million of our common stock as part
of a group of institutional investors that invested $14 million into our
company. (see Note 4 - Common Stock). Media General invested on the same terms
as the other investors.
(17) 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 year ended December 31, 2004 and 2003, the
components of accumulated other comprehensive loss ere as follows:
Year Ended
--------------------------
December 31, December 31,
2004 2003
----------- -----------
Beginning balance $ (628,000) $ (639,000)
Unrealized gain (loss) during period
in investment available-for-sale 115,000 11,000
Foreign currency translation adjustments 44,000 --
----------- -----------
Ending balance $ (469,000) $ (628,000)
=========== ===========
For the year ended December 31, 2004 and 2003, the comprehensive losses
were as follows:
Year Ended
----------------------------
December 31, December 31,
2004 2003
------------ ------------
Beginning balance $ (628,000) $ (639,000)
Net loss $ (4,979,000) $ (2,711,000)
Comprehensive income (loss) 159,000 11,000
------------ ------------
Comprehensive net loss $ (4,820,000) $ (2,700,000)
============ ============
(18) AMERICAN STOCK EXCHANGE LISTING
On May 1, 2003, we received a letter from the American Stock Exchange
(AMEX) stating that NTN was now in compliance with AMEX listing standards. In
our SEC filings over the prior twelve months, we had disclosed that we needed to
achieve $6 million of shareholders' equity to be in compliance with AMEX listing
standards. However, as a result of new AMEX rules effective January 2003, the
AMEX determined that we were in compliance with their listing standards. The new
rules permit a company to remain listed on AMEX if it, like NTN, has a total
market capitalization of at least $50 million, has at least 1.1 million shares
publicly held, has a market value of publicly held shares of at least $15
million and has a minimum of 400 round lot shareholders. As of December 31,
2004, we had satisfied these requirements.
In the event we no longer satisfy the requirements of the new rule (from
subsequent changes in market capitalization or otherwise), we would be subject
to other AMEX listing requirements for companies that have not reported profits
during the past five years. As of December 31, 2004, we had also met the
requirement of $6 million of shareholders' equity.
(19) SEGMENT INFORMATION
We operate our businesses principally through four reportable segments: the
NTN iTV Network, NTN Wireless and Software Solutions, which combine to form the
NTN Hospitality Technologies Division, and our Buzztime Entertainment, Inc.
subsidiary (Buzztime). The NTN Hospitality Technologies Division provides
entertainment promotional services and on-site communications and management
products to the hospitality industry. Buzztime operates our live broadcast
studio, produces our trivia and live sports "Play-Along" content to both the NTN
Network and new consumer interactive platforms, and is selling the Buzztime(R)
interactive television channel to U.S. cable TV operators.
F-31
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, electronic
data-managed comment cards and from its hardware and software enterprise
solutions. NTN Hospitality Technologies revenues comprise 99% of our total
revenue for the year ended December 31, 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 and from performance under a Trial Agreement with a major cable
operator. Included in the operating loss and depreciation and amortization for
three segments included in the NTN Hospitality Technologies Division and the
Buzztime segment is an allocation of corporate expenses, while the related
corporate assets are not allocated to the segments.
The following tables set forth certain information regarding our segments
and other operations that conforms to the consolidated balance sheet and
statement of operations presentated in this Report:
2004 2003 2002
------------- ------------- -------------
Revenues
NTN iTV Network (includes "other revenues") $ 25,925,000 $ 23,024,000 $ 23,077,000
NTN Wireless 5,337,000 4,742,000 2,405,000
NTN Software Solutions 4,034,000 1,527,000 --
------------- ------------- -------------
NTN Hospitality Technologies division 35,296,000 29,293,000 25,482,000
Buzztime 449,000 287,000 128,000
Eliminations (90,000) (91,000) --
------------- ------------- -------------
Total revenue $ 35,655,000 $ 29,489,000 $ 25,610,000
============= ============= =============
Operating income (loss)
NTN iTV Network $ 1,040,000 $ 1,946,000 $ 1,787,000
NTN Wireless (63,000) (170,000) (88,000)
NTN Software Solutions (2,074,000) (565,000) --
------------- ------------- -------------
NTN Hospitality Technologies division (1,097,000) 1,211,000 1,699,000
Buzztime (3,959,000) (3,757,000) (3,554,000)
------------- ------------- -------------
Operating loss $ (5,056,000) $ (2,546,000) $ (1,855,000)
============= ============= =============
Net income (loss)
NTN iTV Network $ 1,122,000 $ 1,772,000 $ 1,241,000
NTN Wireless (64,000) (171,000) (88,000)
NTN Software Solutions (2,074,000) (565,000) --
------------- ------------- -------------
NTN Hospitality Technologies division (1,016,000) 1,036,000 1,153,000
Buzztime (3,963,000) (3,747,000) (3,342,000)
------------- ------------- -------------
Net loss $ (4,979,000) $ (2,711,000) $ (2,189,000)
============= ============= =============
Total assets
NTN iTV Network $ 13,289,000 $ 9,300,000
NTN Wireless 1,690,000 474,000
NTN Software Solutions 4,816,000 3,283,000
------------- -------------
NTN Hospitality Technologies division 19,795,000 13,057,000
Buzztime 2,600,000 2,640,000
Corporate 6,993,000 4,933,000
------------- -------------
Total assets $ 29,388,000 $ 20,630,000
============= =============
Capital expenditures and Software Development Costs
NTN iTV Network $ 2,307,000 $ 1,224,000
NTN Wireless 92,000 57,000
NTN Software Solutions 177,000 34,000
------------- -------------
NTN Hospitality Technologies division 2,576,000 $ 1,315,000
Buzztime 555,000 529,000
Corporate 331,000 191,000
------------- -------------
Total Capital Expenditures and Software Development Costs $ 3,462,000 $ 2,035,000
============= =============
F-32
Depreciation and Amortization
NTN iTV Network $ 2,881,000 $ 3,057,000
NTN Wireless 100,000 138,000
NTN Software Solutions 392,000 164,000
------------- -------------
NTN Hospitality Technologies division 3,373,000 $ 3,359,000
Buzztime 560,000 538,000
------------- -------------
Total Depreciation and Amortization $ 3,933,000 $ 3,897,000
============= =============
Interest Expense (Income), net
NTN iTV Network $ 49,000 $ 232,000
NTN Wireless 1,000 1,000
NTN Software Solutions -- --
------------- -------------
NTN Hospitality Technologies division $ 50,000 233,000
Buzztime 4,000 --
------------- -------------
Total Interest Expense (Income), net $ 54,000 $ 233,000
============= =============
Provision for Income Taxes
NTN iTV Network $ 94,000 $ 47,000
NTN Wireless -- --
NTN Software Solutions -- --
------------- -------------
NTN Hospitality Technologies division $ 94,000 $ 47,000
Buzztime -- --
------------- -------------
Total Provision for Income Taxes $ 94,000 $ 47,000
============= =============
(20) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (AMOUNTS IN THOUSANDS
EXCEPT PER SHARE)
THREE-MONTH PERIOD ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
2004 2004 2004 2004 2004
---------- ---------- ---------- ---------- ----------
Total revenue .................................. $ 8,844 $ 8,528 $ 8,772 $ 9,511 $ 35,655
Total operating expenses ....................... 10,098 9,810 9,986 10,817 40,711
---------- ---------- ---------- ---------- ----------
Operating loss ................................. (1,254) (1,282) (1,214) (1,306) (5,056)
Other income (expense), net .................... (19) 220 (6) (24) 171
---------- ---------- ---------- ---------- ----------
Net loss before income taxes ................ (1,273) (1,062) (1,220) (1,330) (4,885)
Income taxes ................................... (21) (12) (12) (49) (94)
Net loss ....................................... $ (1,294) $ (1,074) $ (1,232) $ (1,379) $ (4,979)
========== ========== ========== ========== ==========
Per share amounts:
Net loss ............................. $ (.02) $ (.02) $ (.02) $ (.03) $ (.09)
========== ========== ========== ========== ==========
Weighted-average shares outstanding ............ 51,871 52,703 52,868 52,941 52,599
========== ========== ========== ========== ==========
F-33
THREE-MONTH PERIOD ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
2003 2003 2003 2003 2003
---------- ---------- ---------- ---------- ----------
Total revenue .................................. $ 7,339 $ 6,701 $ 7,267 $ 8,182 $ 29,489
Total operating expenses ....................... 7,511 7,463 8,048 9,013 32,035
---------- ---------- ---------- ---------- ----------
Operating loss ................................. (172) (762) (781) (831) (2,546)
Other income (expense), net .................... (93) (71) 73 (37) (128)
---------- ---------- ---------- ---------- ----------
Net loss before income taxes and
minority interest in loss of consolidated
subsidiary ................................. (265) (833) (708) (868) (2,674)
Income taxes ................................... (8) (7) (8) (24) (47)
Minority interest in loss of consolidated
subsidiary ................................. 10 -- -- -- 10
---------- ---------- ---------- ---------- ----------
Net loss ....................................... $ (263) $ (840) $ (716) $ (892) $ (2,711)
========== ========== ========== ========== ==========
Per share amounts:
Net loss ............................. $ (.01) $ (.02) $ (.02) $ (.02) $ (.06)
========== ========== ========== ========== ==========
Weighted-average shares outstanding ............ 42,088 44,756 46,939 47,954 45,446
========== ========== ========== ========== ==========
(21) SUBSEQUENT EVENTS
INTURA SOLUTIONS TRANSACTION
On February 4, 2005, we entered into an Asset Purchase Agreement with
Intura Solutions LP (Intura), a Texas limited partnership, pursuant to which we
sold the point of sale software products developed and maintained by our
Software Solutions segment. In accordance with the asset purchase transaction,
Gary Peek terminated his position as vice president and general manager of our
Software Solutions segment and immediately thereafter commenced his position
with Intura to oversee business operations.
The primary software products sold by us to Intura were Vision, Relief
Manager Plus (RMP), Store Link Plus (SLP), Sell More Pizzas and other legacy
products as well as a non-exclusive right to develop and market the Enterprise
software. We received a non-dilutable 10% partnership interest in Intura in the
transaction and will receive 20% of Intura's revenues received during the next
two years, up to a maximum of $100,000. Further, Intura will provide software
development maintenance services for the RMP and SLP software for two years (we
continue to retain the rights to the maintenance and support revenue from the
legacy products).
We have engaged a third party valuation firm to estimate the value of our
10% ownership interest in Intura. We expect to finalize that accounting during
the first quarter of 2005.
LINE OF CREDIT AMENDMENT
In February 2005, we amended our line of credit with Pacific Mercantile
Bank to extend the maturity date from February 1, 2005 to February 11, 2006 (see
Note 9 -- Debt).
LRS LITIGATION SETTLEMENT
On February 28, 2005, we agreed with LRS to settle and dismiss both
lawsuits. Under the terms of the settlement, NTN and LRS each agreed to settle
and dismiss the two lawsuits without liability or any payment to the other
party. Each party is responsible for its own legal costs. On March 2, 2005, the
court dismissed the LRS lawsuit based on this agreement.
F-34
SCHEDULE II
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
ADDITIONS BALANCE AT
ALLOWANCE FOR BALANCE AT CHARGED TO END OF
DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS(A) PERIOD
- ----------------- ---------- ---------- ------------- ----------
2004................ $ 811,000 436,000 485,000 $ 762,000
2003................ $ 437,000 243,000 (131,000) $ 811,000
2002................ $ 440,000 529,000 532,000 $ 437,000
- ----------
(a) Reflects trade accounts receivable written off during the year, net of
amounts recovered.
See accompanying report of independent registered public accounting firm.
F-35
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 -- Amended and Restated Certificate of Incorporation of the Company,
as amended (4)
3.2 -- Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (7)
3.3 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated March 22, 2000 (8)
3.4 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated March 24, 2000 (8)
3.5 -- By-laws of the Company (2)
3.6 -- Certificate of Amendment to Restated Certificate of Incorporation
of the Company, dated May 27, 2003 (16)
4.1 -- Specimen Common Stock Certificate (10)
4.2* -- Stock Option Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
4.3* -- Stock Option Agreement, dated October 7, 1999, by and between NTN
Communications, Inc. and Stanley B. Kinsey (6)
4.4* -- Stock Option Agreement, dated January 26, 2001, by and between NTN
Communications, Inc. and Stanley B. Kinsey (12)
4.5 -- Warrant Certificate issued January 13, 2003 by NTN Communications,
Inc. to Robert M. and Marjie Bennett, Trustees The Bennett Family
Trust dated 11-17-86 (19)
4.6 -- NTN Investor Rights Agreement, dated May 7, 2003, by and between
NTN Communications, Inc. and Media General, Inc. (18)
4.7 -- Buzztime Investor Rights Agreement, dated May 7, 2003, by and among
NTN Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (18)
4.8 -- Common Stock Purchase Warrant dated May 7, 2003 issued to Media
General, Inc. exercisable for 500,000 shares of common stock of
Buzztime Entertainment, Inc. (18)
4.9 -- Form of Common Stock Purchase Warrant by and between Roth Capital
Partners, LLC and NTN Communications, Inc. (14)
10.1 -- License Agreement with NTN Canada (3)
10.2* -- Employment Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
10.3 -- Subscription Agreement dated January 13, 2003 between NTN
Communications, Inc. and Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (19)
10.4 -- Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange
of Buzztime Preferred Stock for NTN Common Stock, dated January 16,
2003 (19)
10.5 -- Securities Purchase Agreement dated May 5, 2003 by and among NTN
Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (18)
10.6 -- Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners, LLC and NTN Communications, Inc. (14)
10.7 -- Manufacturing Agreement, dated November 25, 1997, by and between
NTN Communications, Inc. and Climax Technology Co., Ltd. (9)
10.8 -- Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (11)
10.9 -- Asset Purchase Agreement dated July 30, 2003 by and among NTN
Software Solutions, Inc., NTN Communications, Inc., Breakaway
International, Inc. and the Seller Shareholders (17)
10.10 -- Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc. and Chell Group Corporation (15)
10.11* -- Employment Agreement, dated September 9, 2004, by and between NTN
Communications, Inc. and Stanley B. Kinsey (20)
14.0 -- Code of Ethics for Senior Financial Officers (13)
16.1 -- Letter, dated August 20, 2004, from KPMG to the Securities and
Exchange Commission regarding change in certifying accountant of
NTN (21)
21.1 -- Subsidiaries of Registrant (1)
23.1 -- Consent of HASKELL & WHITE LLP (1)
23.2 -- Consent of KPMG LLP (1)
31 -- Certification of Officers pursuant to Rule 13a-14(a) (1)
32 -- Certification of Officers pursuant to Rule 13a-14(b) (22)
- ----------
* 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 fiscal
year ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's report on Form 10-K for the fiscal
year ended December 31, 1997 and incorporated by reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K for the fiscal
year ended December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-K for the fiscal
year ended December 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 8-K dated October
31, 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 filed on
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 for the fiscal
year ended December 31, 2000 and incorporated by reference.
(12) Previously filed as an exhibit to NTN's report on Form 10-Q for the
quarterly period ended March 31, 2001 and incorporated by reference.
(13) Previously filed as an exhibit to NTN's Form 10-K dated for the fiscal year
ended December 31, 2002 and incorporated herein by reference.
(14) Previously filed as an exhibit to NTN's report on Form 8-K filed on January
29, 2004 and incorporated herein by reference.
(15) Previously filed as an exhibit to NTN's registration statement on Form S-3,
File No. 333-111538, filed on December 24, 2003 and incorporated herein by
reference.
(16) Previously filed as an exhibit to NTN's Form 10-Q for the quarterly period
ended June 30, 2003 and incorporated herein by reference.
(17) Previously filed as an exhibit to NTN's report on Form 8-K dated July 31,
2003 and incorporated herein by reference.
(18) Previously filed as an exhibit to NTN's registration statement on Form S-3,
File No. 333-105429, filed on May 21, 2003 and incorporated herein by
reference.
(19) Previously filed as an exhibit to NTN's Form 10-Q for the quarterly period
ended March 31, 2003 and incorporated herein by reference.
(20) Previously filed as an exhibit to NTN's Form 10-Q for the quarterly period
ended September 30, 2004, and incorporated herein by reference.
(21) Previously filed as an exhibit to NTN's report on Form 8-K dated August 23,
2004 and incorporated herein by reference.
(22) Furnished concurrently herewith.