-----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, OtLQvvt5yI9hkLdBKTns2iM/Xzu2HfUSqSgWallWGdMgdieiyH2c+j1QrLBi6MpD F2kpKC3gOMKNid4/4ByGVQ== 0001005477-00-003184.txt : 20000417 0001005477-00-003184.hdr.sgml : 20000417 ACCESSION NUMBER: 0001005477-00-003184 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000414 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: 602196 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 29, 2000 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 Toronto, 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 13, 2000: 2,858,141 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 29, 2000 Item Item 1. Financial Statements: Consolidated Balance Sheets - as at February 29, 2000 and August 31, 1999 Consolidated Statements of Operations and Retained Earnings - for the Six Months Ended February 29, 2000 and February 28, 1999 Consolidated Statements of Operations and Retained Earnings - for the Three Months Ended February 29, 1999 and February 28, 1999 Consolidated Statements of Cash Flows - for the Six Months Ended February 29, 2000 and February 28, 1999 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 29, 2000 AND AUGUST 31, 1999 (Expressed in Canadian dollars - unaudited) ================================================================================ February 29, August 31, 2000 1999 $ $ ================================================================================ ASSETS Current Cash and cash equivalents 976,090 2,018,122 Short-term temporary investments 258,623 261,926 Accounts receivable, trade - net of allowance for doubtful accounts of $224,000; August - $119,000 3,999,284 2,563,189 Income taxes receivable -- 157,464 Inventory 236,960 260,868 Prepaid expenses 757,722 647,612 - -------------------------------------------------------------------------------- Total current assets 6,228,679 5,909,181 - -------------------------------------------------------------------------------- Property and equipment, net 8,288,380 5,151,755 Software development costs, net 225,000 250,000 Licenses, net of accumulated amortization 260,422 270,596 Goodwill, net of accumulated amortization 2,987,564 3,060,489 Notes receivable 160,000 160,000 - -------------------------------------------------------------------------------- 18,150,045 14,802,021 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness 145,000 157,000 Accounts payable - trade 1,751,365 912,361 Accrued liabilities 835,049 723,218 Income taxes payable 61,042 -- Current portion of long-term debt 407,922 79,542 - -------------------------------------------------------------------------------- Total current liabilities 3,200,378 1,872,121 - -------------------------------------------------------------------------------- Long-term debt 4,473,963 2,077,960 Deferred income taxes payable 59,173 59,173 - -------------------------------------------------------------------------------- Total liabilities 7,733,514 4,009,254 - -------------------------------------------------------------------------------- Shareholders' equity Share capital 900,000 preferred shares 10,917 10,917 2,858,241 common shares [August - 2,756,641] 178,633 171,635 Capital in excess of par value 9,852,580 9,559,883 Retained earnings 374,401 1,050,332 - -------------------------------------------------------------------------------- Total shareholders' equity 10,416,531 10,792,767 - -------------------------------------------------------------------------------- 18,150,045 14,802,021 ================================================================================ 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 29, 2000 AND FEBRUARY 28, 1999 (Expressed in Canadian Dollars - Unaudited) ================================================================================ February 29, February 28, 2000 1999 $ $ ================================================================================ Total revenue 9,961,496 7,163,204 Cost of sales 3,529,538 2,462,591 - -------------------------------------------------------------------------------- 6,431,958 4,700,613 - -------------------------------------------------------------------------------- Selling, general and administrative expenses 5,631,009 3,430,497 Interest and bank charges 148,469 89,208 Depreciation and amortization 1,108,342 684,970 - -------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (455,862) 495,938 Provision for income taxes 223,000 281,000 Minority interest (2,931) (18,238) - -------------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) for the period (675,931) 233,176 Retained earnings, beginning of period 1,050,332 2,021,829 - -------------------------------------------------------------------------------- Retained earnings, end of period 374,401 2,255,005 ================================================================================ Earnings (loss) per share (Note 4): Basic (0.24) 0.09 Diluted (0.24) 0.08 ================================================================================ 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 29, 2000 AND FEBRUARY 28, 1999 (Expressed in Canadian Dollars - Unaudited) ================================================================================ February 29, February 28, 2000 1999 $ $ ================================================================================ Total revenue 4,425,900 3,527,087 Cost of sales 1,722,348 1,228,095 - -------------------------------------------------------------------------------- 2,703,552 2,298,992 - -------------------------------------------------------------------------------- Selling, general and administrative expenses 3,039,071 1,686,336 Interest and bank charges 68,290 46,183 Depreciation and amortization 608,865 338,788 - -------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (1,012,674) 227,685 Provision for (recovery of) income taxes (75,458) 178,000 Minority interest 1,322 7,460 - -------------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) for the period (938,538) 42,225 Retained earnings, beginning of period 1,312,939 2,212,780 - -------------------------------------------------------------------------------- Retained earnings, end of period 374,401 2,255,005 ================================================================================ Earnings (loss) per share: Basic (0.33) 0.02 Diluted (0.33) 0.01 ================================================================================ The accompanying notes are an integral part of these statements NETWORKS NORTH INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (Expressed in Canadian dollars - unaudited) ================================================================================ February 29, February 28, 2000 1999 $ $ ================================================================================ OPERATING ACTIVITIES Net income and comprehensive income for the period (675,931) 233,176 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,108,342 684,970 Loss from investment in Viewer Services -- 47,399 Accretion of interest on non-interest bearing promissory notes 86,538 15,338 Changes in assets and liabilities: Decrease in short-term investments 3,303 93,826 Increase in accounts receivable (1,436,095) (909,813) Decrease in income taxes receivable 157,464 -- Decrease in inventory 23,908 31,083 Increase in prepaid expenses (110,110) (230,662) Increase in accounts payable and accrued liabilities 950,834 49,773 Increase in income taxes payable 61,042 84,531 - -------------------------------------------------------------------------------- Cash provided by (used in) operating activities 169,295 99,621 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property and equipment (1,178,810) (323,691) Investment in Viewer Services -- 143 - -------------------------------------------------------------------------------- Cash used in investing activities (1,178,810) (323,548) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Bank indebtedness (12,000) 27,244 Options exercised 4,336 -- Notes and loans payable (24,853) (23,720) - -------------------------------------------------------------------------------- Cash provided by (used in) financing activities (32,517) 3,524 - -------------------------------------------------------------------------------- Net decrease in cash and cash equivalents during the period (1,042,032) (220,403) Cash and cash equivalents, beginning of period 2,018,122 1,001,115 - -------------------------------------------------------------------------------- Cash and cash equivalents, end of period 976,090 780,712 ================================================================================ 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 29, 2000 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 29, 1999. The results of operations for the six months ended February 29, 2000 are not necessarily indicative of the results for the full fiscal year ending August 31, 2000. Note 2. General The financial statements of the Company for the three and six months ended February 29, 2000 (the "2000 Second Fiscal Quarter" and "2000 First Fiscal Half"), and February 28, 1999 (the "1999 Second Fiscal Quarter" and "1999 First Fiscal Half"), include the operations of the Company's wholly-owned subsidiaries NTN Interactive Network Inc. ("NTNIN") and 3484751 Canada Inc., GalaVu Entertainment Network Inc. ("GalaVu"), NTNIN's wholly-owned subsidiary Magic Lantern Communications Ltd. ("Magic") and Interlynx Multimedia Inc. ("Interlynx"). Magic conducts its operations directly and through its wholly-owned subsidiaries, 745695 Ontario Ltd. ("Custom Video"), B.C. Learning Connection Inc. ("BCLC"), and 1113659 Ontario Ltd. ("Viewer Services") and its 75% ownership of the outstanding shares of Sonoptic Technologies Inc. ("Sonoptic"). Prior period's figures have been reclassified to be consistent with any reclassifications in the current period. Note 3. Business Segment Data for the three months and six months ended February 29, 2000 and February 28, 1999 For the three months ended February 29, 2000 and February 28, 1999 2000 --------------------------------------------------------- Entertainment Education E-commerce Total $ $ $ $ - -------------------------------------------------------------------------------- Total revenue 3,292,828 1,093,877 39,195 4,425,900 Operating loss (236,327) (336,387) (439,960) (1,012,674) Net income (160,869) (337,709) (439,960) (938,538) ================================================================================ 1999 --------------------------------------------------------- Entertainment Education E-commerce Total $ $ $ $ - -------------------------------------------------------------------------------- Total revenue 2,117,767 1,203,690 205,630 3,527,087 Operating income (loss) 245,665 (21,268) 3,288 227,685 Net income 67,665 (49,966) 21,526 42,225 ================================================================================ For the six months ended February 29, 2000 and February 28, 1999 2000 --------------------------------------------------------- Entertainment Education E-commerce Total $ $ $ $ - -------------------------------------------------------------------------------- Total revenue 7,067,507 2,664,574 229,415 9,961,496 Operating income (loss) 335,180 (161,506) (629,536) (455,862) Net income (loss) 112,180 (158,575) (629,536) (675,931) Total assets 12,881,838 4,534,431 733,776 18,150,045 Current liabilities 2,092,696 925,229 182,453 3,200,378 Total liabilities 5,797,071 1,753,990 182,453 7,733,514 ================================================================================ 1999 --------------------------------------------------------- Entertainment Education E-commerce Total $ $ $ $ - -------------------------------------------------------------------------------- Total revenue 4,265,091 2,521,615 376,498 7,163,204 Operating income (loss) 490,181 (272,242) 277,999 495,938 Net income (loss) 209,181 (272,242) 296,237 233,176 Total assets 10,018,606 4,321,384 2,108,626 16,448,616 Current liabilities 1,474,872 859,582 416,167 2,750,621 Total liabilities 3,027,618 918,086 1,236,558 5,182,262 ================================================================================ 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 29, 2000 and February 28, 1999: 2000 1999 ---- ---- Numerator: Net income (loss) (numerator for basic earnings (loss) per share) $(675,931) $233,176 Accretion of interest on non-interest bearing promissory notes -- 15,338 ------ Numerator for diluted earnings (loss) per share $(675,931) $248,514 ========== ======== Denominator: For basic - weighted average number of shares 2,848,558 2,625,170 Effect of dilutive securities: Convertible preferred shares -- 192,857 Convertible promissory notes -- 98,193 Employee stock options -- 95,360 ------ Denominator for diluted earnings (loss) per share - adjusted weighted average number of shares and assumed conversions 2,848,558 3,011,580 ========= ========= Basic earnings (loss) per share $(0.24) $0.09 ======= ===== Diluted earnings (loss) per share $(0.24) $0.08 ======= ===== Note 5. Business Acquisition - GalaVu Entertainment Network Inc. On September 13, 1999, pursuant to an Asset Purchase Agreement dated as of the 10th day of September, 1999, the Company, through its wholly-owned subsidiary, GalaVu, acquired, effective as of September 13th, 1999, substantially all of the property and assets [excluding accounts receivable] of GalaVu Entertainment Inc. for a purchase price of $2,958,058 calculated on a discounted basis. This acquisition was recorded using the purchase method of accounting and, accordingly, the purchase price of $2,958,058 has been allocated to property and equipment. The purchase price was satisfied by the issuance of 100,000 common shares of the Company and the issuance of a promissory note [the "Note"]. The Note is secured by a general security interest in all of GalaVu's present and after-acquired assets. The Note is payable in cash or in common shares of the Company annually, for the term consisting of each of the next five fiscal years in an amount equal to 50% of the earnings before interest, taxes, depreciation and amortization of GalaVu for the immediately preceding annual period. Pursuant to the provisions of the Note, the minimum amount to be received by the holder of the Note is as follows: fiscal 2001 - $300,000, fiscal 2002 - $500,000, fiscal 2003 - $750,000, fiscal 2004 - $875,000 and fiscal 2005 - $875,000. 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 nine 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 fulfillment 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 wholly-owned subsidiary Viewer Services, which was created to assume the inbound telemarketing and product fulfillment services required by Canadian television broadcasters. The eighth unit is Interlynx, which designs and develops web-based training programs. The ninth unit is GalaVu, which delivers Pay-TV and movies to small to medium sized hotels. Highlights of the Three Months Ended February 29, 2000 During the 2000 Second Fiscal Quarter, Magic, through its subsidiary, Sonoptic signed a contract with Altschul Group Corporation ("AGC") of Evanston, Illinois to provide MPEG digital encoding services for more that 1,000 AGC video titles, along with Videobase(TM) indexing, DVD authoring and other digital services. NTNIN entered into a three-year advertising/sponsorship agreement with The GM Card (R) through its agency. Interlynx completed development of an on-line presenter/rapid development tool to facilitate rapid, cost-effective, in-house development of on-line learning. This tool has been delivered to MAPICS Inc., a leading provider of Enterprise Resource Planning Application software specifically designed for the business needs of manufacturers. Results of Operations for the Three Months ended February 29, 2000 The Company's total revenues for the 2000 Second Fiscal Quarter were $4,425,900, compared to $3,527,087 for the 1999 Second Fiscal Quarter, an increase of $898,813 or 25.5%. The major factor impacting the revenue increase was the addition of GalaVu to the company. GalaVu's revenue for the 2000 Second Fiscal Quarter was $1,409,200. Interlynx's revenues for the 2000 Second Fiscal Quarter were $39,195, compared to $205,630 for the 1999 Second Fiscal Quarter, a decrease of $166,435 or 80.9%. Factors impacting the decrease are the loss of the Universal Content revenue stream, due to the sale of this subsidiary and the change in focus away from web-site development to web-based training software. Magic's revenues for the 2000 Second Fiscal Quarter were $1,093,877, compared to $1,203,690 for the 1999 Second Fiscal Quarter, a decrease of $109,813 or 9.1%. The decrease in revenue can be mainly attributed to decreased ordering from educational institutions due to tighter budget constraints. NTNIN's revenues were $1,883,628 for the 2000 Second Fiscal Quarter, compared to $2,117,767 for the 1999 Second Fiscal Quarter, a decrease of $218,943 or 10.4%. Total cost of sales for the 2000 Second Fiscal Quarter were $1,722,348, compared to $1,228,095 for the 1999 Second Fiscal Quarter, an increase of $494,253 or 40.2%. Total cost of sales for GalaVu for the Second Fiscal Quarter were $676,100. There were no cost of sales for the 1999 Second Fiscal Quarter as GalaVu was purchased in the 2000 First Fiscal Quarter. Interlynx's total cost of sales for the 2000 Second Fiscal Quarter were $65,504, as compared to $39,172, an increase of $26,332 or 67.2%. The increase is a result of the change in focus of Interlynx from web-site development to web-based training software. Magic's total cost of sales were $347,231, compared to $493,916, a decrease of $146,685 or 29.7%. The decrease can be attributed to a decreased level in sales and a lower cost for video production. NTNIN's total cost of sales were $633,518, compared to $695,007, a decrease of $61,489 or 8.8%. The decrease can be associated with corresponding decrease in sales. As a percentage of revenues, cost of sales increased in the 2000 Second Fiscal Quarter to 38.9% from 34.8% in the 1999 Second Fiscal Quarter. Total selling, general and administrative expenses for the 2000 Second Fiscal Quarter were $3,039,071, compared to $1,686,336 for the 1999 Second Fiscal Quarter, an increase of $1,352,735 or 80.2%. The increase was caused mainly by the addition of GalaVu, which accounted for $787,617 of the increase. There are no comparative numbers for the 1999 Second Fiscal Quarter for GalaVu. Interlynx's total selling, general and administrative expenses for the 2000 Second Fiscal Quarter were $322,702, compared to $143,414 for the 1999 Second Fiscal Quarter, an increase of $179,288 or 125.0%. The increase is a result of increased staffing levels associated with the development and selling of the PROFIS software. Magic's total selling, general and administrative expenses were $958,471 for the 2000 Second Fiscal Quarter, compared to $769,027, an increase of $189,444 or 24.6%. The increase is associated with increased staffing levels, an increase in the provision for doubtful accounts and an increase in the marketing campaign for Digital Video. NTNIN's total selling, general and administrative expenses were $970,281 for the 2000 Second Fiscal Quarter, compared to $773,895 for the 1999 Second Fiscal Quarter, an increase of $196,386 or 25.4%. As a percentage of the Company's total revenues, selling, general and administrative expenses increased to 68.7% for the 2000 Second Fiscal Quarter from 47.8% for the 1999 Second Fiscal Quarter. Interest and bank charges for the 2000 Second Fiscal Quarter were $68,290, compared to $46,183 for the 1999 Second Fiscal Quarter, an increase of $22,107 or 47.9%. The increase was the result of increased debt arising from the purchase of GalaVu in the 2000 First Fiscal Quarter. As a percentage of the Company's total revenues, interest and bank charges increased to 1.5% for the 2000 Second Fiscal Quarter from 1.3% for the 1999 Second Fiscal Quarter. Total depreciation and amortization expense for the 2000 Second Fiscal Quarter was $608,865, compared to $338,788 for the 1999 Second Fiscal Quarter, an increase of $270,077 or 79.7%. This increase was the result of additional depreciation on fixed assets added in the 2000 Second Fiscal Quarter and depreciation of $200,000 on the newly acquired assets of GalaVu. As a percentage of the Company's total revenues, such expenses increased to 13.8% for the 2000 Second Fiscal Quarter from 9.6% for the 1999 Second Fiscal Quarter. A reduction in the provision of income taxes of $75,458 was recorded in the 2000 Second Fiscal Quarter compared with a provision for income taxes of $178,000 for the 1999 Second Fiscal Quarter, a change of $253,458. As the tax provision for the Company is based solely on the taxable income of NTNIN and GalaVu, it is unaffected by losses experienced in other divisions. For this reason, the tax provision is reflective of the income incurred by NTNIN and GalaVu in the 2000 Second Fiscal Quarter but is not decreased by the losses incurred by the other companies. The minority interest share in profits for the 2000 Second Fiscal Quarter was $1,322. This is compared to the minority interest share in profits for the 1999 Second Fiscal Quarter of $7,460, an overall change of $6,128. The minority interest share of profits results from the profits incurred Sonoptic in the 2000 Second Fiscal Quarter. In addition there is no longer a minority interest in Interlynx as the remaining ownership was purchased in Fiscal 1999. Interlynx posted a minority interest loss in the 1999 Second Fiscal Quarter. As a result of all of the above, the net loss for the 2000 Second Fiscal Quarter was $938,538, compared to net income of $42,225 for the 1999 Second Fiscal Quarter, a decrease of $980,763. In summary, the 2000 Second Fiscal Quarter loss as compared to the 1999 Second Fiscal Quarter income resulted primarily from the loss incurred by Interlynx and the increase in the GalaVu loss. Results of Operations for the Six Months Ended February 29, 2000 The Company's total revenues for the 2000 First Fiscal Half were $9,961,496, compared to $7,163,204 for the 1999 First Fiscal Half, an increase of $2,798,292 or 39.1%. GalaVu's revenues for the 2000 First Fiscal Half were $3,245,900. There was no comparative revenue for GalaVu for the 1999 First Fiscal Half. Interlynx's total revenue for the 2000 First Fiscal Half was $229,415, compared to $376,498 for the 1999 First Fiscal Half, a decrease of $147,083 or 39.1%. The decrease can be attributed to a decreased revenue stream, due to the sale of Interlynx's subsidiary and a change in strategic focus. Magic's total revenue for the 2000 First Fiscal Half was $2,664,574, compared to $2,521,615 for the 1999 First Fiscal Half, an increase of $142,959 or 5.7%. The increase can be attributed to the 2000 First Fiscal Quarter and Magic's fulfillment of a contract to provide over 245 hours of educational programming to Canada's national educational television specialty channel, Canadian Learning Television. NTNIN's total revenues were $3,821,607 for the 2000 First Fiscal Half, compared to $4,265,091 for the 1999 First Fiscal Half, a decrease of $443,484 or 10.4%. The decrease can be attributed to a decreased level of events being hosted, and decreased repair revenue due to repairs no longer being performed on US playmakers. Total cost of sales for the 2000 First Fiscal Half was $3,529,537, compared to $2,462,591 for the 1999 First Fiscal Half, an increase of $1,066,946 or 43.3%. GalaVu's total cost of sales was $1,187,900 for the 2000 First Fiscal Half. There is no comparative figure for the 1999 First Fiscal Half. As a percentage of the Company's total revenues, such costs of sales increased to 35.4% for the 2000 First Fiscal Half from 34.4% for the 1999 First Fiscal Half. Total selling, general and administrative expenses for the 2000 First Fiscal Half were $5,631,009, compared to $3,430,497 for the 1999 First Fiscal Half, an increase of $2,200,512 or 64.1%. This increase was caused in part by the acquisition of GalaVu. GalaVu had total selling, general and administrative expenses of $1,337,817 for the 2000 First Fiscal Half. There are no comparative numbers for the 1999 First Fiscal Half. Interlynx's total selling, general and administrative expenses were $623,480 for the 2000 First Fiscal Half, compared to $259,266 for the 1999 First Fiscal Half, an increase of $364,214 or 140.5%. This increase is due to the increased staff required for the development and selling associated with the strategic change in focus to web-based training from web-site design. Magic's total selling, general and administrative expenses were $1,609,244 for the 2000 First Fiscal Half, compared to $1,390,763 for the 1999 First Fiscal Half, an increase of $218,481 or 15.7%. This increase is the result of increased staffing and salaries, increased bad debt provision and an increase in the company's marketing campaign for digital video. NTNIN's total selling, general and administrative expenses were $2,060,468 for the 2000 First Fiscal Half, compared to $1,780,468 for the 1999 First Fiscal Half, an increase of $280,000 or 15.7%. The increase can be associated with increased legal and professional fees and increased advertising. As a percentage of the Company's total revenues, such expenses increased to 56.5% for the 2000 First Fiscal Half from 47.9% for the 1999 First Fiscal Half. Interest and bank charges for the 2000 First Fiscal Half amounted to $148,469, compared to $89,208 for the 1999 First Fiscal Half, an increase of $59,261 or 66.4%. This increase was the result of increased debt arising from the purchase of GalaVu in the 2000 First Fiscal Quarter. As a percentage of the Company's total revenues, interest and bank charges increased to 1.4% for the 2000 First Fiscal Half from 1.2% for the 1999 First Fiscal Half. Total depreciation and amortization expense for the 2000 First Fiscal Half was $1,108,342, compared to $684,970 for the 1999 First Fiscal Half, an increase of $423,372 or 61.8%. This increase was the result of additional depreciation on fixed assets added in the 2000 First Fiscal Half and depreciation of $400,000 on the newly acquired assets of GalaVu. As a percentage of the Company's total revenues, such expenses increased to 11.1% for the 2000 First Fiscal Half from 9.6% for the 1999 First Fiscal Half. The provision for income taxes for the 2000 First Fiscal Half was $223,000, compared to $281,000 for the 1999 First Fiscal Half, a decrease of $58,000 or 20.6%. As the tax provision for the Company is based solely on the taxable income of NTNIN and GalaVu, it is unaffected by losses experienced in other divisions. For this reason, the tax provision is reflective of the income incurred by NTNIN and GalaVu in the 2000 First Fiscal Half but is not decreased by the losses incurred by the other companies. For this reason, the tax provision increased over the prior period even though income before income taxes decreased in 2000 compared to 1999. As a percentage of the Company's total revenues, such expenses decreased to 2.2% for the 2000 First Fiscal Half from 3.9% for the 1999 First Fiscal Half. The minority interest share in losses for the 2000 First Fiscal Half was $2,931. This is compared to the minority interest share in losses for the 1999 First Fiscal Half of $18,238, an overall decrease of $15,307 or 83.9%. As a result of all of the above, net loss and comprehensive loss for the 2000 First Fiscal Half was $675,931 compared to a net income of $233,176 for the 1999 First Fiscal Half, a decrease of $909,107. In summary, the 2000 First Fiscal Half loss as compared to the 1999 First Fiscal Half income resulted primarily from the losses incurred by Interlynx and Magic. Liquidity and Capital Resources At February 29, 2000, the Company had working capital of $3,028,301, a decrease of $1,008,759 from working capital of $4,037,060 at August 31, 1999. For the 2000 First Fiscal Half, the Company had a net decrease of cash of $1,042,032 compared to a net decrease of $220,403 in the 1999 First Fiscal Half. Cash provided by operating activities for the 2000 First Fiscal Half was $169,294, compared to $99,621 provided by operating activities in the 1999 First Fiscal Half. In 2000, the major items that contributed to cash being provided by operating activities were as follows: the net loss with non-cash expenses added back of $518,949, decreases in income taxes receivable and inventory of $157,464 and $23,908 respectively; and increases in accounts payable and accrued liabilities and income taxes payable of $950,834 and $61,042 respectively. The major uses of operating funds included increases in accounts receivable and prepaid expenses of $1,436,095 and $110,110 respectively. In 1999, the major sources that contributed to cash being provided by operating activities were net income with non-cash expenses added back of $980,884, 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 offset by increases in accounts receivable and prepaid expenses of $909,813 and $230,662 respectively. Cash used in investing activities in the 2000 First Fiscal Half Quarter was $1,178,809 compared to the $323,548 used in investing activities in the 1999 First Fiscal Half. Cash used in financing activities in the 2000 First Fiscal Half was $32,517, compared to the $3,524 provided in the 1999 First Fiscal Half. 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, 2000 (the "2000 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 29, 2000 and 1999 and inflation is not expected to have a significant impact on the Company's operations or financial position during the 2000 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 Company's computer systems and equipment successfully transitioned to the Year 2000 with no significant issues. The company continues to keeps its Year 2000 project management in place to monitor latent problems that could surface at key dates or events in the future. It is not anticipated that there will be any significant problems related to these events. All costs associated with the Year 2000 remediation efforts were expenses or capitalized in accordance with appropriate accounting policies. 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 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 as of October 4, 1994, between NTN Canada Inc. and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.). + Option, dated as of October 4, 1994, registered in the name of NetStar Enterprises Inc. (formerly, Labatt Communications Inc).+ 10.4 Designation Agreement dated as of October 4, 1994, among Networks North Inc. (formerly know as NTN Canada, Inc.), NTN Interactive Network Inc. and NetStar Enterprises Inc. (formerly Labatt Communications Inc.). + 10.15 Asset Purchase Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited, Networks North Inc. and Arthur Andersen Inc., to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. + Promissory Note, dated September 10, 1999, by and between 1373224 Ontario 10.16 Limited, as Debtor, and the Holder, as Creditor. + 10.17 General Security Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited, to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. + 10.18 Securities Pledge Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. + 10.23 Bill of Sale, dated September 13, 1999, by and between 1373224 Ontario Limited to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. + 10.24 Covenant of Networks North Inc., dated September 13, 1999, to allot and issue and pay to the Bank in writing 100,000 common shares of NETN. 22 List of Subsidiaries 27 Financial Data Schedule + Incorporated by reference. See Exhibit Index. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K (Date of Report: April 13, 2000) with the Commission on April 14, 2000, reporting that Chell.com and Hammock Group Ltd. acquired Shares of the Company from NetStar Enterprises, Inc., which constitute approximately a 30.4 direct voting interest in the Company. In addition, the filing stated that VC Advantage Fund ("VC") has agreed to provide a loan to the Company, in which VC will receive a Convertible Debenture, convertible into Common Stock of the Company. 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, 2000 By: /s/ Peter Rona ------------------------------------ Peter Rona, President and Chief Executive Officer (Duly Authorized Officer) Dated: April 14, 2000 By: /s/ Don Pagnutti ------------------------------------ Don Pagnutti, Principal Financial Officer NETWORKS NORTH INC. FORM 10-Q February 29, 2000 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 10.4 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 10.15 Asset Purchase Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited, Networks North Inc. and Arthur Andersen Inc., to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu. +5, Exh. 10.1 10.16 Promissory Note, dated September 10, 1999, by and between 1373224 Ontario Limited, as Debtor, and the Holder, as Creditor. +5, Exh. 10.2 10.17 General Security Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited, to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu.+5, Exh. 10.3 10.18 Securities Pledge Agreement, dated September 10, 1999, by and between 1373224 Ontario Limited to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu+5, Exh. 10.4 10.23 Bill of Sale, dated September 13, 1999, by and between 1373224 Ontario Limited to acquire the property and assets of GalaVu Entertainment Inc., from the person appointed by the court of competent jurisdiction as the receiver or receiver and manager of the property, assets and undertaking of GalaVu.+5, Exh. 10.9 10.24 Covenant of Networks North Inc. for valuable consideration to allot and issue and pay to the Bank in writing 100,000 common shares of NETN. +5, Exh. 10.10 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. +5 All Exhibits so indicated are incorporated herein by reference to the exhibit listed above in the Company's 8-K (Date of Report: September 13, 1999) (File No. 0-18066), filed on September 29, 1999. ++ 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-31-2000 SEP-01-1999 FEB-29-2000 1.466 976,090 258,623 3,999,284 224,000 236,960 6,228,679 8,288,380 0 18,150,045 3,200,378 0 0 10,917 178,633 10,266,981 18,150,045 9,961,496 9,961,496 3,529,538 3,529,538 0 0 148,469 (455,862) 223,000 (675,931) 0 0 0 (675,931) (0.24) (0.24)
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