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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1103425
(State of incorporation) (I.R.S. Employer
Identification No.)
THE CAMPUS 5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
At May 6, 2005, the registrant had outstanding 53,373,000 shares of common
stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
MARCH 31,
2005 DECEMBER 31,
ASSETS (PLEDGED) (UNAUDITED) 2004
-------------- --------------
Current assets:
Cash and cash equivalents $ 5,678,000 $ 6,710,000
Restricted cash 66,000 66,000
Accounts receivable, net 3,453,000 3,405,000
Investment available-for-sale 485,000 304,000
Inventory 443,000 399,000
Deposits on broadcast equipment 624,000 534,000
Deferred costs 990,000 960,000
Prepaid expenses and other current assets 1,331,000 1,128,000
-------------- --------------
Total current assets 13,070,000 13,506,000
Broadcast equipment and fixed assets, net 7,201,000 6,451,000
Software development costs, net 831,000 763,000
Deferred costs 1,039,000 922,000
Intangible assets, net 3,468,000 4,011,000
Goodwill 3,658,000 3,658,000
Other assets 135,000 77,000
-------------- --------------
Total assets $ 29,402,000 $ 29,388,000
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,641,000 $ 1,590,000
Accrued expenses 1,333,000 1,125,000
Revolving line of credit 500,000 --
Accrued salaries 613,000 447,000
Accrued vacation 623,000 635,000
Taxes payable 516,000 558,000
Obligations under capital leases 215,000 148,000
Equipment note payable 235,000 620,000
Deferred revenue - Buzztime 270,000 291,000
Deferred revenue 1,786,000 1,448,000
-------------- --------------
Total current liabilities 7,732,000 6,862,000
Obligations under capital leases, excluding current portion 235,000 123,000
Deferred revenue, excluding current portion 303,000 368,000
-------------- --------------
Total liabilities 8,270,000 7,353,000
-------------- --------------
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 March 31, 2005 and
December 31, 2004 1,000 1,000
Common stock, $.005 par value, 84,000,000 shares
authorized; 53,336,000 and 53,026,000 shares issued and
outstanding at March 31,2005 and December 31, 2004,
respectively 265,000 264,000
Additional paid-in capital 109,270,000 109,008,000
Accumulated deficit (88,116,000) (86,769,000)
Accumulated other comprehensive loss (288,000) (469,000)
-------------- --------------
Total shareholders' equity 21,132,000 22,035,000
-------------- --------------
Total liabilities and shareholders' equity $ 29,402,000 $ 29,388,000
============== ==============
See accompanying notes to unaudited condensed consolidated financial statements
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004
------------ ------------
Revenues:
Hospitality Technologies revenues $ 9,213,000 $ 8,799,000
Buzztime revenues 294,000 43,000
Other revenues -- 2,000
------------ ------------
Total revenues 9,507,000 8,844,000
------------ ------------
Operating expenses:
Direct operating costs (includes depreciation of
$728,000 and $668,000 for the three months ended 3,420,000 3,102,000
ended March 31, 2005 and 2004, respectively
Non-cash charge related to software product sale 276,000 --
Selling, general and administrative 6,326,000 6,144,000
Litigation, legal and professional fees 380,000 378,000
Stock based compensation and payments 107,000 54,000
Depreciation and amortization 255,000 336,000
Research and development 59,000 84,000
------------ ------------
Total operating expenses 10,823,000 10,098,000
------------ ------------
Operating loss (1,316,000) (1,254,000)
------------ ------------
Other income (expense):
Interest income 26,000 19,000
Interest expense (24,000) (38,000)
------------ ------------
Total other income (expense) 2,000 (19,000)
------------ ------------
Net loss before income taxes (1,314,000) (1,273,000
Provision for income taxes 33,000 21,000
------------ ------------
Net loss $ (1,347,000) $ (1,294,000)
============ ============
Net loss per common share - basic and diluted: $ (0.03) $ (0.02)
============ ============
Weighted average shares outstanding - basic and diluted 53,222,000 51,871,000
============ ============
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004
------------ ------------
Net loss........................................... $(1,347,000) $(1,294,000)
------------ ------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments......... -- (15,000)
Unrealized holding gain in investment available
for sale....................................... 181,000 10,000
------------ ------------
Other comprehensive income (loss).................. 181,000 (5,000)
------------ ------------
Comprehensive net loss............................. $(1,166,000) $(1,299,000)
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004
------------- -------------
Cash flows from operating activities:
Net loss $ (1,347,000) $ (1,294,000)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Depreciation and amortization 983,000 940,000
Provision for doubtful accounts 278,000 57,000
Non-cash stock-based compensation and payments 107,000 54,000
Non-cash charge related to software product sale 276,000 --
Provision for warranties 2,000 --
Provision for sales returns 1,000 --
Loss from disposition of equipment 30,000 3,000
Changes in assets and liabilities:
Accounts receivable (328,000) (744,000)
Inventory (44,000) 46,000
Deferred costs (147,000) (55,000)
Prepaid expenses and other assets (196,000) (152,000)
Accounts payable and accrued expenses 444,000 (73,000)
Provision for income tax (69,000) --
Deferred revenue 252,000 115,000
------------- -------------
Net cash provided by (used in)
operating activities 242,000 (1,103,000)
------------- -------------
Cash flows from investing activities:
Capital expenditures (1,243,000) (494,000)
Acquisition of businesses -- (92,000)
Software development expenditures (151,000) (59,000)
Deposits on broadcast equipment (91,000) (41,000)
------------- -------------
Net cash used in investing activities (1,485,000) (686,000)
------------- -------------
Cash flows from financing activities:
Principal payments on capital leases (59,000) (44,000)
Principal payments on equipment notes payable (384,000) (276,000)
Borrowings from revolving line of credit 500,000 --
Principal payments on revolving line of credit -- (1,000,000)
Proceeds from issuance of common stock,
net of offering expenses -- 13,001,000
Proceeds from exercise of stock options and warrants 156,000 101,000
------------- -------------
Net cash provided by financing activities 213,000 11,782,000
------------- -------------
Net increase in cash and cash equivalents (1,030,000) 9,993,000
Effect of exchange rate on cash (2,000) 2,000
Cash and cash equivalents at beginning of period 6,710,000 2,503,000
------------- -------------
Cash and cash equivalents at end of period $ 5,678,000 $ 12,498,000
============= =============
See accompanying notes to unaudited condensed consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004
---------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 23,000 $ 38,000
========== ===========
Income taxes $ 107,000 $ 72,000
========== ===========
Supplemental disclosure of non-cash investing and
financing activities:
Equipment acquired under capital leases and notes payable $ 239,000 $ 306,000
========== ===========
Unrealized holding loss (gain) on investments $(181,000) $ (10,000)
========== ===========
Issuance of warrants in association with equity offering $ -- $ 655,000
========== ===========
Supplemental non-cash disclosure of acquisition of
businesses:
Goodwill and Intangible assets $ -- $ 48,000
========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2005
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
financial statements include all adjustments that are necessary for a fair
presentation of the financial position of NTN Communications, Inc. and its
wholly-owned subsidiaries (collectively, "we" or "NTN") and the results of
operations and cash flows of NTN for the interim periods presented. Management
has elected to omit substantially all notes to our condensed consolidated
financial statements as permitted by the rules and regulations of the Securities
and Exchange Commission. The results of operations for the interim periods are
not necessarily indicative of results to be expected for any other interim
period or for the year ending December 31, 2005.
The condensed consolidated financial statements for the three months ended
March 31, 2005 and 2004 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto included in our Form 10-K/A
for the year ended December 31, 2004.
We have reclassified certain items in the prior period condensed consolidated
financial statements to conform to the current period presentation.
2. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF FASB STATEMENT NO. 123
(SFAS No. 148). SFAS 148 amends FASB Statement No. 123; ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 beginning with our
annual financial statements for the year ended December 31, 2002.
We applied Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25) and related interpretations in accounting for
our employee stock options. No compensation expense has been recognized for the
options granted under the Special Plan and the Option Plan unless the grants
were issued at exercise prices below market value. Pro forma compensation
expense is based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS No. 123. The following table represents the
effect on net loss and net loss per share if we had applied the fair value
recognition provisions of SFAS No. 123 as amended by SFAS No. 148.
THREE MONTHS ENDED
MARCH 31,
2005 2004
------------ -----------
Net loss As reported........................... $(1,347,000) $(1,294,000)
Add: stock option-based employee
compensation expense included in
reported net loss, net of related
tax effects....................... -- 2,000
Deduct: stock-based employee
compensation expense, net of
related tax effects............... (558,000) (332,000)
------------ ------------
Pro forma net loss.................... $(1,905,000) $(1,624,000)
Basic and diluted net loss As reported........................... $ (0.03) $ (0.02)
per share
Pro forma............................. $ (0.04) $ (0.03)
6
The per share weighted-average fair value of stock options granted during the
three months ended March 31, 2005 and 2004 was $1.78, and $2.78, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 2005 -- dividend yield of 0%, risk-free interest rate of 3.73%,
expected volatility of 71.1%, and expected life of 4.0 years; and 2004 --
dividend yield of 0%, risk-free interest rate of 2.96%, expected volatility of
91.61%, and expected life of 4.88 years. In compliance with APB No. 25, we
expensed $0 and $2,000 for the three months ended March 31, 2005 and 2004,
associated with the grants of 80,000 options in 2000 below market value pursuant
to the Option Plan.
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.
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 annual
period beginning after June 15, 2005. Upon adoption of SFAS No. 123R, amounts
previously disclosed on a pro forma basis 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 first
quarter of 2006. We believe that this new standard will increase our operating
losses but that increase will be of a non-cash nature.
3. LOSS PER SHARE
For the three months ended March 31, 2005 and 2004, the weighted average of
options, warrants and convertible preferred stock representing approximately
12,623,000 and 12,045,000 potential common shares, respectively, have been
excluded from the computation of net loss per share, as their effect was
anti-dilutive.
4. SEGMENT INFORMATION
We operate our businesses principally through four reportable segments: the
NTN iTV Network, NTN Wireless Communications, Inc. ("NTN Wireless") and NTN
Software Solutions, Inc. ("Software Solutions"), which combine to form the NTN
Hospitality Technologies division; and our Buzztime Entertainment, Inc.
subsidiary ("Buzztime"). The NTN Hospitality Technologies division provides
entertainment, promotional services and on-site communications and management
products to the hospitality industry. Buzztime operates our live broadcast
studio, produces our trivia and live sports "Play-Along" content to both the NTN
iTV Network and new consumer interactive platforms, and is selling the Buzztime
Channel(R), an interactive television game channel, to U.S. cable TV operators.
7
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 and from our hardware
and software restaurant management and enterprise solutions. NTN Hospitality
Technologies revenues comprised approximately 97% of our total revenue for the
three months ended March 31, 2005. Buzztime's revenue is primarily generated
from the distribution of its digital trivia game show content and "Play-Along"
sports games as well as revenue related to production services for third
parties. Included in the operating loss and depreciation and amortization for
the three segments included in the NTN Hospitality Technologies division and the
Buzztime segment is an allocation of corporate expenses, while the related
corporate assets are not allocated to the segments.
The following tables set forth certain information regarding our segments and
other operations:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004
------------ ------------
Revenues
NTN iTV Network (includes "other revenues") $ 6,793,000 $ 6,316,000
NTN Wireless 1,466,000 1,539,000
Software Solutions 954,000 946,000
------------ ------------
NTN Hospitality Technologies division 9,213,000 8,801,000
Buzztime 294,000 43,000
------------ ------------
Total revenue $ 9,507,000 $ 8,844,000
============ ============
Operating income (loss)
NTN iTV Network $ (33,000) $ 236,000
NTN Wireless 49,000 56,000
Software Solutions (670,000) (564,000)
------------ ------------
NTN Hospitality Technologies division (654,000) (272,000)
Buzztime (662,000) (982,000)
------------ ------------
Operating loss $(1,316,000) $(1,254,000)
------------ ------------
Net income (loss)
NTN iTV Network $ (63,000) $ 197,000
NTN Wireless 49,000 55,000
Software Solutions (670,000) (564,000)
------------ ------------
NTN Hospitality Technologies division (684,000) (312,000)
Buzztime (663,000) (982,000)
Net loss $(1,347,000) $(1,294,000)
============ ============
5. CONTINGENCIES
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.
8
We evaluate such inquiries on a case-by-case basis and have favorably
resolved these tax issues in the past without any material adverse consequences.
During 2003, the state of Texas, our largest state in terms of NTN iTV Network
sites, began a sales tax audit. They 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 not
provided for the purpose of amusing our customers but to provide our customers
the right to use our games to provide amusement to others. The service is
designed to encourage patrons to visit our customers' establishments, stay
longer and spend more. As such, we believe our services are tax exempt
promotional and marketing services and fall 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. We are seeking to reach a mutually agreeable conclusion at the
administrative appeals level and 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.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
6. DEFERRED REVENUE - BUZZTIME
In February 2003, we entered into a Trial Agreement with Comcast Cable
Communications Management LLC (Comcast) that involves developing the Buzztime
Channel for potential deployment within that operator's system. The Trial
Agreement was amended on March 31, 2005 to include payments of license fees and
development costs. The Trial Agreement now runs through December 2005. During
the three months ended March 31, 2005, we recognized $198,000 of revenue under
the Trial Agreement compared to $10,000 recognized in the three months ended
March 31, 2004.
The cable operator has the right under the Trial Agreement to apply 50% of
certain amounts paid under the agreement against future development and/or
license fees paid by that operator to us for the carriage of the Buzztime
channel through December 2005. As of March 31, 2005, $250,000 of payments made
by Comcast to us under the Trial Agreement have not yet been recognized as
revenue due to this right and are included in deferred revenue-Buzztime on the
accompanying condensed consolidated balance sheet. The other $20,000 of deferred
revenue - Buzztime on the accompanying condensed consolidated balance sheet
relates to $14,000 of deferred revenue relating to an agreement with ICTV, Inc.
and $6,000 of deferred revenue relating to our wireless cell phone agreement
with Airborne Entertainment.
7. SALE OF SOFTWARE PRODUCTS
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).
9
We engaged a third party valuation firm to assist in determining the fair
value of our 10% ownership interest in Intura. Based upon that analysis, we
concluded that the fair value of our investment in Intura was approximately
$69,000. Additionally, based on that analysis, we considered whether this
transaction resulted in any impairment of the goodwill in the Software Solutions
segment and we concluded that it did not result in any such impairment. The
sale of the software products, which we carried as part of our intangible
assets, resulted in a one-time, non-cash charge of $276,000. That amount would
have been amortized over the remaining four year life of those intangible assets
if they had been retained by the Company.
8. 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 and of our U.K. operations into U.S. dollars using
the period end exchange rate. Revenue and expenses were translated using the
average exchange rates for the reporting period. For the three months ended
March 31, 2005 and 2004, the components of accumulated other comprehensive loss
were as follows:
Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Beginning balance $ (469,000) $ (628,000)
Unrealized gain (loss) during period
in investment available-for-sale 181,000 10,000
Foreign currency translation
adjustments -- (15,000)
-------------- --------------
Ending balance $ (288,000) $ (649,000)
============== ==============
The comprehensive losses for the three months ended March 31, 2005 and 2004 were
as follows:
Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Net loss $(1,347,000) $(1,294,000)
Comprehensive income (loss) 181,000 (5,000)
-------------- --------------
Comprehensive net loss $(1,166,000) $(1,299,000)
============== ==============
9. LINE OF CREDIT
In February 2005, we amended our $1 million line of credit with Pacific
Mercantile Bank to extend the maturity date from February 1, 2005 to February
11, 2006.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE
FORWARD-LOOKING STATEMENTS REFLECT FUTURE EVENTS, RESULTS, PERFORMANCE,
PROSPECTS AND OPPORTUNITIES, INCLUDING STATEMENTS RELATED TO OUR STRATEGIC
PLANS, CAPITAL EXPENDITURES, INDUSTRY TRENDS AND FINANCIAL POSITION OF NTN
COMMUNICATIONS, INC. AND ITS SUBSIDIARIES. FORWARD-LOOKING STATEMENTS ARE BASED
ON INFORMATION CURRENTLY AVAILABLE TO US AND OUR CURRENT EXPECTATIONS,
ESTIMATES, FORECASTS, AND PROJECTIONS ABOUT THE INDUSTRIES IN WHICH WE OPERATE
AND THE BELIEFS AND ASSUMPTIONS OF MANAGEMENT. WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "COULD," "TARGETS," "PROJECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," "MAY," "WILL," "WOULD," VARIATIONS OF SUCH WORDS, AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. IN
ADDITION, ANY STATEMENTS WHICH REFER TO PROJECTIONS OF OUR FUTURE FINANCIAL
PERFORMANCE, OUR ANTICIPATED GROWTH AND TRENDS IN OUR BUSINESSES, AND OTHER
CHARACTERIZATIONS OF FUTURE EVENTS OR CIRCUMSTANCES, ARE FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED THAT THESE FORWARD-LOOKING STATEMENTS ARE ONLY
PREDICTIONS AND ARE SUBJECT TO RISKS, UNCERTAINTIES, AND ASSUMPTIONS THAT MAY BE
DIFFICULT TO PREDICT. THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY AND
ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN OUR ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2004 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.
A. OVERVIEW
Our business is developing and distributing interactive entertainment and
wireless information and communications products. We operate our business
principally through two operating units: the NTN Hospitality Technologies
division and our Buzztime Entertainment, Inc. ("Buzztime") subsidiary. The NTN
Hospitality Technologies division includes the NTN iTV Network, NTN Wireless and
Software Solutions segments.
Revenues generated and operating income (loss) by our two business units are
illustrated below. The data presented below includes allocations of corporate
expenses.
THREE MONTHS ENDED MARCH 31,
2005 2004
------------------- -------------------
REVENUES
- --------
NTN Hospitality Technologies division
(includes "other revenues").......... $ 9,213,000 97% $ 8,801,000 99%
Buzztime............................... 294,000 3% 43,000 1%
------------- ---- ------------ ----
Total........................ $ 9,507,000 100% $ 8,844,000 100%
============= ==== ============ ====
OPERATING INCOME (LOSS)
- -----------------------
NTN Hospitality Technologies division.. $ (654,000) $ (272,000)
Buzztime............................... (662,000) (982,000)
------------- ------------
Total........................ $ (1,316,000) $(1,254,000)
============= ============
11
NTN Hospitality Technologies revenue is generated primarily from providing an
interactive entertainment service which serves as a marketing and promotional
vehicle for the hospitality industry, from its wireless business with restaurant
on-site paging systems, and from its hardware and software enterprise solutions.
Buzztime's revenue is primarily generated from the distribution of its
interactive game content and live "Play-Along" sports games as well as revenue
related to development and production services for third parties.
Our objective is to leverage our unique interactive entertainment as a means
of growing our business units--first, as a leading provider of interactive
communications, entertainment and software offerings to the hospitality industry
through the NTN Hospitality Technologies division. Second, as a developer and
distributor of interactive entertainment for consumer markets through
interactive television and wireless devices via Buzztime. To accomplish our
objectives we are pursuing business strategies to:
o Increase the number of hospitality locations serviced by the NTN iTV
Network, NTN Wireless and Software Solutions. We intend to accomplish this
increase by expanding our product offerings to include more value-added
services, adding personnel to our sales force, developing new dealer
relationships and providing new and updated content on a regular basis.
Our NTN iTV Network now includes the new NTN BlastTM featuring six new
types of entertainment that can be played on our network, including
Extreme Sports programming, irreverent word-based games and popular card
games like Blackjack and Texas Hold'em Poker.
o Increase revenue by launching the NTN iTV Network in the United Kingdom in
2005. We are currently conducting a trial to test the product in 11 pub
locations. We expect to enter into agreements with pub owners later on in
2005 to launch the NTN iTV Network in the United Kingdom.
o Develop and distribute the Buzztime Channel and other games to cable TV
and satellite TV operators with the intent to remain a leading U.S.
multi-player interactive television game channel. We have adapted or are
planning to adapt our interactive game content and technology to the
leading interactive television platforms and intend to develop new content
and license additional game content for deployment into the U.S. digital
cable interactive television market. As Buzztime gains distribution with
cable television operators, we expect to increase revenue through three
sources: license fees paid by local cable television operators; fees paid
by interactive television home subscribers for premium services or
pay-per-play transactions; and advertising revenue.
We are also making efforts to make the Buzztime-branded games available to
other consumer platforms with the intent of realizing new sources of
licensing revenue, enhancing the value of the Buzztime brand and, in turn,
improving the value of our brand to the cable TV operators. To that end,
we have licensed the Buzztime-branded trivia game content under an
agreement with a retail game and toy company to manufacture and market
Buzztime trivia cards and an electronic plug-and-play TV game for 2005. We
have also licensed certain Buzztime-branded trivia games to a wireless
entertainment production company for distribution to North American
wireless carriers as a consumer subscription game service. Furthermore, we
have entered into an agreement with a provider of airline in-flight
entertainment to provide trivia game content to passengers on iTV-enabled
airlines.
o Both business units may also explore market opportunities to acquire
complimentary businesses to increase revenues and earnings. To that end,
we acquired the operations of Zoom Communications in April 2002 (now NTN
Wireless), Breakaway International in July 2003 (now Software Solutions)
and NTN Interactive Network (now NTN Canada) in December 2003.
There can be no assurance, however, that we will be successful in executing
these strategies.
12
B. CRITICAL ACCOUNTING POLICIES
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 average life of a customer relationship. Currently, we
estimate that the average customer life is three years.
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.
o We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
During the three months ended March 31, 2005, we modified our methodology
for determining our allowance for doubtful accounts based upon an
increasing number of our customers that pay us under electronic payment
methods such as credit cards and direct debits to their checking accounts
and by segment. We estimate our allowance based on:
o For iTV customers that pay under credit terms, we fully reserve for
all the customers that have terminated our iTV Network service or
had their service suspended. Additionally, we reserve three percent
of outstanding balances for all unreserved customer balances.
o For domestic and Canadian iTV customers that pay under electronic
payment arrangements, we fully reserve for all the customers that
have terminated our iTV Network service or had their service
suspended. Additionally, we fully reserve for all receivables over
60 days past due. We then reserve three percent of outstanding
balances for all unreserved customer balances.
o For Software Solutions and NTN Wireless customers, we reserve five
percent of outstanding balances for all unreserved customer
balances.
Beyond the above allowance parameters, we also may increase the reserve based
on our business judgment.
13
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 March 31, 2005 the net amount of
$7,126,000 of goodwill and intangible assets represented 24.2% 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 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 first quarter of 2006. We believe that
this new standard will increase our operating losses in the future but
that increase will be of a non-cash nature.
We do not have any of the following:
o Off-balance sheet arrangements except for purchase orders and commitments,
and operating leases;
14
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 in our Form 10-K/A for the year ended December 31, 2004,
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 the
Canadian operations and the trial in the United Kingdom.
C. RESULTS OF OPERATIONS
1. THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
Operations for the three months ended March 31, 2005 resulted in a net loss
of $1,347,000 compared to a net loss of $1,294,000 for the three months ended
March 31, 2004.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$412,000, or 4.7%, to $9,213,000 for the three months ended March 31, 2005 from
$8,801,000 for the three months ended March 31, 2004. The revenue contribution
from the three operating segments of the division for the three months ended
March 31, 2005 and 2004 are shown in the following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
Three Months Ended March 31,
---------------------------
2005 2004 Change
---- ---- ------
NTN iTV Network* $ 6,793,000 $ 6,316,000 $ 477,000
NTN Wireless 1,466,000 1,539,000 (73,000)
Software Solutions 954,000 946,000 8,000
----------- ----------- ----------
Total Revenue of Division $ 9,213,000 $ 8,801,000 $ 412,000
(* For the purpose of this analysis, the NTN iTV Network's revenues include
$0 and $2,000 of "other" revenues for the three months ended March 31, 2005 and
2004, respectively.)
Within the NTN iTV Network segment there are several revenue contributors,
including our subscription revenue from core hospitality operations, revenue
from our Canadian operations, advertising revenue and installation revenue. The
primary revenue components are broken out in the following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
Three Months Ended March 31,
----------------------------
2005 2004 Change
------ ------ --------
U.S. Subscription Revenues $5,557,000 $5,049,000 $508,000
Subscription and Installation Revenue from Canadian
Operations 868,000 825,000 43,000
Advertising and Special Events Revenue - United States 108,000 177,000 (69,000)
Advertising Revenue and Special Events - Canada 81,000 92,000 (11,000)
U.S. Installation Revenue 179,000 173,000 6,000
---------- ---------- ---------
NTN iTV Network $6,793,000 $6,316,000 $477,000
15
As noted in the above table, our subscription revenue from core domestic
hospitality operations increased by $508,000, or 10.1%, in the first quarter of
2005 due to an increase in net site count and a higher average price on
installed sites compared to terminated sites. Additionally, our Canadian
subscription and installation revenue increased by $43,000, or 5.2%, in the
first quarter of 2005. We believe that a large portion of this site count and
revenue growth can be attributed to our new programming content, including our
Texas Hold `Em card game.
In the three months ended March 31, 2005, the NTN iTV Network generated
domestic advertising and special events revenue of approximately $108,000
compared to approximately $177,000 in the three months ended March 31, 2004. The
primary reason for the $69,000 decline in domestic advertising revenue was due
to a major advertising campaign in the 2004 period without a comparable campaign
in the 2005 period.
In the three months ended March 31, 2005, we added a net number of 45 new
sites in the United States compared to a net decrease of 74 new domestic sites
in the three months ended March 31, 2004. This site count increase was the
largest first quarter net addition of domestic sites in eight years. The NTN iTV
Network customer site count in the United States at March 31, 2005 was 3,354.
This was an increase of 307 sites over March 31, 2004.
In the three months ended March 31, 2005, we added a net number of 9 new
sites in Canada. Our Canadian site count at March 31, 2005 was 360.
Revenues from NTN Wireless decreased by $73,000 from $1,539,000 in the three
months ended March 31, 2004 to $1,466,000 in the three months ended March 31,
2005. This decrease occurred because the first quarter of 2004 included a wide
roll-out to a restaurant chain while the first quarter of 2005 did not include
such a roll-out.
Revenues from Software Solutions increased by $8,000 from $946,000 in the
three months ended March 31, 2004 to $954,000 in the three months ended March
31, 2005.
Buzztime revenues increased $251,000 to $294,000 in the three months ended
March 31, 2005 from $43,000 in the three months ended March 31, 2004. The
primary components in the $251,000 revenue increase were an incremental $188,000
revenue under the Trial Agreement with Comcast Cable that related to a
combination of technology development work, equipment installations and license
fees and an incremental $40,000 in consumer subscription fees via our
distribution through wireless/mobile phones and satellite television companies.
As a result of the above factors, NTN's consolidated revenues increased
$663,000, or 7.5%, to $9,507,000 in the three months ended March 31, 2005 from
$8,844,000 in the three months ended March 31, 2004.
OPERATING EXPENSES
Consolidated direct operating costs increased $318,000, or 10.3%, to
$3,420,000 in the three months ended March 31, 2005 from $3,102,000 in the three
months ended March 31, 2004. The following table compares the direct costs for
each of our operating segments between the three months ended March 31, 2005 and
2004:
DIRECT OPERATING COSTS
Three Months Ended March 31,
2005 2004 Change
------ ------ --------
NTN iTV Network $2,098,000 $1,635,000 $ 463,000
NTN Wireless 910,000 1,010,000 (100,000)
Software Solutions 108,000 173,000 (65,000)
---------- ---------- ----------
Hospitality Technologies division 3,116,000 2,818,000 298,000
Buzztime 304,000 284,000 20,000
---------- ---------- ----------
Consolidated $3,420,000 $3,102,000 $ 318,000
========== ========== ==========
The primary driver in the $318,000 increase in our direct operating costs was
the $463,000 increase in the direct operating costs in the NTN iTV Network. The
reductions in direct operating costs in the NTN Wireless and Software Solutions
segments helped partially offset the increase in the NTN iTV Network segment.
16
The $463,000 increase in the NTN iTV Network's direct operating costs came
from a variety of factors, including:
o $193,000 of the increase came from NTN Canada. The largest single
component of the increase in NTN Canada was an increase in direct
depreciation of $79,000 due to installation of new site equipment at new
and existing sites. Prior to our acquisition of that operation, the site
equipment in Canada was largely fully depreciated. Another $66,000 of the
increase in NTN Canada was from a combination of increased installation
and technical site service expenses associated with the installation and
conversion to new technology of a significant percentage of the Canadian
installed base;
o $56,000 of direct expenses related to our trial in the UK without any
corresponding expenses in the three months ended March 31, 2004;
o $86,000 came from an increase in direct depreciation due to installation
of new site equipment at new and existing sites domestically as a function
of our increase in net site count;
o $79,000 of the increase came from increased technical site service
expense. This expense was due to an increase in the number of technical
service visits to our sites. We believe that certain software releases
that we made to our game play software relating to our new content may
have caused some of this increased activity; and,
o $60,000 of the increase came from increased domestic installation expense.
This expense was due to our continued site count growth.
The $100,000 decrease in the direct operating costs of NTN Wireless was
largely related to the lower level of cost of goods sold associated with the NTN
Wireless revenue decrease of $79,000 noted above. Our gross margin in the NTN
Wireless segment in the three months ended March 31, 2005 was 37.9%, a 3.5%
increase over the 34.4% gross margin we recorded in the three months ended March
31, 2004.
The $65,000 decrease in the direct operating costs of Software Solutions was
largely related to a reduced level of costs of goods sold associated with
hardware shipments in the three months ended March 31, 2005 compared to the
three months ended March 31, 2004. Our gross margin in the Software Solutions
segment in the three months ended March 31, 2005 was 88.7%, which represented a
7.0% increase over the 81.7% gross margin we recorded in the three months ended
March 31, 2004.
The $20,000 increase in the direct operating costs of Buzztime was primarily
due to a $17,000 increase in direct depreciation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses (SG&A) increased
$182,000 or 3%, to $6,326,000 in the three months ended March 31, 2005 from
$6,144,000 in the three months ended March 31, 2004. The following table
compares the selling, general and administrative expenses for each of our
operating segments between the three months ended March 31, 2005 and 2004:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended March 31,
2005 2004 Change
------ ------ --------
NTN iTV Network $4,103,000 $3,765,000 $338,000
NTN Wireless 429,000 386,000 43,000
Software Solutions 1,181,000 1,272,000 (91,000)
---------- ----------- ---------
Hospitality Technologies division 5,713,000 5,423,000 290,000
Buzztime 613,000 721,000 (108,000)
---------- ---------- ---------
Consolidated $6,326,000 $6,144,000 $182,000
========== ========== =========
The $338,000 SG&A increase in the NTN iTV Network segment came from a variety
of factors, including:
o increased bad debt expense of $176,000;
o $127,000 of SG&A expenses related to our trial in the UK without any
corresponding expenses in the three months ended March 31, 2004;
o Increased domestic sales commissions of $72,000 relating to the
increase in new site sales:
17
o Increased marketing and travel and entertainment expenses of $97,000
associated with the launch of NTN BlastTM content and the new iTV
dual-channel technology platform and rollout of an independent dealer
network; and
o The above increases were partially offset by a $121,000 reduction in
Canadian SG&A expenses, which primarily arose out of personnel
reductions.
The $43,000 increase in the SG&A expenses of NTN Wireless was primarily due
to personnel increases.
The $91,000 reduction in the SG&A expenses of Software Solutions was
primarily due to personnel reductions.
The $108,000 reduction in the SG&A expenses of Buzztime was primarily due to
personnel reductions
NON-CASH CHARGE RELATED TO SOFTWARE PRODUCT SALE
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. 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 engaged a third party valuation firm to estimate the value of our 10%
ownership interest in Intura. They concluded that the fair value of our
investment in Intura was approximately $69,000. They also concluded that there
was no impairment of the goodwill in the Software Solutions segment as a result
of this transaction. The transfer of the software products, which we carried as
part of our intangible assets, resulted in a one-time, non-cash charge of
$276,000.
LITIGATION, LEGAL AND PROFESSIONAL FEES
Litigation, legal and professional fees increased $2,000 to $380,000 in the
three months ended March 31, 2005 compared to $378,000 in the three months ended
March 31, 2005. The litigation, legal and professional fees in the three months
ended March 2005 included $113,000 of Sarbanes-Oxley-related expenses with no
comparable expense in the 2004 period, $161,000 in legal fees, which represented
a decrease of $123,000 from the March 2004 period, and $63,000 of audit fees
(excluding $90,000 of fees related to the internal control part of the audit,
which are included in the Sarbanes-Oxley-related expenses noted above), which
represented a $7,000 decrease from our audit fees in the 2004 period.
STOCK BASED COMPENSATION AND PAYMENTS
Stock based compensation and payment expense increased by $53,000, or 98.1%,
to $107,000 in the three months ended March 31, 2005 compared to $54,000 in the
three months ended March 31, 2004. 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.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs decreased
by $81,000, or 24.1%, to $255,000 in the three months ended March 31, 2005 from
$336,000 in the three months ended March 31, 2004 due to certain assets becoming
fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $25,000 to $59,000 in the three
months ended March 31, 2005 from $84,000 in the three months ended March 31,
2004, due primarily to the completion of certain projects for the iTV network.
18
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the three months ended March 31, 2005 was $26,000 compared
to $19,000 in the three months ended March 31, 2004.
Interest expense decreased $14,000, or 36.8%, to $24,000 in the three months
ended March 31, 2005, compared to $38,000 in the three months ended March 31,
2004, due primarily to lower average balances on our line of credit.
INCOME TAXES
The NTN Hospitality Technologies division is expected to report taxable
income for the year ended December 31, 2005. For federal income tax reporting
purposes and in unitary states where NTN may file on a combined basis, taxable
losses incurred by Buzztime should be sufficient to offset the division's
taxable income. In states where separate filing is required, the division will
likely incur a state tax liability. We also expect to pay income taxes in Canada
due to the profitability of NTN Canada. As a result, NTN Hospitality
Technologies recorded a tax provision of $33,000 in the three months ended March
31, 2005. This was a $12,000 increase over the $21,000 provision for income
taxes recorded in the three months ended March 31, 2004.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
not intended to represent a measure of performance in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). Nor
should EBITDA be considered as an alternative to statements of cash flows as a
measure of liquidity. EBITDA is included herein because we believe it is a
measure of operating performance that financial analysts, lenders, investors and
other interested parties find to be a useful tool for analyzing companies like
NTN that carry significant levels of non-cash depreciation and amortization
charges in comparison to their GAAP earnings.
Our EBITDA decreased by $19,000 to negative $333,000 in the three months
ended March 31, 2005 from EBITDA of $314,000 in the three months ended March 31,
2004. This EBITDA decrease was primarily due to the $53,000 increase in our net
loss in the three months ended March 31, 2005.
The following table reconciles our net loss per GAAP to EBITDA:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
-----------------------------
EBITDA CALCULATION
Net loss per GAAP $(1,347,000) $(1,294,000)
Interest expense (net) (2,000) 19,000
Depreciation and amortization 983,000 940,000
Income taxes 33,000 21,000
------------ ------------
EBITDA $ (333,000) $ (314,000)
============ ============
19
On a segment basis, our segments generated EBITDA levels as presented below:
($000) THREE MONTHS ENDED
MARCH 31, 2005
--------------------------------------------------------------------
EBITDA CALCULATION:
NTNiTV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH DIV. BUZZTIME TOTAL
------- -------- --------- --------- -------- -----
Net income (loss) $(63) $49 $ (670) $(684) $(663) $(1,347)
Interest expense (net) (3) -- -- (3) 1 (2)
Depreciation and amortization 709 26 92 827 156 983
Income taxes 33 -- -- 33 -- 33
----- ---- ------- ------ ------ --------
EBITDA $676 $75 $ (578) $173 $(506) $ (333)
===== ==== ======= ====== ====== ========
($000) THREE MONTHS ENDED
MARCH 31, 2004
--------------------------------------------------------------------
EBITDA CALCULATION:
NTN iTV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH DIV. BUZZTIME TOTAL
------- -------- --------- --------- -------- -----
Net income (loss) $197 $55 $ (564) $(312) $(982) $(1,294)
Interest expense (net) 19 -- -- 19 -- 19
Depreciation and amortization 686 36 97 819 121 940
Income taxes 21 -- -- 21 -- 21
----- -- ------- ------ ------ --------
EBITDA $923 $91 $ (467) $ 547 $(861) $ (314)
===== ==== ======= ====== ====== ========
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, we had cash and cash equivalents of $5,678,000 and working
capital (current assets in excess of current liabilities) of $5,338,000,
compared to cash and cash equivalents of $6,710,000 and working capital of
$6,644,000 at December 31, 2004. Net cash provided by (used in) operating
activities was $242,000 for the three months ended March 31, 2005 and
$(1,103,000) for the three months ended March 31, 2004, or a $1,345,000 increase
in cash provided by operating activities.
The primary causes of this $1,345,000 increase in the cash generated by our
operating activities were:
o the non-cash nature of the $276,000 charge related to the Intura
transaction, the $221,000 increase in the provision for doubtful accounts,
and the $53,000 increase in stock-based compensation charges, which while
they decreased our earnings had no impact on our cash generated from
operating activities,
o we used $416,000 less cash supporting the growth of our accounts
receivable and the increase in our accounts payable and accrued expenses
generated an increase of $517,000 of incremental cash, and
o an increase in the use of cash associated with the change in deferred
revenue of $137,000. The increase in the deferred revenue was due to the
growth of new sites in our NTN iTV Network as discussed above.
Net cash used in investing activities was $1,485,000 for the three months
ended March 31, 2005 compared with $686,000 for the three months ended March 31,
2004. Included in net cash used in investing activities for the three months
ended March 31, 2005 were $1,243,000 in capital expenditures largely related to
the increase in our NTN iTV Network sites, $91,000 of deposits on broadcast
equipment and $151,000 of capitalized software development expenditures. The
primary components of net cash used in investing activities for the three months
ended March 31, 2004 were $494,000 of capital expenditures, $92,000 of
incremental cash usage relating to our acquisitions, $59,000 in deposits on
broadcast equipment and $41,000 of capitalized software development
expenditures.
20
Net cash provided by financing activities was $213,000 for the three months
ended March 31, 2005 compared to $11,782,000 for the three months ended March
31, 2004. The cash provided by financing activities for the three months ended
March 31, 2005 included $500,000 in borrowings on our revolving line of credit
and $156,000 in cash generated from the exercise of stock options and warrants.
Those cash inflows were partially offset by $384,000 in principal payments on
equipment note payable and $59,000 in principal payments on capital leases. The
$11,782,000 in cash provided by financing activities in the three months ended
March 31, 2004 included $13,001,000 of net proceeds from our equity offering in
January 2004 and $101,000 from the exercise of stock options and warrants. These
proceeds were partially offset by $1,000,000 of principal payments on the
revolving line of credit, $276,000 of principal payments on equipment notes
payable and $44,000 of principal payments on capital leases.
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 and year to date in 2005, we experienced the most significant
increase in domestic iTV site sales in seven years. We had 1,000 domestic site
sales in 2004 compared with an average of less than 700 per year over the
previous six years. In the three months ended March 31, 2005, we had 348
domestic site sales compared with 237 site sales in the three months ended March
31, 2004. 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 or, if connected through DSL broadband, approximately
$3,200. 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 iTV Network to a much higher speed, two-way VSAT (Very Small
Aperture Technology) satellite technology over the two-year period ending
February 2005. These agreements were with the same reseller of satellite
services that provides 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.
21
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 allow 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 March 31, 2005, 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 March 31, 2005, approximately 68% 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
remainder of our current customer base at a cost on the order of $450,000.
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 Intura (see note 7). We obtained a
10% ownership in Intura as part of the transaction.
Wireless Segment - This segment would have been profitable in 2004 if it had
not borne $450,000 in costs successfully defending the Long Range Systems
("LRS") litigation and has posted a profit in the three months ended March 31,
2005, despite spending an additional $40,000 to resolve the lawsuit. We recently
settled that litigation and we believe that segment should produce operating
profits going forward
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to, stock market fluctuations, interest rates
and currency exchange rates. As of March 31, 2005, we owned common stock of an
Australian company that is subject to market risk. At March 31, 2005, the
carrying value of this investment was $485,000, which is net of a $332,000
unrealized loss. This investment is exposed to further market risk in the future
based on the operating results of the Australian company and stock market
fluctuations. Additionally, the value of the investment is further subject to
changes in Australian currency exchange rates. At March 31, 2005, a hypothetical
10% decline in the value of the Australian dollar would result in a reduction of
$49,000 in the carrying value of the investment. As of March 31, 2005 we also
had cash equivalents of approximately $4 million invested primarily in
short-term government bonds that is subject to market risk.
22
We also face currency exchange risk with our operations in Canada. NTN Canada
earned approximately Canadian $417,000 (or U.S. $340,000) before corporate
overhead and taxes in the three months ended March 31, 2005. A hypothetical 10%
decline in the value of the Canadian dollar versus the United States dollar
would reduce the stated contribution from that unit to the NTN iTV Network
segment by that same 10%.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Based on our management's evaluation (with the participation of our chief
executive officer and chief financial officer), as of the end of the period
covered by this report, our chief executive officer and chief financial officer
have concluded that, subject to the limitations described below, our disclosure
controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)
and 15d-15(e)) are effective to provide reasonable assurance that the
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
Under Auditing Standard No. 2 as defined by the PCAOB, a material weakness is
a significant deficiency, or a combination of significant deficiencies, that
result in more than likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. We identified
that, as of December 31, 2004, there was inadequate documentation of the design
and testing of controls over relevant assertions related to certain significant
accounts and disclosures. This pertains to documenting to the degree appropriate
how certain controls were initiated, authorized, recorded, processed, tested or
reported. Our review found no material deficiencies in the functioning of the
underlying control activities themselves. We also did not have any audit
adjustments to the consolidated financial statements as of and for the year
ended December 31, 2004. We are currently designing and implementing improved
controls and processes to address the weakness described above.
We currently are unable to determine when the above noted material weaknesses
will be fully remediated. However, because remediation will not be completed
until we have completed staffing changes and strengthened the pertinent
controls, we believe that the material weaknesses noted above continued to exist
at March 31, 2005. In addition, we presently do not believe that we will be able
to completely remediate the by the end of our second quarter of fiscal 2005, and
we presently anticipate that we will report in our Quarterly Report on Form 10-Q
for the second quarter of fiscal 2005 that the material weakness continues to
exist.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Since our final evaluation as of December 31, 2004, we have had a significant
change in our internal controls. Previously, all of the accounting functions and
process for NTN Canada and NTN Software Solutions were decentralized and
performed in our Toronto, Canada and Arlington, Texas offices respectfully. As
of January 1, 2005 we started to migrate these functions to our Carlsbad,
California offices to be integrated along with our NTN iTV Network and Buzztime
operations. As of March 31, 2005, these changes have been completed. We also
began our operations in the U.K. in the three months ended March 31, 2005. The
accounting functions related to the U.K. are also based in our Carlsbad,
California offices.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to litigation from time to time in the ordinary course of our
business. There can be no assurance that any or all of the following claims will
be decided in our favor and we are not insured against all claims made. During
the pendency of such claims, we will continue to incur the costs of our legal
defense.
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.
23
On or about April 23, 2003, we filed a complaint in the Superior Court of the
State of California, County of San Diego, against LRS alleging defamation and
trade libel, intentional interference with prospective economic advantage,
Lanham Act (trademark violations) and California unfair competition. The case
was subsequently transferred to the United States District Court, Southern
District of California. Our complaint 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 March 2, 2005, the court dismissed the LRS lawsuit in accordance with our
agreement 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.
We are involved in various claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (4)
3.2 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (7)
3.3 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated March 22, 2000 (8)
3.4 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated March 24, 2000 (8)
3.5 By-laws of the Company (2)
3.6 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated May 27, 2003 (15)
4.1 Specimen Common Stock Certificate (10)
4.2* Stock Option Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
4.3* Stock Option Agreement, dated October 7, 1999, by and between NTN
Communications, Inc. and Stanley B. Kinsey (6)
4.4* Stock Option Agreement, dated January 26, 2001, by and between NTN
Communications, Inc. and Stanley B. Kinsey (12)
4.5 Warrant Certificate issued January 13, 2003 by NTN Communications,
Inc. to Robert M. and Marjie Bennett, Trustees The Bennett Family
Trust dated 11-17-86 (18)
4.6 NTN Investor Rights Agreement, dated May 7, 2003, by and between NTN
Communications, Inc. and Media General, Inc. (17)
4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and among
NTN Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (17)
4.8 Common Stock Purchase Warrant dated May 7, 2003 issued to Media
General, Inc. exercisable for 500,000 shares of common stock of
Buzztime Entertainment, Inc. (17)
4.9 Form of Common Stock Purchase Warrant issued to Roth Capital
Partners (13)
10.1 License Agreement with NTN Canada (3)
10.2* Employment Agreement, dated September 9, 2004, by and between NTN
Communications, Inc. and Stanley B. Kinsey (16)
10.3 Subscription Agreement dated January 13, 2003 between NTN
Communications, Inc. and Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (18)
10.4 Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange
of Buzztime Preferred Stock for NTN Common Stock, dated January 16,
2003 (18)
10.5 Securities Purchase Agreement dated May 5, 2003 by and among NTN
Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (17)
24
10.6 Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners and NTN Communications, Inc. (13)
10.7 Manufacturing Agreement, dated November 25, 1997, by and between NTN
Communications, Inc. and Climax Technology Co., Ltd. (9)
10.8 Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (11)
10.9 Asset Purchase Agreement dated July 30, 2003 by and among NTN
Software Solutions, Inc., NTN Communications, Inc., Breakaway
International, Inc. and the Seller Shareholders (15)
10.10 Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc. and Chell Group Corporation (14)
10.11 Settlement Agreement, effective as of February 28, 2005, between
Long Range Systems, Inc. and NTN Communications, Inc. (19)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (20)
- -------------
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's registration statement on Form
S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to NTN's report on Form 10-K for the
year ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's report on Form 10-K, for the
year ended December 31, 1997, and incorporated by reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on
April 5, 2000 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 10-K/A dated
March 5, 2001 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's registration statement on Form
8-A, File No. 0-19383, and incorporated by reference.
(11) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 2000 and incorporated by reference.
(12) Previously filed as an exhibit to NTN's report on Form 10-Q dated
March 31, 2001 and incorporated by reference.
(13) Previously filed as an exhibit to NTN's report on Form 8-K dated
January 29, 2004 and incorporated herein by reference.
(14) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-111538, filed on December 24, 2003 and incorporated
herein by reference.
(15) Previously filed as an exhibit to NTN's Form 10-Q dated August 14,
2003 and incorporated herein by reference.
(16) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 30, 2004 and incorporated herein by reference.
(17) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-105429, filed on May 21, 2003 and incorporated
herein by reference.
(18) Previously filed as an exhibit to NTN's Form 10-Q dated May 15, 2003
and incorporated herein by reference.
(19) Previously filed as an exhibit to NTN's Form 8-K dated March 18, 2005,
and incorporated herein by reference.
(20) Furnished concurrently herewith.
(b) Reports on Form 8-K.
On March 18, 2005, we filed a current report on Form 8K (event date March
8, 2005) to report under Item 2.02 Results of Operations and Financial
Condition. The information in the report shall not be deemed "filed" with the
Securities and Exchange Commission for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the liabilities of
Section 18. We also reported under Item 5.01 Other Events that NTN and Long
Range Systems, Inc. entered into an agreement to settle and dismiss litigation
relating to allegations of patent infringement and unfair competition filed by
Long Range Systems in United States District Court, Northern District of Texas
and to counter charges alleged by NTN against Long Range Systems, including
domain name misappropriation and unfair competition, pending in the United
States District Court, Southern District of California. We further reported that
under the terms of the settlement, NTN and Long Range Systems each agreed to
settle and dismiss the two lawsuits without liability or any payment to the
other party with each party responsible for its own legal costs.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: May 11, 2005 By: James B. Frakes
----------------------------------------
James B. Frakes
Authorized Signatory and Chief
Financial Officer
26
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (4)
3.2 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (7)
3.3 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated March 22, 2000 (8)
3.4 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated March 24, 2000 (8)
3.5 By-laws of the Company (2)
3.6 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated May 27, 2003 (15)
4.1 Specimen Common Stock Certificate (10)
4.2* Stock Option Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
4.3* Stock Option Agreement, dated October 7, 1999, by and between NTN
Communications, Inc. and Stanley B. Kinsey (6)
4.4* Stock Option Agreement, dated January 26, 2001, by and between NTN
Communications, Inc. and Stanley B. Kinsey (12)
4.5 Warrant Certificate issued January 13, 2003 by NTN Communications,
Inc. to Robert M. and Marjie Bennett, Trustees The Bennett Family
Trust dated 11-17-86 (18)
4.6 NTN Investor Rights Agreement, dated May 7, 2003, by and between NTN
Communications, Inc. and Media General, Inc. (17)
4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and among
NTN Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (17)
4.8 Common Stock Purchase Warrant dated May 7, 2003 issued to Media
General, Inc. exercisable for 500,000 shares of common stock of
Buzztime Entertainment, Inc. (17)
4.9 Form of Common Stock Purchase Warrant issued to Roth Capital
Partners (13)
10.1 License Agreement with NTN Canada (3)
10.2* Employment Agreement, dated September 9, 2004, by and between NTN
Communications, Inc. and Stanley B. Kinsey (16)
10.3 Subscription Agreement dated January 13, 2003 between NTN
Communications, Inc. and Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (18)
10.4 Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange
of Buzztime Preferred Stock for NTN Common Stock, dated January 16,
2003 (18)
10.5 Securities Purchase Agreement dated May 5, 2003 by and among NTN
Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (17)
10.6 Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners and NTN Communications, Inc. (13)
10.7 Manufacturing Agreement, dated November 25, 1997, by and between NTN
Communications, Inc. and Climax Technology Co., Ltd. (9)
10.8 Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (11)
10.9 Asset Purchase Agreement dated July 30, 2003 by and among NTN
Software Solutions, Inc., NTN Communications, Inc., Breakaway
International, Inc. and the Seller Shareholders (15)
10.10 Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc. and Chell Group Corporation (14)
10.11 Settlement Agreement, effective as of February 28, 2005, between
Long Range Systems, Inc. and NTN Communications, Inc. (19)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (20)
- -------------
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's registration statement on Form
S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to NTN's report on Form 10-K for the
year ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's report on Form 10-K, for the
year ended December 31, 1997, and incorporated by reference.
27
(5) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on
April 5, 2000 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 10-K/A dated
March 5, 2001 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's registration statement on Form
8-A, File No. 0-19383, and incorporated by reference.
(11) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 2000 and incorporated by reference.
(12) Previously filed as an exhibit to NTN's report on Form 10-Q dated
March 31, 2001 and incorporated by reference.
(13) Previously filed as an exhibit to NTN's report on Form 8-K dated
January 29, 2004 and incorporated herein by reference.
(14) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-111538, filed on December 24, 2003 and incorporated
herein by reference.
(15) Previously filed as an exhibit to NTN's Form 10-Q dated August 14,
2003 and incorporated herein by reference.
(16) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 30, 2004 and incorporated herein by reference.
(17) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-105429, filed on May 21, 2003 and incorporated
herein by reference.
(18) Previously filed as an exhibit to NTN's Form 10-Q dated May 15, 2003
and incorporated herein by reference.
(19) Previously filed as an exhibit to NTN's Form 8-K dated March 18, 2005,
and incorporated herein by reference.
(20) Furnished concurrently herewith.
28