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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, 2003
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 Offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.005 par value American Stock Exchange
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 [X] No [ ]
The aggregate market value of the common stock held by non-affiliates of the
Registrant as of June 30, 2003, computed by reference to the closing sale price
of the common stock on the American Stock Exchange on June 30, 2003, was
approximately $73,708,479. 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 March 5, 2004, Registrant had 52,611,430 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business....................................................... 1
2. Properties..................................................... 16
3. Legal Proceedings.............................................. 16
4. Submission of Matters to a Vote of Security Holders............ 16
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 17
6. Selected Financial Data........................................ 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation............................. 18
7A. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 37
8. Consolidated Financial Statements and Supplementary Data....... 37
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 37
9A. Controls and Procedures........................................ 37
PART III
10. Directors and Executive Officers of the Registrant............ 39
11. Executive Compensation........................................ 41
12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 44
13. Certain Relationships and Related Transactions................ 45
14. Principal Accountant Fees and Services ....................... 46
PART IV
15. Exhibits, Consolidated Financial Statement Schedule, and
Reports on Form 8-K........................................... 47
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
We operate principally through four business segments, the NTN Interactive
Television Network ("NTN iTV Network" or "iTV Network"), NTN Wireless
Communications ("NTN Wireless"), NTN Software Solutions ("Software Solutions"),
which combine to form our NTN Hospitality Technologies Division (formerly the
NTN Network Division), and our wholly owned subsidiary, Buzztime Entertainment,
Inc. ("Buzztime").
o The NTN iTV Network transmits a wide variety of popular interactive
games, advertisements and informational programming delivered daily to
consumers in approximately 3,500 restaurants, sports bars and taverns
throughout the United States and Canada, as well as hotels, airlines,
cruise ships and active adult communities.
o NTN Wireless offers a complete line of on site wireless communication
management products, including GuestCall(R) and ServerCall(R)paging
systems, repair and replace programs for pagers, and SurveyCheck
(trademark of Superb Serv LLC) electronic touch screen comment cards.
The hospitality product suite is built around the goal of using
technology to improve the customer experience and front-of-store
efficiencies. NTN Wireless also offers on site messaging solutions for
hospitals, church and synagogue nurseries, salons, business offices,
and retail establishments. More than 2,800 sites currently use NTN
Wireless products, including such national chains as Darden
Restaurant's Olive Garden, Logan's Roadhouse, O'Charley's, and more,
making NTN Wireless one of the top providers of hospitality management
products in North America.
o Software Solutions designs, develops, and markets innovative software
for the restaurant and hospitality industry. Software Solutions'
primary products include: NTN VISION(TM)- a Windows based POS
restaurant management system; NTN Enterprise(TM)- a web-based
enterprise management system; NTN ProHost(R), a Windows based seating
management system; NTN RSViP(R), a Windows based reservation
management system; as well as NTN Member Services - stored value gift
card and loyalty programs designed to increase customer retention.
More than 300 different companies in more than 3,300 locations in 43
countries are currently using our Software Solutions products.
Software Solutions customers include Bahama Breeze, Charlie Trotters,
Domino's Pizza, Gaylord Entertainment, MGM MIRAGE, Rainforest Cafe,
Tavern on the Green, and The Cheesecake Factory.
o Buzztime is a leading developer and distributor of real-time
interactive television entertainment programming. Our Buzztime(R)
trivia channel is the only 24-hour multiplayer, two-way game service
created exclusively for television audiences. The Buzztime channel
features play-along trivia games for players of all interests and
ability levels with real-time competition and rankings among
households.
Unless otherwise indicated, references herein to "NTN," "we," "us" and "our"
include NTN Communications, Inc. and its consolidated subsidiaries. Our
headquarters are located at 5966 La Place Court, Carlsbad, California 92008,
telephone (760) 438-7400. NTN Communications, Inc. was incorporated in Delaware
in 1984.
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 current strategy is to leverage our unique interactive entertainment as a
means of growing our business units. First, we intend to be a leading provider
of interactive communications and entertainment offerings to the hospitality
industry through the NTN Hospitality Technologies Division. Second, we plan to
be 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
Hospitality Technologies Division through its NTN iTV Network, NTN Wireless
and Software Solutions segments. 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.
o Develop and distribute the Buzztime channel to cable and satellite
operators with the intent to become the first content provider to deploy a
digital interactive television entertainment channel. Currently we have
launched the Buzztime channel on Susquehanna Communications' York,
Pennsylvania and Williamsport, Pennsylvania systems. We have also launched
the Buzztime channel on Time Warner's Portland, Maine system and on Comcast
Cable's system in Baltimore, Maryland. We have adapted, or are planning to
adapt, our interactive trivia game show content and technology to the
leading interactive television platforms. We are also planning further
adaptations to other platforms, as needed, to gain market share by
partnering with major industry manufacturers and distributors, as well as
to utilize our broadcast interactive television studio as a development and
production facility to develop and deepen relationships with media-related
companies. We plan to continue our efforts in early-stage wireless
entertainment through partnerships with leading wireless distributors and
carriers.
o Increase revenues through current and new sources. The NTN Hospitality
Technologies Division receives revenues from three major areas:
subscription fees from out-of-home hospitality locations along with related
third-party advertising revenue and sales of pagers and restaurant
management products, including sales and support of software products. 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
and satellite television operators, we expect to increase revenue through
license fees paid by cable and satellite television operators, fees paid by
interactive television home subscribers for premium services or
pay-per-play transactions, and advertising revenue.
o Both the NTN Hospitality Technologies Division and Buzztime may also
explore market opportunities to acquire complementary businesses to
increase revenues and earnings. One example of a recent acquisition is NTN
Wireless, which generated over $4.7 million in revenues through sales of
restaurant pagers and related products during 2003. Another example is
Software Solutions, which we formed in July 2003 when we acquired the
assets and certain liabilities of Breakaway International, Inc. Finally, on
December 15, 2003, we acquired the assets of NTN Interactive Network, Inc.,
our Canadian licensee since 1985. This acquisition served to open the
Canadian territory for the marketing and sale of our products and services
and immediately provided us with an installed NTN iTV Network subscriber
base of approximately 400 sites.
We have incurred consolidated net losses in the last five years and expect
to incur consolidated losses through at least the end of 2004. Recent losses
have been primarily as a result of significant, planned development expenditures
related to Buzztime for which no significant revenues have yet been generated.
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THE NTN HOSPITALITY TECHNOLOGIES DIVISION
GENERAL
The NTN Hospitality Technologies division provides 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 3,125 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 on site
wireless commercial communication services, seating management, point of sale,
reservation system and enterprise software for the hospitality industry,
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 and
family dining formats that are beyond our traditional customer base of casual
dining, sports bars and taverns.
The NTN Hospitality Technologies Division's operations can be divided into three
operating segments:
NTN iTV NETWORK SEGMENT
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Approximately 78% of our current revenues come from the operations of the
NTN iTV Network, the largest segment of NTN Hospitality Technologies. The NTN
iTV Network is the longest running out-of-home interactive television network in
the world. We receive service fees from hospitality venues that receive the
transmission of our interactive trivia quiz show and play-along sports
programming. We transmit through our iTV 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. Our NTN
iTV Network also earns revenues from advertising and marketing communications
services to companies seeking to reach the over 6 million unique out-of-home
consumers each month that visit the iTV 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.
During 2003, our iTV Network also received licensing royalty revenue from
NTN Interactive Network (NTNIN), a division of Chell Group Corporation, our
Canadian licensee, which maintained approximately 400 sites as of December 2003.
On December 15, 2003, we acquired most of the operating assets, certain
liabilities and the operations of NTNIN from Chell Group Corporation. We
acquired NTNIN's assets for $200,000 in cash, 238,300 shares of unregistered NTN
common stock valued at $3.70 per share, the contribution of $550,000 in unpaid
licensing royalties, $84,000 of transaction costs and the assumption of certain
liabilities. Total consideration for the acquisition was $1,786,000.
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.
NTN WIRELESS SEGMENT
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NTN Wireless earns revenue from the sale of on site wireless paging products
to restaurants and other hospitality locations. These products are provided to
customers while waiting for a table and will activate 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.
SOFTWARE SOLUTIONS SEGMENT
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Software Solutions earns revenue from the sale of seating management,
reservation systems, point of sale systems and enterprise management systems.
Software Solutions was formed in July 2003 when we acquired the assets and
certain liabilities of Breakaway International, Inc. Software Solutions also
derives some revenues from our 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.
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PRINCIPAL PRODUCTS AND SERVICE:
NTN iTV NETWORK
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THE PRODUCT
Our NTN iTV Network broadcasts a wide variety of entertaining and popular
interactive play-along sports and trivia games to consumers in approximately
3,125 United States venues. Patrons play an estimated 17 million games per
month, using our wireless hand-held game device, called the Playmaker(R), which
allows them to compete locally and nationally with real-time scoring. We have
deployed approximately 50,000 Playmakers across our iTV Network in the United
States. In addition, our research indicates that an average of 4.3 patrons view
and participate in the game for every Playmaker in use. We believe that 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 NTN iTV
Network is supported by third-party research indicating players stay longer,
spend more, return more frequently and refer others to an NTN iTV 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. 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
independent locations in North America.
Through the broadcast of engaging interactive content, our NTN iTV Network
enables single- and multi-player participation as part of local, regional,
national or international competitions supported with prizing and recognition.
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 NTN iTV 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 NTN iTV 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 and
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 NTN iTV
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; Lions Gate Entertainment and Universal Pictures
to support motion picture and DVD releases; as well as University Games, one of
the top five board games companies, to support the introduction of one of its
more popular board games.
VALUE PROPOSITION
The NTN iTV Network has established itself as a cost-effective means of
generating traffic to our domestic hospitality locations, creating 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 these venues,
we provide a competitive advantage, as well as provide a cost-effective
entertainment option when compared to other alternatives such as live
entertainment, karaoke and food and drink discounts.
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Our NTN iTV Network provides a number of advertising units per hour to the
venue. These units may become a revenue and profit center to our customers by
allowing them to cross-promote internal programs and services, or to re-sell to
local area merchants to offset network subscription costs and/or generate
profit.
Our customers may employ our proprietary interactive polling service,
OMNIPoll(TM), 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 iTV Network's hospitality customers pay us an average of $531 per month
per venue to use our interactive technology, and to offer our game transmissions
to their patrons. We also historically have charged an additional subscription
fee of $750 per year for our popular QB1(R) Predict-The-Play(R) football game
played in conjunction with live, televised professional and college football
games. More recently, the QB1 game has been bundled into an increased base
package. NTN iTV Network venues enter into one- and two-year service agreements,
with the average customer life of an NTN iTV Network site/venue of approximately
three years.
TECHNOLOGY
The NTN iTV Network utilizes a proprietary delivery technology called DITV
(Digital Interactive Television). DITV uses the latest Windows-based development
tools and multimedia capabilities, resulting in enhanced, high-resolution
graphics and full-motion video. DITV makes the service more appealing to
advertisers as ads appear as TV commercials rather than static billboards--DITV
technology allows advertisers to use existing video footage in their ads on the
NTN iTV Network.
For ten years, the NTN iTV Network transmitted its data through an FM2
satellite platform and was received by a PC server (base station) installed at a
subscriber's hospitality venue which is configured with a special communications
card equipped for satellite data reception. That arrangement is scheduled to end
in February 2005. We have entered into equipment purchase and satellite service
agreements to convert the NTN iTV Network to a much higher speed, two-way VSAT
(Very Small Aperture Technology) satellite technology over the two-year period
ending February 2005. These agreements are with the same reseller of satellite
services that provided the FM2 satellite platform to us.
This anticipated conversion to the two-way satellite technology will require
us to utilize significant capital resources. We believe that the conversion of
customer locations may require incremental capital expenditures of up to $4.5
million and increased cash operating expenses (including estimated installation
costs) of up to $2.5 million over the two-year conversion period, which will
lower our historical positive cash flow. The third quarter of 2003 was our first
full quarter of rolling out the VSAT technology. At December 31, 2003,
approximately 23% of sites had been converted to VSAT. During the two-year
conversion period, we believe that this upgrade will have a moderately adverse
impact on our earnings when compared with what earnings would have been without
the expenditures. The offsetting benefits of the installation include the
elimination, at completion, of telecom costs that currently average
approximately $660,000 per year and an expected increase of revenues from the
sites, resulting from ancillary services enabled by the new technology.
END USER DEVICES
Our DITV system also uses a 900 MHz wireless Playmaker, which features a 900
MHz transceiver, a monochrome LCD display and sealed keypad. Our system does not
require the "wiring" of the establishment and the Playmakers have no breakable
exterior components. As a result, external interference and Playmaker failure
has been significantly reduced over previous versions. Our Playmakers are a
rugged combination of hardware and firmware optimized for hospitality
environments.
CONTENT SERVICES
The NTN iTV Network licenses game content (both trivia and play-along
sports) from Buzztime and third party content providers. Buzztime creates the
game content that we transmit to NTN iTV Network hospitality locations. Each
hospitality location is individually addressable, allowing us to send specific
content to selected sites. Hospitality locations throughout the United States
and Canada 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 transmission of a variety of sports and
interactive trivia games that entertain and challenge a player's skill and
knowledge while creating significant customer loyalty.
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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.
We also offer a suite of Playmaker only games. This suite of games is
independent of the NTN iTV 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:
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Acey Duecey Two cards are dealt face up. Players bet that the
third card will fall between the previous two
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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
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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 NTN iTV 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 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
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THE PRODUCT
To expand presence in the hospitality industry, during 2002 we 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(R), is comprised of a tabletop transmitter and between 30-70
individual pagers that are distributed to guests upon arrival. The server paging
system, SERVERCALL(R), 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.
6
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
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 industry figures for the hospitality paging segment.
Within the industry, it is estimated that JTech, based in Boca Raton, Florida,
holds a majority position 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 SOFTWARE SOLUTIONS
- ----------------------
THE PRODUCT
Our Software Solutions' products currently target the specific operational
and reporting requirements of the food service industry and include: NTN VISION,
NTN ENTERPRISE, NTN PROHOST, and NTN RSVIP. These products are developed using
the following Microsoft technologies: Visual Basic 6.0, Visual Basic Visual C++
6.0, ASP .NET, and SQL Server 2000. Our products are currently used by more than
300 companies in more than 3,300 locations in 43 countries. Our NTN Software
Solutions customers include Domino's Pizza, The Cheesecake Factory, MGM MIRAGE
and Gaylord Entertainment.
NTN VISION is our flagship point-of-sale and back office management system.
It is a multi-tier, 32-bit Windows application designed for use in quick service
and delivery-based operations. Order Entry takes advantage of touch screen
technology and provides a robust and easy-to-use interface. NTN VISION
accomplishes several important software development objectives such as: database
independence, multiple language support, locale independence, multiple currency
support, open system architecture, and the ability to handle multiple locations
or menu setups within one system installation. NTN VISION is capable of powerful
reporting and information analysis to provide management with the necessary
tools to decrease costs and increase profits.
NTN PROHOST is our guest and seating management application that coordinates
all activities with guests, tables, and servers. It is designed to get more
customers seated, served and satisfied. NTN PROHOST helps restaurants turn more
tables, more often, which means turning higher profits.
NTN RSViP is a reservations management solution designed to accept advance
reservations for single or multiple locations. RSVIP is a client/server
application which connects multiple users in a restaurant to a central database
server. NTN RSVIP provides powerful features that include: 1) quick capture of
complete guest information, 2) elimination of overbooking with manager override
functions, 3) ability to view repeat guest profiles and history, 4) tracking of
customer preferences, 5) tracking of specific "types" of guests for targeted
marketing programs, 6) automatic Microsoft Word mail-merge feature for mailing
campaigns, and 7) customizable reporting features.
NTN ENTERPRISE is an enterprise management solution that acts as a central
repository for all store data. NTN ENTERPRISE uses NTN VISION to transfer store
information to this repository through the Internet, and utilizes a web-based
portal interface for users to access store data and reports. These reports can
be viewed online, printed, or exported to multiple file formats. NTN ENTERPRISE
also includes a powerful communications forum that allows users to post and
reply to messages in a discussion format. Future releases planned for 2004 will
add centralized store setup and marketing capabilities.
NTN MEMBER SERVICES is a unit that was transferred to Software Solutions
following the Breakaway transaction. This unit markets a stored-value gift
loyalty card product line that we obtained as part of the ZOOM asset acquisition
in April 2002. We believe key opportunities exist on two fronts. First, by
linking this program with our 1.1 million Players Plus(R) loyal player database
to combine frequent purchases with game play to offer a unique, comprehensive
player loyalty program. Recent research indicates that our Players Plus members
prefer discounts on food and beverage over other alternatives; combining a
7
frequent diner program with a frequent player program as part of an expanded
Players 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 iTV
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.
The third party technology to support this program is established, requiring
either an integrated card reader installed via phone line, printer or,
alternatively, 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 two
third party system providers. We act as an intermediary and the transactions are
processed through the third party system providers.
COMPETITION
Software Solutions competes with a number of entities within the hospitality
point-of-sale arena, including the Aloha Technologies unit of Radiant Systems,
Inc., MICROS Systems, Inc. and InfoGenesis.
PROFESSIONAL SERVICES
In addition to software development, Software Solutions provides
professional services to its customers and partners including software support,
hardware configuration, systems staging, deployment, and training services.
Our technical support group provides all levels of technical support for
Software Solutions' software products and certain hardware configurations.
Engineering and onsite support for hardware is arranged through the manufacturer
or service organization providing onsite services. Software Solutions' hours of
operation for technical support are 8:30am to 2:00am Central Time, seven days
per week.
Our production group provides services associated with providing turnkey
systems to customers and partners. This includes inventory management, system
configuration, system testing (burn-in), and shipping services.
Our field services group provides complete management of the deployment
process and includes system installation, software setup, and training services.
Software Solutions does not provide site preparation services such as network
cabling, electrical, communications installation, and physical site preparation
for mounting and housing of various types of equipment.
NTN HOSPITALITY TECHNOLOGIES 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. Our sales cycle varies
by customer type, requiring as little as one week for independent customers and
up to 18 months for national chain accounts. We seek to generate qualified leads
for a follow-up field presentation through our marketing and promotion efforts.
During the field 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 NTN iTV Network and third party research results outlining
player purchase behavior and success stories from existing NTN iTV Network
subscribers. Occasionally, demonstration units are provided to validate the
system, with the intention to finalize the sale upon completion of the trial.
NTN HOSPITALITY TECHNOLOGIES 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, Pizza Expo, FS/Tech, WestEx,
Northeast Foodservice, MMR and MUFSO. In addition, we participate in most of the
national chain conference shows. Our field representatives also participate in a
substantial number of smaller regional shows.
8
Another core element to our marketing is our Players Plus frequent player
program. Our 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 or at www.ntn.com,
which we then capture 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 iTV 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 iTV 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.
NTN HOSPITALITY TECHNOLOGIES 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 MHz radio frequency device used to
enter choices and selections by players and is manufactured by Climax
Technology, Ltd., a non-affiliated manufacturer in Taiwan.
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.
NTN HOSPITALITY TECHNOLOGIES SEASONALITY
Our NTN iTV Network business has had 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. In the third quarter of
2003, and coinciding with the rollout of our new two way VSAT broadband
satellite platform, we have started bundling our QB1 Predict the Play football
game with our trivia game. This will likely reduce the seasonal elements of our
business.
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 iTV 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 MHz Playmakers have reduced the
churn rate. The churn rate was 22% for 2003 and 19% for 2002.
NTN HOSPITALITY TECHNOLOGIES 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
2003, 2002 or 2001.
NTN HOSPITALITY TECHNOLOGIES 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.
9
BUZZTIME ENTERTAINMENT, INC. SUBSIDIARY
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 our 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 libraries from our interactive television broadcast
studio where we also produce our live, Predict the Play interactive television
sports games and real-time viewer polls.
Currently we have launched the Buzztime channel on Susquehanna
Communications' York, Pennsylvania and Williamsport, Pennsylvania systems. We
have also launched the Buzztime channel on Time Warner's Portland, Maine system.
In November 2003, we also commenced a trial on Comcast's Baltimore, Maryland,
system. We believe these deployments were the first deployment of a real-time,
two-way game channel via cable TV in the U.S. that operates on commercially
deployed digital set-top boxes. In addition, Buzztime remains the primary
content provider to the NTN iTV Network and currently works with leading
companies such as Scientific-Atlanta, Inc., The National Football League (NFL),
Liberate Technologies, Media General 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. All of the
games listed below are played on the NTN iTV Network:
Prime Time Games
- ------------------------------------- ------------------------------------------
Passport(TM) Travel trivia
- ------------------------------------- ------------------------------------------
Playback(TM) Music trivia
- ------------------------------------- ------------------------------------------
Showdown(R) Advanced trivia challenge
- ------------------------------------- ------------------------------------------
SIX(R) 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
- ------------------------------------- ------------------------------------------
10
Regularly-Scheduled Programming
- ------------------------------------- ------------------------------------------
Appeteasers(TM) 15-minute general trivia
- ------------------------------------- ------------------------------------------
Countdown(R) General trivia
- ------------------------------------- ------------------------------------------
Wipeout(TM) General trivia
- ------------------------------------- ------------------------------------------
Selectable Games
- ------------------------------------- ------------------------------------------
Nightside(R) Adult-oriented trivia
- ------------------------------------- ------------------------------------------
Predict-the-Play Games
- ------------------------------------- ------------------------------------------
QB1(R) Interactive strategy game played in
conjunction with live telecasts of college
and professional football
- ------------------------------------- ------------------------------------------
Race Day(TM) A predictive game combined with auto
racing trivia played in conjunction with
stock car races
- ------------------------------------- ------------------------------------------
Classics
- ------------------------------------- ------------------------------------------
Bingo Interactive version of the classic game
- ------------------------------------- ------------------------------------------
MARKETING
Our current marketing efforts are concentrated on the cable and satellite
television markets 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 iTV 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.
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 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.
11
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 Zodiac Gaming. We believe we have several key advantages over
these companies. First, most of these competitors focus on stand-alone single
player games for 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 game categories for interactive television. Finally, none, that we are
aware of, has developed the level of field experience with the existing cable TV
platforms that only comes from being commercially deployed.
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 NFL Enterprises L.P. Our NFL
agreement grants us data broadcast rights to conduct interactive games on the
NTN iTV 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 iTV 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.
As of December 31, 2003, we owned one United States patent covering certain
aspects of technology related to an interactive learning system. This patent
will expire in 2017. As of December 31, 2003, we had applied for two additional
patents in the United States.
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 iTV 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 iTV
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 iTV Network. In
addition, Buzztime will continue to produce Predict the Play applications for
the NTN Network through 2008. Pursuant to the terms of the agreement, the NTN
iTV Network will promote Buzztime during broadcasts of Buzztime programming on
the NTN iTV Network as long as Buzztime continues to supply new game content for
distribution by the NTN iTV Network. Buzztime shall promote the NTN iTV Network
to the best of its ability in the consumer market, including interactive
television and wireless devices.
12
GOVERNMENT CONTRACTS
We provide our broadcast services through the NTN iTV 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 2003, 2002 and 2001, we incurred approximately $329,000, $12,000 and
$101,000, respectively, related to research and development projects, including
projects performed by outside consultants. In 2003, our research and development
efforts were related to digital network, wireless and interactive applications.
Our level of research and development activity increased markedly in 2003
compared to 2002 as we began aggressive development efforts 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.
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
BREAKAWAY INTERNATIONAL
On July 31, 2003, we acquired all of the assets and certain liabilities of
Breakaway International, Inc. (Breakaway), a privately held provider of
restaurant industry hardware and software enterprise solutions. We acquired
Breakaway's assets for $252,000 in cash, 1,292,614 shares of unregistered NTN
common stock, transaction costs and the assumption of certain liabilities. We
will pay additional contingent earn-out amounts in NTN common stock and/or cash
over the next three years, provided that certain targets over the relevant
trailing twelve month period for earnings before taxes are met for the acquired
assets. The targeted amounts increase by 25% each year. We also entered into
employment agreements with five of the executives of Breakaway.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Total consideration
for the acquisition was $3,623,000, which consisted of 1,292,614 shares
multiplied by the then publicly traded price of $2.44 per share, $252,000 in
cash and $217,000 of transaction costs, plus the assumption of liabilities. To
determine the fair value of the acquired intangible assets and the related
allocation of the purchase price, we commissioned a third party valuation
analysis. That third party analysis determined that the identified intangible
assets and the related useful lives are developed technology ($781,000, 6 year
life), customer relationships ($1,110,000, 6 year life) and non-competition
agreements ($30,000, 3 year life). Results of operations from the acquisition
have been included in our consolidated statements of operations since August 1,
2003 and include $135,000 of amortization of the identified intangibles based
upon the estimated lives.
13
BREAKAWAY INTERNATIONAL, INC.
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Accounts receivable, net $ 333,000
Inventory, net 35,000
Fixed assets, net 108,000
Developed technology 781,000
Customer relationships 1,110,000
Non-competition agreements 30,000
Goodwill 2,225,000
------------
Total assets acquired 4,622,000
------------
Accounts payable and accruals 479,000
Deferred revenue 520,000
------------
Total liabilities assumed 999,000
------------
------------
Net assets acquired $ 3,623,000
=============
NTN CANADA
On December 15, 2003, we acquired most of the operating assets, certain
liabilities and the operations of NTN Interactive Network, Inc. (NTNIN), our
long time Canadian licensee from its parent, Chell Group Corporation Inc. We
acquired NTNIN's assets for $200,000 in cash, 238,300 shares of unregistered NTN
common stock, the contribution of $550,000 in unpaid licensing royalties and the
assumption of certain liabilities.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Total consideration
for the acquisition was approximately $1,786,000, which consisted of 238,300
shares multiplied by the then publicly traded price of $3.70 per share, $200,000
in cash, the contribution of $550,000 in unpaid licensing royalties, $84,000 of
transaction costs, plus the assumption of $70,000 in liabilities. There will be
a final calculation of the cash component of the purchase price based on the
final closing balance sheet. This calculation may increase the purchase price by
up to $50,000. We expect to conclude the final cost of the transaction during
the second fiscal quarter of 2004 once we finish the review of the closing
balance sheet and receive all transaction-related professional fees.
14
NTN CANADA
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Cash $ 20,000
Accounts receivable, net 235,000
Other current assets 50,000
Fixed assets, net 43,000
Customer relationships 720,000
Trivia database 345,000
Interactive events software 102,000
Trivia software 90,000
Licenses 23,000
Goodwill 875,000
------------
Total assets acquired $ 2,503,000
------------
Accounts payable and accruals 606,000
Leases 44,000
Deferred revenue 67,000
------------
Total liabilities assumed 717,000
------------
------------
Net assets acquired $ 1,786,000
============
To determine the fair value of the acquired intangible assets and the
related allocation of the purchase price, we commissioned a third party
valuation analysis. That third party analysis determined that the identified
intangible assets and the related useful lives are customer relationships
($720,000, 4 year life), trivia database ($345,000, 10 year life), interactive
events software ($102,000, 5 year life) and trivia software ($90,000, 5 year
life). Results of operations from the acquisition have been included in our
consolidated statements of operations since December 15, 2003 and include
$10,000 of amortization of the identified intangibles based upon the estimated
lives.
BUZZTIME
Buzztime once again became our wholly owned subsidiary on January 16, 2003
when we issued 1,000,000 shares of restricted NTN common stock to
Scientific-Atlanta, 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. S-A still holds warrants 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 MHz Playmakers. The 900-MHz Playmaker is an integral
component of our network.
EMPLOYEES
As of March 8, 2004, we employ approximately 235 people on a full-time basis
and 5 people on a part-time basis. We also utilize independent contractors for
specific projects and hire up to as many as 59 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.
15
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 6,480 square feet of
additional office space in Atlanta, Georgia, expiring in September 2005,
approximately 16,981 square feet of additional office space in Arlington, Texas,
expiring in July 2005, and approximately 7,700 square feet in Toronto, Ontario,
Canada, expiring in March 2007. In addition, we lease additional office space in
Mill Valley, California. This lease expires in May 2004. In February 2004, we
entered into a lease agreement for an executive office in New York, New York.
The terms of this lease provide for an initial term of six months, with an
option to renew.
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"). In 1996, 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 which were filed in Canada in 1992. The litigation
involves licensing and patent infringement issues. These actions relate only to
the transmission of the NTN iTV Network to subscribers in Canada 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 the
merger with IN, Two Way TV (US) now owns and controls all of IN's intellectual
property. The action is set for trial to commence April 19, 2004 and the 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. In February 2004, LRS amended their complaint to
eliminate certain allegations relating to infringement of its utility patent for
wireless pagers. This complaint relates to our repair and replacement activities
of LRS pagers, which is not a significant percentage of our NTN Wireless
business. We do not believe that this matter represents a significant level of
exposure and we intend to defend this action vigorously.
On or about April 23, 2003, we filed a complaint in the Superior Court of
the State of California, County of San Diego, against LRS alleging defamation
and trade libel, intentional interference with prospective economic advantage,
Lanham Act (trademark violations) and California unfair competition. The case
was subsequently transferred to the United States District Court, Southern
District of California. Our complaint alleges that LRS made false statements in
its complaint and press release regarding our products infringing LRS patents,
that LRS intentionally made false statements to disrupt our business
relationships with our clients, and that LRS registered the domain name
www.ntnwireless.com in violation of our trademark rights. LRS has recently
agreed to transfer ownership of the domain name to us. LRS filed a motion for
change of venue seeking to have the matter transferred to Texas and a motion to
strike under California's Anti-SLAPP statute. Both motions remain pending the
court's ruling.
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, 2003.
16
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
--- ----
2002
----
First Quarter................... $ 0.77 $ 1.10
Second Quarter.................. $ 1.04 $ 1.66
Third Quarter................... $ 0.81 $ 1.19
Fourth Quarter.................. $ 0.72 $ 1.20
2003
----
First Quarter................... $ 0.95 $ 1.75
Second Quarter.................. $ 1.48 $ 2.33
Third Quarter................... $ 1.91 $ 3.00
Fourth Quarter.................. $ 2.65 $ 4.11
2004
----
First Quarter (through 3/5/04).. $ 2.98 $ 4.25
On March 5, 2004, the closing price for our common stock as reported on the
AMEX was $3.82. As of March 5, 2004, there were approximately 1300 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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS]
The following table sets forth as of December 31, 2003 our compensation
plans authorizing us to issue equity securities and the number of securities
issuable thereunder.
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS (A) WARRANTS AND RIGHTS (B) IN COLUMN (A))
------------- ------------------- ------------------- --------------
EQUITY COMPENSATION
PLANS APPROVED BY 9,673,914(1) $1.31 728,069(2)
SECURITY HOLDERS
EQUITY COMPENSATION
PLANS NOT APPROVED BY 1,632,833(4) $1.61 0
SECURITY HOLDERS
-------------- -------------
TOTAL 11,306,747 728,069(3)
============== =============
_______________
(1) Includes 9,173,914 shares issuable upon exercise of options granted
pursuant to the NTN Communications, Inc. 1995 Employee Stock Option Plan
and 500,000 shares issuable upon exercise of options granted pursuant to
the NTN Communications, Inc. 1996 Special Stock Option Plan.
(2) Remaining available for grant under the NTN Communications, Inc. 1995
Employee Stock Option Plan.
(3) Does not include 300,000 shares of Buzztime Entertainment, Inc. common
stock available for grant under the Buzztime Entertainment, Inc. 2001
Incentive Stock Option Plan. To date, no options have been granted under
the plan.
(4) The 1,632,833 shares issuable that are not pursuant to equity
compensation plans approved by security holders are all pursuant to
warrants granted in connection with consulting agreements with
non-employees or were warrants associated with equity financings.
Warrants to purchase 514,000 shares were granted in 2003, 685,000 shares
were granted in 2002 and 190,000 shares in 2001. The remaining warrants
were issued in 2000 or earlier. As of December 31, 2003, the range of
exercise prices and the weighted-average remaining contractual life of
outstanding warrants was $0.50 to $3.75 and 4 years, respectively.
17
On December 15, 2003 we issued approximately 238,300 shares of unregistered
common stock for the acquisition of most of the operating assets, certain
liabilities and operations of NTN Interactive Network, Inc. This offering and
transaction was made without registration under the Securities Act of 1933, as
amended (the "Act") in reliance upon the exemption from registration afforded by
Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder. For
more information regarding the NTN Interactive Network, Inc. acquisition, please
see the discussion under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operation" included elsewhere in this
document.
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, 2003, 2002, 2001, 2000 and 1999 is derived from our audited
financial statements.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Total revenue .............................. $ 29,489 $ 25,610 $ 22,559 $ 22,048 $ 23,748
Total operating expenses ................... 32,035 27,465 25,493 30,249 27,549
--------- --------- --------- --------- ---------
Operating loss ............................. (2,546) (1,855) (2,934) (8,201) (3,801)
Other income (expense), net ................ (128) (505) (807) (940) 1,303
--------- --------- --------- --------- ---------
Loss from continuing operations ............ (2,674) (2,360) (3,741) (9,141) (2,498)
Income taxes ............................... (47) (41) -- -- --
Minority interest in loss of
consolidated subsidiary .................. 10 212 85 -- --
--------- --------- --------- --------- ---------
Loss before cumulative effect of
accounting change ........................ (2,711) (2,189) (3,656) (9,141) (2,498)
Cumulative effect of accounting change ..... -- -- -- (448) --
--------- --------- --------- --------- ---------
Net loss ................................... $ (2,711) $ (2,189) $ (3,656) $ (9,589) $ (2,498)
========= ========= ========= ========= =========
Basic and diluted net loss per common share:
Continuing operations ................... $ (.06) $ (.06) $ (.10) $ (.28) $ (.09)
Cumulative effect of accounting change .. -- -- -- (.01) --
--------- --------- --------- --------- ---------
Net loss ........................ $ (.06) $ (.06) $ (.10) $ (.29) $ (.09)
========= ========= ========= ========= =========
Weighted-average shares outstanding ........ 45,446 39,081 36,755 33,206 28,470
========= ========= ========= ========= =========
BALANCE SHEET DATA
(IN THOUSANDS)
DECEMBER 31,
-----------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Total current assets ......... $ 6,704 $ 4,184 $ 4,218 $ 5,808 $ 6,387
Total assets ................. 20,630 10,842 13,380 18,822 17,287
Total current liabilities .... 5,939 3,620 4,178 4,915 5,466
Total liabilities ............ 7,566 8,719 9,614 14,740 15,066
Total minority interest ...... -- 643 855 -- --
Shareholders' equity ......... 13,064 1,480 2,911 4,082 2,221
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.
18
2003 HIGHLIGHTS
NTN's financial and operating results for the year ended December 31, 2003
included the following highlights:
o In the first quarter of 2003, we completed the rollout of our NTN Wireless
paging products across Darden Restaurants, Inc.'s Olive Garden chain. This
was the first rollout of our NTN Wireless products across a national
restaurant chain.
o On May 1, 2003, we received a letter from the American Stock Exchange (AMEX)
stating that we were now in compliance with AMEX listing standards.
o In May 2003, we began the process of converting our installed base of NTN
iTV Network customers from our one-way satellite technology, FM2, to our new
two-way VSAT technology.
o On May 5, 2003, Time Warner Cable launched the Buzztime channel on its
Portland, Maine cable system. This was our first deployment with a top 5
multiple system operator (MSO).
o On May 6, 2003, Media General, Inc., a communications company with interests
in newspapers, television stations, interactive media and diversified
information services, invested $3 million in exchange for 2 million shares
of our common stock and in a separate transaction, licensed the interactive
television (iTV) rights to their suite of Boxerjam games and puzzles in
exchange for 666,667 shares of our common stock and a warrant to purchase
Buzztime stock.
o In June 2003, Susquehanna Communications (SusCom) launched the Buzztime
channel on its cable television system in Williamsport, Pennsylvania. This
represented our second deployment with SusCom as we had launched on their
York, Pennsylvania system in June 2002.
o In July 2003, we partially paid down and then replaced our revolving line of
credit. Our previous lender, an asset based lender, had been seized by the
FDIC and our then existing $2.5 million credit line had been purchased by a
third party. We successfully entered into a $1 million revolving line of
credit with a new bank.
o On July 31, 2003, we acquired the assets, certain liabilities and operations
of Breakaway International, Inc., a privately held provider of restaurant
industry hardware and software enterprise solutions.
o In December 2003, Comcast Cable began to trial the Buzztime channel at its
cable television system in Baltimore, Maryland. This represented the second
installation with a top 5 MSO.
o On December 15, 2003, we acquired certain assets, certain liabilities and
operations of NTN Interactive Network, Inc., our long time Canadian licensee
for the NTN iTV Network.
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 accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to deferred costs and revenues, depreciation of broadcast equipment, bad
debts, investments, intangible assets, financing operations, and contingencies
and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
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 104 ("SAB 104"), we amortize these amounts over an
estimated three-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.
19
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 depreciable life of these assets was determined based
upon their estimated useful life which considers 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.
o We assess our inventory for estimated obsolescence or unmarketable inventory
and write down the difference between the cost of inventory and the
estimated market value based upon assumptions about future sales and supply
on-hand. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
o Revenues from sales of software generally contain multiple elements, and are
recognized in accordance with Statement of Position ("SOP") No. 97-2,
"SOFTWARE REVENUE RECOGNITION", as amended. Along with the basic software
license agreement purchase, customers generally are provided annual support
and maintenance (PCS) for an additional fee based on a stipulated percentage
of the license fee. In order to continue to use the licensed software,
customers are required to annually renew the PCS contracts. As vendor
specific objective evidence does not exist for this PCS, we recognize the
entire arrangement fee ratably over the life of the contract. Revenue from
development services consists of customizations and, therefore, we recognize
revenue from development services as the services are performed under the
agreements. We recognize revenues from post-contract customer support, such
as maintenance, on a straight-line basis over the term of the contract.
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.
ASSESSMENTS OF FUNCTIONAL CURRENCIES. The U.S. dollar is the functional
currency of all of the Company's operations except for its newly acquired
Canadian operations.
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 Hospitality Technologies
Division and Buzztime. The NTN Hospitality Technologies Division includes the
NTN iTV Network, NTN Wireless and Software Solutions.
20
Revenues generated and operating income (loss) by our two business units
are illustrated below. The data presented below includes allocations of
corporate expenses.
YEARS ENDED DECEMBER 31
2003 2002 2001
---------------- ------------------ ------------------
Revenues
- --------
NTN Hospitality Technologies division.. $29,275,000 99% $25,465,000 99% $22,382,000 99%
Buzztime............................... 196,000 1% 128,000 1% 159,000 1%
Other.................................. 18,000 -- 17,000 -- 18,000 --
---------------- ------------------ ------------------
Total........................ $29,489,000 100% $25,610,000 100% $22,559,000 100%
================= ================== ==================
Operating Income (Loss)
- -----------------------
NTN Hospitality Technologies division.. $ 1,211,000 $ 1,699,000 $ 372,000
Buzztime............................... (3,757,000) (3,554,000) (3,306,000)
------------ ------------ ------------
Total........................ $(2,546,000) $(1,855,000) $(2,934,000)
============ ============ ============
NTN Hospitality Technologies revenue is generated primarily from providing
an interactive entertainment service which serves as a marketing and promotional
vehicle for the hospitality industry, from its wireless business with restaurant
on-site paging systems, stored-value gift cards and loyalty programs and
electronic data-managed comment cards and from its hardware and software
enterprise solutions. Buzztime's revenue is primarily generated from the
distribution of its digital trivia game show content and "Play-Along" sports
games as well as revenue related to production services for third parties and
from performance under a Trial Agreement with a major cable operator.
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
operations for the three years ended December 31, 2003. We believe that
inflation has not had a material effect on the results of operations for the
periods presented.
YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Operations for 2003 resulted in a net loss of $2,711,000 compared to net
loss of $2,189,000 for 2002.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$3,811,000 or 15%, to $29,293,000 in 2003 from $25,482,000 in 2002. For the
purpose of this analysis, the NTN iTV Network's revenues include $18,000 and
$17,000 of "other" revenues for 2003 and 2002, respectively shown on our
consolidated statements of operations. The revenue contribution from the three
operating segments of the division for 2003 and 2002 are shown in the following
table:
----------------------------------------------------------------------------
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
----------------------------------------------------------------------------
2003 2002 Change
------------------------------ --------------- -------------- --------------
NTN iTV Network $23,024,000 $23,077,000 $ (53,000)
NTN Wireless 4,742,000 2,405,000 2,337,000
Software Solutions 1,527,000 -- 1,527,000
------------------------------ --------------- -------------- --------------
Total Revenue of Division $29,293,000 $25,482,000 $3,811,000
============================== =============== ============== ==============
Within the NTN iTV Network there are several revenue contributors, including
our core hospitality revenue, Canadian licensing revenue, installation revenue,
advertising revenue and as of December 15, 2003, revenue from our Canadian
operations. The primary revenue components are broken out in the following
table:
----------------------------------------------------------------------------
COMPONENTS OF NTN ITV NETWORK REVENUE
----------------------------------------------------------------------------
2003 2002 Change
------------------------------ --------------- -------------- --------------
Subscription Revenues $20,011,000 $19,165,000 $ 846,000
Canadian License Revenue 745,000 1,161,000 (416,000)
Revenue from Canadian Operations 167,000 -- 167,000
Advertising Revenue 878,000 959,000 (81,000)
Installation Revenue 1,223,000 1,792,000 (569,000)
------------------------------ --------------- -------------- --------------
NTN iTV Network $23,024,000 $23,077,000 $(53,000)
============================== =============== ============== ==============
As noted in the above table, our core hospitality revenues increased by
$846,000, or 4.4%, in 2003. Installation revenue associated with installing new
customer locations decreased approximately $569,000 as some of the deferred
revenue associated with prior year installations has become fully amortized.
21
Licensing revenues from our Canadian licensee decreased approximately
$416,000 in 2003 to $745,000 from $1,161,000 in 2002 due to a smaller customer
base in 2003 and to a cessation of the royalty stream in the fourth quarter as
we finalized the acquisition of the operations of the licensee. On December 15,
2003, we acquired the operations of our Canadian licensee, so in future years we
will show the overall revenues of the Canadian operation rather than the
previous license revenue.
In 2003, the NTN iTV Network generated revenue of approximately $878,000 in
national and regional advertising, comprised primarily of companies in the wine,
beer and spirits category compared to approximately $959,000 in 2002.
The NTN iTV Network customer site count in the United States at December 31,
2003 was 3,125. This was a decrease of 46 sites over December 31, 2002.
Buzztime service revenues increased $68,000, or 53.1%, to $196,000 in 2003
from $128,000 in 2002. The increase was due to revenues recognized under a trial
agreement with a major cable operator.
As a result of the above factors, NTN's consolidated revenues increased
$3,879,000, or 15.1%, to $29,489,000 in 2003 from $25,610,000 in 2002.
OPERATING EXPENSES
DIRECT OPERATING COSTS
Direct operating costs of services increased $1,428,000, or 14.7%, to
$11,146,000 in 2003 from $9,718,000 in 2002. A great deal of this increase was
because 2003 had a full year of operations of NTN Wireless compared to
approximately nine months in 2002. The following table compares the direct costs
for each of our operating segments between 2003 and 2002:
- --------------------------------------------------------------------------------
DIRECT OPERATING COSTS
- --------------------------------------------------------------------------------
2003 2002 Change
- ----------------------------------- -------------- -------------- --------------
NTN iTV Network $ 6,821,000 $ 7,276,000 $ (455,000)
NTN Wireless 2,952,000 1,515,000 1,437,000
Software Solutions 211,000 -- 211,000
- ----------------------------------- -------------- -------------- --------------
Hospitality Technologies
division 9,984,000 8,791,000 1,193,000
Buzztime 1,162,000 927,000 235,000
- ----------------------------------- -------------- -------------- --------------
Consolidated Company $ 11,146,000 $ 9,718,000 $ 1,428,000
=================================== ============== ============== ==============
As noted in the above table, the direct operating costs of our core NTN iTV
Network segment actually decreased by $455,000 in 2003 compared to 2002. These
savings largely arose from expense reductions in site visits, technical visits
and in depreciation expense associated with equipment at the sites. These
savings were achieved despite incurring operating costs of approximately
$500,000 related to the conversion of approximately 20% of our sites to our new
two-way VSAT technology in the second half of 2003. There was no such
VSAT-related expense in 2002.
The $1,437,000 increase in the NTN Wireless direct operating costs largely
related to the cost of goods sold associated with the NTN Wireless revenue
increase of $2,337,000 in 2003 noted above.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $2,992,000 or 19.1%, to
$18,632,000 in 2003 from $15,640,000 in 2002. A great deal of this increase was
due to the addition of the Software Solutions segment in August 2003 and the NTN
Wireless business in April 2002. The following table compares the selling,
general and administrative expenses for each of our operating segments between
2003 and 2002:
- --------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------------------------------------------
2003 2002 Change
- ----------------------------------- -------------- -------------- --------------
NTN iTV Network $ 12,606,000 $ 12,612,000 $ (6,000)
NTN Wireless 1,617,000 827,000 790,000
Software Solutions 1,802,000 -- 1,802,000
- ----------------------------------- -------------- -------------- --------------
Hospitality Technologies
division 16,025,000 13,439,000 2,586,000
Buzztime 2,607,000 2,201,000 406,000
- ----------------------------------- -------------- -------------- --------------
Consolidated Company $ 18,632,000 $ 15,640,000 $ 2,992,000
=================================== ============== ============== ==============
Selling, general and administrative (SG&A) expenses in 2003 included a full
year of SG&A expenses of NTN Wireless and five months of Software Solutions
compared to nine months of NTN Wireless and none of Software Solutions in 2002.
The SG&A increase in the NTN Wireless segment was largely due to increased
payroll of approximately $280,000, commission expenses of $162,000 and marketing
expenses of $96,000. However, these increases were partially due to the full
year of expenses compared to the nine month period in 2002. The SG&A increase in
the Buzztime segment was largely due to increased payroll of $128,000 and
increased marketing expenses of $167,000. SG&A expenses include an allocation of
our corporate SG&A to the segments based on a variety of factors, including
headcount, square footage of facilities and other factors.
Litigation, legal and professional fees increased $291,000, or 53.9%, to
$831,000 in 2003 compared to $540,000 in 2002. This increase relates to
additional legal fees for trademark registrations, certain litigation matters
and generally to an increase in the scope of our business.
Depreciation and amortization not related to direct operating costs
decreased $458,000, or 29.5%, to $1,097,000 in 2003 from $1,555,000 in 2002 due
to certain assets becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $317,000 to $329,000 in 2003
from $12,000 in 2002, due primarily to projects to develop new technologies for
the iTV network.
OTHER INCOME (EXPENSE):
INTEREST INCOME AND EXPENSE
Interest income decreased $1,000 to $5,000 in 2003, compared to $6,000 in
2002.
Interest expense decreased $273,000, or 53.4%, to $238,000 in 2003, compared
to $511,000 in 2002, due to the expiration of various capitalized leases as well
as to a lower average balance on our revolving line of credit.
OTHER INCOME
Other income reflected a gain on early extinguishment of debt of $105,000
that arose out of a discount recorded on the payoff of the line of credit with
GF Asset Management, LLC.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary decreased $202,000 to
$10,000 in 2003 compared to $212,000 in 2002. The 2002 minority interest figure
represented a full year's allocation of six percent of Buzztime's losses while
the 2003 figure represents an allocation of six percent of Buzztime's losses for
only the first half of the month of January 2003 since Scientific-Atlanta
converted their minority interest in the Buzztime subsidiary into NTN common
stock on January 16, 2003.
INCOME TAXES
The NTN Hospitality Technologies division had taxable income for the year
ended December 31, 2003. For federal income tax reporting purposes and in
unitary states where the NTN iTV Network may file on a combined basis, taxable
losses incurred by Buzztime should be sufficient to offset the division's
taxable income. In states where separate filing is required, the division will
likely incur a state tax liability. As a result, NTN Hospitality Technologies
recorded a state tax provision of $47,000 in 2003. This was a $6,000 increase
over the $41,000 provision for income taxes recorded in 2002.
23
EBITDA
Our earnings before interest, taxes, depreciation and amortization
("EBITDA") decreased by $1,816,000 to $1,466,000 in 2003 from EBITDA of
$3,282,000 in 2002. This EBITDA decrease was primarily due to the increased loss
in 2003 of $522,000 coupled with a decrease in depreciation expense of
$1,028,000.
EBITDA is not intended to represent a measure of performance in accordance
with accounting principles generally accepted in the United States ("GAAP"). Nor
should EBITDA be considered as an alternative to statements of cash flows as a
measure of liquidity. EBITDA is included herein because we believe it is a
measure of operating performance that financial analysts, lenders, investors and
other interested parties find to be a useful tool for analyzing companies like
NTN that carry significant levels of non-cash depreciation and amortization
charges in comparison to their GAAP earnings.
The following table reconciles our net loss per GAAP to EBITDA:
YEAR ENDED
DECEMBER 31
-----------------------------
2003 2002
------------- -------------
EBITDA CALCULATION
Net loss per GAAP $ (2,711,000) $ (2,189,000)
Interest expense (net) 233,000 505,000
Depreciation and amortization 3,897,000 4,925,000
Income taxes 47,000 41,000
------------- -------------
EBITDA $ 1,466,000 $ 3,282,000
============= =============
On a segment basis, our segments generated EBITDA levels as presented below:
($000) YEAR ENDED
DECEMBER 31, 2003
---------------------------------------------------------------
EBITDA CALCULATION:
NTN iTV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,772 $ (171) $ (565) $ 1,036 $(3,747) $(2,711)
Interest expense (net) 232 1 -- 233 -- 233
Depreciation and amortization 3,057 138 164 3,359 538 3,897
Income taxes 47 -- -- 47 -- 47
-------- -------- -------- -------- -------- --------
EBITDA $ 5,108 $ (32) $ (401) $ 4,675 $(3,209) $ 1,466
======== ======== ======== ======== ======== ========
($000) YEAR ENDED
DECEMBER 31, 2002
---------------------------------------------------------------
EBITDA CALCULATION:
NTN iTV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,241 $ (88) $ -- $ 1,153 $(3,342) $(2,189)
Interest expense (net) 505 -- -- 505 -- 505
Depreciation and amortization 4,095 98 -- 4,193 732 4,925
Income taxes 41 -- -- 41 -- 41
-------- -------- -------- -------- -------- --------
EBITDA $ 5,882 $ 10 $ -- $ 5,892 $(2,612) $ 3,282
======== ======== ======== ======== ======== ========
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.
24
REVENUES
NTN Hospitality Technologies' revenues increased $3,083,000, or 13.8%, to
$25,465,000 in 2002 from $22,382,000 in 2001. NTN Hospitality Technologies
division revenue included approximately $2,405,000 of revenue from NTN Wireless
business, which was acquired in April 2002. Revenues from the NTN iTV Network
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 iTV
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