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, 2002
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 [ ]
At April 19, 2002 the registrant had outstanding 39,165,000 shares of common
stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
MARCH 31,
2002 DECEMBER 31,
ASSETS (UNAUDITED) 2001
-------------- -------------
Current assets:
Cash and cash equivalents $ 1,598,000 $ 1,296,000
Restricted cash 199,000 94,000
Accounts receivable, net 1,410,000 1,411,000
Investment available for sale 276,000 174,000
Inventory 27,000 --
Deposits on broadcast equipment -- 69,000
Deferred costs 651,000 675,000
Prepaid expenses and other current assets 612,000 499,000
-------------- -------------
Total current assets 4,773,000 4,218,000
Broadcast equipment and fixed assets, net 7,189,000 8,029,000
Software development costs, net 641,000 588,000
Deferred costs 386,000 411,000
Other assets 130,000 134,000
-------------- -------------
Total assets $ 13,119,000 $ 13,380,000
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 646,000 $ 906,000
Accrued expenses 993,000 889,000
Accrual for litigation costs 91,000 44,000
Accrual for sales tax 131,000 163,000
Obligations under capital leases 178,000 168,000
Deferred revenue 1,830,000 2,008,000
-------------- -------------
Total current liabilities 3,869,000 4,178,000
Obligations under capital leases, excluding current portion 115,000 110,000
Revolving line of credit 2,635,000 2,479,000
Senior subordinated convertible notes 1,968,000 1,958,000
Deferred revenue 778,000 877,000
Other long-term liabilities 12,000 12,000
-------------- -------------
Total liabilities 9,377,000 9,614,000
-------------- -------------
Minority interest in consolidated subsidiary 810,000 855,000
-------------- -------------
Shareholders' equity:
Series A 10% cumulative convertible preferred
stock, $.005 par value, 5,000,000 shares authorized;
161,000 shares issued and outstanding at March 31, 2002
and December 31, 2001 1,000 1,000
Common stock, $.005 par value, 70,000,000 shares
authorized; 38,688,000 and 38,627,000 shares issued
and outstanding at March 31, 2002 and December 31,
2001, respectively 192,000 192,000
Additional paid-in capital 80,647,000 80,639,000
Accumulated deficit (77,056,000) (76,890,000)
Accumulated other comprehensive loss (541,000) (643,000)
Treasury stock, at cost, 73,000 and 91,000 shares at
March 31,2002 and December 31, 2001, respectively (311,000) (388,000)
-------------- -------------
Total shareholders' equity 2,932,000 2,911,000
-------------- -------------
Total liabilities and shareholders' equity $ 13,119,000 $ 13,380,000
============== =============
See accompanying notes to unaudited consolidated financial statements
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
2002 2001
-------------- -------------
Revenues:
NTN Network revenues $ 5,839,000 $ 5,225,000
Buzztime service revenues 56,000 53,000
Other revenues 2,000 7,000
-------------- -------------
Total revenues 5,897,000 5,285,000
-------------- -------------
Operating expenses:
Direct operating costs (includes depreciation of
$853,000 and $804,000 for the three months
ended March 31, 2002 and 2001, respectively) 2,071,000 2,077,000
Selling, general and administrative 3,508,000 4,240,000
Depreciation and amortization 397,000 437,000
Research and development 3,000 61,000
-------------- -------------
Total operating expenses 5,979,000 6,815,000
-------------- -------------
Operating loss (82,000) (1,530,000)
-------------- -------------
Other income (expense):
Interest income 4,000 26,000
Interest expense (133,000) (224,000)
Other -- 150,000
-------------- -------------
Total other expense (129,000) (48,000)
-------------- -------------
Loss before minority interest in loss of consolidated subsidiary (211,000) (1,578,000)
Minority interest in loss of consolidated subsidiary 45,000 --
-------------- -------------
Net loss $ (166,000) $ (1,578,000)
============== =============
Net loss per common share - basic and diluted: $ (0.00) $ (0.04)
============== =============
Weighted average shares outstanding - basic and diluted 38,604,000 36,335,000
============== =============
See accompanying notes to unaudited consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
-------------- -------------
Cash flows provided by (used in) operating activities:
Net loss $ (166,000) $ (1,578,000)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 1,250,000 1,241,000
Provision for doubtful accounts 71,000 192,000
Non-cash stock-based compensation charges 23,000 2,000
Minority interest in loss of consolidated subsidiary (45,000) --
Non-cash interest expense 40,000 50,000
Accreted interest expense 10,000 25,000
Gain on settlement of debt -- (146,000)
Loss from disposition of equipment 31,000 25,000
Changes in assets and liabilities:
Restricted cash (105,000) (11,000)
Accounts receivable (70,000) 189,000
Inventory (27,000) --
Deferred costs 49,000 49,000
Prepaid expenses and other assets (113,000) (159,000)
Accounts payable and accrued expenses (127,000) (102,000)
Deferred revenue (277,000) 22,000
-------------- -------------
Net cash provided by (used in) operating activities 544,000 (201,000)
-------------- -------------
Cash flows from investing activities:
Capital expenditures (416,000) (349,000)
Deposits on broadcast equipment 69,000 (49,000)
-------------- -------------
Net cash used in investing activities (347,000) (398,000)
-------------- -------------
Cash flows from financing activities:
Principal payments on capital leases (59,000) (184,000)
Borrowings from revolving line of credit 5,760,000 5,727,000
Principal payments on revolving line of credit (5,604,000) (5,698,000)
Proceeds from issuance of common and preferred
stock, net of offering expenses -- (51,000)
Principal payments on note payable -- (25,000)
Proceeds from exercise of stock options and warrants 8,000 89,000
-------------- -------------
Net cash provided by (used in) financing activities 105,000 (142,000)
-------------- -------------
Net increase (decrease) in cash and cash equivalents 302,000 (741,000)
Cash and cash equivalents at beginning of period 1,296,000 2,188,000
-------------- -------------
Cash and cash equivalents at end of period $ 1,598,000 $ 1,447,000
============== =============
See accompanying notes to unaudited consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Continued)
THREE MONTH ENDED
--------------------------------
MARCH 31, MARCH 31,
2002 2001
-------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 83,000 $ 137,000
============== =============
Income taxes $ -- $ --
============== =============
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock in payment of interest $ 40,000 $ 69,000
============== =============
Equipment acquired under capital leases $ 74,000 $ 81,000
============== =============
Unrealized holding loss on investments $ (102,000) $ 25,000
============== =============
Issuance of treasury stock in payment of board compensation $ 16,000 $ --
============== =============
See accompanying notes to unaudited consolidated financial statements.
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2002
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and its majority-owned
subsidiary (collectively, "we" or "NTN") and the results of operations and cash
flows of NTN for the interim periods presented. Management has elected to omit
substantially all notes to our consolidated financial statements as permitted by
the rules and regulations of the Securities and Exchange Commission. The results
of operations for the interim periods are not necessarily indicative of results
to be expected for any other interim period or for the year ending December 31,
2002.
The consolidated financial statements for the three months ended March 31,
2002 and 2001 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto included in our Form 10-K
for the year ended December 31, 2001.
We have reclassified certain items in the prior period consolidated
financial statements to conform to the current period presentation.
2. CRITICAL ACCOUNTING POLICIES
The preparation of these financial statements requires NTN 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, NTN evaluates its estimates, including those related to deferred
costs and revenues, depreciation of broadcast equipment and other fixed assets,
bad debts, investments, intangible assets, financing operations, and
contingencies and litigation. NTN bases its 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.
NTN believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. NTN records deferred costs and revenues related to the
costs and related installation revenue associated with installing new customer
sites. Based on Staff Accounting Bulletin 101, NTN amortizes these amounts over
an estimated three-year average life of a customer relationship. If a
significant number of its customers leave NTN before their estimated life is
attained, amortization of those deferred costs and revenues would accelerate,
which would result in net incremental revenue. NTN incurs a relatively
significant level of depreciation expense in relationship to its operating
income. The amount of depreciation expense in any year is largely related to the
estimated life of handheld, wireless Playmaker devices and computers located at
our customer sites. If the Playmakers and servers turn out to have a longer
life, on average, than estimated, NTN depreciation expense would be
significantly reduced in those future periods. Conversely, if the Playmakers and
servers turn out to have a shorter life, on average, than estimated, NTN
depreciation expense would be significantly increased in those future periods.
NTN maintains allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of NTN's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
3. INCOME (LOSS) PER SHARE
For the three months ended March 31, 2002 and 2001 options, warrants,
convertible preferred stock and convertible notes representing approximately
12,443,000, and 12,983,000 potential common shares, respectively, have been
excluded from the computations of net loss per share, as their effect was
anti-dilutive.
6
4. SEGMENT INFORMATION
We develop, produce and distribute interactive entertainment. 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 NTN
Network(R) and Buzztime(TM) units. NTN Network revenue is generated primarily
from broadcasting content to customer locations through two interactive
television networks and from advertising sold on the networks. NTN Network
revenues comprised over 99% of our total revenue for the three months ended
March 31, 2002. Buzztime generates revenue primarily from the distribution of
its digital trivia game show content and "play-along" sports games as well as
from production services provided to third parties. Included in the operating
loss for both the NTN Network and Buzztime is an allocation of corporate
expenses. The following tables set forth certain information regarding our
segments and other operations:
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2002 2001
------------ ------------
Revenues
NTN Network $ 5,839,000 $ 5,225,000
Buzztime 56,000 53,000
Other 2,000 7,000
------------ ------------
Total revenue $ 5,897,000 $ 5,285,000
============ ============
Operating income (loss)
NTN Network $ 673,000 $ (385,000)
Buzztime (755,000) (1,145,000)
------------ ------------
Operating loss $ (82,000) $(1,530,000)
============ ============
Net income (loss)
NTN Network $ 544,000 $ (412,000)
Buzztime (710,000) (1,166,000)
------------ ------------
Net loss $ (166,000) $(1,578,000)
============ ============
5. CONTINGENT LIABILITY
Our Canadian licensee is currently in discussions with the Canada Customs
and Revenue Agency regarding a liability relating to withholding tax on certain
amounts previously paid to us by the Canadian licensee. Our licensee has been
assessed approximately $649,000 Canadian dollars (equivalent to approximately
$407,000 U.S. dollars as of March 31, 2002) by Canada Customs and Revenue
Agency, but is in the process of appealing the assessment. If the appeal is
unsuccessful, it is unclear as to what, if any, liability we might have in this
matter.
6. SUBSEQUENT EVENT
On April 5, 2002, through a newly formed subsidiary, NTN Wireless
Communications, Inc. ("NTN Wireless"), we acquired the assets of ZOOM
Communications, a company in the restaurant wireless paging industry, from
Brandmakers, Inc. In consideration for the purchase, we assumed $314,000 in
liabilities from Brandmakers, Inc. and issued an aggregate of $300,000 in
restricted common stock to all parties. In addition, by way of a separate
agreement, we entered into 2-year employment contracts with ZOOM's two
principals, Sal Veni and Russ Ford to join NTN as Vice President of Operations
and Vice President of Sales, respectively, in the NTN Wireless unit. ZOOM
Communications and its Georgia-based headquarters have been folded into NTN
Wireless and are now a regional office and distribution center for NTN.
We also entered into a distribution agreement on March 11, 2002 with
Brandmakers, Inc., for the non-exclusive right to sell and service certain
products relating to the manufacture, service and distribution of wireless
paging systems and stored value gift and loyalty card programs for ZOOM
Communications. The agreement was superceded on April 5, 2002 upon the
acquisition of the assets of ZOOM Communications.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
This Quarterly Report 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 that reflect our current estimates, expectations
and projections about our future results, performance, prospects and
opportunities, including statements related to our strategic plans, capital
expenditures, industry trends and financial position. In some cases, you can
identify these statements by forward-looking words such as "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "should," "will,"
"plan," "would" and similar expressions. Forward-looking statements are based on
information currently available to us and are subject to risks and
uncertainties, including cash needs, competition, market acceptance and other
factors that may cause our actual results, performance or achievements to differ
materially from those expressed or implied by such forward-looking statements.
Important factors that could cause actual results to differ materially from our
expectations are detailed in our Securities and Exchange Commission filings,
including our Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
GENERAL
We develop and distribute interactive entertainment. We operate our
businesses principally through two operating units, the NTN Network and our
94%-owned subsidiary, Buzztime Entertainment, Inc. ("Buzztime").
The NTN Network is North America's largest "out-of-home" interactive
television network. Our unique private network broadcasts a variety of
interactive multi-player sports and trivia games from 15 to 17 hours a day,
depending on the time zone, 365 days per year to hospitality locations such as
restaurants, sports bars, hotels, clubs and military bases totaling
approximately 3,588 locations in North America as of March 31, 2002. The NTN
Network earns revenue from delivering entertainment content to hospitality
locations for a monthly fee, including installation revenue. The NTN Network
also generates advertising revenue from third party advertisers on the NTN
Network and license fee revenue from our Canadian licensee.
The NTN Network is the only interactive television network that is
specifically designed to entertain the out-of-home viewer. Patrons use our
hand-held wireless Playmaker devices to interact with trivia and sports games
displayed on television screens in the hospitality location. Our content is
designed to promote social interaction and stimulate conversation among the
patrons. Hospitality locations pay to use our interactive technology and to
receive our entertainment broadcast. Our games are broadcast to be easily viewed
from a distance of over 15 feet and are not dependent upon audio, so they do not
interfere with the location's own sound system or with patrons' conversations.
Independent research confirms that NTN players stay longer, spend more and
visit more frequently than non-players, supporting the value proposition to
subscribing locations.
In April 1999, we began upgrading the NTN Network by introducing our
"Digital Interactive TV" system to replace our decade-old DOS-based system. The
DITV system contains many new features, including a Windows-based platform with
full-motion video capabilities and high-resolution graphics to allow more
compelling content and better advertising opportunities. In addition, we
introduced new, more consumer friendly Playmaker(R) wireless game appliances
that operate at 900 megahertz to increase transmission range and have a longer
battery life. The new Playmakers also feature a larger, eight line LCD screen
that displays sports scores and other ticker information and enable electronic,
text-based chat between patrons.
Currently, the NTN Network operates two parallel networks to broadcast our
interactive game content. The more dynamic DITV digital network has largely
supplanted the original DOS-based platform. As of March 31, 2002, all but 128 of
the U.S. sites had converted to the DITV network. Our Canadian licensee also has
not yet converted any of its subscribers to the DITV network. The DITV system
provides greater growth and revenue opportunities due to its MPEG full motion
video capability, allowing for dynamic presentation of enhanced on-screen
interactive game programming and full motion advertising capabilities. The DITV
system also features a more robust 900-megahertz Playmaker that facilitates
consumer interaction with the network.
8
Buzztime Entertainment, Inc., our 94%-owned subsidiary, was incorporated in
the state of Delaware in December 1999 with the intent of creating new revenue
from distributing NTN's content library to several interactive consumer
platforms, with a primary focus on interactive television. Buzztime specializes
in real-time, mass-participation games and entertainment that are produced
specifically for interactive television including BUZZTIME, the interactive
trivia channel for cable television and satellite television services. We manage
the world's largest trivia game show library from our interactive television
broadcast studio where we also produce our live, Predict the Play interactive
television sports games and real-time viewer polls.
In 2001, Buzztime received an investment from Scientific-Atlanta, Inc., a
leading manufacturer of cable set-top boxes. Our first deployment came in March
2002, when we began a technical field trial with Susquehanna Cable ("SusCom") to
deploy the BUZZTIME channel to SusCom's digital subscribers in SusCom's York,
Pennsylvania system. We plan to introduce the BUZZTIME trivia channel on cable
systems using Scientific Atlanta digital cable set-top boxes beginning in the
Spring of 2002. In addition, Buzztime remains the primary content provider to
the NTN Network and currently works with leading companies such as the National
Football League, Microsoft Corporation's MSN(R)TV service, Liberate
Technologies, Airborne Entertainment and others to bring consumers real-time
interactive entertainment.
Our objective is to grow both of our businesses as a leading developer and
distributor of interactive entertainment and communication products and services
across several interactive platforms, including our out-of-home network,
interactive television ("iTV") and wireless devices. To accomplish our
objectives we are pursuing strategies to:
o Increase the number of out-of-home locations serviced by the NTN Network. We
intend to accomplish this increase by expanding our product offerings to
include more value-added services, adding personnel to our sales force and
providing new and updated content on a regular basis.
o Develop and distribute the BUZZTIME trivia channel to cable and satellite
operators with the intent to become the first content provider to deploy a
live 2-way, multi-player interactive television entertainment channel,
sometimes referred to as iTV. We have adapted or are planning to adapt our
interactive trivia game show content and technology to the leading
interactive television platforms, to gain market share by partnering with
major industry manufacturers and distributors, and to utilize our
interactive television broadcast studio as a development and production
facility to build and deepen relationships with media-related companies. We
also plan to continue to support our efforts in the early-stage wireless
entertainment market through alliances with leading wireless distributors
and carriers.
o Increase revenues through current and new revenue sources. The NTN Network
earns subscription revenue from subscribing out-of-home locations and
third-party advertising revenue as well as production services and license
fee revenue from Buzztime. We expect to continue generating revenue through
these sources and, by growing our customer base, we also expect to see
revenue growth in subscription and advertising revenue. Similarly, as
Buzztime gains distribution with cable television operators, we expect to
increase revenue through three sources: license fees paid by local cable
television operators; fees paid by interactive television home subscribers
for premium services or pay-per-play transactions; and advertising revenue.
Both business units will also be exploring market opportunities to acquire
complimentary businesses to increase revenues and earnings.
There can be no assurance, however, that we will be successful in executing
this strategy.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
Operations for the three months ended March 31, 2002 resulted in a net loss
of $166,000 compared to a net loss of $1,578,000 for the three months ended
March 31, 2001.
9
REVENUES
Total revenues increased by $612,000 or 12%, to $5,897,000 for the three
months ended March 31, 2002 from $5,285,000 for the three months ended March 31,
2001. This increase was primarily due to NTN Network revenues as shown in the
following table (in thousands):
THREE MONTHS ENDED
MARCH 31
----------------------------
2002 2001
------------ ------------
NTN Network Revenues $ 5,839 $ 5,225
Buzztime Revenues 56 53
Other Revenues 2 7
------------ ------------
Total Revenues $ 5,897 $ 5,285
============ ============
NTN Network revenues increased by $614,000 or 12%, to $5,839,000 for the
three months ended March 31, 2002 from $5,225,000 for the three months ended
March 31, 2001. Hospitality subscription revenues increased by approximately
$276,000 due to an increase in the number of sites and the average billing rate
per site. The total number of sites as of March 31, 2002 was approximately
3,588, representing a net increase of 88 sites compared to March 31, 2001. At
March 31, 2002, approximately 96% of the U.S. sites have been converted to the
digital network compared to approximately 91% of the U.S. sites converted as of
March 31, 2001. Advertising revenue increased by approximately $194,000 due to
fewer advertising contracts for the three months ended March 31, 2001.
Buzztime revenues were $56,000 for the three months ended March 31, 2002,
compared to $53,000 for the three months ended March 31, 2001.
OPERATING EXPENSES
Direct operating costs decreased by $6,000 or less than 1%, to $2,071,000
for the three months ended March 31, 2002 from $2,077,000 for the three months
ended March 31, 2001. This is due in part to communication charges, which
decreased by approximately $125,000 due to a change in vendors in 2001. Hosting
fees also decreased approximately $87,000 due to the consolidation of equipment
at two separate locations to one location in 2001. Playmaker repairs increased
by approximately $62,000 due to the warranty expiring on some of the Playmakers.
Miscellaneous parts for the equipment increased approximately $26,000 for
replacement of various equipment parts that need to be replaced as the digital
equipment ages. Depreciation and amortization increased by approximately $49,000
for the capitalized purchases of broadcast equipment associated with the digital
network.
Selling, general and administrative expenses decreased by $732,000 or 17%,
to $3,508,000 for the three months ended March 31, 2002 from $4,240,000 for the
three months ended March 31, 2001. Selling, general and administrative expense
included a decrease in payroll and related expenses of approximately $342,000.
While the head count is comparable between the two periods, the employee mix in
the first quarter of 2002 included a lower average cost per employee. Consulting
expenses decreased by approximately $230,000 due to various projects reaching
completion in the past year. Marketing expenses decreased approximately $77,000.
Telephone charges decreased approximately $50,000 due to a change in vendors in
2001. Office lease expense decreased approximately $30,000 due to the expiration
of two leases for office and warehouse space in 2001.
Depreciation and amortization expense decreased 9% to $397,000 for the three
months ended March 31, 2002 from $437,000 for the three months ended March 31,
2001, due to certain assets becoming fully depreciated.
Research and development expenses were not significant for the three months
ended March 31, 2002, compared to $61,000 for the three months ended March 31,
2001. For the three-month period ended March 31, 2001, our research and
development efforts focused primarily on the upgrade of the NTN Network.
Interest expense decreased 41% to $133,000 for the three months ended March
31, 2002, compared to $224,000 for the three months ended March 31, 2001, due to
the expiration of various capitalized leases as well as to a lower average
balance on its revolving line of credit in the first quarter of 2002 compared to
the first quarter of 2001.
Other income was not significant for the three months ended March 31, 2002
compared to $150,000 for the three months ended March 31, 2001 due to the
elimination of the balance of the promissory note and accrued interest upon
settlement of the debt.
10
EBITDA
As a result of the operating improvements discussed above, our earnings
before interest, taxes, depreciation and amortization ("EBITDA") increased by
$1,352,000 to $1,213,000 in the first quarter of 2002 from negative EBITDA of
$139,000 in the first quarter of 2001.
EBITDA is not intended to represent a measure of performance in accordance
with generally accepted accounting principles ("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 that financial analysts,
investors and other interested parties find it to be a useful tool for measuring
our performance.
The following table reconciles our net loss per GAAP to EBITDA:
THREE MONTHS ENDED
MARCH 31
-----------------------------
2002 2001
------------ -------------
EBITDA CALCULATION
Net loss per GAAP $ (166,000) $ (1,578,000)
Interest income (4,000) (26,000)
Interest expense 133,000 224,000
Depreciation and amortization-direct 853,000 804,000
Depreciation and amortization-indirect 397,000 437,000
------------ -------------
EBITDA $ 1,213,000 $ (139,000)
============ =============
On a segment basis, our two segments generated EBITDA levels as presented
below:
THREE MONTHS ENDED MARCH 31, 2002
---------------------------------------------
NETWORK BUZZTIME TOTAL
EBITDA CALCULATION: ------------ ------------- ------------
Net income (loss) $ 544,000 $ (710,000) $ (166,000)
Interest income (4,000) -- (4,000)
Interest expense 133,000 -- 133,000
Depreciation and amortization-direct 816,000 37,000 853,000
Depreciation and amortization-indirect 235,000 162,000 397,000
------------ ------------- ------------
EBITDA $ 1,724,000 $ (511,000) $ 1,213,000
============ ============= ============
THREE MONTHS ENDED MARCH 31, 2001
---------------------------------------------
NETWORK BUZZTIME TOTAL
EBITDA CALCULATION: ------------ ------------- ------------
Net income (loss) $ (412,000) $ (1,166,000) $(1,578,000)
Interest income (23,000) (3,000) (26,000)
Interest expense 200,000 24,000 224,000
Depreciation and amortization-direct 767,000 37,000 804,000
Depreciation and amortization-indirect 296,000 141,000 437,000
------------ ------------- ------------
EBITDA $ 828,000 $ (967,000) $ (139,000)
============ ============= ============
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had cash and cash equivalents of $1,598,000 and
working capital (current assets in excess of current liabilities) of $904,000,
compared to cash and cash equivalents of $1,296,000 and working capital of
$40,000 at December 31, 2001. Net cash provided by operations was $544,000 for
the three months ended March 31, 2002 and net cash used in operations was
$201,000 for the three months ended March 31, 2001. Depreciation, amortization
and other non-cash charges offset the net loss in each period.
Net cash used in investing activities was $347,000 for the three months
ended March 31, 2002 and $398,000 for the three months ended March 31, 2001.
Included in net cash used in investing activities for the three months ended
March 31, 2002 was $326,000 in
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capital expenditures and $90,000 in capital software expenditures, which were
partially offset by $69,000 for deposits on broadcast equipment received.
Net cash provided by financing activities was $105,000 for the three months
ended March 31, 2002 and net cash used in financing activities was $142,000 for
the three months ended March 31, 2001. The cash provided by financing activities
for the three months ended March 31, 2002 included $156,000 of net borrowings on
the revolving line of credit and $8,000 of proceeds from the issuance of stock
options offset by $59,000 of principal payments on capital leases.
We have entered into an agreement with Coast Business Credit for a revolving
line of credit, which presently expires on June 30, 2003. Interest is charged on
the outstanding balance at a rate equal to the prime rate plus 1.5% per annum,
but cannot be less than 9% per annum. The line of credit is secured by
substantially all of our assets.
The line of credit provides for borrowings not to exceed the lesser of a
designated maximum amount or three times trailing monthly collections or three
times annualized trailing adjusted EBITDA. As of March 31, 2002, the maximum
amount outstanding under the line of credit was $2,750,000. Further reductions
in the maximum amount of $250,000 each will occur on June 30, 2002, January 31,
2003, and on March 31, 2003. As of March 31, 2002, we had $115,000 available
under the revolving line of credit. Our availability under the revolving line of
credit may be further reduced if our monthly collections or operating income
falls below certain levels.
Our liquidity and capital resources remain limited and this may constrain
our ability to operate and grow our business. Our requirements for additional
financing in 2002 will depend upon the growth of our two business segments. In a
low growth scenario (for example, net site growth of 100 sites in the NTN
Network and a number of commercial trials of the Buzztime initiative),
utilization of our existing line of credit may be sufficient to cover our
financing requirements. If we face more rapid growth in either or both segments,
then we will require additional financing in 2002. If we are unsuccessful in
obtaining financing, some initiatives relating to those higher growth
opportunities may have to be curtailed or deferred. We may not be able to obtain
additional financing on terms favorable to us or at all.
We are also considering adding to our product line certain other wireless
applications that are relevant to the hospitality industry. We may add these
incremental hospitality products through reseller arrangements or through
acquisition. Our limited capital resources may prevent us from making such an
acquisition on a cash basis.
We expect the level of expenditures in Buzztime to rise over the remainder
of 2002 as we continue in the testing phase. However, subject to any unexpected
changes in our business that may occur as a result of a continued economic
slowdown, and unless we incur unanticipated expenses, we believe we will
continue generating adequate cash from the operation of the NTN Network which,
when combined with cash resources on hand and our line of credit, will allow us
to continue to fund Buzztime at least through December 2002 at current
operational levels assuming that Buzztime remains in the testing phase with
certain cable operators for the remainder of the year
If current BUZZTIME Channel sales efforts to Major Cable System Operators
(defined as the seven largest cable system operators in the United States)
succeed as planned and we enter into field trials with those cable operators,
management intends to aggressively increase Buzztime sales and marketing efforts
late in the year to more quickly advance its distribution within the U.S.
market, which will require additional capital. We believe that Buzztime's
success in entering into those field trials with Major Cable Operators may
enhance our ability to raise additional capital at favorable pricing although
there can be no assurance that will happen.
Based upon current sales targets of achieving commercial deployment of the
BUZZTIME Channel with Major Cable System Operators, we anticipate that Buzztime
will require an additional $1,000,000 in financing per quarter commencing with
the first quarter of 2003. The timing of this capital requirement is largely
dependent on the timing of the commercial deployment. The sooner we achieve
commercial deployment, the sooner this capital requirement would arise. If
additional financing is not obtained, our accelerated growth plans may have to
be deferred. If cash generated by the NTN Network is insufficient to cover
Buzztime's expenses and if additional financing for Buzztime is not obtained and
then we cannot reduce cash expenditures at Buzztime to a sufficient level, we
may not be able to sustain the operations of Buzztime beyond December 2002.
Scientific-Atlanta (S-A) has an option to exchange the S-A shares of Buzztime's
preferred stock into shares of NTN common stock if Buzztime does not obtain
additional equity financing of $2,000,000 before June 8, 2002. We do not intend
to raise capital at the Buzztime subsidiary level by that date.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to currency exchange rates, stock market
fluctuations, and interest rates. As of March 31, 2002, we owned common stock of
an Australian company that is subject to market risk. At March 31, 2002, the
carrying value of this investment was $276,000, which is net of a $541,000
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, 2002, a hypothetical
10% decline in the value of the Australian dollar would result in a reduction of
$28,000 in the carrying value of the investment.
We have outstanding convertible notes, which bear interest at 8% per annum
and line of credit borrowings, which bear interest at a rate equal to the higher
of the prime rate plus 1.5% per annum, or 9% per annum. At March 31, 2002, a
hypothetical one-percentage point increase in the prime rate would result in an
increase of $26,000 in annual interest expense.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ROBIN FERNHOFF, ET. AL
On March 19, 2002, a shareholder class action and derivative complaint was
filed in San Diego County Superior Court for the State of California by Robin
Fernhoff on behalf of himself and all of our shareholders naming Robert M.
Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H. Arlen,
Vincent A. Carrino, Robert B. Clasen, Michael K. Fleming and James B. Frakes as
defendants with NTN Communications as nominal defendant. The Fernhoff action
alleges breach of fiduciary duty, abuse of control and gross mismanagement by
defendants in connection with NTN's rejection of a proposal by a corporation to
purchase all of the outstanding shares of our common stock, as announced
publicly on February 21, 2002. Plaintiffs request the court issue an injunction
requiring defendants to fully and fairly negotiate the highest possible offer to
purchase NTN, award attorney's fees, and grant such other relief as the court
may find just and proper. We believe this action is also without merit and we
intend to vigorously contest this action.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 4, 2002, we issued approximately 50,000 shares of common stock,
to the holders of the outstanding 8% senior convertible notes, in a private
transaction in payment of interest of approximately $40,000 on such notes.
On January 22, 2002, we issued approximately 18,000 shares of treasury stock
in lieu of a cash payment of approximately $16,000 for board of directors'
compensation.
On February 6, 2002, March 7, 2002, and March 8, 2002, we issued a warrant
to purchase 20,000 shares of common stock to each of three newly appointed
members of the NTN Network's advisory board. Each warrant has an exercise price
ranging from $0.77 to $0.85 per share and are exercisable until February 5, 2005
through March 7, 2005
Each offering and transaction was made without registration under the
Securities Act of 1933, as amended (the "Act") in reliance upon the exemption
from registration afforded by Section 4(2) of the Act and Rule 506 of Regulation
D promulgated thereunder.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Fifth Amendment to Loan and Security Agreement, dated March 25,
2002, entered into by and among Coast Business Credit, a division of
Southern Pacific Bank, NTN Communications, Inc. and Buzztime
Entertainment, Inc.
(b) Reports on Form 8-K
On March 12, 2002, we filed a Current Report on Form 8-K (event date March 6,
2002) to report under Item 5 (other events).
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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: April 26, 2002 By: /S/ JAMES FRAKES
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James Frakes
Authorized Signatory and Chief
Financial Officer
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