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.
<PAGE>
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
<PAGE>
NETWORKS NORTH INC.
CONSOLIDATED BALANCE SHEETS
AS AT MAY 31, 2000 AND AUGUST 31, 1999
(Expressed in Canadian dollars - unaudited)
<TABLE>
<CAPTION>
============================================================================================
May 31, 2000 August 31, 1999
$ $
============================================================================================
<S> <C> <C>
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
============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
==============================================================================================
May 31, 2000 May 31, 1999
$ $
==============================================================================================
<S> <C> <C>
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
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
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)
<TABLE>
<CAPTION>
===============================================================================================
May 31, 2000 May 31, 1999
$ $
===============================================================================================
<S> <C> <C>
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
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
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.
<PAGE>
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
<TABLE>
<CAPTION>
2000
-------------------------------------------------------------------
Entertainment Education E-commerce Adjustments Consolidated
$ $ $ $ $
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
===========================================================================================
<CAPTION>
1999
-------------------------------------------------------------------
Entertainment Education E-commerce Adjustments Consolidated
$ $ $ $ $
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
===========================================================================================
</TABLE>
For the nine months ended May 31
<TABLE>
<CAPTION>
2000
-------------------------------------------------------------------
Entertainment Education E-commerce Adjustments Consolidated
$ $ $ $ $
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
===========================================================================================
<CAPTION>
1999
-------------------------------------------------------------------
Entertainment Education E-commerce Adjustments Consolidated
$ $ $ $ $
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
===========================================================================================
</TABLE>
<PAGE>
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
=========== =========
<PAGE>
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.
<PAGE>
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.
<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.
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<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
None.
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
(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.
<PAGE>
(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.
<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, 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
<PAGE>
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
<PAGE>
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.
