10-Q 1 ntn_10q-063005.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 Commission file number 1-11460 NTN COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 31-1103425 (State of incorporation) (I.R.S. Employer Identification No.) THE CAMPUS 5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008 (Address of principal executive offices) (Zip Code) (760) 438-7400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] At August 5, 2005, the registrant had outstanding 53,579,000 shares of common stock, $.005 par value. PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets JUNE 30, 2005 DECEMBER 31, ASSETS (PLEDGED) (UNAUDITED) 2004 ------------- ------------- Current assets: Cash and cash equivalents $ 4,647,000 $ 6,710,000 Restricted cash 65,000 66,000 Accounts receivable, net 3,609,000 3,405,000 Investment available-for-sale 422,000 304,000 Inventory 411,000 399,000 Deposits on broadcast equipment 653,000 534,000 Deferred costs 1,041,000 960,000 Prepaid expenses and other current assets 1,168,000 1,128,000 ------------- ------------- Total current assets 12,016,000 13,506,000 Broadcast equipment and fixed assets, net 7,772,000 6,451,000 Software development costs, net 728,000 763,000 Deferred costs 1,159,000 922,000 Intangible assets, net 3,289,000 4,011,000 Goodwill 3,658,000 3,658,000 Other assets 141,000 77,000 ------------- ------------- Total assets $ 28,763,000 $ 29,388,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,221,000 $ 1,590,000 Accrued expenses 1,346,000 1,125,000 Revolving line of credit 700,000 -- Accrued salaries 282,000 447,000 Accrued vacation 666,000 635,000 Taxes payable 589,000 558,000 Obligations under capital leases 306,000 148,000 Equipment note payable 157,000 620,000 Deferred revenue - Buzztime 706,000 291,000 Deferred revenue - Hospitality Technologies 2,031,000 1,448,000 ------------- ------------- Total current liabilities 8,004,000 6,862,000 Obligations under capital leases, excluding current portion 338,000 123,000 Deferred revenue, excluding current portion - Hospitality Technologies 256,000 368,000 ------------- ------------- Total liabilities 8,598,000 7,353,000 ------------- ------------- Shareholders' equity: Series A 10% cumulative convertible preferred stock, $.005 par value, $161,000 liquidation preference, 5,000,000 shares authorized; 161,000 shares issued and outstanding at June 30, 2005 and December 31, 2004 1,000 1,000 Common stock, $.005 par value, 84,000,000 shares authorized; 53,519,000 and 53,026,000 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively 266,000 264,000 Additional paid-in capital 109,464,000 109,008,000 Accumulated deficit (89,208,000) (86,769,000) Accumulated other comprehensive loss (358,000) (469,000) ------------- ------------- Total shareholders' equity 20,165,000 22,035,000 ------------- ------------- Total liabilities and shareholders' equity $ 28,763,000 $ 29,388,000 ============= ============= See accompanying notes to unaudited condensed consolidated financial statements 2 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenues: Hospitality Technologies revenues $ 9,397,000 $ 8,477,000 $ 18,610,000 $ 17,276,000 Buzztime service revenues 232,000 39,000 526,000 82,000 Other revenues -- 12,000 -- 14,000 ------------ ------------ ------------ ------------ Total revenues 9,629,000 8,528,000 19,136,000 17,372,000 ------------ ------------ ------------ ------------ Operating expenses: Direct operating costs (includes depreciation of $837,000, $737,000, $1,565,000 and $1,457,000 for the three months ended June 30, 2005 and 2004 and for the six months ended June 30, 2005 and 2004, respectively) 3,438,000 2,922,000 6,858,000 6,139,000 Non-cash charge related to software product sales -- -- 276,000 -- Selling, general and administrative 6,710,000 6,175,000 13,036,000 12,320,000 Litigation, legal and professional fees 190,000 370,000 570,000 748,000 Stock based compensation 85,000 40,000 192,000 94,000 Depreciation and amortization 165,000 215,000 420,000 435,000 Research and development 66,000 88,000 125,000 172,000 ------------ ------------ ------------ ------------ Total operating expenses 10,654,000 9,810,000 21,477,000 19,908,000 ------------ ------------ ------------ ------------ Operating loss (1,025,000) (1,282,000) (2,341,000) (2,536,000) ------------ ------------ ------------ ------------ Other income (expense): Interest income 25,000 23,000 51,000 42,000 Interest expense (49,000) (28,000) (73,000) (66,000) Other income -- 225,000 -- 225,000 ------------ ------------ ------------ ------------ Total other income (expense) (24,000) 220,000 (22,000) 201,000 ------------ ------------ ------------ ------------ Net loss before income taxes (1,049,000) (1,062,000) (2,363,000) (2,335,000) Provision for income taxes 43,000 12,000 76,000 33,000 ------------ ------------ ------------ ------------ Net loss $ (1,092,000) $ (1,074,000) $ (2,439,000) $ (2,368,000) ============ ============ ============ ============ Net loss per common share - basic and diluted: $ (0.02) $ (0.02) $ (0.05) $ (0.05) ============ ============ ============ ============ Weighted average shares outstanding - basic and diluted 53,403,000 52,703,000 53,313,000 52,290,000 ============ ============ ============ ============ NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- ---------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net loss ......................................... $(1,092,000) $(1,074,000) $(2,439,000) $(2,368,000) ----------- ----------- ----------- ----------- Other comprehensive income, net of tax: Foreign currency translation adjustments ....... (8,000) (44,000) (7,000) (59,000) Unrealized holding gain (loss) in investment available for sale ........................... (62,000) (29,000) 118,000 (19,000) ----------- ----------- ----------- ----------- Other comprehensive income (loss) ................ (70,000) (73,000) 111,000 (78,000) ----------- ----------- ----------- ----------- Comprehensive net loss ........................... $(1,162,000) $(1,147,000) $(2,328,000) $(2,446,000) =========== =========== =========== =========== See accompanying notes to unaudited condensed consolidated financial statements 3 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) SIX MONTHS ENDED ---------------- JUNE 30, JUNE 30, 2005 2004 ------------ ------------ Cash flows from operating activities: Net loss $ (2,439,000) $ (2,368,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,985,000 1,892,000 Provision for doubtful accounts 513,000 219,000 Non-cash stock-based compensation 192,000 94,000 Non-cash charge related to software product sale 343,000 -- Provision for warranties 2,000 -- Provision for sales returns 2,000 -- Loss from disposition of equipment and capitalized software 175,000 18,000 Changes in assets and liabilities: Accounts receivable (721,000) (884,000) Inventory (12,000) (42,000) Deferred costs (316,000) (311,000) Prepaid expenses and other assets (96,000) (274,000) Accounts payable and accrued expenses (188,000) (336,000) Income tax payable (55,000) (27,000) Deferred revenue 888,000 193,000 ------------ ------------ Net cash provided by (used in) operating activities 273,000 (1,826,000) ------------ ------------ Cash flows from investing activities: Capital expenditures (2,279,000) (1,218,000) Acquisition of businesses -- (82,000) Software development expenditures (270,000) (194,000) Deposits on broadcast equipment (123,000) (32,000) ------------ ------------ Net cash used in investing activities (2,672,000) (1,526,000) ------------ ------------ Cash flows from financing activities: Principal payments on capital leases (147,000) (86,000) Principal payments on equipment notes payable (462,000) (571,000) Borrowings from revolving line of credit 700,000 -- Principal payments on revolving line of credit -- (1,000,000) Proceeds from issuance of common stock, net of offering expenses -- 13,001,000 Proceeds from exercise of stock options and warrants 265,000 320,000 ------------ ------------ Net cash provided by financing activities 356,000 11,664,000 ------------ ------------ Net (decrease) increase in cash and cash equivalents (2,043,000) 8,312,000 Effect of exchange rate on cash (20,000) 2,000 Cash and cash equivalents at beginning of period 6,710,000 2,503,000 ------------ ------------ Cash and cash equivalents at end of period $ 4,647,000 $ 10,817,000 ============ ============ See accompanying notes to unaudited condensed consolidated financial statements 4 NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued) SIX MONTHS ENDED ---------------- JUNE 30, JUNE 30, 2005 2004 ----------- -------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 69,000 $ 66,000 =========== ======== Income taxes $ 44,000 $ 72,000 =========== ======== Supplemental disclosure of non-cash investing and financing activities: Equipment acquired under capital leases and notes payable $ 522,000 $674,000 =========== ======== Unrealized holding loss (gain) on investments $ (118,000) $ 19,000 =========== ======== Issuance of common stock in payment of dividends $ 8,000 $ 8,000 =========== ======== Issuance of warrants in association with equity offering $ -- $655,000 =========== ======== Investment in limited partnership $ 69,000 $ -- =========== ======== Supplemental non-cash disclosure of acquisition of businesses: Goodwill and Intangible assets $ -- $ 36,000 =========== ======== Supplemental non-cash disclosure of warrants exercised - Allen & Company LLC exercised warrants for approximately 433,000 shares into approximately 284,000 shares of NTN common stock on a cashless exercise basis. See accompanying notes to unaudited condensed consolidated financial statements 5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2005 1. BASIS OF PRESENTATION In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting of only normal, recurring adjustments) that are necessary for a fair presentation of the financial position of NTN Communications, Inc. and its wholly-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 condensed 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, 2005. The condensed consolidated financial statements for the three months and six months ended June 30, 2005 and 2004 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K/A for the year ended December 31, 2004. We have reclassified depreciation and amortization expense to direct operating costs for certain assets in the prior period condensed consolidated financial statements to conform to the current period presentation. 2. STOCK-BASED COMPENSATION In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF FASB STATEMENT NO. 123 (SFAS No. 148). SFAS 148 amends FASB Statement No. 123; ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted the disclosure provisions of SFAS No. 148 beginning with our annual financial statements for the year ended December 31, 2002. We applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related interpretations in accounting for our employee stock options. No compensation expense has been recognized for the options granted under the Special Plan and the Option Plan unless the grants were issued at exercise prices below market value. Pro forma compensation expense is based upon the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123. The following table represents the effect on net loss and net loss per share if we had applied the fair value recognition provisions of SFAS No. 123 as amended by SFAS No. 148. THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net loss As reported .............................. $(1,092,000) $(1,074,000) $(2,439,000) $(2,368,000) Add: stock-based employee compensation expense included in reported net loss, net of related tax effects .... -- -- -- 2,000 Deduct: stock-based employee compensation expense, net of related tax effects .................. (358,000) (417,000) (916,000) (777,000) ----------- ----------- ----------- ----------- Pro forma net loss ....................... $(1,450,000) $(1,491,000) $(3,355,000) $(3,143,000) Basic and diluted net loss As reported .............................. $ (0.02) $ (0.02) $ (0.05) $ (0.05) per share Pro forma ................................ $ (0.03) $ (0.03) $ (0.06) $ (0.06)
The per share weighted-average fair value of stock options granted during the three months ended June 30, 2005 and 2004 was $1.17 and $2.02, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2005 -- dividend yield of 0%, risk-free interest rate of 3.73%, expected volatility of 75.6%, and expected life of 4.8 years; and 2004 -- dividend yield of 0%, risk-free interest rate of 3.29%, expected volatility of 88.25%, and expected life of 4.0 years The per share weighted-average fair value of stock options granted during the six months ended June 30, 2005 and 2004 was $1.91 and $2.61, respectively. The fair value of each option grant is estimated on the date of 6 grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2005 -- dividend yield of 0%, risk-free interest rate of 3.73%, expected volatility of 75.5%, and expected life of 4.8 years; and 2004 -- dividend yield of 0%, risk-free interest rate of 3.04%, expected volatility of 90.86%, and expected life of 4.7 years. In compliance with APB No. 25, we expensed $0 and $2,000 for the six months ended June 30, 2005 and 2004, associated with the grants of 80,000 options in 2000 below market value pursuant to the Option Plan. We account for options and warrants issued to non-employees in exchange for services in accordance with SFAS No. 123 and EITF 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES. We estimate the fair value of options and warrants using the Black-Scholes option-pricing model. For agreements which require that achievement of specific performance criteria be met in order for the options or warrants to vest, the measurement date is the date at which the specific performance criteria are met. Prior to the measurement date, options and warrants subject to vesting based on the achievement of specific performance criteria that, based on different possible outcomes, result in a range of aggregate fair values are measured at each financial reporting period at their lowest aggregate then-current fair value, while options and warrants which vest over the service period or at completion of the service period are measured at each financial reporting period at their then-current fair value, for purposes of recognition of costs during those periods. For agreements which provide for services to be rendered without the requirement of specific performance criteria, we measure the fair value of the options and warrants at the earlier of the date the services are completed or the date the options and warrants vest and are non-forfeitable. Generally, services are not rendered prior to the grant date and the related agreements do not contain performance commitments. Accordingly, the measurement date for compensation expense occurs subsequent to the grant date. From the grant date to the measurement date, compensation expense is estimated at each financial reporting period and is recorded over the service period. The unvested options and warrants continue to be remeasured at each financial reporting period until they vest or until the services are completed. For agreements which provide options and warrants for services already rendered, the options and warrants immediately vest and the measurement date is the date of grant. Modifications that increase the fair value of the warrants are treated as an exchange of the original warrant for a new one. Additional compensation expense related to modifications, if any, is recorded over the remaining service period. 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 annual period beginning after June 15, 2005. Upon adoption of SFAS No. 123R, amounts previously disclosed on a pro forma basis 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 first quarter of 2006. We believe that this new standard will increase our operating losses but we cannot currently estimate the impact on our financial statements beyond the proforma effect in the table above. 3. LOSS PER SHARE For the three months ended June 30, 2005 and 2004, and six months ended June 30, 2005 and 2004, the weighted average of options, warrants, deferred stock units and convertible preferred stock representing approximately 11,864,000, 12,095,000, 11,982,000 and 11,936,000 potential common shares, respectively, have been excluded from the computation of net loss per share, as their effect was anti-dilutive. 4. SEGMENT INFORMATION We operate our businesses principally through four reportable segments: the NTN iTV Network, NTN Wireless Communications, Inc. ("NTN Wireless" or "Wireless") and NTN Software Solutions, Inc. ("Software Solutions"), which combine to form the NTN Hospitality Technologies division; and our Buzztime Entertainment, Inc. subsidiary ("Buzztime"). The NTN Hospitality Technologies division provides entertainment, promotional services and on-site communications and management products to the hospitality industry. Buzztime operates our live broadcast studio, produces and licenses our trivia and live sports "Play-Along" content to both the NTN iTV Network and consumer interactive platforms, and is selling the Buzztime(R) Channel, an interactive television game channel, to U.S. cable TV operators. 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 Buzztime segment and the three segments within the NTN Hospitality Technologies division. 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 advertising sold for distribution via the interactive entertainment service, from its wireless business with restaurant on-site paging systems and from our hardware and software restaurant management and enterprise solutions. NTN Hospitality 7 Technologies revenues comprised approximately 97% of our total revenue for the six months ended June 30, 2005. Buzztime's revenue is primarily generated from the distribution and licensing of its digital trivia game show content and "Play-Along" sports games as well as revenue related to production services for third parties. Included in the operating loss for the three segments included in the NTN Hospitality Technologies division and the Buzztime segment is an allocation of corporate expenses, while the related corporate assets are not allocated to the segments. The following tables set forth certain information regarding our segments and other operations: THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenues NTN iTV Network (includes "other revenues") $ 6,920,000 $ 6,029,000 $ 13,712,000 $ 12,345,000 NTN Wireless 1,504,000 1,551,000 2,971,000 3,090,000 Software Solutions 973,000 909,000 1,927,000 1,855,000 ------------ ------------ ------------ ------------ NTN Hospitality Technologies division 9,397,000 8,489,000 18,610,000 17,290,000 Buzztime 232,000 39,000 526,000 82,000 ------------ ------------ ------------ ------------ Total revenue $ 9,629,000 $ 8,528,000 $ 19,136,000 $ 17,372,000 ============ ============ ============ ============ Operating income (loss) NTN iTV Network $ 148,000 $ 212,000 $ 114,000 $ 458,000 NTN Wireless 240,000 115,000 289,000 165,000 Software Solutions (421,000) (510,000) (1,091,000) (1,079,000) ------------ ------------ ------------ ------------ NTN Hospitality Technologies division (33,000) (183,000) (688,000) (456,000) Buzztime (992,000) (1,099,000) (1,653,000) (2,080,000) ------------ ------------ ------------ ------------ Operating loss $ (1,025,000) $ (1,282,000) $ (2,341,000) $ (2,536,000) ============ ============ ============ ============ Net income (loss) NTN iTV Network $ 82,000 $ 420,000 $ 19,000 $ 626,000 NTN Wireless 240,000 115,000 289,000 165,000 Software Solutions (421,000) (510,000) (1,091,000) (1,079,000) ------------ ------------ ------------ ------------ NTN Hospitality Technologies division (99,000) 25,000 (783,000) (288,000) Buzztime (993,000) (1,099,000) (1,656,000) (2,080,000) ------------ ------------ ------------ ------------ Net loss $ (1,092,000) $ (1,074,000) $ (2,439,000) $ (2,368,000) ============ ============ ============ ============ JUNE 30, DECEMBER 31, 2005 2004 ------------ ------------ Goodwill NTN iTV Network $ 974,000 $ 974,000 NTN Wireless 449,000 449,000 Software Solutions 2,235,000 2,235,000 ------------ ------------ NTN Hospitality Technologies division 3,658,000 3,658,000 Buzztime -- -- ------------ ------------ Total revenue $ 3,658,000 $ 3,658,000 ============ ============
5. CONTINGENCIES From time to time, state tax authorities will make inquiries as to whether or not a portion of our services might require the collection of sales and use taxes from customers in those states. In the current difficult economic climate, many states are expanding their interpretation of their sales and use tax statutes to derive additional revenue. While in the past our sales and use tax assessments have not been significant to our operations, it is likely that such expenses will grow in the future. We evaluate such inquiries on a case-by-case basis and have favorably resolved these tax issues in the past without any material adverse consequences. During 2003, the state of Texas, our largest state in terms of NTN iTV Network sites, began a sales tax audit. They concluded that our services are subject to sales taxes on an amusement services basis. On January 12, 2004, the state 8 assessed us for approximately $1,115,000 for the five year audit period ended December 31, 2002.We have objected to this approach since our services are not provided for the purpose of amusing our customers but to provide our customers the right to use our games to provide amusement to others. The service is designed to encourage patrons to visit our customers' establishments, stay longer and spend more. As such, we believe our services are tax exempt promotional and marketing services and fall outside the definition of amusement services as defined by the Texas tax code. We have successfully argued this position regarding amusement services with other states. We have appealed the assessment and the matter is currently at the administrative appeals level. We have retained a team of sales and use tax specialists in Texas to assist us in this matter. We are seeking to reach a mutually agreeable conclusion at the administrative appeals level and we expect that a conclusion may be reached by the end of 2005. In the event the matter is not resolved at administrative appeals, we would likely take the matter before the District Court. At the District Court level, we would anticipate a resolution no earlier than 2006. While we believe that we have a strong position in this matter, there can be no assurance that we will resolve this matter in our favor. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 6. DEFERRED REVENUE - BUZZTIME In February 2003, we entered into a Trial Agreement with Comcast Cable Communications Management LLC (Comcast) that involves developing the Buzztime Channel for potential deployment within that operator's system. The Trial Agreement was amended on March 31, 2005 to include payments of license fees and development costs. The Trial Agreement now runs through December 2005. During the six months ended June 30, 2005, we recognized $226,000 of revenue under the Trial Agreement compared to $10,000 recognized in the six months ended June 30, 2004. As of June 30, 2005, $695,000 of revenue has been deferred for future license fees and software development for Comcast. 7.SALE OF SOFTWARE PRODUCTS 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 and SLP software for two years (we continue to retain the rights to the maintenance and support revenue from the legacy products). We engaged a third party valuation firm to assist in determining the fair value of our 10% ownership interest in Intura. Based upon that analysis, we concluded that the fair value of our investment in Intura was approximately $69,000. Additionally, based on that analysis, we considered whether this transaction resulted in any impairment of the goodwill in the Software Solutions segment and we concluded that it did not result in any such impairment. The sale of the software products, which we carried as part of our intangible assets, resulted in a one-time, non-cash charge of $276,000. That amount would have been amortized over the remaining four year life of those intangible assets if they had been retained by the Company. 8. ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss is the combination of accumulated net unrealized losses on investment available for sale and the accumulated gains or losses from foreign currency translation adjustments. We translated the assets and liabilities of NTN Canada and of our U.K. operations into U.S. dollars using the period-end exchange rate. Revenue and expenses were translated using the average exchange rates for the reporting period. For the three months and six months ended June 30, 2005 and 2004, the components of accumulated other comprehensive loss were as follows: 9 Three Months Ended Six Months Ended ----------------------------- ----------------------------- June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 -------------- -------------- -------------- -------------- Beginning balance $ (288,000) $ (633,000) $ (469,000) $ (628,000) Unrealized loss in investment available-for-sale (62,000) (29,000) 118,000 (19,000) Foreign currency translation adjustments (8,000) (44,000) (7,000) (59,000) -------------- -------------- -------------- -------------- Ending balance $ (358,000) $ (706,000) $ (358,000) $ (706,000) ============== ============== ============== ============== The comprehensive losses for the three and six month periods ended June 30 were as follows: Three Months Ended Six Months Ended ----------------------------- ----------------------------- June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 -------------- -------------- -------------- -------------- Net loss $ (1,092,000) $ (1,074,000) $ (2,439,000) $ (2,368,000) Comprehensive loss (70,000) (73,000) 111,000 (78,000) -------------- -------------- -------------- -------------- Comprehensive net loss $ (1,162,000) $ (1,147,000) $ (2,328,000) $ (2,446,000) ============== ============== ============== ==============
9.LINE OF CREDIT In February 2005, we amended our $1 million line of credit with Pacific Mercantile Bank to extend the maturity date from February 1, 2005 to February 11, 2006. As of June 30, 2005, we have borrowed $700,000 against the line of credit and we were in compliance with our covenant. The line is secured by all inventories, equipment, accounts receivable and various other assets. 10. MEDIA GENERAL INVESTMENT On May 6, 2003, Media General, Inc., a communications company with interests in newspapers, television stations, interactive media and diversified information services, made a $3.0 million investment in NTN. In return for the investment, we issued and sold 2,000,000 shares of unregistered NTN common stock through a private offering to Media General. Pursuant to the terms of the transaction, upon receipt of $3.0 million from Media General, we issued the unregistered shares along with fully vested warrants to purchase 500,000 shares of Buzztime common stock at $3.46 per share, exercisable through May 7, 2007. In connection with the Buzztime common stock, the parties agreed that Media General would have co-sale rights and NTN would have certain drag-along rights. Media General has the right to convert each share of Buzztime common stock into two shares of NTN common stock (subject to adjustment ) on the second and fourth anniversaries of the transaction date, in the event of a sale of NTN, upon certain bankruptcy and other insolvency proceedings of Buzztime, and in certain circumstances if NTN exercises its drag-along rights. Media General has the further right to convert the warrant to purchase 500,000 shares of Buzztime common stock into a warrant to purchase 1,000,000 shares of NTN common stock at $1.73 per NTN share (subject to adjustment) in the event of bankruptcy or insolvency of Buzztime. NTN has the right to require Media General to convert its equity interests in Buzztime into equity interests in NTN if there is a sale of NTN. As of May 7, 2005, Media General did not exercise its right to convert the Buzztime common shares into NTN common shares, so this right has expired until the fourth anniversary of the transaction date. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward Looking Statements THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING 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. IN ADDITION, ANY STATEMENTS WHICH REFER TO PROJECTIONS OF OUR FUTURE FINANCIAL PERFORMANCE, OUR ANTICIPATED GROWTH AND TRENDS IN OUR BUSINESSES, AND OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR CIRCUMSTANCES, ARE FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED THAT THESE FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS AND ARE SUBJECT TO RISKS, UNCERTAINTIES, AND ASSUMPTIONS THAT MAY BE DIFFICULT TO PREDICT. THEREFORE, 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 OUR ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 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. OVERVIEW 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 our Buzztime Entertainment, Inc. ("Buzztime") subsidiary. The NTN Hospitality Technologies division includes the NTN iTV Network, NTN Wireless and Software Solutions segments. Revenues generated and operating income (loss) by our two business units are illustrated below. The data presented below includes allocations of corporate expenses. SIX MONTHS ENDED JUNE 30, 2005 2004 ------------------- ------------------- Revenues -------- NTN Hospitality Technologies division (includes "other revenues") ...................... $ 18,610,000 97% $ 17,290,000 99% Buzztime............................................ 526,000 3% 82,000 1% ------------ --- ------------- --- Total........................................... $ 19,136,000 100% $ 17,372,000 100% ============ === ============= === Operating Income (Loss) ----------------------- NTN Hospitality Technologies division............... $ (688,000) $ (456,000) Buzztime............................................ (1,653,000) (2,080,000) ------------ ------------- Total........................................... $ (2,341,000) $ (2,536,000) ============ =============
Our objective is to leverage our unique interactive entertainment as a means of growing our business units--first, as a developer and distributor of interactive entertainment for consumer markets via our NTN iTV Network and via Buzztime licensing to other interactive platforms and second, as a leading provider of interactive communications and software offerings to the hospitality industry through the NTN Hospitality Technologies division. NTN HOSPITALITY TECHNOLOGIES DIVISION ------------------------------------- NTN iTV Network --------------- The NTN iTV Network transmits a wide variety of popular interactive games, advertisements and informational programming delivered daily to consumers in 3,832 restaurants, sports bars and taverns throughout the United States and Canada and to 11 pubs in the United Kingdom as of June 30, 2005. 11 We seek to continue to increase the number of hospitality locations serviced by the NTN iTV Network. We are currently accomplishing this by expanding our interactive programming content to appeal to a broader consumer base and expanding our sales and distribution "footprint" through both direct sales and independent dealer and reseller channels. The Network recently expanded beyond our core Sports and Quiz Show programming to now include NTN BlastTM, an additional programming channel featuring six new types of entertainment that can be played on our network, including Extreme Sports programming, irreverent word-based games and popular card games like Blackjack and Texas Hold'em poker. NEW DEVELOPMENTS - At June 30, 2005, our combined North America site count of 3,832 subscribing sites is the highest in our history. During the past five quarters, we have experienced the most significant increase in domestic iTV site sales in seven years. NTN iTV Network's net site growth of 118 sites in North America in the second quarter of 2005 was the strongest second quarter net site growth in the Company history. Management attributes the strong site growth during the first six months of 2005 to the continued rollout of our NTN Blast content which began in March 2004, including the Texas Hold `em poker game launched in first quarter of 2005, as well as a restructured sales force. The growth came on second quarter sales of 323 new subscribers, and six-month sales of 672 new subscribers. The six-month sales number is a 44% improvement over sales in the first six months of 2004, when NTN Blast was announced. Since the NTN Blast introduction in March 2004, site sales have increased significantly with a 97% increase above the first six month average total sales for the five years prior to the NTN Blast introduction. As revenues in this segment are derived monthly, most revenues as a result of this six-month sales increase will be recognized in future quarters. We are also seeking to increase revenue by growing the NTN iTV Network in the United Kingdom. July 2005 marked the first pro-active sales efforts to sell subscriptions to the UK-based network, called in the UK "The Buzztime Network," following a successful trial of the system in March through June 2005 at eleven UK pub locations. We have now begun to enter into agreements with pub owners to install and operate our Network. We do not anticipate being able to substantially determine our degree of success regarding this initiative until the first quarter of 2006. NTN Wireless and Software Solutions ----------------------------------- NTN Wireless offers a complete line of on-site wireless communication management products 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. Software Solutions designs, develops, and markets innovative software for the restaurant and hospitality industry, with corresponding fee-based technical support. We seek to increase the number of hospitality locations serviced by these segments by engineering more value-added features; expanding our sales and distribution "footprint" through both direct sales and independent dealer and reseller channels, as well as increasing technical support revenue. The installed base using our Software Solutions unit's ProHost Table Management and Reservation Management software products include Cheesecake Factory, Houston's, J.Alexander's, MGM/Mirage, Harrah's and others. We believe our software products are among the best in the industry and are being adopted to a greater degree now than in past periods. We also continue to expand contracted technical support and services revenue with Domino's Pizza. NEW DEVELOPMENTS - We are now integrating sale and marketing of new Wireless products with our Software Solutions segment under a unique "Speed of Service" initiative. Our newest wireless pager product, called SmartCallTM, uses an LCD display to inform the guest of his/her expected wait-time, as calculated by our ProHost(R) Table Management System. We believe that this integrated initiative will increase future revenues of both product lines. In our Software Solutions segment, we signed an agreement with a major hospitality group during the second quarter that is expected to bring the Company over $1 million in licensing revenues in the coming 12 months. In addition, we are aggressively seeking to increase points of distribution of our hospitality products via software resellers, and have increased reseller relationships from zero at the beginning of 2005 to 22 at the end of six months, with a goal of growing this number in coming quarters. We believe sales of these products can lead to substantial future earnings for the Company. BUZZTIME ENTERTAINMENT SUBSIDIARY --------------------------------- Buzztime is a developer and distributor of multiplayer interactive games and technology for numerous interactive consumer platforms, including the NTN iTV Hospitality Network, interactive cable television, satellite television, mobile phones, airline in-flight entertainment systems and now as a retail game. Our Buzztime(R) 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 12 and other popular single-player games. Buzztime's revenue is primarily generated from the distribution and licensing of its interactive trivia games, live "Play-Along" sports games and other games to emerging consumer platforms, as well as revenue related to development and production services for third parties. To accomplish our objectives we are primarily pursuing business strategies to develop and distribute the Buzztime Channel and other games to cable TV and satellite TV operators with the intent to remain a leading U.S. multi-player interactive television game channel. We have adapted or are planning to adapt our interactive game content and technology to the various leading interactive television platforms and have developed new content and licensed additional game content for deployment into the U.S. digital cable interactive television market. As Buzztime gains distribution with cable television operators, our objective is to increase revenue through three sources: license fees paid by local cable television operators, fees paid by interactive television home subscribers for premium services or pay-per-play transactions and advertising revenue. Buzztime also licenses Buzztime games to other consumer platforms with the intent of realizing new sources of licensing revenue, enhancing the value of the Buzztime brand and improving the value of our brand to the cable TV operators. To that end, Buzztime trivia is available in the form of player cards and an electronic plug-and-play TV game under a license agreement with Cadaco, Inc., a retail game and toy company. We have also licensed certain Buzztime-branded trivia games to a mobile entertainment production company for distribution to North American wireless carriers as a consumer subscription game service for certain mobile phones. Furthermore, we have entered into an agreement with a provider of airline in-flight entertainment to provide trivia game content to passengers on iTV-enabled airlines. NEW DEVELOPMENTS - In June, we received the first royalty payment from our licensee, Cadaco Inc., from the sale of Cadaco's new "Buzztime Home Trivia System" plug-and-play electronic game. Cadaco has achieved broad distribution of this new game in stores across the U.S., and is scheduled to be in 9,000 North America retail outlets including Wal-Mart, Kmart, Target, Toys R Us, Sears and others by September 30, 2005 in preparation for holiday sales. We believe that royalties from the sale of this new product will bring a substantial growth in Buzztime revenues in the fourth quarter of 2005. Buzztime has also seen increased recurring revenues from distribution to cable, satellite and mobile platforms, which we believe will continue to grow in future periods. There can be no assurance, however, that we will be successful in executing any of the strategies described above. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004 Operations for the three months ended June 30, 2005 resulted in a net loss of $1,092,000 compared to a net loss of $1,074,000 for the three months ended June 30, 2004. REVENUES The revenues of the NTN Hospitality Technologies division increased by $908,000, or 11%, to $9,397,000 from $8,489,000 for the three months ended June 30, 2004. The revenue contribution from the three operating segments of the division for the three months ended June 30, 2005 and 2004 are shown in the following table: COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE Three Months Ended June 30, --------------------------- 2005 2004 Change ---- ---- ------ NTN iTV Network* $6,920,000 $6,029,000 $891,000 NTN Wireless 1,504,000 1,551,000 (47,000) Software Solutions 973,000 909,000 64,000 ----------- ----------- --------- Total Revenue of Division $9,397,000 $8,489,000 $908,000 =========== =========== ========= (* For the purpose of this analysis, the NTN iTV Network's revenues include $0 and $12,000 of "other" revenues for the three months ended June 30, 2005 and 2004, respectively.) 13 Within the NTN iTV Network segment there are several revenue contributors, including our subscription revenue from core hospitality operations, revenue from our Canadian operations, advertising revenue and installation revenue. The primary revenue components are broken out in the following table: COMPONENTS OF NTN ITV NETWORK REVENUE Three Months Ended June 30, --------------------------- 2005 2004 Change ---- ---- ------ U.S. Subscription Revenues $ 5,707,000 $ 5,084,000 $ 623,000 Subscription and Installation Revenue from Canadian Operations 916,000 685,000 231,000 Advertising and Special Events Revenue - United States 40,000 24,000 16,000 Advertising Revenue and Special Events - Canada 95,000 91,000 4,000 U.S. Installation Revenue 162,000 145,000 17,000 ------------ ------------- ------------ Total NTN iTV Network $ 6,920,000 $ 6,029,000 $ 891,000 ============ ============= ============
As noted in the above table, our subscription revenue from core domestic hospitality operations increased by $623,000, or 12%, in the second quarter of 2005 due to an increase in net site count. Additionally, our Canadian subscription and installation revenue increased by $231,000, or 34%, in the second quarter of 2005. In the three months ended June 30, 2005, we added a net number of 100 new sites in the United States compared to a net increase of 83 new domestic sites in the three months ended June 30, 2004. The NTN iTV Network customer site count in the United States at June 30, 2005 was 3,454. This was an increase of 324 sites over June 30, 2004. In the three months ended June 30, 2005, we added a net number of 18 new sites in Canada. Our Canadian site count at June 30, 2005 was 378, bringing total North America sites to 3,832, the highest in the Company's history. Revenues from NTN Wireless decreased by $47,000 from $1,551,000 in the three months ended June 30, 2004 to $1,504,000 in the three months ended June 30, 2005. We do not consider this decrease to be a significant change. Revenues from Software Solutions increased by $64,000 from $909,000 in the three months ended June 30, 2004 to $973,000 in the three months ended June 30, 2005 due to the recognition of deferred revenue from 2004. Buzztime revenues increased $193,000 to $232,000 in the three months ended June 30, 2005 from $39,000 in the three months ended June 30, 2004. The primary components in the $193,000 revenue increase were subscription revenues and royalties on game products. As a result of the above factors, NTN's consolidated revenues increased $1,101,000, or 13%, to $9,629,000 in the three months ended June 30, 2005 from $8,528,000 in the three months ended June 30, 2004. OPERATING EXPENSES Consolidated direct operating costs increased $516,000, or 18%, to $3,438,000 in the three months ended June 30, 2005 from $2,922,000 in the three months ended June 30, 2004. The following table compares the direct costs for each of our operating segments between the three months ended June 30, 2005 and 2004: 14 DIRECT OPERATING COSTS Three Months Ended June 30, --------------------------- 2005 2004 Change ---- ---- ------ NTN iTV Network $ 2,007,000 $1,619,000 $ 388,000 NTN Wireless 798,000 883,000 (85,000) Software Solutions 162,000 128,000 34,000 ------------ ---------- ---------- Hospitality Technologies division 2,967,000 2,630,000 337,000 Buzztime 471,000 292,000 179,000 ------------ ---------- ---------- Consolidated $ 3,438,000 $2,922,000 $ 516,000 ============ ========== ========= The primary drivers in the $516,000 increase in our direct operating costs was the $388,000 increase in the direct operating costs in the NTN iTV Network and the $179,000 increase in the direct operating costs of Buzztime. The reductions in direct operating costs in the NTN Wireless segment helped partially offset the increase in the NTN iTV Network segment. The $388,000 increase in the NTN iTV Network's direct operating costs came from a variety of factors, including: o $87,000 of the increase came from NTN Canada. The largest single component of the increase in NTN Canada was an increase in direct depreciation of $84,000 due to installation of new site equipment at new and existing sites. Prior to our acquisition of that operation, the site equipment in Canada was largely fully depreciated; o $26,000 of direct expenses related to our trial in the UK without any corresponding expenses in the three months ended June 30, 2004; o $123,000 of the increase came from communication costs due to the higher costs of the satellite service in accordance with a new agreement signed in December 2004 and acquisition of increased bandwidth; o $96,000 of the increase came from increased technical site service expense. This expense was due to an increase in the number of technical service visits to our sites due to new software releases; o $40,000 of the increase came from increased domestic installation expense. This expense was due to our continued site count growth. The $85,000 decrease in the direct operating costs of NTN Wireless was related to the lower level of cost of goods sold associated with the NTN Wireless revenue decrease of $47,000 noted above as well as an increase in gross margin. Our gross margin in the NTN Wireless segment in the three months ended June 30, 2005 was 47%, a 4% increase over the 43% gross margin we recorded in the three months ended June 30, 2004. The $34,000 increase in the direct operating costs of Software Solutions was related to an increased level of costs of goods sold based on a higher concentration of hardware shipments associated with the Software Solutions revenue increase of $64,000 in the three months ended June 30, 2005 compared to the three months ended June 30, 2004. Our gross margin in the Software Solutions segment in the three months ended June 30, 2005 was 83%, which represented a 3% decrease over the 86% gross margin we recorded in the three months ended June 30, 2004. The $179,000 increase in the direct operating costs of Buzztime was primarily due to a $134,000 of salary production costs that were directly associated with the increase in production revenue. 15 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Consolidated selling, general and administrative expenses (SG&A) increased $535,000 or 9%, to $6,710,000 in the three months ended June 30, 2005 from $6,175,000 in the three months ended June 30, 2004. The following table compares the selling, general and administrative expenses for each of our operating segments between the three months ended June 30, 2005 and 2004: SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Three Months Ended June 30, --------------------------- 2005 2004 Change ---- ---- ------ NTN iTV Network $4,307,000 $3,696,000 $611,000 NTN Wireless 453,000 399,000 54,000 Software Solutions 1,242,000 1,260,000 (18,000) ----------- ---------- --------- Hospitality Technologies division 6,002,000 5,355,000 647,000 Buzztime 708,000 820,000 (112,000) ----------- ---------- --------- Consolidated $6,710,000 $6,175,000 $535,000 =========== ========== ========= The $611,000 SG&A increase in the NTN iTV Network segment came from a variety of factors, including: o $248,000 of SG&A expenses related to our trial in the UK without any corresponding expenses in the three months ended June 30, 2004; o Increased domestic sales commissions of $80,000 relating to the increase in new site sales: o Increased estimate for bad debts of $88,000; o Increased marketing and travel and entertainment expenses of $81,000 associated with the launch of NTN BlastTM content and the new iTV dual-channel technology platform and rollout of an independent dealer network. The $54,000 increase in the SG&A expenses of NTN Wireless was primarily due to an increase in personnel. The $18,000 reduction in the SG&A expenses of Software Solutions was primarily due to personnel reductions. The $112,000 reduction in the SG&A expenses of Buzztime was primarily due to personnel reductions. LITIGATION, LEGAL AND PROFESSIONAL FEES Litigation, legal and professional fees decreased $180,000 to $190,000 in the three months ended June 30, 2005 compared to $370,000 in the three months ended June 30, 2004. The litigation, legal and professional fees in the three months ended June 30, 2004 included $133,000 of legal expenses to defend the litigation against NTN Wireless with no comparable expense in the three months ended June 30, 2005. The three months ended June 30, 2004 included $81,000 of Sarbanes-Oxley-related expenses compared to $20,000 in the three months ended June 30, 2005. STOCK BASED COMPENSATION Stock based compensation expense increased by $45,000 to $85,000 in the three months ended June 30, 2005 compared to $40,000 in the three months ended June 30, 2004. This increase largely arises from recognition of non-cash expense associated with the grants of certain deferred stock units to our executives in third quarter 2004 under the 2004 Performance Incentive Plan. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization not related to direct operating costs decreased by $50,000, or 23%, to $165,000 in the three months ended June 30, 2005 from $215,000 in the three months ended June 30, 2004 due to certain assets becoming fully depreciated. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses decreased $22,000 to $66,000 in the three months ended June 30, 2005 from $88,000 in the three months ended June 30, 2004, due primarily to the completion of certain projects for the iTV network. 16 OTHER INCOME (EXPENSE) INTEREST INCOME AND EXPENSE Interest income in the three months ended June 30, 2005 was $25,000 compared to $23,000 in the three months ended June 30, 2004. Interest expense increased $21,000, or 75%, to $49,000 in the three months ended June 30, 2005, compared to $28,000 in the three months ended June 30, 2004, due to borrowing on our line of credit and additional leases entered into in 2005. INCOME TAXES The NTN Hospitality Technologies division is expected to report taxable income for the year ended December 31, 2005. For federal income tax reporting purposes and in unitary states where NTN may file on a combined basis, taxable losses incurred by Buzztime should be sufficient to offset the division's taxable income. In states where separate filing is required, the division will likely incur a state tax liability. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. As a result, NTN Hospitality Technologies recorded a tax provision of $43,000 in the three months ended June 30, 2005. This was a $31,000 increase over the $12,000 provision for income taxes recorded in the three months ended June 30, 2004. EBITDA Earnings before interest, taxes, depreciation and amortization ("EBITDA") is not intended to represent a measure of performance in accordance with accounting principles generally accepted in the United States of America ("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. Our EBITDA improved by $82,000 to negative $23,000 in the three months ended June 30, 2005 from EBITDA of negative $105,000 in the three months ended June 30, 2004.This EBITDA improvement was due to the increase in interest expense (net), depreciation and amortization expense and income tax expense offset by the increase in loss in the three months ended June 30, 2005. The improvement in EBITDA was achieved despite last year's Q2 benefiting from a one-time legal settlement of $225,000 and despite this year incurring $307,000 in costs for the launch of our iTV Hospitality Network in the UK. Without these items, consolidated Q2 EBITDA would have improved by an additional $532,000 to $284,000. The following table reconciles our net loss per GAAP to EBITDA: THREE MONTHS ENDED JUNE 30, ---------------------------- 2005 2004 ----------- ----------- EBITDA CALCULATION Net loss per GAAP $(1,092,000) $(1,074,000) Interest expense (net) 24,000 5,000 Depreciation and amortization 1,002,000 952,000 Income taxes 43,000 12,000 ----------- ----------- EBITDA $ (23,000) $ (105,000) =========== =========== On a segment basis, our segments generated EBITDA levels as presented below: ($000) THREE MONTHS ENDED JUNE 30, 2005 ----------------------------------------------------------------- EBITDA CALCULATION: NTN ITV NTN SOFTWARE HOSP. NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL ------- -------- --------- ---------- -------- ------- Net income (loss) $ 82 $ 240 $ (421) $ (99) $ (993) $(1,092) Interest expense (net) 23 -- -- 23 1 24 Depreciation and amortization 744 14 85 843 159 1,002 Income taxes 43 -- -- 43 -- 43 ------- -------- --------- ---------- -------- ------- EBITDA $ 892 $ 254 $ (336) $ 810 $ (833) $ (23) ======= ======== ========= ========== ======== ======= 17
($000) THREE MONTHS ENDED JUNE 30, 2004 ----------------------------------------------------------------- EBITDA CALCULATION: NTN ITV NTN SOFTWARE HOSP. NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL ------- -------- --------- ---------- -------- ------- Net income (loss) $ 420 $ 115 $ (510) $ 25 $ (1,099) $(1,074) Interest expense (net) 5 -- -- 5 -- 5 Depreciation and amortization 704 19 94 817 135 952 Income taxes 12 -- -- 12 -- 12 ------- -------- --------- ---------- -------- ------- EBITDA $ 1,141 $ 134 $ (416) $ 859 $ (964) $ (105) ======= ======== ========= ========== ======== =======
SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004 Operations for the six months ended June 30, 2005 resulted in a net loss of $2,439,000 compared to a net loss of $2,368,000 for the six months ended June 30, 2004. REVENUES The revenues of the NTN Hospitality Technologies division increased by $1,320,000, or 8%, to $18,610,000 for the six months ended June 30, 2005 from $17,290,000 for the six months ended June 30, 2004. The revenue contribution from each operating segment of the division for the six months ended June 30, 2005 and 2004 are shown in the following table: COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE Six Months Ended June 30, ------------------------- 2005 2004 Change ---- ---- ------ NTN iTV Network* $ 13,712,000 $ 12,345,000 $ 1,367,000 NTN Wireless 2,971,000 3,090,000 (119,000) Software Solutions 1,927,000 1,855,000 72,000 -------------- ------------- ------------ Total Revenue of Division $ 18,610,000 $ 17,290,000 $ 1,320,000 ============== ============= ============
(* For the purpose of this analysis, the NTN iTV Network's revenues include $0 and $14,000 of "other" revenues for the six months ended June 30, 2005 and 2004, respectively.) Within the NTN iTV Network segment there are several revenue contributors, including our subscription revenue from core hospitality operations, revenue from our Canadian operations, advertising revenue and installation revenue. The primary revenue components are broken out in the following table: COMPONENTS OF NTN ITV NETWORK REVENUE Six Months Ended June 30, ------------------------- 2005 2004 Change ---- ---- ------ U.S. Subscription Revenues $11,263,000 $ 10,116,000 $ 1,147,000 Subscription and Installation Revenue from Canadian Operations 1,785,000 1,511,000 274,000 Advertising and Special Events Revenue - United States 147,000 218,000 (71,000) Advertising Revenue and Special Events - Canada 176,000 182,000 (6,000) U.S. Installation Revenue 341,000 318,000 23,000 ------------- ------------- ------------- NTN iTV Network $13,712,000 $12,345,000 $ 1,367,000 ============= ============= =============
18 As noted in the above table, our subscription revenue from core domestic hospitality operations increased by $1,147,000, or 11%, in the six months ended June 30, 2005 due to an increase in net site count. Additionally, our Canadian subscription and installation revenue increased by $274,000, or 18%, in the six months ended June 30, 2005. In the six months ended June 30, 2005, we added a net number of 145 new sites in the United States compared to no change in new domestic sites in the six months ended June 30, 2004. The NTN iTV Network customer site count in the United States at June 30, 2005 was 3,454. This was an increase of 324 sites over June 30, 2004. In the six months ended June 30, 2005, we added a net number of 27 new sites in Canada. Our Canadian site count at June 30, 2005 was 378. At June 30, 2005, our combined North America site count of 3,832 subscribing sites is the highest in Company history. Revenues from NTN Wireless decreased by $119,000 from $3,090,000 in the six months ended June 30, 2004 to $2,971,000 in the six months ended June 30, 2005. This decrease occurred because the first half of 2004 included a wide product roll-out to a restaurant chain while 2005 did not include such a roll-out. Revenues from Software Solutions increased by $72,000 from $1,855,000 in the six months ended June 30, 2004 to $1,927,000 in the six months ended June 30, 2005 due to the recognition of deferred revenue from 2004. Buzztime revenues increased $444,000 to $526,000 in the six months ended June 30, 2005 from $82,000 in the six months ended June 30, 2004. The primary components in the $444,000 revenue increase were $226,000 under the Trial Agreement with Comcast Cable that related to a combination of technology development work, equipment installations and license fees and $218,000 in consumer subscription fees via our distribution through wireless/mobile phones and satellite television companies and royalties on game products. As a result of the above factors, NTN's consolidated revenues increased $1,764,000, or 10%, to $19,136,000 in the six months ended June 30, 2005 from $17,372,000 in the six months ended June 30, 2004. OPERATING EXPENSES Consolidated direct operating costs increased $719,000, or 12%, to $6,858,000 in the six months ended June 30, 2005 from $6,139,000 in the six months ended June 30, 2004. The following table compares the direct costs for each of our operating segments between the six months ended June 30, 2005 and 2004: DIRECT OPERATING COSTS Six Months Ended June 30, ------------------------- 2005 2004 Change ---- ---- ------ NTN iTV Network $4,105,000 $3,314,000 $ 791,000 NTN Wireless 1,708,000 1,893,000 (185,000) Software Solutions 270,000 350,000 (80,000) ----------- ----------- ---------- Hospitality Technologies division 6,083,000 5,557,000 526,000 Buzztime 775,000 582,000 193,000 ----------- ----------- ---------- Consolidated $6,858,000 $6,139,000 $ 719,000 ========== =========== ========== The primary drivers in the $719,000 increase in our direct operating costs were the $791,000 increase in the direct operating costs in the NTN iTV Network and the $193,000 increase in the direct operating costs of Buzztime. The reductions in direct operating costs in the NTN Wireless and Software Solutions segments helped partially offset the increase in the NTN iTV Network segment. The $791,000 increase in the NTN iTV Network's direct operating costs came from a variety of factors, including: 19 o $276,000 of the increase came from NTN Canada. The largest single component of the increase in NTN Canada was an increase in direct depreciation of $159,000 due to installation of new site equipment at new and existing sites. Prior to our acquisition of that operation, the site equipment in Canada was largely fully depreciated. Another $85,000 of the increase in NTN Canada was from a combination of increased installation and technical site service expenses associated with the installation and conversion to iTV and NTN Blast of a significant percentage of the Canadian installed base; o $82,000 of direct expenses related to our trial in the UK without any corresponding expenses in the six months ended June 30, 2004; o $199,000 of the increase came from communication costs due to the higher costs of the satellite service in accordance with a new agreement signed in December 2004 and acquisition of increased bandwidth; o $176,000 of the increase came from increased technical site service expense. This expense was due to an increase in the number of technical service visits to our sites due to new software releases; o $101,000 of the increase came from increased domestic installation expense. This expense was due to our continued site count growth. The $185,000 decrease in the direct operating costs of NTN Wireless was related to the lower level of cost of goods sold associated with the NTN Wireless revenue decrease of $119,000 noted above as well as an increase in gross margin. Our gross margin in the NTN Wireless segment in the six months ended June 30, 2005 was 43%, a 4% increase over the 39% gross margin we recorded in the six months ended June 30, 2004. The $80,000 decrease in the direct operating costs of Software Solutions was related to a decreased level of costs of goods sold of hardware shipments and a decrease in depreciation after the sale of software products to Intura. Our gross margin in the Software Solutions segment in the six months ended June 30, 2005 was 86%, which represented a 5% increase over the 81% gross margin we recorded in the six months ended June 30, 2004. The $193,000 increase in the direct operating costs of Buzztime was primarily due to a $134,000 of salary production costs that were directly associated with the increase in production revenue. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Consolidated selling, general and administrative expenses (SG&A) increased $716,000 or 6%, to $13,036,000 in the six months ended June 30, 2005 from $12,320,000 in the six months ended June 30, 2004. The following table compares the selling, general and administrative expenses for each of our operating segments between the six months ended June 30, 2005 and 2004: SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Six Months Ended June 30, ------------------------- 2005 2004 Change ---- ---- ------ NTN iTV Network $ 8,414,000 $7,462,000 $952,000 NTN Wireless 880,000 785,000 95,000 Software Solutions 2,422,000 2,532,000 (110,000) ----------- ----------- --------- Hospitality Technologies division 11,716,000 10,779,000 937,000 Buzztime 1,320,000 1,541,000 (221,000) ----------- ----------- --------- Consolidated $13,036,000 $12,320,000 $716,000 =========== =========== ======== The $952,000 SG&A increase in the NTN iTV Network segment came from a variety of factors, including: 20 o $375,000 of SG&A expenses related to our trial in the UK without any corresponding expenses in the six months ended June 30, 2004; o Increased domestic sales commissions of $152,000 relating to the increase in new site sales; o Increased estimate for bad debts of $264,000; o Increased marketing and travel and entertainment expenses of $55,000 associated with the launch of NTN BlastTM content and the new iTV dual-channel technology platform and rollout of an independent dealer network. The $95,000 increase in the SG&A expenses of NTN Wireless was primarily due to an increase in personnel. The $110,000 reduction in the SG&A expenses of Software Solutions was primarily due to personnel reductions. The $221,000 reduction in the SG&A expenses of Buzztime was primarily due to personnel reductions. NON-CASH CHARGE RELATED TO SOFTWARE PRODUCT SALE 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. 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 and SLP software for two years (we continue to retain the rights to the maintenance and support revenue from the legacy products). We engaged a third party valuation firm to estimate the value of our 10% ownership interest in Intura. Based upon that analysis, we concluded that the fair value of our investment in Intura was approximately $69,000. Additionally, based on that analysis, we concluded that there was no impairment of the goodwill in the Software Solutions segment as a result of this transaction. The transfer of the software products, which we carried as part of our intangible assets, resulted in a one-time, non-cash charge of $276,000. LITIGATION, LEGAL AND PROFESSIONAL FEES Litigation, legal and professional fees decreased $178,000 to $570,000 in the six months ended June 30, 2005 compared to $748,000 in the six months ended June 30, 2004. Legal fees in the six months ended June 30, 2005 decreased $269,000 which was primarily related to $176,000 of legal expenses to defend the litigation against NTN Wireless in the six months ended June 30, 2004 with no comparable expense in 2005. The six months ended June 30, 2005 included $253,000 of Sarbanes-Oxley and audit related expenses compared to $197,000 in the six months ended June 30, 2004. STOCK BASED COMPENSATION Stock based compensation expense increased by $98,000 to $192,000 in the six months ended June 30, 2005 compared to $94,000 in the six months ended June 30, 2004. This increase largely arises from recognition of non-cash expense associated with the grants of certain deferred stock units to our executives in third quarter 2004 under the 2004 Performance Incentive Plan. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization not related to direct operating costs decreased by $15,000, or 3%, to $420,000 in the six months ended June 30, 2005 from $435,000 in the six months ended June 30, 2004 due to certain assets becoming fully depreciated. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses decreased $47,000 to $125,000 in the six months ended June 30, 2005 from $172,000 in the six months ended June 30, 2004, due primarily to the completion of certain projects for the iTV network. OTHER INCOME (EXPENSE) INTEREST INCOME AND EXPENSE Interest income in the six months ended June 30, 2005 was $51,000 compared to $42,000 in the six months ended June 30, 2004. 21 Interest expense increased $73,000, or 11%, to $73,000 in the six months ended June 30, 2005, compared to $66,000 in the six months ended June 30, 2004, due to borrowing on our line of credit and additional leases entered into in 2005. INCOME TAXES The NTN Hospitality Technologies division is expected to report taxable income for the year ended December 31, 2005. For federal income tax reporting purposes and in unitary states where NTN may file on a combined basis, taxable losses incurred by Buzztime should be sufficient to offset the division's taxable income. In states where separate filing is required, the division will likely incur a state tax liability. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. As a result, NTN Hospitality Technologies recorded a tax provision of $76,000 in the six months ended June 30, 2005. This was a $43,000 increase over the $33,000 provision for income taxes recorded in the six months ended June 30, 2004. EBITDA Earnings before interest, taxes, depreciation and amortization ("EBITDA") is not intended to represent a measure of performance in accordance with accounting principles generally accepted in the United States of America ("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. Our EBITDA improved by $63,000 to negative $356,000 in the six months ended June 30, 2005 from EBITDA of negative $419,000 in the six months ended June 30, 2004.This EBITDA improvement was due to the increase in depreciation and amortization expense and income tax expense offset by the increase in loss in the six months ended June 30, 2005. The improvement in EBITDA resulted despite last year's first six months benefiting from a one-time legal settlement of $225,000 and despite this year incurring $490,000 in costs for the launch of our iTV Hospitality Network in the UK. Without these items, consolidated six month EBITDA would have improved by $715,000 to $134,000. The following table reconciles our net loss per GAAP to EBITDA: SIX MONTHS ENDED JUNE 30, --------------------------- 2005 2004 ------------ ----------- EBITDA CALCULATION Net loss per GAAP $ (2,439,000) $(2,368,000) Interest expense (net) 22,000 24,000 Depreciation and amortization 1,985,000 1,892,000 Income taxes 76,000 33,000 ------------ ----------- EBITDA $ (356,000) $ (419,000) ============ =========== On a segment basis, our segments generated EBITDA levels as presented below: ($000) SIX MONTHS ENDED JUNE 30, 2005 ----------------------------------------------------------------- EBITDA CALCULATION: NTN ITV NTN SOFTWARE HOSP. NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL ------- -------- --------- ---------- -------- ------- Net income (loss) $ 19 $ 289 $ (1,091) $ (783) $ (1,656) $(2,439) Interest expense (net) 19 -- -- 19 3 22 Depreciation and amortization 1,453 39 177 1,669 316 1,985 Income taxes 76 -- -- 76 -- 76 ------- -------- --------- ---------- -------- ------- EBITDA $ 1,567 $ 328 $ (914) $ 981 $ (1,337) $ (356) ======= ======== ========= ========== ======== ======= 22 ($000) SIX MONTHS ENDED JUNE 30, 2004 ----------------------------------------------------------------- EBITDA CALCULATION: NTN ITV NTN SOFTWARE HOSP. NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL ------- -------- --------- ---------- -------- ------- Net income (loss) $ 626 $ 165 $ (1,079) $ (288) $ (2,080) $(2,368) Interest expense (net) 24 -- -- 24 -- 24 Depreciation and amortization 1,389 55 192 1,636 256 1892 Income taxes 33 -- -- 33 -- 33 ------- -------- --------- ---------- -------- ------- EBITDA $ 2,072 $ 220 $ (887) $ 1,405 $ (1,824) $ (419) ======= ======== ========= ========== ======== =======
LIQUIDITY AND CAPITAL RESOURCES At June 30, 2005, we had cash and cash equivalents of $4,647,000 and working capital (current assets in excess of current liabilities) of $4,012,000, compared to cash and cash equivalents of $6,710,000 and working capital of $6,644,000 at December 31, 2004. Net cash provided by (used in) operating activities was $273,000 for the six months ended June 30, 2005 compared to $(1,826,000) for the six months ended June 30, 2004, or a $2,099,000 increase in cash provided by operating activities. The primary causes of this $2,099,000 increase in the cash generated by our operating activities were: o the non-cash nature of the $343,000 charge related to the Intura transaction, the $294,000 increase in the provision for doubtful accounts, the $98,000 increase in stock-based compensation charges, and the $157,000 increased loss on disposition of equipment and capitalized software, which while they decreased our earnings had no impact on our cash generated from operating activities, o the use of $163,000 less cash supporting the growth of our accounts receivable and the increase in our accounts payable and accrued expenses generated an increase of $148,000 of incremental cash, and o an increase in the use of cash associated with the change in deferred revenue of $695,000. The increase in the deferred revenue was due to the growth of new sites in our NTN iTV Network as discussed above, and Buzztime deferred revenue. Net cash used in investing activities was $2,672,000 for the six months ended June 30, 2005 compared with $1,526,000 for the six months ended June 30, 2004. Included in net cash used in investing activities for the six months ended June 30, 2005 were $2,279,000 in capital expenditures largely related to the increase in our NTN iTV Network sites, $123,000 of deposits on broadcast equipment and $270,000 of capitalized software development expenditures. The primary components of net cash used in investing activities for the six months ended June 30, 2004 were $1,218,000 of capital expenditures, $82,000 of incremental cash usage relating to our acquisitions, $32,000 in deposits on broadcast equipment and $194,000 of capitalized software development expenditures. Net cash provided by financing activities was $356,000 for the six months ended June 30, 2005 compared to $11,664,000 for the six months ended June 30, 2004. The cash provided by financing activities for the six months ended June 30, 2005 included $700,000 in borrowings on our revolving line of credit and $265,000 in cash generated from the exercise of stock options and warrants. Those cash inflows were partially offset by $462,000 in principal payments on equipment note payable and $147,000 in principal payments on capital leases. The $11,664,000 in cash provided by financing activities in the six months ended June 30, 2004 included $13,001,000 of net proceeds from our equity offering in January 2004 and $320,000 from the exercise of stock options and warrants. These proceeds were partially offset by $1,000,000 of principal payments on the revolving line of credit, $571,000 of principal payments on equipment notes payable and $86,000 of principal payments on capital leases. FUTURE FINANCING NEEDS We believe we currently have cash on hand to operate our business. Cash reserves have declined in the first six months of 2005 due to the record growth of NTN iTV Network site installations requiring substantial capital investment, along with continued investment in growth initiatives for our Buzztime Licensing efforts, new investment for distribution of our products in the UK, and operating losses in our Software Solutions segment. We anticipate, however, that stronger operating results in the third and fourth 23 quarter 2005, and into 2006, will allow the cash on hand, along with cash from operations, to be sufficient to operate the Company's business. While there is currently no plan to raise capital, continued high growth or lower than expected results from operations could require us to raise capital at less than favorable rates. As further background and insight, in 2004 and year to date in 2005, in addition to capital expenditures to support the record sales of new iTV Network sites, our iTV Network has required a substantial capital investment due to the one-time conversion of older installations to VSAT connectivity. Each new site installation in 2004 and during Q1 2005 required approximately $5,000 in capital investment and equipment. A move to predominantly DSL connectivity in Q2 2005 has lowered this amount to approximately $3,500 per site. This savings has significantly improved the business model for site profits versus invested capital. Despite this savings, total capital expenditures do remain substantial as sales are running well ahead of prior years and show no signs of abating, thus offsetting what would otherwise be lower total capital expenditures. Additionally, we have been investing capital to convert our approximately 350 Canadian iTV Network sites to our newest iTV2 technology, which allows the play of Texas Hold `Em, as well as other new game content. We acquired the NTN Canada Network assets of our Canadian licensee in December 2003. The previous owner had not converted the Canadian customer base to DITV during the 1999 to 2001 period when our domestic sites were converted, and the Canadian Network had become antiquated and was rapidly losing customers. Following the purchase, we have been in the process of upgrading the technology for all 350 active sites there. Through June 30, 2005, approximately 77% of the Canadian sites had been converted to iTV2, our newest technology platform, and connected via either VSAT or DSL communication platforms. Over the next 6 months we plan to convert the remainder of our current customer base at a cost of approximately $280,000. Capital requirements in the coming 12 months will additionally depend upon two other initiatives. The first is the launch of our iTV Network in the UK, which began with an initial trial of eleven iTV Network sites on March 1, 2005. We believe that a significant growth opportunity exists in the UK for our iTV product, and each new site will require capital expenditures of about $3,500, which is commensurate with U.S. sites. The second initiative is the operations of our Software Solutions segment, for which we have invested over the past two years with a goal that stronger sales can be obtained in late 2005 and in 2006. The capital necessary to support a third initiative, the development and distribution of the Buzztime Channel to the major U.S. cable systems, should decline substantially for the last half of 2005 as operating losses have been reduced to a lower run-rate of approximately $3 million from its historic loss of approximate $4 million per year. This is because the Company has been able to reduce its investment in technology and applications for deployment to digital cable television systems while still maintaining the market requirements to support current operations and sales orders. We do anticipate that costs could go up substantially if we succeed as planned and enter into broader national agreements with the major cable operators, as this may prompt us to aggressively increase Buzztime development, sales and marketing efforts to more quickly advance our distribution within the U.S. market. Offsetting cash usage in this segment will be first-time license revenues from sales of the new plug-and-play Buzztime game to U.S. toy retailers, which could be significant, along with increased satellite TV and mobile licensing revenue. In 2006, continuing Buzztime losses, if incurred, will be due primarily to the approximately $1.5 million in annual costs to create the trivia and live sports game content that is used by all of our interactive game businesses, including distribution to the NTN iTV Network, cable, mobile, satellite and retail toy markets. All of this expense is currently borne by the Buzztime subsidiary. CRITICAL ACCOUNTING POLICIES 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. 24 o We record deferred costs and revenues related to the costs and related installation revenue associated with installing iTV customer sites. Based on Staff Accounting Bulletin 104 (SAB 104), we amortize these amounts over an estimated average life of a customer relationship. Currently, we estimate that the average customer life is three years. 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. o We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. During the three months ended March 31, 2005, we modified our methodology for determining our allowance for doubtful accounts based upon an increasing number of our customers that pay us under electronic payment methods such as credit cards and direct debits to their checking accounts and by segment. We estimate our allowance based on: o For iTV customers that pay under credit terms, we fully reserve for all the customers that have terminated our iTV Network service or had their service suspended. Additionally, we reserve three percent of outstanding balances for all unreserved customer balances. o For iTV customers that pay under electronic payment arrangements, we fully reserve for all the customers that have terminated our iTV Network service or had their service suspended. Additionally, we fully reserve for all receivables over 60 days past due. We then reserve three percent of outstanding balances for all unreserved customer balances. o For Software Solutions and NTN Wireless customers, we reserve five percent of outstanding balances for all unreserved customer balances. Beyond the above allowance parameters, we also may increase the reserve based on our business judgment. 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. 25 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 June 30, 2005 the net amount of $6,947,000 of goodwill and intangible assets represented 24.2% 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 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 first quarter of 2006. We believe that this new standard will increase our operating losses in the future but that increase will be of a non-cash nature. 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 Note 16 - Related Parties or in Note 21 - Subsequent Events in our Form 10-K/A for the year ended December 31, 2004, 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 the Canadian operations and the trial deployment in the United Kingdom. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to risks related to stock market fluctuations, interest rates and currency exchange rates. As of June 30, 2005, we owned common stock of an Australian company that is subject to market risk. At June 30, 2005, the carrying value of this investment was $422,000, which is net of a $394,000 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 June 30, 2005, a hypothetical 10% decline in the value of the Australian dollar would result in a reduction of $42,000 in the carrying value of the investment. As of June 30, 2005 we also had cash equivalents of approximately $2.75 million invested primarily in short-term government bonds that is subject to market risk. 26 We have outstanding line of credit borrowings of $700,000 at June 30, 2005 which bear a rate of interest equal to the prime rate plus 2% per annum. A hypothetical one-percentage point increase in the prime rate would result in an increase of $7,000 in annual interest expense. We also face currency exchange risk with our operations in Canada. NTN Canada earned approximately Canadian $835,000 (or U.S. $678,000) before corporate overhead and taxes in the three months ended June 30, 2005. A hypothetical 10% decline in the value of the Canadian dollar versus the United States dollar would reduce the stated contribution from that unit to the NTN iTV Network segment by that same 10%. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of the end of the period covered by this report, our management (including our chief executive officer and chief financial officer) evaluated our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as to whether such disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, management has concluded that our efforts to remediate the material weakness described below have not yet been completed, and therefore the Company's disclosure controls and procedures were not effective as of the end of the period covered by this report. However, as also described below, we feel that we have made significant progress in remediating such material weakness. Under Auditing Standard No. 2 as defined by the PCAOB, a material weakness is a significant deficiency, or a combination of significant deficiencies, that result in more than likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We identified that, as of December 31, 2004, there was inadequate documentation of the design and testing of controls over relevant assertions related to certain significant accounts and disclosures. This pertains to documenting to the degree appropriate how certain controls were initiated, authorized, recorded, processed, tested or reported. Our review found no material deficiencies in the functioning of the underlying control activities themselves. We also did not have any audit adjustments to the consolidated financial statements as of and for the year ended December 31, 2004. We have made significant progress in designing and implementing improved controls and processes to address the weakness described above. We are redrafting our internal control policies and related test scripts generally to a detail level closer to the desk procedure level to allow a more precise understanding of our processes and controls. We are also expanding and refining our testing methodologies to reflect that greater level of detail in our documentation. We currently are unable to conclusively determine when the above noted material weakness will be fully remediated. However, we believe we have designed a plan and secured the necessary resources that will enable us to continue to make significant progress toward full remediation; specifically, we have: o appointed a vice president to oversee internal controls; o established a compliance team consisting of managers of key areas of responsibility; o established a timeline and schedule of documentation tasks to be completed by members of the compliance team with input and verification from process owners; and o established regularly scheduled status conferences with our independent accountants. We cannot be certain at this time that our effort will result in complete remediation by the third quarter of fiscal 2005. Therefore we are currently unable to provide assurance that the material weakness described above will not be reported in our Quarterly Report on Form 10-Q for the third quarter of fiscal 2005. 27 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING Since our evaluation as of June 30, 2005, other than as described in EVALUATION OF DISCLOSURE CONTROLS AND Procedures, we have had no significant changes in our internal controls. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. We are subject to litigation from time to time in the ordinary course of our business. There can be no assurance that any or all of the following claims will be decided in our favor and we are not insured against all claims made. During the pendency of such claims, we will continue to incur the costs of our legal defense. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - None ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We held our annual meeting of shareholders on June 10, 2005. The following matters were voted upon at such meeting: 1. To elect three directors to hold office until the 2008 annual meeting of stockholders and until their respective successors are duly elected and qualified: BARRY BERGSMAN Votes in Favor.............. 34,124,912 Abstentions................. 15,437,181 NEAL FONDREN Votes in Favor.............. 45,005,042 Abstentions ................ 4,557,051 STANLEY B. KINSEY Votes in Favor.............. 33,591,664 Abstentions................. 15,970,429 Each of Mr. Bergsman, Mr. Fondren and Mr. Kinsey was elected as a director to hold office until the annual meeting of stockholders in 2008 and until each of their respective successors is duly elected and qualified. The following directors were not subject to election and their term of office continued after the meeting: Gary Arlen, Robert M. Bennett, Robert Clasen, Michael Fleming and Esther Rodriquez. Mr. Bennett and Ms. Rodriguez subsequently retired their positions as directors effective June 30, 2005. Kendra Berger and Adrian A. Pace were appointed to serve as directors effective July 1, 2005. As a result of stockholder approval of Proposal 2 to eliminate the classified structure of the Board of Directors as reported below, Mr. Bergsman, Mr. Fondren and Mr. Kinsey will each serve a term of one year through the date of the annual meeting in 2006 or until their respective successors are duly qualified. 2. To amend the Restated Articles of Incorporation of NTN Communications, Inc. to eliminate the classified structure of the Board of Directors: Votes In Favor ............. 49,115,521 Votes Against............... 305,952 Abstentions ................ 140,620 The proposal to amend the Restated Articles of Incorporation of NTN Communications, Inc. to eliminate the classified structure of the Board of Directors was approved by the Company's stockholders. All Directors will each serve a term of one year. 3. To amend the Restated Articles of Incorporation of NTN Communications, Inc. to change the Company's corporate name from NTN Communications, Inc. to NTN Buzztime, Inc.: Votes In Favor ............ 37,050,826 Votes Against ............. 11,318,178 Abstentions................ 1,193,089 28 The proposal to amend the Restated Articles of Incorporation of NTN Communications, Inc. to change the Company's corporate name from NTN Communications, Inc. to NTN Buzztime, Inc. was approved by the Company's stockholders. 4. To ratify the appointment of HASKELL & WHITE LLP as independent accountants of NTN for the fiscal year ending December 31, 2005. Votes In Favor ............ 40,696,167 Votes Against ............. 8,532,347 Abstentions................ 333,579 The proposal for ratification of the appointment of HASKELL & WHITE LLP was approved. ITEM 5. OTHER INFORMATION - None ITEM 6. EXHIBITS (a) Exhibits 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended (4) 3.2 Certificate of Designations, Rights and Preferences of Series B Convertible Preferred Stock (7) 3.3 Certificate of Amendment to Restated Certificate of Incorporation of the Company, dated March 22, 2000 (8) 3.4 Certificate of Amendment to Restated Certificate of Incorporation of the Company, dated March 24, 2000 (8) 3.5 By-laws of the Company (2) 3.6 Certificate of Amendment to Restated Certificate of Incorporation of the Company, dated May 27, 2003 (15) 4.1 Specimen Common Stock Certificate (10) 4.2* Stock Option Agreement, dated October 7, 1998, by and between NTN Communications, Inc. and Stanley B. Kinsey (5) 4.3* Stock Option Agreement, dated October 7, 1999, by and between NTN Communications, Inc. and Stanley B. Kinsey (6) 4.4* Stock Option Agreement, dated January 26, 2001, by and between NTN Communications, Inc. and Stanley B. Kinsey (12) 4.5 Warrant Certificate issued January 13, 2003 by NTN Communications, Inc. to Robert M. and Marjie Bennett, Trustees The Bennett Family Trust dated 11-17-86 (18) 4.6 NTN Investor Rights Agreement, dated May 7, 2003, by and between NTN Communications, Inc. and Media General, Inc. (17) 4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and among NTN Communications, Inc., Buzztime Entertainment, Inc. and Media General, Inc. (17) 4.8 Common Stock Purchase Warrant dated May 7, 2003 issued to Media General, Inc. exercisable for 500,000 shares of common stock of Buzztime Entertainment, Inc. (17) 4.9 Form of Common Stock Purchase Warrant issued to Roth Capital Partners (13) 4.10* Stock Option Agreement, dated June 28, 2005 by and between NTN Communications, Inc. and Stanley B. Kinsey(1) 10.1 License Agreement with NTN Canada (3) 10.2* Employment Agreement, dated June 28, 2005, by and between NTN Communications, Inc. and Stanley B. Kinsey (1) 10.3 Subscription Agreement dated January 13, 2003 between NTN Communications, Inc. and Robert M. and Marjie Bennett, Trustees The Bennett Family Trust dated 11-17-86 (18) 29 10.4 Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange of Buzztime Preferred Stock for NTN Common Stock, dated January 16, 2003 (18) 10.5 Securities Purchase Agreement dated May 5, 2003 by and among NTN Communications, Inc., Buzztime Entertainment, Inc. and Media General, Inc. (17) 10.6 Placement Agency Agreement dated January 26, 2004 by and between Roth Capital Partners and NTN Communications, Inc. (13) 10.7 Manufacturing Agreement, dated November 25, 1997, by and between NTN Communications, Inc. and Climax Technology Co., Ltd. (9) 10.8 Office Lease, dated July 17, 2000, between Prentiss Properties Acquisition Partners, L.P. and NTN Communications, Inc. (11) 10.9 Asset Purchase Agreement dated July 30, 2003 by and among NTN Software Solutions, Inc., NTN Communications, Inc., Breakaway International, Inc. and the Seller Shareholders (15) 10.10 Asset Purchase Agreement dated December 15, 2003 by and among NTN Canada, Inc., NTN Communications, Inc., NTN Interactive Network, Inc. and Chell Group Corporation (14) 10.11 Settlement Agreement, effective as of February 28, 2005, between Long Range Systems, Inc. and NTN Communications, Inc. (19) 31.1 Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ------------- * Management Contract or Compensatory Plan. (1) Filed herewith. (2) Previously filed as an exhibit to NTN's registration statement on Form S-8, File No. 33-75732, and incorporated by reference. (3) Previously filed as an exhibit to NTN's report on Form 10-K for the year ended December 31, 1990, and incorporated by reference. (4) Previously filed as an exhibit to NTN's report on Form 10-K, for the year ended December 31, 1997, and incorporated by reference. (5) Previously filed as an exhibit to NTN's report on Form 10-K dated December 31, 1998 and incorporated by reference. (6) Previously filed as an exhibit to NTN's report on Form 10-K dated December 31, 1999 and incorporated herein by reference. (7) Previously filed as an exhibit to NTN's report on Form 8-K dated November 7, 1997 and incorporated herein by reference. (8) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on April 5, 2000 and incorporated herein by reference. (9) Previously filed as an exhibit to NTN's report on Form 10-K/A dated March 5, 2001 and incorporated herein by reference. (10) Previously filed as an exhibit to NTN's registration statement on Form 8-A, File No. 0-19383, and incorporated by reference. (11) Previously filed as an exhibit to NTN's report on Form 10-K dated December 31, 2000 and incorporated by reference. (12) Previously filed as an exhibit to NTN's report on Form 10-Q dated March 31, 2001 and incorporated by reference. (13) Previously filed as an exhibit to NTN's report on Form 8-K dated January 29, 2004 and incorporated herein by reference. (14) Previously filed as an exhibit to NTN's registration statement on Form S-3, File No. 333-111538, filed on December 24, 2003 and incorporated herein by reference. (15) Previously filed as an exhibit to NTN's Form 10-Q dated August 14, 2003 and incorporated herein by reference. (16) Previously filed as an exhibit to NTN's report on Form 10-Q dated September 30, 2004 and incorporated herein by reference. (17) Previously filed as an exhibit to NTN's registration statement on Form S-3, File No. 333-105429, filed on May 21, 2003 and incorporated herein by reference. (18) Previously filed as an exhibit to NTN's Form 10-Q dated May 15, 2003 and incorporated herein by reference. (19) Previously filed as an exhibit to NTN's Form 8-K dated March 18, 2005, and incorporated herein by reference. (20) Furnished concurrently herewith. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NTN COMMUNICATIONS, INC. Date: August 8, 2005 By: /s/ Andy Wrobel ------------------------------ Andy Wrobel Authorized Signatory and Chief Financial Officer 31 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended (4) 3.2 Certificate of Designations, Rights and Preferences of Series B Convertible Preferred Stock (7) 3.3 Certificate of Amendment to Restated Certificate of Incorporation of the Company, dated March 22, 2000 (8) 3.4 Certificate of Amendment to Restated Certificate of Incorporation of the Company, dated March 24, 2000 (8) 3.5 By-laws of the Company (2) 3.6 Certificate of Amendment to Restated Certificate of Incorporation of the Company, dated May 27, 2003 (15) 4.1 Specimen Common Stock Certificate (10) 4.2* Stock Option Agreement, dated October 7, 1998, by and between NTN Communications, Inc. and Stanley B. Kinsey (5) 4.3* Stock Option Agreement, dated October 7, 1999, by and between NTN Communications, Inc. and Stanley B. Kinsey (6) 4.4* Stock Option Agreement, dated January 26, 2001, by and between NTN Communications, Inc. and Stanley B. Kinsey (12) 4.5 Warrant Certificate issued January 13, 2003 by NTN Communications, Inc. to Robert M. and Marjie Bennett, Trustees The Bennett Family Trust dated 11-17-86 (18) 4.6 NTN Investor Rights Agreement, dated May 7, 2003, by and between NTN Communications, Inc. and Media General, Inc. (17) 4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and among NTN Communications, Inc., Buzztime Entertainment, Inc. and Media General, Inc. (17) 4.8 Common Stock Purchase Warrant dated May 7, 2003 issued to Media General, Inc. exercisable for 500,000 shares of common stock of Buzztime Entertainment, Inc. (17) 4.9 Form of Common Stock Purchase Warrant issued to Roth Capital Partners (13) 4.10* Stock Option Agreement, dated June 28, 2005, by and between NTN Communications, Inc. and Stanley B. Kinsey (1) 10.1 License Agreement with NTN Canada (3) 10.2* Employment Agreement, dated June 28, 2005, by and between NTN Communications, Inc. and Stanley B. Kinsey (1) 10.3 Subscription Agreement dated January 13, 2003 between NTN Communications, Inc. and Robert M. and Marjie Bennett, Trustees The Bennett Family Trust dated 11-17-86 (18) 10.4 Scientific-Atlanta Strategic Investments, L.L.C. Notice of Exchange of Buzztime Preferred Stock for NTN Common Stock, dated January 16, 2003 (18) 10.5 Securities Purchase Agreement dated May 5, 2003 by and among NTN Communications, Inc., Buzztime Entertainment, Inc. and Media General, Inc. (17) 10.6 Placement Agency Agreement dated January 26, 2004 by and between Roth Capital Partners and NTN Communications, Inc. (13) 10.7 Manufacturing Agreement, dated November 25, 1997, by and between NTN Communications, Inc. and Climax Technology Co., Ltd. (9) 10.8 Office Lease, dated July 17, 2000, between Prentiss Properties Acquisition Partners, L.P. and NTN Communications, Inc. (11) 10.9 Asset Purchase Agreement dated July 30, 2003 by and among NTN Software Solutions, Inc., NTN Communications, Inc., Breakaway International, Inc. and the Seller Shareholders (15) 10.10 Asset Purchase Agreement dated December 15, 2003 by and among NTN Canada, Inc., NTN Communications, Inc., NTN Interactive Network, Inc. and Chell Group Corporation (14) 10.11 Settlement Agreement, effective as of February 28, 2005, between Long Range Systems, Inc. and NTN Communications, Inc. (19) 31.1 Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Management Contract or Compensatory Plan. ---------- (1) Filed herewith. (2) Previously filed as an exhibit to NTN's registration statement on Form S-8, File No. 33-75732, and incorporated by reference. (3) Previously filed as an exhibit to NTN's report on Form 10-K for the year ended December 31, 1990, and incorporated by reference. 31 (4) Previously filed as an exhibit to NTN's report on Form 10-K, for the year ended December 31, 1997, and incorporated by reference. (5) Previously filed as an exhibit to NTN's report on Form 10-K dated December 31, 1998 and incorporated by reference. (6) Previously filed as an exhibit to NTN's report on Form 10-K dated December 31, 1999 and incorporated herein by reference. (7) Previously filed as an exhibit to NTN's report on Form 8-K dated November 7, 1997 and incorporated herein by reference. (8) Previously filed as an exhibit to NTN's report on Form 10-K/A filed on April 5, 2000 and incorporated herein by reference. (9) Previously filed as an exhibit to NTN's report on Form 10-K/A dated March 5, 2001 and incorporated herein by reference. (10) Previously filed as an exhibit to NTN's registration statement on Form 8-A, File No. 0-19383, and incorporated by reference. (11) Previously filed as an exhibit to NTN's report on Form 10-K dated December 31, 2000 and incorporated by reference. (12) Previously filed as an exhibit to NTN's report on Form 10-Q dated March 31, 2001 and incorporated by reference. (13) Previously filed as an exhibit to NTN's report on Form 8-K dated January 29, 2004 and incorporated herein by reference. (14) Previously filed as an exhibit to NTN's registration statement on Form S-3, File No. 333-111538, filed on December 24, 2003 and incorporated herein by reference. (15) Previously filed as an exhibit to NTN's Form 10-Q dated August 14, 2003 and incorporated herein by reference. (16) Previously filed as an exhibit to NTN's report on Form 10-Q dated September 30, 2004 and incorporated herein by reference. (17) Previously filed as an exhibit to NTN's registration statement on Form S-3, File No. 333-105429, filed on May 21, 2003 and incorporated herein by reference. (18) Previously filed as an exhibit to NTN's Form 10-Q dated May 15, 2003 and incorporated herein by reference. (19) Previously filed as an exhibit to NTN's Form 8-K dated March 18, 2005, and incorporated herein by reference. (20) Furnished concurrently herewith. 33