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 28, 1999
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
Etobicoke, Ontario, Canada M9W 1A4
(Address of principal executive offices)
(Zip Code)
(416) 675-6666
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of April 14, 1999: 2,625,170 shares of common stock,
par value $.0467 per share.
PART I - FINANCIAL INFORMATION
NETWORKS NORTH INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999
Item
Item 1. Financial Statements:
Consolidated Balance Sheets -
as at February 28, 1999 and August 31, 1998
Consolidated Statements of Operations and Retained Earnings -
for the Six Months Ended February 28, 1999 and February 28, 1998
Consolidated Statements of Operations and Retained Earnings -
for the Three Months Ended February 28, 1999 and February 28, 1998
Consolidated Statements of Cash Flows -
for the Six Months Ended February 28, 1999 and February 28, 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
NETWORKS NORTH INC.
CONSOLIDATED BALANCE SHEETS
AS AT FEBRUARY 28, 1999 AND AUGUST 31, 1998
(Expressed in Canadian dollars - unaudited)
===============================================================================================
February 28, 1999 August 31, 1998
$ $
- -----------------------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 780,712 1,001,115
Short-term temporary investments 1,948,507 2,042,333
Accounts receivable, trade - net of allowance
for doubtful accounts of $63,000; August - $53,000 3,577,997 2,668,184
Income taxes receivable -- 33,174
Inventory 277,005 308,088
Prepaid expenses 774,917 544,255
- -----------------------------------------------------------------------------------------------
Total current assets 7,359,138 6,597,149
- -----------------------------------------------------------------------------------------------
Property and equipment, net 5,531,586 5,785,616
Licenses, net of accumulated amortization 280,770 290,945
Goodwill, net of accumulated amortization 3,117,122 3,214,197
Notes receivable 160,000 160,000
- -----------------------------------------------------------------------------------------------
16,448,616 16,047,907
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 172,583 145,339
Accounts payable - trade 1,885,560 1,440,223
Accrued liabilities 292,318 625,003
Income taxes payable 51,357 --
Current portion of long-term debt 348,803 348,803
- -----------------------------------------------------------------------------------------------
Total current liabilities 2,750,621 2,559,368
- -----------------------------------------------------------------------------------------------
Long-term debt 2,721,271 2,744,991
Less: current portion (348,803) (348,803)
- -----------------------------------------------------------------------------------------------
2,372,468 2,396,188
- -----------------------------------------------------------------------------------------------
Deferred income taxes payable 59,173 59,173
- -----------------------------------------------------------------------------------------------
Total liabilities 5,182,262 5,014,729
- -----------------------------------------------------------------------------------------------
Shareholders' equity
Share capital
900,000 preferred shares 10,917 10,917
2,625,170 common shares 162,484 162,484
Capital in excess of par value 8,837,948 8,837,948
Retained earnings 2,255,005 2,021,829
- -----------------------------------------------------------------------------------------------
Total shareholders' equity 11,266,354 11,033,178
- -----------------------------------------------------------------------------------------------
16,448,616 16,047,907
===============================================================================================
The accompanying notes are an integral part of these statements
NETWORKS NORTH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
(Expressed in Canadian Dollars - Unaudited)
=====================================================================================
February 28, 1999 February 28, 1998
$ $
- -------------------------------------------------------------------------------------
Total revenue 7,163,204 7,491,586
Cost of sales 2,462,591 2,875,547
- -------------------------------------------------------------------------------------
4,700,613 4,616,039
- -------------------------------------------------------------------------------------
Selling, general and administrative expenses 3,430,497 3,292,251
Interest and bank charges 89,208 49,589
Depreciation and amortization 684,970 586,810
- -------------------------------------------------------------------------------------
Income before income taxes and minority interest 495,938 687,389
Provision for income taxes 281,000 238,515
Minority interest (18,238) 99,883
- -------------------------------------------------------------------------------------
Net income and comprehensive income for the period 233,176 348,991
Retained earnings, beginning of period 2,021,829 1,403,764
- -------------------------------------------------------------------------------------
Retained earnings, end of period 2,255,005 1,752,755
=====================================================================================
Earnings per share (Note 4):
Basic 0.09 0.14
Diluted 0.08 0.12
=====================================================================================
The accompanying notes are an integral part of these statements
NETWORKS NORTH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
(Expressed in Canadian Dollars - Unaudited)
=====================================================================================
February 28, 1999 February 28, 1998
$ $
- -------------------------------------------------------------------------------------
Total revenue 3,527,087 3,754,472
Cost of sales 1,228,095 1,439,527
- -------------------------------------------------------------------------------------
2,298,992 2,314,945
- -------------------------------------------------------------------------------------
Selling, general and administrative expenses 1,686,336 1,669,632
Interest and bank charges 46,183 24,467
Depreciation and amortization 338,788 312,408
- -------------------------------------------------------------------------------------
Income before income taxes and minority interest 227,685 308,438
Provision for income taxes 178,000 128,399
Minority interest 7,460 36,105
- -------------------------------------------------------------------------------------
Net income and comprehensive income for the period 42,225 143,934
Retained earnings, beginning of period 2,212,780 1,608,821
- -------------------------------------------------------------------------------------
Retained earnings, end of period 2,255,005 1,752,755
=====================================================================================
Earnings per share:
Basic 0.02 0.06
Diluted 0.01 0.05
=====================================================================================
The accompanying notes are an integral part of these statements
NETWORKS NORTH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
(Expressed in Canadian dollars - unaudited)
========================================================================================================
February 28, 1999 February 28, 1998
$ $
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income and comprehensive income for the period 233,176 348,991
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 684,970 586,810
Loss (income) from investment in Viewer Services 47,399 (3,997)
Accretion of interest on non-interest bearing promissory notes 15,338 16,390
Changes in assets and liabilities:
Decrease (increase) in short-term investments 93,826 (142,477)
Increase in accounts receivable (909,813) (1,030,804)
Decrease in inventory 31,083 393,600
Increase in prepaid expenses (230,662) (29,824)
Increase in accounts payable and
accrued liabilities 49,773 591,669
Decrease in deferred revenue -- (275,925)
Increase (decrease) in income taxes payable 84,531 (250,611)
- --------------------------------------------------------------------------------------------------------
Cash provided by operating activities 99,621 203,822
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment (323,691) (710,046)
Investment in Viewer Services 143 5,894
Increase in notes receivable -- (3,180)
Acquisition of Interlynx Multimedia -- (380,001)
- --------------------------------------------------------------------------------------------------------
Cash used in investing activities (323,548) (1,087,333)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Bank indebtedness 27,244 72,311
Proceeds from issuing common shares -- 247,500
Notes and loans payable (23,720) (455,358)
- --------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 3,524 (135,547)
- --------------------------------------------------------------------------------------------------------
Net decrease in cash and
cash equivalents during the period (220,403) (1,019,058)
Cash and cash equivalents, beginning of period 1,001,115 2,421,797
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 780,712 1,402,739
========================================================================================================
The accompanying notes are an integral part of these statements
NETWORKS NORTH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999
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 27, 1998. The results of
operations for the six months ended February 28, 1999 are not necessarily
indicative of the results for the full fiscal year ending August 31, 1999.
Note 2. General
The financial statements of the Company for the three and six months ended
February 28, 1999 (the "1999 Second Fiscal Quarter" and "1999 First Fiscal Half"
respectively), and February 28, 1998 (the "1998 Second Fiscal Quarter" and "1998
First Fiscal Half" respectively), include the operations of the Company's
wholly-owned subsidiaries NTN Interactive Network Inc. ("NTNIN") and 3484751
Canada Inc., NTNIN's wholly-owned subsidiary Magic Lantern Communications Ltd.
("Magic") and 51% of the operations of Interlynx Multimedia Inc. ("Interlynx").
Magic conducts its operations directly and through its wholly-owned
subsidiaries, 745695 Ontario Ltd. ("Custom Video") and B.C. Learning Connection
Inc. ("BCLC"), its 75% ownership of the outstanding shares of Sonoptic
Technologies Inc. ("Sonoptic"), and its 50% ownership of the outstanding shares
of 1113659 Ontario Ltd. ("Viewer Services"), a joint venture operated with
International Tele-Film Enterprises Ltd. (Magic, Custom Video, BCLC, Sonoptic
and Viewer Services are referred to as the "Magic Lantern Group").
Interlynx conducts its operations directly and through its 60% ownership of the
outstanding shares of Universal Content Inc. (formerly known as Interlynx
International, Inc.), which is the marketing and sales arm of Interlynx
responsible for the international brokering of CD-ROM products from developers
around the world.
Prior period's figures have been reclassified to be consistent with any
reclassifications in the current period.
Note 3. Business Segment Data for the six months ended February 28, 1999 and
February 28, 1998
Interactive TV Educational and
Entertainment Multimedia Distribution Total
------------- ----------------------- -----
$ $ $
1999
- ----
Total revenues 4,265,091 2,898,113 7,163,204
Operating income 490,181 5,757 495,938
Net earnings 209,181 23,995 233,176
Total assets 10,014,505 6,434,111 16,448,616
Current liabilities 1,439,380 1,311,241 2,750,621
Total liabilities 3,027,618 2,154,644 5,182,262
1998
- ----
Total revenues 4,130,070 3,361,516 7,491,586
Operating income 552,261 135,128 687,389
Net earnings 313,746 35,245 348,991
Total assets 8,830,518 6,498,729 15,329,247
Current liabilities 1,475,706 2,079,901 3,555,607
Total liabilities 2,083,673 2,895,435 4,979,108
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 28:
1999 1998
---- ----
Numerator:
Net income (numerator for basic
earnings per share) $ 233,176 $ 348,991
Accretion of interest on non-interest
bearing promissory notes 15,338 16,390
---------- ----------
Numerator for diluted earnings
per share $ 248,514 $ 365,381
========== ==========
Denominator:
For basic - weighted
average number of shares 2,625,170 2,535,359
Effect of dilutive securities:
Convertible preferred shares 192,857 203,571
Convertible promissory notes 98,193 185,448
Employee stock options 95,360 36,840
---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average number of shares
and assumed conversions 3,011,580 2,961,218
========== ==========
Basic earnings per share $ 0.09 $ 0.14
========== ==========
Diluted earnings per share $ 0.08 $ 0.12
========== ==========
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 eight business units or subsidiaries. Of these,
two are considered to be the traditional core of the Company's business, that
is, directly related to multi-player interactive entertainment programs. The two
traditional core business units are the Hospitality Group ("Hospitality") and
the Corporate Products Group ("Corporate"). Five units, 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 fulfilment 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 50% owned joint venture
Viewer Services, which was created to assume the inbound telemarketing and
product fulfilment services required by Canadian television broadcasters. The
eighth unit is Interlynx, which designs and develops web-based training
programs, educational and corporate multimedia, CD-ROMs and web sites.
Highlights of the Three Months Ended February 28, 1999
During the 1999 Second Fiscal Quarter, Interlynx signed a major contract to
provide custom web-based software to facilitate all aspects of eSourcing for the
Canadian Imperial Bank of Commerce (CIBC). Under the contract, Interlynx will
design and build a web interface and a set of programs to support CIBC's
employees' ability to interact with the electronic purchasing capabilities.
NTNIN signed three new sponsors to the NTN Entertainment Network during the
quarter, namely: The Clorox Company of Canada, to advertise its Armor All
product, Goodyear Canada, Inc. and Timex Canada, Inc. NTNIN also became a
sponsor of The Toronto Rock Lacrosse Club during the quarter.
Results of Operations for the Three Months ended February 28, 1999
The Company's total revenues for the 1999 Second Fiscal Quarter were $3,527,087,
compared to $3,754,472 for the 1998 Second Fiscal Quarter, a decrease of
$227,385 or 6.1%. This decrease was contributed to by all of the following; a
weakened worldwide market for CD-ROMs caused a 38.8% decrease in revenues over
the comparable prior period for Interlynx. Magic experienced a 17.9% decrease in
video and software sales over the prior period, mainly due to the change in the
budget year of Ontario schools from a December budget year to
an August budget year. Furthermore, revenues from event programming decreased
31.6% over the corresponding prior period mainly due to the loss of two major
events that took place in 1998.
Total cost of sales for the 1999 Second Fiscal Quarter was $1,228,095, compared
to $1,439,527 for the 1998 Second Fiscal Quarter, a decrease of $211,432 or
14.7%. This decrease is commensurate with the decreased sales levels experienced
above. As a percentage of the Company's total revenues, such expenses decreased
to 34.8% for the 1999 Second Fiscal Quarter from 38.3% for the 1998 Second
Fiscal Quarter.
Total selling, general and administrative expenses for the 1999 Second Fiscal
Quarter were $1,686,336, compared to $1,669,632 for the 1998 Second Fiscal
Quarter, an increase of $16,704 or 1.0%. This increase was caused in part by
increased staffing and salaries. Also, included in these expenses for 1999 was a
loss from the equity investment in Viewer Services of $41,399, while the
corresponding 1998 expenses included income from the equity investment in Viewer
Services of $6,277. The overall increase in selling, general and administrative
expenses was somewhat mitigated by decreases in advertising and promotion and
freight charges. As a percentage of the Company's total revenues, such expenses
increased to 47.8% for the 1999 Second Fiscal Quarter from 44.5% for the 1998
Second Fiscal Quarter.
Interest and bank charges for the 1999 Second Fiscal Quarter were $46,183,
compared to $24,467 for the 1998 Second Fiscal Quarter, an increase of $21,716
or 88.8%. This increase was the result of financing the purchase of land and
building at 10 Meteor Drive with bank debt. As a percentage of the Company's
total revenues, interest and bank charges increased to 1.3% for the 1999 Second
Fiscal Quarter from 0.7% for the 1998 Second Fiscal Quarter.
Total depreciation and amortization expenses for the 1999 Second Fiscal Quarter
were $338,788, compared to $312,408 for the 1998 Second Fiscal Quarter, an
increase of $26,380 or 8.4%. This increase was the result of additional
depreciation on fixed assets added in 1999 and depreciation on the newly
acquired building located at 10 Meteor Drive. As a percentage of the Company's
total revenues, such expenses increased to 9.6% for the 1999 Second Fiscal
Quarter from 8.3% for the 1998 Second Fiscal Quarter.
The provision for income taxes for the 1999 Second Fiscal Quarter was $178,000,
compared to $128,399 for the 1998 Second Fiscal Quarter, an increase of $49,601
or 38.6%. As the tax provision for the Company is based solely on the taxable
income of NTNIN, it is unaffected by losses experienced in other divisions. For
this reason, the tax provision increased over the prior period even though
income before income taxes decreased in 1999 compared to 1998. As a percentage
of the Company's total revenues, such expenses increased to 5.0% for the 1999
Second Fiscal Quarter from 3.4% for the 1998 Second Fiscal Quarter.
The minority interest share in profits for the 1999 Second Fiscal Quarter was
$7,460. This is compared to the minority interest share in profits for the 1998
Second Fiscal Quarter of $36,105, an overall decrease of $28,645 or 79.3%. As a
percentage of the Company's total revenues, the minority interest share of
profits was 0.2% for the 1999 Second Fiscal Quarter.
As a result of all the above, net income and comprehensive income for the 1999
Second Fiscal Quarter was $42,225, compared to $143,934 for the 1998 Second
Fiscal Quarter, a decrease of $101,709 or 70.7%.
Results of Operations for the Six Months Ended February 28, 1999
The Company's total revenues for the 1999 First Fiscal Half were $7,163,204,
compared to $7,491,586 for the 1998 First Fiscal Half, a decrease of $328,382 or
4.4%. This decrease was caused in part by a weakened worldwide market for
CD-ROMs, which resulted in a 53.4% decrease in revenues for Interlynx over the
prior period. Video and software sales by Magic decreased 16.5% and event
programming revenues decreased by 14.4% over the comparable figures in the prior
period. The decrease in event programming revenues was directly attributable to
the loss of two major events that took place in 1998.
Total cost of sales for the 1999 First Fiscal Half was $2,462,591, compared to
$2,875,547 for the 1998 First Fiscal Half, a decrease of $412,956 or 14.4%. This
decrease is commensurate with the decreased sales levels experienced above. As a
percentage of the Company's total revenues, such costs of sales decreased to
34.4% for the 1999 First Fiscal Half from 38.4% for the 1998 First Fiscal Half.
Total selling, general and administrative expenses for the 1999 First Fiscal
Half were $3,430,497, compared to $3,292,251 for the 1998 First Fiscal Half, an
increase of $138,246 or 4.2%. This increase was caused in part by increased
staffing and salaries. Also, included in these expenses for 1999 was a loss from
the equity investment in Viewer Services of $47,399, while the corresponding
1998 expenses included income from the equity investment in Viewer Services of
$3,997. Lastly, the 1998 selling, general and administrative expenses were
reduced by a foreign exchange gain of Cdn$74,442. As a percentage of the
Company's total revenues, such expenses increased to 47.9% for the 1999 First
Fiscal Half from 43.9% for the 1998 First Fiscal Half.
Interest and bank charges for the 1999 First Fiscal Half amounted to $89,208,
compared to $49,589 for the 1998 First Fiscal Half, an increase of $39,619 or
79.9%. This increase was the result of financing the purchase of land and
building at 10 Meteor Drive, acquired in April 1998. As a percentage of the
Company's total revenues, interest and bank charges increased to 1.2% for the
1999 First Fiscal Half from 0.7% for the 1998 First Fiscal Half.
Total depreciation and amortization expenses for the 1999 First Fiscal Half were
$684,970, compared to $586,810 for the 1998 First Fiscal Half, an increase of
$98,160 or 16.7%. This was the result of increased depreciation on rental and
office equipment and furniture and fixtures added during the period.
Depreciation on the newly acquired building located at 10 Meteor Drive also
contributed to the increase. As a percentage of the Company's total revenues,
such expenses increased to 9.6% for the 1999 First Fiscal Half from 7.8% for the
1998 First Fiscal Half.
The provision for income taxes for the 1999 First Fiscal Half was $281,000,
compared to $238,515 for the 1998 First Fiscal Half, an increase of $42,485 or
17.8%. As the tax provision for the Company is based solely on the taxable
income of NTNIN, it is unaffected by losses experienced in other divisions. For
this reason, the tax provision increased over the prior period even though
income before income taxes decreased in 1999 compared to 1998. As a percentage
of the Company's total revenues, such expenses increased to 3.9% for the 1999
First Fiscal Half from 3.2% for the 1998 First Fiscal Half.
The minority interest share in losses for the 1999 First Fiscal Half was
$18,238. This is compared to the minority interest share in profits for the 1998
First Fiscal Half of $99,883, an overall decrease of $118,121 or 118.3%. As a
percentage of the Company's total revenues, the minority interest loss was 0.3%
for the 1999 First Fiscal Half.
As a result of all of the above, net income and comprehensive income for the
1999 First Fiscal Half was $233,176 compared to $348,991 for the 1998 First
Fiscal Half, a decrease of $115,815 or 33.2%.
Liquidity and Capital Resources
At February 28, 1999, the Company had working capital of $4,608,517, an increase
of $570,736 from working capital of $4,037,781 at August 31, 1998.
For the 1999 First Fiscal Half, the Company had a net decrease in cash flow of
$220,403 compared to a net decrease of $1,019,058 in the 1998 First Fiscal Half.
Cash provided by operating activities for the 1999 First Fiscal Half was
$99,621, compared to $203,822 provided by operating activities in the 1998 First
Fiscal Half. In 1999, the major sources that contributed to cash being provided
by operating activities were as follows; net income of $980,883, 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 mitigated by
increases in accounts receivable and prepaid expenses of $909,813 and $230,662
respectively. In 1998, the major sources that contributed to cash being provided
by operating activities were net income of $948,194, a decrease in inventory of
$393,600, and an increase in accounts payable and accrued liabilities of
$591,669. These sources were somewhat offset by increases in short-term
investments, accounts receivable and prepaid expenses of $142,477, $1,030,804
and $29,824 respectively, and decreases in deferred revenue and income taxes
payable of $275,925 and $250,611.
Cash used in investing activities in the 1999 First Fiscal Half was $323,548,
compared to the $1,087,333 used in investing activities in the 1998 First Fiscal
Half. In 1999, cash was used in the purchase of property and equipment. Cash was
used in the comparable prior period for the purchase of property and equipment
and the acquisition of Interlynx.
Cash provided by financing activities in the 1999 First Fiscal Half was $3,524,
compared to the $135,547 used in financing activities in the 1998 First Fiscal
Half. In 1999, cash was provided by short-term borrowings, which were used in
day-to day operations and to meet scheduled debt principal repayments. In 1998,
financing totaling $319,811 was obtained, the majority of which was through the
issuance of common shares ($247,500). This cash was then used in the repayment
of notes payable and to meet scheduled debt principal repayments, which totaled
$455,358.
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, 1999 (the "1999
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 28, 1999 and 1998 and
inflation is not expected to have a significant impact on the Company's
operations or financial position during the 1999 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 year 2000 issue arises because many computerized systems use two digits,
rather than four, to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900, or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the year 2000 issue may be experienced before, on, or after
January 1, 2000, and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure, which
could affect the Company's ability to conduct normal business operations.
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter. For this purpose the term "computer equipment and
software" includes systems that are commonly thought of as information
technology ("IT") systems. Non-IT systems refers to other miscellaneous systems,
not thought of as IT systems, such as alarm systems and fax machines. In
addition, the Company is in the process of determining the extent to which the
systems of third parties with whom the Company has significant relationships may
be vulnerable to year 2000 issues and what impact, if any, these year 2000
issues will have on the Company. As part of these assessments, a compliance
plan, which includes the formation of a steering committee and a timetable for
identifying, evaluating, resolving and testing its year 2000 issues, has been
developed.
The timetable provides for the Company's completion of its remediation of any
year 2000 issues by the end of September 1999. While it is difficult, at
present, to fully quantify the overall cost of this work, the Company currently
estimates its total spending for year 2000 issues to be approximately $100,000
to $500,000. The range is a function of ongoing evaluation as to whether certain
systems and equipment will be corrected or replaced, which is largely dependent
on information to be obtained from suppliers or other external sources. Costs
for systems maintenance and modification are expensed as incurred while spending
for new hardware, software or equipment will be capitalized and depreciated over
the assets' useful lives. The Company anticipates funding its year 2000
expenditures out of its cash flows from operations.
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
The Annual Meeting of Shareholders of the Company was held on
Thursday, February 25, 1999. At the meeting, the existing Directors
of the Company were re-elected by 2,023,061 votes cast in favour of
all the nominees for Director (holders of shares possessing 1,831
votes withheld their votes from all the nominees for Director,
except for Daniel C. Downs whereby 201,831 votes were withheld),
being in excess of a majority of the shares present in person or by
proxy. The holders of shares of the Company possessing 2,021,002
votes, being in excess of a majority of the shares present in person
or by proxy, voted in favour of ratifying the appointment of Ernst &
Young, as independent auditors of the Company for the fiscal year
ending August 31, 1999.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following list sets forth the applicable exhibits (numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Quarterly Report on Form 10-Q:
Exhibit
Number Title
------ -----
3.1 Certificate of Incorporation, as amended to date.+
3.2 By-Laws, as amended to date.+
10.1 License Agreement, dated March 23, 1990, between NTN Communications,
Inc. and NTN Interactive Network Inc.+
10.2 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw
Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy
Connolly and NTN Interactive Network Inc., minus Schedules thereto.+
10.3 Designation Agreement, dated as of October 4, 1994, among NTN
Canada, Inc., NTN Interactive Network Inc. and NetStar Enterprises
Inc. (formerly Labatt Communications Inc.).+
22 List of Subsidiaries.+
27 Financial Data Schedule.
+ Incorporated by reference. See Exhibit Index.
(b) Reports on Form 8-K
None.
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, 1999 By: /s/ Peter Rona
-----------------------------------------
Peter Rona,
President and Chief Executive Officer
(Duly Authorized Officer)
Dated: April 14, 1999 By: /s/ Don Pagnutti
-----------------------------------------
Don Pagnutti,
Principal Financial Officer
NETWORKS NORTH INC.
FORM 10-Q
FEBRUARY 28, 1999
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Location
- ------ ---------------------- --------
3.1 Certificate of Incorporation, as amended to date +1, Exh. 3.1
3.2 By-Laws, as amended to date +1, Exh. 3.2
10.1 License Agreement, dated March 23, 1990, between NTN Communications,
Inc. and NTN Interactive Network Inc. +2, Exh. 10.9
10.2 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw
Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy
Connolly and NTN Interactive Network Inc., minus Schedules thereto
+3, Exh. 10.1
10.3 Designation Agreement, dated as of October 4, 1994, among Networks
North Inc. (formerly known as NTN Canada, Inc., NTN Interactive
Network Inc. and NetStar Enterprises Inc. (formerly Labatt
Communications Inc.) +4, Exh. C
22 List of Subsidiaries +1, Exh. 22
27 Financial Data Schedule ++
- ----------
+1 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Annual Report on Form 10-K of the
Company, for its fiscal year ended August 31, 1996 (File No. 0-18066),
filed on December 16, 1996.
+2 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Annual Report on Form 10-K of NTN
Communications, Inc., for its fiscal year ended December 31, 1990 (File
No. 2-91761-C), filed on April 1, 1991.
+3 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Current Report on Form 8-K of the
Company (Date of Report: October 2, 1996) (File No. 0-18066), filed on
October 17, 1996.
+4 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Current Report on Form 8-K of the
Company (Date of Report: October 4, 1994) (File No. 0-18066), filed on
October 18, 1994.
++ Filed electronically pursuant to Item 401 of Regulation S-T.