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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1103425
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5966 LA PLACE COURT
CARLSBAD, CALIFORNIA 92008
(Address of Principal Executive (Zip Code)
Offices)
(760) 438-7400
(Registrant's telephone number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.005 par value American Stock Exchange
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] Items 10-14???
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, 2004, computed by reference to the closing sale
price of the common stock on the American Stock Exchange on June 30, 2004, was
approximately $132,660,049. 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 9, 2004, Registrant had 53,326,464 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of NTN Communications, Inc. will be
subsequently filed with the Securities and Exchange Commission as to Part III
Item Numbers 10, 11, 12, 13 and 14, in each case as specifically referenced
herein.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business............................................................ 1
2. Properties.......................................................... 14
3. Legal Proceedings................................................... 15
4. Submission of Matters to a Vote of Security Holders................. 15
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 15
6. Selected Financial Data............................................. 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation............................... 17
7A. Quantitative and Qualitative Disclosures About Market Risk.......... 39
8. Consolidated Financial Statements and Supplementary Data............ 39
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 39
9A. Controls and Procedures............................................. 39
PART III
10. Directors and Executive Officers of the Registrant.................. 40
11. Executive Compensation.............................................. 40
12. Security Ownership of Certain Beneficial Owners and Management...... 40
13. Certain Relationships and Related Transactions...................... 40
14. Principal Accountant Fees and Services ............................. 40
PART IV
15. Exhibits and Financial Statement Schedules.......................... 40
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 3,660 restaurants, sports bars and taverns
throughout the United States and Canada and to 11 pubs in the United
Kingdom.
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 restaurants currently use
NTN Wireless products, including such national chains as Buffalo Wild
Wings, Darden Restaurant's Olive Garden and Smokey Bones, Fazoli's,
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 ProHost(R), a Windows based seating
management system and NTN RSViP(R), a Windows based reservation
management system. 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,
Harrah's, MGM MIRAGE, Rainforest Cafe, Tavern on the Green, and The
Cheesecake Factory.
o Buzztime is a developer and distributor of multiplayer interactive
television games and technology. Our Buzztime(R) Trivia Channel is the
first continuous multiplayer, game service created exclusively for
U.S. digital cable TV audiences. Buzztime features play-along trivia
games for players of all interests and ability levels with real-time
competition and rankings among households and across cable TV systems.
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.
SECURITIES AND EXCHANGE COMMISSION REPORTING
We file reports with the Securities and Exchange Commission (SEC). The
public may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC (http://www.sec.gov). Our internet site is
www.ntn.com. Copies of our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available
free of charge on our website.
INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
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. Approximately 90% of all our
revenue is attributable to customers in the United States, and substantially all
of the remaining 10% is attributable to customers in Canada.
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 independent dealers to our existing sales force and providing new
and updated content on a regular basis, including our recently introduced
multiplayer card games such as Blackjack and Texas Hold `Em poker.
o Launch the deployment of the NTN iTV Network in the United Kingdom (UK). We
are seeking to do this via an initial 90-day trial at eleven pubs in the UK
which commenced on March 1, 2005. Two major pub groups are involved in the
trial. There are over 60,000 pubs in the UK and we understand from our
research and experience that verbally-presented "pub quizzes" are often
presented to patrons. We therefore believe that our networked quiz product
may become very successful in this market. It will not be known for several
months or longer if the trial will lead to substantial orders to install
the Network at other UK sites. The Network is being termed "The Buzztime
Network" for the UK market and being operated through NTN Buzztime, Ltd.,
our UK subsidiary.
o Develop and distribute the Buzztime Channel to cable operators with the
intent to become the first to deploy an interactive television games
channel to installed digital cable set-top boxes. We have launched the
Buzztime Channel on Time Warner's systems in Portland, Maine, LaPlace,
Louisiana and Dothan, Alabama and on Comcast Cable's systems in Baltimore,
Maryland, Prince William County, Virginia and Alexandria/Arlington,
Virginia. We have also launched the Buzztime Channel on Susquehanna
Communications' York, Pennsylvania and Williamsport, Pennsylvania systems.
We have additionally launched a one-way Buzztime game service on Echostar's
Dish Network on a subscription basis. Finally, we have begun to deploy
Buzztime on advanced cell phones through several carriers, including
Verizon.
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. We have also taken
steps to establish the Buzztime name as a brand through licensing
arrangements with a toy manufacturer and with a provider of airline
in-flight entertainment.
2
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 $5.3 million in revenues through sales of
restaurant pagers and related products during 2004. Another example is
Software Solutions, which we formed in July 2003 when we acquired the
assets and certain liabilities of Breakaway International, Inc. Software
Solutions generated approximately $4.0 million in revenues in 2004.
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 which now approximates 350 sites.
We have incurred consolidated net losses in the last five years and expect
to incur consolidated losses through at least the end of 2005. 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
and in our Software Solutions segment.
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 and other establishments
that 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 19 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 3,309 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
services to the out-of-home market. As such, the division has evolved 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 and reservation
systems for the hospitality industry, additional entertainment services and
devices and interactive entertainment for corporate events. 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 73% 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, play-along sports programming
and our new NTN Blast channel. We transmit through our iTV Network engaging,
interactive game content to the hospitality locations where patrons use our
wireless 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 3,309 domestic
venues and 351 Canadian venues. 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.
3
Up through 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 $1,823,000.
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 operates in 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
--------------------------
Software Solutions earns revenue from the licensing of seating management
and reservation systems software as well as providing professional services to
Domino's Pizza LLC and to other customers. Software Solutions was formed in July
2003 when we acquired the assets and certain liabilities of Breakaway
International, Inc.
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
multiplayer interactive games, including play-along sports games, trivia games
and card games to consumers in 3,309 United States venues and 351 Canadian
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
57,000 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 transmission of engaging interactive content, stored on a site
server at each location, our NTN iTV Network enables single- and multi-player
participation as part of local, regional, national or international competitions
supported with prizing and player 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 site staff involvement at a fraction of the comparable cost.
Our NTN iTV Network is also the only out-of-home interactive television
network providing advertising and other marketing communications services to
companies seeking to reach the over 6 million unique 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 our game show formats, 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.
4
VALUE PROPOSITION
The NTN iTV Network has established itself as a cost-effective means of
generating traffic to our 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.
Our NTN iTV Network provides eight 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.
In 2004, NTN iTV Network's domestic hospitality customers paid us an
average of $544 per month per venue to use our interactive technology, and to
offer our game transmissions to their patrons. 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 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 was configured with a special
communications card equipped for satellite data reception. That arrangement was
originally scheduled to end in February 2005. We 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 a
two-year period ending February 2005. These agreements were with the same
reseller of satellite services that provided the FM2 satellite platform to us.
We recently amended the agreements with the reseller of satellite services to
push out the expiration date on the FM2 satellite platform to February 2007 and
to modify the VSAT equipment purchase and satellite service agreements. The
modification to the equipment purchase agreement eliminates the requirement to
purchase and install a specific amount of VSAT equipment. It is possible that we
may have to pay some amount of penalties in connection with the reduced amount
of purchases. This flexibility may also enable us to utilize non-satellite based
data transmission platforms, such as digital subscriber lines, wireless
connectivity or cable modems, for customer sites where such platforms may be
appropriate.
The amendment to the FM2 data transmission agreement and the revisions to
the VSAT equipment purchase and satellite service agreements allow us to spread
any conversions to the new VSAT platform over the remainder of the VSAT
satellite services agreement, which is now scheduled to end in April 2009. The
amendments also allow us the flexibility to keep existing FM2 sites on the
existing platform for another two years and do not require us to have defined
levels of VSAT sites by any certain date.
Conversion to the two-way satellite technology requires us to utilize
significant capital resources. At December 31, 2004, approximately 41% of sites
had been converted to VSAT.
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. We are also in the process of developing a more advanced 2.4 GHz
Playmaker that we currently intend to put into service in the second half of
2005.
5
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 programming, 15 hours each day,
365 days each year.
GAME CONTENT & PROMOTION
Our primary product is the transmission of a variety of multiplayer
interactive games that entertain and challenge a player's skill and knowledge
while creating significant customer loyalty. Historically, our technology
limited us to one "channel" of programming that revolved around our sports and
trivia games. Over 2003 and 2004, we developed our new iTV2 technology to
operate a second "channel" of programming. Over that same period of time we
developed a diverse line of games and other content for that second channel that
we call our NTN BlastTM channel.
Trivia Games
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 can 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. For a list of our trivia games, please see the
Principal Products/Services section of the business description of our Buzztime
segment in this report.
Sports Games
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 19 years in
conjunction with QB1.
Currently, our other sports games include Brackets and Race Day. In
Brackets, our players try to guess which teams will advance in the annual
postseason men's college basketball tournament after the collegiate basketball
selection committee sets the field of 64 teams. Race Day, an auto racing game,
includes two elements; one predictive before the race and one trivia during the
race. Points from both elements will be added together for a final score.
NTN BLAST
Designed with today's young adults in mind, NTN Blast brings interactivity
to action sports and movies based on content licensed from Zobmondo!, Rip Curl
and Atom Films. NTN Blast also includes multiplayer card games including
Blackjack and Texas Hold `Em poker. NTN Blast was developed to secure
subscription contracts with new hospitality sites that might not be attracted to
our core trivia and sports products, as well as retaining existing hospitality
sites with the expanded content offering by driving a broader group of consumers
into our subscribing sites, based on varied tastes in interactive entertainment.
Playmaker Games:
We also offer a suite of Playmaker only games. This suite of games is
independent of the NTN iTV Network and they are played directly on our wireless
Playmakers rather than on one of the television screens in the hospitality
venue. Players access the games by logging onto a Playmaker and following the
instructions on the Playmaker screen. Currently, we have the following Playmaker
only 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
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6
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 our 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 a 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. We also
sell our paging products into non-hospitality vertical markets such as retail
stores, hospitals and churches.
In 2004, we introduced two new NTN Wireless products, PlayCall(TM) and
SmartCallTM. PlayCall offers all the functionality and quality of our standard
GUESTCALL coaster pager, combined with five fun, easy-to-play games that guests
of all ages will enjoy. SmartCall pagers provide dynamically updated wait times
based on ProHost's (see our Software Solutions segment) ongoing analysis of
seating trends and table turns. Instead of standing around wondering whether
their name has been called, guests are free to relax at the bar, take a stroll
outside, do a little window shopping --anything in up to a two-mile range. Both
PlayCall game pagers and SmartCall pagers work with our GUESTCALL(R) paging
system.
VALUE PROPOSITION
On-site paging systems are designed to address a key industry initiative
surrounding "Speed of Service", by improving table turnover and throughput for a
venue's operations. The sooner a guest is seated, and the quicker prepared food
is served, the faster a table can be effectively "turned" without negatively
impacting the customer experience. If a typical restaurant can add just three
parties of four during each waiting shift (defined as Thursday, Friday and
Saturday nights), with a $17.00 average per person check, the annual incremental
gross revenue to the venue over a three-year period would be $121,000.
TECHNOLOGY
On-site 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.
COMPETITION
We are not aware of any industry statistics for the hospitality paging
market. 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. JTech was recently acquired by
MICROS Systems, Inc., a leading player in the hospitality point of sale
industry. 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.
7
NTN SOFTWARE SOLUTIONS
- ----------------------
THE PRODUCTS
Our Software Solutions' group provides a turnkey solution that augments our
Wireless products to deliver the "Speed of Service" industry initiative by
facilitating a database driven reservation management solution as well as a
dynamic table management/waitlist management solution. Both solutions currently
target the specific operational and reporting requirements of the food service
industry effectively minimizing the costs and level of expertise required to
manage the guest experience while providing greater intelligence about the
customer base. Our primary Software Solutions products, NTN PROHOST AND NTN
RSVIP, combine with our NTN Wireless products to form a business intelligence
solution in the hospitality market. These products are developed using the
following Microsoft technologies: Visual Basic 6.0, Visual Basic .NET, Visual
C++ 6.0, ASP .NET, SQL Server 2000, Visual C#.NET and Visual Studio.NET 2003.
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 The
Cheesecake Factory, MGM MIRAGE, Darden Restaurants and Gaylord Entertainment.
NTN PROHOST is our guest and seating management application that
coordinates all activities with guests, tables, and servers and integrates to
POS solutions and NTN Wireless solutions. PROHOST and wireless provide a
real-time business intelligence and decision making tool to a restaurant
community. The software is designed to increase the number of guests that a
restaurant can seat, serve and satisfy, and thereby help restaurants achieve
higher profits. PROHOST solves the complex problem of managing the guest before,
during and after they sit at the table, and adds systems and processes where
restaurants typically have none. NTN PROHOST also assists restaurant managers by
providing flash operational data, many operational alerts, and staff performance
reporting.
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. With RSVIP, reservations can be centralized for restaurant groups, made
by phone, through the web, and on public or private websites providing
restaurants with a level of service and flexibility they currently cannot offer.
NTN RSVIP provides powerful customer relationship management (CRM) features that
include guest tracking and preferences, guest history and marketing tools, and
sophisticated reporting.
On February 4, 2005, we entered into an Asset Purchase Agreement with
Intura Solutions LP (Intura), a Texas limited partnership, pursuant to which we
sold the point of sale software products developed and maintained by our
Software Solutions segment. In accordance with the asset purchase transaction,
Gary Peek terminated his position as vice president and general manager of our
Software Solutions segment and immediately thereafter commenced his position
with Intura to oversee business operations. The primary software products sold
by us to Intura were Vision, Relief Manager Plus (RMP), Store Link Plus (SLP),
Sell More Pizzas and other legacy products as well as a non-exclusive right to
develop and market the Enterprise software. See Acquisitions and Divestitures
for more information on this transaction.
COMPETITION
Software Solutions competes with and/or complements a number of entities
within the hospitality point-of-sale arena that either have partnered with or
plan to partner with other companies that have table management and reservation
products. Our competitors include Open Table, 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. In
addition to co-developing the Dominos Pizza Pulse POS, we provide a wide range
of Help Desk services to include all levels of support 24/7/365, in both English
and Spanish. We also provide pre-deployment support services such as legacy POS
extraction for software conversion, as well as proactive support for issues
pending development.
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.
8
NTN Hospitality Technologies Sales & Distribution
- -------------------------------------------------
Currently we sell all products and services through direct sales employees
organized by regions throughout the United States and focusing primarily on
major metropolitan markets and/or national chain accounts, as well as through
independent dealers and representatives in smaller metro markets and rural areas
focusing on smaller chains and/or independent restaurants. 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. In most cases, the products can be sold over the telephone
but occasionally may require a field presentation. During the field
presentation, our sales representative determines the prospect's requirements
and presents 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, 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.
NTN HOSPITALITY TECHNOLOGIES EQUIPMENT
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, which we continue to own. 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.
The majority of 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 on April 5, 2007. We believe the
quality provided by this manufacturer is superior to that provided by
manufacturers located in mainland China, and has become a competitive advantage
for us. While sufficient alternative supply chain capabilities exist, we would
face business interruption if we were to lose this 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 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, driven primarily by the start of the
professional and college football season and the availability of our play-along
football game, QB1. Second, some older customers pay an incremental amount for
our QB1 Predict the Play football game and many customers 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 games. In the third quarter of 2003, we
started bundling our QB1 Predict the Play football game with our trivia content.
This has reduced and will likely continue to reduce the seasonal elements of our
business over time.
9
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. The churn rate was 21%
for 2004 and 22% for 2003.
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 2004, 2003 or 2002.
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 three to four
weeks). Shipments of NTN Wireless products occur in most cases within 20 days of
receipt of order.
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 interactive consumer platforms, with a
primary focus on interactive television. Buzztime specializes in real-time,
mass-participation games and entertainment including the Buzztime Trivia Channel
for cable television services. We manage one of the world's largest trivia game
show libraries from our interactive broadcast studio where we also produce our
live, Predict the Play interactive television sports prediction games, real-time
viewer polls and advertising.
The Buzztime Trivia Channel was launched on cable TV in June 2002 to
Susquehanna Communications' (SusCom) York, Pennsylvania digital cable
subscribers. We believe this was the first deployment of a real-time, two-way
game channel via digital cable TV in the U.S. that operates on commercially
deployed digital set-top boxes. The Buzztime Trivia Channel is now available to
over 250,000 Comcast, Time Warner and SusCom digital cable subscribers within
cable TV systems in Pennsylvania, Virginia, Maryland, Maine and Louisiana.
Buzztime also has trivia games deployed on satellite TV through Echostar's DISH
Network in the United States and Bell ExpressVu in Canada as well as to major
North American wireless carriers through a partnership with Airborne
Entertainment. In addition, Buzztime remains the primary content provider to the
NTN iTV Network and currently works with leading companies such as Media
General, Scientific-Atlanta, The National Football League, Liberate
Technologies, Airborne Entertainment, Cadaco, DTI Software and others to bring
consumers real-time interactive entertainment.
Buzztime's revenue is derived from license fees to distributors and
end-users, royalties from third-party manufacturers and development fees. It is
also our plan to sell advertising when we achieve a critical mass of
subscribers--particularly via cable TV distribution.
PRINCIPAL PRODUCTS/SERVICES AND DISTRIBUTION
Buzztime develops, produces and distributes single and multiplayer games
for both one-way and two-way consumer platforms with a primary focus on
interactive television. The games are designed for general audiences and include
trivia quiz shows, sports prediction competitions that are played along with
live sporting events as well as card, arcade, puzzle and board games. The
Buzztime games are distributed through several platforms including the NTN iTV
Network, cable television, satellite television, mobile phones and airlines.
MARKETING
Buzztime's sales and marketing efforts have been focused on gaining
distribution to cable operators in North America. For the cable systems that are
deployed, we operate regular competitions and promotions to drive consumer
awareness and usage of our games. As distribution of the Buzztime Channel
increases, we plan to sell subscription services to the players and advertising
and 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.
10
Key drivers to revenue growth include the integration of interactive
television enabling technology into the cable systems, adoption of interactive
television services in the home, penetration of Buzztime games into the cable
operators, the ability to charge the cable operator for receiving the Buzztime
Channel, the ability to charge the end-user for additional games or services and
the ability to sell advertising within our games.
EQUIPMENT
The primary product that Buzztime produces is software code and graphics
that enable the Buzztime games. For networked distribution such as cable
television, satellite television and mobile platforms, we primarily rely on the
distribution partners' technology for distribution of our games to the end
users. These partners maintain their own receiving, translation and
re-broadcasting equipment as part of the normal business. Buzztime maintains
server facilities in Carlsbad, California and a co-located facility in Orange
County, California. For cable television distribution, Buzztime may install a
server in the local cable system facility (head-end).
COMPETITION
On a broad basis, the consumer has, and will continue to have, many options
for electronic entertainment and game play. Within each network or platform that
Buzztime distributes through, there are numerous options for entertainment. For
example, there are hundreds of channels of programming on cable and satellite TV
and there are a growing number of choices of entertainment on mobile phones.
Specifically within the games category, there are hundreds of game producers
that produce thousands of games for interactive platforms such as the internet,
game consoles and mobile devices. There are also numerous game companies
developing various games for interactive television platforms such as the ones
that Buzztime is either operating on or has plans to operate on.
Specific to interactive television on cable TV, there are significant
barriers-to-entry for game developers. First, the technology necessary to enable
games, especially two-way games such as Buzztime's games, is in its early stages
and, in some cases, still being developed. This requires the game developers to
devote human resources that have experience in not only games, but interactive
television platforms. Second, not all games are suited for the television and
remote control. Many popular games on non-TV platforms are dependent upon
keyboards, a mouse and advanced game controllers to function properly. Third,
there are only a few cable operators that control the majority of the
decision-making for carriage of interactive applications such as games. The
smaller cable operators will follow the largest cable companies' lead in
selecting game technology and content. If a game company does not have success
in gaining distribution via a major cable operator, they have little chance of
success in the North American cable market.
Buzztime has developed technology, which we promote as Play Along TV(R)
Technology, which we believe enables the deployment of one-way and two-way games
on iTV platforms. Buzztime, with the support of the NTN iTV Network, has an
existing cross-platform promotional network to promote the iTV games and drive
competitions. Buzztime's games have been designed and produced specifically for
the television and remote control and are compatible with the cable and
satellite technology. Finally, due to deployed field trials with Comcast Cable
and Time Warner Cable, we have working relationships with the various
departments within these cable companies that manage iTV application development
and deployment.
LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS
We keep confidential as trade secrets our technology and software. The
hardware used in our operations is purchased from outside vendors. We own
copyrights to all of our programs and formats. We have either received, or have
applied for, trademark protection for the names of our 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,
including regular intellectual property protection meetings and ongoing internal
education on the protection of intellectual property.
As of December 31, 2004, 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, 2004, we had applied for two additional
patents in the United States.
In June 2001, Buzztime Entertainment entered into a contribution agreement
with NTN Communications, effective retroactively to January 1, 2001, whereby NTN
contributed some of our assets to Buzztime including all company-owned games and
related content, trivia game show library, interactive broadcast studio and
related technology and intangible assets.
11
Further, in June 2001, NTN 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 live sports prediction games, such
as QB1, for the NTN iTV 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.
On May 6, 2003, Buzztime entered into an agreement with Media General, Inc.
to license its Boxerjam game content and selected technology. The license
includes a five year exclusive interactive television license of certain
intellectual property, with options to extend the license for an additional five
years.
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. Under the terms
of the license, 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. In
November 2002, we renewed our license agreement with the NFL through August 6,
2005.
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 2004, 2003 and 2002, we incurred approximately $329,000, $329,000
and $12,000, respectively, related to research and development projects,
including projects performed by outside consultants. In 2004, our research and
development efforts were related to digital network, wireless and interactive
applications.
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
may pay additional contingent earn-out amounts in NTN common stock and/or cash
over the first three years following the acquisition, 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.
No earn-out amounts were earned in the first twelve month period following the
acquisition. We also entered into employment agreements with five of the
executives of Breakaway.
12
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 $3,630,000, which consisted of 1,292,614 shares
multiplied by the then publicly traded price of $2.44 per share, $252,000 in
cash and $224,000 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 $461,000 of amortization of the identified intangibles based
upon the estimated lives.
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 2,235,000
-------------
Total assets acquired $ 4,632,000
=============
Accounts payable and accruals $ 482,000
Deferred revenue 520,000
-------------
Total liabilities assumed 1,002,000
-------------
Net assets acquired $ 3,630,000
=============
The above amounts have changed from our initial purchase accounting as
follows: goodwill has increased by $10,000 to reflect $7,000 of additional
transaction costs and $3,000 of additional liabilities that were recorded,
accounts payable and accruals increased by $3,000 to reflect the additional
liabilities that were recorded and, as a result, the overall purchase price
increased by $7,000 from the initial amount of $3,623,000 to $3,630,000.
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.
(Chell). We acquired NTNIN's assets for $233,000 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 $1,823,000, which consisted of 238,300
shares multiplied by the then publicly traded price of $3.70 per share, $233,000
in cash, the contribution of $550,000 in unpaid licensing royalties, $122,000 of
transaction costs, plus the assumption of liabilities.
NTN INTERACTIVE NETWORK, INC.
ASSETS ACQUIRED AND LIABILITIES ACQUIRED
Cash $ 20,000
Accounts receivable, net 235,000
Other current assets 21,000
Fixed assets, net 43,000
Customer relationships 720,000
Trivia database 345,000
Interactive events software 102,000
Trivia software 90,000
Licenses 12,000
Goodwill 974,000
-------------
Total assets acquired $ 2,562,000
-------------
Accounts payable and accruals $ 628,000
Leases 44,000
Deferred revenue 67,000
-------------
Total liabilities assumed 739,000
-------------
Net assets acquired $ 1,823,000
=============
13
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
$203,000 of amortization of the identified intangibles based upon the estimated
lives.
The above amounts have changed from our initial purchase accounting as
follows: (1) goodwill has increased by $99,000 to reflect a variety of factors
including the final calculation of the cash component of the purchase price
based on the final closing balance sheet, which generated an additional payment
to Chell of approximately $10,000 and a payment to the president of NTNIN on
behalf of Chell of approximately $23,000, (2) the final calculation of the
transaction costs (an increase of $38,000), (3) recording $12,000 of additional
liabilities, and (4) making $16,000 of other adjustments to the final balance
sheet. The overall purchase price increased by $37,000 from the initial amount
of $1,786,000 to $1,823,000.
VISION PRODUCT LINE
On February 4, 2005, we entered into an Asset Purchase Agreement with
Intura Solutions LP (Intura), a Texas limited partnership, pursuant to which we
sold the point of sale software products developed and maintained by our
Software Solutions segment. In accordance with the asset purchase transaction,
Gary Peek terminated his position as vice president and general manager of our
Software Solutions segment and immediately thereafter commenced his position
with Intura to oversee business operations.
The primary software products sold by us to Intura were Vision, Relief
Manager Plus (RMP), Store Link Plus (SLP), Sell More Pizzas and other legacy
products as well as a non-exclusive right to develop and market the Enterprise
software. We received a non-dilutable 10% partnership interest in Intura in the
transaction and will receive 20% of Intura's revenues received during the next
two years, up to a maximum of $100,000. Further, Intura will provide software
development maintenance services for the RMP software for two years (we continue
to retain the rights to the maintenance and support revenue from the legacy
products).
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 900 MHz Playmakers. The 900-MHz Playmaker is an integral
component of our network.
EMPLOYEES
As of February 3, 2005, we employ approximately 218 people on a full-time
basis and 50 people on a part-time or seasonal 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.
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 five-year lease renewal 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 5,400 square feet in Toronto, Ontario,
Canada, expiring in December 2014. In addition, we lease additional office space
in Mill Valley, California. This lease expired in May 2004 and is now on a month
to month basis. In February 2004, we entered into a lease agreement for an
executive office in New York, New York. That lease expired in June 2004 and is
now on a month to month basis.
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ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of
our business. There currently is no material litigation pending or threatened
against us.
INTERACTIVE NETWORK, INC.
On April 14, 2004, we settled the lawsuit filed against us in 1992 by IN
(now Two Way TV (US), Inc.) The litigation involved licensing and patent
infringement issues in Canada. These actions related to the delivery of the NTN
iTV Network to subscribers of our former Canadian licensee (we acquired our
licensee's operations in December 2003) and did not extend to our network
operations in the United States or elsewhere. We settled the matter for
$116,500. We recorded expense related to this matter, including the settlement
amount, of approximately $200,000 in the first quarter of 2004 and we recorded
further legal fees of approximately $92,000 relating to this matter in the third
quarter of 2004.
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 related to our repair and replacement activities
of LRS pagers, which is not a significant percentage of our NTN Wireless
business.
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 alleged 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.
On February 28, 2005, we agreed with LRS to settle and dismiss both
lawsuits and the joint request for dismissal was filed with the court, although
at the date of the filing the settlement agreement had not been fully executed.
Under the terms of the settlement, NTN and LRS each agreed to settle and dismiss
the two lawsuits without liability or any payment to the other party. Each party
is responsible for its own legal costs. On March 2, 2005, the court dismissed
the LRS lawsuit based on this agreement.
OPEN TABLE
In March 2004, we received correspondence from Open Table, Inc. (Open
Table) alleging breach of the non-compete provisions of the Asset Purchase
Agreement entered into by and between Open Table and Breakaway International,
Inc. (Breakaway) in February 2002. Our NTN Software Solutions, Inc. subsidiary
assumed certain obligations of Breakaway pursuant to the Asset Purchase
Agreement we entered into with Breakaway in July 2003. In March 2004, we
acknowledged receipt of the Open Table correspondence and advised Open Table
that we were investigating the allegations set forth in such correspondence. On
April 23, 2004, Open Table filed a complaint in the Superior Court of the State
of California, County of San Francisco, against NTN Communications, Inc. f/k/a
Breakaway International, Inc., alleging breach of contract, breach of implied
covenant of good faith and fair dealing, intentional interference with economic
relationship, negligent interference with economic relationship, fraud,
accounting, constructive trust and declaratory relief. In December 2004, we
agreed with Open Table to settle and dismiss this lawsuit. We paid Open Table
$15,000 under the terms of the settlement.
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, 2004.
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:
15
COMMON STOCK
---------------
LOW HIGH
------ ------
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 .............................. $ 2.51 $ 4.25
Second Quarter ............................. 2.51 3.19
Third Quarter .............................. 1.62 3.20
Fourth Quarter ............................. 2.40 3.24
On March 9, 2005, the closing price for our common stock as reported on the
AMEX was $2.83. As of March 9, 2005, there were approximately 1,259 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.
We have 161,000 shares of Series A Preferred Stock issued and outstanding.
The Series A Preferred Stock provides for a cumulative annual dividend of 10
cents per share, payable in semi-annual installments in June and December.
Dividends may be paid in cash or with shares of common stock. In 2004, we issued
approximately 6,000 common shares for payment of these dividends. At December
31, 2004, the cumulative unpaid dividends for the Series A Preferred Stock was
approximately $1,300.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth as of December 31, 2004 our compensation
plans authorizing us to issue equity securities and the number of securities
issuable thereunder.
(A) NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
PLAN CATEGORY
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS 10,443,000(1) $1.46 2,071,177(2)
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS 1,941,000(4) $1.61 0
---------------------- ------------------
TOTAL 12,384,000 2,071,177(3)
====================== ==================
- ----------
(1) Includes 9,485,305 shares issuable upon exercise of options granted
pursuant to the NTN Communications, Inc. 1995 Employee Stock Option Plan,
458,000 shares issuable upon exercise of options and rights granted
pursuant to the NTN Communications, Inc. 2004 Performance Incentive 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. 2004
Performance Incentive Plan. The 2004 Performance Incentive Plan became
effective on September 30, 2004. No additional awards were, or shall be,
granted under the 1995 Plan from and after the effective date of the 2004
Plan. The number of shares of common stock that remained available for
award grants under the 1995 Plan immediately prior to the effectiveness of
the 2004 Plan became available for award grants under the 2004 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.
16
(4) The 1,941,000 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 236,619 shares were
granted in 2004, 514,000 shares were granted in 2003 and 685,000 shares
were granted in 2002. The remaining warrants were issued in 2001 or
earlier. As of December 31, 2004, the range of exercise prices and the
weighted-average remaining contractual life of outstanding warrants was
$0.50 to $3.91 and 4 years, respectively.
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, 2004, 2003, 2002, 2001 and 2000 is derived from our audited
financial statements.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Total revenue .......................................... $ 35,655 $ 29,489 $ 25,610 $ 22,559 $ 22,048
Total operating expenses ............................... 40,711 32,035 27,465 25,493 30,249
---------- ---------- ---------- ---------- ----------
Operating loss ......................................... (5,056) (2,546) (1,855) (2,934) (8,201)
Other income (expense), net ............................ 171 (128) (505) (807) (940)
---------- ---------- ---------- ---------- ----------
Loss from continuing operations ........................ (4,885) (2,674) (2,360) (3,741) (9,141)
Income taxes ........................................... (94) (47) (41) -- --
Minority interest in loss of consolidated subsidiary ... -- 10 212 85 --
---------- ---------- ---------- ---------- ----------
Loss before cumulative effect of accounting change ..... (4,979) (2,711) (2,189) (3,656) (9,141)
Cumulative effect of accounting change ................. -- -- -- -- (448)
---------- ---------- ---------- ---------- ----------
Net loss ............................................... $ (4,979) $ (2,711) $ (2,189) $ (3,656) $ (9,589)
Basic and diluted net loss per common share:
Continuing operations ................................ $ (.09) $ (.06) $ (.06) $ (.10) $ (.28)
Cumulative effect of accounting change ............... -- -- -- -- (.01)
---------- ---------- ---------- ---------- ----------
Net loss ..................................... $ (.09) $ (.06) $ (.06) $ (.10) $ (.29)
========== ========== ========== ========== ==========
Weighted-average shares outstanding .................... 52,599 45,446 39,081 36,755 33,206
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(IN THOUSANDS)
DECEMBER 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Total current assets .................... $ 13,506 $ 6,704 $ 4,184 $ 4,218 $ 5,808
Total assets ............................ 29,388 20,630 10,842 13,380 18,822
Total current liabilities ............... 6,862 5,939 3,620 4,178 4,915
Total liabilities ....................... 7,353 7,566 8,719 9,614 14,740
Total minority interest ................. -- -- 643 855 --
Shareholders' equity .................... 22,035 13,064 1,480 2,911 4,082
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.
17
2004 HIGHLIGHTS
NTN's financial and operating results for the year ended December 31, 2004
included the following highlights:
o On January 30, 2004, we completed the sale of 3,943,661 shares of our
common stock at $3.55 per share, resulting in gross proceeds of
approximately $14.0 million, pursuant to an existing shelf
registration filed under the Securities Act. After commissions and
expenses, the net proceeds of this offering were approximately $13.0
million. The offering was purchased primarily by a number of
institutional investors and by Media General, Inc., a related party,
which invested approximately $2.0 million.
o In April 2004, Time Warner Cable launched the Buzztime channel as part
of its interactive television games channel in La Place, Louisiana.
o In July 2004, we launched our new NTN Blast channel on the NTN iTV
Network. NTN Blast was developed to help land as customers new
hospitality sites that might not be attracted to our core trivia and
sports products and to retain existing hospitality sites with the
expanded content offering. NTN Blast is played on our new underlying
iTV2 technology, which enables us to display two video channels on the
NTN iTV Network.
o In November 2004, Comcast Cable launched the Buzztime channel in its
Alexandria/Arlington system and Prince William system. Both cable
television systems service portions of the Northern Virginia area.
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.
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, VSAT satellite dishes and
associated electronics and the computers located at our customer
sites. The Playmakers are depreciated over a four-year life, VSAT
dishes and associated electronics 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, VSAT dishes and
associated electronics and the computers turn out to have longer
lives, on average, than estimated, our depreciation expense would be
significantly reduced in those future periods. Conversely, if the
Playmakers, VSAT dishes and associated electronics and the computers
turn out to have shorter lives, on average, than estimated, our
depreciation expense would be significantly increased in those future
periods.
18
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
domestic customers that have terminated our iTV Network service plus
five percent of outstanding balances for all unreserved customer
balances across all of our domestic businesses and, for Canadian
customers, all accounts over 90 days past due. 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 Software Solutions are recognized in accordance with
Statement of Position (SOP) No. 97-2, "Software Revenue Recognition",
as amended. Software license fee revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product has
occurred at our customer's location, the fee is fixed or determinable
and collection is probable, provided that vendor specific evidence
exists for any undelivered elements, namely annual support and
maintenance. Along with the basic software license, our customers are
provided post contract support (PCS) for an additional fee, which is
based on a stipulated percentage of the license fee. PCS consists of
technical support as well as unspecified software upgrades and
releases when and if made available by us during the term of the
support period.
If at the outset of an arrangement we determine that the arrangement
fee is not fixed or determinable, revenue is deferred until the
arrangement fee becomes due. If at the outset of an arrangement we
determine that collectibility is not probable, revenue is deferred
until the earlier of when collectibility becomes probable or the
receipt of payment. If an arrangement allows for customer acceptance,
revenue is not recognized until the earlier of receipt of customer
acceptance or expiration of the acceptance period.
Additionally, we provide consulting and training services under both
hourly-based time and materials and fixed-priced contracts. Revenues
from these services are generally recognized as the services are
performed.
o We have a significant amount of goodwill and intangible assets on our
balance sheet related to acquisitions. At December 31, 2004 the net
amount of $7,669,000 of goodwill and intangible assets represented
26.1% of total assets. Goodwill represents the excess of costs over
fair value of assets of businesses acquired. We adopted the provisions
of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, as of January
1, 2002. Goodwill and intangible assets acquired in a purchase
combination determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS.
We annually perform tests for goodwill impairment as required by SFAS
142. We continually monitor for any potential indicators of impairment
of goodwill and intangible assets and we have determined that no such
indicators have arisen to date. Any impairment loss could have a
material adverse impact on our financial condition and results of
operations.
o In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment," a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation" and superseding APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123R requires the Company to
expense grants made under the stock option and employee stock purchase
plan programs. That cost will be recognized over the vesting period of
the plans. SFAS No. 123R is effective for the first interim or annual
period beginning after June 15, 2005. Upon adoption of SFAS No. 123R,
amounts previously disclosed under SFAS No.123 will be recorded in the
consolidated income statement. We are evaluating the alternatives
allowed under the standard, which we are required to adopt beginning
in the third quarter of 2005. We believe that this new standard will
increase our operating losses in the future but that increase will be
of a non-cash nature.
19
We do not have any of the following:
o Off-balance sheet arrangements except for purchase orders and
commitments and operating leases;
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 (which item is incorporated by reference to our
definitive proxy statement) 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.
Revenues generated and operating income (loss) by our two business units
are illustrated below. The data presented below includes allocations of
corporate expenses and elimination of intercompany charges.
YEARS ENDED DECEMBER 31
2004 2003 2002
---- ---- ----
Revenues
NTN Hospitality Technologies division .. $ 35,274,000 99% $ 29,275,000 99% $ 25,465,000 99%
Buzztime ............................... 359,000 1% 196,000 1% 128,000 1%
Other .................................. 22,000 - 18,000 - 17,000 -
------------ ------ ------------ ------ ------------ ------
Total ........................ $ 35,655,000 100% $ 29,489,000 100% $ 25,610,000 100%
============ ====== ============ ====== ============ ======
Operating Income (Loss)
NTN Hospitality Technologies division .. (1,097,000) $ 1,211,000 $ 1,699,000
Buzztime ............................... (3,959,000) (3,757,000) (3,554,000)
------------ ------------ ------------
Total ........................ $ (5,056,000) $ (2,546,000) $ (1,855,000)
============ ============ ============
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 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 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, 2004. We believe that
inflation has not had a material effect on the results of operations for the
periods presented.
YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
Operations for 2004 resulted in a net loss of $4,979,000 compared to net
loss of $2,711,000 for 2003.
REVENUES
The revenues of the NTN Hospitality Technologies division increased by
$6,003,000 or 20.5%, to $35,296,000 in 2004 from $29,293,000 in 2003. 2004
included twelve months of operations of the Software Solutions segment and the
NTN Canada unit while 2003 included only five months and two weeks of operations
from those entities, respectively.
20
For the purpose of this analysis, the NTN iTV Network's revenues include
$22,000 and $18,000 of "other" revenues for 2004 and 2003, respectively shown on
our consolidated statements of operations. The revenue contribution from the
three operating segments of the division for 2004 and 2003 are shown in the
following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
2004 2003 Change
---- ---- ------
NTN iTV Network $25,925,000 $23,024,000 $2,901,000
NTN Wireless 5,337,000 4,742,000 595,000
Software Solutions 4,034,000 1,527,000 2,507,000
------------ ------------ ------------
Total Revenue of Division $35,296,000 $29,293,000 $6,003,000
============ ============ ============
Within the NTN iTV Network there are several revenue contributors,
including our core subscription revenue, Canadian licensing revenue (in 2003),
installation revenue, advertising revenue and since 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
2004 2003 Change
---- ---- ------
Subscription Revenues $20,885,000 $20,011,000 $874,000
Canadian License Revenue -- 745,000 (745,000)
Subscription and Installation
Revenue from Canadian
Operations 3,644,000 167,000 3,477,000
Advertising Revenue - United States 602,000 868,000 (266,000)
Advertising Revenue - Canada 163,000 10,000 153,000
Installation Revenue 631,000 1,223,000 (592,000)
------------ ------------ ------------
NTN iTV Network $25,925,000 $23,024,000 $2,901,000
============ ============ ============
As noted in the above table, our subscription revenue from core hospitality
operations increased by $874,000, or 4.4%, due to an increase in net site count
and average per site revenue. Licensing revenues from our Canadian licensee
ceased in the fourth quarter of 2003 as we finalized the acquisition of the
operations of the licensee. On December 15, 2003, we acquired the operations of
our Canadian licensee, so we now show the overall revenues of the Canadian
operation rather than the previous license revenue.
In 2004, the NTN iTV Network generated domestic advertising revenue of
approximately $602,000 compared to approximately $868,000 in 2003. This $266,000
decrease was due to several advertising campaigns in the 2003 period that ended
without comparable campaigns in the 2004 period.
Installation revenue associated with installing new customer locations
decreased $592,000, or 48.4%. This was primarily due to deferred revenue
associated with prior year installations becoming fully amortized. To a lesser
extent, over the past two years, we have adopted a strategy of charging new
sites a lower installation fee and higher recurring monthly fees than our
previous pricing in order to grow our customer base. This strategy has had the
beneficial impact of increasing our subscription revenues as noted in the above
chart but it has also reduced the amount of deferred revenue from those new
sites that is recognized as installation revenue over an average customer life
of three years. This trend coupled with the falloff of amortization of deferred
revenue from prior years led to this lower level of installation revenue.
However, we believe this move to a lower installation fee coupled with higher
recurring fees has a greater long-term financial benefit to NTN. We added 184
net new domestic sites in 2004 compared to a decrease of 46 net new domestic
sites in 2003. This domestic site count increase was the largest annual net
addition of sites in 7 years.
The NTN iTV Network customer site count in the United States at December
31, 2004 was 3,309. This was an increase of 184 sites over the December 31, 2003
United States site count of 3,125. Our Canadian site count at December 31, 2004
was 351. This was a decrease of 49 sites from the December 31, 2003 Canadian
site count of approximately 400.
Buzztime service revenues increased $163,000, or 83.2%, to $359,000 in 2004
from $196,000 in 2003. The primary factor in the increase was $150,000 from
United States and Canadian satellite operators for distribution of Buzztime
trivia to their users on a subscription basis. There was no comparable
satellite-related revenue in 2003. 2004 included $130,000 in revenues recognized
under a development agreement with a major cable operator compared to $170,000
in 2003. The remainder of the revenue growth came from a variety of sources
including increases in license revenue from SusCom, Digeo and ICTV.
21
As a result of the above factors, NTN's consolidated revenues increased
$6,166,000, or 20.9%, to $35,655,000 in 2004 from $29,489,000 in 2003.
OPERATING EXPENSES
DIRECT OPERATING COSTS
Direct operating costs of services increased $1,111,000, or 10.0%, to
$12,257,000 in 2004 from $11,146,000 in 2003. A significant amount of this
increase was because 2004 had a full year of operations of Software Solutions
compared to approximately five months in 2003 and because we operated NTN Canada
for a full year in 2004 compared to two weeks in 2003. The following table
compares the direct costs for each of our operating segments between 2004 and
2003:
DIRECT OPERATING COSTS
2004 2003 Change
---- ---- ------
NTN iTV Network $7,006,000 $6,821,000 $185,000
NTN Wireless 3,304,000 2,952,000 352,000
Software Solutions 656,000 211,000 445,000
------------ ------------ ------------
Hospitality Technologies division 10,966,000 9,984,000 982,000
Buzztime 1,291,000 1,162,000 129,000
------------ ------------ ------------
Consolidated Company $12,257,000 $11,146,000 $1,111,000
============ ============ ============
Our direct operating costs in the NTN iTV Network increased by $185,000 in
2004. This increase was due to a $748,000 increase in our direct operating costs
with NTN Canada. That $748,000 increase in Canadian direct costs was partially
offset by a $563,000 decrease in domestic direct operating costs. This $563,000
decrease was primarily due to a $457,000 decrease in direct depreciation, which,
in turn, was caused by an increasing level of fully depreciated broadcast
equipment at our customer sites and to a $71,000 reduction of communication
expenses.
The $445,000 increase in Software Solutions' direct operating costs largely
related to the cost of goods sold associated with twelve months of operations in
that segment in 2004 compared to five months in 2003. The gross margin of
Software Solutions in 2004 was 83.7%, a 2.5% decrease from the 2003 gross margin
of 86.2%. The gross margin decline was due to a larger hardware component as a
percentage of revenue in 2004 than in 2003 and greater license expense relating
to certain Microsoft products imbedded in our software. Our hardware revenues
typically carry lower margins than our software revenues.
The $352,000 increase in the NTN Wireless direct operating costs largely
related to the cost of goods sold associated with the NTN Wireless revenue
increase of $595,000 in 2004 noted above. The gross margin of NTN Wireless was
comparable in both years with a gross margin of 38.1% in 2004 and a gross margin
of 37.7% in 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $6,436,000 or 35.0%,
to $24,836,000 in 2004 from $18,400,000 in 2003. A great deal of this increase
was because 2004 had a full year of operations of Software Solutions compared to
approximately five months in 2003 and a full year of operations of NTN Canada in
2004 compared to two weeks in 2003. 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
2004 2003 Change
---- ---- ------
NTN iTV Network $15,214,000 $12,374,000 $2,840,000
NTN Wireless 1,575,000 1,617,000 (42,000)
Software Solutions 5,153,000 1,802,000 3,351,000
------------ ------------ ------------
Hospitality Technologies division 21,942,000 15,793,000 6,149,000
Buzztime 2,894,000 2,607,000 287,000
------------ ------------ ------------
Consolidated Company $24,836,000 $18,400,000 $6,436,000
============ ============ ============
22
The $2,840,000 SG&A increase in the NTN iTV Network segment was largely due
to $1,504,000 of SG&A expenses in our new NTN Canada subsidiary compared to
$162,000 in 2003, or a $1,342,000 increase. The remainder of the SG&A increase
of $1,498,000 in the NTN iTV Network's domestic operations came from a variety
of items including increased salaries and benefits of approximately $800,000,
increased office rental expense of $111,000, increased telephone expense of
$176,000, increased marketing expenses of $229,000 and increased repairs and
maintenance expense of approximately $125,000. The increases in salaries and
related expenses were related to the hiring of additional personnel.
SG&A expenses decreased $42,000 in the NTN Wireless segment largely due to
a combination of factors including reduced bad debt expense. The $287,000 SG&A
increase in the Buzztime segment was largely due to increased payroll of
$476,000 partially offset by a decrease in marketing expenses of $142,000. 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.
STOCK BASED COMPENSATION EXPENSE
Stock based compensation expense increased by $61,000, or 26.3%, to
$293,000 in 2004 compared to $232,000 in 2003. This increase largely arises from
recognition of non-cash expense associated with the grants of certain deferred
stock units to our executives in 2004 under the 2004 Performance Incentive Plan.
LITIGATION, LEGAL AND PROFESSIONAL FEES
Litigation, legal and professional fees increased $810,000, or 97.5%, to
$1,641,000 in 2004 compared to $831,000 in 2003. This increase relates to
$369,000 of Sarbanes-Oxley-related expenses, an increase of $227,000 in legal
fees related to the Long Range Systems litigation in our Wireless segment, an
increase of $67,000 in audit fees, additional legal fees for trademark
registrations and generally to an increase in the scope of our business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization not related to direct operating costs
increased $258,000, or 23.5%, to $1,355,000 in 2004 from $1,097,000 in 2003 due
to increases in amortization expense in Software Solutions and NTN Canada of
$183,000 and $258,000, respectively. Those increases reflected a full year of
amortization related to identified intangible assets compared to five months of
amortization with Software Solutions and two weeks of amortization with NTN
Canada. The combined amortization increase of $441,000 in Software Solutions and
NTN Canada was partially offset by lower levels of depreciation and amortization
throughout the remainder of NTN largely due to certain assets becoming fully
depreciated
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $329,000 in both 2004 and 2003.
Research and development expenses, which are salary expense, primarily related
to projects to develop new technologies for the iTV network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income increased $93,000 to $98,000 in 2004, compared to $5,000 in
2003. This increase was due to a larger amount of cash invested in short-term
marketable securities in 2004 than in 2003.
Interest expense decreased $86,000, or 36.1%, to $152,000 in 2004, compared
to $238,000 in 2003, due to the expiration of various capitalized leases and a
paid down line of credit for the majority of the year, partially offset by the
imputed interest associated with the equipment notes payable.
OTHER INCOME
Other income was $225,000 in 2004. This other income arose from the
settlement of a derivative securities lawsuit. In 2003, we recorded $105,000 of
other income that arose from a gain on early extinguishment of debt.
MINORITY INTEREST
Minority interest in loss of consolidated subsidiary decreased $10,000 to
zero in 2004 compared to $10,000 in 2003. The 2003 figure represented 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.
23
INCOME TAXES
For the year ended December 31, 2004, the NTN Hospitality Technologies
division had taxable income in Canada and a loss in the United States. In states
where separate filing is required, the division will incur a state tax
liability. As a result, NTN Hospitality Technologies recorded a tax provision of
$94,000 in 2004. This was a $47,000 increase over the $47,000 provision for
income taxes recorded in 2003.
EBITDA
Our earnings before interest, taxes, depreciation and amortization (EBITDA)
decreased by $2,364,000 to $(898,000) in 2004 from EBITDA of $1,466,000 in 2003.
This EBITDA decrease was primarily due to the increased loss in 2004 of
$2,268,000.
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
----------------------------
2004 2003
------------ ------------
EBITDA CALCULATION
Net loss per GAAP $ (4,979,000) $ (2,711,000)
Interest expense (net) 54,000 233,000
Depreciation and amortization 3,933,000 3,897,000
Income taxes 94,000 47,000
------------ ------------
EBITDA $ (898,000) $ 1,466,000
=