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 September 30, 2002 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 [ ] At November 4, 2002, the registrant had outstanding 39,372,000 shares of common stock, $.005 par value.
PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets <TABLE> <CAPTION> SEPTEMBER 30, 2002 DECEMBER 31, ASSETS (UNAUDITED) 2001 Current assets: -------------- -------------- <S> <C> <C> Cash and cash equivalents $ 667,000 $ 1,296,000 Restricted cash 145,000 94,000 Accounts receivable, net 1,753,000 1,411,000 Investment available for sale 198,000 174,000 Inventory 123,000 -- Deposits on broadcast equipment 38,000 69,000 Deferred costs 525,000 675,000 Prepaid expenses and other current assets 450,000 499,000 -------------- -------------- Total current assets 3,899,000 4,218,000 Broadcast equipment and fixed assets, net 5,424,000 8,029,000 Software development costs, net 597,000 588,000 Deferred costs 402,000 411,000 Other assets 588,000 134,000 -------------- -------------- Total assets $ 10,910,000 $- 13,380,000 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 695,000 $ 906,000 Accrued expenses 1,362,000 1,096,000 Obligations under capital leases 156,000 168,000 Revolving line of credit 1,968,000 -- Deferred revenue 1,418,000 2,008,000 -------------- -------------- Total current liabilities 5,599,000 4,178,000 Obligations under capital leases, excluding current portion 57,000 110,000 Revolving line of credit -- 2,479,000 Senior subordinated convertible notes 1,987,000 1,958,000 Deferred revenue 686,000 877,000 Other long-term liabilities 12,000 12,000 -------------- -------------- Total liabilities 8,341,000 9,614,000 -------------- -------------- Minority interest in consolidated subsidiary 700,000 855,000 -------------- -------------- Shareholders' equity: Series A 10% cumulative convertible preferred stock, $.005 par value, 5,000,000 shares authorized; 161,000 shares issued and outstanding at September 30, 2002 and December 31, 2001 1,000 1,000 Common stock, $.005 par value, 70,000,000 shares authorized; 39,323,000 and 38,627,000 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively 195,000 192,000 Additional paid-in capital 81,145,000 80,639,000 Accumulated deficit (78,643,000) (76,890,000) Accumulated other comprehensive loss (619,000) (643,000) Treasury stock, at cost, 49,000 and 91,000 shares at September 30, 2002 and December 31, 2001, respectively (210,000) (388,000) -------------- -------------- Total shareholders' equity 1,869,000 2,911,000 -------------- -------------- Total liabilities and shareholders' equity $ 10,910,000 $ 13,380,000 ============== ============== </TABLE> See accompanying notes to unaudited consolidated financial statements 2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Revenues: <S> <C> <C> <C> <C> NTN Network division revenues $ 6,491,000 $ 5,627,000 $ 18,458,000 $ 16,184,000 Buzztime service revenues 23,000 36,000 106,000 102,000 Other revenues 2,000 1,000 7,000 13,000 ------------- ------------- ------------- ------------- Total revenues 6,516,000 5,664,000 18,571,000 16,299,000 ------------- ------------- ------------- ------------- Operating expenses: Direct operating costs (includes depreciation of $846,000 and $838,000, $2,541,000 and $2,458,000 for the three months ended September 30, 2002 and 2001 and for the nine months ended September 30, 2002 and 2001, respectively) 2,369,000 2,135,000 6,942,000 6,184,000 Selling, general and administrative 4,316,000 3,674,000 11,924,000 11,562,000 Depreciation and amortization 417,000 423,000 1,195,000 1,292,000 Research and development 2,000 -- 11,000 96,000 ------------- ------------- ------------- ------------- Total operating expenses 7,104,000 6,232,000 20,072,000 19,134,000 ------------- ------------- ------------- ------------- Operating loss (588,000) (568,000) (1,501,000) (2,835,000) ------------- ------------- ------------- ------------- Other income (expense): Interest income -- 16,000 6,000 54,000 Interest expense (125,000) (227,000) (379,000) (679,000) Other -- 7,000 -- 161,000 ------------- ------------- ------------- ------------- Total other expense (125,000) (204,000) (373,000) (464,000) ------------- ------------- ------------- ------------- Loss before minority interest in loss of (713,000) (772,000) (1,874,000) (3,299,000) consolidated subsidiary and income taxes Minority interest in loss of consolidated subsidiary 58,000 40,000 155,000 40,000 ------------- ------------- ------------- ------------- Net loss before income taxes (655,000) (732,000) (1,719,000) (3,259,000) Income taxes 34,000 -- 34,000 -- ------------- ------------- ------------- ------------- Net loss $ (689,000) $ (732,000) $ (1,753,000) $(3,259,000) ============= ============= ============= ============= Net loss per common share - basic and diluted $ (0.02) $ (0.02) $ (0.04) $ (0.09) ============= ============= ============= ============= Weighted average shares outstanding - basic and diluted 39,270,000 36,775,000 38,999,000 36,592,000 ============= ============= ============= ============= </TABLE> See accompanying notes to unaudited consolidated financial statements 3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED ----------------------------- SEPTEMBER 30, SEPTEMBER 30, 2002 2001 ------------- ------------- Cash flows provided by operating activities: <S> <C> <C> Net loss $ (1,753,000) $ (3,259,000) Adjustments to reconcile net loss to net cash provided by operating activities (net of effects of acquisitions): Depreciation and amortization 3,736,000 3,750,000 Provision for doubtful accounts 311,000 500,000 Provision for deferred income taxes 23,000 -- Non-cash stock-based compensation charges 71,000 101,000 Minority interest in loss of consolidated subsidiary (155,000) (40,000) Non-cash interest expense 120,000 130,000 Accreted interest expense 29,000 63,000 Gain on settlement of debt -- (146,000) Loss from disposition of equipment 114,000 157,000 Changes in assets and liabilities: Restricted cash (51,000) (14,000) Accounts receivable (532,000) (293,000) Inventory (34,000) -- Deferred costs 159,000 245,000 Prepaid expenses and other assets 45,000 (58,000) Accounts payable and accrued expenses (169,000) (506,000) Deferred revenue (812,000) (88,000) ------------- ------------- Net cash provided by operating activities 1,102,000 542,000 ------------- ------------- Cash flows from investing activities: Capital expenditures (1,058,000) (979,000) Acquisition of businesses (102,000) -- Deposits on broadcast equipment 31,000 112,000 ------------- ------------- Net cash used in investing activities (1,129,000) (867,000) ------------- ------------- Cash flows from financing activities: Principal payments on capital leases (152,000) (512,000) Borrowings from revolving line of credit 17,660,000 15,668,000 Principal payments on revolving line of credit (18,243,000) (16,225,000) Proceeds from issuance of common and preferred stock, net of offering expenses -- 802,000 Principal payments on note payable -- (25,000) Proceeds from exercise of stock options and warrants 133,000 92,000 ------------- ------------- Net cash used in financing activities (602,000) (200,000) ------------- ------------- Net decrease in cash and cash equivalents (629,000) (525,000) Cash and cash equivalents at beginning of period 1,296,000 2,188,000 ------------- ------------- Cash and cash equivalents at end of period $ 667,000 $ 1,663,000 ============= ============= </TABLE> See accompanying notes to unaudited consolidated financial statements 4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (Continued) <TABLE> <CAPTION> NINE MONTHS ENDED ----------------------------- SEPTEMBER 30, SEPTEMBER 30, 2002 2001 ------------- ------------- Supplemental disclosures of cash flow information: Cash paid during the period for: <S> <C> <C> Interest $ 229,000 $ 460,000 ============= ============= Income taxes $ -- $ -- ============= ============= Supplemental disclosure of non-cash investing and financing activities: Issuance of common stock in payment of interest $ 120,000 $ 160,000 ============= ============= Equipment acquired under capital leases $ 87,000 $ 126,000 ============= ============= Unrealized holding loss on investments $ (24,000) $ 48,000 ============= ============= Issuance of treasury stock in payment of board compensation $ 43,000 $ -- ============= ============= Issuance of common stock in payment of dividends $ 8,000 $ 8,000 ============= ============= Supplemental non-cash disclosure of acquisition of businesses: Accounts receivable (net) $ 121,000 -- Inventory 89,000 -- Fixed assets 38,000 -- Other assets 521,000 -- Accounts payable and accrued liabilities (244,000) -- Deferred revenue (31,000) -- Line of credit (72,000) -- Common stock issued (320,000) -- </TABLE> See accompanying notes to unaudited consolidated financial statements. 5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 1. BASIS OF PRESENTATION In the opinion of management, the accompanying consolidated financial statements include all adjustments that are necessary for a fair presentation of the financial position of NTN Communications, Inc. and its majority-owned subsidiaries (collectively, "we" or "NTN") and the results of operations and cash flows of NTN for the interim periods presented. Management has elected to omit substantially all notes to our consolidated financial statements as permitted by the rules and regulations of the Securities and Exchange Commission. The results of operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the year ending December 31, 2002. The consolidated financial statements for the three months and nine months ended September 30, 2002 and 2001 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2001. We have reclassified certain items in the prior period consolidated financial statements to conform to the current period presentation. 2. CRITICAL ACCOUNTING POLICIES The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to deferred costs and revenues, depreciation of broadcast equipment and other fixed assets, bad debts, investments, intangible assets, financing operations, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe 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. We record deferred costs and revenues related to the costs and related installation revenue associated with installing new customer sites. Based on Staff Accounting Bulletin 101, we amortize these amounts over an estimated three-year average life of a customer relationship. If a significant number of our customers leave us before their estimated life is attained, amortization of those deferred costs and revenues would accelerate, which would result in net incremental revenue. We incur a relatively significant level of depreciation expense in relationship to our operating income. The amount of depreciation expense in any year is largely related to the estimated life of handheld, wireless Playmaker devices and computers located at our customer sites. If the Playmakers and servers turn out to have a longer life, on average, than estimated, our depreciation expense would be significantly reduced in those future periods. Conversely, if the Playmakers and servers turn out to have a shorter life, on average, than estimated, our depreciation expense would be significantly increased in those future periods. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. 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. 6
We do not have any of the following: o Off-balance sheet arrangements o Certain trading activities that include non-exchange traded contracts accounted for at fair value. o Relationships and transactions with persons or entities that derive benefits from any non-independent relationship other than the related party transactions discussed in ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS of our Form 10-K for the year ended December 31, 2001 and with Michael Fleming, a Company director who joined Buzztime Entertainment, Inc. as Chairman in May 2002. Mr. Fleming has drawn a salary for part-time employment since May. We are in the process of negotiating an Employment Agreement with Mr. Fleming that will contain a stock-based compensation element. However, to date, that Employment Agreement has not yet been consummated. 3. INCOME (LOSS) PER SHARE For the three months ended September 30, 2002 and 2001 and for the nine months ended September 30, 2002 and 2001, options, warrants, convertible preferred stock and convertible notes representing approximately 12,151,000, 13,257,000, 12,278,000 and 13,180,000 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 develop, produce and distribute interactive entertainment. Our reportable segments have been determined based on the nature of the services offered to customers, which include, but are not limited to, revenue from the NTN Network(R), and Buzztime(R) divisions. NTN Network division revenue is generated primarily from broadcasting content to customer locations through two interactive television networks, from advertising sold on the networks and from its wireless segment with restaurant on-site paging systems, electronic gift cards, loyalty programs and electronic data-managed comment cards. NTN Network division revenues comprised over 99% of our total revenue for the nine months ended September 30, 2002. For purposes of presentation, revenues for the NTN Network included "Other Revenues" of NTN as listed on the consolidated statement of operations. Buzztime generates revenue primarily from the distribution of its digital trivia game show content and "play-along" sports games as well as from production services provided to third parties. Included in the operating loss for both the NTN Network division and Buzztime is an allocation of corporate expenses. The following tables set forth certain information regarding our segments and other operations: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Revenues <S> <C> <C> <C> <C> Network $ 5,802,000 $ 5,628,000 $ 17,013,000 $ 16,197,000 NTN Wireless 691,000 -- 1,452,000 -- ------------- ------------- ------------- ------------- NTN Network division 6,493,000 5,628,000 18,465,000 16,197,000 Buzztime 23,000 36,000 106,000 102,000 ------------- ------------- ------------- ------------- Total revenue $ 6,516,000 $ 5,664,000 $ 18,571,000 $ 16,299,000 ============= ============= ============= ============= Operating income (loss) Network $ 446,000 $ 110,000 $ 1,115,000 $ (279,000) NTN Wireless (65,000) -- (26,000) -- ------------- ------------- ------------- ------------- NTN Network division 381,000 110,000 1,089,000 (279,000) Buzztime (969,000) (678,000) (2,590,000) (2,556,000) ------------- ------------- ------------- ------------- Operating loss $ (588,000) $ (568,000) $ (1,501,000) $ (2,835,000) ============= ============= ============= ============= Net income (loss) Network $ 287,000 $ (99,000) $ 708,000 $ (722,000) NTN Wireless (65,000) -- (26,000) -- ------------- ------------- ------------- ------------- NTN Network division 222,000 (99,000) 682,000 (722,000) Buzztime (911,000) (633,000) (2,435,000) (2,537,000) ------------- ------------- ------------- ------------- Net loss $ (689,000) $ (732,000) $ (1,753,000) $ (3,259,000) ============= ============= ============= ============= </TABLE> 7
5. CONTINGENT LIABILITY Our Canadian licensee is currently in discussions with the Canada Customs and Revenue Agency regarding a liability relating to withholding tax on certain amounts previously paid to us by the Canadian licensee. Our licensee has been assessed approximately $649,000 Canadian dollars (equivalent to approximately $411,000 U.S. dollars as of September 30, 2002) by Canada Customs and Revenue Agency, but is in the process of appealing the assessment. If the appeal is unsuccessful, it is unclear as to what, if any, liability we might have in this matter. No amounts have been accrued relating to this contingent liability. 6. SENIOR SUBORDINATED CONVERTIBLE NOTES Our senior subordinated convertible notes ("Convertible Notes") have a maturity date of February 1, 2003. These Convertible Notes have a principal amount of $2 million. We have the ability to convert the Convertible Notes to common stock at maturity at a fixed conversion rate of $1.275 per share. We currently intend to exercise that conversion option and convert the Convertible Notes to common stock at that time. Since that conversion will not require the use of our working capital, the Convertible Notes are not presented as a current liability even though the maturity date is less than one year from the balance sheet date. 7. ACQUISITIONS On April 5, 2002, through a newly formed subsidiary, NTN Wireless Communications, Inc. ("Wireless"), we acquired the net assets of ZOOM Communications, a company in the restaurant wireless paging industry, from Brandmakers, Inc. We entered into separate 2-year employment contracts with each of ZOOM's two principals to join NTN as Vice President of Operations and Vice President of Sales in the Wireless segment. Based out of suburban Atlanta, Georgia, the Wireless segment now serves as a regional office and distribution center for NTN. We also entered into a distribution agreement on March 11, 2002 with Brandmakers, Inc., for the non-exclusive right to sell and service certain products relating to the manufacture, service and distribution of wireless paging systems and stored value gift and loyalty card programs for ZOOM Communications. The agreement was cancelled on April 5, 2002 upon the acquisition of the assets of ZOOM Communications. On May 17, 2002, we acquired the net assets of Hysen Technologies, Inc., another company in the hospitality paging industry. The assets acquired included Hysen's existing inventory and intellectual property, including Hysen's customer base. The assets of Hysen were combined into the Wireless segment. Total consideration for the purchases was $422,000, which is comprised of $320,000 in common stock and $102,000 for transaction costs. In consideration for the ZOOM Communications purchase, we issued 349,614 unregistered shares of our common stock to all parties valued at an aggregate of $300,000 and paid $87,000 in transaction fees. We used the lowest closing price of the common stock for the twenty days immediately prior to March 22, 2002 to issue 329,412 shares and the average closing price of the common stock for the five trading days immediately prior to March 22, 2002 for the balance of 20,202 shares issued. In consideration for the Hysen Technologies purchase, we issued 14,388 unregistered shares of our common stock valued at $20,000 and paid $15,000 in transaction fees. The number of shares issued was determined by the using the average closing price of the common stock for the five trading days ending on the closing date of May 17, 2002. 8
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Of the $520,000 of acquired intangible assets, $231,000 was assigned to goodwill and is not subject to amortization. $140,000 was assigned to employment agreements and will be amortized over the estimated contractual life of 2 years. $150,000 was assigned to customer lists and will be amortized over the estimated useful life of 3 years. The line of credit of $72,000 was paid in full immediately after the closing date of April 5, 2002. <TABLE> <CAPTION> ASSETS ACQUIRED AND LIABILITIES ASSUMED ZOOM COMMUNICATIONS HYSEN TECHNOLOGIES TOTAL ACQUISITIONS ------------------- ----------------- <S> <C> <C> <C> Accounts receivable, net $ 121,000 $ -- $ 121,000 Inventory 48,000 41,000 89,000 Fixed assets 38,000 -- 38,000 Goodwill 216,000 15,000 231,000 Intangibles assets 280,000 10,000 290,000 -------------- ----------- --------------- Total assets acquired 703,000 66,000 769,000 -------------- ----------- --------------- Accounts payable and accrued liabilities 244,000 31,000 275,000 Line of credit 72,000 -- 72,000 -------------- ----------- --------------- Total liabilities assumed 316,000 31,000 347,000 -------------- ----------- --------------- Net assets acquired $ 387,000 $ 35,000 $ 422,000 ============== =========== ============== </TABLE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward Looking Statements This Quarterly Report 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 that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities, including statements related to our strategic plans, capital expenditures, industry trends and financial position. In some cases, you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," "plan," "would" and similar expressions. Forward-looking statements are based on information currently available to us and are subject to risks and uncertainties, including cash needs, competition, market acceptance and other factors that may cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations are detailed in our Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. GENERAL We develop, produce and distribute interactive entertainment. We operate our businesses principally through two operating units, our NTN Network division and our 94%-owned subsidiary, Buzztime Entertainment, Inc. ("Buzztime"). The NTN Network is North America's largest "out-of-home" interactive television network. Our unique private network broadcasts a variety of interactive multi-player sports and trivia games from 15 to 17 hours a day, depending on the time zone, 365 days per year to hospitality locations such as restaurants, sports bars, hotels, clubs and military bases totaling approximately 3,610 locations in North America as of September 30, 2002. The NTN Network earns revenue from delivering entertainment content to hospitality locations for a monthly fee, including installation revenue. The NTN Network also generates advertising revenue from third party advertisers on the NTN Network and license fee revenue from our Canadian licensee. 9
The NTN Network is the only interactive television network that is specifically designed to entertain the out-of-home viewer. Patrons use our hand-held wireless Playmaker devices to interact with trivia and sports games displayed on television screens in the hospitality location. Our content is designed to promote social interaction and stimulate conversation among the patrons. Hospitality locations pay to use our interactive technology and to receive our entertainment broadcast. Our games are broadcast to be easily viewed from a distance of over 15 feet and are not dependent upon audio, so they do not interfere with the location's own sound system or with patrons' conversations. In April 1999, we began upgrading the NTN Network by introducing our "Digital Interactive TV" system to replace our decade-old DOS-based system. The DITV system contains many new features, including a Windows-based platform with full-motion video capabilities and high-resolution graphics to allow more compelling content and better advertising opportunities. In addition, we introduced new, more consumer friendly Playmaker(R) wireless game appliances that operate at 900 megahertz to increase transmission range and have a longer battery life. The new Playmakers also feature a larger, eight line LCD screen that displays sports scores and other ticker information and enable electronic, text-based chat between patrons. As the Playmakers and other digital equipment ages, we believe the costs of servicing and repairing the equipment will increase. We are currently working on various solutions to keep service and repair costs at a minimum. Currently, the NTN Network operates two parallel networks to broadcast our interactive game content. The more dynamic DITV digital network has largely supplanted the original DOS-based platform. As of September 30, 2002, all but 73 of the U.S. sites had converted to the DITV network. Our Canadian licensee also has not yet converted any of its subscribers to the DITV network. The DITV system provides greater growth and revenue opportunities due to its MPEG full motion video capability, allowing for dynamic presentation of enhanced on-screen interactive game programming and full motion advertising capabilities. The DITV system also features the more robust 900-megahertz Playmaker that facilitates consumer interaction with the network. On April 5, 2002, through a newly formed subsidiary, NTN Wireless Communications, Inc. ("Wireless"), we acquired the assets of ZOOM Communications, a company in the restaurant wireless paging industry, from Brandmakers, Inc. We entered into separate 2-year employment contracts with each of ZOOM's two principals to join NTN as Vice President of Operations and Vice President of Sales in the Wireless segment. Based out of suburban Atlanta, Georgia, the Wireless segment now serves as a regional office and distribution center for NTN. On May 17, 2002, we acquired the assets of Hysen Technologies, Inc., another company in the hospitality paging industry. The assets acquired included Hysen's existing inventory and intellectual property, including Hysen's customer base. The assets of Hysen were combined into the Wireless segment. Through our NTN Wireless segment, we sell wireless paging systems to the restaurant industry. The Wireless segment also sells stored value cards, such as gift cards and loyalty cards, to the restaurant industry. It is our objective to introduce and sell Wireless paging and stored value card products to our NTN Network customers and to introduce the Network to our Wireless customers. We also intend, where possible, to link stored value cards for interested Network customer sites with the Players Plus members that play our games at that site. Based on adopting any of a variety of plans under consideration, this program would allow our Players Plus members to receive promotional consideration for their game play and food/beverage purchases, and would allow those sites an additional measure to quantify the return on investment they receive from the NTN Network. The recently acquired Wireless segment recorded an operating loss in the three months ended September 30, 2002 with an allocation of corporate overhead. This loss was incurred as a result of a reduction in gross margin due to promotional activity designed to aggressively gain market share coupled with increased marketing and staffing expenses associated with relaunching and rebranding the business under the NTN umbrella. We expect the Wireless segment to contribute to our earnings in 2003. Buzztime was incorporated in the state of Delaware in December 1999 with the intent of creating new revenue from distributing NTN's content library to several interactive consumer platforms, with a primary focus on interactive television. Buzztime specializes in real-time, mass-participation games and entertainment that are produced specifically for interactive television including the BUZZTIME channel, the interactive trivia channel for cable television and satellite television services. We manage the world's largest trivia game show library from our interactive television broadcast studio where we also produce our live, Predict the Play(R) interactive television sports games and real-time viewer polls. In 2001, Buzztime received an investment from Scientific-Atlanta, Inc., a leading manufacturer of cable set-top boxes. 10
The first commercial deployment of the BUZZTIME channel occurred in June 2002, when Susquehanna Cable ("SusCom") made the BUZZTIME channel available to all 16,000 of the digital subscribers on its York, Pennsylvania system. This deployment followed a technical field trial that began in March 2002. We believe that this deployment was the first live, 2-way multi-player interactive television entertainment channel integrated into a digital set top box in the United States. In addition, Buzztime remains the primary content provider to the NTN Network and currently works with leading companies such as the National Football League, Microsoft Corporation's MSN(R)TV service, Liberate Technologies, Airborne Entertainment and others to bring consumers real-time interactive entertainment. Our objective is to grow both of our businesses as a leading developer and distributor of interactive entertainment and communication products and services across several interactive platforms, including our out-of-home network, interactive television ("iTV") and wireless devices. To accomplish our objectives we are pursuing strategies to: o Increase the number of out-of-home locations serviced by the NTN Network. We intend to accomplish this increase by expanding our product offerings to include more value-added services, adding personnel to our sales force and providing new and updated content on a regular basis. o Develop and distribute the BUZZTIME channel to cable and satellite operators. We have adapted or are planning to adaptour interactive trivia game show content and technology to the leading interactive television platforms, to gain market share by partnering with major industry manufacturers and distributors, and to utilize our interactive television broadcast studio as a development and production facility to build and deepen relationships with media-related companies. We also plan to continue to support our efforts in the early-stage wireless entertainment market through alliances with leading wireless distributors and carriers. o Increase revenues through current and new revenue sources. The NTN Network earns subscription revenue from subscribing out-of-home locations and third-party advertising revenue as well as production services and license fee revenue from Buzztime. We expect to continue generating revenue through these sources and, by growing our customer base, we also expect to see revenue growth in subscription and advertising revenue. Similarly, as Buzztime gains distribution with cable television operators, we expect to increase revenue through three sources: license fees paid by local cable television operators; fees paid by interactive television home subscribers for premium services or pay-per-play transactions; and advertising revenue. Both business units will also be exploring market opportunities to acquire complimentary businesses to increase revenues and earnings. There can be no assurance, however, that we will be successful in executing this strategy. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001 Operations for the three months ended September 30, 2002 resulted in a net loss of $689,000 compared to a net loss of $732,000 for the three months ended September 30, 2001. REVENUES Total revenues increased by $852,000 or 15%, to $6,516,000 for the three months ended September 30, 2002 from $5,664,000 for the three months ended September 30, 2001. This increase was primarily due to NTN Network division revenues as shown in the following table (in thousands): THREE MONTHS ENDED SEPTEMBER 30 ------------------ 2002 2001 ------- ------- NTN Network Division Revenues $ 6,491 $ 5,627 Buzztime Revenues 23 36 Other Revenues 2 1 ------- ------- Total Revenues $ 6,516 $ 5,664 ======= ======= 11
NTN Network division revenues increased by $864,000 or 15%, to $6,491,000 for the three months ended September 30, 2002 from $5,627,000 for the three months ended September 30, 2001. NTN Network division revenue included approximately $691,000 of revenue from the newly acquired Wireless segment. Hospitality subscription revenues increased by approximately $317,000 due to an increase in the number of sites and the average billing rate per site. The NTN Network United States customer site count at September 30, 2002 was approximately 3,146. This was an increase of 90 sites over September 2001. Our Canadian licensee ended the period with 464 sites, a decrease of 55 sites compared to the third quarter of 2001. At September 30, 2002, approximately 98% of the U.S. sites have been converted to the digital network compared to approximately 93% of the U.S. sites converted as of September 30, 2001. Installation revenue associated with installing new customer sites decreased approximately $140,000 as some of the deferred revenue associated with the installation has become fully amortized. Buzztime revenues were $23,000 for the three months ended September 30, 2002, compared to $36,000 for the three months ended September 30, 2001. OPERATING EXPENSES Direct operating costs increased by $234,000 or 11%, to $2,369,000 for the three months ended September 30, 2002 from $2,135,000 for the three months ended September 30, 2001. Direct operating costs included approximately $431,000 for goods sold from the newly acquired Wireless segment. The increase in direct expenses was offset by a decrease in communication charges of approximately $93,000 due to a change in vendors in the third quarter of 2001. Playmaker repairs and miscellaneous parts decreased by approximately $45,000 as more repairs were completed in-house instead of sending to an outside vendor. Selling, general and administrative expenses increased by $642,000 or 17%, to $4,316,000 for the three months ended September 30, 2002 from $3,674,000 for the three months ended September 30, 2001. Selling, general and administrative expense included an increase in payroll and related expenses of approximately $459,000 as the head count increased, which includes the addition of the Wireless employees. Professional fees increased approximately $116,000 due to an increase in legal expenses. Travel and entertainment increased approximately $55,000 related to Wireless and increased travel to support the Buzztime initiatives. Equipment leases increased by approximately $37,000 due to the buy-out of equipment under capitalized leases. INTEREST EXPENSE Interest expense decreased 45% to $125,000 for the three months ended September 30, 2002, compared to $227,000 for the three months ended September 30, 2001, due to the expiration of various capitalized leases as well as to a lower average balance on our revolving line of credit in the third quarter of 2002 compared to the third quarter of 2001. MINORITY INTEREST AND TAXES Minority interest in loss of consolidated subsidiary increased 45% to $58,000 for the three months ended September 30, 2002, compared to $40,000 for the three months ended September 30, 2001. The increase is due to an increase in the net loss for Buzztime for the three months ended September 30, 2002. The NTN Network expects to report taxable income for the year ended December 31, 2002. For federal income tax reporting purposes and in unitary states where the NTN Network may file on a combined basis, taxable losses incurred by Buzztime Entertainment should be sufficient to offset NTN Network's taxable income. In states where separate filing is required, NTN Network will likely incur a state tax liability. As a result, NTN Network recorded a state tax provision of $34,000 in the third quarter. NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001 Operations for the nine months ended September 30, 2002 resulted in a net loss of $1,753,000 compared to a net loss of $3,259,000 for the nine months ended September 30, 2001. 12
REVENUES Total revenues increased by $2,272,000 or 14%, to $18,571,000 for the nine months ended September 30, 2002 from $16,299,000 for the nine months ended September 30, 2001. This increase was primarily due to NTN Network division revenues as shown in the following table (in thousands): NINE MONTHS ENDED SEPTEMBER 30 ------------------ 2002 2001 ------- ------- NTN Network Division Revenues $18,458 $16,184 Buzztime Revenues 106 102 Other Revenues 7 13 ------- ------- Total Revenues $18,571 $16,299 ======= ======= NTN Network division revenues increased by $2,274,000 or 14%, to $18,458,000 for the nine months ended September 30, 2002 from $16,184,000 for the nine months ended September 30, 2001. NTN Network division revenue included approximately $1,452,000 of revenue from the newly acquired Wireless segment. Hospitality subscription revenues increased by approximately $921,000 due to an increase in the number of sites and the average billing rate per site. Advertising revenue increased by approximately $110,000 primarily due to a higher level of advertising revenue being recognized in the first quarter of 2002 compared to the first quarter of 2001. Installation revenue associated with installing new customer sites decreased approximately $224,000 as some of the deferred revenue associated with the installation has become fully amortized over the estimated three-year life of a customer. Buzztime revenues were $106,000 for the nine months ended September 30, 2002, compared to $102,000 for the nine months ended September 30, 2001. OPERATING EXPENSES Direct operating costs increased by $758,000 or 12%, to $6,942,000 for the nine months ended September 30, 2002 from $6,184,000 for the nine months ended September 30, 2001. Direct operating costs included approximately $857,000 for goods sold from the newly acquired Wireless segment. Playmaker repairs increased by approximately $146,000 as the manufacturer warranties continue to expire on some of the Playmakers. Miscellaneous parts for the equipment increased approximately $40,000 for replacement of various equipment parts that need to be replaced as the digital equipment ages. Freight also increased by approximately $69,000 directly due to the increase in Playmaker and digital equipment repairs. Depreciation and amortization increased by approximately $80,000 for the capitalized purchases of broadcast equipment associated with the digital network. Communication charges decreased by approximately $256,000 due to a change in vendors in 2001. Hosting fees also decreased approximately $94,000 due to the consolidation of equipment at two separate locations to one location in 2001. Selling, general and administrative expenses increased by $362,000 or 3%, to $11,924,000 for the nine months ended September 30, 2002 from $11,562,000 for the nine months ended September 30, 2001. Selling, general and administrative expense included an increase in payroll and related expenses of approximately $495,000 as the head count increased, which includes the addition of the Wireless employees. Marketing expenses increased approximately $85,000 due to the attendance at additional trade shows in 2002 and additional advertising for the NTN Network division's "Hospitality 360" initiative, which incorporates the new Wireless products. Travel and entertainment increased approximately $50,000 related to Wireless and increased travel to support the Buzztime initiatives. Equipment lease expense increased by approximately $93,000 due to the buy-out of equipment under capitalized leases. Various other expenses increased due to general expenses associated with Wireless. Consulting expenses decreased by approximately $429,000 due to various projects reaching completion in the past year and the hiring of various consultants as employees. Depreciation and amortization expense decreased $97,000 or 8% to $1,195,000 for the nine months ended September 30, 2002 from $1,292,000 for the nine months ended September 30, 2001, due to certain assets becoming fully depreciated. Research and development expenses were not significant for the nine months ended September 30, 2002, compared to $96,000 for the nine months ended September 30, 2001. For the nine month period ended September 30, 2001, our research and development efforts focused primarily on the upgrade of the NTN Network and interactive television initiatives. 13
INTEREST EXPENSE AND OTHER INCOME Interest expense decreased 44% to $379,000 for the nine months ended September 30, 2002, compared to $679,000 for the nine months ended September 30, 2001, due to the expiration of various capitalized leases as well as to a lower average balance on our revolving line of credit in 2002 compared to 2001. Other income was not significant for the nine months ended September 30, 2002 compared to $161,000 for the nine months ended September 30, 2001 due to the elimination of the balance of a promissory note and accrued interest upon settlement of the debt. MINORITY INTEREST AND TAXES Minority interest in loss of consolidated subsidiary was $155,000 for the nine months ended September 30, 2002 compared to $40,000 for the nine months ended September 30, 2001. We received the investment from Scientific-Atlanta, Inc. at the end June 2001, so there is no related allocation of Buzztime's losses for the first six months of 2001. The NTN Network expects to report taxable income for the year ended December 31, 2002. For federal income tax reporting purposes and in unitary states where the NTN Network may file on a combined basis, taxable losses incurred by Buzztime Entertainment should be sufficient to offset NTN Network's taxable income. In states where separate filing is required, NTN Network will likely incur a state tax liability. As a result, NTN Network recorded a state tax provision of $34,000 in the third quarter. EBITDA Our earnings before interest, taxes, depreciation and amortization ("EBITDA") decreased by $7,000 to $733,000 for the three months ended September 30, 2002 from EBITDA of $740,000 for the three months ended September 30, 2001. EBITDA increased by $1,274,000 to $2,390,000 for the nine months ended September 30, 2002 from EBITDA of $1,116,000 for the nine months ended September 30, 2001. EBITDA is not intended to represent a measure of performance in accordance with generally accepted accounting principles ("GAAP"). Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. EBITDA is included herein because we believe that financial analysts, investors and other interested parties find it to be a useful tool for measuring our performance. The following table reconciles our net loss per GAAP to EBITDA: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------- --------------------------- 2002 2001 2002 2001 ----------- ----------- ------------ ------------ EBITDA CALCULATION <S> <C> <C> <C> <C> Net loss per GAAP $ (689,000) $ (732,000) $(1,753,000) $(3,259,000) Interest expense (net) 125,000 211,000 373,000 625,000 Depreciation and amortization 1,263,000 1,261,000 3,736,000 3,750,000 Income taxes ----------- ----------- ------------ ----------- 34,000 -- 34,000 -- ----------- ----------- ------------ ------------ EBITDA $ 733,000 $ 740,000 $ 2,390,000 $ 1,116,000 =========== =========== ============ ============ </TABLE> On a segment basis, our two segments generated EBITDA levels as presented below: <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTEMBER 30, 2002 EBITDA CALCULATION: NETWORK BUZZTIME TOTAL NETWORK BUZZTIME TOTAL ------------ ------------ ------------ ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Net income (loss) $ 222,000 $ (911,000) $ (689,000) $ 682,000 $ (2,435,000) $ (1,753,000) Interest expense (net) 125,000 -- 125,000 373,000 -- 373,000 Depreciation and amortization 1,073,000 190,000 1,263,000 3,191,000 545,000 3,736,000 Income taxes 34,000 -- 34,000 34,000 -- 34,000 ------------ ------------ ------------ ------------ ------------- ------------- EBITDA $ 1,454,000 $ (721,000) $ 733,000 $ 4,280,000 $ (1,890,000) $ 2,390,000 ============ ============ ============ ============ ============= ============= </TABLE> 14
<TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, 2001 NINE MONTHS ENDED SEPTEMBER 30, 2001 EBITDA CALCULATION: NETWORK BUZZTIME TOTAL NETWORK BUZZTIME TOTAL ------------ ------------ ------------ ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Net loss $ (99,000) $ (633,000) $ (732,000) $ (722,000) $ (2,537,000) $ (3,259,000) Interest expense (net) 216,000 (5,000) 211,000 606,000 19,000 625,000 Depreciation and amortization 1,071,000 190,000 1,261,000 3,182,000 568,000 3,750,000 Income taxes -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------- ------------- EBITDA $ 1,188,000 $ (448,000) $ 740,000 $ 3,066,000 $ (1,950,000) $ 1,116,000 ============ ============ ============ ============ ============= ============= </TABLE> LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002, we had cash and cash equivalents of $667,000 and a working capital deficit (current liabilities in excess of current assets) of $1,700,000, compared to cash and cash equivalents of $1,296,000 and working capital of $40,000 at December 31, 2001. The primary reason for the working capital deficit was the reclassification of the revolving line of credit from a long-term liability to a short-term liability as the line of credit matures on June 30, 2003. Net cash provided by operations was $1,102,000 for the nine months ended September 30, 2002 and $542,000 for the nine months ended September 30, 2001. Depreciation, amortization and other non-cash charges offset the net loss in each period. Net cash used in investing activities was $1,129,000 for the nine months ended September 30, 2002 compared with $867,000 for the nine months ended September 30, 2001. Included in net cash used in investing activities for the nine months ended September 30, 2002 was $895,000 in capital expenditures, $163,000 in capital software expenditures and $102,000 of professional fees related to the recent acquisitions, which were partially offset by $31,000 for deposits on broadcast equipment received. Net cash used in financing activities was $602,000 for the nine months ended September 30, 2002 compared to $200,000 for the nine months ended September 30, 2001. The cash used in financing activities for the nine months ended September 30, 2002 included $583,000 of net principal payments on the revolving line of credit and $152,000 of principal payments on capital leases offset by $133,000 of proceeds from the issuance of stock options. Our revolving line of credit agreement is with Coast Business Credit and presently expires on June 30, 2003. Interest is charged on the outstanding balance at a rate equal to the prime rate plus 1.5% per annum, but cannot be less than 9% per annum. The line of credit is secured by substantially all of our assets. Our intention is to either further extend the expiration date of the existing facility or to find a replacement facility with an alternate lender. The line of credit provides for borrowings not to exceed the lesser of a designated maximum amount or three times trailing monthly collections or three times annualized trailing adjusted EBITDA. As of September 30, 2002, the maximum amount outstanding under the line of credit was $2,500,000. Further reductions in the maximum amount of $250,000 each will occur on January 31, 2003, and on March 31, 2003. As of September 30, 2002, we had $532,000 available under the revolving line of credit. Our availability under the revolving line of credit may be further reduced if our monthly collections or operating income falls below certain levels. Our liquidity and capital resources remain limited and this may constrain our ability to operate and grow our business. For the first nine months of 2002, we generated free cash flow (defined as EBITDA less cash interest expense, cash used in investing activities and cash used in financing activities) of $430,000, which has covered our business requirements over that period. We believe that we should continue to be cash positive from operating activities in the fourth quarter of 2002. Our operational requirements for additional financing through mid-2003 will depend upon the growth of our two business segments. In a low growth scenario (for example, annual net site growth of 100 to 150 sites in the NTN Network and a number of commercial trials of the Buzztime initiative), utilization of our existing line of credit, which matures on June 30, 2003, may be sufficient to cover our financing requirements. If we face more rapid growth in either or both segments, then we will require additional financing over the next 12 months. If we are unsuccessful in obtaining financing in addition to the extension or replacement of our line of credit facility, some initiatives relating to those higher growth opportunities may have to be curtailed or deferred. We have entered into discussions with our current lender regarding an extension of the line of credit. In addition to discussing a potential extension with our current lender, we may also seek a replacement lender. However, we may not be able to obtain additional or replacement (in the case of our credit line) financing on terms favorable to us or at all. 15
We are also considering adding to our product line certain other wireless applications that are relevant to the hospitality industry. We may add these incremental hospitality products through reseller arrangements or through acquisition. Our limited capital resources may prevent us from making such product additions or acquisitions on a cash basis. We expect the level of expenditures in Buzztime to rise over the remainder of 2002 as we have entered the deployment phase with SusCom and continue in the testing phase with certain other cable operators. However, subject to any unexpected changes in our business that may occur as a result of a continued economic slowdown, and unless we incur unanticipated expenses, we believe we will continue generating adequate cash from the operation of the NTN Network which, when combined with cash resources on hand and our line of credit, will allow us to continue to fund Buzztime at least through December 2002 at current operational levels assuming that Buzztime remains in the testing phase with certain cable operators for the remainder of the year. If current BUZZTIME channel sales efforts to major cable system operators (the largest cable system operators in the United States) succeed as planned and we enter into field trials with those cable operators, management intends to aggressively increase Buzztime sales and marketing efforts late in the year to more quickly advance its distribution within the U.S. market, which will require additional capital. We believe that Buzztime's success in entering into those field trials with major cable system operators may enhance our ability to raise additional capital at favorable pricing although there can be no assurance that will happen. Based upon current sales targets of achieving commercial deployment of the BUZZTIME Channel with several major cable system operators over the next several quarters, we anticipate that Buzztime will require an additional $1,000,000 in financing per quarter commencing with the second quarter of 2003. The timing of this capital requirement is largely dependent on the timing of the commercial deployment. The sooner we achieve commercial deployment, the sooner this capital requirement would arise. If additional financing is not obtained, our accelerated growth plans may have to be deferred. If cash generated by the NTN Network is insufficient to cover Buzztime's expenses and if additional financing for Buzztime is not obtained and we cannot reduce cash expenditures at Buzztime to a sufficient level, we may not be able to sustain the operations of Buzztime beyond March 2003. The American Stock Exchange (AMEX) recently adopted several new listing standards. One new standard was established for listed companies that had at least five consecutive years of losses as we do. This new standard is that such companies must maintain shareholders' equity of at least $6 million. We submitted a plan to achieve compliance with that standard to AMEX, which they approved with the understanding that such compliance would be demonstrated on or about mid-November, 2002. That plan was to increase our shareholders' equity through a combination of conversion of equity-like instruments on our balance sheet and by raising additional equity. One such equity-like instrument is in Scientific-Atlanta's (S-A) investment in Buzztime preferred shares. S-A has an option to exchange the S-A shares of Buzztime's preferred stock into shares of NTN common stock. Another equity-like instrument on our balance sheet is our $2 million of Convertible Notes. We have the ability to convert those Convertible Notes to common stock at a fixed conversion price of $1.275 per share at maturity on February 1, 2003. While that date is outside of the timeframe allowed under our plan with AMEX, such conversion will allow us to bolster our shareholders' equity by $2 million, which will allow us to maintain continued compliance with the new AMEX listing guideline. We currently intend to exercise that conversion option and convert the Convertible Notes to common stock at that time. To date, we have not raised additional equity. We remain in discussions with several strategic investors as well as financial investors that we have contacted through an investment-banking firm. From our informal discussions with the AMEX Listings Qualifications Department we believe that if we have failed to achieve compliance with the new $ 6 million net worth standard within approximately one month of filing this document, we will likely enter into a process of letters and hearings regarding our continued listing. We believe that process will take several months. We continue to believe that we will be able to raise the additional equity capital needed to comply with our plan with AMEX during the extended time period afforded by the AMEX hearing process. This time period is expected to extend beyond February 1, 2003, at which time we expect to exercise our right to convert our $2 million convertible note into equity at a price of $1.275 per share, raising our net worth by $2 million. However, there can be no assurance that we will be able to obtain additional equity financing on terms favorable to us or at all. During the third quarter PanAmSat successfully repositioned a new satellite, PanAmSat GIIIR, that took the place of our previous satellite PanAmSat GIIIC. As we previously disclosed, the GIIIC had been operating with only one of two transponders functioning for a number of months. That transition was accomplished seamlessly. 16
The NTN Network has transmitted its data through the FM2 satellite platform for more than ten years. That arrangement is scheduled to end in February 2005. We are currently negotiating with the reseller through which we purchase our satellite capacity to convert the NTN Network to a much higher speed, two-way VSAT satellite technology over the two-year period ending February 2005.This anticipated conversion to a two-way satellite technology will be a significant use of capital resources. We believe that the conversion of our customer locations may require incremental capital expenditures of $3 to $4.5 million and increased cash operating expenses (including estimated installation costs) of $2 to $2.5 million over the two-year conversion period. We believe that the cost of installing and operating the two-way satellite network will be offset both through expense reductions and by revenue enhancements following the two-year conversion period. During the two-year conversion period, we believe that this conversion will have a moderately adverse impact on our earnings in addition to the use of capital involved. In the longer term, we believe that this conversion will increase our earnings potential. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. Statement 145 updates, clarifies and simplifies existing accounting pronouncements including: rescinding Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect and amending Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. Statement 145 is effective for fiscal years beginning after May 15, 2002, with early adoption of the provisions related to the rescission of Statement No. 4 encouraged. We do not expect the adoption of this statement to have a material impact on its financial position or results of operations. In July 2002, the FASB issued Statement No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 nullifies EITF Issue No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The principal difference between SFAS No. 146 and Issue No. 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB's conceptual framework. In contrast, under Issue No. 94-3, a company recognized a liability for an exit cost when it committed to an exit plan. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002 although earlier application is encouraged. The Company is unable to determine the impact on its financial position or results of operations from the adoption of this statement. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to risks related to currency exchange rates, stock market fluctuations, and interest rates. As of September 30, 2002, we owned common stock of an Australian company that is subject to market risk. At September 30, 2002, the carrying value of this investment was $198,000, which is net of a $619,000 unrealized loss. This investment is exposed to further market risk in the future based on the operating results of the Australian company and stock market fluctuations. Additionally, the value of the investment is further subject to changes in Australian currency exchange rates. At September 30, 2002, a hypothetical 10% decline in the value of the Australian dollar would result in a reduction of $20,000 in the carrying value of the investment. We have outstanding convertible notes, which bear interest at 8% per annum and line of credit borrowings, which bear interest at a rate equal to the higher of the prime rate plus 1.5% per annum, or 9% per annum. At September 30, 2002, a hypothetical one-percentage point increase in the prime rate would result in an increase of $20,000 in annual interest expense for line of credit borrowings. ITEM 4. CONTROLS AND PROCEDURES In the 90-day period before the filing of this report, our chief executive officer and chief financial officer (collectively, the "Certifying Officers") have evaluated the effectiveness of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with the Securities and Exchange Commission (the "Commission") is recorded, processed, summarized and reported, within the time periods specified by the Commission's rules and forms, and that the information is communicated to the certifying officers on a timely basis. 17
The Certifying Officers concluded, based on their evaluation, that our disclosure controls and procedures are effective for NTN, taking into consideration the size and nature of our business and operations. No significant changes in the Company's internal controls or in other factors were detected that could significantly affect our internal controls subsequent to the date when the internal controls were evaluated. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. INTERACTIVE NETWORK We have been involved as a plaintiff or defendant in various previously reported lawsuits in both the United States and Canada involving Interactive Network, Inc. We reached a resolution with Interactive Network of all pending disputes in the United States and agreed to private arbitration regarding any future licensing, copyright or infringement issues which may arise between the parties. There remain two lawsuits involving us, our unaffiliated Canadian licensee and Interactive Network, which were filed in Canada in 1992. The litigation involves licensing and patent infringement issues. These actions affect only the operations of our Canadian licensee and do not extend to our operations in the United States or elsewhere. In October 2002, we filed a motion with the Federal Court of Canada, Trial Division, seeking an Order that Interactive Network post an additional Canadian $289,976 (equal to approximately U.S. $196,427) as security for costs based upon our estimate of costs that we may incur in preparing for and conducting trial of the matter. A hearing on the motion is scheduled for November 18, 2002. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On July 2, 2002, we issued approximately 40,000 shares of common stock, to the holders of the outstanding 8% senior convertible notes, in a private transaction in payment of interest of approximately $40,000 on such notes. On July 18, 2002, we issued approximately 12,000 shares of treasury stock in lieu of a cash payment of approximately $13,000 for board of directors' compensation. On September 25, 2002, we entered into a three-year agreement with Allen & Company LLC establishing Allen & Co. as our financial advisor to advise us with respect to acquisitions, joint ventures, strategic alliances, financing alternatives and other growth strategies. In connection with the agreement, we issued warrants to purchase up to 600,000 shares of common stock to Allen & Co. for services to be provided over a three-year period. The warrants are priced at $1.00 per share and shall vest and become exercisable as to: i) 200,000 shares in increments of 1/12 at the end of each three month period immediately subsequent to September 25, 2002; and ii) 400,000 shares upon consummation of one or more private placements resulting in at least $4 million in gross proceeds to us. The warrants shall expire on September 25, 2009. Each offering and transaction was made without registration under the Securities Act of 1933, as amended (the "Act") in reliance upon the exemption from registration afforded by Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 4.1 NTN Communications, Inc. Warrant Certificate, issued September 25, 2002, to Allen & Company LLC. (b) Reports on Form 8-K None. 19
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: November 14, 2002 By: /S/ JAMES FRAKES ----------------------------------- James Frakes Authorized Signatory and Chief Financial Officer 20
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 AND RULE 13A-14 OF THE EXCHANGE ACT OF 1934 I, Stanley B. Kinsey, Chief Executive Officer of NTN Communications, Inc. (the Company) certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: o designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; o evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and o presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): o all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and o any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ STANLEY B. KINSEY Stanley B. Kinsey, Chairman and Chief Executive Officer NTN Communications, Inc. 21
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 AND RULE 13A-14 OF THE EXCHANGE ACT OF 1934 I, James B. Frakes, Chief Financial Officer of NTN Communications, Inc. (the Company) certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: o designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; o evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and o presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): o all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and o any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ JAMES B. FRAKES James B. Frakes, Chief Financial Officer NTN Communications, Inc. 22
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - -------- --------------------------------------------------------- 4.1 NTN Communications, Inc. Warrant Certificate, issued September 25, 2002, to Allen & Company LLC. - ---------- (1) Filed herewith. 23