FORM 10-Q
Securities and Exchange Commission
Washington D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: May 31, 1998
Commission file number: 0-18066
NETWORKS NORTH INC.
formerly known as
NTN CANADA, INC.
(Exact name of registrant as specified in its charter)
New York 11-2805051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Meteor Drive
Etobicoke, Ontario, Canada M9W 1A4
(Address of principal executive offices)
(Zip Code)
(416) 675-6666
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of July 14, 1998: 2,576,073 shares of common stock,
par value $.0467 per share.
<PAGE>
PART I - FINANCIAL INFORMATION
NETWORKS NORTH INC. (FORMERLY KNOWN AS NTN CANADA, INC.) AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
PERIOD ENDED MAY 31, 1998
Item
Item 1. Financial Statements:
Consolidated Balance Sheets -
As at May 31, 1998 and August 31, 1997
Consolidated Statement of Operations and Retained Earnings for the Nine
Months Ended May 31, 1998 and May 31, 1997
Consolidated Statement of Operations and Retained Earnings for the Three
Months Ended May 31, 1998 and May 31, 1997
Consolidated Statement of Cash Flows -
for the Nine Months Ended May 31, 1998 and May 31, 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<PAGE>
NETWORKS NORTH INC.
(FORMERLY KNOWN AS NTN CANADA, INC.)
CONSOLIDATED BALANCE SHEETS
AS AT MAY 31, 1998 AND AUGUST 31, 1997
(Expressed in Canadian dollars - unaudited)
================================================================================
May 31, 1998 August 31, 1997
$ $
================================================================================
ASSETS
Current
Cash and cash equivalents 882,010 2,421,797
Short-term temporary investments 1,896,612 1,705,014
Accounts receivable, trade - net of allowance for
doubtful accounts of $51,000; August - $51,000 2,794,803 1,547,395
Inventory 355,801 624,828
Prepaid expenses 707,636 419,843
- --------------------------------------------------------------------------------
Total current assets 6,636,862 6,718,877
- --------------------------------------------------------------------------------
Investment in Viewer Services (10,377) 5,758
Property and equipment, net 5,462,278 4,754,173
License, net of accumulated amortization 215,670 225,046
Goodwill, net of accumulated amortization 3,189,326 2,273,748
Notes receivable 163,180 310,000
- --------------------------------------------------------------------------------
15,656,939 14,287,602
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 284,587 641,000
Accounts payable - trade 1,324,765 1,165,434
Accrued liabilities 608,302 455,110
Income taxes payable 164 352,161
Current portion of long-term debt 333,228 605,310
- --------------------------------------------------------------------------------
Total current liabilities 2,551,046 3,219,015
- --------------------------------------------------------------------------------
Long-term debt 2,783,537 2,126,076
Less: current portion (333,228) (605,310)
- --------------------------------------------------------------------------------
2,450,309 1,520,766
- --------------------------------------------------------------------------------
Deferred income taxes payable 59,173 59,173
- --------------------------------------------------------------------------------
Total liabilities 5,060,528 4,798,954
- --------------------------------------------------------------------------------
Shareholders' equity
Share capital
900,000 preferred shares [August - 950,000] 10,917 11,523
2,576,073 common shares [August - 2,441,992] 158,881 150,211
Capital in excess of par value 8,529,051 7,923,150
Retained earnings 1,897,562 1,403,764
- --------------------------------------------------------------------------------
Total shareholders' equity 10,596,411 9,488,648
- --------------------------------------------------------------------------------
15,656,939 14,287,602
================================================================================
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC.
(FORMERLY KNOWN AS NTN CANADA, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS AND
RETAINED EARNINGS
FOR THE NINE MONTHS ENDED MAY 31, 1998
AND MAY 31, 1997 (Expressed in
Canadian dollars - unaudited)
================================================================================
May 31, 1998 May 31, 1997
$ $
- --------------------------------------------------------------------------------
Total revenue 11,143,311 7,420,034
Cost of sales 4,317,277 2,266,251
- --------------------------------------------------------------------------------
6,826,034 5,153,783
- --------------------------------------------------------------------------------
Selling, general and administrative expenses 4,892,284 3,823,970
Bad debts 29,122 42,382
- --------------------------------------------------------------------------------
Income before interest, depreciation and
amortization, loss from investment,
income taxes and minority interest 1,904,628 1,287,431
Interest 91,644 83,248
Depreciation and amortization 884,345 581,431
Loss from investment in Viewer Services 4,955 6,022
- --------------------------------------------------------------------------------
Income before income taxes and minority interest 923,684 616,730
Provision for income taxes 296,058 274,450
- --------------------------------------------------------------------------------
Income before minority interest 627,626 342,280
Minority interest (133,828) 42,424
- --------------------------------------------------------------------------------
Net income for the period 493,798 384,704
Retained earnings, beginning of period 1,403,764 794,377
- --------------------------------------------------------------------------------
Retained earnings, end of period 1,897,562 1,179,081
================================================================================
Earnings per share (Note 4):
Basic 0.19 0.16
Diluted 0.17 0.14
================================================================================
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC.
(FORMERLY KNOWN AS NTN CANADA, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS AND
RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997
(Expressed in Canadian dollars - unaudited)
================================================================================
May 31, 1998 May 31, 1997
$ $
================================================================================
Total revenue 3,651,725 2,557,706
Cost of sales 1,441,730 849,820
- --------------------------------------------------------------------------------
2,209,995 1,707,886
- --------------------------------------------------------------------------------
Selling, general and administrative expenses 1,615,324 1,386,829
Bad debts 9,834 8,829
- --------------------------------------------------------------------------------
Income before interest, depreciation and
amortization, loss from investment,
income taxes and minority interest 584,837 312,228
Interest 42,055 23,866
Depreciation and amortization 297,535 220,101
Loss from investment in Viewer Services 8,952 5,629
- --------------------------------------------------------------------------------
Income before income taxes and minority interest 236,295 62,632
Provision for income taxes 57,543 17,542
- --------------------------------------------------------------------------------
Income before minority interest 178,752 45,090
Minority interest (33,945) 14,649
- --------------------------------------------------------------------------------
Net income for the period 144,807 59,739
Retained earnings, beginning of period 1,752,755 1,119,342
- --------------------------------------------------------------------------------
Retained earnings, end of period 1,897,562 1,179,081
================================================================================
Earnings per share (Note 4):
Basic 0.05 0.02
Diluted 0.05 0.02
================================================================================
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC.
(FORMERLY KNOWN AS NTN CANADA, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997
(Expressed in Canadian dollars - unaudited)
================================================================================
May 31, 1998 May 31, 1997
$ $
================================================================================
OPERATING ACTIVITIES
Net income for the nine months 493,798 384,704
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 884,345 583,312
Minority interest 133,828 (42,424)
Changes in assets and liabilities
Decrease (increase) in short-term investments (191,598) 1,530,215
Increase in accounts receivable (1,199,770) (311,991)
Decrease in inventory 280,437 393,134
Increase in prepaid expenses (300,549) (104,981)
Increase in accounts payable and
accrued liabilities 119,978 65,116
Decrease in deferred revenue (275,925) --
Decrease in income taxes payable (390,516) (63,761)
- --------------------------------------------------------------------------------
Cash provided by (used in) operating activities (445,972) 2,433,324
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment (1,268,265) (617,524)
Investment in Viewer Services 16,135 --
Increase in notes receivable (3,180) --
Investment in Interlynx Multimedia (380,001) --
Acquisition of Magic Lantern -- (541,182)
- --------------------------------------------------------------------------------
Cash used in investing activities (1,635,311) (1,158,706)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Bank loan (464,930) (360,000)
Proceeds from issuing common shares 348,965 --
Notes and loans payable 657,461 (36,668)
- --------------------------------------------------------------------------------
Cash provided by (used in) financing activities 541,496 (396,668)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents during the period (1,539,787) 877,950
Cash and cash equivalents, beginning of period 2,421,797 1,777,889
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period 882,010 2,655,839
================================================================================
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC. (FORMERLY KNOWN AS NTN CANADA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 1998
Note 1. Basis of Presentation
The accompanying financial statements for the interim periods are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the periods
presented. These financial statements should be read in conjunction with the
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations, contained in the
Annual Report on Form 10-K of Networks North Inc., formerly known as NTN Canada,
Inc. (the "Company") (Commission No.:0-18066), filed with the Securities and
Exchange Commission on November 28, 1997. The results of operations for the nine
months ended May 31, 1998 are not necessarily indicative of the results for the
full fiscal year ending August 31, 1998.
Note 2. General
The financial statements of the Company for the nine months ended
May 31, 1998, include the operations of the Company's wholly-owned subsidiary,
NTN Interactive Network Inc. ("NTNIN") and NTNIN's wholly-owned subsidiary Magic
Lantern Communications Ltd. ("Magic"). On September 10, 1997, NTNIN acquired,
effective September 1, 1997, 51% of the outstanding stock of Interlynx
Multimedia, Inc. ("Interlynx").
Magic conducts its operations directly and through its wholly-owned
subsidiaries, 745695 Ontario Ltd. ("Custom Video") and B.C. Learning Connection
("BCLC"), its 75% ownership of the outstanding shares of Sonoptic Technologies
Inc. ("Sonoptic"), and its 50% ownership of the outstanding shares of 1113659
Ontario Ltd. ("Viewer Services"), a joint venture operated with International
Tele-Film Enterprises Ltd. (Magic, Custom Video, BCLC, Sonoptic and Viewer
Services are referred to as the "Magic Lantern Group").
Interlynx is involved in designing and developing educational and
corporate multimedia and web-based training programs, programming for CD-ROMs
and Web Sites, and animation and 3-D rendering. It conducts its operations
directly and through its 60% ownership of the outstanding shares of Interlynx
International, Inc., which is the marketing and sales arm of Interlynx
responsible for the international distribution of all CD-ROM products, licensing
and partnerships in other countries.
The acquisition of Interlynx was accounted for as a purchase in
fiscal 1998. Accordingly, the Company's results of operations for the quarter
and nine months ended
<PAGE>
May 31, 1998 (the "1998 Third Fiscal Quarter" and the "1998 First Three Fiscal
Quarters", respectively) reflect 51% of the operating results of Interlynx,
while the Company's results of operations for the quarter and nine months ended
May 31, 1997 (the "1997 Third Fiscal Quarter" and the "1997 First Three Fiscal
Quarters", respectively) do not reflect 51% of the operating results of
Interlynx.
Prior period's figures have been reclassified to be consistent with
any reclassifications in the current period.
Note 3. Business Segment Data for the nine months ended May 31, 1998 and
May 31, 1997
Interactive TV Educational and
Entertainment Multimedia Distribution Total
------------- ----------------------- -----
$ $ $
1998
Total revenue 6,135,971 5,007,340 11,143,311
Operating income 596,627 327,057 923,684
Net income 300,569 193,229 493,798
Total assets 12,241,593 3,415,346 15,656,939
Current liabilities 1,153,928 1,397,118 2,551,046
Total liabilities 2,851,904 2,208,624 5,060,528
1997
Total revenue 5,431,303 1,988,731 7,420,034
Operating income (loss) 633,181 (16,451) 616,730
Net income 358,731 25,973 384,704
Total assets 11,261,695 2,873,982 14,135,677
Current liabilities 1,103,295 1,851,312 2,954,607
Total liabilities 2,070,795 2,802,744 4,873,539
<PAGE>
Note 4. Earnings per share
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements. The following table sets forth the
computation of basic and diluted earnings per share for the nine months ended :
May 31, 1998 May 31, 1997
------------ ------------
Numerator:
Net income (numerator for basic
and diluted earnings per share) $ 493,798 $ 384,704
========== ==========
Denominator:
For basic - weighted
average number of shares 2,541,311 2,441,617
Effect of dilutive securities:
Convertible preferred shares 197,619 203,571
Convertible promissory notes 185,448 --
Employee stock options 23,894 53,547
---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average number of shares
and assumed conversions 2,948,272 2,698,735
========== ==========
Basic earnings per share $ 0.19 $ 0.16
========== ==========
Diluted earnings per share $ 0.17 $ 0.14
========== ==========
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The financial statements of the Company and the information contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are expressed in Canadian dollars ("Cdn$"). For the convenience of
the reader, in this Management's Discussion and Analysis, certain financial
amounts are also given in U.S. dollars ("US$"), converted at the Noon Buying
Rate in effect at the end of the period to which the amount relates, or the
exchange rate on the date specified herein. The Noon Buying Rates for May 29,
1998 and May 31, 1997 were Cdn$1.4571 and Cdn$1.3809 per US$1.00, respectively.
As the Noon Buying Rate fluctuates daily, financial comparisons between periods
expressed in U.S. dollars do not accurately reflect the true difference in the
Company's financial position or results of operations between periods.
Accordingly, the comparisons between periods presented below, both in dollar
amounts and as percentages from prior periods, are expressed in Canadian dollars
only.
General
The Company, through its wholly-owned subsidiary, NTNIN, currently provides its
products and services through eight business units or subsidiaries. Of these,
two are considered to be the traditional core of the Company's business, that
is, directly related to multi-player interactive entertainment programs. The two
traditional core business units are the Hospitality Group ("Hospitality") and
the Corporate Products Group ("Corporate"). Five units, collectively referred to
as the "Magic Lantern Group", are (i) NTNIN's wholly-owned subsidiary Magic,
which is involved in the marketing and distribution of educational video and
media resources, (ii) Magic's wholly-owned subsidiary Custom Video, which is
involved in the manufacturing of videotape copies, (iii) Custom Video's
wholly-owned subsidiary BCLC, which is involved in the marketing and fulfilment
services of educational video titles, (iv) Magic's 75% owned subsidiary
Sonoptic, which is involved in the conversion of analog video to digital video
formats, and (v) Magic's 50% owned joint venture Viewer Services, which is
involved in the inbound telemarketing and fulfilment services for television
broadcasters and others. The eighth unit is Interlynx, which is involved in
designing and developing educational and corporate multimedia and web-based
training programs, programming for CD-ROMs and Web Sites and animation, and 3-D
rendering.
Highlights of the Three Months Ended May 31, 1998
During the 1998 Third Fiscal Quarter, the Hospitality Group entered into an
agreement with Budweiser for advertising and the sponsorship of our QB1 (NFL)
game for the upcoming season. The Corporate Products Group successfully
fulfilled two contracts with Air Canada, for the Air Canada Challenge and
In-flight Training. It was the Company's fourth year working on the Air Canada
Challenge. The in-flight service entailed an entertaining, interactive session
that reinforced the importance of key product and operational issues to Air
Canada personnel. Lastly, Interlynx entered into an agreement with the Canadian
Imperial Bank of Commerce ("CIBC") to provide web-based training for staff
involved with the bank's Management, Accounting, and Reporting (MAR) project.
Interlynx is also developing the Finance web site
<PAGE>
for the CIBC Intranet, as well as an online interactive learning program
accessed through any web browser.
Results of Operations for the Three Months ended May 31, 1998
The Company's total revenues for the 1998 Third Fiscal Quarter were
Cdn$3,651,725 (US$2,506,159), compared to Cdn$2,557,706 (US$1,852,202) for the
1997 Third Fiscal Quarter, an increase of Cdn$1,094,019 or 42.8%. Total
revenues, excluding Interlynx, for the 1998 Third Fiscal Quarter were
Cdn$3,359,562 (US$2,305,650), compared to Cdn$2,557,706 (US$1,852,202) for the
1997 Third Fiscal Quarter, an increase of Cdn$801,856 or 31.4%. This increase
was attributed to all of the following: an increase in video and software sales,
resulting from a greater emphasis on marketing and additional sales from the
newly acquired business assets of Image Media Ltd. and 802117 Ontario Inc.
("Image Media"), acquired August 31, 1997; increased revenue in Hospitality from
program content, maintenance services and equipment rental, all of which are
attributable to there being an average of 535 Hospitality locations outstanding
during the 1998 Third Fiscal Quarter as compared to an average of 514
Hospitality locations outstanding during the 1997 Third Fiscal Quarter; and
increased revenues in ad sponsorship in Hospitality over the same period last
year.
Total cost of sales for the 1998 Third Fiscal Quarter was Cdn$1,441,730
(US$989,452), compared to Cdn$849,820 (US$615,410) for the 1997 Third Fiscal
Quarter, an increase of Cdn$591,910 or 69.7%. Total cost of sales excluding
costs incurred by Interlynx for the 1998 Third Fiscal Quarter was Cdn$1,309,264
(US$898,541), compared to Cdn$849,820 (US$615,410) for the 1997 Third Fiscal
Quarter, an increase of Cdn$459,444 or 54.1%. This increase was the result of:
increased maintenance costs and commissions, both of which are directly
attributable to the increase in the average number of Hospitality locations
outstanding in the 1998 Third Fiscal Quarter over the number of Hospitality
locations outstanding during the comparable prior period as discussed above; and
increased video, dubbing and software costs resulting from the requirements of
operating the business assets of Image Media acquired August 31, 1997.
Total selling, general and administrative expenses for the 1998 Third Fiscal
Quarter were Cdn$1,615,324 (US$1,108,588), compared to Cdn$1,386,829
(US$1,004,294) for the 1997 Third Fiscal Quarter, an increase of Cdn$228,495 or
16.5%. Total selling, general and administrative expenses excluding those
incurred by Interlynx, for the 1998 Third Fiscal Quarter were Cdn$1,585,577
(US$1,088,173), compared to Cdn$1,386,829 (US$1,004,294) for the 1997 Third
Fiscal Quarter, an increase of Cdn$198,748 or 14.3%. This increase was the
result of: increased advertising and promotion expenses resulting mainly from
the increased promotion of our QB1 game in Hospitality, and additional marketing
in the area of video, software and dubbing sales; additional expenses resulting
from the requirements of operating the business assets of Image Media acquired
August 31, 1997; increased travel expenses, due to the increase in the number of
corporate events being hosted abroad and the travel costs of additional area
representatives hired to provide both customer service and training to both new
and existing locations; and the increase in freight charges, which is
commensurate with the increase in advertising and promotion and the increase in
volume of both equipment, being shipped to corporate events and rental
locations, and videos and software being shipped to customers. As a percentage
of the Company's total revenues, excluding those derived by Interlynx, such
expenses decreased to 47.2% for the 1998 Third Fiscal Quarter from 54.2% for the
1997 Third Fiscal Quarter.
<PAGE>
Total depreciation and amortization expenses for the 1998 Third Fiscal Quarter
were Cdn$297,535 (US$204,197), compared to Cdn$220,101 (US$159,390) for the 1997
Third Fiscal Quarter, an increase of Cdn$77,434 or 35.2%. This increase was the
result of additional depreciation on fixed assets added in 1998 and the
amortization of goodwill arising from the Interlynx purchase. As a percentage of
the Company's total revenues, excluding those derived by Interlynx, such
expenses increased to 8.9% for the 1998 Third Fiscal Quarter from 8.6% for the
1997 Third Fiscal Quarter.
The provision for income taxes for the 1998 Third Fiscal Quarter was Cdn$57,543
(US$39,491), compared to Cdn$17,542 (US$12,703) for the 1997 Third Fiscal
Quarter, an increase of Cdn$40,001 or 228.0%. As a percentage of the Company's
income before income taxes and minority interest, the provision decreased to
24.4% for the 1998 Third Fiscal Quarter from 28.0% for the 1997 Third Fiscal
Quarter. This decrease was the result of income from Interlynx being sheltered
from income tax due to tax losses it incurred in previous years, as provided for
under Canadian Tax Law.
As a result of all the above, net income for the 1998 Third Fiscal Quarter was
Cdn$144,807 (US$99,380), compared to Cdn$59,739 (US$43,261) for the 1997 Third
Fiscal Quarter, an increase of Cdn$85,068 or 142.4%.
Results of Operations for the Nine Months Ended May 31, 1998
The Company's total revenues for the 1998 First Three Fiscal Quarters were
Cdn$11,143,311 (US$7,647,595), compared to Cdn$7,420,034 (US$5,373,332) for the
1997 First Three Fiscal Quarters, an increase of Cdn$3,723,277 or 50.2%. Total
revenues, excluding Interlynx, for the 1998 First Three Fiscal Quarters were
Cdn$10,043,408 (US$6,892,738), compared to Cdn$7,420,034 (US$5,373,332) for the
1997 First Three Fiscal Quarters, an increase of Cdn$2,623,374 or 35.4%. This
increase was the result of: an increase in video and software sales, resulting
from a greater emphasis on marketing and additional sales from the newly
acquired business assets of Image Media acquired August 31, 1997; increased
revenue in Hospitality from program content, maintenance services and equipment
rental, all of which were attributable to there being an average of 535
Hospitality locations outstanding during the 1998 First Three Fiscal Quarters as
compared to an average of 514 Hospitality locations outstanding during the 1997
First Three Fiscal Quarters; increased revenues in event programming in
Corporate resulting from an increased number of events in the 1998 First Three
Fiscal Quarters as compared to the number of events in the 1997 First Three
Fiscal Quarters; and increased revenues from ad sponsorship in Hospitality over
the same period last year.
Total cost of sales for the 1998 First Three Fiscal Quarters was Cdn$4,317,277
(US$2,962,924), compared to Cdn$2,266,251 (US$1,641,141) for the 1997 First
Three Fiscal Quarters, an increase of Cdn$2,051,026 or 90.5%. Total cost of
sales excluding costs incurred by Interlynx for the 1998 First Three Fiscal
Quarters was Cdn$3,835,764 (US$2,632,464), compared to Cdn$2,266,251
(US$1,641,141) for the 1997 First Three Fiscal Quarters, an increase of
Cdn$1,569,513 or 69.3%. This increase was the result of: increased maintenance
costs and commissions, both of which are directly attributable to the increase
in average number of Hospitality locations outstanding in the 1998 First Three
Fiscal Quarters from the average number of Hospitality locations outstanding
during the comparable prior period, as discussed
<PAGE>
above; and an increase in video and software costs, directly related to the
additional video and software sales as discussed above, and additional costs
resulting from the requirements of operating the business assets of Image Media.
Total selling, general and administrative expenses for the 1998 First Three
Fiscal Quarters were Cdn$4,892,284 (US$3,357,549), compared to Cdn$3,823,970
(US$2,769,187) for the 1997 First Three Fiscal Quarters, an increase of
Cdn$1,068,314 or 27.9%. Total selling, general and administrative expenses,
excluding those incurred by Interlynx for the 1998 First Three Fiscal Quarters,
were Cdn$4,675,562 (US$3,208,813), compared to Cdn$3,823,970 (US$2,769,187) for
the 1997 First Three Fiscal Quarters, an increase of Cdn$851,592 or 22.3%. This
increase was the result of: increased advertising and promotion expenses
resulting mainly from the increased promotion of our QB1 game in Hospitality in
the 1998 First Three Fiscal Quarters and additional marketing in the area of
video, software and dubbing sales; increased travel expenses, due to the
increase in the number of corporate events being hosted abroad and the travel
costs of additional area representatives hired to provide both customer service
and training to both new and existing locations; and the increase in freight
charges, which is commensurate with the increase in advertising and promotion
and the increase in volume of both equipment, being shipped to corporate events
and rental locations, and videos and software being shipped to customers. As a
percentage of the Company's total revenues, excluding revenues derived by
Interlynx, such expenses decreased to 46.6% for the 1998 First Three Fiscal
Quarters from 51.5% for the 1997 First Three Fiscal Quarters.
Total depreciation and amortization expenses for the 1998 First Three Fiscal
Quarters were Cdn$884,345 (US$606,921), compared to Cdn$581,431 (US$421,052) for
the 1997 First Three Fiscal Quarters, an increase of Cdn$302,914 or 52.1%. This
increase was primarily the result of: additional depreciation on fixed assets
added in the 1998 First Three Fiscal Quarters; a full nine months of
amortization on goodwill resulting from the Magic purchase, as compared to the
eight months of amortization on the said goodwill expensed in the 1997 First
Three Fiscal Quarters; and the amortization of goodwill arising from the
Interlynx purchase. As a percentage of the Company's total revenues, excluding
those derived by Interlynx, such expenses increased to 8.8% for the 1998 First
Three Fiscal Quarters from 7.8% for the 1997 First Three Fiscal Quarters.
The provision for income taxes for the 1998 First Three Fiscal Quarters was
Cdn$296,058 (US$203,183), compared to Cdn$274,450 (US$198,747) for the 1997
First Three Fiscal Quarters, an increase of Cdn$21,608 or 7.9%. As a percentage
of the Company's income before income taxes and minority interest, the provision
decreased to 32.1% for the 1998 First Three Fiscal Quarters from 44.5% for the
1997 First Three Fiscal Quarters. This decrease was the result of income from
Interlynx being sheltered from income tax due to tax losses it incurred in
previous years, as provided for under Canadian Tax Law.
As a result of all of the above, net income for the 1998 First Three Fiscal
Quarters was Cdn$493,798 (US$338,891), compared to Cdn$384,704 (US$278,589) for
the 1997 First Three Fiscal Quarters, an increase of Cdn$109,094 or 28.4%.
Liquidity and Capital Resources
At May 31, 1998, the Company had working capital of Cdn$4,085,816
(US$2,804,074), an increase of Cdn$585,954 from working capital of Cdn$3,499,862
(US$2,520,606) at August
<PAGE>
31, 1997. This increase was primarily due to the retirement of short-term debt
through long-term financing and the payment of a current note payable with the
issuance of common shares.
For the 1998 First Three Fiscal Quarters, the Company had a net decrease in cash
flow of Cdn$1,539,787 (US$1,056,748), compared to a net increase of Cdn$877,950
(US$635,781) in the 1997 First Three Fiscal Quarters.
Cash used in operating activities for the 1998 First Three Fiscal Quarters was
Cdn$445,972 (US$306,068), a decrease of Cdn$2,879,296 from cash provided by
operating activities in the 1997 First Three Fiscal Quarters. The major factors
that contributed to this decrease were the increase in short-term investments of
Cdn$1,721,813 over the same figure for the 1997 First Three Fiscal Quarters and
the increase in accounts receivable of Cdn$887,779, due to the 50.2 % increase
in revenues over the levels of revenue experienced in the same prior period.
Cash used in investing activities in the 1998 First Three Fiscal Quarters was
Cdn$1,635,311 (US$1,122,305), an increase of Cdn$476,605 from cash used in
investing activities in the 1997 First Three Fiscal Quarters. Cash used in
investing activities in the 1998 First Three Fiscal Quarters was for the
purchase of property and equipment and the investment in Interlynx. Cash was
used in the comparable prior period for the purchase of property and equipment
and the acquisition of Magic.
Cash provided by financing activities in the 1998 First Three Fiscal Quarters
was Cdn$541,496 (US$371,626), an increase of Cdn$938,164 from the cash used in
financing activities in the 1997 First Three Fiscal Quarters. Cash provided by
financing activities in the 1998 First Three Fiscal Quarters was through the
issuance of common shares and the acquisition of an operating loan from the
Royal Bank of Canada. The loan was used to retire short-term debt and finance
the purchase of long-term assets. Cash used in financing activities for the 1997
First Three Fiscal Quarters was used to reduce debt in the Magic Lantern Group.
Management believes that the Company's working capital position provides the
necessary liquidity, on both a short and long term basis, for its planned
activities and that additional external financing will not be required for its
operating activities during the year ending August 31, 1998 (the "1998 Fiscal
Year"). However, any changes in such plans may require the Company to seek
outside financing. No arrangements are presently in place for outside financing
should the need arise.
Inflation
The rate of inflation has had little impact on the Company's operations or
financial position during the six months ended May 31, 1998 and May 31, 1997,
and inflation is not expected to have a significant impact on the Company's
operations or financial position during the 1998 Fiscal Year.
The Company pays a number of its suppliers, including its licensor and principal
supplier, NTN Communications, Inc., in US dollars. Therefore, fluctuations in
the value of the Canadian dollar against the US dollar will have an impact on
its gross profit as well as its net income. If the value of the Canadian dollar
falls against the US dollar, the cost of sales of the
<PAGE>
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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
At a meeting of its Board of Directors on July 10, 1998, the Board
determined that it is in the best interest of the Company to offer the holders
of options, pursuant to the Company's Long Term Incentive Plan, to reduce the
exercise price of outstanding options to $3.00 per share if the option holders
agree not to exercise such options for at least six months. The Board based its
determination on the belief that the performance of the Company has not been
reflected in the price of the Company's stock and that, in view of the higher
exercise price of the Company's outstanding options, employees did not receive,
and could not receive in the foreseeable future, the anticipated benefit of
their ownership of options. Employees will be given the option of keeping their
existing options' exercise prices in lieu of agreeing not to exercise such
options for six months.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following list sets forth the applicable exhibits (numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Quarterly Report on Form 10-Q:
Exhibit
Number Title
- ------ -----
3.1 Certificate of Incorporation, as amended to date.+
3.2 By-Laws, as amended to date.+
10.1 License Agreement, dated March 23, 1990, between NTN Communications,
Inc. and NTN Interactive Network Inc.+
10.2 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw
Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy
Connolly and NTN Interactive Network Inc., minus Schedules thereto.+
10.3 Designation Agreement, dated as of October 4, 1994, among NTN
Canada, Inc., NTN Interactive Network Inc. and NetStar Enterprises
Inc. (formerly Labatt Communications Inc.).+
22 List of Subsidiaries.+
27 Financial Data Schedule.
+ Incorporated by reference. See Exhibit Index.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETWORKS NORTH INC.
Dated: July 14, 1998 By: /s/ Peter Rona
-------------------------------------
Peter Rona,
President and Principal Financial Officer
(Duly Authorized Officer)
<PAGE>
NETWORKS NORTH INC.
(FORMERLY KNOWN AS NTN CANADA, INC.)
FORM 10-Q
MAY 31, 1998
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Location
- ------ ---------------------- --------
3.1 Certificate of Incorporation, as amended to date +1,
Exh. 3.1
3.2 By-Laws, as amended to date +1, Exh. 3.2
10.1 License Agreement, dated March 23, 1990,
between NTN Communications, Inc. and NTN
Interactive Network Inc. +2, Exh. 10.9
10.2 Stock Purchase Agreement, dated October 1,
1996, among Connolly-Daw Holdings Inc., 1199846
Ontario Ltd., Douglas Connolly, Wendy Connolly and
NTN Interactive Network Inc., minus Schedules
thereto +3, Exh. 10.1
10.3 Designation Agreement, dated as of October 4,
1994, among Networks North Inc. (formerly known
as NTN Canada, Inc., NTN Interactive Network
Inc. and NetStar Enterprises Inc. (formerly
Labatt Communications Inc.) +4, Exh. C
22 List of Subsidiaries +1, Exh. 22
27 Financial Data Schedule ++
- ----------
+1 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Annual Report on Form 10-K of the
Company, for its fiscal year ended August 31, 1996 (File No. 0-18066),
filed on December 16, 1996.
+2 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Annual Report on Form 10-K of NTN
Communications, Inc., for its fiscal year ended December 31, 1990 (File
No. 2-91761-C), filed on April 1, 1991.
+3 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Current Report on Form 8-K of the
Company (Date of Report: October 2, 1996) (File No. 0-18066), filed on
October 17, 1996.
+4 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Current Report on Form 8-K of the
Company (Date of Report: October 4, 1994) (File No. 0-18066), filed on
October 18, 1994.
++ Filed electronically pursuant to Item 401 of Regulation S-T.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<CURRENCY> Canadian dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-31-1998
<EXCHANGE-RATE> 1.4571
<CASH> 882,010
<SECURITIES> 1,896,612
<RECEIVABLES> 2,845,803
<ALLOWANCES> 51,000
<INVENTORY> 355,801
<CURRENT-ASSETS> 6,636,862
<PP&E> 5,462,278
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,656,939
<CURRENT-LIABILITIES> 2,551,046
<BONDS> 0
0
10,917
<COMMON> 158,881
<OTHER-SE> 10,426,613
<TOTAL-LIABILITY-AND-EQUITY> 15,656,939
<SALES> 11,143,311
<TOTAL-REVENUES> 11,143,311
<CGS> 4,317,277
<TOTAL-COSTS> 4,317,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 29,122
<INTEREST-EXPENSE> 91,644
<INCOME-PRETAX> 923,684
<INCOME-TAX> 296,058
<INCOME-CONTINUING> 493,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 493,798
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.17
</TABLE>
