1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1103425
(State of incorporation) (I.R.S. Employer Identification No.)
THE CAMPUS 5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
At November 1, 2000 the registrant had outstanding 34,813,000 shares of
common stock, $.005 par value.
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
2000 December 31,
Assets (Unaudited) 1999
------------- -------------
Current assets:
Cash and cash equivalents $ 1,699,000 $ 1,044,000
Restricted cash 147,000 239,000
Accounts receivable, net 1,891,000 2,541,000
Investment available for sale 385,000 937,000
Deposits on broadcast equipment 37,000 611,000
Prepaid expenses and other current assets 712,000 1,015,000
------------- -------------
Total current assets 4,871,000 6,387,000
Broadcast equipment and fixed assets, net 13,790,000 10,470,000
Other assets 250,000 430,000
------------- -------------
Total assets $ 18,911,000 $ 17,287,000
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,464,000 $ 1,421,000
Accrued expenses 1,346,000 1,498,000
Accrual for litigation costs 98,000 334,000
Accrual for management severance 213,000 598,000
Obligations under capital leases 874,000 740,000
Deferred revenue 680,000 796,000
Note payable and other current liabilities 161,000 79,000
------------- -------------
Total current liabilities 4,836,000 5,466,000
Obligations under capital leases, excluding current portion 157,000 475,000
Accrual for settlement warrants -- 1,793,000
Revolving line of credit 3,772,000 2,486,000
7% senior convertible notes 3,947,000 4,705,000
Other long-term liabilities 91,000 141,000
------------- -------------
Total liabilities 12,803,000 15,066,000
------------- -------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock, $.005 par value,
5,000,000 shares authorized; 161,000 shares issued
and outstanding at September 30, 2000 and December 31, 1999 1,000 1,000
Common stock, $.005 par value, 70,000,000 and 50,000,000 shares
authorized at September 30, 2000 and December 31, 1999, respectively;
34,610,000 and 29,914,000 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 173,000 149,000
Additional paid-in capital 74,354,000 66,548,000
Accumulated deficit (67,516,000) (63,645,000)
Accumulated other comprehensive loss (432,000) (360,000)
Treasury stock, at cost, 111,000 shares at September 30, 2000
and December 31, 1999 (472,000) (472,000)
------------- -------------
Total shareholders' equity 6,108,000 2,221,000
------------- -------------
Total liabilities and shareholders' equity $ 18,911,000 $ 17,287,000
============= =============
See accompanying notes to unaudited consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 30 September 30 September 30 September 30
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues:
NTN Network revenues $ 5,458,000 $ 5,559,000 $ 16,631,000 $ 16,146,000
BUZZTIME service revenues 172,000 72,000 356,000 300,000
America Online fees -- 150,000 -- 500,000
Other revenues 67,000 106,000 87,000 439,000
------------- ------------- ------------- -------------
Total revenues 5,697,000 5,887,000 17,074,000 17,385,000
------------- ------------- ------------- -------------
Operating expenses:
Direct operating costs 1,499,000 1,759,000 4,556,000 4,047,000
Selling, general and administrative 3,827,000 3,774,000 10,950,000 10,466,000
Depreciation and amortization 1,222,000 1,623,000 5,029,000 4,763,000
Research and development 97,000 229,000 320,000 524,000
------------- ------------- ------------- -------------
Total operating expenses 6,645,000 7,385,000 20,855,000 19,800,000
------------- ------------- ------------- -------------
Operating loss (948,000) (1,498,000) (3,781,000) (2,415,000)
------------- ------------- ------------- -------------
Other income (expense):
Interest income (expense), net (271,000) (249,000) (262,000) (613,000)
Gain on sale of assets of subsidiary -- 2,254,000 -- 2,254,000
Other 11,000 -- 172,000 (25,000)
------------- ------------- ------------- -------------
Total other income (expense) (260,000) 2,005,000 (90,000) 1,616,000
------------- ------------- ------------- -------------
Income (loss) before income taxes (1,208,000) 507,000 (3,871,000) (799,000)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) $ (1,208,000) $ 507,000 $ (3,871,000) $ (799,000)
============= ============= ============= =============
Net income (loss) per common share - basic $ (0.04) $ 0.02 $ (0.12) $ (0.03)
============= ============= ============= =============
Net income (loss) per common share - diluted $ (0.04) $ 0.02 $ (0.12) $ (0.03)
============= ============= ============= =============
Weighted average shares outstanding - basic 34,237,000 28,573,000 32,613,000 28,235,000
============= ============= ============= =============
Weighted average shares outstanding - diluted 34,237,000 35,294,000 32,613,000 28,235,000
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
September 30 September 30 September 30 September 30
2000 1999 2000 1999
------------- ------------- ------------- -------------
Cash flows provided by (used in) operating activities:
Net Income (loss) $ (1,208,000) $ 507,000 $ (3,871,000) $ (799,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,222,000 1,623,000 5,029,000 4,763,000
Provision for doubtful accounts (182,000) 209,000 366,000 594,000
Non-cash stock-based compensation charges 497,000 35,000 810,000 91,000
Expiration of settlement warrant obligation -- -- (1,793,000) --
Accreted interest expense 58,000 98,000 165,000 303,000
Amortization of deferred revenue -- -- -- (85,000)
Gain from disposition of equipment -- -- -- (6,000)
Gain on sale of assets of subsidiary -- (2,254,000) -- (2,254,000)
(Gain) loss on sale of investment available for sale 7,000 -- (58,000) --
Changes in assets and liabilities:
Accounts receivable (317,000) 330,000 284,000 (288,000)
Prepaid expenses and other assets (56,000) 197,000 76,000 (576,000)
Accounts payable and accrued expenses 451,000 626,000 (11,000) (158,000)
Deferred revenue 20,000 (122,000) (116,000) 117,000
Management severance and other long-term liabilities (131,000) (187,000) (392,000) (735,000)
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities 361,000 1,062,000 489,000 967,000
------------- ------------- ------------- -------------
Cash flows provided by (used in) investing activities:
Capital expenditures (1,529,000) (2,548,000) (7,569,000) (4,453,000)
Deposits on broadcast equipment 442,000 (107,000) 574,000 289,000
Restricted cash 112,000 -- 92,000 --
Notes receivable -- 20,000 138,000 59,000
Capital software expenditures -- (25,000) -- (56,000)
Proceeds from sale of equipment -- -- -- 45,000
Proceeds from sale of investment available for sale 10,000 1,227,000 538,000 1,227,000
------------- ------------- ------------- -------------
Net cash provided by (used in) investing activities (965,000) (1,433,000) (6,227,000) (2,889,000)
------------- ------------- ------------- -------------
Cash flows provided by (used in) financing activities:
Principal payments on capital leases (242,000) (282,000) (695,000) (916,000)
Borrowings from revolving line of credit 5,767,000 1,257,000 20,169,000 1,257,000
Principal payments on revolving line of credit (5,688,000) -- (18,883,000) --
Proceeds from issuance of stock, net of offering expenses -- -- 5,163,000 --
Principal payments on notes payable -- (60,000) (50,000) (60,000)
Exercise of stock options and warrants 119,000 -- 689,000 150,000
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities (44,000) 915,000 6,393,000 431,000
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (648,000) 544,000 655,000 (1,491,000)
------------- ------------- ------------- -------------
Cash and cash equivalents at beginning of period 2,347,000 2,525,000 1,044,000 4,560,000
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 1,699,000 $ 3,069,000 $ 1,699,000 $ 3,069,000
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements
6
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30 September 30 September 30 September 30
2000 1999 2000 1999
------------- ------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 121,000 $ 52,000 $ 381,000 $ 110,000
============= ============= ============= =============
Income taxes $ -- $ -- $ -- $ --
============= ============= ============= =============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest $ 82,000 $ 103,000 $ 251,000 $ 193,000
============= ============= ============= =============
Equipment acquired under capital leases $ 234,000 $ 328,000 $ 511,000 $ 1,469,000
============= ============= ============= =============
Unrealized holding loss on investments $ 185,000 $ 410,000 $ 72,000 $ 410,000
============= ============= ============= =============
Exchange of convertible notes to common stock $ 713,000 $ -- $ 915,000 $ --
============= ============= ============= =============
Issuance of treasury stock pursuant to
anti-dilution provisions $ -- $ 930,000 $ -- $ 930,000
============= ============= ============= =============
Equipment and license acquired by issuing note payable $ -- $ 360,000 $ -- $ 360,000
============= ============= ============= =============
Exchange of preferred stock for convertible notes
and warrants $ -- $ -- $ -- $ 5,449,000
============= ============= ============= =============
Issuance of common stock in payment of accrued
board compensation $ -- $ 247,000 $ -- $ 247,000
============= ============= ============= =============
Sale of assets of subsidiary in exchange for cash
of $1,227,000 and stock of eBet Online $ -- $ 1,297,000 $ -- $ 1,297,000
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements.
7
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and subsidiaries
(collectively, the "Company") and the results of operations and cash flows of
the Company for the interim periods presented. Management has elected to omit
substantially all notes to the Company's consolidated financial statements as
permitted by the rules and regulations of the Securities and Exchange
Commission. The results of operations for the interim periods are not
necessarily indicative of results to be expected for any other interim period or
for the year ending December 31, 2000.
The consolidated financial statements for the three months and nine months
ended September 30, 2000 and 1999 are unaudited and should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1999.
Certain items in the prior period consolidated financial statements have
been reclassified to conform to the current period presentation.
2. INCOME (LOSS) PER SHARE
Options, warrants, convertible preferred stock and convertible notes
representing approximately 12,414,000, 4,462,000, 14,105,000, and 13,346,000
potentially dilutive common shares have been excluded from the computations of
net income (loss) per share for the three months ended September 30, 2000 and
1999 and the nine months ended September 30, 2000 and 1999, respectively, as
their effect was anti-dilutive.
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Numerator for diluted earnings (loss) per
share:
Net income (loss) available to common
shareholders $ (1,208,000) $ 507,000 $ (3,871,000) $ (799,000)
Interest on 7% convertible notes -- 103,000 -- --
------------- ------------- ------------- -------------
$ (1,208,000) $ 610,000 $ (3,871,000) $ (799,000)
============= ============= ============= =============
Denominator:
Denominator for basic earnings (loss) per share:
Weighted average shares 34,237,000 28,573,000 32,613,000 28,235,000
Potential effect of dilutive securities:
Employee stock options and director
options -- 1,497,000 -- --
Warrants -- 526,000
Convertible preferred stock -- 61,000 -- --
Convertible debt -- 4,637,000 -- --
------------- ------------- ------------- -------------
Potentially dilutive common stock -- 6,721,000 -- --
------------- ------------- ------------- -------------
Denominator for diluted earnings (loss) per
share:
Adjusted weighted average shares
and assumed conversions 34,237,000 35,294,000 32,613,000 28,235,000
============= ============= ============= =============
Basic earnings (loss) per common share $ (0.04) $ 0.02 $ (0.12) $ (0.03)
============= ============= ============= =============
Diluted earnings (loss) per common share $ (0.04) $ 0.02 $ (0.12) $ (0.03)
============= ============= ============= =============
8
3. SEGMENT INFORMATION
The Company develops, produces and distributes interactive entertainment.
The Company's reportable segments have been determined based on the nature of
the services offered to customers, which include, but are not limited to,
revenue from the NTN Network(R) and BUZZTIME(TM) divisions. NTN Network revenue
is generated primarily from broadcasting content to customer locations through
the NTN Network, an interactive television network, and from advertising sold on
the NTN Network. NTN Network revenues comprised 98% of the Company's total
revenue for the nine months ended September 30, 2000. BUZZTIME service revenue
includes revenue from BUZZTIME and is generated primarily from the distribution
of the Company's digital trivia game show content and "Predict-the-Play" sports
games, as well as revenue related to advertising and production services for
third parties. The following tables set forth certain information regarding the
Company's segments and other operations:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues
NTN Network $ 5,458,000 $ 5,559,000 $ 16,631,000 $ 16,146,000
BUZZTIME 172,000 222,000 356,000 800,000
Other 67,000 106,000 87,000 439,000
------------- ------------- ------------- -------------
Total revenue $ 5,697,000 $ 5,887,000 $ 17,074,000 $ 17,385,000
============= ============= ============= =============
Operating income (loss)
NTN Network $ 1,790,000 $ 798,000 $ 2,843,000 $ 3,461,000
BUZZTIME (1,302,000) (417,000) (3,263,000) (1,143,000)
Corporate (1,503,000) (1,864,000) (3,448,000) (4,689,000)
Other 67,000 (15,000) 87,000 (44,000)
------------- ------------- ------------- -------------
Operating loss $ (948,000) $ (1,498,000) $ (3,781,000) $ (2,415,000)
============= ============= ============= =============
4. SETTLEMENT WARRANTS
The results for the nine months ended September 30, 2000 include a reversal
of an accrued liability of approximately $1,793,000 for a potential redemption
obligation, relating to Settlement Warrants, which expired in February 2000. The
Settlement Warrants entitle the holder of a Settlement Warrant to purchase a
share of the Company's 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 the
Company 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 the Company's Common Stock
on the American Stock Exchange reached $4.22 or above for the seventh trading
day since the Settlement Warrants were issued. The Company has no further
obligation to redeem or repurchase the Settlement Warrants.
5. PUBLIC OFFERING OF COMMON STOCK
The Company raised gross proceeds of $6,000,000 in April 2000 through the
underwritten sale of 2,000,000 shares of Common Stock pursuant to the Company's
existing shelf registration. The net proceeds from the sale, which totaled
approximately $5,163,000, were used primarily for working capital and general
corporate purposes relating to the Company's launch of its new game portal,
BUZZTIME and ongoing conversion of the NTN Network's hospitality locations to
the Company's DITV technology.
6. SUBSEQUENT EVENT
On November 14, 2000 the Company closed a private equity placement of
$2,000,000 with two accredited investors (the "Buyers"). The Company sold a
total of 1,218,583 shares of common stock to the Buyers. The shares were sold at
a purchase price of $1.64125 per share.
The Company also issued warrants to the Buyers to purchase 609,292 shares.
Each warrant is exercisable for one share of the Company's common stock at an
initial exercise price of $1.64125 per share of common stock. In addition, the
Company agreed to issue to the Buyers, for no additional consideration,
additional warrants to purchase 609,292 shares of its common stock at an initial
price of $1.64125 per share of common stock in the event the Company raises less
than $5 million in gross proceeds from the sale of the Company's common stock to
entities other than the Buyers by May 14, 2001. The exercise price of all
warrants will be reset every six months beginning May 14, 2001 to the average
closing bid price for the 20 days prior to each sixth month anniversary if a
lower exercise price would result. The warrants have a three-year life starting
from the date of issuance.
Pursuant to the terms of the private placement, each Buyer will be issued
additional shares of common stock in the event the Company issues, at any time
or from time to time during the six months immediately following November 14,
2000, any common stock or convertible securities without consideration or for a
consideration per share less than the original purchase price per share paid by
the Buyers. In addition, the Company also granted the Buyer a limited right of
first refusal on subsequent offerings exercisable at the option of each Buyer
during the twelve-month period ending November 14, 2001.
The net proceeds from the offering, which totaled approximately $1,900,000,
will be used primarily for working capital and general corporate purposes
relating to the Company's further expansion of its DITV Network and
infrastructure and continued BUZZTIME development.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
This Quarterly Report contains forward looking statements regarding use of
the proceeds from the recent sale of common stock, business strategies and other
matters, which are subject to risks and uncertainties, including cash needs,
competition, market acceptance and other risk factors detailed in the Company's
Securities and Exchange Commission filings, including the Company's Report on
Form 10-K for the fiscal year ended December 31, 1999, as amended by Form
10-K/A, reports on Form 8-K, and its quarterly reports on 10-Q for the periods
ended March 31, 2000 and June 30, 2000, which risk factors are incorporated
herein by reference.
9
GENERAL
The Company is a developer and distributor of interactive game content.
The Company operates its businesses through two operating divisions, the NTN
Network and BUZZTIME, Inc. (BUZZTIME).
The NTN Network is North America's largest "out-of-home" interactive
television network. The unique private network, distributed by Internet-enhanced
technology, broadcasts a variety of multi-player sports and trivia games 365
days a year to hospitality venues such as restaurants, sports bars, hotels,
clubs and military bases totaling approximately 3,400 locations in North America
("Locations") as of October 1, 2000. A unique feature of NTN Network's
interactive programming is that all players compete in real-time within each
Location and are ranked at the end of each game against players in all Locations
throughout North America. This enables each Location to create on-premises
promotions to increase patron loyalty and allows NTN to capture national
sponsors who want to use the competitions as a promotional tool.
In April 1999, the Company upgraded the NTN Network by introducing a
new Windows 98-based "Digital Interactive TV" system (DITV) to replace its
decade-old DOS-based system. The new DITV system uses Windows-based development
tools and multimedia capabilities, resulting in enhanced, high-resolution
graphics and full-motion video, making broadcasts on the NTN Network more
appealing.
BUZZTIME, a wholly-owned subsidiary formed in December 1999, functions
both as a game web site, BUZZTIME.com launched in May 2000, and as a developer
and distributor of game content. As a developer, BUZZTIME will continue to
augment our expansive interactive game libraries. As a distributor, BUZZTIME
broadcasts live play-along game shows to a broad array of interactive networks
and platforms, including the Internet and online services, interactive
television and hand-held devices.
The Company's current strategy for each of the two operating divisions
is as follows: For the NTN Network, the strategy is to continue to lower
operating costs while increasing the number of paying customers in the Network.
To lower costs, the company's focus is on declining telecommunications and
technology costs. To increase sales, the focus is on increasing targeted sales
efforts in the top twenty metropolitan markets, using new forms of connectivity,
including DSL, to reach locations not previously available. The strategy also
calls for using newly available and inexpensive broadband connectivity and the
availability of inexpensive wireless Internet appliances to deliver new content
and services, for additional revenues, to both locations and their consumers.
For BUZZTIME, the Company intends to focus increasingly on the distribution of
BUZZTIME content to Interactive Television (ITV) markets and to wireless
devices. These channels should both increase future direct revenues and increase
player registrations and loyalty, regardless of the consumer's point of access.
The NTN Network will continue to be a key element in promoting the BUZZTIME
brand. In addition, the Company expects to generate revenues through a
combination of direct consumer marketing, advertising, game sponsorships,
pay-to-play and subscription models across all platforms. There can be no
assurance, however, that the Company will be successful in executing this
strategy.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Operations for the three months ended September 30, 2000 resulted in a net
loss of $1,208,000 compared to net income of $507,000 for the three months ended
September 30, 1999. The results for the third quarter 1999 include a gain of
$2,254,000 related to the sale of the assets of its wholly-owned subsidiary,
IWN, Inc. to eBet Limited in exchange for $1,227,000 in cash and 4,000,000
shares of eBet Online stock. Excluding this gain, operations for the three
months ended September 30, 1999 resulted in a net loss of $1,747,000.
Total revenues decreased 3% to $5,697,000 for the three months ended
September 30, 2000 from $5,887,000 for the three months ended September 30,
1999. This decrease was primarily due to a decrease in NTN Network revenues,
America Online fees and other revenues. America Online fees decreased as the
Company wound down such exclusive relationships to pursue Internet and
interactive initiatives through its BUZZTIME subsidiary.
NTN Network revenues revenue decreased 2% to $5,458,000 for the three months
ended September 30, 2000 from $5,559,000 for the three months ended September
30, 1999. This decrease was primarily due to a decrease of $195,000 in setup,
installation, and training revenue for the three months ended September 30,
2000, as approximately 325 DITV systems were installed, including both new
customers and conversions from the original network during the three months
ended September 30, 2000, compared to 596 DITV systems for the three months
ended September 30, 1999. It was also influenced by decreases of approximately
$73,000, in hospitality subscription revenues attributable to a lower billing
rate structure associated with the DITV network as compared to the original
network. The lower billing rate structure was introduced in order to incent
DOS-based customers to convert to the DITV system and to grow the number of
hospitality sites receiving the DITV service. The total number of sites as of
September 30, 2000 was 2,906, representing a net increase of approximately 100
sites compared to September 30, 1999. At September 30, 2000, approximately 83%
of the sites have been converted to the DITV network compared to approximately
33% of the sites converted as of September 30, 1999. Advertising revenue for
hospitality increased 69%, or $137,000, to $337,000 for the three months ended
September 30, 2000 from $200,000 for the three months ended September 30, 1999
due to new advertising contracts that did not exist for the three months ended
September 30, 1999.
BUZZTIME service revenue increased to $172,000 for the three months ended
September 30, 2000 from $72,000 for the three months ended September 30, 1999.
Included in BUZZTIME service revenue for the three months ended September 30,
2000 was advertising revenue of $85,000 and production revenue of $87,000. The
increase was due primarily to new contracts for advertising that did not exist
for the three months ended September 30, 1999.
America Online ("AOL") fees were zero for the three months ended September
30, 2000, compared to $150,000 for the three months ended September 30, 1999.
The Company's contract with AOL expired on December 1, 1999, at which time a new
contract was signed, under which the Company will not generate revenue from AOL.
Under the terms of the new nonexclusive contract, the Company has access to
AOL's 25 million subscribers allowing promotion of the BUZZTIME web site on
several AOL channels. The contract with AOL expires on November 30, 2000.
Other revenues decreased 37% to $67,000 for the three months ended September
30, 2000 from $106,000 for the three months ended September 30, 1999. Included
in other revenues for the three months ended September 30, 1999 was
approximately $99,000 of revenues from IWN, Inc. No revenue was recorded for
IWN, Inc. for the three months ended September 30, 2000 due to the sale of its
assets in August 1999.
Direct operating costs decreased 15% to $1,499,000 for the three months
ended September 30, 2000 from $1,759,000 for the three months ended September
30, 1999. Playmaker repairs, miscellaneous parts, and technical site service
costs decreased approximately $145,000, in aggregate, which is attributable to
new equipment at the sites for the DITV network which requires less repair and
servicing than the DOS-based network equipment. Additionally, installation
expenses decreased $95,000 for the three months ended September 30, 2000 as
there were 271 fewer installations compared to the three months ended September
30, 1999. The conversion to the DITV network is expected to be complete by
Spring 2001.
Selling, general and administrative expenses increased 1% to $3,827,000 for
the three months ended September 30, 2000 from $3,774,000 for the three months
ended September 30, 1999. Salaries, payroll taxes, benefits, recruiting fees and
other employee related expenses increased by approximately $503,000 during the
three months ended September 30, 2000 due to an increase in the
11
number of employees related to the development and launch of the Internet web
site, interactive television and wireless applications as compared to the three
months ended September 30, 1999. Additionally, stock-based compensation expense
increased to $497,000 for the three months ended September 30, 2000 from $35,000
for the three months ended September 30, 1999. These noncash charges result from
the issuance of warrants and options to employees and non-employees, which can
vary from period-to-period. Hosting fees associated with the web site of
approximately $180,000 were incurred for the three months ended September 30,
2000. No similar hosting fees were recorded for the three months ended September
30, 1999. The Company expects to incur hosting fees for the three months ending
December 31, 2000 of approximately $125,000. These increases were partially
offset by a decrease in bad debt expense of approximately $390,000 primarily
related to improved collections. Consulting expenses decreased approximately
$294,000 related to Year 2000 efforts for the three months ended September 30,
1999. Equipment lease expense decreased for the three months ended September 30,
2000 by $180,000 due to the payoff of such leases during 1999. Marketing
expenses decreased approximately $133,000 for the three months ended September
30, 2000 due to additional expenses incurred for the three months ended
September 30, 1999 related to the DITV Network.
Depreciation and amortization expense decreased 25% to $1,222,000 for the
three months ended September 30, 2000 from $1,623,000 for the three months ended
September 30, 1999 due to the DOS-based network equipment being fully
depreciated by June 30, 2000. This decrease is offset by an increase in
depreciation for the quarter due to recent capitalized purchases. Depreciation
and amortization expense is expected to increase in future periods due to the
recent and planned future purchases of broadcast equipment for the DITV network
and equipment and software purchased for the web site.
Research and development expenses were $97,000 for the three months ended
September 30, 2000, compared to $229,000 for the three months ended September
30, 1999. The current period expenses resulted from the Company's research and
development efforts related to the next generation of the DITV network and
development of an Internet web site. For the three-month period ended September
30, 1999, the Company's research and development efforts focused primarily on
the upgrade of the NTN network as well as Internet web sites and Internet
stations.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Operations for the nine months ended September 30, 2000 resulted in a net
loss of $3,871,000 compared to a net loss of $799,000 for the nine months ended
September 30, 1999. The results for the nine months ended September 30, 2000
included a one-time expense reduction of approximately $1,793,000 related to the
reversal of an accrued liability for Settlement Warrants. The operating results
for the nine months ended September 30, 1999 include a gain of $2,254,000
related to the sale of the assets of its wholly-owned subsidiary, IWN, Inc. to
eBet Limited in exchange for $1,227,000 in cash and 4,000,000 shares of eBet
Online stock. Excluding the one-time expense reduction in 2000 and the one-time
gain in 1999, the Company's net loss for the nine months ended September 30,
2000 was $5,664,000 compared to a net loss of $3,053,000 for the nine months
ended September 30, 1999.
Total revenues decreased 2% to $17,074,000 for the nine months ended
September 30, 2000 from $17,385,000 for the nine months ended September 30,
1999. This decrease was primarily due to a decrease in America Online fees and
other revenues as the Company wound down such exclusive relationships to pursue
Internet and interactive initiatives through BUZZTIME.
NTN Network revenues increased 3% to $16,631,000 for the nine months ended
September 30, 2000 from $16,146,000 for the nine months ended September 30,
1999. This increase was due primarily to an increase in rates charged for the
setup, installation and training for the DITV network as compared to the
original network. Advertising revenue for hospitality also increased to
$1,070,000 for the nine months ended September 30, 2000 from $468,000 for the
nine months ended September 30, 1999 due to new advertising contracts that did
not exist for the nine months ended September 30, 1999. These increases were
partially offset by a decrease in hospitality subscription revenues attributable
to a lower billing rate structure associated with the DITV network as compared
to the original network. During the nine months ended September 30, 2000,
approximately 1,055 DITV systems were installed compared to 936 DITV sites
installed for the nine months ended September 30, 1999.
BUZZTIME service revenue increased 19% to $356,000 for the nine months ended
September 30, 2000 from $300,000 for the nine months ended September 30, 1999.
Included in BUZZTIME service revenue for the nine months ended September 30,
2000 was advertising revenue of $125,000 and production revenue of $231,000. The
increase was due to new contracts for advertising that did not exist for the
nine months ended September 30, 1999. This increase was partially offset by a
decrease in production revenue due to the expiration of the Company's contract
with GTE Mainstreet, in February 2000.
12
AOL fees were zero for the nine months ended September 30, 2000, compared to
$500,000 for the nine months ended September 30, 1999. The Company's contract
with AOL expired on December 1, 1999, at which time a new contract was signed as
described above, under which the Company will not generate revenue from AOL.
Other revenues decreased 82% to $87,000 for the nine months ended September
30, 2000 from $439,000 for the nine months ended September 30, 1999. Included in
other revenue for the nine months ended September 30, 1999 was approximately
$269,000 of revenue from IWN, Inc. and approximately $84,000 of equipment sales.
No revenue was recorded for IWN, Inc. or equipment sales for the nine months
ended September 30, 2000.
Direct operating costs increased 13% to $4,556,000 for the nine months ended
September 30, 2000 from $4,047,000 for the nine months ended September 30, 1999.
This increase was due primarily to increased ISP charges of $535,000 due to
additional services needed to support the DITV network for the nine months ended
September 30, 2000. Advertising commissions increased by $150,000 directly
related to the increase in hospitality advertising revenue. License fees also
increased for the three months ended September 30, 2000 due to the settlement of
an accrued liability for license fees that was less than had been estimated for
the three months ended September 30, 1999. As a result, the Company reduced the
accrued expenses and direct operating costs by approximately $180,000 related to
the settlement. These increases were partially offset by a decrease of
approximately $370,000, in aggregate, for playmaker repairs, miscellaneous parts
and technical site service which is attributable to new equipment at the sites
for the DITV network which requires less repair and servicing than the DOS-based
network equipment. The conversion to the DITV network is expected to be complete
by Spring 2001.
Selling, general and administrative expenses increased 5% to $10,950,000 for
the nine months ended September 30, 2000 from $10,466,000 for the nine months
ended September 30, 1999. The Company reduced selling, general and
administrative expenses by approximately $1,252,000 and reversed the previously
recorded interest expense by approximately $541,000 during the nine months ended
September 30, 2000, due to a one-time expense reduction of approximately
$1,793,000 related to the reversal of an accrued liability for Settlement
Warrants. Excluding the one-time expense reduction, selling general and
administrative expenses totaled $12,202,000 for the nine months ended September
30, 2000. Salaries, payroll taxes, benefits, recruiting fees and other related
employee expenses increased by approximately $1,988,000 for the nine months
ended September 30, 2000 due to an increase in the number of employees related
to the development and launch of the Internet web site, interactive television
and wireless applications as compared to the nine months ended September 30,
1999. Stock-based compensation expense increased approximately $719,000 to
$810,000 for the nine months ended September 30, 2000 from $91,000 for the nine
months ended September 30, 1999. The charges resulted from the issuance of
warrants and options to employees and non-employees, which can vary from
period-to-period. Hosting fees associated with the web site of approximately
$180,000 were incurred for the nine months ended September 30, 2000. No similar
hosting fees were recorded for the nine months ended September 30, 1999. These
increases were partially offset by a decrease in equipment lease expense for the
nine months ended September 30, 2000 of $684,000 due to the payoff of such
leases during 1999. Bad debt expense decreased approximately $228,000 for the
nine months ended September 30, 2000 primarily related to improved collections.
Excluding the one-time expense reduction, professional fees decreased to
$262,000 for the nine months ended September 30, 2000 from $542,000 for the nine
months ended September 30, 1999.
Depreciation and amortization expense increased 6% to $5,029,000 for the
nine months ended September 30, 2000 from $4,763,000 for the nine months ended
September 30, 1999 due to purchases of DITV equipment and BUZZTIME equipment
which was placed in service in 2000. This increase is partially offset by a
decrease in depreciation due to the DOS-based network equipment being fully
depreciated by June 30, 2000. Depreciation and amortization expense is expected
to increase in future periods due to the recent and planned future purchases of
broadcast equipment for the DITV network and equipment and software purchased
for the web site.
Research and development expenses were $320,000 for the nine months ended
September 30, 2000, compared to $524,000 for the nine months ended September 30,
1999. The current period expenses resulted from the Company's research and
development efforts related to the next generation of the DITV network, a new
Internet web site, wireless and interactive applications and Internet stations.
For the nine-month period ended September 30, 1999, the Company's research and
development efforts focused primarily on the upgrade of the NTN network and
Internet web sites.
Interest expense, net, includes a one-time expense reduction of
approximately $541,000 from the reversal of the Settlement Warrant liability
during the nine months ended September 30, 2000. Excluding the one-time expense
reduction, interest expense, net, totaled $852,000 for the nine months ended
September 30, 2000 compared to $699,000 for the nine months ended September 30,
1999. This increase in interest expense relates to the Company's revolving line
of credit, other notes payable and additional capital leases for equipment
acquisitions which were added in mid to late 1999.
13
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash and cash equivalents of
$1,699,000 and working capital of $35,000, compared to cash and cash equivalents
of $1,044,000 and working capital of $921,000 at December 31, 1999. Net cash
provided by operations was $489,000 for the nine months ended September 30, 2000
and $967,000 for the nine months ended September 30, 1999. The principal uses of
cash from operations for the nine months ended September 30, 2000 were to fund
the Company's net loss, which include BUZZTIME start-up costs, and for severance
payments made by the Company in compliance with management resignation
agreements executed in March 1997 with former officers totaling $392,000.
Depreciation, amortization and other non-cash charges offset the uses. Net cash
used in investing activities was $6,227,000 for the nine months ended September
30, 2000 and $2,889,000 for the nine months ended September 30, 1999. Included
in net cash used in investing activities for the nine months ended September 30,
2000 was $7,569,000 in capital expenditures offset by deposits on broadcast
equipment of $574,000, proceeds from the sale of investments available for sale
of $538,000 and notes receivable of $138,000 for the nine months ended September
30, 2000. Net cash provided by financing activities was $6,393,000 for the nine
months ended September 30, 2000 and $431,000 for the nine months ended September
30, 1999. Net cash provided by financing activities for the nine months ended
September 30, 2000 included $5,163,000 of proceeds from issuance of stock, net
of offering expenses, $1,286,000 of net proceeds from the revolving line of
credit, and $689,000 of proceeds from the exercise of stock options and warrants
offset by $695,000 of principal payments on capital leases.
The Company announced on November 14, 2000 that it closed a private equity
placement of $2,000,000 with two accredited investors (the "Buyers"). The
Company sold a total of 1,218,583 shares of common stock to the Buyers. The
shares were sold at a purchase price of $1.64125 per share. The Company also
issued warrants to the Buyers to purchase 609,292 shares. Each warrant is
exercisable for one share of the Company's common stock at an initial exercise
price of $1.64125 per share of common stock. In addition, the Company agreed to
issue to the Buyers, for no additional consideration, additional warrants to
purchase 609,292 shares of its common stock at an initial price of $1.64125 per
share of common stock in the event the Company raises less than $5 million in
gross proceeds from the sale of the Company's common stock to entities other
than the Buyers by May 14, 2001. The exercise price of all warrants will be
reset every six months beginning May 14, 2001 to the average closing bid price
for the 20 days prior to each sixth month anniversary if a lower exercise price
would result. The warrants have a three-year life starting from the date of
issuance.
Pursuant to the terms of the private placement, each Buyer will be issued
additional shares of common stock in the event the Company issues, at any time
or from time to time during the six months immediately following November 14,
2000, any common stock or convertible securities without consideration or for a
consideration per share less than the original purchase price per share paid by
the Buyers. In addition, the Company also granted the Buyers a limited right of
first refusal on subsequent offerings exercisable at the option of each Buyer
during the twelve-month period ending November 14, 2001.
The net proceeds from the offering, which totaled approximately $1,900,000,
will be used primarily for working capital and general corporate purposes
relating to the Company's further expansion of its DITV Network and
infrastructure and continued BUZZTIME development.
The Company currently has a revolving line of credit agreement which
provides for borrowings not to exceed the lesser of $4,000,000 or three times
trailing monthly collections or three times annualized trailing adjusted EBITDA.
As of November 14, 2000, the maximum of $4,000,000 was available to us.
Additionally, the Company has approximately $14,000,000 of common stock
remaining under its existing shelf registration for possible future sale to meet
its liquidity needs.
The Company plans to pursue a direct investment for BUZZTIME, its
wholly-owned subsidiary, of up to approximately $10 million in total over the
next twelve months. Such an investment, which is not expected to exceed 50%,
would be sufficient to support BUZZTIME operations through December 31, 2001.
Until such a transaction is entered into, NTN will continue to invest in
BUZZTIME initiatives from its cash on hand, funds available under its line of
credit and anticipated cash flows.
The NTN Network will also pursue additional funding over the next twelve
months of up to approximately $5 million in total. If obtained, this capital
will be used to fund growth of installations and for research and development
for new applications and technologies in its Hospitality market. The Company
believes this additional funding from the cash sources described above and
possible investment in BUZZTIME will be sufficient to support its operations
through December 31, 2002.
Without an immediate direct investment in BUZZTIME, the Company believes
that cash flow from operations and its current cash, together with funds
available under the revolving line of credit, will be sufficient to support its
operations and provide for budgeted capital expenditures and liquidity
requirements through March 31, 2001.
The Company's long-term liquidity requirements will depend on many factors,
including, but not limited to, the rate at which the Company expands its
business, whether internally or through strategic alliances. In the long term,
as described above, the Company will be required to raise additional funds
through public or private financing to achieve its initiatives. No assurance can
be given that additional financing will be available or that, if available, it
will be on terms acceptable to the Company.
The Company's 7% Senior Subordinated Notes mature on February 1, 2001 (the
"Notes"). Upon maturity of the Notes, the Company will be required to pay to
each of the two Note holders $2,000,000 less any amount of principal converted
to common stock by the holders prior to February 1, 2001. If the Notes become
payable in cash, the Company will likely need to refinance the terms of the
Notes in order to meet its obligations. There can be no assurance that the
Company will be successful in refinancing the Notes or that the Notes would be
refinanced on terms acceptable to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, the Company owned an investment available for sale
which is common stock of an Australian company that is subject to market risk.
During the nine months September 30, 2000, the Company recorded an unrealized
gain of $72,000 associated with the investment. The Company is exposed to risks
related to currency exchange rates and stock market fluctuations associated with
the investment.
The Company is also exposed to risks related to interest rates. The Company
has a line of credit at a rate equal to the Prime Rate plus 1.5% per annum,
which cannot be less than 9% per annum. A significant increase in interest rates
could have an adverse affect on the Company's financial condition or results of
operations.
The Company does not have derivative financial instruments.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 5, 2000, approximately 38,000 shares of Common Stock were issued in a
private transaction in payment of interest of approximately $82,000 on the
outstanding 7% senior convertible notes.
On July 10, 2000, the Company issued stock options to purchase shares of Common
Stock to a member of the board of directors for consulting services. These stock
options enable the holder to purchase 100,000 common shares at a price of $2.25
per share for a period of five years. The stock options vested upon the date of
grant.
On July 12, 2000, the Company issued warrants to purchase shares of Common Stock
to an advertising and marketing firm retained by the Company's wholly-owned
subsidiary to provide advertising and marketing services. These warrants enable
the holder to purchase 25,000 shares at a price of $2.375 per share for a period
of three years. The warrants shall vest in full and become exercisable six
months from the date of grant.
On July 13, 2000, approximately $713,000 principal amount of the 7% senior
convertible notes was converted into approximately 560,000 shares of Common
Stock in accordance with the terms of the notes.
Each offering was made without registration under the Securities Act of 1933, as
amended (the "Act") in reliance upon the exemption from registration afforded by
Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Incorporated by reference to the quarterly report on 10Q for the period ended
June 30, 2000.
14
ITEM 5. OTHER INFORMATION.
In September 2000, the board of directors appointed Stephen L. Gray to the
position of Chief Technical Officer. Mr. Gray joined the company in April 2000
as a consultant acting as Vice President of Technology.
ITEM 6. EXHIBITS AND REPORTS ON REPORT 8-K.
(a) Exhibits
10.10 Warrant Certificate, dated August 1, 2000, issued to Gray & Yorg, LLC (1)
27 Financial Data Schedule. (1)
(b) Reports on Form 8-K
None.
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(1) Filed herewith.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: November 14, 2000
By: /s/ Zach Vela
--------------------------
Zach Vela
Chief Financial Officer
16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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10.10 Warrant Certificate, dated August 1, 2000, issued to Gray & Yorg, LLC (1)
27 Financial Data Schedule. (1)
- ----------
(1) Filed herewith.