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 June 30, 2005
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 August 5, 2005, the registrant had outstanding 53,579,000 shares of
common stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
JUNE 30,
2005 DECEMBER 31,
ASSETS (PLEDGED) (UNAUDITED) 2004
------------- -------------
Current assets:
Cash and cash equivalents $ 4,647,000 $ 6,710,000
Restricted cash 65,000 66,000
Accounts receivable, net 3,609,000 3,405,000
Investment available-for-sale 422,000 304,000
Inventory 411,000 399,000
Deposits on broadcast equipment 653,000 534,000
Deferred costs 1,041,000 960,000
Prepaid expenses and other current assets 1,168,000 1,128,000
------------- -------------
Total current assets 12,016,000 13,506,000
Broadcast equipment and fixed assets, net 7,772,000 6,451,000
Software development costs, net 728,000 763,000
Deferred costs 1,159,000 922,000
Intangible assets, net 3,289,000 4,011,000
Goodwill 3,658,000 3,658,000
Other assets 141,000 77,000
------------- -------------
Total assets $ 28,763,000 $ 29,388,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,221,000 $ 1,590,000
Accrued expenses 1,346,000 1,125,000
Revolving line of credit 700,000 --
Accrued salaries 282,000 447,000
Accrued vacation 666,000 635,000
Taxes payable 589,000 558,000
Obligations under capital leases 306,000 148,000
Equipment note payable 157,000 620,000
Deferred revenue - Buzztime 706,000 291,000
Deferred revenue - Hospitality Technologies 2,031,000 1,448,000
------------- -------------
Total current liabilities 8,004,000 6,862,000
Obligations under capital leases, excluding current portion 338,000 123,000
Deferred revenue, excluding current portion - Hospitality
Technologies 256,000 368,000
------------- -------------
Total liabilities 8,598,000 7,353,000
------------- -------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock,
$.005 par value, $161,000 liquidation preference,
5,000,000 shares authorized; 161,000 shares issued
and outstanding at June 30, 2005 and December 31, 2004 1,000 1,000
Common stock, $.005 par value, 84,000,000 shares
authorized; 53,519,000 and 53,026,000 shares
issued and outstanding at June 30, 2005 and
December 31, 2004, respectively 266,000 264,000
Additional paid-in capital 109,464,000 109,008,000
Accumulated deficit (89,208,000) (86,769,000)
Accumulated other comprehensive loss (358,000) (469,000)
------------- -------------
Total shareholders' equity 20,165,000 22,035,000
------------- -------------
Total liabilities and shareholders' equity $ 28,763,000 $ 29,388,000
============= =============
See accompanying notes to unaudited condensed consolidated financial statements
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues:
Hospitality Technologies revenues $ 9,397,000 $ 8,477,000 $ 18,610,000 $ 17,276,000
Buzztime service revenues 232,000 39,000 526,000 82,000
Other revenues -- 12,000 -- 14,000
------------ ------------ ------------ ------------
Total revenues 9,629,000 8,528,000 19,136,000 17,372,000
------------ ------------ ------------ ------------
Operating expenses:
Direct operating costs (includes depreciation
of $837,000, $737,000, $1,565,000 and
$1,457,000 for the three months ended June
30, 2005 and 2004 and for the six months
ended June 30, 2005 and 2004, respectively) 3,438,000 2,922,000 6,858,000 6,139,000
Non-cash charge related to software product sales -- -- 276,000 --
Selling, general and administrative 6,710,000 6,175,000 13,036,000 12,320,000
Litigation, legal and professional fees 190,000 370,000 570,000 748,000
Stock based compensation 85,000 40,000 192,000 94,000
Depreciation and amortization 165,000 215,000 420,000 435,000
Research and development 66,000 88,000 125,000 172,000
------------ ------------ ------------ ------------
Total operating expenses 10,654,000 9,810,000 21,477,000 19,908,000
------------ ------------ ------------ ------------
Operating loss (1,025,000) (1,282,000) (2,341,000) (2,536,000)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 25,000 23,000 51,000 42,000
Interest expense (49,000) (28,000) (73,000) (66,000)
Other income -- 225,000 -- 225,000
------------ ------------ ------------ ------------
Total other income (expense) (24,000) 220,000 (22,000) 201,000
------------ ------------ ------------ ------------
Net loss before income taxes (1,049,000) (1,062,000) (2,363,000) (2,335,000)
Provision for income taxes 43,000 12,000 76,000 33,000
------------ ------------ ------------ ------------
Net loss $ (1,092,000) $ (1,074,000) $ (2,439,000) $ (2,368,000)
============ ============ ============ ============
Net loss per common share - basic and diluted: $ (0.02) $ (0.02) $ (0.05) $ (0.05)
============ ============ ============ ============
Weighted average shares outstanding - basic
and diluted 53,403,000 52,703,000 53,313,000 52,290,000
============ ============ ============ ============
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss ......................................... $(1,092,000) $(1,074,000) $(2,439,000) $(2,368,000)
----------- ----------- ----------- -----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments ....... (8,000) (44,000) (7,000) (59,000)
Unrealized holding gain (loss) in investment
available for sale ........................... (62,000) (29,000) 118,000 (19,000)
----------- ----------- ----------- -----------
Other comprehensive income (loss) ................ (70,000) (73,000) 111,000 (78,000)
----------- ----------- ----------- -----------
Comprehensive net loss ........................... $(1,162,000) $(1,147,000) $(2,328,000) $(2,446,000)
=========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
SIX MONTHS ENDED
----------------
JUNE 30, JUNE 30,
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (2,439,000) $ (2,368,000)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,985,000 1,892,000
Provision for doubtful accounts 513,000 219,000
Non-cash stock-based compensation 192,000 94,000
Non-cash charge related to software product sale 343,000 --
Provision for warranties 2,000 --
Provision for sales returns 2,000 --
Loss from disposition of equipment and capitalized
software 175,000 18,000
Changes in assets and liabilities:
Accounts receivable (721,000) (884,000)
Inventory (12,000) (42,000)
Deferred costs (316,000) (311,000)
Prepaid expenses and other assets (96,000) (274,000)
Accounts payable and accrued expenses (188,000) (336,000)
Income tax payable (55,000) (27,000)
Deferred revenue 888,000 193,000
------------ ------------
Net cash provided by (used in) operating activities 273,000 (1,826,000)
------------ ------------
Cash flows from investing activities:
Capital expenditures (2,279,000) (1,218,000)
Acquisition of businesses -- (82,000)
Software development expenditures (270,000) (194,000)
Deposits on broadcast equipment (123,000) (32,000)
------------ ------------
Net cash used in investing activities (2,672,000) (1,526,000)
------------ ------------
Cash flows from financing activities:
Principal payments on capital leases (147,000) (86,000)
Principal payments on equipment notes payable (462,000) (571,000)
Borrowings from revolving line of credit 700,000 --
Principal payments on revolving line of credit -- (1,000,000)
Proceeds from issuance of common stock,
net of offering expenses -- 13,001,000
Proceeds from exercise of stock options and warrants 265,000 320,000
------------ ------------
Net cash provided by financing activities 356,000 11,664,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,043,000) 8,312,000
Effect of exchange rate on cash (20,000) 2,000
Cash and cash equivalents at beginning of period 6,710,000 2,503,000
------------ ------------
Cash and cash equivalents at end of period $ 4,647,000 $ 10,817,000
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
SIX MONTHS ENDED
----------------
JUNE 30, JUNE 30,
2005 2004
----------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 69,000 $ 66,000
=========== ========
Income taxes $ 44,000 $ 72,000
=========== ========
Supplemental disclosure of non-cash investing and
financing activities:
Equipment acquired under capital leases and
notes payable $ 522,000 $674,000
=========== ========
Unrealized holding loss (gain) on investments $ (118,000) $ 19,000
=========== ========
Issuance of common stock in payment of dividends $ 8,000 $ 8,000
=========== ========
Issuance of warrants in association with equity
offering $ -- $655,000
=========== ========
Investment in limited partnership $ 69,000 $ --
=========== ========
Supplemental non-cash disclosure of acquisition of
businesses:
Goodwill and Intangible assets $ -- $ 36,000
=========== ========
Supplemental non-cash disclosure of warrants exercised - Allen & Company LLC
exercised warrants for approximately 433,000 shares into approximately 284,000
shares of NTN common stock on a cashless exercise basis.
See accompanying notes to unaudited condensed consolidated financial statements
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2005
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
financial statements include all adjustments (consisting of only normal,
recurring 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 condensed 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, 2005.
The condensed consolidated financial statements for the three months
and six months ended June 30, 2005 and 2004 are unaudited and should be read in
conjunction with the consolidated financial statements and notes thereto
included in our Form 10-K/A for the year ended December 31, 2004.
We have reclassified depreciation and amortization expense to direct
operating costs for certain assets 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss As reported .............................. $(1,092,000) $(1,074,000) $(2,439,000) $(2,368,000)
Add: stock-based employee compensation
expense included in reported net
loss, net of related tax effects .... -- -- -- 2,000
Deduct: stock-based employee
compensation expense, net of
related tax effects .................. (358,000) (417,000) (916,000) (777,000)
----------- ----------- ----------- -----------
Pro forma net loss ....................... $(1,450,000) $(1,491,000) $(3,355,000) $(3,143,000)
Basic and diluted net loss As reported .............................. $ (0.02) $ (0.02) $ (0.05) $ (0.05)
per share
Pro forma ................................ $ (0.03) $ (0.03) $ (0.06) $ (0.06)
The per share weighted-average fair value of stock options granted
during the three months ended June 30, 2005 and 2004 was $1.17 and $2.02,
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: 2005 -- dividend yield of 0%, risk-free interest
rate of 3.73%, expected volatility of 75.6%, and expected life of 4.8 years; and
2004 -- dividend yield of 0%, risk-free interest rate of 3.29%, expected
volatility of 88.25%, and expected life of 4.0 years
The per share weighted-average fair value of stock options granted
during the six months ended June 30, 2005 and 2004 was $1.91 and $2.61,
respectively. The fair value of each option grant is estimated on the date of
6
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 2005 -- dividend yield of 0%, risk-free interest
rate of 3.73%, expected volatility of 75.5%, and expected life of 4.8 years; and
2004 -- dividend yield of 0%, risk-free interest rate of 3.04%, expected
volatility of 90.86%, and expected life of 4.7 years. In compliance with APB No.
25, we expensed $0 and $2,000 for the six months ended June 30, 2005 and 2004,
associated with the grants of 80,000 options in 2000 below market value pursuant
to the Option Plan.
We account for options and warrants issued to non-employees in exchange
for services in accordance with SFAS No. 123 and EITF 96-18, ACCOUNTING FOR
EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES. We estimate the fair value of
options and warrants using the Black-Scholes option-pricing model. For
agreements which require that achievement of specific performance criteria be
met in order for the options or warrants to vest, the measurement date is the
date at which the specific performance criteria are met. Prior to the
measurement date, options and warrants subject to vesting based on the
achievement of specific performance criteria that, based on different possible
outcomes, result in a range of aggregate fair values are measured at each
financial reporting period at their lowest aggregate then-current fair value,
while options and warrants which vest over the service period or at completion
of the service period are measured at each financial reporting period at their
then-current fair value, for purposes of recognition of costs during those
periods. For agreements which provide for services to be rendered without the
requirement of specific performance criteria, we measure the fair value of the
options and warrants at the earlier of the date the services are completed or
the date the options and warrants vest and are non-forfeitable. Generally,
services are not rendered prior to the grant date and the related agreements do
not contain performance commitments. Accordingly, the measurement date for
compensation expense occurs subsequent to the grant date. From the grant date to
the measurement date, compensation expense is estimated at each financial
reporting period and is recorded over the service period. The unvested options
and warrants continue to be remeasured at each financial reporting period until
they vest or until the services are completed. For agreements which provide
options and warrants for services already rendered, the options and warrants
immediately vest and the measurement date is the date of grant. Modifications
that increase the fair value of the warrants are treated as an exchange of the
original warrant for a new one. Additional compensation expense related to
modifications, if any, is recorded over the remaining service period.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" and
superseding APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires the Company to expense grants made under the stock option and
employee stock purchase plan programs. That cost will be recognized over the
vesting period of the plans. SFAS No. 123R is effective for the first annual
period beginning after June 15, 2005. Upon adoption of SFAS No. 123R, amounts
previously disclosed on a pro forma basis under SFAS No.123 will be recorded in
the consolidated income statement. We are evaluating the alternatives allowed
under the standard, which we are required to adopt beginning in the first
quarter of 2006. We believe that this new standard will increase our operating
losses but we cannot currently estimate the impact on our financial statements
beyond the proforma effect in the table above.
3. LOSS PER SHARE
For the three months ended June 30, 2005 and 2004, and six months ended
June 30, 2005 and 2004, the weighted average of options, warrants, deferred
stock units and convertible preferred stock representing approximately
11,864,000, 12,095,000, 11,982,000 and 11,936,000 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" or
"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 and licenses our trivia and live sports "Play-Along"
content to both the NTN iTV Network and consumer interactive platforms, and is
selling the Buzztime(R) Channel, 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
7
Technologies revenues comprised approximately 97% of our total revenue for the
six months ended June 30, 2005. Buzztime's revenue is primarily generated from
the distribution and licensing 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 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.
The following tables set forth certain information regarding our
segments and other operations:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues
NTN iTV Network (includes "other revenues") $ 6,920,000 $ 6,029,000 $ 13,712,000 $ 12,345,000
NTN Wireless 1,504,000 1,551,000 2,971,000 3,090,000
Software Solutions 973,000 909,000 1,927,000 1,855,000
------------ ------------ ------------ ------------
NTN Hospitality Technologies division 9,397,000 8,489,000 18,610,000 17,290,000
Buzztime 232,000 39,000 526,000 82,000
------------ ------------ ------------ ------------
Total revenue $ 9,629,000 $ 8,528,000 $ 19,136,000 $ 17,372,000
============ ============ ============ ============
Operating income (loss)
NTN iTV Network $ 148,000 $ 212,000 $ 114,000 $ 458,000
NTN Wireless 240,000 115,000 289,000 165,000
Software Solutions (421,000) (510,000) (1,091,000) (1,079,000)
------------ ------------ ------------ ------------
NTN Hospitality Technologies division (33,000) (183,000) (688,000) (456,000)
Buzztime (992,000) (1,099,000) (1,653,000) (2,080,000)
------------ ------------ ------------ ------------
Operating loss $ (1,025,000) $ (1,282,000) $ (2,341,000) $ (2,536,000)
============ ============ ============ ============
Net income (loss)
NTN iTV Network $ 82,000 $ 420,000 $ 19,000 $ 626,000
NTN Wireless 240,000 115,000 289,000 165,000
Software Solutions (421,000) (510,000) (1,091,000) (1,079,000)
------------ ------------ ------------ ------------
NTN Hospitality Technologies division (99,000) 25,000 (783,000) (288,000)
Buzztime (993,000) (1,099,000) (1,656,000) (2,080,000)
------------ ------------ ------------ ------------
Net loss $ (1,092,000) $ (1,074,000) $ (2,439,000) $ (2,368,000)
============ ============ ============ ============
JUNE 30, DECEMBER 31,
2005 2004
------------ ------------
Goodwill
NTN iTV Network $ 974,000 $ 974,000
NTN Wireless 449,000 449,000
Software Solutions 2,235,000 2,235,000
------------ ------------
NTN Hospitality Technologies division 3,658,000 3,658,000
Buzztime -- --
------------ ------------
Total revenue $ 3,658,000 $ 3,658,000
============ ============
5. CONTINGENCIES
From time to time, state tax authorities will make inquiries as to
whether or not a portion of our services might require the collection of sales
and use taxes from customers in those states. In the current difficult economic
climate, many states are expanding their interpretation of their sales and use
tax statutes to derive additional revenue. While in the past our sales and use
tax assessments have not been significant to our operations, it is likely that
such expenses will grow in the future.
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 concluded that our services are subject to
sales taxes on an amusement services basis. On January 12, 2004, the state
8
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 services are not
provided for the purpose of amusing our customers but to provide our customers
the right to use our games to provide amusement to others. The service is
designed to encourage patrons to visit our customers' establishments, stay
longer and spend more. As such, we believe our services are tax exempt
promotional and marketing services and fall 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. We are seeking to reach a mutually agreeable conclusion at the
administrative appeals level and we expect that a conclusion may be reached by
the end of 2005. In the event the matter is not resolved at administrative
appeals, we would likely take the matter before the District Court. At the
District Court level, we would anticipate a resolution no earlier than 2006.
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.
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 Comcast Cable
Communications Management LLC (Comcast) that involves developing the Buzztime
Channel for potential deployment within that operator's system. The Trial
Agreement was amended on March 31, 2005 to include payments of license fees and
development costs. The Trial Agreement now runs through December 2005. During
the six months ended June 30, 2005, we recognized $226,000 of revenue under the
Trial Agreement compared to $10,000 recognized in the six months ended June 30,
2004. As of June 30, 2005, $695,000 of revenue has been deferred for future
license fees and software development for Comcast.
7.SALE OF SOFTWARE PRODUCTS
On February 4, 2005, we entered into an Asset Purchase Agreement with
Intura Solutions LP (Intura), a Texas limited partnership, pursuant to which we
sold the point of sale software products developed and maintained by our
Software Solutions segment. In accordance with the asset purchase transaction,
Gary Peek terminated his position as vice president and general manager of our
Software Solutions segment and immediately thereafter commenced his position
with Intura to oversee business operations.
The primary software products sold by us to Intura were Vision, Relief
Manager Plus (RMP), Store Link Plus (SLP), Sell More Pizzas and other legacy
products as well as a non-exclusive right to develop and market the Enterprise
software. We received a non-dilutable 10% partnership interest in Intura in the
transaction and will receive 20% of Intura's revenues received during the next
two years, up to a maximum of $100,000. Further, Intura will provide software
development maintenance services for the RMP and SLP software for two years (we
continue to retain the rights to the maintenance and support revenue from the
legacy products).
We engaged a third party valuation firm to assist in determining the
fair value of our 10% ownership interest in Intura. Based upon that analysis, we
concluded that the fair value of our investment in Intura was approximately
$69,000. Additionally, based on that analysis, we considered whether this
transaction resulted in any impairment of the goodwill in the Software Solutions
segment and we concluded that it did not result in any such impairment. The sale
of the software products, which we carried as part of our intangible assets,
resulted in a one-time, non-cash charge of $276,000. That amount would have been
amortized over the remaining four year life of those intangible assets if they
had been retained by the Company.
8. 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 and of our U.K. operations 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 months
and six months ended June 30, 2005 and 2004, the components of accumulated other
comprehensive loss were as follows:
9
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
-------------- -------------- -------------- --------------
Beginning balance $ (288,000) $ (633,000) $ (469,000) $ (628,000)
Unrealized loss in investment
available-for-sale (62,000) (29,000) 118,000 (19,000)
Foreign currency translation
adjustments (8,000) (44,000) (7,000) (59,000)
-------------- -------------- -------------- --------------
Ending balance $ (358,000) $ (706,000) $ (358,000) $ (706,000)
============== ============== ============== ==============
The comprehensive losses for the three and six month periods ended June
30 were as follows:
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
-------------- -------------- -------------- --------------
Net loss $ (1,092,000) $ (1,074,000) $ (2,439,000) $ (2,368,000)
Comprehensive loss (70,000) (73,000) 111,000 (78,000)
-------------- -------------- -------------- --------------
Comprehensive net loss $ (1,162,000) $ (1,147,000) $ (2,328,000) $ (2,446,000)
============== ============== ============== ==============
9.LINE OF CREDIT
In February 2005, we amended our $1 million line of credit with Pacific
Mercantile Bank to extend the maturity date from February 1, 2005 to February
11, 2006. As of June 30, 2005, we have borrowed $700,000 against the line of
credit and we were in compliance with our covenant. The line is secured by all
inventories, equipment, accounts receivable and various other assets.
10. MEDIA GENERAL INVESTMENT
On May 6, 2003, Media General, Inc., a communications company with
interests in newspapers, television stations, interactive media and diversified
information services, made a $3.0 million investment in NTN. In return for the
investment, we issued and sold 2,000,000 shares of unregistered NTN common stock
through a private offering to Media General. Pursuant to the terms of the
transaction, upon receipt of $3.0 million from Media General, we issued the
unregistered shares along with fully vested warrants to purchase 500,000 shares
of Buzztime common stock at $3.46 per share, exercisable through May 7, 2007. In
connection with the Buzztime common stock, the parties agreed that Media General
would have co-sale rights and NTN would have certain drag-along rights. Media
General has the right to convert each share of Buzztime common stock into two
shares of NTN common stock (subject to adjustment ) on the second and fourth
anniversaries of the transaction date, in the event of a sale of NTN, upon
certain bankruptcy and other insolvency proceedings of Buzztime, and in certain
circumstances if NTN exercises its drag-along rights. Media General has the
further right to convert the warrant to purchase 500,000 shares of Buzztime
common stock into a warrant to purchase 1,000,000 shares of NTN common stock at
$1.73 per NTN share (subject to adjustment) in the event of bankruptcy or
insolvency of Buzztime. NTN has the right to require Media General to convert
its equity interests in Buzztime into equity interests in NTN if there is a sale
of NTN. As of May 7, 2005, Media General did not exercise its right to convert
the Buzztime common shares into NTN common shares, so this right has expired
until the fourth anniversary of the transaction date.
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/A FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2004 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.
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.
SIX MONTHS ENDED JUNE 30,
2005 2004
------------------- -------------------
Revenues
--------
NTN Hospitality Technologies division
(includes "other revenues") ...................... $ 18,610,000 97% $ 17,290,000 99%
Buzztime............................................ 526,000 3% 82,000 1%
------------ --- ------------- ---
Total........................................... $ 19,136,000 100% $ 17,372,000 100%
============ === ============= ===
Operating Income (Loss)
-----------------------
NTN Hospitality Technologies division............... $ (688,000) $ (456,000)
Buzztime............................................ (1,653,000) (2,080,000)
------------ -------------
Total........................................... $ (2,341,000) $ (2,536,000)
============ =============
Our objective is to leverage our unique interactive entertainment as a
means of growing our business units--first, as a developer and distributor of
interactive entertainment for consumer markets via our NTN iTV Network and via
Buzztime licensing to other interactive platforms and second, as a leading
provider of interactive communications and software offerings to the hospitality
industry through the NTN Hospitality Technologies division.
NTN HOSPITALITY TECHNOLOGIES DIVISION
- -------------------------------------
NTN iTV Network
- ---------------
The NTN iTV Network transmits a wide variety of popular interactive
games, advertisements and informational programming delivered daily to consumers
in 3,832 restaurants, sports bars and taverns throughout the United States and
Canada and to 11 pubs in the United Kingdom as of June 30, 2005.
11
We seek to continue to increase the number of hospitality locations
serviced by the NTN iTV Network. We are currently accomplishing this by
expanding our interactive programming content to appeal to a broader consumer
base and expanding our sales and distribution "footprint" through both direct
sales and independent dealer and reseller channels. The Network recently
expanded beyond our core Sports and Quiz Show programming to now include NTN
BlastTM, an additional programming channel 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
and Texas Hold'em poker.
NEW DEVELOPMENTS - At June 30, 2005, our combined North America site
count of 3,832 subscribing sites is the highest in our history. During the past
five quarters, we have experienced the most significant increase in domestic iTV
site sales in seven years. NTN iTV Network's net site growth of 118 sites in
North America in the second quarter of 2005 was the strongest second quarter net
site growth in the Company history.
Management attributes the strong site growth during the first six
months of 2005 to the continued rollout of our NTN Blast content which began in
March 2004, including the Texas Hold `em poker game launched in first quarter of
2005, as well as a restructured sales force. The growth came on second quarter
sales of 323 new subscribers, and six-month sales of 672 new subscribers. The
six-month sales number is a 44% improvement over sales in the first six months
of 2004, when NTN Blast was announced. Since the NTN Blast introduction in March
2004, site sales have increased significantly with a 97% increase above the
first six month average total sales for the five years prior to the NTN Blast
introduction. As revenues in this segment are derived monthly, most revenues as
a result of this six-month sales increase will be recognized in future quarters.
We are also seeking to increase revenue by growing the NTN iTV Network
in the United Kingdom. July 2005 marked the first pro-active sales efforts to
sell subscriptions to the UK-based network, called in the UK "The Buzztime
Network," following a successful trial of the system in March through June 2005
at eleven UK pub locations. We have now begun to enter into agreements with pub
owners to install and operate our Network. We do not anticipate being able to
substantially determine our degree of success regarding this initiative until
the first quarter of 2006.
NTN Wireless and Software Solutions
- -----------------------------------
NTN Wireless offers a complete line of on-site wireless communication
management products to improve the customer experience and front-of-store
efficiencies. NTN Wireless also offers on site messaging solutions for
hospitals, church and synagogue nurseries, salons, business offices, and retail
establishments. Software Solutions designs, develops, and markets innovative
software for the restaurant and hospitality industry, with corresponding
fee-based technical support.
We seek to increase the number of hospitality locations serviced by
these segments by engineering more value-added features; expanding our sales and
distribution "footprint" through both direct sales and independent dealer and
reseller channels, as well as increasing technical support revenue. The
installed base using our Software Solutions unit's ProHost Table Management and
Reservation Management software products include Cheesecake Factory, Houston's,
J.Alexander's, MGM/Mirage, Harrah's and others. We believe our software products
are among the best in the industry and are being adopted to a greater degree now
than in past periods. We also continue to expand contracted technical support
and services revenue with Domino's Pizza.
NEW DEVELOPMENTS - We are now integrating sale and marketing of new
Wireless products with our Software Solutions segment under a unique "Speed of
Service" initiative. Our newest wireless pager product, called SmartCallTM, uses
an LCD display to inform the guest of his/her expected wait-time, as calculated
by our ProHost(R) Table Management System. We believe that this integrated
initiative will increase future revenues of both product lines.
In our Software Solutions segment, we signed an agreement with a major
hospitality group during the second quarter that is expected to bring the
Company over $1 million in licensing revenues in the coming 12 months. In
addition, we are aggressively seeking to increase points of distribution of our
hospitality products via software resellers, and have increased reseller
relationships from zero at the beginning of 2005 to 22 at the end of six months,
with a goal of growing this number in coming quarters. We believe sales of these
products can lead to substantial future earnings for the Company.
BUZZTIME ENTERTAINMENT SUBSIDIARY
- ---------------------------------
Buzztime is a developer and distributor of multiplayer interactive
games and technology for numerous interactive consumer platforms, including the
NTN iTV Hospitality Network, interactive cable television, satellite television,
mobile phones, airline in-flight entertainment systems and now as a retail game.
Our Buzztime(R) Channel is the first continuous multiplayer, game service
created exclusively for U.S. digital cable TV audiences. Buzztime features
play-along trivia games for players of all interests and ability levels with
real-time competition and rankings among households and across cable TV systems
12
and other popular single-player games. Buzztime's revenue is primarily generated
from the distribution and licensing of its interactive trivia games, live
"Play-Along" sports games and other games to emerging consumer platforms, as
well as revenue related to development and production services for third
parties.
To accomplish our objectives we are primarily pursuing business
strategies to develop and distribute the Buzztime Channel and other games to
cable TV and satellite TV operators with the intent to remain a leading U.S.
multi-player interactive television game channel. We have adapted or are
planning to adapt our interactive game content and technology to the various
leading interactive television platforms and have developed new content and
licensed additional game content for deployment into the U.S. digital cable
interactive television market. As Buzztime gains distribution with cable
television operators, our objective is 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.
Buzztime also licenses Buzztime games to other consumer platforms with
the intent of realizing new sources of licensing revenue, enhancing the value of
the Buzztime brand and improving the value of our brand to the cable TV
operators. To that end, Buzztime trivia is available in the form of player cards
and an electronic plug-and-play TV game under a license agreement with Cadaco,
Inc., a retail game and toy company. We have also licensed certain
Buzztime-branded trivia games to a mobile entertainment production company for
distribution to North American wireless carriers as a consumer subscription game
service for certain mobile phones. Furthermore, we have entered into an
agreement with a provider of airline in-flight entertainment to provide trivia
game content to passengers on iTV-enabled airlines.
NEW DEVELOPMENTS - In June, we received the first royalty payment from
our licensee, Cadaco Inc., from the sale of Cadaco's new "Buzztime Home Trivia
System" plug-and-play electronic game. Cadaco has achieved broad distribution of
this new game in stores across the U.S., and is scheduled to be in 9,000 North
America retail outlets including Wal-Mart, Kmart, Target, Toys R Us, Sears and
others by September 30, 2005 in preparation for holiday sales. We believe that
royalties from the sale of this new product will bring a substantial growth in
Buzztime revenues in the fourth quarter of 2005. Buzztime has also seen
increased recurring revenues from distribution to cable, satellite and mobile
platforms, which we believe will continue to grow in future periods.
There can be no assurance, however, that we will be successful in
executing any of the strategies described above.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
Operations for the three months ended June 30, 2005 resulted in a net
loss of $1,092,000 compared to a net loss of $1,074,000 for the three months
ended June 30, 2004.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$908,000, or 11%, to $9,397,000 from $8,489,000 for the three months ended June
30, 2004. The revenue contribution from the three operating segments of the
division for the three months ended June 30, 2005 and 2004 are shown in the
following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
Three Months Ended June 30,
---------------------------
2005 2004 Change
---- ---- ------
NTN iTV Network* $6,920,000 $6,029,000 $891,000
NTN Wireless 1,504,000 1,551,000 (47,000)
Software Solutions 973,000 909,000 64,000
----------- ----------- ---------
Total Revenue of Division $9,397,000 $8,489,000 $908,000
=========== =========== =========
(* For the purpose of this analysis, the NTN iTV Network's revenues include
$0 and $12,000 of "other" revenues for the three months ended June 30, 2005
and 2004, respectively.)
13
Within the NTN iTV Network segment there are several revenue contributors,
including our subscription revenue from core hospitality operations, revenue
from our Canadian operations, 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 June 30,
---------------------------
2005 2004 Change
---- ---- ------
U.S. Subscription Revenues $ 5,707,000 $ 5,084,000 $ 623,000
Subscription and Installation Revenue from Canadian
Operations 916,000 685,000 231,000
Advertising and Special Events Revenue - United States 40,000 24,000 16,000
Advertising Revenue and Special Events - Canada 95,000 91,000 4,000
U.S. Installation Revenue 162,000 145,000 17,000
------------ ------------- ------------
Total NTN iTV Network $ 6,920,000 $ 6,029,000 $ 891,000
============ ============= ============
As noted in the above table, our subscription revenue from core
domestic hospitality operations increased by $623,000, or 12%, in the second
quarter of 2005 due to an increase in net site count. Additionally, our Canadian
subscription and installation revenue increased by $231,000, or 34%, in the
second quarter of 2005.
In the three months ended June 30, 2005, we added a net number of 100
new sites in the United States compared to a net increase of 83 new domestic
sites in the three months ended June 30, 2004. The NTN iTV Network customer site
count in the United States at June 30, 2005 was 3,454. This was an increase of
324 sites over June 30, 2004. In the three months ended June 30, 2005, we added
a net number of 18 new sites in Canada. Our Canadian site count at June 30, 2005
was 378, bringing total North America sites to 3,832, the highest in the
Company's history.
Revenues from NTN Wireless decreased by $47,000 from $1,551,000 in the
three months ended June 30, 2004 to $1,504,000 in the three months ended June
30, 2005. We do not consider this decrease to be a significant change.
Revenues from Software Solutions increased by $64,000 from $909,000 in
the three months ended June 30, 2004 to $973,000 in the three months ended June
30, 2005 due to the recognition of deferred revenue from 2004.
Buzztime revenues increased $193,000 to $232,000 in the three months
ended June 30, 2005 from $39,000 in the three months ended June 30, 2004. The
primary components in the $193,000 revenue increase were subscription revenues
and royalties on game products.
As a result of the above factors, NTN's consolidated revenues increased
$1,101,000, or 13%, to $9,629,000 in the three months ended June 30, 2005 from
$8,528,000 in the three months ended June 30, 2004.
OPERATING EXPENSES
Consolidated direct operating costs increased $516,000, or 18%, to
$3,438,000 in the three months ended June 30, 2005 from $2,922,000 in the three
months ended June 30, 2004. The following table compares the direct costs for
each of our operating segments between the three months ended June 30, 2005 and
2004:
14
DIRECT OPERATING COSTS
Three Months Ended June 30,
---------------------------
2005 2004 Change
---- ---- ------
NTN iTV Network $ 2,007,000 $1,619,000 $ 388,000
NTN Wireless 798,000 883,000 (85,000)
Software Solutions 162,000 128,000 34,000
------------ ---------- ----------
Hospitality Technologies division 2,967,000 2,630,000 337,000
Buzztime 471,000 292,000 179,000
------------ ---------- ----------
Consolidated $ 3,438,000 $2,922,000 $ 516,000
============ ========== =========
The primary drivers in the $516,000 increase in our direct operating
costs was the $388,000 increase in the direct operating costs in the NTN iTV
Network and the $179,000 increase in the direct operating costs of Buzztime. The
reductions in direct operating costs in the NTN Wireless segment helped
partially offset the increase in the NTN iTV Network segment.
The $388,000 increase in the NTN iTV Network's direct operating costs
came from a variety of factors, including:
o $87,000 of the increase came from NTN Canada. The largest
single component of the increase in NTN Canada was an increase
in direct depreciation of $84,000 due to installation of new
site equipment at new and existing sites. Prior to our
acquisition of that operation, the site equipment in Canada
was largely fully depreciated;
o $26,000 of direct expenses related to our trial in the UK
without any corresponding expenses in the three months ended
June 30, 2004;
o $123,000 of the increase came from communication costs due to
the higher costs of the satellite service in accordance with a
new agreement signed in December 2004 and acquisition of
increased bandwidth;
o $96,000 of the increase came from increased technical site
service expense. This expense was due to an increase in the
number of technical service visits to our sites due to new
software releases;
o $40,000 of the increase came from increased domestic
installation expense. This expense was due to our continued
site count growth.
The $85,000 decrease in the direct operating costs of NTN Wireless was
related to the lower level of cost of goods sold associated with the NTN
Wireless revenue decrease of $47,000 noted above as well as an increase in gross
margin. Our gross margin in the NTN Wireless segment in the three months ended
June 30, 2005 was 47%, a 4% increase over the 43% gross margin we recorded in
the three months ended June 30, 2004.
The $34,000 increase in the direct operating costs of Software
Solutions was related to an increased level of costs of goods sold based on a
higher concentration of hardware shipments associated with the Software
Solutions revenue increase of $64,000 in the three months ended June 30, 2005
compared to the three months ended June 30, 2004. Our gross margin in the
Software Solutions segment in the three months ended June 30, 2005 was 83%,
which represented a 3% decrease over the 86% gross margin we recorded in the
three months ended June 30, 2004.
The $179,000 increase in the direct operating costs of Buzztime was
primarily due to a $134,000 of salary production costs that were directly
associated with the increase in production revenue.
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses (SG&A)
increased $535,000 or 9%, to $6,710,000 in the three months ended June 30, 2005
from $6,175,000 in the three months ended June 30, 2004. The following table
compares the selling, general and administrative expenses for each of our
operating segments between the three months ended June 30, 2005 and 2004:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended June 30,
---------------------------
2005 2004 Change
---- ---- ------
NTN iTV Network $4,307,000 $3,696,000 $611,000
NTN Wireless 453,000 399,000 54,000
Software Solutions 1,242,000 1,260,000 (18,000)
----------- ---------- ---------
Hospitality Technologies division 6,002,000 5,355,000 647,000
Buzztime 708,000 820,000 (112,000)
----------- ---------- ---------
Consolidated $6,710,000 $6,175,000 $535,000
=========== ========== =========
The $611,000 SG&A increase in the NTN iTV Network segment came from a
variety of factors, including:
o $248,000 of SG&A expenses related to our trial in the UK
without any corresponding expenses in the three months ended
June 30, 2004;
o Increased domestic sales commissions of $80,000 relating to
the increase in new site sales:
o Increased estimate for bad debts of $88,000;
o Increased marketing and travel and entertainment expenses of
$81,000 associated with the launch of NTN BlastTM content and
the new iTV dual-channel technology platform and rollout of an
independent dealer network.
The $54,000 increase in the SG&A expenses of NTN Wireless was primarily
due to an increase in personnel.
The $18,000 reduction in the SG&A expenses of Software Solutions was
primarily due to personnel reductions.
The $112,000 reduction in the SG&A expenses of Buzztime was primarily
due to personnel reductions.
LITIGATION, LEGAL AND PROFESSIONAL FEES
Litigation, legal and professional fees decreased $180,000 to $190,000
in the three months ended June 30, 2005 compared to $370,000 in the three months
ended June 30, 2004. The litigation, legal and professional fees in the three
months ended June 30, 2004 included $133,000 of legal expenses to defend the
litigation against NTN Wireless with no comparable expense in the three months
ended June 30, 2005. The three months ended June 30, 2004 included $81,000 of
Sarbanes-Oxley-related expenses compared to $20,000 in the three months ended
June 30, 2005.
STOCK BASED COMPENSATION
Stock based compensation expense increased by $45,000 to $85,000 in the
three months ended June 30, 2005 compared to $40,000 in the three months ended
June 30, 2004. This increase largely arises from recognition of non-cash expense
associated with the grants of certain deferred stock units to our executives in
third quarter 2004 under the 2004 Performance Incentive Plan.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
decreased by $50,000, or 23%, to $165,000 in the three months ended June 30,
2005 from $215,000 in the three months ended June 30, 2004 due to certain assets
becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $22,000 to $66,000 in the
three months ended June 30, 2005 from $88,000 in the three months ended June 30,
2004, due primarily to the completion of certain projects for the iTV network.
16
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the three months ended June 30, 2005 was $25,000
compared to $23,000 in the three months ended June 30, 2004.
Interest expense increased $21,000, or 75%, to $49,000 in the three
months ended June 30, 2005, compared to $28,000 in the three months ended June
30, 2004, due to borrowing on our line of credit and additional leases entered
into in 2005.
INCOME TAXES
The NTN Hospitality Technologies division is expected to report taxable
income for the year ended December 31, 2005. For federal income tax reporting
purposes and in unitary states where 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. We also expect to pay income taxes in Canada
due to the profitability of NTN Canada. As a result, NTN Hospitality
Technologies recorded a tax provision of $43,000 in the three months ended June
30, 2005. This was a $31,000 increase over the $12,000 provision for income
taxes recorded in the three months ended June 30, 2004.
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 improved by $82,000 to negative $23,000 in the three months
ended June 30, 2005 from EBITDA of negative $105,000 in the three months ended
June 30, 2004.This EBITDA improvement was due to the increase in interest
expense (net), depreciation and amortization expense and income tax expense
offset by the increase in loss in the three months ended June 30, 2005.
The improvement in EBITDA was achieved despite last year's Q2
benefiting from a one-time legal settlement of $225,000 and despite this year
incurring $307,000 in costs for the launch of our iTV Hospitality Network in the
UK. Without these items, consolidated Q2 EBITDA would have improved by an
additional $532,000 to $284,000.
The following table reconciles our net loss per GAAP to EBITDA:
THREE MONTHS ENDED
JUNE 30,
----------------------------
2005 2004
----------- -----------
EBITDA CALCULATION
Net loss per GAAP $(1,092,000) $(1,074,000)
Interest expense (net) 24,000 5,000
Depreciation and amortization 1,002,000 952,000
Income taxes 43,000 12,000
----------- -----------
EBITDA $ (23,000) $ (105,000)
=========== ===========
On a segment basis, our segments generated EBITDA levels as presented
below:
($000) THREE MONTHS ENDED
JUNE 30, 2005
-----------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
------- -------- --------- ---------- -------- -------
Net income (loss) $ 82 $ 240 $ (421) $ (99) $ (993) $(1,092)
Interest expense (net) 23 -- -- 23 1 24
Depreciation and amortization 744 14 85 843 159 1,002
Income taxes 43 -- -- 43 -- 43
------- -------- --------- ---------- -------- -------
EBITDA $ 892 $ 254 $ (336) $ 810 $ (833) $ (23)
======= ======== ========= ========== ======== =======
17
($000) THREE MONTHS ENDED
JUNE 30, 2004
-----------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
------- -------- --------- ---------- -------- -------
Net income (loss) $ 420 $ 115 $ (510) $ 25 $ (1,099) $(1,074)
Interest expense (net) 5 -- -- 5 -- 5
Depreciation and amortization 704 19 94 817 135 952
Income taxes 12 -- -- 12 -- 12
------- -------- --------- ---------- -------- -------
EBITDA $ 1,141 $ 134 $ (416) $ 859 $ (964) $ (105)
======= ======== ========= ========== ======== =======
SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
Operations for the six months ended June 30, 2005 resulted in a net
loss of $2,439,000 compared to a net loss of $2,368,000 for the six months ended
June 30, 2004.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$1,320,000, or 8%, to $18,610,000 for the six months ended June 30, 2005 from
$17,290,000 for the six months ended June 30, 2004. The revenue contribution
from each operating segment of the division for the six months ended June 30,
2005 and 2004 are shown in the following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
Six Months Ended June 30,
-------------------------
2005 2004 Change
---- ---- ------
NTN iTV Network* $ 13,712,000 $ 12,345,000 $ 1,367,000
NTN Wireless 2,971,000 3,090,000 (119,000)
Software Solutions 1,927,000 1,855,000 72,000
-------------- ------------- ------------
Total Revenue of Division $ 18,610,000 $ 17,290,000 $ 1,320,000
============== ============= ============
(* For the purpose of this analysis, the NTN iTV Network's revenues include $0
and $14,000 of "other" revenues for the six months ended June 30, 2005 and 2004,
respectively.)
Within the NTN iTV Network segment there are several revenue
contributors, including our subscription revenue from core hospitality
operations, revenue from our Canadian operations, advertising revenue and
installation revenue. The primary revenue components are broken out in the
following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
Six Months Ended June 30,
-------------------------
2005 2004 Change
---- ---- ------
U.S. Subscription Revenues $11,263,000 $ 10,116,000 $ 1,147,000
Subscription and Installation Revenue from Canadian Operations 1,785,000 1,511,000 274,000
Advertising and Special Events Revenue - United States 147,000 218,000 (71,000)
Advertising Revenue and Special Events - Canada 176,000 182,000 (6,000)
U.S. Installation Revenue 341,000 318,000 23,000
------------- ------------- -------------
NTN iTV Network $13,712,000 $12,345,000 $ 1,367,000
============= ============= =============
18
As noted in the above table, our subscription revenue from core
domestic hospitality operations increased by $1,147,000, or 11%, in the six
months ended June 30, 2005 due to an increase in net site count. Additionally,
our Canadian subscription and installation revenue increased by $274,000, or
18%, in the six months ended June 30, 2005.
In the six months ended June 30, 2005, we added a net number of 145 new
sites in the United States compared to no change in new domestic sites in the
six months ended June 30, 2004. The NTN iTV Network customer site count in the
United States at June 30, 2005 was 3,454. This was an increase of 324 sites over
June 30, 2004.
In the six months ended June 30, 2005, we added a net number of 27 new
sites in Canada. Our Canadian site count at June 30, 2005 was 378.
At June 30, 2005, our combined North America site count of 3,832
subscribing sites is the highest in Company history.
Revenues from NTN Wireless decreased by $119,000 from $3,090,000 in the
six months ended June 30, 2004 to $2,971,000 in the six months ended June 30,
2005. This decrease occurred because the first half of 2004 included a wide
product roll-out to a restaurant chain while 2005 did not include such a
roll-out.
Revenues from Software Solutions increased by $72,000 from $1,855,000
in the six months ended June 30, 2004 to $1,927,000 in the six months ended June
30, 2005 due to the recognition of deferred revenue from 2004.
Buzztime revenues increased $444,000 to $526,000 in the six months
ended June 30, 2005 from $82,000 in the six months ended June 30, 2004. The
primary components in the $444,000 revenue increase were $226,000 under the
Trial Agreement with Comcast Cable that related to a combination of technology
development work, equipment installations and license fees and $218,000 in
consumer subscription fees via our distribution through wireless/mobile phones
and satellite television companies and royalties on game products.
As a result of the above factors, NTN's consolidated revenues increased
$1,764,000, or 10%, to $19,136,000 in the six months ended June 30, 2005 from
$17,372,000 in the six months ended June 30, 2004.
OPERATING EXPENSES
Consolidated direct operating costs increased $719,000, or 12%, to
$6,858,000 in the six months ended June 30, 2005 from $6,139,000 in the six
months ended June 30, 2004. The following table compares the direct costs for
each of our operating segments between the six months ended June 30, 2005 and
2004:
DIRECT OPERATING COSTS
Six Months Ended June 30,
-------------------------
2005 2004 Change
---- ---- ------
NTN iTV Network $4,105,000 $3,314,000 $ 791,000
NTN Wireless 1,708,000 1,893,000 (185,000)
Software Solutions 270,000 350,000 (80,000)
----------- ----------- ----------
Hospitality Technologies division 6,083,000 5,557,000 526,000
Buzztime 775,000 582,000 193,000
----------- ----------- ----------
Consolidated $6,858,000 $6,139,000 $ 719,000
========== =========== ==========
The primary drivers in the $719,000 increase in our direct operating
costs were the $791,000 increase in the direct operating costs in the NTN iTV
Network and the $193,000 increase in the direct operating costs of Buzztime. The
reductions in direct operating costs in the NTN Wireless and Software Solutions
segments helped partially offset the increase in the NTN iTV Network segment.
The $791,000 increase in the NTN iTV Network's direct operating costs
came from a variety of factors, including:
19
o $276,000 of the increase came from NTN Canada. The largest
single component of the increase in NTN Canada was an increase
in direct depreciation of $159,000 due to installation of new
site equipment at new and existing sites. Prior to our
acquisition of that operation, the site equipment in Canada
was largely fully depreciated. Another $85,000 of the increase
in NTN Canada was from a combination of increased installation
and technical site service expenses associated with the
installation and conversion to iTV and NTN Blast of a
significant percentage of the Canadian installed base;
o $82,000 of direct expenses related to our trial in the UK
without any corresponding expenses in the six months ended
June 30, 2004;
o $199,000 of the increase came from communication costs due to
the higher costs of the satellite service in accordance with a
new agreement signed in December 2004 and acquisition of
increased bandwidth;
o $176,000 of the increase came from increased technical site
service expense. This expense was due to an increase in the
number of technical service visits to our sites due to new
software releases;
o $101,000 of the increase came from increased domestic
installation expense. This expense was due to our continued
site count growth.
The $185,000 decrease in the direct operating costs of NTN Wireless was
related to the lower level of cost of goods sold associated with the NTN
Wireless revenue decrease of $119,000 noted above as well as an increase in
gross margin. Our gross margin in the NTN Wireless segment in the six months
ended June 30, 2005 was 43%, a 4% increase over the 39% gross margin we recorded
in the six months ended June 30, 2004.
The $80,000 decrease in the direct operating costs of Software
Solutions was related to a decreased level of costs of goods sold of hardware
shipments and a decrease in depreciation after the sale of software products to
Intura. Our gross margin in the Software Solutions segment in the six months
ended June 30, 2005 was 86%, which represented a 5% increase over the 81% gross
margin we recorded in the six months ended June 30, 2004.
The $193,000 increase in the direct operating costs of Buzztime was
primarily due to a $134,000 of salary production costs that were directly
associated with the increase in production revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses (SG&A)
increased $716,000 or 6%, to $13,036,000 in the six months ended June 30, 2005
from $12,320,000 in the six months ended June 30, 2004. The following table
compares the selling, general and administrative expenses for each of our
operating segments between the six months ended June 30, 2005 and 2004:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Six Months Ended June 30,
-------------------------
2005 2004 Change
---- ---- ------
NTN iTV Network $ 8,414,000 $7,462,000 $952,000
NTN Wireless 880,000 785,000 95,000
Software Solutions 2,422,000 2,532,000 (110,000)
----------- ----------- ---------
Hospitality Technologies division 11,716,000 10,779,000 937,000
Buzztime 1,320,000 1,541,000 (221,000)
----------- ----------- ---------
Consolidated $13,036,000 $12,320,000 $716,000
=========== =========== ========
The $952,000 SG&A increase in the NTN iTV Network segment came from a
variety of factors, including:
20
o $375,000 of SG&A expenses related to our trial in the UK
without any corresponding expenses in the six months ended
June 30, 2004;
o Increased domestic sales commissions of $152,000 relating to
the increase in new site sales;
o Increased estimate for bad debts of $264,000;
o Increased marketing and travel and entertainment expenses of
$55,000 associated with the launch of NTN BlastTM content and
the new iTV dual-channel technology platform and rollout of an
independent dealer network.
The $95,000 increase in the SG&A expenses of NTN Wireless was primarily
due to an increase in personnel.
The $110,000 reduction in the SG&A expenses of Software Solutions was
primarily due to personnel reductions.
The $221,000 reduction in the SG&A expenses of Buzztime was primarily
due to personnel reductions.
NON-CASH CHARGE RELATED TO SOFTWARE PRODUCT SALE
On February 4, 2005, we entered into an Asset Purchase Agreement with
Intura Solutions LP (Intura), a Texas limited partnership, pursuant to which we
sold the point of sale software products developed and maintained by our
Software Solutions segment. The primary software products sold by us to Intura
were Vision, Relief Manager Plus (RMP), Store Link Plus (SLP), Sell More Pizzas
and other legacy products as well as a non-exclusive right to develop and market
the Enterprise software. We received a non-dilutable 10% partnership interest in
Intura in the transaction and will receive 20% of Intura's revenues received
during the next two years, up to a maximum of $100,000. Further, Intura will
provide software development maintenance services for the RMP and SLP software
for two years (we continue to retain the rights to the maintenance and support
revenue from the legacy products).
We engaged a third party valuation firm to estimate the value of our
10% ownership interest in Intura. Based upon that analysis, we concluded that
the fair value of our investment in Intura was approximately $69,000.
Additionally, based on that analysis, we concluded that there was no impairment
of the goodwill in the Software Solutions segment as a result of this
transaction. The transfer of the software products, which we carried as part of
our intangible assets, resulted in a one-time, non-cash charge of $276,000.
LITIGATION, LEGAL AND PROFESSIONAL FEES
Litigation, legal and professional fees decreased $178,000 to $570,000
in the six months ended June 30, 2005 compared to $748,000 in the six months
ended June 30, 2004. Legal fees in the six months ended June 30, 2005 decreased
$269,000 which was primarily related to $176,000 of legal expenses to defend the
litigation against NTN Wireless in the six months ended June 30, 2004 with no
comparable expense in 2005. The six months ended June 30, 2005 included $253,000
of Sarbanes-Oxley and audit related expenses compared to $197,000 in the six
months ended June 30, 2004.
STOCK BASED COMPENSATION
Stock based compensation expense increased by $98,000 to $192,000 in
the six months ended June 30, 2005 compared to $94,000 in the six months ended
June 30, 2004. This increase largely arises from recognition of non-cash expense
associated with the grants of certain deferred stock units to our executives in
third quarter 2004 under the 2004 Performance Incentive Plan.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
decreased by $15,000, or 3%, to $420,000 in the six months ended June 30, 2005
from $435,000 in the six months ended June 30, 2004 due to certain assets
becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $47,000 to $125,000 in the
six months ended June 30, 2005 from $172,000 in the six months ended June 30,
2004, due primarily to the completion of certain projects for the iTV network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the six months ended June 30, 2005 was $51,000
compared to $42,000 in the six months ended June 30, 2004.
21
Interest expense increased $73,000, or 11%, to $73,000 in the six
months ended June 30, 2005, compared to $66,000 in the six months ended June 30,
2004, due to borrowing on our line of credit and additional leases entered into
in 2005.
INCOME TAXES
The NTN Hospitality Technologies division is expected to report taxable
income for the year ended December 31, 2005. For federal income tax reporting
purposes and in unitary states where 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. We also expect to pay income taxes in Canada
due to the profitability of NTN Canada. As a result, NTN Hospitality
Technologies recorded a tax provision of $76,000 in the six months ended June
30, 2005. This was a $43,000 increase over the $33,000 provision for income
taxes recorded in the six months ended June 30, 2004.
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 improved by $63,000 to negative $356,000 in the six months
ended June 30, 2005 from EBITDA of negative $419,000 in the six months ended
June 30, 2004.This EBITDA improvement was due to the increase in depreciation
and amortization expense and income tax expense offset by the increase in loss
in the six months ended June 30, 2005.
The improvement in EBITDA resulted despite last year's first six months
benefiting from a one-time legal settlement of $225,000 and despite this year
incurring $490,000 in costs for the launch of our iTV Hospitality Network in the
UK. Without these items, consolidated six month EBITDA would have improved by
$715,000 to $134,000.
The following table reconciles our net loss per GAAP to EBITDA:
SIX MONTHS ENDED
JUNE 30,
---------------------------
2005 2004
------------ -----------
EBITDA CALCULATION
Net loss per GAAP $ (2,439,000) $(2,368,000)
Interest expense (net) 22,000 24,000
Depreciation and amortization 1,985,000 1,892,000
Income taxes 76,000 33,000
------------ -----------
EBITDA $ (356,000) $ (419,000)
============ ===========
On a segment basis, our segments generated EBITDA levels as presented below:
($000) SIX MONTHS ENDED
JUNE 30, 2005
-----------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
------- -------- --------- ---------- -------- -------
Net income (loss) $ 19 $ 289 $ (1,091) $ (783) $ (1,656) $(2,439)
Interest expense (net) 19 -- -- 19 3 22
Depreciation and amortization 1,453 39 177 1,669 316 1,985
Income taxes 76 -- -- 76 -- 76
------- -------- --------- ---------- -------- -------
EBITDA $ 1,567 $ 328 $ (914) $ 981 $ (1,337) $ (356)
======= ======== ========= ========== ======== =======
22
($000) SIX MONTHS ENDED
JUNE 30, 2004
-----------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
------- -------- --------- ---------- -------- -------
Net income (loss) $ 626 $ 165 $ (1,079) $ (288) $ (2,080) $(2,368)
Interest expense (net) 24 -- -- 24 -- 24
Depreciation and amortization 1,389 55 192 1,636 256 1892
Income taxes 33 -- -- 33 -- 33
------- -------- --------- ---------- -------- -------
EBITDA $ 2,072 $ 220 $ (887) $ 1,405 $ (1,824) $ (419)
======= ======== ========= ========== ======== =======
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, we had cash and cash equivalents of $4,647,000 and
working capital (current assets in excess of current liabilities) of $4,012,000,
compared to cash and cash equivalents of $6,710,000 and working capital of
$6,644,000 at December 31, 2004. Net cash provided by (used in) operating
activities was $273,000 for the six months ended June 30, 2005 compared to
$(1,826,000) for the six months ended June 30, 2004, or a $2,099,000 increase in
cash provided by operating activities.
The primary causes of this $2,099,000 increase in the cash generated by
our operating activities were:
o the non-cash nature of the $343,000 charge related to the Intura
transaction, the $294,000 increase in the provision for doubtful
accounts, the $98,000 increase in stock-based compensation charges, and
the $157,000 increased loss on disposition of equipment and capitalized
software, which while they decreased our earnings had no impact on our
cash generated from operating activities,
o the use of $163,000 less cash supporting the growth of our accounts
receivable and the increase in our accounts payable and accrued expenses
generated an increase of $148,000 of incremental cash, and
o an increase in the use of cash associated with the change in deferred
revenue of $695,000. The increase in the deferred revenue was due to the
growth of new sites in our NTN iTV Network as discussed above, and
Buzztime deferred revenue.
Net cash used in investing activities was $2,672,000 for the six months
ended June 30, 2005 compared with $1,526,000 for the six months ended June 30,
2004. Included in net cash used in investing activities for the six months ended
June 30, 2005 were $2,279,000 in capital expenditures largely related to the
increase in our NTN iTV Network sites, $123,000 of deposits on broadcast
equipment and $270,000 of capitalized software development expenditures. The
primary components of net cash used in investing activities for the six months
ended June 30, 2004 were $1,218,000 of capital expenditures, $82,000 of
incremental cash usage relating to our acquisitions, $32,000 in deposits on
broadcast equipment and $194,000 of capitalized software development
expenditures.
Net cash provided by financing activities was $356,000 for the six
months ended June 30, 2005 compared to $11,664,000 for the six months ended June
30, 2004. The cash provided by financing activities for the six months ended
June 30, 2005 included $700,000 in borrowings on our revolving line of credit
and $265,000 in cash generated from the exercise of stock options and warrants.
Those cash inflows were partially offset by $462,000 in principal payments on
equipment note payable and $147,000 in principal payments on capital leases. The
$11,664,000 in cash provided by financing activities in the six months ended
June 30, 2004 included $13,001,000 of net proceeds from our equity offering in
January 2004 and $320,000 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, $571,000 of principal payments on equipment notes
payable and $86,000 of principal payments on capital leases.
FUTURE FINANCING NEEDS
We believe we currently have cash on hand to operate our business.
Cash reserves have declined in the first six months of 2005 due to the
record growth of NTN iTV Network site installations requiring substantial
capital investment, along with continued investment in growth initiatives for
our Buzztime Licensing efforts, new investment for distribution of our products
in the UK, and operating losses in our Software Solutions segment. We
anticipate, however, that stronger operating results in the third and fourth
23
quarter 2005, and into 2006, will allow the cash on hand, along with cash from
operations, to be sufficient to operate the Company's business. While there is
currently no plan to raise capital, continued high growth or lower than expected
results from operations could require us to raise capital at less than favorable
rates.
As further background and insight, in 2004 and year to date in 2005, in
addition to capital expenditures to support the record sales of new iTV Network
sites, our iTV Network has required a substantial capital investment due to the
one-time conversion of older installations to VSAT connectivity. Each new site
installation in 2004 and during Q1 2005 required approximately $5,000 in capital
investment and equipment. A move to predominantly DSL connectivity in Q2 2005
has lowered this amount to approximately $3,500 per site. This savings has
significantly improved the business model for site profits versus invested
capital. Despite this savings, total capital expenditures do remain substantial
as sales are running well ahead of prior years and show no signs of abating,
thus offsetting what would otherwise be lower total capital expenditures.
Additionally, we have been investing capital to convert our
approximately 350 Canadian iTV Network sites to our newest iTV2 technology,
which allows the play of Texas Hold `Em, as well as other new game content. We
acquired the NTN Canada Network assets of our Canadian licensee in December
2003. The previous owner had not converted the Canadian customer base to DITV
during the 1999 to 2001 period when our domestic sites were converted, and the
Canadian Network had become antiquated and was rapidly losing customers.
Following the purchase, we have been in the process of upgrading the technology
for all 350 active sites there. Through June 30, 2005, approximately 77% of the
Canadian sites had been converted to iTV2, our newest technology platform, and
connected via either VSAT or DSL communication platforms. Over the next 6 months
we plan to convert the remainder of our current customer base at a cost of
approximately $280,000.
Capital requirements in the coming 12 months will additionally depend
upon two other initiatives. The first is the launch of our iTV Network in the
UK, which began with an initial trial of eleven iTV Network sites on March 1,
2005. We believe that a significant growth opportunity exists in the UK for our
iTV product, and each new site will require capital expenditures of about
$3,500, which is commensurate with U.S. sites. The second initiative is the
operations of our Software Solutions segment, for which we have invested over
the past two years with a goal that stronger sales can be obtained in late 2005
and in 2006.
The capital necessary to support a third initiative, the development
and distribution of the Buzztime Channel to the major U.S. cable systems, should
decline substantially for the last half of 2005 as operating losses have been
reduced to a lower run-rate of approximately $3 million from its historic loss
of approximate $4 million per year. This is because the Company has been able to
reduce its investment in technology and applications for deployment to digital
cable television systems while still maintaining the market requirements to
support current operations and sales orders. We do anticipate that costs could
go up substantially if we succeed as planned and enter into broader national
agreements with the major cable operators, as this may prompt us to aggressively
increase Buzztime development, sales and marketing efforts to more quickly
advance our distribution within the U.S. market. Offsetting cash usage in this
segment will be first-time license revenues from sales of the new plug-and-play
Buzztime game to U.S. toy retailers, which could be significant, along with
increased satellite TV and mobile licensing revenue. In 2006, continuing
Buzztime losses, if incurred, will be due primarily to the approximately $1.5
million in annual costs to create the trivia and live sports game content that
is used by all of our interactive game businesses, including distribution to the
NTN iTV Network, cable, mobile, satellite and retail toy markets. All of this
expense is currently borne by the Buzztime subsidiary.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. 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 affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
24
o We record deferred costs and revenues related to the costs and
related installation revenue associated with installing iTV
customer sites. Based on Staff Accounting Bulletin 104 (SAB
104), we amortize these amounts over an estimated average life
of a customer relationship. Currently, we estimate that the
average customer life is three years.
o We incur a relatively significant level of depreciation
expense in relationship to our operating income. The amount of
depreciation expense in any fiscal year is largely related to
the estimated life of handheld, wireless Playmaker devices,
VSAT satellite dishes and associated electronics and the
computers located at our customer sites. The Playmakers are
depreciated over a four-year life, VSAT dishes and associated
electronics over a four-year life and the computers over a
three-year life. The depreciable life of these assets was
determined based upon their estimated useful life which
considers anticipated technology changes. If our Playmakers,
VSAT dishes and associated electronics and the computers turn
out to have longer lives, on average, than estimated, our
depreciation expense would be significantly reduced in those
future periods. Conversely, if the Playmakers, VSAT dishes and
associated electronics and the computers turn out to have
shorter lives, 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. During the three months ended March 31,
2005, we modified our methodology for determining our
allowance for doubtful accounts based upon an increasing
number of our customers that pay us under electronic payment
methods such as credit cards and direct debits to their
checking accounts and by segment. We estimate our allowance
based on:
o For iTV customers that pay under credit terms, we
fully reserve for all the customers that have
terminated our iTV Network service or had their
service suspended. Additionally, we reserve three
percent of outstanding balances for all unreserved
customer balances.
o For iTV customers that pay under electronic payment
arrangements, we fully reserve for all the customers
that have terminated our iTV Network service or had
their service suspended. Additionally, we fully
reserve for all receivables over 60 days past due. We
then reserve three percent of outstanding balances
for all unreserved customer balances.
o For Software Solutions and NTN Wireless customers, we
reserve five percent of outstanding balances for all
unreserved customer balances.
Beyond the above allowance parameters, we also may increase the reserve
based on our business judgment.
If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required.
o We assess our inventory for estimated obsolescence or unmarketable
inventory and write down the difference between the cost of inventory
and the estimated market 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 Software Solutions are recognized in accordance with
Statement of Position (SOP) No. 97-2, "Software Revenue Recognition",
as amended. Software license fee revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product has occurred
at our customer's location, the fee is fixed or determinable and
collection is probable, provided that vendor specific evidence exists
for any undelivered elements, namely annual support and maintenance.
Along with the basic software license, our customers are provided post
contract support (PCS) for an additional fee, which is based on a
stipulated percentage of the license fee. PCS consists of technical
support as well as unspecified software upgrades and releases when and
if made available by us during the term of the support period.
25
If at the outset of an arrangement we determine that the arrangement
fee is not fixed or determinable, revenue is deferred until the
arrangement fee becomes due. If at the outset of an arrangement we
determine that collectibility is not probable, revenue is deferred
until the earlier of when collectibility becomes probable or the
receipt of payment. If an arrangement allows for customer acceptance,
revenue is not recognized until the earlier of receipt of customer
acceptance or expiration of the acceptance period.
Additionally, we provide consulting and training services under both
hourly-based time and materials and fixed-priced contracts. Revenues
from these services are generally recognized as the services are
performed.
o We have a significant amount of goodwill and intangible assets on our
balance sheet related to acquisitions. At June 30, 2005 the net amount
of $6,947,000 of goodwill and intangible assets represented 24.2% 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 annually perform tests for goodwill impairment as required by SFAS
142. We continually monitor for any potential indicators of impairment
of goodwill and intangible assets and we have determined that no such
indicators have arisen to date. Any impairment loss could have a
material adverse impact on our financial condition and results of
operations.
o In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
a revision of SFAS No. 123, "Accounting for Stock-Based Compensation"
and superseding APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 123R requires the Company to expense grants made
under the stock option and employee stock purchase plan programs. That
cost will be recognized over the vesting period of the plans. SFAS No.
123R is effective for the first annual period beginning after June 15,
2005. Upon adoption of SFAS No. 123R, amounts previously disclosed
under SFAS No.123 will be recorded in the consolidated income
statement. We are evaluating the alternatives allowed under the
standard, which we are required to adopt beginning in the first quarter
of 2006. We believe that this new standard will increase our operating
losses in the future but that increase will be of a non-cash nature.
We do not have any of the following:
o Off-balance sheet arrangements except for purchase orders and
commitments, and operating leases;
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 16 - Related Parties or in Note 21
- Subsequent Events in our Form 10-K/A for the year ended December 31,
2004, ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (which
item is incorporated by reference to our definitive proxy statement) or
which are so non-material to fall below the materiality threshold of
such item.
ASSESSMENTS OF FUNCTIONAL CURRENCIES. The U.S. dollar is the functional
currency of all of the Company's operations except for the Canadian operations
and the trial deployment in the United Kingdom.
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 June 30, 2005, we owned common stock of
an Australian company that is subject to market risk. At June 30, 2005, the
carrying value of this investment was $422,000, which is net of a $394,000
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 June 30, 2005, a hypothetical
10% decline in the value of the Australian dollar would result in a reduction of
$42,000 in the carrying value of the investment. As of June 30, 2005 we also had
cash equivalents of approximately $2.75 million invested primarily in short-term
government bonds that is subject to market risk.
26
We have outstanding line of credit borrowings of $700,000 at June 30,
2005 which bear a rate of interest equal to the prime rate plus 2% per annum. A
hypothetical one-percentage point increase in the prime rate would result in an
increase of $7,000 in annual interest expense.
We also face currency exchange risk with our operations in Canada. NTN
Canada earned approximately Canadian $835,000 (or U.S. $678,000) before
corporate overhead and taxes in the three months ended June 30, 2005. 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%.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, our management
(including our chief executive officer and chief financial officer) evaluated
our disclosure controls and procedures (as defined in Securities Exchange Act
Rules 13a-15(e) and 15d-15(e)) as to whether such disclosure controls and
procedures were effective in providing reasonable assurance that the information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms and ensuring that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and communicated to
our management, including the chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, management has concluded that our efforts to remediate
the material weakness described below have not yet been completed, and therefore
the Company's disclosure controls and procedures were not effective as of the
end of the period covered by this report. However, as also described below, we
feel that we have made significant progress in remediating such material
weakness.
Under Auditing Standard No. 2 as defined by the PCAOB, a material
weakness is a significant deficiency, or a combination of significant
deficiencies, that result in more than likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected.
We identified that, as of December 31, 2004, there was inadequate documentation
of the design and testing of controls over relevant assertions related to
certain significant accounts and disclosures. This pertains to documenting to
the degree appropriate how certain controls were initiated, authorized,
recorded, processed, tested or reported. Our review found no material
deficiencies in the functioning of the underlying control activities themselves.
We also did not have any audit adjustments to the consolidated financial
statements as of and for the year ended December 31, 2004. We have made
significant progress in designing and implementing improved controls and
processes to address the weakness described above. We are redrafting our
internal control policies and related test scripts generally to a detail level
closer to the desk procedure level to allow a more precise understanding of our
processes and controls. We are also expanding and refining our testing
methodologies to reflect that greater level of detail in our documentation.
We currently are unable to conclusively determine when the above noted
material weakness will be fully remediated. However, we believe we have designed
a plan and secured the necessary resources that will enable us to continue to
make significant progress toward full remediation; specifically, we have:
o appointed a vice president to oversee internal controls;
o established a compliance team consisting of managers of key
areas of responsibility;
o established a timeline and schedule of documentation tasks to
be completed by members of the compliance team with input and
verification from process owners; and
o established regularly scheduled status conferences with our
independent accountants.
We cannot be certain at this time that our effort will result in
complete remediation by the third quarter of fiscal 2005. Therefore we are
currently unable to provide assurance that the material weakness described above
will not be reported in our Quarterly Report on Form 10-Q for the third quarter
of fiscal 2005.
27
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Since our evaluation as of June 30, 2005, other than as described in
EVALUATION OF DISCLOSURE CONTROLS AND Procedures, we have had no significant
changes in our internal controls.
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our annual meeting of shareholders on June 10, 2005. The following
matters were voted upon at such meeting:
1. To elect three directors to hold office until the 2008 annual
meeting of stockholders and until their respective successors are duly
elected and qualified:
BARRY BERGSMAN
Votes in Favor.............. 34,124,912
Abstentions................. 15,437,181
NEAL FONDREN
Votes in Favor.............. 45,005,042
Abstentions ................ 4,557,051
STANLEY B. KINSEY
Votes in Favor.............. 33,591,664
Abstentions................. 15,970,429
Each of Mr. Bergsman, Mr. Fondren and Mr. Kinsey was elected as a
director to hold office until the annual meeting of stockholders in 2008 and
until each of their respective successors is duly elected and qualified. The
following directors were not subject to election and their term of office
continued after the meeting: Gary Arlen, Robert M. Bennett, Robert Clasen,
Michael Fleming and Esther Rodriquez. Mr. Bennett and Ms. Rodriguez subsequently
retired their positions as directors effective June 30, 2005. Kendra Berger and
Adrian A. Pace were appointed to serve as directors effective July 1, 2005. As a
result of stockholder approval of Proposal 2 to eliminate the classified
structure of the Board of Directors as reported below, Mr. Bergsman, Mr. Fondren
and Mr. Kinsey will each serve a term of one year through the date of the annual
meeting in 2006 or until their respective successors are duly qualified.
2. To amend the Restated Articles of Incorporation of NTN
Communications, Inc. to eliminate the classified structure of the
Board of Directors:
Votes In Favor ............. 49,115,521
Votes Against............... 305,952
Abstentions ................ 140,620
The proposal to amend the Restated Articles of Incorporation of NTN
Communications, Inc. to eliminate the classified structure of the Board of
Directors was approved by the Company's stockholders. All Directors will each
serve a term of one year.
3. To amend the Restated Articles of Incorporation of NTN
Communications, Inc. to change the Company's corporate name from NTN
Communications, Inc. to NTN Buzztime, Inc.:
Votes In Favor ............ 37,050,826
Votes Against ............. 11,318,178
Abstentions................ 1,193,089
28
The proposal to amend the Restated Articles of Incorporation of NTN
Communications, Inc. to change the Company's corporate name from NTN
Communications, Inc. to NTN Buzztime, Inc. was approved by the Company's
stockholders.
4. To ratify the appointment of HASKELL & WHITE LLP as independent
accountants of NTN for the fiscal year ending December 31, 2005.
Votes In Favor ............ 40,696,167
Votes Against ............. 8,532,347
Abstentions................ 333,579
The proposal for ratification of the appointment of HASKELL & WHITE LLP
was approved.
ITEM 5. OTHER INFORMATION - None
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)
4.10* Stock Option Agreement, dated June 28, 2005 by and between NTN
Communications, Inc. and Stanley B. Kinsey(1)
10.1 License Agreement with NTN Canada (3)
10.2* Employment Agreement, dated June 28, 2005, 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)
29
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 (15)
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)
10.11 Settlement Agreement, effective as of February 28, 2005,
between Long Range Systems, Inc. and NTN Communications, Inc.
(19)
31.1 Certification of CEO pursuant to Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- -------------
* 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 report on Form 10-K,
for the year ended December 31, 1997, and incorporated by
reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K
dated December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-K
dated December 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 January 29, 2004 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 10-Q
dated September 30, 2004 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) Previously filed as an exhibit to NTN's Form 8-K dated March
18, 2005, and incorporated herein by reference.
(20) Furnished concurrently herewith.
30
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: August 8, 2005 By: /s/ Andy Wrobel
------------------------------
Andy Wrobel
Authorized Signatory and Chief
Financial Officer
31
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)
4.10* Stock Option Agreement, dated June 28, 2005, by and between
NTN Communications, Inc. and Stanley B. Kinsey (1)
10.1 License Agreement with NTN Canada (3)
10.2* Employment Agreement, dated June 28, 2005, 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 (15)
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)
10.11 Settlement Agreement, effective as of February 28, 2005,
between Long Range Systems, Inc. and NTN Communications, Inc.
(19)
31.1 Certification of CEO pursuant to Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* 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.
31
(4) Previously filed as an exhibit to NTN's report on Form 10-K, for the
year ended December 31, 1997, and incorporated by reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-K dated
December 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
January 29, 2004 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 10-Q dated
September 30, 2004 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) Previously filed as an exhibit to NTN's Form 8-K dated March 18, 2005,
and incorporated herein by reference.
(20) Furnished concurrently herewith.
33