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, 2001
Commission file number: 0-18066
CHELL GROUP CORPORATION
f/k/a 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 13, 2001: 9,028,239 shares of common stock,
par value $.0467 per share.
CHELL GROUP CORPORATION
(formerly known as Networks North Inc.)
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED MAY 31, 2001
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets -
as at May 31, 2001 (unaudited) and August 31, 2000 1
Consolidated Statements of Operations and Retained Earnings (Deficit) -
For the Nine Months Ended May 31, 2001 and May 31, 2000 (unaudited) 2
Consolidated Statements of Operations and Retained Earnings (Deficit) -
For the Three Months Ended May 31, 2001 and May 31, 2000 (unaudited) 2
Consolidated Statements of Cash Flows -
For the Nine Months Ended May 31, 2001 and May 31, 2000 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II - OTHER INFORMATION
Item 2. Changes in Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
2
CHELL GROUP CORPORATION
(formerly known as Networks North Inc.)
CONSOLIDATED BALANCE SHEETS
AS AT May 31, 2001 AND AUGUST 31, 2000
(Expressed in Canadian dollars)
==================================================================================================
May 31, 2001 August 31, 2000
(unaudited) (restated - Note 14)
$ $
==================================================================================================
ASSETS
Current
Cash and cash equivalents 190,211 1,355,613
Short-term investments 19,518 269,727
Accounts receivable, trade - net of allowance for doubtful
accounts of $227,000; August - $178,000 2,494,085 3,098,808
Other receivables 223,717 216,990
Income taxes receivable 155,184 143,227
Inventory 152,318 206,216
Prepaid expenses 768,887 527,549
- --------------------------------------------------------------------------------------------------
Total current assets 4,003,920 5,818,130
- --------------------------------------------------------------------------------------------------
Property and equipment, net 8,930,414 7,689,620
Licenses, net of accumulated amortization 236,949 250,248
Goodwill, net of accumulated amortization 2,286,227 2,863,146
Notes receivable 461,100 160,000
Deposit on purchase (note 7) 1,689,710 --
Other assets, net of amortization 326,152 202,799
Net assets from discontinued operations 104,754 236,268
- --------------------------------------------------------------------------------------------------
18,039,226 17,220,211
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable - trade 2,242,188 1,379,727
Accrued liabilities 1,532,498 1,623,220
Current portion of long-term debt (note 8, 9) 3,150,262 397,632
- --------------------------------------------------------------------------------------------------
Total current liabilities 6,924,948 3,400,579
- --------------------------------------------------------------------------------------------------
Long-term debt (note 8, 9) 6,593,515 4,377,040
Deferred income taxes payable 59,173 59,173
- --------------------------------------------------------------------------------------------------
Total liabilities 13,577,636 7,836,792
- --------------------------------------------------------------------------------------------------
Contingent liabilities (note 10)
Shareholders' equity
Share capital (note 11)
900,000 preferred shares -- 10,917
9,028,239 common shares [August - 2,925,141] 604,110 191,122
Capital in excess of par value 14,143,532 10,454,669
Deficit (10,286,052) (1,273,289)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 4,461,590 9,383,419
- --------------------------------------------------------------------------------------------------
18,039,226 17,220,211
==================================================================================================
The accompanying notes are an integral part of these statements
1
CHELL GROUP CORPORATION
(formerly known as Networks North Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (DEFICIT)
(Expressed in Canadian dollars - unaudited)
==========================================================================================================================
For Three Months Ended For Nine Months Ended
May 31, 2000 May 31, 2000
(restated - (restated -
May 31, 2001 Note 14) May 31, 2001 Note 14)
$ $ $ $
- --------------------------------------------------------------------------------------------------------------------------
REVENUE
Network services 1,565,610 1,561,663 4,915,072 4,884,821
Pay-TV 1,750,918 1,613,800 5,047,393 4,859,700
Event programming 139,012 212,917 336,711 422,068
Ad sponsorship 60,578 94,691 132,869 383,989
Video/software sales 1,137,261 973,052 2,967,029 3,394,517
Digital encoding 139,598 154,719 677,350 397,828
- --------------------------------------------------------------------------------------------------------------------------
4,792,977 4,610,842 14,076,424 14,342,923
- --------------------------------------------------------------------------------------------------------------------------
COST OF SALES
Network services 584,501 563,984 1,790,031 1,740,647
Pay-TV 867,426 735,400 2,182,480 1,923,300
Ad sponsorship -- 4,592 -- 15,872
Video/software sales 266,318 509,254 895,049 1,477,925
Digital encoding 3,534 32,769 17,590 78,957
- --------------------------------------------------------------------------------------------------------------------------
1,721,779 1,845,999 4,885,150 5,236,701
- --------------------------------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative
expenses 3,421,623 2,584,925 13,625,449 7,472,134
Bad debt 21,276 3,194 88,305 118,706
Interest and bank charges 284,115 56,974 570,060 196,286
Write off of leasehold improvements -- -- 355,560 --
Depreciation and amortization 543,886 561,970 2,142,417 1,636,312
- --------------------------------------------------------------------------------------------------------------------------
Loss before undernoted (1,199,702) (442,220) (7,590,517) (317,216)
Provision for (recovery of) income taxes -- (113,000) -- 110,000
Minority interest 14,483 (6,752) 49,989 (9,683)
- --------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (1,214,185) (322,468) (7,640,506) (417,533)
Loss from discontinued operations (net of
income tax) (1,086,036) (286,388) (1,372,257) (867,254)
- --------------------------------------------------------------------------------------------------------------------------
Loss and comprehensive loss for the period (2,300,221) (608,856) (9,012,763) (1,284,787)
Retained earnings (deficit), beginning of
period (7,985,831) 374,401 (1,273,289) 1,050,332
- --------------------------------------------------------------------------------------------------------------------------
Deficit, end of period (10,286,052) (234,455) (10,286,052) (234,455)
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share (note 4):
Basic and diluted from continuing
operations (0.14) (0.11) (0.90) (0.15)
Basic and diluted from discontinued
operations (0.13) (0.10) (0.16) (0.30)
Net loss per share (0.27) (0.21) (1.06) (0.45)
==========================================================================================================================
The accompanying notes are an integral part of these statements
2
CHELL GROUP CORPORATION
(formerly known as Networks North Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 2001 AND MAY 31, 2000
(Expressed in Canadian dollars - unaudited)
=============================================================================================================
May 31, 2000
May 31, 2001 (restated - Note 14)
$ $
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss and comprehensive loss for the period (9,012,763) (1,284,787)
Adjustments to reconcile net income to net cash
used in operating activities:
Compensation costs related to the change in the conversion
rate of preferred shares -- 337,779
Depreciation and amortization 2,142,417 1,636,312
Accretion of interest on non-interest bearing promissory notes 137,617 129,807
Write-off of leasehold improvements 355,560 --
Services rendered for shares 659,359 --
Warrants issued 174,084 --
Write-off of prepaids arising from Chell asset purchase 367,235 --
Write-off assets arising from discontinued operations 636,268 --
Changes in assets and liabilities:
Decrease (increase) in short-term investments 250,209 (9,718)
Decrease (increase) in accounts receivable, trade 604,723 (1,488,312)
Decrease (increase) in income taxes receivable (11,957) 167,957
Decrease (increase) in inventory 53,898 (130,043)
Increase in prepaid expenses (72,998) (38,588)
Increase in other accounts receivable (5,323) --
Decrease in other assets 72,627 --
Decrease in assets from discontinued operations 131,514 183,903
Increase in accounts payable and accrued liabilities 634,123 540,021
- -------------------------------------------------------------------------------------------------------------
Cash (used in) provided by operating activities (2,883,407) 44,331
- -------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (1,279,651) (1,081,664)
Increase in deposit on purchase (1,689,710) --
Increase in notes receivable (301,100) --
- -------------------------------------------------------------------------------------------------------------
Cash used in investing activities (3,270,461) (1,081,664)
- -------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes and loans payable 5,011,537 --
Repayment of notes and loans payable (23,071) (23,453)
Proceeds from exercise of options -- 156,236
- -------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 4,988,466 132,783
- -------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents during the period (1,165,402) (904,550)
Cash and cash equivalents, beginning of period 1,355,613 2,018,122
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 190,211 1,113,572
=============================================================================================================
- -------------------------------------------------------------------------------------------------------------
Income Taxes Paid 98,491 2,500
Interest Paid 92,793 91,076
Non cash items arose from the purchase of Chell.com assets during the 2001
First Three Fiscal Quarters. They are $1,936,272 of property & equipment,
$107,589 of goodwill, $45,044 of prepaids, $1,404 in other accounts receivable
and in addition shares were issued (Note 5). Other assets of $217,362 arose from
the issue of warrants, shares were issued for consulting fees and salaries in
the amount of $668,388 and shares were issued for a debt payment on the GalaVu
purchase in the amount of $115,165.
The accompanying notes are an integral part of these statements
3
CHELL GROUP CORPORATION
(formerly known as Networks North Inc.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 2001 AND MAY 31, 2000
(UNAUDITED)
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 December 14,
2000. The results of operations for the nine months ended May 31, 2001 are not
necessarily indicative of the results for the full fiscal year ending August 31,
2001.
Note 2. General
The financial statements of the Company for the three and nine months
ended May 31, 2001 (the "2001 Third Fiscal Quarter" and "2001 First Three Fiscal
Quarters"), include the operations of the Company's wholly-owned subsidiaries
Chell Merchant Capital Group Inc. ("CMCG"), Chell.com (USA) Inc., NTN
Interactive Network Inc. ("NTNIN"), 3484751 Canada Inc., GalaVu Entertainment
Network Inc. ("GalaVu") and NTNIN's wholly-owned subsidiaries Magic Lantern
Communications Ltd. ("Magic") and Interlynx Multimedia Inc. ("Interlynx").
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"), include the operations of the Company's wholly-owned subsidiaries
NTNIN, 3484751 Canada Inc., GalaVu and NTNIN's wholly-owned subsidiaries Magic
and 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").
Effective September 1, 2000 the operations of BCLC and Custom Video were merged
with Magic and the BCLC and Custom Video corporations were wound up. Also,
effective September 1, 2000 Magic's wholly owned subsidiary TutorBuddy Inc.
commenced operations.
Prior period's figures have been reclassified to be consistent with any
reclassifications in the current period.
4
Note 3. Business Segment Data for the three and nine months ended May 31, 2001
and May 31, 2000
==================================================================================================
For Three Months Ended For Nine Months Ended
May 31, 2001 May 31, 2000 May 31, 2001 May 31, 2000
$ $ $ $
- --------------------------------------------------------------------------------------------------
External revenue
Entertainment 3,496,975 3,477,758 10,392,084 10,540,017
Education 1,295,908 1,127,772 3,667,758 3,792,345
ASP Services -- -- -- --
Corporate 94 5,312 16,582 10,561
- --------------------------------------------------------------------------------------------------
4,792,977 4,610,842 14,076,424 14,342,923
- --------------------------------------------------------------------------------------------------
Inter-segment revenue
Entertainment -- 14,211 -- 42,686
Education 48,261 388,643 147,002 388,643
Corporate -- 31,969 -- 96,269
- --------------------------------------------------------------------------------------------------
48,261 434,823 147,002 527,598
- --------------------------------------------------------------------------------------------------
Operating profit (loss)
Entertainment 113,124 27,604 (110,013) 332,229
Education (228,629) 42,739 (620,530) (118,768)
ASP Services (662,054) -- (5,490,359) --
Corporate (422,143) (512,563) (1,369,615) (530,677)
- --------------------------------------------------------------------------------------------------
(1,199,702) (442,220) (7,590,517) (317,216)
- --------------------------------------------------------------------------------------------------
Net income (loss)
Entertainment 113,124 140,604 (110,013) 222,229
Education (243,112) 49,491 (670,519) (109,085)
ASP Services (662,054) -- (5,490,359) --
Corporate (422,143) (512,563) (1,369,615) (530,677)
Discontinued operations (1,086,036) (286,388) (1,372,257) (867,254)
- --------------------------------------------------------------------------------------------------
(2,300,221) (608,856) (9,012,763) (1,284,787)
- --------------------------------------------------------------------------------------------------
==================================================================================================
As at
May 31, 2001 May 31, 2000
$ $
- --------------------------------------------------------------------------------------------------
Total assets
Entertainment 9,791,918 12,753,181
Education 3,228,830 3,934,847
ASP Services 2,033,921 --
Corporate 2,879,803 1,078,042
Discontinued operations 104,754 313,324
- --------------------------------------------------------------------------------------------------
18,039,226 18,079,394
- --------------------------------------------------------------------------------------------------
5
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 three months and
nine months ended May 31, 2001 and May 31, 2000:
====================================================================================================================
For Three Months Ended For Nine Months Ended
May 31, 2001 May 31, 2000 May 31, 2001 May 31, 2000
$ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Numerator:
Net loss (numerator for basic and diluted
loss per share) from continuing operations (1,214,185) (322,468) (7,640,506) (417,533)
Net loss (numerator for basic and diluted
loss per share) from discontinued operations (1,086,036) (286,388) (1,372,257) (867,254)
- --------------------------------------------------------------------------------------------------------------------
Net loss (numerator for basic and diluted
loss per share) (2,300,221) (608,856) (9,012,763) (1,284,787)
====================================================================================================================
Denominator for basic and diluted loss
per share -adjusted weighted average
number of shares and assumed conversions 8,490,576 2,860,464 8,490,576 2,860,464
====================================================================================================================
Basic and diluted loss per share from
continuing operations $(0.14) $(0.11) $(0.90) $(0.15)
Basic and diluted loss per share from
discontinued operations $(0.13) $(0.10) $(0.16) $(0.30)
- --------------------------------------------------------------------------------------------------------------------
Net loss per share $(0.27) $(0.21) $(1.06) $(0.45)
====================================================================================================================
Note 5. Purchase of assets and shares from Chel.com Ltd. and Cameron Chell
On September 19, 2000, pursuant to an Agreement of Purchase and Sale dated
as of August 4, 2000, the Company and its subsidiary Chell Merchant Capital
Group acquired, certain shares and assets from Cameron Chell and Chell.com Ltd.
("Chell.com"), a Company owned 100% by Cameron Chell. Pursuant to the Agreement,
the Company acquired: (a) 480,000 common shares of cDemo Inc. (23%); (b) 875,000
common shares of Engyro, Inc. (34%); and (c) 60,000 common shares of Chell.com
USA (100%). In addition, Chell Merchant Capital Group acquired 962,500 common
shares of eSupplies (Alberta) Ltd. (27%) as well as certain assets from
Chell.com.
This acquisition was not reflected in the financial statements for the
year ended August 31, 2000 since shareholder approval to ratify the above
purchase transaction was not voted on and approved until September 8, 2000.
In consideration for this acquisition, the Company issued 4,974,904 shares
of its common stock and Chell Merchant Capital Group issued 1,928,267 special
convertible shares, inclusive of 1,476,398 shares issued in exchange for the
shares of eSupplies (Alberta) Ltd., to Cameron Chell, Chell.com and others. The
shares of the Company that were issued in exchange for the shares of eSupplies
(Alberta) Inc. were placed in escrow and the investment in this company was not
to be recorded until such time as certain contingent conditions were met. Each
share issued by Chell Merchant Capital Group is convertible into
6
one share of common stock of the Company. Pursuant to a Voting and Exchange
Trust Agreement entered into with a trustee, whereby voting privileges have been
granted, such shares issued by Chell Merchant Capital Group can be voted by the
trustee immediately. The amount of shares issued was determined based upon an
appraisal valuation of the investments and assets acquired which aggregated US
$28,652,086.
The shares of the Company that were originally issued in exchange for the
shares of cMeRun Corp. were placed in escrow and the investment in this company
was not recorded. The conditions of the escrow were not met for cMeRun Corp. and
subsequently these shares were cancelled.
The shares of Chell Merchant Capital Group that were originally issued in
exchange for the shares of eSupplies were placed in escrow and the investment in
this company was not recorded. The conditions of the escrow were not met for
eSupplies and subsequently these shares were cancelled.
As a result of the above, Cameron Chell and Chell.com now own
approximately 65% of the Company's outstanding common stock, that is the Company
has in effect been acquired in a reverse acquisition.
This acquisition of the Company by Cameron Chell and Chell.com and the
acquisition by the Company of the equity interests, as described in the first
paragraph, are reflected at historical cost in the Company's separate financial
statements.
The Company will reflect the minority equity investments using the equity
method of accounting.
Note 6. Purchase of Richard Wolff Enterprises, Inc. assets
Pursuant to an asset purchase agreement dated September 1, 2000, Magic
acquired the assets and business operations of Richard Wolff Enterprises, Inc.
("RWE"), a company based in Illinois, for a purchase price of $289,590
calculated on a discounted basis. As a result, Magic has expanded its library of
educational titles and now has access to the international distribution
infrastructure formerly held by RWE. The acquisition was accounted for using the
purchase method of accounting and accordingly, the purchase price has been
allocated to property and equipment. The purchase price was satisfied by
$154,825 in cash and the issuance of four promissory notes with maturity values
aggregating $147,350. These promissory notes mature over a period of two years.
The fair values of these promissory notes approximate their carrying value.
The asset purchase agreement also contains a purchase price adjustment
clause whereby the price may be adjusted upwards to a maximum of an additional
US$100,000 if certain revenue levels are achieved. Specifically, if gross
revenues for the acquired business exceed US$500,000 for the 12 month period
ending August 31, 2001, Magic will pay to RWE US$50,000, and if gross revenues
exceed US$600,000 for the second 12 month period ending August 31, 2002, Magic
will pay to RWE an additional US$50,000.
7
The operating results related to the acquisition are included in the
Company's consolidated statements of operations and retained earnings from the
date of acquisition. Pro-forma information has not been provided for the prior
year because it is not material.
Note 7. Deposit on purchase of Applicationstation.com, Inc. shares
On November 22, 2000, the Company entered into an agreement with Chell.com
Ltd. to participate in the purchase of a 51% interest in the shares of
ApplicationStation.com, Inc. The Company has provided a deposit of $1,689,710 to
Chell.com Ltd. for its 25% share of the 51% interest in the shares of
ApplicationStation.com, Inc. The Company's investment will be reflected using
the equity method of accounting.
Note 8. Note payable
On January 15, 2001, the Company received US$1,500,000 in return for a
promissory note. The note bears interest at 2% per month and the principal and
accrued interest is due and payable on July 15th, 2001.
Note 9. Convertible debenture - related party transaction
On October 3, 2000, the Company closed the sale of a US$3,000,000
Convertible 10% Debenture to the VC Advantage Limited Partnership ("VCALP"). As
at May 31, 2001, US$1,700,000 has been advanced. This unsecured convertible
debenture is due three years from issue. The Convertible Debenture bears
interest at 10% per annum, payable upon conversion, redemption or maturity. The
unpaid principal of the debenture bears interest from the date that it is
actually advanced until paid. Interest is payable in cash or stock at the
Company's option. The Convertible Debenture is convertible into common stock of
the Company, at US$3.00 per share, in amounts specified by the VCALP. The
maximum number of common shares VCALP will receive is one million. On the close
date, the Company also issued 50,000 warrants to purchase 50,000 common shares
at US$3.00 per share to VCALP. The warrants have a term of four years. On
November 30, 2000 the convertible debenture was assigned by VCALP to CALP II
Limited Partnership.
Note 10. Contingent Liabilities
On June 18, 1992, Interactive Network Inc., a third party, instituted
proceedings against NTN Communications Inc., one of the Company's major
suppliers, 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.
Canada Customs and Revenue Agency is currently in discussions with the
Company regarding a potential liability with respect to withholding tax on
certain amounts paid to NTN Communications, Inc. No assessment has been made to
date by Canada Customs and Revenue Agency. However, Management believes that it
has valid defenses with respect to these matters and, accordingly, no amount has
been recorded in these consolidated financial statements. The withholding tax
assessment could be between $0 and $460,000. In the event
8
that such matters are settled in favour of Canada Customs and Revenue Agency,
the amounts could be material and would be recorded in the period in which they
become determinable. NTN Communications Inc. would be responsible for paying
such taxes.
Note 11. Changes in share capital
During the nine months ended May 31, 2001, the following transactions
resulted in the issuance of 6,103,098 common shares of the Company and Chell
Merchant Capital Group Inc. The acquisition of certain assets of Chell.com and
Cameron Chell was satisfied by the issuance of 5,426,772 common shares of the
Company. In addition 145,000 shares were issued as payment for consulting fees
rendered, 131,974 shares issued in lieu of salary and 36,602 shares for the
settlement of debt. In addition, the preferred shares were converted for 300,000
commons shares. Also during the nine months ended May 31, 2001, options totaling
62,750 were exercised resulting in the issuance of additional 62,750 common
shares of the Company. Effective February 28, 2001, common shares authorized to
be issued was increased to 50,000,000.
Note 12. Recent pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving
Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB No. 25 for certain issues, including the definition of an
employee, the treatment of the acceleration of stock options and the accounting
treatment for options assumed in business combinations. FIN 44 became effective
on July 1, 2000, but is applicable for certain transactions dating back to
December 1998. The adoption of FIN 44 did not have a material impact on the
Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." (SAB No. 101). SAB No. 101 expresses the views of the SEC staff in
applying generally accepted accounting principles to certain revenue recognition
issues. The adoption of the provisions of SAB No. 101 in the first quarter of
fiscal 2001 did not have a material impact on the Company's financial position
or its results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities."(SFAS No. 133). SFAS No. 133, as amended by
SFAS No. 138, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and the measurement of those
instruments at fair value. The Company adopted this standard in the first
quarter of fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999),
which delays the adoption of SFAS No. 133 until that time. The adoption of SFAS
No. 133 did not have a material impact on the Company's financial position or
its results of operations.
9
Note 13. Discontinued Operations/Subsequent Events
In May 2001, the Company entered into a plan regarding the sale of
Interlynx. On June 30th 2001, subsequent to the balance sheet date, the Company
signed an agreement to sell Interlynx, a wholly-owned subsidiary of its a
wholly-owned subsidiary NTNIN for $50,000. The sale will be completed effective
July 31st 2001. The Company's financial statements have been restated to reflect
Interlynx as a discontinued operation for all periods presented.
Note 14. Restatement of financial statements
On April 4th, 2000, the ratio at which preferred shares could be converted
to common shares was changed from 4.67 to 3. The resulting change from 192,857
to 300,000 common shares upon conversion resulted in a one-time compensation
charge of $337,779. As a result, all prior year and period statements have been
restated in order to reflect this change.
10
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
Chell Group Corporation is engaged in the business of defining, building
and re-engineering businesses, interactive entertainment services and
electronic/online products and services using new economy technologies to
maximize market value. The Company's main business strategy is to operate or
invest in companies that represent the latest in technological innovations. In
that regard, the Company has two main categories of companies: operating
subsidiaries and investment companies. The Company applies its expertise,
industry contacts, and market foresight to these companies in order to create
shareholder value. The core businesses of the Company are the merchant capital
services provided through Chell Merchant Capital Group Inc. (referred to as the
"Merchant Capital Group") and the interactive entertainment services provided by
NTN IN. In addition, GalaVu is a technology based entertainment provider of
interactive in-room entertainment systems to hotels across Canada; the Magic
Lantern Group is involved in the marketing and distribution of educational video
and media resources and the conversion of analog video to digital video formats;
and Interlynx designs and develops web-based training software. Interlynx was
sold subsequent to May 31, 2001, the balance sheet date.
Results of Operations for the Three Months ended May 31, 2001
The Company's total revenues for the 2001 Third Fiscal Quarter were
$4,792,977, compared to $4,610,842 for the 2000 Third Fiscal Quarter, an
increase of $182,135 or 4.0%.
Revenues from network services for the 2001 Third Fiscal Quarter were
$1,565,610, compared to $1,561,663 for the 2000 Third Fiscal Quarter, an
increase of $3,947 or 0.3%. These revenues are relatively constant between years
due to the number of Hospitality sites remaining at approximately the same level
between the 2001 and 2000 Third Fiscal Quarters.
Revenues from Pay-tv for the 2001 Third Fiscal Quarter were $1,750,918
compared to $1,613,800 for the 2000 Third Fiscal Quarter, an increase of
$137,118 or 8.5%. This increase can be attributed to more popular movies
available in the 2001 Third Fiscal Quarter than in the 2000 Third Fiscal
Quarter.
Revenues from event programming for the 2001 Third Fiscal Quarter were
$139,012, compared to $212,917 for the 2000 Third Fiscal Quarter, a decrease of
$73,905 or 34.7%. The decrease was due to a decreased number of corporate events
hosted in the 2001 Third Fiscal Quarter when compared to the number of events
hosted in 2000 Third Fiscal Quarter.
11
Revenues from ad sponsorship were $60,578 for the 2001 Third Fiscal
Quarter, compared to $94,691 for the 2000 Third Fiscal Quarter, a decrease of
34,113 or 36.0%. The decrease was the result of a decrease in the number and
size of corporate sponsors over the level experienced in the previous period.
Revenues from video and software sales for the 2001 Third Fiscal Quarter
were $1,137,261, compared to $973,052 for the 2000 Third Fiscal Quarter, an
increase of $164,209 or 16.9%. The increase is primarily the result of an
increase in foreign sales ($229,429), which is offset by the decrease in analog
video sales, as the demand for digital video has not increased at the same
corresponding levels.
Revenues from digital encoding were $139,598 for the 2001 Third Fiscal
Quarter, compared to $154,719 for the 2000 Third Fiscal Quarter, a decrease of
$15,121 or 9.8%. The decrease can be attributed a decreased level of sales
compared to the 2000 Third Fiscal Quarter.
Total cost of sales for the 2001 Third Fiscal Quarter were $1,721,779
compared to $1,845,999 for the 2000 Third Fiscal Quarter, a decrease of $124,220
or 6.7%. The decrease is the result of decreased costs associated with a change
in the focus of event programming, the decreased sales in ad sponsorship and the
decrease in video and software sales. As a percentage of revenues, cost of sales
decreased in the 2001 Third Fiscal Quarter to 35.9% from 40.0% in the 2000 Third
Fiscal Quarter.
Total selling, general and administrative expenses for the 2001 Third
Fiscal Quarter were $3,421,623, compared to $2,584,925 for the 2000 Third Fiscal
Quarter, an increase of $836,698 or 32.4%. The increase was caused mainly by the
addition of the ASP Services segment, which accounted for an increase of
$779,861. The Company has also experienced increased investor and public
relation costs ($320,822) as a result of the addition of the ASP Services
segment. In the 2000 Third Fiscal Quarter, there was a one-time $337,779
compensation charge resulting from a change in the conversion rate on the
preferred shares.
Total selling, general and administrative expenses for the 2001 Third
Fiscal Quarter for the ASP Services segment comprised the following major items;
professional fees of $526,065 salaries of $126,955, and communication costs of
$50,038.
As a percentage of the Company's total revenues, selling, general and
administration expenses increased to 71.4% for the 2001 Third Fiscal Quarter
from 56.1% for the 2000 Third Fiscal Quarter.
During the 2001 Second Fiscal Quarter, Chell Merchant Capital Group Inc.
decreased its staffing levels in the ASP Services segment. The costs of
restructuring this company are of a one time nature and will not be incurred
beyond the 2001 Third Fiscal Quarter.
Interest and bank charges for the 2001 Third Fiscal Quarter were $284,115,
compared to $56,974 for the 2000 Third Fiscal Quarter, an increase of $227,141
or 398.7%. This increase results from an increase in debt related to the
purchase of the RWE assets (Note 6), the note payable (Note 8) and the sale of
the convertible debenture (Note 9). As a percentage
12
of the Company's total revenues, interest and bank charges increased to 5.9% for
the 2001 Third Fiscal Quarter from 1.2% for the 2000 Third Fiscal Quarter.
There was no provision for income taxes recorded in the 2001 Third Fiscal
Quarter compared with a recovery of income taxes of $113,000 for the 2000 Third
Fiscal Quarter. As the tax provision is based upon the individual companies'
taxable income, no provision was incurred, as the companies are not in a taxable
position.
Loss from discontinued operations for the 2001 Third Fiscal Quarter was
$1,086,036, compared to $286,388 for the 2000 Third Fiscal Quarter, an increase
of $799,648 or 279.2%. During the 2001 Third Fiscal Quarter, prepaids of
$41,512, software costs of $162,500 and goodwill of $636,268 were written off in
anticipation of the sale of Interlynx. The items are of a one time nature and
will not be incurred beyond the 2001 Third Fiscal Quarter.
The minority interest share in profit for the 2001 Third Fiscal Quarter
was $14,483. This is compared to the minority interest share in losses for the
2000 Third Fiscal Quarter of $6,752, an overall change of $21,235. This change
results from profitable operations in Sonoptic Technologies Inc., in which there
is a 25% minority interest.
As a result of all of the above, the net loss for the 2001 Third Fiscal
Quarter was $2,300,221, compared to net loss of $608,856 for the 2000 Third
Fiscal Quarter, a increase of $1,691,365. The 2001 Third Fiscal Quarter loss
resulted primarily from the addition of Chell Merchant Capital Group Inc. and
Chell.com (USA) Inc. to the Company and their activities including the provision
of services to developing ASP companies in which the Company has invested, as
well as the loss incurred from discontinuing the operations of Interlynx.
Results of Operations for the Nine Months ended May 31, 2001
The Company's total revenues for the 2001 First Three Fiscal Quarters were
$14,076,424, compared to $14,342,923 for the 2000 First Three Fiscal Quarters, a
decrease of $266,499 or 1.9%.
Revenues from network services for the 2001 First Three Fiscal Quarters
were $4,915,072, compared to $4,884,821 for the 2000 First Three Fiscal
Quarters, an increase of $30,251 or 0.6%. These revenues are relatively constant
between the years due to the number of Hospitality sites remaining at
approximately the same level between the 2001 and 2000 First Three Fiscal
Quarters.
Revenues from Pay-tv for the 2001 First Three Fiscal Quarters were
$5,047,393 compared to $4,859,700 for the 2000 First Three Fiscal Quarters, an
increase of $187,693 or 3.9%. This increase can be attributed to more popular
movies available in 2001 versus 2000.
Revenues from event programming for the 2001 First Three Fiscal Quarters
were $336,711 compared to $422,068 for the 2000 First Three Fiscal Quarters, a
decrease of $85,357 or 20.2%. The decrease was due to a decreased number of
corporate events hosted in the 2001 First Three Fiscal Quarters when compared to
the number of events hosted in 2000 First Three
13
Fiscal Quarters.
Revenues from ad sponsorship were $132,869 for the 2001 First Three Fiscal
Quarters, compared to $383,989 for the 2000 First Three Fiscal Quarters, a
decrease of $251,120 or 65.4%. The decrease was the result of a decrease in the
number and size of corporate sponsors over the level experienced in the previous
period.
Revenues from video and software sales for the 2001 First Three Fiscal
Quarters were $2,967,029 compared to $3,394,517 for the 2000 First Three Fiscal
Quarters, a decrease of $427,488 or 12.6%. In the First Three Fiscal Quarters of
2000, a one time large sale of $294,600 was recorded that resulted in abnormally
high revenue when compared to 2001's First Three Fiscal Quarters.
Revenues from digital encoding were $677,350 for the 2001 First Three
Fiscal Quarters, compared to $397,828 for the 2000 First Three Fiscal Quarters,
an increase of $279,522 or 70.3%. The increase can be attributed to increased
demand for digital services and the greater sales effort in this area.
Total cost of sales for the 2001 First Three Fiscal Quarters were
$4,885,150, compared to $5,236,701 for the 2000 First Three Fiscal Quarters, a
decrease of $351,551. The decrease is commensurate with the decreased sales
levels experienced, offset by increased cable costs in the Pay-tv segment. As a
percentage of revenues, cost of sales decreased in the 2001 First Three Fiscal
Quarters to 34.7% from 36.5% in the 2000 First Three Fiscal Quarters.
Total selling, general and administrative expenses for the 2001 First
Three Fiscal Quarters were $13,625,449, compared to $7,472,134 for the 2000
First Three Fiscal Quarters, an increase of $6,153,315 or 82.4%. The increase
was caused mainly by the addition of the ASP Services segment, which accounted
for an increase of $5,377,070.
Total selling, general and administrative expenses for the 2001 First
Three Fiscal Quarters for the ASP Services segment comprised the following major
items; salaries $1,772,780, professional fees of $1,547,487, communication costs
of $157,351, travel of $791,574, advertising and promotion of $407,559, and
investor and public relation costs of $487,196.
As a percentage of the Company's total revenues, selling, general and
administrative expenses increased to 96.8% for the 2001 First Three Fiscal
Quarters from 52.1% for the 2000 First Three Fiscal Quarters.
During the 2001 First Three Fiscal Quarters, Chell Merchant Capital Group
Inc. vacated certain leased space and as a result the Company wrote off the net
book value of the related leasehold improvements in the amount of $355,560.
There were no similar transactions in the 2000 First Three Fiscal Quarters.
Interest and bank charges for the 2001 First Three Fiscal Quarters were
$570,060, compared to $196,286 for the 2000 First Three Fiscal Quarters, an
increase of $373,774 or 190.4%. This increase results from an increase in debt
related to the purchase of the RWE
14
assets (Note 6), the note payable (Note 8) and the sale of the convertible
debenture (Note 9). As a percentage of the Company's total revenues, interest
and bank charges increased to 4.0% for the 2001 First Three Fiscal Quarters from
1.4% for the 2000 First Three Fiscal Quarters.
Total depreciation and amortization expense for the 2001 First Three
Fiscal Quarters was $2,142,417, compared to $1,636,312 for the 2000 First Three
Fiscal Quarters, an increase of $506,105 or 30.9%. This increase is primarily
the result of depreciation on the fixed assets acquired from RWE and Chell.com
Ltd.
There was no provision of income taxes recorded in the 2001 First Three
Fiscal Quarters compared with a provision for income taxes of $110,000 for the
2000 First Three Fiscal Quarters. As the tax provision is based upon the
individual companies' taxable income, no provision was incurred, as the
companies are not in a taxable position.
Loss from discontinued operations for the 2001 First Three Fiscal Quarters
was $1,372,257, compared to $867,254 for the 2000 Third Fiscal Quarter, an
increase of $505,003 or 58.2%. During the 2001 Third Fiscal Quarter, prepaids of
$41,512, software costs of $162,500 and goodwill of $636,268 were written off
coinciding with the Sale of Interlynx. The items are of a one time nature and
will not be incurred beyond the 2001 Third Fiscal Quarter.
The minority interest share in profit for the 2001 First Three Fiscal
Quarters was $49,989. This is compared to the minority interest share in losses
for the 2000 First Three Fiscal Quarters of $9,683, an overall change of
$59,672. This change results from profitable operations in Sonoptic Technologies
Inc., in which there is a 25% minority interest.
As a result of all of the above, the net loss for the 2001 First Three
Fiscal Quarters was $9,012,763, compared to net loss of $1,284,787 for the 2000
First Three Fiscal Quarters, an increase of $7,727,976. The 2001 First Three
Fiscal Quarters loss resulted primarily from the addition of Chell Merchant
Capital Group Inc. and Chell.com (USA) Inc. to the Company and their activities
including the provision of services to developing ASP companies in which the
Company has invested.
Liquidity and Capital Resources
At May 31st, 2001, the Company had a working capital deficit of
$2,921,028, a decrease of $5,338,579 from working capital of $2,417,551 at
August 31, 2000.
For the 2001 First Three Fiscal Quarters, the Company had a net decrease
of cash of $1,165,402 compared to a net decrease of $904,550 in the 2000 First
Three Fiscal Quarters.
Cash used in operating activities for the 2001 First Three Fiscal Quarters
was $2,883,407, compared to $44,331 provided by operating activities in the 2000
First Three Fiscal Quarters. In 2001, the major items that contributed to cash
being used in operating activities were as follows: the net loss with non-cash
expenses added back of $4,540,223, the increase in income taxes receivable of
$11,957 and the increase in prepaid expenses of $72,998. The major items that
contributed to cash being provided by operating activities
15
were as follows: the decrease in accounts receivable of $604,723 a decrease in
short-term investments of $250,209, an increase in accounts payable and accrued
liabilities of $634,123 and a decrease in net assets from discontinued
operations of of $131,514. In 2000, the major items that contributed to cash
being provided by operating activities were as follows: net income with non-cash
expenses added back of $819,111, decreases in income taxes receivable $167,957,
and an increase in accounts payable and accrued liabilities and a decrease in
net assets from discontinued operations of $540,021 and $183,903 respectively.
The major uses of operating funds included increases in accounts receivable and
prepaid expenses of $1,488,312 and $130,043 respectively.
Cash used in investing activities in the 2001 First Three Fiscal Quarters
was $3,270,461 compared to the $1,081,664 used in investing activities in the
2000 First Three Fiscal Quarters, an increase of $2,188,797. This increase was
primarily the result of an increase in the note receivable from Engyro and the
deposit of $1,689,710 on the purchase of shares in ApplicationStation.com, Inc.
Cash provided by financing activities in the 2001 First Three Fiscal
Quarters was $4,988,466, compared to the $132,783 providedin the 2000 First
Three Fiscal Quarters. The increase is primarily due to the sale of the
convertible debenture and the bridge financing.
The Company is in the process of attempting to raise additional capital in
order to realize its ASP strategy and to repay its loan obligations that are
currently being negotiated. The Company's subsidiaries operating in the
entertainment, education and E-commerce segments create liquidity sufficient to
fund their operations. Management believes that the current negotiations for
terms and financing will be successful and that combined with the reorganizing
of the ASP segment in the First Fiscal 2001 Half, the Company will have the
required liquidity for its planned operating activities in the current 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, 2001 and May 31, 2000
and inflation is not expected to have a significant impact on the Company's
operations or financial position during the 2001 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.
16
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.
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following list sets forth the applicable exhibits (numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Quarterly Report on Form 10-Q:
Exhibit
Number Title
- ------- -----
3.1 Certificate of Incorporation, as amended to date.
3.2 By-Laws, as amended to date.
10.1 License Agreement, dated March 23, 1990, between NTN Communications,
Inc. and NTN Interactive Network Inc.+
10.2 Stock Purchase Agreement, dated as of October 4, 1994, between NTN
Canada Inc. and NetStar Enterprises Inc. (formerly, Labatt
Communications Inc.). + Option, dated as of October 4, 1994,
registered in the name of NetStar Enterprises Inc. (formerly, Labatt
Communications Inc).+
10.4 Designation Agreement dated as of October 4, 1994, among Networks
North Inc. (formerly know as NTN Canada, Inc.), NTN Interactive
Network Inc. and NetStar Enterprises Inc. (formerly Labatt
Communications Inc.). +
10.15 Asset Purchase Agreement, dated September 10, 1999, by and between
1373224 Ontario Limited, Networks North Inc. and Arthur Andersen
Inc., to acquire the property and assets of GalaVu Entertainment
Inc., from the person appointed by the court of competent
jurisdiction as the receiver or receiver and manager of the property,
assets and undertaking of GalaVu. +
10.16 Promissory Note, dated September 10, 1999, by and between 1373224
Ontario Limited, as Debtor, and the Holder, as Creditor. +
10.17 General Security Agreement, dated September 10, 1999, by and between
1373224 Ontario Limited, to acquire the property and assets of GalaVu
Entertainment Inc., from the person appointed by the court of
competent jurisdiction as the receiver or receiver and manager of the
property, assets and undertaking of GalaVu. +
10.18 Securities Pledge Agreement, dated September 10, 1999, by and between
1373224 Ontario Limited to acquire the property and assets of GalaVu
Entertainment Inc., from the person appointed by the court of
competent jurisdiction as the receiver or receiver and manager of the
property, assets and undertaking of GalaVu. +
10.23 Bill of Sale, dated September 13, 1999, by and between 1373224
Ontario Limited to acquire the property and assets of GalaVu
Entertainment Inc., from the person appointed by the court of
competent jurisdiction as the receiver or receiver and manager of the
property, assets and undertaking of GalaVu. +
10.24 Covenant of Networks North Inc., dated September 13, 1999, to allot
and issue and pay to the Bank in writing 100,000 common shares of
NETN.
11. Computation of Earnings Per Share (see note 4).
22 List of Subsidiaries
18
+ Incorporated by reference. See Exhibit Index.
(b) Reports on Form 8-K
None.
19
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.
CHELL GROUP CORPORATION
Dated: July 13, 2001 By: /s/ Cameron Chell
--------------------------------------
Cameron Chell,
President and Chief Executive Officer
(Duly Authorized Officer)
Dated: July 13, 2001 By: /s/ Don Pagnutti
--------------------------------------
Don Pagnutti,
Principal Financial Officer
20
CHELL GROUP CORPORATION
FORM 10-Q
May 31, 2001
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
21
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
11 Computation of earnings per share (see Note 4)
22 List of Subsidiaries +1, Exh. 22
+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.
22