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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1103425
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5966 LA PLACE COURT
CARLSBAD, CALIFORNIA 92008
(Address of Principal Executive (Zip Code)
Offices)
(760) 438-7400
(Registrant's telephone number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.005 par value American Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-12). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of
the Registrant as of June 28, 2002, computed by reference to the closing sale
price of the common stock on the American Stock Exchange on June 28, 2002, was
approximately $33,429,060. Shares of common stock held by each executive officer
and director and by each person who owns 5% or more of the outstanding common
stock have been excluded in that such persons may be deemed to be affiliates.
The determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 28, 2003, Registrant had 43,040,139 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business............................................. 1
2. Properties........................................... 14
3. Legal Proceedings.................................... 15
4. Submission of Matters to a Vote of Security Holders.. 16
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 16
6. Selected Financial Data.............................. 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation................... 17
7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 34
8. Consolidated Financial Statements and Supplementary
Data................................................. 34
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 34
PART III
10. Directors and Executive Officers of the Registrant... 35
11. Executive Compensation............................... 37
12. Security Ownership of Certain Beneficial Owners and
Management........................................... 39
13. Certain Relationships and Related Transactions....... 41
14. Controls and Procedures.............................. 41
PART IV
15. Exhibits, Consolidated Financial Statement Schedule,
and Reports on Form 8-K.............................. 42
Index to Consolidated Financial Statements and
Schedule............................................. F-1
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE
FORWARD-LOOKING STATEMENTS REFLECT FUTURE EVENTS, RESULTS, PERFORMANCE,
PROSPECTS AND OPPORTUNITIES, INCLUDING STATEMENTS RELATED TO OUR STRATEGIC
PLANS, CAPITAL EXPENDITURES, INDUSTRY TRENDS AND FINANCIAL POSITION OF NTN
COMMUNICATIONS, INC. AND ITS SUBSIDIARIES. FORWARD-LOOKING STATEMENTS ARE BASED
ON INFORMATION CURRENTLY AVAILABLE TO US AND OUR CURRENT EXPECTATIONS,
ESTIMATES, FORECASTS, AND PROJECTIONS ABOUT THE INDUSTRIES IN WHICH WE OPERATE
AND THE BELIEFS AND ASSUMPTIONS OF MANAGEMENT. WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "COULD," "TARGETS," "PROJECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," "MAY," "WILL," "WOULD," VARIATIONS OF SUCH WORDS, AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS AND ARE SUBJECT TO RISKS,
UNCERTAINTIES, AND ASSUMPTIONS THAT MAY BE DIFFICULT TO PREDICT. ACTUAL RESULTS
MAY DIFFER MATERIALLY AND ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS REPORT UNDER THE SECTION
ENTITLED "RISK FACTORS," AND IN OTHER REPORTS WE FILE WITH THE SECURITIES AND
EXCHANGE COMMISSION FROM TIME TO TIME. WE UNDERTAKE NO OBLIGATION TO REVISE OR
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENT FOR ANY REASON.
PART I
ITEM 1. BUSINESS
GENERAL
NTN Communications, Inc., based in Carlsbad, California, develops and
distributes interactive entertainment and a suite of products to manage the
customer experience. We own and operate the largest "out-of-home" interactive
consumer marketing television network in North America.
We operate our businesses principally through two operating segments: the
NTN Network(R) division and our Buzztime Entertainment, Inc. (TM) subsidiary
("Buzztime"). The NTN Network division provides entertainment services and
on-site communications products to the hospitality industry. The entertainment
services represent a wide variety of popular interactive games, advertisements
and informational programming delivered daily to consumers in 3,171 restaurants,
sports bars and taverns throughout the United States, as well hotels, cruise
ships and active adult communities. The division's on-site communications
products--primarily guest and server paging products--are distributed to another
2,800 locations in the United States. Buzztime operates our live broadcast
studio, produces our trivia and live sports "play-along" content to both the NTN
Network and new consumer interactive platforms, and is developing the
Buzztime(R) interactive television channel.
Unless otherwise indicated, references herein to "NTN," "we," "us" and
"our" include NTN Communications, Inc. and its consolidated subsidiaries.
INDUSTRY SEGMENTS
Financial information for each of our business segments for each of the
last three fiscal years is contained in the Notes to the Consolidated Financial
Statements included in Item 15 of this Form 10-K.
BUSINESS STRATEGY
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 and entertainment offerings to the hospitality industry through
the NTN Network division. Second, as a leading developer and distributor of
interactive entertainment for the in-home market through interactive television
and wireless devices via Buzztime. To accomplish our objectives we are pursuing
strategies to:
o Increase the number of hospitality locations serviced by the NTN
Network and our wholly owned subsidiary NTN Wireless Communications,
Inc. ("NTN Wireless"). 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.
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o Develop and distribute the Buzztime trivia channel to cable and
satellite operators with the intent to become the first content
provider to deploy an interactive television entertainment channel. We
have adapted or are planning to adapt our interactive trivia game show
content and technology to the leading interactive television platforms,
to gain market share by partnering with major industry manufacturers
and distributors, and to utilize our broadcast interactive television
studio as a development and production facility to develop and deepen
relationships with media-related companies. We also plan to continue to
support our efforts in early-stage wireless entertainment through
partnerships with leading wireless distributors and carriers.
o Increase revenues through current and new revenue sources. The NTN
Network receives service revenue from subscribing out-of-home locations
as well as third-party advertising revenue and production services and
royalty revenue from our Canadian licensee. We expect to continue
generating revenue through these sources and, by growing our customer
base, we also expect to see revenue growth in service and advertising
revenue. Similarly, as Buzztime gains distribution with cable
television operators, we expect to increase revenue through three
sources: license fees paid by local cable television operators; fees
paid by interactive television home subscribers for premium services or
pay-per-play transactions; and advertising revenue. Both business units
may also explore market opportunities to acquire complimentary
businesses to increase revenues and earnings. An example of a recent
acquisition is NTN Wireless which generated approximately $2.4 million
in revenues in 2002 through sales of restaurant pagers since April
2002. NTN Wireless is part of our NTN Network business segment.
We have incurred consolidated net losses in the last five years and expect
to incur consolidated losses through at least the end of 2003. Recent losses
have been primarily as a result of significant expenditures related to Buzztime
for which no significant revenues have yet been generated.
THE NTN NETWORK
GENERAL
The NTN Network division ("the Division") is one of our two primary
business units. We provide consumer-oriented interactive communications and
entertainment products to the out-of-home hospitality industry including
restaurants, sports bars, taverns, cruise ships, hotels and active adult
communities who are looking for a competitive point-of-difference to attract and
retain customers.
We have maintained a unique and preemptive position in the hospitality
industry for over 18 years as a platform for providing interactive trivia and
play-along sports programming. We believe that strong growth opportunities exist
by continuing to leverage our preeminent entertainment product and our installed
base of 3,171 United States venues to include other interactive communications
and entertainment services that effectively increase both breadth and depth of
their business in this segment.
We have adopted the mission to become the leader in providing distributed
network systems comprised of INTERACTIVE Communication and ENTERTAINMENT (ICE)
services to the out-of-home market. As such, the division is evolving from one
that provides a single product--interactive entertainment located primarily in
the bar area--to a full-service provider of "front of the house" products and
services across the establishment. These products and services include wireless
commercial communication services, additional entertainment services and
devices, interactive training and an expanded set of member services--including
emerging stored value gift and loyalty card programs. Providing this expanded
array of products will allow us to offer additional value to and grow revenues
in our primary markets, as well as to expand the market to include hospitality
venues such as fine dining, QSR (Quick Serve Restaurants, e.g. fast food) and
family dining formats that are beyond our traditional customer base of casual
dining, sports bars and taverns.
The division's operations can be divided into five general areas:
NTN NETWORK
Ninety percent of our current revenues come from our operation of the NTN
Network (the "Network" or the "NTN Network"), the only out-of-home interactive
television network in the world. We receive service fees from hospitality venues
that receive our broadcast of the Network's interactive trivia quiz show and
play-along sports programming. We broadcast through our Network engaging,
interactive game content to the hospitality locations where patrons use our
wireless interactive game devices to interact with content displayed on
television screens. The Network enables multi-player participation in
hospitality locations throughout North America as part of local, regional,
national or international competitions supported with valuable prizing and
recognition. The locations pay us an average of $527 per month to receive our
game broadcast in conjunction with the use of our equipment, and their
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consumers play the games free of charge. Objective data has demonstrated that
this combination of entertainment and recognition creates a sense of community
among players, which prompts them to visit the venues more frequently, stay
longer, spend more and refer others to Network locations.
NTN WIRELESS COMMUNICATIONS
NTN Wireless earns revenue from the sale of wireless paging products to
restaurants and other hospitality locations. These products are given to
customers to let them know when their table is ready as well as to restaurant
staff to alert them to certain issues, such as when hot food is ready to be
served.
NTN MEMBER SERVICES
NTN Member Services receives revenue from stored value gift and loyalty
card programs. Loyalty card programs are becoming increasingly popular among
restaurants and other hospitality establishments as they provide incentives for
customers to return more frequently.
ADVERTISING SALES
We provide advertising and marketing communications services to companies
seeking to reach the over 6 million unique out-of-home consumers each month that
visit the Network's over 3,100 domestic installations. Via an average of four
dedicated television screens per location, we provide advertisers with a
targeted, cost-effective way to communicate their brand message, obtain consumer
feedback and stimulate product trial.
INTERNATIONAL LICENSING
We receive licensing royalty revenue from NTN Interactive Network, a
division of Chell Group Corporation, our Canadian licensee, which maintained
approximately 500 sites as of December 2002. We broadcast interactive
programming directly to the Canadian sites. NTN Interactive Network is
responsible for all selling, marketing, promotional and technical service costs
and activities. We intend to begin licensing our products to other international
markets.
We also have granted an exclusive license to eBet Limited, an Australian
company, to distribute our games in commercial establishments and other public
places throughout Australia and New Zealand via eBet Limited's own licensed
network. Our Australian licensee currently broadcasts to approximately 20
hospitality locations.
PRINCIPAL PRODUCTS AND SERVICES
THE NTN NETWORK
THE PRODUCT
The Network broadcasts a wide variety of entertaining and popular
interactive play-along sports and trivia games to consumers in 3,171 United
States venues. Patrons play an estimated 17 million games per month, using our
wireless hand-held game devices, called Playmakers, that allow them to compete
locally and nationally with real-time scoring. There are approximately 50,000
Playmakers deployed across the Network. Also, many additional players
participate with the primary player as they watch the game--research indicates
that on average, 3.4 additional patrons view the game for every Playmaker in
use. No other company has created such broad hospitality industry relationships
or captured such a large and diverse out-of-home audience. The strong demand for
our Network is supported by third-party research indicating players stay longer,
spend more, return more frequently and refer others to an NTN Network
establishment (source: Actionable Marketing Research, May 2000).
We target national and regional hospitality chains as well as local
independent venues that are looking for a competitive point-of-difference to
attract and retain customers. Through the broadcast of engaging interactive
content, the Network enables single- and multi-player participation as part of
local, regional, national or international competitions supported with prizing
and recognition. This combination of entertainment and recognition creates
community among players who visit the venues more frequently, stay longer,
spend more and refer others (source: Actionable Marketing Research, May 2000).
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Unlike coin-operated games, live entertainment and themed events which are
either single-player based, expensive and/or require effort to coordinate and
conduct, the Network offers a turnkey solution of unique multi-player,
multi-venue entertainment requiring virtually no employee involvement at a
fraction of the comparable cost.
Our customers include leading companies in the casual-dining restaurant
segment such as TGIFriday's, Bennigan's Irish Grill, Applebee's, Damon's Grill
and Buffalo Wild Wings, as well as over 2,700 domestic independent locations.
The Network is also the only interactive television network providing
advertising and other marketing communications services to companies seeking to
reach the over 6 million unique out-of-home consumers each month in 3,171 NTN
domestic installations, who are looking for a targeted, cost-effective way to
communicate their brand message, obtain consumer feedback and stimulate product
trial.
Unlike current out-of-home advertising vehicles which are either static or
lack multiple consumer exposure, we provide, as part of the trivia quiz show and
play-along sports broadcasts, an end-to-end marketing communications solution
comprised of full-motion video commercials, promotional messages, Advergaming
contextual opportunities and real-time interactive research capabilities at
costs well below current media and research alternatives.
Historically, our advertising clients have come primarily from the beer,
wine and spirits industries, reflecting the natural appeal of the Network as a
place-based advertising medium. However, beginning in 2001, we began to take
steps to broaden the client base beyond traditional alcoholic beverage companies
by securing the Dodge Division of Daimler-Chrysler to support the launch of the
new Ram Truck, as well as University Games, one of the top five board games
companies, to support the introduction of one of their more popular board games.
We also receive licensing royalty revenue from NTN Interactive Network
Inc., our Canadian licensee, which maintained 504 sites as of December 31, 2002.
We broadcast interactive programming directly to the Canadian sites. NTN
Interactive Network is responsible for all selling, marketing, promotional and
technical service costs and activities.
VALUE PROPOSITION
The Network has established itself as a cost-effective means of generating
traffic, loyalty and return on investment based on the ability to positively
impact venue revenue because players stay longer (39% compared to non-players);
spend more (47% more than non-players); return more often (72% more than
non-players); and demonstrate positive word-of-mouth (90% have or will recommend
an NTN subscriber venue to a friend) (source: Actionable Marketing Research, May
2000).
By distributing turnkey promotional and marketing support to the venues, we
provide a competitive advantage to subscriber venues, as well as a
cost-effective entertainment option when compared to traditional
alternatives--live entertainment, karaoke and food and drink discounts.
We provide eight 15-second advertising units per hour to the venue, these
units may become a revenue and profit center to the venue by cross-promoting
internal programs and services, or re-selling to local area merchants to offset
network subscription costs and/or generate profit.
Our proprietary interactive polling service, OMNIPoll(TM), may be used in
conjunction with network programming and our wireless Playmaker units to
regularly deliver custom player feedback on food, service and promotions,
allowing the venue to gauge customer satisfaction levels and make adjustments if
necessary.
NTN Network subscribers pay us an average of $527 per month to use our
interactive technology, and to receive our game broadcast. We also charge an
additional subscription fee of $750 per year for our popular QB1
Predict-The-Play football game played in conjunction with live, televised
professional and college football games. NTN Network venues enter into one- and
two-year broadcast agreements, with the average life of an NTN Network
site/venue being 39 months.
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TECHNOLOGY
We first operated a DOS-based out-of-home interactive Network in 1982.
Beginning in 1999, we invested $9 million in hardware and installation upgrades
to migrate the Network from a DOS-based platform to a Windows platform, called
Digital Interactive Television Network (DITV). DITV has eliminated many of the
Network's previous technology roadblocks. It uses the latest Windows-based
development tools and multimedia capabilities, resulting in better performance
and reliability; enhanced, high-resolution graphics; and full-motion video. This
makes the broadcast more appealing to advertisers as ads appear as TV
commercials rather than static billboards--DITV technology will now allow
advertisers to use existing video footage in their ads on the Network. We intend
to discontinue the DOS-based Network in December 2004.
Our DITV network requires a satellite dish and a PC server configured with
a special communications card, which is necessary for satellite data reception.
Each of our venue systems also has a base station for transmission and reception
with our wireless Playmaker devices. Our introduction of DITV enhanced the
viewing and gaming aspects of our system and upgraded the software platform to a
better operating system, but did not increase the speed or bandwidth of
transmission. The transmission system remains satellite based. Our conversion to
DITV is virtually complete--as of December 31, 2002, approximately 98% of our
3,171 domestic locations utilize the DITV system.
END USER DEVICES
DITV also uses a new 900 MHz wireless Playmaker versus the DOS system's 49
MHz Playmaker. Our new system does not require the "wiring" of the
establishment; the Playmakers have no breakable exterior components, and can
operate at power output levels that were restrained by the 49 MHz DOS system. As
a result, interference and Playmaker failure has been significantly reduced.
Our wireless hand-held Playmaker device features a 900 MHz transceiver, a
monochrome LCD display and sealed keypad. Our Playmakers are a rugged
combination of hardware and firmware optimized for hospitality environments.
We believe that the new DITV system is sufficient to carry us well into the
future from a performance and technical requirements standpoint.
CONTENT SERVICES
The NTN Network licenses game content (both trivia and play-along sports)
from Buzztime. Buzztime creates the game content that we broadcast to NTN
Network hospitality locations. Each hospitality location is individually
addressable, allowing us to send specific content to selected sites. Hospitality
locations throughout the United States receive our content, in the form of
broadcast programming, 15 hours each day, 365 days each year.
GAME CONTENT & PROMOTION
Our primary product is the broadcast of a variety of sports and interactive
trivia games that entertain and challenge a player's skill and knowledge while
creating significant customer loyalty.
A core component of our content is QB1, a live, play-along football game in
which players predict the outcome of each play broadcast within professional and
collegiate football games. We have held a license with the NFL for 18 years in
conjunction with QB1.
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We offer a suite of Playmaker only games. This suite of games is independent
of the NTN Network and may be played directly on our wireless Playmakers.
Players access the games by logging onto a Playmaker and following the
instructions on the Playmaker screen.
Playmaker Games
Acey Duecey.......... Two cards are dealt face up. Players bet that the
third card will fall between the previous two
Crystal Ball......... Ask the Crystal Ball a question and receive your answer
Playmaker Poker...... Compete against the house in a game of jacks-or-better
poker
Shark Attack......... Just like hangman, but with an oceanic twist
We provide premium trivia competitions during evening hours when the
venues, particularly restaurants and taverns, tend to be busiest. During these
programs, each venue system simultaneously displays selected trivia questions on
television monitors. Participants use Playmakers to enter their answers. Answers
are collected, transmitted and tabulated. We display the score of each
participant on the television monitors in our customer venues, along with
national, regional and local rankings, as applicable. Players compete for prizes
and merchandise in their local venues, as well as on a regional and national
scale. In addition to game interaction, other consumer features available on the
Playmaker include real-time sports scores transmitted directly to the units and
player chat.
COMPETITION
Currently, we have no direct competitors to the Network that furnish live,
multi-player interactive entertainment in a similar scope and nature. While we
have no direct competitors, we do compete for total entertainment dollars in the
marketplace. Other forms of entertainment provided in public venues include
music-based systems, live entertainment, cable and pay-per-view programming,
coin-operated single-player games/amusements and traffic-building promotions
like happy hour specials and buffets. However, none of the alternatives provide
the combination of proven, live sports and trivia entertainment broadcast 15
hours per day, 365 days per year, and most require some involvement with the
venue staff to be successful, which conflicts with the primary responsibility of
the staff.
NTN WIRELESS COMMUNICATIONS
THE PRODUCT
To expand presence in the hospitality industry, we recently completed the
acquisitions of the assets of each of ZOOM Communications and Hysen
Technologies, manufacturers and sellers of on-site wireless paging products.
On-site paging systems consist of guest paging systems designed to improve the
wait time for hospitality guests and server paging systems designed to alert
servers when prepared food is ready to be served. Our guest paging system,
GUESTCALL(TM), is comprised of a tabletop transmitter and between 30-70
individual pagers that are distributed to guests upon arrival. The server paging
system, ServerCall(TM), is made up of transmitter located in the kitchen area,
and between 12-36 individual pagers for the wait staff. Both systems may
vibrate, flash or both to indicate either the table or food are ready.
VALUE PROPOSITION
On-site paging systems are designed to improve table turnover and
throughput for a venue's operations. The sooner a guest is seated, and the
quicker prepared food is served, the faster a table can be effectively "turned"
without negatively impacting the customer experience. If a typical restaurant
can add just three parties of four during each waiting shift (defined as
Thursday, Friday and Saturday nights), with a $17.00 average per person check,
the annual incremental gross revenue to the venue over a three-year period would
be $121,000.
TECHNOLOGY
Onsite paging systems consist of a small tabletop transmitter or PC-based
software and transmitter communicating with a group of pager units in either
vibration flashing LED, or alpha-numeric combinations. These systems are defined
as "closed systems," meaning they work within a limited area for a specific
purpose. The transmitter and pagers are set to the same frequency, which
typically carries a range of between one-quarter and one-half mile. Most early
paging systems operated used either a 27 or 45 MHz (AM) frequency, which
demonstrated limited range and reliability. Recently, paging companies adopted a
newer standard, POGSAG, which operates a UHF frequency range of between 450-470
MHz. This higher frequency allows for wider range of transmission, as well as
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the ability to provide signal transmission in venue environments characterized
by multi-floors and other construction obstacles like concrete walls.
COMPETITION
We are not aware of any audited industry figures for the hospitality paging
segment. Within the industry, it is estimated that JTech, based in Boca Raton,
Florida, holds approximately 82% of the hospitality paging market, JTech markets
guest paging and server paging systems, and has recently expanded their product
mix to include other operations-based products that integrate with a venue's POS
system for check management/paging and electronic guest survey cards. Long Range
Systems of Dallas, Texas, also markets products similar to ours and those of
Jtech, including guest and server paging products and electronic guest survey
card systems.
NTN MEMBER SERVICES
THE PRODUCT
With the emergence of stored-value gift and loyalty cards, we see strong
synergies in linking these products to both current and future member services
programs. Current estimates indicate that stored-value gift cards will represent
2.5 billion transactions and 80% of the gift certificate market by 2005 (for a
total of 850 million cards in circulation).
We recently obtained a stored-value gift loyalty card product line as part
of the ZOOM asset acquisition. We believe key opportunities exist on two fronts.
First, by linking this program with our 1.1 million Player's Plus loyal player
database to combine frequent purchases with game play to offer a unique,
comprehensive player loyalty program. Recent research indicates that our
Player's Plus members prefer discounts on food and beverage over other
alternatives; combining a frequent diner program with a frequent player program
as part of an expanded Player's Plus service enables us to market a meaningful
loyalty program to our customer base. In addition, the cost of designing and
implementing a loyalty program has been prohibitive to most small independent
venues. By offering a combined gift and loyalty program to the approximately
2,400 independent NTN Network venues, we are in a position to provide a unique
service to this constituent that would otherwise not have the financial
wherewithal to develop on their own.
VALUE PROPOSITION
Stored-value gift cards represent a significant benefit to hospitality
venues. By allowing guests to purchase cards as gift certificates, or use them
as part of a site/chain-specific loyalty program, venues can measure the success
of these programs as well as use them for marketing purposes. A recent study
indicated that most consumers consider the gift cards a discount to anticipated
spending and on average, spend 40% more than the value. In addition, the cards
represent a benefit to current paper gift certificates for tracking and
accounting purposes as well as ensuring the total amount is spent at the venue
rather than the current paper process of making change for short purchases.
From a loyalty card standpoint, stored-value services provide strong guest
retention to the venue. With food costs averaging 30%, a loyalty program
providing food and beverage as incentives become a cost-effective program for
venues.
TECHNOLOGY
The third party technology to support this program is established,
requiring either an integrated card reader installed via phone line, printer or
integration into the venue's existing POS system. In the case of the former,
costs and interface is established; the latter will require a software interface
written for the specific POS system. Currently, we have an interface program
written for common Micros systems, a leading POS provider, and will develop and
bill for other systems on a project basis. The cards are standard stored-value
magnetic strip cards produced in association with Datamark, our system provider.
COMPETITION
The gift and loyalty card market can be broadly divided between turnkey
service providers and banking industry providers. We fall under the first
category providing customized solutions, which include program set-up, hardware,
plastic cards, data management and reports.
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We may compete with such competitors as GiveX with offices in Toronto,
Chicago, San Diego, and the Bahamas, claims alliances with over twenty point of
sale (POS) companies across North America.
POS companies also offer gift and loyalty card programs that interface
directly into their own proprietary POS software. Digital Dining (Menusoft) and
Aloha Technologies are two such companies. Digital Dining was first introduced
to the United States (from Australia) in 1984 and boasts over 20,000
installations. Aloha Technologies, based in Dallas, Texas, offers gift and
loyalty programs as additional modules that tie into their POS software
We may also compete with banks as they also have the capability to provide
gift and loyalty card services in conjunction with their credit card processing
services.
Our strategic point-of-difference lies in our ability to market the program
over the Network in each venue, as well as incorporate the program into the
current Players Plus frequent player program--both of which are unique to us.
SALES & DISTRIBUTION
Currently we sell all products and services through direct sales employees
located in major metropolitan markets, with independent dealers and
representatives in smaller metro markets and rural areas.
The sales cycle varies by customer type, requiring as little as one week
for independent customers and up to 18 months for national chain accounts. The
goal of our marketing and promotion efforts is to generate qualified leads for a
follow-up field presentation. During the presentation, our sales representative
determines the prospect's need and features possible solutions through the
benefits of each product or service presented, including an interactive
demonstration, detailed return on investment calculations, local advertising
opportunities made available through the Network and third party research
results outlining player purchase behavior and success stories from existing NTN
Network subscribers. Occasionally, demonstration units are provided to validate
the system, with the intention to finalize the sale upon completion of the
trial.
MARKETING AND PROMOTION
We market our services to the industry primarily through advertising in
national trade periodicals, national and regional trade shows, telemarketing,
direct mail and direct contact through our field sales and marketing
representatives. We organize and track all sales prospects through our
distributed database software.
We have found the most effective trade periodicals for our marketing
purposes to be Nation's Restaurant News, Nightclub & Bar and Military
Hospitality. The key national and regional trade shows to us are the National
Restaurant Association Show, Nightclub & Bar Expo, FS/Tech, WestEx, Northeast
Foodservice, MMR and MUFSO. In addition, we participate in most of the national
chain conference shows, including those for TGIFriday's, BWW, Applebee's,
Houlihan's, Jillian's, Famous Sam's and Damon's. Our field representatives also
participate in a substantial number of smaller regional shows.
Another core element to our marketing is our Players Plus frequent player
program. The NTN Network's Players Plus frequent player club, numbering over 1.1
million current membership records, offers advertisers an effective tool for
market research and direct marketing. Players Plus members join by entering
their name, address, zip code and identification number into a Playmaker, which
is then captured at our broadcast center. Members earn points each time they
play. Points earned by Players Plus members have no cash or redemption value.
Sponsors are capable of receiving feedback through interaction with customers in
the form of customer surveys on the NTN Network or via email.
Our research indicates that players place a high value on recognition for
achievement and game play prowess. Achieving higher point levels earns the
Players Plus member a higher status within the NTN Network rankings. We
broadcast the leading player names and rankings within their home location and
provide network-wide national exposure as well, which supports higher player
satisfaction levels and repeat game play. Finally, we use our installed base of
over 12,000 television screens to cross-sell other site/venue services,
including wireless paging systems and member services such as gift and loyalty
card programs.
8
RAW MATERIALS
With the exception of our Playmakers, each system installed at a
hospitality location is assembled from off-the-shelf components available from a
variety of sources. We are responsible for the installation and maintenance of
each system. Our current Playmaker is a hand-held, 900-megahertz radio frequency
device used to enter choices and selections by players and is manufactured by
Climax Technology, Ltd., a non-affiliated manufacturer in Taiwan. Before
conversion to the DITV network, we had previously experienced problems in the
performance of our 49-megahertz Playmaker device. In an effort to address these
equipment function problems, we developed and introduced the current
900-megahertz Playmaker. The device has proven more reliable than the previous
Playmaker.
Our NTN Wireless products are manufactured based on our specifications
under contract through a third party manufacturing company located in Seoul,
Korea. The contract expires in April 5, 2007. We believe the quality provided by
this manufacturer is superior to that provided by manufacturers located on
mainland China, and has become a competitive advantage.
While sufficient alternative supply chain capabilities exist, we would face
business interruption if we were to lose the existing manufacturer, and there
are no assurances that we could recover lost business in a timely manner.
SEASONALITY
Our business has some seasonal elements. While we bill revenue monthly as
service is provided to customers, three factors increase our revenues in the
second half of the year over the first half. First, sales to new locations have
traditionally been higher in the summer and early fall months compared to the
rest of the year. Second, existing customers pay an incremental amount for our
QB1 Predict the Play football game and order additional Playmakers to meet their
patrons' demands to play this game in late summer and early fall. Third, we
typically gain additional advertising customers who want to participate in our
football-oriented broadcasts.
The hospitality industry has historically experienced a relatively high
business failure rate. That factor combined with change in ownership and
non-renewal of contracts leads us to lose a certain amount of our customers each
year. We refer to this collective loss of customers as "churn." Our historical
churn experience has also been seasonal in that the percentage of churn has been
highest following the completion of the professional football season in
February, although churn occurs in all months. During our operating history,
approximately 18% to 30% of the existing NTN Network customers at the beginning
of a year have churned by the end of that year. We believe the introduction of
the new digital network and 900-megahertz Playmakers have reduced the churn
rate. The churn rate was 19% for 2002 and 18% for 2001, which was the lowest in
our history.
SIGNIFICANT CUSTOMERS
Our customers are diverse and varied in size as well as location. We are
not dependent on any one customer. We do not have any individual customer,
including chain locations, who accounted for 10% or more of our consolidated
revenues in 2002, 2001 or 2000.
BACKLOG
We historically have not had a significant backlog at any time because we
normally can deliver and install new systems at hospitality locations within the
delivery schedule requested by customers (generally, within two to three weeks).
Shipments of NTN Wireless products occur in most cases within 14 days of receipt
of order.
BUZZTIME ENTERTAINMENT, INC.
GENERAL
Buzztime, our wholly owned subsidiary, was incorporated in the state of
Delaware in December 1999 with the objective of creating new revenue from
distributing 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 the Buzztime interactive
trivia channel for cable television and satellite television services. We manage
one of 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.
9
We launched the Buzztime trivia channel in June 2002 in York, Pennsylvania
on Susquehana Cable ("SusCom") system. We believe this was the first deployment
of a real-time, two-way cable channel in the U.S. that operated on commercially
deployed digital set-top boxes. In addition, Buzztime remains the primary
content provider to the NTN Network and currently works with leading companies
such as Scientific-Atlanta, Inc., The National Football League (NFL), Liberate
Technologies, Microsoft Corporation's MSNTV and others to bring consumers
real-time interactive entertainment.
PRINCIPAL PRODUCTS/SERVICES AND DISTRIBUTION
There are three categories of Buzztime content: live, interactive trivia
game shows which are broadcast on the hour, quarter hour or half hour; real-time
predictive TV play-along sports games where viewers predict certain strategic
events while viewing live sports television broadcasts; and live viewer polls
which can be broadcast in conjunction with a live televised event.
Prime Time Games
- ----------------
Passport(TM)..................... Travel trivia
Playback(TM)..................... Music trivia
Showdown(R)...................... Advanced trivia challenge
SIX(TM).......................... General trivia
Spotlight(TM).................... Entertainment trivia
Sports IQ(TM).................... Sports Trivia
Sports Trivia Challenge(R)....... Sports Trivia
Featured Games
- --------------
Abused News(R)................... Humorous trivia based on recent news
Battle of the Sexes(TM).......... Gender based Trivia; created under license
from Imagination Entertainment Limited
BrainBuster(R)................... Difficult level general trivia
Get Reel(TM)..................... Movie trivia
Glory Daze(TM)................... 60s and 70s trivia
Jukebox(TM)...................... Music trivia
PasTimes(TM)..................... History trivia
Retroactive(TM).................. TV trivia from 50s - 70s
SciFiles(TM)..................... Science Fiction trivia
Speed(TM)........................ Fast paced general trivia
Topix(TM)........................ Theme based trivia
Triviaoke(R)..................... Music trivia
Tuned In(TM)..................... Television trivia
Regularly-Scheduled Programming
- -------------------------------
Appeteasers(TM).................. 15-minute general trivia
Countdown(R)..................... General trivia
Wipeout(TM)...................... General trivia
Selectable Games
- ----------------
Nightside(R)..................... Adult-oriented trivia
10
Predict-the-Play Games
QB1(R)........................... Interactive strategy game played in
conjunction with live telecasts of college
and professionalfootball
NTN Race Day..................... A predictive game combined with auto racing
trivia played in conjunction with stock
car races
Classics
- --------
Bingo............................ Interactive version of the classic game
INTERACTIVE TELEVISION
Buzztime entered into a multiyear development, licensing and marketing
agreement with Scientific-Atlanta in June 2001. The agreement calls for
Scientific-Atlanta to provide development and marketing resources to develop and
promote the Buzztime trivia channel specifically for their digital set-top
boxes. In return, we will pay to Scientific-Atlanta a portion of any licensing
revenue received from cable operators distributing the Buzztime trivia channel
during the first five years after launch of the service.
Our letter of intent with SusCom provides the Buzztime trivia channel for
their cable systems. The letter of intent calls for SusCom to distribute the
Buzztime channel to each of its digital subscribers and to pay us a monthly
license fee per subscriber after a limited free trial period.
MARKETING
Our current marketing efforts are concentrated on the cable television
industry to build awareness and distribution. Once the Buzztime trivia channel
has launched within cable and satellite systems, we will add consumer-marketing
efforts. Our intent is to take advantage of Buzztime's early market advantage by
securing trial agreements with as many large cable operators as possible. Once
each trial has successfully concluded, we intend to negotiate carriage and
licensing agreements with the cable operators. As distribution of the Buzztime
trivia channel increases, we will offer to sell premium and pay-to-play services
to the players and advertising and marketing opportunities to marketing
companies. Our business model is supported by strong market demand for
compelling content on emerging interactive television platforms and the proven
success of our content on existing platforms such as the NTN Network.
Key to revenue growth includes the integration of interactive television
enabling technology in the cable systems, adoption of interactive television
services in the home, penetration of Buzztime content into the cable operators
and the ability to charge either the player/subscriber or the cable operator for
receiving the Buzztime trivia channel. We expect to sell advertising under a
standard cable television model once the content is exposed to a critical mass
of interactive television viewers.
RAW MATERIALS
For media platforms such as cable television, wireless platforms and online
services, we distribute our programs to the recipients who maintain their own
receiving, translation and re-broadcasting equipment. Accordingly, we currently
have no raw materials or equipment needs for these customers beyond our own
back-end servers. Although it is not certain, it is likely that Buzztime's
application will require a single hardware server at each cable operator's head
end system.
COMPETITION
On a broad basis, the consumer has, and will continue to have, many options
in the in-home entertainment market from which to choose. Our interactive
television offering will compete for a share of total home entertainment time
and dollars against broadcast television, pay-per-view and other content offered
on cable and satellite television. We will also compete with other programming
available to consumers through the Internet and online services such as America
Online.
11
Cable television, in its various forms, provides consumers the opportunity
to make viewing selections from 30 to over 100 free and pay channels, thus
limiting the amount of time devoted to any particular channel. To those
consumers who enjoy watching game shows, the offerings are plentiful from the
networks and the cable programmers. Shows like Jeopardy and Wheel of Fortune,
and those offered 24 hours per day on cable interactive television such as Game
Show Network, are expected to continue to draw audiences. For the most part,
television is currently a passive medium, and does not offer the viewer the
opportunity to participate in its programming, and even less frequently does it
offer programming designed for interactive participation. Buzztime's offering
will differ from most television game programs in two major ways: it will allow
the home consumer to truly interact with the game shows via their remote control
and it will allow the home player to receive a "score" and be ranked both
locally and nationally, on screen for all players to see, in most games. We
believe this is a compelling characteristic that will draw players to the
Buzztime offering.
In-home online/Internet game sites will also compete with Buzztime's
interactive television channel. Dozens, if not hundreds, of these sites offer
either trivia game play or similarly styled social, non-violent game play such
as board or card games, games of chance, and strategy games. Internet and online
providers, such as America Online, can provide literally thousands of options
for content and entertainment. The number of Internet game sites competing for
consumers' attention has proliferated in recent years, and we expect the
competition to continue. We believe that our principal competitive factor is
that by offering our games almost solely in the cable space on digital set-top
boxes, Buzztime will attract and retain a large and broad player audience that
is different from the Internet/online audiences. Being on television in consumer
homes has long been considered the premium opportunity for game play, and we are
becoming one of the first game companies to be able to deliver content in that
medium. Because Internet and online services are either confined to a site's
subscriber base or found by only a subset of the game audience, interaction
among viewers is limited to the particular program as offered only on the
specific online service.
Finally, competition within the interactive television space comes from
three or four existing game providers that are also seeking to provide games on
digital set-top boxes, either as single play or networked games. These
competitors include Two-way TV, PlayJam (owned by OpenTV), Visiware, Pixel
Technologies and ZAQ. We believe we have several key advantages over these
companies. First, most of these competitors can only offer stand-alone single
player games on the set-tops that are currently deployed in North America.
Second, those that do allow competition with others have limited trivia content
or games in their offerings, and we believe trivia game shows will be one of the
most popular games for interactive television. Finally, none, that we are aware
of, has developed the level of a direct relationship with interactive television
middle-ware technology companies and set-top box manufacturer that gives the
product a technical endorsement.
LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
Our sports games make use of simultaneous telecasts of sporting events.
Where we have a license with a sporting league, we are also permitted to utilize
the trademarks and logos of the teams and the leagues in connection with the
playing of an interactive game.
We are party to a license agreement with the NFL. Our NFL agreement grants
us data broadcast rights to conduct interactive games on the NTN Network in
conjunction with the broadcast of NFL football games, for which we pay the NFL a
flat royalty independent of revenues billed to subscribers by the NTN Network in
connection with QB1 play. In November 2002, we renewed our license agreement
with the NFL through August 6, 2005.
We keep confidential as trade secrets the software used in the production
of our programs. The hardware used in our operations is virtually off-the-shelf,
except for the Playmakers. We own copyrights to all of our programs, formats and
software. In addition to the registration of the trademark for QB1, we have
either received, or have applied for, trademark protection for the names of our
other proprietary programming, to the extent that trademark protection is
available for them. Our intellectual property assets are important to our
business and, accordingly, we maintain a program directed to the protection of
our intellectual property assets.
In June 2001, we entered into a contribution agreement with Buzztime,
effective retroactively to January 1, 2001, whereby we contributed some of our
assets to Buzztime. The assets we contributed to Buzztime included the
interactive trivia game show libraries, the play along sports game libraries and
related technology and intangible assets.
Further, in June 2001, we entered into a licensing and marketing agreement
with Buzztime, effective retroactively to January 1, 2001, whereby Buzztime
granted the NTN Network an exclusive, royalty-free, perpetual license to the
game libraries and related technology for distribution to the commercial market
for group viewing audiences. Buzztime will continue to provide the NTN Network
with new game content created by Buzztime during the ordinary course of
business, as well as maintenance and upgrades to existing content and related
technologies, through 2006. This obligation is subject to a termination right at
the option of Buzztime, upon one year's prior notice to the NTN Network. In
addition, Buzztime will continue to produce Predict the Play applications for
the
12
NTN Network through 2008. Pursuant to the terms of the agreement, the NTN
Network will promote Buzztime during broadcasts of Buzztime programming on the
NTN Network as long as Buzztime continues to supply new game content for
distribution by the NTN Network. Buzztime shall promote the NTN Network to the
best of its ability in the consumer market, including interactive television and
wireless devices.
GOVERNMENT CONTRACTS
We provide our broadcast services through the NTN Network to a small number
of government agencies, usually military base recreation units. However, the
number of government customers is small compared to our overall customer base.
We provide our products and services to government agencies under contracts with
substantially the same terms and conditions as are in place with other
non-government customers.
RESEARCH AND DEVELOPMENT
During 2002, 2001 and 2000, we incurred approximately $12,000, $101,000,
and $430,000, respectively, related to research and development projects,
including projects performed by outside consultants. In 2002, our research and
development efforts were related to digital network, wireless and interactive
applications.
In 2002 and 2001, we recognized only payments to outside providers as
research and development expense and, as a result, any research and development
work by our employees fell into general and administrative expenses. Over the
past two years we have hired as full-time employees several of the consultants
who previously conducted research and development activities for us, and have
further added other employees to our information technology group. We believe
that our information technology department, in fact, has increased our true
overall level of development activity over the past year. We intend to continue
aggressive development on new technology enhancements including the adoption and
rollout of VSAT two-way broadband satellite technology, a more robust graphics
engine for the entertainment network, enhanced and improved hand-held Playmaker
devices and next generation wireless products. In future years, we will capture
the level of in-house development activity in order to provide a more accurate
representation of our research and development expenses.
There is no assurance that we will successfully complete current or planned
development projects or will do so within the prescribed time parameters and
budgets. There can be no assurance, furthermore, that a market will develop for
any product successfully developed.
ACQUISITIONS AND DIVESTITURES
On April 5, 2002, through a newly formed subsidiary, NTN Wireless, we
acquired the net assets of ZOOM Communications ("ZOOM"), a company in the
restaurant wireless paging industry, from Brandmakers, Inc. We entered into
separate 2-year employment contracts with each of ZOOM's two principals to join
NTN Wireless as Vice President of Operations and Vice President of Sales. Based
out of suburban Atlanta, Georgia, the office of NTN Wireless now serves as a
regional office and distribution center for us.
On May 17, 2002, we acquired the net assets of Hysen Technologies, Inc.
("Hysen"), another company in the hospitality paging industry. The assets
acquired included Hysen's existing inventory and intellectual property,
including Hysen's customer base. The assets of Hysen were combined into
Wireless.
Total consideration for the purchases was $422,000, which is comprised of
$320,000 in common stock and $102,000 for transaction costs. In addition to the
above consideration, we entered into, in connection with the ZOOM purchase, an
earn-out arrangement with the two principals. The earn-out will be paid to each
principal at 25% of the excess of which the adjusted gross profit exceeds
$900,000 for the twelve month period after the acquisition. For the period ended
December 31, 2002 the adjusted gross profit was approximately $780,000. This
earn out amount will be added to the purchase price of the ZOOM transaction.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Of the $521,000 of
acquired intangible assets, $231,000 was assigned to goodwill and is not subject
to amortization. We assigned $140,000 to employment agreements and will amortize
this amount over the estimated contractual life of 2 years. We assigned $150,000
to customer lists and will amortize this amount over the estimated useful life
of 3 years. We paid off the line of credit of $72,000 in full immediately after
the closing date of April 5, 2002.
13
ASSETS ACQUIRED AND LIABILITIES ASSUMED
ZOOM HYSEN TOTAL
COMMUNICATIONS TECHNOLOGIES ACQUISITIONS
--------------- ------------- -------------
Accounts receivable, net $ 121,000 $ -- $ 121,000
Inventory 48,000 41,000 89,000
Fixed assets 38,000 -- 38,000
Goodwill 216,000 15,000 231,000
Intangibles assets 280,000 10,000 290,000
--------------- ------------- -------------
Total assets acquired 703,000 66,000 769,000
--------------- ------------- -------------
Accounts payable and accrued liabilities 244,000 31,000 275,000
Line of credit 72,000 -- 72,000
--------------- ------------- -------------
Total liabilities assumed 316,000 31,000 347,000
--------------- ------------- -------------
Net assets acquired $ 387,000 $ 35,000 $ 422,000
=============== ============= =============
Buzztime once again became our wholly owned subsidiary on January 16, 2003
when we issued 1,000,000 shares of restricted common stock, $.005 par value, to
Scientific-Altanta, Inc. ("S-A") in exchange for the surrender by S-A of 636,943
shares of Buzztime Entertainment, Inc. Series A preferred stock pursuant to the
Right of First Refusal and Exchange Agreement entered into by and among NTN,
Buzztime and S-A as of June 8, 2001. Warrants were also issued to S-A to obtain
an additional 159,236 shares of Buzztime's Series A Convertible Preferred Stock
(the "S-A Warrants"). The S-A warrants vest in 10% increments as cable system
operators sign on for the Buzztime game show channel. The exercise price of the
S-A warrants is $1.57 per share.
GOVERNMENT REGULATIONS
The cost of compliance with federal, state and local laws has not had a
material effect upon our capital expenditures, earnings or competitive position
to date. On June 16, 1998, we received approval from the Federal Communications
Commission for our new 900 megahertz Playmakers. The 900-megahertz Playmaker is
an integral component of our network.
EMPLOYEES
As of March 8, 2003, we employ approximately 170 people on a full-time
basis and 4 people on a part-time basis. We also utilize independent contractors
for specific projects and hire up to as many as 36 seasonal employees as needed
to produce our play along sports games during varying professional and
collegiate sports seasons. None of our employees are represented by a labor
union and we believe our employee relations are satisfactory.
ITEM 2. PROPERTIES
We lease approximately 39,000 square feet of office and warehouse space at
5966 La Place Court, Carlsbad, California for our corporate headquarters and
broadcast center. In July 2001, a new five-year lease for the property commenced
upon expiration of the prior lease term that expired in June 2001. Until March
2003, we sublet approximately 11,600 square feet of this office space to
WinResources Computing, Inc. under a sublease entered into in February 2001.
We also lease approximately 1,253 square feet of additional office space
located in San Francisco. This lease expires in April 2005. We sublease this
space to a subtenant for approximately the same amount as our monthly rent. That
sublease expires in April 2005. We also lease approximately 200 square feet of
additional office space in Northern California. This lease expires in May 2003,
with an option to renew for one additional year. We also lease approximately
6,480 square feet of additional office space in Atlanta, Georgia. This lease
expires in September 2005. In addition, we lease additional office space in Mill
Valley, California. This lease expires in May 2003.
14
ITEM 3. 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. Other than set forth below, there is no material litigation
pending or threatened against us.
INTERACTIVE NETWORK, INC.
We have been involved as a plaintiff or defendant in various previously
reported lawsuits in both the United States and Canada involving Interactive
Network, Inc. ("IN"). We reached a resolution with IN of all pending disputes in
the United States and agreed to private arbitration regarding any future
licensing, copyright or infringement issues which may arise between us. There
remain two lawsuits involving us, our unaffiliated Canadian licensee and IN,
which were filed in Canada in 1992. The litigation involves licensing and patent
infringement issues. These actions relate only to the broadcast of the NTN
Network to subscribers of our Canadian licensee and do not extend to our network
operations in the United States or elsewhere. In April 2002, Two Way TV (US),
Inc., was created as a joint venture between IN and Two Way TV Limited. Two Way
TV (US) was incorporated in Delaware on January 10, 2000 to develop and market
IN's patent portfolio and Two Way TV Limited's content, technology and patents
for digital interactive services. As a result of a merger with IN, Two Way TV
(US) now owns and controls all of IN's intellectual property. On February 6,
2003, IN deposited $100,000 Canadian currency with the Canadian Court in
compliance with the Court's November 27, 2002 order, issued upon our motion
seeking an order that IN post an additional sum as security for costs to be
incurred by us in defense of the action. This sum is in addition to the $10,000
Canadian currency IN was ordered to post in November 1998 and the $30,000
Canadian currency IN was ordered to post on June 16, 2000. The action is at the
trial stage; trial is expected to last 2 weeks. We intend to defend the action
vigorously.
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. This complaint relates to our repair and
replacement activities of LRS pagers, which is not a significant percentage of
our NTN Wireless business. At this early stage, we do not believe that this
matter represents a significant level of exposure; however, we continue to
review the complaint. We intend to defend this action vigorously.
STEVEN M. MIZEL, ET. AL
On February 22, 2002, a shareholder class action and derivative complaint
was filed in San Diego County Superior Court for the State of California by
Steven M. Mizel on behalf of himself and all NTN shareholders naming Robert M.
Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H. Arlen,
Vincent A. Carrino and James B. Frakes as defendants with NTN as nominal
defendant. The Mizel action alleged breach of fiduciary duty 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. In June 2002, in ruling on a motion by NTN, the court found that
Mizel's complaint failed to state a valid claim. The court gave Mizel an
opportunity to replead his case, but he declined to do so. On July 11, 2002, the
court formally dismissed the case and entered judgment in our favor.
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 as nominal defendant. The Fernhoff action alleged 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. In July 2002, in light of the ruling on Mizel, Fernhoff requested that
the court dismiss his complaint.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote by security holders during the fourth
quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange ("AMEX") under
the symbol "NTN." Set forth below are the high and low sales prices for the
common stock as reported by the AMEX for the two most recent fiscal years:
COMMON STOCK
-------------------
LOW HIGH
-------- --------
2001
First Quarter........................ $ 0.5000 $ 1.2000
Second Quarter....................... $ 0.4500 $ 0.9300
Third Quarter........................ $ 0.6400 $ 0.9100
Fourth Quarter....................... $ 0.5900 $ 0.9300
2002
First Quarter........................ $ 0.7700 $ 1.1100
Second Quarter....................... $ 1.0400 $ 1.6600
Third Quarter........................ $ 0.8100 $ 1.1900
Fourth Quarter....................... $ 0.7200 $ 1.2000
2003
First Quarter (through 3/24/03)...... $ 1.3800 $ 1.4900
On March 24, 2003, the closing price for our common stock as reported on
the AMEX was $1.43. As of March 24, 2003, there were approximately 1,302 holders
of common stock.
To date, we have not declared or paid any cash dividends with respect to
our common stock, and the current policy of our Board of Directors is to retain
earnings, if any, after payment of dividends on the outstanding preferred stock
to provide for our growth. Consequently, no cash dividends are expected to be
paid on our common stock in the foreseeable future. Pursuant to the terms of our
line of credit, we may not pay or declare dividends without the prior written
consent of the lender.
On October 1, 2002, we issued approximately 49,000 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. The
issuance of the shares of common stock was exempt from registration under
Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
included elsewhere in this document. The selected financial data for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998 is derived from our audited
financial statements.
16
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Total revenue............................ $ 25,610 $ 22,559 $ 22,048 $ 23,748 $ 24,194
Total operating expenses................. 27,465 25,493 30,249 27,549 27,641
--------- --------- --------- --------- ---------
Operating loss........................... (1,855) (2,934) (8,201) (3,801) (3,447)
Other income (expense), net.............. (505) (807) (940) 1,303 1,654
--------- --------- --------- --------- ---------
Loss from continuing operations.......... (2,360) (3,741) (9,141) (2,498) (1,793)
Income taxes............................. (41) -- -- -- --
Minority interest in loss of
consolidated subsidiary................ 212 85 -- -- --
--------- --------- --------- --------- ---------
Loss before cumulative effect of
accounting change...................... (2,189) (3,656) (9,141) (2,498) (1,793)
Cumulative effect of accounting change... -- -- (448) -- --
--------- --------- --------- --------- ---------
Net loss................................. $ (2,189) $ (3,656) $ (9,589) $ (2,498) $ (1,793)
Accretion of beneficial conversion
feature of preferred stock............. -- -- -- -- (758)
--------- --------- --------- --------- ---------
Net loss available to common
Shareholders........................... $ (2,189) $ (3,656) $ (9,589) $ (2,498) $ (2,551)
========= ========= ========= ========= =========
Basic and diluted net loss per common
share:
Continuing operations.................. $ (.06) $ (.10) $ (.28) $ (.09) $ (.10)
Cumulative effect of accounting change -- -- (.01) -- --
--------- --------- --------- --------- ---------
Net loss....................... $ (.06) $ (.10) $ (.29) $ (.09) $ (.10)
========= ========= ========= ========= =========
Weighted-average shares outstanding...... 39,081 36,755 33,206 28,470 26,078
========= ========= ========= ========= =========
BALANCE SHEET DATA
(IN THOUSANDS)
DECEMBER 31,
-----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Total current assets......... $ 4,184 $ 4,218 $ 5,808 $ 6,387 $ 8,131
Total assets................. 10,842 13,380 18,822 17,287 16,767
Total current liabilities.... 3,620 4,178 4,915 5,466 5,731
Total liabilities............ 8,719 9,614 14,740 15,066 8,442
Total minority interest...... 643 855 -- -- --
Shareholders' equity......... 1,480 2,911 4,082 2,221 8,325
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The following management's discussion and analysis of financial condition
and results of operations discussion should be read in conjunction with the
consolidated financial statements provided under Part II, Item 8 of this Annual
Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. 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 and other fixed assets,
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 101 ("SAB 101"), we amortize these
amounts over an estimated three-
17
year average life of a customer relationship. If a significant number
of our customers leave us before the estimated life of each customer is
attained, amortization of those deferred costs and revenues would
accelerate, which would result in net incremental revenue.
o We incur a relatively significant level of depreciation expense in
relationship to our operating income. The amount of depreciation
expense in any fiscal year is largely related to the estimated life of
handheld, wireless Playmaker devices and computers located at our
customer sites. The Playmakers are depreciated over a four-year life
and the computers over a three-year life. The estimated life of these
assets was determined based upon anticipated technology changes. If our
Playmakers and servers turn out to have a longer life, on average, than
estimated, our depreciation expense would be significantly reduced in
those future periods. Conversely, if the Playmakers and servers turn
out to have a shorter life, on average, than estimated, our
depreciation expense would be significantly increased in those future
periods.
o We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. The allowance is determined based on reserving for all
customers that have terminated our service and all accounts over 90
days past due, plus five percent of outstanding balances for all
unreserved customer balances. 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.
We do not have any of the following:
o Off-balance sheet arrangements;
o Certain trading activities that include non-exchange traded contracts
accounted for at fair value or speculative or hedging instruments; or
o Relationships and transactions with persons or entities that derive
benefits from any non-independent relationship other than the related
party transactions discussed in ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS or which are so non-material to fall below the
materiality threshold of such item.
BACKGROUND
Our business is developing and distributing interactive entertainment and
wireless information and communications products. We operate our business
principally through two operating units: the NTN Network and Buzztime. The NTN
Network provides interactive communications and entertainment products and
services to the hospitality industry, including premiere casual-dining
restaurants, sports bars, taverns, hotels, cruise ships and active adult
communities. The NTN Network also includes our sales of wireless paging and
member services products to restaurants and other hospitality locations.
Buzztime operates our live broadcast studio, and produces our trivia and live
sports "play-along" content to both the NTN Network and new consumer interactive
platforms and is developing the Buzztime interactive television channel.
Revenues generated and operating income (loss) by segment by our two
business units are illustrated below. The segment data presented below includes
allocations of corporate expenses.
YEARS ENDED DECEMBER 31
2002 2001 2000
------------------- ------------------- -------------------
REVENUES
NTN Network............. $ 25,465,000 99% $ 22,382,000 99% $ 21,406,000 97%
Buzztime................ 128,000 1% 159,000 1% 540,000 2%
Other................... 17,000 - 18,000 - 102,000 -
------------- ---- ------------- ---- ------------- ----
Total......... $ 25,610,000 100% $ 22,559,000 100% $ 22,048,000 100%
============= ==== ============= ==== ============= ====
OPERATING INCOME (LOSS)
NTN Network............. $ 1,699,000 $ 372,000 $ (2,162,000)
Buzztime................ (3,554,000) (3,306,000) (6,039,000)
------------- ------------- -------------
Total......... $ (1,855,000) $ (2,934,000) $ (8,201,000)
============= ============= =============
18
NTN Network revenues are generated primarily from distributing content,
advertising to customer locations and wireless paging systems. The direct costs
associated with these revenues include the cost of installing the equipment at
the customer location, marketing visits, technical service, freight,
telecommunications, sales commission, parts, repairs, depreciation of the
equipment placed in service and paging equipment.
Buzztime revenues are generated primarily from production, licensing and
advertising. The direct costs associated with these revenues are license fees
and server hosting fees.
RESULTS OF OPERATION
Following is a comparative discussion by fiscal year of the results of
operation for the three years ended December 31, 2002. We believe that inflation
has not had a material effect on the results of operations for the periods
presented.
YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Operations for 2002 resulted in a net loss of $2,189,000 compared to net
loss of $3,656,000 for 2001. The operating results for 2001 included non-cash
debt conversion costs of $189,000 related to the conversion of $2,000,000 on the
convertible senior subordinated notes.
REVENUES
NTN Network revenues increased $3,083,000, or 14%, to $25,465,000 in 2002
from $22,382,000 in 2001. NTN Network division revenue included approximately
$2,405,000 of revenue from NTN Wireless business, which was acquired in April
2002. Hospitality service revenues increased by approximately $1,227,000 due to
an increase in the number of subscribing locations and the average billing rate
per location. The NTN Network customer site count in the United States at
December 31, 2002 was 3,171. This was an increase of 65 sites over December 31,
2001. Installation revenue associated with installing new customer locations
decreased approximately $451,000 as some of the deferred revenue associated with
the installation has become fully amortized. Included in NTN Network revenues
are revenues from our Canadian licensee that decreased approximately $102,000 in
2002 to $1,161,000 from $1,263,000 in 2001 due to a smaller customer base in
2002. In 2002, the NTN Network generated revenue of approximately $959,000 in
national and regional advertising, comprised primarily of companies in the wine,
beer and spirits category compared to approximately $1,000,000 in 2001.
Buzztime service revenues decreased 19% to $128,000 in 2002 from $159,000
in 2001. The decrease was due to expiration of advertising contracts.
Other revenues decreased 6% to $17,000 in 2002 from $18,000 in 2001.
As a result of the above factors, NTN's consolidated revenues increased
$3,051,000, or 14%, to $25,610,000 in 2002 from $22,559,000 in 2001.
OPERATING EXPENSES
Direct operating costs of services increased $1,011,000, or 12%, to
$9,252,000 in 2002 from $8,241,000 in 2001. Direct operating costs included
approximately $1,513,000 for costs of goods sold from the NTN Wireless business
acquired in April 2002. Excluding the NTN Wireless cost of goods sold, for which
there was no comparable expense in 2001, our direct operating costs decreased by
$502,000 in 2002. Some of the primary factors that led to that $502,000 direct
operating cost reduction included:
o Communication charges decreased by approximately $348,000 due to a
change in vendors in July 2001, which generated a full year of related
cost savings in 2002 compared to a partial year of savings in 2001.
o Marketing site visits decreased approximately $98,000 due to a
restructuring of regularly scheduled visits to the sites.
Selling, general and administrative expenses increased $1,129,000, or 8%,
to $16,106,000 in 2002 from $14,977,000 in 2001. Selling, general and
administrative expenses in 2002 included an increase in payroll and related
expenses of approximately $1,022,000 as the head count increased, which includes
the addition of the NTN Wireless employees. Travel and entertainment increased
approximately $129,000 related to NTN Wireless and increased travel to support
the Buzztime initiatives. Marketing expenses increased approximately $69,000 due
to additional trade shows attended and increased marketing expenses associated
with our
19
acquisition of ZOOM Communications, and subsequent introduction of our new NTN
Wireless subsidiary. Equipment leases increased approximately $100,000 due to
the buy-out of equipment under capital leases. Consulting expenses decreased
approximately $490,000 due to the completion of various projects in the past
year and to the hiring of various consultants as employees.
Litigation, legal and professional fees increased $77,000, or 17%, to
$540,000 in 2002 compared to $463,000 in 2001. This increase relates to
additional legal fees for trademark registrations and employee matters.
Depreciation and amortization not related to direct operating costs
decreased $156,000, or 9%, to $1,555,000 in 2002 from $1,711,000 in 2001 due to
certain assets becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $89,000, or 88%, to $12,000 in
2002 from $101,000 in 2001, due primarily to the transition away from using
outside consultants in favor of expansion of internal development departments to
aggressively pursue ongoing research and development initiatives.
INTEREST INCOME AND EXPENSE
Interest income decreased $57,000, or 91%, to $6,000 in 2002, compared to
$63,000 in 2001, due to less cash on hand from capital raised in previous years.
Interest expense decreased $335,000, or 40%, to $511,000 in 2002, compared
to $846,000 in 2001, due to the expiration of various capitalized leases as well
as to a lower average balance on our revolving line of credit.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary increased $127,000 or
149% to $212,000 in 2002 compared to $85,000 in 2001. The 2002 minority interest
figure represented a full year's allocation of six percent of Buzztime's losses
while the 2001 figure represents an allocation of six percent of Buzztime's
losses for only the second half of 2001 as we received the minority interest
investment in Buzztime by Scientific-Atlanta, Inc. at the end of June 2001.
INCOME TAXES
The NTN Network has taxable income for the year ended December 31, 2002.
For federal income tax reporting purposes and in unitary states where the NTN
Network may file on a combined basis, taxable losses incurred by Buzztime should
be sufficient to offset NTN Network's taxable income. In states where separate
filing is required, NTN Network will likely incur a state tax liability. As a
result, NTN Network recorded a state tax provision of $41,000 in 2002.
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Operations for 2001 resulted in a net loss of $3,656,000 compared to net
loss of $9,589,000 for 2000. The operating results for 2001 included non-cash
debt conversion costs of $189,000 related to the conversion of $2,000,000 on the
convertible senior subordinated notes. The operating results for 2000 also
included the implementation of SAB 101 related to the recognition of
installation, training and set up revenues, which resulted in a reduction in
revenues of $845,000, an increase in related expenses of $282,000 and the
cumulative effect on prior years of approximately $448,000. It also includes a
charge for the impairment of assets for certain web development costs and
Internet game stations equipment, license and related goodwill in the amount of
$1,362,000.
REVENUES
NTN Network revenues increased $976,000, or 5%, to $22,382,000 in 2001 from
$21,406,000 in 2000. Hospitality subscription revenues increased by
approximately $862,000 due to an increase in the number of sites and the average
billing rate per site. During 2001, approximately 697 sites were installed. This
increase was also due in part to installation, training and setup revenue which
increased approximately $438,000 due to an increase in amortization of
previously deferred fees. Other production revenues of approximately $83,000
were recorded in 2001. Included in NTN Network revenues are revenues from our
Canadian licensee totaling $1,263,000 in 2001 and $1,266,000 in 2000. In 2001,
the NTN Network generated revenue of approximately $1,000,000 in national
20
and regional advertising, comprised primarily of companies in the wine, beer and
spirits category compared to approximately $1,400,000 in 2000.
Buzztime service revenues decreased 71% to $159,000 in 2001 from $540,000
in 2000. The decrease was due to expiration of advertising contracts.
Other revenue decreased 82% to $18,000 in 2001 from $102,000 in 2000.
OPERATING EXPENSES
Direct operating costs of services decreased $2,857,000, or 26%, to
$8,241,000 in 2001 from $11,098,000 in 2000. This is primarily due to a decrease
in depreciation and amortization of approximately $1,184,000 due to our
DOS-based network equipment being fully depreciated by June 2000. That decrease
was partially offset by an increase in depreciation for capitalized broadcast
equipment associated with the digital network. Communication charges decreased
by approximately $586,000 due to technical changes made in 2000 and a change in
vendors during the second half of 2001. Freight expenses decreased by
approximately $148,000 due to 545 less installations of the digital equipment
and less incoming shipments of Playmakers in 2001. Advertising and network
commissions also decreased approximately $590,000 partially as a result of our
decision to transition advertising sales in-house. Playmaker repairs increased
by approximately $335,000 in 2001 due to the expiration of warranties on some of
the Playmakers.
Selling, general and administrative expenses decreased $93,000, or 1%, to
$14,977,000 in 2001 from $15,070,000 in 2000. Selling, general and
administrative expense in 2001 included a decrease in payroll and related
expenses of approximately $189,000 relating to a decrease in the number of
employees. Consulting expenses decreased approximately $427,000 due to hiring of
fewer consultants for technology and Buzztime during 2001. Stock-based
compensation decreased $566,000 due to the impact of marking warrants to market
in accordance with variable accounting, and awards granted and fully expensed in
2000. Supplies, printing costs and seminars decreased approximately $261,000 due
to general cost cutting measures and fewer new employees in 2001. Various other
expenses decreased due to general cost cutting measures that have been
implemented. Marketing expenses increased approximately $260,000 due to an
effort to increase site count and to introduce new games in 2001. Bad debt
expense increased $325,000 due to reassessment of the allowance in 2000 and
increased collections in 2000, which lowered bad debt expense in the prior
period compared to 2001.
Litigation, legal and professional fees decreased $11,000, or 2%, to
$463,000 in 2001 compared to $474,000 in 2000.
Depreciation and amortization not related to direct operating costs
decreased $104,000, or 6%, to $1,711,000 in 2001 from $1,815,000 in 2000 due to
certain assets becoming fully depreciated.
As the focus of Buzztime changed to other interactive initiatives,
impairment charges totaled $1,362,000 in 2000 due to the write-off of certain
web development costs for the Internet web site Buzztime.com and Internet game
station assets, license and related goodwill on the basis that the assets are
not recoverable through future cash flows.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $329,000, or 77%, to $101,000
in 2001 from $430,000 in 2000. The current period expenses resulted from our
research and development efforts related to the digital network and interactive
television initiatives. We currently recognize as research and development
expense only payments to outside providers and, as a result, any research and
development work by our employees fell into general and administrative expenses.
Over the past two years, we have hired several of the consultants who previously
conducted research and development activities as well as adding to the
information technology group. We believe that our information technology
department, in fact, has increased our true overall level of development
activity in 2002 over 2001.
In 2000, our research and development efforts related to the digital
network and Internet initiatives. This $329,000 decrease in 2001 was largely due
to the cessation of the Internet initiatives in late 2000.
INTEREST EXPENSE
Interest expense decreased $285,000, or 25%, to $846,000 in 2001, compared
to $1,131,000 in 2000, due to the expiration of various capital leases, the
decrease in the interest rate on our convertible senior subordinated notes from
7% to 4% during the period
21
January 2001 through November 2001 and to lower outstanding balances on our line
of credit in 2001.
EBITDA
Our earnings before interest, taxes, depreciation and amortization
("EBITDA") increased by $1,147,000 to $3,282,000 for the year ended December 31,
2002 from EBITDA of $2,135,000 for the year ended December 31, 2001.
EBITDA is not intended to represent a measure of performance in accordance
with generally accepted accounting principals ("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,
lenders, investors and other interested parties find it to be a useful tool for
measuring the performance of companies that carry significant levels of non-cash
depreciation and amortization charges in comparison to their GAAP earnings. For
example, our credit line carries certain financial covenants that are based upon
our EBITDA.
The following table reconciles our net loss per GAAP to EBITDA:
YEAR ENDED DECEMBER 31
-------------------------------------------
EBITDA CALCULATION: 2002 2001 2000
------------- ------------- -------------
Net income (loss) $ (2,189,000) $ (3,656,000) $ (9,589,000)
Interest expense (net) 505,000 783,000 1,059,000
Depreciation and amortization 4,925,000 5,008,000 6,296,000
Provision for income taxes 41,000 -- --
------------- ------------- -------------
EBITDA $ 3,282,000 $ (2,135,000) $ (2,234,000)
============= ============= =============
On a segment basis, our two segments generated EBITDA levels as presented below:
YEAR ENDED DECEMBER 31, 2002
-------------------------------------------
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL
------------- ------------- -------------
Net income (loss) $ 1,153,000 $ (3,342,000) $ (2,189,000)
Interest expense (net) 505,000 -- 505,000
Depreciation and amortization 4,194,000 731,000 4,925,000
Provision for income taxes 41,000 -- 41,000
------------- ------------- -------------
EBITDA $ 5,893,000 $ (2,611,000) $ 3,282,000
============= ============= =============
YEAR ENDED DECEMBER 31, 2001
-------------------------------------------
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL
------------- ------------- -------------
Net loss $ (418,000) $ (3,238,000) $ (3,656,000)
Interest expense (net) 767,000 16,000 783,000
Depreciation and amortization 4,242,000 766,000 5,008,000
Income taxes -- -- --
------------- ------------- -------------
EBITDA $ 4,591,000 $ (2,456,000) $ 2,135,000
============= ============= =============
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL
------------- ------------- -------------
Net loss $ (3,598,000) $ (5,991,000) $ (9,589,000)
Interest expense (net) 949,000 110,000 1,059,000
Depreciation and amortization 5,668,000 628,000 6,296,000
Income taxes -- -- --
------------- ------------- -------------
EBITDA $ 3,019,000 $ (5,253,000) $ (2,234,000)
============= ============= =============
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had cash and cash equivalents of $577,000 and
working capital (current assets in excess of current liabilities) of $564,000
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 $1,131,000 in
2002 and $1,482,000 in 2001. Our net loss from operations was more than offset
by depreciation, amortization and other non-cash charges in both years.
22
Net cash used in investing activities was $1,551,000 in 2002 and $1,228,000
in 2001. Included in net cash used in investing activities in 2002 were
approximately $1,518,000 in capital expenditures, software and web site
development and $102,000 of professional fees related to the acquisitions, which
were partially offset by a reduction in deposits on equipment of $69,000.
Net cash used in financing activities was $299,000 in 2002 and $1,146,000
in 2001. The cash used in financing activities in 2002 included $222,000 of
principal payments on capital leases, and $212,000 of net payments on the
revolving line of credit. The net cash used in financing activities was
partially offset by $135,000 of proceeds from the exercise of stock options and
warrants.
CONTRACTUAL CASH OBLIGATIONS
A table recapping our contractual cash obligations is presented below:
PAYMENTS DUE BY PERIOD
--------------------------------------------
CONTRACTUAL OBLIGATION LESS THAN 1 YEAR 2-3 YEARS 4-6 YEARS TOTAL
- ---------------------- ---------------- ------------ ------------ -----------
Revolving line of credit.............. $ 89,000 $ 2,250,000 $ -- $ 2,339,000
Capital lease obligations............. 246,000 201,000 42,000 489,000
Purchase commitments.................. 908,000 2,558,000 782,000 4,248,000
Operating leases...................... 618,000 1,227,000 271,000 2,116,000
---------------- ------------ ------------ -----------
Total............................ $ 1,861,000 $ 6,236,000 $ 1,095,000 $ 9,192,000
================ ============ ============ ============
The convertible senior subordinated notes are not included in the table as
they were converted into NTN common stock at February 1, 2003.
CONVERTIBLE SENIOR SUBORDINATED NOTES
As of December 31, 2002, we had outstanding convertible senior subordinated
notes of $2,000,000, payable February 1, 2003 and bearing interest at 8% per
year. The notes permitted us to convert up to the full principal amount into
shares of our common stock at maturity at a conversion price of $1.275 per
share.
The convertible senior subordinated notes were originally issued in January
2001 for a principal amount of $4,000,000 and carried an interest rate of 4% in
exchange for our outstanding 7% convertible senior subordinated notes of
$3,987,000 payable on February 1, 2001. Effective on December 11, 2001, we
agreed to permit the holders of the notes to convert $2,000,000 of the
outstanding principal amount into shares of our common stock at a conversion
price of $1.22 per share in order to increase our stockholder equity. As a
result, the holders received an aggregate amount of 1,639,344 shares of our
common stock. In connection with the conversion, we agreed to increase the
interest rate on the remaining outstanding principal of the convertible notes
was increased to 8% from 4% per year.
On February 1, 2003, the remaining $2,000,000 of convertible senior
subordinated notes converted into 1,568,627 shares of our common stock based on
the agreed conversion price of $1.275 per share.
REVOLVING LINE OF CREDIT
In August 1999, we entered into an agreement with Coast Business Credit
("Coast") for a revolving line of credit not to exceed $4,000,000. 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. Total loan fees of $120,000 were payable in
three annual installments and are being amortized over the life of the loan,
which originally matured on August 31, 2002.
Our revolving line of credit agreement with Coast was amended in May 2001.
The line of credit provides for borrowings not to exceed the lesser of (i) a
designated maximum amount, (ii) three times trailing monthly collections, or
(iii) three times annualized trailing adjusted EBITDA. The amendment called for
a gradual reduction in the line from $4,000,000 on April 1, 2001 to $2,750,000
on December 31, 2001. We completed that pay down process on December 31, 2001.
The amendment to our revolving line of credit in May 2001 also allowed
equity raised by us to be added to the EBITDA calculation and permit us to
exclude the effect of SAB 101 for 2000. The May 2001 amendment also required us
to raise $1,000,000 in equity by June 30, 2001, maintain a minimum cash level of
$400,000 each month and limited our cash burn to not more than $1,000,000 from
April 1, 2001 onward without receiving additional equity. The maturity date on
the line of credit was also moved
23
forward by two months to June 30, 2002 as part of the May 2001 amendment. The
investment in Buzztime by an affiliate of Scientific-Atlanta in June 2001
satisfied the $1,000,000 equity requirement.
On February 25, 2002, we amended our revolving line of credit to extend the
expiration date of the revolving line of credit to June 30, 2003. The amendment
also requires further line reductions of $250,000 each on June 30, 2002, January
31, 2003, and on March 31, 2003. The amendment deleted our minimum tangible
effective net worth financial covenant and replaced it with two cash
flow-oriented covenants. In return for the extension, Coast received a loan fee
of $40,000 on July 1, 2002. There were no changes to the interest rate in this
amendment.
On February 4, 2003, we amended our revolving line of credit to extend the
maturity date on the line of credit to June 30, 2004. The amendment also struck
the previously scheduled March 31, 2003 $250,000 paydown on the line of credit,
deleted the trailing cash flow multiplier element of the borrowing base and
modified the cash flow oriented covenants. We agreed to pay Coast a renewal fee
of $30,000 on July 1, 2003 in association with this amendment. There were no
changes to the interest rate in this amendment.
On February 7, 2003, Coast and its parent company, Southern Pacific Bank,
were seized by the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC
is currently acting as a trustee for Coast and is in the process of selling off
Coast's loan portfolio to other lending institutions. It is likely that the line
of credit will be sold to another lender by the FDIC. However, should the FDIC
either cease funding or materially reduce the credit available to us despite the
terms of the loan and security agreement, it would have a significant impact on
our liquidity.
INVESTMENT IN BUZZTIME
On June 8, 2001, an affiliate of Scientific-Atlanta invested $1,000,000 in
Buzztime for 636,943 shares of its preferred stock, representing 6% of
Buzztime's capitalization on an as-converted basis, and warrants to obtain an
additional 159,236 shares of its preferred stock. Each share of Buzztime
preferred stock was initially convertible into one share of Buzztime common
stock and entitled to a non-cumulative dividend of 8%, if, and when as declared
by Buzztime's board of directors. The exercise price of the Scientific-Atlanta
preferred stock purchase warrants is $1.57 per share. However, the warrants vest
in 10% increments only as cable system operators sign on by executing a
distribution agreement for the Buzztime channel.
In connection with the investment, Buzztime entered into a development,
license and marketing agreement with Scientific-Atlanta to co-develop an
application to enable operation of a Buzztime interactive trivia game show
channel on Scientific-Atlanta's Explorer digital interactive set-top network for
distribution by cable operators to their subscribers. The $1,000,000 in net
proceeds may only be used towards development of the application for
Scientific-Atlanta and fulfillment of Buzztime's obligations under the
development agreement.
We granted Scientific-Atlanta the right to exchange its shares of Buzztime
preferred stock into shares of NTN common stock if (i) Buzztime did not obtain
additional equity financing of $2,000,000 before June 8, 2002, (ii) the
liquidation, dissolution or bankruptcy of Buzztime before June 8, 2002, (iii)
the failure of Buzztime to conduct a qualified public offering by June 8, 2004,
or (iv) a change in control of Buzztime before June 8, 2002. On January 16,
2003, Scientific-Atlanta converted its shares of Buzztime preferred stock into
our common stock at a conversion price of $1.00 per share.
FUTURE FINANCING NEEDS
Our requirements for additional financing in 2003 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 couple of commercial trials of
the Buzztime trivia channel), utilization of our existing line of credit is
expected to 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 2003. 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. In addition, our line of credit matures on June
30, 2004.
Our liquidity and capital resources remain limited and this may constrain
our ability to operate and grow our business. In 2002, we generated free cash
flow (defined as EBITDA less cash interest expense, cash used in investing
activities and cash used in financing activities) of $1,120,000, which has
covered our business requirements over that period.
24
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
product additions or acquisitions on a cash basis.
We expect the level of expenditures in Buzztime to rise over 2003 as we
have entered the deployment phase with SusCom and continue in the testing phase
with certain other cable operators. 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 2003 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 (the 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 system 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 several major cable system operators over the next several
quarters, we anticipate that Buzztime will require an additional $250,000 in
financing per quarter commencing with the third 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 we cannot reduce cash expenditures at Buzztime
to a sufficient level, we may not be able to sustain the operations of Buzztime
beyond December 2003.
In 2002, the American Stock Exchange (AMEX) adopted several new listing
standards. One new standard was established for listed companies that had at
least five consecutive years of losses as we do. This new standard requires that
such companies must maintain shareholders' equity of at least $6 million. We
submitted a plan to AMEX to achieve compliance with that standard, which they
approved with the understanding that such compliance would be demonstrated on or
about mid-November, 2002. That plan was to increase our shareholders' equity
through a combination of conversion of existing equity-like instruments on our
balance sheet and by raising additional equity.
Both of the equity-like instruments on our balance sheet recently were
converted into equity. Scientific-Atlanta's (S-A) investment in Buzztime
preferred shares converted to our common stock on January 16, 2003 at a
conversion price of $1.00 per share. The S-A conversion increased our
shareholders' equity by approximately $640,000.
On February 1, 2003, the $2 million principal balance of our outstanding
convertible senior subordinated notes converted to our common stock at the
preagreed conversion price of $1.275 per share and the conversion increased our
shareholders' equity by $2 million.
On January 15, 2003, we issued and sold 1,000,000 shares of restricted
common stock along with fully vested warrants to purchase 500,000 shares of
common stock at $1.15 per share, exercisable through January 15, 2008 through a
private offering to Robert M. Bennett, one of our directors, at a price per
share of $1.00 for an aggregate amount of $1.0 million No commissions or
placement agent fees were paid in connection with the offering. We agreed to
file a registration statement covering the resale of the shares of common stock
(including those shares underlying the warrants) issued in both the S-A
conversion and in the Bennett investment within 90 days.
The combination of the above conversions and the Bennett investment with
our December 31, 2002 shareholders' equity position of $1.48 million yields a
sum of $5.12 million. While these recent events have occurred on dates outside
of the timeframe allowed under our plan with AMEX, the AMEX staff has continued
to monitor our financial performance and outcome of our equity raising efforts
and has allowed us to continue our listing on an exception basis.
We remain in discussion with several strategic and financial investors that
we have contacted through investment-banking firms. We also have considered
several acquisitions for stock which would additionally bring us into
compliance. From our informal discussions with the AMEX Listings Qualifications
Department, we believe that if we do not exercise our options and fail to
achieve compliance with the new $6 million net worth standard within
approximately one month of filing this document, we will likely enter
25
into a process of letters and hearings regarding our continued listing. We
believe that process will take several months. We continue to believe that we
will be able to raise the additional equity capital or make an acquisition to
comply with our plan with AMEX during the extended time period afforded by the
AMEX hearing process. However, there can be no assurance that we will be able to
obtain additional equity financing on terms favorable to us or at all.
The NTN Network has transmitted its data through the FM2 satellite platform
for more than ten years. That arrangement is scheduled to end in February 2005.
We have entered into equipment purchase and satellite service agreements to
convert the NTN Network to a much higher speed, two-way VSAT satellite
technology over the two-year period ending February 2005. These agreements are
with the same reseller of satellite services that provided the FM2 satellite
platform to us. This anticipated conversion to a two-way satellite technology
will be a significant use of capital resources. We believe that the conversion
of customer locations may require incremental capital expenditures of $3.0 to
$4.5 million and increased cash operating expenses (including estimated
installation costs) of $2.0 to $2.5 million over the two-year conversion period.
We believe that the cost of installing and operating the two-way satellite
network will be offset both through expense reductions and by revenue
enhancements following the two-year conversion period. During the two-year
conversion period, we believe that this conversion will have a moderately
adverse impact on our earnings in addition to the use of capital involved. In
the longer term, we believe that this conversion will increase our earnings
potential.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF
FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. Statement 145 updates,
clarifies and simplifies existing accounting pronouncements including:
rescinding Statement No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect and amending Statement No.
13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Statement 145 is effective for fiscal years
beginning after May 15, 2002, with early adoption of the provisions related to
the rescission of Statement No. 4 encouraged. We do not expect the adoption of
this statement to have a material impact on our financial position or results of
operations.
In July 2002, the FASB issued Statement No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 nullifies EITF Issue No. 94-3, LIABILITY RECOGNITION
FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The principal difference
between SFAS No. 146 and Issue No. 94-3 relates to the recognition of a
liability for a cost associated with an exit or disposal activity. SFAS No. 146
requires that a liability be recognized for those costs only when the liability
is incurred, that is, when it meets the definition of a liability in the FASB's
conceptual framework. In contrast, under Issue No. 94-3, a company recognized a
liability for an exit cost when it committed to an exit plan. SFAS No. 146 also
establishes fair value as the objective for initial measurement of liabilities
related to exit or disposal activities. The Statement is effective for exit or
disposal activities that are initiated after December 31, 2002 although earlier
application is encouraged. We are unable to determine the impact on our
financial position or results of operations from the adoption of this statement.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO.
5, 57 AND 107 AND A RESCISSION OF FASB INTERPRETATION NO. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on our financial
statements. The disclosure requirements are effective for financial statements
of interim and annual periods ending after December 15, 2002. We have adopted
the disclosure requirements of this interpretation. To date, we have not entered
into any guarantees.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO.
123. This Statement amends FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements. We have adopted the
26
annual disclosure provision in our December 31, 2002 financial statements and
will adopt the interim provisions in the first quarter of 2003.
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on our financial statements. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that we will consolidate or
disclose information about variable interest entities when the Interpretation
becomes effective.
RISK FACTORS
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business, results of operation and financial condition could be adversely
affected by a number of factors, including the following:
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND WE EXPECT TO INCUR SIGNIFICANT NET
LOSSES IN THE FUTURE.
We have a history of significant losses, including net losses of $2,189,000
in 2002, $3,656,000 in 2001, and $9,589,000 in 2000 and an accumulated deficit
of $79,079,000 as of December 31, 2002. We expect to incur significant operating
and net losses for the next four quarters due primarily to our continued
development of Buzztime. Furthermore, we may never achieve profitability, and
even if we do, we may not sustain or increase profitability on a quarterly or
annual basis in the future.
OUR LIMITED LIQUIDITY AND CAPITAL RESOURCES MAY CONSTRAIN OUR ABILITY TO OPERATE
AND GROW OUR BUSINESS.
At December 31, 2002, our current assets exceeded our current liabilities
by approximately $564,000. Our liquidity and capital resources remain limited
and this may constrain our ability to operate and grow our business.
We currently have a revolving line of credit agreement with Coast Business
Credit, which provides for borrowings of up to $2,250,000 and which expires on
June 30, 2004. Our availability under the line of credit may be reduced if our
monthly collections fall below certain levels. As of February 28, 2003, the
maximum amount of $2,250,000 was available to us and approximately $2,098,000
was outstanding under the line of credit. The line of credit is secured by
substantially all of our assets. Any reduction in availability under our line of
credit may further constrain our liquidity.
On February 7, 2003, Coast and its parent company, Southern Pacific Bank,
were seized by the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC
is currently acting as a trustee for Coast and is in the process of selling off
Coast's loan portfolio to other lending institutions. Should the FDIC either
cease funding us or materially reduce the credit availability to us under the
terms of the line of credit, our liquidity would be significantly impacted in a
negative way.
We will require additional financing to implement our plan to significantly
expand the DITV network, including the planned two-way satellite rollout, and to
develop Buzztime into a leading content provider for interactive television
platforms. Our requirements for additional financing in 2003 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 line of credit is
expected to 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 2003. 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. If we receive additional equity financing, it
could be dilutive to our stockholders. Any debt financing, if available, may
involve covenants limiting or restricting our operations or future
opportunities.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE MAY RENDER OUR OPERATIONS OBSOLETE
OR NONCOMPETITIVE.
If we do not compete successfully in the development of new products and
keep pace with rapid technological change, we will be unable to achieve
profitability or sustain a meaningful market position. The interactive
entertainment and game industry is becoming highly competitive and subject to
rapid technological changes when compared to other industries. We are aware of
other companies
27
that are introducing interactive game products on interactive platforms that
allow players to compete across the nation. Some of these companies may have
substantially greater financial resources and organizational capital than we do,
which could allow them to identify emerging trends. In addition, changes in
customer tastes may render our network, its content and our technology obsolete
or noncompetitive.
The emergence of new entertainment products and technologies, changes in
consumer preferences and other factors may limit the life cycle of our
technologies and any future products and services we develop. Accordingly, our
future performance will depend on our ability to:
o identify emerging technological trends in our market;
o identify changing consumer needs, desires or tastes;
o develop and maintain competitive technology, including new product and
service offerings;
o improve the performance, features and reliability of our products and
services, particularly in response to technological changes and
competitive offerings; and
o bring technology to the market quickly at cost-effective prices.
We may not be successful in developing and marketing new products and
services that respond to technological and competitive developments and changing
customer needs. Such products and services may not gain market acceptance. Any
significant delay or failure in developing new or enhanced technology, including
new product and service offerings, could result in a loss of actual or potential
market share and a decrease in revenues.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY LOSE BUSINESS AND EXPERIENCE
REDUCED PROFITABILITY.
Continued implementation of our business plan requires an effective planning
and management process. Our anticipated future growth will continue to place a
significant strain on our management systems and resources. If we are to grow
successfully, we must:
o improve our operational, administrative and financial systems;
o expand, train and manage our workforce; and
o attract and retain qualified management and technical personnel.
THE INTERACTIVE GAMING AND ENTERTAINMENT INDUSTRY IS HIGHLY COMPETITIVE.
The entertainment business is highly competitive. We compete with other
companies for total entertainment related revenues in the marketplace. Our
network programming competes generally with broadcast television, direct
satellite programming, pay-per-view, other content offered on cable television,
and other forms of entertainment. Furthermore, certain of our competitors have
greater financial and other resources available to them. With the entrance of
motion picture, cable and television companies, competition in the interactive
entertainment and multimedia industries will likely intensify in the future. In
January 1999, The Walt Disney Company introduced interactive programming
broadcast in conjunction with live sporting and other events, which competes
directly with our programming. We do not know of any direct impact on our
operations to date.
We also compete with other content and services available to consumers
through online services. The expanded use of online networks and the Internet
provide computer users with an increasing number of alternatives to video games
and entertainment software. With this increasing competition and rapidly
changing factors, we must be able to compete on technology, content and
management strategy. If we fail to provide the quality services and products, we
will lose revenues to other competitors in the entertainment industry. Increased
competition may also result in price reductions, fewer customer orders, reduced
gross margins, longer sales cycles, reduced revenues and loss of market share.
28
IF OUR INTELLECTUAL PROPERTY DOES NOT ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS
AND INTELLECTUAL PROPERTY, OUR BUSINESS COULD BE SERIOUSLY DAMAGED.
We rely on a combination of trademarks, copyrights and trade secret laws to
protect our proprietary rights in some of our products. Furthermore, it is our
policy that all employees and consultants involved in research and development
activities sign nondisclosure agreements. Our competitors may, however,
misappropriate our technology or independently develop technologies that are as
good as or better than ours. Our competitors may also challenge or circumvent
our proprietary rights. If we have to initiate or defend against an infringement
claim in the future to protect our proprietary rights, the litigation over such
claims could be time-consuming and costly to us, adversely affecting our
financial condition.
From time to time, we hire or retain employees or external consultants who
may work for other companies developing products similar to those offered by us.
These former employers may claim that our products are based on their products
and that we have misappropriated their intellectual property. Any such
litigation could prevent us from exploiting our patent portfolio and cause us to
incur substantial costs, which in turn could materially adversely affect our
business.
WE MAY BE LIABLE FOR THE CONTENT WE MAKE AVAILABLE ON THE INTERNET.
We make content available on our web sites and on the web sites of our
advertisers and distribution partners. The availability of this content could
result in claims against us based on a variety of theories, including
defamation, obscenity, negligence or copyright or trademark infringement. We
could also be exposed to liability for third party content accessed through the
links from our web sites to other web sites. We may incur costs to defend
ourselves against even baseless claims, and our financial condition could be
materially adversely affected if we are found liable for information that we
make available. Implementing measures to reduce our exposure may require us to
spend substantial resources and may limit the attractiveness of our services to
users.
WE MAY FACE EXPOSURE ON SALES AND/OR USE TAXES IN VARIOUS STATES.
Over the past several years, state tax authorities have made inquiries as
to whether or not our services might require the collection of sales and use
taxes from customers in those states. We evaluate such inquiries on a
case-by-case basis and have favorably resolved these tax issues in the past
without any material adverse consequences. However, 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 expenses have not been material, it is likely that such expenses
will grow in the future.
OUR GAMES AND GAME SHOWS ARE SUBJECT TO GAMING REGULATIONS.
We operate online games of skill and chance that, in some instance, reward
prizes. These games are regulated in many jurisdictions. The selection of
prizewinners is sometimes based on chance, although none of our games require
any form of monetary payment. The laws and regulations that govern these games,
however, are subject to differing interpretations in each jurisdiction and are
subject to legislative and regulatory change in any of the jurisdictions in
which we offer our games. If such changes were to happen, we may find it
necessary to eliminate, modify or cancel certain components of our products that
could result in additional development costs and/or the possible loss of
revenue.
WE ARE CURRENTLY INVOLVED IN LITIGATION MATTERS THAT COULD MATERIALLY IMPACT OUR
PROFITABILITY.
We are involved in two pending lawsuits in Canada, both involving
Interactive Network, Inc. Both NTN and Interactive Network have asserted claims
involving patent infringement and validity and certain other proprietary rights.
In February 2003, Interactive Network deposited $100,000 in Canadian dollars
with the Canadian court in compliance with the court's November 27, 2002 order,
as additional security for costs to be incurred by us in defense of the action,
in addition to $10,000 in Canadian dollars posted in November 1998 and the
$30,000 in Canadian dollars posted on June 16, 2000. These actions relate only
to the broadcast of the NTN Network to subscribers of our Canadian licensee and
do not extend to our network operations in the United States or elsewhere.
On March 21, 2003, Long Range Systems, Inc. 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. This complaint relates to our repair and replacement
activities of LRS pagers, which is not a significant percentage of our NTN
Wireless business. At this early stage, we do not believe that this
29
matter represents a significant level of exposure; however, we continue to
review the complaint. We intend to defend this action vigorously.
The foregoing claims may not be decided in our favor and we are not insured
against claims made. During the pendency of these claims, we will continue to
incur the costs of our legal defense.
IF OUR CHIEF EXECUTIVE OFFICER LEAVES US, OUR BUSINESS MAY BE ADVERSELY
AFFECTED.
Our success greatly depends on the efforts of our chief executive officer,
Stanley B. Kinsey. Our ability to operate successfully will depend significantly
on his services and contributions. Mr. Kinsey's employment agreement with NTN
was originally set to expire on October 6, 2002 and was extended through
December 31, 2002. He is presently an at-will employee. The compensation
committee of our Board of Directors is presently negotiating with Mr. Kinsey the
terms and conditions of an extension of his employment contract. Our business
and operations may be adversely affected if he were to leave.
RISKS FACTORS ASSOCIATED WITH THE NTN NETWORK
OUR CANADIAN LICENSEE HAS NOT YET CONVERTED TO OUR NEW DIGITAL NETWORK.
Our Canadian licensee to date has declined to convert its hospitality
customers to our new digital network and, as a result, remains on our old DOS
network. We now have converted all but 66 of our domestic hospitality sites to
our new digital network and we intend to discontinue our old DOS network in
December 2004.
If our Canadian licensee continues to refuse to convert to our new digital
network through the time we discontinue our DOS network in June 2004, this will
materially negatively impact their business and, therefore, our licensing
revenue may decline significantly as well.
WE DEPEND ON A SINGLE SUPPLIER OF PLAYMAKERS(R).
We currently purchase our 900-megahertz Playmakers from Climax Technology
Co. Ltd., an unaffiliated Taiwanese manufacturer. We are currently soliciting
bids for the manufacture of our Playmakers. Unless and until we succeed in
establishing additional manufacturing relationships, we will continue to depend
on our current sole source supplier of Playmakers. If we lose our supplier, our
growth may be slowed until an alternative supplier is identified.
COMMUNICATION FAILURES WITH OUR SUBSCRIBER LOCATIONS COULD RESULT IN THE
CANCELLATION OF SUBSCRIBERS AND A DECREASE IN OUR REVENUES.
We rely on both satellite and telephone systems to communicate with our
subscriber locations. We transmit our data to our hospitality customer sites via
PanAmSat's Galaxy IIIR ("GIIIR") satellite. Interruption in communications with
our subscriber locations under either system could decrease customer loyalty and
satisfaction and result in a cancellation of our services. We are continually
reviewing alternative telephone service providers and establishing contingency
plans; however, such alternative providers and contingency plans have not been
finalized.
In the event that we were forced to switch to another satellite, we would
incur significant costs associated with re-pointing its satellite receivers. In
addition, we could experience higher operating costs to transmit data to our
customers via telephone lines and the Internet during the transition period.
Another potential risk, as our country is at war, is the possibility that
our government could pre-empt our satellite for national security reasons, as
the United States satellite operators are federally licensed. This would appear
to be unlikely as our government has a strong communications infrastructure in
place domestically. Also, it is likely the satellite would not be at risk of
being damaged by any of the physical aspects of the war due to the fact that the
satellite orbits over 22,000 miles above the earth.
30
WE MAY SELL EQUITY INTERESTS IN BUZZTIME TO THIRD PARTIES, WHICH COULD RESULT IN
THE LOSS OF CONTROL OF BUZZTIME OR DEVALUATION OF OUR EQUITY INTEREST IN
BUZZTIME.
In June 2001, we sold a 6% interest in Buzztime to an affiliate of
Scientific-Atlanta, a leading cable television set-top box manufacturer. While
Scientific-Atlanta's investment position was converted to our common stock in
January 2003, we believe there may be divergent investment preferences between
the strategies pursued by the NTN Network and Buzztime and may decide in the
future to continue to raise additional financing by issuing and selling equity
interests in Buzztime to third parties. To enhance the ability of Buzztime to
raise such financing, we have previously contributed and may contribute in the
future some of our assets to Buzztime in order to allow the development of a
distinct identity that we believe is necessary for it to effectively grow as a
separate concern. These assets include our extensive trivia game show library
and our interactive play-along sports games and related intangible assets.
From an operational standpoint, we could lose control in Buzztime. If we
lose control, Buzztime may no longer provide adequate support and resources for
content and programming for the NTN Network, affecting the ability of the NTN
Network to continue its operations. From a financial viewpoint, we could
undervalue the stock of Buzztime when selling it to third parties or undervalue
assets transferred to Buzztime and this could devalue your holdings in NTN,
because we would not receive the fair value for our interest in Buzztime.
RISK FACTORS ASSOCIATED WITH BUZZTIME
IF OUR NEW BUZZTIME PROGRAMMING IS NOT ACCEPTED BY CONSUMERS, WE ARE NOT LIKELY
TO GENERATE SIGNIFICANT REVENUES OR BECOME
PROFITABLE.
The new Buzztime channel faces risks as to whether consumers will accept
interactive television products and the trivia programming produced by Buzztime.
If interactive television does not become a successful, scalable medium or if
consumers do not accept trivia and play-along sports games, then we will be
unable to draw revenues from advertising, direct-marketing of third-party
products, subscription fees and pay-per-play fees. Until a sufficient market
develops for the digital set-top boxes enabled to run our interactive television
game applications, our profit potential is uncertain and we may also face
competition from companies developing and marketing stand-alone game products
and services. We will also be unable to attract local cable operators to add
Buzztime programming as a channel to their service.
THE MARKET FOR INTERACTIVE TELEVISION GAMES AND SERVICES IS NEW AND MAY NOT
DEVELOP AS ANTICIPATED.
The interactive television market currently is small and emerging. Our
success will depend on the growth and development of this market in the United
States and it will depend upon the commercialization and broad acceptance by
consumers and businesses of a wide variety of interactive television products.
Demand and market acceptance of recently introduced products and services are
subject to a high level of uncertainty and, as a result, our profit potential is
unproven. In addition, the potential size of this new market opportunity and the
timing of its development and deployment are currently uncertain. Development
schedules of interactive television offered by our competitors have been delayed
or refocused as the industry evolves. If the market for interactive television
does not develop or develops more slowly than anticipated, our revenues will not
grow as fast as anticipated, if at all.
THE ADOPTION OF INCOMPATIBLE STANDARDS COULD RENDER OUR PRODUCTS OBSOLETE OR
NON-COMPETITIVE.
If a new digital set-top box standard is defined, we do not know whether
our products will be compatible with such a standard once it is defined. The
establishment of multiple standards could hurt our business and significantly
increase our expenses, particularly if our products require significant
redevelopment in order to conform to the newly established standards. Any delay
or failure on our part to respond quickly, cost-effectively and sufficiently to
these developments could render our existing products and services obsolete and
cause us not to be competitive, resulting in a decrease in our revenues without
a corresponding decrease in our expenses. We may have to incur substantial
expenditures to modify or adapt our products or services to respond to these
developments. We must be able to incorporate new technologies into the products
we design and develop in order to address the increasingly complex and varied
needs of our customer base.
31
INCREASING GOVERNMENT REGULATION COULD CAUSE DEMAND FOR OUR PRODUCTS AND
SERVICES TO DECLINE SIGNIFICANTLY.
We are subject not only to regulations applicable to businesses generally,
but also laws and regulations that apply directly to the industry of interactive
television products. Although there are currently few such laws and regulations,
state and federal governments may adopt a number of these laws and regulations
governing any of the following issues:
o user privacy;
o copyrights;
o consumer protection;
o the media distribution of specific material or content; and
o the characteristics and quality of interactive television products and
services.
One or more states or the federal government could enact regulations aimed
at companies, like us, which provide interactive television products. The
likelihood of such regulation being enacted will increase as interactive
television becomes more pervasive and extends to more people's daily lives. Any
such legislation or regulation could dampen the growth of the industry of
interactive television. If such a reduction in growth occurs, demand for our
products and services may decline significantly.
On January 18, 2001, the Federal Communications Commission ("FCC") issued a
notice of inquiry concerning interactive television. The notice raised a series
of questions that suggest that cable systems might be regarded as essential,
open platforms of spectrum for non-discriminatory third-party access, rather
than facilities-based providers competing in a wider market. The notice sought
comments on the nature of interactive television and whether cable systems will
be a "superior platform" for providing interactive television. The notice asked
very detailed questions, many of which arise from a common regulatory premise:
whether cable operators who are affiliated with interactive television providers
should not be permitted to "discriminate" in favor of their own interactive
television services with respect to spectrum usage and whether interactive
television providers affiliated with cable operators may need to be subjected to
non-discrimination rules so that they may not obtain leverage from any exclusive
arrangement they would otherwise negotiate with popular programmers. The outcome
of the notice will determine whether or not a subsequent rulemaking will be held
in order to create regulations for the interactive television industry. Any
regulation of this industry could impact on Buzztime and its operations.
WE MAY HAVE DIFFICULTY RECRUITING PROFESSIONALS FOR OUR BUSINESS.
Our business requires experienced programmers, creative designers, and
application developers. Our success will depend on identifying, hiring, training
and retaining such experienced, knowledgeable professionals. We must recruit
talented professionals in order for our business to grow. There is significant
competition for employees with the skills required to develop the products and
perform the services we offer. There can be no assurance that we will be able to
attract a sufficient number of qualified employees in the future to sustain and
grow our business, or that we will be successful in motivating and retaining the
employees we are able to attract. If we cannot attract, motivate and retain
qualified professionals, our business, financial condition and results of
operations will suffer.
RISK FACTORS ASSOCIATED WITH OUR COMMON STOCK
WE DO NOT COMPLY WITH THE AMERICAN STOCK EXCHANGE GUIDELINES AND MAY BE DELISTED
OR SUSPENDED FROM TRADING.
In 2002, the American Stock Exchange ("AMEX") adopted several new listing
standards. One new standard was established for listed companies that had at
least five consecutive years of losses as we do. Such companies must maintain
shareholders' equity of at least $6.0 million. We submitted a plan to achieve
compliance with that standard to AMEX, which they approved with the
understanding that compliance would be demonstrated on or about mid-November
2002. Our plan was to increase our shareholders' equity through a combination of
conversion of equity-like instruments (including the exchange of Buzztime Series
A preferred stock held by Scientific-Atlanta and the conversion of our
subordinated convertible notes) on our balance sheet and by raising additional
equity.
32
The combination of the conversions of the equity-like instruments and the
$1.0 million investment by Robert M. Bennett in January 2003 with our December
31, 2002 shareholders' equity position of $1.48 million yields a sum of $5.12
million. While the January 2003 events have occurred on dates outside of the
timeframe allowed under our plan with AMEX, the AMEX staff has continued to
monitor our financial performance and the outcome of our equity-raising efforts
and has allowed us to continue our listing on an exception basis.
We remain in discussions with several strategic investors as well as
financial investors that we have contacted through investment-banking firms. We
also have considered several acquisitions for stock which would additionally
bring us into compliance. We believe that if we do not exercise our options and
fail to achieve compliance with the new $6 million net worth standard within
approximately one month of filing this document, we will likely enter into a
process of letters and hearings regarding our continued listing. We believe that
process will take several months. We continue to believe that we will be able to
raise the additional equity capital or consummate an acquisition for stock in
order to comply with our plan with AMEX during the extended time period afforded
by the AMEX hearing process. However, there can be no assurance that we will be
able to obtain additional equity financing on terms favorable to us or at all.
To date, AMEX has not taken any action regarding delisting. Still, our
common stock may not remain listed on AMEX or any other exchange or quotation
system in the future. If our common stock is delisted from AMEX, spreads can
often be higher for securities traded on the over-the-counter market and the
execution time for orders may be longer. Thus, removing our stock from AMEX may
result in decreased liquidity by making the trading of our stock less efficient.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND YOUR INVESTMENT COULD SUFFER A
DECREASE IN VALUE.
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. The stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products and media properties
by us or our competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, and the market
prices for Internet-related companies in particular, have experienced extreme
volatility that often has been unrelated to the operating performance of such
companies. These broad market and industry fluctuations may adversely affect the
price of our stock, regardless of our operating performance.
OUR CHARTER CONTAINS PROVISIONS THAT MAY HINDER OR PREVENT A CHANGE IN CONTROL
OF OUR COMPANY, WHICH COULD RESULT IN OUR INABILITY TO APPROVE A CHANGE IN
CONTROL AND POTENTIALLY RECEIVE A PREMIUM OVER THE CURRENT MARKET VALUE OF YOUR
STOCK.
Certain provisions of our certificate of incorporation could make it more
difficult for a third party to acquire control of us, even if such a change in
control would benefit our stockholders. For example, our certificate of
incorporation requires a supermajority vote of at least 80% of the total voting
power, voting together as a single class, to amend certain provisions of such
document, including those provisions relating to:
o the number, election and term of directors;
o the removal of directors and the filling of vacancies; and
o the supermajority voting requirements of our Certificate of
Incorporation.
These provisions could discourage third parties from taking over control of
our company. Such provisions may also impede a transaction in which you could
receive a premium over then current market prices and your ability to approve a
transaction that you consider in your best interests.
IF THE SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE ARE SOLD, THE MARKET
PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.
Future sales of substantial amounts of our common stock in the public
market or the anticipation of such sales could have a material adverse effect on
then-prevailing market prices. As of February 28, 2003, there were approximately
9,423,000 shares of common stock reserved for issuance upon the exercise of
outstanding stock options at exercise prices ranging from $0.45 to $6.375
33
per share. As of February 28, 2003, there were also outstanding warrants to
purchase an aggregate of approximately 2,526,000 shares of common stock at
exercise prices ranging from $0.50 to $3.75 per share. As of February 1, 2003,
there were approximately 1,569,000 shares of common stock issued upon the
conversion of the senior convertible subordinated notes at a conversion price of
$1.275. Additionally, we have approximately $14 million of common stock
remaining under our existing shelf registration for possible future sale.
The foregoing options and warrants could adversely affect our ability to
obtain future financing or engage in certain mergers or other transactions,
since the holders of these options and warrants can be expected to exercise them
at a time when we would be able to obtain additional capital through a new
offering of securities on terms more favorable than those provided by such
options and warrants. For the life of such options and warrants, the holders are
given the opportunity to profit from a rise in the market price of our common
stock without assuming the risk of ownership. To the extent the trading price of
our common stock at the time of exercise of any such options or warrants exceeds
the exercise price, such exercise will have a dilutive effect on our
stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to currency exchange rates, stock market
fluctuations, and interest rates. As of December 31, 2002, we owned common stock
of an Australian company that is subject to market risk. At December 31, 2002,
the carrying value of this investment was $178,000, which is net of a $639,000
unrealized loss. This investment is exposed to further market risk in the future
based on the operating results of the Australian company and stock market
fluctuations. Additionally, the value of the investment is further subject to
changes in Australian currency exchange rates. At December 31, 2002, a
hypothetical 10% decline in the value of the Australian dollar would result in a
reduction of $18,000 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 a rate equal to the prime rate plus
1.5% per annum, which cannot be less than 9% per annum. At December 31, 2002, a
hypothetical one-percentage point increase in the prime rate would result in an
increase of $24,000 in annual interest expense. On February 1, 2003, the
convertible notes converted to NTN common stock.
We do not have any derivative financial instruments. Nor do we have any
speculative or hedging instruments.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule on page F-1,
for a listing of the Consolidated Financial Statements and Schedule filed with
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth as of March 8, 2003 certain information
regarding our directors and executive officers:
NAME AGE(4) POSITION(S) HELD
- ------------------------ ------ ---------------------------------------------
Stanley B. Kinsey(3).... 49 Chief Executive Officer and Chairman of the
Board
Barry Bergsman(1)(2).... 64 Director
Robert M. Bennett(1).... 74 Director
Robert B. Clasen........ 58 Director
Michael Fleming(3)...... 51 Director
Esther L. Rodriguez(1).. 61 Director
Gary Arlen(2)(3)........ 58 Director
Vincent A. Carrino(3)... 47 Director
Mark deGorter........... 45 President and Chief Operating Officer, NTN
Network
V. Tyrone Lam........... 41 President and Chief Operating Officer,
Buzztime Entertainment, Inc.
James B. Frakes......... 46 Chief Financial Officer
- ----------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Board of Directors, Buzztime Entertainment, Inc.
(4) As of March 8, 2003.
The following biographical information is furnished with respect to the
directors and executive officers:
STANLEY B. KINSEY has served as Chairman and Chief Executive Officer of NTN
since October 1998. Mr. Kinsey was appointed as a Director in November 1997 and
his current term expires in 2005. From 1980 to 1985, Mr. Kinsey was a senior
executive with the Walt Disney Company. In 1985, Mr. Kinsey left his position as
senior vice president of operations and new technologies for The Walt Disney
Studio to co-found IWERKS Entertainment, a high-technology entertainment
company. Mr. Kinsey was chairman and chief executive officer at IWERKS from
inception until 1995 when he resigned to spend more time with his family.
BARRY BERGSMAN has been a Director since August 1998 and his current term
expires in 2005. He is president of Baron Enterprises, Inc., a privately owned
consulting company established in 1965. As president of Intertel Communications,
Inc., from 1985 to 1998, Mr. Bergsman pioneered the use of the telephone and
interactive technology for promotion, entertainment and information. Prior to
1985, Mr. Bergsman was engaged in television production and syndication and was
an executive with CBS. He currently serves as a director and member of the
management team of Photogenesis, Inc., a private medical device and
biotechnology company.
ROBERT M. BENNETT has been a Director since August 1996 and his current
term expires in 2004. Since 1989, Mr. Bennett has been chairman of the board of
Bennett Productions, Inc., a production company with experience in virtually all
areas of production including syndicated sports and specialty programming, music
videos, commercial productions, home video, corporate communications and feature
films. Mr. Bennett was president of Metromedia Broadcasting from 1982 until
1986. His career in broadcasting began at KTTV, Metromedia's broadcast division.
In 1972, Mr. Bennett joined Boston Broadcasters, Inc. (BBI), serving as
president and director from 1979 until 1982. In 1991, he acquired full ownership
from his partners of Trans Atlantic Entertainment, Inc., owner of film and video
libraries. Mr. Bennett was named to The Broadcasting and Cable Hall of Fame on
November 7, 1994.
ROBERT B. CLASEN has been a Director since November 2001 and his current
term expires in 2004. For most of the past ten years, Mr. Clasen has been
President and CEO of Clasen Associates, an advisor to a broad range of
technology and service companies who operate in the broadband, wireless and
satellite sectors. In this capacity he often has served as an interim executive.
In January 2002, he was appointed Acting Chairman and Chief Executive Officer of
Inetcam, Inc., a privately held international streaming media management
software company that develops and globally distributes high-performance
multimedia webcasting solutions where he served for five months. Since
September, 2002, Mr. Clasen has served as Interim Chief Strategy Officer and
director for Path 1
35
Network Technologies (PNWK), a publicly traded provider of broadcast quality
video over packet-based networks. He also serves as Chairman for Broadband
Innovations and Lightwave Solutions, two San Diego companies providing
components to the cable television industry. From 1999 until June 2001, Mr.
Clasen served as Chairman and Chief Executive Officer of ICTV, an
interactive/internet television provider. From June 2001 until December 2001,
Mr. Clasen remained as Chairman of the board at ICTV and, since December 2001,
he has continued to serve as a director for ICTV. During 1997, Mr. Clasen served
as President and Chief Executive Officer of ComStream Corporation, an
international provider of digital transmission solutions for voice, data,
imaging, audio and video applications during the sale of the company. Prior to
1997, Mr. Clasen held positions as President of each of Comcast International
Holdings, the international division of Comcast Cable Communications, and
Comcast Cable Communications, one of the country's five largest cable television
companies.
MICHAEL FLEMING was appointed a Director in November 2001 and his current
term expires in 2003. Since May 2002, he has also served as Chairman of the
Board of our Buzztime Entertainment, Inc. subsidiary. Mr. Fleming is currently
chairman and Chief Executive Officer of the Fleming Media Group, advising a
broad range of content and technology companies on interactive television,
broadband, wireless and other convergent technology opportunities. He is the
founder and recent past-President of Game Show Network, a satellite delivered
television programming service dedicated to the world of games and game play.
Mr. Fleming has held senior executive positions at Playboy Entertainment Group,
ESPN, Turner Broadcasting and Warner Amex Satellite Entertainment Company. He
was inducted into the Cable Pioneers in 1999.
ESTHER L. RODRIGUEZ has been a Director since September 1997 and her
current term expires in 2004. She served in various executive capacities since
joining General Instrument (now Motorola's Broadband Communications Division)
from 1987 until her retirement in November 1996. As vice president of worldwide
business development for General Instrument, Ms. Rodriguez was instrumental in
developing the first nationwide home satellite pay-per-view business in the
United States. She was also general manager and chief operating officer of
General Instrument's Satellite Video Center, a General Instrument-Cable Data
partnership, and was a founding member of the Partnership Council. After leaving
General Instrument, she founded and continues to serve as chief executive
officer of Rodriguez Consulting Group, a business development consulting firm.
Ms. Rodriguez has over 30 years of experience in the development and management
of consumer and commercial multi-national businesses, as well as entertainment
and educational networks and systems.
GARY ARLEN was appointed as a Director in August 1999 and his current term
expires in 2003. Since 1980, he has been president of Arlen Communications,
Inc., a research and consulting firm specializing in interactive information,
transactions, telecommunications and entertainment. Arlen Communications
provides research and analytical services to domestic and international
organizations in entertainment, media, telecommunications and Internet
industries. In 1981, Mr. Arlen, an interactive media analyst, founded the group
now known as the Internet Alliance, an industry group representing the interest
of online content and service suppliers. Mr. Arlen is a member of the Academy of
Digital TV Pioneers.
VINCENT A. CARRINO was appointed as a Director in September 1999 and his
current term expires in 2003. Mr. Carrino is founder and president of Brookhaven
Capital Management, LLC, a private investment firm focusing on technology
companies, established by him in 1985. He also currently serves as executive
vice president and director of investments for Fidelity National Financial, a
title insurance and real estate services company. Prior to establishing
Brookhaven Capital Management, LLC, Mr. Carrino was an analyst with Alliance
Capital Management and was an investment banker with CitiBank in New York.
MARK DEGORTER was appointed President and Chief Operating Officer of the
NTN Network in January 2001. Prior to that time, Mr. deGorter served as Vice
President of Marketing of our Buzztime subsidiary. Further, during the third
quarter of 2000, Mr. deGorter assumed the additional role of Vice President of
Marketing for the NTN Network. Prior to joining Buzztime in April 2000, Mr.
deGorter had served as Vice President of Marketing for MET-Rx USA, a sports
nutrition company, since July 1997. From June 1994 until July 1997, Mr. deGorter
was a senior manager with ProShot Golf, Inc., a global positioning
satellite-based communications and information system for the golf industry.
During his career, Mr. deGorter has held key management positions with Bally's
Total Fitness, a public company operating commercial fitness centers in North
America; L.A. Gear, a licensor of trademarks and trade names for use in
conjunction with apparel, accessory and consumer-related products; and J. Walter
Thompson/USA, a multi-media advertising agency with worldwide operations.
V. TYRONE LAM was appointed President of Buzztime Entertainment, Inc. in
December 1999, upon incorporation of the subsidiary. Prior to his current
appointment, Mr. Lam served as executive vice president of NTN, responsible for
sales, marketing and operations of the NTN Network. Before joining NTN in 1994,
he managed the development of iTV game and sports applications for EON
Corporation, formerly known as TV Answer, a pioneer in the interactive
television industry, from April 1992 until December 1994. Additionally, Mr. Lam
has served in sales and marketing management
36
positions within the PC software industry, is past chairman of the Interactive
Services Association's Interactive Television Council and is an author of
articles on interactive television and sales and marketing strategies.
JAMES B. FRAKES was appointed Chief Financial Officer and Secretary of NTN
in April 2001. Prior to joining us, Mr. Frakes was chief financial officer and a
director of Play Co. Toys, a publicly held chain of retail toy stores, where he
had been since 1997. On March 28, 2001, Play Co. Toys and its majority-owned
subsidiary, Toys International.com, Inc., filed a Chapter 11 petition under
federal bankruptcy laws in the Southern District in the State of New York. From
June 1990 to March 1997, Mr. Frakes was chief financial officer and a director
of Urethane Technologies, Inc., a publicly held specialty chemical company, and
two of its subsidiaries, Polymer Development Laboratories, Inc. and BMC
Acquisition, Inc., chemical companies focused on the polyurethane segment of the
plastics industry. From 1985 to 1990, Mr. Frakes was a manager at Berkeley
International Capital Corporation, an investment banking firm specializing in
later stage venture capital and leveraged buyout transactions. Mr. Frakes serves
on the board of Shopnet.com, Inc., a designer and distributor of swimwear.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under federal securities laws, our directors and officers and any persons
holding more than 10% of our common stock are required to report their
beneficial ownership of our common stock and any changes in that ownership to
the Securities and Exchange Commission. Accelerated due dates for these reports
were established in August 2002, and we are required to report any failure to
file by these dates. We believe that, based on the written representations of
our directors and officers and copies of reports filed with the Commission in
2002, our directors, officers and holders of more than 10% of our common stock
complied with the requirements of Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the compensation paid or accrued as of each of
the last three fiscal years to all individuals who served as our chief executive
officer during 2002 and the four other most highly compensated executive
officers who were serving as executive officers at the end of 2002 whose salary
and bonus exceeded $100,000 (collectively, the "Named Executive Officers"):
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION OPTIONS
---------------------------- ------ ----------- ----------- ------------- ------------
Stanley B. Kinsey(2).................. 2002 $313,542 $24,000(3) -- 100,000
Chief Executive Officer 2001 305,386 -- -- 350,000
And Chairman of the Board 2000 295,057 -- -- --
V. Tyrone Lam......................... 2002 $222,156 $15,000(3) -- 100,000
President and Chief Operating Officer 2001 223,077 -- -- --
Buzztime Entertainment, Inc. 2000 198,077 -- -- --
Mark deGorter(4)...................... 2002 $222,538 $60,000(3) -- 250,000
President and Chief Operating 2001 199,038 25,382(5) -- 150,000
Officer, The NTN Network 2000 127,212 -- -- 250,000
James B. Frakes(6) ................... 2002 $159,000 $20,000(3) -- --
Chief Financial Officer 2001 111,539 10,000 -- 250,000
2000 -- -- -- --
- ----------
(1) Includes amounts, if any, deferred under NTN's 401(k) Plan.
(2) Mr. Kinsey waived compensation for serving as a director of NTN. Mr. Kinsey
received perquisites and personal benefits that did not exceed the lesser
of $50,000 or 10% of his annual salary and bonus.
(3) Represents bonus paid out pursuant to the 2002 performance-based bonus
program. All of Mr. Kinsey's 2002 bonus and $8,000 of Mr. Frakes' 2002
bonus have yet to be paid.
(4) Mr. deGorter joined NTN in April 2000.
37
(5) Represents a bonus paid to Mr. deGorter in March 2002 based upon exceeding
established targets for the NTN Network for the fiscal year ended 2001.
(6) Mr. Frakes joined NTN in April 2001.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning grants of stock options
during 2002 with respect to the Named Executive Officers:
INDIVIDUAL GRANTS
-------------------------------------------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR PRICE DATE VALUE(1)
-------------------- ---------- ------------- ---------- ---------- ----------
Stanley B. Kinsey... 100,000(2) 10% $0.75 10/6/12 $63,166
V. Tyrone Lam....... 100,000(3) 10% 0.79 02/18/12 67,739
Mark deGorter....... 250,000(4) 25% 0.79 02/18/12 169,349
James B. Frakes..... -- -- -- -- --
- ----------
(1) The present value of grant on the grant date was estimated using the Black
Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0%, risk-free interest rate of 3.92%,
expected volatility of 125.35%, and expected option life of 5 years.
(2) Represents options granted under the 1995 Stock Option Plan, which became
fully vested and exercisable as of December 31, 2002. The options were
granted to Mr. Kinsey in exchange for Mr. Kinsey's agreement to reset the
commencement of the renewal term of his employment agreement to January 1,
2003.
(3) Represents options granted under the 1995 Stock Option Plan which become
exercisable as to 25% of the total shares on the first anniversary of the
date of grant and will become exercisable as to an additional 1/36 of the
remaining shares on the last day of each of the thirty-six (36) calendar
months immediately following the first anniversary of the grant date.
(4) Represents options granted pursuant to the Option Exchange Agreement, dated
as of February 19, 2002, entered into by and between Mr. deGorter and us
whereby Mr. deGorter surrendered 250,000 partially-vested options
previously granted in February 2000 in exchange for 250,000 options which
become exercisable as to 25% of the total shares on the first anniversary
of the date of grant and will become exercisable as to an additional 1/36
of the remaining shares on the last day of each of the thirty-six (36)
calendar months immediately following the first anniversary of the grant
date.
FISCAL YEAR-END OPTION VALUES
The following table contains information concerning stock options which
were unexercised at the end of 2002 with respect to the Named Executive
Officers. No stock options were exercised in 2002 by any Named Executive
Officer.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY
AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END(1)
-------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- --------------- --------------- -------------- -------------
Stanley B. Kinsey.. 2,350,000 -- $767,500 --
V. Tyrone Lam...... 500,000 100,000 128,500 41,000
Mark deGorter...... 71,875 328,125 50,313 157,188
James B. Frakes.... 98,958 151,042 59,375 90,625
- ----------
(1) Represents the amount by which the aggregate market price on December 31,
2002 of the shares of our Common Stock subject to such options exceeded the
respective exercise prices of such options.
DIRECTOR COMPENSATION
During 2002, directors were entitled to receive cash compensation of $2,400
per month for their services as directors. Further, directors who serve on
either the audit or compensation committees or the board of directors of
Buzztime Entertainment, Inc. were entitled to receive an additional $3,000
annually for each such service. In 2002, Messrs. Bennett and Carrino have
elected to receive shares of common stock in lieu of the cash component of
director compensation. Directors are also eligible for the grant of options to
purchase common stock from time to time for services in their capacity as
directors.
38
Upon the date of commencement of a director's term of service, we grant to
each director options to purchase 20,000 shares of our common stock. These
options are priced at the closing market price of the common stock on the date
of grant. As of the date of grant, 10,000 options are fully vested and
exercisable; thereafter, the remaining 10,000 options vest and become
exercisable in equal installments each month immediately subsequent to the date
of grant and up to the date of the next annual meeting of shareholders. Further,
after the initial year of a director's term of service, options to purchase an
additional 20,000 shares of common stock shall be granted each year on the date
of our annual meeting of shareholders during the remainder of the term of
service. The additional options shall be priced at the closing market price of
the common stock on the date of grant and shall vest and become exercisable as
to 1/12 of the shares each month following the date of grant, subject to the
director's continuing service. A director who is re-elected for an additional
term of service will be granted options to purchase 20,000 shares of common
stock, priced at the closing market price of the common stock on the date of our
annual meeting of shareholders, subject to monthly vesting and continued
service. Finally, all options granted to directors as compensation for service
on the Board of Directors shall expire on the earlier of ten years from the date
of grant or two years from the date the director ceases to serve on the Board of
Directors. The options provide for immediate vesting in full in the event of a
change of control event.
EMPLOYMENT CONTRACTS
In October 1998, we entered into a written employment agreement pursuant to
which Mr. Kinsey is to receive a bonus under a bonus program that was to be
agreed upon by and between Mr. Kinsey and the compensation committee of our
board of directors. On October 7, 1999, we entered into an addendum to the
employment agreement with Mr. Kinsey setting forth the terms of the bonus
program. Under the bonus program, the options granted to Mr. Kinsey in October
1999 were granted at a preferred, below market, price of $0.98 per share, the
average closing price of our Common Stock during the three calendar quarters
immediately prior to the grant date. The options were granted to Mr. Kinsey
pursuant to our 1995 Employee Stock Option Plan and are subject to immediate
vesting upon the occurrence of a change of control event. In January 2001, we
amended the employment agreement with Mr. Kinsey to extend the duration of the
agreement by one year until October 6, 2002 and to award options for an
additional 350,000 shares of our Common Stock at an exercise price of $0.875 per
share. On October 7, 2002, Mr. Kinsey was granted options in exchange for his
agreement to reset the commencement of the renewal term of the employment
agreement to January 1, 2003.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All compensation determinations for 2002 for our executive officers were
made by the Board of Directors as a whole upon the recommendation of the
Compensation Committee. During 2002, Mr. Bennett and Mr. Bergsman served on the
Compensation Committee. None of our directors or executive officers has served
on the board of directors or the compensation committee of any other company or
entity, any of whose officers served either on our Board of Directors or on our
Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 8, 2003 the number and
percentage ownership of common stock by (i) all persons known to us to own
beneficially more than 5% of the outstanding shares of Common Stock based upon
reports filed by each such person with the Securities and Exchange Commission,
(ii) each of our directors, (iii) each of the named executive officers, and (iv)
all of the named executive officers and directors as a group. Except as
otherwise indicated and subject to applicable community property and similar
laws, each of the persons named has sole voting and investment power with
respect to the shares of Common Stock shown. Except as otherwise indicated, the
address for each person is c/o NTN Communications, Inc., 5966 La Place Court,
Carlsbad, California 92008. An asterisk denotes beneficial ownership of less
than 1%.
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME OWNED COMMON STOCK(1)
- ---------------------------------------------------- ------------------- ----------------
Gary Arlen(2)...................................... 139,333 *
Robert M. Bennett(3)............................... 1,277,857 3%
Barry Bergsman(4).................................. 233,333 1%
Vincent A. Carrino(5).............................. 5,859,019 14%
Robert B. Clasen(6)................................ 48,333 *
Michael Fleming(7)................................. 38,333 *
Esther L. Rodriguez(8)............................. 201,099 *
Stanley B. Kinsey(9)............................... 2,474,333 5%
V. Tyrone Lam(10).................................. 529,722 1%
Mark deGorter(11).................................. 159,514 *
James B. Frakes(12) ............................... 153,437 *
------------------- ----------------
All executive officers and directors of NTN as a
Group (11 persons)(13)............................. 11,114,313 26%
=================== ================
39
- ----------
(1) Included as outstanding for purposes of this calculation are 43,040,681
shares of Common Stock (the amount outstanding as of March 8, 2003) plus,
in the case of each particular holder, the shares of Common Stock subject
to currently exercisable options, warrants, or other instruments
exercisable for or convertible into shares of Common Stock (including such
instruments exercisable within 60 days after March 8, 2003) held by that
person, which instruments are specified by footnote. Shares issuable as
part or upon exercise of outstanding options, warrants, or other
instruments other than as described in the preceding sentence are not
deemed to be outstanding for purposes of this calculation.
(2) Includes 138,333 shares subject to currently exercisable options held by
Mr. Arlen.
(3) Includes 138,333 shares subject to currently exercisable options held by
Mr. Bennett.
(4) Includes 138,333 shares subject to currently exercisable options and 20,000
shares subject to currently exercisable warrants held by Mr. Bergsman.
(5) Includes 238,333 shares subject to currently exercisable options held by
Mr. Carrino. Also includes 308,241 shares owned directly by Mr. Carrino and
5,312,445 shares owned, directly or indirectly, by investment advisory
clients of Brookhaven Capital Management, LLC, which in some cases has sole
voting and investment discretion over such shares. Mr. Carrino is the sole
owner and the Manager of Brookhaven Capital Management, LLC and, as such,
in some cases he may be deemed to beneficially own such shares. Mr. Carrino
disclaims such beneficial ownership. Brookhaven Capital Management is
located at 3000 Sand Hill Road, Menlo Park, CA 94205.
(6) Includes 38,333 shares subject to currently exercisable options held by Mr.
Clasen. Includes 10,000 owned by the Clasen Family Trust, of which Mr.
Clasen is co-trustee with members of his immediate family. As co-trustee,
Mr. Clasen shares voting and investment power with respect to the shares.
(7) Includes 38,333 shares subject to currently exercisable options held by Mr.
Fleming.
(8) Includes 138,333 shares subject to currently exercisable options held by
Ms. Rodriguez. Also includes 1,000 shares owned by the Rodriguez Family
Trust, of which Ms. Rodriguez is a co-trustee with members of her immediate
family. As co-trustee, Ms. Rodriguez shares voting and investment power
with respect to the shares.
(9) Includes 2,350,000 shares subject to currently exercisable options held by
Mr. Kinsey.
(10) Represents shares subject to currently exercisable options held by Mr. Lam.
(11) Represents shares subject to currently exercisable options held by Mr.
deGorter.
(12) Represents shares subject to currently exercisable options held by Mr.
Frakes.
(13) Includes 4,061,004 shares subject to currently exercisable options and
warrants held by executive officers and directors, including those
described in notes (2) through (12) above.
EQUITY COMPENSATION PLANS
The following table sets forth as of December 31, 2002 our compensation
plans authorizing us to issue equity securities and the number of securities
issuable thereunder.
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
- --------------------- ----------------------- ------------------------ --------------------------------
EQUITY COMPENSATION
PLANS APPROVED BY 8,212,211(1) $1.35 2,679,023(2)
SECURITY HOLDERS
EQUITY COMPENSATION
PLANS NOT APPROVED BY 1,377,000(4) $2.03 0
SECURITY HOLDERS
----------------------- --------------------------------
TOTAL 9,589,211 2,679,023(3)
======================= ================================
- ----------
(1) Includes 7,712,211 shares issuable upon exercise of options granted
pursuant to the NTN Communications, Inc. 1995 Employee Stock Option Plan
and 500,000 shares issuable upon exercise of options granted pursuant to
the NTN Communications, Inc. 1996 Special Stock Option Plan.
(2) Remaining available for grant under the NTN Communications, Inc. 1995
Employee Stock Option Plan.
(3) Does not include 300,000 shares of Buzztime Entertainment, Inc. common
stock available for grant under the Buzztime Entertainment, Inc. 2001
Incentive Stock Option Plan. To date, no options have been granted under
the plan.
(4) The 1,377,000 shares issuable that are not pursuant to equity compensation
plans approved by security holders are all pursuant to warrants granted in
connection with consulting agreements with non-employees. Warrants to
purchase 685,000 shares were granted in 2002, 190,000 shares in 2001 and
885,000
40
shares in 2000. As of December 31, 2002, the range of exercise prices and
the weighted-average remaining contractual life of outstanding warrants was
$0.50 to $3.75 and 4 years, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING ARRANGEMENTS
On May 8, 2001, we entered into an advertising sales representative
agreement with Baron Enterprises, Inc., a corporation wholly-owned and operated
by Barry Bergsman, a member of our board of directors, pursuant to which Baron
provides advertising sales representation services to us under the direction of
the NTN Network's president and chief operating officer. For Baron's services
under the advertising sales representative agreement, we granted Baron a
three-year warrant to purchase 20,000 shares of Common Stock at an exercise
price of $0.50 per share. The warrant vests and becomes exercisable as to 1/12
of the total shares on the last business day of each of the twelve months
commencing April 2001, subject to Baron continuing to provide services to us. In
addition, Baron will receive a commission in the amount of 35% of net
advertising revenues received by the NTN Network from any advertising contract
solicited by Baron. We will pay to Baron a monthly recoverable cash advance
against commissions to be earned in the amount of $5,000 per month, not to
exceed an aggregate of $60,000 per year. The advertising sales representative
agreement expired on April 1, 2002. An amendment to the agreement was entered
into in October 2002, to extend the contract to October 31, 2003, to reduce the
rate of commission to 25% of net advertising revenues received by us and to
include bartered advertising. Under the amended agreement, Baron was paid
$15,000 in commissions in 2002.
INDEMNITY AGREEMENTS
We have entered into indemnity agreements with each of our directors and
executive officers. The indemnity agreements provide that we will indemnify
these individuals under certain circumstances against certain liabilities and
expenses they may incur in their capacities as directors or officers. We believe
that the use of such indemnity agreements is customary among corporations and
that the terms of the indemnity agreements are reasonable and fair, and are in
our best interests to retain experienced directors and officers.
CHANGE OF CONTROL ARRANGEMENTS
We have entered into change of control employment agreements with certain
of our executive officers. The agreements provide that, if the executive is
terminated other than for cause within one year after a change of control of the
Company, then the executive is entitled to receive a lump sum severance payment
equal to up to one year's base salary.
ITEM 14. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures", as such term is defined
under Exchange Act Rule 13a-14(c), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. We
have carried out an evaluation, within the 90 days prior to the date of filing
of this report, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon their evaluation and subject to the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that there were no
significant deficiencies or material weaknesses in the our disclosure controls
and procedures and therefore there were no corrective actions taken.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date we
completed our evaluation.
41
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE. The consolidated financial
statements and schedule of the Company and its consolidated subsidiaries are set
forth in the "Index to Consolidated Financial Statements and schedule" on page
F-1.
EXHIBITS. The following exhibits are filed as a part of this report:
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------
3.1 -- Amended and Restated Certificate of Incorporation of the
Company, as amended(4)
3.2 -- Certificate of Designations, Rights and Preferences of
Series B Convertible Preferred Stock(8)
3.3 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 22, 2000(9)
3.4 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 24, 2000(9)
3.5 -- By-laws of the Company(2)
4.1 -- Specimen Common Stock Certificate(13)
4.2 -- Securities Purchase Agreement, dated November 14, 2000,
by and among NTN Communications, Inc. and the Buyers, as
defined therein(11)
4.3 -- Registration Rights Agreement, dated November 14, 2000,
by and among NTN Communications, Inc. and the Buyers, as
defined therein(11)
4.4 -- First Amendment to Securities Purchase Agreement, dated
January 26, 2001, by and among NTN Communications, Inc. and
the Buyers, as defined therein.(12)
4.5 -- Form of Amended and Restated Common Stock Purchase
Warrants of NTN Communications, Inc., dated January 26,
2001(12)
4.6* -- Stock Option Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(5)
4.7* -- Stock Option Agreement, dated October 7, 1999, by and
between NTN Communications, Inc. and Stanley B. Kinsey(7)
4.8* -- Stock Option Agreement, dated January 26, 2001, by and
between NTN Communications, Inc. and Stanley B. Kinsey(15)
10.1 -- License Agreement with NTN Canada(3)
10.2* -- Employment Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(5)
10.3 -- Loan and Security Agreement, dated August 6, 1999, by
and between NTN Communications, Inc. and Coast Business
Credit, a division of Southern Pacific Bank.(6)
10.4 -- First Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit (6)
10.5 -- Second Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (15)
10.6 -- Third Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (15)
10.7 -- Fourth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(16)
10.8 -- Manufacturing Agreement, dated November 25, 1997, by
and between NTN Communications, Inc. and Climax Technology
Co., Ltd. (10)
10.9 -- Office Lease, dated July 17, 2000, between Prentiss
Properties Acquisition Partners, L.P. and NTN
Communications, Inc. (14)
10.10 -- Fifth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(17)
10.11 -- Sixth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(18)
10.12 -- Seventh Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(18)
10.13 -- Eighth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(1)
10.14 -- Ninth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(1)
42
14.0 -- Code of Ethics for Senior Financial Officers (1)
21.1 -- Subsidiaries of Registrant (1)
23.1 -- Consent of KPMG LLP(1)
- ----------
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's registration statement on Form
S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to NTN's report on Form 10-K for the
year ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-69383, filed on December 28, 1998, and incorporated
by reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 30, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 31, 1999 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on
April 5, 2000 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's report on Form 10-K/A dated
March 5, 2001 and incorporated herein by reference.
(11) Previously filed as an exhibit to NTN's registration statement on Form
S-3, filed on December 11, 2000, and incorporated by reference.
(12) Previously filed as an exhibit to NTN's registration statement on Form
S-3/A, filed on March 5, 2001, and incorporated by reference.
(13) Previously filed as an exhibit to NTN's registration statement on Form
8-A, File No. 0-19383, and incorporated by reference.
(14) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 2000 and incorporated by reference.
(15) Previously filed as an exhibit to NTN's report on Form 10-Q dated
March 31, 2001 and incorporated by reference.
(16) Previously filed as an exhibit to NTN's Form 10-K dated March 6, 2002
and incorporated by reference.
(17) Previously filed as an exhibit to NTN's Form 10-Q dated April 26, 2002
and incorporated by reference.
(18) Previously filed as an exhibit to NTN's Form 10-Q dated August 6, 2002
and incorporated by reference.
(b) Reports on Form 8-K.
None
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NTN COMMUNICATIONS, INC.
By:________/S/ JAMES B. FRAKES___________
CHIEF FINANCIAL OFFICER
Dated: March 31, 2003
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose name
appears below appoints and constitutes Stanley B. Kinsey and James B. Frakes,
and each one of them, acting individually and without the other, as his or her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to execute any and all amendments to this Report on Form
10-K and to file the same, together with all exhibits thereto, with the
Securities and Exchange Commission, and such other agencies, offices and persons
as may be required by applicable law, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorney-in-fact and agent may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------------------- ------------------------- --------------
______/S/ STANLEY B. KINSEY_______ Chief Executive Officer March 31, 2003
and Chairman of the Board
Stanley B. Kinsey
_______/S/ BARRY BERGSMAN_________ Director March 31, 2003
Barry Bergsman
______/S/ ROBERT M. BENNETT_______ Director March 31, 2003
Robert M. Bennett
_____/S/ ESTHER L. RODRIGUEZ______ Director March 31, 2003
Esther L. Rodriguez
_________/S/ GARY ARLEN___________ Director March 31, 2003
Gary Arlen
_____/S/ VINCENT A. CARRINO_______ Director March 31, 2003
Vincent A. Carrino
______/S/ ROBERT B. CLASEN________ Director March 31, 2003
Robert B. Clasen
_______/S/ MICHAEL FLEMING________ Director March 31, 2003
Michael Fleming
44
CERTIFICATIONS
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULE 13A-14 OF THE EXCHANGE ACT OF 1934
I, Stanley B. Kinsey, Chief Executive Officer of NTN Communications, Inc. (the
"Company") certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
o evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
o presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 31, 2003 /s/ STANLEY B. KINSEY
Stanley B. Kinsey,
Chairman and Chief Executive Officer
NTN Communications, Inc.
45
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULE 13A-14 OF THE EXCHANGE ACT OF 1934
I, James B. Frakes, Chief Financial Officer of NTN Communications, Inc. (the
"Company") certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
o evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
o presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 31, 2003 /s/ JAMES B. FRAKES
James B. Frakes,
Chief Financial Officer
NTN Communications, Inc.
46
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
Independent Auditors' Report............................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as December 31, 2002
and 2001............................................... F-3
Consolidated Statements of Operations for the
years ended December 31, 2002, 2001, and 2000.......... F-4
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 2002, 2001, and 2000...... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001, and 2000................ F-6
Notes to Consolidated Financial Statements............... F-8
Financial Statement Schedule II-- Valuation and
Qualifying Accounts.................................... F-26
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NTN Communications, Inc.:
We have audited the consolidated financial statements of NTN
Communications, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NTN
Communications, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
San Diego, California
February 13, 2003
F-2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS (Pledged)
2002 2001
------------- -------------
Current Assets:
Cash and cash equivalents............................ $ 577,000 $ 1,296,000
Restricted cash...................................... 102,000 94,000
Accounts receivable, net of allowance for doubtful
accounts of $437,000 in 2002 and $440,000 in 2001.. 2,013,000 1,411,000
Inventory............................................ 241,000 --
Investments available-for-sale....................... 178,000 174,000
Deposits on broadcast equipment...................... -- 69,000
Deferred costs....................................... 492,000 675,000
Prepaid expenses and other current assets............ 581,000 499,000
------------- -------------
Total current assets.......................... 4,184,000 4,218,000
Broadcast equipment and fixed assets, net.............. 5,141,000 8,029,000
Software development costs, net of accumulated
amortization of $405,000 in 2002 and $173,000 in 2001.. 591,000 588,000
Deferred costs......................................... 370,000 411,000
Other assets........................................... 556,000 134,000
------------- -------------
Total assets.................................. $ 10,842,000 $ 13,380,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 657,000 $ 906,000
Accrued expenses..................................... 1,177,000 933,000
Sales tax payable.................................... 284,000 163,000
Income taxes payable................................. 30,000 --
Obligations under capital leases..................... 184,000 168,000
Revolving line of credit............................. 89,000 --
Deferred revenue..................................... 1,199,000 2,008,000
------------- -------------
Total current liabilities..................... 3,620,000 4,178,000
Obligations under capital leases, excluding current
portion................................................ 199,000 110,000
Revolving line of credit............................... 2,250,000 2,479,000
Senior subordinated convertible notes.................. 1,997,000 1,958,000
Deferred revenue....................................... 653,000 877,000
Other long-term liabilities............................ -- 12,000
------------- -------------
Total liabilities............................. 8,719,000 9,614,000
------------- -------------
Minority interest in consolidated subsidiary........... 643,000 855,000
------------- -------------
Commitments and contingencies
Shareholders' equity:
Series A 10% cumulative convertible preferred
stock, $.005 par value, 5,000,000 shares
authorized; 161,000 shares issued and outstanding
at December 31, 2002 and December 31, 2001......... 1,000 1,000
Common stock, $.005 par value, 70,000,000 shares
authorized; 39,381,000 and 38,627,000 shares issued
and outstanding at December 31, 2002 and
December 31, 2001 respectively.................... 196,000 192,000
Additional paid-in capital........................... 81,211,000 80,639,000
Accumulated deficit.................................. (79,079,000) (76,890,000)
Accumulated other comprehensive loss................. (639,000) (643,000)
Treasury stock, at cost, 49,000 and 91,000 shares at
December 31, 2002 and December 31, 2001............ (210,000) (388,000)
------------- -------------
Total shareholders' equity.................... 1,480,000 2,911,000
------------- -------------
Total liabilities and shareholders' equity.... $ 10,842,000 $ 13,380,000
============= =============
See accompanying notes to consolidated financial statements
F-3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ -------------
Revenues:
NTN Network revenues........................ $ 25,465,000 $ 22,382,000 $ 21,406,000
Buzztime service revenues................... 128,000 159,000 540,000
Other revenues.............................. 17,000 18,000 102,000
------------ ------------ -------------
Total revenues...................... 25,610,000 22,559,000 22,048,000
------------ ------------ -------------
Operating expenses:
Direct operating costs of services
(includes depreciation of $3,370,000,
$3,297,000 and $4,481,000 for 2002, 2001
and 2000, respectively).................. 9,252,000 8,241,000 11,098,000
Selling, general and administrative....... 16,106,000 14,977,000 15,070,000
Litigation, legal and professional fees... 540,000 463,000 474,000
Depreciation and amortization............. 1,555,000 1,711,000 1,815,000
Impairment charges........................ -- -- 1,362,000
Research and development.................. 12,000 101,000 430,000
------------ ------------ -------------
Total operating expenses............ 27,465,000 25,493,000 30,249,000
------------ ------------ -------------
Operating loss................................ (1,855,000) (2,934,000) (8,201,000)
------------ ------------ -------------
Other income (expense):
Interest income............................. 6,000 63,000 72,000
Interest expense............................ (511,000) (846,000) (1,131,000)
Debt conversion costs....................... -- (189,000) --
Other....................................... -- 165,000 119,000
------------ ------------ -------------
Total other income (expense)........ (505,000) (807,000) (940,000)
------------ ------------ -------------
Loss before income taxes, minority interest
in loss of consolidated subsidiary and
cumulative effect of accounting change...... (2,360,000) (3,741,000) (9,141,000)
Provision for deferred income taxes........... (41,000) -- --
Minority interest in loss of consolidated
subsidiary.................................... 212,000 85,000 --
------------ ------------ -------------
Loss before cumulative effect of accounting
change...................................... (2,189,000) (3,656,000) (9,141,000)
Cumulative effect of accounting change........ -- -- (448,000)
------------ ------------ -------------
Net loss...................................... $(2,189,000) $(3,656,000) $ (9,589,000)
============ ============ =============
Loss per common share-- basic and diluted loss
before cumulative effect of accounting change $ (0.06) $ (0.10) $ (0.28)
Cumulative effect of accounting change........ $ -- $ -- $ (0.01)
------------ ------------ -------------
Net loss...................................... $ (0.06) $ (0.10) $ (0.29)
============ ============ =============
Weighted average shares outstanding-- basic and
diluted..................................... 39,081,000 36,755,000 33,206,000
============ ============ =============
See accompanying notes to consolidated financial statements
F-4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
SERIES A AND B
CUMULATIVE
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- ------------
Balance, December 31, 1999............................. 161,000 $ 1,000 29,914,000 $ 149,000 $66,548,000
Convertible Note Payable converted to Common Stock... -- -- 719,000 4,000 913,000
Issuance of stock for exercise of warrants and
options............................................ -- -- 2,069,000 9,000 881,000
Issuance of stock in lieu of interest................ -- -- 115,000 1,000 321,000
Issuance of stock in lieu of dividends............... -- -- 10,000 -- --
Issuance of stock in private placements, net of
issuance costs..................................... -- -- 3,219,000 16,000 7,012,000
Stock-based compensation............................. -- -- -- -- 685,000
Unrealized holding loss on investments
available-for-sale................................. -- -- -- -- --
Expiration of settlement warrant obligation.......... -- -- -- -- 1,793,000
Net loss............................................. -- -- -- -- --
----------- ----------- ----------- ----------- ------------
Balance, December 31, 2000............................. 161,000 $ 1,000 36,046,000 $ 179,000 $78,153,000
Convertible Note Payable converted to Common Stock... -- -- 1,639,000 8,000 2,137,000
Issuance of stock for exercise of warrants and
options............................................ -- -- 104,000 1,000 92,000
Issuance of stock in lieu of interest................ -- -- 418,000 2,000 198,000
Issuance of stock in lieu of dividends............... -- -- 24,000 -- --
Issuance of stock in payment of accrued board
compensation....................................... -- -- -- -- (71,000)
Issuance of stock in private placement, net of
issuance costs..................................... -- -- 396,000 2,000 11,000
Stock-based compensation............................. -- -- -- -- 119,000
Unrealized holding loss on investments
available-for-sale................................. -- -- -- -- --
Net loss............................................. -- -- -- -- --
----------- ----------- ----------- ----------- ------------
Balance, December 31, 2001............................. 161,000 $ 1,000 38,627,000 $ 192,000 $80,639,000
Issuance of stock for exercise of warrants and
options............................................ -- -- 191,000 1,000 134,000
Issuance of stock in lieu of interest................ -- -- 185,000 1,000 159,000
Issuance of stock in lieu of dividends............... -- -- 14,000 -- --
Issuance of stock in payment of accrued board
compensation....................................... -- -- -- -- (135,000)
Issuance of stock for acquisitions................... -- -- 364,000 2,000 318,000
Stock-based compensation............................. -- -- -- -- 96,000
Unrealized holding gain on investments
available-for-sale................................. -- -- -- -- --
Net loss............................................. -- -- -- -- --
----------- ----------- ----------- ----------- ------------
Balance, December 31, 2002............................. 161,000 $ 1,000 39,381,000 $ 196,000 $81,211,000
=========== =========== =========== =========== ============
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE TREASURY
DEFICIT LOSS STOCK TOTAL
------------- -------------- ------------ ------------
Balance, December 31, 1999............................. $(63,645,000) $ (360,000) $ (472,000) $ 2,221,000
Convertible Note Payable converted to Common Stock... -- -- -- 917,000
Issuance of stock for exercise of warrants and
options............................................ -- -- -- 890,000
Issuance of stock in lieu of interest................ -- -- -- 322,000
Issuance of stock in lieu of dividends............... -- -- -- --
Issuance of stock in private placements, net of
issuance costs..................................... -- -- -- 7,028,000
Stock-based compensation............................. -- -- -- 685,000
Unrealized holding loss on investments
available-for-sale................................. -- (185,000) -- (185,000)
Expiration of settlement warrant obligation.......... -- -- -- 1,793,000
Net loss............................................. (9,589,000) -- -- (9,589,000)
------------- -------------- ------------ ------------
Balance, December 31, 2000............................. $(73,234,000) $ (545,000) $ (472,000) $ 4,082,000
Convertible Note Payable converted to Common Stock... -- -- -- 2,145,000
Issuance of stock for exercise of warrants and
options............................................ -- -- -- 93,000
Issuance of stock in lieu of interest................ -- -- -- 200,000
Issuance of stock in lieu of dividends............... -- -- -- --
Issuance of stock in payment of accrued board
compensation....................................... -- -- 84,000 13,000
Issuance of stock in private placement, net of
issuance costs..................................... -- -- -- 13,000
Stock-based compensation............................. -- -- -- 119,000
Unrealized holding loss on investments
available-for-sale................................. -- (98,000) -- (98,000)
Net loss............................................. (3,656,000) -- -- (3,656,000)
------------- -------------- ------------ ------------
Balance, December 31, 2001............................. $(76,890,000) $ (643,000) $ (388,000) $ 2,911,000
Issuance of stock for exercise of warrants and
options............................................ -- -- -- 135,000
Issuance of stock in lieu of interest................ -- -- -- 160,000
Issuance of stock in lieu of dividends............... -- -- -- --
Issuance of stock in payment of accrued board
compensation....................................... -- -- 178,000 43,000
Issuance of stock for acquisitions................... -- -- -- 320,000
Stock-based compensation............................. -- -- -- 96,000
Unrealized holding gain on investments
available-for-sale................................. -- 4,000 -- 4,000
Net loss............................................. (2,189,000) -- -- (2,189,000)
------------- -------------- ------------ ------------
Balance, December 31, 2002............................. $(79,079,000) $ (639,000) $ (210,000) $ 1,480,000
============= ============== ============ ============
See accompanying notes to consolidated financial statements
F-5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
Cash flows provided by operating activities:
Net loss........................................... $ (2,189,000) $ (3,656,000) $ (9,589,000)
Adjustments to reconcile net loss to net cash
provided by operating activities (net of
effects of acquisitions):
Depreciation and amortization................... 4,925,000 5,008,000 6,296,000
Provision for doubtful accounts................. 529,000 767,000 442,000
Provision for deferred income taxes............. 41,000 -- --
Impairment charges.............................. -- -- 1,362,000
Cumulative effect of accounting change.......... -- -- 448,000
Gain on settlement of debt...................... -- (146,000) --
Debt conversion costs........................... -- 189,000 --
(Gain) loss from disposition of equipment and
sale of available-for-sale investments, net... (52,000) 221,000 6,000
Stock-based compensation charges................ 96,000 119,000 685,000
Non-cash interest expense....................... 160,000 170,000 309,000
Accreted interest expense....................... 39,000 80,000 206,000
Minority interest in loss of subsidiary......... (212,000) (85,000) --
Changes in assets and liabilities:
Restricted cash............................... (8,000) 108,000 37,000
Accounts receivable........................... (1,010,000) (454,000) 375,000
Inventory..................................... (152,000) -- --
Prepaid expenses and other assets............. (88,000) (29,000) 476,000
Accounts payable and accrued expenses......... (108,000) (567,000) (558,000)
Deferred revenue and deferred costs........... (840,000) (243,000) 515,000
Management severance and other long-term
liabilities................................. -- -- (606,000)
------------- ------------- -------------
Net cash provided by operating activities... 1,131,000 1,482,000 404,000
------------- ------------- -------------
Cash flows used in investing activities:
Capital expenditures............................... (1,284,000) (947,000) (7,188,000)
Software development expenditures.................. (234,000) (324,000) (1,557,000)
Deposits on broadcast equipment.................... 69,000 43,000 499,000
Notes receivable................................... -- -- 138,000
Proceeds from sale of investments.................. -- -- 538,000
Acquisition of businesses.......................... (102,000) -- --
------------- ------------- -------------
Net cash used in investing activities....... (1,551,000) (1,228,000) ( 7,570,000)
------------- ------------- -------------
Cash flows provided by (used in) financing activities:
Principal payments on capital leases............... (222,000) (576,000) (932,000)
Borrowings from revolving line of credit........... 24,614,000 20,694,000 26,624,000
Principal payments on note payable and revolving
line of credit................................... (24,826,000) (22,159,000) (25,300,000)
Proceeds from issuance of common stock and
preferred stock, net of issuance costs........... -- 802,000 7,028,000
Proceeds from exercise of warrants and options..... 135,000 93,000 890,000
------------- ------------- -------------
Net cash provided by (used in) financing
activities................................. (299,000) (1,146,000) 8,310,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents. (719,000) (892,000) 1,144,000
......................
Cash and cash equivalents at beginning of year....... 1,296,000 2,188,000 1,044,000
------------- ------------- -------------
Cash and cash equivalents at end of year............. $ 577,000 $ 1,296,000 $ 2,188,000
============= ============= =============
F-6
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.......................................... $ 313,000 $ 559,000 $ 602,000
============= ============= =============
Income taxes...................................... $ 11,000 $ -- $ --
============= ============= =============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest.... $ 160,000 $ 200,000 $ 322,000
============= ============= =============
Issuance of treasury stock in payment of board
compensation..................................... $ 43,000 $ 13,000 $ --
============= ============= =============
Equipment acquired under capital leases............ $ 327,000 $ 192,000 $ 379,000
============= ============= =============
Exchange of convertible notes for common stock..... $ -- $ 2,000,000 $ 917,000
============= ============= =============
Unrealized holding gain/loss on investments
available for sale............................... $ 4,000 $ 98,000 $ 185,000
============= ============= =============
Expiration of settlement warrant obligation........ $ -- $ -- $ 1,793,000
============= ============= =============
Supplemental non-cash disclosure of acquisition of
businesses:
Accounts receivable (net)......................... $ 121,000 -- --
Inventory......................................... 89,000 -- --
Fixed assets...................................... 38,000 -- --
Goodwill and intangibles.......................... 521,000 -- --
Accounts payable and accrued liabilities.......... (244,000) -- --
Deferred revenue.................................. (31,000) -- --
Line of credit.................................... (72,000) -- --
Common stock issued............................... (320,000) -- --
See accompanying notes to consolidated financial statements
F-7
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
NTN Communications, Inc. operate its businesses through two operating
segments: Buzztime Entertainment, Inc.(R)(TM) (Buzztime) and the NTN Network(R).
Buzztime, its wholly-owned subsidiary formed in December 1999, owns the
exclusive rights to one of the largest known digital trivia game show library
and many unique "TV Play-along" sports games. The NTN Network operates two
interactive television networks: the original NTN Network and the new Digital
Interactive Television (DITV) Network. Both networks broadcast daily a wide
variety of popular interactive games, advertisements and informational
programming to consumers in 3,171 restaurants, sports bars and taverns in the
United States.
BASIS OF ACCOUNTING PRESENTATION
The consolidated financial statements include the accounts of NTN and its
subsidiaries, IWN Inc. (IWN), IWN, L.P., Buzztime and NTN Wireless
Communications, Inc. (collectively NTN or the Company). IWN and IWN, L.P. are
dormant subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. Unless otherwise indicated, references to
"NTN", "we", "us" and "our" include NTN and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to deferred
costs and revenues, depreciation of broadcast equipment and other fixed assets,
bad debts, investments, intangible assets, financing operations, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that we believe 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. 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 101, we amortize these amounts over an
estimated three year average life of a customer relationship. If a significant
number of our customers leave us before the estimated life of each customer is
attained, amortization of those deferred costs and revenues would accelerate,
which would result in net incremental revenue. We incur a relatively significant
level of depreciation expense in relationship to our 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, our depreciation expense would be significantly reduced
in those future periods. Conversely, if the Playmakers and servers turn out to
have a shorter life, on average, than estimated, our depreciation expense would
be significantly increased in those future periods. We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. 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.
We do not have any of the following:
o Off-balance sheet arrangements
o Certain trading activities that include non-exchange traded contracts
accounted for at fair value or speculative or hedging instruments; or
F-8
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 14 - RELATED PARTIES or which are
so non-material to fall below the materiality threshold of such item.
CASH AND CASH EQUIVALENTS
For the purpose of financial statement presentation, we consider all highly
liquid investment instruments with original maturities of three months or less
to be cash equivalents. Cash equivalents at December 31, 2002 and 2001 consist
primarily of money market accounts.
RESTRICTED CASH
Under our revolving line of credit agreement, all cash receipts are
required to be deposited into a restricted cash account. The restricted cash is
then transferred to pay down the line of credit.
INVENTORY
Inventory consists of wireless paging equipment and is stated at the lower
of cost (first-in, first-out basis) or market.
BROADCAST EQUIPMENT AND FIXED ASSETS
Broadcast equipment and fixed assets are stated at cost. Equipment under
capital leases is stated at the present value of minimum lease payments.
Depreciation of fixed assets is computed using the straight-line method over the
estimated useful lives of the assets (three to seven years). Depreciation of
broadcast equipment is computed using the straight-line method over the
estimated useful lives of the assets (two to four years). Amortization of fixed
assets under capital leases is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the lease period, and is
included in depreciation expense.
REVENUE RECOGNITION
We recognize revenue from three sources: NTN Network revenues, Buzztime
service revenues, and other sources. Revenue is not recognized until
collectibility of fees is reasonably assured.
NTN Network revenue is generated primarily from distributing content, sales
of wireless paging equipment and advertising. Revenues generated from
broadcasting content to subscriber locations is recognized ratably over the
contract term as the content is broadcast 17 hours a day/seven days a week.
Wireless paging equipment revenue is recognized upon the shipment of equipment
to the customer. Consistent with the terms of advertising agreements,
advertising is aired a specified number of times per hour everyday and
therefore, revenues are recognized ratable over the contract term. Included in
NTN Network revenues are amounts earned under a license agreement with our
Canadian licensee, which operates approximately 500 hospitality locations.
Revenue under this license agreement is recognized on a monthly basis as
broadcast content is aired similar to NTN Network revenue.
Buzztime service revenues are recognized as the service is provided.
Other revenue is recognized when all material services or conditions
relating to the transaction have been performed or satisfied.
In the fourth quarter of 2000, we changed our method of accounting for NTN
Network installation, setup and training fees ("installation fees") received
from customers, retroactively effective as of January 1, 2000, in accordance
with Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, which provides guidance related to revenue recognition
based on interpretations and practices followed by the SEC. Previously, we
recognized approximately one-half of the installation fees upon customer setup
to cover direct expenses of the installation, setup and training and the balance
over the life of the contract which generally is one year. Under the new method,
all installation fees billed are deferred and recognized as revenue on a
straight-line basis over 36 months, the estimated life of the customer
relationship. Installation fees not recognized in revenue have been recorded as
deferred revenue in the accompanying consolidated balance sheets. In addition,
the direct expenses of the installation, setup and training are deferred and
amortized on a straight-line basis over 36 months and are classified as deferred
costs on the accompanying consolidated balance sheets. Included in 2000 is
revenue of $780,000 and direct expenses of $843,000 that was previously
recognized in 1999, 1998 and 1997 under the old method. The pro forma effect of
retroactive application on the results of operations for the year ended December
31, 2000 is shown below:
F-9
2000
-----------
Net loss As reported............. $ 9,589,000
Pro forma............... $ 9,141,000
Net loss per share As reported............. $ 0.29
Pro forma............... $ 0.28
SOFTWARE DEVELOPMENT COSTS
We capitalize costs related to the development of certain software
products. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD,
LEASED, OR OTHERWISE MARKETED, capitalization of costs begins when technological
feasibility has been established and ends when the product is available for
general release to customers. Amortization of costs related to interactive
programs is recognized on a straight-line basis over three years. Amortization
expense for software development costs was $232,000, $141,000 and $32,000 in
2002, 2001 and 2000, respectively.
WEBSITE DEVELOPMENT COSTS
We capitalize web site development costs in accordance with Emerging Issues
Task Force Issue No. 00-02, ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS. Costs
incurred during the planning and operating stages are expensed as incurred while
costs incurred during the web site application and infrastructure development
stage are capitalized and amortized on a straight-line basis over their expected
useful life of three years.
STOCK-BASED COMPENSATION
On January 1, 1996, we adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over the vesting
period, the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees," and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1996 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. We have elected to continue to apply the provisions of APB No. 25 and
related interpretations and provide the pro forma disclosure provisions of SFAS
No. 123.
The per share weighted-average fair value of stock options granted during
2002, 2001 and 2000 was $0.95, $0.78, and $2.45, 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: 2002 --
dividend yield of 0%, risk-free interest rate of 4.05%, expected volatility of
123%, and expected life of 4.6 years; and 2001 -- dividend yield of 0%,
risk-free interest rate of 4.50%, expected volatility of 131%, and expected life
of 4 years; and 2000 -- dividend yield of 0%, risk-free interest rate of 6.30%,
expected volatility of 129%, and expected life of 4 years. In compliance with
APB No. 25, NTN expensed $6,000, $104,000, and $134,000 in 2002, 2001, and 2000
respectively, associated with the grants of 600,000 options in 1999 below market
value pursuant to the Option Plan. No options were granted below market value in
2002, 2001 and 2000 pursuant to the Option Plan.
We apply APB Opinion No. 25 and related interpretations in accounting for
our stock option plans. Accordingly, no compensation cost has been recognized in
the consolidated financial statements for the issuance of options to employees
pursuant to the Special Plan and the Option Plan unless the grants were issued
at exercise prices below market value. Had compensation cost related to
employees for our stock-based compensation plans been determined consistent with
SFAS No. 123, our net loss and net loss per share applicable to common stock
would have been increased to the pro forma amounts indicated below.
2002 2001 2000
------------ ------------ -------------
Net loss As reported......................... $ 2,189,000 $ 3,656,000 $ 9,589,000
Add: stock-based employee
compensation expense included in
reported net loss, net of related
tax effects....................... 6,000 104,000 134,000
Deduct: stock-based employee
compensation expense, net of
related tax effects............... 1,203,000 1,475,000 1,920,000
------------ ------------ -------------
Pro forma........................... $ 3,386,000 $ 5,027,000 $ 11,375,000
Basic and diluted As reported......................... $ 0.06 $ 0.10 $ 0.29
net loss per share
Pro forma........................... $ 0.09 $ 0.14 $ 0.34
F-10
We account for options and warrants issued to non-employees in exchange for
services in accordance with SFAS No. 123 and EITF 96-18, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES. We estimate the fair value of
options and warrants using the Black Scholes option-pricing model. For
agreements which require the achievement of specific performance criteria be met
in order for the options or warrants to vest, the measurement date is the date
at which the specific performance criteria are met. Prior to the measurement
date, options and warrants subject to vesting based on the achievement of
specific performance criteria that, based on different possible outcomes, result
in a range of aggregate fair values are measured at each financial reporting
period at their lowest aggregate then-current fair value, while options and
warrants which vest over the service period or at completion of the service
period are measured at each financial reporting period at their then-current
fair value, for purposes of recognition of costs during those periods. For
agreements which provide for services to be rendered without the requirement of
specific performance criteria, the company measures the fair value of the
options and warrants at the earlier of the date the services are completed or
the date the options and warrants vest and are non-forfeitable. Generally,
services are not rendered prior to the grant date and the related agreements do
not contain performance commitments. Accordingly, the measurement date for
compensation expense occurs subsequent to the grant date. From the grant date to
the measurement date, compensation expense is estimated at each financial
reporting period and is recorded over the service period. The unvested options
and warrants continue to be remeasured at each financial reporting period until
they vest or until the services are completed. For agreements which provide
options and warrants for services already rendered, the options and warrants
immediately vest and the measurement date is the date of grant. Modifications
that increase the fair value of the warrants are treated as an exchange of the
original warrant for a new one. Additional compensation expense related to
modifications, if any, is recorded over the remaining service period.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. We adopted the provisions of SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS, as of January 1, 2002. Goodwill and intangible assets
acquired in a purchase combination and determined to have an indefinite useful
life are not amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, ACCOUNTING FOR IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. Amortization expense for intangible assets was
$104,000, $15,000 and $15,000 in 2002, 2001 and 2000, respectively.
As of December 31, 2002 intangible assets were comprised of the following:
ACCUMULATED
COST AMORTIZATION NET
----------- ------------ ------------
Customers lists...................$ 150,000 $ 37,000 $ 113,000
Employment agreements............. 140,000 53,000 87,000
Trademarks........................ 149,000 82,000 67,000
----------- ------------ ------------
Total $ 439,000 $ 172,000 $ 267,000
=========== ============ ============
As of December 31, 2001 intangible assets were comprised of the following:
ACCUMULATED
COST AMORTIZATION NET
----------- ------------ -------------
Trademarks........................$ 149,000 $ 67,000 $ 82,000
=========== ============ ============
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
INVESTMENTS AVAILABLE-FOR-SALE
Investment securities consist of equity securities, which are classified as
available-for-sale securities. Available-for-sale securities are recorded at
fair value and unrealized holding gains and losses are excluded from earnings
and are reported as a separate
F-11
component of comprehensive income until realized. Realized gains and losses from
the sale of available-for-sale securities are determined on a
specific-identification basis. A decline in the market value of any
available-for-sale security below cost that is deemed to be other than
temporary, results in a reduction in the carrying amount to fair value. The
impairment is charged to operations and a new cost basis for the security is
established.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We believe that the fair value of financial instruments approximate their
carrying value. The following methods and assumptions were used to estimate the
fair value of financial instruments:
The carrying values of cash and cash equivalents, restricted cash,
investments available-for-sale, accounts receivable, accounts payable and
accrued liabilities approximate fair value because of the short maturity of
these instruments. The carrying value of the revolving line of credit
approximates its fair value because the interest rate is indexed by current
market rates, and the other terms are comparable to those currently available in
the market place. The carrying value of the convertible notes approximates its
fair value because the interest rate and other terms are comparable to rates
currently available in the market.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
RESEARCH AND DEVELOPMENT AND ADVERTISING
Research and development costs and marketing-related advertising costs are
expensed as incurred. Research and development costs amounted to $12,000,
$101,000 and $430,000 in 2002, 2001 and 2000, respectively. Marketing-related
advertising costs amounted to $1,065,000, $939,000 and $403,000 in 2002, 2001
and 2000, respectively, and are included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.
CONCENTRATION OF CREDIT RISK
We provide services to group viewing locations, generally restaurants,
sports bars and lounges throughout the United States. In addition, we license
our technology and products to licensees outside of the United States.
Concentration of credit risk with respect to trade receivables is limited due to
the large number of customers comprising our customer base, and their dispersion
across many different industries and geographies. We perform ongoing credit
evaluations of our customers and generally require no collateral. We maintain an
allowance for doubtful accounts to provide for credit losses.
BASIC AND DILUTED EARNINGS PER COMMON SHARE
We compute basic and diluted earnings per share in accordance with SFAS No.
128, EARNINGS PER SHARE. Basic EPS excludes the dilutive effects of options,
warrants and other convertible securities. Diluted EPS reflects the potential
dilution of securities that could share in our earnings. Options, warrants,
convertible preferred stock and convertible notes representing approximately
12,435,000, 12,199,000 and 12,614,000 shares were excluded from the computations
of diluted net loss per common share for the years ended December 31, 2002, 2001
and 2000, respectively, as their effect is anti-dilutive.
RECLASSIFICATIONS
We have reclassified certain items in the 2001 and 2000 consolidated
financial statements to conform to the 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF
FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. Statement 145 updates,
clarifies and simplifies
F-12
existing accounting pronouncements including: rescinding Statement No. 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect and amending Statement No. 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. Statement 145 is
effective for fiscal years beginning after May 15, 2002, with early adoption of
the provisions related to the rescission of Statement No. 4 encouraged. We do
not expect the adoption of this statement to have a material impact on our
financial position or results of operations.
In July 2002, the FASB issued Statement No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 nullifies EITF Issue No. 94-3, LIABILITY RECOGNITION
FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The principal difference
between SFAS No. 146 and Issue No. 94-3 relates to the recognition of a
liability for a cost associated with an exit or disposal activity. SFAS No. 146
requires that a liability be recognized for those costs only when the liability
is incurred, that is, when it meets the definition of a liability in the FASB's
conceptual framework. In contrast, under Issue No. 94-3, a company recognized a
liability for an exit cost when it committed to an exit plan. SFAS No. 146 also
establishes fair value as the objective for initial measurement of liabilities
related to exit or disposal activities. The Statement is effective for exit or
disposal activities that are initiated after December 31, 2002 although earlier
application is encouraged. We are unable to determine the impact on our
financial position or results of operations from the adoption of this statement.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO.
5, 57 AND 107 AND A RESCISSION OF FASB INTERPRETATION NO. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on our financial
statements. The disclosure requirements are effective for financial statements
of interim and annual periods ending after December 15, 2002. We have adopted
the disclosure requirements of this interpretation. To date, we have not entered
into any guarantees.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO.
123. This Statement amends FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements. We have adopted the annual disclosure
provision in our December 31, 2002 financial statements and will adopt the
interim provisions in the first quarter of 2003.
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on our financial statements. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that we will consolidate or
disclose information about variable interest entities when the Interpretation
becomes effective.
F-13
(2) BROADCAST EQUIPMENT AND FIXED ASSETS
Broadcast equipment and fixed assets are recorded at cost and consist of
the following:
2002 2001
------------- -------------
Broadcast equipment......................... $ 10,292,000 $ 19,591,000
Furniture and fixtures...................... 590,000 580,000
Machinery and equipment..................... 8,339,000 8,154,000
Leasehold improvements...................... 861,000 821,000
Equipment under capital lease:
Broadcast equipment....................... 1,683,000 1,745,000
Machinery and equipment................... 1,594,000 1,298,000
Other equipment........................... 21,000 21,000
------------- -------------
23,380,000 32,210,000
Accumulated depreciation and amortization... (18,239,000) (24,181,000)
------------- -------------
$ 5,141,000 $ 8,029,000
============= =============
(3) ASSET IMPAIRMENT
We developed the internet site Buzztime.com with the intent of registering
a large number of consumers at little cost and converting these registrations
into revenue through direct marketing to the member database, sponsorship, ad
revenues, subscriptions and third party licensing. However, in the fourth
quarter of 2000, we shifted our focus from the internet initiatives to
interactive television opportunities and decided not to pursue the direct
marketing application of Buzztime.com. As a result, the use of Buzztime.com as a
direct marketing database was abandoned resulting in an impairment charge of
$1,131,000 during the fourth quarter of 2000.
In addition to the write-off of certain web development costs, we also
wrote off $231,000 associated with the Internet game station licenses,
equipment, and related goodwill on the basis that assets are not recoverable
through future cash flows.
(4) COMMON STOCK OPTIONS AND WARRANTS
OPTIONS
We have two active stock option plans. The 1995 Employee Stock Option Plan
(the "Option Plan") was approved by our shareholders in 1995 and was
subsequently amended. Under the Option Plan, options for the purchase of our
common stock may be granted to officers, directors and employees. Options may be
designated as incentive stock options or as nonqualified stock options and
generally vest over four years, except, the Board of Directors, at its
discretion, can authorize acceleration of vesting periods. Options under the
Option Plan, which have a term of up to ten years, are exercisable at a price
per share not less than the fair market value on the date of grant. The
aggregate number of shares authorized for issuance under the Option Plan as of
December 31, 2002 is 10,909,152.
In addition, we have issued options pursuant to a Special Stock Option Plan
("Special Plan"). Options issued under the Special Plan are made at the
discretion of the Board of Directors and are designated only as nonqualified
options. The options generally have a term of up to ten years, are exercisable
at a price per share not less than the fair market value on the date of grant
and vest over various terms. The aggregate number of shares authorized for
issuance under the Special Plan as of December 31, 2002 is 500,000.
On May 31, 2001, Buzztime adopted an incentive stock option plan. Pursuant
to the option plan, Buzztime may grant options to purchase Buzztime common
stock, subject to applicable share limits, upon terms and conditions specified
in the plan. To date, no options have been granted under the plan.
F-14
A summary of stock option activity during 2002, 2001 and 2000 is as
follows:
SPECIAL PLAN OPTION PLAN
------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- ------------------ ----------- ------------------
OUTSTANDING DECEMBER 31, 1999......... 704,000 $ 2.81 6,481,000 $ 1.38
Granted............................. -- -- 1,851,000 2.45
Exercised........................... -- -- (546,000) 1.01
Cancelled........................... -- -- (1,077,000) 1.52
----------- ------------------ ----------- ------------------
OUTSTANDING DECEMBER 31, 2000......... 704,000 2.81 6,709,000 1.69
Granted............................. -- -- 2,141,000 0.78
Exercised........................... -- -- (17,000) 0.63
Cancelled........................... (100,000) -- (1,365,000) 1.83
----------- ------------------ ----------- ------------------
OUTSTANDING DECEMBER 31, 2001......... 604,000 2.81 7,468,000 1.40
Granted............................. -- -- 1,096,000 0.93
Exercised........................... -- -- (191,000) 0.70
Cancelled........................... (104,000) 2.81 (661,000) 2.54
----------- ------------------ ----------- ------------------
OUTSTANDING DECEMBER 31, 2002. 500,000 $ 2.81 7,712,000 $ 1.26
=========== ================== =========== ==================
EXERCISABLE AS OF DECEMBER 31, 2002... 500,000 $ 2.81 5,749,000 $ 1.37
=========== ================== =========== ==================
A summary of options outstanding and exercisable by exercise price range at
December 31, 2002 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ------------ ---------------- ---------------- ------------ ----------------
Special Plan:
$2.81 500,000 4 years $ 2.81 500,000 $ 2.81
Option Plan:
$0.45-$1.50 5,956,000 7 years $ 0.85 4,142,000 $ 0.87
$1.51-$3.00 1,657,000 5 years $ 2.57 1,514,000 $ 2.60
$3.01-$6.38 99,000 4 years $ 3.59 93,000 $ 3.58
------------ ------------
8,212,000 6,249,000
============ ============
WARRANTS
In 2002, 2001 and 2000, we granted 685,000, 190,000 and 885,000 warrants to
non-employees. The warrants were granted under consulting agreements. We
expensed $90,000, $15,000 and $373,000 in 2002, 2001 and 2000, respectively,
associated with the grant of these warrants.
The following summarizes warrant activity during 2002, 2001 and 2000:
OUTSTANDING WEIGHTED AVERAGE
WARRANTS EXERCISE PRICES
------------ ----------------
DECEMBER 31, 1999...................... 3,147,000 1.89
Granted.............................. 885,000 1.79
Exercised............................ (1,626,000) 0.36
Canceled............................. (404,000) 4.53
------------ ----------------
DECEMBER 31, 2000...................... 2,002,000 1.94
Granted.............................. 190,000 0.72
Exercised............................ (87,000) 0.96
Canceled............................. (316,000) 0.96
------------ ----------------
DECEMBER 31, 2001...................... 1,789,000 2.03
Granted.............................. 685,000 0.98
Exercised............................ -- --
Canceled............................. (412,000) 2.05
------------ ----------------
DECEMBER 31, 2002...................... 2,062,000 $ 1.68
============ ================
BALANCE EXERCISABLE AT DECEMBER 31, 2002 1,377,000 $ 2.03
============ ================
At December 31, 2002, the range of exercise prices and the weighted-average
remaining contractual life of outstanding warrants was $0.50 to $3.75 and 4
years, respectively. The table above does not include warrants issued to S-A to
obtain an additional 159,236 shares of Buzztime's Series A Convertible Preferred
Stock (the "S-A Warrants"). The S-A warrants vest in 10% increments as cable
system operators sign on for the Buzztime game show channel. The exercise price
of the S-A warrants is $1.57 per share.
F-15
(5) CUMULATIVE CONVERTIBLE PREFERRED STOCK
We have authorized 10,000,000 shares of preferred stock. The preferred
stock may be issued in one or more series. The only series currently designated
are a series of 5,000,000 shares of Series A Cumulative Convertible Preferred
Stock ("Series A Preferred Stock").
SERIES A
At December 31, 2002 and 2001, there were 161,000 shares of Series A
Preferred Stock issued and outstanding. The Series A Preferred Stock provides
for a cumulative annual dividend of 10 cents per share, payable in semi-annual
installments in June and December. Dividends may be paid in cash or with shares
of common stock. In 2002, 2001 and 2000, we issued approximately 14,000, 24,000
and 10,000 common shares, respectively, for payment of dividends. At December
31, 2002, the cumulative unpaid dividends for the Series A Preferred Stock was
approximately $1,300.
The Series A Preferred Stock has no voting rights and has a $1.00 per share
liquidation preference over common stock. The registered holder has the right at
any time to convert shares of Series A Preferred Stock into that number of
shares of our common stock that equals the number of shares of Series A
Preferred Stock that are surrendered for conversion divided by the conversion
rate. The conversion rate is subject to adjustment in certain events and is
established at the time of each conversion. During 2002, 2001 and 2000, there
were no conversions. There are no mandatory conversion terms or dates associated
with the Series A Preferred Stock.
SETTLEMENT WARRANTS
The results for the year ended December 31, 2000 include the
reclassification of an accrued liability of approximately $1,793,000 to
additional paid-in capital for a potential redemption obligation, relating to
warrants issued in connection with the settlement of litigation in 1996
(Settlement Warrants), which expired in February 2000. The Settlement Warrants
entitled the holder of a Settlement Warrant to purchase a share of Common Stock
at a price of $0.96 during the period ending February 18, 2001. During the
period from February 18, 2000 to February 18, 2001, the holders of the
Settlement Warrants were to have the right to cause us to redeem the Settlement
Warrants for a redemption price of $3.25 per Warrant (the "Put Right"); however,
this Put Right expired by its terms on February 17, 2000 when the closing price
per share of our Common Stock on the American Stock Exchange reached $4.22 or
above for the seventh trading day since the Settlement Warrants were issued. We
have no further obligation to redeem or repurchase the Settlement Warrants,
which have been retired and listing on the American Stock Exchange cancelled.
(6) RETIREMENT AND SAVINGS PLANS
During 1994, we established a defined contribution plan which is organized
under Section 401(k) of the Internal Revenue Code, which allows employees who
have completed at least one month of service and have reached age 21 to defer up
to 20% of their pay on a pre-tax basis. In 2002, we amended the plan to permit
employees who have reached age 18 to defer up to 50% of their pay on a pre-tax
basis. We may at our discretion contribute to the plan. For the years ended
December 31, 2002, 2001 and 2000, we made no such contributions.
F-16
(7) INCOME TAXES
For each of the years ended December 31, 2002, 2001 and 2000, there was no
provision for current or deferred federal income taxes. A deferred tax provision
of $41,000 was recorded for the year ended December 31, 2002 for state taxes. No
tax provision was recorded for state taxes for the years ended December 31, 2001
and 2000. The components that comprise deferred tax assets and liabilities at
December 31, 2002 and 2001 are as follows:
2002 2001
------------- -------------
Deferred tax assets:
NOL carryforwards.................... $ 20,424,000 $ 21,522,000
Legal and litigation accruals........ 13,000 18,000
Allowance for doubtful accounts...... 276,000 176,000
Compensation and vacation accrual 151,000 115,000
Operating accruals................... 460,000 65,000
Allowance for equipment
obsolescence....................... -- 36,000
Deferred revenue..................... 343,000 720,000
Research and experimentation credit.. 186,000 199,000
Amortization......................... 122,000 104,000
Depreciation......................... 1,288,000
Charitable contributions............. 2,000 3,000
------------- -------------
Total gross deferred tax assets... 23,265,000 22,958,000
Valuation allowance.................... (23,029,000) (21,675,000)
------------- -------------
Deferred tax assets............... 236,000 1,283,000
------------- -------------
Deferred tax liabilities:
Capitalized software................. 236,000 235,000
Depreciation......................... -- 1,048,000
------------- -------------
Total deferred liabilities........ 236,000 1,283,000
------------- -------------
Net deferred taxes................ $ -- $ --
============= =============
The reconciliation of computed expected income tax (benefit) to effective
income taxes by applying the federal statutory rate of 34% is as follows:
2002 2001 2000
------------ ------------ ------------
Tax at federal income tax rate................ $ (802,000) $(1,272,000) $(3,260,000)
State taxes net of federal benefit............ (115,000) (224,000) (575,000)
Settlement warrants and SFAS 123 charges...... -- 47,000 274,000
Change in valuation allowance................. 1,354,000 (770,000) 2,531,000
Change in beginning deferred tax assets....... (2,155,000) -- --
Expiration and adjustments of net
operating loss carryforwards................. 1,748,000 1,848,000 952,000
Other......................................... 11,000 371,000 78,000
------------ ------------ ------------
$ 41,000 $ -- $ --
============ ============ ============
The net change in the total valuation allowance for the year ended December
31, 2002 was an increase of $1,354,000. The net change in the total valuation
allowance for the year ended December 31, 2001 was a decrease of $770,000. The
net change in the total valuation allowance for the year ended December 31, 2000
was an increase of $2,531,000. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based on the level of historical operating results and
projections for the taxable income for the future, management has determined
that it is more likely than not that the portion of deferred tax assets not
utilized through the reversal of deferred tax liabilities will not be realized.
Accordingly, NTN has recorded a valuation allowance to reduce deferred tax
assets to the amount that is more likely than not to be realized.
At December 31, 2002, the Company has available net operating loss
carryforwards of approximately $58,935,000 for federal income tax purposes,
which began to expire in 2002. The net operating loss carryforwards for state
purposes, which began to expire in 2002, are approximately $6,440,000.
F-17
(8) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We lease office and production facilities and equipment under agreements
which expire at various dates. Certain leases contain renewal provisions and
generally require us to pay utilities, insurance, taxes and other operating
expenses. Additionally, we entered into lease agreements for certain equipment
used in broadcast operations and the corporate computer network. Lease expense
under operating leases totaled $725,000, $656,000 and $475,000, in 2002, 2001
and 2000, respectively, net of sublease income of $265,000, $228,000 and
$149,000 in 2002, 2001 and 2000, respectively.
Future minimum lease obligations under noncancelable operating leases, net
of contractual sublease payments, at December 31, 2002 are as follows:
YEAR LEASE SUBLEASE
ENDING PAYMENTS PAYMENTS NET
------------- ----------- ---------- -----------
2003......... $ 618,000 $ 162,000 $ 456,000
2004......... 637,000 78,000 559,000
2005......... 590,000 23,000 567,000
2006......... 271,000 -- 271,000
----------- ---------- -----------
Total.... $2,116,000 $ 263,000 $1,853,000
=========== ========== ===========
CAPITAL LEASES
We lease certain equipment under capital leases. Future minimum lease
payments under the capital leases together with the present value of the net
minimum lease payments as of December 31, 2002 are as follows:
YEAR ENDING TOTAL
- ------------------------------------------------------ -----------
2003.................................................. $ 246,000
2004.................................................. 132,000
2005.................................................. 69,000
2006.................................................. 42,000
-----------
Total minimum lease payments................ 489,000
Less: Amount representing interest ranging
from 10.7% to 29.9%................................ (106,000)
-----------
Present value of net minimum lease payments........... 383,000
Less current portion.................................. (184,000)
-----------
Long term portion........................... $ 199,000
===========
Property held under capital leases is as follows:
2002 2001
------------ ------------
Equipment.................... $ 3,277,000 $ 3,064,000
Accumulated amortization..... (2,879,000) (2,442,000)
------------ ------------
$ 398,000 $ 622,000
============ ============
PURCHASE COMMITMENTS
We have a commitment under a long-term agreement to purchase satellite
equipment over a five year period beginning in March 2003. Future minimum
payments under the agreement along with the present value of the net minimum
payments as of December 31, 2002 are as follows:
YEAR ENDING TOTAL
- ------------------------------------------------------ -----------
2003.................................................. $ 908,000
2004.................................................. 1,636,000
2005.................................................. 922,000
2006.................................................. 361,000
2007.................................................. 361,000
Thereafter............................................ 60,000
-----------
Total minimum payments...................... 4,248,000
Less: Amount representing imputed interest at 9% ..... (205,000)
-----------
Present value of net minimum payments................. $4,043,000
===========
F-18
(9) DEBT
REVOLVING LINE OF CREDIT
We have an agreement with Coast Business Credit (Coast) for a revolving
line of credit, which was amended in May 2001. 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. The maximum line of credit was gradually reduced from $4,000,000 at
April 1, 2001 to $2,750,000 at December 31, 2001. Interest is charged on the
outstanding balance at a rate equal to the prime rate plus 1.5% per annum
(effective rate of interest is 9.0% at December 31, 2002), but cannot be less
than 9% per annum. The line of credit is secured by substantially all of our
assets. Total loan fees of $120,000 were payable in three annual installments
and are being amortized over the life of the loan.
On February 25, 2002, we signed the Fourth Amendment to the Loan and
Security Agreement governing the line of credit with Coast. This amendment
extended the maturity date on the line of credit to June 30, 2003. The amendment
calls for three separate $250,000 reductions in the maximum borrowing amount
under the line on June 30, 2002 (from $2.75 million to $2.5 million), on January
31, 2003 (from $2.5 million to $2.25 million), and on March 31, 2003 (from $2.25
million to $2 million).
The amendment also deleted the minimum tangible effective net worth
covenant and added two new cash flow oriented covenants; a senior debt to EBITDA
ratio test and a debt service coverage ratio test. We agreed to pay Coast a
renewal fee of $40,000 on July 1, 2002 in association with this amendment. There
were no changes to the interest rate in this amendment.
On February 4, 2003, we signed the Ninth Amendment to the Loan and Security
Agreement with Coast. This amendment extended the maturity date on the line of
credit to June 30, 2004. The amendment also struck the previously scheduled
March 31, 2003 $250,000 paydown on the line of credit, deleted the trailing cash
flow multiplier element of the borrowing base and modified the cash flow
oriented covenants. We agreed to pay Coast a renewal fee of $30,000 on July 1,
2003 in association with this amendment. There were no changes to the interest
rate in this amendment.
On February 7, 2003, Coast and its parent company, Southern Pacific Bank,
were seized by the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC
is currently acting as a trustee for Coast and is in the process of selling off
Coast's loan portfolio to other lending institutions. It is likely that the line
of credit will be sold to another lender by the FDIC. However, should the FDIC
either cease funding or materially reduce the credit available to us under the
terms of the loan and security agreement, it would have a significant impact on
our liquidity.
As we have refinanced the revolving line of credit, and have met the
criteria of Statement of Accounting Standard No. 6, CLASSIFICATION OF SHORT-TERM
OBLIGATIONS EXPECTED TO BE REFINANCED, $2,250,000 of the borrowings outstanding
at December 31, 2002 have been classified as noncurrent in the consolidated
balance sheet reflecting the portion of the line that was extended through June
30, 2004.
8% SENIOR SUBORDINATED CONVERTIBLE NOTES
In 1999, we reacquired our Series B Preferred Stock in exchange for
convertible notes and warrants. The convertible notes, with a face value of
$5,913,000, were issued January 11, 1999 at the annual rate of 7% per annum.
Interest was due and payable in quarterly installments, in arrears, and the
entire principal amount was due and payable on February 1, 2001. Interest on the
convertible notes was payable in cash or, at our election, in shares of our
common stock valued for this purpose at 90% of the average closing bid price of
the common stock during the 10 trading days preceding the interest payment date.
At any time after a period of 20 consecutive trading days during which the
daily "Market Price" (as defined in the Exchange Agreement) of the common stock
equals or exceeds $1.75 (subject to adjustment), we may elect upon 45 days prior
written notice to prepay all or any portion of the convertible notes at a price
of 105% of the outstanding principal amount, plus accrued and unpaid interest.
The convertible notes will continue to be convertible, however, at any time
prior to prepayment in full. The convertible notes must be prepaid in connection
with a merger or consolidation of NTN or other "Major Transaction" (as defined
in the Exchange Agreement) if the consideration per share of common stock in the
Major Transaction is at least $1.50. In such event, the prepayment price will be
105% of the outstanding principal amount of the convertible notes, plus accrued
and unpaid interest.
F-19
The holders of the convertible notes had the right to convert them at any
time, in whole or in part, at their option. The number of shares of common stock
issuable upon conversion of each convertible note was determined by dividing the
outstanding principal amount to be converted, plus any accrued and unpaid
interest, by the conversion price then in effect. The conversion price was be
$1.275 per share, subject to adjustment if certain events, including stock
dividends or subdivisions or reclassifications of the common stock or any sale
or issuance of common stock (or of rights or options to subscribe for or
purchase common stock) for no consideration or for a consideration per share
less than the "Average Market Price" (as defined in the Exchange Agreement) of
the common Stock. The actual number of shares of common Stock issuable upon any
conversion of the convertible notes was dependent upon the conversion price in
effect on the relevant conversion date. On November 20, 1999, $1,000,000 of
principal plus accrued interest was converted into approximately 793,000 shares
of common Stock. On March 16 and July 13, 2000, $200,000 and $717,000,
respectively, of principal plus accrued interest was converted into
approximately 159,000 and 560,000 share of common stock, respectively. An
additional $22,000 and $45,000 of interest expense in 2000 and 1999,
respectively, related to the unamortized discount on the converted notes was
recognized upon conversion of the principal.
On October 5, 1998, in consideration for their entering into the Exchange
Agreement, we issued to each of the Investors a warrant to purchase 500,000
shares of common stock at an initial purchase price of $1.25 per share. The
exercise price was subject to adjustment based on future changes in the price of
the common stock. The warrants were exercisable at any time on or before
February 1, 2001. The warrants contain certain antidilution provisions that
require adjustments. The warrants were exercised on March 24, 2000 in a cashless
exercise at a purchase price of $0.005 as the daily Market Price on each day
during any 10 consecutive trading days was equal to or greater than $4.00. Upon
exercise of the warrants, 999,096 shares of common stock were issued.
An allocation has been made between the convertible notes and the warrants
based on the relative fair values of the securities at the time of issuance. A
discount of approximately $464,000 has been recorded against the convertible
notes due to the allocation. As a result of this allocation, we recorded
interest expense, at an effective interest rate of 11% per year, throughout the
term of the convertible notes, which began in the first quarter of 1999.
Interest expense of approximately $39,000, $80,000 and $206,000 has been
accreted for the years ended December 31, 2002, 2001 and 2000, respectively.
In January 2001, we reached agreement with the holders of the convertible
notes to extend the maturity date of the aggregate $4 million face value in
promissory notes from February 1, 2001 to February 1, 2003. The promissory notes
remained convertible at $1.275 per share, but the terms were modified to reduce
the interest rate from 7% to 4% and to permit us to convert up to the full
principal amount of the promissory notes into NTN common stock at maturity at a
conversion price of $1.275 per share. In addition, if our common stock closes
above $2.50 for more than 20 consecutive trading days, we can force conversion
of the promissory notes at $1.275 per share.
In December 2001, NTN reached an agreement with the holders of the
convertible notes to convert $2 million of the outstanding convertible notes
payable into approximately 1,639,000 of common stock at $1.22 per share and
increase the interest rate on the remaining notes payable to 8%. Upon conversion
of the principal, debt conversion costs of approximately $189,000 were recorded.
The balance of the convertible notes plus accreted interest at December 31,
2002 was $1,997,000.
On February 1, 2003 the outstanding balance of $2.0 million on the notes
was converted into 1,568,628 shares of common stock at a conversion price of
$1.275.
A registration statement on Form S-3 covering 4,637,516 shares of common
stock, some or all of which may be issuable upon conversion of the convertible
notes, was declared effective by the Securities and Exchange Commission on
January 8, 1999.
NOTE PAYABLE
In April 1999, we purchased Internet Stations equipment and game licenses
for $400,000 from Sikander, Inc. We issued a promissory note to Sikander, Inc.
for $360,000 along with a $40,000 cash payment. In December 1999, the payment
provisions were revised including issuance of a replacement promissory note for
$178,000. No payments were made after March 31, 2000 on the promissory note. In
June 2000, we commenced litigation against Sikander, Inc. and related
defendants. As of December 31, 2000, the note balance was approximately $171,000
including accrued interest. We reached an agreement with Sikander, Inc. on March
31, 2001 to settle the balance of the promissory note and accrued interest for
$25,000. The results of operations for the year ended December 31, 2001 include
an elimination of the balance of the promissory note and accrued interest
totaling $146,000, which is presented as other income in the statement of
operations.
F-20
(10) STRATEGIC PARTNERSHIP AND INVESTMENT IN BUZZTIME
On June 8, 2001, Buzztime entered into a development, license and marketing
agreement (the Marketing Agreement) with Scientific-Atlanta, Inc. (S-A) to
co-develop an application to enable the operation of a Buzztime interactive
trivia game show channel on S-A's Explorer digital interactive set-top network,
for distribution by cable operators to their subscribers. Buzztime will be
responsible for the trivia game channel content including ongoing programming
and player promotions. The channel will derive revenue from cable operator
license fees, premium subscription fees and advertising revenue. Under the
Marketing Agreement, Buzztime and S-A have predetermined commission arrangements
based on sales and support of Buzztime's products to the cable system operators.
In connection with the Marketing Agreement, Scientific-Atlanta Strategic
Investments, L.L.C., a Delaware limited liability company and affiliate of S-A,
invested $1.0 million in Buzztime for 636,943 shares of Buzztime's Series A
Convertible Preferred Stock, representing 6% of Buzztime's common shares
outstanding on an as-converted basis, and warrants to obtain an additional
159,236 shares of Series A Convertible Preferred Stock (the S-A Warrants). Each
share of preferred stock was convertible into one share of Buzztime's common
stock, subject to future adjustment, and entitled to a non-cumulative dividend
of 8%, if, when and as declared by Buzztime's board of directors. The $1.0
million investment may only be used towards development of the application for
S-A and fulfillment of Buzztime's obligations under Marketing Agreement, which
are currently Buzztime's primary focus.
NTN granted S-A the right to exchange its shares of Buzztime's preferred
stock into shares of NTN common stock upon the earlier of (i) Buzztime being
unable to obtain additional equity financing of $2.0 million before June 8,
2002, (ii) the liquidation, dissolution or bankruptcy of Buzztime before June 8,
2002, (iii) the failure of Buzztime to conduct a qualified public offering by
June 8, 2004, or (iv) a change in control of Buzztime before June 8, 2002. The
exchange price was the 20-day average closing price of NTN's common stock
immediately preceding the date S-A gives notice of its intent to exercise its
rights.
The exercise price of the S-A warrants is $1.57 per share. The warrants
vest in 10% increments as cable system operators sign on for the Buzztime game
show channel. No compensation expense has been recorded for the year ended
December 31, 2002 as the warrants vesting provisions are contingent upon
specified performance-based conditions and the low end of the range of the
aggregate fair value of the warrants is zero as of December 31, 2002.
On January 16, 2003, the 636,943 shares of Buzztime Series A Convertible
Preferred Stock were converted to 1,000,000 shares of NTN common stock. For
purposes of the exchange, the Series A liquidation preference was $1.57 per
share of Buzztime Series A preferred stock. The conversion price of the NTN
common stock was $1.00 per share.
(11) MINORITY INTEREST ACCOUNTING
We retained majority ownership of Buzztime and, as a result, will continue
to consolidate Buzztime's operations in its financial statements. No gain or
loss was recorded by us on this sale of Buzztime's shares in accordance with
Staff Accounting Bulletin Topic 5h - Miscellaneous Accounting, ACCOUNTING FOR
SALES OF STOCK IN A SUBSIDIARY, as the realization of the gain is not assured
given Buzztime's history of losses from operations, net operating loss
carryforwards, which are generally not available to offset capital gains, and
the start-up nature of Buzztime's products designed for the interactive
television market. In addition, the ongoing business relationship with S-A
through the Marketing Agreement and restrictions placed on the use of proceeds
were additional factors considered in accounting for the sale of Buzztime's
shares. As a result, the investment was reflected as a capital transaction.
The investment in Buzztime is presented as a minority interest in
consolidated subsidiary on our consolidated balance sheet. The minority interest
balance of $643,000 is comprised of the S-A investment, reduced by $60,000 of
issuance costs, and by S-A's share of Buzztime's net losses in the amount of
$212,000 and $85,000 for the years ended December 31, 2002 and 2001,
respectively.
The minority interest accounting treatment ceased as of January 16, 2003
when S-A converted its preferred stock investment into NTN common stock (see
Note 16 - Subsequent Events).
F-21
(12) CONTINGENCIES
We have been involved as a plaintiff or defendant in various previously
reported lawsuits in both the United States and Canada involving Interactive
Network, Inc. (IN). We reached a resolution with IN of all pending disputes in
the United States and agreed to private arbitration regarding any future
licensing, copyright or infringement issues which may arise between us. There
remain two lawsuits involving us, our unaffiliated Canadian licensee and IN,
which were filed in Canada in 1992. The litigation involves licensing and patent
infringement issues. These actions relate only to the broadcast of the NTN
Network to subscribers of our Canadian licensee and do not extend to our network
operations in the United States or elsewhere. In April 2002, Two Way TV (US),
Inc., was created as a joint venture between IN and Two Way TV Limited. Two Way
TV (US) was incorporated in Delaware on January 10, 2000 to develop and market
IN's patent portfolio and Two Way TV Limited's content, technology and patents
for digital interactive services. As a result of a merger with IN, Two Way TV
(US) now owns and controls all of IN's intellectual property and in particular
their patent portfolio. On February 6, 2003, IN deposited $100,000 Canadian
currency with the Canadian Court in compliance with the Court's November 27,
2002 order, issued upon our motion seeking an order that IN post an additional
sum as security for costs to be incurred by us in defense of the action. This
sum is in addition to the $10,000 Canadian currency IN was ordered to post in
November 1998 and the $30,000 Canadian currency IN was ordered to post on June
16, 2000. The action is at the trial stage; trial is expected to last 2 weeks.
We intend to defend the action vigorously.
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 our Canadian licensee. Our licensee has been
assessed approximately $649,000 Canadian dollars (equivalent to approximately
$412,000 U.S. dollars as of December 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.
There can be no assurance that the foregoing claims will be decided in our
favor. We are not insured against all claims made. During the pendency of such
claims, we will continue to incur the costs of defense. Other than set forth
above, there is no material litigation pending or threatened against us.
In February 2002, a shareholder class action and derivative complaint was
filed in San Diego County Superior Court for the State of California by Steven
M. Mizel on behalf of himself and all NTN shareholders, naming Robert M.
Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H. Arlen,
Vincent A. Carrino and James B. Frakes as defendants with NTN Communications as
nominal defendant. The Mizel action alleged breach of fiduciary duty by
defendants in connection with our rejection of a proposal by a corporation to
purchase all of the outstanding shares of the our common stock, as announced
publicly on February 21, 2002. In June 2002, in ruling on our motion, the court
found that Mizel's complaint failed to state a valid claim. The court gave Mizel
an opportunity to replead his case, but he declined to do so. On July 11, 2002,
the court formally dismissed the case and entered judgment in our favor.
Similarly, in March 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 NTN's 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 alleged breach of fiduciary duty, abuse of control and gross
mismanagement by defendants in connection with our 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. In July 2002, in light of the ruling on
Mizel, Fernhoff requested that the court dismiss his complaint.
(13) ACQUISITIONS
On April 5, 2002, through a newly formed subsidiary, NTN Wireless
Communications, Inc. (Wireless), we acquired the net assets of ZOOM
Communications (ZOOM), a company in the restaurant wireless paging industry,
from Brandmakers, Inc. We entered into separate 2-year employment contracts with
each of ZOOM's two principals to join NTN as Vice President of Operations and
Vice President of Sales in the Wireless business. Based out of suburban Atlanta,
Georgia, the Wireless segment now serves as a regional office and distribution
center for us.
We also entered into a distribution agreement on March 11, 2002 with
Brandmakers, Inc., for the non-exclusive right to sell and service certain
products relating to the manufacture, service and distribution of wireless
paging systems and stored value gift and loyalty card programs for ZOOM. The
agreement was cancelled on April 5, 2002 upon the acquisition of the assets of
ZOOM.
F-22
On May 17, 2002, we acquired the net assets of Hysen Technologies, Inc.
(Hysen), another company in the hospitality paging industry. The assets acquired
included Hysen's existing inventory and intellectual property, including Hysen's
customer base. The assets of Hysen were combined into the Wireless segment.
Total consideration for the purchases was $422,000, which is comprised of
$320,000 in common stock and $102,000 for transaction costs. In addition to the
above consideration, we entered into, in connection with the ZOOM purchase, an
earn-out arrangement with the two principals. The earn-out will be paid to each
principal at 25% of the excess of which the adjusted gross profit exceeds
$900,000 for the twelve month period after the acquisition. For the period ended
December 31, 2002 the adjusted gross profit was approximately $780,000. This
earn out amount will be added to the purchase price of the ZOOM transaction.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Of the $521,000 of
acquired intangible assets, $231,000 was assigned to goodwill and is not subject
to amortization. $140,000 was assigned to employment agreements and will be
amortized over the estimated contractual life of 2 years. $150,000 was assigned
to customer lists and will be amortized over the estimated useful life of 3
years. The line of credit of $72,000 was paid in full immediately after the
closing date of April 5, 2002.
ASSETS ACQUIRED AND LIABILITIES ASSUMED
ZOOM HYSEN TOTAL
COMMUNICATIONS TECHNOLOGIES ACQUISITIONS
--------------- ------------- -------------
Accounts receivable, net $ 121,000 $ -- $ 121,000
Inventory 48,000 41,000 89,000
Fixed assets 38,000 -- 38,000
Goodwill 216,000 15,000 231,000
Intangibles assets 280,000 10,000 290,000
--------------- ------------- -------------
Total assets acquired 703,000 66,000 769,000
--------------- ------------- -------------
Accounts payable and accrued liabilities 244,000 31,000 275,000
Line of credit 72,000 -- 72,000
--------------- ------------- -------------
Total liabilities assumed 316,000 31,000 347,000
--------------- ------------- -------------
Net assets acquired $ 387,000 $ 35,000 $ 422,000
=============== ============= =============
If the acquisitions had occurred on January 1, 2002, our results of
operations for fiscal 2002 would not have been materially different from the
reported results and as such, no pro forma results of operations are included.
(14) RELATED PARTIES
On May 8, 2001, we entered into an advertising sales representative
agreement with Baron Enterprises, Inc., a corporation wholly-owned and operated
by Barry Bergsman, a member of our board of directors, pursuant to which Baron
provides advertising sales representation services to us under the direction of
the NTN Network's president and chief operating officer. For Baron's services
under the advertising sales representative agreement, we granted Baron a
three-year warrant to purchase 20,000 shares of Common Stock at an exercise
price of $0.50 per share. The warrant vests and becomes exercisable as to 1/12
of the total shares on the last business day of each of the twelve months
commencing April 2001, subject to Baron continuing to provide services to us. In
addition, Baron will receive a commission in the amount of 35% of net
advertising revenues received by the NTN Network from any advertising contract
solicited by Baron. We will pay to Baron a monthly recoverable cash advance
against commissions to be earned in the amount of $5,000 per month, not to
exceed an aggregate of $60,000 per year. The advertising sales representative
agreement expired on April 1, 2002. An amendment to the agreement was entered
into in October 2002, to extend the contract to October 31, 2003, to reduce the
rate of commission to 25% of net advertising revenues received by us and to
include bartered advertising. Under the amended agreement, Baron was paid
$15,000 in commissions in 2002.
In May 2002, Michael Fleming was appointed Chairman of the Board of our
Buzztime subsidiary, after having served, since January 8, 2002, as an
independent consultant. Pursuant to the consulting arrangement, Mr. Fleming
provided general consulting services to us in connection with Buzztime's cable
television initiatives. We paid Mr. Fleming approximately $2,000 per month for
these services.
F-23
In January 2002, we entered into a consulting agreement with Robert Clasen,
one of our directors, whereby Mr. Clasen provides consulting services to us with
respect to Buzztime's cable television initiatives. We are continuing the
relationship on a month to month basis since expiration of the initial term of
the agreement on December 31, 2002. We pay Mr. Clasen $2,000 per month for the
services provided under the consulting agreement.
(15) SEGMENT INFORMATION
Our operations are to develop 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 and Buzztime divisions. NTN Network revenue is generated primarily
from broadcasting content to customer locations through two interactive
television networks, from advertising sold on the network and from its wireless
segment with restaurant on-site paging systems, electronic gift cards, loyalty
programs and electronic data-managed comment cards. NTN Network revenues
comprise 99% of our total revenue in 2002 and 2001 and 97% in 2000. Revenue from
Buzztime 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 both the NTN Network and Buzztime 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:
2002 2001 2000
------------- ------------ -------------
Revenues:
Network....................................... $ 25,465,000 $22,382,000 $ 21,406,000
Buzztime...................................... 128,000 159,000 540,000
Other......................................... 17,000 18,000 102,000
------------- ------------ -------------
Total Revenues.......................... $ 25,610,000 $22,559,000 $ 22,048,000
============= ============ =============
Operating Income (Loss):
NTN Network................................... $ 1,699,000 $ 372,000 $ (2,162,000)
Buzztime...................................... (3,554,000) (3,306,000) (6,039,000)
------------- ------------ -------------
Total Operating Loss.................... $ (1,855,000) $(2,934,000) $ (8,201,000)
============= ============ =============
Total Assets:
NTN Network................................... $ 8,295,000 $ 8,849,000 $ 14,012,000
Buzztime...................................... 790,000 1,395,000 1,776,000
Corporate..................................... 1,757,000 3,136,000 3,034,000
------------- ------------ -------------
Total Assets............................ $ 10,842,000 $13,380,000 $ 18,822,000
============= ============ =============
Capital Expenditures and Software Development
Costs:
NTN Network................................... $ 1,208,000 $ 861,000 $ 5,138,000
Buzztime...................................... 237,000 300,000 2,623,000
Corporate..................................... 73,000 110,000 984,000
------------- ------------ -------------
Total Capital Expenditures and Software
Development Costs..................... $ 1,518,000 $ 1,271,000 $ 8,745,000
============= ============ =============
Depreciation and Amortization:
NTN Network................................... $ 4,194,000 $ 4,242,000 $ 5,668,000
Buzztime...................................... 731,000 766,000 628,000
------------- ------------ -------------
Total Depreciation and Amortization..... $ 4,925,000 $ 5,008,000 $ 6,296,000
============= ============ =============
Interest Expense (net):
NTN Network................................... $ 505,000 $ 767,000 $ 949,000
Buzztime...................................... -- 16,000 110,000
------------- ------------ -------------
Total Interest Expense (net)............ $ 505,000 $ 783,000 $ 1,059,000
============= ============ =============
Income Taxes:
NTN Network................................... $ 41,000 $ -- $ --
Buzztime...................................... -- -- --
------------- ------------ -------------
Total Income Taxes...................... $ 41,000 $ -- $ --
============= ============ =============
F-24
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (AMOUNTS IN THOUSANDS
EXCEPT PER SHARE)
THREE-MONTH PERIOD ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
2002 2002 2002 2002 2002
---------- ----------- ------------- ------------- -----------
Total revenue..................... $ 5,897 $ 6,158 $ 6,516 $ 7,039 $ 25,610
Total operating expenses.......... 5,979 6,989 7,104 7,393 27,465
---------- ----------- ------------- ------------- -----------
Operating loss.................... (82) (831) (588) (354) (1,855)
Other income (expense), net....... (129) (119) (125) (132) (505)
---------- ----------- ------------- ------------- -----------
Net loss before income taxes and
minority interest in loss of
consolidated subsidiary......... (211) (950) (713) (486) (2,360)
Income taxes...................... -- -- (34) (7) (41)
Minority interest in loss of
consolidated subsidiary......... 45 52 58 57 212
---------- ----------- ------------- ------------- -----------
Net loss.......................... $ (166) $ (898) $ (689) $ (436) $ (2,189)
========== =========== ============= ============= ===========
Per share amounts:
Net loss..................... $ (.00) $ (.02) $ (.02) $ (0.01) $ (.06)
========== =========== ============= ============= ===========
Weighted-average shares
outstanding..................... 38,604 39,977 39,270 39,325 39,081
========== =========== ============= ============= ===========
THREE-MONTH PERIOD ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
2001 2001 2001 2001 2001
---------- ----------- ------------- ------------- -----------
Total revenue..................... $ 5,285 $ 5,350 $ 5,664 $ 6,260 $ 22,559
Total operating expenses.......... 6,812 6,077 6,185 6,419 25,493
---------- ----------- ------------- ------------- -----------
Operating loss.................... (1,527) (727) (521) (159) (2,934)
Other income (expense), net....... (51) (222) (251) (283) (807)
---------- ----------- ------------- ------------- -----------
Net loss before income taxes and
minority interest in loss of
consolidated subsidiary......... (1,578) (949) (772) (442) (3,741)
Minority interest in loss of
consolidated subsidiary......... -- -- 40 45 85
---------- ----------- ------------- ------------- -----------
Net loss.......................... $ (1,578) $ (949) $ (732) $ (397) $ (3,656)
========== =========== ============= ============= ===========
Per share amounts:
Net loss..................... $ (.04) $ (.03) $ (.02) $ (0.01) $ (.10)
========== =========== ============= ============= ===========
Weighted-average shares
outstanding..................... 36,335 36,660 36,775 37,239 36,755
========== =========== ============= ============= ===========
(16) SUBSEQUENT EVENTS
On January 15, 2003, we issued and sold 1,000,000 shares of restricted
common stock through a private offering to Robert M. Bennett, one of our
directors, at a price per share of $1.00. Pursuant to the terms of the
transaction, upon receipt of $1.0 million from Mr. Bennett, we issued the
restricted shares along with fully vested warrants to purchase 500,000 shares of
common stock at $1.15 per share, exercisable through January 15, 2008. No
commissions or placement agent fees were paid in connection with the offering.
We have agreed to file a registration statement covering the resale of the
shares of common stock (including those shares underlying the warrant) issued in
both the S-A conversion and in the Bennett investment within 90 days.
On January 16, 2003, S-A's investment in Buzztime preferred shares
converted to NTN common stock at a conversion price of $1.00 per share (see Note
11).
On February 1, 2003, the $2 million principal balance of the Convertible
Notes converted to NTN common stock at the previously agreed conversion price of
$1.275 per share (see Note 9).
F-25
SCHEDULE II
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ADDITIONS BALANCE AT
ALLOWANCE FOR BALANCE AT CHARGED TO END OF
DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS(A) PERIOD
------------------ ----------- ---------- ------------------ -----------
2002.............. $ 440,000 529,000 532,000 $ 437,000
2001.............. $ 811,000 767,000 1,138,000 $ 440,000
2000.............. $2,148,000 442,000 1,779,000 $ 811,000
- ----------
(a) Reflects trade accounts receivable written off during the year, net of
amounts recovered.
See accompanying independentauditors' report.
F-26
INDEX TO EXHIBITS
EXHIBIT
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------
3.1 -- Amended and Restated Certificate of Incorporation of the
Company, as amended(4)
3.2 -- Certificate of Designations, Rights and Preferences of
Series B Convertible Preferred Stock(8)
3.3 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 22, 2000(9)
3.4 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 24, 2000(9)
3.5 -- By-laws of the Company(2)
4.1 -- Specimen Common Stock Certificate(13)
4.2 -- Securities Purchase Agreement, dated November 14, 2000,
by and among NTN Communications, Inc. and the Buyers, as
defined therein(11)
4.3 -- Registration Rights Agreement, dated November 14, 2000,
by and among NTN Communications, Inc. and the Buyers, as
defined therein(11)
4.4 -- First Amendment to Securities Purchase Agreement, dated
January 26, 2001, by and among NTN Communications, Inc. and
the Buyers, as defined therein.(12)
4.5 -- Form of Amended and Restated Common Stock Purchase
Warrants of NTN Communications, Inc., dated January 26,
2001(12)
4.6* -- Stock Option Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(5)
4.7* -- Stock Option Agreement, dated October 7, 1999, by and
between NTN Communications, Inc. and Stanley B. Kinsey(7)
4.8* -- Stock Option Agreement, dated January 26, 2001, by and
between NTN Communications, Inc. and Stanley B. Kinsey(15)
10.1 -- License Agreement with NTN Canada(3)
10.2* -- Employment Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(5)
10.3 -- Loan and Security Agreement, dated August 6, 1999, by
and between NTN Communications, Inc. and Coast Business
Credit, a division of Southern Pacific Bank.(6)
10.4 -- First Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit (6)
10.5 -- Second Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (15)
10.6 -- Third Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business Credit (15)
10.7 -- Fourth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(16)
10.8 -- Manufacturing Agreement, dated November 25, 1997, by
and between NTN Communications, Inc. and Climax Technology
Co., Ltd. (10)
10.9 -- Office Lease, dated July 17, 2000, between Prentiss
Properties Acquisition Partners, L.P. and NTN
Communications, Inc. (14)
10.10 -- Fifth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(17)
10.11 -- Sixth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(18)
10.12 -- Seventh Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(18)
10.13 -- Eighth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(1)
10.14 -- Ninth Amendment to Loan and Security Agreement, by and
between NTN Communications, Inc. and Coast Business
Credit(1)
F-27
14.0 -- Code of Ethics for Senior Financial Officers (1)
21.1 -- Subsidiaries of Registrant (1)
23.1 -- Consent of KPMG LLP(1)
- ----------
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's registration statement on Form
S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to NTN's report on Form 10-K for the
year ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's registration statement on Form
S-3, File No. 333-69383, filed on December 28, 1998, and incorporated
by reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 30, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 31, 1999 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on
April 5, 2000 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's report on Form 10-K/A dated
March 5, 2001 and incorporated herein by reference.
(11) Previously filed as an exhibit to NTN's registration statement on Form
S-3, filed on December 11, 2000, and incorporated by reference.
(12) Previously filed as an exhibit to NTN's registration statement on Form
S-3/A, filed on March 5, 2001, and incorporated by reference.
(13) Previously filed as an exhibit to NTN's registration statement on Form
8-A, File No. 0-19383, and incorporated by reference.
(14) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 2000 and incorporated by reference.
(15) Previously filed as an exhibit to NTN's report on Form 10-Q dated
March 31, 2001 and incorporated by reference.
(16) Previously filed as an exhibit to NTN's Form 10-K dated March 6, 2002
and incorporated by reference.
(17) Previously filed as an exhibit to NTN's Form 10-Q dated April 26, 2002
and incorporated by reference.
(18) Previously filed as an exhibit to NTN's Form 10-Q dated August 6, 2002
and incorporated by reference.
F-28