1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1103425
(State of incorporation) (I.R.S. Employer Identification No.)
The Campus 5966 La Place Court, Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
At August 7, 2000 the registrant had 34,286,000 shares of common stock,
$.005 par value, outstanding.
2
FORM 10-Q/A
PERIOD ENDED JUNE 30, 2000
NTN COMMUNICATIONS, INC.
ITEM PAGE
---- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................3
Consolidated Balance Sheets..........................................4
Consolidated Statements of Operations................................5
Consolidated Statements of Cash Flows................................6
Notes to Consolidated Financial Statements...........................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........12
Signature.................................................................................13
2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
3
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2000 December 31,
Assets (Unaudited) 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 2,347,000 $ 1,044,000
Restricted cash 259,000 239,000
Accounts receivable, net 1,392,000 2,541,000
Investment available for sale 587,000 937,000
Deposits on broadcast equipment 479,000 611,000
Prepaid expenses and other current assets 701,000 1,015,000
------------ ------------
Total current assets 5,765,000 6,387,000
Broadcast equipment and fixed assets, net 13,190,000 10,470,000
Other assets 264,000 430,000
------------ ------------
Total assets $ 19,219,000 $ 17,287,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 716,000 $ 1,421,000
Accrued expenses 1,677,000 1,498,000
Accrual for litigation costs 212,000 334,000
Accrual for management severance 342,000 598,000
Obligations under capital leases 780,000 740,000
Deferred revenue 660,000 796,000
Note payable and other current liabilities 96,000 79,000
------------ ------------
Total current liabilities 4,483,000 5,466,000
Obligations under capital leases, excluding current portion 259,000 475,000
Accrual for settlement warrants -- 1,793,000
Revolving line of credit 3,693,000 2,486,000
7% senior convertible notes 4,604,000 4,705,000
Other long-term liabilities 91,000 141,000
------------ ------------
Total liabilities 13,130,000 15,066,000
------------ ------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock, $.005 par value,
5,000,000 shares authorized; 161,000 shares issued
and outstanding at June 30, 2000 and December 31, 1999 1,000 1,000
Common stock, $.005 par value, 70,000,000 and 50,000,000 shares
authorized at June 30, 2000 and December 31, 1999, respectively;
33,653,000 and 29,914,000 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 168,000 149,000
Additional paid-in capital 74,740,000 66,548,000
Accumulated deficit (68,101,000) (63,645,000)
Accumulated other comprehensive gain (loss) (247,000) (360,000)
Treasury stock, at cost, 111,000 shares at June 30, 2000
and December 31, 1999 (472,000) (472,000)
------------ ------------
Total shareholders' equity 6,089,000 2,221,000
------------ ------------
Total liabilities and shareholders' equity $ 19,219,000 $ 17,287,000
============ ============
See accompanying notes to unaudited consolidated financial statements
4
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30 June 30 June 30 June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues:
Hospitality revenues $ 5,408,000 $ 5,360,000 $ 11,173,000 $ 10,587,000
Internet revenues 102,000 118,000 184,000 228,000
America Online fees -- 170,000 -- 350,000
Other revenues 4,000 163,000 20,000 333,000
------------ ------------ ------------ ------------
Total revenues 5,514,000 5,811,000 11,377,000 11,498,000
------------ ------------ ------------ ------------
Operating expenses:
Direct operating costs of services 2,990,000 2,255,000 6,060,000 4,791,000
Selling, general and administrative 4,233,000 3,319,000 8,315,000 6,692,000
Depreciation and amortization 471,000 331,000 864,000 637,000
Research and development 76,000 160,000 223,000 295,000
------------ ------------ ------------ ------------
Total operating expenses 7,770,000 6,065,000 15,462,000 12,415,000
------------ ------------ ------------ ------------
Operating loss (2,256,000) (254,000) (4,085,000) (917,000)
------------ ------------ ------------ ------------
Other income (expense):
Interest income (expense), net (228,000) (205,000) (532,000) (364,000)
Other 15,000 (15,000) 161,000 (25,000)
------------ ------------ ------------ ------------
Total other income (expense) (213,000) (220,000) (371,000) (389,000)
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,469,000) (474,000) (4,456,000) (1,306,000)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ (2,469,000) $ (474,000) $ (4,456,000) $ (1,306,000)
============ ============ ============ ============
Net income (loss) per common share - basic and diluted $ (0.07) $ (0.02) $ (0.14) $ (0.05)
============ ============ ============ ============
Weighted average shares outstanding - basic and diluted 33,061,000 28,249,000 31,788,000 28,063,000
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements
5
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30 June 30 June 30 June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
Cash flows provided by (used in) operating activities:
Net Income (loss) $ (2,469,000) $ (474,000) $ (4,456,000) $ (1,306,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,877,000 1,443,000 3,807,000 3,140,000
Provision for doubtful accounts 173,000 192,000 548,000 385,000
Non-cash compensation charges 119,000 17,000 312,000 56,000
Accreted interest expense 48,000 100,000 108,000 192,000
Amortization of deferred revenue -- (34,000) -- (85,000)
(Gain) loss on sale of investment available for sale 12,000 (6,000) (65,000) (6,000)
Changes in assets and liabilities:
Accounts receivable 223,000 (126,000) 601,000 (618,000)
Prepaid expenses and other assets 331,000 (1,013,000) 132,000 (926,000)
Accounts payable and accrued expenses (830,000) (92,000) (462,000) (784,000)
Deferred revenue (127,000) 18,000 (136,000) 239,000
Management severance and other long-term liabilities (131,000) (200,000) (262,000) (535,000)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (774,000) (175,000) 127,000 (248,000)
------------ ------------ ------------ ------------
Cash flows provided by (used in) investing activities:
Capital expenditures (2,650,000) (1,154,000) (6,040,000) (2,001,000)
Deposits on broadcast equipment 332,000 549,000 132,000 549,000
Restricted cash (157,000) -- (20,000)
Notes receivable -- 19,000 138,000 38,000
Capital software expenditures -- (3,000) -- (31,000)
Proceeds from sale of equipment -- 45,000 -- 45,000
Proceeds from sale of investment available for sale 134,000 -- 528,000 --
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (2,341,000) (544,000) (5,262,000) (1,400,000)
------------ ------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Principal payments on capital leases (235,000) (414,000) (453,000) (537,000)
Borrowings from revolving line of credit 5,794,000 -- 14,402,000 --
Principal payments on revolving line of credit (5,801,000) -- (13,195,000) --
Proceeds from issuance of stock, net of offering expenses 5,163,000 -- 5,163,000 --
Principal payments on notes payable -- -- (50,000) --
Exercise of stock options and warrants 79,000 -- 571,000 150,000
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 4,999,000 (414,000) 6,438,000 (387,000)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,884,000 (1,133,000) 1,303,000 (2,035,000)
------------ ------------ ------------ ------------
Cash and cash equivalents at beginning of period 463,000 3,658,000 1,044,000 4,560,000
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,347,000 $ 2,525,000 $ 2,347,000 $ 2,525,000
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 30 June 30 June 30 June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 108,000 $ 32,000 $ 260,000 $ 58,000
============ ============ ============ ============
Income taxes $ -- $ -- $ -- $ --
============ ============ ============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest $ 82,000 $ 90,000 $ 168,000 $ 90,000
============ ============ ============ ============
Equipment acquired under capital leases $ 39,000 $ 712,000 $ 277,000 $ 1,044,000
============ ============ ============ ============
Unrealized holding gain (loss) on investments $ (284,000) $ -- $ 113,000 $ --
============ ============ ============ ============
Exchange of convertible notes to common stock $ -- $ -- $ 202,000 $ --
============ ============ ============ ============
Issuance of treasury stock pursuant to anti-dilution provisions $ -- $ 930,000 $ -- $ 930,000
============ ============ ============ ============
Equipment and license acquired by issuing note payable $ -- $ 360,000 $ -- $ 360,000
============ ============ ============ ============
Exchange of preferred stock for convertible notes and warrants $ -- $ -- $ -- $ 5,449,000
============ ============ ============ ============
Expiration of settlement warrant obligation $ -- $ -- $ 1,793,000 $ --
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and subsidiaries
(collectively, the "Company") and the results of operations and cash flows of
the Company for the interim periods presented. Management has elected to omit
substantially all notes to the Company's consolidated financial statements as
permitted by the rules and regulations of the Securities and Exchange
Commission. The results of operations for the interim periods are not
necessarily indicative of results to be expected for any other interim period or
for the year ending December 31, 2000.
The consolidated financial statements for the three months and six months
ended June 30, 2000 and 1999 are unaudited and should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1999.
Certain items in the prior period consolidated financial statements have
been reclassified to conform to the current period presentation.
2. INCOME (LOSS) PER SHARE
Options, warrants, convertible preferred stock and convertible notes
representing approximately 12,818,000, 13,491,000, 14,440,000, and 13,309,000
potentially dilutive common shares have been excluded from the computations of
net income (loss) per share for the three months ended June 30, 2000 and 1999
and the six months ended June 30, 2000 and 1999, respectively, as their effect
was anti-dilutive.
3. SEGMENT INFORMATION
The Company develops, produces and distributes interactive entertainment.
The Company's reportable segments have been determined based on the nature of
the services offered to customers, which include, but are not limited to,
revenue from the NTN Network and BUZZTIME divisions. Hospitality revenue is
generated primarily from broadcasting content to customer locations through an
interactive television network and from advertising sold on the network.
Hospitality revenues comprise 98% of the Company's total revenue. Internet
revenue includes revenue from BUZZTIME and is generated primarily from the
distribution of the Company's digital trivia game show content and "Play-Along"
sports games, as well as revenue related to advertising and production services
for third parties. Revenues from the BUZZTIME segment also include fees earned
from AOL. The following tables set forth certain information regarding the
Company's segments and other operations:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES
NTN Network $ 5,410,000 $ 5,394,000 $ 11,181,000 $ 10,676,000
BUZZTIME(1) 102,000 288,000 184,000 578,000
Other 2,000 129,000 12,000 244,000
------------ ------------ ------------ ------------
Total revenue $ 5,514,000 $ 5,811,000 $ 11,377,000 $ 11,498,000
============ ============ ============ ============
OPERATING INCOME (LOSS)
NTN Network $ 492,000 $ 1,294,000 $ 1,057,000 $ 2,663,000
BUZZTIME (1,109,000) (182,000) (1,957,000) (726,000)
Corporate (1,639,000) (1,356,000) (3,185,000) (2,825,000)
Other -- (10,000) -- (29,000)
------------ ------------ ------------ ------------
OPERATING LOSS $ (2,256,000) $ (254,000) $ (4,085,000) $ (917,000)
============ ============ ============ ============
----------
(1) Includes AOL fees of $0 and $170,000 for the three months ended June 30,
2000 and June 30, 1999, respectively, and $0 and $350,000 for the six months
ended June 30, 2000 and June 30, 1999, respectively.
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4. SETTLEMENT WARRANTS
Shareholders' equity at June 30, 2000 includes the reclassification in the
first quarter of 2000 of an accrued liability of approximately $1,793,000 to
additional paid-in capital for a potential redemption obligation, relating to
warrants issued in connection with the settlement of litigation in 1996
("Settlement Warrants"), which expired in February 2000. The Settlement Warrants
entitled the holder of a Settlement Warrant to purchase a share of Common Stock
at a price of $0.96 during the period ending February 18, 2001. During the
period from February 18, 2000 to February 18, 2001, the holders of the
Settlement Warrants were to have the right to cause the Company to redeem the
Settlement Warrants for a redemption price of $3.25 per Warrant (the "Put
Right"); however, this Put Right expired by its terms on February 17, 2000 when
the closing price per share of the Company's Common Stock on the American Stock
Exchange reached $4.22 or above for the seventh trading day since the Settlement
Warrants were issued. The Company has no further obligation to redeem or
repurchase the Settlement Warrants.
5. 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 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 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.
6. PUBLIC OFFERING OF COMMON STOCK
The Company raised gross proceeds of $6,000,000 in April 2000 through the
underwritten sale of 2,000,000 shares of Common Stock pursuant to the Company's
existing shelf registration. The net proceeds from the sale, which totaled
approximately $5,163,000, are being used primarily for working capital and
general corporate purposes relating to the Company's launch of its new game
portal, BUZZTIME and ongoing conversion of the NTN Network's hospitality
locations to the Company's new DITV technology.
7. SUBSEQUENT EVENTS
On July 13, 2000, approximately $713,000 of the 7% senior convertible notes,
was converted into approximately 560,000 shares of Common Stock in accordance
with the terms of the notes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This Quarterly Report contains forward looking statements regarding use of
the proceeds from the recent sale of common stock and other matters, which are
subject to risks and uncertainties, including cash needs and other risk factors
detailed in the Company's Securities and Exchange Commission filings, including
the Company's Report on Form 10-K for the fiscal year ended December 31, 1999,
as amended by Form 10-K/A, and its quarterly report on 10Q for the period ended
March 31, 2000, which risk factors are incorporated herein by reference.
GENERAL
NTN is a developer and distributor of interactive game content. The
Company operates its businesses through two operating divisions, the NTN Network
and BUZZTIME, Inc. (BUZZTIME).
The NTN Network is North America's largest "out-of-home" interactive
television network. The unique private network, distributed by Internet-enhanced
technology, broadcasts a variety of multi-player sports and trivia games 365
days a year to hospitality venues such as restaurants, sports bars, hotels,
clubs and military bases totaling approximately 3,400 locations in North America
("Locations") as of August 1, 2000. A unique feature of NTN Network's
interactive programming is that all players compete in real-time within each
Location and are ranked at the end of each game against players in all Locations
throughout North America. This enables each Location to create on-premises
promotions to increase patron loyalty and allows NTN to capture national
sponsors who want to use the competitions as a promotional tool.
In April 1999, the Company upgraded the NTN Network by introducing a
new Windows 98-based "Digital Interactive TV" system (DITV) to replace its
decade-old DOS-based system. The new DITV system uses Windows-based development
tools and multimedia capabilities, resulting in enhanced, high-resolution
graphics and full-motion video, making broadcasts on the NTN Network more
appealing. As of June 2000, approximately 64% of the NTN Network has been
converted to the new digital system. NTN estimates that it will convert about
82% of its network to the digital system. About 15% of the network will
continue to run on the DOS-band system under the Canadian license. NTN
anticipates service will be terminated on the remaining 3% of the systems under
the terms of the existing contracts.
BUZZTIME, a wholly-owned subsidiary formed in December 1999, functions
both as a game web site, BUZZTIME.com launched in May 2000, and as a developer
and distributor of game content. As a developer, BUZZTIME will continue to
augment the Company's expansive interactive game libraries. As a distributor,
BUZZTIME broadcasts live play-along game shows to a broad array of interactive
networks and platforms, including the Internet and online services, interactive
television and hand-held devices.
In May 2000, BUZZTIME entered into an agreement with NHL Interactive
CyberEnterprises, or NHL ICE, to maintain and develop BUZZTIME Hockey Trivia.
This trivia game will be accessed by a link on the front page of NHL.com for
the 2000-2001 NHL season. The game is a multi-player trivia contest testing the
players' knowledge on the National Hockey League. NHL ICE will advertise on the
area displaying the trivia game and BUZZTIME will receive 45% of the net
revenues derived from such advertising sales. No minimum revenue is guaranteed.
Users of the trivia game will be registered on both BUZZTIME and NHL ICE.
The Company's current strategy for each of the two operating divisions
is as follows: For the NTN Network, the strategy is to continue to lower
operating costs while increasing the number of paying customers in the Network.
To lower costs, the company's focus is on declining telecommunications and
technology costs. To increase sales, the focus is on increasing targeted sales
efforts in the top twenty metropolitan markets, using new forms of connectivity,
including DSL, to reach locations not previously available. The strategy also
calls for using newly available and inexpensive broadband connectivity and the
availability of inexpensive wireless Internet appliances to deliver new content
and services, for additional revenues, to both locations and their consumers.
For BUZZTIME, the Company intends to focus increasingly on the distribution of
BUZZTIME content to Interactive Television (ITV) markets and to wireless
devices. These channels should both increase future direct revenues and increase
player registrations and loyalty, regardless of the consumer's point of access.
The NTN Network will continue to be a key element in promoting the BUZZTIME
brand. In addition, the Company expects to generate revenues through a
combination of direct consumer marketing, advertising, game sponsorships,
pay-to-play and subscription models across all platforms. There can be no
assurance, however, that the Company will be successful in executing this
strategy.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Operations for the three months ended June 30, 2000 resulted in a net loss
of $2,469,000 compared to a net loss of $474,000 for the three months ended June
30, 1999.
Total revenues decreased 5% to $5,514,000 for the three months ended June
30, 2000 from $5,811,000 for the three months ended June 30, 1999. This decrease
was primarily due to a decrease in Internet revenues, America Online fees and
other revenues as the Company wound down such exclusive relationships to pursue
Internet and interactive initiatives through its wholly-owned subsidiary,
BUZZTIME, Inc.
Hospitality revenues increased 1% to $5,408,000 for the three months ended
June 30, 2000 from $5,360,000 for the three months ended June 30, 1999. This
increase was primarily due to an increase in rates charged for the setup,
installation and training for the DITV network as compared to the original
network. Included in hospitality revenues are revenues from the Company's
Canadian licensee totaling $313,000 for the three months ended June 30, 2000.
Advertising revenue for hospitality increased 81%, or $150,000, to $335,000 for
the three months ended June 30, 2000 from $185,000 for the three months ended
June 30, 1999 due to new advertising contracts that did not exist for the three
months ended June 30, 1999. These increases were partially offset by a 2%
decrease in hospitality subscription revenues attributable to a lower billing
rate structure associated with the DITV network as compared to the original
network. During the three months ended June 30, 2000, approximately 377 DITV
systems were installed, including both new customers and conversions from the
original network. 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.
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Internet revenues decreased 14% to $102,000 for the three months ended June
30, 2000 from $118,000 for the three months ended June 30, 1999. The decrease
was largely due to the expiration of the Company's contract with GTE Mainstreet,
which occurred in February 2000. 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 ("AOL") fees were zero for the three months ended June 30,
2000, compared to $170,000 for the three months ended June 30, 1999. The
Company's contract with AOL expired on December 1, 1999, at which time a new
contract was signed. Under the terms of the new nonexclusive contract, the
Company will have access to AOL's 24 million subscribers allowing promotion of
the BUZZTIME website on several AOL channels. The Company also will receive
extensive promotional branding and revenue opportunities; however, it will
receive little or no revenue directly from AOL. 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.
Other revenues decreased 98% to $4,000 for the three months ended June 30,
2000 from $163,000 for the three months ended June 30, 1999. Included in other
revenues for the three months ended June 30, 1999 was approximately $108,000 of
revenues from IWN, Inc. and approximately $34,000 recognition of previously
deferred revenues from equipment sales. No revenue was recorded for IWN, Inc. or
deferred revenues from equipment sales for the three months ended June 30, 2000
as the Company sold the assets of IWN in August 1999 to eBet Online Limited and
concluded the recognition of deferred revenue associated with prior equipment
sale-leasebacks. The Company stopped selling equipment to its customers in 1998.
Direct operating costs of services increased 33% to $2,990,000 for the
three months ended June 30, 2000 from $2,255,000 for the three months ended June
30, 1999. This increase was due primarily to a net increase in depreciation and
amortization of approximately $294,000 directly related to an increase in
capitalized purchase of broadcast equipment for the DITV network offset by a
decrease in amortization for capitalized software as the software becomes fully
amortized. In addition, ISP charges increased $235,000 attributable to
additional services needed to support the DITV network. These were combined with
a reversal of $180,000 during the three months ended June 30, 1999 due to the
settlement of an accrued liability and license fee expense which had been less
than estimated. As a result, the Company reduced the excess liability and
license fee expense related to the settlement which occurred in the second
quarter of last year. The conversion to the DITV network is expected to be
complete by the end of 4th quarter 2000.
Selling, general and administrative expenses increased 28% to $4,233,000 for
the three months ended June 30, 2000 from $3,319,000 for the three months ended
June 30, 1999. Salaries and related payroll taxes, benefits, recruiting fees and
other related expenses increased approximately $872,000 during the three months
ended June 30, 2000 due to an increase in the number of employees directly
related to the development and launch of the Internet web sites as compared to
the three months ended June 30, 1999. Consulting expenses increased
approximately $201,000 related to the launch of the Internet website and the
hiring of an investor relations firm for the three months ended June 30, 2000.
Stock-based compensation expense increased to $119,000 for the three months
ended June 30, 2000 from $17,000 for the three months ended June 30, 1999. The
charges resulted from the issuance of warrants and options to employees and
non-employees, which can vary from period-to-period. Equipment lease expense
decreased for the three months ended June 30, 2000 by $236,000 due to the payoff
of such leases during 1999.
Research and development expenses were $76,000 for the three months ended
June 30, 2000, compared to $160,000 for the three months ended June 30, 1999.
The current period expenses resulted from the Company's research and development
efforts related to the next generation of the DITV network and development of
new Internet web sites. For the three-month period ended June 30, 1999, the
Company's research and development efforts focused primarily on the upgrade of
the NTN network as well as future Internet web sites.
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
The Company's net loss for the six months ended June 30, 2000 was
$4,456,000 compared to a net loss of $1,306,000 for the six months ended June
30, 1999.
Total revenues decreased 1% to $11,377,000 for the six months ended June 30,
2000 from $11,498,000 for the six months ended June 30, 1999. This decrease was
primarily due to a decrease in Internet revenues, America Online fees and other
revenues as the Company wound down such exclusive relationships to pursue
Internet and interactive initiatives through its wholly-owned subsidiary,
BUZZTIME, Inc.
Hospitality revenues increased 6% to $11,173,000 for the six months ended
June 30, 2000 from $10,587,000 for the six months ended June 30, 1999. This
increase was due primarily to an increase in rates charged for the setup,
installation and training for the DITV network as compared to the original
network. This increase was partially offset by a decrease in hospitality
subscription revenues attributable to a lower billing rate structure associated
with the DITV network as compared to the original network. During the six months
ended June 30, 2000, approximately 730 DITV systems were installed. Included in
hospitality revenues are revenues from the Company's Canadian licensee totaling
$634,000 for the six months ended June 30, 2000. Advertising revenue for
hospitality also
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increased to $733,000 for the six months ended June 30, 2000 from $269,000 for
the six months ended June 30, 1999 due to new advertising contracts that did not
exist for the six months ended June 30, 1999.
Internet revenues decreased 19% to $184,000 for the six months ended June
30, 2000 from $228,000 for the six months ended June 30, 1999. The decrease was
largely due to the expiration of the Company's contract with GTE Mainstreet, in
February 2000.
AOL fees were zero for the six months ended June 30, 2000, compared to
$350,000 for the six months ended June 30, 1999. The Company's contract with AOL
expired on December 1, 1999, at which time a new contract was signed as
described above, under which the Company will not generate revenue from AOL.
Other revenues decreased 94% to $20,000 for the six months ended June 30,
2000 from $333,000 for the six months ended June 30, 1999. Included in other
revenue for the six months ended June 30, 1999 was approximately $202,000 of
revenue from IWN, Inc. and approximately $84,000 of equipment sales. No revenue
was recorded for IWN, Inc. or equipment sales for the six months ended June 30,
2000 as the Company sold the assets of IWN in August 1999 to eBet Online Limited
and concluded the recognition of deferred revenue associated with prior
equipment sale-leasebacks. The Company stopped selling equipment to its
customers in 1998.
Direct operating costs of services increased 27% to $6,060,000 for the six
months ended June 30, 2000 from $4,791,000 for the six months ended June 30,
1999. This increase was due primarily to increased ISP charges of $549,000 due
to additional services needed to support the DITV network for the six months
ended June 30, 2000. Depreciation and amortization also increased by a net
amount of approximately $440,000 due to an increase in capitalized purchase of
broadcast equipment for the DITV network offset by a decrease in amortization of
capitalized software as the software becomes fully amortized, and to a lesser
extent, due to expenses of approximately $79,000 associated with an increase in
the number of sites installed in connection with the roll out of the DITV
network for the six months ended June 30, 2000. Advertising commissions also
increased directly related to the increase in hospitality advertising revenue.
These increases were partially offset by a decrease of approximately $187,000
for technical site service costs attributable to new equipment at the sites for
the DITV network which required less servicing than the 49 MHz network
equipment. The conversion to the DITV network is expected to be complete by the
end of 4th quarter 2000.
Selling, general and administrative expenses increased 24% to $8,315,000
for the six months ended June 30, 2000 from $6,692,000 for the six months ended
June 30, 1999. Salaries and related payroll taxes, benefits, recruiting fees and
other related expenses increased approximately $1,466,000 for the six months
ended June 30, 2000 due to an increase in the number of employees directly
related to the development and launch of the Internet web site as compared to
the six months ended June 30, 1999. Consulting expenses increased approximately
$286,000 related to the launch of the Internet web site and investor relations
for the six months ended June 30, 2000. Bad debt expense increased approximately
$163,000 for the six months ended June 30, 2000. This increase is directly
related to continuing evaluation of the uncollectible accounts. Stock-based
compensation expense increased approximately $257,000 for the six months ended
June 30, 2000. The charges resulted from the issuance of warrants and options to
employees and non-employees, which can vary from period-to-period. Equipment
leases decreased for the six months ended June 30, 2000 by $503,000 due to the
payoff of such leases during 1999. Professional fees decreased to $371,000 for
the six months ended June 30, 2000 from $485,000 for the six months ended June
30, 1999.
Research and development expenses were $223,000 for the six months ended
June 30, 2000, compared to $295,000 for the six months ended June 30, 1999. The
current period expenses resulted from the Company's research and development
efforts related to the next generation of the DITV network and future Internet
web sites. For the six-month period ended June 30, 1999, the Company's research
and development efforts focused primarily on the upgrade of the NTN network and
future Internet web sites.
Interest expense, net, totaled $532,000 for the six months ended June 30,
2000 compared to $364,000 for the six months ended June 30, 1999. This increase
in interest expense relates to the Company's revolving line of credit, other
notes payable and additional capital leases for equipment acquisitions which did
not exist for the most of the first half of 1999.
The Company recorded other income of $161,000 for the six months ended June
30, 2000 compared to other expenses of $25,000 for the six months ended June 30,
1999. Other income includes gains on sales of investments available for sale and
equipment.
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SEGMENT ANALYSIS
The Company's operations are to develop and distribute interactive
entertainment. Revenues generated by the two most significant segments are as
follows:
Three Months Ended Three Months Ended
Segment June 30, 2000 June 30, 1999
----------- -------------------- --------------------
Hospitality 5,410,000 98% 5,394,000 95%
BUZZTIME 102,000 2% 288,000 5%
--------- ---- --------- ----
Total 5,512,000 100% 5,682,000 100%
========= ==== ========= ====
Hospitality revenues increased less than 1% in the second quarter 2000 over
the second quarter 1999 due primarily to an increase in fees charged for the
setup, installation and training for the DITV Network as compared to the
original NTN Network.
BUZZTIME revenues decreased 65% in the second quarter 2000 over the second
quarter 1999 due primarily to a decrease of $170,000 of fees earned from AOL as
a result of the expiration of the contract on December 1, 1999 and a decrease
of fees earned from GTE Mainstreet of $40,000. This decrease was offset by an
increase of advertising revenue of $15,000 and an increase of production
revenue of $8,500.
Operating income (loss) by segment are illustrated below:
Three Months Ended Three Months Ended
Segment June 30, 2000 June 30, 1999
----------- -------------------- --------------------
Hospitality 492,000 1,294,000
BUZZTIME (1,109,000) (182,000)
---------- ----------
Total (617,000) (1,112,000)
========== ==========
The Hospitality operating income was 62% lower in the second quarter 2000
over the second quarter 1999. Direct expenses increased $400,000 due primarily
to increases in communication and advertising commissions. Additionally,
depreciation expense increased by $445,000 due to the purchase of the digital
network equipment.
BUZZTIME operating loss was $927,000 higher in the second quarter 2000 over
the second quarter 1999. Lower revenues of $186,000 combined with a $782,000
increase in operating expenses due to an increase in personnel were offset by a
reduction in depreciation and amortization expense due to assets becoming fully
amortized in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had cash and cash equivalents of $2,347,000
and working capital of $1,282,000, compared to cash and cash equivalents of
$1,044,000 and working capital of $921,000 at December 31, 1999. Net cash
provided by operations was $127,000 for the six months ended June 30, 2000 and
net cash used by operations was $248,000 for the six months ended June 30, 1999.
The principal uses of cash from operations for the six months ended June 30,
2000 were to fund the Company's net loss, to fund deposits on broadcast
equipment and capital software and for severance payments made by the Company in
compliance with management resignation agreements with former officers totaling
$262,000. Depreciation, amortization and other non-cash charges offset the uses.
Net cash used in investing activities was $5,262,000 for the six months ended
June 30, 2000 and $1,400,000 for the six months ended June 30, 1999. Included in
net cash used in investing activities for the six months ended June 30, 2000 was
$6,040,000 in capital expenditures offset by deposits on broadcast equipment of
$132,000, proceeds from the sale of investments available for sale of $528,000
and notes receivable of $138,000 for the six months ended June 30, 2000. Net
cash provided by financing activities was $6,438,000 for the six months ended
June 30, 2000 and net cash used by financing activities of $387,000 for the six
months ended June 30, 1999. Net cash provided by financing activities for the
six months ended June 30, 2000 included $5,163,000 of proceeds from issuance of
stock, net of offering expenses, $1,207,000 of proceeds from the revolving line
of credit, net of principal payments, and $571,000 of proceeds from the exercise
of stock options and warrants offset by $453,000 of principal payments on
capital leases.
The Company raised gross proceeds of $6,000,000 in April 2000 through the
underwritten sale of 2,000,000 shares of Common Stock pursuant to the Company's
existing shelf registration. The net proceeds from the sale, which totaled
approximately $5,163,000, are being used primarily for working capital and
general corporate purposes relating to the Company's launch of its new game
portal, BUZZTIME and ongoing conversion of the NTN Network's hospitality
locations to the Company's new DITV technology. The Company has approximately
$14,000,000 remaining under its existing shelf registration for possible future
sale to meet its liquidity needs. Depending on market conditions, the Company
may attempt to raise capital during the second half of the year for, among other
uses, further development and marketing of its game portal, BUZZTIME, and
further expansion and improvement of its DITV Network.
The Company believes that its cash on hand, anticipated net proceeds from
additional sales of Common Stock under its shelf registration, anticipated cash
flows from its operations and borrowings under its line of credit will be
sufficient to meet its operating needs through 2000. Depending on the Company's
results of operations, the actual availability under the line of credit may be
restricted. The Company has no commitments or arrangements for the purchase of
Common Stock available under its shelf registration, and if no sales of such
stock are made, borrowings under the line of credit become restricted, cash flow
is less than anticipated or the Company incurs unexpected expenses, the Company
may need additional funding or need to curtail certain of its activities. The
Company will also need to raise additional capital to fully implement the
BUZZTIME Internet strategy, convert its entire existing customer base to the
DITV Network, expand the DITV Network and implement the Company's Internet
station strategy. The Company has no agreement or commitment for any additional
financing and there can be no assurance whether, or on what terms, such
financing will be available to the Company.
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
became 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 3. 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 June 30, 2000, NTN owned common stock
of an Australian company that is subject to market risk. At June 30, 2000, the
carrying value of this investment was $587,000, which is net of a $247,000
unrealized loss. This investment is exposed to further market risk in the
future based on the operating results of the Australian company and stock
market fluctuations. Additionally, the value of the investment is further
subject to changes in Australian currency exchange rates. At June 30, 2000, a
hypothetical 10% decline in the value of the Australian dollar would result in
a reduction of $59,000 in the carrying value of the investment.
NTN has outstanding convertible notes which bear interest at 7% 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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: April 13, 2001
By: /s/ STANLEY B. KINSEY
------------------------------------
Stanley B. Kinsey,
Chairman and Chief Executive Officer
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