UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1103425
(State of incorporation) (I.R.S. Employer
Identification No.)
THE CAMPUS 5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
At November 4, 2004, the registrant had outstanding 52,912,000 shares of
common stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
SEPTEMBER 30,
2004 DECEMBER 31,
ASSETS (PLEDGED) (UNAUDITED) 2003
------------- -------------
Current assets:
Cash and cash equivalents $ 9,464,000 $ 2,503,000
Accounts receivable, net 2,757,000 2,324,000
Investment available-for-sale 261,000 189,000
Inventory 454,000 404,000
Deposits on broadcast equipment 372,000 34,000
Deferred costs 871,000 493,000
Prepaid expenses and other current assets 957,000 757,000
------------- -------------
Total current assets 15,136,000 6,704,000
Broadcast equipment and fixed assets, net 5,740,000 4,398,000
Software development costs, net 772,000 676,000
Deferred costs 720,000 505,000
Intangible assets, net 4,236,000 4,800,000
Goodwill 3,681,000 3,490,000
Other assets 57,000 57,000
-------------- --------------
Total assets $ 30,342,000 $ 20,630,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,745,000 $ 612,000
Accrued expenses 2,140,000 3,174,000
Taxes payable 250,000 258,000
Obligations under capital leases 137,000 165,000
Equipment note payable 116,000 46,000
Deferred revenue - Buzztime 308,000 206,000
Deferred revenue 1,789,000 1,478,000
-------------- --------------
Total current liabilities 6,485,000 5,939,000
Obligations under capital leases, excluding current portion 79,000 181,000
Revolving line of credit -- 1,000,000
Deferred revenue, excluding current portion 304,000 262,000
Equipment note payable, excluding current portion 343,000 184,000
-------------- --------------
Total liabilities 7,211,000 7,566,000
-------------- --------------
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, 2004 and
December 31, 2003 1,000 1,000
Common stock, $.005 par value, 84,000,000 shares
authorized; 52,896,000 and 48,623,000 shares issued and
outstanding at September 30, 2004 and December 31, 2003,
respectively 263,000 242,000
Additional paid-in capital 108,756,000 95,239,000
Accumulated deficit (85,390,000) (81,790,000)
Accumulated other comprehensive loss (499,000) (628,000)
-------------- --------------
Total shareholders' equity 23,131,000 13,064,000
-------------- --------------
Total liabilities and shareholders' equity $ 30,342,000 $ 20,630,000
============== ==============
See accompanying notes to unaudited condensed consolidated financial statements
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Hospitality Technologies revenues $ 8,588,000 $ 7,157,000 $ 25,865,000 $ 21,127,000
Buzztime service revenues 180,000 107,000 262,000 172,000
Other revenues 4,000 3,000 18,000 8,000
------------- ------------- ------------- -------------
Total revenues 8,772,000 7,267,000 26,145,000 21,307,000
------------- ------------- ------------- -------------
Operating expenses:
Direct operating costs (includes depreciation of
$645,000, $652,000, $1,885,000 and
$2,123,000 for the three months ended
September 30, 2004 and 2003 and for the nine
months ended September 30, 2004 and
2003, respectively) 2,895,000 2,817,000 8,817,000 8,309,000
Selling, general and administrative 6,672,000 4,822,000 19,835,000 13,561,000
Depreciation and amortization 335,000 329,000 987,000 908,000
Research and development 84,000 80,000 256,000 244,000
------------- ------------- ------------- -------------
Total operating expenses 9,986,000 8,048,000 29,895,000 23,022,000
------------- ------------- ------------- -------------
Operating loss (1,214,000) (781,000) (3,750,000) (1,715,000)
------------- ------------- ------------- -------------
Other income (expense):
Interest income 24,000 1,000 66,000 4,000
Interest expense (30,000) (33,000) (96,000) (200,000)
Other income -- 105,000 225,000 105,000
------------- ------------- ------------- -------------
Total other income (expense) (6,000) 73,000 195,000 (91,000)
------------- ------------- ------------- -------------
Loss before minority interest in loss of
consolidated subsidiary and income taxes (1,220,000) (708,000) (3,555,000) (1,806,000)
Minority interest in loss of consolidated
subsidiary -- -- -- 10,000
------------- ------------- ------------- -------------
Net loss before income taxes (1,220,000) (708,000) (3,630,000) (1,796,000)
Provision for income taxes 12,000 8,000 45,000 23,000
------------- ------------- ------------- -------------
Net loss $ (1,232,000) $ (716,000) $ (3,600,000) $ (1,819,000)
============= ============= ============= =============
Net loss per common share - basic and diluted: $ (0.02) $ (0.02) $ (0.07) $ (0.04)
============= ============= ============= =============
Weighted average shares outstanding -
basic and diluted 52,868,000 46,939,000 52,484,000 44,601,000
============= ============= ============= =============
See accompanying notes to unaudited condensed consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------- -------------
Cash flows from operating activities:
Net loss $ (3,600,000) $ (1,819,000)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Depreciation and amortization 2,872,000 3,031,000
Provision for doubtful accounts 275,000 254,000
Non-cash stock-based compensation charges 152,000 153,000
Gain on early extinguishment of debt -- (105,000)
Minority interest in loss of consolidated subsidiary -- (10,000)
Non-cash interest expense -- 14,000
Accreted interest expense -- 3,000
Provision for obsolete inventory 4,000 --
Provision for warranties 22,000 --
Provision for sales returns 5,000 --
Loss from disposition of equipment 38,000 62,000
Changes in assets and liabilities:
Restricted cash -- 102,000
Accounts receivable (706,000) (497,000)
Inventory (54,000) (151,000)
Deferred costs (592,000) 12,000
Prepaid expenses and other assets (230,000) (69,000)
Accounts payable and accrued expenses 71,000 872,000
Taxes payable (8,000) (2,000)
Deferred revenue 452,000 (136,000)
------------- -------------
Net cash (used in) provided by operating activities (1,299,000) 1,714,000
------------- -------------
Cash flows from investing activities:
Capital expenditures (2,276,000) (1,611,000)
Acquisition of businesses (103,000) (570,000)
Software development expenditures (313,000) --
Deposits on broadcast equipment (338,000) --
------------- -------------
Net cash used in investing activities (3,030,000) (2,181,000)
------------- -------------
Cash flows from financing activities:
Principal payments on capital leases (131,000) (163,000)
Principal payments on equipment notes payable (974,000) (310,000)
Borrowings from revolving line of credit -- 15,631,000
Principal payments on revolving line of credit (1,000,000) (16,865,000)
Proceeds from issuance of common stock,
net of offering expenses 13,001,000 3,723,000
Proceeds from exercise of stock options and warrants 385,000 373,000
------------- -------------
Net cash provided by financing activities 11,281,000 2,389,000
------------- -------------
Net increase in cash and cash equivalents 6,952,000 1,922,000
Effect of exchange rate on cash 9,000 --
Cash and cash equivalents at beginning of period 2,503,000 577,000
------------- -------------
Cash and cash equivalents at end of period $ 9,464,000 $ 2,499,000
============= =============
See accompanying notes to unaudited condensed consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 96,000 $ 200,000
============ ============
Income taxes $ 73,000 $ 39,000
============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest $ -- $ 54,000
============ ============
Equipment acquired under capital leases and notes payable $ 1,172,000 $ 696,000
============ ============
Unrealized holding loss (gain) on investments $ (72,000) $ (10,000)
============ ============
Issuance of treasury stock in payment of board compensation $ -- $ 55,000
============ ============
Issuance of common stock in payment of dividends $ 8,000 $ 8,000
============ ============
Issuance of warrants in association with equity offering $ 655,000 $ 460,000
============ ============
Conversion of Senior Subordinated Notes into common stock $ -- $ 2,000,000
============ ============
Conversion of Buzztime Preferred Series A into common stock $ -- $ 633,000
============ ============
Issuance of common stock for licensed technology $ -- $ 1,720,000
============ ============
Supplemental non-cash disclosure of acquisition of
businesses:
Accounts receivable (net) $ -- $ 361,000
Inventory -- 46,000
Fixed assets -- 108,000
Goodwill and Intangible assets 71,000 3,840,000
Accounts payable & accrued liabilities -- (697,000)
Deferred revenue -- (479,000)
Common stock issued -- (3,154,000)
See accompanying notes to unaudited condensed consolidated financial statements
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2004
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
financial statements include all adjustments that are necessary for a fair
presentation of the financial position of NTN Communications, Inc. and its
wholly-owned subsidiaries (collectively, "we" or "NTN") and the results of
operations and cash flows of NTN for the interim periods presented. Management
has elected to omit substantially all notes to our 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, 2004.
The condensed consolidated financial statements for the three months and
nine months ended September 30, 2004 and 2003 are unaudited and should be read
in conjunction with the consolidated financial statements and notes thereto
included in our Form 10-K for the year ended December 31, 2003.
We have reclassified certain items in the prior period condensed
consolidated financial statements to conform to the current period presentation.
2. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF FASB STATEMENT NO. 123
(SFAS No. 148). SFAS 148 amends FASB Statement No. 123; ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 beginning with our
annual financial statements for the year ended December 31, 2002.
We applied Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25) and related interpretations in accounting for
our employee stock options. No compensation expense has been recognized for the
options granted under the Special Plan and the Option Plan unless the grants
were issued at exercise prices below market value. Pro forma compensation
expense is based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS No. 123. The following table represents the
effect on net loss and net loss per share if we had applied the fair value
recognition provisions of SFAS No. 123 as amended by SFAS No. 148.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss As reported........................... $(1,232,000) $ (716,000) $ (3,600,000) $(1,819,000)
Add: stock option-based employee
compensation expense included in
reported net loss, net of related
tax effects....................... -- 1,000 2,000 5,000
Deduct: stock-based employee
compensation expense, net of
related tax effects............... (454,000) (303,000) (1,230,000) (845,000)
------------ ------------ ------------- ------------
Pro forma net loss.................... $(1,686,000) $(1,018,000) $ (4,828,000) $ 2,659,000
Basic and diluted net As reported........................... $ (0.02) $ (0.02) $ (0.07) $ (0.04)
loss per share Pro forma............................. $ (0.03) $ (0.02) $ (0.09) $ (0.06)
6
The per share weighted-average fair value of stock options granted during
the three months ended September 30, 2004 and 2003 was $1.82, and $1.51,
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: 2004 -- dividend yield of 0%, risk-free interest
rate of 3.33%, expected volatility of 90.4%, and expected life of 4.78 years;
and 2003 -- dividend yield of 0%, risk-free interest rate of 2.65%, expected
volatility of 96.5%, and expected life of 3.75 years. In compliance with APB No.
25, we expensed $0 and $1,000 for the three months ended September 30, 2004 and
2003, associated with the grants of 80,000 options in 2000 below market value
pursuant to the Option Plan.
The per share weighted-average fair value of stock options granted during
the nine months ended September 30, 2004 and 2003 was $2.22, and $0.98,
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: 2004 -- dividend yield of 0%, risk-free interest
rate of 3.13%, expected volatility of 90.60%, and expected life of 4.73 years;
and 2003 -- dividend yield of 0%, risk-free interest rate of 2.62%, expected
volatility of 109.0%, and expected life of 4.20 years. In compliance with APB
No. 25, we expensed $2,000 and $5,000 for the nine months ended September 30,
2004 and 2003, respectively, associated with the grants of 80,000 options in
2000 below market value pursuant to the Option Plan.
3. LOSS PER SHARE
For the three months ended September 30, 2004 and 2003 and for the nine
months ended September 30, 2004 and 2003, the weighted average of options,
warrants, convertible preferred stock and convertible notes representing
approximately 11,722,000, 12,376,000, 11,707,000 and 12,255,000 potential common
shares, respectively, have been excluded from the computation of net loss per
share, as their effect was anti-dilutive.
4. SEGMENT INFORMATION
We operate our businesses principally through four reportable segments: the
NTN iTV Network, NTN Wireless Communications, Inc. ("NTN Wireless") and NTN
Software Solutions, Inc. ("Software Solutions"), which combine to form the NTN
Hospitality Technologies division; and our Buzztime Entertainment, Inc.
subsidiary ("Buzztime"). The NTN Hospitality Technologies division provides
entertainment, promotional services and on-site communications and management
products to the hospitality industry. Buzztime operates our live broadcast
studio, produces our trivia and live sports "Play-Along" content to both the NTN
iTV Network and new consumer interactive platforms, and is selling the Buzztime
Channel(R), an interactive television game channel, to U.S. cable TV operators.
Our reportable segments have been determined based on the nature of the
services offered to customers, which include, but are not limited to, revenue
from the Buzztime segment and the three segments within the NTN Hospitality
Technologies division. NTN Hospitality Technologies revenue is generated
primarily from providing an interactive entertainment service which serves as a
marketing and promotional vehicle for the hospitality industry, from advertising
sold for distribution via the interactive entertainment service, from its
wireless business with restaurant on-site paging systems and from our hardware
and software restaurant management and enterprise solutions. NTN Hospitality
Technologies revenues comprised over 98% of our total revenue for the nine
months ended September 30, 2004. Buzztime's revenue is primarily generated from
the distribution of its digital trivia game show content and "Play-Along" sports
games as well as revenue related to production services for third parties.
Included in the operating loss and depreciation and amortization for the three
segments included in the NTN Hospitality Technologies division and the Buzztime
segment is an allocation of corporate expenses, while the related corporate
assets are not allocated to the segments.
7
The following tables set forth certain information regarding our segments
and other operations:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues
NTN iTV Network (includes "other revenues") $ 6,545,000 $ 5,614,000 $ 18,890,000 $ 16,836,000
NTN Wireless 1,041,000 962,000 4,131,000 3,715,000
Software Solutions 1,006,000 584,000 2,862,000 584,000
------------- ------------- ------------- -------------
NTN Hospitality Technologies division 8,592,000 7,160,000 25,883,000 21,135,000
Buzztime 180,000 107,000 262,000 172,000
------------- ------------- ------------- -------------
Total revenue $ 8,772,000 $ 7,267,000 $ 26,145,000 $ 21,307,000
============= ============= ============= =============
Operating income (loss)
NTN iTV Network $ 307,000 $ 504,000 $ 801,000 $ 1,453,000
NTN Wireless (182,000) (96,000) (12,000) (79,000)
Software Solutions (504,000) (321,000) (1,579,000) (321,000)
------------- ------------- ------------- -------------
NTN Hospitality Technologies division (379,000) 87,000 (790,000) 1,053,000
Buzztime (835,000) (868,000) (2,960,000) (2,768,000)
------------- ------------- ------------- -------------
Operating loss $ (1,214,000) $ (781,000) $ (3,750,000) $ (1,715,000)
============= ============= ============= =============
Net income (loss)
NTN iTV Network $ 289,000 $ 569,000 $ 951,000 $ 1,340,000
NTN Wireless (182,000) (96,000) (12,000) (80,000)
Software Solutions (504,000) (321,000) (1,579,000) (321,000)
------------- ------------- ------------- -------------
NTN Hospitality Technologies division (397,000) 152,000 (640,000) 939,000
Buzztime (835,000) (868,000) (2,960,000) (2,758,000)
------------- ------------- ------------- -------------
Net loss $ (1,232,000) $ (716,000) $ (3,600,000) $ (1,819,000)
============= ============= ============= =============
5. CONTINGENCIES
Over the past few years, state tax authorities from several states have
made inquiries as to whether our NTN iTV Network 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. During 2003, the
state of Texas, our largest state in terms of NTN iTV Network sites, began a
sales tax audit. They have concluded that our services are subject to sales
taxes on an amusement services basis and assessed us for approximately
$1,115,000 for the five year audit period ended December 31, 2002. We have
objected to this approach since our network services are provided to the
consumers for free as a promotional service, which we believe falls outside the
definition of amusement services as defined by the Texas tax code. We have
successfully argued this position regarding amusement services with other
states. We have appealed the assessment and the matter is currently at the
administrative appeals level. We have retained a team of sales and use tax
specialists in Texas to assist us in this matter. If we are able to reach a
mutually agreeable conclusion at the administrative appeals level, we expect
that a conclusion may be reached by the end of 2004. In the event the matter is
not resolved at administrative appeals, we would take the matter before the
District Court. At the District Court level, we would anticipate a resolution no
earlier than 2005. While we believe that we have a strong position in this
matter, there can be no assurance that we will resolve this matter in our favor.
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. This complaint relates
only to our repair and replacement activities of LRS pagers, which is not a
significant percentage of our NTN Wireless business. In February 2004, LRS
amended their complaint to eliminate certain allegations relating to
infringement of its utility patent for wireless pagers. In August 2004, the
Court rejected an LRS motion requesting additional time to take discovery.
Further, in August 2004, we filed a motion for partial summary judgment seeking
to dispose of certain claims of LRS. The summary judgment motion remains pending
the Court's ruling. We do not believe that this matter represents a significant
level of exposure and we intend to defend vigorously.
On or about April 23, 2003, we filed a complaint in the Superior Court of
the State of California, County of San Diego, against LRS alleging defamation
and trade libel, intentional interference with prospective economic advantage,
Lanham Act (trademark violations) and California unfair competition. The case
8
was subsequently transferred to the United States District Court, Southern
District of California. Our complaint alleges that LRS made false statements in
its complaint and press release regarding our products infringing LRS patents,
that LRS intentionally made false statements to disrupt our business
relationships with our clients, and that LRS registered the domain name:
www.ntnwireless.com in violation of our trademark rights. LRS agreed to
relinquish its rights to the domain name and we subsequently secured
registration of www.ntnwireless.com. In March 2004, the Court ruled on the
motion filed by LRS to dismiss our complaint, granting in part dismissal of the
defamation, trade libel and intentional interference with prospective economic
advantage claims and denying the motion to dismiss on the Lanham Act and unfair
competition allegations. In June 2004, we participated in a settlement
conference before the Court; however, no settlement was attained. We intend to
vigorously pursue the remaining claims.
In March 2004, we received correspondence from Open Table, Inc. ("Open
Table") alleging breach of the non-compete provisions of the Asset Purchase
Agreement entered into by and between Open Table and Breakaway International,
Inc. ("Breakaway") in February 2002. Our NTN Software Solutions, Inc. subsidiary
assumed certain obligations of Breakaway pursuant to the Asset Purchase
Agreement we entered into with Breakaway in July 2003. In March 2004, we
acknowledged receipt of the Open Table correspondence and advised Open Table
that we were investigating the allegations set forth in such correspondence. On
April 23, 2004, Open Table filed a complaint in the Superior Court of the State
of California, County of San Francisco, against NTN Communications, Inc. f/k/a
Breakaway International, Inc., alleging breach of contract, breach of implied
covenant of good faith and fair dealing, intentional interference with economic
relationship, negligent interference with economic relationship, fraud,
accounting, constructive trust and declaratory relief. To date, we have made no
appearance in the matter but, rather, are engaged in settlement discussions with
Open Table. We intend to complete our investigation and to resolve the action
accordingly.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
6. DEFERRED REVENUE - BUZZTIME
In February 2003, we entered into a Trial Agreement with a major cable
operator that involves developing the Buzztime channel for potential deployment
on two different cable technology platforms within that operator's system. The
Trial Agreement runs through December 2005. During the year ended December 31,
2003, the cable operator paid us an initial non-refundable amount of $100,000
and an additional payment of $200,000 under the Trial Agreement. The $200,000
payment was related to entering a trial on one of the two specified technology
platforms. During the nine months ended September 30, 2004, the cable operator
paid us another payment of $200,000 under the Trial Agreement. The cable
operator has the right under the Trial Agreement to apply 50% of any amounts
paid under the agreement against future development and/or license fees paid by
that operator to us for the carriage of the Buzztime channel through December
2005. During the year ended December 31, 2003, we recognized $150,000 of revenue
related to this agreement. During the nine months ended September 30, 2004, we
recognized an additional $100,000 of revenue related to this agreement. The
remaining 50% of the three payments received to date, or $250,000, is included
in deferred revenue-Buzztime on the accompanying condensed consolidated balance
sheet. The other $58,000 of deferred revenue - Buzztime on the accompanying
condensed consolidated balance sheet relates to $22,000 of deferred revenue
relating to an agreement with ICTV, Inc., $20,000 of deferred revenue relating
to our wireless cell phone agreement with Airborne Entertainment and $16,000 of
deferred revenue arising from our agreement with Digeo Interactive LLC (Digeo).
7. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is the combination of accumulated net
unrealized losses on investment available for sale and the accumulated gains or
losses from foreign currency translation adjustments. We translated the assets
and liabilities of NTN Canada into U.S. dollars using the period end exchange
rate. Revenue and expenses were translated using the average exchange rates for
the reporting period. For the three and nine month periods ended September 30,
2004 and 2003, the components of accumulated other comprehensive loss were as
follows:
9
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------ ------------------ ------------------
Beginning balance $(706,000) $(649,000) $(628,000) $(639,000)
Unrealized gain (loss) during period
in investment available-for-sale 91,000 -- 72,000 (10,000)
Foreign currency translation
adjustments 116,000 -- 57,000 --
---------- ---------- ---------- ----------
Ending balance $(499,000) $(649,000) $(499,000) $(649,000)
========== ========== ========== ==========
The comprehensive losses for the three and nine month periods ended September 30
were as follows:
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------ ------------------ ------------------
Net loss $(1,232,000) $ (716,000) $(3,600,000) $(1,819,000)
Comprehensive income (loss) 207,000 -- 129,000 (10,000)
------------ ------------ ------------ ------------
Comprehensive net loss $(1,025,000) $ (716,000) $(3,471,000) $(1,829,000)
============ ============ ============ ============
8. EQUITY PLACEMENT
On January 30, 2004, we completed the sale of 3,943,661 shares of our common
stock at $3.55 per share, resulting in gross proceeds of approximately $14.0
million, pursuant to an existing shelf registration filed under the Securities
Act. Roth Capital Partners, LLC (Roth) acted as placement agent in the offering.
After commissions and expenses, the net proceeds of this offering were
approximately $13.0 million. The offering was purchased primarily by a number of
institutional investors and by Media General, Inc., a related party, which
invested approximately $2.0 million. Roth received a warrant for 236,619 shares
with an exercise price of $3.91 per share as part of their compensation as
underwriter of this offering. The shares underlying this warrant have not yet
been registered.
9. LITIGATION SETTLEMENT
On April 14, 2004, we settled the lawsuit filed against us in 1992 by
Interactive Network, Inc. (now Two Way TV (US), Inc.) The litigation involved
licensing and patent infringement issues in Canada. These actions related to the
delivery of the NTN iTV Network to subscribers of our former Canadian licensee
(we acquired our licensee's operations in December 2003) and did not extend to
our network operations in the United States or elsewhere. We settled the matter
for $116,500. We recorded expense related to this matter, including the
settlement amount, of approximately $200,000 in the first quarter of 2004 and we
recorded further legal fees of approximately $92,000 relating to this matter in
the third quarter of 2004.
10. SUBSEQUENT EVENT
On October 26, 2004, our Software Solutions segment entered in a Help Desk
Services Agreement with Domino's Pizza, LLC ("Domino's") to provide remote
telephonic call center technical support on Domino's Pulse point of sale ("POS")
computer systems in all Domino's corporate owned stores. The agreement will run
through December 31, 2007 after which date either party may terminate the
agreement upon 90 days notice. The agreement also calls for us to offer the
telephonic support to Domino's franchisee stores as well. Domino's currently has
578 corporate stores and over 4,200 franchisee stores in the United States. The
agreement calls for us to receive between $595 and $895 annually per store for
providing the call center support. There can be no assurance that the franchisee
stores will sign up for this service.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE
FORWARD-LOOKING STATEMENTS REFLECT FUTURE EVENTS, RESULTS, PERFORMANCE,
PROSPECTS AND OPPORTUNITIES, INCLUDING STATEMENTS RELATED TO OUR STRATEGIC
PLANS, CAPITAL EXPENDITURES, INDUSTRY TRENDS AND FINANCIAL POSITION OF NTN
COMMUNICATIONS, INC. AND ITS SUBSIDIARIES. FORWARD-LOOKING STATEMENTS ARE BASED
ON INFORMATION CURRENTLY AVAILABLE TO US AND OUR CURRENT EXPECTATIONS,
ESTIMATES, FORECASTS, AND PROJECTIONS ABOUT THE INDUSTRIES IN WHICH WE OPERATE
AND THE BELIEFS AND ASSUMPTIONS OF MANAGEMENT. WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "COULD," "TARGETS," "PROJECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," "MAY," "WILL," "WOULD," VARIATIONS OF SUCH WORDS, AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. IN
ADDITION, ANY STATEMENTS WHICH REFER TO PROJECTIONS OF OUR FUTURE FINANCIAL
PERFORMANCE, OUR ANTICIPATED GROWTH AND TRENDS IN OUR BUSINESSES, AND OTHER
CHARACTERIZATIONS OF FUTURE EVENTS OR CIRCUMSTANCES, ARE FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED THAT THESE FORWARD-LOOKING STATEMENTS ARE ONLY
PREDICTIONS AND ARE SUBJECT TO RISKS, UNCERTAINTIES, AND ASSUMPTIONS THAT MAY BE
DIFFICULT TO PREDICT. THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY AND
ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2003 UNDER THE SECTION ENTITLED "RISK FACTORS," AND IN OTHER
REPORTS WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME.
WE UNDERTAKE NO OBLIGATION TO REVISE OR UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENT FOR ANY REASON.
A. OVERVIEW
Our business is developing and distributing interactive entertainment and
wireless information and communications products. We operate our business
principally through two operating units: the NTN Hospitality Technologies
division and our Buzztime Entertainment, Inc. ("Buzztime") subsidiary. The NTN
Hospitality Technologies division includes the NTN iTV Network, NTN Wireless and
Software Solutions segments.
Revenues generated and operating income (loss) by our two business units are
illustrated below. The data presented below includes allocations of corporate
expenses.
THREE MONTHS ENDED SEPTEMBER 30,
2004 2003
------------------- -------------------
Revenues
- --------
NTN Hospitality Technologies division (includes "other revenues") $ 8,592,000 98% $ 7,160,000 99%
Buzztime................................................ 180,000 2% 107,000 1%
------------ ----- ------------- ----
Total......................................... $ 8,772,000 100% $ 7,267,000 100%
============ ===== ============= ====
Operating Income (Loss)
- -----------------------
NTN Hospitality Technologies division................... $ (379,000) $ 87,000
Buzztime................................................ (835,000) (868,000)
------------- --------------
Total......................................... $ (1,214,000) $ (781,000)
============= ==============
NTN Hospitality Technologies revenue is generated primarily from providing
an interactive entertainment service which serves as a marketing and promotional
vehicle for the hospitality industry, from its wireless business with restaurant
on-site paging systems, and from its hardware and software enterprise solutions.
Buzztime's revenue is primarily generated from the distribution of its
digital trivia game show content and "Play-Along" sports games as well as
revenue related to production services for third parties and from performance
under a trial agreement with a major cable operator.
11
Our objective is to leverage our unique interactive entertainment as a means
of growing our business units--first, as a leading provider of interactive
communications, entertainment and software offerings to the hospitality industry
through the NTN Hospitality Technologies division. Second, as a developer and
distributor of interactive entertainment for consumer markets through
interactive television and wireless devices via Buzztime. To accomplish our
objectives we are pursuing business strategies to:
o Increase the number of hospitality locations serviced by the NTN iTV
Network, NTN Wireless and Software Solutions. We intend to accomplish
this increase by expanding our product offerings to include more
value-added services, adding personnel to our sales force, developing
new dealer relationships and providing new and updated content on a
regular basis. Our NTN iTV Network now includes the new NTN Blast(TM)
featuring six new types of entertainment that can be played on our
network, including Extreme Sports programming, irreverent word-based
games and popular card games like Blackjack (available now) and Texas
Hold'em Poker (projected to be launched in late 2004).
o Increase revenue by launching the NTN iTV Network in the United Kingdom
in 2005. Trials are slated for testing the product in approximately 15
to 20 pub locations late in the first quarter of 2005, and we plan to
enter into agreements with pub owners later on in 2005 to launch the NTN
iTV Network in the United Kingdom.
o Develop and distribute the Buzztime Trivia Channel and other games to
cable and satellite operators with the intent to remain a leading U.S.
multi-player interactive television entertainment game channel. We have
adapted or are planning to adapt our interactive trivia game show
content and technology to the leading interactive television platforms
and intend to develop new content and license additional game content
for deployment into the U.S. digital cable interactive television
market. As Buzztime gains distribution with cable television operators,
we expect to increase revenue through three sources: license fees paid
by local cable television operators; fees paid by interactive television
home subscribers for premium services or pay-per-play transactions; and
advertising revenue. We also plan to continue to support our efforts in
early-stage wireless entertainment through partnerships with leading
wireless distributors and carriers.
We also are making efforts to make the Buzztime brand more widely known
as we believe that will enhance the value of the Buzztime brand and, in
turn, should improve our opportunity to gain deployments into the
digital cable interactive television market. To that end, we have
licensed the Buzztime brand and provided trivia game content under an
agreement with a toy manufacturer to develop and market Buzztime trivia
cards in late 2004 as well as an electronic plug and play game in 2005.
Furthermore, we have entered into an agreement with a provider of
airline in flight entertainment to provide in flight trivia game content
to selected airlines.
o Both business units may also explore market opportunities to acquire
complimentary businesses to increase revenues and earnings. To that end,
we acquired the operations of Zoom Communications in April 2002 (now NTN
Wireless), Breakaway International in July 2003 (now Software Solutions)
and NTN Interactive Network (now NTN Canada) in December 2003.
There can be no assurance, however, that we will be successful in executing
these strategies.
B. CRITICAL ACCOUNTING POLICIES
The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to deferred
costs and revenues, depreciation of broadcast equipment, bad debts, investments,
intangible assets, financing operations, and contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies are affected by these
significant judgments and estimates used in the preparation of our consolidated
financial statements:
12
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 No. 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.
o We incur a relatively significant level of depreciation expense in
relationship to our operating income (loss). The amount of depreciation
expense in any fiscal year is largely related to the estimated life of
our handheld, wireless Playmaker(R) keypad devices, computer servers and
VSAT satellite dishes located at our customer sites. The Playmakers are
depreciated over a four-year life, the servers over a three-year life
and the VSAT satellite dishes (most of which expense is actually the
associated electronics not the dish itself) over a five-year life. The
depreciable life of these assets was determined based upon their
estimated useful life which considers 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. We also closely monitor all accounts over
90 days past due and reserve for estimated uncollectible accounts. If
the financial condition of our customers were to deteriorate, resulting
in an inability to make payments, additional allowances may be required.
o We assess our inventory for estimated obsolescence or unmarketable
inventory and write down the difference between the cost of inventory
and the estimated realizable value based upon assumptions about future
sales and supply on-hand. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may
be required.
o Revenues from sales of software generally contain multiple elements, and
are recognized in accordance with Statement of Position ("SOP") No.
97-2, "SOFTWARE REVENUE RECOGNITION", as amended. Along with the basic
software license agreement purchase, customers have the option to
purchase annual support and maintenance (also known as post contract
support or PCS) for an additional fee based on a stipulated percentage
of the license fee. Since vendor specific objective evidence exists for
the PCS, we recognize the revenue from the software license at the time
the software is shipped to the customer and we recognize the revenue
associated with PCS ratably over the term of the support agreement.
Revenue from development services consists of customizations and,
therefore, we recognize revenue from development services as the
services are performed under the agreements. We recognize revenues from
post-contract customer support, such as maintenance, on a straight-line
basis over the term of the contract.
o We have a significant amount of goodwill and intangible assets on our
balance sheet related to acquisitions. At September 30, 2004 the net
amount of $7,917,000 of goodwill and intangible assets represented 26.1%
of total assets. Goodwill represents the excess of costs over fair value
of assets of businesses acquired. We adopted the provisions of SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS, as of January 1, 2002.
Goodwill and intangible assets acquired in a purchase combination
determined to have an indefinite useful life are not amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed
for impairment in accordance with SFAS No. 144, ACCOUNTING FOR
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.
We performed our annual test for goodwill impairment as required by SFAS
142 for our Software Solutions segment and our NTN Canada unit
subsequent to the end of the third quarter in conjunction with the
preparation of the September 30, 2004 financial statements. We retained
a third-party valuation firm to assist in calculating the fair values of
Software Solutions and NTN Canada. The analysis was based upon
consideration of (1) the market value of comparable publicly traded
companies, (2) the market value of similar companies involved in
business combinations, and (3) an income approach of discounting the
projected cash flows of operations. The projections of those units
involved a number of assumptions and estimates, including revenue growth
13
and operating margins, which management believes are reasonable based
upon existing operations and prospective business opportunities. We
completed our evaluation and concluded that goodwill was not impaired as
the fair value of Software Solutions and NTN Canada exceeded their
carrying value, including goodwill. The amount of goodwill as of
September 30, 2004 was $3,681,000. Future events could cause us to
conclude that impairment indicators exist and that goodwill and other
intangible assets associated with our acquired businesses are impaired.
We continually monitor for any potential indicators of impairment of
goodwill and intangible assets and we have determined that no such
indicators have arisen during 2004 to date. Any impairment loss could
have a material adverse impact on our financial condition and results of
operations.
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 NOTE 15 - RELATED PARTIES or in NOTE 18
- SUBSEQUENT EVENTS notes of the audited financial statements in our
Form 10-K for the year ended December 31, 2003.
14
C. RESULTS OF OPERATIONS
1. THREE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
Operations for the three months ended September 30, 2004 resulted in a net
loss of $1,232,000 compared to a net loss of $716,000 for the three months ended
September 30, 2003.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$1,432,000, or 20.0%, to $8,592,000 for the three months ended September 30,
2004 from $7,160,000 for the three months ended September 30, 2003. The revenue
contribution from the three operating segments of the division for the three
months ended September 30, 2004 and 2003 are shown in the following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
Three Months Ended September 30,
--------------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network* $6,545,000 $5,614,000 $ 931,000
NTN Wireless 1,041,000 962,000 79,000
Software Solutions 1,006,000 584,000 422,000
---------- ---------- ----------
Total Revenue of Division $8,592,000 $7,160,000 $1,432,000
========== ========== ==========
(* For the purpose of this analysis, the NTN iTV Network's revenues include
$4,000 and $3,000 of "other" revenues for the three months ended September
30, 2004 and 2003, respectively.)
Within the NTN iTV Network segment there are several revenue contributors,
including our subscription revenue from core hospitality operations, Canadian
license revenue (which ceased as of December 15, 2003), revenue from our
Canadian operations (which commenced on December 15, 2003), advertising revenue
and installation revenue. The primary revenue components are broken out in the
following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
Three Months Ended September 30,
--------------------------------
2004 2003 Change
---- ---- ------
U.S. Subscription Revenues $5,360,000 $5,064,000 $ 296,000
Canadian License Revenue -- 223,000 (223,000)
Revenue from Canadian
Operations 921,000 -- 921,000
U.S. Advertising Revenue 121,000 149,000 (28,000)
U.S. Installation Revenue 143,000 178,000 (35,000)
----------- ----------- -----------
NTN iTV Network $6,545,000 $5,614,000 $ 931,000
=========== =========== ===========
As noted in the above table, our subscription revenue from core hospitality
operations increased by $296,000, or 5.8%, in the third quarter of 2004 due to
an increase in net site count and a higher average price on installed sites
compared to terminated sites. Licensing revenues from our Canadian licensee
ceased in the fourth quarter of 2003 as we finalized the acquisition of the
operations of the licensee. On December 15, 2003, we acquired the operations of
our Canadian licensee, so we now show the overall revenues of the Canadian
operation rather than the previous license revenue.
In the three months ended September 30, 2004, the NTN iTV Network generated
domestic advertising revenue of approximately $121,000 compared to approximately
$149,000 in the three months ended September 30, 2003. The primary reason for
the $28,000 decline in domestic advertising revenue was due to a major
advertising campaign in the 2003 period without a comparable campaign in the
2004 period.
15
In the three months ended September 30, 2004, we added a net number of 95
new sites in the United States compared to a net number of 37 new domestic sites
in the three months ended September 30, 2003. This site count increase was the
largest third quarter net addition of sites in seven years, which builds on the
second quarter of 2004, which was the highest second quarter addition of sites
in nine years. Despite this growth in new sites, installation revenue
associated with installing new customer locations decreased $35,000 as some of
the deferred revenue associated with prior year installations has become fully
amortized. Over the past two years we have also adopted a strategy of charging
new sites a lower installation fee and higher recurring monthly fees than our
previous pricing. This strategy has had the beneficial impact of increasing our
subscription revenues as noted in the above chart but it has also reduced the
amount of deferred revenue from those new sites that is recognized as
installation revenue over an estimated average customer life of three years.
This trend, coupled with the falloff of amortization of deferred revenue from
prior years, led to this lower level of installation revenue.
The NTN iTV Network customer site count in the United States at September
30, 2004 was 3,225. This was an increase of 126 sites over September 30, 2003.
Our Canadian site count at September 30, 2004 was approximately 353.
Revenues from NTN Wireless increased by $79,000 from $962,000 in the three
months ended September 30, 2003 to $1,041,000 in the three months ended
September 30, 2004. This increase resulted from a general increase in customer
activity.
Revenues from Software Solutions increased by $422,000 from $584,000 in the
three months ended September 30, 2003 to $1,006,000 in the three months ended
September 30, 2004. There were only two months of activity in the September 30,
2003 period as we acquired the operations of Breakaway International on July 31,
2003.
Buzztime service revenues increased $73,000 to $180,000 in the three months
ended September 30, 2004 from $107,000 in the three months ended September 30,
2003. Both periods included $100,000 in revenues recognized under a development
agreement with Comcast Cable, a major cable operator. The primary factor in the
$73,000 increase was $58,000 from United States and Canadian satellite operators
for distribution of Buzztime trivia to their users on a subscription basis. The
remainder of the revenue growth came from increases in license revenue from
SusCom and Digeo.
As a result of the above factors, NTN's consolidated revenues increased
$1,505,000, or 20.7%, to $8,772,000 in the three months ended September 30, 2004
from $7,267,000 in the three months ended September 30, 2003.
OPERATING EXPENSES
Consolidated direct operating costs increased $78,000, or 2.8%, to
$2,895,000 in the three months ended September 30, 2004 from $2,817,000 in the
three months ended September 30, 2003. The following table compares the direct
costs for each of our operating segments between the three months ended
September 30, 2004 and 2003:
DIRECT OPERATING COSTS
Three Months Ended September 30,
--------------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $1,830,000 $1,876,000 $ (46,000)
NTN Wireless 631,000 566,000 65,000
Software Solutions 111,000 82,000 29,000
---------- ---------- ----------
Hospitality Technologies division 2,572,000 2,524,000 48,000
Buzztime 323,000 293,000 30,000
---------- ---------- ----------
Consolidated $2,895,000 $2,817,000 $ 78,000
========== ========== ==========
The drivers in the $78,000 increase in our direct operating costs were the
$65,000 increase in NTN Wireless, the $30,000 increase in Buzztime, the $29,000
increase in Software Solutions and $46,000 decrease in NTN iTV Network. As noted
above, we operated the Software Solutions segment for only two months of the
2003 period compared to all three months of the 2004 period.
The $65,000 increase in the direct operating costs of NTN Wireless was
largely related to the cost of goods sold associated with the NTN Wireless
revenue increase of $79,000 noted above and to reduced gross margins. Our gross
margin in the NTN Wireless segment in the three months ended September 30, 2004
was 39%, a 2% decrease from the 41% gross margin we recorded in the three months
ended September 30, 2003. An increase of $48,000 in our reserves for sales
returns and warranties to reflect the increased sales volume of the segment
caused this gross margin decrease.
16
The direct operating costs of our core NTN iTV Network segment included
$113,000 of direct operating costs of NTN Canada, which we did not operate in
the 2003 period. Given that the direct operating costs of the entire iTV
Network, including NTN Canada, decreased by $46,000, the direct operating costs
of the domestic portion of the iTV Network actually decreased by $159,000. This
$159,000 decrease was primarily due to an approximate $83,000 decrease in direct
depreciation and a reduction of communication expenses of approximately $84,000.
The depreciation decrease was due, in turn, to a growing amount of the broadcast
equipment at our customer sites becoming fully depreciated. The reduction in
communication expenses was due to a decline in our phone rates and to the
conversion of a portion of our installed customer base to VSAT.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses (SG&A) increased
$1,850,000 or 39.9%, to $6,672,000 in the three months ended September 30, 2004
from $4,822,000 in the three months ended September 30, 2003. The following
table compares the selling, general and administrative expenses for each of our
operating segments between the three months ended September 30, 2004 and 2003:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended September 30,
--------------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $ 4,098,000 $ 2,973,000 $ 1,125,000
NTN Wireless 571,000 451,000 120,000
Software Solutions 1,334,000 723,000 611,000
------------ ------------ ------------
723,000
Hospitality Technologies division 6,003,000 4,147,000 1,856,000
Buzztime 669,000 675,000 (6,000)
------------ ------------ ------------
Consolidated $ 6,672,000 $ 4,822,000 $ 1,850,000
============ ============ ============
SG&A expenses in the three months ended September 30, 2004 included the SG&A
expenses of Software Solutions and NTN Canada compared to the three months ended
September 30, 2003, which included only two months of operations of Software
Solutions (compared to three months in the 2004 period) and did not include NTN
Canada at all.
The $1,125,000 SG&A increase in the NTN iTV Network segment was partially
due to $400,000 of SG&A expenses in our new NTN Canada subsidiary. The remainder
of the SG&A increase of $725,000 in the NTN iTV Network came from a variety of
items including:
o $168,000 of Sarbanes-Oxley-related costs;
o approximately $92,000 of legal fees relating to the now settled
litigation with Two Way TV (U.S.);
o increased salaries and benefits of approximately $147,000 related to the
hiring of additional personnel in the United States;
o increased bad debt expense of $57,000;
o increased marketing expenses of $51,000 associated with the launch of
NTN Blast(TM) content and the new iTV dual-channel technology platform;
and
o increased repairs and maintenance expense of approximately $45,000
The $120,000 increase in the SG&A of NTN Wireless was primarily due to an
$82,000 increase in legal fees relating to the LRS litigation in the three
months ended September 30, 2004 over the legal fees in the 2003 period.
The increase in the SG&A of Software Solutions was also due to a trial of an
increased telephonic technical support call center with Domino's Pizza over the
three months ended September 30, 2004 with related head count increases both of
a permanent and temporary personnel nature.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
increased $6,000, or 1.8%, to $335,000 in the three months ended September 30,
2004 from $329,000 in the three months ended September 30, 2003. This increase
was due to amortization of intangible assets that we added as a result of the
Software Solutions and NTN Canada transactions in the second half of 2003.
17
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $4,000 to $84,000 in the three
months ended September 30, 2004 from $80,000 in the three months ended September
30, 2003, due primarily to projects to continue development of new technologies
for the iTV network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the three months ended September 30, 2004 was $24,000
compared to $1,000 in the three months ended September 30, 2003. The interest
income in 2004 arose from investing the proceeds of our January 2004 equity
offering into short term United States governmental agency securities.
Interest expense decreased $3,000, or 9.1%, to $30,000 in the three months
ended September 30, 2004, compared to $33,000 in the three months ended
September 30, 2003, due primarily to the paydown of the balance on our revolving
line of credit following the completion of our equity offering in January 2004.
In the three months ended September 30, 2003, we recorded $105,000 of other
income that arose from a gain on early extinguishment of debt. We did not record
any other income in the three months ended September 30, 2004.
INCOME TAXES
The NTN Hospitality Technologies division is expected to report taxable
income for the year ended December 31, 2004. For federal income tax reporting
purposes and in unitary states where the NTN may file on a combined basis,
taxable losses incurred by Buzztime should be sufficient to offset the
division's taxable income. In states where separate filing is required, the
division will likely incur a state tax liability. As a result, NTN Hospitality
Technologies recorded a state tax provision of $12,000 in the three months ended
September 30, 2004. This was a $4,000 increase over the $8,000 provision for
income taxes recorded in the three months ended September 30, 2003
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
not intended to represent a measure of performance in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). Nor
should EBITDA be considered as an alternative to statements of cash flows as a
measure of liquidity. EBITDA is included herein because we believe it is a
measure of operating performance that financial analysts, lenders, investors and
other interested parties find to be a useful tool for analyzing companies like
NTN that carry significant levels of non-cash depreciation and amortization
charges in comparison to their GAAP earnings.
Our EBITDA decreased by $614,000 to negative $309,000 in the three months
ended September 30, 2004 from EBITDA of $305,000 in the three months ended
September 30, 2003. This EBITDA decrease was primarily due to the $591,000
increase in our net loss in 2004.
The following table reconciles our net loss per GAAP to EBITDA:
THREE MONTHS ENDED
SEPTEMBER 30
-------------------------------
2004 2003
------------ ------------
EBITDA CALCULATION
Net loss per GAAP $(1,232,000) $ (716,000)
Interest expense (net) 6,000 32,000
Depreciation and amortization 980,000 981,000
Income taxes 12,000 8,000
------------ ------------
EBITDA $ (234,000) $ 305,000
============ ============
18
On a segment basis, our segments generated EBITDA levels as presented below:
THREE MONTHS ENDED
($000) SEPTEMBER 30, 2004
-----------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP. TECH.
NETWORK WIRELESS SOLUTIONS DIV. BUZZTIME TOTAL
------- -------- --------- ---- -------- -----
Net income (loss) $ 289 $ (182) $ (504) $ (397) $ (835) $(1,232)
Interest expense (net) 6 -- -- 6 -- 6
Depreciation and amortization 725 20 98 843 137 980
Income taxes 12 -- -- 12 -- 12
-------- -------- -------- -------- -------- --------
EBITDA $ 1,032 $ (162) $ (406) $ 464 $ (698) $ (234)
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED
($000) SEPTEMBER 30, 2003
-----------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP. TECH.
NETWORK WIRELESS SOLUTIONS DIV. BUZZTIME TOTAL
------- -------- --------- ---- -------- -----
Net income (loss) $ 569 $ (96) $ (321) $ 152 $ (868) $ (716)
Interest expense (net) 32 -- -- 32 -- 32
Depreciation and amortization 709 36 113 858 123 981
Income taxes 8 -- -- 8 -- 8
------- ------- ------- ------- ------- -------
EBITDA $1,321 $ (61) $ (210) $1,050 $ (745) $ 305
======= ======= ======= ======= ======= =======
2. NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
Operations for the nine months ended September 30, 2004 resulted in a net
loss of $3,600,000 compared to a net loss of $1,819,000 for the nine months
ended September 30, 2003.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$4,748,000, or 22.5%, to $25,883,000 for the nine months ended September 30,
2004 from $21,135,000 for the nine months ended September 30, 2003. For the
purpose of this analysis, the NTN Hospitality Technologies division's revenues
include $18,000 and $8,000 of "other" revenues for the nine months ended
September 30, 2004 and 2003, respectively. The revenue contribution from the
three operating segments of the division for the nine months ended September 30,
2004 and 2003 are shown in the following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
Nine Months Ended September 30,
-------------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $18,890,000 $16,836,000 $ 2,054,000
NTN Wireless 4,131,000 3,715,000 416,000
Software Solutions 2,862,000 584,000 2,278,000
----------- ----------- -----------
Total Revenue of Division $25,883,000 $21,135,000 $ 4,748,000
=========== =========== ===========
Within the NTN iTV Network there are several revenue contributors, including
our subscription revenue from core hospitality operations, Canadian license
revenue (which ceased as of December 15, 2003), revenue from our Canadian
operations (which commenced on December 15, 2003), advertising revenue and
installation revenue. The primary revenue components are broken out in the
following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
Nine Months Ended September 30,
-------------------------------
2004 2003 Change
---- ---- ------
U.S. Subscription Revenues $15,499,000 $14,662,000 $ 837,000
Canadian License Revenue -- 751,000 (751,000)
Revenue from Canadian
Operations 2,614,000 -- 2,614,000
U.S. Advertising Revenue 315,000 372,000 (57,000)
U.S. Installation Revenue 462,000 1,051,000 (589,000)
----------- ----------- -----------
NTN iTV Network $18,890,000 $16,836,000 $ 2,054,000
=========== =========== ===========
19
As noted in the above table, our subscription revenue from core hospitality
operations increased by $837,000, or 5.7%, in the nine months ended September
30, 2004 due to an increase in net site count. Licensing revenues from our
Canadian licensee ceased in the fourth quarter of 2003 as we finalized the
acquisition of the operations of the licensee. On December 15, 2003, we acquired
the operations of our Canadian licensee, so we now show the overall revenues of
the Canadian operation rather than the previous license revenue.
In the first nine months of 2004, the NTN iTV Network generated domestic
advertising revenue of approximately $315,000 compared to approximately $372,000
in the first nine months of 2003. This $57,000 decrease was due to several
advertising campaigns in the 2003 period that ended without comparable campaigns
in the 2004 period.
Installation revenue associated with installing new customer locations
decreased $589,000, or 56.0%. This was primarily due to deferred revenue
associated with prior year installations becoming fully amortized. To a lesser
extent, over the past two years, we have adopted a strategy of charging new
sites a lower installation fee and higher recurring monthly fees than our
previous pricing in order to grow our customer base. This strategy has had the
beneficial impact of increasing our subscription revenues as noted in the above
chart but it has also reduced the amount of deferred revenue from those new
sites that is recognized as installation revenue over an average customer life
of three years. This trend coupled with the falloff of amortization of deferred
revenue from prior years led to this lower level of installation revenue.
However, we believe this move to a lower installation fee coupled with higher
recurring fees has a greater long-term financial benefit to NTN. We added 100
net new domestic sites in the first nine months of 2004 compared to a decrease
of 72 net new domestic sites in the first nine months of 2003. This domestic
site count increase was the largest nine month net addition of sites in 7 years.
Revenues from NTN Wireless increased by $416,000 from $3,715,000 in the
first nine months of 2003 to $4,131,000 in the first nine months of 2004. This
revenue growth resulted from a general increase in customer activity.
Revenues from Software Solutions increased by $2,278,000 from $584,000 in
the first nine months of 2004 to $2,862,000. There were only two months of
Software Solutions revenues in the comparable 2003 period since we acquired the
operations of Breakaway International on July 31, 2003.
Buzztime service revenues increased $90,000 to $262,000 in the first nine
months of 2004 from $172,000 in the first nine months of 2003. The 2004 period
included $100,000 in revenues recognized under a development agreement with a
major cable operator compared to $150,000 in the 2003 period. Excluding that
$50,000 negative variance, Buzztime's revenues grew by $140,000. The primary
factor in that $140,000 pro forma increase was $103,000 from United States and
Canadian satellite operators for distribution of Buzztime trivia to their users
on a subscription basis. The remainder of the revenue growth came from a variety
of sources including increases in license revenue from SusCom and Digeo.
As a result of the above factors, NTN's consolidated revenues increased
$4,838,000, or 22.7%, to $26,145,000 in the first nine months of 2004 from
$21,307,000 in the first nine months of 2003.
OPERATING EXPENSES
Direct operating costs increased $508,000, or 6.1%, to $8,817,000 in the
first nine months of 2004 from $8,309,000 in the first nine months of 2003. The
following table compares the direct operating costs for each of our operating
segments for the nine months ended September 30, 2004 and 2003:
DIRECT OPERATING COSTS
Nine Months Ended September 30,
-------------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $5,025,000 $5,112,000 $ (87,000)
NTN Wireless 2,524,000 2,303,000 221,000
Software Solutions 363,000 82,000 281,000
---------- ---------- ----------
Hospitality Technologies division 7,912,000 7,497,000 415,000
Buzztime 905,000 812,000 93,000
---------- ---------- ----------
Consolidated $8,817,000 $8,309,000 $ 508,000
========== ========== ==========
20
The three drivers in the $508,000 increase in our direct operating costs
were the $281,000 increase in Software Solutions, the $221,000 increase in NTN
Wireless and the $93,000 increase in Buzztime, which increases were partially
offset by the $87,000 decrease in the direct costs of the iTV Network. As noted
above, we only operated the Software Solutions segment for only two months in
the 2003 period compared to nine months of the 2004 period.
The $221,000 increase in the direct operating costs of NTN Wireless was
largely related to the cost of goods sold associated with the NTN Wireless
revenue increase of $416,000 noted above. Our gross margin in the NTN Wireless
segment in the first nine months of 2004 was 39%, a 1% increase over the 38%
gross margin we recorded in the first nine months of 2003. This gross margin
increase was due to reduced costs on our NTN Wireless inventories.
The $93,000 increase in the direct operating costs of Buzztime was primarily
due to a $67,000 increase in direct amortization relating to licensed content
and to a $39,000 increase in salaries and related expenses as a result of adding
additional content creation and other personnel.
The $87,000 decrease in the direct operating costs of our NTN iTV Network
segment was the result of a number of factors. The 2004 period included $216,000
of direct operating costs of NTN Canada while the 2003 period had no such costs.
Therefore, the domestic direct operating costs actually decreased by $303,000 in
the nine-month period. This $303,000 decrease was primarily due to a $443,000
decrease in direct depreciation, which, in turn, was caused by an increasing
level of fully depreciated broadcast equipment at our customer sites and to a
$312,000 reduction of communication expenses. The reduction in telephone
expenses was due to a decline in our phone rates and to the conversion of a
portion of our installed customer base to VSAT. These decreases were partially
offset by a $279,000 increase in Playmaker repair expenses, and a $102,000
increase in costs for miscellaneous parts used in Playmakers and other broadcast
equipment. These expense increases were largely caused by the overall increase
in the average age of the site equipment at our customer sites.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses increased $6,274,000 or
46.8%, to $19,835,000 in the first nine months of 2004 from $13,561,000 in the
first nine months of 2003. The following table compares the SG&A expenses for
each of our operating segments for the nine months ended September 30, 2004 and
2003:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Nine Months Ended September 30,
----------------------------------------------
2004 2003 Change
---- ---- ------
NTN iTV Network $13,052,000 $9,951,000 $3,101,000
NTN Wireless 1,286,000 1,192,000 94,000
Software Solutions 3,640,000 777,000 2,863,000
----------- ----------- ----------
Hospitality Technologies division 17,978,000 11,920,000 6,058,000
Buzztime 1,857,000 1,641,000 216,000
----------- ----------- ----------
Consolidated $19,835,000 $13,561,000 $6,274,000
=========== =========== ==========
SG&A expenses in the first nine months of 2004 included the SG&A expenses of
Software Solutions and NTN Canada compared to the first nine months of 2003,
which only included two months of operations of Software Solutions compared to
nine months of the 2004 period and did not include the operations of NTN Canada
as those units were acquired in July and December of 2003, respectively. The
$94,000 increase in the SG&A of NTN Wireless was primarily due to a $206,000
increase in legal fees relating to the LRS litigation in the first nine months
of 2004 over the legal fees in the 2003 period.
The $3,101,000 SG&A increase in the NTN iTV Network segment was partially
due to $1,164,000 of SG&A expenses in our new NTN Canada subsidiary. Another
significant factor was approximately $292,000 of expenses related to the costs
and eventual settlement of the Two Way TV litigation in Canada. The remainder of
the SG&A increase of $1,645,000 in the NTN iTV Network came from a variety of
21
items including increased legal and professional fees, including
Sarbanes-Oxley-related costs of $249,000, and increased salaries and benefits of
approximately $567,000, increased office rental expense of $120,000, increased
telephone expense of $140,000, increased marketing expenses of $197,000,
increased repairs and maintenance expense of approximately $90,000 and increased
insurance costs of $39,000. The increases in salaries and related expenses were
related to the hiring of additional personnel in the United States.
The increase in the SG&A of Software Solutions was also due to a trial of an
increased telephonic technical support call center with Domino's Pizza over the
three months ended September 30, 2004 with related head count increases both of
a permanent and temporary personnel nature.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
increased $79,000, or 8.7%, to $987,000 in the first nine months of 2004 from
$908,000 in the first nine months of 2003. This increase was due to amortization
of intangible assets that we added as a result of the Software Solutions and NTN
Canada transactions in the second half of 2003.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $12,000 to $256,000 in the first
nine months of 2004 from $244,000 in the first nine months of 2003, due
primarily to projects to continue development of new technologies for the iTV
network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the first nine months of 2004 was $66,000 compared to
$4,000 in the first nine months of 2003. The interest income in 2004 arose from
investing the proceeds of our January 2004 equity offering into short term
United States governmental agency securities.
Interest expense decreased $104,000, or 52.0%, to $96,000 in the first nine
months of 2004, compared to $200,000 in the first nine months of 2003, due
primarily to the paydown of the balance on our revolving line of credit
following the completion of our equity offering in January 2004.
Other income was $225,000 in the nine months ended September 30, 2004. This
other income arose from the settlement of a derivative securities lawsuit. In
the nine months ended September 30, 2003, we recorded $105,000 of other income
that arose from a gain on early extinguishment of debt.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary was $10,000 in the
first six months of 2003, which represented an allocation of six percent of
Buzztime's losses for only the first half of the month of January 2003 since
Scientific-Atlanta converted their minority interest in the Buzztime subsidiary
into NTN common stock on January 16, 2003.
INCOME TAXES
The NTN Hospitality Technologies division is expected to report taxable
income for the year ended December 31, 2004. For federal income tax reporting
purposes and in unitary states where the NTN may file on a combined basis,
taxable losses incurred by Buzztime should be sufficient to offset the
division's taxable income. In states where separate filing is required, the
division will likely incur a state tax liability. As a result, NTN Hospitality
Technologies recorded a state tax provision of $45,000 in the first nine months
of 2004. This was a $22,000 increase over the $23,000 provision for income taxes
recorded in the first nine months of 2003.
EBITDA
EBITDA is not intended to represent a measure of performance in accordance
GAAP. Nor should EBITDA be considered as an alternative to statements of cash
flows as a measure of liquidity. EBITDA is included herein because we believe it
is a measure of operating performance that financial analysts, lenders,
investors and other interested parties find to be a useful tool for analyzing
companies like NTN that carry significant levels of non-cash depreciation and
amortization charges in comparison to their GAAP earnings.
22
Our EBITDA decreased by $2,159,000 to negative $728,000 in the first nine
months of 2004 from EBITDA of $1,431,000 in the first nine months of 2003. This
EBITDA decrease was primarily due to the $1,856,000 increase in our net loss in
2004.
The following table reconciles our net loss per GAAP to EBITDA:
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------
2004 2003
------------ ------------
EBITDA CALCULATION
Net loss per GAAP $(3,600,000) $(1,819,000)
Interest expense (net) 30,000 196,000
Depreciation and amortization 2,872,000 3,031,000
Income taxes 45,000 23,000
------------ ------------
EBITDA $ (653,000) $ 1,431,000
============ ============
On a segment basis, our segments generated EBITDA levels as presented below:
NINE MONTHS ENDED
($000) SEPTEMBER 30, 2004
-----------------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP. TECH.
NETWORK WIRELESS SOLUTIONS DIV. BUZZTIME TOTAL
------- -------- --------- ---- -------- -----
Net income (loss) $ 951 $ (12) $(1,579) $ (640) $(2,960) $(3,600)
Interest expense (net) 30 -- -- 30 -- 30
Depreciation and amortization 2,114 75 290 2,479 393 2,872
Income taxes 45 -- -- 45 -- 45
-------- -------- -------- -------- -------- --------
EBITDA $ 3,140 $ 63 $(1,289) $ 1,914 $(2,567) $ (653)
======== ======== ======== ======== ======== ========
NINE MONTHS ENDED
($000) SEPTEMBER 30, 2003
-----------------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP. TECH.
NETWORK WIRELESS SOLUTIONS DIV. BUZZTIME TOTAL
------- -------- --------- ---- -------- -----
Net income (loss) $ 1,340 $ (80) $ (321) $ 939 $(2,758) $(1,819)
Interest expense (net) 196 -- -- 196 -- 196
Depreciation and amortization 2,403 102 113 2,618 413 3,031
Income taxes 23 -- -- 23 -- 23
-------- -------- -------- -------- -------- --------
EBITDA $ 3,962 $ 22 $ (208) $ 3,776 $(2,345) $ 1,431
======== ======== ======== ======== ======== ========
D. LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had cash and cash equivalents of $9,464,000 and
working capital (current assets in excess of current liabilities) of $8,651,000,
compared to cash and cash equivalents of $2,503,000 and working capital of
$765,000 at December 31, 2003. Net cash provided by (used in) operating
activities was $(1,299,000) for the nine months ended September 30, 2004 and
$1,714,000 for the nine months ended September 30, 2003, or a $3,013,000
reduction in cash provided by operating activities.
The primary causes of this $3,013,000 decline in the cash generated by our
operating activities were:
o the increase in our loss of $1,781,000,
o accounts payable and accrued expenses declined as a source of cash from
$872,000 in the nine months ended September 30, 2003 to $71,000 in the
2004 period, or a decrease in the change in accounts payable and accrued
expenses of $801,000. This reduction was primarily due to the change in
accrued expenses in 2004, and
o an increase in the use of cash associated with the change in deferred
costs of $604,000. The increase in the deferred costs area was due to
the growth of new sites in our NTN iTV Network as discussed above.
23
Net cash used in investing activities was $3,030,000 for the nine months
ended September 30, 2004 compared with $2,181,000 for the nine months ended
September 30, 2003. Included in net cash used in investing activities for the
nine months ended September 30, 2004 were $2,276,000 in capital expenditures
largely related to the increase in our NTN iTV Network sites and to the ongoing
process of converting our NTN iTV Network installed customer base to the new
VSAT satellite technology, $338,000 of deposits on broadcast equipment and
$313,000 of capitalized software development expenditures. The two components of
net cash used in investing activities for the nine months ended September 30,
2003 were $1,611,000 of capital expenditures and $570,000 relating to the
acquisition of businesses in 2003.
Net cash provided by financing activities was $11,281,000 for the nine
months ended September 30, 2004 compared to $2,389,000 for the nine months ended
September 30, 2003. The cash provided by financing activities for the nine
months ended September 30, 2004 included $13,001,000 of net proceeds from our
equity offering in January 2004 and $385,000 from the exercise of stock options
and warrants. These proceeds were partially offset by $1,000,000 of principal
payments on the revolving line of credit, $974,000 of principal payments on
equipment notes payable and $131,000 of principal payments on capital leases. In
the first nine months of 2003, we raised $3,723,000 in net proceeds from
investments by Media General, Inc. and Robert Bennett, both related parties, and
$373,000 from the exercise of stock options and warrants. These proceeds were
partially offset by $1,234,000 of net principal payments on the revolving line
of credit, $310,000 of principal payments on equipment notes payable and
$163,000 of principal payments on capital leases.
JANUARY 2004 FINANCING
On January 30, 2004, we completed the sale of 3,943,661 shares of our common
stock at $3.55 per share, resulting in gross proceeds of approximately $14.0
million, pursuant to an existing shelf registration filed under the Securities
and Exchange Act of 1934. Roth Capital Partners, LLC (Roth) acted as placement
agent in the offering. After commissions and expenses, the net proceeds of this
offering were approximately $13.0 million. The offering was purchased primarily
by a number of institutional investors and by Media General, Inc., a related
party, which invested approximately $2.0 million. Roth received a warrant for
236,619 shares with an exercise price of $3.91 per share as part of their
compensation as underwriter of this offering. The shares underlying this warrant
have not yet been registered.
VSAT EQUIPMENT FINANCING
Our VSAT satellite equipment vendor has helped finance our VSAT equipment
purchases under a five year equipment note payable, which has helped finance
approximately 30% of the cost of the equipment. For the nine months ended
September 30, 2004, the total amount of VSAT equipment purchased was $1,172,000
and we paid approximately $940,000 in principal payments to the vendor. While
this equipment note is non-interest bearing, we impute an interest rate to this
note.
FUTURE FINANCING NEEDS
In light of the recent completion of the January 2004 financing, it is
unlikely that we will require additional financing in the next twelve months.
While our capital requirements over the next twelve months will depend upon the
growth of our two business units, unless we see exceptionally high growth (for
example, net site growth of 300 or more sites in the NTN iTV Network or at least
a dozen additional deployments of the Buzztime Trivia Channel), utilization of
our cash and existing line of credit is expected to be sufficient to cover our
financing requirements for the next twelve months.
Our liquidity and capital resources, while stronger than in recent years,
remain limited and this may constrain our ability to operate and grow our
business beyond these levels.
Future capital investment for our new satellite network and for new site
installations, and cash used for acquisitions and expenditures for Buzztime,
will likely cause our cash expenditures to exceed cash inflows, though we
currently do not anticipate using more than $5 million over the next twelve
months based on the above low growth scenario. We expect the level of
expenditures in Buzztime to increase over the next twelve months as we are
field-testing the channel with Time Warner in Portland, Maine and now with
Comcast Cable in Baltimore, Maryland. We also continue in the pre-field testing
phase with certain other cable operators.
If current Buzztime channel sales efforts to cable MSOs (the largest
multiple system operators in the United States) succeed as planned and we enter
into additional field trials or national agreements with those cable operators,
management intends to aggressively increase Buzztime game development and sales
and marketing efforts to more quickly advance our distribution within the U.S.
24
market, which likely will require additional capital in the second half of 2005.
We also believe that any additional success that Buzztime achieves in entering
into additional field trials with MSOs may enhance our ability to raise
additional capital at favorable pricing, although there can be no assurance that
will happen.
The NTN Hospitality Technologies division has transmitted its data through
the FM2 satellite platform for more than ten years. That arrangement is
currently scheduled to end in February 2005; however, we have a verbal
understanding to extend the expiration date. In November 2002, we entered into
equipment purchase and satellite service agreements to convert the entire
network of over 3,000 sites to a much higher speed, two-way VSAT satellite
technology over a two-year period ending February 2005. We are now discussing
the extension of this two-year conversion period and the continued operation of
some FM2 sites for an indefinite period of time. We entered into these
agreements with the same reseller of satellite services that provided the FM2
satellite platform to us. If and when all 3,000 sites are converted, the
conversion from the one-way FM2 technology to a two-way satellite technology may
require aggregate capital expenditures of up to $4.5 million and increased cash
operating expenses (including estimated installation costs) of up to $2.5
million over the conversion period, which will lower our historical positive
cash flow. As of September 30, 2004, installations of the two-way VSAT
technology were only being implemented for new iTV Network installations and for
those existing sites that chose to pay additional fees to receive our new NTN
Blast(TM) content. As of September 30, 2004, approximately 38% of North American
sites had been converted to VSAT. To date, this upgrade has had a moderately
adverse impact on our earnings when compared with what earnings would have been
without the expenditures. The offsetting benefits of the installation include
the elimination, at completion, of telecom costs that currently average
approximately $660,000 per year and an expected increase of revenues from the
sites.
We also believe that NTN Canada will require a significant amount of capital
investment. The previous owner did not convert the Canadian customer base from
the older, DOS-based platform to our newer, Windows(R)-based DITV Network, which
we believe adversely affected growth and licensing revenue in that market. To
address future growth strategies in Canada, we have begun to convert the
customer base of approximately 350 sites to both DITV and VSAT, which we expect
to take place over the next 12 months. This investment may be on the order of
$1.4 million. We believe that the majority or perhaps all of the Canadian
capital expenditures will be financed through operating cash flow that we
generate in Canada.
We believe that NTN Wireless will continue to generate working capital
requirements to purchase inventories in advance of projected sales. No
significant levels of fixed asset additions are expected in this segment for the
next twelve months. Given the assumption that this segment's current level of
profitability continues over the next twelve months, this segment should cover
its working capital requirements over that period.
Software Solutions currently requires ongoing capital resources to cover its
operating losses. It is likely that Software Solutions will require $1 to $1.5
million of working capital over the next twelve months. The historical
activities of the segment do not require significant fixed asset additions.
However, we recently entered into a three-year agreement to provide an expanded
set of support services with Domino's Pizza. This expanded support agreement
initially is with Domino's corporate-owned stores and Domino's is recommending
that their franchisees enter into the support arrangement with us. If a majority
of the Domino's franchisees eventually sign up with us for support, this
agreement could materially improve the performance of the Software Solutions
segment. If the franchise stores delay their conversion to the Domino's Pulse
POS software, and therefore do not enter into broader support relationships with
the Company, some of the upside potential available under this agreement may not
be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to, stock market fluctuations, interest
rates and currency exchange rates. As of September 30, 2004, we owned common
stock of an Australian company that is subject to market risk. At September 30,
2004, the carrying value of this investment was $261,000, which is net of a
$556,000 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 September 30, 2004,
a hypothetical 10% decline in the value of the Australian dollar would result in
a reduction of $26,000 in the carrying value of the investment. As of September
30, 2004 we also had cash equivalents of approximately $9 million invested
primarily in short-term government bonds that is subject to market risk.
We also face currency exchange risk with our operations in Canada. NTN
Canada earned approximately Canadian $1.4 million (or U.S. $1.1 million) before
corporate overhead and taxes in the nine months ended September 30, 2004. A
hypothetical 10% decline in the value of the Canadian dollar versus the United
States dollar would reduce the stated contribution from that unit to the NTN iTV
Network segment by that same 10%.
25
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have reviewed and
continue to evaluate the effectiveness of NTN's controls and procedures over
financial reporting and disclosure (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this quarterly report. The
term "disclosure controls and procedures" is defined in Rules13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange Commission'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 Company's controls and procedures
over financial reporting and disclosure, 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.
An evaluation was performed under the supervision and with the participation
of the Company's management, including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness of the Company's controls
and procedures over financial reporting and disclosure as of September 30, 2004.
We are continuing our evaluation of our internal controls as required by
Sections 404(a) of the Sarbanes-Oxley Act of 2002. We are nearing completion of
our documentation and testing of the effectiveness of our internal controls
using the COSO framework. In the course of our evaluation, we have identified
certain deficiencies, which we are addressing. These have been communicated to
our Audit Committee and we are taking appropriate steps to make necessary
improvements and enhance the reliability of our internal controls over financial
reporting.
Based on our continuing evaluation, the Company's management, including the
CEO and CFO, concluded that the Company's controls and procedures over financial
reporting and disclosure were effective as of September 30, 2004. 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to litigation from time to time in the ordinary course of our
business. There can be no assurance that any or all of the following claims will
be decided in our favor and we are not insured against all claims made. During
the pendency of such claims, we will continue to incur the costs of our legal
defense.
LONG RANGE SYSTEMS
On March 21, 2003, Long Range Systems, Inc. ("LRS") filed, in the United
States District Court, Northern District of Texas, a patent infringement
complaint against our NTN Wireless subsidiary. This complaint alleged trade
dress and patent infringement and unfair competition. This complaint relates
only to our repair and replacement activities of LRS pagers, which is not a
significant percentage of our NTN Wireless business. In February 2004, LRS
amended their complaint to eliminate certain allegations relating to
infringement of its utility patent for wireless pagers. In August 2004, the
Court rejected LRS motion requesting additional time to take discovery. Further,
in August 2004, we filed a motion for partial summary judgment seeking to
dispose of certain claims of LRS. The summary judgment motion remains pending
the Court's ruling. We do not believe that this matter represents a significant
level of exposure and intend to defend vigorously.
On or about April 23, 2003, we filed a complaint in the Superior Court of
the State of California, County of San Diego, against LRS alleging defamation
and trade libel, intentional interference with prospective economic advantage,
Lanham Act (trademark violations) and California unfair competition. The case
was subsequently transferred to the United States District Court, Southern
District of California. Our complaint alleges that LRS made false statements in
26
its complaint and press release regarding our products infringing LRS patents,
that LRS intentionally made false statements to disrupt our business
relationships with our clients, and that LRS registered the domain name:
www.ntnwireless.com in violation of our trademark rights. LRS agreed to
relinquish its rights to the domain name and we subsequently secured
registration of www.ntnwireless.com. In March 2004, the Court ruled on the
motion filed by LRS to dismiss our complaint, granting in part dismissal of the
defamation, trade libel and intentional interference with prospective economic
advantage claims and denying the motion to dismiss on the Lanham Act and unfair
competition allegations. In June 2004, we participated in a settlement
conference before the Court; however, no settlement was attained. We intend to
vigorously pursue the remaining claims.
OPEN TABLE
In March 2004, we received correspondence from Open Table, Inc. ("Open
Table") alleging breach of the non-compete provisions of the Asset Purchase
Agreement entered into by and between Open Table and Breakaway International,
Inc. ("Breakaway") in February 2002. Our NTN Software Solutions, Inc. subsidiary
assumed certain obligations of Breakaway pursuant to the Asset Purchase
Agreement we entered into with Breakaway in July 2003. In March 2004, we
acknowledged receipt of the Open Table correspondence and advised Open Table
that we were investigating the allegations set forth in such correspondence. On
April 23, 2004, Open Table filed a complaint in the Superior Court of the State
of California, County of San Francisco, against NTN Communications, Inc. f/k/a
Breakaway International, Inc., alleging breach of contract, breach of implied
covenant of good faith and fair dealing, intentional interference with economic
relationship, negligent interference with economic relationship, fraud,
accounting, constructive trust and declaratory relief. To date, we have made no
appearance in the matter but, rather, are engaged in settlement discussions with
Open Table. We intend to complete our investigation and to resolve the action
accordingly.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held a special meeting of shareholders on September 30, 2004. The
following matter was voted upon at such meeting:
To adopt the NTN Communications, Inc. 2004 Performance Incentive Plan:
Votes In Favor ............ 21,269,012
Votes Against ............. 5,564,255
Abstentions ............... 5,162,302
The proposal to adopt the NTN Communications, Inc. 2004 Performance
Incentive Plan was approved by stockholders.
ITEM 5. OTHER INFORMATION
On September 9, 2004, we entered into a written employment agreement with
Stanley B. Kinsey, our Chief Executive Officer. The employment agreement extends
the duration of Mr. Kinsey's employment through February 28, 2005 and provides
for a salary of $380,000 per annum. In connection with the extension of
employment, Mr. Kinsey was granted options to purchase 300,000 shares of Common
Stock at $1.86 per share, the closing market price on the date of grant, in
accordance with the NTN Communications, Inc. 1995 Stock Option Plan. These
options vest monthly through February 28, 2005. In addition, Mr. Kinsey was
granted 50,000 stock units, subject to stockholder approval of the NTN
Communications, Inc. 2004 Performance Incentive Plan (the "Plan"). The grant of
stock units became effective September 30, 2004, upon stockholder approval of
the Plan and shall vest monthly through February 28, 2005. We have attributed a
cost of $2.60 per stock unit to that grant based upon the closing stock price on
September 30, 2004, the date the Plan was approved. In the event of termination
of Mr. Kinsey's employment by us without cause, Mr. Kinsey shall be entitled to
the greater of one year's additional compensation or the compensation that would
have accrued during the remainder of the term of employment.
27
ITEM 6. EXHIBITS.
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (4)
3.2 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (7)
3.3 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated March 22, 2000 (8)
3.4 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated March 24, 2000 (8)
3.5 By-laws of the Company (2)
3.6 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated May 27, 2003 (15)
4.1 Specimen Common Stock Certificate (10)
4.2* Stock Option Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
4.3* Stock Option Agreement, dated October 7, 1999, by and between NTN
Communications, Inc. and Stanley B. Kinsey (6)
4.4* Stock Option Agreement, dated January 26, 2001, by and between NTN
Communications, Inc. and Stanley B. Kinsey (12)
4.5 Warrant Certificate issued January 13, 2003 by NTN Communications,
Inc. to Robert M. and Marjie Bennett, Trustees The Bennett Family
Trust dated 11-17-86 (18)
4.6 NTN Investor Rights Agreement, dated May 7, 2003, by and between NTN
Communications, Inc. and Media General, Inc. (17)
4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and among
NTN Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (17)
4.8 Common Stock Purchase Warrant dated May 7, 2003 issued to Media
General, Inc. exercisable for 500,000 shares of common stock of
Buzztime Entertainment, Inc. (17)
4.9 Form of Common Stock Purchase Warrant issued to Roth Capital
Partners (13)
10.1 License Agreement with NTN Canada (3)
10.2* Employment Agreement, dated September 9, 2004, by and between NTN
Communications, Inc. and Stanley B. Kinsey (1)
10.3 Subscription Agreement dated January 13, 2003 between NTN
Communications, Inc. and Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (18)
10.4 Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange
of Buzztime Preferred Stock for NTN Common Stock, dated January 16,
2003 (18)
10.5 Securities Purchase Agreement dated May 5, 2003 by and among NTN
Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (17)
10.6 Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners and NTN Communications, Inc. (13)
10.7 Manufacturing Agreement, dated November 25, 1997, by and between NTN
Communications, Inc. and Climax Technology Co., Ltd. (9)
10.8 Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (11)
10.9 Asset Purchase Agreement dated July 30, 2003 by and among NTN
Software Solutions, Inc., NTN Communications, Inc., Breakaway
International, Inc. and the Seller Shareholders (16)
10.10 Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc. and Chell Group Corporation (14)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (19)
- -------------
* 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.
28
(6) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 10-K/A filed
on April 5, 2000 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 10-K/A dated
March 5, 2001 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's registration statement on
Form 8-A, File No. 0-19383, and incorporated by reference.
(11) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 2000 and incorporated by reference.
(12) Previously filed as an exhibit to NTN's report on Form 10-Q dated
March 31, 2001 and incorporated by reference.
(13) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 29, 2003 and incorporated herein by reference.
(14) Previously filed as an exhibit to NTN's registration statement on
Form S-3, File No. 333-111538, filed on December 24, 2003 and
incorporated herein by reference.
(15) Previously filed as an exhibit to NTN's Form 10-Q dated August 14,
2003 and incorporated herein by reference.
(16) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 29, 2003 and incorporated herein by reference.
(17) Previously filed as an exhibit to NTN's registration statement on
Form S-3, File No. 333-105429, filed on May 21, 2003 and
incorporated herein by reference.
(18) Previously filed as an exhibit to NTN's Form 10-Q dated May 15, 2003
and incorporated herein by reference.
(19) Furnished concurrently herewith.
29
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 9, 2004 By: /s/ James B. Frakes
--------------------------------
James B. Frakes
Authorized Signatory and Chief
Financial Officer
30
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (4)
3.2 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (7)
3.3 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated March 22, 2000 (8)
3.4 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated March 24, 2000 (8)
3.5 By-laws of the Company (2)
3.6 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated May 27, 2003 (15)
4.1 Specimen Common Stock Certificate (10)
4.2* Stock Option Agreement, dated October 7, 1998, by and between NTN
Communications, Inc. and Stanley B. Kinsey (5)
4.3* Stock Option Agreement, dated October 7, 1999, by and between NTN
Communications, Inc. and Stanley B. Kinsey (6)
4.4* Stock Option Agreement, dated January 26, 2001, by and between NTN
Communications, Inc. and Stanley B. Kinsey (12)
4.5 Warrant Certificate issued January 13, 2003 by NTN Communications,
Inc. to Robert M. and Marjie Bennett, Trustees The Bennett Family
Trust dated 11-17-86 (18)
4.6 NTN Investor Rights Agreement, dated May 7, 2003, by and between NTN
Communications, Inc. and Media General, Inc. (17)
4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and among
NTN Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (17)
4.8 Common Stock Purchase Warrant dated May 7, 2003 issued to Media
General, Inc. exercisable for 500,000 shares of common stock of
Buzztime Entertainment, Inc. (17)
4.9 Form of Common Stock Purchase Warrant issued to Roth Capital
Partners (13)
10.1 License Agreement with NTN Canada (3)
10.2* Employment Agreement, dated September 9, 2004, by and between NTN
Communications, Inc. and Stanley B. Kinsey (1)
10.3 Subscription Agreement dated January 13, 2003 between NTN
Communications, Inc. and Robert M. and Marjie Bennett, Trustees The
Bennett Family Trust dated 11-17-86 (18)
10.4 Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange
of Buzztime Preferred Stock for NTN Common Stock, dated January 16,
2003 (18)
10.5 Securities Purchase Agreement dated May 5, 2003 by and among NTN
Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (17)
10.6 Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners and NTN Communications, Inc. (13)
10.7 Manufacturing Agreement, dated November 25, 1997, by and between NTN
Communications, Inc. and Climax Technology Co., Ltd. (9)
10.8 Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (11)
10.9 Asset Purchase Agreement dated July 30, 2003 by and among NTN
Software Solutions, Inc., NTN Communications, Inc., Breakaway
International, Inc. and the Seller Shareholders (16)
10.10 Asset Purchase Agreement dated December 15, 2003 by and among NTN
Canada, Inc., NTN Communications, Inc., NTN Interactive Network,
Inc. and Chell Group Corporation (14)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (19)
- -------------
* 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.
31
(6) Previously filed as an exhibit to NTN's report on Form 10-Q dated
September 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 10-K/A filed
on April 5, 2000 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 10-K/A dated
March 5, 2001 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's registration statement on
Form 8-A, File No. 0-19383, and incorporated by reference.
(11) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 2000 and incorporated by reference.
(12) Previously filed as an exhibit to NTN's report on Form 10-Q dated
March 31, 2001 and incorporated by reference.
(13) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 29, 2003 and incorporated herein by reference.
(14) Previously filed as an exhibit to NTN's registration statement on
Form S-3, File No. 333-111538, filed on December 24, 2003 and
incorporated herein by reference.
(15) Previously filed as an exhibit to NTN's Form 10-Q dated August 14,
2003 and incorporated herein by reference.
(16) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 29, 2003 and incorporated herein by reference.
(17) Previously filed as an exhibit to NTN's registration statement on
Form S-3, File No. 333-105429, filed on May 21, 2003 and
incorporated herein by reference.
(18) Previously filed as an exhibit to NTN's Form 10-Q dated May 15, 2003
and incorporated herein by reference.
(19) Furnished concurrently herewith.
32