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 September 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 November 1, 2000 the registrant had outstanding 34,813,000 shares of
common stock, $.005 par value.
2
FORM 10-Q/A
PERIOD ENDED SEPTEMBER 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.........................................................14
Signature.................................................................................15
2
3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
3
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
2000 December 31,
Assets (Unaudited) 1999
------------- -------------
Current assets:
Cash and cash equivalents $ 1,699,000 $ 1,044,000
Restricted cash 147,000 239,000
Accounts receivable, net 1,891,000 2,541,000
Investment available for sale 385,000 937,000
Deposits on broadcast equipment 37,000 611,000
Prepaid expenses and other current assets 712,000 1,015,000
------------- -------------
Total current assets 4,871,000 6,387,000
Broadcast equipment and fixed assets, net 13,790,000 10,470,000
Other assets 250,000 430,000
------------- -------------
Total assets $ 18,911,000 $ 17,287,000
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,464,000 $ 1,421,000
Accrued expenses 1,346,000 1,498,000
Accrual for litigation costs 98,000 334,000
Accrual for management severance 213,000 598,000
Obligations under capital leases 874,000 740,000
Deferred revenue 680,000 796,000
Note payable and other current liabilities 161,000 79,000
------------- -------------
Total current liabilities 4,836,000 5,466,000
Obligations under capital leases, excluding current portion 157,000 475,000
Accrual for settlement warrants -- 1,793,000
Revolving line of credit 3,772,000 2,486,000
7% senior convertible notes 3,947,000 4,705,000
Other long-term liabilities 91,000 141,000
------------- -------------
Total liabilities 12,803,000 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 September 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 September 30, 2000 and December 31, 1999, respectively;
34,610,000 and 29,914,000 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 173,000 149,000
Additional paid-in capital 76,147,000 66,548,000
Accumulated deficit (69,309,000) (63,645,000)
Accumulated other comprehensive loss (432,000) (360,000)
Treasury stock, at cost, 111,000 shares at September 30, 2000
and December 31, 1999 (472,000) (472,000)
------------- -------------
Total shareholders' equity 6,108,000 2,221,000
------------- -------------
Total liabilities and shareholders' equity $ 18,911,000 $ 17,287,000
============= =============
See accompanying notes to unaudited consolidated financial statements
4
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 30 September 30 September 30 September 30
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues:
NTN Network revenues $ 5,458,000 $ 5,559,000 $ 16,631,000 $ 16,146,000
BUZZTIME service revenues 172,000 72,000 356,000 300,000
America Online fees -- 150,000 -- 500,000
Other revenues 67,000 106,000 87,000 439,000
------------- ------------- ------------- -------------
Total revenues 5,697,000 5,887,000 17,074,000 17,385,000
------------- ------------- ------------- -------------
Operating expenses:
Direct operating costs of services 2,401,000 3,045,000 8,461,000 7,836,000
Selling, general and administrative 3,665,000 3,774,000 11,980,000 10,466,000
Depreciation and amortization 482,000 337,000 1,346,000 974,000
Research and development 97,000 229,000 320,000 524,000
------------- ------------- ------------- -------------
Total operating expenses 6,645,000 7,385,000 22,107,000 19,800,000
------------- ------------- ------------- -------------
Operating loss (948,000) (1,498,000) (5,033,000) (2,415,000)
------------- ------------- ------------- -------------
Other income (expense):
Interest income (expense), net (271,000) (249,000) (803,000) (613,000)
Gain on sale of assets of subsidiary -- 2,254,000 -- 2,254,000
Other 11,000 -- 172,000 (25,000)
------------- ------------- ------------- -------------
Total other income (expense) (260,000) 2,005,000 (631,000) 1,616,000
------------- ------------- ------------- -------------
Income (loss) before income taxes (1,208,000) 507,000 (5,664,000) (799,000)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) $ (1,208,000) $ 507,000 $ (5,664,000) $ (799,000)
============= ============= ============= =============
Net income (loss) per common share - basic $ (0.04) $ 0.02 $ (0.17) $ (0.03)
============= ============= ============= =============
Net income (loss) per common share - diluted $ (0.04) $ 0.02 $ (0.17) $ (0.03)
============= ============= ============= =============
Weighted average shares outstanding - basic 34,237,000 28,573,000 32,613,000 28,235,000
============= ============= ============= =============
Weighted average shares outstanding - diluted 34,237,000 35,294,000 32,613,000 28,235,000
============= ============= ============= =============
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 Nine Months Ended
----------------------------- ------------------------------
September 30 September 30 September 30 September 30
2000 1999 2000 1999
------------- ------------- ------------- -------------
Cash flows provided by (used in) operating activities:
Net Income (loss) $ (1,208,000) $ 507,000 $ (5,644,000) $ (799,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,222,000 1,623,000 5,029,000 4,763,000
Provision for doubtful accounts (182,000) 209,000 366,000 594,000
Non-cash stock-based compensation charges 497,000 35,000 810,000 91,000
Accreted interest expense 58,000 98,000 165,000 303,000
Amortization of deferred revenue -- -- -- (85,000)
Gain from disposition of equipment -- -- -- (6,000)
Gain on sale of assets of subsidiary -- (2,254,000) -- (2,254,000)
(Gain) loss on sale of investment available for sale 7,000 -- (58,000) --
Changes in assets and liabilities:
Accounts receivable (317,000) 330,000 284,000 (288,000)
Prepaid expenses and other assets (56,000) 197,000 76,000 (576,000)
Accounts payable and accrued expenses 451,000 626,000 (11,000) (158,000)
Deferred revenue 20,000 (122,000) (116,000) 117,000
Management severance and other long-term liabilities (131,000) (187,000) (392,000) (735,000)
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities 361,000 1,062,000 489,000 967,000
------------- ------------- ------------- -------------
Cash flows provided by (used in) investing activities:
Capital expenditures (1,529,000) (2,548,000) (7,569,000) (4,453,000)
Deposits on broadcast equipment 442,000 (107,000) 574,000 289,000
Restricted cash 112,000 -- 92,000 --
Notes receivable -- 20,000 138,000 59,000
Capital software expenditures -- (25,000) -- (56,000)
Proceeds from sale of equipment -- -- -- 45,000
Proceeds from sale of investment available for sale 10,000 1,227,000 538,000 1,227,000
------------- ------------- ------------- -------------
Net cash provided by (used in) investing activities (965,000) (1,433,000) (6,227,000) (2,889,000)
------------- ------------- ------------- -------------
Cash flows provided by (used in) financing activities:
Principal payments on capital leases (242,000) (282,000) (695,000) (916,000)
Borrowings from revolving line of credit 5,767,000 1,257,000 20,169,000 1,257,000
Principal payments on revolving line of credit (5,688,000) -- (18,883,000) --
Proceeds from issuance of stock, net of offering expenses -- -- 5,163,000 --
Principal payments on notes payable -- (60,000) (50,000) (60,000)
Exercise of stock options and warrants 119,000 -- 689,000 150,000
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities (44,000) 915,000 6,393,000 431,000
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (648,000) 544,000 655,000 (1,491,000)
------------- ------------- ------------- -------------
Cash and cash equivalents at beginning of period 2,347,000 2,525,000 1,044,000 4,560,000
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 1,699,000 $ 3,069,000 $ 1,699,000 $ 3,069,000
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements
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Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30 September 30 September 30 September 30
2000 1999 2000 1999
------------- ------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 121,000 $ 52,000 $ 381,000 $ 110,000
============= ============= ============= =============
Income taxes $ -- $ -- $ -- $ --
============= ============= ============= =============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest $ 82,000 $ 103,000 $ 251,000 $ 193,000
============= ============= ============= =============
Equipment acquired under capital leases $ 234,000 $ 328,000 $ 511,000 $ 1,469,000
============= ============= ============= =============
Unrealized holding loss on investments $ 185,000 $ 410,000 $ 72,000 $ 410,000
============= ============= ============= =============
Exchange of convertible notes to common stock $ 713,000 $ -- $ 915,000 $ --
============= ============= ============= =============
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
============= ============= ============= =============
Issuance of common stock in payment of accrued
board compensation $ -- $ 247,000 $ -- $ 247,000
============= ============= ============= =============
Sale of assets of subsidiary in exchange for cash
of $1,227,000 and stock of eBet Online $ -- $ 1,297,000 $ -- $ 1,297,000
============= ============= ============= =============
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)
SEPTEMBER 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 nine months
ended September 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 12,414,000, 4,462,000, 14,105,000, and 13,346,000
potentially dilutive common shares have been excluded from the computations of
net income (loss) per share for the three months ended September 30, 2000 and
1999 and the nine months ended September 30, 2000 and 1999, respectively, as
their effect was anti-dilutive.
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Numerator for diluted earnings (loss) per
share:
Net income (loss) available to common
shareholders $ (1,208,000) $ 507,000 $ (5,664,000) $ (799,000)
Interest on 7% convertible notes -- 103,000 -- --
------------- ------------- ------------- -------------
$ (1,208,000) $ 610,000 $ (5,664,000) $ (799,000)
============= ============= ============= =============
Denominator:
Denominator for basic earnings (loss) per share:
Weighted average shares 34,237,000 28,573,000 32,613,000 28,235,000
Potential effect of dilutive securities:
Employee stock options and director
options -- 1,497,000 -- --
Warrants -- 526,000
Convertible preferred stock -- 61,000 -- --
Convertible debt -- 4,637,000 -- --
------------- ------------- ------------- -------------
Potentially dilutive common stock -- 6,721,000 -- --
------------- ------------- ------------- -------------
Denominator for diluted earnings (loss) per
share:
Adjusted weighted average shares
and assumed conversions 34,237,000 35,294,000 32,613,000 28,235,000
============= ============= ============= =============
Basic earnings (loss) per common share $ (0.04) $ 0.02 $ (0.17) $ (0.03)
============= ============= ============= =============
Diluted earnings (loss) per common share $ (0.04) $ 0.02 $ (0.17) $ (0.03)
============= ============= ============= =============
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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(R) and BUZZTIME(TM) divisions. NTN Network revenue
is generated primarily from broadcasting content to customer locations through
the NTN Network, an interactive television network, and from advertising sold on
the NTN Network. NTN Network revenues comprised 98% of the Company's total
revenue for the nine months ended September 30, 2000. Revenues from the BUZZTIME
segment includes fees earned from AOL and BUZZTIME services revenue. BUZZTIME
services revenue is generated primarily from the distribution of the Company's
digital trivia game show content and "Predict-the-Play" sports games, as well as
revenue related to advertising and production services for third parties. The
following tables set forth certain information regarding the Company's segments
and other operations:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues
NTN Network $ 5,458,000 $ 5,559,000 $ 16,631,000 $ 16,146,000
BUZZTIME(1) 172,000 222,000 356,000 800,000
Other 67,000 106,000 87,000 439,000
------------- ------------- ------------- -------------
Total revenue $ 5,697,000 $ 5,887,000 $ 17,074,000 $ 17,385,000
============= ============= ============= =============
Operating income (loss)
NTN Network $ 1,790,000 $ 798,000 $ 2,843,000 $ 3,461,000
BUZZTIME (1,302,000) (417,000) (3,263,000) (1,143,000)
Corporate (1,503,000) (1,864,000) (4,700,000) (4,689,000)
Other 67,000 (15,000) 87,000 (44,000)
------------- ------------- ------------- -------------
Operating loss $ (948,000) $ (1,498,000) $ (5,033,000) $ (2,415,000)
============= ============= ============= =============
(1) Includes AOL fees of $0 and $150,000 for the three months ended September
30, 2000 and September 30, 1999, respectively, and $0 and $500,000 for the
nine months ended September 30, 2000 and September 30, 1999, respectively.
4. SETTLEMENT WARRANTS
Shareholders' equity at September 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 the Company's
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, were 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 DITV technology.
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, business strategies and other
matters, which are subject to risks and uncertainties, including cash needs,
competition, market acceptance 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, reports on Form 8-K, and its quarterly reports on 10-Q for the periods
ended March 31, 2000 and June 30, 2000, which risk factors are incorporated
herein by reference.
9
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GENERAL
The Company 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 October 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 September 2000, approximately 70% 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 its 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
its 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 NTN'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.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Operations for the three months ended September 30, 2000 resulted in a net
loss of $1,208,000 compared to net income of $507,000 for the three months ended
September 30, 1999. The results for the third quarter 1999 include a gain of
$2,254,000 related to the sale of the assets of its wholly-owned subsidiary,
IWN, Inc. to eBet Limited in exchange for $1,227,000 in cash and 4,000,000
shares of eBet Online stock. Excluding this gain, operations for the three
months ended September 30, 1999 resulted in a net loss of $1,747,000.
Total revenues decreased 3% to $5,697,000 for the three months ended
September 30, 2000 from $5,887,000 for the three months ended September 30,
1999. This decrease was primarily due to a decrease in NTN Network revenues,
America Online fees and other revenues. America Online fees decreased as the
Company wound down such exclusive relationships to pursue Internet and
interactive initiatives through its BUZZTIME subsidiary.
NTN Network 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. NTN Network revenues revenue decreased 2% to $5,458,000 for the
three months ended September 30, 2000 from $5,559,000 for the three months ended
September 30, 1999. This decrease was primarily due to a decrease of $195,000 in
setup, installation, and training revenue for the three months ended September
30, 2000, as approximately 325 DITV systems were installed, including both new
customers and conversions from the original network during the three months
ended September 30, 2000, compared to 596 DITV systems for the three months
ended September 30, 1999. It was also influenced by decreases of approximately
$73,000, in hospitality subscription revenues attributable to a lower billing
rate structure associated with the DITV network as compared to the original
network. The lower billing rate structure was introduced in order to incent
DOS-based customers to convert to the DITV system and to grow the number of
hospitality sites receiving the DITV service. The total number of sites as of
September 30, 2000 was 2,906, representing a net increase of approximately 100
sites compared to September 30, 1999. At September 30, 2000, approximately 83%
of the sites have been converted to the DITV network compared to approximately
33% of the sites converted as of September 30, 1999. Included in hospitality
revenues are revenues from the Company's Canadian licensee totaling $316,000 for
the three months ended September 30, 2000. Advertising revenue for hospitality
increased 69%, or $137,000, to $337,000 for the three months ended September 30,
2000 from $200,000 for the three months ended September 30, 1999 due to new
advertising contracts that did not exist for the three months ended September
30, 1999.
BUZZTIME service revenues are generated primarily from advertising and
production services. The direct costs associated with these revenues are license
fees and service hosting fees. BUZZTIME service revenue increased to $172,000
for the three months ended September 30, 2000 from $72,000 for the three months
ended September 30, 1999. Included in BUZZTIME service revenue for the three
months ended September 30, 2000 was advertising revenue of $85,000 and
production revenue of $87,000. The increase was due primarily to new contracts
for advertising that did not exist for the three months ended September 30,
1999.
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. America Online ("AOL") fees
were zero for the three months ended September 30, 2000, compared to $150,000
for the three months ended September 30, 1999. The Company's contract with AOL
expired on December 1, 1999, at which time a new contract was signed, under
which the Company will not generate revenue from AOL. Under the terms of the new
nonexclusive contract, the Company has access to AOL's 25 million subscribers
allowing promotion of the BUZZTIME web site on several AOL channels. The
contract with AOL expires on November 30, 2000.
Other revenues decreased 37% to $67,000 for the three months ended September
30, 2000 from $106,000 for the three months ended September 30, 1999. Included
in other revenues for the three months ended September 30, 1999 was
approximately $99,000 of revenues from IWN, Inc. No revenue was recorded for
IWN, Inc. for the three months ended September 30, 2000 due to the sale of its
assets in August 1999 to eBet Online Limited.
Direct operating costs of services decreased 21% to $2,401,000 for the three
months ended September 30, 2000 from $3,045,000 for the three months ended
September 30, 1999. Depreciation and amortization decreased by a net amount of
approximately $546,000 due to broadcast equipment for the DOS-based network
being fully depreciation in June 2000 and capitalized software as it becomes
fully depreciated by the end of 2000. This decrease is offset by an increase in
depreciation related to capitalized purchases of broadcast equipment for the
DITV network. Playmaker repairs, miscellaneous parts, and technical site service
costs decreased approximately $145,000, in aggregate, which is attributable to
new equipment at the sites for the DITV network which requires less repair and
servicing than the DOS-based network equipment. Specifically, the costs incurred
included $62,000 for Playmaker repairs, $117,000 for miscellaneous parts and
$130,000 for technical site service. Additionally, installation expenses
decreased $95,000 for the three months ended September 30, 2000 as there were
271 fewer installations compared to the three months ended September 30, 1999.
Hosting fees associated with the web site of approximately $162,000 were
incurred for the three months ended September 30, 2000. No similar hosting fees
were recorded for the three months ended September 30, 1999. The Company expects
to incur hosting fees for the three months ending December 31, 2000 of
approximately $125,000. The conversion to the DITV network is expected to be
complete by Spring 2001.
Selling, general and administrative expenses decreased 3% to $3,665,000 for
the three months ended September 30, 2000 from $3,774,000 for the three months
ended September 30, 1999. Bad debt expense decreased approximately $390,000
primarily related to improved collections. Consulting expenses decreased
approximately $294,000 related to Year 2000 efforts for the three months ended
September 30, 1999. Equipment lease expense decreased for the three months
ended September 30, 2000 by $180,000 due to the payoff of such leases during
1999. Marketing expenses decreased approximately $133,000 for the three months
ended September 30, 2000 due to additional expenses incurred for the three
months ended September 30, 1999 related to the DITV Network. Salaries, payroll
taxes, benefits, recruiting fees and other employee related expenses increased
by approximately $503,000 during the three months ended September 30, 2000 due
to an increase in the
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number of employees related to the development and launch of the Internet web
site, interactive television and wireless applications as compared to the three
months ended September 30, 1999. Additionally, stock-based compensation expense
increased to $497,000 for the three months ended September 30, 2000 from $35,000
for the three months ended September 30, 1999. These noncash charges result from
the issuance of warrants and options to employees and non-employees, which can
vary from period-to-period.
Research and development expenses were $97,000 for the three months ended
September 30, 2000, compared to $229,000 for the three months ended September
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 an Internet web site. For the three-month period ended September
30, 1999, the Company's research and development efforts focused primarily on
the upgrade of the NTN network as well as Internet web sites and Internet
stations.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Operations for the nine months ended September 30, 2000 resulted in a net
loss of $5,664,000 compared to a net loss of $799,000 for the nine months ended
September 30, 1999. The operating results for the nine months ended September
30, 1999 include a gain of $2,254,000 related to the sale of the assets of its
wholly-owned subsidiary, IWN, Inc. to eBet Limited in exchange for $1,227,000 in
cash and 4,000,000 shares of eBet Online stock. Excluding the one-time gain in
1999, the Company's net loss for the nine months ended September 30, 1999 was
$3,053,000.
Total revenues decreased 2% to $17,074,000 for the nine months ended
September 30, 2000 from $17,385,000 for the nine months ended September 30,
1999. This decrease was primarily due to a decrease in America Online fees and
other revenues as the Company wound down such exclusive relationships to pursue
Internet and interactive initiatives through BUZZTIME.
NTN Network revenues increased 3% to $16,631,000 for the nine months ended
September 30, 2000 from $16,146,000 for the nine months ended September 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. Advertising revenue for hospitality also increased to
$1,070,000 for the nine months ended September 30, 2000 from $468,000 for the
nine months ended September 30, 1999 due to new advertising contracts that did
not exist for the nine months ended September 30, 1999. These increases were
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 nine months ended September 30, 2000,
approximately 1,055 DITV systems were installed compared to 936 DITV sites
installed for the nine months ended September 30, 1999. Included in hospitality
revenues are revenues from the Company's Canadian licensee totaling $950,000 for
the nine months ended September 30, 2000.
BUZZTIME service revenue increased 19% to $356,000 for the nine months ended
September 30, 2000 from $300,000 for the nine months ended September 30, 1999.
Included in BUZZTIME service revenue for the nine months ended September 30,
2000 was advertising revenue of $125,000 and production revenue of $231,000. The
increase was due to new contracts for advertising that did not exist for the
nine months ended September 30, 1999. This increase was partially offset by a
decrease in production revenue due to the expiration of the Company's contract
with GTE Mainstreet, in February 2000.
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AOL fees were zero for the nine months ended September 30, 2000, compared to
$500,000 for the nine months ended September 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 82% to $87,000 for the nine months ended September
30, 2000 from $439,000 for the nine months ended September 30, 1999. Included in
other revenue for the nine months ended September 30, 1999 was approximately
$269,000 of revenue from IWN, Inc. and approximately $84,000 of equipment sales.
No revenue was recorded for IWN, Inc. or equipment sales for the nine months
ended September 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 8% to $8,461,000 for the nine
months ended September 30, 2000 from $7,836,000 for the nine months ended
September 30, 1999. This increase was due primarily to increased ISP charges of
$535,000 due to additional services needed to support the DITV network for the
nine months ended September 30, 2000. Advertising commissions increased by
$150,000 directly related to the increase in hospitality advertising revenue.
License fees also increased for the three months ended September 30, 2000 due to
the settlement of an accrued liability for license fees that was less than had
been estimated for the three months ended September 30, 1999. As a result, the
Company reduced the accrued expenses and direct operating costs by approximately
$180,000 related to the settlement. Hosting fees associated with the web site of
approximately $222,000 were incurred for the nine months ended September 30,
2000. No similar hosting fees were recorded for the nine months ended September
30, 1999. These increases were partially offset by a decrease of approximately
$370,000, in aggregate, for playmaker repairs, miscellaneous parts and technical
site service which is attributable to new equipment at the sites for the DITV
network which requires less repair and servicing than the DOS-based network
equipment. Depreciation and amortization decreased by a net amount of
approximately $105,000 due to broadcast equipment for the DOS based network
being fully depreciation in June 2000 and for capitalized software as it becomes
fully depreciated by the end of 2000. This decrease is offset by an increase in
depreciation related to capitalized purchases for broadcast equipment for the
DITV network. The conversion to the DITV network is expected to be complete by
Spring 2001.
Selling, general and administrative expenses increased 14% to $11,980,000
for the nine months ended September 30, 2000 from $10,466,000 for the nine
months ended September 30, 1999. Salaries, payroll taxes, benefits, recruiting
fees and other related employee expenses increased by approximately $1,988,000
for the nine months ended September 30, 2000 due to an increase in the number of
employees related to the development and launch of the Internet web site,
interactive television and wireless applications as compared to the nine months
ended September 30, 1999. Stock-based compensation expense increased
approximately $719,000 to $810,000 for the nine months ended September 30, 2000
from $91,000 for the nine months ended September 30, 1999. The charges resulted
from the issuance of warrants and options to employees and non-employees, which
can vary from period-to-period. These increases were partially offset by a
decrease in equipment lease expense for the nine months ended September 30, 2000
of $684,000 due to the payoff of such leases during 1999. Bad debt expense
decreased approximately $228,000 for the nine months ended September 30, 2000
primarily related to improved collections. Professional fees decreased to
$262,000 for the nine months ended September 30, 2000 from $542,000 for the nine
months ended September 30, 1999.
Depreciation and amortization expense increased 38% to $1,346,000 for the
nine months ended September 30, 2000 from $974,000 for the nine months ended
September 30, 1999 due to purchases of fixed assets.
Research and development expenses were $320,000 for the nine months ended
September 30, 2000, compared to $524,000 for the nine months ended September 30,
1999. The current period expenses resulted from the Company's research and
development efforts related to the next generation of the DITV network, a new
Internet web site, wireless and interactive applications and Internet stations.
For the nine-month period ended September 30, 1999, the Company's research and
development efforts focused primarily on the upgrade of the NTN network and
Internet web sites.
Interest expense, net, totaled $852,000 for the nine months ended September
30, 2000 compared to $699,000 for the nine months ended September 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 were added in mid to late 1999.
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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:
Segment Three Months Ended Three Months Ended
------- September 30, 2000 September 30, 1999
------------------ ------------------
Hospitality 5,458,000 97% 5,559,000 96%
BUZZTIME 172,000 3% 222,000 4%
--------- --- --------- ---
Total 5,630,000 100% 5,781,000 100%
========= === ========= ===
Hospitality revenues decreased by $101,000 in the third quarter 2000
compared to the third quarter 1999 due primarily to a decrease of $195,000 in
setup, installation, and training revenue as a result of fewer systems installed
in the third quarter 2000 as compared to the same period in 1999. Additionally,
hospitality revenues decreased due to a lower billing rate structure associated
with the digital network. These decreases were offset by an increase in
advertising revenue of $137,000.
BUZZTIME revenues decreased by $50,000 in the third quarter 2000 over the
third quarter 1999 due to no fees earned from AOL in the third quarter 2000
compared to $150,000 in the same period of 1999. The AOL contract expired on
December 1, 1999. The loss of AOL revenue was offset by an $85,000 increase in
advertising revenue and an increase of $15,000 in other production fees.
Operating income (loss) by segment are illustrated below:
Segment Three Months Ended Three Months Ended
------- September 30, 2000 September 30, 1999
------------------ ------------------
Hospitality 1,790,000 798,000
BUZZTIME (1,302,000) (417,000)
---------- --------
Total 488,000 381,000
========== ========
The Hospitality operating income increased $992,000 in the third quarter
2000 over the third quarter 1999 as a result of lower SG&A expenses and direct
expenses. Direct expenses decreased primarily because of a reduction in sales
commissions as a result of fewer installations and reduced playmaker repairs.
SG&A expenses declined as a result of lower bad debt expense because of
improved collection efforts and depreciation expense due to the broadcast
equipment associated with the original network becoming fully depreciated in
June 2000.
BUZZTIME operating loss was $885,000 higher in the third quarter 2000
compared to the third quarter 1999. Lower revenues of $50,000 combined with a
$835,000 increase in operating expenses as a result of an increase in
personnel, increased stock-based compensation due to warrants issued to
consultants and hosting fees associated with the web site.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash and cash equivalents of
$1,699,000 and working capital of $35,000, 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 $489,000 for the nine months ended September 30, 2000
and $967,000 for the nine months ended September 30, 1999. The principal uses of
cash from operations for the nine months ended September 30, 2000 were to fund
the Company's net loss, which include BUZZTIME start-up costs, and for severance
payments made by the Company in compliance with management resignation
agreements executed in March 1997 with former officers totaling $392,000.
Depreciation, amortization and other non-cash charges offset the uses. Net cash
used in investing activities was $6,227,000 for the nine months ended September
30, 2000 and $2,889,000 for the nine months ended September 30, 1999. Included
in net cash used in investing activities for the nine months ended September 30,
2000 was $7,569,000 in capital expenditures offset by deposits on broadcast
equipment of $574,000, proceeds from the sale of investments available for sale
of $538,000 and notes receivable of $138,000 for the nine months ended September
30, 2000. Net cash provided by financing activities was $6,393,000 for the nine
months ended September 30, 2000 and $431,000 for the nine months ended September
30, 1999. Net cash provided by financing activities for the nine months ended
September 30, 2000 included $5,163,000 of proceeds from issuance of stock, net
of offering expenses, $1,286,000 of net proceeds from the revolving line of
credit, and $689,000 of proceeds from the exercise of stock options and warrants
offset by $695,000 of principal payments on capital leases.
The Company announced on November 14, 2000 that it closed a private
placement of $2,000,000 with two accredited investors (the "Buyers"). The
Company sold a total of 1,218,583 shares of common stock to the Buyers. The
shares were sold at a purchase price of $1.64125 per share. The Company also
issued warrants to the Buyers to purchase 609,292 shares. Each warrant is
exercisable for one share of the Company's common stock at an initial exercise
price of $1.64125 per share of common stock. In addition, the Company agreed to
issue to the Buyers, for no additional consideration, additional warrants to
purchase 609,292 shares of its common stock at an initial price of $1.64125 per
share of common stock in the event the Company raises less than a total of $5
million in gross proceeds from the sale of the Company's common stock to
entities other than the Buyers by May 14, 2001. The exercise price of all
warrants will be reset every six months beginning May 14, 2001 to the average
closing bid price for the 20 days prior to each sixth month anniversary if a
lower price would result. The warrants have a three-year life starting from the
date of issuance.
Pursuant to the terms of the private placement, each Buyer will be issued
additional shares of common stock in the event the Company issues, at any time
or from time to time during the six months immediately following November 14,
2000, any common stock or convertible securities without consideration or for a
consideration per share less than the original purchase price per share paid by
the Buyers. In addition, the Company also granted the Buyers a limited right of
first refusal exercisable at the option of each Buyer during the twelve-month
period ending November 14, 2001.
Capital expenditures for the next twelve months are not expected to exceed
$4.6 million. The majority of these expenditures will be used for further
expansion of the Company's digital network and upgrades to its corporate
computer network. The expenditures are expected to be funded through cash from
operations and from the November 2000 private placement.
The Company currently has a revolving line of credit agreement which
provides for borrowings not to exceed the lesser of $4,000,000 or three times
trailing monthly collections or three times annualized trailing adjusted
EBITDA. As of November 14, 2000, the maximum of $4,000,000 was available to the
Company. Additionally, the Company has approximately $14,000,000 of common
stock remaining under its existing shelf registration for possible future sale
to meet its liquidity needs.
The NTN Network currently generates cash flow sufficient to sustain its
operations and to continue funding the operation of the Company's BUZZTIME
subsidiary, assuming that the development and marketing of BUZZTIME are
curtailed as planned. However, in order to fund any BUZZTIME growth initiatives,
based on its projected cash requirements, the Company will need additional
financing in the form of equity or debt or a combination of both. If additional
financing for BUZZTIME is not obtained and the Company is not successful in
reducing cash expenditures at BUZZTIME, the Company may not be able to sustain
the operations of Buzztime. The Company is also seeking an additional $2 million
in financing to support growth of the NTN Network during the next twelve months
to 4,000 sites in the U.S. and Canada. The Company intends to fund such growth
initiatives only if and when commensurate revenue or strategic investment is
made.
The Company plans to offer direct investment in BUZZTIME of up to
approximately $10 million over the next twelve months to selected investors. The
Company would retain a controlling interest in BUZZTIME. Such an investment
would be sufficient to support BUZZTIME's continued growth and expansion
through December 31, 2001. Until such a transaction is entered into, NTN will
continue to finance BUZZTIME's growth initiatives from its cash on hand, funds
available under its line of credit and anticipated cash flows.
The Company's 7% Senior Subordinated Notes mature on February 1, 2001 (the
"Notes"). Upon maturity of the Notes, the Company will be required to pay to the
two noteholders of an aggregate principal amount of $4,000,000 less any amount
of principal converted to common stock by the holders prior to February 1,
2001. If the Notes become payable in cash, the Company will likely need to
refinance the terms of the Notes in order to meet its obligations. There can be
no assurance that the Company will be successful in refinancing the Notes or
that the Notes would be refinanced on terms acceptable 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 September 30, 2000, NTN owned common
stock of an Australian company that is subject to market risk. At September 30,
2000, the carrying value of this investment was $385,000, which is net of a
$432,000 unrealized loss. This investment is exposed to further market risk in
the future based on the operating results of the Australian company and stock
market fluctuations. Additionally, the value of the investment is further
subject to changes in Australian currency exchange rates. At September 30, 2000,
a hypothetical 10% decline in the value of the Australian dollar would result in
a reduction of $38,000 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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