SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-------------------
Date of Report (Date of earliest event reported)
July 31, 2003
NTN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 001-11460 31-1103425
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) 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)
-------------------
ITEM 7. FINANCIAL STATEMENTS, PROFORMA FINANCIAL INFORMATION AND EXHIBITS.
This Form 8-K/A amends the Registrant's current report on Form 8-K dated August
14, 2003 to include the following financial information required to be filed
pursuant to Item 7.
a) Financial Statements of Breakaway International, Inc.
(i) The balance sheet of Breakaway International, Inc. ("Breakaway")
as of December 31, 2002, the statements of operations,
stockholders' equity (deficit) and cash flows and for the year then
ended December 31, 2002, including independent auditors' report.
(ii) The unaudited balance sheet of Breakaway as of June 30, 2003 and the
unaudited statements of operations and cash flows of Breakaway
for the six months ended June 30, 2003 and 2002 and the related notes
thereto.
b) Pro forma financial information.
The unaudited pro forma consolidated financial information of the
Registrant and Breakaway as of June 30, 2003 and for the six months
ended June 30, 2003 and for the year ended December 31, 2002.
c) Exhibit.
23.1. Consent of KPMG LLP
2
BREAKAWAY INTERNATIONAL, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
TOGETHER WITH INDEPENDENT AUDITORS' REPORT
AND AS OF JUNE 30, 2003 (UNAUDITED)
3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NTN Communications, Inc.:
We have audited the accompanying financial statements of Breakaway
International, Inc. as of December 31, 2002 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Breakaway International,
Inc. as of December 31, 2002, and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
San Diego, California
October 9, 2003
4
BREAKAWAY INTERNATIONAL, INC.
BALANCE SHEETS
DECEMBER 31, 2002 AND JUNE 30, 2003 (UNAUDITED)
ASSETS
(UNAUDITED)
DECEMBER 31 JUNE 30
2002 2003
------------ -------------
Current assets:
Cash and cash equivalents.................................. $ 211,000 $ 58,000
Accounts receivable, net of allowance for doubtful accounts 204,000 310,000
Inventory, net of reserve for obsolescence................. 96,000 49,000
------------ -------------
Total current assets................................ 511,000 417,000
Fixed assets, net of accumulated depreciation................ 138,000 109,000
Purchased software, net of accumulated amortization.......... 159,000 122,000
------------ -------------
Total assets........................................ $ 808,000 $ 648,000
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 171,000 $ 255,000
Accrued expenses........................................... 330,000 157,000
Notes payable-related parties.............................. 155,000 217,000
Deferred revenue........................................... 440,000 643,000
------------ -------------
Total current liabilities........................... 1,096,000 1,272,000
------------ -------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, no par value, 10,000,000 shares authorized;
1,581,000 shares issued and outstanding at
December 31, 2002........................................ 23,000 28,000
Accumulated deficit........................................ (311,000) (652,000)
------------ -------------
Total stockholders' deficit......................... (288,000) (624,000)
------------ -------------
Total liabilities and stockholders' equity (deficit) $ 808,000 $ 648,000
============ =============
See accompanying notes to audited financial statements
5
BREAKAWAY INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31 JUNE 30 (UNAUDITED)
------------- ----------------------------
2002 2003 2002
------------- ------------- ------------
Revenues........................................... $ 4,432,000 $ 2,027,000 $ 2,159,000
------------- ------------- ------------
Operating expenses:
Cost of revenues............................... 995,000 366,000 441,000
Selling, general and administrative............ 4,184,000 1,923,000 2,175,000
Depreciation and amortization.................. 118,000 73,000 51,000
------------- ------------- ------------
Total operating expenses................. 5,297,000 2,362,000 2,667,000
------------- ------------- ------------
Operating loss..................................... (865,000) (335,000) (508,000)
------------- ------------- ------------
Other income (expense):
Interest income................................ 3,000 -- 3,000
Interest expense............................... (4,000) (6,000) --
------------- ------------- ------------
Total other income (expense)............. (1,000) (6,000) 3,000
------------- ------------- ------------
Net loss........................................... $ (866,000) $ (341,000) $ (505,000)
============= ============= ============
See accompanying notes to audited financial statements
6
BREAKAWAY INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
RETAINED
COMMON STOCK EARNINGS/
------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------------- ---------- ------------- ------------
Balance, December 31, 2001.......................... 1,573,000 $ 14,000 555,000 569,000
Issuance of common stock ....................... 8,000 9,000 -- 9,000
Net loss........................................ -- -- (866,000) (866,000)
------------- ---------- ------------- ------------
Balance, December 31, 2002.......................... 1,581,000 23,000 (311,000) (288,000)
Issuance of common stock (unaudited)............ 4,000 5,000 -- 5,000
Net loss (unaudited)............................ -- -- (341,000) (341,000)
------------- ---------- ------------- ------------
Balance, June 30, 2003 (unaudited).................. 1,585,000 $ 28,000 (652,000) (624,000)
============= ========== ============= ============
See accompanying notes to audited financial statements
7
BREAKAWAY INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31 JUNE 30 (UNAUDITED)
------------- ------------------------------
2002 2003 2002
------------- ------------- -------------
Cash flows provided by (used in) operating activities:
Net loss.............................................. $ (866,000) $ (341,000) $ (505,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities (net of effects
of acquisition):
Depreciation and amortization...................... 118,000 73,000 50,000
Provision for doubtful accounts.................... 45,000 43,000 9,000
Provision for inventory obsolescence............... 18,000 19,000 9,000
Changes in assets and liabilities:
Accounts receivable.............................. 1,483,000 (150,000) 1,425,000
Inventory........................................ (26,000) 28,000 (24,000)
Accounts payable and accrued expenses............ 33,000 (89,000) (80,000)
Deferred revenue................................. 97,000 203,000 20,000
------------- ------------- -------------
Net cash provided by (used in) operating
activities.................................. 902,000 (214,000) 904,000
------------- ------------- -------------
Cash flows used in investing activities:
Capital expenditures.................................. (42,000) (6,000) (33,000)
Acquisition of assets................................. (250,000) -- (250,000)
------------- ------------- -------------
Net cash used in investing activities......... (292,000) (6,000) (283,000)
------------- ------------- -------------
Cash flows provided by (used in) financing activities:
Principal payments on capital leases.................. (3,000) -- (3,000)
Proceeds from notes payable-related parties........... 155,000 62,000 --
Distributions to stockholders......................... (1,000,000) -- (1,000,000)
Proceeds from issuance of common stock................ 9,000 5,000 4,000
------------- ------------- -------------
Net cash provided by (used) in financing
activities (839,000) 67,000 (999,000)
------------- ------------- -------------
Net decrease in cash and cash equivalents............... (229,000) (153,000) (378,000)
Cash and cash equivalents at beginning of period........ 440,000 211,000 440,000
------------- ------------- -------------
Cash and cash equivalents at end of period.............. $ 211,000 $ 58,000 $ 62,000
============= ============= =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest........................................... $ -- $ -- $ --
============= ============= =============
Income taxes....................................... $ -- $ -- $ --
============= ============= =============
See accompanying notes to audited financial statements
8
BREAKAWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
Breakaway International, Inc. (the "Company") is an S corporation that is a
provider of restaurant industry hardware and software enterprise solutions in
Arlington, Texas. The Company has elected to be taxed as an S corporation for
Federal income tax purposes.
(B) UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements for the six months ended June 30, 2003 and 2002
are unaudited. In the opinion of management, the accompanying unaudited
financial statements include all adjustments that are necessary for a fair
presentation of the financial position of the Company and the results of
operations and cash flows for the interim periods presented. Management has
elected to omit substantially all notes to the unaudited financial statements.
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, 2003.
(C) CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with a
maturity of three months or less, when acquired, to be cash equivalents.
(D) REVENUE RECOGNITION FOR SOFTWARE LICENSES, SERVICES, AND POST CONTRACT
CUSTOMER SUPPORT
Revenues from sales of software generally contain multiple elements, and
are recognized in accordance with Statement of Position ("SOP") No. 97-2,
"SOFTWARE REVENUE RECOGNITION", as amended. Along with the basic software
license agreement purchase, customers generally are provided annual support and
maintenance (PCS) for an additional fee based on a stipulated percentage of the
license fee. In order to continue to use the licensed software, customers are
required to annually renew the PCS contracts. As vendor specific objective
evidence does not exist for this PCS, the entire arrangement fee is recognized
ratably over the life of the contract.
Revenue from development services consists of customizations and is
recognized as the services are performed under the agreements.
9
BREAKAWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) SOFTWARE DEVELOPMENT COSTS (R&D)
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been achieved. After technological feasibility has
been established, any additional costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED." No
software development costs have been capitalized as of December 31, 2002.
Research and development expenses were $472,000 for the year ended December 31,
2002.
(F) INVENTORY
Inventory is comprised of various computer supplies and is recorded at the
lower of cost or market where cost is determined on a first-in, first-out basis.
(G) FIXED ASSETS
Fixed assets are recorded at cost. The cost of assets retired or sold, net
of accumulated depreciation and amortization, are removed from the accounts, and
any profit or loss on disposition is credited or charged to operations. The
Company capitalizes purchases of furniture and fixtures and computer equipment
over $1,000 and capitalizes purchases of computer software over $500.
Depreciation and amortization have been computed using the straight-line
method over estimated useful lives as follows:
Furniture and fixtures 7 years
Leasehold improvements 3 years
Computer equipment and software 3-5 years
10
BREAKAWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." The Company accounts
for stock-based awards to non-employees using the fair value method in
accordance with SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," and
amendments thereto, and in accordance with the performance criteria of Emerging
Issues Task Force 96-18.
As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted
the disclosure only requirements of SFAS No. 123. SFAS No. 123, as amended by
SFAS No. 148, requires the disclosure of pro forma net income (loss) had the
Company adopted the fair value method in accounting for stock-based awards.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option-pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock-option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company uses the Black-Scholes option
pricing model to value the options. No stock options or other stock compensation
were issued during the year ended December 31, 2002. If the fair value method
had been applied to all option awards granted in prior years, there would not be
a material impact to the reported net loss for the year ended December 31, 2002.
(I) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
11
BREAKAWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) INCOME TAXES
The Company has elected, with the consent of its stockholders, to be taxed
as an S corporation for federal and state income tax purposes. Accordingly, the
Company is not taxed on its income, except for a Texas corporate franchise tax
based on taxable capital. The stockholders of the Company are responsible for
the payment of income taxes on their pro-rata share of the Company's taxable
income.
(K) CONCENTRATIONS
The Company maintains cash balances in several accounts at a bank. Accounts
at the institution are insured by the Federal Deposit Insurance Corporation up
to $100,000 in the aggregate. The Company had uninsured amounts on deposit of
approximately $111,000 at December 31, 2002.
(L) USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial statements
in accordance with accounting principles generally accepted in the United States
of America. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses. Actual results could vary from
those estimates.
(M) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES."
SFAS No. 146 addresses the timing and amount of costs recognized as a result of
restructuring and similar activities. The Company will apply SFAS No. 146
prospectively to activities initiated after December 31, 2002. SFAS No. 146 had
no significant impact at the point of adoption on the Company's results of
operations or financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES." FIN 45
requires a guarantor to recognize at the inception of a guarantee, a liability
for the fair value of the obligation it has undertaken in issuing the guarantee.
The Company will apply FIN 45 to guarantees, if any, issued after December 31,
2002. At adoption, FIN 45 did not have a significant impact on the Company's
results of operations or financial position.
12
BREAKAWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling interest or
the equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from the other
parties. As of December 31, 2002, the Company does not have any investments in
other entities.
2. INVENTORY
Inventory at December 31, 2002 consisted of the following:
Inventory - New $ 114,000
Inventory - Used 12,000
Inventory - Vendor 1,000
------------------
127,000
Less reserve for obsolescence (31,000)
------------------
$ 96,000
==================
3. FIXED ASSETS
Fixed assets consists of the following as of December 31, 2002:
Furniture and fixtures $ 93,000
Leasehold improvements 3,000
Computer equipment and software 189,000
------------------
285,000
Less accumulated depreciation and
amortization (147,000)
------------------
$ 138,000
==================
13
BREAKAWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
4. PURCHASED SOFTWARE
In February 2002, the Company acquired intangible assets consisting of
proprietary software applications for resale. The original purchase price of
$250,000 was allocated by management based on the fair value of the assets
purchased, which was estimated to be $220,000 for the software applications and
$30,000 for supply inventory.
The Company has capitalized the software applications, which are being
amortized over a three-year life.
The asset purchase agreement contained a clause to provide royalties to the
seller ("Royalty Portion") whereby the Company would remit 50% of the gross
sales of the software applications to the seller for a two-year period after the
closing date. The payments under the Royalty Portion are not to exceed $350,000.
Through December 31, 2002, the Company has incurred Royalty Portion expense of
$49,000, of which $22,000 was due at December 31, 2002.
5. NOTES PAYABLE TO RELATED PARTIES
The Company executed a note payable with a significant stockholder in July
of 2002 for $100,000, accruing interest at 6.75% per annum. The note is due on
demand as of December 31, 2002 and was repaid in August of 2003, and is
therefore classified as a current liability. The balance including accrued
interest at December 31, 2002 is $104,000.
The Company executed a note payable with another significant stockholder in
September 2002 for $50,000, accruing interest at 6.75% per annum. The note is
due on demand as of December 31, 2002 and was repaid in August of 2003, and is
therefore classified as a current liability. The balance including accrued
interest at December 31, 2002 is $51,000.
6. STOCKHOLDERS' EQUITY
STOCK PURCHASE AGREEMENT AND STOCK OPTIONS
On August 28, 2000, the Company entered into a Stock Purchase Agreement
("Agreement") with an employee to enable the employee to obtain an ownership
interest in the Company. The Agreement was executed concurrently with an
employment agreement with the employee. The Agreement calls for the purchase of
approximately 32,000 shares of common stock at the deemed fair value of $1.16
per share over a four-year period. The total purchase price of approximately
$37,000 is to be paid in 104 equal installments of $357. The installments are
equal to the number of pay periods over the employment agreement.
14
BREAKAWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The Company is authorized under the Agreement to deduct the installment
payments from the employee's bi-weekly salary. Through December 31, 2002, a
total of 18,703 shares of stock have been purchased for $22,000.
Under the Agreement, the Company has granted two options to purchase common
stock. The exercise price of both options is $1.16 per share. The first option
is for 4,000 shares, which are exercisable after two years from the date of the
Agreement and expire four years and six months after the Agreement date. The
second option for 4,000 shares is also exercisable at $1.16 per share and is
exercisable four years after the Agreement date, and expires four years and six
months after the Agreement date. Through December 31, 2002, no options have been
exercised.
Year Ended
DECEMBER 31, 2002
-----------------------------------
Weighted Average
OPTION SHARES EXERCISE PRICE
-------------- -----------------
Outstanding, beginning of year 8,000 $ 1.16
Options granted - -
Options cancelled - -
Options exercised - -
-------------- -----------------
Outstanding, end of year 8,000 $ 1.16
============== =================
Exercisable, end of year 4,000 $ 1.16
============== =================
7. EMPLOYEE BENEFIT PLANS
401(K) PLAN
The Company maintains a 401(k) Plan (the "Plan"). All classes of employees
meeting the participation requirements are eligible to participate in the Plan.
The Company matches 25% of the employee's contribution, up to the first 8% of
compensation that the employee contributes. The Company made matching
contributions to the Plan of $31,000 during the year ended December 31, 2002.
15
BREAKAWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company was obligated under two operating leases for adjoining offices
located in Arlington, Texas. One lease expires in June 2003 and the other
expires in February 2004. The leases have monthly rental payments ranging from
$2,500 to $3,700. Rent expense for the year ended December 31, 2002 was $74,000.
Aggregate minimum rental payments under these leases are as follows:
For the Year Ending
DECEMBER 31,
-------------------
2003 $ 59,000
2004 7,000
--------------
$ 66,000
==============
(B) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based in part on the
advice of legal counsel, the ultimate disposition of these matters will not have
a material adverse effect on the Company's financial position, results of
operations or liquidity.
9. SUBSEQUENT EVENTS
On July 31, 2003, NTN Communications, Inc. (NTN) through its newly created
subsidiary, NTN Software Solutions, Inc., completed the acquisition of
substantially all of the assets and certain liabilities of the Company.
16
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003 AND FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND THE
YEAR ENDED DECEMBER 31, 2002
17
ARTICLE 1 INTRODUCTION
NTN Communications, Inc. ("NTN") aquired substantially all of the assets
and liabilities of Breakaway International, Inc. ("Breakaway") on July 31, 2003.
The following unaudited pro forma consolidated balance sheet as of June 30, 2003
gives effect to the acquisition as if it occurred on June 30, 2003. The
unaudited pro forma consolidated statements of operations for the six months
ended June 30, 2003 and for the year ended December 31, 2002 give effect to the
acquisition as if it occurred on January 1, 2003 and 2002, respectively.
The unaudited pro forma consolidated financial statements are based on
historical financial statements of NTN Communications, Inc. and Subsidiaries and
Breakaway International, Inc. ("Breakaway"), giving effect to the acquisition
applying the purchase method of accounting. The pro forma adjustments are based
on available information and assumptions that we believe are reasonable and are
discussed in the accompanying notes to the unaudited pro forma consolidated
financial statements. These unaudited pro forma consolidated financial
statements have been prepared by the management of NTN based upon the
consolidated financial statements of NTN and Breakaway as of June 30, 2003 and
for the six months ended June 30, 2003 and for the year ended December 31, 2002.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements and notes thereto. The
unaudited pro forma consolidated financial statements are not necessarily
indicative of what actual results of operations would have been for the periods
presented had the transaction occurred on the dates indicated and do not purport
to indicate the results of the future operations.
18
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
ASSETS
HISTORICAL
-----------------------------
NTN BREAKAWAY PRO FORMA
JUNE 30, JUNE 30, ADJUSTMENTS PRO FORMA
2003 2003 NOTE B AS ADJUSTED
------------- ------------- ------------- -------------
Current Assets:
Cash and cash equivalents............................ $ 3,810,000 $ 58,000 $ (442,000) $ 3,426,000
Restricted cash...................................... 271,000 -- -- 271,000
Accounts receivable, net of allowance for doubtful
accounts........................................... 1,754,000 310,000 -- 2,064,000
Inventory............................................ 324,000 49,000 -- 373,000
Investments available-for-sale....................... 168,000 -- -- 168,000
Deposits on broadcast equipment...................... 108,000 -- -- 108,000
Deferred costs....................................... 407,000 -- -- 407,000
Prepaid expenses and other current assets............ 613,000 -- -- 613,000
------------- ------------- ------------- -------------
Total current assets.......................... 7,455,000 417,000 (442,000) 7,430,000
Broadcast equipment and fixed assets, net.............. 4,291,000 109,000 -- 4,400,000
Software development costs, net of accumulated
amortization........................................... 579,000 -- -- 579,000
Deferred costs......................................... 349,000 -- -- 349,000
Other assets........................................... 1,563,000 122,000 3,124,000 4,809,000
------------- ------------- ------------- -------------
Total assets.................................. $ 14,237,000 $ 648,000 $ 2,682,000 $ 17,567,000
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 826,000 $ 255,000 $ -- $ 1,081,000
Accrued expenses..................................... 1,392,000 156,000 -- 1,548,000
Sales tax payable.................................... 268,000 1,000 -- 269,000
Income taxes payable................................. 16,000 -- -- 16,000
Obligations under capital leases..................... 155,000 -- -- 155,000
Equipment notes payable.............................. 13,000 -- -- 13,000
Notes payable-related parties........................ -- 217,000 (217,000) --
Deferred revenue..................................... 886,000 643,000 -- 1,529,000
------------- ------------- ------------- -------------
Total current liabilities..................... 3,556,000 1,272,000 (217,000) 4,611,000
Obligations under capital leases, excluding current
portion................................................ 200,000 -- -- 200,000
Revolving line of credit............................... 1,875,000 -- -- 1,875,000
Deferred revenue....................................... 350,000 -- -- 350,000
Equipment notes payable................................ 61,000 -- -- 61,000
------------- ------------- ------------- -------------
Total liabilities............................. 6,042,000 1,272,000 (217,000) 7,097,000
------------- ------------- ------------- -------------
Commitments and contingencies
Shareholders' equity:
Series A 10% cumulative convertible preferred stock,
$.005 par value.................................... 1,000 -- -- 1,000
Common stock, $.005 par value........................ 228,000 28,000 (22,000) 234,000
Additional paid-in capital........................... 88,823,000 -- 2,269,000 91,092,000
Accumulated deficit.................................. (80,182,000) (652,000) 652,000 (80,182,000)
Accumulated other comprehensive loss................. (649,000) -- -- (649,000)
Treasury stock, at cost.............................. (26,000) -- -- (26,000)
------------- ------------- ------------- -------------
Total shareholders' equity.................... 8,195,000 (624,000) 2,899,000 10,470,000
------------- ------------- ------------- -------------
Total liabilities and shareholders' equity.... $ 14,237,000 $ 648,000 $ 2,682,000 $ 17,567,000
============= ============= ============= =============
See accompanying notes to pro forma consolidated financial statements
19
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
HISTORICAL
-----------------------------
NTN BREAKAWAY
SIX MONTHS SIX MONTHS PRO FORMA
ENDED ENDED ADJUSTMENTS PRO FORMA
JUNE 30, 2003 JUNE 30, 2003 NOTE C AS ADJUSTED
------------- ------------- ------------- -------------
Revenues:
NTN Network revenues............................. $ 13,970,000 $ 2,027,000 $ -- $ 15,997,000
Buzztime service revenues........................ 65,000 -- -- 65,000
Other revenues................................... 5,000 -- -- 5,000
------------- ------------- ------------- -------------
Total revenues........................... 14,040,000 2,027,000 -- 16,067,000
------------- ------------- ------------- -------------
Operating expenses:
Direct operating costs of services............... 5,492,000 366,000 -- 5,858,000
Selling, general and administrative.............. 8,739,000 1,923,000 -- 10,662,000
Depreciation and amortization.................... 579,000 73,000 271,000 923,000
Research and development......................... 164,000 -- -- 164,000
------------- ------------- ------------- -------------
Total operating expenses................. 14,974,000 2,362,000 271,000 17,607,000
------------- ------------- ------------- -------------
Operating loss..................................... (934,000) (335,000) (271,000) (1,540,000)
------------- ------------- ------------- -------------
Other income (expense):
Interest income.................................. 3,000 -- -- 3,000
Interest expense................................. (167,000) (6,000) 6,000 (167,000)
------------- ------------- ------------- -------------
Total other income (expense)............. (164,000) (6,000) 6,000 (164,000)
------------- ------------- ------------- -------------
Loss before income taxes, minority interest
in loss of consolidated subsidiary.............. (1,098,000) (341,000) (265,000) (1,704,000)
Provision for deferred income taxes................ (15,000) -- -- (15,000)
Minority interest in loss of consolidated
subsidiary....................................... 10,000 -- -- 10,000
------------- ------------- ------------- -------------
Net loss........................................... $ (1,103,000) $ (341,000) $ (265,000) $ (1,709,000)
============= ============= ============= =============
Net loss per common share - basic and diluted...... $ (0.03) $ (0.04)
============= =============
Weighted average shares outstanding-- basic and
diluted.......................................... 43,413,000 44,706,000
============= =============
See accompanying notes to pro forma consolidated financial statements
20
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
HISTORICAL
-----------------------------
NTN BREAKAWAY
YEAR ENDED YEAR ENDED PRO FORMA
DECEMBER 31, DECEMBER 31, ADJUSTMENTS PRO FORMA
2002 2002 NOTE C AS ADJUSTED
------------- ------------- ------------- -------------
Revenues:
NTN Network revenues............................. $ 25,465,000 $ 4,432,000 $ -- $ 29,897,000
Buzztime service revenues........................ 128,000 -- -- 128,000
Other revenues................................... 17,000 -- -- 17,000
------------- ------------- ------------- -------------
Total revenues........................... 25,610,000 4,432,000 -- 30,042,000
------------- ------------- ------------- -------------
Operating expenses:
Direct operating costs of services.............. 9,252,000 995,000 -- 10,247,000
Selling, general and administrative............ 16,646,000 4,184,000 -- 20,830,000
Depreciation and amortization................. 1,555,000 118,000 542,000 2,215,000
Research and development....................... 12,000 -- -- 12,000
------------- ------------- ------------- -------------
Total operating expenses................. 27,465,000 5,297,000 542,000 33,304,000
------------- ------------- ------------- -------------
Operating loss..................................... (1,855,000) (865,000) (542,000) (3,262,000)
------------- ------------- ------------- -------------
Other income (expense):
Interest income.................................. 6,000 3,000 -- 9,000
Interest expense................................. (511,000) (4,000) 4,000 (511,000)
------------- ------------- ------------- -------------
Total other income (expense)............. (505,000) (1,000) 4,000 (502,000)
------------- ------------- ------------- -------------
Loss before income taxes, minority interest
in loss of consolidated subsidiary.............. (2,360,000) (866,000) (538,000) (3,764,000)
Provision for deferred income taxes................ (41,000) -- -- (41,000)
Minority interest in loss of consolidated
subsidiary....................................... 212,000 -- -- 212,000
------------- ------------- ------------- -------------
Net loss........................................... $ (2,189,000) $ (866,000) $ (538,000) $ (3,593,000)
============= ============= ============= =============
Net loss per common share - basic and diluted...... $ (0.06) $ (0.09)
============= =============
Weighted average shares outstanding-- basic and
diluted.......................................... 39,081,000 40,374,000
============= =============
See accompanying notes to pro forma consolidated financial statements
21
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
On July 31, 2003, NTN through its newly created subsidiary, NTN Software
Solutions, Inc., completed the acquisition of substantially all of the assets
and certain liabilities of Breakaway, a privately held provider of restaurant
industry hardware and software enterprise solutions based in Arlington, Texas.
NTN consummated the acquisition pursuant to an asset purchase agreement entered
into on July 31, 2003 with Breakaway and all of Breakaway's existing
shareholders.
Under the terms of the agreement, NTN acquired Breakaway's assets for
$25,000 in cash, 1,292,614 shares of unregistered NTN common stock (estimated to
be $2.275 million) and the assumption of existing liabilities set forth on
Breakaway's preliminary closing balance sheet dated as of July 31, 2003. The
amount of the cash component of the purchase price is subject to post closing
adjustments, based on a final closing date balance sheet accepted by NTN.
NTN will pay additional contingent earn-out amounts in shares of
unregistered NTN common stock and/or cash for each of the years ending June 30,
2004, June 30, 2005 and June 30, 2006, provided that certain targets for
earnings before taxes are met for the acquired assets. The targeted amounts
increase by 25% each year. NTN also entered into employment agreements with five
of the executives of Breakaway.
NOTE B
The pro forma consolidated balance sheet includes the estimated pro forma
adjustments necessary to give effect to the acquisition, using the purchase
method of accounting as if it had occurred on June 30, 2003 and reflects the
allocation of the estimated purchase price to the estimated fair value of assets
acquired and liabilities assumed, including the issuance of 1,292,614 shares of
NTN common stock at $1.76 per share totaling approximately $2.275 million in the
aggregate; payment of estimated costs of the merger transactions of $200,000;
and elimination of Breakaways equity accounts.
The estimated purchase price for the Breakaway acquisition was allocated to
the intangible assets of Breakaway based on preliminary estimates of the fair
value of those assets. A final allocation of the purchase price is expected to
be completed in the fourth quarter of 2003, upon receipt of the third party
valuation analysis. The final allocation is expected to include potential
adjustments to purchased software, customer list, non-compete agreement,
goodwill and deferred revenue.
The pro forma adjustments are summarized as follows:
o Use of cash for acquisition and related costs and repayment of
Breakaway notes payable- related parties; $442,000
22
o Excess of purchase price over the fair value of tangible assets of
$3,124,000 is allocated to intangible assets based on preliminary
estimates of the fair value of those assets as follows:
o Purchased software - $1,000,000
o Customer List - $500,000
o Non-compete agreement - $500,000
o Goodwill - $1,124,000
o Repayment of Breakaway notes payable to related parties on acquisition
date; $217,000
o Issuance of NTN common stock; $2,275,000
o Elimination of Breakaway common stock; $28,000
o Elimination of Breakaway retained earnings; $652,000
NOTE C
The pro forma consolidated statements of operations include adjustments
necessary to reflect the merger as if it had occurred on January 1, 2003 for the
six months ended June 30, 2003 and January 1, 2002 for the year ended December
31, 2002.
The pro forma adjustments for the six months ended June 30, 2003 and the
year ended December 31, 2002, respectively, are summarized as follows:
o Amortization of purchased software acquired based upon an estimated
life of 4 years; $125,000 and $250,000, respectively
o Amortization of customer list acquired based upon an estimated life
of 3 years; $83,000 and $167,000, respectively
o Amortization of non-compete agreement acquired based upon an estimated
life of 4 years; $63,000 and $125,000, respectively
o Elimination of interest expense on notes payable-related parties
repaid at acquisition date; $6,000 and $0, respectively.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
By: /S/ JAMES B. FRAKES
--------------------------------------------------
James B. Frakes
Chief Financial Officer
Date: October 14, 2003
24
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION
--------- ---------------------------
23.1 Consent of KPMG LLP.
25