-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O61WwbRC2fWIyytkbvcB6vRAsRuG954/IsIEA9RbxVu+zYAGtm8NOdVcq1eEVMyQ 2wkDm3SSLL7HN/a4FmEJwg== 0001005477-98-002197.txt : 19980716 0001005477-98-002197.hdr.sgml : 19980716 ACCESSION NUMBER: 0001005477-98-002197 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NTN CANADA INC CENTRAL INDEX KEY: 0000797313 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 112805051 STATE OF INCORPORATION: NY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18066 FILM NUMBER: 98666224 BUSINESS ADDRESS: STREET 1: 14 METEOR DR STREET 2: BLDG 18 CITY: ETOBOCOKE ONTARIO STATE: A6 ZIP: L4W 5A1 BUSINESS PHONE: 4166756666 MAIL ADDRESS: STREET 1: 14 METEOR DR CITY: ETOBICOKE ONTARIO STATE: A6 10-Q 1 FORM 10-Q FORM 10-Q Securities and Exchange Commission Washington D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended: May 31, 1998 Commission file number: 0-18066 NETWORKS NORTH INC. formerly known as NTN CANADA, INC. (Exact name of registrant as specified in its charter) New York 11-2805051 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14 Meteor Drive Etobicoke, Ontario, Canada M9W 1A4 (Address of principal executive offices) (Zip Code) (416) 675-6666 (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 the number of shares outstanding of each of the registrant's classes of common stock, as of July 14, 1998: 2,576,073 shares of common stock, par value $.0467 per share. PART I - FINANCIAL INFORMATION NETWORKS NORTH INC. (FORMERLY KNOWN AS NTN CANADA, INC.) AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL INFORMATION PERIOD ENDED MAY 31, 1998 Item Item 1. Financial Statements: Consolidated Balance Sheets - As at May 31, 1998 and August 31, 1997 Consolidated Statement of Operations and Retained Earnings for the Nine Months Ended May 31, 1998 and May 31, 1997 Consolidated Statement of Operations and Retained Earnings for the Three Months Ended May 31, 1998 and May 31, 1997 Consolidated Statement of Cash Flows - for the Nine Months Ended May 31, 1998 and May 31, 1997 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations NETWORKS NORTH INC. (FORMERLY KNOWN AS NTN CANADA, INC.) CONSOLIDATED BALANCE SHEETS AS AT MAY 31, 1998 AND AUGUST 31, 1997 (Expressed in Canadian dollars - unaudited) ================================================================================ May 31, 1998 August 31, 1997 $ $ ================================================================================ ASSETS Current Cash and cash equivalents 882,010 2,421,797 Short-term temporary investments 1,896,612 1,705,014 Accounts receivable, trade - net of allowance for doubtful accounts of $51,000; August - $51,000 2,794,803 1,547,395 Inventory 355,801 624,828 Prepaid expenses 707,636 419,843 - -------------------------------------------------------------------------------- Total current assets 6,636,862 6,718,877 - -------------------------------------------------------------------------------- Investment in Viewer Services (10,377) 5,758 Property and equipment, net 5,462,278 4,754,173 License, net of accumulated amortization 215,670 225,046 Goodwill, net of accumulated amortization 3,189,326 2,273,748 Notes receivable 163,180 310,000 - -------------------------------------------------------------------------------- 15,656,939 14,287,602 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness 284,587 641,000 Accounts payable - trade 1,324,765 1,165,434 Accrued liabilities 608,302 455,110 Income taxes payable 164 352,161 Current portion of long-term debt 333,228 605,310 - -------------------------------------------------------------------------------- Total current liabilities 2,551,046 3,219,015 - -------------------------------------------------------------------------------- Long-term debt 2,783,537 2,126,076 Less: current portion (333,228) (605,310) - -------------------------------------------------------------------------------- 2,450,309 1,520,766 - -------------------------------------------------------------------------------- Deferred income taxes payable 59,173 59,173 - -------------------------------------------------------------------------------- Total liabilities 5,060,528 4,798,954 - -------------------------------------------------------------------------------- Shareholders' equity Share capital 900,000 preferred shares [August - 950,000] 10,917 11,523 2,576,073 common shares [August - 2,441,992] 158,881 150,211 Capital in excess of par value 8,529,051 7,923,150 Retained earnings 1,897,562 1,403,764 - -------------------------------------------------------------------------------- Total shareholders' equity 10,596,411 9,488,648 - -------------------------------------------------------------------------------- 15,656,939 14,287,602 ================================================================================ The accompanying notes are an integral part of these statements NETWORKS NORTH INC. (FORMERLY KNOWN AS NTN CANADA, INC.) CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS FOR THE NINE MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997 (Expressed in Canadian dollars - unaudited) ================================================================================ May 31, 1998 May 31, 1997 $ $ - -------------------------------------------------------------------------------- Total revenue 11,143,311 7,420,034 Cost of sales 4,317,277 2,266,251 - -------------------------------------------------------------------------------- 6,826,034 5,153,783 - -------------------------------------------------------------------------------- Selling, general and administrative expenses 4,892,284 3,823,970 Bad debts 29,122 42,382 - -------------------------------------------------------------------------------- Income before interest, depreciation and amortization, loss from investment, income taxes and minority interest 1,904,628 1,287,431 Interest 91,644 83,248 Depreciation and amortization 884,345 581,431 Loss from investment in Viewer Services 4,955 6,022 - -------------------------------------------------------------------------------- Income before income taxes and minority interest 923,684 616,730 Provision for income taxes 296,058 274,450 - -------------------------------------------------------------------------------- Income before minority interest 627,626 342,280 Minority interest (133,828) 42,424 - -------------------------------------------------------------------------------- Net income for the period 493,798 384,704 Retained earnings, beginning of period 1,403,764 794,377 - -------------------------------------------------------------------------------- Retained earnings, end of period 1,897,562 1,179,081 ================================================================================ Earnings per share (Note 4): Basic 0.19 0.16 Diluted 0.17 0.14 ================================================================================ The accompanying notes are an integral part of these statements NETWORKS NORTH INC. (FORMERLY KNOWN AS NTN CANADA, INC.) CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997 (Expressed in Canadian dollars - unaudited) ================================================================================ May 31, 1998 May 31, 1997 $ $ ================================================================================ Total revenue 3,651,725 2,557,706 Cost of sales 1,441,730 849,820 - -------------------------------------------------------------------------------- 2,209,995 1,707,886 - -------------------------------------------------------------------------------- Selling, general and administrative expenses 1,615,324 1,386,829 Bad debts 9,834 8,829 - -------------------------------------------------------------------------------- Income before interest, depreciation and amortization, loss from investment, income taxes and minority interest 584,837 312,228 Interest 42,055 23,866 Depreciation and amortization 297,535 220,101 Loss from investment in Viewer Services 8,952 5,629 - -------------------------------------------------------------------------------- Income before income taxes and minority interest 236,295 62,632 Provision for income taxes 57,543 17,542 - -------------------------------------------------------------------------------- Income before minority interest 178,752 45,090 Minority interest (33,945) 14,649 - -------------------------------------------------------------------------------- Net income for the period 144,807 59,739 Retained earnings, beginning of period 1,752,755 1,119,342 - -------------------------------------------------------------------------------- Retained earnings, end of period 1,897,562 1,179,081 ================================================================================ Earnings per share (Note 4): Basic 0.05 0.02 Diluted 0.05 0.02 ================================================================================ The accompanying notes are an integral part of these statements NETWORKS NORTH INC. (FORMERLY KNOWN AS NTN CANADA, INC.) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997 (Expressed in Canadian dollars - unaudited) ================================================================================ May 31, 1998 May 31, 1997 $ $ ================================================================================ OPERATING ACTIVITIES Net income for the nine months 493,798 384,704 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 884,345 583,312 Minority interest 133,828 (42,424) Changes in assets and liabilities Decrease (increase) in short-term investments (191,598) 1,530,215 Increase in accounts receivable (1,199,770) (311,991) Decrease in inventory 280,437 393,134 Increase in prepaid expenses (300,549) (104,981) Increase in accounts payable and accrued liabilities 119,978 65,116 Decrease in deferred revenue (275,925) -- Decrease in income taxes payable (390,516) (63,761) - -------------------------------------------------------------------------------- Cash provided by (used in) operating activities (445,972) 2,433,324 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property and equipment (1,268,265) (617,524) Investment in Viewer Services 16,135 -- Increase in notes receivable (3,180) -- Investment in Interlynx Multimedia (380,001) -- Acquisition of Magic Lantern -- (541,182) - -------------------------------------------------------------------------------- Cash used in investing activities (1,635,311) (1,158,706) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Bank loan (464,930) (360,000) Proceeds from issuing common shares 348,965 -- Notes and loans payable 657,461 (36,668) - -------------------------------------------------------------------------------- Cash provided by (used in) financing activities 541,496 (396,668) - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period (1,539,787) 877,950 Cash and cash equivalents, beginning of period 2,421,797 1,777,889 - -------------------------------------------------------------------------------- Cash and cash equivalents, end of period 882,010 2,655,839 ================================================================================ The accompanying notes are an integral part of these statements NETWORKS NORTH INC. (FORMERLY KNOWN AS NTN CANADA, INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED MAY 31, 1998 Note 1. Basis of Presentation The accompanying financial statements for the interim periods are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report on Form 10-K of Networks North Inc., formerly known as NTN Canada, Inc. (the "Company") (Commission No.:0-18066), filed with the Securities and Exchange Commission on November 28, 1997. The results of operations for the nine months ended May 31, 1998 are not necessarily indicative of the results for the full fiscal year ending August 31, 1998. Note 2. General The financial statements of the Company for the nine months ended May 31, 1998, include the operations of the Company's wholly-owned subsidiary, NTN Interactive Network Inc. ("NTNIN") and NTNIN's wholly-owned subsidiary Magic Lantern Communications Ltd. ("Magic"). On September 10, 1997, NTNIN acquired, effective September 1, 1997, 51% of the outstanding stock of Interlynx Multimedia, Inc. ("Interlynx"). Magic conducts its operations directly and through its wholly-owned subsidiaries, 745695 Ontario Ltd. ("Custom Video") and B.C. Learning Connection ("BCLC"), its 75% ownership of the outstanding shares of Sonoptic Technologies Inc. ("Sonoptic"), and its 50% ownership of the outstanding shares of 1113659 Ontario Ltd. ("Viewer Services"), a joint venture operated with International Tele-Film Enterprises Ltd. (Magic, Custom Video, BCLC, Sonoptic and Viewer Services are referred to as the "Magic Lantern Group"). Interlynx is involved in designing and developing educational and corporate multimedia and web-based training programs, programming for CD-ROMs and Web Sites, and animation and 3-D rendering. It conducts its operations directly and through its 60% ownership of the outstanding shares of Interlynx International, Inc., which is the marketing and sales arm of Interlynx responsible for the international distribution of all CD-ROM products, licensing and partnerships in other countries. The acquisition of Interlynx was accounted for as a purchase in fiscal 1998. Accordingly, the Company's results of operations for the quarter and nine months ended May 31, 1998 (the "1998 Third Fiscal Quarter" and the "1998 First Three Fiscal Quarters", respectively) reflect 51% of the operating results of Interlynx, while the Company's results of operations for the quarter and nine months ended May 31, 1997 (the "1997 Third Fiscal Quarter" and the "1997 First Three Fiscal Quarters", respectively) do not reflect 51% of the operating results of Interlynx. Prior period's figures have been reclassified to be consistent with any reclassifications in the current period. Note 3. Business Segment Data for the nine months ended May 31, 1998 and May 31, 1997 Interactive TV Educational and Entertainment Multimedia Distribution Total ------------- ----------------------- ----- $ $ $ 1998 Total revenue 6,135,971 5,007,340 11,143,311 Operating income 596,627 327,057 923,684 Net income 300,569 193,229 493,798 Total assets 12,241,593 3,415,346 15,656,939 Current liabilities 1,153,928 1,397,118 2,551,046 Total liabilities 2,851,904 2,208,624 5,060,528 1997 Total revenue 5,431,303 1,988,731 7,420,034 Operating income (loss) 633,181 (16,451) 616,730 Net income 358,731 25,973 384,704 Total assets 11,261,695 2,873,982 14,135,677 Current liabilities 1,103,295 1,851,312 2,954,607 Total liabilities 2,070,795 2,802,744 4,873,539 Note 4. Earnings per share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share for the nine months ended : May 31, 1998 May 31, 1997 ------------ ------------ Numerator: Net income (numerator for basic and diluted earnings per share) $ 493,798 $ 384,704 ========== ========== Denominator: For basic - weighted average number of shares 2,541,311 2,441,617 Effect of dilutive securities: Convertible preferred shares 197,619 203,571 Convertible promissory notes 185,448 -- Employee stock options 23,894 53,547 ---------- ---------- Denominator for diluted earnings per share - adjusted weighted average number of shares and assumed conversions 2,948,272 2,698,735 ========== ========== Basic earnings per share $ 0.19 $ 0.16 ========== ========== Diluted earnings per share $ 0.17 $ 0.14 ========== ========== Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction The financial statements of the Company and the information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are expressed in Canadian dollars ("Cdn$"). For the convenience of the reader, in this Management's Discussion and Analysis, certain financial amounts are also given in U.S. dollars ("US$"), converted at the Noon Buying Rate in effect at the end of the period to which the amount relates, or the exchange rate on the date specified herein. The Noon Buying Rates for May 29, 1998 and May 31, 1997 were Cdn$1.4571 and Cdn$1.3809 per US$1.00, respectively. As the Noon Buying Rate fluctuates daily, financial comparisons between periods expressed in U.S. dollars do not accurately reflect the true difference in the Company's financial position or results of operations between periods. Accordingly, the comparisons between periods presented below, both in dollar amounts and as percentages from prior periods, are expressed in Canadian dollars only. General The Company, through its wholly-owned subsidiary, NTNIN, currently provides its products and services through eight business units or subsidiaries. Of these, two are considered to be the traditional core of the Company's business, that is, directly related to multi-player interactive entertainment programs. The two traditional core business units are the Hospitality Group ("Hospitality") and the Corporate Products Group ("Corporate"). Five units, collectively referred to as the "Magic Lantern Group", are (i) NTNIN's wholly-owned subsidiary Magic, which is involved in the marketing and distribution of educational video and media resources, (ii) Magic's wholly-owned subsidiary Custom Video, which is involved in the manufacturing of videotape copies, (iii) Custom Video's wholly-owned subsidiary BCLC, which is involved in the marketing and fulfilment services of educational video titles, (iv) Magic's 75% owned subsidiary Sonoptic, which is involved in the conversion of analog video to digital video formats, and (v) Magic's 50% owned joint venture Viewer Services, which is involved in the inbound telemarketing and fulfilment services for television broadcasters and others. The eighth unit is Interlynx, which is involved in designing and developing educational and corporate multimedia and web-based training programs, programming for CD-ROMs and Web Sites and animation, and 3-D rendering. Highlights of the Three Months Ended May 31, 1998 During the 1998 Third Fiscal Quarter, the Hospitality Group entered into an agreement with Budweiser for advertising and the sponsorship of our QB1 (NFL) game for the upcoming season. The Corporate Products Group successfully fulfilled two contracts with Air Canada, for the Air Canada Challenge and In-flight Training. It was the Company's fourth year working on the Air Canada Challenge. The in-flight service entailed an entertaining, interactive session that reinforced the importance of key product and operational issues to Air Canada personnel. Lastly, Interlynx entered into an agreement with the Canadian Imperial Bank of Commerce ("CIBC") to provide web-based training for staff involved with the bank's Management, Accounting, and Reporting (MAR) project. Interlynx is also developing the Finance web site for the CIBC Intranet, as well as an online interactive learning program accessed through any web browser. Results of Operations for the Three Months ended May 31, 1998 The Company's total revenues for the 1998 Third Fiscal Quarter were Cdn$3,651,725 (US$2,506,159), compared to Cdn$2,557,706 (US$1,852,202) for the 1997 Third Fiscal Quarter, an increase of Cdn$1,094,019 or 42.8%. Total revenues, excluding Interlynx, for the 1998 Third Fiscal Quarter were Cdn$3,359,562 (US$2,305,650), compared to Cdn$2,557,706 (US$1,852,202) for the 1997 Third Fiscal Quarter, an increase of Cdn$801,856 or 31.4%. This increase was attributed to all of the following: an increase in video and software sales, resulting from a greater emphasis on marketing and additional sales from the newly acquired business assets of Image Media Ltd. and 802117 Ontario Inc. ("Image Media"), acquired August 31, 1997; increased revenue in Hospitality from program content, maintenance services and equipment rental, all of which are attributable to there being an average of 535 Hospitality locations outstanding during the 1998 Third Fiscal Quarter as compared to an average of 514 Hospitality locations outstanding during the 1997 Third Fiscal Quarter; and increased revenues in ad sponsorship in Hospitality over the same period last year. Total cost of sales for the 1998 Third Fiscal Quarter was Cdn$1,441,730 (US$989,452), compared to Cdn$849,820 (US$615,410) for the 1997 Third Fiscal Quarter, an increase of Cdn$591,910 or 69.7%. Total cost of sales excluding costs incurred by Interlynx for the 1998 Third Fiscal Quarter was Cdn$1,309,264 (US$898,541), compared to Cdn$849,820 (US$615,410) for the 1997 Third Fiscal Quarter, an increase of Cdn$459,444 or 54.1%. This increase was the result of: increased maintenance costs and commissions, both of which are directly attributable to the increase in the average number of Hospitality locations outstanding in the 1998 Third Fiscal Quarter over the number of Hospitality locations outstanding during the comparable prior period as discussed above; and increased video, dubbing and software costs resulting from the requirements of operating the business assets of Image Media acquired August 31, 1997. Total selling, general and administrative expenses for the 1998 Third Fiscal Quarter were Cdn$1,615,324 (US$1,108,588), compared to Cdn$1,386,829 (US$1,004,294) for the 1997 Third Fiscal Quarter, an increase of Cdn$228,495 or 16.5%. Total selling, general and administrative expenses excluding those incurred by Interlynx, for the 1998 Third Fiscal Quarter were Cdn$1,585,577 (US$1,088,173), compared to Cdn$1,386,829 (US$1,004,294) for the 1997 Third Fiscal Quarter, an increase of Cdn$198,748 or 14.3%. This increase was the result of: increased advertising and promotion expenses resulting mainly from the increased promotion of our QB1 game in Hospitality, and additional marketing in the area of video, software and dubbing sales; additional expenses resulting from the requirements of operating the business assets of Image Media acquired August 31, 1997; increased travel expenses, due to the increase in the number of corporate events being hosted abroad and the travel costs of additional area representatives hired to provide both customer service and training to both new and existing locations; and the increase in freight charges, which is commensurate with the increase in advertising and promotion and the increase in volume of both equipment, being shipped to corporate events and rental locations, and videos and software being shipped to customers. As a percentage of the Company's total revenues, excluding those derived by Interlynx, such expenses decreased to 47.2% for the 1998 Third Fiscal Quarter from 54.2% for the 1997 Third Fiscal Quarter. Total depreciation and amortization expenses for the 1998 Third Fiscal Quarter were Cdn$297,535 (US$204,197), compared to Cdn$220,101 (US$159,390) for the 1997 Third Fiscal Quarter, an increase of Cdn$77,434 or 35.2%. This increase was the result of additional depreciation on fixed assets added in 1998 and the amortization of goodwill arising from the Interlynx purchase. As a percentage of the Company's total revenues, excluding those derived by Interlynx, such expenses increased to 8.9% for the 1998 Third Fiscal Quarter from 8.6% for the 1997 Third Fiscal Quarter. The provision for income taxes for the 1998 Third Fiscal Quarter was Cdn$57,543 (US$39,491), compared to Cdn$17,542 (US$12,703) for the 1997 Third Fiscal Quarter, an increase of Cdn$40,001 or 228.0%. As a percentage of the Company's income before income taxes and minority interest, the provision decreased to 24.4% for the 1998 Third Fiscal Quarter from 28.0% for the 1997 Third Fiscal Quarter. This decrease was the result of income from Interlynx being sheltered from income tax due to tax losses it incurred in previous years, as provided for under Canadian Tax Law. As a result of all the above, net income for the 1998 Third Fiscal Quarter was Cdn$144,807 (US$99,380), compared to Cdn$59,739 (US$43,261) for the 1997 Third Fiscal Quarter, an increase of Cdn$85,068 or 142.4%. Results of Operations for the Nine Months Ended May 31, 1998 The Company's total revenues for the 1998 First Three Fiscal Quarters were Cdn$11,143,311 (US$7,647,595), compared to Cdn$7,420,034 (US$5,373,332) for the 1997 First Three Fiscal Quarters, an increase of Cdn$3,723,277 or 50.2%. Total revenues, excluding Interlynx, for the 1998 First Three Fiscal Quarters were Cdn$10,043,408 (US$6,892,738), compared to Cdn$7,420,034 (US$5,373,332) for the 1997 First Three Fiscal Quarters, an increase of Cdn$2,623,374 or 35.4%. This increase was the result of: an increase in video and software sales, resulting from a greater emphasis on marketing and additional sales from the newly acquired business assets of Image Media acquired August 31, 1997; increased revenue in Hospitality from program content, maintenance services and equipment rental, all of which were attributable to there being an average of 535 Hospitality locations outstanding during the 1998 First Three Fiscal Quarters as compared to an average of 514 Hospitality locations outstanding during the 1997 First Three Fiscal Quarters; increased revenues in event programming in Corporate resulting from an increased number of events in the 1998 First Three Fiscal Quarters as compared to the number of events in the 1997 First Three Fiscal Quarters; and increased revenues from ad sponsorship in Hospitality over the same period last year. Total cost of sales for the 1998 First Three Fiscal Quarters was Cdn$4,317,277 (US$2,962,924), compared to Cdn$2,266,251 (US$1,641,141) for the 1997 First Three Fiscal Quarters, an increase of Cdn$2,051,026 or 90.5%. Total cost of sales excluding costs incurred by Interlynx for the 1998 First Three Fiscal Quarters was Cdn$3,835,764 (US$2,632,464), compared to Cdn$2,266,251 (US$1,641,141) for the 1997 First Three Fiscal Quarters, an increase of Cdn$1,569,513 or 69.3%. This increase was the result of: increased maintenance costs and commissions, both of which are directly attributable to the increase in average number of Hospitality locations outstanding in the 1998 First Three Fiscal Quarters from the average number of Hospitality locations outstanding during the comparable prior period, as discussed above; and an increase in video and software costs, directly related to the additional video and software sales as discussed above, and additional costs resulting from the requirements of operating the business assets of Image Media. Total selling, general and administrative expenses for the 1998 First Three Fiscal Quarters were Cdn$4,892,284 (US$3,357,549), compared to Cdn$3,823,970 (US$2,769,187) for the 1997 First Three Fiscal Quarters, an increase of Cdn$1,068,314 or 27.9%. Total selling, general and administrative expenses, excluding those incurred by Interlynx for the 1998 First Three Fiscal Quarters, were Cdn$4,675,562 (US$3,208,813), compared to Cdn$3,823,970 (US$2,769,187) for the 1997 First Three Fiscal Quarters, an increase of Cdn$851,592 or 22.3%. This increase was the result of: increased advertising and promotion expenses resulting mainly from the increased promotion of our QB1 game in Hospitality in the 1998 First Three Fiscal Quarters and additional marketing in the area of video, software and dubbing sales; increased travel expenses, due to the increase in the number of corporate events being hosted abroad and the travel costs of additional area representatives hired to provide both customer service and training to both new and existing locations; and the increase in freight charges, which is commensurate with the increase in advertising and promotion and the increase in volume of both equipment, being shipped to corporate events and rental locations, and videos and software being shipped to customers. As a percentage of the Company's total revenues, excluding revenues derived by Interlynx, such expenses decreased to 46.6% for the 1998 First Three Fiscal Quarters from 51.5% for the 1997 First Three Fiscal Quarters. Total depreciation and amortization expenses for the 1998 First Three Fiscal Quarters were Cdn$884,345 (US$606,921), compared to Cdn$581,431 (US$421,052) for the 1997 First Three Fiscal Quarters, an increase of Cdn$302,914 or 52.1%. This increase was primarily the result of: additional depreciation on fixed assets added in the 1998 First Three Fiscal Quarters; a full nine months of amortization on goodwill resulting from the Magic purchase, as compared to the eight months of amortization on the said goodwill expensed in the 1997 First Three Fiscal Quarters; and the amortization of goodwill arising from the Interlynx purchase. As a percentage of the Company's total revenues, excluding those derived by Interlynx, such expenses increased to 8.8% for the 1998 First Three Fiscal Quarters from 7.8% for the 1997 First Three Fiscal Quarters. The provision for income taxes for the 1998 First Three Fiscal Quarters was Cdn$296,058 (US$203,183), compared to Cdn$274,450 (US$198,747) for the 1997 First Three Fiscal Quarters, an increase of Cdn$21,608 or 7.9%. As a percentage of the Company's income before income taxes and minority interest, the provision decreased to 32.1% for the 1998 First Three Fiscal Quarters from 44.5% for the 1997 First Three Fiscal Quarters. This decrease was the result of income from Interlynx being sheltered from income tax due to tax losses it incurred in previous years, as provided for under Canadian Tax Law. As a result of all of the above, net income for the 1998 First Three Fiscal Quarters was Cdn$493,798 (US$338,891), compared to Cdn$384,704 (US$278,589) for the 1997 First Three Fiscal Quarters, an increase of Cdn$109,094 or 28.4%. Liquidity and Capital Resources At May 31, 1998, the Company had working capital of Cdn$4,085,816 (US$2,804,074), an increase of Cdn$585,954 from working capital of Cdn$3,499,862 (US$2,520,606) at August 31, 1997. This increase was primarily due to the retirement of short-term debt through long-term financing and the payment of a current note payable with the issuance of common shares. For the 1998 First Three Fiscal Quarters, the Company had a net decrease in cash flow of Cdn$1,539,787 (US$1,056,748), compared to a net increase of Cdn$877,950 (US$635,781) in the 1997 First Three Fiscal Quarters. Cash used in operating activities for the 1998 First Three Fiscal Quarters was Cdn$445,972 (US$306,068), a decrease of Cdn$2,879,296 from cash provided by operating activities in the 1997 First Three Fiscal Quarters. The major factors that contributed to this decrease were the increase in short-term investments of Cdn$1,721,813 over the same figure for the 1997 First Three Fiscal Quarters and the increase in accounts receivable of Cdn$887,779, due to the 50.2 % increase in revenues over the levels of revenue experienced in the same prior period. Cash used in investing activities in the 1998 First Three Fiscal Quarters was Cdn$1,635,311 (US$1,122,305), an increase of Cdn$476,605 from cash used in investing activities in the 1997 First Three Fiscal Quarters. Cash used in investing activities in the 1998 First Three Fiscal Quarters was for the purchase of property and equipment and the investment in Interlynx. Cash was used in the comparable prior period for the purchase of property and equipment and the acquisition of Magic. Cash provided by financing activities in the 1998 First Three Fiscal Quarters was Cdn$541,496 (US$371,626), an increase of Cdn$938,164 from the cash used in financing activities in the 1997 First Three Fiscal Quarters. Cash provided by financing activities in the 1998 First Three Fiscal Quarters was through the issuance of common shares and the acquisition of an operating loan from the Royal Bank of Canada. The loan was used to retire short-term debt and finance the purchase of long-term assets. Cash used in financing activities for the 1997 First Three Fiscal Quarters was used to reduce debt in the Magic Lantern Group. Management believes that the Company's working capital position provides the necessary liquidity, on both a short and long term basis, for its planned activities and that additional external financing will not be required for its operating activities during the year ending August 31, 1998 (the "1998 Fiscal Year"). However, any changes in such plans may require the Company to seek outside financing. No arrangements are presently in place for outside financing should the need arise. Inflation The rate of inflation has had little impact on the Company's operations or financial position during the six months ended May 31, 1998 and May 31, 1997, and inflation is not expected to have a significant impact on the Company's operations or financial position during the 1998 Fiscal Year. The Company pays a number of its suppliers, including its licensor and principal supplier, NTN Communications, Inc., in US dollars. Therefore, fluctuations in the value of the Canadian dollar against the US dollar will have an impact on its gross profit as well as its net income. If the value of the Canadian dollar falls against the US dollar, the cost of sales of the Company will increase thereby reducing its gross profit and net income. Conversely, if the value of the Canadian dollar rises against the US dollar, its gross profit and net income will increase. PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information At a meeting of its Board of Directors on July 10, 1998, the Board determined that it is in the best interest of the Company to offer the holders of options, pursuant to the Company's Long Term Incentive Plan, to reduce the exercise price of outstanding options to $3.00 per share if the option holders agree not to exercise such options for at least six months. The Board based its determination on the belief that the performance of the Company has not been reflected in the price of the Company's stock and that, in view of the higher exercise price of the Company's outstanding options, employees did not receive, and could not receive in the foreseeable future, the anticipated benefit of their ownership of options. Employees will be given the option of keeping their existing options' exercise prices in lieu of agreeing not to exercise such options for six months. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following list sets forth the applicable exhibits (numbered in accordance with Item 601 of Regulation S-K) required to be filed with this Quarterly Report on Form 10-Q: Exhibit Number Title - ------ ----- 3.1 Certificate of Incorporation, as amended to date.+ 3.2 By-Laws, as amended to date.+ 10.1 License Agreement, dated March 23, 1990, between NTN Communications, Inc. and NTN Interactive Network Inc.+ 10.2 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy Connolly and NTN Interactive Network Inc., minus Schedules thereto.+ 10.3 Designation Agreement, dated as of October 4, 1994, among NTN Canada, Inc., NTN Interactive Network Inc. and NetStar Enterprises Inc. (formerly Labatt Communications Inc.).+ 22 List of Subsidiaries.+ 27 Financial Data Schedule. + Incorporated by reference. See Exhibit Index. (b) Reports on Form 8-K None. 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, thereunto duly authorized. NETWORKS NORTH INC. Dated: July 14, 1998 By: /s/ Peter Rona ------------------------------------- Peter Rona, President and Principal Financial Officer (Duly Authorized Officer) NETWORKS NORTH INC. (FORMERLY KNOWN AS NTN CANADA, INC.) FORM 10-Q MAY 31, 1998 EXHIBIT INDEX Exhibit Number Description of Exhibit Location - ------ ---------------------- -------- 3.1 Certificate of Incorporation, as amended to date +1, Exh. 3.1 3.2 By-Laws, as amended to date +1, Exh. 3.2 10.1 License Agreement, dated March 23, 1990, between NTN Communications, Inc. and NTN Interactive Network Inc. +2, Exh. 10.9 10.2 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy Connolly and NTN Interactive Network Inc., minus Schedules thereto +3, Exh. 10.1 10.3 Designation Agreement, dated as of October 4, 1994, among Networks North Inc. (formerly known as NTN Canada, Inc., NTN Interactive Network Inc. and NetStar Enterprises Inc. (formerly Labatt Communications Inc.) +4, Exh. C 22 List of Subsidiaries +1, Exh. 22 27 Financial Data Schedule ++ - ---------- +1 All exhibits so indicated are incorporated herein by reference to the exhibit number listed above in the Annual Report on Form 10-K of the Company, for its fiscal year ended August 31, 1996 (File No. 0-18066), filed on December 16, 1996. +2 All exhibits so indicated are incorporated herein by reference to the exhibit number listed above in the Annual Report on Form 10-K of NTN Communications, Inc., for its fiscal year ended December 31, 1990 (File No. 2-91761-C), filed on April 1, 1991. +3 All exhibits so indicated are incorporated herein by reference to the exhibit number listed above in the Current Report on Form 8-K of the Company (Date of Report: October 2, 1996) (File No. 0-18066), filed on October 17, 1996. +4 All exhibits so indicated are incorporated herein by reference to the exhibit number listed above in the Current Report on Form 8-K of the Company (Date of Report: October 4, 1994) (File No. 0-18066), filed on October 18, 1994. ++ Filed electronically pursuant to Item 401 of Regulation S-T. EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the quarterly report on Form 10-Q and is qualified in its entirety by reference to such financial statements. Canadian dollars 3-MOS AUG-31-1998 SEP-01-1997 MAY-31-1998 1.4571 882,010 1,896,612 2,845,803 51,000 355,801 6,636,862 5,462,278 0 15,656,939 2,551,046 0 0 10,917 158,881 10,426,613 15,656,939 11,143,311 11,143,311 4,317,277 4,317,277 0 29,122 91,644 923,684 296,058 493,798 0 0 0 493,798 0.19 0.17
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