Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
YES [X] NO [ ]At October 17, 2001 the registrant had outstanding 36,905,000 shares of common stock, $.005 par value.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
SEPTEMBER 30,
2001 DECEMBER 31,
Assets (UNAUDITED) 2000
-------------- ----------
Current assets:
Cash and cash equivalents $ 1,663,000 $ 2,188,000
Restricted cash 216,000 202,000
Accounts receivable, net 1,517,000 1,724,000
Investment available for sale 224,000 272,000
Deposits on broadcast equipment -- 112,000
Deferred costs 686,000 772,000
Prepaid expenses and other current assets 548,000 538,000
------------ ------------
Total current assets 4,854,000 5,808,000
Broadcast equipment and fixed assets, net 9,072,000 11,963,000
Software development costs, net 505,000 405,000
Deferred costs 406,000 565,000
Other assets 118,000 81,000
------------ ------------
Total assets $ 14,955,000 $ 18,822,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 826,000 $ 816,000
Accrued expenses 1,000,000 1,351,000
Accrual for litigation costs 65,000 57,000
Accrual for sales tax 185,000 399,000
Obligations under capital leases 185,000 579,000
Deferred revenue 2,329,000 1,575,000
Revolving line of credit 3,362,000 --
Note payable and other current liabilities -- 138,000
------------ ------------
Total current liabilities 7,952,000 4,915,000
Obligations under capital leases,
excluding current portion 91,000 83,000
Deferred revenue 962,000 1,804,000
Revolving line of credit -- 3,919,000
4% senior convertible notes 3,897,000 3,987,000
Other long-term liabilities 12,000 32,000
------------ ------------
Total liabilities 12,914,000 14,740,000
------------ ------------
Minority interest in consolidated subsidiary 899,000 --
------------ ------------
Shareholders' equity:
Series A 10% cumulative convertible preferred
stock, $.005 par value, 5,000,000 shares
authorized; 161,000 shares issued and
outstanding at September 30, 2001 and
December 31, 2000 1,000 1,000
Common stock, $.005 par value, 70,000,000 shares
authorized; 36,905,000 and 36,046,000 shares
issued and outstanding at September 30, 2001
and December 31, 2000, respectively 183,000 179,000
Additional paid-in capital 78,516,000 78,153,000
Accumulated deficit (76,493,000) (73,234,000)
Accumulated other comprehensive loss (593,000) (545,000)
Treasury stock, at cost, 111,000 shares at
September 30, 2001 and December 31, 2000 (472,000) (472,000)
------------ ------------
Total shareholders' equity 1,142,000 4,082,000
------------ ------------
Total liabilities and
shareholders' equity $ 14,955,000 $ 18,822,000
============ ============
See accompanying notes to unaudited consolidated financial statements
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------------ ------------------ ------------------ -----------
Revenues:
NTN Network revenues $ 5,627,000 $ 5,374,000 $16,184,000 $15,836,000
Buzztime service revenues 36,000 172,000 102,000 356,000
Other revenues 1,000 67,000 13,000 87,000
----------- ----------- ----------- -----------
Total revenues 5,664,000 5,613,000 16,299,000 16,279,000
----------- ----------- ----------- -----------
Operating expenses:
Direct operating costs (includes depreciation of
$838,000, $737,000, $2,458,000 and $3,680,000
for the three months ended September 30, 2001
and 2000 and for the nine months
September 30, 2001 and 2000, respectively) 2,263,000 2,492,000 6,620,000 8,623,000
Selling, general and administrative 3,499,000 3,663,000 11,066,000 11,980,000
Depreciation and amortization 423,000 485,000 1,292,000 1,349,000
Research and development -- 97,000 96,000 319,000
----------- ----------- ----------- -----------
Total operating expenses 6,185,000 6,737,000 19,074,000 22,271,000
----------- ----------- ----------- -----------
Operating loss (521,000) (1,124,000) (2,775,000) (5,992,000)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 16,000 12,000 54,000 49,000
Interest expense (227,000) (281,000) (679,000) (850,000)
Other (40,000) 10,000 101,000 172,000
----------- ----------- ----------- -----------
Total other expense (251,000) (259,000) (524,000) (629,000)
----------- ----------- ----------- -----------
Loss before minority interest in loss of consolidated
subsidiary and cumulative effect of accounting change (772,000) (1,383,000) (3,299,000) (6,621,000)
Minority interest in loss of consolidated subsidiary 40,000 -- 40,000 --
----------- ----------- ----------- -----------
Loss before cumulative effect of accounting change (732,000) (1,383,000) (3,259,000) (6,621,000)
Cumulative effect of accounting change -- -- -- (448,000)
----------- ----------- ----------- ------------
Net loss $ (732,000) $(1,383,000) $(3,259,000) $(7,069,000)
=========== =========== =========== ===========
Net loss per common share - basic and diluted:
Loss before cumulative effect of accounting change $ (0.02) $ (0.04) $ (0.09) $ (0.21)
Cumulative effect of accounting change -- -- -- (0.01)
----------- ----------- ----------- -----------
Net loss per common share - basic and diluted $ (0.02) $ (0.04) $ (0.09) $ (0.22)
=========== =========== =========== ===========
Weighted average shares outstanding - basic and
Diluted 36,775,000 34,237,000 36,592,000 32,613,000
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------------ ------------------ ------------------ -----------
Cash flows provided by operating activities:
Net loss $ (732,000) $(1,382,000) $ (3,259,000) $ (7,069,000)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 1,261,000 1,222,000 3,750,000 5,029,000
Provision for doubtful accounts 235,000 (182,000) 500,000 366,000
Non-cash stock-based compensation charges 47,000 497,000 101,000 810,000
Minority interest in loss of
consolidated subsidiary (40,000) -- (40,000) --
Cumulative effect of accounting change -- -- -- 448,000
Non-cash interest expense 40,000 71,000 130,000 239,000
Accreted interest expense 19,000 58,000 63,000 165,000
Gain on settlement of debt -- -- (146,000) --
Loss from disposition of equipment 75,000 -- 157,000 --
(Gain) loss on sale of investment
available for sale -- 7,000 -- (58,000)
Changes in assets and liabilities:
Restricted cash 26,000 112,000 (14,000) 92,000
Accounts receivable (585,000) (317,000) (293,000) 284,000
Prepaid expenses and other assets 72,000 (57,000) (58,000) 75,000
Deferred costs 6,000 90,000 245,000 162,000
Accounts payable and accrued expenses 35,000 381,000 (506,000) (249,000)
Deferred revenue (34,000) 104,000 (88,000) 679,000
Management severance and other long-term
liabilities -- (131,000) -- (392,000)
---------- ---------- ------------ ------------
Net cash provided by operating activities 425,000 473,000 542,000 581,000
---------- ---------- ------------ ------------
Cash flows from investing activities:
Capital expenditures (350,000) (1,529,000) (979,000) (7,569,000)
Deposits on broadcast equipment -- 442,000 112,000 574,000
Notes receivable -- -- -- 138,000
Proceeds from sale of investment available for sale -- 10,000 -- 538,000
---------- ---------- ------------ ------------
Net cash used in investing activities (350,000) (1,077,000) (867,000) (6,319,000)
---------- ---------- ------------ ------------
Cash flows from financing activities:
Principal payments on capital leases (145,000) (242,000) (512,000) (695,000)
Borrowings from revolving line of credit 3,275,000 5,767,000 15,668,000 20,169,000
Principal payments on revolving line of credit (3,644,000) (5,688,000) (16,225,000) (18,883,000)
Proceeds from issuance of common and preferred
stock, net of offering expenses (9,000) -- 802,000 5,163,000
Principal payments on note payable -- -- (25,000) (50,000)
Proceeds from exercise of stock options and warrants -- 119,000 92,000 689,000
---------- ---------- ------------ ------------
Net cash provided by (used in)
financing activities (523,000) (44,000) (200,000) 6,393,000
----------- ----------- ------------- ------------
Net increase (decrease) in cash and cash equivalents (448,000) (648,000) (525,000) 655,000
----------- ----------- ------------ ------------
Cash and cash equivalents at beginning of period 2,111,000 2,347,000 2,188,000 1,044,000
---------- ---------- ------------ ------------
Cash and cash equivalents at end of period $1,663,000 $1,699,000 $ 1,663,000 $ 1,699,000
========== ========== ============ ============
See accompanying notes to unaudited consolidated financial statements
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------------ ------------------ ------------------ -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $156,000 $ 121,000 $460,000 $ 381,000
======== ========== ======== ==========
Income taxes $ -- $ -- $ -- $ --
======== ========== ======== ==========
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in payment of interest $ 40,000 $ 82,000 $160,000 $ 251,000
======== ========== ======== ==========
Equipment acquired under capital leases $ 45,000 $ 234,000 $126,000 $ 511,000
======== ========== ======== ==========
Unrealized holding loss on investments $104,000 $ 185,000 $ 48,000 $ 72,000
======== ========== ======== ==========
Exchange of convertible notes to common stock $ -- $ 713,000 $ -- $ 915,000
======== ========== ======== ==========
Issuance of common stock in payment of dividends $ -- $ -- $ -- $ 8,000
======== ========== ======== ==========
Expiration of settlement warrant obligation $ -- $ -- $ -- $1,793,000
======== ========== ======== ==========
See accompanying notes to unaudited consolidated financial statements.
In the opinion of management, the accompanying consolidated financial statements include all adjustments that are necessary for a fair presentation of the financial position of NTN Communications, Inc. and its majority-owned subsidiaries (collectively, “we” or “NTN”) and the results of operations and cash flows of NTN for the interim periods presented. Management has elected to omit substantially all notes to our consolidated financial statements as permitted by the rules and regulations of the Securities and Exchange Commission. The results of operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the year ending December 31, 2001.
The consolidated financial statements for the three and nine months ended September 30, 2001 and 2000 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2000.
We have restated the results for the three and nine months ended September 30, 2000 to reflect the adoption of Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, in the fourth quarter of fiscal 2000, effective as of January 1, 2000. Refer to Note 1 under “revenue recognition” in the Form 10-K for the year ended December 31, 2000. We have reclassified certain items in the prior period consolidated financial statements to conform to the current period presentation.
2. CASH AND CASH EQUIVALENTSFor the purpose of financial statement presentation, NTN considers all highly liquid investment instruments with original maturities of three months or less to be cash equivalents. Of the September 30, 2001 cash position, approximately $600,000 belonged to NTN’s subsidiary, Buzztime Entertainment, Inc. (“Buzztime”) and can only be utilized for the development of the application for Scientific Atlanta, Inc. (“S-A”) and fulfillment of Buzztime’s obligations under the development, license and marketing agreement with S-A, and is not available for general corporate use. This $600,000 is the remaining amount of the $1.0 million which was raised through the sale of preferred stock of Buzztime to an affiliate of S-A (Note 7).
3. INCOME (LOSS) PER SHAREFor the three months ended September 30, 2001 and 2000 and the nine months ended September 30, 2001 and 2000, options, warrants, convertible preferred stock and convertible notes representing approximately 13,257,000, 12,414,000, 13,180,000 and 14,105,000 potential common shares, respectively, have been excluded from the computations of net loss per share, as their effect was anti-dilutive.
4. SEGMENT INFORMATIONWe develop, produce and distribute interactive entertainment. Our reportable segments have been determined based on the nature of the services offered to customers, which include, but are not limited to, revenue from the NTN Network(R) and Buzztime(TM) units. NTN Network revenue is generated primarily from broadcasting content to customer locations through two interactive television networks and from advertising sold on the networks. NTN Network revenues comprised over 99% of our total revenue for the three months ended September 30, 2001. Buzztime generates revenue primarily from the distribution of its digital trivia game show content and “play-along” sports games as well as from production services provided to third parties. Included in the operating loss for both the NTN Network and Buzztime is an allocation of corporate expenses. The following tables set forth certain information regarding our segments and other operations:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------------ ------------------ ------------------ -----------
Revenues
NTN Network $5,627,000 $ 5,374,000 $16,184,000 $15,836,000
Buzztime 36,000 172,000 102,000 356,000
Other 1,000 67,000 13,000 87000
---------- ----------- ----------- -----------
Total revenue $5,664,000 $ 5,613,000 $16,299,000 $16,279,000
========== =========== =========== ===========
Operating income (loss)
NTN Network $ 157,000 $ 222,000 $ (218,000) $(2,367,000)
Buzztime (678,000) (1,346,000) (2,557,000) (3,625,000)
---------- ----------- ----------- -----------
Operating loss $ (521,000) $(1,124,000) $(2,775,000) $(5,992,000)
========== =========== =========== ===========
Net loss
NTN Network $ (99,000) $ (2,000) $ (722,000) $(3,421,000)
Buzztime (633,000) (1,374,000) (2,537,000) (3,706,000)
IWN -- (7,000) -- 58,000
---------- ----------- ----------- -----------
Net loss $ (732,000) $(1,383,000) $(3,259,000) $(7,069,000)
========== =========== =========== ===========
5. PRIVATE PLACEMENT OFFERING AND CONVERTIBLE NOTES PAYABLE
On January 26, 2001, we reached an agreement with the purchasers in the November 2000 private placement to revise the terms of the private placement in exchange for the issuance of an additional 350,043 shares of our common stock. The revisions eliminated the exercise price reset provisions contained in the warrants and set the exercise price at $1.64125 per share. Furthermore, the purchasers agreed to surrender and cancel their rights to additional contingent warrants for 609,291 shares of our common stock.
On January 26, 2001, we reached agreement with the holders of the convertible notes, affiliates of the purchasers in the November 2000 private placement, to extend the maturity date of the aggregate $4 million in promissory notes from February 1, 2001 to February 1, 2003 and to reduce the interest rate from 7% to 4%. We may now convert the promissory notes into NTN common stock at a conversion price of $1.25 per share upon the earlier to occur of (i) February 1, 2003 or (ii) any time after NTN common stock closes above $2.50 for more than 20 consecutive trading days.
We allocated the 350,043 shares between the 4% convertible notes payable and the additional stock we issued to the purchasers in the November 2000 private placement based on the relative fair value of the securities at the time of issuance. As a result, during the quarter ended March 31, 2001, we recorded a discount of approximately $153,000 against the convertible notes due to the allocation. To recognize the discount over the term of the notes, we have accreted additional interest expense of approximately $50,000 for the nine months ended September 30, 2001. As a result of the extension, we record interest expense, at an effective rate of 6% per year, throughout the term of the notes which began on January 26, 2001.
6. SETTLEMENT OF DEBTIn April 1999, we purchased Internet Stations equipment and game licenses for $400,000 from Sikander, Inc. We issued a promissory note to Sikander, Inc. for $360,000 along with a $40,000 cash payment. In December 1999, the payment provisions were revised including issuance of a replacement promissory note for $178,000. No payments were made after March 31, 2000 on the promissory note. In June 2000, we commenced litigation against Sikander, Inc. and related defendants. As of December 31, 2000, the note balance was approximately $170,000 including accrued interest. We reached an agreement with Sikander, Inc. on March 31, 2001 to settle the balance of the promissory note and accrued interest for $25,000. The results of operations for the nine months ended September 30, 2001 include an elimination of the balance of the promissory note and accrued interest totaling $146,000, which is presented as other income in the statement of operations.
7. STRATEGIC PARTNERSHIP AND INVESTMENT IN BUZZTIMEOn June 8, 2001, Buzztime entered into a development, license and marketing agreement (the “Marketing Agreement”) with Scientific-Atlanta, Inc. (“S-A”) to co-develop an application to enable the operation of a Buzztime interactive trivia game show channel on S-A’s Explorer digital interactive set-top network, for distribution by cable operators to their subscribers. Buzztime will be responsible for the trivia game channel content including ongoing programming and player promotions. The channel will derive revenue from cable operator license fees, premium subscription fees and advertising revenue. Under the Marketing Agreement, Buzztime and S-A have predetermined commission arrangements based on sales and support of Buzztime’s products to the cable system operators.
In connection with the Marketing Agreement, Scientific-Atlanta Strategic Investments, L.L.C., a Delaware limited liability company and affiliate of S-A, invested $1.0 million in Buzztime for 636,943 shares of Buzztime’s Series A Convertible Preferred Stock, representing 6% of Buzztime’s common shares outstanding on an as-converted basis, and warrants to obtain an additional 159,236 shares of Series A Convertible Preferred Stock (the “S-A Warrants”). Each share of preferred stock is convertible into one share of Buzztime’s common stock, subject to future adjustment, and entitled to a non-cumulative dividend of 8%, if, when and as declared by Buzztime’s board of directors. The $1.0 million investment may only be used towards development of the application for S-A and fulfillment of Buzztime’s obligations under Marketing Agreement, which are currently Buzztime’s primary focus.
NTN granted S-A the right to exchange its shares of Buzztime’s preferred stock into shares of NTN common stock upon the earlier of (i) Buzztime is unable to obtain additional equity financing of $2.0 million before June 8, 2002, (ii) the liquidation, dissolution or bankruptcy of Buzztime before June 8, 2002, (iii) the failure of Buzztime to conduct a qualified public offering by June 8, 2004, or (iv) a change in control of Buzztime before June 8, 2002. The exchange price will be the 20-day average closing price of NTN’s common stock immediately preceding the date S-A gives notice of its intent to exercise its rights.
The exercise price of the S-A warrants is $1.57 per share. The warrants vest in 10% increments as cable system operators sign on for the Buzztime game show channel. No compensation expense has been recorded in the quarter ended September 30, 2001 as the warrants vesting provisions are contingent upon specified performance-based conditions and the low end of the range of the aggregate fair value of the warrants is zero as of September 30, 2001.
8. MINORITY INTEREST ACCOUNTINGNTN retained majority ownership of Buzztime and, as a result, will continue to consolidate Buzztime’s operations in its financial statements. No gain or loss was recorded by NTN on this sale of Buzztime’s shares in accordance with Staff Accounting Bulletin Topic 5h - Miscellaneous Accounting, “Accounting for Sales of Stock in a Subsidiary”, as the realization of the gain is not assured given Buzztime’s history of losses from operations, net operating loss carryforwards, which are generally not available to offset capital gains, and the start-up nature of Buzztime’s products designed for the interactive television market. In addition, the ongoing business relationship with S-A through the Marketing Agreement and restrictions placed on the use of proceeds were additional factors considered in accounting for the sale of Buzztime’s shares. As a result, the investment was reflected as a capital transaction.
The investment in Buzztime is presented as a minority interest in consolidated subsidiary on NTN’s consolidated balance sheet. The minority interest balance of $940,000, net of $60,000 of issuance costs, was reduced by S-A’s share of Buzztime’s net loss in the amount of $40,000 during the quarter ended September 30, 2001.
9. BUZZTIME 2001 STOCK INCENTIVE PLANOn May 31, 2001, Buzztime adopted an incentive stock option plan. The purpose of the plan is to promote the success of Buzztime and the interests of stockholders by attracting, motivating, retaining and rewarding certain officers, employees, directors and other eligible persons with awards and incentives. Pursuant to the option plan, Buzztime may grant options to purchase Buzztime common stock, subject to applicable share limits, upon terms and conditions specified in the plan. To date, no options have been granted under the plan.
10. CONTINGENT LIABILITYOur Canadian licensee is currently in discussions with the Canada Customs and Revenue Agency regarding a liability relating to withholding tax on certain amounts previously paid to NTN by the Canadian licensee. Our licensee has been assessed approximately $649,000 Canadian dollars (equivalent to approximately $410,000 U.S. dollars as of September 30, 2001) by Canada Customs and Revenue Agency, but is in the process of appealing the assessment. If the appeal is unsuccessful, it is unclear as to what, if any, liability NTN might have in this matter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.This Quarterly Report contains forward looking statements regarding our business strategies, projections, financing requirements and other matters, which are subject to risks and uncertainties, including cash needs, competition, market acceptance and other risk factors detailed in our Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and our Registration Statement on Form S-3 (File No. 333-51650), which risk factors are incorporated herein by reference.
We develop and distribute interactive game content. We operate our businesses through two operating units, the NTN Network and our 94%-owned subsidiary, Buzztime Entertainment, Inc. ("Buzztime").
The NTN Network is North America’s largest “out-of-home” interactive television network. Our unique private network broadcasts a variety of multi-player sports and trivia games 365 days per year to hospitality locations such as restaurants, sports bars, hotels, clubs and military bases totaling approximately 3,575 locations in North America as of September 30, 2001. The NTN Network earns revenue from delivering entertainment content to hospitality locations in the United States for a monthly fee, including installation revenue. The NTN Network also generates advertising revenue from third party advertisers on the NTN Network and license fee revenue from our Canadian licensee.
The NTN Network is the only interactive television network that is specifically designed to entertain the out-of-home viewer. Where most other television broadcasts are produced for the home viewer who is passively watching from six feet away, our broadcast is easily viewed from a distance of 15 feet or more. In addition, our content is not dependent upon audio, so it does not interfere with the location’s own sound system or with patrons’ conversations. Our content is designed to promote social interaction and stimulate conversation among the patrons. Hospitality locations pay to use our interactive technology to receive our entertainment broadcast.
In April 1999, we began upgrading the NTN Network by introducing a new Windows 98-based “Digital Interactive TV” (“DITV”) system to replace our decade-old DOS-based system. The new digital system contains many new features, including a Windows-based platform with full-motion video capabilities and high-resolution graphics to allow more compelling content and better advertising opportunities. In addition, we have introduced new, more consumer friendly Playmaker(R) wireless game pads that operate at 900 MHz to increase transmission range and have a longer battery life. The new Playmakers also feature a larger, eight line LCD screen that displays sports scores and other ticker information and enables electronic, text-based chat between patrons.
Buzztime was incorporated in the state of Delaware in December 1999. Buzztime currently is the distributor of the largest known digital trivia game show library and many unique “TV play-along” sports games. Buzztime’s TV play-along sports games are played while watching a sporting event on television. The games allow players to enter play call predictions and to be ranked against other players. For example, while watching an NFL football game on television, a player can predict whether the quarterback will pass or run the ball. The play call prediction must be entered by the player prior to the ball snap. Once the play has been completed, the player’s score is tabulated and ranked against other players.
Buzztime functions as a developer and distributor of game content. As a developer, it continues to augment its expansive interactive game library. As a distributor, Buzztime broadcasts live play-along game shows to a variety of interactive platforms. Our mission is to take the Buzztime brand and online services to a multitude of interactive platforms that will include interactive television and wireless devices.
We have separate strategies for each of our two operating units. For the NTN Network, our strategy is to increase the number of paying customers and advertising revenue while continuing to lower operating costs. To increase sales, we are focused on increasing targeted sales efforts in the top twenty metropolitan markets. To lower costs, we are focused on reducing telecommunications and technology costs. Our strategy also calls for using newly available and inexpensive broadband connectivity and taking advantage of the availability of inexpensive wireless Internet appliances to deliver new content and services, for additional revenues, to locations and their consumers. For Buzztime, we intend to focus increasingly on the distribution of Buzztime content to interactive television markets and to wireless devices. These distribution channels should increase future direct revenues while also increasing player registrations and loyalty, regardless of the consumer’s point of access. The NTN Network will continue to be a key element in promoting the Buzztime brand. In addition, we expect to generate revenues through a combination of direct consumer marketing, advertising, game sponsorships, pay-to-play and subscription models across all platforms. There can be no assurance, however, that we will be successful in executing this strategy.
RESULTS OF OPERATIONSOperations for the three months ended September 30, 2001 resulted in a net loss of $732,000 compared to a net loss of $1,383,000 for the three months ended September 30, 2000. The results for the quarter ended September 30, 2000 have been restated to reflect the adoption of Staff Accounting Bulletin No. 101 in the fourth quarter of fiscal 2000, effective as of January 1, 2000.
Total revenues increased by $51,000 or 1%, to $5,664,000 for the three months ended September 30, 2001 from $5,613,000 for the three months ended September 30, 2000. This increase was primarily due to NTN Network revenues as shown in the following table (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30
------------------
2001 2000
--------- ---------
NTN Network Revenues $5,627 $5,374
Buzztime Service Revenues 36 172
Other Revenues 1 67
------ ------
Total Revenues $5,664 $5,613
====== ======
NTN Network revenues increased by $253,000 or 5%, to $5,627,000 for the three months ended September 30, 2001 from $5,374,000 for the three months ended September 30, 2000. This increase was due in part to installation, training and setup revenue which increased approximately $66,000 due to an increase in amortization of previously deferred fees. Hospitality subscription revenues increased by approximately $311,000 due to an increase in the number of sites. The total number of sites as of September 30, 2001 was approximately 3,575, representing a net increase of 169 sites compared to September 30, 2000. Advertising revenue decreased by approximately $139,000 due to fewer advertising contracts for the three months ended September 30, 2001. At September 30, 2001, approximately 94% of the sites have been converted to the digital network compared to approximately 83% of the sites converted as of September 30, 2000.
Buzztime revenues were $36,000 for the three months ended September 30, 2001, compared to $172,000 for the three months ended September 30, 2000. The third quarter 2000 revenues arose out of production and advertising revenue which did not recur in 2001.
Direct operating costs decreased by $229,000 or 9%, to $2,263,000 for the three months ended September 30, 2001 from $2,492,000 for the three months ended September 30, 2000. This is due in part to communication charges which decreased by approximately $152,000 due to technical changes made in 2000 and to a change in vendors during the three months ended September 30, 2001. Freight expenses decreased by approximately $75,000 due to 94 less installations of the DITV equipment and less incoming shipments of Playmakers for the three months ended September 30, 2001 compared to the three months ended September 30, 2000. Hosting fees also decreased approximately $145,000 due to the consolidation of equipment at two separate locations to one location in 2001. Depreciation and amortization increased by approximately $101,000 for the capitalized purchases of broadcast equipment associated with the digital network. Playmaker repairs increased by approximately $66,000 due to the warranty expiring on some of the Playmakers.
Selling, general and administrative expenses decreased by $164,000 or 4%, to $3,499,000 for the three months ended September 30, 2001 from $3,663,000 for the three months ended September 30, 2000. Consulting expenses decreased by approximately $142,000 due to various projects reaching completion in the past year. Stock-based compensation decreased $450,000 due to the impact of marking warrants to market at September 30, 2001, in accordance with variable accounting, and awards granted and fully expensed in 2000. Expenses related to the annual report and shareholder meeting decreased approximately $66,000 caused in part by the timing of the meeting being held in June this year compared to July in 2000. Office lease expense decreased approximately $32,000 due to the expiration of an office lease in 2001. Various other expenses decreased due to general cost cutting measures that have been implemented. Marketing expenses increased approximately $61,000 due to an effort to increase site count and to introduce new games in 2001. Professional fees increased approximately $175,000 primarily due to the reversal of certain professional fee accruals during the three months ended September 30, 2000, after certain expenses were less than anticipated. Bad debt expense also increased $416,000 due to reassessment of the allowance in 2000 and increased collections in 2000 which lowered bad debt expense in the prior period.
Depreciation and amortization expense decreased 13% to $423,000 for the three months ended September 30, 2001 from $485,000 for the three months ended September 30, 2000, due to certain assets becoming fully depreciated.
Research and development expenses were not significant for the three months ended September 30, 2001, compared to $97,000 for the three months ended September 30, 2000. For the three-month period ended September 30, 2000, our research and development efforts focused primarily on the upgrade of the NTN Network as well as our Internet web site.
Interest expense decreased 19% to $227,000 for the three months ended September 30, 2001, compared to $281,000 for the three months ended September 30, 2000, due to the expiration of various capitalized leases as well as the decrease in the interest rate on the convertible notes payable from 7% to 4%.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000Operations for the nine months ended September 30, 2001 resulted in a net loss of $3,259,000 compared to a net loss of $7,069,000 for the nine months ended September 30, 2000. The results for the nine months ended September 30, 2000 have been restated to reflect the adoption of Staff Accounting Bulletin No. 101 in the fourth quarter of fiscal 2000, effective as of January 1, 2000.
Total revenues increased by $20,000 or less than 1%, to $16,299,000 for the nine months ended September 30, 2001 from $16,279,000 for the nine months ended September 30, 2000. This increase was primarily due to NTN Network revenues as shown in the following table (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
2001 2000
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NTN Network Revenues $16,184 $15,836
Buzztime Service Revenues 102 356
Other Revenues 13 87
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Total Revenues $16,299 $16,279
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NTN Network revenues increased by $348,000 or 2%, to $16,184,000 for the nine months ended September 30, 2001 from $15,836,000 for the nine months ended September 30, 2000. This increase was due to installation, training and setup revenue which increased approximately $385,000 due to an increase in amortization of previously deferred fees. Hospitality subscription revenues also increased by approximately $440,000 due to an increase in the number of sites. The total number of sites as of September 30, 2001 was approximately 3,575, representing a net increase of 169 sites compared to September 30, 2000. These increases were offset by a decrease of approximately $468,000 in advertising revenue due to fewer advertising contracts during the nine months ended September 30, 2001. At September 30, 2001, approximately 94% of the sites have been converted to the digital network compared to approximately 83% of the sites converted as of September 30, 2000.
Buzztime revenues were $102,000 for the nine months ended September 30, 2001, compared to $356,000 for the nine months ended September 30, 2000, due to production and advertising revenue which did not recur in 2001.
Direct operating costs decreased by $2,003,000 or 23%, to $6,620,000 for the nine months ended September 30, 2001 from $8,623,000 for the nine months ended September 30, 2000. This is primarily due to a decrease in depreciation and amortization of approximately $1,222,000 due to the DOS-based network equipment being fully depreciated by June 2000, which is offset by an increase in depreciation for the capitalized broadcast equipment associated with the digital network. Communication charges decreased by approximately $414,000 due to technical changes made in 2000 and a change in vendors during the three months ended September 30, 2001. Freight expenses decreased by approximately $183,000 due to 753 less installations of the DITV equipment and less incoming shipments of Playmakers for the period ended September 30, 2001. Advertising commissions also decreased approximately $365,000 as a direct result of decreased NTN Network advertising revenue for the nine months ended September 30, 2001. Playmaker repairs increased by approximately $215,000 due to the warranty expiring on some of the Playmakers.
Selling, general and administrative expenses decreased by $914,000 or 8%, to $11,066,000 for the nine months ended September 30, 2001 from $11,980,000 for the nine months ended September 30, 2000. Consulting expenses decreased by approximately $312,000 due to various projects reaching completion in the past year. Stock-based compensation decreased $709,000 due to the impact of marking warrants to market at September 30, 2001, in accordance with variable accounting, and awards granted and fully expensed in 2000. Supplies, printing costs and seminars decreased approximately $211,000 due to general cost cutting measures and fewer new employees in 2001. Various other expenses decreased due to general cost cutting measures that have been implemented. Marketing expenses increased approximately $138,000 due to an effort to increase site count and to introduce new games in 2001. Professional fees increased approximately $81,000 primarily due to the reversal of certain professional fee accruals for the three months ended September 30, 2000, after expenses were less than anticipated. Bad debt expense increased $134,000 due to reassessment of the allowance in 2000 and increased collections in 2000 which lowered bad debt expense in the prior period.
Depreciation and amortization expense decreased 4% to $1,292,000 for the three months ended September 30, 2001 from $1,349,000 for the three months ended September 30, 2000, due to certain assets becoming fully depreciated.
Research and development expenses were $96,000 for the nine months ended September 30, 2001, compared to $319,000 for the nine months ended September 30, 2000. The current period expenses resulted from our research and development efforts related to the next generation of the digital network and interactive television initiatives. For the nine-month period ended September 30, 2000, our research and development efforts focused primarily on the upgrade of the NTN Network as well as our Internet web site.
Interest expense decreased 20% to $679,000 for the nine months ended September 30, 2001, compared to $850,000 for the nine months ended September 30, 2000, due to the expiration of various capitalized leases as well as the decrease in the interest rate on the convertible notes payable from 7% to 4%.
LIQUIDITY AND CAPITAL RESOURCESAt September 30, 2001, we had cash and cash equivalents of $1,663,000 and a working capital deficit of $3,097,000, compared to cash and cash equivalents of $2,188,000 and working capital of $893,000 at December 31, 2000. The cash balance at September 30, 2001 includes approximately $600,000 which can only be utilized for the development of the application for S-A and fulfillment of Buzztime’s obligations under the development, license and marketing agreement and is not available for general corporate use. The primary reason for the working capital deficit was the reclassification of the revolving line of credit from a long-term liability to a short-term liability in 2001 as the line of credit matures on June 30, 2002.
Net cash provided by operations was $542,000 for the nine months ended September 30, 2001 and $581,000 for the nine months ended September 30, 2000. The principal uses of cash from operations for the nine months ended September 30, 2001 were to fund our net loss, which includes Buzztime initiatives. Depreciation, amortization and other non-cash charges offset the net loss.
Net cash used in investing activities was $867,000 for the nine months ended September 30, 2001 and $6,319,000 for the nine months ended September 30, 2000. Included in net cash used in investing activities for the nine months ended September 30, 2001 was $979,000 in capital expenditures which was partially offset by $112,000 for deposits on broadcast equipment received.
Net cash used in financing activities was $200,000 for the nine months ended September 30, 2001 and net cash provided by financing activities was $6,393,000 for the nine months ended September 30, 2000. The cash used in financing activities for the nine months ended September 30, 2001 included $512,000 of principal payments on capital leases, $25,000 in principal payments on a note payable, and $557,000 of net payments on the revolving line of credit. Net cash used in financing activities were offset by $1.0 million raised by Buzztime offset by issuance costs of $59,000, and issuance costs of $139,000 related to the capital raised in November 2000, and $92,000 of proceeds from the exercise of stock options and warrants.
We currently have a revolving line of credit agreement with Coast Business Credit, which was amended in May 2001. The line of credit provides for borrowings not to exceed the lesser of a designated maximum amount or three times trailing monthly collections or three times annualized trailing adjusted EBITDA. The maximum line of credit is being gradually reduced from $4,000,000 at April 1, 2001 to $2,750,000 at December 31, 2001. As of October 1, 2001, the maximum line of credit was $3,400,000. Our availability under the revolving line of credit may be further reduced if our monthly collections or operating income falls below certain levels. The line of credit is secured by substantially all of our assets.
The amendments to our revolving line of credit in May 2001 also allow equity raised by us to be added to the EBITDA calculation and permit us to exclude the effect of Staff Accounting Bulletin No. 101 for the fiscal year 2000. The amendments also required us to raise $1.0 million in equity by June 30, 2001, maintain a minimum cash level of $0.4 million each month and to limit our cash burn to not more than $1.0 million from April 1, 2001 onward without receiving additional equity. The line of credit matures on June 30, 2002. The recent investment in Buzztime by an affiliate of Scientific-Atlanta, Inc., discussed below, satisfied the $1.0 million equity requirement.
Our liquidity and capital resources remain limited and this may constrain our ability to operate and grow our business. Any reduction in availability under our revolving line of credit may further constrain our liquidity.
Subject to any unexpected changes in our business that may occur as a result of a continued economic slowdown in the economy, and unless we incur unanticipated expenses, we believe we will continue generating adequate cash from the operation of the NTN Network which, when combined with cash resources on hand, the existence of its line of credit and the S-A investment, will allow it to continue to fund the Buzztime subsidiary at least until June 2002 at current operational levels of the company.
But our liquidity and capital resources remain limited and this may constrain our ability to grow either of our two businesses. In addition, any reduction described in the pay down process in availability under our revolving line of credit beyond the above may further constrain our liquidity.
If current BUZZTIME Channel sales efforts to cable operators succeed as planned, management intends to aggressively increase Buzztime sales and marketing efforts to more quickly advance its distribution within the North American market, which will require additional capital. Based upon current sales targets, we anticipate that Buzztime will require an additional $2,000,000 financing within the next twelve months (in addition to the $1,000,000 from Scientific Atlanta that has been already received). As part of our financing plan, we will try to obtain direct investments in Buzztime. If additional financing is not obtained, our accelerated growth plans will be deferred. If cash generated by the NTN Network is insufficient to cover Buzztime’s expenses and if additional financing for Buzztime is not obtained and then we cannot reduce cash expenditures at Buzztime sufficiently, we may not be able to sustain the operations of Buzztime beyond June 2002. S-A has an option to exchange the S-A shares of Buzztime’s preferred stock into shares of NTN common stock if Buzztime does not obtain additional equity financing of $2,000,000 before June 8, 2002.
Based on slowness in the economy and a lengthening of our sales cycle for adding new sites to the NTN Network management has reduced selected sales and marketing costs. We now plan to increase our number of sites to 3,600 in the U.S. and Canada by the end of 2001, which is a reduction from the previously stated goal of 4,000. The NTN Network currently generates cash flow sufficient to sustain its operations in this reduced growth scenario for the next twelve months. However, we will need to raise additional capital in the form of senior debt, subordinated debt and/or equity to pay off the line of credit facility, which expires in June 2002. Management is currently in discussions with several lending institutions for the purposes of replacing its credit line, but no assurance can be made that it will be able to obtain additional financing on terms favorable to us or at all, in which case we would likely sell common stock to replace the credit line, which will be at $2,750,000 at that time.
RECENT DEVELOPMENTSWe transmit our data to our hospitality customer sites via PanAmSat’s Galaxy IIIR (“GIIIR”) satellite. We were recently notified by the reseller through which we contract this service that PanAmSat’s GIIIR satellite experienced a failure of its primary Satellite Control Processor (“SCP”). The SCP is the principal computer for command and control of the satellite. As expected and planned for in this event, the secondary SCP took over control of the satellite with minimal interruption.
The satellite is currently operating normally and is stable but now has only one operable SCP. If the secondary SCP were to fail, PanAmSat would lose control of GIIIR and it would become unusable. Also, GIIIR is the in-orbit spare for another satellite, Galaxy VIIIi. If Galaxy VIIIi were to fail, it is possible that NTN could lose the use of GIIIR.
Our reseller states that PanAmSat has made it clear to them that it expects GIIIR to continue operating normally until it is replaced in the second quarter of 2002 and that it has a contingency plan for making replacement capacity available to us on another satellite in its fleet if GIIIR were to become unavailable.
In the event that we were forced to switch to another satellite, we would incur significant costs associated with re-pointing its satellite receivers. In addition, we could experience higher operating costs to transmit data to our customers via telephone lines and the Internet during the transition period.
In order to provide some historical context to this risk, in 1998, we were forced to switch from the satellite that we were then using to PanAmSat GIIIR since the previous satellite became inoperable. That transition was completed in approximately two weeks.
Another potential risk, as our country is at war, is the possibility that our government could pre-empt a satellite for national security reasons, as the United States satellite operators are federally licensed. This would appear to be unlikely as our government has a strong communications infrastructure in place domestically. Also, it is likely the satellite would not be at risk of being damaged by any of the physical aspects of the war due to the fact that the satellite orbits over 22,000 miles above the earth.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are exposed to risks related to currency exchange rates, stock market fluctuations, and interest rates. As of September 30, 2001, we owned common stock of an Australian company that is subject to market risk. At September 30, 2001, the carrying value of this investment was $224,000, which is net of a $593,000 unrealized loss. This investment is exposed to further market risk in the future based on the operating results of the Australian company and stock market fluctuations. Additionally, the value of the investment is further subject to changes in Australian currency exchange rates. At September 30, 2001, a hypothetical 10% decline in the value of the Australian dollar would result in a reduction of $22,000 in the carrying value of the investment.
We have outstanding convertible notes which bear interest at 4% per annum and line of credit borrowings which bear interest at a rate equal to the higher of the prime rate plus 1.5% per annum, or 9% per annum. At September 30, 2001, a hypothetical one-percentage point increase in the prime rate would result in an increase of $39,000 in annual interest expense.
PART II. OTHER INFORMATIONAs previously reported in our Annual Report on Form 10-K for the period ended December 31, 2000, an action was filed in 1992 in the Trial Division of the Federal Court of Canada by Interactive Network naming us and our unaffiliated Canadian licensee as defendants. We filed a counterclaim against Interactive Network in the same action. The litigation involves licensing and patent infringement issues. These actions affect only the operations of our Canadian licensee and do not extend to our operations in the United States or elsewhere. In August 2001, the parties to completed examinations for discovery, as ordered by the Court. We expect the Court to assign a date for a pretrial conference in the matter shortly.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.On July 2, 2001, we issued approximately 72,000 shares of common stock, to the holders of the outstanding 4% senior convertible notes, in a private transaction in payment of interest of approximately $40,000 on such notes.
On August 1, 2001, we issued approximately 46,000 shares of common stock to two accredited investors under the penalty provisions arising out of the failure of the Securities and Exchange Commission to declare effective a resale registration statement within the time limits required under the registration rights agreement in connection with our private placement of shares on November 14, 2000.
Each offering and transaction was made without registration under the Securities Act of 1933, as amended (the “Act”) in reliance upon the exemption from registration afforded by Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder.
ITEM 5. OTHER INFORMATION.In August 2001, we entered into an agreement with NFL Enterprises, L.P. extending our license through the 2002-2003 professional football season. The NFL license grants us the rights to feature NFL marks for QB1 Predict the Play play-along sports game applications for broadcast by the NTN Network and for NTN Network advertising, promotion and point-of-sale materials. We pay the NFL a royalty based on revenues billed by the NTN Network in connection with QB1 play. Royalty expenses under the agreement are not material to us.
In October 2001, Stephen L. Gray resigned from his position as our Chief Technology Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.__________ Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Date: October 23, 2001
By: /s/ James Frakes
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James Frakes
Authorized Signatory and Chief
Financial Officer