FORM 10-Q
Securities and Exchange Commission
Washington D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: February 29, 2000
Commission file number: 0-18066
NETWORKS NORTH INC.
(Exact name of registrant as specified in its charter)
New York 11-2805051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Meteor Drive
Toronto, Ontario, Canada M9W 1A4
(Address of principal executive offices)
(Zip Code)
(416) 675-6666
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of April 13, 2000: 2,858,141 shares of common stock,
par value $.0467 per share.
<PAGE>
PART I - FINANCIAL INFORMATION
NETWORKS NORTH INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2000
Item
Item 1. Financial Statements:
Consolidated Balance Sheets -
as at February 29, 2000 and August 31, 1999
Consolidated Statements of Operations and Retained Earnings -
for the Six Months Ended February 29, 2000 and February 28, 1999
Consolidated Statements of Operations and Retained Earnings -
for the Three Months Ended February 29, 1999 and February 28, 1999
Consolidated Statements of Cash Flows -
for the Six Months Ended February 29, 2000 and February 28, 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<PAGE>
NETWORKS NORTH INC.
CONSOLIDATED BALANCE SHEETS
AS AT FEBRUARY 29, 2000 AND AUGUST 31, 1999
(Expressed in Canadian dollars - unaudited)
================================================================================
February 29, August 31,
2000 1999
$ $
================================================================================
ASSETS
Current
Cash and cash equivalents 976,090 2,018,122
Short-term temporary investments 258,623 261,926
Accounts receivable, trade - net of allowance
for doubtful accounts of $224,000;
August - $119,000 3,999,284 2,563,189
Income taxes receivable -- 157,464
Inventory 236,960 260,868
Prepaid expenses 757,722 647,612
- --------------------------------------------------------------------------------
Total current assets 6,228,679 5,909,181
- --------------------------------------------------------------------------------
Property and equipment, net 8,288,380 5,151,755
Software development costs, net 225,000 250,000
Licenses, net of accumulated amortization 260,422 270,596
Goodwill, net of accumulated amortization 2,987,564 3,060,489
Notes receivable 160,000 160,000
- --------------------------------------------------------------------------------
18,150,045 14,802,021
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 145,000 157,000
Accounts payable - trade 1,751,365 912,361
Accrued liabilities 835,049 723,218
Income taxes payable 61,042 --
Current portion of long-term debt 407,922 79,542
- --------------------------------------------------------------------------------
Total current liabilities 3,200,378 1,872,121
- --------------------------------------------------------------------------------
Long-term debt 4,473,963 2,077,960
Deferred income taxes payable 59,173 59,173
- --------------------------------------------------------------------------------
Total liabilities 7,733,514 4,009,254
- --------------------------------------------------------------------------------
Shareholders' equity
Share capital
900,000 preferred shares 10,917 10,917
2,858,241 common shares [August - 2,756,641] 178,633 171,635
Capital in excess of par value 9,852,580 9,559,883
Retained earnings 374,401 1,050,332
- --------------------------------------------------------------------------------
Total shareholders' equity 10,416,531 10,792,767
- --------------------------------------------------------------------------------
18,150,045 14,802,021
================================================================================
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
(Expressed in Canadian Dollars - Unaudited)
================================================================================
February 29, February 28,
2000 1999
$ $
================================================================================
Total revenue 9,961,496 7,163,204
Cost of sales 3,529,538 2,462,591
- --------------------------------------------------------------------------------
6,431,958 4,700,613
- --------------------------------------------------------------------------------
Selling, general and administrative expenses 5,631,009 3,430,497
Interest and bank charges 148,469 89,208
Depreciation and amortization 1,108,342 684,970
- --------------------------------------------------------------------------------
Income (loss) before income taxes and
minority interest (455,862) 495,938
Provision for income taxes 223,000 281,000
Minority interest (2,931) (18,238)
- --------------------------------------------------------------------------------
Net income (loss) and comprehensive income
(loss) for the period (675,931) 233,176
Retained earnings, beginning of period 1,050,332 2,021,829
- --------------------------------------------------------------------------------
Retained earnings, end of period 374,401 2,255,005
================================================================================
Earnings (loss) per share (Note 4):
Basic (0.24) 0.09
Diluted (0.24) 0.08
================================================================================
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
(Expressed in Canadian Dollars - Unaudited)
================================================================================
February 29, February 28,
2000 1999
$ $
================================================================================
Total revenue 4,425,900 3,527,087
Cost of sales 1,722,348 1,228,095
- --------------------------------------------------------------------------------
2,703,552 2,298,992
- --------------------------------------------------------------------------------
Selling, general and administrative expenses 3,039,071 1,686,336
Interest and bank charges 68,290 46,183
Depreciation and amortization 608,865 338,788
- --------------------------------------------------------------------------------
Income (loss) before income taxes and
minority interest (1,012,674) 227,685
Provision for (recovery of) income taxes (75,458) 178,000
Minority interest 1,322 7,460
- --------------------------------------------------------------------------------
Net income (loss) and comprehensive income
(loss) for the period (938,538) 42,225
Retained earnings, beginning of period 1,312,939 2,212,780
- --------------------------------------------------------------------------------
Retained earnings, end of period 374,401 2,255,005
================================================================================
Earnings (loss) per share:
Basic (0.33) 0.02
Diluted (0.33) 0.01
================================================================================
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
(Expressed in Canadian dollars - unaudited)
================================================================================
February 29, February 28,
2000 1999
$ $
================================================================================
OPERATING ACTIVITIES
Net income and comprehensive income for the period (675,931) 233,176
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,108,342 684,970
Loss from investment in Viewer Services -- 47,399
Accretion of interest on non-interest bearing
promissory notes 86,538 15,338
Changes in assets and liabilities:
Decrease in short-term investments 3,303 93,826
Increase in accounts receivable (1,436,095) (909,813)
Decrease in income taxes receivable 157,464 --
Decrease in inventory 23,908 31,083
Increase in prepaid expenses (110,110) (230,662)
Increase in accounts payable and accrued
liabilities 950,834 49,773
Increase in income taxes payable 61,042 84,531
- --------------------------------------------------------------------------------
Cash provided by (used in) operating activities 169,295 99,621
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment (1,178,810) (323,691)
Investment in Viewer Services -- 143
- --------------------------------------------------------------------------------
Cash used in investing activities (1,178,810) (323,548)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Bank indebtedness (12,000) 27,244
Options exercised 4,336 --
Notes and loans payable (24,853) (23,720)
- --------------------------------------------------------------------------------
Cash provided by (used in) financing activities (32,517) 3,524
- --------------------------------------------------------------------------------
Net decrease in cash and
cash equivalents during the period (1,042,032) (220,403)
Cash and cash equivalents, beginning of period 2,018,122 1,001,115
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period 976,090 780,712
================================================================================
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 29, 2000
Note 1. Basis of Presentation
The accompanying financial statements for the interim periods are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the periods presented. These
financial statements should be read in conjunction with the financial statements
and notes thereto, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations, contained in the Annual Report on
Form 10-K of Networks North Inc. (the "Company") (Commission No.:0-18066), filed
with the Securities and Exchange Commission on November 29, 1999. The results of
operations for the six months ended February 29, 2000 are not necessarily
indicative of the results for the full fiscal year ending August 31, 2000.
Note 2. General
The financial statements of the Company for the three and six months ended
February 29, 2000 (the "2000 Second Fiscal Quarter" and "2000 First Fiscal
Half"), and February 28, 1999 (the "1999 Second Fiscal Quarter" and "1999 First
Fiscal Half"), include the operations of the Company's wholly-owned subsidiaries
NTN Interactive Network Inc. ("NTNIN") and 3484751 Canada Inc., GalaVu
Entertainment Network Inc. ("GalaVu"), NTNIN's wholly-owned subsidiary Magic
Lantern Communications Ltd. ("Magic") and Interlynx Multimedia Inc.
("Interlynx").
Magic conducts its operations directly and through its wholly-owned
subsidiaries, 745695 Ontario Ltd. ("Custom Video"), B.C. Learning Connection
Inc. ("BCLC"), and 1113659 Ontario Ltd. ("Viewer Services") and its 75%
ownership of the outstanding shares of Sonoptic Technologies Inc. ("Sonoptic").
Prior period's figures have been reclassified to be consistent with any
reclassifications in the current period.
<PAGE>
Note 3. Business Segment Data for the three months and six months ended February
29, 2000 and February 28, 1999
For the three months ended February 29, 2000 and February 28, 1999
2000
---------------------------------------------------------
Entertainment Education E-commerce Total
$ $ $ $
- --------------------------------------------------------------------------------
Total revenue 3,292,828 1,093,877 39,195 4,425,900
Operating loss (236,327) (336,387) (439,960) (1,012,674)
Net income (160,869) (337,709) (439,960) (938,538)
================================================================================
1999
---------------------------------------------------------
Entertainment Education E-commerce Total
$ $ $ $
- --------------------------------------------------------------------------------
Total revenue 2,117,767 1,203,690 205,630 3,527,087
Operating income (loss) 245,665 (21,268) 3,288 227,685
Net income 67,665 (49,966) 21,526 42,225
================================================================================
For the six months ended February 29, 2000 and February 28, 1999
2000
---------------------------------------------------------
Entertainment Education E-commerce Total
$ $ $ $
- --------------------------------------------------------------------------------
Total revenue 7,067,507 2,664,574 229,415 9,961,496
Operating income (loss) 335,180 (161,506) (629,536) (455,862)
Net income (loss) 112,180 (158,575) (629,536) (675,931)
Total assets 12,881,838 4,534,431 733,776 18,150,045
Current liabilities 2,092,696 925,229 182,453 3,200,378
Total liabilities 5,797,071 1,753,990 182,453 7,733,514
================================================================================
1999
---------------------------------------------------------
Entertainment Education E-commerce Total
$ $ $ $
- --------------------------------------------------------------------------------
Total revenue 4,265,091 2,521,615 376,498 7,163,204
Operating income (loss) 490,181 (272,242) 277,999 495,938
Net income (loss) 209,181 (272,242) 296,237 233,176
Total assets 10,018,606 4,321,384 2,108,626 16,448,616
Current liabilities 1,474,872 859,582 416,167 2,750,621
Total liabilities 3,027,618 918,086 1,236,558 5,182,262
================================================================================
<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 six months ended February 29, 2000
and February 28, 1999:
2000 1999
---- ----
Numerator:
Net income (loss) (numerator for basic
earnings (loss) per share) $(675,931) $233,176
Accretion of interest on non-interest
bearing promissory notes -- 15,338
------
Numerator for diluted earnings (loss)
per share $(675,931) $248,514
========== ========
Denominator:
For basic - weighted
average number of shares 2,848,558 2,625,170
Effect of dilutive securities:
Convertible preferred shares -- 192,857
Convertible promissory notes -- 98,193
Employee stock options -- 95,360
------
Denominator for diluted earnings (loss) per share -
adjusted weighted average number of shares
and assumed conversions 2,848,558 3,011,580
========= =========
Basic earnings (loss) per share $(0.24) $0.09
======= =====
Diluted earnings (loss) per share $(0.24) $0.08
======= =====
Note 5. Business Acquisition - GalaVu Entertainment Network Inc.
On September 13, 1999, pursuant to an Asset Purchase Agreement dated as of the
10th day of September, 1999, the Company, through its wholly-owned subsidiary,
GalaVu, acquired, effective as of September 13th, 1999, substantially all of the
property and assets [excluding accounts receivable] of GalaVu Entertainment Inc.
for a purchase price of $2,958,058 calculated on a discounted basis. This
acquisition was recorded using the purchase method of accounting and,
accordingly, the purchase price of $2,958,058 has been allocated to property and
equipment. The purchase price was satisfied by the issuance of 100,000 common
shares of the Company and the issuance of a promissory note [the "Note"]. The
Note is secured by a general security interest in all of GalaVu's present and
after-acquired assets. The Note is payable in cash or in common shares of the
Company annually, for the term consisting of each of the next five fiscal years
in an amount equal to 50% of the earnings before interest, taxes, depreciation
and amortization of GalaVu for the immediately preceding annual period. Pursuant
to the provisions of the Note, the minimum amount to be received by the holder
of the Note is as follows: fiscal 2001 - $300,000, fiscal 2002 - $500,000,
fiscal 2003 - $750,000, fiscal 2004 - $875,000 and fiscal 2005 - $875,000.
<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 to small to
medium sized hotels.
Highlights of the Three Months Ended February 29, 2000
During the 2000 Second Fiscal Quarter, Magic, through its subsidiary, Sonoptic
signed a contract with Altschul Group Corporation ("AGC") of Evanston, Illinois
to provide MPEG digital encoding services for more that 1,000 AGC video titles,
along with Videobase(TM) indexing, DVD authoring and other digital services.
NTNIN entered into a three-year advertising/sponsorship agreement with The GM
Card (R) through its agency.
Interlynx completed development of an on-line presenter/rapid development tool
to facilitate rapid, cost-effective, in-house development of on-line learning.
This tool has been delivered to MAPICS Inc., a leading provider of Enterprise
Resource Planning Application software specifically designed for the business
needs of manufacturers.
<PAGE>
Results of Operations for the Three Months ended February 29, 2000
The Company's total revenues for the 2000 Second Fiscal Quarter were $4,425,900,
compared to $3,527,087 for the 1999 Second Fiscal Quarter, an increase of
$898,813 or 25.5%. The major factor impacting the revenue increase was the
addition of GalaVu to the company. GalaVu's revenue for the 2000 Second Fiscal
Quarter was $1,409,200. Interlynx's revenues for the 2000 Second Fiscal Quarter
were $39,195, compared to $205,630 for the 1999 Second Fiscal Quarter, a
decrease of $166,435 or 80.9%. Factors impacting the decrease are the loss of
the Universal Content revenue stream, due to the sale of this subsidiary and the
change in focus away from web-site development to web-based training software.
Magic's revenues for the 2000 Second Fiscal Quarter were $1,093,877, compared to
$1,203,690 for the 1999 Second Fiscal Quarter, a decrease of $109,813 or 9.1%.
The decrease in revenue can be mainly attributed to decreased ordering from
educational institutions due to tighter budget constraints. NTNIN's revenues
were $1,883,628 for the 2000 Second Fiscal Quarter, compared to $2,117,767 for
the 1999 Second Fiscal Quarter, a decrease of $218,943 or 10.4%.
Total cost of sales for the 2000 Second Fiscal Quarter were $1,722,348, compared
to $1,228,095 for the 1999 Second Fiscal Quarter, an increase of $494,253 or
40.2%. Total cost of sales for GalaVu for the Second Fiscal Quarter were
$676,100. There were no cost of sales for the 1999 Second Fiscal Quarter as
GalaVu was purchased in the 2000 First Fiscal Quarter. Interlynx's total cost of
sales for the 2000 Second Fiscal Quarter were $65,504, as compared to $39,172,
an increase of $26,332 or 67.2%. The increase is a result of the change in focus
of Interlynx from web-site development to web-based training software. Magic's
total cost of sales were $347,231, compared to $493,916, a decrease of $146,685
or 29.7%. The decrease can be attributed to a decreased level in sales and a
lower cost for video production. NTNIN's total cost of sales were $633,518,
compared to $695,007, a decrease of $61,489 or 8.8%. The decrease can be
associated with corresponding decrease in sales. As a percentage of revenues,
cost of sales increased in the 2000 Second Fiscal Quarter to 38.9% from 34.8% in
the 1999 Second Fiscal Quarter.
Total selling, general and administrative expenses for the 2000 Second Fiscal
Quarter were $3,039,071, compared to $1,686,336 for the 1999 Second Fiscal
Quarter, an increase of $1,352,735 or 80.2%. The increase was caused mainly by
the addition of GalaVu, which accounted for $787,617 of the increase. There are
no comparative numbers for the 1999 Second Fiscal Quarter for GalaVu.
Interlynx's total selling, general and administrative expenses for the 2000
Second Fiscal Quarter were $322,702, compared to $143,414 for the 1999 Second
Fiscal Quarter, an increase of $179,288 or 125.0%. The increase is a result of
increased staffing levels associated with the development and selling of the
PROFIS software. Magic's total selling, general and administrative expenses were
$958,471 for the 2000 Second Fiscal Quarter, compared to $769,027, an increase
of $189,444 or 24.6%. The increase is associated with increased staffing levels,
an increase in the provision for doubtful accounts and an increase in the
marketing campaign for Digital Video. NTNIN's total selling, general and
administrative expenses were $970,281 for the 2000 Second Fiscal Quarter,
compared to $773,895 for the 1999 Second Fiscal Quarter, an increase of $196,386
or 25.4%. As a percentage of the Company's total revenues, selling, general and
administrative expenses increased to 68.7% for the 2000 Second Fiscal Quarter
from 47.8% for the 1999 Second Fiscal Quarter.
<PAGE>
Interest and bank charges for the 2000 Second Fiscal Quarter were $68,290,
compared to $46,183 for the 1999 Second Fiscal Quarter, an increase of $22,107
or 47.9%. The increase was the result of increased debt arising from the
purchase of GalaVu in the 2000 First Fiscal Quarter. As a percentage of the
Company's total revenues, interest and bank charges increased to 1.5% for the
2000 Second Fiscal Quarter from 1.3% for the 1999 Second Fiscal Quarter.
Total depreciation and amortization expense for the 2000 Second Fiscal Quarter
was $608,865, compared to $338,788 for the 1999 Second Fiscal Quarter, an
increase of $270,077 or 79.7%. This increase was the result of additional
depreciation on fixed assets added in the 2000 Second Fiscal Quarter and
depreciation of $200,000 on the newly acquired assets of GalaVu. As a percentage
of the Company's total revenues, such expenses increased to 13.8% for the 2000
Second Fiscal Quarter from 9.6% for the 1999 Second Fiscal Quarter.
A reduction in the provision of income taxes of $75,458 was recorded in the 2000
Second Fiscal Quarter compared with a provision for income taxes of $178,000 for
the 1999 Second Fiscal Quarter, a change of $253,458. As the tax provision for
the Company is based solely on the taxable income of NTNIN and GalaVu, it is
unaffected by losses experienced in other divisions. For this reason, the tax
provision is reflective of the income incurred by NTNIN and GalaVu in the 2000
Second Fiscal Quarter but is not decreased by the losses incurred by the other
companies.
The minority interest share in profits for the 2000 Second Fiscal Quarter was
$1,322. This is compared to the minority interest share in profits for the 1999
Second Fiscal Quarter of $7,460, an overall change of $6,128. The minority
interest share of profits results from the profits incurred Sonoptic in the 2000
Second Fiscal Quarter. In addition there is no longer a minority interest in
Interlynx as the remaining ownership was purchased in Fiscal 1999. Interlynx
posted a minority interest loss in the 1999 Second Fiscal Quarter.
As a result of all of the above, the net loss for the 2000 Second Fiscal Quarter
was $938,538, compared to net income of $42,225 for the 1999 Second Fiscal
Quarter, a decrease of $980,763. In summary, the 2000 Second Fiscal Quarter loss
as compared to the 1999 Second Fiscal Quarter income resulted primarily from the
loss incurred by Interlynx and the increase in the GalaVu loss.
Results of Operations for the Six Months Ended February 29, 2000
The Company's total revenues for the 2000 First Fiscal Half were $9,961,496,
compared to $7,163,204 for the 1999 First Fiscal Half, an increase of $2,798,292
or 39.1%. GalaVu's revenues for the 2000 First Fiscal Half were $3,245,900.
There was no comparative revenue for GalaVu for the 1999 First Fiscal Half.
Interlynx's total revenue for the 2000 First Fiscal Half was $229,415, compared
to $376,498 for the 1999 First Fiscal Half, a decrease of $147,083 or 39.1%. The
decrease can be attributed to a decreased revenue stream, due to the sale of
Interlynx's subsidiary and a change in strategic focus. Magic's total revenue
for the 2000 First Fiscal Half was $2,664,574, compared to $2,521,615 for the
1999 First Fiscal Half, an increase of $142,959 or 5.7%. The increase can be
attributed to the 2000 First Fiscal
<PAGE>
Quarter and Magic's fulfillment of a contract to provide over 245 hours of
educational programming to Canada's national educational television specialty
channel, Canadian Learning Television. NTNIN's total revenues were $3,821,607
for the 2000 First Fiscal Half, compared to $4,265,091 for the 1999 First Fiscal
Half, a decrease of $443,484 or 10.4%. The decrease can be attributed to a
decreased level of events being hosted, and decreased repair revenue due to
repairs no longer being performed on US playmakers.
Total cost of sales for the 2000 First Fiscal Half was $3,529,537, compared to
$2,462,591 for the 1999 First Fiscal Half, an increase of $1,066,946 or 43.3%.
GalaVu's total cost of sales was $1,187,900 for the 2000 First Fiscal Half.
There is no comparative figure for the 1999 First Fiscal Half. As a percentage
of the Company's total revenues, such costs of sales increased to 35.4% for the
2000 First Fiscal Half from 34.4% for the 1999 First Fiscal Half.
Total selling, general and administrative expenses for the 2000 First Fiscal
Half were $5,631,009, compared to $3,430,497 for the 1999 First Fiscal Half, an
increase of $2,200,512 or 64.1%. This increase was caused in part by the
acquisition of GalaVu. GalaVu had total selling, general and administrative
expenses of $1,337,817 for the 2000 First Fiscal Half. There are no comparative
numbers for the 1999 First Fiscal Half. Interlynx's total selling, general and
administrative expenses were $623,480 for the 2000 First Fiscal Half, compared
to $259,266 for the 1999 First Fiscal Half, an increase of $364,214 or 140.5%.
This increase is due to the increased staff required for the development and
selling associated with the strategic change in focus to web-based training from
web-site design. Magic's total selling, general and administrative expenses were
$1,609,244 for the 2000 First Fiscal Half, compared to $1,390,763 for the 1999
First Fiscal Half, an increase of $218,481 or 15.7%. This increase is the result
of increased staffing and salaries, increased bad debt provision and an increase
in the company's marketing campaign for digital video. NTNIN's total selling,
general and administrative expenses were $2,060,468 for the 2000 First Fiscal
Half, compared to $1,780,468 for the 1999 First Fiscal Half, an increase of
$280,000 or 15.7%. The increase can be associated with increased legal and
professional fees and increased advertising. As a percentage of the Company's
total revenues, such expenses increased to 56.5% for the 2000 First Fiscal Half
from 47.9% for the 1999 First Fiscal Half.
Interest and bank charges for the 2000 First Fiscal Half amounted to $148,469,
compared to $89,208 for the 1999 First Fiscal Half, an increase of $59,261 or
66.4%. This increase was the result of increased debt arising from the purchase
of GalaVu in the 2000 First Fiscal Quarter. As a percentage of the Company's
total revenues, interest and bank charges increased to 1.4% for the 2000 First
Fiscal Half from 1.2% for the 1999 First Fiscal Half.
Total depreciation and amortization expense for the 2000 First Fiscal Half was
$1,108,342, compared to $684,970 for the 1999 First Fiscal Half, an increase of
$423,372 or 61.8%. This increase was the result of additional depreciation on
fixed assets added in the 2000 First Fiscal Half and depreciation of $400,000 on
the newly acquired assets of GalaVu. As a percentage of the Company's total
revenues, such expenses increased to 11.1% for the 2000 First Fiscal Half from
9.6% for the 1999 First Fiscal Half.
The provision for income taxes for the 2000 First Fiscal Half was $223,000,
compared to $281,000 for the 1999 First Fiscal Half, a decrease of $58,000 or
20.6%. As the tax provision
<PAGE>
for the Company is based solely on the taxable income of NTNIN and GalaVu, it is
unaffected by losses experienced in other divisions. For this reason, the tax
provision is reflective of the income incurred by NTNIN and GalaVu in the 2000
First Fiscal Half but is not decreased by the losses incurred by the other
companies. For this reason, the tax provision increased over the prior period
even though income before income taxes decreased in 2000 compared to 1999. As a
percentage of the Company's total revenues, such expenses decreased to 2.2% for
the 2000 First Fiscal Half from 3.9% for the 1999 First Fiscal Half.
The minority interest share in losses for the 2000 First Fiscal Half was $2,931.
This is compared to the minority interest share in losses for the 1999 First
Fiscal Half of $18,238, an overall decrease of $15,307 or 83.9%.
As a result of all of the above, net loss and comprehensive loss for the 2000
First Fiscal Half was $675,931 compared to a net income of $233,176 for the 1999
First Fiscal Half, a decrease of $909,107. In summary, the 2000 First Fiscal
Half loss as compared to the 1999 First Fiscal Half income resulted primarily
from the losses incurred by Interlynx and Magic.
Liquidity and Capital Resources
At February 29, 2000, the Company had working capital of $3,028,301, a decrease
of $1,008,759 from working capital of $4,037,060 at August 31, 1999.
For the 2000 First Fiscal Half, the Company had a net decrease of cash of
$1,042,032 compared to a net decrease of $220,403 in the 1999 First Fiscal Half.
Cash provided by operating activities for the 2000 First Fiscal Half was
$169,294, compared to $99,621 provided by operating activities in the 1999 First
Fiscal Half. In 2000, the major items that contributed to cash being provided by
operating activities were as follows: the net loss with non-cash expenses added
back of $518,949, decreases in income taxes receivable and inventory of $157,464
and $23,908 respectively; and increases in accounts payable and accrued
liabilities and income taxes payable of $950,834 and $61,042 respectively. The
major uses of operating funds included increases in accounts receivable and
prepaid expenses of $1,436,095 and $110,110 respectively. In 1999, the major
sources that contributed to cash being provided by operating activities were net
income with non-cash expenses added back of $980,884, decreases in short-term
investments and inventory of $93,826 and $31,083 respectively, and increases in
accounts payable and accrued liabilities and income taxes payable of $49,773 and
$84,531 respectively. These sources were somewhat offset by increases in
accounts receivable and prepaid expenses of $909,813 and $230,662 respectively.
Cash used in investing activities in the 2000 First Fiscal Half Quarter was
$1,178,809 compared to the $323,548 used in investing activities in the 1999
First Fiscal Half.
Cash used in financing activities in the 2000 First Fiscal Half was $32,517,
compared to the $3,524 provided in the 1999 First Fiscal Half.
<PAGE>
Management believes that the Company's working capital position and current
borrowings provide the necessary liquidity, on both a short and long term basis,
for its planned activities. Additional external financing will not be required
for its operating activities during the year ending August 31, 2000 (the "2000
Fiscal Year"). However, any changes in such plans may require the Company to
seek outside financing. No arrangements are presently in place for outside
financing should the need arise.
Inflation
The rate of inflation has had little impact on the Company's operations or
financial position during the six months ended February 29, 2000 and 1999 and
inflation is not expected to have a significant impact on the Company's
operations or financial position during the 2000 Fiscal Year.
The Company pays a number of its suppliers, including its licensor and principal
supplier, NTN Communications, Inc., in US dollars. Therefore, fluctuations in
the value of the Canadian dollar against the US dollar will have an impact on
its gross profit as well as its net income. If the value of the Canadian dollar
falls against the US dollar, the cost of sales of the Company will increase
thereby reducing its gross profit and net income. Conversely, if the value of
the Canadian dollar rises against the US dollar, its gross profit and net income
will increase.
Year 2000 Compliance
The Company's computer systems and equipment successfully transitioned to the
Year 2000 with no significant issues. The company continues to keeps its Year
2000 project management in place to monitor latent problems that could surface
at key dates or events in the future. It is not anticipated that there will be
any significant problems related to these events. All costs associated with the
Year 2000 remediation efforts were expenses or capitalized in accordance with
appropriate accounting policies.
<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. +
Promissory Note, dated September 10, 1999, by and between 1373224 Ontario
10.16 Limited, as Debtor, and the Holder, as Creditor. +
10.17 General Security Agreement, dated September 10, 1999, by and between
1373224 Ontario Limited, to acquire the property and assets of GalaVu
Entertainment Inc., from the person appointed by the court of competent
jurisdiction as the receiver or receiver and manager of the property,
assets and undertaking of GalaVu. +
10.18 Securities Pledge Agreement, dated September 10, 1999, by and between
1373224 Ontario Limited to acquire the property and assets of GalaVu
Entertainment Inc., from the person appointed by the court of competent
jurisdiction as the receiver or receiver and manager of the property,
assets and undertaking of GalaVu. +
10.23 Bill of Sale, dated September 13, 1999, by and between 1373224 Ontario
Limited to acquire the property and assets of GalaVu Entertainment Inc.,
from the person appointed by the court of competent jurisdiction as the
receiver or receiver and manager of the property, assets and undertaking
of GalaVu. +
10.24 Covenant of Networks North Inc., dated September 13, 1999, to allot and
issue and pay to the Bank in writing 100,000 common shares of NETN.
22 List of Subsidiaries
27 Financial Data Schedule
+ Incorporated by reference. See Exhibit Index.
<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: April 14, 2000 By: /s/ Peter Rona
------------------------------------
Peter Rona,
President and Chief Executive Officer
(Duly Authorized Officer)
Dated: April 14, 2000 By: /s/ Don Pagnutti
------------------------------------
Don Pagnutti,
Principal Financial Officer
<PAGE>
NETWORKS NORTH INC.
FORM 10-Q
February 29, 2000
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Location
- ------ ---------------------- --------
3.1 Certificate of Incorporation, as amended to date +1, Exh. 3.1
3.2 By-Laws, as amended to date +1, Exh. 3.2
10.1 License Agreement, dated March 23, 1990, between NTN
Communications, Inc. and NTN Interactive Network Inc. +2, Exh.
10.9
10.2 Stock Purchase Agreement, dated October 1, 1996, among
Connolly-Daw Holdings Inc., 1199846 Ontario Ltd., Douglas
Connolly, Wendy Connolly and NTN Interactive Network Inc.,
minus Schedules thereto +3, Exh. 10.1
10.4 Designation Agreement dated as of October 4, 1994, among
Networks North Inc. (formerly known as NTN Canada, Inc.), NTN
Interactive Network Inc. and NetStar Enterprises Inc.
(formerly Labatt Communications Inc.) +4, Exh. C
10.15 Asset Purchase Agreement, dated September 10, 1999, by and
between 1373224 Ontario Limited, Networks North Inc. and
Arthur Andersen Inc., to acquire the property and assets of
GalaVu Entertainment Inc., from the person appointed by the
court of competent jurisdiction as the receiver or receiver
and manager of the property, assets and undertaking of GalaVu.
+5, Exh. 10.1
10.16 Promissory Note, dated September 10, 1999, by and between
1373224 Ontario Limited, as Debtor, and the Holder, as
Creditor. +5, Exh. 10.2
10.17 General Security Agreement, dated September 10, 1999, by and
between 1373224 Ontario Limited, to acquire the property and
assets of GalaVu Entertainment Inc., from the person appointed
by the court of competent jurisdiction as the receiver or
receiver and manager of the property, assets and undertaking
of GalaVu.+5, Exh. 10.3
10.18 Securities Pledge Agreement, dated September 10, 1999, by and
between 1373224 Ontario Limited to acquire the property and
assets of GalaVu Entertainment Inc., from the person appointed
by the court of competent jurisdiction as the receiver or
receiver and manager of the property, assets and undertaking
of GalaVu+5, Exh. 10.4
10.23 Bill of Sale, dated September 13, 1999, by and between 1373224
Ontario Limited to acquire the property and assets of GalaVu
Entertainment Inc., from the person appointed by the court of
competent jurisdiction as the receiver or receiver and manager
of the property, assets and undertaking of GalaVu.+5, Exh.
10.9
<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.
<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> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> FEB-29-2000
<EXCHANGE-RATE> 1.466
<CASH> 976,090
<SECURITIES> 258,623
<RECEIVABLES> 3,999,284
<ALLOWANCES> 224,000
<INVENTORY> 236,960
<CURRENT-ASSETS> 6,228,679
<PP&E> 8,288,380
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,150,045
<CURRENT-LIABILITIES> 3,200,378
<BONDS> 0
0
10,917
<COMMON> 178,633
<OTHER-SE> 10,266,981
<TOTAL-LIABILITY-AND-EQUITY> 18,150,045
<SALES> 9,961,496
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<CGS> 3,529,538
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<INCOME-TAX> 223,000
<INCOME-CONTINUING> (675,931)
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<NET-INCOME> (675,931)
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