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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 March 31, 2001
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 May 3, 2001 the registrant had outstanding 36,761,000 shares of common
stock, $.005 par value.
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
MARCH 31,
2001 DECEMBER 31,
Assets (UNAUDITED) 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 1,447,000 $ 2,188,000
Restricted cash 213,000 202,000
Accounts receivable, net 1,343,000 1,724,000
Investment available for sale 247,000 272,000
Deposits on broadcast equipment 161,000 112,000
Deferred costs 723,000 772,000
Prepaid expenses and other current assets 734,000 538,000
------------ ------------
Total current assets 4,868,000 5,808,000
Broadcast equipment and fixed assets, net 11,150,000 11,963,000
Software development costs, net 386,000 405,000
Deferred costs 508,000 565,000
Other assets 97,000 81,000
------------ ------------
Total assets $ 17,009,000 $ 18,822,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 901,000 $ 816,000
Accrued expenses 1,275,000 1,351,000
Accrual for litigation costs 75,000 57,000
Accrual for sales tax 237,000 399,000
Obligations under capital leases 445,000 579,000
Deferred revenue 1,767,000 1,575,000
Revolving line of credit 3,948,000 --
Note payable and other current liabilities -- 138,000
------------ ------------
Total current liabilities 8,648,000 4,915,000
Obligations under capital leases, excluding current portion 114,000 83,000
Deferred revenue 1,634,000 1,804,000
Revolving line of credit -- 3,919,000
4% senior convertible notes 3,859,000 3,987,000
Other long-term liabilities 12,000 32,000
------------ ------------
Total liabilities 14,267,000 14,740,000
------------ ------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock, $.005 par value,
5,000,000 shares authorized; 161,000 shares issued
and outstanding at March 31, 2001 and December 31, 2000 1,000 1,000
Common stock, $.005 par value, 70,000,000 shares
authorized; 36,648,000 and 36,046,000 shares issued and outstanding
at March 31, 2001 and December 31, 2000, respectively 182,000 179,000
Additional paid-in capital 78,413,000 78,153,000
Accumulated deficit (74,812,000) (73,234,000)
Accumulated other comprehensive loss (570,000) (545,000)
Treasury stock, at cost, 111,000 shares at March 31, 2001
and December 31, 2000 (472,000) (472,000)
------------ ------------
Total shareholders' equity 2,742,000 4,082,000
------------ ------------
Total liabilities and shareholders' equity $ 17,009,000 $ 18,822,000
============ ============
See accompanying notes to unaudited consolidated financial statements
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
2001 2000(NOTE 1)
------------ ------------
Revenues:
NTN Network revenues $ 5,215,000 $ 5,343,000
BUZZTIME service revenues 63,000 82,000
Other revenues 7,000 16,000
------------ ------------
Total revenues 5,285,000 5,441,000
------------ ------------
Operating expenses:
Direct operating costs (includes depreciation of
$804,000 and $1,537,000, respectively) 2,245,000 3,080,000
Selling, general and administrative 4,069,000 4,082,000
Depreciation and amortization 437,000 393,000
Research and development 61,000 147,000
------------ ------------
Total operating expenses 6,812,000 7,702,000
------------ ------------
Operating loss (1,527,000) (2,261,000)
------------ ------------
Other income (expense):
Interest income 26,000 10,000
Interest expense (224,000) (315,000)
Other, net 147,000 147,000
------------ ------------
Total other expense (51,000) (158,000)
------------ ------------
Loss before cumulative effect of accounting
change (1,578,000) (2,419,000)
Cumulative effect of accounting change -- (448,000)
------------ ------------
Net loss $ (1,578,000) $ (2,867,000)
============ ============
Net loss per common share - basic and diluted:
Net loss before cumulative effect of accounting
change $ (0.04) $ (0.08)
Cumulative effect of accounting change -- (0.01)
------------ ------------
Net loss per common share - basic and diluted $ (0.04) $ (0.09)
============ ============
Weighted average shares outstanding - basic and
diluted 36,335,000 30,500,000
============ ============
See accompanying notes to unaudited consolidated financial statements
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
2001 2000
------------ ------------
Cash flows provided by (used in) operating activities:
Net loss $ (1,578,000) $ (2,867,000)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
Activities:
Depreciation and amortization 1,241,000 1,930,000
Provision for doubtful accounts 192,000 375,000
Non-cash stock-based compensation charges 2,000 194,000
Gain on settlement of debt (146,000) --
Cumulative effect of accounting change -- 448,000
Accreted interest expense 25,000 94,000
Gain on sale of investment available for sale -- (77,000)
Loss from disposition of equipment 25,000 --
Changes in assets and liabilities:
Restricted cash (11,000) 137,000
Accounts receivable 189,000 410,000
Prepaid expenses and other assets (159,000) (201,000)
Deferred costs 49,000 10,000
Accounts payable and accrued expenses (52,000) 368,000
Deferred revenue 22,000 413,000
Management severance and other long-term liabilities -- (165,000)
------------ ------------
Net cash provided by (used in) operating activities (201,000) 1,069,000
------------ ------------
Cash flows used in investing activities:
Capital expenditures (339,000) (3,389,000)
Deposits on broadcast equipment (49,000) (200,000)
Notes receivable -- 138,000
Capital software expenditures (10,000) --
Proceeds from sale of investment available for sale -- 362,000
------------ ------------
Net cash used in investing activities (398,000) (3,089,000)
------------ ------------
Cash flows provided by (used in) financing activities:
Principal payments on capital leases (184,000) (218,000)
Borrowings from revolving line of credit 5,727,000 8,608,000
Principal payments on revolving line of credit (5,698,000) (7,394,000)
Principal payments on note payable (25,000) (50,000)
Equity issuance costs (51,000) --
Proceeds from exercise of stock options and warrants 89,000 493,000
------------ ------------
Net cash provided by (used in) financing activities (142,000) 1,439,000
------------ ------------
Net decrease in cash and cash equivalents (741,000) (581,000)
------------ ------------
Cash and cash equivalents at beginning of period 2,188,000 1,044,000
------------ ------------
Cash and cash equivalents at end of period $ 1,447,000 $ 463,000
============ ============
See accompanying notes to unaudited consolidated financial statements
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THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2001 2000
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 137,000 $ 152,000
============ ============
Income taxes $ -- $ --
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock in payment of interest $ 69,000 $ 86,000
============ ============
Equipment acquired under capital leases $ 81,000 $ 238,000
============ ============
Unrealized holding loss on investments $ 25,000 $ 397,000
============ ============
Exchange of convertible notes to common stock $ -- $ 202,000
============ ============
Expiration of settlement warrant obligations $ -- $ 1,793,000
============ ============
See accompanying notes to unaudited consolidated financial statements.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and its subsidiaries
(collectively, "NTN") and the results of operations and cash flows of NTN for
the interim periods presented. Management has elected to omit substantially all
notes to NTN'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, 2001.
The consolidated financial statements for the three months ended March 31,
2001 and 2000 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto included in NTN's Form 10-K
for the year ended December 31, 2000.
The results for the three months ended March 31, 2000 have been restated to
reflect the adoption of Staff Accounting Bulletin No. 101 as of January 1, 2000.
Refer to footnote 1 under "revenue recognition" in the Form 10-K for the year
ended December 31, 2000. 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 12,983,000, and 12,414,000 potentially dilutive
common shares have been excluded from the computations of net loss per share for
the three months ended March 31, 2001 and 2000, respectively, as their effect
was anti-dilutive.
3. SEGMENT INFORMATION
NTN develops, produces and distributes interactive entertainment. NTN'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 two
interactive television networks and from advertising sold on the networks. NTN
Network revenues comprised 99% of NTN's total revenue for the three months ended
March 31, 2001. BUZZTIME generates revenue primarily from the distribution of
its digital trivia game show content and "Play-Along" sports games as well as
from production services provided to third parties. Included in the operating
loss for both the NTN Network and BUZZTIME is an allocation of corporate
expenses. The following tables set forth certain information regarding NTN's
segments and other operations:
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
2001 2000
------------ ------------
Revenues
NTN Network $ 5,215,000 $ 5,343,000
BUZZTIME 63,000 82,000
Other 7,000 16,000
------------ ------------
Total revenue $ 5,285,000 $ 5,441,000
============ ============
Operating loss
NTN Network $ (357,000) $ (1,342,000)
BUZZTIME (1,170,000) (919,000)
------------ ------------
Operating loss $ (1,527,000) $ (2,261,000)
============ ============
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4. PRIVATE PLACEMENT OFFERING AND CONVERTIBLE NOTES PAYABLE
On January 26, 2001, we reached an agreement with the purchasers in the
November 2000 private placement to revise the terms of the private placement in
exchange for the issuance of an additional 350,043 shares of our common stock.
The revisions eliminated the exercise price reset provisions contained in the
warrants and set the exercise price at $1.64125 per share. Furthermore, the
purchasers agreed to surrender and cancel their rights to additional contingent
warrants for 609,291 shares of our common stock.
On January 26, 2001, we reached agreement with the holders of the
convertible notes, affiliates of the purchasers in the November 2000 private
placement, to extend the maturity date of the aggregate $4 million in
promissory notes from February 1, 2001 to February 1, 2003 and to reduce the
interest rate from 7% to 4%. NTN may now convert the promissory notes into NTN
common stock at a conversion price of $1.25 per share upon the earlier to occur
of (i) February 1, 2003 or (ii) any time after NTN's common stock closes above
$2.50 for more than 20 consecutive trading days.
The 350,043 shares have been allocated between the 4% convertible notes
payable and the additional stock issued to the purchasers in the November 2000
private placement based on the relative fair value of the securities at the time
of issuance. As a result, a discount of approximately $153,000 was recorded
against the convertible notes due to the allocation. To recognize the discount
over the term of the notes, additional interest expense of approximately $13,000
has been accreted for the three months ended March 31, 2001. As a result of the
extension, we will record interest expense, at an effective rate of 6% per year,
throughout the term of the notes which began on January 26, 2001.
5. SETTLEMENT OF DEBT
In April 1999, we purchased Internet Stations equipment and game licenses
for $400,000 from Sikander, Inc. A promissory note was issued 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 new promissory note for
$178,000. No payments were made since March 31, 2000 on the promissory note. In
June 2000, NTN commenced litigation against Sikander, Inc. and related
defendants. At December 31, 2000, the note balance was approximately $170,000
including accrued interest. An agreement was reached on March 31, 2001 to settle
the balance of the promissory note and accrued interest for $25,000. The results
of operations for the three months ended March 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.
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 our
business strategies, projections, financing requirements and other matters,
which are subject to risks and uncertainties, including cash needs, competition,
market acceptance and other risk factors detailed in our Securities and Exchange
Commission filings, including our Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, which risk factors are incorporated herein by
reference.
GENERAL
NTN develops and distributes interactive game content. We operate our
businesses through two operating divisions, the NTN Network and BUZZTIME, Inc.
The NTN Network is North America's largest "out-of-home" interactive
television network. Our unique private network broadcasts a variety of
multi-player sports and trivia games 365 days per year to hospitality locations
such as restaurants, sports bars, hotels, clubs and military bases totaling
approximately 3,500 locations in North America as of May 11, 2001. The NTN
Network earns revenue from delivering entertainment content to hospitality
locations in the United States for a monthly fee, including installation
revenue. The NTN Network also generates advertising revenue from third party
advertisers on the NTN Network and license fee revenue from our Canadian
licensee.
The NTN Network is the only television network that is specifically designed
to entertain the out-of-home viewer. Where other television broadcasts are
produced for the home viewer who is passively watching from six feet away, our
broadcast is easily viewed from a distance of 15 feet or more. In addition, our
content is not dependent upon audio, so it does not interfere with the
location's own sound system or with patrons' conversations. Our content is
designed to promote social interaction and stimulate conversation
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among the patrons. Hospitality locations pay to use our interactive technology
to receive our entertainment broadcast.
In April 1999, we began upgrading the NTN Network by introducing a new
Windows 98-based "Digital Interactive TV" system to replace our decade-old
DOS-based system. The new digital system contains many new features, including a
Windows-based platform with full-motion video capabilities and high-resolution
graphics to allow more compelling content and better advertising opportunities.
In addition, we have introduced new, more consumer friendly Playmaker(R)
wireless game pads that operate at 900 MHz to increase transmission range and
have a longer battery life. The new Playmakers also feature a larger, eight line
LCD screen that displays sports scores and other ticker information and enables
electronic, text-based chat between patrons.
BUZZTIME, Inc. is our wholly-owned subsidiary incorporated in the state of
Delaware in December 1999. BUZZTIME currently is the distributor of the largest
known digital trivia game show library and many unique "TV Play-along" sports
games. Our TV play-along sports games are played while watching a sporting event
on television. The games allow players to enter play call predictions and to be
ranked against other players. For example, while watching a NFL football game on
television, a player can predict whether the quarterback will pass or run the
ball. The play call prediction must be entered by the player prior to the ball
snap. Once the play has been completed, the player's score is tabulated and
ranked against other players.
BUZZTIME functions as a developer and distributor of game content. As a
developer, it continues to augment its expansive interactive game library. As a
distributor, BUZZTIME broadcasts live play-along game shows to a broad array of
interactive platforms. Our mission is to take the BUZZTIME brand and online
services to a multitude of interactive platforms that will include interactive
television and hand-held interactive devices. There can be no assurance that we
will be successful in executing this strategy.
We have separate strategies for each of our two operating divisions. For the
NTN Network, our strategy is to continue to lower operating costs while
increasing the number of paying customers. To lower costs, we will focus on
reducing telecommunications and technology costs. To increase sales, we are
focused on increasing targeted sales efforts in the top twenty metropolitan
markets, using new forms of connectivity, including DSL, to reach locations not
previously available to us through our satellite distribution network. Our
strategy also calls for using newly available and inexpensive broadband
connectivity and taking advantage of the availability of inexpensive wireless
Internet appliances to deliver new content and services, for additional
revenues, to locations and their consumers. For BUZZTIME, we intend to focus
increasingly on the distribution of BUZZTIME content to Interactive Television
(ITV) markets and to wireless devices. These distribution channels should
increase future direct revenues while also increasing 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, we
expect 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 we will be successful in
executing this strategy.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
Operations for the three months ended March 31, 2001 resulted in a net loss
of $1,578,000 compared to a net loss of $2,867,000 for the three months ended
March 31, 2000. The results for the quarter ended March 31, 2000 have been
restated to reflect the adoption of Staff Accounting Bulletin No. 101 as of
January 1, 2000.
Total revenues decreased 3% to $5,285,000 for the three months ended March
31, 2001 from $5,441,000 for the three months ended March 31, 2000. This
decrease was primarily due to a reduction in NTN Network advertising revenues as
shown in the following table:
QUARTER ENDED
MARCH 31
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
NTN Network Revenues .............. $ 5,215 $ 5,343
BUZZTIME Service Revenues ......... 63 82
Other Revenues .................... 7 16
NTN Network revenues decreased 2% to $5,215,000 for the three months ended
March 31, 2001 from $5,343,000 for the three months ended March 31, 2000. This
decrease was primarily due to a decrease of approximately $268,000 in
advertising revenue due to fewer advertising contracts for the three months
ended March 31, 2001. It was also decreased by approximately $62,000 in
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hospitality subscription revenues attributable to a lower billing rate structure
associated with the digital 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 digital system and to grow the number of hospitality
sites receiving the digital service. The total number of sites as of March 31,
2001 was approximately 3,500, representing a net increase of approximately 120
sites compared to March 31, 2000. At March 31, 2001, approximately 91% of the
sites have been converted to the digital network compared to approximately 62%
of the sites converted as of March 31, 2000. Installation, training and setup
revenue increased approximately $188,000 due to an increase in amortization of
previously deferred fees.
BUZZTIME revenues were $63,000 for the three months ended March 31, 2001,
compared to $82,000 for the three months ended March 31, 2000.
Direct operating costs decreased 27% to $2,245,000 for the three months
ended March 31, 2001 from $3,080,000 for the three months ended March 31, 2000.
This is primarily due to a decrease in depreciation and amortization of
approximately $733,000 due to the DOS-based network equipment being fully
depreciated by June 2000, which is offset by an increase in depreciation for the
capitalized purchases of broadcast equipment associated with the digital
network. Advertising commissions also decreased approximately $152,000 as a
direct result of decreased NTN Network advertising revenue for the three months
ended March 31, 2001. Hosting fees increased approximately $108,000 due to the
development of BUZZTIME.com, which did not exist during the three months ended
March 31, 2000. Playmaker repairs also increased by approximately $78,000 due to
the warranty expiring on some of the Playmakers.
Selling, general and administrative expenses decreased less than 1% to
$4,069,000 for the three months ended March 31, 2001 from $4,082,000 for the
three months ended March 31, 2000. Salaries, payroll taxes, benefits, recruiting
fees and other employee related expenses increased by approximately $303,000
during the three months ended March 31, 2001 due to an increase in the number of
employees related to the strategy of increasing the number of customer sites in
2001 as well as severance packages for employees terminated during the three
months ended March 31, 2001. Marketing expenses also increased by approximately
$86,000 due to increased marketing efforts to increase customer sites in 2001.
Stock-based compensation decreased $192,000 due to warrants issued to
consultants being marked to market during the three months ended March 31, 2001.
Bad debt expense also decreased $183,000 due to increased collection efforts.
Depreciation and amortization expense increased 11% to $437,000 for the
three months ended March 31, 2001 from $393,000 for the three months ended March
31, 2000 due to recent capitalized purchases.
Research and development expenses were $61,000 for the three months ended
March 31, 2001, compared to $147,000 for the three months ended March 31, 2000.
The current period expenses resulted from our research and development efforts
related to the next generation of the digital network and interactive television
initiatives. For the three-month period ended March 31, 2000, our research and
development efforts focused primarily on the upgrade of the NTN Network as well
as our Internet web site.
Interest expense decreased 29% to $224,000 for the three months ended March
31, 2001, compared to $315,000 for the three months ended March 31, 2000 due to
the expiration of various capitalized leases as well as the decrease in the
interest rate on the convertible notes payable from 7% to 4%.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, we had cash and cash equivalents of $1,447,000 and a
working capital deficit of $3,780,000, compared to cash and cash equivalents of
$2,188,000 and working capital of $893,000 at December 31, 2000. The primary
reason for the working capital deficit was the reclassification of the revolving
line of credit from a long-term liability to a short-term liability. Net cash
used by operations was $201,000 for the three months ended March 31, 2001 and
net cash provided by operations was $1,069,000 for the three months ended March
31, 2000. The principal uses of cash from operations for the three months ended
March 31, 2001 were to fund our net loss, which includes BUZZTIME initiatives.
Depreciation, amortization and other non-cash charges offset the net loss. Net
cash used in investing activities was $398,000 for the three months ended March
31, 2001 and $3,089,000 for the three months ended March 31, 2000. Included in
net cash used in investing activities for the three months ended March 31, 2001
was $339,000 in capital expenditures, $49,000 for deposits on broadcast
equipment and $10,000 in capitalized software expenditures. Net cash used in
financing activities was $142,000 for the three months ended March 31, 2001 and
net cash provided by financing activities was $1,439,000 for the three months
ended March 31, 2000. Net cash used in financing activities for the three months
ended March 31, 2001 included $184,000 of principal payments on capital leases,
$51,000 of equity issuance costs related to the capital raised in November 2000
and $25,000 in principal payments on a note payable. These uses of cash were
offset by $29,000 of net proceeds from
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the revolving line of credit, and $89,000 of proceeds from the exercise of stock
options and warrants.
We currently have a revolving line of credit agreement which provides for
borrowings not to exceed the lesser of $3,950,000 or three times trailing
monthly collections or three times annualized trailing adjusted EBITDA. Our
availability under the revolving line of credit may be reduced if our monthly
collections or operating income falls below certain levels. The line of credit
is secured by substantially all of our assets.
In May 2001, we agreed to certain amendments to the revolving line of credit
agreement with Coast Business Credit. The amendments allow equity raised by us
to be added to the EBITDA calculation as well as to exclude the revenue effect
of Staff Accounting Bulletin No. 101 for year 2000. The amendments also call for
us to raise $1.0 million in equity by June 30, 2001, maintain a minimum cash
level of $0.4 million each month, not burn more than $1.0 million from April 1,
2001 onward without receiving additional equity, and reduce the maximum
borrowing amount or ceiling under the line of credit in increments each month.
The maximum line of credit will gradually be reduced from $4.0 million at April
1, 2001 to $2,750,000 at December 31, 2001. As of May 1, 2001, the maximum line
of credit was $3,950,000.
Our liquidity and capital resources remain limited and this may constrain
our ability to operate and grow our business. Any reduction in availability
under our revolving line of credit may further constrain our liquidity.
We will require additional financing to implement our plan of:
o converting our entire existing U.S. customer base to the digital
network;
o expanding the digital network; and
o developing BUZZTIME into a leading content provider for
interactive television platforms
We will need to raise additional equity or debt financing to execute our
business plans for the NTN Network and BUZZTIME, which call for significant
growth, as well as to comply with our recently amended revolving line of credit
agreement. Based on our projected cash requirements, we will need $3.0 million
in additional financing in order to fund any BUZZTIME growth initiatives.
Similarly, we will also need an additional $2.0 million in debt or equity
financing to grow the NTN Network during the next twelve months to 4,000 sites
in the U.S. and Canada. The NTN Network currently generates cash flow sufficient
to sustain its operations on a no growth scenario for the next twelve months. We
may not be able to obtain additional financing on terms favorable to us or at
all.
As part of our financing plan, we will try to obtain a direct investment in
BUZZTIME. We will begin growth initiatives only if we succeed in raising capital
at an appropriate cost. If additional financing is not obtained, our growth
plans will be deferred. If additional financing for BUZZTIME is not obtained and
we do not reduce cash expenditures at BUZZTIME sufficiently, we may not be able
to sustain the operations of BUZZTIME. If our cash flows are less than
anticipated or if we incur unanticipated expenses, we may not be able to
continue improvement, development and expansion of our new digital network or
pursue our BUZZTIME initiatives.
On January 26, 2001, we reached an agreement with the purchasers in the
November 2000 private placement to revise the terms of the private placement in
exchange for the issuance of an additional 350,043 shares of our common stock.
The revisions eliminated the exercise price reset provisions contained in the
warrants and set the exercise price at $1.64125 per share. Furthermore, the
purchasers agreed to surrender and cancel their rights to additional contingent
warrants for 609,291 shares of our common stock.
On January 26, 2001, we reached agreement with the holders of the
convertible notes, affiliates of the purchasers in the November 2000 private
placement, to extend the maturity date of the aggregate $4 million in
promissory notes from February 1, 2001 to February 1, 2003 and to reduce the
interest rate from 7% to 4%. NTN may now convert the promissory notes into NTN
common stock at a conversion price of $1.25 per share upon the earlier to occur
of (i) February 1, 2003 or (ii) any time after NTN's common stock closes above
$2.50 for more than 20 consecutive trading days.
The 350,043 shares have been allocated between the 4% convertible notes
payable and the additional stock issued to the purchasers in the November 2000
private placement based on the relative fair value of the securities at the time
of issuance. As a result, a discount of approximately $153,000 was recorded
against the convertible notes due to the allocation. To recognize the discount
over the term of the notes, additional interest expense of approximately $13,000
has been accreted for the three months ended March 31, 2001. As a result of the
extension, we will record interest expense, at an effective rate of 6% per year,
throughout the term of the notes which began on January 26, 2001.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to currency exchange rates, stock market
fluctuations, and interest rates. As of March 31, 2001, we owned common stock of
an Australian company that is subject to market risk. At March 31, 2001, the
carrying value of this investment was $247,000, which is net of a $570,000
unrealized loss. This investment is exposed to further market risk in the future
based on the operating results of the Australian company and stock market
fluctuations. Additionally, the value of the investment is further subject to
changes in Australian currency exchange rates. At March 31, 2001, a hypothetical
10% decline in the value of the Australian dollar would result in a reduction of
$25,000 in the carrying value of the investment.
We have outstanding convertible notes which bear interest at 4% 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 March 31, 2001, a
hypothetical one-percentage point increase in the prime rate would result in an
increase of $39,000 in annual interest expense.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In February 1998, an action entitled Dorman vs. NTN Communications, Inc. was
filed in the Superior Court of San Diego County for the State of California
alleging a fraud and negligent misrepresentation claim based upon purported
omissions from our filings with the Securities and Exchange Commission. In March
1999, the court granted our motion for summary judgment in the Dorman matter
and, on May 13, 1999, denied plaintiff's motion for new trial. On August 20,
1999, plaintiffs filed an appeal of the summary judgment in the Fourth Appellate
District of the Court of Appeals for the State of California. The Court of
Appeals reversed the Superior Court's decision and sent the case back to the
Superior Court. On May 3 and 4, 2001, the parties participated in a mediation
with a court-appointed mediator during which the parties reached an agreement to
settle the litigation. Pursuant to the settlement, we will pay to Dorman the sum
of $42,000 which is fully covered by insurance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 3, 2001, warrants to purchase shares of common stock were issued
to an investor relations firm for services provided. These warrants enable the
holder to purchase 150,000 shares at a price of $0.75 per share for a period of
five years. The warrants vest ratably over a two-year period beginning on
February 28, 2001.
On January 4, 2001, approximately 156,000 shares of common stock were issued
in a private transaction in payment of interest of approximately $69,000 on the
outstanding 4% senior convertible notes.
On January 26, 2001, we reached an agreement with the purchasers in the November
2000 private placement to revise the terms of the private placement in exchange
for the issuance of an additional 350,043 shares of our common stock. The
revisions eliminated the exercise price reset provisions contained in the
warrants and set the exercise price at $1.64125 per share. Furthermore, the
purchasers agreed to surrender and cancel their rights to additional contingent
warrants for 609,291 shares of our common stock.
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 5. OTHER INFORMATION.
In February 2001, NTN entered into a data transmission agreement with
Cidera, Inc. for satellite communications services. The NTN Network relies on
satellite systems to communicate with subscriber locations, including
transmission of game programming data.
In April 2001, Jim Frakes was hired as the chief financial officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.1 NTN Communications, Inc. Warrant Certificate, #WE-021, issued to Wolfe
Axelrod Weinberger Associates LLC. (1)
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10.1 Third Amendment to Loan and Security Agreement, dated April 30, 2001,
by and among Coast Business Credit, NTN Communications, Inc. and
BUZZTIME, Inc. (1)
10.2 First Amendment to Employment Agreement, dated January 26, 2001, by and
between NTN Communications, Inc. and Stanley B. Kinsey. (1)
10.3 Restructure Agreement, dated January 26, 2001, by and among NTN
Communications, Inc. and the Investors as defined herein. (2)
10.4 First Amendment to Securities Purchase Agreement, dated January 26,
2001, by and among NTN Communications, Inc. and the Investors as
defined herein. (2)
10.5 Form of Amended and Restated Common Stock Purchase Warrants of NTN
Communications, Inc. dated January 26, 2001. (2)
(b) Reports on Form 8-K
On February 5, 2001 NTN filed a current Report on Form 8-K (event date
January 30, 2001) to report under Item 5 (other events).
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(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's Amendment No. 1 to Registration
Statement on Form S-3, File No. 333-51650 and incorporated by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: May 14, 2001
By: /s/ James Frakes
--------------------------------------
James Frakes
Authorized Signatory and Chief
Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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4.1 NTN Communications, Inc. Warrant Certificate, #WE-021, issued
to Wolfe Axelrod Weinberger, LLC.(1)
10.1 Third Amendment to Loan and Security Agreement, dated April
30, 2001, by and among Coast Business Credit, NTN
Communications, Inc. and BUZZTIME, Inc.(1)
10.2 First Amendment to Employment Agreement, dated January 26,
2001, by and between NTN Communications Inc. and Stanley B.
Kinsey.(1)
10.3 Restructure Agreement, dated January 26, 2001, by and among
NTN Communication, Inc. and the Investors as defined
herein.(2)
10.4 First Amendment to Securities Purchase Agreement, dated
January 26, 2001, by and among NTN Communication, Inc. and the
Investors as defined herein.(2)
10.5 Form of Amended and Restated Common Stock Purchase Warrants of
NTN Communications, Inc. dated January 26, 2001.(2)
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(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's Amendment No. 1 to Registration
Statement on Form S-3, File No. 333-51650, and incorporated by reference.