-----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, JcGq6aI7wex86BifJzxY+F2tRJa+PCc97LVfg9URaVNLy9fH8K4tSsoB2ioNdKVZ JGAAOUkBUQwfybnz7j3fwQ== /in/edgar/work/20000714/0001005477-00-005132/0001005477-00-005132.txt : 20000920 0001005477-00-005132.hdr.sgml : 20000920 ACCESSION NUMBER: 0001005477-00-005132 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORKS NORTH INC CENTRAL INDEX KEY: 0000797313 STANDARD INDUSTRIAL CLASSIFICATION: [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: 673278 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 0001.txt 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, 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 July 14, 2000: 2,900,656 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 NINE MONTHS ENDED MAY 31, 2000 Item - ---- Item 1. Financial Statements: Consolidated Balance Sheets - as at May 31, 2000 and August 31, 1999 Consolidated Statements of Operations and Retained Earnings - for the Three Months Ended May 31, 2000 and May 31, 1999 Consolidated Statements of Operations and Retained Earnings - for the Nine Months Ended May 31, 2000 and May 31, 1999 Consolidated Statements of Cash Flows - for the Nine Months Ended May 31, 2000 and May 31, 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 MAY 31, 2000 AND AUGUST 31, 1999 (Expressed in Canadian dollars - unaudited)
============================================================================================ May 31, 2000 August 31, 1999 $ $ ============================================================================================ ASSETS Current Cash and cash equivalents 1,113,572 2,018,122 Short-term investments 271,644 261,926 Accounts receivable, trade - net of allowance for doubtful accounts of $219,000; August - $119,000 4,044,540 2,534,459 Income taxes receivable and other receivable 15,279 186,194 Inventory 390,911 260,868 Prepaid expenses 692,841 647,612 - -------------------------------------------------------------------------------------------- Total current assets 6,528,787 5,909,181 - -------------------------------------------------------------------------------------------- Property and equipment, net 7,997,417 5,151,755 Software development costs, net 212,500 250,000 Licenses, net of accumulated amortization 255,335 270,596 Goodwill, net of accumulated amortization 2,925,355 3,060,489 Notes receivable 160,000 160,000 - -------------------------------------------------------------------------------------------- 18,079,394 14,802,021 ============================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness 139,000 157,000 Accounts payable - trade 1,613,220 912,361 Accrued liabilities 1,044,093 723,218 Current portion of long-term debt 362,122 79,542 - -------------------------------------------------------------------------------------------- Total current liabilities 3,158,435 1,872,121 - -------------------------------------------------------------------------------------------- Long-term debt 4,564,432 2,077,960 Deferred income taxes payable 59,173 59,173 - -------------------------------------------------------------------------------------------- Total liabilities 7,782,040 4,009,254 - -------------------------------------------------------------------------------------------- Shareholders' equity Share capital 900,000 preferred shares 10,917 10,917 2,894,156 common shares [August - 2,756,641] 181,094 171,635 Capital in excess of par value 10,002,019 9,559,883 Retained earnings 103,324 1,050,332 - -------------------------------------------------------------------------------------------- Total shareholders' equity 10,297,354 10,792,767 - -------------------------------------------------------------------------------------------- 18,079,394 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 THREE MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999 (Expressed in Canadian Dollars - Unaudited) ================================================================================ May 31, 2000 May 31, 1999 $ $ ================================================================================ REVENUE Network services 1,555,108 1,580,254 Event programming 208,434 128,240 Ad sponsorship 94,691 35,864 Video/software sales 983,503 1,289,888 Video dubbing 188,069 362,827 Pay-TV 1,613,800 -- Other 11,037 28,124 - -------------------------------------------------------------------------------- 4,654,642 3,425,197 - -------------------------------------------------------------------------------- COST OF SALES Network services 565,073 561,841 Event programming 1,069 10,347 Ad sponsorship 4,592 7,708 Video/software sales 414,007 780,197 Video dubbing 210,266 (32,481) Pay-TV 735,400 -- Other (2,158) 33,145 - -------------------------------------------------------------------------------- 1,928,249 1,360,757 - -------------------------------------------------------------------------------- 2,726,393 2,064,440 EXPENSES Selling, general and administrative expenses 2,465,838 1,940,307 Interest and bank charges 72,414 65,830 Depreciation and amortization 578,971 338,608 - -------------------------------------------------------------------------------- Loss before income taxes and minority interest (390,830) (280,305) Recovery of income taxes (113,000) (27,000) Minority interest (6,753) (50,561) - -------------------------------------------------------------------------------- Net loss and comprehensive loss for the period (271,077) (202,744) Retained earnings, beginning of period 374,401 2,255,005 - -------------------------------------------------------------------------------- Retained earnings, end of period 103,324 2,052,261 ================================================================================ Loss per share: Basic (0.09) (0.08) Diluted (0.09) (0.08) ================================================================================ The accompanying notes are an integral part of these statements NETWORKS NORTH INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE NINE MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999 (Expressed in Canadian Dollars - Unaudited)
============================================================================================== May 31, 2000 May 31, 1999 $ $ ============================================================================================== REVENUE Network services 4,863,707 5,107,456 Event programming 422,068 461,490 Ad sponsorship 383,989 302,064 Video/software sales 3,286,484 3,559,885 Video dubbing 779,076 1,002,667 Pay-TV 4,859,700 -- Other 21,114 154,839 - ---------------------------------------------------------------------------------------------- 14,616,138 10,588,401 - ---------------------------------------------------------------------------------------------- COST OF SALES Network services 1,710,965 1,759,289 Event programming 14,834 20,841 Ad sponsorship 15,872 20,588 Video/software sales 1,220,533 1,619,513 Video dubbing 557,435 259,103 Pay-TV 1,923,300 -- Other 14,848 144,014 - ---------------------------------------------------------------------------------------------- 5,457,787 3,823,348 - ---------------------------------------------------------------------------------------------- 9,158,351 6,765,053 EXPENSES Selling, general and administrative expenses 8,096,847 5,370,804 Interest and bank charges 220,883 155,038 Depreciation and amortization 1,687,312 1,023,578 - ---------------------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (846,691) 215,633 Provision for income taxes 110,000 254,000 Minority interest (9,683) (68,799) - ---------------------------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) for the period (947,008) 30,432 Retained earnings, beginning of period 1,050,332 2,021,829 - ---------------------------------------------------------------------------------------------- Retained earnings, end of period 103,324 2,052,261 ============================================================================================== Earnings (loss) per share (Note 4): Basic (0.33) 0.01 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 NINE MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999 (Expressed in Canadian dollars - unaudited)
=============================================================================================== May 31, 2000 May 31, 1999 $ $ =============================================================================================== OPERATING ACTIVITIES Net income (loss) and comprehensive income (loss) for the period (947,008) 30,432 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,687,312 1,023,578 Loss from investment in Viewer Services -- 67,787 Accretion of interest on non-interest bearing promissory notes 129,807 26,392 Changes in assets and liabilities: Decrease (increase) in short-term investments (9,718) 826,872 Increase in accounts receivable (1,510,083) (472,163) Decrease (increase) in income taxes receivable and other receivable 170,915 (13,162) Decrease (increase) in inventory (130,043) 44,666 Increase in prepaid expenses (45,229) (139,337) Increase (decrease) in accounts payable and accrued liabilities 492,295 (608,261) - ----------------------------------------------------------------------------------------------- Cash provided (used in) by operating activities (161,752) 786,804 - ----------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property and equipment 857,581 (447,987) Investment in Viewer Services -- (149,779) - ----------------------------------------------------------------------------------------------- Cash used in investing activities 857,581 (597,766) - ----------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Bank indebtedness (18,000) (8) Options exercised 156,236 -- Notes and loans payable (23,453) 2,570 - ----------------------------------------------------------------------------------------------- Cash provided by financing activities 114,783 2,562 - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period (904,550) 191,600 Cash and cash equivalents, beginning of period 2,018,122 1,001,115 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period 1,113,572 1,192,715 ===============================================================================================
The accompanying notes are an integral part of these statements NETWORKS NORTH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31, 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 nine months ended May 31, 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 nine months ended May 31, 2000 (the "2000 Third Fiscal Quarter" and "2000 First Three Fiscal Quarters"), and May 31, 1999 (the "1999 Third Fiscal Quarter" and "1999 First Three Fiscal Quarters"), include the operations of the Company's wholly-owned subsidiaries NTN Interactive Network Inc. ("NTNIN"), 3484751 Canada Inc. and 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 nine months ended May 31, 2000 and May 31, 1999 For the three months ended May 31
2000 ------------------------------------------------------------------- Entertainment Education E-commerce Adjustments Consolidated $ $ $ $ $ - ------------------------------------------------------------------------------------------- External revenue 3,483,070 1,127,772 43,800 -- 4,654,642 Inter-segment revenue 46,180 102,559 -- (148,739) -- - ------------------------------------------------------------------------------------------- Total revenue 3,529,250 1,230,331 43,800 (148,739) 4,654,642 - ------------------------------------------------------------------------------------------- Operating profit (loss) 5,296 (125,676) (270,450) -- (390,830) Net income (loss) 118,296 (118,923) (270,450) -- (271,077) =========================================================================================== 1999 ------------------------------------------------------------------- Entertainment Education E-commerce Adjustments Consolidated $ $ $ $ $ - ------------------------------------------------------------------------------------------- External revenue 1,802,748 1,492,579 129,870 -- 3,425,197 Inter-segment revenue 294,856 83,443 -- (378,299) -- - ------------------------------------------------------------------------------------------- Total revenue 2,097,604 1,576,022 129,870 (378,299) 3,425,197 - ------------------------------------------------------------------------------------------- Operating loss (167,698) (9,391) (103,216) -- (280,305) Net loss (140,698) (7,023) (55,023) -- (202,744) ===========================================================================================
For the nine months ended May 31
2000 ------------------------------------------------------------------- Entertainment Education E-commerce Adjustments Consolidated $ $ $ $ $ - ------------------------------------------------------------------------------------------- External revenue 10,550,578 3,792,345 273,215 -- 14,616,138 Inter-segment revenue 138,955 435,476 -- (574,431) -- - ------------------------------------------------------------------------------------------- Total revenue 10,689,533 4,227,821 273,215 (574,431) 14,616,138 - ------------------------------------------------------------------------------------------- Operating profit (loss) 260,120 (202,000) (904,811) -- (846,691) Net income (loss) 150,120 (192,317) (904,811) -- (947,008) Total assets 13,564,489 4,106,788 408,117 -- 18,079,394 Current liabilities 1,937,409 906,734 314,292 -- 3,158,435 Total liabilities 5,788,313 1,679,435 314,292 -- 7,782,040 =========================================================================================== 1999 ------------------------------------------------------------------- Entertainment Education E-commerce Adjustments Consolidated $ $ $ $ $ - ------------------------------------------------------------------------------------------- External revenue 6,067,839 4,014,194 506,368 -- 10,588,401 Inter-segment revenue 387,631 265,333 -- (652,964) -- - ------------------------------------------------------------------------------------------- Total revenue 6,455,470 4,279,527 506,368 (652,964) 10,588,401 - ------------------------------------------------------------------------------------------- Operating profit (loss) 274,887 28,324 (87,578) -- 215,633 Net income (loss) 20,887 19,231 (9,686) -- 30,432 Total assets 9,277,721 4,960,451 1,328,647 -- 15,566,819 Current liabilities 1,277,079 572,361 195,838 -- 2,045,278 Total liabilities 2,821,657 1,485,714 195,838 -- 4,503,209 ===========================================================================================
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 nine months ended May 31, 2000 and May 31, 1999: 2000 1999 ---- ---- Numerator: Net income (loss) (numerator for basic and diluted earnings (loss) per share) $ (947,008) $ 30.432 =========== ========= Denominator: For basic - weighted average number of shares 2,860,464 2,630,670 Effect of dilutive securities: Convertible preferred shares -- 192,857 Convertible promissory notes -- 98,193 Employee stock options -- 54,396 ----------- --------- Denominator for diluted earnings (loss) per share - adjusted weighted average number of shares and assumed conversions 2,860,464 2,796,116 =========== ========= Basic earnings (loss) per share $ (0.33) $ 0.01 =========== ========= Diluted earnings (loss) per share $ (0.33) $ 0.01 =========== ========= Note 5. Business Acquisition - GalaVu Entertainment Network Inc. Effective 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 substantially all of the property and assets [excluding accounts receivable] of GalaVu Entertainment Inc. for a purchase price of $2,958,058. This acquisition was recorded using the purchase method of accounting and, accordingly, the purchase price of $2,958,058 has been allocated as follows: Property and equipment $3,487,498 Assumption of liabilities (529,440) ---------- Purchase price $2,958,058 ========== The purchase price was satisfied by the issuance of 100,000 common shares of the Company at fair market value and the issuance of a non-interest bearing promissory note [the "Note"]. The Note is discounted using an interest rate of 6.5%. The Note accretes to face value over its term and the accretion is treated as interest expense. 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. As of end of the 2000 First Three Fiscal Quarters, 50% of GalaVu's earnings before interest, taxes, depreciation and amortization was $256,670. As of end of the 2000 First Three Fiscal Quarters, GalaVu's gross revenue and loss before taxes were as follows: 9 months Ended May 31, 2000 -------------- Gross Revenue $4,859,700 Loss before taxes $ (259,467) Per share data: Basic loss (0.09) Diluted loss (0.09) Note 6. Income Taxes The tax provision for the Company is based primarily on the taxable income of NTNIN. Therefore the provision is unaffected by losses experienced in other divisions. For this reason, the tax provision is reflective of the income incurred by NTNIN in the 2000 First Three Fiscal Quarters but is not decreased by the losses incurred by the other companies. Note 7. Contingent Liabilities On June 18, 1992, Interactive Network Inc., a third party, instituted proceedings against Communications, NTN Interactive Network Inc. and the Company in the Federal Court of Canada and in the California Supreme Court claiming patent infringement. It is the opinion of the Company's management that this patent infringement claim will be successfully defended. Revenue Canada is currently in discussions with the Company regarding a potential liability with respect to withholding tax on certain amounts paid to Communications. No assessment has been made to date by Revenue Canada. Management believes that it has valid defenses with respect to these matters and, accordingly, no amount has been recorded in these consolidated financial statements. In the event that such matters are settled in favour of Revenue Canada, the amounts could be material and would be recorded in the period in which they become determinable. Note 8. Recent accounting pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133 " Accounting for Derivative Instruments and Hedging Activities" ["SFAS 133"] and Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ["FIN 44"]. The Securities and Exchange Commission has also issued Staff Accounting Bulletin No. 101 - "Revenue Recognition" ["SAB 101"]. FAS 133 is effective for the Company commencing on September 1, 2000 and FIN 44 is generally effective July 1, 2000. SAB 101 is effective for the Company's fourth quarter of its 2001 fiscal year. The Company has not determined the impact, if any, of these pronouncements on its consolidated financial statements. Note 9. Changes in share capital During the nine months ended May 31, 2000, the following transactions resulted in the issuance of 137,515 common shares of the Company. The acquisition of certain assets by GalaVu was partially satisfied by the issuance of 100,000 common shares of the Company. Also during the nine months ended May 31, 2000, options totaling 37,515 were exercised resulting in the issuance of an additional 37,515 common shares of the Company. 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 in small and medium sized hotels. Highlights of the Three Months Ended May 31, 2000 During the 2000 Third Fiscal Quarter, Chell.com Ltd. along with a finance group acquired NetStar Enterprises Inc.'s approximately 31% interest in the Company. In addition the VC Advantage Fund agreed to provide, subject to shareholder approval, $US3,000,000 in financing. This financing would be in the form of a convertible debenture, which is convertible into common stock of the Company. This financing has not been advanced. Interlynx has entered into an agreement to provide Air Canada with their web-based training software, PROFIS. Results of Operations for the Three Months ended May 31, 2000 The Company's total revenues for the 2000 Third Fiscal Quarter were $4,654,642, compared to $3,425,197 for the 1999 Third Fiscal Quarter, an increase of $1,229,445 or 35.9%. The major factor impacting the revenue increase was the addition of GalaVu to the company. GalaVu's revenue for the 2000 Third Fiscal Quarter was $1,613,800. Interlynx's revenues for the 2000 Third Fiscal Quarter were $43,800, compared to $129,870 for the 1999 Third Fiscal Quarter, a decrease of $86,070 or 66.3%. 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 Third Fiscal Quarter were $1,127,772, compared to $1,492,579 for the 1999 Third Fiscal Quarter, a decrease of $364,807 or 24.4%. The decrease in revenue can be mainly attributed to decreased ordering of analog videos from educational institutions due to tighter budget constraints. NTNIN's revenues were $1,869,270 for the 2000 Third Fiscal Quarter, compared to $1,802,748 for the 1999 Third Fiscal Quarter, an increase of $66,522 or 3.7%. Total cost of sales for the 2000 Third Fiscal Quarter were $1,928,249, compared to $1,360,757 for the 1999 Third Fiscal Quarter, an increase of $567,492 or 41.7%. Total cost of sales for GalaVu for the Third Fiscal Quarter were $735,400. There were no cost of sales for the 1999 Third Fiscal Quarter as GalaVu was purchased in the 2000 First Fiscal Quarter. Interlynx's total cost of sales for the 2000 Third Fiscal Quarter were $82,250, as compared to $70,357, an increase of $11,893 or 16.9%. 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 $542,023, compared to $686,927, a decrease of $144,904 or 21.1%. 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 $568,576, compared to $603,473, a decrease of $34,897 or 5.8%. The decrease can be associated with corresponding decrease in sales. As a percentage of revenues, cost of sales increased in the 2000 Third Fiscal Quarter to 41.4% from 39.7% in the 1999 Third Fiscal Quarter. Total selling, general and administrative expenses for the 2000 Third Fiscal Quarter were $2,465,838, compared to $1,940,307 for the 1999 Third Fiscal Quarter, an increase of $525,531 or 27.1%. The increase was caused mainly by the addition of GalaVu, which accounted for $743,119 of the increase. There are no comparative numbers for the 1999 Third Fiscal Quarter for GalaVu. Interlynx's total selling, general and administrative expenses for the 2000 Third Fiscal Quarter were $123,550, compared to $146,480 for the 1999 Third Fiscal Quarter, a decrease of $22,930 or 15.7%. Magic's total selling, general and administrative expenses were $509,405 for the 2000 Third Fiscal Quarter, compared to $698,970, a decrease of $189,565 or 27.1%. NTNIN's total selling, general and administrative expenses were $1,089,764 for the 2000 Third Fiscal Quarter, compared to $1,094,857 for the 1999 Third Fiscal Quarter, a decrease of $5,093 or 0.5%. As a percentage of the Company's total revenues, selling, general and administrative expenses decreased to 53.0% for the 2000 Third Fiscal Quarter from 56.6% for the 1999 Third Fiscal Quarter. Interest and bank charges for the 2000 Third Fiscal Quarter were $72,414, compared to $65,830 for the 1999 Third Fiscal Quarter, an increase of $6,584 or 10.0%. 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 decreased to 1.5% for the 2000 Third Fiscal Quarter from 1.9% for the 1999 Third Fiscal Quarter. Total depreciation and amortization expense for the 2000 Third Fiscal Quarter was $578,971, compared to $338,608 for the 1999 Third Fiscal Quarter, an increase of $240,363 or 71.0%. This increase was the result of additional depreciation on fixed assets added in the 2000 Third 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 12.4% for the 2000 Third Fiscal Quarter from 9.9% for the 1999 Third Fiscal Quarter. A reduction in the provision of income taxes of $113,000 was recorded in the 2000 Third Fiscal Quarter compared with a reduction in the provision for income taxes of $27,000 for the 1999 Third Fiscal Quarter, a change of $86,000. As the tax provision for the Company is based principally on the taxable income of NTNIN, it is unaffected by losses experienced in other divisions. For this reason, the tax provision is reflective of the income incurred by NTNIN in the 2000 Third Fiscal Quarter but is not decreased by the losses incurred by the other companies. The minority interest share in losses for the 2000 Third Fiscal Quarter was $6,753. This is compared to the minority interest share in losses for the 1999 Third Fiscal Quarter of $50,561, an overall change of $43,808. The minority interest share of profits results from the losses incurred by Sonoptic in the 2000 Third 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 Third Fiscal Quarter. As a result of all of the above, the net loss for the 2000 Third Fiscal Quarter was $271,077, compared to net loss of $202,744 for the 1999 Third Fiscal Quarter, an increase in the loss of $68,333. In summary, the 2000 Third Fiscal Quarter loss as compared to the 1999 Third Fiscal Quarter income resulted primarily from the loss incurred by Interlynx and the increase in the GalaVu loss. Results of Operations for the Nine Months Ended May 31, 2000 The Company's total revenues for the 2000 First Three Fiscal Quarters were $14,616,138, compared to $10,588,401 for the 1999 First Three Fiscal Quarters, an increase of $4,027,737 or 38.0%. GalaVu's revenues for the 2000 First Three Fiscal Quarters were $4,859,700. There was no comparative revenue for GalaVu for the 1999 First Three Fiscal Quarters. Interlynx's total revenue for the 2000 First Three Fiscal Quarters was $273,215, compared to $506,368 for the 1999 First Three Fiscal Quarters, a decrease of $233,153 or 46.0%. 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 Three Fiscal Quarters was $3,792,345, compared to $4,014,194 for the 1999 First Three Fiscal Quarters, a decrease of $221,849 or 5.5%. NTNIN's total revenues were $5,690,878 for the 2000 First Three Fiscal Quarters, compared to $6,067,839 for the 1999 First Three Fiscal Quarters, a decrease of $376,961 or 6.2%. The decrease can be attributed to a decreased level of events being hosted and decreased repair revenue due to fewer repairs being performed for third parties. Total cost of sales for the 2000 First Three Fiscal Quarters was $5,457,787, compared to $3,823,348 for the 1999 First Three Fiscal Quarters, an increase of $1,634,439 or 42.7%. GalaVu's total cost of sales was $1,923,300 for the 2000 First Three Fiscal Quarters. There is no comparative figure for the 1999 First Three Fiscal Quarters. As a percentage of the Company's total revenues, such costs of sales increased to 37.3% for the 2000 First Three Fiscal Quarters from 36.1% for the 1999 First Three Fiscal Quarters. Total selling, general and administrative expenses for the 2000 First Three Fiscal Quarters were $8,096,847, compared to $5,370,804 for the 1999 First Three Fiscal Quarters, an increase of $2,726,043 or 50.8%. This increase was caused in part by the acquisition of GalaVu. GalaVu had total selling, general and administrative expenses of $2,136,717 for the 2000 First Three Fiscal Quarters. There are no comparative numbers for the 1999 First Three Fiscal Quarters. Interlynx's total selling, general and administrative expenses were $628,782 for the 2000 First Three Fiscal Quarters, compared to $363,746 for the 1999 First Three Fiscal Quarters, an increase of $265,036 or 72.9%. 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 $1,857,209 for the 2000 First Three Fiscal Quarters, compared to $1,925,652 for the 1999 First Three Fiscal Quarters, an increase of $68,443 or 3.6%. This increase is the result of an 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 $3,474,140 for the 2000 First Three Fiscal Quarters, compared to $3,081,406 for the 1999 First Three Fiscal Quarters, an increase of $392,734 or 12.7%. The increase can be associated with increased legal and professional fees, increased advertising and severance costs. As a percentage of the Company's total revenues, such expenses increased to 55.4% for the 2000 First Three Fiscal Quarters from 50.7% for the 1999 First Three Fiscal Quarters. Interest and bank charges for the 2000 First Three Fiscal Quarters amounted to $220,883, compared to $155,038 for the 1999 First Three Fiscal Quarters, an increase of $65,845 or 42.5%. 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 remained constant at 1.5% for the 2000 First Three Fiscal Quarters compared to 1.5% for the 1999 First Three Fiscal Quarters. Total depreciation and amortization expense for the 2000 First Three Fiscal Quarters was $1,687,312, compared to $1,023,578 for the 1999 First Three Fiscal Quarters, an increase of $663,734 or 64.8%. This increase was the result of additional depreciation on fixed assets added in the 2000 First Three Fiscal Quarters and depreciation of $600,000 on the newly acquired assets of GalaVu. As a percentage of the Company's total revenues, such expenses increased to 11.5% for the 2000 First Three Fiscal Quarters from 9.7% for the 1999 First Three Fiscal Quarters. The provision for income taxes for the 2000 First Three Fiscal Quarters was $110,000, compared to $254,000 for the 1999 First Three Fiscal Quarters, a decrease of $144,000 or 56.7%. As the tax provision for the Company is based principally on the taxable income of NTNIN, it is unaffected by losses experienced in other divisions. For this reason, the tax provision is reflective of the income incurred by NTNIN in the 2000 First Three Fiscal Quarters but is not decreased by the losses incurred by the other companies. As a percentage of the Company's total revenues, such expenses decreased to 0.7% for the 2000 First Three Fiscal Quarters from 2.4% for the 1999 First Three Fiscal Quarters. The minority interest share in losses for the 2000 First Three Fiscal Quarters was $9,683. This is compared to the minority interest share in losses for the 1999 First Three Fiscal Quarters of $68,799, an overall decrease of $59,116 or 85.9%. As a result of all of the above, net loss and comprehensive loss for the 2000 First Three Fiscal Quarters was $947,008 compared to a net income of $30,432 for the 1999 First Three Fiscal Quarters, a decrease of $977,440. In summary, the 2000 First Three Fiscal Quarters loss as compared to the 1999 First Three Fiscal Quarters income resulted primarily from the losses incurred by Interlynx and Magic. Liquidity and Capital Resources At May 31, 2000, the Company had working capital of $3,370,352, a decrease of $666,708 from working capital of $4,037,060 at August 31, 1999. For the 2000 First Three Fiscal Quarters, the Company had a net decrease of cash of $904,550 compared to a net increase of $191,600 in the 1999 First Three Fiscal Quarters. Cash used in operating activities for the 2000 First Three Fiscal Quarters was $161,752, compared to $786,804 provided by operating activities in the 1999 First Three Fiscal Quarters. 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 $870,111, decreases in income taxes receivable and other receivables of $142,185 and increases in accounts payable and accrued liabilities of $1,021,735. The major uses of operating funds included increases in accounts receivable and prepaid expenses of $1,481,353 and $45,229 respectively and an increase in inventory of $130,043. In 1999, the major items that contributed to cash being provided by operating activities were as follows: net income with non-cash expenses added back of $1,148,189, and decreases in short-term investments and inventory of $826,872 and $44,666 respectively. These sources were somewhat offset by increases in accounts receivable and prepaid expenses of $472,163 and $139,337 respectively and a decrease in accounts payable and accrued liabilities of $608,261 and an increase in taxes receivable and other receivable of $13,162. Cash used in investing activities in the 2000 First Three Fiscal Quarters was $857,581 compared to the $597,766 used in investing activities in the 1999 First Three Fiscal Quarters. During the 2000 First Three Fiscal Quarters, cash was invested primarily in equipment for GalaVu. Cash provided in financing activities in the 2000 First Three Fiscal Quarters was $114,783, compared to the $2,562 provided in the 1999 First Three Fiscal Quarters. The increase is primarily due to options being exercised in the 2000 First Three Fiscal Quarters. Management believes that the Company's working capital position and current borrowings provide the necessary liquidity for its planned activities in the current year. Additional external financing will not be required for its operating activities during the year ending August 31, 2000 (the "2000 Fiscal Year"). VC Advantage Fund has agreed to provide, subject to a definitive agreement and shareholder approval, $US3,000,000 in financing in the form of a convertible debenture. It is expected that this financing will be advanced in the first quarter of the Company's 2001 Fiscal Year. Inflation The rate of inflation has had little impact on the Company's operations or financial position during the nine months ended May 31, 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. 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. + 10.16 Promissory Note, dated September 10, 1999, by and between 1373224 Ontario 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: July 14, 2000 By: /s/ Peter Rona ------------------------------------- Peter Rona, President and Chief Executive Officer (Duly Authorized Officer) Dated: July 14, 2000 By: /s/ Don Pagnutti ------------------------------------- Don Pagnutti, Principal Financial Officer NETWORKS NORTH INC. FORM 10-Q May 31, 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 0002.txt 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 9-MOS AUG-31-2000 SEP-01-1999 MAY-31-2000 1.469 1,113,572 271,644 4,044,540 219,000 390,911 6,528,787 7,997,417 0 18,079,394 3,158,435 0 0 10,917 181,094 10,105,343 18,079,394 14,616,138 14,616,138 5,457,787 5,457,787 0 0 220,883 (837,008) 110,000 (947,008) 0 0 0 (926,345) (0.33) (0.33)
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