-----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, ATnZBgg1x/xgKsNGfb2vRytUkt0Q5E3qePbc2F/asmBYBkbZRGItbsxbxMFyCWio qsiNIIWmikuoZGwfSbWyZg== 0001005477-99-001797.txt : 19990415 0001005477-99-001797.hdr.sgml : 19990415 ACCESSION NUMBER: 0001005477-99-001797 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORKS NORTH 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: 99593680 BUSINESS ADDRESS: STREET 1: 14 METEOR DR STREET 2: BLDG 18 CITY: ETOBOCOKE ONTARIO STATE: A6 ZIP: 00000 BUSINESS PHONE: 4166756666 MAIL ADDRESS: STREET 1: 14 METEOR DR CITY: ETOBICOKE ONTARIO STATE: A6 FORMER COMPANY: FORMER CONFORMED NAME: NTN CANADA INC DATE OF NAME CHANGE: 19961016 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: February 28, 1999 Commission file number: 0-18066 NETWORKS NORTH 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 April 14, 1999: 2,625,170 shares of common stock, par value $.0467 per share. PART I - FINANCIAL INFORMATION NETWORKS NORTH INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 Item Item 1. Financial Statements: Consolidated Balance Sheets - as at February 28, 1999 and August 31, 1998 Consolidated Statements of Operations and Retained Earnings - for the Six Months Ended February 28, 1999 and February 28, 1998 Consolidated Statements of Operations and Retained Earnings - for the Three Months Ended February 28, 1999 and February 28, 1998 Consolidated Statements of Cash Flows - for the Six Months Ended February 28, 1999 and February 28, 1998 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations NETWORKS NORTH INC. CONSOLIDATED BALANCE SHEETS AS AT FEBRUARY 28, 1999 AND AUGUST 31, 1998 (Expressed in Canadian dollars - unaudited)
=============================================================================================== February 28, 1999 August 31, 1998 $ $ - ----------------------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 780,712 1,001,115 Short-term temporary investments 1,948,507 2,042,333 Accounts receivable, trade - net of allowance for doubtful accounts of $63,000; August - $53,000 3,577,997 2,668,184 Income taxes receivable -- 33,174 Inventory 277,005 308,088 Prepaid expenses 774,917 544,255 - ----------------------------------------------------------------------------------------------- Total current assets 7,359,138 6,597,149 - ----------------------------------------------------------------------------------------------- Property and equipment, net 5,531,586 5,785,616 Licenses, net of accumulated amortization 280,770 290,945 Goodwill, net of accumulated amortization 3,117,122 3,214,197 Notes receivable 160,000 160,000 - ----------------------------------------------------------------------------------------------- 16,448,616 16,047,907 =============================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness 172,583 145,339 Accounts payable - trade 1,885,560 1,440,223 Accrued liabilities 292,318 625,003 Income taxes payable 51,357 -- Current portion of long-term debt 348,803 348,803 - ----------------------------------------------------------------------------------------------- Total current liabilities 2,750,621 2,559,368 - ----------------------------------------------------------------------------------------------- Long-term debt 2,721,271 2,744,991 Less: current portion (348,803) (348,803) - ----------------------------------------------------------------------------------------------- 2,372,468 2,396,188 - ----------------------------------------------------------------------------------------------- Deferred income taxes payable 59,173 59,173 - ----------------------------------------------------------------------------------------------- Total liabilities 5,182,262 5,014,729 - ----------------------------------------------------------------------------------------------- Shareholders' equity Share capital 900,000 preferred shares 10,917 10,917 2,625,170 common shares 162,484 162,484 Capital in excess of par value 8,837,948 8,837,948 Retained earnings 2,255,005 2,021,829 - ----------------------------------------------------------------------------------------------- Total shareholders' equity 11,266,354 11,033,178 - ----------------------------------------------------------------------------------------------- 16,448,616 16,047,907 ===============================================================================================
The accompanying notes are an integral part of these statements NETWORKS NORTH INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998 (Expressed in Canadian Dollars - Unaudited)
===================================================================================== February 28, 1999 February 28, 1998 $ $ - ------------------------------------------------------------------------------------- Total revenue 7,163,204 7,491,586 Cost of sales 2,462,591 2,875,547 - ------------------------------------------------------------------------------------- 4,700,613 4,616,039 - ------------------------------------------------------------------------------------- Selling, general and administrative expenses 3,430,497 3,292,251 Interest and bank charges 89,208 49,589 Depreciation and amortization 684,970 586,810 - ------------------------------------------------------------------------------------- Income before income taxes and minority interest 495,938 687,389 Provision for income taxes 281,000 238,515 Minority interest (18,238) 99,883 - ------------------------------------------------------------------------------------- Net income and comprehensive income for the period 233,176 348,991 Retained earnings, beginning of period 2,021,829 1,403,764 - ------------------------------------------------------------------------------------- Retained earnings, end of period 2,255,005 1,752,755 ===================================================================================== Earnings per share (Note 4): Basic 0.09 0.14 Diluted 0.08 0.12 =====================================================================================
The accompanying notes are an integral part of these statements NETWORKS NORTH INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998 (Expressed in Canadian Dollars - Unaudited)
===================================================================================== February 28, 1999 February 28, 1998 $ $ - ------------------------------------------------------------------------------------- Total revenue 3,527,087 3,754,472 Cost of sales 1,228,095 1,439,527 - ------------------------------------------------------------------------------------- 2,298,992 2,314,945 - ------------------------------------------------------------------------------------- Selling, general and administrative expenses 1,686,336 1,669,632 Interest and bank charges 46,183 24,467 Depreciation and amortization 338,788 312,408 - ------------------------------------------------------------------------------------- Income before income taxes and minority interest 227,685 308,438 Provision for income taxes 178,000 128,399 Minority interest 7,460 36,105 - ------------------------------------------------------------------------------------- Net income and comprehensive income for the period 42,225 143,934 Retained earnings, beginning of period 2,212,780 1,608,821 - ------------------------------------------------------------------------------------- Retained earnings, end of period 2,255,005 1,752,755 ===================================================================================== Earnings per share: Basic 0.02 0.06 Diluted 0.01 0.05 =====================================================================================
The accompanying notes are an integral part of these statements NETWORKS NORTH INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998 (Expressed in Canadian dollars - unaudited)
======================================================================================================== February 28, 1999 February 28, 1998 $ $ - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income and comprehensive income for the period 233,176 348,991 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 684,970 586,810 Loss (income) from investment in Viewer Services 47,399 (3,997) Accretion of interest on non-interest bearing promissory notes 15,338 16,390 Changes in assets and liabilities: Decrease (increase) in short-term investments 93,826 (142,477) Increase in accounts receivable (909,813) (1,030,804) Decrease in inventory 31,083 393,600 Increase in prepaid expenses (230,662) (29,824) Increase in accounts payable and accrued liabilities 49,773 591,669 Decrease in deferred revenue -- (275,925) Increase (decrease) in income taxes payable 84,531 (250,611) - -------------------------------------------------------------------------------------------------------- Cash provided by operating activities 99,621 203,822 - -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property and equipment (323,691) (710,046) Investment in Viewer Services 143 5,894 Increase in notes receivable -- (3,180) Acquisition of Interlynx Multimedia -- (380,001) - -------------------------------------------------------------------------------------------------------- Cash used in investing activities (323,548) (1,087,333) - -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Bank indebtedness 27,244 72,311 Proceeds from issuing common shares -- 247,500 Notes and loans payable (23,720) (455,358) - -------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities 3,524 (135,547) - -------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents during the period (220,403) (1,019,058) Cash and cash equivalents, beginning of period 1,001,115 2,421,797 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period 780,712 1,402,739 ========================================================================================================
The accompanying notes are an integral part of these statements NETWORKS NORTH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 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. (the "Company") (Commission No.:0-18066), filed with the Securities and Exchange Commission on November 27, 1998. The results of operations for the six months ended February 28, 1999 are not necessarily indicative of the results for the full fiscal year ending August 31, 1999. Note 2. General The financial statements of the Company for the three and six months ended February 28, 1999 (the "1999 Second Fiscal Quarter" and "1999 First Fiscal Half" respectively), and February 28, 1998 (the "1998 Second Fiscal Quarter" and "1998 First Fiscal Half" respectively), include the operations of the Company's wholly-owned subsidiaries NTN Interactive Network Inc. ("NTNIN") and 3484751 Canada Inc., NTNIN's wholly-owned subsidiary Magic Lantern Communications Ltd. ("Magic") and 51% of the operations 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 Inc. ("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 conducts its operations directly and through its 60% ownership of the outstanding shares of Universal Content Inc. (formerly known as Interlynx International, Inc.), which is the marketing and sales arm of Interlynx responsible for the international brokering of CD-ROM products from developers around the world. Prior period's figures have been reclassified to be consistent with any reclassifications in the current period. Note 3. Business Segment Data for the six months ended February 28, 1999 and February 28, 1998 Interactive TV Educational and Entertainment Multimedia Distribution Total ------------- ----------------------- ----- $ $ $ 1999 - ---- Total revenues 4,265,091 2,898,113 7,163,204 Operating income 490,181 5,757 495,938 Net earnings 209,181 23,995 233,176 Total assets 10,014,505 6,434,111 16,448,616 Current liabilities 1,439,380 1,311,241 2,750,621 Total liabilities 3,027,618 2,154,644 5,182,262 1998 - ---- Total revenues 4,130,070 3,361,516 7,491,586 Operating income 552,261 135,128 687,389 Net earnings 313,746 35,245 348,991 Total assets 8,830,518 6,498,729 15,329,247 Current liabilities 1,475,706 2,079,901 3,555,607 Total liabilities 2,083,673 2,895,435 4,979,108 Note 4. Earnings per share Earnings per share were calculated in accordance with Statement of Financial Accounting Standards No. 128. The following table sets forth the computation of basic and diluted earnings per share for the six months ended February 28: 1999 1998 ---- ---- Numerator: Net income (numerator for basic earnings per share) $ 233,176 $ 348,991 Accretion of interest on non-interest bearing promissory notes 15,338 16,390 ---------- ---------- Numerator for diluted earnings per share $ 248,514 $ 365,381 ========== ========== Denominator: For basic - weighted average number of shares 2,625,170 2,535,359 Effect of dilutive securities: Convertible preferred shares 192,857 203,571 Convertible promissory notes 98,193 185,448 Employee stock options 95,360 36,840 ---------- ---------- Denominator for diluted earnings per share - adjusted weighted average number of shares and assumed conversions 3,011,580 2,961,218 ========== ========== Basic earnings per share $ 0.09 $ 0.14 ========== ========== Diluted earnings per share $ 0.08 $ 0.12 ========== ========== 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. 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, comprising the "Magic Lantern Group", are (i) NTNIN's wholly-owned subsidiary Magic, which markets and distributes an exclusively licensed library of educational video titles to schools, school boards and Ministries of Education across Canada, (ii) Magic's wholly-owned subsidiary Custom Video, which provides video dubbing and conversion services, (iii) Custom Video's wholly-owned subsidiary BCLC, which has traditionally operated under an exclusive arrangement with the British Columbia Ministry of Education to provide marketing and fulfilment services for educational video titles in the British Columbia school system, (iv) Magic's 75% owned subsidiary Sonoptic, which operates a digital video facility that converts analog video to digital video formats, and (v) Magic's 50% owned joint venture Viewer Services, which was created to assume the inbound telemarketing and product fulfilment services required by Canadian television broadcasters. The eighth unit is Interlynx, which designs and develops web-based training programs, educational and corporate multimedia, CD-ROMs and web sites. Highlights of the Three Months Ended February 28, 1999 During the 1999 Second Fiscal Quarter, Interlynx signed a major contract to provide custom web-based software to facilitate all aspects of eSourcing for the Canadian Imperial Bank of Commerce (CIBC). Under the contract, Interlynx will design and build a web interface and a set of programs to support CIBC's employees' ability to interact with the electronic purchasing capabilities. NTNIN signed three new sponsors to the NTN Entertainment Network during the quarter, namely: The Clorox Company of Canada, to advertise its Armor All product, Goodyear Canada, Inc. and Timex Canada, Inc. NTNIN also became a sponsor of The Toronto Rock Lacrosse Club during the quarter. Results of Operations for the Three Months ended February 28, 1999 The Company's total revenues for the 1999 Second Fiscal Quarter were $3,527,087, compared to $3,754,472 for the 1998 Second Fiscal Quarter, a decrease of $227,385 or 6.1%. This decrease was contributed to by all of the following; a weakened worldwide market for CD-ROMs caused a 38.8% decrease in revenues over the comparable prior period for Interlynx. Magic experienced a 17.9% decrease in video and software sales over the prior period, mainly due to the change in the budget year of Ontario schools from a December budget year to an August budget year. Furthermore, revenues from event programming decreased 31.6% over the corresponding prior period mainly due to the loss of two major events that took place in 1998. Total cost of sales for the 1999 Second Fiscal Quarter was $1,228,095, compared to $1,439,527 for the 1998 Second Fiscal Quarter, a decrease of $211,432 or 14.7%. This decrease is commensurate with the decreased sales levels experienced above. As a percentage of the Company's total revenues, such expenses decreased to 34.8% for the 1999 Second Fiscal Quarter from 38.3% for the 1998 Second Fiscal Quarter. Total selling, general and administrative expenses for the 1999 Second Fiscal Quarter were $1,686,336, compared to $1,669,632 for the 1998 Second Fiscal Quarter, an increase of $16,704 or 1.0%. This increase was caused in part by increased staffing and salaries. Also, included in these expenses for 1999 was a loss from the equity investment in Viewer Services of $41,399, while the corresponding 1998 expenses included income from the equity investment in Viewer Services of $6,277. The overall increase in selling, general and administrative expenses was somewhat mitigated by decreases in advertising and promotion and freight charges. As a percentage of the Company's total revenues, such expenses increased to 47.8% for the 1999 Second Fiscal Quarter from 44.5% for the 1998 Second Fiscal Quarter. Interest and bank charges for the 1999 Second Fiscal Quarter were $46,183, compared to $24,467 for the 1998 Second Fiscal Quarter, an increase of $21,716 or 88.8%. This increase was the result of financing the purchase of land and building at 10 Meteor Drive with bank debt. As a percentage of the Company's total revenues, interest and bank charges increased to 1.3% for the 1999 Second Fiscal Quarter from 0.7% for the 1998 Second Fiscal Quarter. Total depreciation and amortization expenses for the 1999 Second Fiscal Quarter were $338,788, compared to $312,408 for the 1998 Second Fiscal Quarter, an increase of $26,380 or 8.4%. This increase was the result of additional depreciation on fixed assets added in 1999 and depreciation on the newly acquired building located at 10 Meteor Drive. As a percentage of the Company's total revenues, such expenses increased to 9.6% for the 1999 Second Fiscal Quarter from 8.3% for the 1998 Second Fiscal Quarter. The provision for income taxes for the 1999 Second Fiscal Quarter was $178,000, compared to $128,399 for the 1998 Second Fiscal Quarter, an increase of $49,601 or 38.6%. As the tax provision for the Company is based solely on the taxable income of NTNIN, it is unaffected by losses experienced in other divisions. For this reason, the tax provision increased over the prior period even though income before income taxes decreased in 1999 compared to 1998. As a percentage of the Company's total revenues, such expenses increased to 5.0% for the 1999 Second Fiscal Quarter from 3.4% for the 1998 Second Fiscal Quarter. The minority interest share in profits for the 1999 Second Fiscal Quarter was $7,460. This is compared to the minority interest share in profits for the 1998 Second Fiscal Quarter of $36,105, an overall decrease of $28,645 or 79.3%. As a percentage of the Company's total revenues, the minority interest share of profits was 0.2% for the 1999 Second Fiscal Quarter. As a result of all the above, net income and comprehensive income for the 1999 Second Fiscal Quarter was $42,225, compared to $143,934 for the 1998 Second Fiscal Quarter, a decrease of $101,709 or 70.7%. Results of Operations for the Six Months Ended February 28, 1999 The Company's total revenues for the 1999 First Fiscal Half were $7,163,204, compared to $7,491,586 for the 1998 First Fiscal Half, a decrease of $328,382 or 4.4%. This decrease was caused in part by a weakened worldwide market for CD-ROMs, which resulted in a 53.4% decrease in revenues for Interlynx over the prior period. Video and software sales by Magic decreased 16.5% and event programming revenues decreased by 14.4% over the comparable figures in the prior period. The decrease in event programming revenues was directly attributable to the loss of two major events that took place in 1998. Total cost of sales for the 1999 First Fiscal Half was $2,462,591, compared to $2,875,547 for the 1998 First Fiscal Half, a decrease of $412,956 or 14.4%. This decrease is commensurate with the decreased sales levels experienced above. As a percentage of the Company's total revenues, such costs of sales decreased to 34.4% for the 1999 First Fiscal Half from 38.4% for the 1998 First Fiscal Half. Total selling, general and administrative expenses for the 1999 First Fiscal Half were $3,430,497, compared to $3,292,251 for the 1998 First Fiscal Half, an increase of $138,246 or 4.2%. This increase was caused in part by increased staffing and salaries. Also, included in these expenses for 1999 was a loss from the equity investment in Viewer Services of $47,399, while the corresponding 1998 expenses included income from the equity investment in Viewer Services of $3,997. Lastly, the 1998 selling, general and administrative expenses were reduced by a foreign exchange gain of Cdn$74,442. As a percentage of the Company's total revenues, such expenses increased to 47.9% for the 1999 First Fiscal Half from 43.9% for the 1998 First Fiscal Half. Interest and bank charges for the 1999 First Fiscal Half amounted to $89,208, compared to $49,589 for the 1998 First Fiscal Half, an increase of $39,619 or 79.9%. This increase was the result of financing the purchase of land and building at 10 Meteor Drive, acquired in April 1998. As a percentage of the Company's total revenues, interest and bank charges increased to 1.2% for the 1999 First Fiscal Half from 0.7% for the 1998 First Fiscal Half. Total depreciation and amortization expenses for the 1999 First Fiscal Half were $684,970, compared to $586,810 for the 1998 First Fiscal Half, an increase of $98,160 or 16.7%. This was the result of increased depreciation on rental and office equipment and furniture and fixtures added during the period. Depreciation on the newly acquired building located at 10 Meteor Drive also contributed to the increase. As a percentage of the Company's total revenues, such expenses increased to 9.6% for the 1999 First Fiscal Half from 7.8% for the 1998 First Fiscal Half. The provision for income taxes for the 1999 First Fiscal Half was $281,000, compared to $238,515 for the 1998 First Fiscal Half, an increase of $42,485 or 17.8%. As the tax provision for the Company is based solely on the taxable income of NTNIN, it is unaffected by losses experienced in other divisions. For this reason, the tax provision increased over the prior period even though income before income taxes decreased in 1999 compared to 1998. As a percentage of the Company's total revenues, such expenses increased to 3.9% for the 1999 First Fiscal Half from 3.2% for the 1998 First Fiscal Half. The minority interest share in losses for the 1999 First Fiscal Half was $18,238. This is compared to the minority interest share in profits for the 1998 First Fiscal Half of $99,883, an overall decrease of $118,121 or 118.3%. As a percentage of the Company's total revenues, the minority interest loss was 0.3% for the 1999 First Fiscal Half. As a result of all of the above, net income and comprehensive income for the 1999 First Fiscal Half was $233,176 compared to $348,991 for the 1998 First Fiscal Half, a decrease of $115,815 or 33.2%. Liquidity and Capital Resources At February 28, 1999, the Company had working capital of $4,608,517, an increase of $570,736 from working capital of $4,037,781 at August 31, 1998. For the 1999 First Fiscal Half, the Company had a net decrease in cash flow of $220,403 compared to a net decrease of $1,019,058 in the 1998 First Fiscal Half. Cash provided by operating activities for the 1999 First Fiscal Half was $99,621, compared to $203,822 provided by operating activities in the 1998 First Fiscal Half. In 1999, the major sources that contributed to cash being provided by operating activities were as follows; net income of $980,883, decreases in short-term investments and inventory of $93,826 and $31,083 respectively, and increases in accounts payable and accrued liabilities and income taxes payable of $49,773 and $84,531 respectively. These sources were somewhat mitigated by increases in accounts receivable and prepaid expenses of $909,813 and $230,662 respectively. In 1998, the major sources that contributed to cash being provided by operating activities were net income of $948,194, a decrease in inventory of $393,600, and an increase in accounts payable and accrued liabilities of $591,669. These sources were somewhat offset by increases in short-term investments, accounts receivable and prepaid expenses of $142,477, $1,030,804 and $29,824 respectively, and decreases in deferred revenue and income taxes payable of $275,925 and $250,611. Cash used in investing activities in the 1999 First Fiscal Half was $323,548, compared to the $1,087,333 used in investing activities in the 1998 First Fiscal Half. In 1999, cash was used in the purchase of property and equipment. Cash was used in the comparable prior period for the purchase of property and equipment and the acquisition of Interlynx. Cash provided by financing activities in the 1999 First Fiscal Half was $3,524, compared to the $135,547 used in financing activities in the 1998 First Fiscal Half. In 1999, cash was provided by short-term borrowings, which were used in day-to day operations and to meet scheduled debt principal repayments. In 1998, financing totaling $319,811 was obtained, the majority of which was through the issuance of common shares ($247,500). This cash was then used in the repayment of notes payable and to meet scheduled debt principal repayments, which totaled $455,358. Management believes that the Company's working capital position and current borrowings provide the necessary liquidity, on both a short and long term basis, for its planned activities. Additional external financing will not be required for its operating activities during the year ending August 31, 1999 (the "1999 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 February 28, 1999 and 1998 and inflation is not expected to have a significant impact on the Company's operations or financial position during the 1999 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. Year 2000 Compliance The year 2000 issue arises because many computerized systems use two digits, rather than four, to identify a year. Date-sensitive systems may recognize the year 2000 as 1900, or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the year 2000 issue may be experienced before, on, or after January 1, 2000, and if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure, which could affect the Company's ability to conduct normal business operations. The Company has undertaken various initiatives intended to ensure that its computer equipment and software will function properly with respect to dates in the year 2000 and thereafter. For this purpose the term "computer equipment and software" includes systems that are commonly thought of as information technology ("IT") systems. Non-IT systems refers to other miscellaneous systems, not thought of as IT systems, such as alarm systems and fax machines. In addition, the Company is in the process of determining the extent to which the systems of third parties with whom the Company has significant relationships may be vulnerable to year 2000 issues and what impact, if any, these year 2000 issues will have on the Company. As part of these assessments, a compliance plan, which includes the formation of a steering committee and a timetable for identifying, evaluating, resolving and testing its year 2000 issues, has been developed. The timetable provides for the Company's completion of its remediation of any year 2000 issues by the end of September 1999. While it is difficult, at present, to fully quantify the overall cost of this work, the Company currently estimates its total spending for year 2000 issues to be approximately $100,000 to $500,000. The range is a function of ongoing evaluation as to whether certain systems and equipment will be corrected or replaced, which is largely dependent on information to be obtained from suppliers or other external sources. Costs for systems maintenance and modification are expensed as incurred while spending for new hardware, software or equipment will be capitalized and depreciated over the assets' useful lives. The Company anticipates funding its year 2000 expenditures out of its cash flows from operations. 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 The Annual Meeting of Shareholders of the Company was held on Thursday, February 25, 1999. At the meeting, the existing Directors of the Company were re-elected by 2,023,061 votes cast in favour of all the nominees for Director (holders of shares possessing 1,831 votes withheld their votes from all the nominees for Director, except for Daniel C. Downs whereby 201,831 votes were withheld), being in excess of a majority of the shares present in person or by proxy. The holders of shares of the Company possessing 2,021,002 votes, being in excess of a majority of the shares present in person or by proxy, voted in favour of ratifying the appointment of Ernst & Young, as independent auditors of the Company for the fiscal year ending August 31, 1999. Item 5. Other Information None. 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: April 14, 1999 By: /s/ Peter Rona ----------------------------------------- Peter Rona, President and Chief Executive Officer (Duly Authorized Officer) Dated: April 14, 1999 By: /s/ Don Pagnutti ----------------------------------------- Don Pagnutti, Principal Financial Officer NETWORKS NORTH INC. FORM 10-Q FEBRUARY 28, 1999 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 6-MOS AUG-31-1999 SEP-01-1998 FEB-28-1999 1.5074 780,712 1,948,507 3,640,997 63,000 277,005 7,359,138 5,531,586 0 16,448,616 2,750,621 0 0 10,917 162,484 11,092,953 16,448,616 7,163,204 7,163,204 2,462,591 2,462,591 0 34,451 89,208 495,938 281,000 233,176 0 0 0 233,176 0.09 0.08
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