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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(AMENDMENT NO. 2)
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1103425
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5966 LA PLACE COURT
CARLSBAD, CALIFORNIA 92008
(Address of Principal Executive (Zip Code)
Offices)
(760) 438-7400
(Registrant's telephone number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.005 par value American Stock Exchange
Redeemable Common Stock
Purchase Warrants
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
Registrant as of March 1, 2000, computed by reference to the closing sale price
of the Common Stock on the American Stock Exchange, was approximately
$116,318,582. For purposes of this computation, all directors and executive
officers of Registrant are considered affiliates.
As of March 1, 2000, Registrant had 30,242,559 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
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FORM 10-K/A ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1999
NTN COMMUNICATIONS, INC.
ITEM PAGE
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PART I
1. Business......................................................................... 2
PART II
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................... 13
7A. Quantitative and Qualitative Disclosure about Market Risk........................ 23
PART III
13. Certain Relationships and Related Transactions................................... 24
PART IV
14. Exhibits, Consolidated Financial Statement Schedule, and Reports on Form 8-K..... 25
Index to Consolidated Financial Statements and Schedule.......................... F-1
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NTN Communications, Inc. (the "Registrant") hereby amends and restates
Items 1, 7, 7A, 13 and 14 of its Annual Report on Form 10-K filed for the fiscal
year ending December 31, 1999 to read in its entirety as follows:
PART I
ITEM 1. BUSINESS
THIS REPORT 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, INCLUDING, WITHOUT LIMITATION, STATEMENTS THAT INCLUDE THE
WORDS "BELIEVES," "EXPECTS," "ANTICIPATES," "PLANS" OR SIMILAR EXPRESSIONS AND
STATEMENTS RELATING TO THE COMPANY'S STRATEGIC PLANS, CAPITAL EXPENDITURES,
INDUSTRY TRENDS AND PROSPECTS AND THE COMPANY'S FINANCIAL POSITION. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE
COMPANY TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT ITS PLANS,
INTENTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH PLANS, INTENTIONS OR EXPECTATIONS
WILL BE ACHIEVED. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE SET FORTH IN THIS REPORT UNDER
THE CAPTION "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS".
GENERAL
NTN Communications, Inc. ("NTN" or the "Company"), based in Carlsbad,
California, is a developer and distributor of interactive entertainment and owns
and operates the largest "out-of-home" interactive consumer marketing television
network in the United States.
NTN operates its businesses principally through two operating divisions:
BUZZTIME, Inc.(TM) ("BUZZTIME") and The NTN Network(R). BUZZTIME, NTN's
wholly-owned subsidiary was formed in December 1999 to distribute NTN's digital
trivia game show library and many unique "TV Play-along" sports games. The NTN
Network operates two interactive television (ITV) networks: its original NTN
Network and its new Digital Interactive Television ("DITV") Network. Both
networks broadcast daily a wide variety of popular interactive games,
advertisements and informational programming to consumers in approximately 3,300
restaurants, sports bars and taverns throughout North America.
In 1994, NTN formed LearnStar, Inc., which operated through June 1998 as a
wholly-owned subsidiary of NTN. In June 1998, the Company sold an 82.5% interest
in LearnStar, Inc. to NewStar Learning Systems, L.L.C.
NTN formed another wholly-owned subsidiary, IWN, Inc., in 1994. IWN, Inc.
serves as general partner of IWN, L.P., of which NTN is a limited partner. IWN
L.P. is a limited partnership engaged in the development of interactive
technology for gaming applications. IWN, Inc. has no business or operations
apart from its service as the general partner of IWN, L.P. In August 1999, IWN,
Inc. and NTN sold to eBet Online Limited the assets of IWN, L.P., which included
its interactive wagering technology and a 25% interest in eBet Online Limited.
IWN, Inc. and NTN received 4 million shares of eBet Online stock and $1,227,000
in cash. eBet Online is a publicly traded company listed on the Australian Stock
Exchange. IWN, Inc. and IWN, L.P. remain as legal entities, but they are not
engaged in any business activities.
NTN sold the assets of IWN, L.P. and the interest in LearnStar, Inc. in an
effort to divest itself of its non-core subsidiaries.
Unless otherwise indicated, references herein to "NTN" or the "Company"
include NTN and its consolidated subsidiaries.
INDUSTRY SEGMENTS
The industry segment information contained in the Notes to the Consolidated
Financial Statements included in Item 14 of this report is incorporated herein
by reference.
THE NTN NETWORK
General
The NTN Network is North America's largest "out-of-home" interactive
television network. The unique private network is driven by Internet-enhanced
technology and broadcasts a variety of multi-player sports and trivia games 365
days a year to hospitality venues such as restaurants, sports bars, hotels,
clubs and military bases totaling approximately 3,300 locations in North America
("Locations"). 17.7 million games are played per month on over 12,000 public
television screens.
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Locations pay NTN to use the Company's interactive technology, which
consists of a customized personal computer and an average of 15 wireless game
pads, or Playmakers(R), and to receive the Company's 17-hours-per-day
entertainment broadcast. The content is delivered to the sites by satellite and
through the Internet, usually during off-peak hours, and stored on the
customized NTN-computer. The game and advertising content is then replayed off a
standard time clock to simulate a "real-time" broadcast.
The NTN Network is the only television network that is specifically
designed to entertain the out-of-home viewer. Where other television broadcasts
are produced for the home viewer who is passively watching from six feet away,
NTN's broadcast is easily viewed from a distance of over 15 feet. In addition,
the NTN content is not dependent upon audio, so it does not interfere with the
Locations' own sound system or patrons' conversations. NTN's content is designed
to promote social interaction and stimulate conversation among the patrons.
Since 1982, the Company has operated a DOS-based Network, now termed the
original NTN Network. In April 1999, the Company launched a new and second DITV
network which is now being deployed.
DITV contains many new features, including a Windows-based platform with
full-motion video capabilities and high-resolution graphics to allow more
compelling content and better advertising opportunities. In addition, the new,
more consumer friendly Playmaker keypads operate at 900 MHz to increase
transmission range and have a longer battery life. They also feature a much
larger, eight line LCD screen that displays sports scores and other ticker
information. They also enable electronic, text-based chat between patrons.
PRINCIPAL PRODUCTS AND SERVICES
Entertainment Programming
The NTN Network's principal product/service is the broadcast of a variety
of sports and interactive trivia games that entertain and challenge a players'
skill and knowledge while creating significant customer loyalty. Each Location
is furnished with NTN proprietary equipment (a "Location System"), including a
customized personal computer, a satellite data receiving unit (usually a small
satellite dish), and a minimum of five hand-held, portable Playmakers which
players use to enter their selections. During live interactive programs, players
participate in the play-along programs using two television screens. One screen
features the live broadcast from the television network (e.g., an NFL football
game), while the second screen displays the NTN Network program. Participants
play the game by entering their selection on Playmakers, which transmit a radio
signal to the on-site computer. At the conclusion of the broadcast, scores are
calculated and top scores are sent via phone lines to the NTN broadcast center
(the "Broadcast Center") in Carlsbad, California. Within minutes, rankings for
each Location are tabulated and displayed and rankings and scores for the top
Locations are transmitted back to all Locations via the NTN Network for display.
This allows players to compete not only with other patrons at their Location,
but against all players across the nation who are participating interactively on
the NTN Network. Customers generally have executed a one-year contract to obtain
the Company's services and pay a monthly fee ranging from $400 to $800.
While certain of the Company's sports games are available only during the
seasons when the respective sports are played, trivia game programs allow the
Company to offer year-round interactive programming. The NTN Network provides
trivia competitions during evening hours, when Locations, particularly
restaurants and taverns, tend to be busiest.
A unique feature of NTN Network's interactive programming is the players'
ability to compete in real-time within each Location and be ranked against
players in all Locations throughout North America. This enables each Location to
create on-premise promotions to increase patron loyalty as well as NTN to
capture national sponsors who want to use the competitions as a promotional
tool.
The programming is created to build a sense of community within each
Location by providing customers the opportunity to compete against one another
as well as consumers in other Locations across the country. The competition,
intellectual challenge and personal recognition received on the NTN Network
encourages patrons to stay longer at Locations and return more often, enabling
the Locations to increase sales.
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The NTN Network presently features the following interactive sports games
programs:
NTN Play-Along Games -- Interactive games played in conjunction with live,
televised events. Games include the following:
GAME DESCRIPTION
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QB1(R)................................... NFL licensed interactive strategy game in
conjunction with live telecasts of
college and professional football games
NTN PowerPlay............................ Interactive strategy game played in
conjunction with live televised Hockey
games
NTN Fantasy Games -- Fantasy league games played in conjunction with
sporting events or rotisserie leagues. Games include the following:
GAME DESCRIPTION
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Brackets(TM)............................. Basketball or hockey tournament
prediction game
Football Challenge(TM)................... Weekly selection of winners of college
and professional football games
Survivor(R).............................. Weekly single elimination prediction game
for professional football
The NTN Network presently features the following interactive trivia games
programs:
NTN Premium Trivia Games -- Promotion-oriented weekly game shows that
generally require 1-2 hours of participation. Prizes are awarded to the top
finishers, except where prohibited by law. Games include the following:
GAME DESCRIPTION
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Passport................................. Travel trivia
Playback(TM)............................. Music trivia
Showdown(R).............................. Advanced trivia challenge
SportsIQ(TM)............................. Weekly sports trivia game
Sports Trivia Challenge(R)............... Advanced sports trivia covering multiple
topics
Spotlight(TM)............................ Entertainment and media-based trivia game
(movies, music)
Glory Daze(TM)........................... Trivia game focused on baby boomer topics
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NTN Trivia Games -- General-themed, standard games typically one-half hour
in length. Games include the following:
GAME DESCRIPTION
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Brain Buster(R).......................... Interactive trivia game covering esoteric
topics
Countdown(R)............................. Interactive trivia game using word plays
Topix(TM)................................ Theme-driven trivia game played under
controlled timing
Wipeout(TM).............................. Interactive trivia game eliminating
incorrect answers
Nightside(R)............................. Adult-oriented trivia
Sports Trivia(R)......................... General trivia game covering sports
topics
Retroactive(TM).......................... Pop-culture trivia with 60's, 70's and
80's content
Football Weekend Roundup(TM)............. Football trivia game
Abused News(TM).......................... Humorous trivia game focused on headline
News
Appeteasers(TM).......................... Shorter version of humorous general
trivia game
Jukebox(TM).............................. Music trivia based on category selected
by player
Triviaoke(TM)............................ Music trivia game
Custom Games -- Interactive games created specifically for media companies
such as Capital Cities/ ABC for simultaneous broadcast with their live
telecasts.
GAME DESCRIPTION
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NTN Awards Show(TM)...................... Interactive game played in conjunction
with the Academy Awards Show
NTN Draft Show(TM)....................... Interactive game played in conjunction
with the annual NFL draft
Information Programming
During the hours in which the NTN Network is not broadcasting interactive
games, the Company uses its broadcast network to transmit sports information as
well as NTN Network programming information. The Company obtains the majority of
its sports information (for which it pays a monthly fee) from Sportsticker wire
service, electronically formats the information and then retransmits it for
broadcast to Locations.
Advertising
The NTN Network, in a manner similar to the television broadcast medium,
sets aside a number of minutes of a broadcast hour for sale for advertising,
promotional spots (promoting NTN Network's competitions and special events),
"tune-in spots" (promoting NTN Network programming schedule), and public service
announcements.
The Company has currently set aside 14 minutes each hour for advertising
spots, promotional spots and "tune-in spots." Each spot is designed to be 15
seconds in length for a total of 56 spots per hour. The Company can insert
advertising messages into its interactive sports and trivia programming at any
number of Locations. Further, messages can be broadcast over the NTN Network or
custom-tailored for a specific Location or several Locations. Sponsorships of
programs are also available and provide advertisers with specific premium
exposure within a sponsorship program.
Of the 56 available spots per hour, NTN reserves 40 for national
advertisers. Using current cost-per-thousand estimates and the non-discounted
rate, the Company has approximately $33.3 million in available inventory to
support national advertising, with 12 additional spots reserved for regional
advertisers and priced on a supply versus demand basis. The remaining four spots
are offered to the individual site for local promotion and direct revenue
opportunity. However, the company may discount the advertising rates by as much
as 25%. In 2000, NTN sold $1.3 million in national and regional advertising,
comprised primarily of companies in the wine, beer and spirits category. The
Company believes more opportunities exist to build business with these endemic
advertisers, as well as other non-endemic advertisers.
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Frequent Player Program
The NTN Network's Players Plus(R) ("Players Plus") frequent player club,
numbering over 500,000 current members, offers advertisers an effective tool for
market research. Players Plus members join by entering their name, address, zip
code and identification number into a Playmaker, which is then captured at the
Broadcast Center. Members earn points each time they play and also a chance to
win prizes in the monthly Players Plus sweepstakes. Sponsors are capable of
receiving feedback through interaction with customers in the form of customer
surveys on the NTN Network or via email.
Internet Game Station Business
In April 1999, NTN acquired the assets and rights to certain technology,
hardware and video games used in the Internet game business from Sikander, Inc.
NTN paid $40,000 in cash and issued a promissory note for $360,000 to Sikander
for the assets. The technology acquired from Sikander allows the Company to link
users on the NTN Network to players on coin-operated or pay-per-play Internet
stations at other remote locations. Typically, only one person plays on an
Internet game station, but several of the Internet game stations will allow two
persons to play with each person taking a turn. The Internet game stations
increase the number of places that someone can access NTN's system because these
remote Internet stations are located in public venues, such as restaurants and
hotels. NTN has completed internal testing of the new technology acquired from
Sikander. NTN is now testing the hardware and software at various public
locations in southern California and Texas to determine if consumers will use
the remote Internet stations. NTN has not established timelines for the
conclusion of its product development and testing efforts.
DISTRIBUTION
The NTN Network presently features from 14 to 17 hours, depending on the
time zone, of interactive sports and entertainment trivia game programming on
weekdays, with extended programming hours on weekends. The balance of broadcast
time is devoted to a non-audible graphics-based service transmitting
information, including sports scores and upcoming program promotions.
Original programming is developed and produced at the Company's corporate
offices in Carlsbad, California, for distribution to Locations. The Company's
facilities are equipped with video, satellite and communications equipment, and
multimedia computers. The Company can provide simultaneous transmission of up to
16 live events for interactive play and a multitude of interactive games and
other programs, allowing distribution of different programs to customers in
different geographical locations.
The Company uses two independent services to distribute NTN programming via
satellite to customers, although it is not dependent upon either service because
there are several other providers that offer similar services. The Company
attempts to use the most effective and least expensive multiple data
transmission techniques to distribute data from the Company's facilities to
customers, including Internet transmission and direct satellite broadcast.
NTN has granted an exclusive license to Networks North, Inc., a Canadian
Company, to conduct all business relating to NTN's content and hardware products
throughout Canada. This Canadian licensee currently broadcasts to approximately
500 hospitality venues.
NTN has also granted an exclusive license to eBet Limited, an Australian
Company, to distribute NTN's games in commercial establishments and other public
places throughout Australia and New Zealand via eBet Limited's own licensed
network. This Australian licensee currently broadcasts to approximately 40
hospitality venues.
MARKETING
The NTN Network markets its services to customers primarily through
advertising in national trade periodicals, national and regional industry trade
shows, telemarketing, direct mail and direct contact through field
representatives. All sales prospects are organized and tracked through shared
database software. Currently, services are sold through a regional-based
management team that utilizes direct salespersons, as well as independent
representatives.
The Company believes that the DITV Network will be a growth vehicle for the
NTN Network. The additional appeal of the games and on-screen look are expected
to lead to greater customer satisfaction and an even longer product life cycle,
thereby extending the revenue stream from each Location.
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The ability to broadcast full-motion video ads is expected to provide new
advertising opportunities. For the first time, advertisers will be able to
assimilate existing video footage into their NTN advertisements and avoid much
of the extra work needed to produce less compelling static ads that are
broadcast on the original NTN Network.
The Company is enhancing its frequent player program, PlayersPlus, to
enable registration of more players and increase its database of names, email
addresses and demographic information. This information can be used to target
direct marketing opportunities, as well as to drive players to NTN's other
businesses. Achieving higher point levels earns the PlayersPlus member a higher
status on the Network and their name is broadcast inside their "home" Location
and, if they score high enough, the entire country. NTN is currently developing
a common database that will enable cross promotions between all NTN interactive
platforms, whether they are in or out of the home.
Approximately, 500,000 people have registered as part of the PlayersPlus
frequent player program. Based on a study conducted by the Company, 18% of these
registered users play everyday, 32% play once or twice a week and 12% play once
or twice a month.
Currently, NTN is placing prototype Internet Stations in various Southern
California and Texas Locations as its next phase of testing. The Company plans
to expand the test to 50 locations in the near future. NTN is aggressively
attending trade shows for the purpose of creating awareness and establishing
NTN's name as the leader for networked, multi-player entertainment platforms.
While other companies, such as Midway and Merit, provide interactive games on a
pay-to-use basis, NTN is the only company that provides the combination of
interactive, networked entertainment with marketing and promotional
availability. NTN intends to use the Internet Stations to expand the Company's
reach to Locations not currently suitable for the interactive NTN Network
(primarily due to its cost). The Internet stations will also be valuable as a
stand-alone product in many public locations that do not have televisions or
sit-down customers.
RAW MATERIALS
The Location System is assembled from off-the-shelf components available
from a variety of sources, except for the Playmaker package. The Company is
responsible for the installation and maintenance of the Location Systems. The
DITV Playmaker is a hand-held, 900-megahertz radio frequency device used to
enter choices and selections by players of QB1 and other games and programming
is broadcast via the NTN Network and is currently manufactured by a sole
supplier, Climax Technology, Ltd., a non-affiliated manufacturer in Taiwan.
The servers NTN maintains to store and distribute its online services
include:
o Web servers. These servers are used to connect the user to NTN's websites.
o Login and registration servers. These servers allow a user to register
and/or log into NTN's websites.
o Game servers. These servers execute the games and collect user statistics
from NTN's website.
o Backend servers. These servers receive the data from the game servers and
update the player's database, including producing reports on the game
results and other statistical information.
o Database servers. These servers host the player, game schedule and
accounting databases.
SEASONAL BUSINESS
Overall, the Company's business generally is not seasonal. Revenue is
billed monthly as service is provided to customers. However, sales of new
Locations have traditionally been higher in the summer and early fall months
compared to the rest of the year. This trend coincides with the start of the NFL
season in August.
The hospitality industry has historically experienced a relatively high
business failure rate. Likewise, the Company has lost customers due to the
failure of customer businesses, change in ownership and non-renewal of
contracts, collectively referred to as "churn". The Company's historical churn
experience has also been seasonal in that the percentage of churn has been
highest following the completion of the NFL season in February, although churn
occurs in all months. During the Company's operating history, approximately 25%
to 30% of the existing NTN Network customers at the beginning of a year have
churned by the end of that year. The Company believes that a significant portion
of the historical churn rate is attributable to customer dissatisfaction with
the 49 MHz technology. NTN believes the introduction of the new DITV system may
reduce the churn rate. In a survey conducted by NTN with customers who
terminated NTN's service, 18% of the customers with the 49 MHz technology cited
technical performance as the primary reason for terminating service. Only 2% of
customers with the new digital system have said they terminated services due to
technical performance. Since the customer may choose when to convert to the new
DITV system, the Company will continue to support the DOS-based network as well
for the immediate future. However, the Company pays for the equipment necessary
to upgrade the customer to the DITV system and the customer has to pay an
installation fee to cover NTN's costs in setting up the equipment and training
the customer's personnel.
SIGNIFICANT CUSTOMERS
The Company's customers are diverse and varied in size as well as location.
The Company is not dependent on any one customer. The Company does not have any
individual customer, including chain locations, who accounted for 10% or more of
its consolidated revenues in 1999, 1998 or 1997.
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BACKLOG
The Company historically has not had a significant backlog at any time
because the Company normally can deliver and install new Location Systems within
the delivery schedule requested by customers (generally, within two to three
weeks). With the introduction of the DITV Network, however, a backlog of sales
ranging from 100 to 500 contracts existed from April 1999 to October 1999. As of
November 1999, the Company returned to its normal delivery schedule.
COMPETITION
In January 1999, The Walt Disney Company introduced interactive
programming broadcast in conjunction with live sporting and other events. In
addition, pay-to-play, single-player interactive games from Midway, Merit and
iWink compete minimally with NTN in the entertainment category, but this form of
entertainment lacks the live, multi-player aspect and requires fees to play.
Although the Company has few direct competitors in this area, it does compete
for total entertainment dollars in the marketplace. Other forms of entertainment
provided in public eating and drinking establishments include music-based
systems and cable and pay-per-view television. However, informal feedback
provided by customers indicates that patrons are inclined to stay longer and
consume more food and drink when NTN Network interactive games are offered as
the main source of entertainment. Accordingly, NTN Network customers generally
tend to view these services as a profit generator rather than a cost center.
BUZZTIME
General
BUZZTIME is a wholly-owned subsidiary of NTN incorporated in the state of
Delaware in December 1999. BUZZTIME currently is the exclusive distributor of
the Company's largest known digital trivia game show library and many unique
"TV Play-along" sports games. NTN's TV play-along sports games are played while
watching a sporting event on television. The game allows players to enter
play-call predictions into a BUZZTIME website and be ranked against other
players. For example, while watching a NFL football game on television, a
player can predict whether the quarterback is going to pass or run the ball.
The play-call prediction must be entered by the player into the BUZZTIME
website prior to the ball snap. Once the play has been completed, the player's
prediction is scored and ranked against other players on the website at that
time.
BUZZTIME will function as a game website as well as a developer and a
distributor of game content. As a developer, it will continue to augment the
Company's expansive interactive game library. As a distributor, BUZZTIME intends
to broadcast live play-along game shows to a broad array of interactive
platforms under a "BUZZTIME Everywhere" campaign. The Company's mission is to
take the BUZZTIME brand beyond BUZZTIME.com and online services to a multitude
of interactive platforms that will include Interactive Television (ITV) and
hand-held interactive devices. There can be no assurance that the Company will
be successful in executing this strategy.
PRINCIPAL PRODUCTS/SERVICES AND DISTRIBUTION
BUZZTIME offers a broad range of interactive entertainment and programming
which it delivers through many distribution channels. As the exclusive
distributor of the NTN interactive game library, BUZZTIME is the primary game
distributor to the NTN Network. In the spring of 2000, BUZZTIME will launch its
game website, BUZZTIME.com, which will feature its trivia content with a focus
on fun, community, competition and player rewards with the introduction of a
player reward program. BUZZTIME.com will feature popular, branded interactive
trivia games and consumer marketing promotions and contests. BUZZTIME will also
host and distribute the Company's unique interactive TV play-along sports games
which add an interactive, "Play-Along" layer to live sports television
broadcasts.
During 1999, BUZZTIME entered into key distribution agreements as follows:
FOXSports.com
BUZZTIME has an agreement with FOXSports.com through the 2000-2001 NFL
season providing for the production and hosting of a customized, co-branded
version of QB1 and live sports trivia game shows. Under this revenue-sharing
agreement, the games will be provided to end users via FOXSports Online and the
NTN Network. Additionally, Fox has agreed to provide on-air promotion during
Fox-televised professional football games. The agreement does not provide for
any minimum guaranteed revenue.
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AT&T
BUZZTIME was selected in December 1999 as AT&T's first content provider for
AT&T's initiative to deploy DCT-5000 cable boxes in 2000. DCT-5000 cable boxes
are capable of providing high-end digital interactive services to televisions on
which they are connected. BUZZTIME has agreed to provide its multi-player
interactive trivia games and interactive play-along applications through AT&T's
interactive television service. Currently, less than one million North American
homes have digital interactive services. However, approximately 50 million
American homes are expected to have digital boxes by 2005. All major cable and
satellite companies will likely adopt this technology over the next five years.
The Company's five-year agreement with AT&T provides for revenue-sharing
opportunities through sponsorship, advertising and e-commerce. NTN is not
guaranteed to receive any revenue from this agreement.
AMERICA ONLINE
In December 1999, NTN signed a one-year nonexclusive content agreement with
America Online that made NTN's BUZZTIME.com trivia games available to AOL's more
than 21 million members. In contrast to NTN's previous agreement with AOL, the
BUZZTIME content will be available on each of AOL's 13 channels. There will be
one game per channel, but an option to play more BUZZTIME trivia will be
available to consumers that if selected will take the consumers to BUZZTIME.com
where registrations and transactional activities will be between BUZZTIME and
the consumer. Under the previous agreement with AOL, over 500,000 unique players
played the Company's games each month and there were over two million monthly
entries averaging 14 minutes per visit according to AOL usage reports. The
agreement with AOL will expire on November 30, 2000.
MIDWAY AMUSEMENT GAMES
BUZZTIME entered into a branding license agreement with Midway Amusement
Games whereby BUZZTIME's trivia questions and answers are to be provided via
Midway's "Touchmaster", a coin-operated video game and amusement machine.
BUZZTIME will be paid a royalty fee based on sales of the licensed products. No
minimum revenue is guaranteed.
Management believes that the combination of multiple cross-promotional
distribution channels that currently exist together with those expected to be
established in 2000 will give BUZZTIME broad consumer exposure as an emerging
leader in the interactive game space.
MARKETING
The Company is aggressively implementing a plan to market interactive game
shows available for play 24-hours per day on multiple interactive platforms,
simultaneously, by hundreds of thousands of individuals. The platforms will
include interactive television, the Internet, online services (such as AOL), the
NTN Network, and even hand-held portable devices. Key to BUZZTIME's marketing
strategy is not only traditional website promotion but also the targeted
promotion to hundreds of thousands of its loyal AOL game players and millions of
dedicated out-of-home hospitality players. The NTN Network currently hosts 17
million games played each month in 3,300 restaurants and sports bars in North
America, and will be a key element in promoting the new brand.
The Company intends to grow revenues through a combination of advertising,
game sponsorships, e-commerce and pay-to-play models. The BUZZTIME business
model is supported by the emergence of strong market demand for compelling
content on the Internet; the installation of digital interactive cable set-top
boxes by Multiple Systems Operators; and content which will enable BUZZTIME
games to be played across all interactive platforms, including cell phones and
mobile devices, in the near future.
Key to revenue growth will be the Company's ability to register a large
number of users at little cost, and turn these registrations into revenue
through sponsorship, ad revenues and e-commerce. While our competitors must
spend millions of dollars per year to expose their brands to new players,
BUZZTIME is expected to have three powerful self-branding entities. These
include the millions of game players each month found playing its out-of-home
game network and the upcoming introductions to hundreds of thousands of BUZZTIME
players on both the AOL and interactive television platforms.
Revenues also are expected to be generated by creating a cross-platform
player rewards program with hundreds of rewards/distribution partners.
E-commerce partners will pay a "bounty" to gain direct access to
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BUZZTIME's registered players. Players will receive redemption points, "Buzz
Points," for participating in the marketing promotion.
RAW MATERIALS
For media platforms such as online services, the Company distributes its
programs to the recipients who maintain their own receiving, translation and
re-broadcasting equipment. Accordingly, the Company has no raw materials or
equipment needs for these customers beyond its own back-end servers.
SEASONAL BUSINESS
The Company's Internet game site is subject to industry trends that affect
Internet providers generally, including seasonality and user inactivity. User
traffic on web sites has typically declined during summer and year-end vacation
and holiday periods.
COMPETITION
In the Online/Internet Services market, the consumer has many entertainment
options from which to choose, ranging from cable television to telephone based
services to computer online providers and the Internet. The Company offers live,
multi-player games and services which are available to multiple interactive
platforms in the home. Also, the Company competes for a share of the total home
entertainment dollars against broadcast television, pay-per-view and other
content offered on cable television. The Company also competes with other
programming available to consumers through online services such as AOL. Cable
television, in its various forms, provides consumers the opportunity to make
viewing selections from anywhere between 30 to 100 free and pay channels, thus
limiting the amount of time devoted to any particular channel. For the most
part, cable television is predominantly a passive medium, and does not offer the
viewer the opportunity to participate in its programming, and even less
frequently, does it offer programming designed for active participation. Online
providers, such as AOL, can provide literally thousands of options for content
and entertainment; however, such online services have traditionally been
confined to that company's subscriber base. Interaction among viewers is thus
limited to the particular program as offered only on the specific online
service. NTN offers consumers the opportunity to participate and compete against
other viewers who are seeing the identical program over several different
technological media, including interactive television, personal computers and/or
the NTN Network.
Within the Online/Internet service market is the competitive set for
BUZZTIME.com, which are those sites which offer either trivia game play or
similarly styled social, non-violent game play such as board or card games,
games of chance, and strategy games. The competitive market for Internet game
sites is relatively new, intensely competitive and rapidly changing. The number
of Internet games sites competing for consumers' attention and spending has
proliferated in recent years, and the Company expects the competition to
continue to intensify. The Company competes directly and indirectly for
advertisers, registrants and players. Registration data, number of users per
month and the amount of time a user spends on a site per month (stickiness) are
all important metrics by which advertising revenue is attracted. The Company
believes that the principal competitive factors in attracting and retaining
users and registrants is the ability to offer compelling and entertaining
content and brand recognition. NTN does not currently have sufficient volume of
registered users to be ranked by a third-party research firm as to how the
number of users and amount of time per user rank with comparable websites.
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LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
The Company's sports games make use of simultaneous telecasts of sporting
events. Where the Company has licenses with various sporting leagues, the
Company is also permitted to utilize the trademarks and logos of national teams
and leagues in connection with the playing of an interactive game.
The Company is party to an agreement with the NFL which will, unless
renewed, expire March 31, 2000. The NFL agreement grants the Company the
exclusive data broadcast rights to conduct interactive games in conjunction with
the broadcast of NFL football games, for which the NFL receives a royalty based
on revenues billed by the Company in connection with QB1 play. The Company's
rights under the agreement include certain approved online services to all
territories in which such online services are accessible and significantly
includes the Internet. The Company is currently negotiating with the NFL for a
new agreement, but is not assured that a new agreement will be reached.
The Company keeps confidential as trade secrets the software used in the
production of its programs. The hardware used in the Company's operations is
virtually off-the-shelf, except for the Playmaker keypads. The Company owns
copyrights to all of its programs and software. In addition to the registration
of the trademark for QB1, the Company has either received, or is presently
applying for, trademark protection for the names of its other proprietary
programming, to the extent that trademark protection is available for them. The
Company's intellectual property assets are important to the Company's business
and, accordingly, the Company maintains a program directed to the protection of
its intellectual property assets.
GOVERNMENT CONTRACTS
The Company provides its broadcast services through the NTN Network to a
small number of government agencies (usually military base recreation units);
however, the number of government customers is small compared to the Company's
overall customer base. Contracts with government agencies are provided under
substantially the same terms and conditions as other corporate customers.
RESEARCH AND DEVELOPMENT
During 1999, 1998 and 1997, the Company incurred approximately $842,000,
$714,000, and $1,600,000, respectively, related to Company-sponsored research
and development projects, including projects performed by consultants for the
Company. In 1999, research and development efforts related to the development of
the second generation of the DITV Network, Internet stations and future Internet
websites.
The Company has previously experienced problems in the performance of its
49 megahertz Playmaker device. In an effort to address these equipment function
problems, the Company developed a new 900 megahertz Playmaker. The new device
has been more reliable as it has been deployed commercially with the launch of
NTN's DITV Network. Further, the Company has developed enhancements to its
interactive software including a migration to a Windows-based platform and
continued research into new and enhanced graphics. The Company continuously
evaluates various methods of transmitting its programs and services. Research
and development is also underway to migrate the current Network technology to
off-the-shelf
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Internet technology. By doing so, third-party content, technology and hardware
solutions can be easily integrated into the Network systems. The goal is to
transform the previously entertainment-based service into a Public Portal to the
Internet(TM), enabling popular online services such as e-mail, chat, instant
messaging and real-time informational services. Research is currently underway
evaluating a web-enabled Playmaker device. We have also developed Internet
kiosks into test sites. Currently, we do not have an anticipated time for
development of the Public Portal. In an effort to prepare for the launch of the
Company's new game website, BUZZTIME.com, the Company performed off-site testing
for Internet based engines and content delivery mechanisms for trivia gaming.
The Company also investigated various hardware and software platforms to
determine the environment that will best serve the live sport play-along games.
In 1999, the Company incurred approximately $60,000 in research and
development expenses for the development and testing of its coin-operated
Internet stations.
The Company works closely with independent user groups in an attempt to
develop new and enhanced services and products in response to customer needs.
GOVERNMENT REGULATIONS
The cost of compliance with federal, state and local laws has not had a
material effect upon the Company's capital expenditures, earnings or competitive
position to date.
On June 16, 1998 the Company received FCC approval for its new 900 MHz
Playmaker keypad. The 900 MHz Playmaker is an integral component of the
Company's DITV Network.
EMPLOYEES
The Company employs approximately 188 people on a full-time basis and 35
people on a part-time basis, and also utilizes independent contractors for
specific projects. In addition, the Company retains a number of non-affiliated
programming and systems consultants. It is expected that as the Company expands,
additional employees and consultants will be required. The Company believes that
its present employees and consultants have the technical knowledge necessary for
the operation of the Company and that it will experience no particular
difficulties in engaging additional personnel with the necessary technical
skills when required. None of the Company's employees are represented by a labor
union, and the Company believes its employee relations are satisfactory.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected financial data and
the consolidated financial statements and notes thereto included elsewhere
herein.
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
operations for the three years ended December 31, 1999. The Company believes
that inflation has not had a material effect on its results of operations for
the periods presented.
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Operations for the year ended December 31, 1999 resulted in a net loss of
$2,498,000 compared to net loss of $1,793,000 for the year ended December 31,
1998. The operating results for the year ended December 31, 1999 included a gain
of $2,254,000 related to the sale of the assets of the Company's wholly-owned
subsidiary, IWN, L.P., to eBet Limited for $1,227,000 in cash and 4,000,000
shares of eBet Online stock. The operating results for the year ended December
31, 1998 included a gain of $1,643,000 related to the sale of a majority
interest in one of the Company's subsidiaries.
Total revenues decreased 2% to $23,748,000 for the year ended December 31,
1999 from $24,194,000 for the year ended December 31, 1998. This occurred
primarily due to decreases in Internet revenues, America Online fees, equipment
sales and other revenues which were partially offset by increases in Hospitality
revenues.
The following table sets forth certain information with respect to the
principal sources of the Company's revenues during the years ended December 31,
1999 and 1998.
YEARS ENDED DECEMBER 31
-----------------------
1999 1998
------- -------
(IN THOUSANDS)
Hospitality Revenues.................................... $22,250 $20,973
Internet Revenues....................................... 383 1,131
America Online Fees..................................... 600 883
Equipment Sales, net.................................... 84 499
Other Revenue........................................... 431 708
Hospitality revenue is generated primarily from broadcasting content and
advertising to customer locations. The direct costs associated with these
revenues include the cost of installing the equipment at the customer location,
marketing visits, technical service, freight, telecommunication, sales
commission, parts, repairs, and depreciation of the equipment placed in service
and materials.
Internet revenues are generated primarily from advertising and production
services. The direct costs associated with these revenues are license fees and
server hosting fees.
America Online fees relate to the fees paid by AOL in connection with an
exclusive agreement whereby NTN provided trivia content in exchange for a fee.
There are no direct costs related to these fees.
Equipment sales are sales of NTN's broadcast equipment to customers and
foreign licensees.
Hospitality revenues increased 6% to $22,250,000 for the year ended
December 31, 1999 from $20,973,000 for the year ended December 31, 1998. This
increase is primarily due to an increase in fees charged for the setup,
installation and training for the Digital Interactive Television Network ("DITV
Network") as compared to the original NTN Network. Subscribers to the network
did, however, decline by 2% from 1998 to 1999. During the year ended December
31, 1999, approximately 1,500 DITV Network systems were installed. Included in
hospitality revenues are revenues from NTN's Canadian licensee totalling
$1,292,000 for both years ended December 31, 1999 and 1998. The Company also
include advertising fees in hospitality revenues. In 2000, the Company sold $1.3
million in national and regional advertising, comprised primarily of companies
in the wine, beer and spirits category.
Internet revenues decreased 66% to $383,000 for the year ended December 31,
1999 from $1,131,000 for the year ended December 31, 1998. The decrease was
largely due to the expiration of the trials the Company performed for Bell
Canada in 1998 which generated $670,000 in 1998 that did not occur in 1999.
America Online fees decreased 32% to $600,000 for the year ended December
31, 1999 from $883,000 for the year ended December 31, 1998. The Company entered
into a new contract in the second quarter of 1998 with its Internet partner,
America Online. The new contract, which expired December 1, 1999, provided for a
flat monthly fee rather than fees based on AOL member usage of the Company's
content, which resulted in a reduction of revenue from this source of $283,000
for the year ended December 31, 1999 compared to the year ended December 31,
1998.
Equipment sales decreased 83% to $84,000 for the year ended December
31,1999 from $499,000 for the year ended December 31, 1998. This decrease was
due to the conclusion of the recognition of deferred revenue associated with
prior equipment sale-leasebacks and also a result of no equipment being sold in
1999. Prior to 1999, the Company sold equipment to its customers and through its
wholly-owned subsidiary, LearnStar. In 1998, the Company stopped selling
equipment to its customers. In 1999, the Company sold an 82.5% interest in
LearnStar and stopped selling equipment to LearnStar customers.
Other revenue decreased 39% to $431,000 for the year ended December 31,
1999 from $708,000 for the year ended December 31, 1998. Other revenue for the
year ended December 31, 1998 included $125,000 in sales generated by LearnStar,
Inc. As a result of the sale of an 82.5% interest in LearnStar in June 1998, no
such revenue was recorded for the year ended December 31, 1999. Additionally,
due to the curtailment of operations related to IWN, Inc. in 1998, other revenue
decreased by approximately $191,000 for IWN, Inc. for the year ended December
31, 1999 as compared to the year ended December 31,1998.
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Direct operating costs of services increased 18% to $11,169,000 for the
year ended December 31, 1999 from $9,491,000 for the year ended December 31,
1998. This increase was due to aggregate expenses of approximately $600,000
associated with an increase in the number of sites installed, increased freight
expenses associated with shipping equipment to the sites and an increase in the
number of sales commissions paid in connection with the roll-out of the DITV
Network in 1999. Satellite transmissions costs and ISP charges increased
$884,000 due to additional services needed to support the DITV Network for the
year ended December 31, 1999. Depreciation and amortization increased $411,000
due to an acceleration of depreciation of the DOS-based network equipment and
capitalized purchases of broadcast equipment associated with the DITV Network
which are offset by a decrease in amortization of capitalized software. These
increases were partially offset by the settlement of an accrued liability for
license fees that was less than had been estimated. As a result, the Company
reduced the accrued expenses and direct operating costs by approximately
$180,000 related to the settlement in 1999. The results for the year ended
December 31, 1998 included approximately $360,000 in costs related to the
realignment of the satellite dishes at hospitality locations in order to receive
broadcast transmissions from the Galaxy III-R satellite when the PanAmSat Galaxy
IV satellite failed to operate in May 1998.
Selling, general and administrative expenses increased 1% to $11,920,000
for the year ended December 31, 1999 from $11,767,000 for the year ended
December 31, 1998. Selling, general and administrative expense for the year
ended December 31, 1999 included consulting expenses of approximately $415,000
relating to Year 2000 remediation efforts. Additionally, marketing expenses
increased approximately $343,000 related to the new DITV Network which was
introduced during the year ended December 31, 1999. Approximately $276,000 in
selling, general and administrative expenses were incurred by LearnStar for the
year ended December 31, 1998. As a result of the sale of an 82.5% interest in
LearnStar in June 1998, no such expenses were recorded for the year ended
December 31, 1999. Selling, general and administrative expenses incurred by IWN
also decreased by approximately $235,000 in 1999 as a result of the sale of
assets of IWN, L.P. in August 1999. Additionally, office lease expense decreased
approximately $135,000 due to the sublet of office space beginning in September
1998.
Litigation, legal and professional fees decreased to $558,000 for the year
ended December 31, 1999 from $1,658,000 for the year ended December 31, 1998
partially due to the settlement of litigation for which the Company had accrued
a liability of $500,000 and the litigation was settled for approximately
$340,000. As a result, the Company reduced the accrued expenses and litigation,
legal and professional fee expenses by approximately $160,000 related to the
settlement. Expenses for 1998 include legal expenses incurred in the ordinary
course of business, as well as certain litigation expenses which did not recur
in 1999.
Equipment lease expense decreased 30% to $652,000 for the year ended
December 31, 1999 from $932,000 for the year ended December 31, 1998 due to the
payoff of such leases during the year ended December 31, 1999.
Stock-based compensation expense decreased 17% to $292,000 for the year
ended December 31, 1999 compared to $353,000 for the year ended December 31,
1998. The 1999 and 1998 charges resulted from the issuance of warrants and
options to employees and non-employees and can vary from period-to-period.
Depreciation and amortization decreased 16% to $1,370,000 for the year
ended December 31, 1999 compared to $1,636,000 for the year ended December 31,
1998 due to assets becoming fully depreciated.
Research and development expenses decreased 18% to $842,000 for the year
ended December 31, 1999 compared to $714,000 for the year ended December 31,
1998. The current period expenses result from the Company's research and
development efforts related to the second generation of the DITV Network,
Internet stations, and future Internet web sites. For the year ended December
31, 1998, the Company's research and development efforts focused primarily on
the upgrade of the NTN Network to DITV Network.
Interest expense increased 263% to $1,050,000 for the year ended December
31, 1999 from $289,000 for the year ended December 31, 1998. The increase was
primarily due to interest expense recorded in 1999 related to the 7% senior
subordinated convertible notes issued in 1999. The Company also incurred
increased interest expense related to a new revolving line of credit, other
notes payable and additional capital leases for equipment acquisitions that did
not exist in 1998.
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
The Company incurred a net loss of $1,793,000 for the year ended December
31, 1998 as compared to a net loss of $12,457,000 for the year ended December
31, 1997. The 1998 results includes an operating loss of $3,447,000 which was
partially offset by a gain of $1,643,000 from the sale of an 82.5% interest in
the Company's LearnStar subsidiary. The 1997 results included charges totaling
$4,998,000 related to a management
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reorganization, a $2,543,000 charge related to shrinkage and obsolete equipment
and a $905,000 gain from the sale of an interest in real estate.
Total revenues decreased 6% to $24,194,000 in 1998 from $25,861,000 in 1997
due to declines in hospitality revenues, internet revenues, America Online fees,
and other revenue.
The following table sets forth certain information with respect to the
principal sources of the Company revenues during the years ended December 31,
1998 and 1997.
YEARS ENDED DECEMBER 31
-----------------------
1998 1997
------- -------
(IN THOUSANDS)
Hospitality Revenues.................................... $20,973 $21,018
Internet Revenues....................................... 1,131 694
America Online Fees..................................... 883 2,632
Equipment Sales, net.................................... 499 475
Other Revenue........................................... 708 1,042
Hospitality revenues decreased 1% to $20,973,000 in 1998 from $21,018,000
in 1997 due primarily to a reduction in average billing rates during 1998, which
is offset by an increase in advertising revenue due to an increase in the number
of commercial spots sold. NTN also experienced a 2% increase in subscribers to
our network from 1997 to 1998.
Internet revenues increased 63% to $1,131,000 in 1998 from $694,000 in 1997
partially due to the trials the Company performed for Bell Canada which resulted
in an increase in revenue from this source of $290,000 in 1998. Also included in
1998 is revenue related to GTE Mainstreet which did not exist in 1997.
America Online fees decreased 66% to $883,000 in 1998 from $2,632,000 in
1997 largely due to non-recurring revenue of $1,000,000 in 1997 from AOL related
to AOL's termination of its prior contract with the Company and the recognition
of revenue for production services in 1997 that did not recur in 1998.
Equipment sales increased 5% to $499,000 in 1998 from $475,000 in 1997.
Equipment sales in the past have included sales to foreign licensees, which are
subject to outside influences and can occur unevenly throughout the year.
Direct operating costs of services decreased 13% to $9,491,000 in 1998 from
$10,860,000 in 1997. The decrease relates to a reduction in site visit fees,
commissions and other field expenses due to (i) the Company's decreased reliance
on independent representatives in favor of employed field and marketing
personnel and (ii) a revision, effective January 1, 1998, in the Company's
commission and bonus structure for all field personnel. The decreases are offset
by an increase of $446,000 in amortization expense related to an increase in
software capitalized in 1997.
Selling, general and administrative expenses decreased 28% to $11,767,000
in 1998 from $16,244,000 in 1997. Included in selling, general and
administrative expenses for 1997 were charges for the reorganization of the
Company's management totaling $3,363,000 and costs associated with the abandoned
merger with GTECH Corporation of $376,000. Exclusive of these charges, selling,
general and administrative expenses decreased $738,000 or 6%. This decrease is
primarily due to a reduction in advertising and promotion expense, the sale of
LearnStar, Inc. and a significant reduction in IWN, LP business activity which
collectively reduced selling, general and administrative expenses.
Litigation, legal and professional fees increased to $1,658,000 in 1998
from $808,000 in 1997. In the fourth quarter of 1997, the Company reduced the
accrual for a legal settlement which reduced legal expense by $1,350,000.
Expenses for 1998 included legal expenses incurred in the ordinary course of
business, as well as litigation expenses and accruals which included $500,000 to
cover the potential liability related to insufficient licensing for MS-DOS.
Stock-based compensation decreased 89% to $353,000 in 1998 from $3,205,000
in 1997. Stock-based compensation charges result from the issuance, extension or
modification of warrants or options to non-employees and can vary from period to
period. Charges in 1997 included $1,450,000 that resulted from extension of the
exercise period and reductions in the exercise price of warrants owned by
certain former officers pursuant to the management reorganization in 1997.
Depreciation and amortization expense increased 62% to $1,636,000 in 1998
from $1,010,000 in 1997 due to additions of fixed assets.
Bad debt expense decreased 42% to $850,000 in 1998 from $1,462,000 in 1997.
The Company began to experience reliability problems with its equipment in NTN
Network Locations. These problems led to an increase in bad debt expense in 1996
and 1997. In 1998, the equipment problems stabilized, resulting in a lower bad
debt expense.
Equipment charges decreased 91% to $240,000 in 1998 from $2,543,000 in
1997. Equipment charges consist of charges for obsolescence and shrinkage of the
Company's stock of broadcast equipment. The Company performs periodic reviews of
its broadcast equipment. In connection with these reviews, the Company
identified equipment shrinkage and obsolescence primarily related to terminated
sites.
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Research and development expenses decreased 55% to $714,000 in 1998 from
$1,600,000 in 1997. The decrease was due to certain research and development
endeavors which began in early 1997 that were completed by the end of 1997.
These efforts included initial design and implementation of the Company website,
redesign of the America Online site and content and other production for third
parties. For 1998, the Company's research and development efforts related
primarily to the upgrade of the NTN network to DITV Network.
Other income (expense) increased to $1,654,000 in 1998 from $350,000 in
1997. Other income in 1998 included a gain of $1,643,000 related to the sale of
an 82.5% interest in LearnStar in June 1998. Other income in 1997 included a
gain of $905,000 related to the sale of the Company's interest in an office
building. Interest expense decreased 64% to $289,000 in 1998 from $793,000 in
1997 due primarily to interest expense recorded in 1997 in conjunction with the
repurchase of a limited partnership interest in IWN, L.P. in 1997.
SEGMENT ANALYSIS
NTN's operations are to develop and distribute interactive entertainment.
Revenues generated by the two most significant segments are as follows:
- ------------------------------------------------------------------------------------------------------------
Segment 1999 Revenues 1998 Revenues 1997 Revenues
- ------------------------------------------------------------------------------------------------------------
Hospitality $22,250,000 96% $20,973,000 91% $21,018,000 86%
BUZZTIME 1,028,000 4% 2,014,000 9% 3,326,000 14%
----------- ---- ----------- ---- ----------- ----
Total 23,278,000 100% 22,987,000 100% 24,344,000 100%
=========== ==== =========== ==== =========== ====
- ------------------------------------------------------------------------------------------------------------
Hospitality revenues increased 6% in 1999 over 1998 due primarily to an increase
in fees charges for the setup, installation and training for the DITV Network as
compared to the original NTN Network.
Hospitality revenues decreased 1% in 1998 over 1997 due primarily to a reduction
in average billing rates during 1998 offset partially by an increase in
advertising revenue due to an increase in the number of commercial spots aired.
BUZZTIME revenues decreased 49% in 1999 over 1998 due to the expiration of the
trial performed for Bell Canada in 1998 which generated $670,000 in 1998 that
did not occur in 1999 and a reduction in the fees earned from America Online of
$283,000 as a result of entering into a new contract with AOL in the second
quarter of 1998 which provided for a flat monthly fee rather than fees based on
usage.
BUZZTIME revenues decreased 39% in 1998 over 1997 due to a reduction in the fees
earned from AOL of $1,749,000 largely due to non-recurring revenue of $1,000,000
in 1997 from AOL related to AOL's termination of its prior contract with
BUZZTIME. These decreases were partially offset by an increase in
revenue generated from Bell Canada of $290,000 and revenue related to GTE
Mainstreet, which did not exist in 1997.
Operating income (loss) by segment are illustrated below:
- ------------------------------------------------------------------------------------------------
Segment 1999 Income (Loss) 1998 Income (Loss) 1997 Income (Loss)
- ------------------------------------------------------------------------------------------------
Hospitality $ 6,798,000 $ 5,755,000 $1,129,000
BUZZTIME (4,599,000) (1,371,000) (247,000)
----------- ----------- ----------
Total 2,199,000 4,384,000 882,000
=========== =========== ==========
- ------------------------------------------------------------------------------------------------
The hospitality operating income was $1 million higher in 1999 over 1998. The
increased income was a result of a reduction in SG&A. SG&A expenses decreased
because of a shift in directives within the technology area. Prior to 1999 the
technology personnel costs were primarily was related to the hospitality
business. In 1999, the majority of technology personnel costs were incurred for
the BUZZTIME segment business initiatives.
The hospitality operating income was $4.6 million higher in 1998 over 1997. A
significant decrease in SG&A of approximately $2.8 million drove the increase in
operating income in 1998. $2.3 million of the reduction related to charges for
obsolete inventory in 1997 while the remainder was from reductions in
advertising and promotion expense. Direct expenses decreased by approximately
$1.8 million due to a reduction in site visit fees, commissions, and other field
expenses.
BUZZTIME operating loss was $3.2 million higher in 1999 over 1998. SG&A expenses
increased due to a strengthened focus on BUZZTIME initiatives as a result of
increased technology personnel costs related to positioning BUZZTIME for the
year 2000.
BUZZTIME operating loss was $1.1 million higher in 1998 over 1997. Revenue
decreased by $1.3 million due to a significant reduction in AOL fees. The
reduction was primarily a result of non-recurring revenue recognized in 1997 and
a revised contract with AOL. The increase in revenues was offset by a decrease
in SG&A expenses as a result of lower production efforts.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of
$1,044,000 and working capital (current assets in excess of current liabilities)
of $921,000 compared to cash and cash equivalents of $4,560,000 and working
capital of $2,400,000 at December 31, 1998. Net cash provided by operations was
$431,000 and $1,120,000 for the twelve months ended December 31, 1999 and 1998,
respectively. The principal uses of cash in 1999 were to fund the Company's net
loss from operations, to fund prepaid expenses and to fund severance payments
totaling $925,000 in compliance with reorganization agreements with former
officers. These uses were more than offset by depreciation, amortization and
other noncash charges. Net cash used in investing activities was $5,472,000 for
the twelve months ended December 31, 1999 and $1,220,000 for the twelve months
ended December 31, 1998. Included in net cash used in investing activities for
the twelve months ended December 31, 1999 were approximately $6,814,000 in
capital expenditures, which were partially offset by proceeds from the sale of
assets of a subsidiary of approximately $1,227,000. Net cash provided by
financing activities was $1,525,000 for the year ended December 31, 1999. Net
cash used in financing activities was $104,000 for the year ended December 31,
1998. Net cash provided by financing activities for the year ended December 31,
1999 included borrowings under a new revolving line of credit of approximately
$11,175,000, offset by principal payments on the revolving line of credit and
other debt of approximately $8,872,000, and $1,125,000 of principal payments on
capital leases.
As of December 31, 1999, the Company has outstanding in 7% senior
subordinated convertible notes of $4,705,000, payable February 1, 2001 and
bearing interest at 7% per annum. If the Company defaults under the convertible
notes, in the discretion of the holders of the convertible notes, the entire
outstanding principal amount of the convertible notes and all accrued and unpaid
interest will become immediately due and payable in full. On November 20, 1999,
$1,000,000 of principal plus accrued interest was converted into approximately
793,000 shares of Common Stock.
In August 1999, the Company entered into an agreement with Coast Business
Credit for a revolving line of credit not to exceed $4,000,000. Interest is
charged on the outstanding balance at a rate equal to the Prime Rate plus 1.5%
per annum, but cannot be less than 9% per annum. The line of credit is secured
by substantially all of the Company's assets. Total loan fees of $120,000 are
payable in three annual installments and are being amortized over the life of
the loan, which matures on August 31, 2002. The line of credit is expected to be
used primarily for capital expenditures related to the launch of the DITV
Network.
In February 1998, pursuant to the settlement of a class-action lawsuit
pending against the Company since 1993, the Company issued 565,000 warrants to
purchase Common Stock of the Company ("Settlement Warrants"). Each Settlement
Warrant has a term of three years beginning February 18, 1998. The Settlement
Warrants entitle the holder of a Settlement Warrant to purchase a share of
Common Stock of the Company at a price of $0.96. During the period from February
18, 2000 to February 18, 2001, the holders of Settlement Warrants were to have
the right, but not the obligation, to cause the Company to redeem the Settlement
Warrants for a redemption price of $3.25 per Settlement Warrant (the "Put
Right"); however, this Put Right expired by its terms on February 17, 2000 when
the closing price per share of the Company's Common Stock on the American Stock
Exchange reached $4.22 or above for the seventh trading day. The Company has no
further obligation to repurchase the Settlement Warrants or the underlying
Common Stock. The right of holders to exercise the
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Settlement Warrants to purchase shares of Common Stock of the Company at $0.96
per share continues through February 18, 2001.
The Company believes that its cash on hand, anticipated cash flows from its
operations and borrowings under its line of credit will be sufficient to meet
its immediate operating needs. If cash flow is less than anticipated, however,
or if the Company incurs unexpected expenses, the Company may need additional
funding in order to maintain its current level of operations of business
activities. It also is likely the Company will need to raise additional capital
in future periods through public or private financing or other arrangements to
expand the BUZZTIME Internet strategy, convert its entire existing customer base
to the DITV Network, to expand the DITV Network and to implement the Company's
Internet station strategy. The Company has no agreement or commitment for any
such additional financing and there can be no assurance whether, or on what
terms, such financing will be available to the Company. If the Company is unable
to obtain any needed financing, it would have to curtail certain business
activities.
YEAR 2000 COMPLIANCE
The Company's computer systems and equipment successfully transitioned to
the Year 2000 with no significant issues. The Company continues to keep its Year
2000 project management in place to monitor latent problems that could surface
at key dates or events in the future. It is not anticipated that there will be
any significant problems related to these events. All costs associated with the
Year 2000 remediation efforts were expensed or capitalized in accordance with
appropriate accounting policies.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, results of operation and financial condition would
be adversely affected by a number of factors, including the following:
The Company's Limited Liquidity And Capital Resources May Constrain Its
Ability To Operate Its Business. At December 31, 1999, the Company's current
assets exceeded its current liabilities by $921,000. As of the date of this
Annual Report, the Company believes that its cash on hand, anticipated cash
flows from its operations and borrowings under its line of credit will be
sufficient to meet immediate operating needs. However, if cash flows are less
than anticipated, or if unanticipated expenses arise, the Company will have to
obtain additional funding to maintain its current level of operations and
business activities, or otherwise curtail business operations.
The Company will require additional financing to implement its plan of:
- converting its entire existing customer base to DITV Network;
- expanding DITV Network; and
- executing its strategy to promote its newly-branded game portal called
"BUZZTIME.com."
The Company may seek to raise additional funds through public or private
financing or other arrangements. There can be no assurance that the Company will
be able to raise capital on satisfactory terms. If the Company is unable to
raise capital when needed, its business, financial condition and results of
operations could be materially adversely affected.
Any additional equity financing may be dilutive to stockholders.
The Company Has Experienced Significant Losses And Its Future Profitability
Remains Uncertain. The Company has a history of significant losses, including
net losses of $2,498,000, $1,793,000 and $12,457,000 for each of the three years
ended December 31, 1999, and an accumulated deficit of $63,645,000 as of
December 31, 1999. The results of operations during these periods included
substantial charges related to the resignation or termination of certain former
executive officers, write-downs of assets associated with discontinued business
activities and shrinkage and obsolescence of equipment, accruals for litigation
settlement costs and other litigation expenses, charges relating to stock-based
compensation, charges related to Year 2000 compliance, as well as charges
related to the rollout of the new DITV Network and the development of the
Company's Internet strategies. The Company expects to incur significant
additional charges in the future in connection with the
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deployment of the Company's Internet strategies. There is no assurance that the
Company will ever operate profitably. See "Liquidity and Capital Resources" and
"Selected Consolidated Financial Data" for more information regarding the
Company's financial condition and need for financing.
The Company's Prospects For Growth Are Uncertain. DITV Network was launched
in April 1999 and is now being deployed to subscriber locations. The Company
currently plans to continue operating its original NTN network and DITV Network
concurrently until approximately June 2000. Immediate prospects for growth
depend, in part, on the successful introduction and implementation of the new
DITV Network. There can be no assurance that DITV Network will be favorably
received by current subscribers or that it will enable the Company to attract a
significant number of new subscribers. There also can be no assurance that the
Company can implement and operate DITV Network profitably.
In December 1999, the Company established a subsidiary, BUZZTIME.com, Inc.,
a Delaware corporation ("BUZZTIME.com"). The Company expects BUZZTIME.com to
function both as a developer and a distributor of game content. As a developer,
BUZZTIME.com will continue to augment the Company's expansive interactive game
library. As a distributor, BUZZTIME.com intends to broadcast live play-along
game shows to a broad array of interactive networks and platforms, including the
Internet and online services, interactive television and hand-held devices. In
Spring of 2000, the Company expects to launch BUZZTIME.com as a new game web
site. The strategy is to develop and take the BUZZTIME.com brand beyond the
Internet and online services to multiple consumer interactive platforms. These
prospects are subject to risks and uncertainties, including those described in
this Annual Report, and there can be no assurance that the Company will be
successful in executing its strategy.
The Company Is Involved In Pending Litigation Proceedings. On June 11,
1997, the Company was named as a defendant in a class action lawsuit filed in
the United States District Court for the Southern District of California. The
complaint alleged violations of state and federal securities laws based upon
purported omissions from the Company's periodic filings with the Securities and
Exchange Commission. More particularly, the complaint alleged that the defendant
directors and former officers devised an "exit strategy" to provide themselves
with undue compensation upon their resignation from the Company. The plaintiffs
further alleged that the defendants made false statements about, and failed to
disclose, contingent liabilities and phantom assets in the Company's
consolidated financial statements and independent auditor's audit reports.
According to the plaintiffs, these alleged misrepresentations and omissions
inflated the trading price of the Company's Common Stock.
In November 1999, the Company reached a tentative settlement agreement with
the plaintiffs in the federal lawsuit whereby the Company will pay $3,250,000,
subject to final approval by the U.S. District Court. A settlement hearing is
scheduled to take place in April 2000 for the purpose of seeking court approval
of the proposed settlement and plan of allocation of the settlement funds. Upon
approval of the proposed settlement, the court is expected to enter final
judgment and dismiss the litigation. However, there can be no assurance that the
U.S. District Court will approve the settlement agreement.
The Company is also involved in two pending lawsuits in Canada involving
Interactive Network, Inc. ("IN"), in which the Company and IN have each claimed
that the other is unlawfully infringing on its trademarks and certain other
proprietary rights. The litigation is at the discovery stage, and accordingly,
there can be no assurance as to the probable outcome of the litigation or its
potential impact on the Company's business operations in Canada or elsewhere.
The Company Faces Significant Competition. The entertainment business is
highly competitive. The Company competes with other companies for total
entertainment dollars in the marketplace. Its network programming competes
generally with broadcast television, direct satellite programming, pay-per-view,
other content offered on cable television, and other forms of entertainment.
Furthermore, certain of its competitors have greater financial and other
resources available to them. With the entrance of motion picture, cable and
television companies, competition in the interactive entertainment and
multimedia industries will likely intensify in the future. In January 1999, The
Walt Disney Company introduced interactive programming broadcast in conjunction
with live sporting and other events which may compete directly with the
Company's programming.
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The Company also competes with other content and services available to
consumers through online services. Moreover, the expanded use of online networks
and the Internet provide computer users with an increasing number of
alternatives to video games and entertainment software. The Company seeks to
compete by providing high quality products, thereby establishing a favorable
reputation among frequent users. There can be no assurance, however, that it can
compete effectively. The entertainment industry is continuing to undergo
significant changes, primarily due to technological developments. Due to this
rapid growth of technology, shifting consumer tastes and the popularity and
availability of other forms of entertainment, it is impossible to predict the
overall effect these factors will have on the potential revenue from and
profitability of the Company's products.
New Products And Rapid Technological Change May Affect The Company's
Operations. The emergence of new entertainment products and technologies,
changes in consumer preferences and other factors may limit the life cycle of
the Company's technologies and any future products and services it develops.
Accordingly, the Company's future performance will depend on its ability to:
- identify emerging technological trends in its market;
- identify changing consumer needs, desires or tastes;
- develop and maintain competitive technology, including new product and
service offerings;
- improve the performance, features and reliability of its products and
services, particularly in response to technological changes and
competitive offerings; and
- bring technology to the market quickly at cost-effective prices.
There can be no assurance that the Company will be successful in developing
and marketing new products and services that respond to technological and
competitive developments and changing customer needs, or that such products and
services will gain market acceptance. Any significant delay or failure in
developing new or enhanced technology, including new product and service
offerings, would have a material adverse effect on the Company's business,
financial condition and operating results.
The Company's Inability To Protect Its Intellectual Property Could
Seriously Damage Its Business. The Company relies on a combination of
trademarks, copyrights and trade secret laws to protect its proprietary rights
in certain of its products. Furthermore, it is the Company's policy that all
employees and consultants involved in research and development activities sign
nondisclosure agreements. Competitors may, however, misappropriate the Company's
technology or independently develop technologies that are as good as or better
than those of the Company. Competitors may also challenge or circumvent the
Company's proprietary rights. If the Company has to initiate or defend against
an infringement claim in the future to protect its proprietary rights, the
litigation over such claims could be time-consuming and costly, adversely
affecting its financial condition.
If The Company Cannot Establish Brand Awareness, Its Business May Be
Adversely Affected. Enhancing the BUZZTIME.com brand is critical to the
Company's ability to expand its user base and revenues. The Company believes
that the importance of brand recognition will increase as the number of
entertainment web sites grows and has, therefore, launched its "BUZZTIME
Everywhere" campaign. In order to attract and retain users and advertisers, the
Company intends to increase expenditures for creating and maintaining brand
loyalty. There is no assurance that it will be successful in building or
maintaining this brand. The Company's success in promoting and enhancing the
BUZZTIME.com brand will also depend on its success in providing high quality
content, features and functions that are attractive and entertaining to users of
online game shows and multi-player games. If advertisers or visitors to the
Company's web sites do not perceive its services to be of high quality, the
value of the BUZZTIME.com brand could be diminished, and this could adversely
affect its business, financial condition and results of operations.
The Company Has Recently Experienced Equipment Problems. The 49 megahertz
Playmaker(R), a hand-held, radio frequency device used to enter choices and
selections by players of QB-1(R) and other games and programming broadcast via
the original NTN Network is still being used in approximately 40% of the
Company's hospitality locations as of March 16, 2000. Customers have experienced
certain recurring problems with 49 megahertz Playmakers related to noise
sensitivity and performance of the Playmaker's rechargeable
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batteries. The Company believes these equipment problems have contributed to a
high rate of terminations and bad debt experience. To address these problems,
the Company introduced a 900 megahertz Playmaker in April 1999. The 900
megahertz Playmaker is manufactured by the manufacturer of the 49 megahertz
Playmaker. To date, there have been no significant equipment problems with the
900 megahertz Playmaker. However, there is no assurance that such problems or
other problems will not occur in the future.
The Company Depends On A Single Supplier Of Playmakers. The Company
currently purchases the redesigned 900 megahertz Playmaker from a single,
unaffiliated Taiwanese manufacturer. Unless and until it succeeds in
establishing additional manufacturing relationships, the Company will continue
to depend on its current sole source supplier of Playmakers. If the Company
loses its supplier, its business will be adversely affected.
The Company's Games And Game Shows Are Subject To Gaming Regulations. The
Company operates online games of skill and chance that are regulated in many
jurisdictions and, in some instances, it rewards prizes to the participants. The
selection of prize winners is sometimes based on chance, although none of the
Company's games requires any form of monetary payment. The laws and regulations
that govern these games, however, are subject to differing interpretations in
each jurisdiction and are subject to legislative and regulatory change in any of
the jurisdictions in which the Company offers its games. If such changes were to
happen, the Company may find it necessary to eliminate, modify or cancel certain
components of its products that could result in additional development costs
and/or the possible loss of revenue.
If The Company Fails To Manage Its Growth Effectively, It May Lose Business
and Experience Reduced Profitability. Continued implementation of the Company's
business plan requires an effective planning and management process. The
Company's growth has placed, and its anticipated future growth will continue to
place, a significant strain on its management systems and resources. If the
Company is to grow successfully, it must:
- improve its operational, administrative and financial systems;
- expand, train and manage its workforce; and
- attract and retain qualified management and technical personnel.
The Company plans to continue adding to its technical and Internet sales
and marketing force and its advertising sales department. However, competition
for qualified personnel is intense, particularly for employees with technical
and Internet sales and marketing expertise. The success of the Company depends
on hiring and retaining suitable personnel.
If Key Personnel Leave The Company, Its Business May Be Adversely
Affected. The Company's success greatly depends on the efforts of its executive
management, including the Chief Executive Officer, Chief Financial Officer and
President of BUZZTIME.com. The Company's ability to operate successfully will
depend significantly on the services and contributions of each of these
officers. Although the Company entered into an employment agreement with the
Chief Executive Officer on October 7, 1998, there can be no assurance that he
will continue his employment for any specified period of time. The Company's
business and operations may be adversely affected if one or more key executives
were to leave.
The Company's Stock Price Has Been Highly Volatile. The trading price of
the Company's Common Stock has been and may continue to be subject to wide
fluctuations. The stock price may fluctuate in response to a number of events
and factors, such as quarterly variations in operating results, announcements of
technological innovations or new products and media properties by the Company or
its competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in the Company's markets. In addition, the stock market in general, and
the market prices for Internet-related companies in particular, have experienced
extreme volatility that often has been unrelated to the operating performance of
such companies. These broad market and industry fluctuations may adversely
affect the price of the Company's stock, regardless of its operating
performance.
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Outstanding Options And Warrants May Adversely Affect The Company's Ability
To Engage In Certain Transactions And May Have A Dilutive Effect On The
Company's Stockholders. At March 1, 2000, there were approximately 7,011,104
shares of Common Stock reserved for issuance upon the exercise of outstanding
stock options at exercise prices ranging from $0.5625 to $6.37 per share. At
March 1, 2000, there were also outstanding warrants to purchase an aggregate of
approximately 3,008,238 shares of Common Stock at current exercise prices
ranging from $0.6875 to $6.125 per share. Substantially all of the shares
underlying these outstanding warrants are subject to currently effective
registration statements covering the resale of the underlying warrant shares by
the holders.
The foregoing options and warrants could adversely affect the Company's
ability to obtain future financing or engage in certain mergers or other
transactions, since the holders of those options and warrants can be expected to
exercise them at a time when the Company would be able to obtain additional
capital through a new offering of securities on terms more favorable than those
provided by such options and warrants. For the life of such options and
warrants, the holders are given the opportunity to profit from a rise in the
market price of the Common Stock without assuming the risk of ownership. To the
extent the trading price of the Common Stock at the time of exercise of any such
options or warrants exceeds the exercise price, such exercise will also have a
dilutive effect on the Company's stockholders, including purchases of the
offered shares.
The Company's Charter Contains Provisions That May Hinder Or Prevent A
Change In Control Of The Company. Certain provisions of the Company's
Certificate of Incorporation could make it more difficult for a third party to
acquire control of the Company, even if such a change in control would benefit
its stockholders. For example, the Company's Certificate of Incorporation
requires a supermajority vote of at least 80% of the total voting power, voting
together as a single class, to amend certain provisions of such document,
including those provisions relating to:
- the number, election and term of directors;
- the removal and the filling of vacancies of directors; and
- the supermajority voting requirements of the Certificate of
Incorporation.
These provisions could discourage third parties from taking over control of
the Company. Such provisions may also impede a transaction in which stockholders
receive a premium over then current market prices and impede stockholders'
ability to approve a transaction that they consider in their best interests.
The Company Does Not Expect To Pay Dividends During The Foreseeable
Future. The Company has never declared or paid any cash dividends on its Common
Stock and anticipates that for the foreseeable future any earnings will be
retained for use in its business. The Company's outstanding revolving line of
credit prohibits it from paying cash dividends without obtaining prior approval
from the lender.
If The Shares Of The Company's Common Stock Eligible For Future Sales Are
Sold, The Market Price Of Its Common Stock May Be Adversely Affected. Future
sales of substantial amounts of the Company's Common Stock in the public market
or the anticipation of such sales could have a material adverse effect on
then-prevailing market prices. As of March 1, 2000, there were approximately
7,011,104 shares of Common Stock reserved for issuance upon the exercise of
outstanding stock options at exercise prices ranging from $0.5625 to $6.50 per
share. As of March 1, 2000, there were also outstanding warrants to purchase an
aggregate of approximately 3,008,238 shares of Common Stock at exercise prices
ranging from $0.6875 to $6.125 per share.
RISKS ASSOCIATED WITH THE INTERNET
One of the Company's principal business objectives is to increase its
direct contact with consumers. To that end, the Company maintains a web site on
the Internet (the "NTN Web Site") and is currently constructing a web site for
BUZZTIME on the Internet (the "BUZZTIME Web Site", together with NTN Web Site,
the "Web Sites"). The Company will face the risks described below in operating
the Web Sites on the Internet.
The Company Faces Significant Internet Competition. The Internet market is
new, rapidly evolving and intensely competitive. The Company expects this
competition to intensify in the future due in part to the minimal
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barriers to entry and the relatively low cost to launch a new web site. The
Company will compete with a variety of other entertainment and multimedia
companies on the Internet. Some of these competitors can devote substantial
resources to Internet commerce in the near future. The Web Sites will also
compete with traditional providers of entertainment and multimedia content and
services.
The Company believes that the principal competitive factors it will face in
providing entertainment and multimedia content and services through the Web
Sites are brand recognition, selection, availability, price, effectiveness of
advertising, customer service, technical expertise, convenience, accessibility,
quality of search tools and quality of editorial and other site content. Many of
the Company's current and potential competitors have large customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than the Company. In addition, some competitors may be able to
obtain services from vendors on more favorable terms, devote greater resources
to marketing and promotional campaigns, adopt more aggressive pricing policies
and devote more resources to web site and systems development than the Company.
There can be no assurance that the Web Sites will be able to compete
successfully against current or future competitors.
The Company Faces Rapid Technological Change. The technology used in the
Internet commerce industry changes rapidly. This rapid change results in the
availability of many new products and services, new industry standards, and
frequent changes in user and customer requirements and preferences. The success
of the Web Sites will depend, in part, on the Company's ability to do the
following:
- license leading technologies useful in the Internet services business;
- enhance the Web Sites' existing services;
- develop new services and technologies that address the increasingly
sophisticated and varied needs of its customers; and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
There can be no assurance that the Company will successfully use new
technologies effectively or adapt the Web Sites to customer requirements or
emerging industry standards.
The Company Depends On Continued Growth Of The Internet. The Company's
future success depends on the increased use of the Internet. There can be no
assurance that the market for Internet services will continue to grow or become
sustainable. The Internet may not continue as a viable commercial marketplace
because of many factors, including:
- inadequate development of the necessary infrastructure;
- lack of development of complementary products such as high speed modems
and high speed communication lines; and
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity.
If the Internet and other online services continue to experience
significant growth in the number of users, the frequency of use or bandwidth
requirements, the infrastructure for the Internet could be affected by capacity
constraints. In addition, the Internet could lose its viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of service activity. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and could adversely affect usage of the Internet. The Company's
business, prospects, financial condition and results of operations could be
materially adversely affected if use of the Internet does not continue to grow
or grows more slowly than expected, if the infrastructure for the Internet does
not effectively support growth that may occur, or if the Internet does not
become a viable commercial marketplace.
The Company Will Only Be Able To Execute Its Business Plan If It Is
Successful In Achieving Its Advertising Revenue Goals. Consumer usage of the
Internet is relatively new, and the success of the Internet as an
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advertising medium will depend on its widespread adoption. The Company's
business would be materially adversely affected if the Internet advertising
market develops more slowly than it expects, or if the Company is unsuccessful
in achieving its advertising revenue goals. The Company expects that revenues
from Internet advertising will make up a significant amount of its revenues in
the future. The adoption of Internet advertising, particularly by those entities
that have historically relied on traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally relied on
other advertising media may be reluctant to advertise on the Internet. These
businesses may find Internet advertising to be less effective than traditional
advertising media for promoting their products and services. Many potential
advertising and electronic commerce partners have little or no experience using
the Internet for advertising purposes. Consequently, they may allocate only
limited portions of their advertising budgets to the Internet.
The Company May Be Liable For The Content It Makes Available On The
Internet. The Company makes content available on the Web Sites and on the web
sites of its advertisers and distribution partners. The availability of this
content could result in claims against the Company based on a variety of
theories, including defamation, obscenity, negligence, or copyright or trademark
infringement. The Company could also be exposed to liability for third-party
content accessed through the links from the Web Sites to other web sites. The
Company may incur costs to defend itself against even baseless claims, and its
financial condition could be materially adversely affected if it is found liable
for information that it makes available. Implementing measures to reduce the
Company's exposure to this liability may require it to spend substantial
resources and may limit the attractiveness of its services to users.
The Company May Lose Visitors To The Web Sites If Its Online Security
Measures Fail. Secure transmission of confidential information over public
networks is a significant barrier to Internet commerce. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
could compromise the security measures the Company employs to protect customer
transaction data. In addition, concerns over the security of transactions
conducted on the Internet and the privacy of users in general may inhibit the
growth of Internet commerce. To the extent that the Company's activities or the
activities of third-party contractors involve the storage and transmission of
proprietary information, security breaches could damage the Company's reputation
and expose it to a risk of loss or litigation and possible liability. The
Company may be required to expend significant capital and other resources to
protect against such security breaches or to alleviate security-related
problems, and there can be no assurance that its security measures will prevent
security breaches. Any compromise of the Company's security systems could have a
material adverse effect on its reputation, business, prospects, financial
condition and results of operations.
The Company's Business May Suffer If It Has Difficulty Retaining Users On
The Web Sites. The Company's business and financial results depend on its
ability to retain users on the Web Sites. In any particular month, many of the
visitors to the Web Sites are not registered users, and many registered users do
not visit the Web Sites. The Company believes that intense competition has
caused, and will continue to cause, some of its registered users to seek online
entertainment on other web sites and spend less time on the Web Sites. It is
relatively easy for Internet users to go to competing sites, and the Company
cannot be certain that any steps it takes will maintain or improve its retention
of users. In addition, some new users may decide to visit the Web Sites out of
curiosity regarding the Internet and may later discontinue using Internet
entertainment services. If the Company is unable to retain its user base, its
business and financial results may suffer.
Laws Restricting the Internet Could Adversely Affect The Company's
Business. Federal, state and foreign governmental organizations are currently
considering many legislative and regulatory proposals. If a government authority
were to adopt laws or regulations that cover Internet-related issues such as
user privacy, pricing and characteristics and quality of products and services
provided, the growth of the Internet could be adversely affected. This could
lead to a decrease in demand for services offered over the Internet, including
those that the Web Sites offer, and could increase the cost of doing business on
the Internet. In addition, the Company does not know how existing laws governing
issues such as property ownership, copyright, trade secret, libel and personal
privacy will be applied to the rapidly changing Internet. The Company's business
could be materially adversely affected by any new legislation or regulation or
by the application or interpretation of existing laws to the Internet.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 requires companies to report any
changes in revenue recognition as cumulative change in accounting principle at
the time of implementation in accordance with Accounting Principles Board
Opinion 20, "Accounting Changes." SAB 101 will not be effective until the
Company's fourth fiscal quarter of 2001. The Company believes that the
implementation of SAB 101 will have an impact on the Company's revenue
recognition related to fees associated with the installation of broadcast
equipment. The Company is in the process of evaluating the impact that SAB 101
will have on its financial position and results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB 25. This Interpretation clarifies
(a) the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a non compensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. This Interpretation will
become effective July 1, 2000, but certain conclusions in this Interpretation
cover specific events that occur after either December 15, 1998, or January 12,
2000. The Company does not believe that implementation of this standard will
have a material impact on the results of operations, liquidity or financial
position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NTN is exposed to risks related to currency exchange rates, stock market
fluctuations, and interest rates. As of December 31, 1999, NTN owned Common
Stock of an Australian company that is subject to market risk. At December 31,
1999, the carrying value of this investment was $937,000, which is net of a
$360,000 unrealized loss. This investment is exposed to further market risk in
the future based on the operating results of the Australian company and stock
market fluctuations. Additionally, the value of the investment is further
subject to changes in Australian currency exchange rates. At December 31, 1999,
a hypothetical 10% decline in the value of the Australian dollar would result in
a reduction of $97,000 in the carrying value of the investment.
NTN has outstanding convertible notes which bear interest at 4% per annum
and line of credit borrowings which bear a rate equal to the Prime Rate plus
1.5% per annum, which cannot be less than 9% per annum. At December 31, 1999, a
hypothetical one percentage point increase in the Prime Rate would result in an
increase of $25,000 in annual interest expense.
The Company does not have derivative financial instruments.
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PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING ARRANGEMENTS
On February 1, 1999, NTN entered into a Consulting Agreement with Barry
Bergsman pursuant to which Mr. Bergsman was engaged to actively provide
consulting services to the Company under the direction of the Company's Chief
Executive Officer. For Mr. Bergsman's services under the Consulting Agreement,
NTN granted Mr. Bergsman a warrant to purchase 36,000 shares of Common Stock at
an exercise price of $0.6875 per share. The warrant is exercisable as to 3,000
shares on the first day of each of the twelve consecutive months commencing
March 1, 1999. In addition, Mr. Bergsman will receive cash compensation of
$3,500 per month. The Consulting Agreement expired on January 31, 2000.
On March 14, 1997, the Company entered into a Consulting Agreement with
Donald Klosterman pursuant to which Mr. Klosterman was engaged to perform
consulting services for the Company regarding the Company's marketing plans and
the Company's relationship with the National Football League. The Consulting
Agreement expired on December 31, 1999. In lieu of compensation for Mr.
Klosterman's services pursuant to the Consulting Agreement, the Company extended
the expiration date of warrants previously granted to Mr. Klosterman from June
15, 1997 to June 15, 2002. In further consideration, the Company repriced
options to purchase 100,000 shares at $8.25 per share and 50,000 options at
$5.75 per share held by Mr. Klosterman so as to be exercisable at $4.00 per
share and the terms of all such options were extended to January 1, 2002.
In March 1997, NTN entered into a separate Consulting Agreement with Mr.
Edward C. Frazier. Mr. Frazier was an NTN director from August 1996 until May
1998. He served as Chairman of the Board from March 1997 until February 1998.
From March 1997 until October 1997, Mr. Frazier assumed the responsibilities of
Chief Executive Officer of NTN on an interim basis. Under the consulting
agreement, Mr. Frazier agreed to spend on average seven days a month
consulting with management of NTN regarding NTN's operations and serving as a
consultant to NTN's President and as a member of NTN's Executive Advisory Board,
which had just been created by NTN's Board of Directors. The Executive Advisory
Board was subsequently disbanded. The Consulting Agreement was to expire in
March 1999, unless sooner terminated. In consideration for his services under
the foregoing Consulting Agreement, Mr. Frazier was granted a five-year,
nonqualified stock option to purchase 250,000 shares of Common Stock at an
exercise price of $4.50 per share, which was to vest in 24 monthly installments
of approximately 10,416 shares each, subject to Mr. Frazier remaining as a
consultant, and was to become exercisable on and after February 28, 1999. NTN
also agreed to reimburse Mr. Frazier for certain expenses relating to his
consulting services. In May 1997, Mr. Frazier's option was amended to reduce the
exercise price to $2.81 and to provide that it would become immediately
exercisable in full in the event of a "Change of Control" (as defined) of NTN.
In January 1998, the Board of Directors cancelled the Consulting Agreement and
reduced the compensation to 104,167 options, which are 100% vested at March 31,
1998. In connection with the option granted to Mr. Frazier under the
24
26
Consulting Agreement, NTN recorded a charge pursuant to SFAS No. 123 of $224,000
in 1997. An additional charge of $58,000 was recorded in 1998.
In April 1997, NTN entered into another Consulting Agreement with
Frazier King Media Holding Co. under which Frazier/King was engaged to review
and consult with management of NTN regarding NTN's strategic business plan,
current operations and future development and to devise and structure an
appropriate plan to secure future financing for NTN. Frazier King Media Holding
Co. is a private media property holding company and consulting firm, founded in
August 1996. Mr. Edward C. Frazier is a principal of the company and 50% owner.
The Consulting Agreement was terminable by NTN any time upon ten days notice to
Frazier/King in the event the Board of Directors as a whole determined in good
faith that Frazier/ King had failed materially to perform, or had breached its
duties, under the Consulting Agreement.
For Frazier/King's services under the foregoing Consulting Agreement, NTN
granted Frazier/King a warrant to purchase 1,000,000 shares of Common Stock at
an exercise price of $2.81, the approximate market value of the Common Stock on
the date of the Consulting Agreement, and agreed to reimburse Frazier/King for
expenses (other than normal operating expenses) incurred by it in performing its
consulting services. Frazier/King's warrant was immediately vested and
exercisable as to 200,000 shares of Common Stock covered thereby and was to
become vested and exercisable as to the balance of 800,000 covered shares in
quarterly installments of 100,000 shares each as of the 15th day of each July,
October, January and April commencing July 15, 1997 and ending April 15, 1999,
provided that the Board of Directors of NTN has determined that Frazier/King was
performing satisfactorily under the Consulting Agreement. In January, 1998, the
Board and Frazier/King agreed to terminate this consulting agreement and the
number of warrants granted was reduced to 500,000, which were immediately
vested. In connection with the warrant granted to Frazier/King, NTN recorded a
charge pursuant to SFAS No. 123 of $1,401,000, in 1997.
INDEMNITY AGREEMENTS
The Company has entered into indemnity agreements with each of its
directors and executive officers. The indemnity agreements provide that the
Company will indemnify these individuals under certain circumstances against
certain liabilities and expenses they may incur in their capacities as directors
or officers of the Company. The Company believes that the use of such indemnity
agreements is customary among corporations and that the terms of the indemnity
agreements are reasonable and fair to the Company, and are in its best interests
to retain experienced directors.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
1.2. Consolidated Financial Statements and Schedule. The consolidated
financial statements and schedule of the Company and its consolidated
subsidiaries are set forth in the "Index to Consolidated Financial
Statements and Schedule" on page F-1.
3. Exhibits. The following exhibits are filed as a part of this
report:
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 -- Amended and Restated Certificate of Incorporation
of the Company, as amended(7)
3.2 -- Certificate of Designations, Rights and Preferences
of Series B Convertible Preferred Stock(12)
3.3 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 22, 2000(13)
3.4 -- Certificate of Amendment to Restated Certificate
of Incorporation of the Company, dated March 24, 2000(13)
3.5 -- Bylaws of the Company(2)
10.1 -- License Agreement with NTN Canada(3)
10.2 -- National Football League License Agreement(3)
10.3 -- Lease of Office with The Campus L.L.C.(4)
10.4* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Patrick J.
Downs.(5)
25
27
EXHIBIT
NO. DESCRIPTION
------- -----------
10.5* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Daniel C.
Downs.(5)
10.6* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Ronald E.
Hogan(5)
10.7* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Gerald P.
McLaughlin.(5)
10.8* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Michael J.
Downs.(5)
10.9* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Robert
Klosterman.(5)
10.10* -- Letter agreement, dated March 4, 1997, between NTN and
Alan Magerman.(5)
10.11* -- Consulting Agreement, dated as of December 31, 1996,
between NTN Communications Inc. and Patrick J. Downs.(5)
10.12* -- Consulting Agreement, dated as of December 31, 1996,
between NTN Communications Inc. and Daniel C. Downs.(5)
10.13* -- Consulting Agreement, dated as of December 31, 1996,
between NTN Communications Inc. and Ronald E. Hogan.(5)
10.14* -- Consulting Agreement, dated as of December 31, 1996,
between NTN Communications Inc. and Gerald P.
McLaughlin.(5)
10.15* -- Consulting Agreement, dated as of March 14, 1997, between
NTN Communications Inc. and Donald Klosterman.(5)
10.16* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Patrick J Downs.(5)
10.17* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Daniel C. Downs.(5)
10.18* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Ronald E. Hogan.(5)
10.19* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Gerald P. McLaughlin.(5)
10.20* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Michael J. Downs.(5)
10.21* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Robert Klosterman.(5)
10.22* -- Special Stock Option dated August 18, 1996 between NTN
Communications, Inc. and Gerald Sokol, Jr.(5)
10.23* -- Special Stock Option dated August 25, 1996 between NTN
Communications, Inc. and Robert Bennett(5)
10.24* -- Special Stock Option dated August 30, 1996 between NTN
Communications, Inc. and Edward C. Frazier(5)
10.25* -- Amendment to Nonqualified Stock Option Agreement, dated
as of April 14, 1997, between NTN Communications, Inc.
and Edward C. Frazier.(6)
10.26 -- Warrant Agreement, dated as of February 18, 1998 between
NTN Communications, Inc. and American Stock Transfer and
Trust Company, as warrant agent, including a form of
warrant certificate.(7)
26
28
EXHIBIT
NO. DESCRIPTION
------- -----------
10.27* -- Performance Incentive Stock Option Agreement dated
November 4, 1996 by and between NTN Communications, Inc.
and Gerald Sokol, Jr.(7)
10.28* -- Nonqualified Stock Option Agreement dated May 14, 1997 by
and between NTN Communications, Inc. and Gerald Sokol,
Jr.(7)
10.29* -- Modification to Resignation Agreement, dated as of March
9, 1998 by and between NTN Communications, Inc. and
Daniel C. Downs(7)
10.30* -- Modification to Resignation Agreement, dated as of March
9, 1998 by and between NTN Communications, Inc. and
Patrick J. Downs(7)
10.31* -- Modification to Resignation Agreement, dated as of March
20, 1998 by and between NTN Communications, Inc. and
Ronald E. Hogan(7)
10.32* -- Employment Agreement, dated July 1, 1998, by and between
NTN Communications, Inc. and Gerald Sokol, Jr.(8)
10.33* -- Employment Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(9)
10.34* -- Stock Option Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(9)
10.35* -- Resignation and Release Agreement, dated February 18,
1999, by and between NTN Communications, Inc. and Gerald
Sokol, Jr.(9)
10.36 -- Exchange Agreement, dated October 5, 1998, by and between
NTN Communications, Inc. and the Buyers as defined)(7)
10.37 -- Loan and Security Agreement, dated August 6, 1999, by and
between NTN Communications, Inc. and Coast Business
Credit, a division of Southern Pacific Bank.(10)
10.38 -- Settlement Agreement, dated November 1, 1999, by and
between the Business Software Alliance and NTN
Communications, Inc.(10)
10.39* -- Stock Option Agreement, dated October 7, 1999, by and
between NTN Communications, Inc. and Stanley B. Kinsey(11)
10.40 -- Manufacturing Agreement, dated November 25, 1997, by and
between NTN Communications, Inc. and Climax Technology Co.
Ltd.(1)
23.00 -- Consent of KPMG LLP.(1)
- ---------------
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's registration statement on
Form S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1994, and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's report on Form 8-K dated
March 5, 1997 and incorporated by reference.
(6) Previously filed as an exhibit to the Company's report on Form 10-K dated
December 31, 1996 and incorporated by reference.
(7) Previously filed as an exhibit to the Company's registration statement on
Form S-3, File No. 333-69383, and incorporated by reference.
(8) Previously filed as an exhibit to the Company's report on Form 10-Q dated
September 30, 1998 and incorporated herein by reference.
27
29
(9) Previously filed as an exhibit to the Company's report on Form 10-K dated
December 31, 1998 and incorporated by reference.
(10) Previously filed as an exhibit to the Company's report on Form 10-Q dated
September 30, 1999 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's report on Form 10-K dated
December 31, 1999 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's report on Form 10-K/A
filed on April 5, 2000 and incorporated herein by reference.
28
30
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements.................. F-8
Financial Statement Schedule II -- Valuation and Qualifying
Accounts.................................................. F-25
F-1
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NTN Communications, Inc.:
We have audited the consolidated financial statements of NTN
Communications, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NTN
Communications, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
San Diego, California
March 9, 2000
F-2
32
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
------------ ------------
Current Assets:
Cash and cash equivalents................................. $ 1,044,000 $ 4,560,000
Restricted cash........................................... 239,000 --
Accounts receivable -- trade, net of allowance for
doubtful accounts of $2,148,000 in 1999 and $1,720,000
in 1998................................................. 2,541,000 2,471,000
Investments available for sale............................ 937,000 --
Deposits on broadcast equipment........................... 611,000 237,000
Prepaid expenses and other current assets................. 1,015,000 863,000
------------ ------------
Total current assets............................... 6,387,000 8,131,000
Broadcast equipment and fixed assets, net................... 10,470,000 7,249,000
Software development costs, net of accumulated amortization
of $6,356,000 in 1999 and $5,422,000 in 1998.............. 138,000 1,072,000
Other assets................................................ 292,000 315,000
------------ ------------
Total assets....................................... $ 17,287,000 $ 16,767,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,421,000 $ 840,000
Accrued expenses.......................................... 1,099,000 1,946,000
Accrual for litigation costs.............................. 334,000 847,000
Accrual for management severance.......................... 598,000 866,000
Obligations under capital leases.......................... 740,000 205,000
Deferred revenue.......................................... 796,000 645,000
Note payable.............................................. 79,000 --
Sales taxes payable....................................... 399,000 382,000
------------ ------------
Total current liabilities.......................... 5,466,000 5,731,000
Obligations under capital leases, excluding current
portion................................................... 475,000 380,000
Accrual for settlement warrants............................. 1,793,000 1,670,000
Accrual for management severance............................ -- 619,000
Revolving line of credit.................................... 2,486,000 --
7% senior subordinated convertible notes.................... 4,705,000 --
Other long-term liabilities and note payable, excluding
current portion........................................... 141,000 42,000
------------ ------------
Total liabilities.................................. 15,066,000 8,442,000
------------ ------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock, $.005
par value, 5,000,000 shares authorized; 161,000 shares
issued and outstanding at December 31, 1999 and December
31, 1998................................................ 1,000 1,000
Series B 7% cumulative convertible preferred stock, $.005
par value, 85,000 shares authorized; 0 and 56,000 shares
issued and outstanding at December 31, 1999 and December
31, 1998, respectively.................................. -- 1,000
Common stock, $.005 par value, 50,000,000 shares
authorized; 29,914,000 and 28,086,000 shares issued and
outstanding at December 31, 1999 and December 31, 1998,
respectively............................................ 149,000 140,000
Additional paid-in capital................................ 66,548,000 70,733,000
Accumulated deficit....................................... (63,645,000) (61,147,000)
Accumulated other comprehensive loss...................... (360,000) --
Treasury stock, at cost, 111,000 and 329,000 shares at
December 31, 1999 and December 31, 1998, respectively... (472,000) (1,403,000)
------------ ------------
Total shareholders' equity......................... 2,221,000 8,325,000
============ ============
Total liabilities and shareholders' equity......... $ 17,287,000 $ 16,767,000
============ ============
See accompanying notes to consolidated financial statements
F-3
33
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- ------------
Revenues:
Hospitality revenues................................. $22,250,000 $20,973,000 $ 21,018,000
Internet revenues.................................... 383,000 1,131,000 694,000
America Online fees.................................. 600,000 883,000 2,632,000
Equipment sales, net of cost of sales of $0, $208,000
and $231,000 in 1999, 1998 and 1997,
respectively...................................... 84,000 499,000 475,000
Other revenues....................................... 431,000 708,000 1,042,000
----------- ----------- ------------
Total revenues............................... 23,748,000 24,194,000 25,861,000
----------- ----------- ------------
Operating expenses:
Direct operating costs of services................... 11,169,000 9,491,000 10,860,000
Selling, general and administrative.................. 11,920,000 11,767,000 16,244,000
Litigation, legal and professional fees.............. 558,000 1,658,000 808,000
Equipment lease expense.............................. 652,000 932,000 936,000
Stock-based compensation expense..................... 292,000 353,000 3,205,000
Depreciation and amortization........................ 1,370,000 1,636,000 1,010,000
Bad debt expense..................................... 746,000 850,000 1,462,000
Equipment charges.................................... -- 240,000 2,543,000
Research and development............................. 842,000 714,000 1,600,000
----------- ----------- ------------
Total operating expenses..................... 27,549,000 27,641,000 38,668,000
----------- ----------- ------------
Operating loss......................................... (3,801,000) (3,447,000) (12,807,000)
----------- ----------- ------------
Other income (expense):
Interest income...................................... 116,000 288,000 238,000
Interest expense..................................... (1,050,000) (289,000) (793,000)
Gain on sale of interest in subsidiary............... -- 1,643,000 --
Gain on sale of assets of subsidiary................. 2,254,000 -- --
Other................................................ (17,000) 12,000 905,000
----------- ----------- ------------
Total other income (expense)................. 1,303,000 1,654,000 350,000
----------- ----------- ------------
Income (loss) before income taxes...................... (2,498,000) (1,793,000) (12,457,000)
Provision for income taxes............................. -- -- --
----------- ----------- ------------
Net income (loss)............................ (2,498,000) (1,793,000) (12,457,000)
----------- ----------- ------------
Accretion of beneficial conversion feature on preferred
stock................................................ -- (758,000) --
----------- ----------- ------------
Net income (loss) available to common shareholders..... $(2,498,000) $(2,551,000) $(12,457,000)
=========== =========== ============
Net income (loss) per common share -- basic and
diluted.............................................. $ (0.09) $ (0.10) $ (0.55)
=========== =========== ============
Weighted average shares outstanding -- basic and
diluted.............................................. 28,470,000 26,078,000 22,696,000
=========== =========== ============
See accompanying notes to consolidated financial statements
F-4
34
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
SERIES A AND B
CUMULATIVE
CONVERTIBLE ACCUMULATED
PREFERRED ADDITIONAL
STOCK COMMON STOCK ADDITIONAL OTHER
----------------- --------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS
------- ------- ---------- -------- ----------- ------------ -------------
Balance, December 31, 1996......... 161,000 $1,000 23,177,000 $116,000 $59,583,000 $(46,139,000)
Issuance of stock for exercise of
warrants and options........... -- -- 419,000 2,000 888,000 -- --
Issuance of Series B Preferred
Stock in private offering, net
of issuance costs.............. 70,000 1,000 -- -- 6,706,000 -- --
Issuance of stock in lieu of
dividends...................... -- -- 8,000 -- -- -- --
Issuance and modifications of
warrants granted to
non-employees.................. -- -- -- -- 3,205,000 -- --
Issuance of stock for settlement
of litigation.................. -- -- 73,000 -- 159,000 -- --
Net loss......................... -- -- -- -- -- (12,457,000) --
------- ------- ---------- -------- ----------- ------------ ---------
Balance, December 31, 1997......... 231,000 $2,000 23,677,000 $118,000 $70,541,000 $(58,596,000)
Issuance of stock in lieu of
dividends...................... -- -- 19,000 -- -- -- --
Issuance of Treasury stock for
settlement of litigation....... -- -- -- -- (622,000) -- --
Issuance of Common Stock for
settlement of litigation....... -- -- 1,200,000 6,000 1,194,000 -- --
Conversion of Series B Preferred
Stock to Common Stock.......... (14,000) -- 2,430,000 12,000 (12,000) -- --
Issuance of Common Stock in
exchange for cancellation of
options and warrants........... -- -- 759,000 4,000 (4,000) -- --
Issuance of Treasury Stock in
exchange for cancellation of
options and warrants........... -- -- -- -- (1,181,000) -- --
Accretion of beneficial
conversion feature on Series B
Preferred Stock................ -- -- -- -- 758,000 -- --
Issuance of stock for exercise of
warrants and options........... -- -- 1,000 -- 1,000 -- --
Options granted to
non-employees.................. -- -- -- -- 58,000 -- --
Net loss......................... -- -- -- -- -- (2,551,000) --
------- ------- ---------- -------- ----------- ------------ ---------
Balance, December 31, 1998......... 217,000 $2,000 28,086,000 $140,000 $70,733,000 $(61,147,000) --
Conversion of Series B Preferred
Stock to Convertible Note
Payable........................ (56,000) (1,000) -- -- (5,448,000) -- --
Convertible Note Payable
converted to Common Stock...... -- -- 793,000 4,000 1,008,000 -- --
Issuance of stock for exercise of
warrants and options........... -- -- 334,000 2,000 345,000 -- --
Issuance of Treasury Stock
pursuant to anti-dilution
provision...................... -- -- -- -- (931,000) -- --
Issuance of stock in lieu of
interest....................... -- -- 435,000 2,000 295,000 -- --
Issuance of stock in lieu of
dividends...................... -- -- 13,000 -- -- -- --
Issuance of stock in payment of
accrued board compensation..... -- -- 253,000 1,000 246,000 -- --
Stock options granted below
market......................... -- -- -- -- 38,000 -- --
Warrants granted to
non-employees.................. -- -- -- -- 262,000 -- --
Unrealized holding loss on
investments available for
sale........................... -- -- -- -- -- -- (360,000)
Net loss......................... -- -- -- -- -- (2,498,000) --
------- ------- ---------- -------- ----------- ------------ ---------
Balance, December 31, 1999......... 161,000 $1,000 29,914,000 $149,000 $66,548,000 $(63,645,000) $(360,000)
======= ======= ========== ======== =========== ============ =========
TREASURY
STOCK TOTAL
----------- ------------
Balance, December 31, 1996......... $(3,339,000) $ 10,222,000
Issuance of stock for exercise of
warrants and options........... -- 890,000
Issuance of Series B Preferred
Stock in private offering, net
of issuance costs.............. -- 6,707,000
Issuance of stock in lieu of
dividends...................... -- --
Issuance and modifications of
warrants granted to
non-employees.................. -- 3,205,000
Issuance of stock for settlement
of litigation.................. -- 159,000
Net loss......................... -- (12,457,000)
----------- ------------
Balance, December 31, 1997......... $(3,339,000) $ 8,726,000
Issuance of stock in lieu of
dividends...................... -- --
Issuance of Treasury stock for
settlement of litigation....... 755,000 133,000
Issuance of Common Stock for
settlement of litigation....... -- 1,200,000
Conversion of Series B Preferred
Stock to Common Stock.......... -- --
Issuance of Common Stock in
exchange for cancellation of
options and warrants........... -- --
Issuance of Treasury Stock in
exchange for cancellation of
options and warrants........... 1,181,000 --
Accretion of beneficial
conversion feature on Series B
Preferred Stock................ -- 758,000
Issuance of stock for exercise of
warrants and options........... -- 1,000
Options granted to
non-employees.................. -- 58,000
Net loss......................... -- (2,551,000)
----------- ------------
Balance, December 31, 1998......... $(1,403,000) $ 8,325,000
Conversion of Series B Preferred
Stock to Convertible Note
Payable........................ -- (5,449,000)
Convertible Note Payable
converted to Common Stock...... -- 1,012,000
Issuance of stock for exercise of
warrants and options........... -- 347,000
Issuance of Treasury Stock
pursuant to anti-dilution
provision...................... 931,000 --
Issuance of stock in lieu of
interest....................... -- 297,000
Issuance of stock in lieu of
dividends...................... -- --
Issuance of stock in payment of
accrued board compensation..... -- 247,000
Stock options granted below
market......................... -- 38,000
Warrants granted to
non-employees.................. -- 262,000
Unrealized holding loss on
investments available for
sale........................... -- (360,000)
Net loss......................... -- (2,498,000)
----------- ------------
Balance, December 31, 1999......... $ (472,000) $ 2,221,000
=========== ============
F-5
35
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- ------------
Cash flows provided by (used in) operating
activities:
Net Income (loss).................................. $(2,498,000) $(1,793,000) $(12,457,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 6,557,000 6,412,000 5,305,000
Provision for doubtful accounts................. 746,000 850,000 1,462,000
(Gain) loss from disposition of equipment....... (6,000) 240,000 2,543,000
Non-cash compensation charges................... 292,000 353,000 3,205,000
Accreted interest expense....................... 459,000 211,000 410,000
Amortization of deferred revenue................ (85,000) (1,022,000) (719,000)
Gain on sale of interest in subsidiary.......... -- (1,643,000) --
Gain on sale of assets of subsidiary............ (2,254,000) -- --
Gain on sale of interest in building............ -- -- (905,000)
Stock issued in settlement of litigation........ -- -- 159,000
Changes in assets and liabilities:
Restricted cash............................... (239,000) -- --
Accounts receivable........................... (816,000) (627,000) (1,956,000)
Deposits on broadcast equipment............... (374,000) (237,000) --
Prepaid expenses and other assets............. (423,000) (487,000) 3,542,000
Accounts payable and accrued expenses......... (209,000) 64,000 (108,000)
Deferred revenue.............................. 236,000 (382,000) 523,000
Management severance and other long-term
liabilities................................ (955,000) (819,000) (2,008,000)
----------- ----------- ------------
Net cash provided by (used in) operating
activities............................... 431,000 1,120,000 (1,004,000)
----------- ----------- ------------
Cash flows provided by (used in) investing
activities:
Capital expenditures............................... (6,814,000) (3,002,000) (3,700,000)
Capital software expenditures...................... -- (10,000) (1,020,000)
Notes receivable................................... 70,000 (70,000) --
Proceeds from sale of assets of subsidiary......... 1,227,000 -- --
Proceeds from sale of equipment.................... 45,000 -- --
Proceeds from sale of interest in building......... -- -- 1,405,000
Proceeds from sale of interest in subsidiary....... -- 1,862,000 --
----------- ----------- ------------
Net cash provided by (used in) investing
activities............................... (5,472,000) (1,220,000) (3,315,000)
----------- ----------- ------------
Cash flows provided by (used in) financing
activities:
Principal payments on capital leases............... (1,125,000) (104,000) --
Borrowings from revolving line of credit........... 11,175,000 -- --
Proceeds from issuance of debt..................... -- -- 4,470,000
Principal payments on debt and revolving line of
credit.......................................... (8,872,000) -- (9,563,000)
Proceeds from issuance of common and preferred
stock, less issuance of costs paid in cash...... -- -- 7,597,000
Exercise of stock options.......................... 347,000 -- --
----------- ----------- ------------
Net cash provided by (used in) financing
activities............................... 1,525,000 (104,000) 2,504,000
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents........................................ (3,516,000) (204,000) (1,815,000)
----------- ----------- ------------
Cash and cash equivalents at beginning of period..... 4,560,000 4,764,000 6,579,000
----------- ----------- ------------
Cash and cash equivalents at end of period........... $ 1,044,000 $ 4,560,000 $ 4,764,000
=========== =========== ============
See accompanying notes to consolidated financial statements
F-6
36
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---------- ---------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................. $ 249,000 $ 121,000 $367,000
========== ========== ========
Income taxes......................................... $ -- $ -- $ --
========== ========== ========
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of treasury stock pursuant to anti-dilution
provision............................................ $ 931,000 $1,181,000 $ --
========== ========== ========
Issuance of common stock in payment of interest......... $ 297,000 $ -- $ --
========== ========== ========
Issuance of common stock in payment of board
compensation......................................... $ 247,000 $ -- $ --
========== ========== ========
Equipment acquired under capital leases................. $1,767,000 $ 464,000 $258,000
========== ========== ========
Equipment and license acquired by issuing note
payable.............................................. $ 361,000 $ -- $ --
========== ========== ========
Exchange of preferred stock for convertible notes and
warrants............................................. $5,449,000 $ -- $ --
========== ========== ========
Exchange of convertible notes to common stock........... $1,012,000 $ -- $ --
========== ========== ========
Issuance of common stock in exchange for cancellation of
options and warrants................................. $ -- $ 4,000 $ --
========== ========== ========
Unrealized holding loss on investments available for
sale................................................. $ 360,000 $ -- $ --
========== ========== ========
Sale of assets of subsidiary for cash of $1,227,000 and
stock of eBet Online................................. $1,297,000 $ -- $ --
========== ========== ========
See accompanying notes to consolidated financial statements
F-7
37
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company operates its businesses through two operating divisions:
BUZZTIME, Inc.(TM) (BUZZTIME) and The NTN Network(TM). BUZZTIME, NTN's
wholly-owned subsidiary formed in December 1999, owns the exclusive rights to
the largest digital trivia game show library and many unique "TV Play-along"
sports games. The NTN Network operates two interactive television (ITV)
networks: its original NTN Network and its new Digital Interactive Television
(DITV) Network. Both networks broadcast daily a wide variety of popular
interactive games, advertisements and informational programming to consumers in
approximately 3,300 restaurants, sports bars and taverns throughout North
America.
Basis of Accounting Presentation
The consolidated financial statements include the accounts of NTN and its
wholly-owned subsidiaries, IWN Inc. ("IWN"), IWN, L.P. and BUZZTIME, Inc.
(BUZZTIME) ("the Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
On June 16, 1998, the Company sold an 82.5% interest in LearnStar, Inc.
(LearnStar) to NewStar Learning Systems, L.L.C. (NewStar) for $1,862,000. The
transaction resulted in a gain of $1,643,000, which is included in other income
for the year ended December 31, 1998. In 1994, the Company formed IWN, Inc.
("IWN"), which serves as the general partner of IWN L.P., a limited partnership
engaged in the development of interactive technology for gaming applications.
IWN has no business or operations apart from its service as the general partner
of IWN, L.P. In August of 1999, the assets of IWN, L.P. were sold to eBet
Limited for $1,227,000 in cash and 4,000,000 shares of eBet Online stock.
Cash and Cash Equivalents
For the purpose of financial statement presentation, the Company considers
all highly liquid investment instruments with original maturities of three
months or less to be cash equivalents. Cash equivalents of $860,000 and
$4,144,000 at December 31, 1999 and 1998, respectively, consist of money market
accounts.
Restricted Cash
Under the revolving line of credit agreement, all cash receipts are
required to be deposited into a restricted cash account. The restricted cash is
then transferred to pay down the line of credit.
Broadcast Equipment and Fixed Assets
Broadcast equipment and fixed assets are stated at cost. Equipment under
capital leases is stated at the present value of minimum lease payments.
Depreciation of fixed assets is computed using the straight-line method over the
estimated useful lives of the assets (three to five years). Depreciation of
broadcast equipment is computed using the straight-line method over the
estimated useful lives of the assets (two to four years). Amortization of fixed
assets under capital leases is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the lease period, and is
included in depreciation expense.
Revenue Recognition
The Company recognizes revenue from five sources: Hospitality revenues,
Internet revenues, America Online revenues, Equipment Sales and Other Sources.
Revenue is not recognized until collectability of fees is reasonably assured.
Hospitality revenue is generated primarily from broadcasting content and
advertising. Revenues generated from broadcasting content to subscriber
locations is recognized ratably over the contract term as the content is
broadcast 17 hours a day / seven days a week. Consistent with the terms of
advertising agreements, advertising is aired a specified number of times per
hour everyday and therefore, revenues are recognized ratably over the contract
term. Included in hospitality revenue are amounts earned under a license
agreement with the Company's Canadian licensee, who operates approximately 500
hospitality locations. Revenue under this license agreement is recognized on a
monthly basis as broadcast content is aired similar to hospitality revenue.
F-8
38
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Internet and America Online revenues are recognized as the service is
provided by the Company.
Equipment Sales are recognized when equipment is shipped or transferred to
the purchaser.
Other Revenue is recognized when all material services or conditions
relating to the transaction have been performed or satisfied.
Software Development Costs
The Company capitalizes costs related to the development of certain
software products. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed" capitalization of costs begins when
technological feasibility has been established and ends when the product is
available for general release to customers. Amortization of costs related to
interactive programs is recognized on a straight line basis over three years.
Stock-Based Compensation
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as expense over
the vesting period, the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees", and provide pro forma net income and pro forma earnings
per share disclosures for employee stock options grants made in 1996 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
Under SFAS No. 123, options or warrants issued to non-employees in exchange
for goods or services received are recorded at the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Investments Available for Sale
Investment securities consist of equity securities, which are classified as
available-for-sale securities. Available-for-sale securities are recorded at
fair value and unrealized holding gains and losses are excluded from earnings
and are reported as a separate component of comprehensive income until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific-identification basis. A decline in the market value of
any available-for-sale security below cost that is deemed to be other than
temporary, results in a reduction in the carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established.
F-9
39
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company believes that the fair value of financial instruments
approximate their carrying value. The following methods and assumptions were
used to estimate the fair value of financial instruments:
The carrying values of cash and cash equivalents, restricted cash,
investments held for sale, accounts receivable, accounts payable and accrued
liabilities approximate fair value because of the short maturity of these
instruments. The carrying value of the accrual for settlement warrants
approximates the fair value because the accrual for settlement warrants was
determined using the present value of expected future cash flows discounted at
the interest rate currently available to the Company. The carrying value of the
revolving line of credit approximates fair value because the interest rate is
indexed by current market rates, and the other terms are comparable to those
currently available in the market place. The carrying value of the convertible
notes approximates its fair value because the interest rate is comparable to
rates currently available in the market.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Research and Development and Advertising
Research and development and advertising are expensed as incurred. Research
and development costs amounted to $842,000, $714,000 and $1,600,000 in 1999,
1998 and 1997, respectively. Advertising costs amounted to $265,000, $343,000
and $284,000 in 1999, 1998 and 1997, respectively.
Concentration of Credit Risk
The Company provides services to group viewing locations, generally bars
and lounges, and to third party distributors, primarily throughout the United
States. In addition, the Company licenses its technology and products to
licensees outside of the United States. Concentration of credit risk with
respect to trade receivables is limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different industries and geographies. The Company performs ongoing credit
evaluations of its customers and generally requires no collateral. The Company
maintains an allowance for doubtful accounts to provide for credit losses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Basic and Diluted Earnings Per Common Share
The Company computes basic and diluted earnings per share in accordance
with SFAS No. 128, "Earnings per Share". Basic EPS excludes the dilutive effects
of options, warrants and other convertible
F-10
40
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities. Diluted EPS reflects the potential dilution of securities that could
share in the earnings of the Company. Options, warrants, convertible preferred
stock and convertible notes representing approximately 15,306,000, 5,569,000 and
17,630,000 shares were excluded from the computations of net loss per common
share for the years ended December 31, 1999, 1998 and 1997, respectively, as
their effect is anti-dilutive.
Reflected in the net loss available to common shareholders for the year
ended December 31, 1998 is the accretion of the beneficial conversion feature on
the Series B Preferred Stock in the amount of $758,000. The amount of the
beneficial conversion feature was measured at the date of issue of the
convertible security as the difference between the conversion price and the
market value of the Common Stock into which the security was convertible. This
amount was accounted for as a non-cash dividend on the convertible preferred
stock with the same amount credited to additional paid-in capital, allocated
over the period from issuance to first convertibility. Therefore, there is no
impact to shareholders' equity. The beneficial conversion feature was fully
accreted as of June 30, 1998. As described in Note 4 to the consolidated
financial statements, the Company entered into an exchange agreement with the
holders of the Series B Preferred Stock.
Reclassifications
Certain items in the 1998 and 1997 consolidated financial statements have
been reclassified to conform to the 1999 presentation.
(2) BROADCAST EQUIPMENT AND FIXED ASSETS
Broadcast equipment and fixed assets are recorded at cost and consist of
the following:
1999 1998
------------ -----------
Broadcast equipment....................................... $ 14,502,000 $ 9,243,000
Furniture and fixtures.................................... 445,000 294,000
Machinery and equipment................................... 5,080,000 3,958,000
Leasehold improvements.................................... 547,000 472,000
Equipment under capital lease:
Broadcast equipment..................................... 1,589,000 --
Machinery and equipment................................. 902,000 724,000
Other equipment........................................... 9,000 36,000
------------ -----------
23,074,000 14,727,000
Accumulated depreciation and amortization................. (12,604,000) (7,478,000)
------------ -----------
$ 10,470,000 $ 7,249,000
============ ===========
(3) COMMON STOCK OPTIONS AND WARRANTS
Options
The Company has two active stock option plans. The 1995 Employee Stock
Option Plan (the "Option Plan") was approved by the shareholders in 1995 and was
subsequently amended. Under the Option Plan, options for the purchase of the
Company's Common Stock may be granted to officers, directors and employees.
Options may be designated as incentive stock options or as nonqualified stock
options and generally vest over four years, except, the Board of Directors, at
its discretion, can authorize acceleration of vesting periods. Options under the
Option Plan, which have a term of up to ten years, are exercisable at a price
per share not less than the fair market value on the date of grant. The
aggregate number of shares authorized for issuance under the Option Plan as of
December 31, 1999 is 6,818,930. The Company held a special meeting of
stockholders on January 7, 2000 at which time approval was received to increase
the aggregate number of shares that may be issued under the plan by 5,000,000
shares.
F-11
41
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company has issued options pursuant to a Special Stock
Option Plan ("Special Plan"). Options issued under the Special Plan are made at
the discretion of the Board of Directors and are designated only as nonqualified
options. The options generally have a term of up to ten years, are exercisable
at a price per share not less than the fair market value on the date of grant
and vest over various terms. The aggregate number of shares authorized for
issuance under the Special Plan as of December 31, 1999 is 704,000.
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $0.72, $0.72, and $2.58, 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:
1999 -- dividend yield of 0%, risk-free interest rate of 5.28%, expected
volatility of 124.97%, and expected life of 3.6 years; 1998 -- dividend yield of
0%, risk-free interest rate of 4.69%, expected volatility of 188%, and expected
life of 5.2 years; and 1997 -- dividend yield of 0%, risk-free interest rate of
6.5%, expected volatility of 179%, and expected life of 7.5 years; In compliance
with APB No. 25, the Company expensed $38,000 in 1999 associated with the grant
of 600,000 options issued in 1999 below market value pursuant to the Option
Plan. No options were granted below market value in 1998 or 1997 pursuant to the
Option Plan.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized in the consolidated financial statements for the issuance of
options to employees pursuant to the Special Plan and the Option Plan. Had
compensation cost related to employees for the Company's stock-based
compensation plans been determined consistent with SFAS No. 123, the Company's
net loss and net loss per share applicable to Common Stock would have been
increased to the pro forma amounts indicated below.
1999 1998 1997
---------- ---------- -----------
Net loss As reported................. $2,498,000 $2,551,000 $12,457,000
Pro forma................... $3,514,000 $4,365,000 $16,733,000
Net loss per share As reported................. $ 0.09 $ 0.10 $ 0.55
Pro forma................... $ 0.12 $ 0.17 $ 0.74
A summary of stock option activity during 1999, 1998 and 1997 is as
follows:
SPECIAL PLAN OPTION PLAN
---------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- ---------- ----------------
OUTSTANDING DECEMBER 31, 1996.... -- -- 6,689,000 $5.09
Granted........................ 600,000 $5.00 1,947,000 2.66
Exercised...................... 430,000 3.30 (45,000) 2.08
Canceled....................... -- -- (3,503,000) 5.58
--------- ----- ---------- -----
OUTSTANDING DECEMBER 31, 1997.... 1,030,000 3.01 5,088,000 3.47
Granted........................ 104,000 2.81 3,290,000 0.93
Exercised...................... -- -- -- --
Canceled....................... (430,000) 3.30 (3,721,000) 3.59
--------- ----- ---------- -----
OUTSTANDING DECEMBER 31, 1998.... 704,000 2.81 4,657,000 1.58
Granted........................ -- -- 3,179,000 0.92
Exercised...................... -- -- (325,000) 1.04
Canceled....................... -- -- (1,030,000) 0.95
--------- ----- ---------- -----
OUTSTANDING DECEMBER 31, 1999.... 704,000 $2.81 6,481,000 $1.38
========= ===== ========== =====
EXERCISABLE AS OF DECEMBER 31,
1999........................... 704,000 $2.81 2,039,000 $2.11
========= ===== ========== =====
F-12
42
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of options outstanding and exercisable by exercise price range at
December 31, 1999 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
RANGE OF WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ----------- ---------------- ---------------- ----------- ----------------
Special
Plan:
$2.81...... 704,000 4 years $2.81 704,000 $2.81
Option
Plan:
$0.56-$1.50.. 4,863,000 9 years $0.86 807,000 $0.89
$1.51-$3.00.. 1,293,000 6 years $2.71 1,006,000 $2.68
$3.01-$6.50.. 325,000 5 years $3.95 226,000 $3.95
In April 1998, the Board of Directors approved the issuance of 564,000
options with exercise price of $1.00 in exchange for the cancellation of various
prior employee options under the Option Plan with exercise prices ranging from
$2.00 to $6.50. No compensation expense was recorded as a result of the
issuance.
In March 1998, the Company issued approximately 277,000 shares of Common
Stock to two former officers in exchange for the surrender and cancellation of
certain previously outstanding warrants and options to purchase 1,500,000 shares
of Common Stock at exercise prices ranging from $2.00 to $4.75 per share. The
fair market value of the shares issued was approximately $242,000, which was
less than the fair value of the warrants and options received in the exchange.
In January 1998, the Company issued approximately 759,000 shares of Common
Stock in exchange for the surrender and cancellation of certain previously
outstanding warrants and options to purchase approximately 2,578,000 shares of
Common Stock at exercise prices ranging from $2.00 to $5.75 per share. The fair
market value of the shares issued was approximately $900,000, which was less
than the fair value of the warrants and options received in the exchange.
In May 1997, the Board of Directors approved a modification to previously
issued options under the Special and Option Plans whereby the exercise price of
1,612,000 options issued to certain members of the Board of Directors,
management and employees was reduced to $2.81. The previous exercise prices
ranged from $3.50 to $5.08. No compensation expense was recorded as a result of
the modification.
The Company has issued various options pursuant to the Special Plan to
non-employees to purchase Common Stock in 1997, the majority of which were
exercisable as of December 31, 1997. In compliance with SFAS No. 123, the
Company expensed $58,000 and $354,000 in 1998 and 1997, respectively, associated
with the grant of 134,000 options in 1997. The fair value of each grant in 1997
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of 0% percent, risk-free interest
rate of 6.5%, expected volatility of 179%, and an expected option life of 5
years.
Warrants
In 1999, 1998 and 1997, the Company granted 1,191,000, 1,000,000 and
1,065,000 warrants to non-employees, with exercise prices equal to the market
value on the date of grant. The warrants were issued to non-employees under
consulting agreements in consideration for services provided to the Company over
contractual periods of one to two years. Compensation expense related to these
warrants is recorded over the service period that generally coincides with
vesting. In accordance with SFAS 123 and EITF 96-18 the Company considers the
measurement date for compensation expense to be the date when all services have
been rendered under the agreement. 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 is recorded over the
remaining service period. The per share weighted-average fair value of warrants
granted during 1999, 1998 and 1997 was $1.03, $0.50 and $1.83, respectively. In
compliance with SFAS No. 123, the Company expensed $262,000, $0 and $1,401,000
in 1999, 1998 and 1997, respectively, associated with these warrants. The fair
value of each warrant is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions: 1999 -- dividend yield of 0%
percent, risk-free interest rate of 4.93%, expected volatility of 81.2%, and an
expected life of 2.9 years; 1998 -- dividend yield of 0% percent, risk-free
interest rate of 4.23%,
F-13
43
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected volatility of 188%, and an expected life of 2.3 years; 1997 -- dividend
yield of 0% percent, risk-free interest rate of 6.5%, expected volatility of
179%, and an expected life of 10 years.
The following summarizes warrant activity during 1999, 1998 and 1997:
OUTSTANDING WEIGHTED AVERAGE
WARRANTS EXERCISE PRICES
----------- ----------------
DECEMBER 31, 1996........................................ 4,581,000 $4.10
Granted................................................ 1,065,000 1.83
Exercised.............................................. (374,000) 2.07
Canceled............................................... (1,078,000) 4.39
---------- -----
DECEMBER 31, 1997........................................ 4,194,000 3.63
Granted................................................ 1,000,000 1.25
Exercised.............................................. -- --
Canceled............................................... (2,291,000) 4.02
---------- -----
DECEMBER 31, 1998........................................ 2,903,000 2.49
Granted................................................ 1,191,000 1.00
Exercised.............................................. (9,000) 0.96
Canceled............................................... (938,000) 2.63
---------- -----
DECEMBER 31, 1999........................................ 3,147,000 $1.89
========== =====
BALANCE EXERCISABLE AT DECEMBER 31, 1999................. 2,905,000 $1.72
========== =====
At December 31, 1999, the range of exercise prices and the weighted-average
remaining contractual life of outstanding warrants was $0.6875 to $7.50 and 2
years, respectively.
(4) CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock. The
preferred stock may be issued in one or more series. The only series currently
designated are a series of 5,000,000 shares of Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock") and a series of 85,000 shares of
Series B Preferred Stock.
Series A
At December 31, 1999 and 1998, there were 161,000 shares of Series A
Preferred Stock issued and outstanding. The Series A Preferred Stock provides
for a cumulative annual dividend of 10 cents per share, payable in semi-annual
installments in June and December. Dividends may be paid in cash or with shares
of Common Stock. In 1999, 1998 and 1997, the Company issued approximately
13,000, 19,000 and 8,000 common shares, respectively, for payment of dividends.
At December 31, 1999, the cumulative unpaid dividends for the Series A Preferred
Stock was approximately $1,300.
The Series A Preferred Stock has no voting rights and has a $1.00 per share
liquidation preference over Common Stock. The registered holder has the right at
any time to convert shares of Series A Preferred Stock into that number of
shares of NTN Common Stock that equals the number of shares of Series A
Preferred Stock that are surrendered for conversion divided by the conversion
rate. The conversion rate is subject to adjustment in certain events and is
established at the time of each conversion. During 1999, 1998 and 1997, there
were no conversions. There are no mandatory conversion terms or dates associated
with the Series A Preferred Stock.
F-14
44
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Series B
In October 1997, NTN sold and issued 35,000 shares of Series B Preferred
Stock each to two institutional purchasers ("the Investors") for a total of
$7,000,000. The sale of the Series B Preferred Stock was effected pursuant to
Regulation D of the Securities and Exchange Commission under the Securities Act
of 1993 as amended. The Company paid $210,000 in financial advisory services in
connection with the sale of the Series B Preferred Stock. A portion of the net
proceeds from the private placement was used to repay indebtedness and accrued
interest to GTECH totaling $3,883,000. The balance was used for general working
capital purposes.
As of October 5, 1998, 14,000 shares of the Series B Preferred Stock (plus
accrued dividends) had been converted into 2,430,000 shares of Common Stock of
the Company, leaving 56,000 shares of the Series B Preferred Stock outstanding.
On October 5, 1998, NTN entered into an Exchange Agreement with the Investors
pursuant to which they agreed to surrender for cancellation their remaining
shares of Series B Preferred Stock in exchange for warrants and 7% senior
subordinated convertible notes (convertible notes) as described below. Pending
their surrender and cancellation, the dividend rate on the Series B Preferred
Stock was increased from 4% to 7% and the conversion price of the Series B
Preferred Stock was fixed at $1.275 per share.
Under the Exchange Agreement, the Company agreed to issue each of the
Investors a convertible note of the Company in a principal amount equal to the
stated value of their Series B Preferred Stock, plus accrued and unpaid
dividends through the date of issuance of the convertible notes. The convertible
notes were issued January 11, 1999.
(5) RETIREMENT AND SAVINGS PLANS
Defined Contribution Plan
During 1994, the Company established a defined contribution plan which is
organized under Section 401(k) of the Internal Revenue Code, which allows
employees who have completed at least six months of service or reached age 21,
whichever is later, to defer up to 15% of their pay on a pre-tax basis. The
Company, at its discretion, may contribute to the plan. For the years ended
December 31, 1999, 1998 and 1997, the Company made no such contributions.
Defined Benefit Pension Plan
In connection with the Reorganization in 1997, the Company terminated a
non-qualified, non-contributory pension plan that covered certain former
officers. There were no accrued pension benefits payable to any participants
upon termination of the plan. The plan was secured by whole-life insurance
policies for certain former officers. The Company had previously borrowed funds
against these assets. Upon termination, the loans were repaid and the net assets
were liquidated.
Deferred Compensation Plan
In connection with the Reorganization in 1997, the Company terminated an
unfunded, non-qualified deferred compensation plan that covered certain former
officers. The accrued plan benefits of $580,000 included in accrued expenses as
of December 31, 1996 were substantially paid to participants in 1997. Unpaid
benefits at December 31, 1999 and 1998 were $0 and $58,000, respectively.
F-15
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
For each of the years ended December 31, 1999, 1998 and 1997, there was no
provision for current or deferred income taxes. The components that comprise
deferred tax assets and liabilities at December 31, 1999 and 1998 are as
follows:
1999 1998
------------ ------------
Deferred tax assets:
NOL carryforwards...................................... $ 16,711,000 $ 17,295,000
Legal and litigation accruals.......................... 3,000 361,000
Allowance for doubtful accounts........................ 859,000 719,000
Compensation and vacation accrual...................... 337,000 779,000
Accrued expenses....................................... 185,000 1,032,000
Allowance for equipment obsolescence................... 77,000 --
Deferred revenue....................................... 247,000 133,000
Research and experimentation credit.................... 245,000 280,000
Other reserves......................................... 717,000 247,000
Amortization........................................... 96,000 --
Depreciation........................................... 482,000 --
Charitable contributions............................... 10,000 376,000
Other.................................................. -- 12,000
------------ ------------
Total gross deferred tax assets................ 19,969,000 21,234,000
Valuation allowance...................................... (19,914,000) (20,703,000)
------------ ------------
Net deferred tax assets.................................. 55,000 531,000
------------ ------------
Deferred tax liabilities:
Capitalized software................................... 55,000 457,000
Amortization........................................... -- 55,000
Other.................................................. -- 19,000
------------ ------------
Total gross deferred liabilities............... 55,000 531,000
------------ ------------
Net deferred taxes............................. $ -- $ --
============ ============
The reconciliation of computed expected income taxes to effective income
taxes by applying the federal statutory rate is as follows:
1999 1998 1997
---------- ----------- -----------
Tax at federal income tax rate................. $ (849,000) $ (610,000) $(4,235,000)
State taxes net of federal benefit............. (150,000) (105,000) (142,000)
Settlement warrants and SFAS 123 charges....... 99,000 84,000 1,109,000
Nondeductible expenses of IWN.................. -- 299,000 --
Sale of LearnStar.............................. -- (559,000) --
Change in valuation allowance.................. (789,000) 3,131,000 2,768,000
Adjustments of net operating loss
carryforwards................................ 1,384,000 (2,313,000) 563,000
Other.......................................... 305,000 73,000 (63,000)
---------- ----------- -----------
$ -- $ -- $ --
========== =========== ===========
The net change in the total valuation allowance for the year ended December
31, 1999 was a decrease of $789,000. The net change in the total valuation
allowance for the years ended December 31, 1998 and 1997 was an increase of
$3,131,000, and $2,768,000, respectively. In assessing the realizability of
deferred tax assets,
F-16
46
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based on the level of historical operating results and projections
for the taxable income for the future, management has determined that it is more
likely than not that the portion of deferred tax assets not utilized through the
reversal of deferred tax liabilities will not be realized. Accordingly, the
Company has recorded a valuation allowance to reduce deferred tax assets to the
amount that is more likely than not to be realized.
At December 31, 1999, the Company has available net operating loss
carryforwards of approximately $47,500,000 for federal income tax purposes,
which begin to expire in 2000. The net operating loss carryforwards for state
purposes, which began expiring in 1998 are approximately $9,100,000.
(7) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office and production facilities and equipment under
agreements which expire at various dates. Certain leases contain renewal
provisions and generally require the Company to pay utilities, insurance, taxes
and other operating expenses. Additionally, the Company entered into lease
agreements for certain equipment used in broadcast operations, some of which
involved sale and leaseback transactions. Any deferred gains on sale and
leaseback transactions were amortized over the three year lease terms. Each
lease provides an option to the Company to repurchase the equipment at the
estimated fair market value at the end of the lease term. All sale and leaseback
transactions were completed during 1999 at which time the equipment was
purchased. Lease expense under operating leases totaled $1,007,000, 1,505,000
and $1,299,000, in 1999, 1998 and 1997, respectively, net of sublease income of
$157,000 and $46,000 in 1999 and 1998, respectively.
In November 1997, the Company sold its interest in a LLC that owns the
building containing the Company's corporate office. A gain of $905,000 was
recognized in 1997.
Future minimum lease obligations under noncancelable operating leases, net
of expected sublease payments of $154,000 in 2000 and $79,000 in 2001, at
December 31, 1999 are as follows:
YEAR
ENDING TOTAL
- ------ --------
2000..................................................... $378,000
2001..................................................... 63,000
--------
Total.......................................... $441,000
========
F-17
47
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capital Leases
The Company entered into capital leases for the purchase of new equipment.
Future minimum lease payments under the capital leases together with the present
value of the net minimum lease payments as of December 31, 1999 are as follows:
YEAR ENDING TOTAL
- ----------- ----------
2000.................................................... $ 907,000
2001.................................................... 480,000
2002.................................................... 21,000
2003.................................................... 17,000
----------
Total minimum lease payments.................. 1,425,000
Less: Amount representing interest ranging from 6% to
33.7%................................................. (210,000)
----------
Present value of net minimum lease payments............. 1,215,000
Less current portion.................................... (740,000)
----------
Long term portion............................. $ 475,000
==========
Property held under capital leases is as follows:
1999 1998
---------- ---------
Equipment................................................... $2,491,000 $ 724,000
Accumulated depreciation.................................... (667,000) (159,000)
---------- ---------
$1,824,000 $ 565,000
========== =========
(8) DEBT
Revolving Line Of Credit
The Company entered into an agreement with Coast Business Credit for a
revolving line of credit not to exceed $4,000,000. Interest is charged on the
outstanding balance at a rate equal to the prime rate plus 1.5% per annum
(effective rate of interest is 10% at December 31, 1999), but cannot be less
than 9% per annum. The line of credit is secured by substantially all of the
Company's assets. Total loan fees of $120,000 are payable in three annual
installments and are being amortized over the life of the loan which matures on
August 31, 2002. The unused line of credit at December 31, 1999 was $1,514,000.
7% Senior Subordinated Convertible Notes
In 1999, the Company reacquired the Series B Preferred Stock in exchange
for convertible notes and warrants. The convertible notes, with a face value of
$5,913,000, were issued January 11, 1999 and bear interest at the annual rate of
7% per annum. Interest is due and payable in quarterly installments, in arrears,
and the entire principal amount will be due and payable on February 1, 2001.
Interest on the convertible notes may be paid in cash or, at NTN's election, in
shares of its Common Stock valued for this purpose at 90% of the average closing
bid price of the Common Stock during the 10 trading days preceding the interest
payment date.
At any time after a period of 20 consecutive trading days during which the
daily "Market Price" (as defined in the Exchange Agreement) of the Common Stock
equals or exceeds $1.75 (subject to adjustment), the Company may elect upon 45
days prior written notice to prepay all or any portion of the convertible notes
at a price of 105% of the outstanding principal amount, plus accrued and unpaid
interest. The convertible notes will continue to be convertible, however, at any
time prior to prepayment in full. The convertible notes
F-18
48
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
must be prepaid in connection with a merger or consolidation of the Company or
other "Major Transaction" (as defined in the Exchange Agreement) if the
consideration per share of Common Stock in the Major Transaction is at least
$1.50. In such event, the prepayment price will be 105% of the outstanding
principal amount of the convertible notes, plus accrued and unpaid interest.
The holders of the convertible notes may convert them at any time, in whole
or in part, at their option. The number of shares of Common Stock issuable upon
conversion of each convertible note will be determined by dividing the
outstanding principal amount to be converted, plus any accrued and unpaid
interest, by the conversion price then in effect. The conversion price will be
$1.275 per share, subject to adjustment if certain events, including stock
dividends or subdivisions or reclassifications of the Common Stock or any sale
or issuance of Common Stock (or of rights or options to subscribe for or
purchase Common Stock) for no consideration or for a consideration per share
less than the "Average Market Price" (as defined in the Exchange Agreement) of
the Common Stock. The actual number of shares of Common Stock issuable upon any
conversion of the convertible notes will depend on the conversion price in
effect on the relevant conversion date. On November 20, 1999, $1,000,000 of
principal plus accrued interest was converted into approximately 793,000 shares
of Common Stock. An additional $45,000 of interest expense related to the
unamortized discount on the converted notes was recognized upon conversion of
the principal.
The convertible notes are subordinate in right of payment to the prior
payment of all "Senior Debt" (as defined in the Exchange Agreement). The Company
is restricted under the terms of the convertible notes from incurring any Senior
Debt in excess of $10,000,000 or any other indebtedness (except senior debt and
"subordinated debt" (as defined in the Exchange Agreement)) in excess of
$2,000,000 at any time.
The Company will be in default under the convertible notes if it fails to
pay any principal or interest on the convertible notes when due, and in certain
other events, including in the event of a material adverse change in the
condition, financial or otherwise, or operations of the Company as determined by
the holders of the convertible notes in their discretion. If the Company
defaults under the convertible notes, in the discretion of the holders of the
convertible notes, the entire outstanding principal amount of the convertible
notes and all accrued and unpaid interest will become immediately due and
payable in full.
On October 5, 1998, in consideration for their entering into the Exchange
Agreement on October 5, 1998, NTN issued to each of the Investors a warrant to
purchase 500,000 shares of Common Stock at an initial purchase price of $1.25
per share. The purchase price of shares of Common Stock under the warrants will
be subject to reduction based on the future "Market Price" (as defined) of the
Common Stock as follows: the purchase price will be (i) $0.75, if the daily
Market Price on each day during any 10 consecutive trading days shall be equal
to or greater than $1.75 but less than $2.00; (ii) $0.625, if the daily Market
Price on each day during any 10 consecutive trading days shall be equal to or
greater than $2.00 but less than $2.25; (iii) $0.50, if the daily Market Price
on each day during any 10 consecutive trading days shall be equal to or greater
than $2.25 but less than $2.50; (iv) $0.375, if the daily Market Price on each
day during any 10 consecutive trading days shall be equal to or greater than
$2.50 but less than $3.00; (v) $0.25, if the daily Market Price on each day
during any 10 consecutive trading days shall be equal to or greater than $3.00
but less than $4.00; and (vi) $0.005, if the daily Market Price on each day
during any 10 consecutive trading days shall be equal to or greater than $4.00.
No adjustments to the purchase price will be made to increase the purchase price
in effect at any time. The warrants are exercisable at any time on or before
February 1, 2001. In the event, however, that a "Major Transaction" (as defined
in the Convertible Notes) occurs, NTN may elect upon 30 days prior written
notice to the warrant holders to accelerate the expiration date of the warrants
so long as the consideration per share of Common Stock which would be received
by the warrant holders in the Major Transaction exceeds the then-applicable
purchase price per share under the warrants.
The warrants contain certain antidilution provisions that require
adjustments in the purchase price and the number of shares of Common Stock
purchasable in the event of a stock dividend, subdivision or combination of the
outstanding shares of Common Stock or in the event of a recapitalization of the
Company
F-19
49
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and certain similar events. In addition, the exercise price and number of shares
purchasable under the warrants are to be adjusted in the event the Company
issues additional shares of Common Stock (or rights or options to subscribe for
or purchase Common Stock) for no consideration, or for a consideration per share
of Common Stock less than the "Current Market Price" (as defined) of the Common
Stock under any employee stock option plan or other employee plan approved by
the Company's Board of Directors, provided that the exercise or purchase price
is not less than 85% of the fair market value on the date of grant. The warrants
allow for cashless exercises by means of the Company's withholding of shares of
Common Stock otherwise issuable to the holder, which shares are to be valued for
this purpose based on the market price of the Common Stock at the time.
An allocation has been made between the convertible notes and the warrants
based on the relative fair values of the securities at the time of issuance. A
discount of approximately $464,000 has been recorded against the convertible
notes due to the allocation. As a result of this allocation, the Company will
record interest expense, at an effective interest rate of 11% per year,
throughout the terms of the convertible notes which began in the first quarter
of 1999. Interest expense of approximately $257,000 has been accreted for the
year ended December 31, 1999.
The balance of the note plus accreted interest at December 31, 1999 is
$4,705,000.
A registration statement on Form S-3 covering 4,637,516 shares of Common
Stock, some or all of which may be issuable upon conversion of the convertible
notes, was declared effective by the Securities and Exchange Commission on
January 8, 1999.
Note Payable
The Company purchased equipment and a license agreement related to the
Internet stations for $400,000 in April 1999. A promissory note was issued for
$360,000 and cash of $40,000 was paid in relation to this agreement. The note
bears interest at 10% per annum and principal is payable in twelve equal
quarterly installments of $30,000 plus interest. In December 1999, the agreement
was revised and a payment of approximately $123,000 plus interest was paid in
December 1999, leaving a balance of approximately $178,000 at December 31, 1999
to be paid in nine quarterly installments of $19,676 beginning on March 31,
2000.
Maturities
Maturities of notes payable at December 31, 1999 are as follows:
CONVERTIBLE
YEAR ENDING NOTES NOTE PAYABLE TOTAL
- ----------- ----------- ------------ ----------
2000............................................ -- $ 79,000 $ 79,000
2001............................................ $4,705,000 79,000 4,784,000
2003............................................ -- 20,000 20,000
---------- -------- ----------
Total Obligation................................ 4,705,000 178,000 4,883,000
Less Current Maturities......................... -- (79,000) (79,000)
---------- -------- ----------
Long Term Obligation............................ $4,705,000 $ 99,000 $4,804,000
========== ======== ==========
(9) LEGAL ACTIONS
In February 1998, pursuant to the settlement of a class-action lawsuit
pending against the Company since 1993, the Company issued 565,000 warrants to
purchase the Common Stock of the Company ("Settlement Warrants"). Each
Settlement Warrant has a term of three years beginning February 18, 1998. The
Settlement Warrants were issued on February 18, 1998 and entitle the holder of a
Settlement Warrant to purchase a share of Common Stock of the Company at a price
of $0.96. During the period from February 18, 2000 to
F-20
50
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 18, 2001, the holders of Settlement Warrants were to have the right,
but not the obligation, to put the Settlement Warrants to the Company for
repurchase at a price of $3.25 per Settlement Warrant (the "Put Right"),
however, this Put Right expired by its terms on February 17, 2000 when the
closing price per share of the Company's Common Stock on the American Stock
Exchange reached $4.22 or above for the seventh trading day. The Company has no
further obligation to repurchase the Settlement Warrants. In no event shall the
Company have any obligation to repurchase its Common Stock. The right of holders
to exercise the Settlement Warrants to purchase shares of Common Stock of the
Company at $0.96 per share continues through February 18, 2001.
On June 11, 1997, the Company was included as a defendant in a class-action
lawsuit, entitled Eliot Miller and Jay Iyer, shareholders on behalf of
themselves and all others similarly situated vs. NTN Communications, Inc.,
Patrick J. Downs, Daniel C. Downs, Donald C. Klosterman, Ronald E. Hogan, Gerald
P. McLaughlin and KPMG Peat Marwick LLP, filed in the United States District
Court for the Southern District of California. The complaint alleges violations
of state and federal securities laws based upon purported omissions from the
Company's filings with the Securities and Exchange Commission. More
particularly, the complaint alleges that the directors and former officers
devised an "exit strategy" to provide themselves with undue compensation upon
their resignation from the Company. The plaintiffs further allege that
defendants made false statements about, and failed to disclose, contingent
liabilities (guaranteed compensation to management and the right of an investor
in IWN to require the Company to repurchase its investment during 1997) and
phantom assets (loans to management) in the Company's financial statements and
KPMG LLP's audit reports, all of which served allegedly to inflate the trading
price of the Company's Common Stock.
On November 7, 1997, the court granted KPMG LLP's motion to dismiss the
plaintiffs' claims against it pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure for failure to state a claim upon which relief may be granted.
On July 3, 1997, the Company filed a motion to dismiss the lawsuit. On
November 6, 1997, the Court dismissed all of the plaintiff's state law causes of
action against the Company but retained the plaintiff's federal law causes of
action. In February 1998, the attorneys representing the plaintiffs in this
litigation filed an action entitled Dorman vs. NTN Communications, Inc. in the
Superior Court of San Diego County for the State of California in which they
essentially replead the state law causes of action dismissed in the federal
lawsuit. In March 1999, the Court granted the Company's motion for summary
judgment in the Dorman matter. On May 13, 1999, plaintiffs filed a motion for
new trial which was denied by the Court. On August 20, 1999, plaintiffs filed an
appeal of the summary judgment in the Fourth Appellate District of the Court of
Appeals for the State of California. The Company will file its reply to the
appeal on or before March 30, 2000. In the Company's opinion, the claim in the
Dorman litigation is covered by directors and officers liability insurance
providing $15,000,000 of coverage. The Company has submitted this claim to its
directors and officers liability insurance underwriters, who have accepted such
claims subject to reservation of rights. The Company's deductible under the
insurance policy is $200,000 which has been paid.
In November 1999, the Company reached a tentative settlement agreement with
the class of plaintiffs in the Miller litigation whereby the Company would pay
$3,250,000 upon approval by the court. The settlement payment is fully covered
by the Company's liability insurance. A settlement hearing is scheduled to take
place in April, 2000 for the purpose of seeking court approval of the proposed
settlement and plan of allocation of the settlement funds. Upon approval of the
proposed settlement, the Court will enter final judgment and dismiss the
litigation as to all defendants.
In September 1998, the Company received correspondence from counsel to
Microsoft Corporation and related inquiries from the Business Software Alliance
and Software Publishers Association, two industry associations, requesting
information regarding the Company's use of the MS-DOS operating system in
connection with its Playmaker(R) systems which were installed in over 2,900
hospitality locations throughout the
F-21
51
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
United States. In response, the Company conducted an internal audit and produced
the results to counsel to the three entities. Based on the audit results, it was
determined that the Company had insufficient licensing for the MS-DOS in use in
the hospitality locations. In November 1999, the Company entered into a
Settlement Agreement with the Business Software Alliance ("BSA") pursuant to
which the Company will pay the Business Software Alliance a total of $339,864 in
ten equal monthly installments. The Company will also be required to deliver to
BSA a Certification of Compliance certifying the accuracy of the software audit
results and that all copies of the relevant software products used by NTN in the
course of business are licensed to NTN and are used solely in accordance with
such licenses. In addition, in December 1999, the Company entered into a
Settlement Agreement with the Software Publishers Association pursuant to which
the Company was liable for a total of $25,000 to the Software Publishers
Association in two equal installments and purchased sufficient copies of the
software to replace infringing copies as needed. The Company had previously
provided an amount sufficient to cover the expense of both settlements.
The Company has been involved as a plaintiff or defendant in various
previously reported lawsuits in both the United States and Canada involving
Interactive Network, Inc. ("IN"). With the court's assistance, the Company and
IN reached a resolution of all pending disputes in the United States and agreed
to private arbitration regarding any future licensing, copyright or infringement
issues which may arise between the parties. There remain two lawsuits involving
the Company, its unaffiliated Canadian licensee and IN, which were filed in
Canada in 1992. No action was taken in the Canadian litigation until May 1998,
when IN gave notice of its intention to proceed. In November 1998, the Company
and its Canadian licensee filed a counterclaim against IN. These actions affect
only the Canadian operations of the Company and its Canadian licensee and do not
extend to the Company's operations in the United States or elsewhere. In
January, 2000 the Court ordered the parties to complete discovery in the matter
on or before May 2000. Although they cannot be estimated with certainty, any
damages the Company might incur are not expected to be material.
There can be no assurance that any or all of the foregoing claims will be
decided in favor of the Company, which is not insured against all claims made.
During the pendency of such claims, the Company will continue to incur the costs
of defense of same. Other than set forth above, there is no material litigation
pending or threatened against the Company.
(10) MANAGEMENT REORGANIZATION
On March 5, 1997, the Company announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board and Daniel C. Downs resigned as President. In
addition, three other officers resigned or were terminated in connection with
the reorganization ("Reorganization"). The Company entered into separate
agreements ("Agreements") with each of the former officers setting out the terms
on which their existing employment contracts with the Company would be settled.
In compliance with the Agreements, the Company was to continue to pay the former
officers their current annual salaries and other benefits for the remaining
terms of their employment agreements with the Company, which were to expire on
or before December 31, 1999.
In March 1998, the Company and three of the former officers agreed to an
amendment of the Agreements. The Agreements were modified to extend the payment
term an additional year to December 31, 2000 and provided for reductions of
amounts to be paid in 1998 and 1999 totaling $272,000 and $355,000,
respectively. Medical and life insurance benefits pursuant to the Agreements
were also extended to December 31, 2000.
Pursuant to the Agreements, in 1997, the Company canceled an aggregate of
2,325,000 of outstanding warrants and options to purchase Common Stock of the
Company previously issued to the former officers. In addition, the Company
agreed to extend the exercise period and reduce the exercise price of certain
other warrants and options retained by the former officers.
F-22
52
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total charges related to the Reorganization are comprised of the following:
1997
----------
Contractual payments for Agreements, net of discount........ $3,128,000
Cancellation of notes receivable and related accrued
interest of $216,000 from former officers................. --
Cancellation of note receivable from President.............. 150,000
Bonus granted to President.................................. 85,000
Charge related to extension of the exercise period and
reduction in the exercise price of certain warrants and
options................................................... 1,450,000
----------
Total charges..................................... $4,813,000
==========
Interest expense totaling $34,000, $56,000 and $185,000 was incurred in
1999, 1998 and 1997, respectively, related to the Agreements.
Upon joining the Company in October 1997 as Chief Financial Officer, Gerald
Sokol, Jr. was granted a total of 700,000 options to purchase Common Stock at
prices ranging from $5.00 to $5.08 per share. The options were exercisable as
follows: 100,000 upon grant, 200,000 in three equal annual installments and
400,000 exercisable only if the closing price of the Common Stock was at least
$11 per share for ten consecutive days prior to August 15, 1998. All of the
options were subject to acceleration in the event of a "Change in Control Event"
as defined. Such a Change of Control Event occurred in March 1997 as a
consequence of the Reorganization and all the options became vested and
exercisable in full at that time. Also as a result of the Reorganization in
1997, the Board of Directors granted Gerald Sokol Jr. an additional 600,000
options to purchase the Common Stock of the Company. Mr. Sokol is no longer with
the Company.
F-23
53
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) SEGMENT INFORMATION
The Company's operations are to develop and distribute interactive
entertainment. The Company's reportable segments have been determined based on
the nature of the services offered to customers, which include, but are not
limited to, revenue from the Hospitality and Buzztime divisions. Hospitality
revenue is generated primarily from broadcasting content to customer locations
through two interactive television networks. Hospitality revenues comprise 94%
of the Company's total revenue. Revenue from Buzztime is primarily generated
from the distribution of its digital trivia game show content and "Play-Along"
sports games as well as revenue related to production services for third
parties. The following tables set forth certain information regarding the
Company's segments and other operations:
1999 1998 1997
----------- ----------- ------------
Revenues:
Hospitality........................................ $22,250,000 $20,973,000 $ 21,018,000
BUZZTIME........................................... 1,028,000 2,014,000 3,326,000
IWN................................................ 302,000 493,000 275,000
Other.............................................. -- 282,000 456,000
Corporate.......................................... 168,000 432,000 787,000
----------- ----------- ------------
Total Revenues............................. $23,748,000 $24,194,000 $ 25,861,000
=========== =========== ============
Operating income (loss):
Hospitality........................................ $ 6,798,000 $ 5,755,000 $ 1,129,000
BUZZTIME........................................... (4,599,000) (1,371,000) (247,000)
IWN................................................ (50,000) (895,000) (1,429,000)
Other.............................................. -- (16,000) (780,000)
Corporate.......................................... (5,950,000) (6,920,000) (11,480,000)
----------- ----------- ------------
Total Operating Loss....................... $(3,801,000) $(3,447,000) (12,807,000)
=========== =========== ============
Total Assets:
Hospitality........................................ $12,547,000 $11,816,000 $ 10,510,000
BUZZTIME........................................... 230,000 1,072,000 3,087,000
IWN................................................ 118,000 367,000 1,126,000
Other.............................................. -- -- 556,000
Corporate.......................................... 4,392,000 3,512,000 4,992,000
----------- ----------- ------------
Total Assets............................... $17,287,000 $16,767,000 20,271,000
=========== =========== ============
Capital Expenditures and Software Development Costs:
Hospitality........................................ $ 5,174,000 $ 2,383,000 $ 4,050,000
BUZZTIME........................................... -- 10,000 --
Corporate.......................................... 1,640,000 619,000 670,000
----------- ----------- ------------
Total Capital Expenditures and Software
Development Costs........................ $ 6,814,000 $ 3,012,000 4,720,000
=========== =========== ============
Depreciation and amortization:
Hospitality........................................ $ 4,290,000 $ 2,865,000 $ 2,848,000
BUZZTIME........................................... 934,000 2,015,000 1,578,000
IWN................................................ 14,000 698,000 157,000
Other.............................................. -- 21,000 67,000
Corporate.......................................... 1,319,000 763,000 788,000
----------- ----------- ------------
Total depreciation and Amortization........ $ 6,557,000 $ 6,412,000 $ 5,305,000
=========== =========== ============
F-24
54
SCHEDULE II
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONS BALANCE
ALLOWANCE FOR BALANCE AT CHARGED TO AT END
DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS(A) OF PERIOD
- ----------------- ---------- ---------- ------------- ----------
1997........................................ $1,563,000 1,462,000 1,712,000 $1,313,000
1998........................................ $1,313,000 850,000 443,000(b) $1,720,000
1999........................................ $1,720,000 746,000 318,000 $2,148,000
- ---------------
(a) Reflects trade accounts receivable written off during the year, net of
amounts recovered.
(b) In June 1998, the Company sold 82.5% of its interest in LearnStar, Inc. The
deductions for 1998 include $379,000 related to the allowance for
LearnStar, Inc. at the time of the sale.
See accompanying independent auditors' report.
F-25
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
NTN COMMUNICATIONS, INC.
By: /s/ KENDRA BERGER
----------------------------------
Authorized Signatory
Dated: March 1, 2001
56
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 -- Amended and Restated Certificate of Incorporation of the
Company, as amended.(7)
3.2 -- Certificate of Designations, Rights and Preferences of
Series B Convertible Preferred Stock.(12)
3.3 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 22, 2000.(13)
3.4 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 24, 2000.(13)
3.5 -- Bylaws of the Company.(2)
10.1 -- License Agreement with NTN Canada(3)
10.2 -- National Football League License Agreement(3)
10.3 -- Lease of Office with The Campus L.L.C.(4)
10.4* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Patrick J.
Downs.(5)
10.5* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Daniel C.
Downs.(5)
10.6* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Ronald E.
Hogan(5)
10.7* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Gerald P.
McLaughlin.(5)
10.8* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Michael J.
Downs.(5)
10.9* -- Resignation and General Release Agreement, dated December
31, 1996 between NTN Communications, Inc. and Robert
Klosterman.(5)
10.10* -- Letter agreement, dated March 4, 1997, between NTN and
Alan Magerman.(5)
10.11* -- Consulting Agreement, dated as of December 31, 1996,
between NTN Communications Inc. and Patrick J. Downs.(5)
10.12* -- Consulting Agreement, dated as of December 31, 1996,
between NTN Communications Inc. and Daniel C. Downs.(5)
10.13* -- Consulting Agreement, dated as of December 31, 1996,
between NTN Communications Inc. and Ronald E. Hogan.(5)
10.14* -- Consulting Agreement, dated as of December 31, 1996,
between NTN Communications Inc. and Gerald P.
McLaughlin.(5)
10.15* -- Consulting Agreement, dated as of March 14, 1997, between
NTN Communications Inc. and Donald Klosterman.(5)
10.16* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Patrick J Downs.(5)
10.17* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Daniel C. Downs.(5)
10.18* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Ronald E. Hogan.(5)
10.19* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Gerald P. McLaughlin.(5)
10.20* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Michael J. Downs.(5)
10.21* -- General Release, dated as of December 31, 1996, between
NTN Communications Inc. and Robert Klosterman.(5)
10.22* -- Special Stock Option dated August 18, 1996 between NTN
Communications, Inc. and Gerald Sokol, Jr.(5)
57
EXHIBIT
NO. DESCRIPTION
------- -----------
10.23* -- Special Stock Option dated August 25, 1996 between NTN
Communications, Inc. and Robert Bennett(5)
10.24* -- Special Stock Option dated August 30, 1996 between NTN
Communications, Inc. and Edward C. Frazier(5)
10.25* -- Amendment to Nonqualified Stock Option Agreement, dated
as of April 14, 1997, between NTN Communications, Inc.
and Edward C. Frazier.(6)
10.26 -- Warrant Agreement, dated as of February 18, 1998 between
NTN Communications, Inc. and American Stock Transfer and
Trust Company, as warrant agent, including a form of
warrant certificate.(7)
10.27* -- Performance Incentive Stock Option Agreement dated
November 4, 1996 by and between NTN Communications, Inc.
and Gerald Sokol, Jr.(7)
10.28* -- Nonqualified Stock Option Agreement dated May 14, 1997 by
and between NTN Communications, Inc. and Gerald Sokol,
Jr.(7)
10.29* -- Modification to Resignation Agreement, dated as of March
9, 1998 by and between NTN Communications, Inc. and
Daniel C. Downs(7)
10.30* -- Modification to Resignation Agreement, dated as of March
9, 1998 by and between NTN Communications, Inc. and
Patrick J. Downs(7)
10.31* -- Modification to Resignation Agreement, dated as of March
20, 1998 by and between NTN Communications, Inc. and
Ronald E. Hogan(7)
10.32* -- Employment Agreement, dated July 1, 1998, by and between
NTN Communications, Inc. and Gerald Sokol, Jr.(8)
10.33* -- Employment Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(9)
10.34* -- Stock Option Agreement, dated October 7, 1998, by and
between NTN Communications, Inc. and Stanley B. Kinsey(9)
10.35* -- Resignation and Release Agreement, dated February 18,
1999, by and between NTN Communications, Inc. and Gerald
Sokol, Jr.(9)
10.36 -- Exchange Agreement, dated October 5, 1998, by and between
NTN Communications, Inc. and the Buyers as defined)(7)
10.37 -- Loan and Security Agreement, dated August 6, 1999, by and
between NTN Communications, Inc. and Coast Business
Credit, a division of Southern Pacific Bank.(10)
10.38 -- Settlement Agreement, dated November 1, 1999, by and
between the Business Software Alliance and NTN
Communications, Inc.(10)
10.39* -- Stock Option Agreement, dated October 7, 1999, by and
between NTN Communications, Inc. and Stanley B. Kinsey(11)
10.40 -- Manufacturing Agreement, dated November 25, 1997, by and
between NTN Communications, Inc. and Climax Technology Co.
Ltd.(1)
23.00 -- Consent of KPMG LLP.(1)
- ---------------
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's registration statement on
Form S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1990, and incorporated by reference.
58
(4) Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1994, and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's report on Form 8-K dated
March 5, 1997 and incorporated by reference.
(6) Previously filed as an exhibit to the Company's report on Form 10-K dated
December 31, 1996 and incorporated by reference.
(7) Previously filed as an exhibit to the Company's registration statement on
Form S-3, File No. 333-69383, and incorporated by reference.
(8) Previously filed as an exhibit to the Company's report on Form 10-Q dated
September 30, 1998 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Company's report on Form 10-K dated
December 31, 1998 and incorporated by reference.
(10) Previously filed as an exhibit to the Company's report on Form 10-Q dated
September 30, 1999 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's report on Form 10-K dated
December 31, 1999 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's report on Form 10-K/A
filed on April 5, 2000 and incorporated herein by reference.