================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
---------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1103425
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5966 LA PLACE COURT
CARLSBAD, CALIFORNIA 92008
(Address of Principal Executive (Zip Code)
Offices)
(760) 438-7400
(Registrant's telephone number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
----------------------------- ----------------------------
Common Stock, $.005 par value American Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-12). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of
the Registrant as of June 28, 2002, computed by reference to the closing sale
price of the common stock on the American Stock Exchange on June 28, 2002, was
approximately $33,429,060. Shares of common stock held by each executive officer
and director and by each person who owns 5% or more of the outstanding common
stock have been excluded in that such persons may be deemed to be affiliates.
The determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 28, 2003, Registrant had 43,040,139 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
TABLE OF CONTENTS
ITEM PAGE
- ------ ----
PART I
1. Business............................................. 1
2. Properties........................................... 14
3. Legal Proceedings.................................... 15
4. Submission of Matters to a Vote of Security Holders.. 16
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 16
6. Selected Financial Data.............................. 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation................... 17
7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 34
8. Consolidated Financial Statements and Supplementary
Data................................................. 34
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 34
PART III
10. Directors and Executive Officers of the Registrant... 35
11. Executive Compensation............................... 37
12. Security Ownership of Certain Beneficial Owners and
Management........................................... 39
13. Certain Relationships and Related Transactions....... 41
14. Controls and Procedures.............................. 41
PART IV
15. Exhibits, Consolidated Financial Statement Schedule,
and Reports on Form 8-K.............................. 42
Index to Consolidated Financial Statements and
Schedule............................................. F-1
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE
FORWARD-LOOKING STATEMENTS REFLECT FUTURE EVENTS, RESULTS, PERFORMANCE,
PROSPECTS AND OPPORTUNITIES, INCLUDING STATEMENTS RELATED TO OUR STRATEGIC
PLANS, CAPITAL EXPENDITURES, INDUSTRY TRENDS AND FINANCIAL POSITION OF NTN
COMMUNICATIONS, INC. AND ITS SUBSIDIARIES. FORWARD-LOOKING STATEMENTS ARE BASED
ON INFORMATION CURRENTLY AVAILABLE TO US AND OUR CURRENT EXPECTATIONS,
ESTIMATES, FORECASTS, AND PROJECTIONS ABOUT THE INDUSTRIES IN WHICH WE OPERATE
AND THE BELIEFS AND ASSUMPTIONS OF MANAGEMENT. WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "COULD," "TARGETS," "PROJECTS," "INTENDS," "PLANS," "BELIEVES,"
"SEEKS," "ESTIMATES," "MAY," "WILL," "WOULD," VARIATIONS OF SUCH WORDS, AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS AND ARE SUBJECT TO RISKS,
UNCERTAINTIES, AND ASSUMPTIONS THAT MAY BE DIFFICULT TO PREDICT. ACTUAL RESULTS
MAY DIFFER MATERIALLY AND ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS REPORT UNDER THE SECTION
ENTITLED "RISK FACTORS," AND IN OTHER REPORTS WE FILE WITH THE SECURITIES AND
EXCHANGE COMMISSION FROM TIME TO TIME. WE UNDERTAKE NO OBLIGATION TO REVISE OR
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENT FOR ANY REASON.
PART I
ITEM 1. BUSINESS
GENERAL
NTN Communications, Inc., based in Carlsbad, California, develops and
distributes interactive entertainment and a suite of products to manage the
customer experience. We own and operate the largest "out-of-home" interactive
consumer marketing television network in North America.
We operate our businesses principally through two operating segments: the
NTN Network(R) division and our Buzztime Entertainment, Inc. (TM) subsidiary
("Buzztime"). The NTN Network division provides entertainment services and
on-site communications products to the hospitality industry. The entertainment
services represent a wide variety of popular interactive games, advertisements
and informational programming delivered daily to consumers in 3,171 restaurants,
sports bars and taverns throughout the United States, as well hotels, cruise
ships and active adult communities. The division's on-site communications
products--primarily guest and server paging products--are distributed to another
2,800 locations in the United States. Buzztime operates our live broadcast
studio, produces our trivia and live sports "play-along" content to both the NTN
Network and new consumer interactive platforms, and is developing the
Buzztime(R) interactive television channel.
Unless otherwise indicated, references herein to "NTN," "we," "us" and
"our" include NTN Communications, Inc. and its consolidated subsidiaries.
INDUSTRY SEGMENTS
Financial information for each of our business segments for each of the
last three fiscal years is contained in the Notes to the Consolidated Financial
Statements included in Item 15 of this Form 10-K.
BUSINESS STRATEGY
Our objective is to leverage our unique interactive entertainment as a
means of growing our business units--first, as a leading provider of interactive
communications and entertainment offerings to the hospitality industry through
the NTN Network division. Second, as a leading developer and distributor of
interactive entertainment for the in-home market through interactive television
and wireless devices via Buzztime. To accomplish our objectives we are pursuing
strategies to:
o Increase the number of hospitality locations serviced by the NTN
Network and our wholly owned subsidiary NTN Wireless Communications,
Inc. ("NTN Wireless"). We intend to accomplish this increase by
expanding our product offerings to include more value-added services,
adding personnel to our sales force and providing new and updated
content on a regular basis.
1
o Develop and distribute the Buzztime trivia channel to cable and
satellite operators with the intent to become the first content
provider to deploy an interactive television entertainment channel. We
have adapted or are planning to adapt our interactive trivia game show
content and technology to the leading interactive television platforms,
to gain market share by partnering with major industry manufacturers
and distributors, and to utilize our broadcast interactive television
studio as a development and production facility to develop and deepen
relationships with media-related companies. We also plan to continue to
support our efforts in early-stage wireless entertainment through
partnerships with leading wireless distributors and carriers.
o Increase revenues through current and new revenue sources. The NTN
Network receives service revenue from subscribing out-of-home locations
as well as third-party advertising revenue and production services and
royalty revenue from our Canadian licensee. We expect to continue
generating revenue through these sources and, by growing our customer
base, we also expect to see revenue growth in service and advertising
revenue. Similarly, as Buzztime gains distribution with cable
television operators, we expect to increase revenue through three
sources: license fees paid by local cable television operators; fees
paid by interactive television home subscribers for premium services or
pay-per-play transactions; and advertising revenue. Both business units
may also explore market opportunities to acquire complimentary
businesses to increase revenues and earnings. An example of a recent
acquisition is NTN Wireless which generated approximately $2.4 million
in revenues in 2002 through sales of restaurant pagers since April
2002. NTN Wireless is part of our NTN Network business segment.
We have incurred consolidated net losses in the last five years and expect
to incur consolidated losses through at least the end of 2003. Recent losses
have been primarily as a result of significant expenditures related to Buzztime
for which no significant revenues have yet been generated.
THE NTN NETWORK
GENERAL
The NTN Network division ("the Division") is one of our two primary
business units. We provide consumer-oriented interactive communications and
entertainment products to the out-of-home hospitality industry including
restaurants, sports bars, taverns, cruise ships, hotels and active adult
communities who are looking for a competitive point-of-difference to attract and
retain customers.
We have maintained a unique and preemptive position in the hospitality
industry for over 18 years as a platform for providing interactive trivia and
play-along sports programming. We believe that strong growth opportunities exist
by continuing to leverage our preeminent entertainment product and our installed
base of 3,171 United States venues to include other interactive communications
and entertainment services that effectively increase both breadth and depth of
their business in this segment.
We have adopted the mission to become the leader in providing distributed
network systems comprised of INTERACTIVE Communication and ENTERTAINMENT (ICE)
services to the out-of-home market. As such, the division is evolving from one
that provides a single product--interactive entertainment located primarily in
the bar area--to a full-service provider of "front of the house" products and
services across the establishment. These products and services include wireless
commercial communication services, additional entertainment services and
devices, interactive training and an expanded set of member services--including
emerging stored value gift and loyalty card programs. Providing this expanded
array of products will allow us to offer additional value to and grow revenues
in our primary markets, as well as to expand the market to include hospitality
venues such as fine dining, QSR (Quick Serve Restaurants, e.g. fast food) and
family dining formats that are beyond our traditional customer base of casual
dining, sports bars and taverns.
The division's operations can be divided into five general areas:
NTN NETWORK
Ninety percent of our current revenues come from our operation of the NTN
Network (the "Network" or the "NTN Network"), the only out-of-home interactive
television network in the world. We receive service fees from hospitality venues
that receive our broadcast of the Network's interactive trivia quiz show and
play-along sports programming. We broadcast through our Network engaging,
interactive game content to the hospitality locations where patrons use our
wireless interactive game devices to interact with content displayed on
television screens. The Network enables multi-player participation in
hospitality locations throughout North America as part of local, regional,
national or international competitions supported with valuable prizing and
recognition. The locations pay us an average of $527 per month to receive our
game broadcast in conjunction with the use of our equipment, and their
2
consumers play the games free of charge. Objective data has demonstrated that
this combination of entertainment and recognition creates a sense of community
among players, which prompts them to visit the venues more frequently, stay
longer, spend more and refer others to Network locations.
NTN WIRELESS COMMUNICATIONS
NTN Wireless earns revenue from the sale of wireless paging products to
restaurants and other hospitality locations. These products are given to
customers to let them know when their table is ready as well as to restaurant
staff to alert them to certain issues, such as when hot food is ready to be
served.
NTN MEMBER SERVICES
NTN Member Services receives revenue from stored value gift and loyalty
card programs. Loyalty card programs are becoming increasingly popular among
restaurants and other hospitality establishments as they provide incentives for
customers to return more frequently.
ADVERTISING SALES
We provide advertising and marketing communications services to companies
seeking to reach the over 6 million unique out-of-home consumers each month that
visit the Network's over 3,100 domestic installations. Via an average of four
dedicated television screens per location, we provide advertisers with a
targeted, cost-effective way to communicate their brand message, obtain consumer
feedback and stimulate product trial.
INTERNATIONAL LICENSING
We receive licensing royalty revenue from NTN Interactive Network, a
division of Chell Group Corporation, our Canadian licensee, which maintained
approximately 500 sites as of December 2002. We broadcast interactive
programming directly to the Canadian sites. NTN Interactive Network is
responsible for all selling, marketing, promotional and technical service costs
and activities. We intend to begin licensing our products to other international
markets.
We also have granted an exclusive license to eBet Limited, an Australian
company, to distribute our games in commercial establishments and other public
places throughout Australia and New Zealand via eBet Limited's own licensed
network. Our Australian licensee currently broadcasts to approximately 20
hospitality locations.
PRINCIPAL PRODUCTS AND SERVICES
THE NTN NETWORK
THE PRODUCT
The Network broadcasts a wide variety of entertaining and popular
interactive play-along sports and trivia games to consumers in 3,171 United
States venues. Patrons play an estimated 17 million games per month, using our
wireless hand-held game devices, called Playmakers, that allow them to compete
locally and nationally with real-time scoring. There are approximately 50,000
Playmakers deployed across the Network. Also, many additional players
participate with the primary player as they watch the game--research indicates
that on average, 3.4 additional patrons view the game for every Playmaker in
use. No other company has created such broad hospitality industry relationships
or captured such a large and diverse out-of-home audience. The strong demand for
our Network is supported by third-party research indicating players stay longer,
spend more, return more frequently and refer others to an NTN Network
establishment (source: Actionable Marketing Research, May 2000).
We target national and regional hospitality chains as well as local
independent venues that are looking for a competitive point-of-difference to
attract and retain customers. Through the broadcast of engaging interactive
content, the Network enables single- and multi-player participation as part of
local, regional, national or international competitions supported with prizing
and recognition. This combination of entertainment and recognition creates
community among players who visit the venues more frequently, stay longer,
spend more and refer others (source: Actionable Marketing Research, May 2000).
3
Unlike coin-operated games, live entertainment and themed events which are
either single-player based, expensive and/or require effort to coordinate and
conduct, the Network offers a turnkey solution of unique multi-player,
multi-venue entertainment requiring virtually no employee involvement at a
fraction of the comparable cost.
Our customers include leading companies in the casual-dining restaurant
segment such as TGIFriday's, Bennigan's Irish Grill, Applebee's, Damon's Grill
and Buffalo Wild Wings, as well as over 2,700 domestic independent locations.
The Network is also the only interactive television network providing
advertising and other marketing communications services to companies seeking to
reach the over 6 million unique out-of-home consumers each month in 3,171 NTN
domestic installations, who are looking for a targeted, cost-effective way to
communicate their brand message, obtain consumer feedback and stimulate product
trial.
Unlike current out-of-home advertising vehicles which are either static or
lack multiple consumer exposure, we provide, as part of the trivia quiz show and
play-along sports broadcasts, an end-to-end marketing communications solution
comprised of full-motion video commercials, promotional messages, Advergaming
contextual opportunities and real-time interactive research capabilities at
costs well below current media and research alternatives.
Historically, our advertising clients have come primarily from the beer,
wine and spirits industries, reflecting the natural appeal of the Network as a
place-based advertising medium. However, beginning in 2001, we began to take
steps to broaden the client base beyond traditional alcoholic beverage companies
by securing the Dodge Division of Daimler-Chrysler to support the launch of the
new Ram Truck, as well as University Games, one of the top five board games
companies, to support the introduction of one of their more popular board games.
We also receive licensing royalty revenue from NTN Interactive Network
Inc., our Canadian licensee, which maintained 504 sites as of December 31, 2002.
We broadcast interactive programming directly to the Canadian sites. NTN
Interactive Network is responsible for all selling, marketing, promotional and
technical service costs and activities.
VALUE PROPOSITION
The Network has established itself as a cost-effective means of generating
traffic, loyalty and return on investment based on the ability to positively
impact venue revenue because players stay longer (39% compared to non-players);
spend more (47% more than non-players); return more often (72% more than
non-players); and demonstrate positive word-of-mouth (90% have or will recommend
an NTN subscriber venue to a friend) (source: Actionable Marketing Research, May
2000).
By distributing turnkey promotional and marketing support to the venues, we
provide a competitive advantage to subscriber venues, as well as a
cost-effective entertainment option when compared to traditional
alternatives--live entertainment, karaoke and food and drink discounts.
We provide eight 15-second advertising units per hour to the venue, these
units may become a revenue and profit center to the venue by cross-promoting
internal programs and services, or re-selling to local area merchants to offset
network subscription costs and/or generate profit.
Our proprietary interactive polling service, OMNIPoll(TM), may be used in
conjunction with network programming and our wireless Playmaker units to
regularly deliver custom player feedback on food, service and promotions,
allowing the venue to gauge customer satisfaction levels and make adjustments if
necessary.
NTN Network subscribers pay us an average of $527 per month to use our
interactive technology, and to receive our game broadcast. We also charge an
additional subscription fee of $750 per year for our popular QB1
Predict-The-Play football game played in conjunction with live, televised
professional and college football games. NTN Network venues enter into one- and
two-year broadcast agreements, with the average life of an NTN Network
site/venue being 39 months.
4
TECHNOLOGY
We first operated a DOS-based out-of-home interactive Network in 1982.
Beginning in 1999, we invested $9 million in hardware and installation upgrades
to migrate the Network from a DOS-based platform to a Windows platform, called
Digital Interactive Television Network (DITV). DITV has eliminated many of the
Network's previous technology roadblocks. It uses the latest Windows-based
development tools and multimedia capabilities, resulting in better performance
and reliability; enhanced, high-resolution graphics; and full-motion video. This
makes the broadcast more appealing to advertisers as ads appear as TV
commercials rather than static billboards--DITV technology will now allow
advertisers to use existing video footage in their ads on the Network. We intend
to discontinue the DOS-based Network in December 2004.
Our DITV network requires a satellite dish and a PC server configured with
a special communications card, which is necessary for satellite data reception.
Each of our venue systems also has a base station for transmission and reception
with our wireless Playmaker devices. Our introduction of DITV enhanced the
viewing and gaming aspects of our system and upgraded the software platform to a
better operating system, but did not increase the speed or bandwidth of
transmission. The transmission system remains satellite based. Our conversion to
DITV is virtually complete--as of December 31, 2002, approximately 98% of our
3,171 domestic locations utilize the DITV system.
END USER DEVICES
DITV also uses a new 900 MHz wireless Playmaker versus the DOS system's 49
MHz Playmaker. Our new system does not require the "wiring" of the
establishment; the Playmakers have no breakable exterior components, and can
operate at power output levels that were restrained by the 49 MHz DOS system. As
a result, interference and Playmaker failure has been significantly reduced.
Our wireless hand-held Playmaker device features a 900 MHz transceiver, a
monochrome LCD display and sealed keypad. Our Playmakers are a rugged
combination of hardware and firmware optimized for hospitality environments.
We believe that the new DITV system is sufficient to carry us well into the
future from a performance and technical requirements standpoint.
CONTENT SERVICES
The NTN Network licenses game content (both trivia and play-along sports)
from Buzztime. Buzztime creates the game content that we broadcast to NTN
Network hospitality locations. Each hospitality location is individually
addressable, allowing us to send specific content to selected sites. Hospitality
locations throughout the United States receive our content, in the form of
broadcast programming, 15 hours each day, 365 days each year.
GAME CONTENT & PROMOTION
Our primary product is the broadcast of a variety of sports and interactive
trivia games that entertain and challenge a player's skill and knowledge while
creating significant customer loyalty.
A core component of our content is QB1, a live, play-along football game in
which players predict the outcome of each play broadcast within professional and
collegiate football games. We have held a license with the NFL for 18 years in
conjunction with QB1.
5
We offer a suite of Playmaker only games. This suite of games is independent
of the NTN Network and may be played directly on our wireless Playmakers.
Players access the games by logging onto a Playmaker and following the
instructions on the Playmaker screen.
Playmaker Games
Acey Duecey.......... Two cards are dealt face up. Players bet that the
third card will fall between the previous two
Crystal Ball......... Ask the Crystal Ball a question and receive your answer
Playmaker Poker...... Compete against the house in a game of jacks-or-better
poker
Shark Attack......... Just like hangman, but with an oceanic twist
We provide premium trivia competitions during evening hours when the
venues, particularly restaurants and taverns, tend to be busiest. During these
programs, each venue system simultaneously displays selected trivia questions on
television monitors. Participants use Playmakers to enter their answers. Answers
are collected, transmitted and tabulated. We display the score of each
participant on the television monitors in our customer venues, along with
national, regional and local rankings, as applicable. Players compete for prizes
and merchandise in their local venues, as well as on a regional and national
scale. In addition to game interaction, other consumer features available on the
Playmaker include real-time sports scores transmitted directly to the units and
player chat.
COMPETITION
Currently, we have no direct competitors to the Network that furnish live,
multi-player interactive entertainment in a similar scope and nature. While we
have no direct competitors, we do compete for total entertainment dollars in the
marketplace. Other forms of entertainment provided in public venues include
music-based systems, live entertainment, cable and pay-per-view programming,
coin-operated single-player games/amusements and traffic-building promotions
like happy hour specials and buffets. However, none of the alternatives provide
the combination of proven, live sports and trivia entertainment broadcast 15
hours per day, 365 days per year, and most require some involvement with the
venue staff to be successful, which conflicts with the primary responsibility of
the staff.
NTN WIRELESS COMMUNICATIONS
THE PRODUCT
To expand presence in the hospitality industry, we recently completed the
acquisitions of the assets of each of ZOOM Communications and Hysen
Technologies, manufacturers and sellers of on-site wireless paging products.
On-site paging systems consist of guest paging systems designed to improve the
wait time for hospitality guests and server paging systems designed to alert
servers when prepared food is ready to be served. Our guest paging system,
GUESTCALL(TM), is comprised of a tabletop transmitter and between 30-70
individual pagers that are distributed to guests upon arrival. The server paging
system, ServerCall(TM), is made up of transmitter located in the kitchen area,
and between 12-36 individual pagers for the wait staff. Both systems may
vibrate, flash or both to indicate either the table or food are ready.
VALUE PROPOSITION
On-site paging systems are designed to improve table turnover and
throughput for a venue's operations. The sooner a guest is seated, and the
quicker prepared food is served, the faster a table can be effectively "turned"
without negatively impacting the customer experience. If a typical restaurant
can add just three parties of four during each waiting shift (defined as
Thursday, Friday and Saturday nights), with a $17.00 average per person check,
the annual incremental gross revenue to the venue over a three-year period would
be $121,000.
TECHNOLOGY
Onsite paging systems consist of a small tabletop transmitter or PC-based
software and transmitter communicating with a group of pager units in either
vibration flashing LED, or alpha-numeric combinations. These systems are defined
as "closed systems," meaning they work within a limited area for a specific
purpose. The transmitter and pagers are set to the same frequency, which
typically carries a range of between one-quarter and one-half mile. Most early
paging systems operated used either a 27 or 45 MHz (AM) frequency, which
demonstrated limited range and reliability. Recently, paging companies adopted a
newer standard, POGSAG, which operates a UHF frequency range of between 450-470
MHz. This higher frequency allows for wider range of transmission, as well as
6
the ability to provide signal transmission in venue environments characterized
by multi-floors and other construction obstacles like concrete walls.
COMPETITION
We are not aware of any audited industry figures for the hospitality paging
segment. Within the industry, it is estimated that JTech, based in Boca Raton,
Florida, holds approximately 82% of the hospitality paging market, JTech markets
guest paging and server paging systems, and has recently expanded their product
mix to include other operations-based products that integrate with a venue's POS
system for check management/paging and electronic guest survey cards. Long Range
Systems of Dallas, Texas, also markets products similar to ours and those of
Jtech, including guest and server paging products and electronic guest survey
card systems.
NTN MEMBER SERVICES
THE PRODUCT
With the emergence of stored-value gift and loyalty cards, we see strong
synergies in linking these products to both current and future member services
programs. Current estimates indicate that stored-value gift cards will represent
2.5 billion transactions and 80% of the gift certificate market by 2005 (for a
total of 850 million cards in circulation).
We recently obtained a stored-value gift loyalty card product line as part
of the ZOOM asset acquisition. We believe key opportunities exist on two fronts.
First, by linking this program with our 1.1 million Player's Plus loyal player
database to combine frequent purchases with game play to offer a unique,
comprehensive player loyalty program. Recent research indicates that our
Player's Plus members prefer discounts on food and beverage over other
alternatives; combining a frequent diner program with a frequent player program
as part of an expanded Player's Plus service enables us to market a meaningful
loyalty program to our customer base. In addition, the cost of designing and
implementing a loyalty program has been prohibitive to most small independent
venues. By offering a combined gift and loyalty program to the approximately
2,400 independent NTN Network venues, we are in a position to provide a unique
service to this constituent that would otherwise not have the financial
wherewithal to develop on their own.
VALUE PROPOSITION
Stored-value gift cards represent a significant benefit to hospitality
venues. By allowing guests to purchase cards as gift certificates, or use them
as part of a site/chain-specific loyalty program, venues can measure the success
of these programs as well as use them for marketing purposes. A recent study
indicated that most consumers consider the gift cards a discount to anticipated
spending and on average, spend 40% more than the value. In addition, the cards
represent a benefit to current paper gift certificates for tracking and
accounting purposes as well as ensuring the total amount is spent at the venue
rather than the current paper process of making change for short purchases.
From a loyalty card standpoint, stored-value services provide strong guest
retention to the venue. With food costs averaging 30%, a loyalty program
providing food and beverage as incentives become a cost-effective program for
venues.
TECHNOLOGY
The third party technology to support this program is established,
requiring either an integrated card reader installed via phone line, printer or
integration into the venue's existing POS system. In the case of the former,
costs and interface is established; the latter will require a software interface
written for the specific POS system. Currently, we have an interface program
written for common Micros systems, a leading POS provider, and will develop and
bill for other systems on a project basis. The cards are standard stored-value
magnetic strip cards produced in association with Datamark, our system provider.
COMPETITION
The gift and loyalty card market can be broadly divided between turnkey
service providers and banking industry providers. We fall under the first
category providing customized solutions, which include program set-up, hardware,
plastic cards, data management and reports.
7
We may compete with such competitors as GiveX with offices in Toronto,
Chicago, San Diego, and the Bahamas, claims alliances with over twenty point of
sale (POS) companies across North America.
POS companies also offer gift and loyalty card programs that interface
directly into their own proprietary POS software. Digital Dining (Menusoft) and
Aloha Technologies are two such companies. Digital Dining was first introduced
to the United States (from Australia) in 1984 and boasts over 20,000
installations. Aloha Technologies, based in Dallas, Texas, offers gift and
loyalty programs as additional modules that tie into their POS software
We may also compete with banks as they also have the capability to provide
gift and loyalty card services in conjunction with their credit card processing
services.
Our strategic point-of-difference lies in our ability to market the program
over the Network in each venue, as well as incorporate the program into the
current Players Plus frequent player program--both of which are unique to us.
SALES & DISTRIBUTION
Currently we sell all products and services through direct sales employees
located in major metropolitan markets, with independent dealers and
representatives in smaller metro markets and rural areas.
The sales cycle varies by customer type, requiring as little as one week
for independent customers and up to 18 months for national chain accounts. The
goal of our marketing and promotion efforts is to generate qualified leads for a
follow-up field presentation. During the presentation, our sales representative
determines the prospect's need and features possible solutions through the
benefits of each product or service presented, including an interactive
demonstration, detailed return on investment calculations, local advertising
opportunities made available through the Network and third party research
results outlining player purchase behavior and success stories from existing NTN
Network subscribers. Occasionally, demonstration units are provided to validate
the system, with the intention to finalize the sale upon completion of the
trial.
MARKETING AND PROMOTION
We market our services to the industry primarily through advertising in
national trade periodicals, national and regional trade shows, telemarketing,
direct mail and direct contact through our field sales and marketing
representatives. We organize and track all sales prospects through our
distributed database software.
We have found the most effective trade periodicals for our marketing
purposes to be Nation's Restaurant News, Nightclub & Bar and Military
Hospitality. The key national and regional trade shows to us are the National
Restaurant Association Show, Nightclub & Bar Expo, FS/Tech, WestEx, Northeast
Foodservice, MMR and MUFSO. In addition, we participate in most of the national
chain conference shows, including those for TGIFriday's, BWW, Applebee's,
Houlihan's, Jillian's, Famous Sam's and Damon's. Our field representatives also
participate in a substantial number of smaller regional shows.
Another core element to our marketing is our Players Plus frequent player
program. The NTN Network's Players Plus frequent player club, numbering over 1.1
million current membership records, offers advertisers an effective tool for
market research and direct marketing. Players Plus members join by entering
their name, address, zip code and identification number into a Playmaker, which
is then captured at our broadcast center. Members earn points each time they
play. Points earned by Players Plus members have no cash or redemption value.
Sponsors are capable of receiving feedback through interaction with customers in
the form of customer surveys on the NTN Network or via email.
Our research indicates that players place a high value on recognition for
achievement and game play prowess. Achieving higher point levels earns the
Players Plus member a higher status within the NTN Network rankings. We
broadcast the leading player names and rankings within their home location and
provide network-wide national exposure as well, which supports higher player
satisfaction levels and repeat game play. Finally, we use our installed base of
over 12,000 television screens to cross-sell other site/venue services,
including wireless paging systems and member services such as gift and loyalty
card programs.
8
RAW MATERIALS
With the exception of our Playmakers, each system installed at a
hospitality location is assembled from off-the-shelf components available from a
variety of sources. We are responsible for the installation and maintenance of
each system. Our current Playmaker is a hand-held, 900-megahertz radio frequency
device used to enter choices and selections by players and is manufactured by
Climax Technology, Ltd., a non-affiliated manufacturer in Taiwan. Before
conversion to the DITV network, we had previously experienced problems in the
performance of our 49-megahertz Playmaker device. In an effort to address these
equipment function problems, we developed and introduced the current
900-megahertz Playmaker. The device has proven more reliable than the previous
Playmaker.
Our NTN Wireless products are manufactured based on our specifications
under contract through a third party manufacturing company located in Seoul,
Korea. The contract expires in April 5, 2007. We believe the quality provided by
this manufacturer is superior to that provided by manufacturers located on
mainland China, and has become a competitive advantage.
While sufficient alternative supply chain capabilities exist, we would face
business interruption if we were to lose the existing manufacturer, and there
are no assurances that we could recover lost business in a timely manner.
SEASONALITY
Our business has some seasonal elements. While we bill revenue monthly as
service is provided to customers, three factors increase our revenues in the
second half of the year over the first half. First, sales to new locations have
traditionally been higher in the summer and early fall months compared to the
rest of the year. Second, existing customers pay an incremental amount for our
QB1 Predict the Play football game and order additional Playmakers to meet their
patrons' demands to play this game in late summer and early fall. Third, we
typically gain additional advertising customers who want to participate in our
football-oriented broadcasts.
The hospitality industry has historically experienced a relatively high
business failure rate. That factor combined with change in ownership and
non-renewal of contracts leads us to lose a certain amount of our customers each
year. We refer to this collective loss of customers as "churn." Our historical
churn experience has also been seasonal in that the percentage of churn has been
highest following the completion of the professional football season in
February, although churn occurs in all months. During our operating history,
approximately 18% to 30% of the existing NTN Network customers at the beginning
of a year have churned by the end of that year. We believe the introduction of
the new digital network and 900-megahertz Playmakers have reduced the churn
rate. The churn rate was 19% for 2002 and 18% for 2001, which was the lowest in
our history.
SIGNIFICANT CUSTOMERS
Our customers are diverse and varied in size as well as location. We are
not dependent on any one customer. We do not have any individual customer,
including chain locations, who accounted for 10% or more of our consolidated
revenues in 2002, 2001 or 2000.
BACKLOG
We historically have not had a significant backlog at any time because we
normally can deliver and install new systems at hospitality locations within the
delivery schedule requested by customers (generally, within two to three weeks).
Shipments of NTN Wireless products occur in most cases within 14 days of receipt
of order.
BUZZTIME ENTERTAINMENT, INC.
GENERAL
Buzztime, our wholly owned subsidiary, was incorporated in the state of
Delaware in December 1999 with the objective of creating new revenue from
distributing NTN's content library to several interactive consumer platforms,
with a primary focus on interactive television. Buzztime specializes in
real-time, mass-participation games and entertainment that are produced
specifically for interactive television including the Buzztime interactive
trivia channel for cable television and satellite television services. We manage
one of the world's largest trivia game show library from our interactive
television broadcast studio where we also produce our live, Predict the Play
interactive television sports games and real-time viewer polls.
9
We launched the Buzztime trivia channel in June 2002 in York, Pennsylvania
on Susquehana Cable ("SusCom") system. We believe this was the first deployment
of a real-time, two-way cable channel in the U.S. that operated on commercially
deployed digital set-top boxes. In addition, Buzztime remains the primary
content provider to the NTN Network and currently works with leading companies
such as Scientific-Atlanta, Inc., The National Football League (NFL), Liberate
Technologies, Microsoft Corporation's MSNTV and others to bring consumers
real-time interactive entertainment.
PRINCIPAL PRODUCTS/SERVICES AND DISTRIBUTION
There are three categories of Buzztime content: live, interactive trivia
game shows which are broadcast on the hour, quarter hour or half hour; real-time
predictive TV play-along sports games where viewers predict certain strategic
events while viewing live sports television broadcasts; and live viewer polls
which can be broadcast in conjunction with a live televised event.
Prime Time Games
- ----------------
Passport(TM)..................... Travel trivia
Playback(TM)..................... Music trivia
Showdown(R)...................... Advanced trivia challenge
SIX(TM).......................... General trivia
Spotlight(TM).................... Entertainment trivia
Sports IQ(TM).................... Sports Trivia
Sports Trivia Challenge(R)....... Sports Trivia
Featured Games
- --------------
Abused News(R)................... Humorous trivia based on recent news
Battle of the Sexes(TM).......... Gender based Trivia; created under license
from Imagination Entertainment Limited
BrainBuster(R)................... Difficult level general trivia
Get Reel(TM)..................... Movie trivia
Glory Daze(TM)................... 60s and 70s trivia
Jukebox(TM)...................... Music trivia
PasTimes(TM)..................... History trivia
Retroactive(TM).................. TV trivia from 50s - 70s
SciFiles(TM)..................... Science Fiction trivia
Speed(TM)........................ Fast paced general trivia
Topix(TM)........................ Theme based trivia
Triviaoke(R)..................... Music trivia
Tuned In(TM)..................... Television trivia
Regularly-Scheduled Programming
- -------------------------------
Appeteasers(TM).................. 15-minute general trivia
Countdown(R)..................... General trivia
Wipeout(TM)...................... General trivia
Selectable Games
- ----------------
Nightside(R)..................... Adult-oriented trivia
10
Predict-the-Play Games
QB1(R)........................... Interactive strategy game played in
conjunction with live telecasts of college
and professionalfootball
NTN Race Day..................... A predictive game combined with auto racing
trivia played in conjunction with stock
car races
Classics
- --------
Bingo............................ Interactive version of the classic game
INTERACTIVE TELEVISION
Buzztime entered into a multiyear development, licensing and marketing
agreement with Scientific-Atlanta in June 2001. The agreement calls for
Scientific-Atlanta to provide development and marketing resources to develop and
promote the Buzztime trivia channel specifically for their digital set-top
boxes. In return, we will pay to Scientific-Atlanta a portion of any licensing
revenue received from cable operators distributing the Buzztime trivia channel
during the first five years after launch of the service.
Our letter of intent with SusCom provides the Buzztime trivia channel for
their cable systems. The letter of intent calls for SusCom to distribute the
Buzztime channel to each of its digital subscribers and to pay us a monthly
license fee per subscriber after a limited free trial period.
MARKETING
Our current marketing efforts are concentrated on the cable television
industry to build awareness and distribution. Once the Buzztime trivia channel
has launched within cable and satellite systems, we will add consumer-marketing
efforts. Our intent is to take advantage of Buzztime's early market advantage by
securing trial agreements with as many large cable operators as possible. Once
each trial has successfully concluded, we intend to negotiate carriage and
licensing agreements with the cable operators. As distribution of the Buzztime
trivia channel increases, we will offer to sell premium and pay-to-play services
to the players and advertising and marketing opportunities to marketing
companies. Our business model is supported by strong market demand for
compelling content on emerging interactive television platforms and the proven
success of our content on existing platforms such as the NTN Network.
Key to revenue growth includes the integration of interactive television
enabling technology in the cable systems, adoption of interactive television
services in the home, penetration of Buzztime content into the cable operators
and the ability to charge either the player/subscriber or the cable operator for
receiving the Buzztime trivia channel. We expect to sell advertising under a
standard cable television model once the content is exposed to a critical mass
of interactive television viewers.
RAW MATERIALS
For media platforms such as cable television, wireless platforms and online
services, we distribute our programs to the recipients who maintain their own
receiving, translation and re-broadcasting equipment. Accordingly, we currently
have no raw materials or equipment needs for these customers beyond our own
back-end servers. Although it is not certain, it is likely that Buzztime's
application will require a single hardware server at each cable operator's head
end system.
COMPETITION
On a broad basis, the consumer has, and will continue to have, many options
in the in-home entertainment market from which to choose. Our interactive
television offering will compete for a share of total home entertainment time
and dollars against broadcast television, pay-per-view and other content offered
on cable and satellite television. We will also compete with other programming
available to consumers through the Internet and online services such as America
Online.
11
Cable television, in its various forms, provides consumers the opportunity
to make viewing selections from 30 to over 100 free and pay channels, thus
limiting the amount of time devoted to any particular channel. To those
consumers who enjoy watching game shows, the offerings are plentiful from the
networks and the cable programmers. Shows like Jeopardy and Wheel of Fortune,
and those offered 24 hours per day on cable interactive television such as Game
Show Network, are expected to continue to draw audiences. For the most part,
television is currently a passive medium, and does not offer the viewer the
opportunity to participate in its programming, and even less frequently does it
offer programming designed for interactive participation. Buzztime's offering
will differ from most television game programs in two major ways: it will allow
the home consumer to truly interact with the game shows via their remote control
and it will allow the home player to receive a "score" and be ranked both
locally and nationally, on screen for all players to see, in most games. We
believe this is a compelling characteristic that will draw players to the
Buzztime offering.
In-home online/Internet game sites will also compete with Buzztime's
interactive television channel. Dozens, if not hundreds, of these sites offer
either trivia game play or similarly styled social, non-violent game play such
as board or card games, games of chance, and strategy games. Internet and online
providers, such as America Online, can provide literally thousands of options
for content and entertainment. The number of Internet game sites competing for
consumers' attention has proliferated in recent years, and we expect the
competition to continue. We believe that our principal competitive factor is
that by offering our games almost solely in the cable space on digital set-top
boxes, Buzztime will attract and retain a large and broad player audience that
is different from the Internet/online audiences. Being on television in consumer
homes has long been considered the premium opportunity for game play, and we are
becoming one of the first game companies to be able to deliver content in that
medium. Because Internet and online services are either confined to a site's
subscriber base or found by only a subset of the game audience, interaction
among viewers is limited to the particular program as offered only on the
specific online service.
Finally, competition within the interactive television space comes from
three or four existing game providers that are also seeking to provide games on
digital set-top boxes, either as single play or networked games. These
competitors include Two-way TV, PlayJam (owned by OpenTV), Visiware, Pixel
Technologies and ZAQ. We believe we have several key advantages over these
companies. First, most of these competitors can only offer stand-alone single
player games on the set-tops that are currently deployed in North America.
Second, those that do allow competition with others have limited trivia content
or games in their offerings, and we believe trivia game shows will be one of the
most popular games for interactive television. Finally, none, that we are aware
of, has developed the level of a direct relationship with interactive television
middle-ware technology companies and set-top box manufacturer that gives the
product a technical endorsement.
LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
Our sports games make use of simultaneous telecasts of sporting events.
Where we have a license with a sporting league, we are also permitted to utilize
the trademarks and logos of the teams and the leagues in connection with the
playing of an interactive game.
We are party to a license agreement with the NFL. Our NFL agreement grants
us data broadcast rights to conduct interactive games on the NTN Network in
conjunction with the broadcast of NFL football games, for which we pay the NFL a
flat royalty independent of revenues billed to subscribers by the NTN Network in
connection with QB1 play. In November 2002, we renewed our license agreement
with the NFL through August 6, 2005.
We keep confidential as trade secrets the software used in the production
of our programs. The hardware used in our operations is virtually off-the-shelf,
except for the Playmakers. We own copyrights to all of our programs, formats and
software. In addition to the registration of the trademark for QB1, we have
either received, or have applied for, trademark protection for the names of our
other proprietary programming, to the extent that trademark protection is
available for them. Our intellectual property assets are important to our
business and, accordingly, we maintain a program directed to the protection of
our intellectual property assets.
In June 2001, we entered into a contribution agreement with Buzztime,
effective retroactively to January 1, 2001, whereby we contributed some of our
assets to Buzztime. The assets we contributed to Buzztime included the
interactive trivia game show libraries, the play along sports game libraries and
related technology and intangible assets.
Further, in June 2001, we entered into a licensing and marketing agreement
with Buzztime, effective retroactively to January 1, 2001, whereby Buzztime
granted the NTN Network an exclusive, royalty-free, perpetual license to the
game libraries and related technology for distribution to the commercial market
for group viewing audiences. Buzztime will continue to provide the NTN Network
with new game content created by Buzztime during the ordinary course of
business, as well as maintenance and upgrades to existing content and related
technologies, through 2006. This obligation is subject to a termination right at
the option of Buzztime, upon one year's prior notice to the NTN Network. In
addition, Buzztime will continue to produce Predict the Play applications for
the
12
NTN Network through 2008. Pursuant to the terms of the agreement, the NTN
Network will promote Buzztime during broadcasts of Buzztime programming on the
NTN Network as long as Buzztime continues to supply new game content for
distribution by the NTN Network. Buzztime shall promote the NTN Network to the
best of its ability in the consumer market, including interactive television and
wireless devices.
GOVERNMENT CONTRACTS
We provide our broadcast services through the NTN Network to a small number
of government agencies, usually military base recreation units. However, the
number of government customers is small compared to our overall customer base.
We provide our products and services to government agencies under contracts with
substantially the same terms and conditions as are in place with other
non-government customers.
RESEARCH AND DEVELOPMENT
During 2002, 2001 and 2000, we incurred approximately $12,000, $101,000,
and $430,000, respectively, related to research and development projects,
including projects performed by outside consultants. In 2002, our research and
development efforts were related to digital network, wireless and interactive
applications.
In 2002 and 2001, we recognized only payments to outside providers as
research and development expense and, as a result, any research and development
work by our employees fell into general and administrative expenses. Over the
past two years we have hired as full-time employees several of the consultants
who previously conducted research and development activities for us, and have
further added other employees to our information technology group. We believe
that our information technology department, in fact, has increased our true
overall level of development activity over the past year. We intend to continue
aggressive development on new technology enhancements including the adoption and
rollout of VSAT two-way broadband satellite technology, a more robust graphics
engine for the entertainment network, enhanced and improved hand-held Playmaker
devices and next generation wireless products. In future years, we will capture
the level of in-house development activity in order to provide a more accurate
representation of our research and development expenses.
There is no assurance that we will successfully complete current or planned
development projects or will do so within the prescribed time parameters and
budgets. There can be no assurance, furthermore, that a market will develop for
any product successfully developed.
ACQUISITIONS AND DIVESTITURES
On April 5, 2002, through a newly formed subsidiary, NTN Wireless, we
acquired the net assets of ZOOM Communications ("ZOOM"), a company in the
restaurant wireless paging industry, from Brandmakers, Inc. We entered into
separate 2-year employment contracts with each of ZOOM's two principals to join
NTN Wireless as Vice President of Operations and Vice President of Sales. Based
out of suburban Atlanta, Georgia, the office of NTN Wireless now serves as a
regional office and distribution center for us.
On May 17, 2002, we acquired the net assets of Hysen Technologies, Inc.
("Hysen"), another company in the hospitality paging industry. The assets
acquired included Hysen's existing inventory and intellectual property,
including Hysen's customer base. The assets of Hysen were combined into
Wireless.
Total consideration for the purchases was $422,000, which is comprised of
$320,000 in common stock and $102,000 for transaction costs. In addition to the
above consideration, we entered into, in connection with the ZOOM purchase, an
earn-out arrangement with the two principals. The earn-out will be paid to each
principal at 25% of the excess of which the adjusted gross profit exceeds
$900,000 for the twelve month period after the acquisition. For the period ended
December 31, 2002 the adjusted gross profit was approximately $780,000. This
earn out amount will be added to the purchase price of the ZOOM transaction.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Of the $521,000 of
acquired intangible assets, $231,000 was assigned to goodwill and is not subject
to amortization. We assigned $140,000 to employment agreements and will amortize
this amount over the estimated contractual life of 2 years. We assigned $150,000
to customer lists and will amortize this amount over the estimated useful life
of 3 years. We paid off the line of credit of $72,000 in full immediately after
the closing date of April 5, 2002.
13
ASSETS ACQUIRED AND LIABILITIES ASSUMED
ZOOM HYSEN TOTAL
COMMUNICATIONS TECHNOLOGIES ACQUISITIONS
--------------- ------------- -------------
Accounts receivable, net $ 121,000 $ -- $ 121,000
Inventory 48,000 41,000 89,000
Fixed assets 38,000 -- 38,000
Goodwill 216,000 15,000 231,000
Intangibles assets 280,000 10,000 290,000
--------------- ------------- -------------
Total assets acquired 703,000 66,000 769,000
--------------- ------------- -------------
Accounts payable and accrued liabilities 244,000 31,000 275,000
Line of credit 72,000 -- 72,000
--------------- ------------- -------------
Total liabilities assumed 316,000 31,000 347,000
--------------- ------------- -------------
Net assets acquired $ 387,000 $ 35,000 $ 422,000
=============== ============= =============
Buzztime once again became our wholly owned subsidiary on January 16, 2003
when we issued 1,000,000 shares of restricted common stock, $.005 par value, to
Scientific-Altanta, Inc. ("S-A") in exchange for the surrender by S-A of 636,943
shares of Buzztime Entertainment, Inc. Series A preferred stock pursuant to the
Right of First Refusal and Exchange Agreement entered into by and among NTN,
Buzztime and S-A as of June 8, 2001. Warrants were also issued to S-A to obtain
an additional 159,236 shares of Buzztime's Series A Convertible Preferred Stock
(the "S-A Warrants"). The S-A warrants vest in 10% increments as cable system
operators sign on for the Buzztime game show channel. The exercise price of the
S-A warrants is $1.57 per share.
GOVERNMENT REGULATIONS
The cost of compliance with federal, state and local laws has not had a
material effect upon our capital expenditures, earnings or competitive position
to date. On June 16, 1998, we received approval from the Federal Communications
Commission for our new 900 megahertz Playmakers. The 900-megahertz Playmaker is
an integral component of our network.
EMPLOYEES
As of March 8, 2003, we employ approximately 170 people on a full-time
basis and 4 people on a part-time basis. We also utilize independent contractors
for specific projects and hire up to as many as 36 seasonal employees as needed
to produce our play along sports games during varying professional and
collegiate sports seasons. None of our employees are represented by a labor
union and we believe our employee relations are satisfactory.
ITEM 2. PROPERTIES
We lease approximately 39,000 square feet of office and warehouse space at
5966 La Place Court, Carlsbad, California for our corporate headquarters and
broadcast center. In July 2001, a new five-year lease for the property commenced
upon expiration of the prior lease term that expired in June 2001. Until March
2003, we sublet approximately 11,600 square feet of this office space to
WinResources Computing, Inc. under a sublease entered into in February 2001.
We also lease approximately 1,253 square feet of additional office space
located in San Francisco. This lease expires in April 2005. We sublease this
space to a subtenant for approximately the same amount as our monthly rent. That
sublease expires in April 2005. We also lease approximately 200 square feet of
additional office space in Northern California. This lease expires in May 2003,
with an option to renew for one additional year. We also lease approximately
6,480 square feet of additional office space in Atlanta, Georgia. This lease
expires in September 2005. In addition, we lease additional office space in Mill
Valley, California. This lease expires in May 2003.
14
ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of
our business. There can be no assurance that any or all of the following claims
will be decided in our favor and we are not insured against all claims made.
During the pendency of such claims, we will continue to incur the costs of our
legal defense. Other than set forth below, there is no material litigation
pending or threatened against us.
INTERACTIVE NETWORK, INC.
We have been involved as a plaintiff or defendant in various previously
reported lawsuits in both the United States and Canada involving Interactive
Network, Inc. ("IN"). We reached a resolution with IN 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 us. There
remain two lawsuits involving us, our unaffiliated Canadian licensee and IN,
which were filed in Canada in 1992. The litigation involves licensing and patent
infringement issues. These actions relate only to the broadcast of the NTN
Network to subscribers of our Canadian licensee and do not extend to our network
operations in the United States or elsewhere. In April 2002, Two Way TV (US),
Inc., was created as a joint venture between IN and Two Way TV Limited. Two Way
TV (US) was incorporated in Delaware on January 10, 2000 to develop and market
IN's patent portfolio and Two Way TV Limited's content, technology and patents
for digital interactive services. As a result of a merger with IN, Two Way TV
(US) now owns and controls all of IN's intellectual property. On February 6,
2003, IN deposited $100,000 Canadian currency with the Canadian Court in
compliance with the Court's November 27, 2002 order, issued upon our motion
seeking an order that IN post an additional sum as security for costs to be
incurred by us in defense of the action. This sum is in addition to the $10,000
Canadian currency IN was ordered to post in November 1998 and the $30,000
Canadian currency IN was ordered to post on June 16, 2000. The action is at the
trial stage; trial is expected to last 2 weeks. We intend to defend the action
vigorously.
LONG RANGE SYSTEMS
On March 21, 2003, Long Range Systems, Inc. ("LRS") filed in the United
States District Court, Northern District of Texas, a patent infringement
complaint against our NTN Wireless subsidiary. This complaint alleged trade
dress and patent infringement and unfair competition. We were served with this
complaint on March 27, 2003. This complaint relates to our repair and
replacement activities of LRS pagers, which is not a significant percentage of
our NTN Wireless business. At this early stage, we do not believe that this
matter represents a significant level of exposure; however, we continue to
review the complaint. We intend to defend this action vigorously.
STEVEN M. MIZEL, ET. AL
On February 22, 2002, a shareholder class action and derivative complaint
was filed in San Diego County Superior Court for the State of California by
Steven M. Mizel on behalf of himself and all NTN shareholders naming Robert M.
Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H. Arlen,
Vincent A. Carrino and James B. Frakes as defendants with NTN as nominal
defendant. The Mizel action alleged breach of fiduciary duty by defendants in
connection with NTN's rejection of a proposal by a corporation to purchase all
of the outstanding shares of our common stock, as announced publicly on February
21, 2002. In June 2002, in ruling on a motion by NTN, the court found that
Mizel's complaint failed to state a valid claim. The court gave Mizel an
opportunity to replead his case, but he declined to do so. On July 11, 2002, the
court formally dismissed the case and entered judgment in our favor.
ROBIN FERNHOFF, ET. AL
On March 19, 2002, a shareholder class action and derivative complaint was
filed in San Diego County Superior Court for the State of California by Robin
Fernhoff on behalf of himself and all of our shareholders naming Robert M.
Bennett, Esther L. Rodriguez, Barry Bergsman, Stanley B. Kinsey, Gary H. Arlen,
Vincent A. Carrino, Robert B. Clasen, Michael K. Fleming and James B. Frakes as
defendants with NTN as nominal defendant. The Fernhoff action alleged breach of
fiduciary duty, abuse of control and gross mismanagement by defendants in
connection with NTN's rejection of a proposal by a corporation to purchase all
of the outstanding shares of our common stock, as announced publicly on February
21, 2002. In July 2002, in light of the ruling on Mizel, Fernhoff requested that
the court dismiss his complaint.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote by security holders during the fourth
quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange ("AMEX") under
the symbol "NTN." Set forth below are the high and low sales prices for the
common stock as reported by the AMEX for the two most recent fiscal years:
COMMON STOCK
-------------------
LOW HIGH
-------- --------
2001
First Quarter........................ $ 0.5000 $ 1.2000
Second Quarter....................... $ 0.4500 $ 0.9300
Third Quarter........................ $ 0.6400 $ 0.9100
Fourth Quarter....................... $ 0.5900 $ 0.9300
2002
First Quarter........................ $ 0.7700 $ 1.1100
Second Quarter....................... $ 1.0400 $ 1.6600
Third Quarter........................ $ 0.8100 $ 1.1900
Fourth Quarter....................... $ 0.7200 $ 1.2000
2003
First Quarter (through 3/24/03)...... $ 1.3800 $ 1.4900
On March 24, 2003, the closing price for our common stock as reported on
the AMEX was $1.43. As of March 24, 2003, there were approximately 1,302 holders
of common stock.
To date, we have not declared or paid any cash dividends with respect to
our common stock, and the current policy of our Board of Directors is to retain
earnings, if any, after payment of dividends on the outstanding preferred stock
to provide for our growth. Consequently, no cash dividends are expected to be
paid on our common stock in the foreseeable future. Pursuant to the terms of our
line of credit, we may not pay or declare dividends without the prior written
consent of the lender.
On October 1, 2002, we issued approximately 49,000 shares of common stock,
to the holders of the outstanding 8% senior convertible notes, in a private
transaction in payment of interest of approximately $40,000 on such notes. The
issuance of the shares of common stock was exempt from registration under
Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
included elsewhere in this document. The selected financial data for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998 is derived from our audited
financial statements.
16
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Total revenue............................ $ 25,610 $ 22,559 $ 22,048 $ 23,748 $ 24,194
Total operating expenses................. 27,465 25,493 30,249 27,549 27,641
--------- --------- --------- --------- ---------
Operating loss........................... (1,855) (2,934) (8,201) (3,801) (3,447)
Other income (expense), net.............. (505) (807) (940) 1,303 1,654
--------- --------- --------- --------- ---------
Loss from continuing operations.......... (2,360) (3,741) (9,141) (2,498) (1,793)
Income taxes............................. (41) -- -- -- --
Minority interest in loss of
consolidated subsidiary................ 212 85 -- -- --
--------- --------- --------- --------- ---------
Loss before cumulative effect of
accounting change...................... (2,189) (3,656) (9,141) (2,498) (1,793)
Cumulative effect of accounting change... -- -- (448) -- --
--------- --------- --------- --------- ---------
Net loss................................. $ (2,189) $ (3,656) $ (9,589) $ (2,498) $ (1,793)
Accretion of beneficial conversion
feature of preferred stock............. -- -- -- -- (758)
--------- --------- --------- --------- ---------
Net loss available to common
Shareholders........................... $ (2,189) $ (3,656) $ (9,589) $ (2,498) $ (2,551)
========= ========= ========= ========= =========
Basic and diluted net loss per common
share:
Continuing operations.................. $ (.06) $ (.10) $ (.28) $ (.09) $ (.10)
Cumulative effect of accounting change -- -- (.01) -- --
--------- --------- --------- --------- ---------
Net loss....................... $ (.06) $ (.10) $ (.29) $ (.09) $ (.10)
========= ========= ========= ========= =========
Weighted-average shares outstanding...... 39,081 36,755 33,206 28,470 26,078
========= ========= ========= ========= =========
BALANCE SHEET DATA
(IN THOUSANDS)
DECEMBER 31,
-----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Total current assets......... $ 4,184 $ 4,218 $ 5,808 $ 6,387 $ 8,131
Total assets................. 10,842 13,380 18,822 17,287 16,767
Total current liabilities.... 3,620 4,178 4,915 5,466 5,731
Total liabilities............ 8,719 9,614 14,740 15,066 8,442
Total minority interest...... 643 855 -- -- --
Shareholders' equity......... 1,480 2,911 4,082 2,221 8,325
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The following management's discussion and analysis of financial condition
and results of operations discussion should be read in conjunction with the
consolidated financial statements provided under Part II, Item 8 of this Annual
Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to deferred
costs and revenues, depreciation of broadcast equipment and other fixed assets,
bad debts, investments, intangible assets, financing operations, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o We record deferred costs and revenues related to the costs and related
installation revenue associated with installing new customer sites.
Based on Staff Accounting Bulletin 101 ("SAB 101"), we amortize these
amounts over an estimated three-
17
year average life of a customer relationship. If a significant number
of our customers leave us before the estimated life of each customer is
attained, amortization of those deferred costs and revenues would
accelerate, which would result in net incremental revenue.
o We incur a relatively significant level of depreciation expense in
relationship to our operating income. The amount of depreciation
expense in any fiscal year is largely related to the estimated life of
handheld, wireless Playmaker devices and computers located at our
customer sites. The Playmakers are depreciated over a four-year life
and the computers over a three-year life. The estimated life of these
assets was determined based upon anticipated technology changes. If our
Playmakers and servers turn out to have a longer life, on average, than
estimated, our depreciation expense would be significantly reduced in
those future periods. Conversely, if the Playmakers and servers turn
out to have a shorter life, on average, than estimated, our
depreciation expense would be significantly increased in those future
periods.
o We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. The allowance is determined based on reserving for all
customers that have terminated our service and all accounts over 90
days past due, plus five percent of outstanding balances for all
unreserved customer balances. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
We do not have any of the following:
o Off-balance sheet arrangements;
o Certain trading activities that include non-exchange traded contracts
accounted for at fair value or speculative or hedging instruments; or
o Relationships and transactions with persons or entities that derive
benefits from any non-independent relationship other than the related
party transactions discussed in ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS or which are so non-material to fall below the
materiality threshold of such item.
BACKGROUND
Our business is developing and distributing interactive entertainment and
wireless information and communications products. We operate our business
principally through two operating units: the NTN Network and Buzztime. The NTN
Network provides interactive communications and entertainment products and
services to the hospitality industry, including premiere casual-dining
restaurants, sports bars, taverns, hotels, cruise ships and active adult
communities. The NTN Network also includes our sales of wireless paging and
member services products to restaurants and other hospitality locations.
Buzztime operates our live broadcast studio, and produces our trivia and live
sports "play-along" content to both the NTN Network and new consumer interactive
platforms and is developing the Buzztime interactive television channel.
Revenues generated and operating income (loss) by segment by our two
business units are illustrated below. The segment data presented below includes
allocations of corporate expenses.
YEARS ENDED DECEMBER 31
2002 2001 2000
------------------- ------------------- -------------------
REVENUES
NTN Network............. $ 25,465,000 99% $ 22,382,000 99% $ 21,406,000 97%
Buzztime................ 128,000 1% 159,000 1% 540,000 2%
Other................... 17,000 - 18,000 - 102,000 -
------------- ---- ------------- ---- ------------- ----
Total......... $ 25,610,000 100% $ 22,559,000 100% $ 22,048,000 100%
============= ==== ============= ==== ============= ====
OPERATING INCOME (LOSS)
NTN Network............. $ 1,699,000 $ 372,000 $ (2,162,000)
Buzztime................ (3,554,000) (3,306,000) (6,039,000)
------------- ------------- -------------
Total......... $ (1,855,000) $ (2,934,000) $ (8,201,000)
============= ============= =============
18
NTN Network revenues are generated primarily from distributing content,
advertising to customer locations and wireless paging systems. The direct costs
associated with these revenues include the cost of installing the equipment at
the customer location, marketing visits, technical service, freight,
telecommunications, sales commission, parts, repairs, depreciation of the
equipment placed in service and paging equipment.
Buzztime revenues are generated primarily from production, licensing and
advertising. The direct costs associated with these revenues are license fees
and server hosting fees.
RESULTS OF OPERATION
Following is a comparative discussion by fiscal year of the results of
operation for the three years ended December 31, 2002. We believe that inflation
has not had a material effect on the results of operations for the periods
presented.
YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Operations for 2002 resulted in a net loss of $2,189,000 compared to net
loss of $3,656,000 for 2001. The operating results for 2001 included non-cash
debt conversion costs of $189,000 related to the conversion of $2,000,000 on the
convertible senior subordinated notes.
REVENUES
NTN Network revenues increased $3,083,000, or 14%, to $25,465,000 in 2002
from $22,382,000 in 2001. NTN Network division revenue included approximately
$2,405,000 of revenue from NTN Wireless business, which was acquired in April
2002. Hospitality service revenues increased by approximately $1,227,000 due to
an increase in the number of subscribing locations and the average billing rate
per location. The NTN Network customer site count in the United States at
December 31, 2002 was 3,171. This was an increase of 65 sites over December 31,
2001. Installation revenue associated with installing new customer locations
decreased approximately $451,000 as some of the deferred revenue associated with
the installation has become fully amortized. Included in NTN Network revenues
are revenues from our Canadian licensee that decreased approximately $102,000 in
2002 to $1,161,000 from $1,263,000 in 2001 due to a smaller customer base in
2002. In 2002, the NTN Network generated revenue of approximately $959,000 in
national and regional advertising, comprised primarily of companies in the wine,
beer and spirits category compared to approximately $1,000,000 in 2001.
Buzztime service revenues decreased 19% to $128,000 in 2002 from $159,000
in 2001. The decrease was due to expiration of advertising contracts.
Other revenues decreased 6% to $17,000 in 2002 from $18,000 in 2001.
As a result of the above factors, NTN's consolidated revenues increased
$3,051,000, or 14%, to $25,610,000 in 2002 from $22,559,000 in 2001.
OPERATING EXPENSES
Direct operating costs of services increased $1,011,000, or 12%, to
$9,252,000 in 2002 from $8,241,000 in 2001. Direct operating costs included
approximately $1,513,000 for costs of goods sold from the NTN Wireless business
acquired in April 2002. Excluding the NTN Wireless cost of goods sold, for which
there was no comparable expense in 2001, our direct operating costs decreased by
$502,000 in 2002. Some of the primary factors that led to that $502,000 direct
operating cost reduction included:
o Communication charges decreased by approximately $348,000 due to a
change in vendors in July 2001, which generated a full year of related
cost savings in 2002 compared to a partial year of savings in 2001.
o Marketing site visits decreased approximately $98,000 due to a
restructuring of regularly scheduled visits to the sites.
Selling, general and administrative expenses increased $1,129,000, or 8%,
to $16,106,000 in 2002 from $14,977,000 in 2001. Selling, general and
administrative expenses in 2002 included an increase in payroll and related
expenses of approximately $1,022,000 as the head count increased, which includes
the addition of the NTN Wireless employees. Travel and entertainment increased
approximately $129,000 related to NTN Wireless and increased travel to support
the Buzztime initiatives. Marketing expenses increased approximately $69,000 due
to additional trade shows attended and increased marketing expenses associated
with our
19
acquisition of ZOOM Communications, and subsequent introduction of our new NTN
Wireless subsidiary. Equipment leases increased approximately $100,000 due to
the buy-out of equipment under capital leases. Consulting expenses decreased
approximately $490,000 due to the completion of various projects in the past
year and to the hiring of various consultants as employees.
Litigation, legal and professional fees increased $77,000, or 17%, to
$540,000 in 2002 compared to $463,000 in 2001. This increase relates to
additional legal fees for trademark registrations and employee matters.
Depreciation and amortization not related to direct operating costs
decreased $156,000, or 9%, to $1,555,000 in 2002 from $1,711,000 in 2001 due to
certain assets becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $89,000, or 88%, to $12,000 in
2002 from $101,000 in 2001, due primarily to the transition away from using
outside consultants in favor of expansion of internal development departments to
aggressively pursue ongoing research and development initiatives.
INTEREST INCOME AND EXPENSE
Interest income decreased $57,000, or 91%, to $6,000 in 2002, compared to
$63,000 in 2001, due to less cash on hand from capital raised in previous years.
Interest expense decreased $335,000, or 40%, to $511,000 in 2002, compared
to $846,000 in 2001, due to the expiration of various capitalized leases as well
as to a lower average balance on our revolving line of credit.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary increased $127,000 or
149% to $212,000 in 2002 compared to $85,000 in 2001. The 2002 minority interest
figure represented a full year's allocation of six percent of Buzztime's losses
while the 2001 figure represents an allocation of six percent of Buzztime's
losses for only the second half of 2001 as we received the minority interest
investment in Buzztime by Scientific-Atlanta, Inc. at the end of June 2001.
INCOME TAXES
The NTN Network has taxable income for the year ended December 31, 2002.
For federal income tax reporting purposes and in unitary states where the NTN
Network may file on a combined basis, taxable losses incurred by Buzztime should
be sufficient to offset NTN Network's taxable income. In states where separate
filing is required, NTN Network will likely incur a state tax liability. As a
result, NTN Network recorded a state tax provision of $41,000 in 2002.
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Operations for 2001 resulted in a net loss of $3,656,000 compared to net
loss of $9,589,000 for 2000. The operating results for 2001 included non-cash
debt conversion costs of $189,000 related to the conversion of $2,000,000 on the
convertible senior subordinated notes. The operating results for 2000 also
included the implementation of SAB 101 related to the recognition of
installation, training and set up revenues, which resulted in a reduction in
revenues of $845,000, an increase in related expenses of $282,000 and the
cumulative effect on prior years of approximately $448,000. It also includes a
charge for the impairment of assets for certain web development costs and
Internet game stations equipment, license and related goodwill in the amount of
$1,362,000.
REVENUES
NTN Network revenues increased $976,000, or 5%, to $22,382,000 in 2001 from
$21,406,000 in 2000. Hospitality subscription revenues increased by
approximately $862,000 due to an increase in the number of sites and the average
billing rate per site. During 2001, approximately 697 sites were installed. This
increase was also due in part to installation, training and setup revenue which
increased approximately $438,000 due to an increase in amortization of
previously deferred fees. Other production revenues of approximately $83,000
were recorded in 2001. Included in NTN Network revenues are revenues from our
Canadian licensee totaling $1,263,000 in 2001 and $1,266,000 in 2000. In 2001,
the NTN Network generated revenue of approximately $1,000,000 in national
20
and regional advertising, comprised primarily of companies in the wine, beer and
spirits category compared to approximately $1,400,000 in 2000.
Buzztime service revenues decreased 71% to $159,000 in 2001 from $540,000
in 2000. The decrease was due to expiration of advertising contracts.
Other revenue decreased 82% to $18,000 in 2001 from $102,000 in 2000.
OPERATING EXPENSES
Direct operating costs of services decreased $2,857,000, or 26%, to
$8,241,000 in 2001 from $11,098,000 in 2000. This is primarily due to a decrease
in depreciation and amortization of approximately $1,184,000 due to our
DOS-based network equipment being fully depreciated by June 2000. That decrease
was partially offset by an increase in depreciation for capitalized broadcast
equipment associated with the digital network. Communication charges decreased
by approximately $586,000 due to technical changes made in 2000 and a change in
vendors during the second half of 2001. Freight expenses decreased by
approximately $148,000 due to 545 less installations of the digital equipment
and less incoming shipments of Playmakers in 2001. Advertising and network
commissions also decreased approximately $590,000 partially as a result of our
decision to transition advertising sales in-house. Playmaker repairs increased
by approximately $335,000 in 2001 due to the expiration of warranties on some of
the Playmakers.
Selling, general and administrative expenses decreased $93,000, or 1%, to
$14,977,000 in 2001 from $15,070,000 in 2000. Selling, general and
administrative expense in 2001 included a decrease in payroll and related
expenses of approximately $189,000 relating to a decrease in the number of
employees. Consulting expenses decreased approximately $427,000 due to hiring of
fewer consultants for technology and Buzztime during 2001. Stock-based
compensation decreased $566,000 due to the impact of marking warrants to market
in accordance with variable accounting, and awards granted and fully expensed in
2000. Supplies, printing costs and seminars decreased approximately $261,000 due
to general cost cutting measures and fewer new employees in 2001. Various other
expenses decreased due to general cost cutting measures that have been
implemented. Marketing expenses increased approximately $260,000 due to an
effort to increase site count and to introduce new games in 2001. Bad debt
expense increased $325,000 due to reassessment of the allowance in 2000 and
increased collections in 2000, which lowered bad debt expense in the prior
period compared to 2001.
Litigation, legal and professional fees decreased $11,000, or 2%, to
$463,000 in 2001 compared to $474,000 in 2000.
Depreciation and amortization not related to direct operating costs
decreased $104,000, or 6%, to $1,711,000 in 2001 from $1,815,000 in 2000 due to
certain assets becoming fully depreciated.
As the focus of Buzztime changed to other interactive initiatives,
impairment charges totaled $1,362,000 in 2000 due to the write-off of certain
web development costs for the Internet web site Buzztime.com and Internet game
station assets, license and related goodwill on the basis that the assets are
not recoverable through future cash flows.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $329,000, or 77%, to $101,000
in 2001 from $430,000 in 2000. The current period expenses resulted from our
research and development efforts related to the digital network and interactive
television initiatives. We currently recognize as research and development
expense only payments to outside providers and, as a result, any research and
development work by our employees fell into general and administrative expenses.
Over the past two years, we have hired several of the consultants who previously
conducted research and development activities as well as adding to the
information technology group. We believe that our information technology
department, in fact, has increased our true overall level of development
activity in 2002 over 2001.
In 2000, our research and development efforts related to the digital
network and Internet initiatives. This $329,000 decrease in 2001 was largely due
to the cessation of the Internet initiatives in late 2000.
INTEREST EXPENSE
Interest expense decreased $285,000, or 25%, to $846,000 in 2001, compared
to $1,131,000 in 2000, due to the expiration of various capital leases, the
decrease in the interest rate on our convertible senior subordinated notes from
7% to 4% during the period
21
January 2001 through November 2001 and to lower outstanding balances on our line
of credit in 2001.
EBITDA
Our earnings before interest, taxes, depreciation and amortization
("EBITDA") increased by $1,147,000 to $3,282,000 for the year ended December 31,
2002 from EBITDA of $2,135,000 for the year ended December 31, 2001.
EBITDA is not intended to represent a measure of performance in accordance
with generally accepted accounting principals ("GAAP"). Nor should EBITDA be
considered as an alternative to statements of cash flows as a measure of
liquidity. EBITDA is included herein because we believe that financial analysts,
lenders, investors and other interested parties find it to be a useful tool for
measuring the performance of companies that carry significant levels of non-cash
depreciation and amortization charges in comparison to their GAAP earnings. For
example, our credit line carries certain financial covenants that are based upon
our EBITDA.
The following table reconciles our net loss per GAAP to EBITDA:
YEAR ENDED DECEMBER 31
-------------------------------------------
EBITDA CALCULATION: 2002 2001 2000
------------- ------------- -------------
Net income (loss) $ (2,189,000) $ (3,656,000) $ (9,589,000)
Interest expense (net) 505,000 783,000 1,059,000
Depreciation and amortization 4,925,000 5,008,000 6,296,000
Provision for income taxes 41,000 -- --
------------- ------------- -------------
EBITDA $ 3,282,000 $ (2,135,000) $ (2,234,000)
============= ============= =============
On a segment basis, our two segments generated EBITDA levels as presented below:
YEAR ENDED DECEMBER 31, 2002
-------------------------------------------
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL
------------- ------------- -------------
Net income (loss) $ 1,153,000 $ (3,342,000) $ (2,189,000)
Interest expense (net) 505,000 -- 505,000
Depreciation and amortization 4,194,000 731,000 4,925,000
Provision for income taxes 41,000 -- 41,000
------------- ------------- -------------
EBITDA $ 5,893,000 $ (2,611,000) $ 3,282,000
============= ============= =============
YEAR ENDED DECEMBER 31, 2001
-------------------------------------------
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL
------------- ------------- -------------
Net loss $ (418,000) $ (3,238,000) $ (3,656,000)
Interest expense (net) 767,000 16,000 783,000
Depreciation and amortization 4,242,000 766,000 5,008,000
Income taxes -- -- --
------------- ------------- -------------
EBITDA $ 4,591,000 $ (2,456,000) $ 2,135,000
============= ============= =============
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------
EBITDA CALCULATION: NETWORK BUZZTIME TOTAL
------------- ------------- -------------
Net loss $ (3,598,000) $ (5,991,000) $ (9,589,000)
Interest expense (net) 949,000 110,000 1,059,000
Depreciation and amortization 5,668,000 628,000 6,296,000
Income taxes -- -- --
------------- ------------- -------------
EBITDA $ 3,019,000 $ (5,253,000) $ (2,234,000)
============= ============= =============
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had cash and cash equivalents of $577,000 and
working capital (current assets in excess of current liabilities) of $564,000
compared to cash and cash equivalents of $1,296,000 and working capital of
$40,000 at December 31, 2001. Net cash provided by operations was $1,131,000 in
2002 and $1,482,000 in 2001. Our net loss from operations was more than offset
by depreciation, amortization and other non-cash charges in both years.
22
Net cash used in investing activities was $1,551,000 in 2002 and $1,228,000
in 2001. Included in net cash used in investing activities in 2002 were
approximately $1,518,000 in capital expenditures, software and web site
development and $102,000 of professional fees related to the acquisitions, which
were partially offset by a reduction in deposits on equipment of $69,000.
Net cash used in financing activities was $299,000 in 2002 and $1,146,000
in 2001. The cash used in financing activities in 2002 included $222,000 of
principal payments on capital leases, and $212,000 of net payments on the
revolving line of credit. The net cash used in financing activities was
partially offset by $135,000 of proceeds from the exercise of stock options and
warrants.
CONTRACTUAL CASH OBLIGATIONS
A table recapping our contractual cash obligations is presented below:
PAYMENTS DUE BY PERIOD
--------------------------------------------
CONTRACTUAL OBLIGATION LESS THAN 1 YEAR 2-3 YEARS 4-6 YEARS TOTAL
- ---------------------- ---------------- ------------ ------------ -----------
Revolving line of credit.............. $ 89,000 $ 2,250,000 $ -- $ 2,339,000
Capital lease obligations............. 246,000 201,000 42,000 489,000
Purchase commitments.................. 908,000 2,558,000 782,000 4,248,000
Operating leases...................... 618,000 1,227,000 271,000 2,116,000
---------------- ------------ ------------ -----------
Total............................ $ 1,861,000 $ 6,236,000 $ 1,095,000 $ 9,192,000
================ ============ ============ ============
The convertible senior subordinated notes are not included in the table as
they were converted into NTN common stock at February 1, 2003.
CONVERTIBLE SENIOR SUBORDINATED NOTES
As of December 31, 2002, we had outstanding convertible senior subordinated
notes of $2,000,000, payable February 1, 2003 and bearing interest at 8% per
year. The notes permitted us to convert up to the full principal amount into
shares of our common stock at maturity at a conversion price of $1.275 per
share.
The convertible senior subordinated notes were originally issued in January
2001 for a principal amount of $4,000,000 and carried an interest rate of 4% in
exchange for our outstanding 7% convertible senior subordinated notes of
$3,987,000 payable on February 1, 2001. Effective on December 11, 2001, we
agreed to permit the holders of the notes to convert $2,000,000 of the
outstanding principal amount into shares of our common stock at a conversion
price of $1.22 per share in order to increase our stockholder equity. As a
result, the holders received an aggregate amount of 1,639,344 shares of our
common stock. In connection with the conversion, we agreed to increase the
interest rate on the remaining outstanding principal of the convertible notes
was increased to 8% from 4% per year.
On February 1, 2003, the remaining $2,000,000 of convertible senior
subordinated notes converted into 1,568,627 shares of our common stock based on
the agreed conversion price of $1.275 per share.
REVOLVING LINE OF CREDIT
In August 1999, we entered into an agreement with Coast Business Credit
("Coast") for a revolving line of credit not to exceed $4,000,000. Interest is
charged on the outstanding balance at a rate equal to the prime rate plus 1.5%
per annum, but cannot be less than 9% per annum. The line of credit is secured
by substantially all of our assets. Total loan fees of $120,000 were payable in
three annual installments and are being amortized over the life of the loan,
which originally matured on August 31, 2002.
Our revolving line of credit agreement with Coast was amended in May 2001.
The line of credit provides for borrowings not to exceed the lesser of (i) a
designated maximum amount, (ii) three times trailing monthly collections, or
(iii) three times annualized trailing adjusted EBITDA. The amendment called for
a gradual reduction in the line from $4,000,000 on April 1, 2001 to $2,750,000
on December 31, 2001. We completed that pay down process on December 31, 2001.
The amendment to our revolving line of credit in May 2001 also allowed
equity raised by us to be added to the EBITDA calculation and permit us to
exclude the effect of SAB 101 for 2000. The May 2001 amendment also required us
to raise $1,000,000 in equity by June 30, 2001, maintain a minimum cash level of
$400,000 each month and limited our cash burn to not more than $1,000,000 from
April 1, 2001 onward without receiving additional equity. The maturity date on
the line of credit was also moved
23
forward by two months to June 30, 2002 as part of the May 2001 amendment. The
investment in Buzztime by an affiliate of Scientific-Atlanta in June 2001
satisfied the $1,000,000 equity requirement.
On February 25, 2002, we amended our revolving line of credit to extend the
expiration date of the revolving line of credit to June 30, 2003. The amendment
also requires further line reductions of $250,000 each on June 30, 2002, January
31, 2003, and on March 31, 2003. The amendment deleted our minimum tangible
effective net worth financial covenant and replaced it with two cash
flow-oriented covenants. In return for the extension, Coast received a loan fee
of $40,000 on July 1, 2002. There were no changes to the interest rate in this
amendment.
On February 4, 2003, we amended our revolving line of credit to extend the
maturity date on the line of credit to June 30, 2004. The amendment also struck
the previously scheduled March 31, 2003 $250,000 paydown on the line of credit,
deleted the trailing cash flow multiplier element of the borrowing base and
modified the cash flow oriented covenants. We agreed to pay Coast a renewal fee
of $30,000 on July 1, 2003 in association with this amendment. There were no
changes to the interest rate in this amendment.
On February 7, 2003, Coast and its parent company, Southern Pacific Bank,
were seized by the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC
is currently acting as a trustee for Coast and is in the process of selling off
Coast's loan portfolio to other lending institutions. It is likely that the line
of credit will be sold to another lender by the FDIC. However, should the FDIC
either cease funding or materially reduce the credit available to us despite the
terms of the loan and security agreement, it would have a significant impact on
our liquidity.
INVESTMENT IN BUZZTIME
On June 8, 2001, an affiliate of Scientific-Atlanta invested $1,000,000 in
Buzztime for 636,943 shares of its preferred stock, representing 6% of
Buzztime's capitalization on an as-converted basis, and warrants to obtain an
additional 159,236 shares of its preferred stock. Each share of Buzztime
preferred stock was initially convertible into one share of Buzztime common
stock and entitled to a non-cumulative dividend of 8%, if, and when as declared
by Buzztime's board of directors. The exercise price of the Scientific-Atlanta
preferred stock purchase warrants is $1.57 per share. However, the warrants vest
in 10% increments only as cable system operators sign on by executing a
distribution agreement for the Buzztime channel.
In connection with the investment, Buzztime entered into a development,
license and marketing agreement with Scientific-Atlanta to co-develop an
application to enable operation of a Buzztime interactive trivia game show
channel on Scientific-Atlanta's Explorer digital interactive set-top network for
distribution by cable operators to their subscribers. The $1,000,000 in net
proceeds may only be used towards development of the application for
Scientific-Atlanta and fulfillment of Buzztime's obligations under the
development agreement.
We granted Scientific-Atlanta the right to exchange its shares of Buzztime
preferred stock into shares of NTN common stock if (i) Buzztime did not obtain
additional equity financing of $2,000,000 before June 8, 2002, (ii) the
liquidation, dissolution or bankruptcy of Buzztime before June 8, 2002, (iii)
the failure of Buzztime to conduct a qualified public offering by June 8, 2004,
or (iv) a change in control of Buzztime before June 8, 2002. On January 16,
2003, Scientific-Atlanta converted its shares of Buzztime preferred stock into
our common stock at a conversion price of $1.00 per share.
FUTURE FINANCING NEEDS
Our requirements for additional financing in 2003 will depend upon the
growth of our two business segments. In a low growth scenario (for example, net
site growth of 100 sites in the NTN Network and a couple of commercial trials of
the Buzztime trivia channel), utilization of our existing line of credit is
expected to be sufficient to cover our financing requirements. If we face more
rapid growth in either or both segments, then we will require additional
financing in 2003. If we are unsuccessful in obtaining financing, some
initiatives relating to those higher growth opportunities may have to be
curtailed or deferred. We may not be able to obtain additional financing on
terms favorable to us or at all. In addition, our line of credit matures on June
30, 2004.
Our liquidity and capital resources remain limited and this may constrain
our ability to operate and grow our business. In 2002, we generated free cash
flow (defined as EBITDA less cash interest expense, cash used in investing
activities and cash used in financing activities) of $1,120,000, which has
covered our business requirements over that period.
24
We are also considering adding to our product line certain other wireless
applications that are relevant to the hospitality industry. We may add these
incremental hospitality products through reseller arrangements or through
acquisition. Our limited capital resources may prevent us from making such
product additions or acquisitions on a cash basis.
We expect the level of expenditures in Buzztime to rise over 2003 as we
have entered the deployment phase with SusCom and continue in the testing phase
with certain other cable operators. However, subject to any unexpected changes
in our business that may occur as a result of a continued economic slowdown, and
unless we incur unanticipated expenses, we believe we will continue generating
adequate cash from the operation of the NTN Network which, when combined with
cash resources on hand and our line of credit, will allow us to continue to fund
Buzztime at least through December 2003 at current operational levels assuming
that Buzztime remains in the testing phase with certain cable operators for the
remainder of the year. If current Buzztime channel sales efforts to major cable
system operators (the largest cable system operators in the United States)
succeed as planned and we enter into field trials with those cable operators,
management intends to aggressively increase Buzztime sales and marketing efforts
late in the year to more quickly advance its distribution within the U.S.
market, which will require additional capital. We believe that Buzztime's
success in entering into those field trials with major cable system operators
may enhance our ability to raise additional capital at favorable pricing
although there can be no assurance that will happen.
Based upon current sales targets of achieving commercial deployment of the
Buzztime channel with several major cable system operators over the next several
quarters, we anticipate that Buzztime will require an additional $250,000 in
financing per quarter commencing with the third quarter of 2003. The timing of
this capital requirement is largely dependent on the timing of the commercial
deployment. The sooner we achieve commercial deployment, the sooner this capital
requirement would arise. If additional financing is not obtained, our
accelerated growth plans may have to be deferred. If cash generated by the NTN
Network is insufficient to cover Buzztime's expenses and if additional financing
for Buzztime is not obtained and we cannot reduce cash expenditures at Buzztime
to a sufficient level, we may not be able to sustain the operations of Buzztime
beyond December 2003.
In 2002, the American Stock Exchange (AMEX) adopted several new listing
standards. One new standard was established for listed companies that had at
le