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 March 31, 2006
Commission file number 1-11460
NTN BUZZTIME, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1103425
(State of incorporation) (I.R.S. Employer
Identification No.)
5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
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 such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
At May 1, 2006, the registrant had outstanding 54,138,632 shares of common
stock, $.005 par value.
NTN BUZZTIME, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
PAGE
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements.............................................. 3
Condensed Consolidated Balance Sheets as of March 31, 2006
(unaudited) and December 31, 2005 ............................. 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2006 and 2005 (unaudited)......... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 and 2005 (unaudited)............... 5
Notes to Condensed Consolidated Financial Statements.............. 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........ 26
ITEM 4. Controls and Procedures........................................... 26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................. 27
ITEM 1A. Risk Factors ..................................................... 27
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 27
ITEM 3. Defaults Upon Senior Securities................................... 27
ITEM 4. Submission of Matters to a Vote of Security Holders............... 27
ITEM 5. Other Information................................................. 27
ITEM 6. Exhibits and Reports on Form 8-K.................................. 27
Signatures........................................................ 28
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2006 2005
--------- ---------
(Unaudited)
ASSETS (Pledged)
Current Assets:
Cash and cash equivalents .................................... $ 6,032 $ 5,982
Restricted cash .............................................. 69 69
Accounts receivable, net ..................................... 3,575 3,630
Inventory .................................................... 328 371
Investments available-for-sale ............................... 215 258
Deposits on broadcast equipment .............................. 557 799
Deferred costs ............................................... 1,159 1,118
Prepaid expenses and other current assets .................... 965 955
--------- ---------
Total current assets .................................. 12,900 13,182
Broadcast equipment and fixed assets, net ...................... 8,091 8,085
Software development costs, net ................................ 783 706
Deferred costs ................................................. 1,203 1,256
Goodwill ....................................................... 3,658 3,658
Intangible assets, net ......................................... 2,761 2,946
Other assets ................................................... 185 185
--------- ---------
Total assets .......................................... $ 29,581 $ 30,018
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................................. $ 657 $ 725
Accrued expenses .............................................. 2,126 1,799
Sales tax payable ............................................. 204 714
Accrued salaries .............................................. 89 643
Accrued vacation .............................................. 613 619
Income taxes payable .......................................... 58 147
Obligations under capital leases - current portion ............ 422 436
Revolving line of credit ...................................... 700 700
Deferred revenue .............................................. 1,701 2,024
Deferred revenue-Buzztime ..................................... 663 632
--------- ---------
Total current liabilities .............................. 7,233 8,439
Obligations under capital leases, excluding current portion ..... 271 366
Deferred revenue ................................................ 689 321
--------- ---------
Total liabilities ...................................... 8,193 9,126
--------- ---------
Commitments and contingencies
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 March 31, 2006 and December 31, 2005 ..................... 1 1
Common stock, $.005 par value, 84,000,000 shares
authorized; 53,985,000 and 53,877,000 shares issued and
outstanding at March 31, 2006 and December 31, 2005,
respectively ................................................ 269 268
Additional paid-in capital .................................... 110,346 109,860
Accumulated deficit ........................................... (88,712) (88,788)
Accumulated other comprehensive loss .......................... (516) (449)
--------- ---------
Total shareholders' equity ............................. 21,388 20,892
--------- ---------
Total liabilities and shareholders' equity ............. $ 29,581 $ 30,018
========= =========
See accompanying notes to unaudited condensed consolidated financial statements
3
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
-------- --------
Revenues ........................................................ $ 11,062 $ 9,507
Operating expenses:
Direct operating costs (includes depreciation of $948 and
$764 for the three months ended March 31, 2006 and 2005,
respectively)............................................... 3,501 3,456
Non-cash charge related to software product sale ............ -- 276
Selling, general and administrative ......................... 6,817 6,433
Litigation, legal and professional fees ..................... 346 380
Depreciation and amortization ............................... 209 219
Research and development .................................... 66 59
-------- --------
Total operating expenses .............................. 10,939 10,823
Operating income (loss) ......................................... 123 (1,316)
Other income (expense):
Interest income ............................................. 31 26
Interest expense ............................................ (46) (24)
-------- --------
Total other income (expense) .......................... (15) 2
-------- --------
Net income (loss) before income taxes ........................... 108 (1,314)
Provision for income taxes ...................................... 32 33
-------- --------
Net income (loss) ..................................... $ 76 $ (1,347)
======== ========
Net income (loss) per common share - basic ...................... $ 0.00 $ (0.03)
======== ========
Net income (loss) per common share - diluted .................... $ 0.00 $ (0.03)
======== ========
Weighted average shares outstanding - basic ..................... 53,928 53,222
======== ========
Weighted average shares outstanding - diluted ................... 60,931 53,222
======== ========
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS) (UNAUDITED)
(THOUSANDS)
THREE MONTHS ENDED MARCH 31,
2006 2005
------- -------
Net income (loss) ............................................... $ 76 $(1,347)
------- -------
Other comprehensive income, net of tax:
---------------------------------------
Foreign currency translation adjustments ...................... (24) --
Unrealized holding gain (loss) in investment available for sale (43) 181
------- -------
Other comprehensive income (loss) ............................... (67) 181
------- -------
Comprehensive income (loss) ................................. $ 9 $(1,166)
======= =======
See accompanying notes to unaudited condensed consolidated financial statements
4
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2006 2005
------- -------
Cash flows from operating activities:
Net income (loss) ........................................ $ 76 $(1,347)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ...................... 1,157 983
Provision for doubtful accounts .................... 269 278
Non-cash stock-based compensation .................. 408 107
Non-cash charge related to software product sale.... -- 276
Provision for warranties ........................... -- 2
Provision for sales returns ........................ -- 1
Loss from disposition of equipment ................. 17 30
Changes in assets and liabilities:
Accounts receivable .............................. (199) (328)
Inventory ........................................ 43 (44)
Deferred costs ................................... 13 (147)
Prepaid expenses and other assets ................ (11) (196)
Accounts payable and accrued expenses ............ (763) 444
Provision for income tax ......................... (129) (69)
Deferred revenue ................................. 76 252
------- -------
Net cash provided by operating activities ..... 957 242
------- -------
Cash flows from investing activities:
Capital expenditures ..................................... (429) (725)
Software development expenditures ........................ (132) (151)
Deposits on broadcast equipment .......................... (271) (609)
------- -------
Net cash used in investing activities ......... (832) (1,485)
------- -------
Cash flows from financing activities:
Principal payments on capital leases ..................... (108) (59)
Principal payments on equipment notes payable ............ -- (384)
Borrowings from revolving line of credit ................. -- 500
Proceeds from exercise of stock options and warrants ..... 79 156
------- -------
Net cash (used in) provided by financing
activities ................................................... (29) 213
------- -------
Net increase (decrease) in cash and cash equivalents ......... 96 (1,030)
Effect of exchange rate on cash .............................. (46) (2)
Cash and cash equivalents at beginning of period ............. 5,982 6,710
------- -------
Cash and cash equivalents at end of period ................... $ 6,032 $ 5,678
======= =======
See accompanying notes to unaudited condensed consolidated financial statements
5
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2006 2005
---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 46 $ 23
======== ========
Income taxes .................................................... $ 185 $ 107
======== ========
Supplemental disclosure of non-cash investing and financing
activities:
Equipment acquired under capital leases and notes payable .......... $ -- $ 239
======== ========
Reclass of deposits for equipment placed in service ................ $ 513 $ 518
======== ========
Unrealized holding loss on investments available for sale.... $ (43) $ (181)
======== ========
See accompanying notes to unaudited condensed consolidated financial statements
6
NTN BUZZTIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2006
(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 Buzztime, Inc. and its wholly-owned subsidiaries
(collectively, "we", "our" 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, 2006.
The condensed consolidated financial statements for the three months ended
March 31, 2006 and 2005 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, 2005.
We have reclassified depreciation and amortization expense to direct
operating costs for certain assets from selling, general and administrative
expenses in the prior period condensed consolidated financial statements to
conform to the current period presentation.
(2) STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION VALUATION ASSUMPTIONS
We estimate the fair value of our stock options using a Black-Scholes option
pricing model, consistent with the provisions of SFAS No. 123R, Securities and
Exchange Commission Staff Accounting Bulletin No. 107 ("SAB 107") and our prior
period pro forma disclosures of net income (loss), including stock-based
compensation as required by SFAS No. 123. The fair value of stock options
granted is recognized to expense over the requisite service period. Compensation
expense for all share-based payment awards is recognized using the straight-line
single-option method. Compensation expense related to stock-based compensation
is reported as general and administrative based upon the department to which
materially all of the associated employees report.
We used the historical stock price volatility to value our stock options under
SFAS 123R and in accordance with SFAS 123 for purposes of its pro forma
information. The expected term of our stock options represents the period of
time options are expected to be outstanding and is based on observed historical
exercise patterns for our company which we believe are indicative of future
exercise behavior. For the risk free interest rate, we use the observed interest
rates appropriate for the term of time options are expected to be outstanding.
The dividend yield assumption is based on NTN's history and expectation of
dividend payouts.
The following weighted average assumptions were used for grants issued in the
three months ended March 31, 2005 under the SFAS No. 123 requirements and in the
three months ended March 31, 2006 under the SFAS No. 123R requirements:
MARCH 31,
----------------------------------
2006 2005
---------------- ----------------
Risk-free interest rate 4.65% 3.73%
Dividend yield 0.0% 0.0%
Volatility 67.34% 71.1%
Expected Life 4.9 years 4.0 years
In our pro forma disclosures prior to the adoption of SFAS No. 123R, we
accounted for forfeitures as they occurred. SFAS No. 123R requires forfeitures
to be estimated at the time of grant and revised if necessary in subsequent
periods if actual forfeiture rates differ from those estimates. Forfeitures were
estimated based on historical activity for our company. For the three months
ended March 31, 2006, we estimated a 13% annual forfeiture rate.
7
IMPACT OF SFAS NO. 123R
The following table presents the impact to our consolidated financial statements
as a result of our adoption of SFAS No. 123R for the three months ended March
31, 2006 (in thousands, except per share amounts):
THREE MONTHS
ENDED MARCH 31,
2006
-----------------
Stock-based compensation expense $ 283
Effect on earnings per share:
-----------------
Basic $ 0.01
Diluted $ 0.01
As of March 31, 2006, the unamortized compensation expense related to
outstanding unvested options was approximately $1,795,000 with a
weighted average remaining vesting period of 1.9 years. We expect to amortize
this expense over the remaining vesting period of these stock options.
Prior to the adoption of SFAS No. 123R, for options granted to employees, we
applied Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" and provided the pro forma disclosures of SFAS No. 123 as amended
by Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure". No compensation expense
has been recognized for options granted unless the grants were issued at
exercise prices below market value prior to the adoption of SFAS No.123R.
We account for options and warrants granted to non-employees under SFAS No. 123
and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments that are Issued to other than Employees for Acquiring or in
Conjunction with Selling Goods or Services". We measure the fair value of such
options using the Black-Scholes option pricing model at each financial reporting
date. We account for changes in fair values between reporting dates in
accordance with FIN 28. Stock-based compensation expense for options and
warrants granted to nonemployees during the three months ended March 31, 2006
and 2005 was $13,000 and $33,000 respectively.
PRO FORMA FOR 2005 UNDER SFAS NO. 123
The following table compares the earnings (loss) per share that we reported to
the pro forma amounts that we would have reported for the three months ended
March 31, 2005 had we recognized compensation expense for our stock-based
compensation plans in accordance with SFAS No. 123 (in thousands, except per
share amounts):
THREE MONTHS
------------
ENDED MARCH 31,
---------------
2005
----
Net income (loss) as reported..................... $ (1,347)
Add: stock option-based employee compensation
expense included in reported net loss, net of
related tax effects............................ 75
Deduct: stock-based employee compensation
expense, net of related tax effects............ (558)
------------
Pro forma......................................... $ (1,830)
============
Basic and diluted net loss per share, as reported. $ (0.03)
Basic and diluted net loss per share, pro forma... $ (0.03)
8
STOCK OPTION PLANS
2004 PERFORMANCE INCENTIVE PLAN
We have two active stock option plans. The 2004 Performance Incentive Plan
(the "2004 Plan") was approved by our shareholders in September 2004 in a
Special Meeting of Shareholders (Special Meeting). Our previous plan (the 1995
Plan) had approximately 77,000 options available for grant in September 2004. As
noted in our Proxy for the Special Meeting, the number of shares of common stock
that remained available for award grants under the 1995 Plan immediately prior
to the Special Meeting became available for award grants under the 2004 Plan.
Under the 2004 Plan, options for the purchase of our common stock or other
instruments such as deferred stock units may be granted to officers, directors
and employees. Options may be designated as incentive stock options or as
nonqualified stock options, and generally vest over four years. At its
discretion, the Board of Directors can authorize acceleration of vesting
periods. Options under both the 1995 Plan and the 2004 Plan, which have a term
of up to ten years, are exercisable at a price per share not less than the fair
market value on the date of grant. The aggregate number of shares authorized for
issuance under the 2004 Plan as of December 31, 2005 was 2,577,000. As of the
effective date of the 2004 Plan, a total of 9,946,000 shares of common stock
were then subject to outstanding awards granted under the 1995 Plan and any such
awards that expire, are cancelled or otherwise terminate after will also be
available for award grant purposes under the 2004 Plan. At March 31, 2006, a
total of 10,200,000 options were outstanding, options to purchase 8,412,000
shares were exercisable, and 938,000 shares were available for future grant.
SPECIAL STOCK OPTION PLAN
In 1996, NTN adopted a Special Stock Option Plan (Special Plan). Options
issued under the Special Plan are made at the discretion of the Board of
Directors and are designated only as nonqualified options. The options generally
have a term of up to ten years, are exercisable at a price per share not less
than the fair market value on the date of grant and vest over various terms. The
aggregate number of shares issued and outstanding under the Special Plan as of
December 31, 2005 is 500,000. At March 31, 2006, a total of 500,000 options were
outstanding, 500,000 shares were exercisable, and zero shares were available for
future grant.
BUZZTIME INC. STOCK INCENTIVE PLAN
On May 31, 2001, Buzztime Entertainment, Inc. adopted an incentive stock
option plan. Pursuant to the plan, Buzztime may grant options to purchase
Buzztime common stock, subject to applicable share limits, upon terms and
conditions specified in the plan. There are 300,000 shares authorized under this
plan. To date, no options have been granted under the plan.
STOCK OPTIONS
The following table summarizes stock option activity for the three months
ended March 31, 2005 and March 31, 2006 (in thousands, except per share data):
SPECIAL PLAN OPTION PLAN
--------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
BALANCE AT JANUARY 1, 2006...... 500,000 $ 2.81 10,428,000 $ 1.49
Granted....................... --- --- 86,000 1.40
Exercised..................... --- --- (99,000) 0.78
Forfeited or expired.......... --- --- (215,000) 2.43
------- ------- ---------- ----------
OUTSTANDING MARCH 31, 2005...... 500,000 $ 2.81 10,200,000 $ 1.48
======= ======== ========== ==========
The following table summarizes information concerning currently outstanding
and exercisable options (in thousands, except contractual life and exercise
price data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE AGGREGATE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE INTRINSIC VALUE
--------------- ----------- ---------------- -------------- ----------- -------------- ---------------
Special Plan:
$2.81 500,000 .38 year $ 2.81 500,000 $ 2.81 $ ---
Option Plan:
$0.45-$1.50 6,345,000 4.68 $0.95 5,700,000 $0.91 3,021,000
$1.51-$3.00 3,757,000 5.74 $2.31 2,623,000 $2.41 ---
$3.01-$4.94 98,000 2.10 $3.49 89,000 $3.50 ---
---------- ---------- ---------
10,700,000 8,912,000 3,021,000
========== ========== =========
9
The aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on a per share price of $1.44 the closing price of our
common stock on March 31, 2006 as reported by the American Stock Exchange, which
would have been received by the option holders had all option holders exercised
their options as of that date. The total number of in-the-money stock options
exercisable as of March 31, 2006 was 5,700,000 million.
The per share weighted-average fair value of stock options granted during
the three months ended March 31, 2006 and 2005 was $0.84 and $1.78,
respectively.
The total intrinsic value of options exercised during the three months ended
March 31, 2006 and 2005 was $48,000 and $45,000, respectively.
The total cash received from employees as a result of employee stock option
exercises during the three months ended March 31, 2006 was approximately
$79,000.
(3) INCOME (LOSS) PER SHARE
For the three months ended March 31, 2006 and 2005, the weighted average of
options, warrants and convertible preferred stock representing approximately
5,423,000 and 12,623,000 potential common shares, respectively, have been
excluded from the computation of net income and net loss per share,
respectively, as their effect was anti-dilutive.
(4) SEGMENT INFORMATION
We produce and distribute interactive entertainment and hospitality
communications products, and manage our business via two operating divisions:
Entertainment and Hospitality. Our reportable segments have been determined
based upon the information provided to our chief decision makers.
The Entertainment Division is comprised of the Buzztime Interactive
Television Network (Buzztime iTV Network or iTV Network) and Buzztime
Distribution.
In the past year, we have completed the re-branding of our entertainment
product offerings under the Buzztime brand, including the re-naming of the NTN
iTV Network as the Buzztime iTV Network. With this 2006 first quarter report, we
have modified our segment reporting by moving the Buzztime iTV Network segment
out of the Hospitality Division and into the newly created Entertainment
Division.
Additionally, the segment formerly known as Buzztime Entertainment, Inc., is
now presented as Buzztime Distribution segment. The Buzztime Entertainment, Inc.
segment formerly absorbed all of the costs to produce and manage our game
content. The newly designated Buzztime Distribution will now include only 10% of
the costs of producing and managing the content, as this better matches the
nature of the services provided to the segment. The remaining 90% of content
costs are charged to the iTV Network segment.
The Buzztime iTV Network generates revenue from providing an interactive
television promotional game network to restaurants, sportsbars, taverns and pubs
in North America and the UK and from selling third-party advertising on the
Network. Buzztime Distribution generates revenue from distributing and licensing
the company's game content to other interactive consumer platforms, including
cable and satellite television, mobile phones, retail games, airlines and books.
The Hospitality Division is comprised of NTN Wireless Communications (NTN
Wireless) and NTN Software Solutions (Software Solutions). NTN Wireless earns
revenue from producing and distributing guest and server paging systems to
restaurants and other markets. NTN Software Solutions generates revenue from
licensing, support and maintenance of our restaurant management and enterprise
solutions software used to manage reservations and table service in restaurants
and the sale of hardware required to operate these management solutions.
Included in the operating income (loss) for the segments is an allocation
of corporate expenses, while the related corporate assets are not allocated to
the segments. The segment results for March 31, 2005, below were prepared to
conform to the 2006 presentation.
10
The following tables set forth certain information regarding our segments
and other operations (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
---- ----
Revenues
Entertainment Division
Buzztime TV Network $ 8,089 $ 6,793
Buzztime Distribution 180 294
-------- --------
Total Entertainment Division 8,269 7,087
-------- --------
Hospitality Division
NTN Wireless 1,529 1,466
Software Solutions 1,264 954
-------- --------
Hospitality Division 2,793 2,420
-------- --------
Total revenue $ 11,062 $ 9,507
======== ========
--------------------------------------------------------------------------------
Operating income (loss)
Entertainment Division
Buzztime iTV Network $ 570 $ (311)
Buzztime Distribution (220) (384)
-------- --------
Total Entertainment Division 350 (695)
-------- --------
Hospitality Division
NTN Wireless 155 49
Software Solutions (382) (670)
-------- --------
Hospitality Division (227) (621)
-------- --------
Total operating income (loss) $ 123 $ (1,316)
======== ========
--------------------------------------------------------------------------------
Net income (loss)
Entertainment Division
Buzztime iTV Network $ 525 $ (340)
Buzztime Distribution (222) (386)
-------- --------
Total Entertainment Division 303 (726)
-------- --------
Hospitality Division
NTN Wireless 155 49
Software Solutions (382) (670)
-------- --------
Hospitality Division (227) (621)
-------- --------
Net income (loss) $ 76 $ (1,347)
======== ========
--------------------------------------------------------------------------------
AS OF AS OF
MARCH 31, DECEMBER 31,
2006 2005
Goodwill
Entertainment Division
Buzztime iTV Network $ 974 $ 974
Buzztime Distribution -- --
-------- --------
Total Entertainment Division 974 974
-------- --------
Hospitality Divison
NTN Wireless 449 449
Software Solutions 2,235 2,235
-------- --------
Hospitality Division 2,684 2,684
-------- --------
Total Goodwill $ 3,658 $ 3,658
======== ========
11
As of March 31
2006 2005
-------- --------
Total assets
Entertainment Division
Buzztime iTV Network $ 18,555 $ 14,490
Buzztime Distribution 2,569 2,867
-------- --------
Total Entertainment Division 21,124 17,357
-------- --------
Hospitality Division
NTN Wireless 1,929 1,915
Software Solutions 4,283 4,368
-------- --------
Total Hospitality Division 6,212 6,283
-------- --------
Corporate 2,245 5,762
-------- --------
Total assets $ 29,581 $ 29,402
======== ========
(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. Today 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.
11
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 Buzztime 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 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 provided to the consumers for free as a promotional service, which we
believe falls 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. If we are able to
reach a mutually agreeable conclusion at the administrative appeals level, we
expect that a conclusion may be reached by the end of 2006. 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 2007. 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.
We are involved in various other claims and legal actions arising in the
ordinary course of business. In our opinion, the ultimate disposition of these
matters will not have a material adverse effect on our consolidated financial
position, results of operations, or liquidity.
(6) DEFERRED REVENUE - BUZZTIME DISTRIBUTION
In February 2003, we entered into a Trial Agreement with a major cable
operator that involves developing the Buzztime Trivia Channel for potential
deployment on two different cable technology platforms within their system.
Under the Trial Agreement, the cable operator has the right to apply 50% of any
amount they pay us related to the Trial Agreement against future development
and/or license fees paid for the carriage of the Buzztime Trivia Channel. In
2005, we amended this Trial Agreement by adding license option rights to new
game applications (in addition to the Buzztime Trivia Channel) and new
development platforms. We extended the expiration date of this Trial Agreement
through December 2006 and have also extended the right for the cable operator to
use their 50% credit per the original agreement.
At March 31, 2006 and December 31, 2005, we carried $598,000 and $632,000,
respectively, in Deferred Revenue-Buzztime Distribution related to the Trial
Agreement and Amendment.
(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 a royalty representing 20% of Intura's revenues
during the two years after February 4, 2005, 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 legacy products).
We engaged a third-party valuation firm to assist in determining the fair
value of our 10% ownership interest in Intura. Based on this analysis, we
concluded that the fair value of our investment in Intura was approximately
$69,000. Additionally, based on this 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 assets if we had retained
them.
(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 United Kingdom 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.
12
For the three months ended March 31, 2006, and 2005, the components of
accumulated other comprehensive loss were as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
2006 2005
---- ----
Beginning balance................... $ (449) $ (469)
Unrealized gain (loss) during period
in investment available-for-sale. (43) 181
Foreign currency translation
adjustments...................... (24) ---
---------- ----------
Ending balance...................... $ (516) $ (288)
========== ==========
(9) LINE OF CREDIT
In March 2006, we signed a one-year $2.0 million credit facility agreement
with Discovery Bank. Interest on the line is based on an independent index which
is the highest rate on corporate loans posted by at least 75% of the thirty
largest U.S. banks known as the Wall Street Journal's Prime Rate. The interest
rate to be applied to the unpaid principal balance is not to exceed the Wall
Street Journal Prime rate plus 0.5%. The line is secured by all inventories,
equipment, accounts receivable and various other assets of NTN.
In April 2006, we repaid in full the outstanding balance on the line of
credit.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
A. CAUTION CONCERNING 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
Buzztime, 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 for the fiscal year ended
December 31, 2005, 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.
B. OVERVIEW
We produce and distribute interactive entertainment and hospitality
communications products, and manage our business via two operating divisions:
Entertainment and Hospitality.
The Entertainment Division is comprised of the Buzztime Interactive
Television Network (Buzztime iTV Network or iTV Network) and Buzztime
Distribution (formerly Buzztime Entertainment, Inc.). The Buzztime iTV Network
distributes an interactive television promotional game network to restaurants,
sportsbars, taverns and pubs in North America and the UK. Buzztime Distribution
distributes the company's game content to other interactive consumer platforms,
including cable and satellite television, mobile phones, retail games, airlines
and books.
The Hospitality Division is comprised of NTN Wireless Communications (NTN
Wireless) and NTN Software Solutions (Software Solutions). NTN Wireless produces
and distributes guest and server paging systems to restaurants and other
markets. NTN Software Solutions develops and distributes customer management
software to manage reservations and table service in restaurants.
In the third quarter of 2005 we were approached by a hospitality-focused
company stating an interest in purchasing the assets of NTN Wireless and
Software Solutions. In the fourth quarter of 2005 we disclosed our interest in
considering the sale of these businesses. This interest continues; and, as of
the date of this filing, we have several interested parties for each of the two
segments. Discussions with potential buyers are currently on hold, however,
pending the assignment of certain contracts. If we cannot find buyers
willing to pay what we believe are the market values for the assets, we may
decide to maintain their operations. Until a transaction is completed, we will
continue to grow these two business segments, which recently have experienced
increased success in the hospitality industry.
14
ENTERTAINMENT DIVISION
BUZZTIME ITV NETWORK SEGMENT
The Buzztime iTV Network (iTV Network; formerly the "NTN iTV Hospitality
Network") has maintained a unique and preemptive position in the hospitality
industry for over 20 years as a promotional platform providing interactive
entertainment to restaurants and sportsbars. Approximately 73% of our current
consolidated revenues come from the operations of this segment as we receive
recurring service fees from hospitality venues that receive the transmission of
our interactive entertainment.
The iTV Network transmits a wide variety of engaging interactive multiplayer
games, including trivia quiz shows, play-along sports programming, casino and
casual games to hospitality locations. Patrons use our wireless game devices to
interact with games displayed on television screens and compete locally and
nationally with real-time scoring. After nearly 20 years of displaying only
trivia and sports games, recent new content concepts such as Texas Hold'em have
created strong demand for our product. During the past 7 quarters, we have
experienced the most significant increase in domestic iTV site sales in over 8
years.
We target national and regional hospitality chains as well as local
independent venues that are looking for a competitive point-of-difference to
attract and retain customers. We ended the quarter with 3,626 United States
subscribers, 381 Canadian subscribers and 29 UK subscribers. Approximately 25%
of our sites come from leading national chains in the casual-dining restaurant
segment such as Buffalo Wild Wings, TGIFriday's, Bennigan's Irish Grill,
Applebee's and Damon's Grill.
Through the transmission of engaging interactive content, stored on a site
server at each location, our Buzztime iTV Network enables single- and
multi-player participation as part of local, regional, national or international
competitions supported with prizing and player recognition. Unlike coin-operated
games, live entertainment and themed events which are either single-player
based, expensive and/or require effort to coordinate and conduct, the Buzztime
iTV Network offers a turnkey solution of unique multi-player, multi-venue
entertainment requiring virtually no site staff involvement at a fraction of the
comparable cost.
Our Buzztime iTV Network also earns revenues from advertising and marketing
communications services to companies seeking to reach the over six million
unique out-of-home consumers each month that visit the iTV Network's 4,036
venues. With an average of four dedicated television screens per location, we
provide advertisers with a targeted, cost-effective way to communicate their
brand message, obtain consumer feedback, and stimulate product trial. Unlike
current out-of-home advertising vehicles which are either static or lack
multiple consumer exposure, we provide, as part of our game show formats, an
end-to-end marketing communications solution comprised of full-motion video
commercials, promotional messages, "advergaming" contextual opportunities and
real-time interactive research capabilities at costs well below current media
and research alternatives.
VALUE PROPOSITION
The Buzztime iTV Network has established itself as a cost-effective means of
generating traffic to our hospitality locations, creating loyalty and return on
investment based on the ability to positively impact venue revenue. According to
a May 2000 report by Actionable Marketing Research, players stay longer (39%
compared to non-players); spend more money (47% more than non-players); return
more often (72% more than non-players); and demonstrate positive word-of-mouth
(90% have or will recommend a Buzztime subscriber venue to a friend).
We manage one of the world's largest trivia game show libraries from our
interactive broadcast studio where we also produce multi-player Texas Hold'em
and Buzztime Billiards competitions, Predict the Play interactive television
sports prediction games, real-time viewer polls and advertising.
By distributing turnkey promotional and marketing support to these venues,
we provide a competitive advantage, as well as provide a cost-effective
entertainment option when compared to other alternatives such as live
entertainment, karaoke and food and drink discounts.
In 2005, Buzztime iTV Network's domestic hospitality customers paid us an
average of $567 per month per venue to use our interactive technology, and to
offer our game transmissions to their patrons. Buzztime iTV Network venues enter
into one- and two-year service agreements, with the average customer life of an
Buzztime iTV Network site/venue of approximately three years.
For more information on the Buzztime iTV Network, please see our 2005 Form
10-K or visit our website at www.buzztime.com.
15
UNITED KINGDOM NETWORK LAUNCH
In March 2005, we launched our iTV hospitality network product in the United
Kingdom under the brand "Buzztime Network." In the late fall of 2005, we began
our first broad marketing programs with a target of driving sales growth early
in 2006. The year ended with 13 sites in operation. These sales are made through
our exclusive United Kingdom independent representatives, Q109 Limited. In
January 2006, we had sales of 8 site subscriptions, and in February 2006, we
sold 18 sites. At March 31, 2006 we had 29 sites installed and 11 sold sites
awaiting installation.
In early May 2006, Greene King PLC., the third largest managed pub company
in the UK, committed to increasing the number of locations offering the Buzztime
iTV Network to nineteen of its UK pubs. The decision follows a three month
period of testing the new Buzztime Network in two Green King pubs. The increase
in sites offering the Buzztime iTV Network will enable Greene King to evaluate
the impact on a wider scale. Locations joining the network are from Greene
King's Hungry Horse brand, Real Pubs North, Town Locals and Real Pubs South.
There are over 60,000 pubs in the United Kingdom and "Pub quizzes,"
presented verbally by the manager or a host, are a popular pub activity. Texas
Hold'em is also popular, and represents a high proportion of our current game
play. Buzztime Billiards was added in the United Kingdom and in North America in
early May 2006. With our recent momentum, we believe that our network product
may become very successful in this market.
We also have granted an exclusive license to eBet Limited, an Australian
gaming technology corporation, to distribute our games in commercial
establishments and other public places throughout Australia and New Zealand via
eBet Limited's own licensed network.
BUZZTIME DISTRIBUTION SEGMENT (FORMERLY PRESENTED AS BUZZTIME ENTERTAINMENT,
INC. SUBSIDIARY)
NOTE - BEGINNING WITH THIS REPORT, THE SEGMENT FORMERLY KNOWN AS BUZZTIME
ENTERTAINMENT, INC., IS BEING PRESENTED AS BUZZTIME DISTRIBUTION. REVENUES AND
EXPENSES IN THIS SEGMENT FORMERLY REFLECTED BOTH OUR EFFORTS TO LICENSE OUR GAME
CONTENT AND TECHNOLOGY TO EMERGING INTERACTIVE PLATFORMS AND ALL OF THE COSTS TO
PRODUCE AND MANAGE THAT CONTENT. IT WILL NOW INCLUDE ALL COSTS OF LICENSING BUT
ONLY 10% OF THE COST OF CREATING AND MANAGING THE CONTENT, AS THIS BETTER
MATCHES CONTENT COSTS WITH REVENUES IN THE SEGMENT. THE REMAINING 90% OF CONTENT
COSTS ARE CHARGED TO THE ITV NETWORK SEGMENT.
Buzztime Distribution generates revenue from distributing and licensing our
Buzztime-branded Play Along TV(R) content and technology to interactive consumer
platforms, with a primary focus on interactive cable television. Our
distribution efforts focus on licencing real-time, mass-participation games and
head-to-head multi-player games.
The company develops, produces and distributes single-player and
multi-player games for both one-way and two-way consumer platforms with a
primary focus on interactive television. The games are designed for general
audiences and include trivia quiz shows, real-time sports prediction
competitions that are played along with live sporting events, multi-player card
and billiard games as well as single-player card, arcade, puzzle and board
games. The games are distributed through several platforms including the
Buzztime Network, cable television, satellite television, mobile phones, home
electronic games, cards, books and airplanes.
The Buzztime Trivia Channel was launched on cable television in June 2002 to
digital cable subscribers of Susquehanna Communications (SusCom), headquartered
in York, Pennsylvania. We believe this was the first deployment of a real-time,
two-way game channel via digital cable television in the United States that
operates on commercially deployed digital set-top boxes in the home. The
Buzztime Network is now available to over 300,000 Comcast, Time Warner, SusCom
and Blue Ridge digital cable subscribers within cable television systems in
Pennsylvania, Virginia, Maryland, Maine and Louisiana. Buzztime Entertainment
also has trivia games deployed on satellite television through Echostar DISH
Network in the United States and Bell Canada ExpressVu in Canada, as well as to
major North American wireless carriers through a licensing and development
agreement with Airborne Entertainment. In addition, Buzztime Entertainment
remains the primary content provider to the Buzztime Network in restaurants and
sports bars in the United States, Canada and the United Kingdom. Buzztime
currently works with leading companies such as Media General, Airborne
Entertainment, Cadaco, DTI Software, Square One Publishers and others to bring
consumers Buzztime game content.
Revenue for Buzztime Distribution is derived from license fees and royalties
from third-party licensees who distribute Buzztime content to end-users, as well
as from third-party development and production fees. It is also our plan to sell
advertising when we achieve a critical mass of subscribers - particularly via
cable television distribution.
16
THE HOSPITALITY DIVISION
NTN WIRELESS SEGMENT
NTN Wireless earns revenue from the sale of on-site wireless paging products
to restaurants and other hospitality locations. These products are provided to
customers waiting for a table and will activate to let them know when
their table is ready, as well as to restaurant staff to alert them to certain
issues, such as when hot food is ready to be served.
SOFTWARE SOLUTIONS SEGMENT
Software Solutions earns revenue from the licensing of seating management
and reservation systems software as well as from providing professional services
to Domino's Pizza LLC and to other customers. Software Solutions was formed in
July 2003 when we acquired the assets and assumed certain liabilities of
Breakaway International, Inc.
C. CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). 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 ongoing basis, we evaluate our estimates, including those
related to deferred costs and revenues, depreciation of broadcast equipment, bad
debts, investments, intangible assets, financing operations, and contingencies
and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o We record deferred costs and revenues related to the costs and related
installation revenue associated with installing new customer sites.
Based on SEC Staff Accounting Bulletin (SAB) 104, REVENUE RECOGNITION,
we amortize these amounts over an estimated three-year average life of a
customer relationship.
o We incur a relatively significant level of depreciation expense in
relationship to our operating income. The amount of depreciation expense
in any fiscal year is largely related to the estimated life of handheld
wireless Playmaker devices, VSAT satellite dishes and associated
electronics and the computers located at our customer sites. The
Playmakers are depreciated over a four-year life, VSAT dishes and
associated electronics over a four-year life and the computers over a
three-year life. The depreciable life of these assets was determined
based on 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.
We reserve for all accounts that have suspended or terminated our
Buzztime iTV Network services, all auto debit customers with balances
that are greater than 60 days past due, plus 5% of all outstanding
balances for iTV customers and 5% of outstanding balances for NTN
Wireless and Software Solutions' customers. 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 on assumptions about future sales
and supply on-hand. If actual market conditions are less favorable than
those we have projected, additional inventory write-downs may be
required.
17
o Revenues from sales of software generally contain multiple elements, and
are recorded 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 have the option to elect post contract support (PCS) for
an additional fee, which is based on a stipulated percentage of the
license fee. PCS consists of technical support as well as unspecified
software upgrades and releases when and if made available by us during
the term of the support period.
If, at the outset of an arrangement, we determine that the arrangement
fee is not fixed or determinable, revenue is deferred until the
arrangement fee becomes due. If, at the outset of an arrangement, we
determine that collectibility is not probable, revenue is deferred until
the earlier of when collectibility becomes probable or when payment is
received. 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.
Revenue from development services consists of customizations and,
therefore, we recognize revenue from development services as the
services are performed under the agreements. We recognize revenues from
PCS, such as maintenance, on a straight-line basis over the term of the
contract.
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 March 31, 2006, the combined
net amount of $6,419,000 of goodwill and intangible assets represented
22% of total assets. Goodwill represents the excess of costs over fair
value of assets of businesses acquired. As of January 1, 2002, we
adopted the provisions of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. 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 performed our annual test for goodwill impairment for Software
Solutions and NTN Canada, Inc., as of September 30, 2005, and for NTN
Wireless as of December 31, 2005, and concluded that there was no
indication of impairment. We retained a third-party valuation firm to
assist in calculating fair values. The analysis was based on
consideration of (1) the market value of comparable publicly traded
companies; (2) the market value of similar companies involved in
business combinations; and (3) an income approach of discounting the
projected cash flows of operations. The projections of those units
involved a number of assumptions and estimates, including revenue growth
and operating margins, which we believe are reasonable based on existing
operations and prospective business opportunities. We completed our
evaluation and concluded that goodwill was not impaired as the fair
values exceeded carrying values, including goodwill. The amount of
goodwill as of March 31, 2006 was $3,658,000. Future events could cause
us to conclude that impairment indicators exist and that goodwill and
other intangible assets associated with our acquired businesses are
impaired.
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.
18
o SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES, and SEC SAB 59, ACCOUNTING FOR NONCURRENT MARKETABLE EQUITY
SECURITIES, provide guidance on determining when an investment is
other-than-temporarily impaired. Investments are reviewed quarterly for
indicators of other-than-temporary impairment. This determination
requires significant judgment. In making this judgment, we employ a
systematic methodology quarterly that considers available quantitative
and qualitative evidence in evaluating potential impairment of our
investments. If the cost of an investment exceeds its fair value, we
evaluate, among other factors, general market conditions, the duration
and extent to which the fair value is less than cost, and our intent and
ability to hold the investment. We also consider specific adverse
conditions related to the financial health of, and business outlook for,
the investee, including industry and sector performance, changes in
technology, operational and financing cash flow factors, and rating
agency actions. Once a decline in fair value is determined to be
other-than-temporary, an impairment charge is recorded and a new cost
basis in the investment is established. If market, industry and/or
investee conditions deteriorate, we may incur future impairments.
As of March 31, 2006, we owned common stock of an Australian company
that is subject to market risk. At March 31, 2006, the carrying value of
this investment was $215,000, which is net of a $602,000 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.
We do not have any of the following:
o Off-balance sheet arrangements except for purchase orders, purchase
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 in
our Form 10-K for the year ended December 31, 2005, ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED Transactions, or which are so non-material
to fall below the materiality threshold of such item.
ASSESSMENTS OF FUNCTIONAL CURRENCIES. The United States dollar is our
functional currency, except for our operations in Canada and the United Kingdom.
D. RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
CHANGE IN REPORTING FORMAT AND ALLOCATIONS
In the past year, we completed the re-branding of our entertainment product
offerings under the Buzztime brand, including the re-naming of the NTN iTV
Network as the Buzztime iTV Network.
With this report, NTN Buzztime initiates a new presentation format of four
operating segments, reflecting a change of primary focus and a consolidation of
entertainment operations under one entity, which reflects the information
provided to our chief decision makers. Formerly all costs of content development
for all aspects of our entertainment operations were included in the Buzztime
Entertainment operating results. With the consolidation of operations, 90% of
content development costs are now expensed to the Buzztime iTV Network segment
and 10% to Buzztime Distribution. The 2005 results conform to the 2006
presentation format.
Additionally, with this 2006 first quarter report, we have modified our
reporting format by moving the Buzztime iTV Network segment out of the
Hospitality Division and into the Entertainment Division. Thus the Buzztime iTV
Network and Buzztime Distribution now comprise the Buzztime Entertainment
Division. The segments of NTN Wireless and NTN Software Solutions represent
Hospitality Division.
19
GENERAL
Operations for the three months ended March 31, 2006, resulted in a net
income of $76,000 compared to a net loss of $1,347,000 for the three months
ended March 31, 2005.
As a result of adopting SFAS 123(R), our net income for the three months
ended March 31, 2006 is approximately $283,000 lower than if we had continued to
account for share-based compensation under APB 25. Basic and diluted earnings
per share for the three months ended March 31, 2006, would have been $ 0.01 if
we had not adopted SFAS 123 (R) compared to reported basic and diluted earnings
per share of $0.00, respectively.
REVENUES
The consolidated revenues of NTN Buzztime, Inc. increased $1,555,000, or
16.4%, to $11,062,000 for the three months ended March 31, 2006, from $9,507,000
for the three months ended March 31, 2005. The revenue contribution from the two
operating segments of the division for the three months ended March 31, 2006,
and 2005 are shown in the following table (in thousands):
COMPONENTS OF REVENUE
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005 CHANGE
---- ---- ------
Entertainment Division
----------------------
Buzztime iTV Network..................... $ 8,089 $ 6,793 $ 1,296
Buzztime Distribution.................... 180 294 (114)
---------------- ---------------- ----------------
Entertainment Division................. 8,269 7,087 1,182
---------------- ---------------- ----------------
Hospitality Division
--------------------
NTN Wireless............................. 1,529 1,466 63
Software Solutions....................... 1,264 954 310
---------------- ---------------- ----------------
Hospitality Division.................. 2,793 2,420 373
---------------- ---------------- ----------------
Consolidated revenue................ $ 11,062 $ 9,507 $ 1,555
================ ================ ================
Within the Entertainment Division, we have several revenue contributors:
Buzztime iTV Network (our core subscription revenue) and Buzztime Distribution.
As noted in the above table, our Buzztime iTV Network revenue from core
subscription operations increased $1,296,000, or 19% in the first quarter of
2006 due to a worldwide increase of 322 in net site count over March 31, 2005.
As of March 31, 2006 the world wide customer site count was 4,036. This includes
29 sites in the U.K. as of March 31, 2006 compared to zero at March 31, 2005.
The number of sites in North America was 4,007 as of March 31, 2006 compared to
3,714 as of March 31, 2005. We believe that a large portion of this site count
and revenue growth can be attributed to our new programming content, including
our Texas Hold'em card game.
Revenues from NTN Wireless increased $63,000 to $1,529,000 in the three
months ended March 31, 2006, from $1,466,000 in the three months ended March 31,
2005. This increase occurred because of increased replacement sales in 2006
compared to the prior year period.
Revenues from Software Solutions increased $310,000 to $1,264,000 in the
three months ended March 31, 2006, from $954,000 in the three months ended March
31, 2005. This increase was primarily the result of increases in development
service revenue and installations of software for large clients.
Buzztime Distribution revenues decreased $114,000 to $180,000 in the three
months ended March 31, 2006, from $294,000 in the three months ended March 31,
2005. The primary reason for decreased revenue in 2006 was the lower development
service revenue from the Trial Agreement with Comcast Cable compared to the
prior year.
20
OPERATING EXPENSES
Consolidated direct operating costs increased only $45,000, or 1%, to
$3,501,000 in the three months ended March 31, 2006, from $3,456,000 in the
three months ended March 31, 2005. The following table compares the direct costs
for each of our operating segments between the three months ended March 31, 2006
and 2005, respectively (in thousands):
DIRECT OPERATING COSTS
THREE MONTHS ENDED MARCH 31,
2006 2005 CHANGE
---- ---- ------
Entertainment Division
----------------------
Buzztime iTV Network...................... $ 2,364 $ 2,255 $ 109
Buzztime Distribution licensing......... 112 147 (35)
------------ ------------ ------------
Entertainment Division 2,476 2,402 74
------------ ------------ ------------
Hospitality Division
--------------------
NTN Wireless.............................. 939 910 29
Software Solutions........................ 86 144 (58)
------------ ------------ ------------
Hospitality Division.................... 1,025 1,054 (29)
------------ ------------ ------------
Consolidated operating costs.......... $ 3,501 $ 3,456 $ 45
============ ============ ============
Consolidated direct operating costs were essentially unchanged from the
prior year three month period, even though consolidated revenues increased 17%.
The $109,000 increase in the Buzztime iTV Network's direct operating costs
came from a variety of factors, including an increased level of depreciation
expense resulting from the increased number of sites and continued deployment of
new equipment to convert customers to ITV2 and increased salary expense
associated with production of content and live studio.
The $29,000 increase in the direct operating costs of NTN Wireless was
largely related to the lower level of cost of goods sold associated with the NTN
Wireless revenue decrease of $63,000 noted above. Our gross margin in the NTN
Wireless segment in the three months ended March 31, 2006, was 38.6%, a 0.7%
increase over the 37.9% gross margin we recorded in the three months ended March
31, 2005.
The $58,000 decrease in the direct operating costs of Software Solutions was
largely related to lower hardware sales as compared to March 31, 2005. Our gross
margin in the Software Solutions segment in the three months ended March 31,
2006, was 93.2%, a 8.3% increase over the 84.9% gross margin we recorded in the
three months ended March 31, 2005.
The $35,000 decrease in the direct operating costs of Buzztime Distribution
was primarily due to a $27,000 decrease of amortization expense associated with
assets fully amortized and $8,000 decrease in expense associated with hardware
sales.
21
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses (SG&A) increased
$384,000, or 6%, to $6,817,000 in the three months ended March 31, 2006, from
$6,433,000 in the three months ended March 31, 2005. The following table
compares the selling, general and administrative expenses for each of our
operating segments between the three months ended March 31, 2006, and 2005 (in
thousands):
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED MARCH 31,
2006 2005 CHANGE
---- ---- ------
Entertainment Division
----------------------
Buzztime iTV Network....................... $ 4,636 $ 4,331 $ 305
Buzztime Distribution...................... 252 492 (240)
------------ ------------ ------------
Entertainment Division 4,888 4,823 65
------------ ------------ ------------
Hospitality Division
--------------------
NTN Wireless............................... 392 429 (37)
Software Solutions......................... 1,537 1,181 356
------------ ------------ ------------
Hospitality Division.................... 1,929 1,610 319
------------ ------------ ------------
Consolidated selling, general and
administrative expenses............ $ 6,817 $ 6,433 $ 384
============ ============ ============
The $305,000 SG&A increase in the Buzztime iTV Network segment was primarily
due to $217,000 of the total Company stock based compensation expense in the
three months ended March 31, 2006, upon the implementation of FAS 123R effective
January 1, 2006. In addition in the quarter ended March 31, 2006, we recorded a
charge of $134,000 (this includes $99,000 that is a non-cash stock charge)
related to an estimated settlement for a legal matter.
The $37,000 SG&A decrease in the NTN Wireless segment was due to decreases
in marketing and commission expense associated with the mix of products sold.
The $356,000 SG&A increase in the Software Solutions segment was due to
increased staffing and telephone expense resulting from increased subscribers
for help desk services, increased commissions and selling expense associated
with a higher level of software sales.
The $240,000 SG&A decrease in Buzztime Distribution was due primarily to
reduced staffing associated with completion of development projects in mid 2005.
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. They concluded that the fair value of our
investment in Intura was approximately $69,000. They also 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 $35,000 to $346,000 in the
three months ended March 31, 2006, compared to $380,000 in the three months
ended March 31, 2005. The litigation, legal and professional fees in the three
months ended March 31, 2006 included costs related to compliance with
Sarbanes-Oxley requirements and audit fees.
22
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
decreased by $10,000, or 4.6%, to $209,000 in the three months ended March 31,
2006 from $219,000 in the three months ended March 31, 2005 due to certain
assets becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $7,000 to $66,000 in the three
months ended March 31, 2006, from $59,000 in the three months ended March 31,
2005, due primarily to the completion of certain projects for the iTV Network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the three months ended March 31, 2006 was $31,000
compared to $26,000 in the three months ended March 31, 2005. Interest expense
increased $22,000, or 91.7% to $46,000 in the three months ended March 31, 2006,
compared to $24,000 in the three months ended March 31, 2005. The $700,000
balance outstanding on the line of credit throughout the three months ended
March 31, 2006, resulted in greater interest than in the prior year period when
there were no outstanding credit facility borrowings.
INCOME TAXES
The NTN Hospitality Technologies Division is expected to report taxable
income for the year ended December 31, 2006. 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 Division recorded a tax provision of $32,000 in the three months
ended March 31, 2006. This was a $1,000 decrease compared to the $33,000
provision for income taxes recorded in the three months ended March 31, 2005.
ADJUSTED EBITDA
Earnings before interest, taxes, depreciation and amortization, non-cash
stock based compensation and payments and non-cash charge related to software
product sale ("Adjusted EBITDA") is not intended to represent a measure of
performance in accordance with accounting principles generally accepted in the
United States ("GAAP"). Nor should adjusted EBITDA be considered as an
alternative to statements of cash flows as a measure of liquidity. Adjusted
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 adjusted EBITDA increased $1,638,000 to $1,688,000 in the three months
ended March 31, 2006, from adjusted EBITDA of $50,000 in the three months ended
March 31, 2005. This adjusted EBITDA increase was primarily due to the net
income of $76,000 recorded in the three months ended March 31, 2006 compared to
the net loss of $1,347,000 for the similar prior year period.
The following table reconciles our net income (loss) per GAAP to adjusted
EBITDA, with the 2005 numbers conforming to the 2006 presentation format (in
thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
---- ----
ADJUSTED EBITDA CALCULATION
(IN 000'S)
Net income (loss) per GAAP $ 76 $ (1,347)
Interest expense (net) 15 (2)
Depreciation and amortization 1,157 983
Non-cash stock based compensation
and payments 408 107
Non-cash charge related to software
product sale --- 276
Income taxes 32 33
------------ ------------
ADJUSTED EBITDA $ 1,688 $ 50
============ ============
23
On a segment basis, our segments generated adjusted EBITDA levels as follows
(in thousands):
THREE MONTHS ENDED MARCH 31, 2006
---------------------------------------------------------------------------------------
ENTERTAINMENT HOSPITALITY
------------- -----------
ADJUSTED EBITDA CALCULATION BUZZTIME ITV BUZZTIME SOFTWARE NTN
(IN 000'S) NETWORK DISTRIBUTION SOLUTIONS WIRELESS CORPORATE TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) per GAAP $ 525 $ (222) $ (382) $ 155 $ -- $ 76
Interest expense (net) 14 1 -- -- -- 15
Depreciation and amortization 928 129 84 16 -- 1,157
Non-cash stock based
compensation and payments 342 24 33 9 -- 408
Income taxes 32 -- -- -- -- 32
------------ ------------ ------------ ------------ ------------ ------------
ADJUSTED EBITDA $ 1,841 $ (68) $ (265) $ 180 $ -- $ 1,688
============ ============ ============ ============ ============ ============
TOTAL ASSETS $ 18,555 $ 1,569 $ 4,283 $ 1,924 $ 2,245 $ 29,581
============ ============ ============ ============ ============ ============
THREE MONTHS ENDED MARCH 31, 2005
---------------------------------------------------------------------------------------
ENTERTAINMENT HOSPITALITY
------------- -----------
ADJUSTED EBITDA CALCULATION BUZZTIME ITV BUZZTIME SOFTWARE NTN
(IN 000'S) NETWORK DISTRIBUTION SOLUTIONS WIRELESS CORPORATE TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) per GAAP $ (340) $ (386) $ (670) $ 49 $ -- $ (1,347)
Interest expense (net) (3) 1 -- -- -- (2)
Depreciation and amortization 709 156 92 26 -- 983
Non-cash stock based
compensation and payments 107 -- -- -- -- 107
Non-cash charge related to
software product sale -- -- 276 -- -- 276
Income taxes 33 -- -- -- -- 33
------------ ------------ ------------ ------------ ------------ ------------
ADJUSTED EBITDA $ 506 $ (229) $ (302) $ 75 $ -- $ 50
============ ============ ============ ============ ============ ============
TOTAL ASSETS $ 14,490 $ 2,867 $ 4,368 $ 1,915 $ 5,762 $ 29,402
============ ============ ============ ============ ============ ============
E. LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, we had cash and cash equivalents of $6,032,000 and
working capital (current assets in excess of current liabilities) of $5,667,000
compared to cash and cash equivalents of $5,982,000 and working capital of
$4,743,000 at December 31, 2005. For the three months period ending March 31,
2006 and 2005 net cash provided by operations was $957,000 and $242,000,
respectively. This fluctuation in cash was primarily due to the $1,423,000
improvement in operating results moving to net income of $76,000 compared to a
net loss of $1,347,000 in the three month periods ending March 31, 2006 and
2005, respectively.
For the three months period ending March 31, 2006 and 2005 net cash used in
investing activities was $832,000 and $1,485,000, respectively. Included in net
cash used in investing activities in 2006 was approximately $429,000 in capital
expenditures, $132,000 of software development, and $271,000 of deposits made on
broadcast equipment.
For the three months period ending March 31, 2006 and 2005 net cash used in
financing activities was $29,000 and $213,000 provided by financing activities,
respectively. Included in net cash used by financing activities in 2006 was
$79,000 in proceeds from the exercise of options and warrants. These cash
inflows were offset by $108,000 in principal payments on our capital leases.
24
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 a royalty representing 20% of Intura's revenues
during the two years after February 4, 2005, 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 legacy products).
We engaged a third-party valuation firm to assist in determining the fair
value of our 10% ownership interest in Intura. Based on this analysis, we
concluded that the fair value of our investment in Intura was approximately
$69,000. Additionally, based on this 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 assets if we had retained
them.
FUTURE FINANCING NEEDS
Our liquidity and capital resources, while stronger now than in recent
years, remain limited, which may constrain our ability to operate and grow our
business. However, cash flows from operations have increased significantly
during the third and fourth quarters of 2005.
In 2005, we experienced the most significant increase in iTV site sales in 8
years, with 359 site sales. We believe that this sales increase can be
attributed in large part to our announcement in February 2004 of the planned
deployment of a wireless electronic multi-player version of the popular poker
game, Texas Hold'em, on our NTN iTV Network in 2005. Additionally, we are
halfway through the conversion of approximately 350 Canadian NTN iTV Network
sites to our newest iTV2 technology, which allows the play of Texas Hold'em, as
well as other new game content.
On February 6, 2005, we announced the deployment of Texas Hold'em to all of
our iTV2 sites, which numbered about 900 in North America. In 2005, we witnessed
continued strong growth of sales for the Buzztime iTV Network. At the Nightclub
and Bar Trade Show in early March 2005, which is one of our strongest trade
shows, we had continued strong sales success. Each new site requires a capital
investment of approximately $5,000 when connected to the Buzztime iTV Network
via VSAT satellite technology. We believe that we have sufficient cash to
operate our businesses through 2006.
Capital requirements in 2006 will additionally depend upon two other growth
initiatives. The first is the launch of our Buzztime iTV Network in the United
Kingdom, beginning with an initial trial of 11 Buzztime iTV Network sites that
began on March 1, 2005. We believe that a significant growth opportunity exists
in the United Kingdom for our iTV product, and success in sales would require
substantial capital for any level of significant deployments. The second is the
intended broad distribution of the Buzztime Trivia Channel in digital cable
television systems as sales efforts continue to focus on cable MSOs (the largest
multiple system operators in the United States). With 8 current sites in
operation, if this initiative succeeds as planned and we enter into national
agreements with those cable operators, we intend to aggressively increase
Buzztime sales and marketing efforts to more quickly advance our distribution
within the United States market.
A primary driver of capital use over the past three years has been the cost
of deploying the VSAT technology in our Buzztime iTV Network. For more than 10
years, we transmitted our data through the FM2 satellite one-way platform. In
2003, we were informed that this platform would no longer be available to us
after February 2005. After considering several alternative delivery channels, we
entered into equipment purchase and satellite service agreements in 2003 to
convert the Network to a much higher speed, two-way VSAT (Very Small Aperture
Technology) satellite technology over the two-year period ending February 2005.
These agreements were with the same reseller of satellite services that provided
the FM2 satellite platform to us. The VSAT technology is more expensive than
FM2, and, with our strong sales in 2005, our cash usage increased to fund the
new installations.
25
On January 20, 2005, after learning that the FM2 platform life was being
extended, we amended our agreements with our satellite services provider to push
out the expiration date on the FM2 satellite platform to February 2007 and to
modify our VSAT equipment purchase and satellite service agreements. The
amendments will help us in three ways: First, the modification to the equipment
purchase agreement eliminates the requirement to purchase and install a specific
amount of VSAT equipment. Second, the flexibility will enable us to utilize
non-satellite based data transmission platforms, such as digital subscriber
lines (DSL), wireless connectivity or cable modems, for customer sites where
such platforms may be appropriate. We have begun installing some sites with DSL
connectivity in areas that cannot be reached by VSAT, which lowers the cost of
the installations by a significant amount of approximately $1,800 per site.
Third, the amendment allows us to slow our rate of converting sites from the FM2
system to the new VSAT platform over the remainder of the amended FM2 satellite
services agreement, which is now scheduled to end in February 2007. As of
December 31, 2005, approximately 65% of our domestic sites had been converted
from FM2 to DSL or VSAT. We anticipate that with the extension of FM2 sites, an
increasing number of DSL installations and the revised VSAT agreement, North
America installation costs overall and installation costs per site over the
coming years will trend down from what was seen in 2003, 2004 and 2005.
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 397 active sites there. Through December 31, 2005, approximately 91% 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 12
months, we plan to convert the remaining 9% of our current customer base at a
cost on the order of $175,000. However, we believe that these Canadian capital
expenditures will be financed through the operating cash flow we generate in
Canada.
We also have taken actions to reduce operating losses in two of our segments
that produced losses in 2005, as follows:
o Software Solutions - In February 2005, we sold the Vision
Point-of-Sale product line, which had produced losses, to a new
venture formed by the former president of Breakaway International.
We retained a 10% ownership in that new venture.
o NTN Wireless - This segment was profitable in 2005. We believe this
segment should produce operating profits going forward, although
this segment is very competitive and its gross margins remain under
pressure.
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 March 31, 2006, we owned common stock of
an Australian company that is subject to market risk. At March 31, 2006, the
carrying value of this investment was $215,000, which is net of a $602,000
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 March 31, 2006, a hypothetical
10% decline in the value of the Australian dollar would result in a reduction of
$22,000 in the carrying value of the investment.
We do not have any derivative financial instruments. Nor do we have any
speculative or hedging instruments.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, our management 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 our evaluation and subject to the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that there were no material
weaknesses in our disclosure controls and procedures and that such disclosure
controls and procedures were effective as of the end of the period covered by
this report in providing reasonable assurance of achieving the desired control
objectives, and therefore there were no corrective actions taken.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Since our evaluation as of December 31, 2005, other than as described in
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES, we have had no significant
changes in our internal controls.
26
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 currently is one potentially material arbitration item pending
or threatened against us.
ARBITRATION WITH FORMER EMPLOYEE
On May 5, 2005, a former employee of the company filed a Demand for
Arbitration claiming that we had wrongfully rejected his request to exercise
20,000 options granted to him in 1997 that we deemed as expired in 1999. The
former employee is seeking validation of his option grants, declaratory relief
and specific performance, money damages for breach of contract and breach of the
covenant of good faith and fair dealing, punitive damages, and attorneys' fees
and costs. We answered the arbitration demand and asserted counterclaims. We
have recorded an estimated total charge of $184,000, including $134,000 in the
first quarter of 2006 related to this matter. The settlement negotiations are
ongoing and, at this time, we do not know if a mutually acceptable settlement
will be reached. We continue to vigorously defend the case.
ITEM 1A. RISK FACTORS.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
There are no material changes form the risk factors as previously disclosed
in NTN Buzztime, Inc.'s Form 10-K for the year ended December 31, 2005.
ITEM 2. UNREGISTRED 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.
None.
ITEM 5. OTHER INFORMATION.
None.
27
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 BUZZTIME, INC.
Date: May 15, 2006 By: /s/ Andy Wrobel
------------------------------
Andy Wrobel
Authorized Signatory and Chief
Financial Officer
28
Item 6. 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)
3.7 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated October 20, 2005 (20)
3.8 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated December 27, 2005 (20)
4.1 Specimen Common Stock Certificate (10)
4.2* Stock Option Agreement, dated October 7, 1998, by and between NTN
Buzztime, Inc. and Stanley B. Kinsey (5)
4.3* Stock Option Agreement, dated October 7, 1999, by and between NTN
Buzztime, Inc. and Stanley B. Kinsey (6)
4.4* Stock Option Agreement, dated January 26, 2001, by and between NTN
Buzztime, Inc. and Stanley B. Kinsey (12)
4.5 Warrant Certificate issued January 13, 2003 by NTN Buzztime, 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
Buzztime, Inc. and Media General, Inc. (17)
4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and among NTN
Buzztime, 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* NTN Communications, Inc. 2004 Performance Incentive Plan (21)
4.11* Stock Option Agreement, dated June 28, 2005, by and between NTN
Communications, Inc. and Stanley B. Kinsey (20)
10.1 License Agreement with NTN Canada (3)
10.2* Employment Agreement, dated September 9, 2004, by and between NTN
Buzztime, Inc. and Stanley B. Kinsey (16)
10.3 Subscription Agreement dated January 13, 2003 between NTN Buzztime,
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
Buzztime, 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 Buzztime, Inc. (13)
10.7 Manufacturing Agreement, dated November 25, 1997, by and between NTN
Buzztime, Inc. and Climax Technology Co., Ltd. (9)
10.8 Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Buzztime, Inc. (11)
10.9 Asset Purchase Agreement dated July 30, 2003 by and among NTN Software
Solutions, Inc., NTN Buzztime, 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 Buzztime, 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 Buzztime, Inc. (19)
10.12 First Amendment to Lease, dated October 4, 2005, between Prentiss
Properties Acquisition Partners L.P. and NTN Communications, Inc. (20)
10.13 License Agreement with NTN Canada, Inc. (3)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (20)
* 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) Previously filed as an exhibit to NTN's report on Form 10-K for the
year ended December 31, 2005 and incorporated by reference.
(21) Previously filed as an exhibit to NTN's Form 10-Q dated August 9, 2005,
and incorporated herein by reference.
(22) Furnished concurrently herewith.