Without limitation, some events that tend to reduce travel and, therefore, could reduce CTM’s sales and revenues include:
If any of the foregoing factors results in a downturn in the tourism and travel industry, there could be a material adverse effect on CTM’s business, prospects and financial condition.
Declines or disruptions in the travel and tourism industry, such as those caused by terrorist attacks or general economic slowdowns such as the current recession, could negatively affect CTM’s business.
If CTM’s access to hotels and other locations for its display stations on the current terms were to be limited, it could negatively impact its results of operations.
CTM’s brochure distribution business relies on access to hotels and other locations for the placement of its display stations as a service or convenience for the customers of those businesses and other users of those facilities. If the owners or operators of those facilities were to restrict or substantially reduce such access, CTM’s brochure distribution business, revenues and results of operations could be materially and adversely affected.
Trends and changes in the theater industry could adversely affect CTM’s revenues.
A significant portion of CTM’s revenue, 11% in fiscal 2009 and approximately 13% in fiscal 2010, is derived from its distribution of brochures related to Broadway shows. If Broadway theater attendance declines, the demand for CTM’s services to the theater industry could soften, adversely affecting its revenues. Further, economic downturns negatively affect the entertainment industry generally and attendance at Broadway shows in particular. Moreover, new shows may not open. Accordingly, economic downturns, whether currently or in the future, could adversely impact CTM’s business from the theater industry which could have an adverse effect on its business, prospects and financial condition.
Any labor disputes that cause Broadway shows to close could adversely affect CTM’s revenues.
As a significant portion of CTM’s revenue is derived from its distribution of brochures related to Broadway shows, any strikes that cause the “lights to go off” on Broadway could adversely affect CTM’s revenues.
Rapid technological changes and reliance on the Internet may decrease the attractiveness of CTM’s services to customers.
In order to remain competitive in the brochure industry, CTM must continue to enhance its services. If CTM fails to continually improve its services, it could lag behind competitors or it could become obsolete due to its customers’ and the public’s reliance on technology and the Internet. In particular, the increasing popularity and availability of access content and the Internet through wireless devices may reduce the appeal of advertising through brochure displays.
CTM may need to develop technology or modify its services accordingly to retain its customers and grow its customer base. Such development and modifications may require CTM to incur substantial costs and expenses to respond. Such costs and expenses may have a material adverse effect on CTM’s business, financial condition and results of operations. It is possible that CTM may not be able to adapt as Internet technologies and customer demands continue to evolve. To be successful, CTM must adapt to its rapidly changing market by continually enhancing the technologies used in its Internet products and services, and by introducing new technology to address the changing needs of its business and consumers. If CTM is unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or business and consumer customer requirements, its business, prospects and financial condition could be materially adversely affected.
Seasonal factors affect CTM’s operating results.
Seasonality of revenues will cause CTM’s revenues to fluctuate. Travel is usually slow during non-summer months and during the non-holiday season, and customers are less likely to pay for distribution of brochures during such periods. Accordingly, CTM needs adequate liquidity to finance its operations during off-seasons. Although in the past CTM has consistently had sufficient cash reserves to fund its operations year-round, there can be no assurance that it will have sufficient funds from operations or external sources to fund its operations during slower periods.
IDW depends on a single distributor for its publications and such dependence subjects IDW to the risk that such distributor may be unable to perform its obligations to IDW.
Diamond, which handles the vast majority of all comic publishers’ direct market distribution, distributes all of IDW’s products for both the direct and non-direct markets. Should Diamond fail to perform under its distribution agreement or if it were to experience financial difficulties that would hinder its performance, although the non-direct market may have other distributors that could fill Diamond’s role, distribution to the direct market would be significantly impaired in the short term and IDW’s ability to distribute and receive proceeds from its publications would be impaired.
Any loss of key personnel and the inability to attract and retain qualified employees could have a material adverse impact on IDW’s operations.
IDW is dependent on the continued services of key executives such as its CEO, Ted Adams, its Executive Vice-President, Robbie Robbins, and certain creative employees. IDW currently has employment contracts with its CEO and Executive Vice-President, but does not have employment agreements with any other officers or employees. The departure of key personnel without adequate replacement could severely disrupt IDW’s business operations. Additionally, IDW needs qualified managers and skilled employees with industry experience to operate its businesses successfully. From time to time there may be shortages of skilled labor which may make it more difficult and expensive for IDW to attract and retain qualified employees. If IDW is unable to attract and retain qualified individuals or its costs to do so increase significantly, its op erations would be materially adversely affected.
IDW’s publications might be more expensive to make than anticipated.
Expenses associated with producing IDW’s publications could increase beyond anticipated amounts because of, among other things, an escalation in compensation rates of talent working on the publications, and unexpected increase in the number of personnel required to work on publications, creative problems, or an increase in printing costs.
IDW may not be able to respond to changing consumer preferences and its sales may decline.
IDW operates in highly competitive markets that are subject to rapid change, including changes in customer preferences. There are substantial uncertainties associated with IDW’s efforts to develop successful publications and products for its customers. New fads, trends, and shifts in popular culture could affect the type of creative media consumers will purchase. IDW has no professionally gathered demographic data, but anecdotal evidence and management experience indicate that the majority of IDW’s readers are males between the ages of 18 and 35. Content in which IDW has invested significant resources may fail to respond to consumer demand at the time it is published. IDW regularly makes significant investments in new products that may not be profitable, or whose profitability may be significantly lower than IDW has ex perienced historically. A loss in sales due to the foregoing could have a material adverse effect on IDW’s business, prospects and financial condition.
Significant returns of IDW publications sold to mass market book stores may have a material impact on IDW’s cash flow.
Through its exclusive distribution arrangement with Diamond, IDW sells its publications to mass market books stores (such as Borders and Barnes & Noble) on a fully returnable basis. As a result, these stores can return publications to Diamond for credit, which in turn is charged back to IDW. There is no time limit on the stores’ right to return publications distributed to them. In addition to IDW being charged back the wholesale cost of the publications, IDW also incurs a return processing fee by Diamond. Such returns and fees are credited against IDW’s current sales revenue from Diamond reducing IDW’s current cash flow. Product returns are a normal part of book publishing and IDW estimates and records a reserve for such returns based on its return history and current trends that are expected to continue. A s ignificant over estimation of demand for a publication by the mass market book stores, however, could result in a large volume of returns significantly reducing IDW’s operating capital. Further, the general downturn in the economy may also result in significant returns as book stores reduce their outstanding debts to improve their own cash flow.
IDW’s publications may be less successful than anticipated.
IDW cannot predict the commercial success of any of its publications because the revenue derived from the distribution of a publication depends primarily upon its acceptance by the public, which cannot be accurately predicted. The commercial success of a publication also depends upon the public’s acceptance of competing publications, critical reviews, the availability of alternative forms of entertainment and leisure time activities, piracy and unauthorized distribution of publications, general economic conditions, and other tangible and intangible factors, none of which can be predicted with certainty. The commercial failure of just one of IDW’s publications could have a material adverse effect on IDW’s results of operations in both the year of release and in the future.
If IDW fails to maintain strong relationships with its licensors, authors, illustrators and other creative talent, as well as to develop relationships with new licensors and creative talent, its business could be adversely affected.
IDW’s business is highly dependent on maintaining strong relationships with the entertainment companies that license their entertainment properties to IDW, and with authors, illustrators and other creative talent who produce the products that are sold to IDW’s customers. Any weakening of these relationships, or the failure to develop successful new relationships, could have an adverse impact on IDW’s business and financial performance. IDW has an exclusive relationship with only one artist. IDW, therefore, depends on freelance artists who choose how to spend their time and utilize their talents. It is important for IDW to maintain strong relationships with those freelance artists so they devote their time and talent to IDW’s projects.
A decrease in the level of media exposure or popularity of IDW’s licensed characters could adversely affect its financial results.
If the movies or television programs that IDW licenses are not successful, or if the characters that IDW licenses lose some of their popularity, IDW’s ability to sell publications based on such characters will decline.
IDW cannot control certain publication delays and cancellations which could adversely affect IDW’s sales and its ability to meet delivery obligations.
IDW does not control the decision to proceed with the production of publications based on characters that it licenses from others, and it does not control the timing of the releases of those publications, which are subject to long and inflexible schedules. Disruptions, delays or cancellations to those schedules could cause IDW to incur additional costs, miss an anticipated publication date, endure long periods without publishing a publication or all of the above, and could hurt IDW’s associated licensing programs and business, generally.
IDW depends on the internal controls of its distributor for its financial reporting and revenues.
Because of Diamond’s role as distributor of IDW’s publications and the fact that much of IDW’s inventory is held at Diamond’s facilities, IDW depends on Diamond to implement internal controls over financial reporting and to provide IDW with information related to those internal controls. Diamond’s internal controls might not be sufficient to allow IDW to meet its internal control obligations or to allow IDW’s management to properly assess those controls. Diamond might fail to cure any internal control deficiencies related to the publications that it distributes. IDW may be unable to effectively create compensating controls to detect and prevent errors or irregularities in Diamond’s accounting to IDW and others. Errors in properly tracking publication sales could also negatively impact IDW& #8217;s revenues.
IDW might be disadvantaged by changes or disruptions in the way publications are distributed.
The manner in which consumers access content has undergone rapid and dramatic changes. IDW cannot assure that new distribution channels, such as digital distribution, will be as profitable for its industry as are today’s channels or that it will successfully exploit any new channels. IDW can also not assure that current distribution channels will maintain their profitability.
IDW might lose potential sales because of piracy of publications.
With technological advances, the piracy of publications has increased. Unauthorized and pirated copies of IDW’s publications will reduce the revenue generated by those publications. If consumers can obtain illegal copies of IDW’s publications and media, IDW’s revenues will decline. IDW may not be able to identify or enforce violations of its intellectual property rights and even if legal remedies are available, they could be costly and drain its financial resources. Accordingly, illegal copying of IDW’s content could negatively affect its revenues.
IDW’s dependence on printers outside the United States subjects it to the risks of international business.
IDW’s publications are printed in South Korea and occasionally in Canada on an as-needed basis. International manufacturing is subject to a number of risks, including extreme fluctuations and volatility in currency exchange rates, transportation delays and interruptions, political and economic disruptions, the impositions of tariffs, import and export controls and changes in governmental policies. The impact of changes in currency rates has been especially heightened by current global economic conditions and significant devaluations of local currencies in comparison to the U.S. Dollar. Although to date, currency fluctuations have not adversely affected IDW’s costs, such fluctuations could adversely affect IDW in the future. Possible increases in costs and delays of, or interferences with, product deliveries could resul t in losses of revenues, reduced profitability and reductions in the goodwill of IDW’s customers. Additional factors that may adversely affect IDW’s printing activities outside of the United States include international political situations, uncertain legal systems and applications of law, prejudice against foreigners, corrupt practices, uncertain economic policies and potential political and economic instability that may be exacerbated in foreign countries.
The competitive pressures IDW faces in its business could adversely affect its financial performance and growth prospects.
IDW is subject to significant competition, including from other publishers, many of which are substantially larger than IDW and have much greater resources than it, such as Marvel Comics, DC Comics and Dark Horse Comics. To the extent IDW cannot meet the challenges from existing or new competitors or develop new product offerings to meet customer preferences or needs, its revenues and profitability could be adversely affected.
There may be a limited trading market for shares of our common stock and stockholders may find it difficult to sell our shares.
Investors may suffer dilution.
We may engage in equity financing to fund our future operations and growth. If we raise additional funds by issuing equity securities, stockholders may experience significant dilution of their ownership interest (both with respect to the percentage of total securities held, and with respect to the book value of their securities) and such securities may have rights senior to those of the holders of our common stock.
General economic conditions may negatively impact our operations.
Economic downturns may negatively affect our operations. These conditions may be widespread or isolated to one or more geographic regions in which we operate. Higher wages, related labor costs, printing costs, leasing costs, energy, insurance and fuel costs and the increasing cost trends in those markets may decrease our margins. Moreover, economic downturns present an additional challenge to IDW because a significant portion of IDW’s revenues are from sales through retail stores, which are more likely to close during economic downturns. In addition, decreases in travel and entertainment spending during economic downturns could impact our businesses, and thereby negatively impact our operations.
We have limited resources and could find it difficult to raise additional capital.
As a result of the Spin-Off, we became independent of IDT. We have limited operating history as an independent company, and no current sources of financing. Any financing formerly provided to any of our businesses by IDT is no longer available. We may need to raise additional capital in order for stockholders to realize increased value on our securities. Given the current global economy, there can be no assurance that we would be able to obtain funding on commercially reasonable terms in a timely fashion. Failure to obtain additional funding, if necessary, could have a material adverse effect on our business, prospects and financial condition.
Holders of our Class B common stock have significantly less voting power than holders of our Class A common stock and our Class C common stock.
Holders of our Class B common stock are entitled to one-tenth of a vote per share on all matters on which our stockholders are entitled to vote, while holders of our Class A common stock are entitled to one vote per share and holders of our Class C common stock are entitled to three votes per share. As a result, the ability of holders of our Class B common stock to influence our management is limited.
We are controlled by our principal stockholder, which limits the ability of our other stockholders to affect the management of the Company.
Howard S. Jonas, our Chairman of the Board and founder has voting power over 3,981,894 shares of our common stock (which includes 497,237 shares of our Class A common stock, 2,393,882 shares of our Class B common stock and 1,090,775 shares of our Class C common stock which are convertible into shares of our Class A common stock on a 1-for-1 basis), representing approximately 80% of the combined voting power of our outstanding capital stock, as of October 26, 2010. Mr. Jonas is able to control matters requiring approval by our stockholders, including the approval of significant corporate matters, such as any merger, consolidation or sale of all or substantially all of our assets. As a result, the ability of any of our other stockholders to influence the management of our Company is limited. Mr. Jonas and William C. Martin (via his funds Raging Capital Fund, LP and Raging Capital Fund (QP), LP) collectively own approximately 57% of our outstanding shares which are publicly traded, limiting the liquidity of our remaining publicly traded shares.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our headquarters are located in CTM’s headquarters at 11 Largo Drive South, Stamford, Connecticut in approximately 9,000 square feet of leased office space and 22,000 square feet of warehouse space.
IDW leases 5,000 square feet (approximately 4,300 square feet of leased office space and approximately 700 square feet of warehouse space) in a stand alone building in San Diego, California under a 4-year lease expiring in February 2012.
Item 3. Legal Proceedings.
None. We are subject to other legal proceedings which arise in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, in the opinion of our management, none of the legal proceedings to which we are a party, whether discussed above or otherwise, will have a material adverse effect on our results of operations, cash flows or financial condition.
Item 4. (Removed and Reserved).
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our Class A common stock and Class B common stock are quoted on the Pink OTC Markets and trade under the symbols “CTMMA” and “CTMMB,” respectively.
The table below sets forth the high and low sales prices for our Class A common stock as reported on the Pink OTC Markets for the fiscal periods indicated.
The table below sets forth the high and low sales prices for our Class B common stock as reported on the Pink OTC Markets for the fiscal periods indicated.
On October 26, 2010, there were 64 holders of record of our Class A common stock, 121 holders of record of our Class B common stock and 5 holders of our Class C common stock. These numbers do not include the number of persons whose shares are in nominee or in “street name” accounts through brokers. On October 25, 2010, the last sales price reported on the Pink OTC Markets for our Class A common stock was $2.00 per share and for our Class B common stock was $2.35 per share.
We paid cash dividends to our stockholders in March and June 2010. On March 15, 2010, we paid a dividend in the amount of $0.25 per share (approximately $2.1 million in the aggregate) to holders of our Class A, Class B and Class C common stock. On June 15, 2010, we paid a dividend in the aggregate amount of $0.06 per share (approximately $500,000 in the aggregate) to holders of our Class A, Class B and Class C common stock. The declaration of any future dividend will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board that dividends are in the best interest of our stockholders. On October 19, 2010, our Board of Directors approved the payment of a dividend in the am ount of $0.12 per share. The dividend is to be paid on November 9, 2010 to stockholders of record as of November 1, 2010 of our Class A, Class B and Class C common stock, subject to confirmation by our management that there is sufficient surplus and other circumstances existing at such time.
In addition, on October 19, 2010, our Board of Directors approved the payment of regular quarterly dividends in the amount of approximately $0.06 per share, subject to confirmation by our management that there is sufficient surplus as of the proposed future payment dates and other circumstances existing at the relevant times.
The information required by Item 201(d) of Regulation S-K will be contained in our Information Statement for our Written Consent in Lieu of an Annual Stockholders Meeting (the “Information Statement”), which we will file with the SEC within 120 days after July 31, 2010, and which is incorporated by reference herein.
Item 6. Selected Financial Data.
Smaller reporting companies are not required to provide the information required by this Item. In accordance with Item 10-(f)(2)(i) of Regulation S-K, we qualify as a “smaller reporting company” because our public float was below $75 million as of January 29, 2010, the last business day of our second fiscal quarter.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Annual Report contains forward-looking statements. Statements that are not historical facts are forward-looking statements and such forward-looking statements are statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include:
Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “aim,” “will,” “should,” “likely,” “continue” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Readers are cautioned not to place undue reliance on these forward-looking statements and all such forward-looking statements are qualified in their entirety by reference to the following cautionary statements.
We caution that such factors are not exhaustive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements.
Forward-looking statements speak only as of the date of this Annual Report and are statements of our current expectations concerning future results, events and conditions and we are under no obligation to update any of the forward-looking statements, whether as a result of new information, future events or otherwise.
Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our reports on Form 8-K and Form 10-Q.
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.
Our operations face challenges, including those discussed under Item 1A to Part I “Risk Factors” in this Annual Report. In particular, we face challenges:
We are developing plans and changes to our businesses to address each of these identified challenges.
The current economic situation, including reductions in compensation, increases in unemployment and the relatively low level of consumer confidence, has led to a decrease in travel and spending on entertainment, which has a negative impact on CTM’s operations. Despite the general economy’s continued downturn, CTM’s business showed improvement, mainly due to management’s focus on sectors of the market that are impacted less by the economic downturn, as well as cost cutting measures.
However, while the segment of the travel industry that CTM targets is less impacted by the downturn, and certain consumers may look to more modest travel options, including car travel as opposed to air travel, which could increase the demand for the offerings of CTM’s customers, any negative impact on travel and entertainment spending could negatively impact CTM’s business.
CTM has increased its monitoring of customers’ financial condition and is seeking to target those sectors of the market that it believes to be less impacted by the current economic situation.
IDW’s products are directly impacted to a lesser degree by the economic situation, but IDW is experiencing challenges to its distribution efforts as certain retail stores, which are an important outlet through which its products are sold, are experiencing pressure and some may close.
CTM and IDW both anticipate challenges to their businesses from new entrants, technological developments and developments of alternative products and are addressing these challenges by developing their own competitive offerings.
IDW is also impacted by declines in the publishing industry. To counteract that decline, IDW is increasing its presence in the digital book area.
We have the following two reportable business segments: CTM and IDW.
The consolidated financial statements for the periods reflect our financial position, results of operations, changes in stockholders’ equity and cash flows as if the current structure existed for all periods presented. The financial statements have been prepared using the historical basis for the assets and liabilities and results of operations.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts, goodwill and intangible assets with indefinite useful lives and valuation of long-lived assets including intangible assets with finite usefu l lives. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. See Note 1 to the Consolidated Financial Statements in this Annual Report for a complete discussion of our significant accounting policies.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts receivable for estimated losses, which result from the inability or unwillingness of our customers to make required payments and for returns of inventory from our distributors and our direct market customers. We base our allowances on our determination of the likelihood of recoverability of trade accounts receivable based on past experience and current collection trends that are expected to continue. In addition, we perform ongoing internal credit evaluations of our significant customers, but historically we have not required collateral to support trade accounts receivable from our customers. Our estimates of recoverability of customer accounts may change due to new developments, changes in assumptions or changes in our strategy, which may impact our allowance for doubtful accounts balances. We continually assess the likelihood of potential amounts or ranges of recoverability and adjust our allowances accordingly; however actual collections and write-offs of trade accounts receivables may materially differ from our estimates.
Goodwill and Intangible Assets with Indefinite Useful Lives
In accordance with Accounting Standards Codification ‘ASC 350’ relating to goodwill and other intangible assets deemed to have indefinite lives are not amortized. These assets are reviewed annually (or more frequently under various conditions) for impairment using a fair value approach. Other intangible assets with definite lives are amortized over their estimated useful lives.
The goodwill impairment assessment involves estimating the fair value of the reporting unit and comparing it to its carrying amount (which is known as Step 1). If the carrying value of the reporting unit exceeds its estimated fair value, additional steps are followed to determine if an impairment of goodwill is required. In fiscal 2009, we recorded aggregate goodwill impairment charges of $31.5 million, which reduced the carrying amount our goodwill to zero. We estimated the fair value of our reporting units using discounted cash flow methodologies, as well as considering third party market value indicators. Calculating the fair value of the reporting units, and allocating the estimated fair value to all of the tangible assets, intangible assets and liabilities, required significant estimates and assumptions by management.
Valuation of Long-Lived Assets including Intangible Assets with Finite Useful Lives
We test the recoverability of our long-lived assets including identifiable intangible assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of any such asset may not be recoverable. Such events or changes in circumstances include:
| ● | significant actual underperformance relative to expected performance or projected future operating results; |
| ● | significant changes in the manner or use of the asset or the strategy of our overall business; and |
| ● | significant adverse changes in the business climate in which we operate. |
If we determine that the carrying value of certain long-lived assets may not be recoverable and may exceed its fair value based upon the existence of one or more of the above indicators, we will test for impairment based on the projected undiscounted cash flows to be derived from such asset. If the projected undiscounted future cash flows are less than the carrying value of the asset, we will record an impairment loss based on the difference between the estimated fair value and the carrying value of the asset. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from the asset using an appropriate discount rate. Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should our estimates and assumptions prove to be incorrect, we may be required to record impairments in future periods and such impairments could be material.
RESULTS OF OPERATIONS
We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results of operations.
Year Ended July 31, 2010 Compared To Year Ended July 31, 2009
Sale of Assets of WMET Radio
On May 5, 2010, we consummated the sale of substantially all of the assets used in our WMET radio station business (other than working capital). WMET 1160 AM is a radio station serving the Washington, D.C. metropolitan area. The sale price for the WMET assets was $4 million in a combination of cash and a promissory note of the buyer that is secured by the assets sold. $1.3 million of the purchase price was paid in cash by the closing and the remainder is owed pursuant to a two-year promissory note, which is extendable in part to three years at the option of the buyer. The sale met the criteria to be reported as a discontinued operation and accordingly, WMET’s results are classified as part of discontinued operations for all periods presented. In the forth quarter of fiscal 2010, the company recognized a gain of $1.6 million in connection with the sale.
Summary Financial Data of Discontinued Operations
Revenues, (loss) income before income taxes and net (loss) income of WMET, which are included in discontinued operations, were as follows:
| Year Ended July 31, | | 2010 | | | 2009 | |
| | | (in thousands) | |
Revenue | | $ | 411 | | | $ | 1,168 | |
| Loss before income taxes and net loss . | | | (625 | ) | | | (1,936 | ) |
Consolidated
| (in millions) | | | | | | | | Change | |
| Year ended July 31, | | 2010 | | | 2009 | | | $ | | | | % | |
| Revenues | | | | | | | | | | | | | |
| CTM | | $ | 18.6 | | | $ | 19.9 | | | $ | (1.3 | ) | | | (6.53 | ) |
| IDW | | | 11.4 | | | | 12.6 | | | | (1.2 | ) | | | (9.52 | ) |
| Total revenues | | $ | 30.0 | | | $ | 32.5 | | | $ | (2.5 | ) | | | (7.7 | ) |
Revenues. The decrease in consolidated revenues in fiscal 2010 compared to fiscal 2009 was due to the decrease in both CTM and IDW revenues. The decrease in CTM revenues was primarily due to our exit from or changes to the business model of our unprofitable business lines and due to a global economic slowdown in our distribution and printing businesses. Some of CTM’s distribution customers rely on state and local funding or grants which have been decreased or eliminated, resulting in reduced advertising and customer spending and, in some cases, certain of our customers going out of business. The decrease in IDW revenues due to higher returns, lower publishing revenue and lower creative services revenue partially offset by increased licensing and royalty revenue and increase d digital publishing revenue.
| (in millions) | | | | | | | | Change | |
| Year ended July 31, | | 2010 | | | 2009 | | | $ | | | | % | |
| Costs and expenses | | | | | | | | | | | | | |
| Direct cost of revenues | | $ | 14.1 | | | $ | 14.6 | | | $ | (0.5 | ) | | | (3.4 | ) |
| Selling, general and administrative | | | 14.2 | | | | 14.6 | | | | (0.4 | ) | | | (2.7 | ) |
| Depreciation and amortization | | | 0.9 | | | | 1.0 | | | | (0.1 | ) | | | (10.0 | ) |
| Bad debt expense | | | 0.1 | | | | 0.7 | | | | (0.6 | ) | | | 85.0 | |
| Impairment and severance charges | | | 0.0 | | | | 32.1 | | | | (32.1 | ) | | | 100.0 | |
| Total costs and expenses | | $ | 29.3 | | | $ | 63.0 | | | $ | (33.7 | ) | | | (53.5 | ) |
Direct Cost of Revenues. The decrease in direct cost of revenues in fiscal 2010 compared to fiscal 2009 was due to a decrease in CTM’s cost of sales which was partially offset by an increase in IDW’s cost of sales. The decrease in CTM’s direct cost of revenues was primarily due to a decrease in printing business as a result of exiting the printing business as well as our cost reduction strategies initiated in 2010. The increase in IDW’s direct cost of revenues was as result of an increase in printing and royalty costs.
This increase was largely due to property acquisitions which did not result in sales as significant as those related to major movies. Lower sales volumes result in higher print prices. In addition, many of these new properties provided creators a share in the profits of the publications, resulting in an increase in royalties.Overall gross margin decreased from 55.0% in fiscal 2009 to 52.9% in fiscal 2010 due to a decrease in IDW’s gross margin percentage offset by a slight increase in CTM’s gross margin percentage a result of a change in the mix of products.
Selling, General and Administrative. The decrease in selling, general and administrative expenses in fiscal 2010 compared to fiscal 2009 was due to a decrease in the selling, general and administrative expenses of CTM partially offset by an increase in IDW costs. CTM’s selling, general and administrative expenses decrease was primarily due to the exit from certain unprofitable lines of businesses, reduction in compensation, commissions and insurance expenses partially offset by costs allocated to the CTM segment associated with operating as a publicly traded company and non cash compensation cost. IDW’s selling, general and administrative expenses increase was primarily due to an increase in the number of employees, consultants and IDW’s share of costs associated with operating as a publicly traded company. Total selling, general and administrative expenses associated with operating as a publicly traded company was $0.7 million and stock based compensation costs was $0.4 million in fiscal 2010.
As a percentage of total revenues, selling, general and administrative expenses increased from 44.8% in fiscal 2009 to 47.4% in fiscal 2010 as selling, general and administrative expenses increased while revenues decreased.
On October 14, 2009, our Board of Directors granted our Chairman and founder, Howard S. Jonas, 1.8 million restricted shares of our Class B common stock with a value of $1.25 million on the date of grant in lieu of a cash base salary for the next five years. The restricted shares will vest in equal thirds on each of October 14, 2011, October 14, 2012 and October 14, 2013. Unvested shares would be forfeited if we terminate Mr. Jonas’ employment other than under circumstances where the accelerated vesting applies. The shares are subject to adjustments or acceleration based on certain corporate transactions, changes in capitalization, or termination, death or disability of Mr. Jonas. If Mr. Jonas is terminated by us for cause, a pro rata portion of the shares would vest. This arrangement does not impact Mr. Jonas’ ca sh compensation from the date of the Spin-Off through the pay period ending on the grant date. Total unrecognized compensation cost on the grant date of $1.25 million, is expected to be recognized over the vesting period from October 14, 2009 through October 14, 2014.
Bad Debt Expense. The decrease in the total bad debt expense in fiscal 2010 compared to fiscal 2009 was primarily due to a decrease in bad debt expenses at CTM resulting from improved collections and a better economy in 2010.
Impairment and Severance Charges. We recorded aggregate goodwill impairment charges of $31.5 million in fiscal 2009. In the second quarter of fiscal 2009, the following events and circumstances indicated that the fair value of certain of our reporting units may be below their carrying value: (1) a significant adverse change in the business climate, (2) operating losses of reporting units, and (3) significant revisions to internal forecasts. We measured the fair value of our reporting units by discounting their estimated future cash flows using an appropriate discount rate. The carrying value including goodwill of CTM and IDW exceeded their estimated fair value, therefore we performed additional steps for these reporting units to determine whether an impairment of goodwill wa s required. As a result of this analysis, in fiscal 2009, we recorded goodwill impairment of $29.7 million in CTM and $1.8 million in IDW which reduced the carrying amount of the goodwill in each of these reporting units to zero. Calculating the fair value of the reporting units, and allocating the estimated fair value to all of the tangible assets, intangible assets and liabilities, requires significant estimates and assumptions.
The primary drivers in our assumptions that resulted in the goodwill impairment in fiscal 2009 were (1) lower than expected revenues since our prior annual goodwill impairment test conducted as of May 1, 2008 that caused us to reduce our revenue and cash flow projections at December 31, 2008, the date of our interim impairment test, (2) an increase in the discount rates used at December 31, 2008 compared to May 1, 2008, (3) reductions in the terminal value growth rates used at December 31, 2008 compared to May 1, 2008, and (4) no expectation of an economic recovery in our cash flow projections. The primary drivers behind our changed expectations for future results, cash flows and liquidity were (1) the global economic slowdown, (2) lower than expected revenue including a decrease in customer spending, (3) certain of our customers experiencing financial challenges including bankruptcy, and (4) specifically related to CTM, new lines of business that did not perform as expected and were discontinued beginning in the fourth quarter of fiscal 2008. All of these factors contributed to the reduction in the revenue and cash flow projections at December 31, 2008 compared to May 1, 2008.
The Company recorded in fiscal 2009 restructuring charges of $0.6 million consisting primarily of severance related to a company-wide cost savings program and reduction in force.
| (in millions) | | | | | | | | Change | |
| Year ended July 31, | | 2010 | | | 2009 | | | $ | | | | % | |
| Income (loss) from operations | | $ | 0.8 | | | $ | (30.5 | ) | | $ | 31.3 | | | | 102.6 | |
| Interest income, net | | | (0.1 | ) | | | (0.1 | ) | | | — | | | | - | |
| Other income, net | | | (0.2 | ) | | | — | | | | (0.2 | ) | | | 100.0 | |
| Provision for income taxes | | | (0.1 | ) | | | (0.1 | ) | | | — | | | | - | |
| Net Income (loss) from continuing operations | | | 0.4 | | | | (30.7 | ) | | | 31.1 | | | | 101.3 | |
| Loss from discontinued operations | | | (0.6 | ) | | | (1.9 | ) | | | 1.3 | | | | 68.4 | |
| Gain from sale of discontinued operations | | | 1.6 | | | | — | | | | 1.6 | | | | 100.0 | |
| Total income (loss) from discontinued operations | | | 1.0 | | | | (1.9 | ) | | | 2.9 | | | | 152.6 | |
| Net Income (loss) | | | 1.4 | | | | (32.6 | ) | | | 34.0 | | | | 104.29 | |
| Less: Net income attributable to noncontrolling interest | | | 0.1 | | | | 1.3 | | | | (1.2 | ) | | | 0.92 | |
| Net income (loss) attributable to CTM Media Holdings, Inc. | | $ | 1.3 | | | $ | (33.9 | ) | | $ | 35.2 | | | | 103.8 | |
Non-controlling Interests. Noncontrolling interests relate to minority owners of IDW. On November 5, 2009, the Company purchased an additional 23.335% interest in IDW for a purchase price of $0.4 million in cash. As a result of the transaction, the Company owns a 76.665% interest in IDW.
Income Taxes. Provision for income taxes in fiscal 2010 decreased compared to fiscal 2009 due to decreases in our foreign income tax expense which were partially offset by state and local income tax expenses. Our foreign income tax expense results from income generated by our Canadian subsidiary that cannot be offset against losses generated in the United States.
We and IDT entered into a Tax Separation Agreement, dated as of September 14, 2009, to provide for certain tax matters including the assignment of responsibility for the preparation and filing of tax returns, the payment of and indemnification for taxes, entitlement to tax refunds and the prosecution and defense of any tax controversies. Pursuant to this agreement, IDT indemnified us from all liability for taxes of ours and our subsidiaries for periods ending on or before September 14, 2009, and we indemnified IDT from all liability for taxes of our and our subsidiaries accruing after September 14, 2009. Also, for periods ending on or before September 14, 2009, IDT shall have the right to control the conduct of any audit, examination or other proceeding brought by a taxing authority. We shall have the right to participate jointly in an y proceeding that may affect our tax liability unless IDT has indemnified us. Finally, we and our subsidiaries agreed not to carry back any net operating losses, capital losses or credits for any taxable period ending after September 14, 2009 to a taxable period ending on or before September 14, 2009 unless required by applicable law, in which case any refund of taxes attributable to such carry back shall be for the account of IDT.
CTM
| (in millions) | | | | | | | | Change | |
| Year Ended July 31, | | 2010 | | | 2009 | | | $ | | | | % | |
| Revenues | | $ | 18.6 | | | $ | 19.9 | | | $ | (1.3 | ) | | | (6.5 | ) |
| Direct cost of revenues | | | 6.8 | | | | 7.5 | | | | (0.7 | ) | | | (9.3 | ) |
| Selling, general and administrative | | | 9.8 | | | | 11.0 | | | | (1.2 | ) | | | (10.9 | ) |
| Depreciation and amortization | | | 0.8 | | | | 0.8 | | | | — | | | | - | |
| Bad debt expense | | | 0.1 | | | | 0.7 | | | | (0.6 | ) | | | 85.7 | |
| Impairment and severance charges | | | — | | | | 30.3 | | | | (30.3 | ) | | | 100 | |
| Income (loss) from operations | | $ | 1.1 | | | $ | (30.4 | ) | | $ | (31.5 | ) | | | 103.62 | |
Revenues. The decrease in CTM’s revenues in fiscal 2010 compared to fiscal 2009 was primarily due to our exit from or changes to business model of certain unprofitable business lines and due to a global economic slowdown in our distribution and publishing business. In fiscal 2009 we exited most of our Local Media business and restructured the remaining portion to commission based revenue. This resulted in a decline in revenues of approximately $0.3 million in fiscal 2010, compared to fiscal 2009. In the fourth quarter of fiscal 2010 we restructured our unprofitable printing business from a reseller of print services to a commission agent for printing vendors. The change to a commission based revenue structure and the overall slowdown of the business res ulted in a decline of $0.6 million in fiscal 2010 compared to fiscal 2009. Our distribution and publishing business declined $0.5 million in fiscal 2010 compared to fiscal 2009, as a result of the global economic slowdown. The most significant declines were in the North East which was largely due to the lingering effects of the global economic slowdown during the first half of fiscal 2010, followed by the South East and the Mid-West regions partially offset by increased revenues and favorable exchange rates on revenues generated in our Canadian division. Some of CTM’s distribution customers rely on state and local funding or grants which have been decreased or eliminated resulting in reduced advertising and customer spending. Partially offsetting the decrease in revenue was an increase in our Digital Products revenue. We have seen positive signs of a gradual recovery in our business such that we expect our fiscal 2011 revenues to be slightly higher than our fiscal 2010 revenues.
Direct Cost of Revenues. Direct cost of revenues consist primarily of distribution and fulfillment payroll, warehouse and vehicle distribution expenses, and print and design expenses. The decrease in direct cost of revenues in fiscal 2010 compared to fiscal 2009 is primarily due to decreased printing revenues. CTM’s aggregate gross margin increased in fiscal 2010 to 63.3% from 62.2% in fiscal 2009. The increase was primarily due to the change in mix of products partially as a result of our exit from lower margin business.
Selling, General and Administrative. Selling, general and administrative expenses consist primarily of payroll and related benefits, facilities costs and insurance. Selling, general and administrative expenses decreased in fiscal 2010 compared to fiscal 2009 primarily due to the exit from certain unprofitable lines of business, reduction in compensation, commissions, insurance and allocation of executive compensation to IDW which previously was recorded solely at CTM. This decrease was partially offset by costs associated with operating as a publicly traded company and stock based compensation. Total selling, general and administrative expenses associated with operating as a publicly traded company and stock based compensation, in each case, as allocated to CTM, was $0.5 and $0.4 million in fiscal 2010. As a percentage of CTM’s aggregate revenues, selling, general and administrative expenses decreased in fiscal 2010 to 52.7% from 55.5% in fiscal 2009, as selling, general and administrative expenses decreased more than proportionally to revenues.
Impairment and severance charges. In the second quarter of fiscal 2009, certain events and circumstances indicated that the fair value of CTM, which is one of our reporting units, may be below its carrying value. We measured the fair value of CTM by discounting its estimated future cash flows using an appropriate discount rate. CTM’s carrying value including goodwill exceeded its estimated fair value, therefore additional steps were performed to determine whether an impairment of goodwill was required. As a result of this analysis, in fiscal 2009, CTM recorded goodwill impairment of $29.7 million, which reduced the carrying amount of its goodwill to zero.
The Company recorded in fiscal 2009 restructuring charges of $0.6 million consisting primarily of severance related to a company-wide cost savings program and reduction in work force.
IDW
| (in millions) | | | | | | | | Change | |
| Year ended July 31, | | 2010 | | | 2009 | | | $ | | | | % | |
| Revenues | | $ | 11.4 | | | $ | 12.6 | | | $ | (1.2 | ) | | | (9.5 | ) |
| Direct cost of revenues | | | 7.3 | | | | 7.1 | | | | 0.2 | | | | 2.8 | |
| Selling, general and administrative | | | 4.3 | | | | 3.6 | | | | 0.7 | | | | 19.4 | |
| Depreciation and amortization | | | 0.1 | | | | 0.2 | | | | (0.1 | ) | | | 50 | |
| Impairment | | | — | | | | 1.8 | | | | (1.8 | ) | | | 100 | |
| Loss from operations | | $ | (0.3 | ) | | $ | (0.1 | ) | | $ | (0.2 | ) | | | 200 | |
Revenues. The decrease in IDW’s revenue in fiscal 2010 compared to fiscal 2009 was due to higher returns based on historical averages, lower publishing revenue and lower creative services revenue partially offset by increased licensing and royalty revenue and increased digital publishing revenue. The higher returns are due to comic book movie releases that have a shorter shelf life at our distributers, a downturn in the economy and the higher relative impact of lesser known titles with higher return rates. The decreased publishing revenue was a result of particularly strong publishing revenue in the third and forth qu arter of 2009 from comic book movie releases such as: Transformers, Revenge of the Fallen, Star Trek (2009), Terminator Salvation, and G.I. Joe: The Rise of Cobra. Our creative services revenue decreased as a result of lower marking budgets by our customers during the downturn in the economy. The increase in licensing and royalty revenue is mainly a result of the sale of the World War Robot license in the second quarter of fiscal 2010. The Digital Distribution revenue has continued to grow since its inception in January 2010. IDW has entered into a number of digital distribution agreements, and IDW’s publications are currently available for purchase via handheld devices, including iPhones, iPod Touch, iPad, PSP, PSP Go, Kindle, Nokia, and Blackberry. IDW titles are also available direct-to-desktop via several websites and are expected to be available on Google’s Android and Barnes and Noble’s Nook by the end of calendar year 2010. We expect IDW’s revenues to be higher across all lines of business in fiscal 2011.
Direct Cost of Revenues. Direct cost of revenues consists primarily of printing expenses, costs of artist and writers and royalty fees. The increase in direct cost of revenues in fiscal 2010 compared to fiscal 2009 was as result of an increase in printing and royalty fees.
This increase was largely due to property acquisitions which did not result in sales as significant as those related to major movies. Lower sales volumes result in higher print prices. In addition, many of these new properties provided creators a share in the profits of the publications, resulting in an increase in the royalties. There was a product shift to increased sales of hard cover edition graphic novels that bear a higher print cost of sales than the traditional soft cover comic books. Additionally, fiscal 2010 revenues consi sted of an increased number of titles sold, with lower sales per title. This resulted in smaller quantities printed per title which carry a higher print cost per unit. There was also an increase in old inventory being written down. Royalty fees relating to the distribution businesses increased as a result of the increase in the number of profit sharing deals from the more traditional royalty agreements on net sales.
IDW’s aggregate gross margin decreased in fiscal 2010 to 35.9% from 43.6% in fiscal 2009. The decrease in fiscal 2010 was primarily due to an increase in costs discussed above.
Selling, General and Administrative. Selling, general and administrative expenses increased in fiscal 2010 compared to fiscal 2009 primarily due to an increase in allocated expenses to IDW by the Company in fiscal 2010. This allocation includes executive salaries and costs associated with operating as a publicly traded company, which were approximately $0.5 million in fiscal 2010. IDW has increased staff in an effort to increase the number of titles sold and establish a footprint into digital distribution. As a percentage of IDW’s aggregate revenues, selling, general and administrative expenses increas ed in fiscal 2010 to 37.7% from 28.6% in fiscal 2009, as selling, general and administrative expenses increased while revenues declined.
In the second quarter of fiscal 2009, certain events and circumstances indicated that the fair value of IDW, which is one of our reporting units, may be below its carrying value. We measured the fair value of IDW by discounting its estimated future cash flows using an appropriate discount rate. IDW’s carrying value including goodwill exceeded its estimated fair value, therefore additional steps were performed to determine whether an impairment of goodwill was required. As a result of this analysis, in fiscal 2009, IDW recorded goodwill impairment of $1.8 million, which reduced the carrying amount of its goodwill to zero.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we satisfied our cash requirements primarily through cash provided by CTM’s operating activities and funding from IDT.
| (in millions) | | Year ended July 31, | |
| | | 2010 | | | 2009 | |
| Cash flows provided by (used in): | | | | | | |
| Operating activities | | $ | 2.6 | | | $ | 1.3 | |
| Investing activities | | | 0.4 | | | | (1.7 | ) |
| Financing activities | | | (2.6 | ) | | | 1.5 | |
| Increase in cash and cash equivalents from continuing operations | | | 0.4 | | | | 1.1 | |
| Discontinued operations | | | (0.4 | ) | | | (.2 | ) |
| Increase in cash and cash equivalents | | $ | 0.0 | | | $ | 0.9 | |
Operating Activities
Our cash flow from operations varies from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable. In the fourth quarter of fiscal 2008, we commenced to exit from certain unprofitable lines of businesses of CTM, consisting of Traffic Pull, Local Pull and Click2Talk. The exit from these lines of business is mostly completed. The Local Pull product is still being offered by CTM, however the business model has been reworked and Local Pull is being marketed through outsourced channels, which is more cost effective for us. Cash used in operating activities from these exited businesses was approximately $1.1 million in fiscal 2009.
Investing Activities
Our capital expenditures were $0.4 million in fiscal 2010 and $0.7 million in fiscal 2009. We currently anticipate that total capital expenditures for all of our divisions in fiscal 2011 will be approximately $0.7 million. We expect to fund our capital expenditures with our cash, cash equivalents and short term investment on hand.
In fiscal 2009, IDW invested $1.0 million in a short-term certificate of deposit.
On November 5, 2009, we purchased an additional 23.335% interest in IDW for a purchase price of $0.4 million in cash. As a result of the transaction, we own a 76.665% interest in IDW. We acquired the additional interests as we determined that the purchase price was reasonable as well as to reduce the number of noncontrolling interest holders in this business.
On May 5, 2010, the Company consummated the sale of substantially all of the assets used in the WMET radio station business for a sale price of $4 million in a combination of cash and a promissory note from the buyer that is secured by the assets sold. $1.3 million of the purchase price (net of 0.1million in selling expenses) was paid in cash by the closing and the remainder is owed pursuant to a two-year promissory note, which is extendable in part to three years at the option of the buyer.
Financing Activities
During fiscal 2009 and in fiscal 2010 up until the Spin-Off on September 14, 2009, IDT, our former parent company, provided us with the required liquidity to fund our working capital requirement and investments for some of our businesses. We used any excess cash provided by our operations to repay IDT. In fiscal 2010 and in fiscal 2009, IDT provided net cash to us of $2.4 million and $2.0 million, respectively. At July 31, 2009, the amount due to IDT was $24.9 million. In September 2009, the amount due to IDT of $25.3 million was converted into a capital contribution.
We distributed cash of $1.0 million in fiscal 2010 and $0.3 million in fiscal 2009 to the minority shareholders of IDW.
We repaid capital lease obligations of $0.2 million in fiscal 2010 and $0.2 million in fiscal 2009.
We repurchased $1.1 million of our Class A and Class B common stock in the second quarter ended January 31, 2010 in connection with the tender offer that expired on December 22, 2009.
We paid a cash dividend in the amount of $0.25 per share (approximately $2.1 million in the aggregate), and $0.06 per share (approximately $0.5 million in the aggregate) on March 15, 2010 and June 15, 2010, respectively, to stockholders of record as of March 8, 2010 and May 3, 2010, respectively, of our Class A, Class B and Class C common stock.
On October 19, 2010, our Board of Directors approved the payment of a dividend in the amount of $0.12 per share. The dividend is to be paid on November 9, 2010 to stockholders of record as of November 1, 2010 of our Class A, Class B and Class C common stock, subject to confirmation by our management that there is sufficient surplus and other circumstances existing at such time.
In addition, on October 19, 2010, our Board of Directors approved the payment of regular quarterly dividends in the amount of approximately $0.06 per share, subject to confirmation by our management that there is sufficient surplus as of the proposed future payment dates and other circumstances existing at the relevant times.
The declaration of any future dividend will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by our Board of Directors that dividends are in the best interest of our stockholders.
CHANGES IN TRADE ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Gross trade accounts receivable decreased to $4.3 million at July 31, 2010 compared to $4.6 million at July 31, 2009. The decrease in fiscal 2010 is mainly due to higher collections in IDW. The allowance for doubtful accounts as a percentage of gross trade accounts receivable increased to 18.2% at July 31, 2010 compared to 14.7% at July 31, 2009. The main reason for the increase in the allowance for doubtful accounts is due to fully reserving for all accounts receivable in the recently discontinued WMET business.
Other Sources and Uses of Resources
We intend to, where appropriate, make strategic investments and acquisitions to complement, expand, and/or enter into new businesses. In considering acquisitions and investments, we search for opportunities to profitably grow our existing businesses, to add qualitatively to the range of businesses in our portfolio and to achieve operational synergies. Historically, such acquisitions have not exceeded $0.5 million, with the average acquisition being less than $0.1 million. At this time, we cannot guarantee that we will be presented with acquisition opportunities that meet our return on investment criteria, or that our efforts to make acquisitions that meet our criteria will be successful.
Historically, we satisfied our cash requirements primarily through cash provided by CTM’s operating activities and funding from IDT. The conversion of our balance due to IDT into a capital contribution in September 2009 significantly improved our working capital balance. We do not currently have any material debt obligations. With the exit of certain lines of businesses within CTM, we expect our operations in the next twelve months and the balance of cash, cash equivalents and short term investment that we held as of July 31, 2010, as well as the $0.4 million expected to be repaid in fiscal 2011 under terms of the promissory note for the sale of WMET, will be sufficient to meet our currently anticipated working capital and capital expenditure requir ements, capital lease obligations, make limited acquisitions and investments, and to fund any potential operating cash flow deficits within any of our segments for at least the next twelve months. In addition, we anticipate that our expected cash balances as well as cash flows from our operations will be sufficient to meet our long term liquidity needs. The foregoing is based on a number of assumptions, including that we will collect on our receivables, effectively manage our working capital requirements, and maintain our revenue levels and liquidity and timely payments of the $4 million due to us under the promissory note from the sale of WMET. Predicting these matters is particularly difficult in the current worldwide economic situation and overall decline in consumer demand. Failure to generate sufficient revenue and operating income could have a material adverse effect on our results of operations, financial condition and cash flows.
FOREIGN CURRENCY RISK
Revenues from our international operations represented 9.0% and 7.4% of our consolidated revenues from continuing revenues for fiscal 2010 and fiscal 2009, respectively. A significant portion of these revenues is in currencies other than the U.S. Dollar, primarily Canadian dollars. Our foreign currency exchange risk is somewhat mitigated by our ability to offset the majority of these non U.S. Dollar-denominated revenues with operating expenses that are paid in the same currencies. While the impact from fluctuations in foreign exchange rates affects our revenues and expenses denominated in foreign currencies, the net amount of our exposure to foreign currency exchange rate changes at the end of each reporting period is generally not material.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Recently Adopted Accounting Standards and Recently Issued Accounting Standards
In September 2009, the Company adopted changes issued by the FASB to the authoritative hierarchy of U.S. GAAP. These changes establish the FASB Accounting Standards Codification™ (or Codification) as the source of authoritative U.S. GAAP for all non-governmental entities. Rules and interpretive releases of the U.S. Securities and Exchange Commission (the “SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification did not change or alter existing U.S. GAAP. The adoption of these changes had no impact on the Company’s financial position, results of operations or cash flows.
On February 1, 2010, the Company adopted the amendment to the accounting standard relating to fair value measurements, which is intended to improve the disclosures about fair value measurements in financial statements. The main provisions of the amendment require new disclosures about (1) transfers in and out of the three levels of the fair value hierarchy and (2) activity within Level 3 of the hierarchy. In addition, the amendment clarifies existing disclosures about (1) the level of disaggregation of fair value measurements, (2) valuation techniques and inputs used to measure fair value, and (3) postretirement benefit plan assets. The adoption of the changes to the disclosures about fair value measurements did not have an impact on the Company’s financial position, results of operations or cash flows. Pursuant to the amendment, the adoption of certain of the disclosures about the activity within Level 3 is not required until August 1, 2011. The Company does not expect the adoption of these changes to its disclosures about fair value measurements to have an impact on its financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
Smaller reporting companies are not required to provide the information required by this item.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements and supplementary data of the Company and the report of the independent registered public accounting firm thereon are set forth starting on page F-1 herein are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A(T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Annual Report on Form 10-K.
There were no changes in our internal control over financial reporting during the fourth quarter of fiscal 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s report on internal control over financial reporting is included in this Annual Report on Form 10-K on page 24 and is incorporated herein by reference.
Item 9B. Other Information.
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
The following is a list of our executive officers and directors along with the specific information required by Rule 14a-3 of the Securities Exchange Act of 1934:
Executive Officers
| Howard S. Jonas - Chairman of the Board |
| Marc E. Knoller - Chief Executive Officer and President |
| Leslie B. Rozner -Chief Financial Officer, Treasurer and Corporate Secretary |
Management Directors
Independent Directors
Jan Buchsbaum - Management Associate at New York Life Insurance Company.
Perry Davis - Partner at Perry Davis Associates, Inc. (“PDA”), an international consulting firm providing management and development assistance to non-profit organizations. Mr. Davis is a founder of PDA and has been its President since 1986.
Irwin Katsof – Partner at Doheny Global Group, a company developing renewable energy projects throughout Central and Eastern Europe, and Founder, President and past Chief Executive Officer of Global Capital Associates, which provides business development and networking services, where Mr. Katsof developed business and marketing strategy for the company.
The remaining information required by this Item will be contained in the Information Statement, which will be filed with the SEC within 120 days after July 31, 2010, and which is incorporated by reference herein.
We make available free of charge through the investor relations page of our website (http://ir.ctmholdings.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity, as soon as reasonably practicable after such reports are electronically filed with the SEC. We have adopted a code of business conduct and ethics for all of our employees, including our principal executive officer, principal financial officer. A copy of the code of business conduct and ethics is available on our website.
Our website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K or our other filings with the SEC.
Item 11. Executive Compensation.
The information required by this Item will be contained in the Information Statement, which will be filed with the SEC within 120 days after July 31, 2010, and which is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item will be contained in the Information Statement, which will be filed with the SEC within 120 days after July 31, 2010, and which is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item will be contained in the Information Statement, which will be filed with the SEC within 120 days after July 31, 2010, and which is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services.
The information required by this Item will be contained in the Information Statement, which will be filed with the SEC within 120 days after July 31, 2010, and which is incorporated by reference herein.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Report:
1. Report of Management on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firms on Consolidated Financial Statements
Consolidated Financial Statements covered by Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedule.
All schedules have been omitted since they are either included in the Notes to Consolidated Financial Statements or not required or not applicable.
3. The exhibits listed in paragraph (b) of this item.
(b) Exhibits.
Exhibit Number | Description of Exhibits |
| 2.1(1) | Separation and Distribution Agreement, dated September 14, 2009. |
| | |
| 3.1(1) | Second Restated Certificate of Incorporation of the Registrant. |
| | |
| 3.2(2) | By-laws of the Registrant. |
| | |
| 10.1(2) | 2009 Stock Option and Incentive Plan of CTM Media Holdings, Inc.# |
| | |
| 10.2(1) | Master Service Agreement, dated September 14, 2009. |
| | |
| 10.3(1) | Tax Separation Agreement, dated September 14, 2009. |
| | |
| 10.4(3) | Restricted Stock Agreement, dated October 14, 2009 between the Company and Howard Jonas. # |
| | |
| 14.1(1) | Code of Business Ethics and Conduct, adopted on August 18, 2009. |
| | |
| 21.1* | Subsidiaries of the Registrant. |
| | |
| 23.1* | Consent of Zwick Maddox & Banyai, PLLC. |
| | |
| 31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith.
# Management contract or compensatory plan or arrangement.
| (1) | Incorporated by reference to the Company’s Form 10-K filed October 29, 2009. |
| (2) | Incorporated by reference to the Company’s Form 10-12G/A filed August 10, 2009. |
| (3) | Incorporated by reference to the Company’s Form 8-K filed October 20, 2009. |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| | CTM MEDIA HOLDINGS, INC. | |
| | | | |
| | By: | /s/ Marc E. Knoller | |
| | | Marc E. Knoller | |
| | | Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | | Titles | Date |
| | | | |
| /s/ Howard S. Jonas | | Chairman of the Board and Director | October 29, 2010 |
| Howard S. Jonas | | | |
| | | | |
| /s/ Marc E. Knoller | | Chief Executive Officer, President and Director (Principal Executive Officer) | October 29, 2010 |
| Marc E. Knoller | | | |
| | | | |
| /s/ Leslie B. Rozner | | Chief Financial Officer, Treasurer and Corporate Secretary | October 29, 2010 |
| Leslie B. Rozner | | (Principal Financial Officer and Principal Accounting Officer) | |
| | | | |
| /s/ Jan Buchsbaum | | Director | October 29, 2010 |
| Jan Buchsbaum | | | |
| | | | |
| /s/ Perry Davis | | Director | October 29, 2010 |
| Perry Davis | | | |
| | | | |
| /s/ Irwin Katsof | | Director | October 29, 2010 |
| Irwin Katsof | | | |
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We, the management of CTM Media Holdings, Inc. (the “Company”), are responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Management has evaluated internal control over financial reporting by the Company using the criteria for effective internal control established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management has assessed the effectiveness of the Company’s internal controls over financial reporting as of July 31, 2010. Based on this assessment, we believe that the internal control over financial reporting of the Company as of July 31, 2010 was effective and through operation provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, as a result of the remediation of a material weakness in the Company’s internal controls and procedures, as described below.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company as a small reporting filer, to provide only management’s report in this annual report.
| /s/ Marc E. Knoller | |
| Marc E. Knoller | |
| Chief Executive Officer, President and Director (Principal Executive Officer) | |
| /s/ Leslie B. Rozner | |
| Leslie B. Rozner | |
| Chief Financial Officer, Treasurer and Corporate Secretary (Principal Financial Officer and Principal Accounting Officer) | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements | F-2 |
| | |
| Consolidated Balance Sheets as of July 31, 2010 and 2009 | F-3 |
| | |
| Consolidated Statements of Operations for the Years Ended July 31, 2010 and 2009 | F-4 |
| | |
| Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended July 31, 2010 and 2009 | F-5 |
| | |
| Consolidated Statements of Cash Flows for the Years Ended July 31, 2010 and 2009 | F-6 |
| | |
| Notes to Consolidated Financial Statements | F-7 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders of CTM Media Holdings, Inc,
We have audited the accompanying consolidated balance sheets of CTM Media Holdings, Inc. as of July 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended July 31, 2010. These financial statements are the responsibility of the CTM Media Holdings, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financia l reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts in the disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CTM Media Holdings, Inc. as of July 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended July 31, 2010, in conformity with generally accepted accounting principles in the United States of America.
| | |
| /s/ Zwick Maddox & Banyai, PLLC | |
| | |
Zwick Maddox & Banyai, PLLC Southfield, Michigan | |
| | |
| October 29, 2010 | |
| | |
CTM MEDIA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
| | | Year Ended July 31, | |
| (in thousands, except per share data) | | 2010 | | | 2009 | |
| | | | | | | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 6,516 | | | $ | 6,480 | |
| Short term investment | | | 1,030 | | | | 1,024 | |
| Trade accounts receivable, net | | | 3,496 | | | | 3,908 | |
| Inventory – finished goods | | | 1,462 | | | | 1,405 | |
| Prepaid expenses | | | 965 | | | | 979 | |
| Note receivable - current | | | 321 | | | | 3 | |
| Assets of discontinued operations | | | — | | | | 2,350 | |
| Total current assets | | | 13,790 | | | | 16,149 | |
| Property and equipment, net | | | 2,013 | | | | 2,392 | |
| Licenses and other intangibles, net | | | 17 | | | | 89 | |
| Note receivable | | | 2,400 | | | | — | |
| Other assets | | | 181 | | | | 159 | |
| Total assets | | $ | 18,401 | | | $ | 18,789 | |
| Liabilities and stockholders’ equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Trade accounts payable | | $ | 1,187 | | | $ | 1,024 | |
| Accrued expenses | | | 1,539 | | | | 1,360 | |
| Deferred revenue | | | 2,035 | | | | 1,731 | |
| Due to IDT Corporation | | | 38 | | | | 24,921 | |
| Income tax payable | | | 770 | | | | 690 | |
| Capital lease obligations—current portion | | | 227 | | | | 222 | |
| Other current liabilities | | | 646 | | | | 563 | |
| Total current liabilities | | | 6,442 | | | | 30,511 | |
| Capital lease obligations—long-term portion | | | 286 | | | | 529 | |
| Total liabilities | | | 6,728 | | | | 31,040 | |
| Commitments and contingencies | | | | | | | — | |
| Stockholders’ Equity (deficit): | | | | | | | | |
| CTM Media Holdings, Inc. stockholders’ equity (deficit): | | | | | | | | |
| Preferred stock, $0.01 par value; authorized shares—10,000; no shares issued | | | — | | | | — | |
| Class A common stock, $0.01 par value; authorized shares—35,000; 1,285 shares issued and 1,106 shares outstanding at July 31, 2010; no shares issued at July 31, 2009 | | | 13 | | | | — | |
| Class B common stock, $0.01 par value; authorized shares—65,000; 6,920 shares issued and 6,126 shares outstanding at July 31, 2010; no shares issued at July 31, 2009 | | | 69 | | | | — | |
Class C common stock, $0.01 par value; authorized shares—15,000; 1,091 shares issued and outstanding at July 31, 2010; no shares issued at July 31, 2009 | | | 11 | | | | — | |
| Additional paid-in capital | | | 58,548 | | | | 33,141 | |
| Treasury Stock, at cost, consisting of 179 shares of shares of Class A and 797 shares of Class B at July 31, 2010 | | | (1,070 | ) | | | — | |
| Accumulated other comprehensive income | | | 117 | | | | 124 | |
| Accumulated deficit | | | (46,235 | ) | | | (47,483 | ) |
| Total CTM Media Holdings, Inc. stockholders’ equity (deficit) | | | 11,453 | | | | (14,218 | ) |
| Noncontrolling interests | | | 220 | | | | 1,967 | |
| Total stockholders’ equity (deficit) | | | 11,673 | | | | (12,251 | ) |
| Total liabilities and stockholders’ equity | | $ | 18,401 | | | $ | 18,789 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Year ended July, 31 | |
| (in thousands, except per share data) | | 2010 | | | 2009 | |
| | | | | | | |
| Revenues | | $ | 30,026 | | | $ | 32,515 | |
| Costs and expenses: | | | | | | | | |
| Direct cost of revenues | | | 14,148 | | | | 14,640 | |
| Selling, general and administrative (i) | | | 14,218 | | | | 14,577 | |
| Depreciation and amortization | | | 859 | | | | 1,032 | |
| Bad debt | | | 63 | | | | 647 | |
| Impairment and severance charges | | | — | | | | 32,125 | |
| Total costs and expenses | | | 29,288 | | | | 63,021 | |
| Income (loss) from operations | | | 738 | | | | (30,506 | ) |
| Interest expense, net | | | (75 | ) | | | (51 | ) |
| Other (expense) income, net | | | (163 | ) | | | 8 | |
| Income (loss) from continuing operations before income taxes | | | 500 | | | | (30,549 | ) |
| Provision for income taxes | | | (91 | ) | | | (145 | ) |
| Income (loss) from continuing operations | | | 409 | | | | (30,694 | ) |
| Discontinued operations net of tax: (Note 2) | | | | | | | | |
| Loss from discontinued operations | | | (623 | ) | | | (1,936 | ) |
| Gain from sale of discontinued operations | | | 1,599 | | | | — | |
| Total income (loss) from discontinued operations | | | 976 | | | | (1,936 | ) |
| Net Income (loss) | | | 1,385 | | | | (32,630 | ) |
| | | | | | | | | |
| Less - net income attributable to non-controlling interests | | | 137 | | | | 1,230 | |
| Net income (loss) attributable to CTM Media Holdings, Inc. | | | 1,248 | | | $ | (33,860 | ) |
| | | | | | | | | |
| Amounts Attributable to CTM Media Holdings common stockholders: | | | | | | | | |
| Income (loss) from continuing operations | | | 272 | | | | (31,924 | ) |
| Income (loss) from discontinued operations | | | 976 | | | | (1,936 | ) |
Net income (loss) attributable to CTM Media Holdings, Inc. | | | 1,248 | | | $ | (33,860 | ) |
| Earnings per share attributable to CTM Media Holdings, Inc. common stockholders: | | | | | | |
| Basic: | | | | | | |
| Income (loss) from continuing operations | | $ | 0.04 | | | $ | (4.25 | ) |
| Income (loss) from discontinued operations | | $ | 0.16 | | | $ | (0.26 | ) |
| Net Income (loss) | | $ | 0.20 | | | $ | (4.51 | ) |
| Weighted-average number of shares used in calculation of basic earnings per share: | | | 6,188 | | | | 7,514 | |
| | | | | | | | | |
| Diluted: | | | | | | | | |
| Income (loss) from continuing operations | | $ | 0.03 | | | $ | (4.25 | ) |
| Income (loss) from discontinued operations | | $ | 0.13 | | | $ | (0.26 | ) |
| Net Income (loss) | | $ | 0.16 | | | $ | (4.51 | ) |
| Weighted-average number of shares used in calculation of dilutive earnings per share: | | | 7,839 | | | | 7,514 | |
| | | | | | | | | |
(i) Stock-based compensation included in selling, general and administrative expenses | | | 357 | | | | - | |
See accompanying notes to consolidated financial statements.
CTM MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
| | | IDT Corporation Stockholders | | | | | | | |
| | | Class A Common Stock | | | Class B Common Stock | | | Class C Common Stock | | | Additional Paid-In Capital | | | Treasury Stock | | | Accumulated Other Comprehensive Income (Loss) | | | Accumulated Deficit | | | Non controlling Interests | | | Total Equity | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | |
| BALANCE AT August 1, 2008 | | | — | | | $ | — | | | | — | | | $ | — | | | | — | | | $ | — | | | $ | 33,144 | | | $ | — | | | $ | 188 | | | $ | (13,623 | ) | | $ | 1,077 | | | $ | 20,786 | |
| Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | — | | | | — | | | | — | | | | (3 | ) |
| Distributions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (340 | ) | | | (340 | ) |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (64 | ) | | | — | | | | — | | | | (64 | ) |
| Net loss for the year ended July 31, 2009 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (33,860 | ) | | | 1,230 | | | | (32,630 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive (loss) income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (64 | ) | | | (33,860 | ) | | | 1,230 | | | | (32,694 | ) |
| BALANCE AT JULY 31, 2009 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 33,141 | | | | — | | | | 124 | | | | (47,483 | ) | | | 1,967 | | | | (12,251 | ) |
| Shares issued upon spinoff | | | 1,285 | | | | 13 | | | | 5,138 | | | | 51 | | | | 1,091 | | | | 11 | | | | (75 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Conversion of amount due to IDT to APIC | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25,293 | | | | — | | | | — | | | | — | | | | — | | | | 25,293 | |
| Cash contribution from IDT | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,000 | | | | — | | | | — | | | | — | | | | — | | | | 2,000 | |
| Repurchases of Class A common stock and Class B common stock through repurchase program | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,070 | ) | | | — | | | | — | | | | — | | | | (1,070 | ) |
| Stock-based compensation on restricted stock | | | — | | | | — | | | | 1,786 | | | | 18 | | | | — | | | | — | | | | 339 | | | | — | | | | — | | | | — | | | | — | | | | 357 | |
| Dividends ($0.31 per common share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,581 | ) | | | — | | | | — | | | | — | | | | — | | | | (2,581 | ) |
| Distributions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,039 | ) | | | (1,039 | ) |
| Repurchase of noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 431 | | | | — | | | | — | | | | — | | | | (845 | ) | | | (414 | ) |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7 | ) | | | — | | | | — | | | | (7 | ) |
| Net income for the year ended July 31, 2010 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | 1,248 | | | | 137 | | | | 1,385 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7 | ) | | | 1,248 | | | | 137 | | | | 1,378 | |
| BALANCE AT JULY 31, 2010 | | | 1,285 | | | $ | 13 | | | | 6,924 | | | $ | 69 | | | | 1,091 | | | $ | 11 | | | $ | 58,548 | | | $ | (1,070 | ) | | $ | 117 | | | $ | (46,235 | ) | | $ | 220 | | | $ | 11,673 | |
See accompanying notes to consolidated financial statements.
CTM MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended July 31, (in thousands) | | 2010 | | | 2009 | |
| Operating activities | | | | | | |
| Net Income (loss) | | $ | 1,385 | | | $ | (32,630 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | |
| Loss from discontinued operations | | | 623 | | | | 1,936 | |
| Depreciation and amortization | | | 859 | | | | 1,031 | |
| Bad debt | | | 63 | | | | 647 | |
| Gain on sale of WMET | | | (1,599 | ) | | | — | |
| Impairment charges | | | — | | | | 31,466 | |
| Stock-based compensation | | | 357 | | | | (3 | ) |
| Change in assets and liabilities: | | | | | | | | |
| Trade accounts receivable | | | 221 | | | | (162 | ) |
| Inventory, prepaid and other assets | | | (62 | ) | | | (734 | ) |
| Trade accounts payable, accrued expenses, and other current liabilities | | | 391 | | | | 168 | |
| Income tax payable | | | 80 | | | | | |
| Deferred revenue | | | 306 | | | | (387 | ) |
| Net cash provided by operating activities | | | 2,624 | | | | 1,332 | |
| Investing activities | | | | | | | | |
| Capital expenditures | | | (416 | ) | | | (689 | ) |
| Purchase of IDW noncontrolling interest | | | (414 | ) | | | — | |
| Purchase of short-term investment | | | — | | | | (1,018 | ) |
| Proceeds from sale of WMET | | | 1,221 | | | | | |
| Net cash provided by (used in) investing activities | | | 391 | | | | (1,707 | ) |
| Financing activities | | | | | | | | |
| Dividend paid | | | (2,581 | ) | | | — | |
| Repurchases of Class A and Class B common stock | | | (1,070 | ) | | | — | |
| Distributions to holders of noncontrolling interests | | | (1,039 | ) | | | (340 | ) |
| Funding provided by IDT Corporation, net | | | 2,372 | | | | 1,997 | |
| Repayments of capital lease obligations | | | (246 | ) | | | (183 | ) |
| Net cash (used in) provided by financing activities | | | (2,564 | ) | | | 1,474 | |
| Discontinued operations | | | | | | | | |
| Net cash used in operating activities | | | (412 | ) | | | (209 | ) |
| Net cash used in investing activities | | | (3 | ) | | | — | |
| Net cash used in discontinued operations | | | (415 | ) | | | (209 | ) |
| | | | | | | | | |
| Net increase in cash and cash equivalents | | | 36 | | | | 890 | |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 6,480 | | | | 5,590 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 6,516 | | | $ | 6,480 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | | |
| Cash payments made for interest | | | 109 | | | | 89 | |
| Cash payments made for income taxes | | | 1 | | | | 156 | |
| Supplemental schedule of non cash investing and financing activities | | | | | | | | |
| Purchases of property and equipment through capital lease obligations | | | - | | | | 299 | |
| Receipt of note receivable as part of sale of WMET | | | 2,400 | | | | - | |
The effect of exchange rate changes on cash and cash equivalents is not material.
See accompanying notes to consolidated financial statements.
CTM MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description of Business and Summary of Significant Accounting Policies
Description of Business
CTM Media Holdings, Inc. (the “Company”) is a holding company consisting of the following principal businesses:
| ● | CTM Media Group (“CTM”), the Company’s brochure distribution company and other advertising-based product initiatives focused on small to medium sized businesses; and |
| ● | The Company’s approximately 77% interest in Idea and Design Works, LLC (“IDW”), which is a comic book and graphic novel publisher that creates and licenses intellectual property. |
The Company was formerly a subsidiary of IDT Corporation. On September 14, 2009, the Company was spun-off by IDT Corporation and became an independent public company (the “Spin-Off”). IDT Corporation transferred its ownership in all of the entities that became the Company’s consolidated subsidiaries to the Company prior to the Spin-Off. The entities that became direct or indirect subsidiaries are: CTM; Beltway Acquisition Corporation; IDT Local Media, Inc. (which conducted certain operations related to CTM that are no longer active) and IDT Internet Mobile Group, Inc. (“IIMG”). IIMG owns approximately 76.665% of the equity interests in IDW. All indebtedness owed by any of these entities to IDT Corporation or its affiliates was con verted into a capital contribution.
The Company’s authorized capital stock consists of (a) 35 million shares of Class A common stock, (b) 65 million shares of Class B common stock, (c) 15 million shares of Class C common stock, and (d) 10 million shares of Preferred Stock. IDT Corporation completed the Spin-Off through a pro rata distribution of the Company’s common stock to IDT Corporation’s stockholders of record as of the close of business on August 3, 2009 (the “record date”). As a result of the Spin-Off, each of IDT Corporation’s stockholders received: (i) one share of the Company’s Class A common stock for every three shares of IDT Corporation’s common stock held on the record date; (ii) one share of the Company’s Cl ass B common stock for every three shares of IDT Corporation’s Class B common stock held on the record date; (iii) one share of the Company’s Class C common stock for every three shares of IDT Corporation’s Class A common stock held on the record date; and (iv) cash from IDT Corporation in lieu of a fractional share of all classes of the Company’s common stock. Upon completion of the Spin-Off, the Company had 1.3 million shares of Class A common stock, 5.1 million shares of Class B common stock and 1.1 million shares of Class C common stock outstanding.
Prior to the Spin-Off, IDT Corporation provided certain services to the entities that became the Company’s consolidated subsidiaries. The Company and IDT Corporation entered into the Master Services Agreement, dated September 14, 2009, pursuant to which IDT Corporation will continue to provide, among other things, certain administrative and other services. In addition, pursuant to the Master Services Agreement, IDT Corporation will provide certain additional services to the Company, on an interim basis, as a separate publicly-traded company. Such services include assistance with periodic reports required to be filed with the U.S. Securities and Exchange Commission (the “SEC”) as well as maintaining minutes, books and records of meetings of th e Board of Directors, Audit Committee and Compensation Committee, as well as assistance with corporate governance. The cost of these additional services are not included in the Company’s historical results of operations, as they were not applicable for periods that the Company was not a separate public company.
Basis of Accounting and Consolidation
The Company was incorporated in May 2009 in the state of Delaware. The consolidated financial statements include the assets, liabilities, results of operations and cash flows of the entities included in the Company that were spun-off, and are reflected as if the Company existed and owned these entities in all periods presented, or from the date an entity was acquired, if later. All material intercompany balances and transactions have been eliminated in consolidation. The historical cost basis of assets and liabilities has been reflected in these financial statements. Historically, the businesses included in the Company operated independently on a stand-alone basis. Direct expenses incurred by IDT Corporation on behalf of the businesses included in the consolidated financial statement are reflected in these financial statements. The mos t significant expenses are as follows: Medical and dental benefits were allocated to the Company based on rates similar to COBRA health benefit provision rates charged to former IDT Corporation employees. Stock-based compensation and retirement benefits under the defined contribution plan were allocated to the Company based on specific identification. Insurance was allocated to the Company based on a combination of headcount and specific policy identification. Facility costs as well as payroll of certain IDT Corporation departments or functions consisting of payroll, human resources, network and telephone services, legal, security and travel were allocated to the Company based on estimates of the incremental cost incurred by IDT Corporation related to the Company. Management believes that the assumptions and methods of allocation used underlying the consolidated financial statements are reasonable. However, the costs as allocated to the Company are not necessarily indicative of the costs that would have been incurred if the Company operated as a stand-alone entity. Therefore, the consolidated financial statements may not necessarily be indicative of the financial position, results of operations, changes in stockholders’ equity and cash flows of the Company to be expected in the future or what they would have been had the Company been a separate stand-alone entity during the periods presented.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation. As described in Note 2, WMET has been reclassified to discontinued operations.
Noncontrolling Interests
On August 1, 2009, the Company adopted the accounting standard relating to noncontrolling interests in consolidated financial statements. This standard clarifies that a noncontrolling interest in a subsidiary, which was previously referred to as a minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Also, this standard requires consolidated net income (loss) to include the amounts attributable to both the parent and the noncontrolling interest, and it requires disclosure of the amounts of net income (loss) attributable to the parent and to the noncontrolling interest. Finally, this standard requires increases and decreases in the noncontrolling ownership interest amount to be accounted for as equity transactions, and the gain or loss on t he deconsolidation of a subsidiary will be measured using the fair value of any noncontrolling equity investment rather than the carrying amount of the retained investment. As required by this standard, the Company retrospectively changed the classification and presentation of noncontrolling interests in its financial statements for all prior periods. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows. In January 2010, the Financial Accounting Standards Board (“FASB”) amended the accounting standard relating to noncontrolling interests in consolidated financial statements (1) to address implementation issues related to the changes in ownership provisions of the standard and (2) to expand the disclosures about the deconsolidation of a subsidiary or derecognition of a group of assets within the scope of the standard. These amendments were effective for the Company when they were issued by the FASB. The adoption of the amendments to this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Revenue Recognition
Revenues from CTM brochure distribution services are recognized on a straight-line basis over the services arrangement, which is typically between six months and one year. Brochure distribution services include distribution of marketing materials to display stations and straightening and refilling of the stations. In 2009 and the first three quarters of 2010 revenues from CTM printing services are recognized based on delivery of the print job by subcontractors to CTM’s warehouse. In the fourth quarter of 2010, we restructured our unprofitable printing business from a reseller of print services to a commission agent for printing vendors. The revenues from CTM printing services are now being recognized based on payment by customer to print vendor. Rev enues from CTM publication guides are recognized based on the publication release date of guides, which is the same date as distribution. IDW’s primary revenue is recognized, net of an allowance for estimated sales returns, at the time of shipment of its graphic novels and comic books by IDW’s distributor to its customers, and when all of the conditions specified by ‘ASC 605-15-25’ - Revenue Recognition When Right of Return Exists, are met. Sales returns allowances represent a reserve for products that may be returned due to dating, competition or other marketing matters, or certain destruction in the field. Sales returns are generally estimated and recorded based on historical sales and returns experience and current trends that are expected to continue. Licensing revenues are recognized upon execution of the agreement for such rights, and other creative revenues are recognized upon completion of services rendered on a con tractual basis.
Direct Cost of Revenues
Direct cost of revenues excludes depreciation and amortization expense. Direct cost of revenues for CTM consists primarily of distribution and fulfillment payroll, warehouse and vehicle distribution expenses, and print and design expenses. Direct cost of revenues for IDW consists primarily of printing expenses and costs of artist and writers.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Inventory
Inventory consists of IDW’s graphic novels and comic books. Inventory is stated at the lower of cost or market determined by the first in, first out method.
Property and Equipment
Equipment, vehicles and computer software are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives, which range as follows: equipment—5, 7 or 20 years; vehicles—5 years; and computer software—2, 3 or 5 years. Leasehold improvements are recorded at cost and are depreciated on a straight-line basis over the term of the lease or their estimated useful lives, whichever is shorter.
Long-Lived Assets
In accordance with ‘ASC 360’ - Accounting for the Impairment or Disposal of Long-Lived Assets, the Company tests the recoverability of its long-lived assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company tests for impairment based on the projected undiscounted cash flows to be derived from such asset. If the projected undiscounted future cash flows are less than the carrying value of the asset, the Company will record an impairment loss based on the difference between the estimated fair value and the carrying value of the asset. The Company generally measures fair value by considerin g sale prices for similar assets or by discounting estimated future cash flows from such asset using an appropriate discount rate. Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should the estimates and assumptions prove to be incorrect, the Company may be required to record impairments in future periods and such impairments could be material.
Goodwill and Other Intangibles
Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. In accordance ‘ASC 350’ - Goodwill and Other Intangible Assets, goodwill and other indefinite lived intangible assets are not amortized. These assets are reviewed annually (or more frequently under various conditions) for impairment using a fair value approach. The goodwill impairment assessment involves estimating the fair value of the reporting unit and comparing it to its carrying amount. If the carrying value of the reporting unit exceeds its estimated fair value, additional steps are followed to determine if an impairment of goodwill is required. The fair value o f the reporting units is estimated using discounted cash flow methodologies, as well as considering third party market value indicators. Goodwill impairment is measured by the excess of the carrying amount of the reporting unit’s goodwill over its implied fair value. Calculating the fair value of the reporting units, and allocating the estimated fair value to all of the tangible assets, intangible assets and liabilities, requires significant estimates and assumptions by management.
Costs associated with obtaining the right to use licenses owned by third parties are capitalized and amortized on a straight-line basis over the approximately 4-year term of the licenses. Customer lists are amortized on a straight-line basis over the 5-year period of expected cash flows.
Advertising Expense
The majority of the Company’s advertising expense is incurred by CTM. In fiscal 2010 and fiscal 2009, advertising expense was $0.2 million and $0.2 million, respectively.
Repairs and Maintenance
The Company charges the cost of repairs and maintenance, including the cost of replacing minor items not constituting substantial betterment, to selling, general and administrative expenses as these costs are incurred.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries denominated in foreign currencies are translated to U.S. Dollars at end-of-period rates of exchange, and their monthly results of operations are translated to U.S. Dollars at the average rates of exchange for that month. Gains or losses resulting from such foreign currency translations are recorded in “Accumulated other comprehensive income” in the accompanying consolidated balance sheets.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in its assessment of a valuation allowance. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.
The Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. Tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of tax benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 p ercent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability.
Commitments and Contingencies
The Company accrues for loss contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. When the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range, the Company records its best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount in the range. The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.
Earnings per Share
Basic earnings per share is computed by dividing net income (loss) attributable to all classes of common stockholders by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture (non-vested) using the treasury stock method, unless the effect of such increase is anti-dilutive.
The weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s common stockholders consists of the following:
| | | | | | | |
| Year ended July 31 (in thousands) | | 2010 | | | 2009 | |
| Basic weighted-average number of shares | | | 6,188 | | | | 7,514 | |
| Effect of dilutive securities: | | | | | | | | |
| Non-vested restricted common stock | | | 1,651 | | | | — | |
| Diluted weighted-average number of shares | | | 7,839 | | | | 7,514 | |
In fiscal 2009, the diluted earnings per share equal basic earnings per share because the Company had losses from continuing operations and the impact of including 831 thousand shares of non-vested restricted stock would have been anti-dilutive. The earnings per share for the periods prior to the Spin-Off were calculated as if the number of shares outstanding at the Spin-Off were outstanding during those periods.
Stock-Based Compensation
The Company accounted for stock-based compensation granted to its employees by IDT Corporation in accordance with the fair value recognition provisions of ‘ASC’ 718 Share-Based Payment. Under ‘ASC’ 718- compensation cost recognized based on the grant-date fair value. Stock-based compensation is included in selling, general and administrative expense.
Vulnerability Due to Certain Concentrations
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, short term investment and trade accounts receivable. The Company holds cash and cash equivalents at several major financial institutions, which often exceed FDIC insurance limits. Historically, the Company has not experienced any losses due to such concentration of credit risk. The Company’s temporary cash investments policy is to limit the dollar amount of investments with any one financial institution and monitor the credit ratings of those institutions. While the Company may be exposed to credit losses due to the nonperformance of its counterparties, the Company does not expect the settlement of these transactions to have a material effect on its results of operations, cash flows or financia l condition.
IDW has one major customer, Diamond Comic Distributors, Inc., which is the major distributor of comic books in the United States. Revenues from this customer represented approximately 31.1% and 33.5% of the total consolidated revenues for the years ended July 31, 2010 and 2009, respectively. No other single customer accounted for more than 10% of consolidated revenues in fiscal 2010 or fiscal 2009. The receivable balances from this customer represented approximately 17.4% and 29.6% of the total consolidated trade accounts receivable at July 31, 2010 and 2009, respectively. This concentration of customers increases the Company’s risk associated with nonpayment by those customers. For CTM, concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers in various geographi c regions comprising CTM's customer base.
Sales Returns and Allowances
IDW offers its sole distributor, Diamond Comic Distributors, a right of return with no expiration date. Diamond Comic Distributors then offers this same right of return to its largest chain retailers. IDW records an estimate for sales return reserves from such retailers based on historical sales and return experience and current trends that are expected to continue. In fiscal 2010, actual returns exceeded estimated returns by approximately $142 thousand.
The change in the allowance for sales returns is as follows:
| Year ended July 31 (in thousands) | | Balance at beginning of year | | | Additions charged to revenues | | | Actual returns | | | Balance at end of year | |
| 2010 | | | | | | | | | | | | |
| Reserves deducted from accounts receivable: | | | | | | | | | | | | |
| Allowance for sales returns | | $ | 374 | | | $ | 3,305 | | | $ | (3,514 | ) | | $ | 165 | |
| 2009 | | | | | | | | | | | | | | | | |
| Reserves deducted from accounts receivable: | | | | | | | | | | | | | | | | |
| Allowance for sales returns | | $ | 149 | | | $ | 2,597 | | | $ | (2,372 | ) | | $ | 374 | |
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The allowance is determined based on known troubled accounts, historical experience and other currently available evidence.
The change in the allowance for doubtful accounts is as follows:
| Year ended July 31 (in thousands) | | Balance at beginning of year | | | Additions charged to costs and expenses(1) | | | Deductions(2) | | | Balance at end of year | |
| 2010 | | | | | | | | | | | | |
| Reserves deducted from accounts receivable: | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 673 | | | $ | 277 | | | $ | (172 | ) | | $ | 778 | |
| 2009 | | | | | | | | | | | | | | | | |
| Reserves deducted from accounts receivable: | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 137 | | | $ | 1,003 | | | $ | (467 | ) | | $ | 673 | |
(1) Includes expense of discontinued operations of $214 and $356 in Fiscal 2009 and 2010, respectively
(2) Uncollectible accounts written off, net of recoveries.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting this data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. At July 31, 2010 and 2009, the carrying value of the Company’s trade accounts receivable, inventory, prepaid expenses, trade accounts payable, accrued expenses, deferred revenue, due to IDT Corporation, capital lease obligations-current portion, and other current liabilities approximate fair value because of the short period of time to maturity. At July 31, 2010 and 2009, the carrying value of the long term portion of the Compa ny’s capital lease obligations approximate fair value as their contractual interest rates approximate market yields for similar debt instruments.
Recently Adopted Accounting Standards and Recently Issued Accounting Standards
In September 2009, the Company adopted changes issued by the FASB to the authoritative hierarchy of U.S. GAAP. These changes establish the FASB Accounting Standards Codification™ (or Codification) as the source of authoritative U.S. GAAP for all non-governmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification did not change or alter existing U.S. GAAP. The adoption of these changes had no impact on the Company’s financial position, results of operations or cash flows.
On February 1, 2010, the Company adopted the amendment to the accounting standard relating to fair value measurements, which is intended to improve the disclosures about fair value measurements in financial statements. The main provisions of the amendment require new disclosures about (1) transfers in and out of the three levels of the fair value hierarchy and (2) activity within Level 3 of the hierarchy. In addition, the amendment clarifies existing disclosures about (1) the level of disaggregation of fair value measurements, (2) valuation techniques and inputs used to measure fair value, and (3) postretirement benefit plan assets. The adoption of the changes to the disclosures about fair value measurements did not have an impact on the Company’s financial position, results of operations or cash flows. Pursuant to the amendment, the adoption of certain of the disclosures about the activity within Level 3 is not required until August 1, 2011. The Company does not expect the adoption of these changes to its disclosures about fair value measurements to have an impact on its financial position, results of operations or cash flows.
Note 2—Discontinued Operations
Sale of Assets of WMET Radio
On May 5, 2010, we consummated the sale of substantially all of the assets used in our WMET radio station business (other than working capital). WMET 1160 AM is a radio station serving the Washington, D.C. metropolitan area. The sale price for the WMET assets was $4 million in a combination of cash and a promissory note of the buyer that is secured by the assets sold. $1.3 million of the purchase price was paid in cash by the closing and the remainder is owed pursuant to a two-year promissory note, which is extendable in part to three years at the option of the buyer. The sale met the criteria to be reported as a discontinued operation and accordingly, WMET’s results are classified as part of discontinued operations for all periods presented. In the forth quarter of fiscal 2010, the company recognized a gain of $1.6 million in connection with the sale.
Summary Financial Data of Discontinued Operations
Revenues, loss before income taxes and net loss of WMET, which are included in discontinued operations, were as follows:
| Year Ended July 31, | | 2010 | | | 2009 | |
| | | (in thousands) | |
Revenue | | $ | 411 | | | $ | 1,168 | |
| Loss before income taxes and net loss . | | | (623 | ) | | | (1,936 | ) |
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The assets and liabilities of WMET included in discontinued operations consist of the following:
| Year Ended July 31, | | 2009 | |
| | | (in thousands) | |
| Assets | | | |
Property, plant and equipment, net | | $ | 1,851 | |
Licenses and other intangibles, net | | | 499 | |
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Assets of discontinued operations | | $ | 2,350 | |
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Note 3—Stock Repurchase and Cash Dividend
On November 17, 2009, we commenced a tender offer to purchase up to thirty percent of our outstanding common stock. We offered to purchase up to 0.4 million shares of our Class A common stock and up to 2.4 million shares of our Class B common stock, at a price per share of $1.10. The offer expired on December 22, 2009 and pursuant to the offer, we repurchased 0.2 million shares of Class A common stock and 0.8 million shares of Class B common stock for an aggregate purchase price of $1.1 million, representing approximately 14% of our total outstanding capital stock at the time.
We paid a cash dividend in the amount of $0.25 per share (approximately $2.1 million in the aggregate), and $0.06 per share (approximately $0.5 million in the aggregate) on March 15, 2010 and June 15, 2010, respectively, to stockholders of record as of March 8, 2010 and May 3, 2010, respectively, of our Class A, Class B and Class C common stock.
Note 4—Trade Accounts Receivable
Trade accounts receivable consists of the following:
| July 31 (in thousands) | | 2010 | | | 2009 | |
| Trade accounts receivable | | $ | 4,439 | | | $ | 4,955 | |
| Less allowance for sales returns | | | (165 | ) | | | (374 | ) |
| Less allowance for doubtful accounts | | | (778 | ) | | | (673 | ) |
| Trade accounts receivable, net | | $ | 3,496 | | | $ | 3,908 | |
Note 5—Accrued Expenses
Accrued expenses consists of the following:
| July 31 (in thousands) | | 2010 | | | 2009 | |
| Royalty | | $ | 505 | | | $ | 362 | |
| Payroll and related taxes | | | 435 | | | | 457 | |
| Bonus | | | 216 | | | | 199 | |
| Other | | | 383 | | | | 342 | |
| Total | | $ | 1,539 | | | $ | 1,360 | |
Note 6—Property and Equipment
Property and equipment consists of the following:
| July 31 (in thousands) | | 2010 | | | 2009 | |
| Equipment | | $ | 6,094 | | | $ | 5,774 | |
| Vehicles | | | 2,043 | | | | 2,080 | |
| Leasehold improvements | | | 279 | | | | 270 | |
| Computer software | | | 848 | | | | 701 | |
| | | | 9,264 | | | | 8,825 | |
| Less accumulated depreciation and amortization | | | (7,251 | ) | | | (6,433 | ) |
| Property and equipment, net | | $ | 2,013 | | | $ | 2,392 | |
During the year, the Company performed an assessment of the value of its assets and concluded that no impairment of property and equipment existed.
Property and equipment under capital leases were $1.1 million and $1.0 million at July 31, 2010 and 2009, respectively. The accumulated depreciation related to these assets under capital leases was $0.6 million and $0.4 million at July 31, 2010 and 2009, respectively. Depreciation of fixed assets under capital leases is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Depreciation and amortization expense of property and equipment was $0.8 million and $0.8 million in fiscal 2010 and fiscal 2009, respectively.
Note 7—Goodwill, Licenses and Other Intangibles
The Company recorded aggregate goodwill impairment charges of $31.5 million in fiscal 2009. In the second quarter of fiscal 2009, the following events and circumstances indicated that the fair value of certain of the Company’s reporting units may be below their carrying value: (1) a significant adverse change in the business climate, (2) operating losses of reporting units, and (3) significant revisions to internal forecasts. The Company measured the fair value of its reporting units by discounting their estimated future cash flows using an appropriate discount rate. The carrying value including goodwill of CTM and IDW exceeded their estimated fair values; therefore additional steps were performed for these reporting units to determine whether an impairment of goodwill was required. As a result of this analysis, in fiscal 2009, t he Company recorded goodwill impairment of $29.7 million in CTM and $1.8 million in IDW, which reduced the carrying amount of the goodwill in each of these reporting units to zero.
The table below reconciles the change in the carrying amount of goodwill by operating segment for the period from July 31, 2008 to July 31, 2009:
| (in thousands) | | CTM | | | IDW | | | Total | |
| Balance as of July 31, 2008 | | $ | 29,687 | | | $ | 1,806 | | | $ | 31,493 | |
| Impairments | | | (29,661 | ) | | | (1,806 | ) | | | (31,467 | ) |
| Foreign currency translation adjustments | | | (26 | ) | | | — | | | | (26 | ) |
| Balance as of July 31, 2009 | | $ | — | | | $ | — | | | $ | — | |
The table below presents information on the Company’s licenses and other intangible assets:
| (in thousands) | Amortization Period | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Balance | |
| As of July 31, 2010: | | | | | | | | | | |
| | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | |
| Customer lists | 5 years | | $ | 25 | | | $ | (21 | ) | | $ | 4 | |
| Licenses and other intangible assets | 2.5 years | | | 1,138 | | | | (1,125 | ) | | | 13 | |
| Total licenses and other intangibles | | | $ | 1,163 | | | $ | (1,146 | ) | | $ | 17 | |
| As of July 31, 2009: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | | | | |
| Customer lists | 5 years | | $ | 25 | | | $ | (17 | ) | | $ | 8 | |
| Licenses and other intangible assets | 2.5 years | | | 1,138 | | | | (1,057 | ) | | | 81 | |
| Total licenses and other intangibles | | | $ | 1,163 | | | $ | (1,074 | ) | | $ | 89 | |
Amortization expense of licenses and other intangible assets was $0.1 million and $0.2 million in fiscal 2010 and fiscal 2009, respectively.
Note 8—Income Taxes
Significant components of the Company’s deferred tax assets and deferred tax liabilities consist of the following:
| Year Ended July 31 (in thousands) | | 2010 | | | 2009 | |
| Deferred tax assets: | | | | | | |
| Bad debt reserve | | $ | 64 | | | $ | 107 | |
| Accrued expenses | | | 93 | | | | 92 | |
| Exercise of stock options and lapsing of restrictions on restricted stock | | | (275 | ) | | | 82 | |
| Impairment | | | 12,609 | | | | 12,609 | |
| | | | | | | | | |
| Net operating loss | | | 4,243 | | | | 2,690 | |
| Total deferred tax assets | | | 16,734 | | | | 15,580 | |
| Valuation allowance | | | (16,734 | ) | | | (15,580 | ) |
| NET DEFERRED TAX ASSETS | | $ | — | | | $ | — | |
The provision for income taxes consists of the following:
| Year ended July 31 (in thousands) | | 2010 | | | 2009 | |
| Current: | | | | | | |
| Federal | | $ | — | | | $ | — | |
| State and local | | | 56 | | | | 39 | |
| Foreign | | | 35 | | | | 106 | |
| PROVISION FOR INCOME TAXES | | | 91 | | | | 145 | |
The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as follows:
| Year ended July 31 (in thousands) | | 2010 | | | 2009 | |
| U.S. federal income tax at statutory rate | | $ | (495 | ) | | $ | (11,370 | ) |
| Change in valuation allowance | | | 495 | | | | 11,370 | |
| Foreign tax rate differential | | | 35 | | | | 106 | |
| State and local income tax, net of federal benefit | | | 56 | | | | 39 | |
| Other | | | — | | | | — | |
| PROVISION FOR INCOME TAXES | | $ | 91 | | | $ | 145 | |
At July 31, 2010, the Company had federal and state net operating loss carry-forwards of approximately $10.6 million. This carry-forward loss is available to offset future U.S. federal and state taxable income. The net operating loss carry-forwards will start to expire in fiscal 2026, with fiscal 2010’s loss expiring in fiscal 2030. The Company has no foreign net operating losses. The utilization of the net operating loss carry-forwards may be subject to certain limitations as a result of the Spin-Off.
The Company has not recorded U.S. income tax expense for foreign earnings, as such earnings are permanently reinvested outside the U.S. The cumulative undistributed foreign earnings are included in accumulated deficit in the Company’s consolidated balance sheets, and consisted of approximately $1 million at July 31, 2010. Upon distribution of these foreign earnings, the Company may be subject to U.S. income taxes and foreign withholding taxes, however, it is not practicable to determine the amount, if any, which would be paid.
The table below summarizes the change in the balance of unrecognized income tax benefits:
| Year ended July 31 (in thousands) | | 2010 | | | 2009 | |
| Balance at the beginning of the year (excludes interest) | | $ | 579 | | | $ | 546 | |
| Additions based on tax positions related to the current year | | | — | | | | — | |
| Additions for tax positions of prior years | | | 46 | | | | 33 | |
| Reductions for tax positions of prior years | | | — | | | | — | |
| Settlements | | | — | | | | — | |
| Lapses of statutes of limitations | | | — | | | | — | |
| Balance at the end of the year | | $ | 625 | | | $ | 579 | |
The Company classifies interest and penalties on income taxes as a component of income tax expense. As of August 1, 2007, accrued interest expense relating to the unrecognized tax benefits was $15 thousand. In fiscal 2010 and fiscal 2009, the Company recorded additional interest expense of $46 thousand and $33 thousand, respectively. As of July 31, 2010 and 2009, accrued interest expense included in current income taxes payable was $110 thousand and $64 thousand, respectively.
The Company currently remains subject to examinations of its tax returns as follows: U.S. federal tax returns for fiscal 2009, state and local tax returns generally for fiscal 2005 to fiscal 2009 and foreign tax returns generally for fiscal 2005 to fiscal 2009. The IRS audited IDT Corporation’s federal tax returns (of which the Company was a part of the consolidated group), for fiscal years 2005, 2006 and 2007. No changes to the Company resulted from this audit.
The Company and IDT Corporation entered into a Tax Separation Agreement, dated as of September 14, 2009, to provide for certain tax matters including the assignment of responsibility for the preparation and filing of tax returns, the payment of and indemnification for taxes, entitlement to tax refunds and the prosecution and defense of any tax controversies. Pursuant to this agreement, IDT Corporation indemnified the Company from all liability for taxes of the Company and its subsidiaries for periods ending on or before September 14, 2009, and the Company indemnified IDT Corporation from all liability for taxes of the Company and its subsidiaries accruing after September 14, 2009. Also, for periods ending on or before September 14, 2009, IDT Corporation shall have the right to control the conduct of any audit, examination or other proc eeding brought by a taxing authority. The Company shall have the right to participate jointly in any proceeding that may affect its tax liability unless IDT Corporation has indemnified the Company. Finally, the Company and its subsidiaries agreed not to carry back any net operating losses, capital losses or credits for any taxable period ending after September 14, 2009 to a taxable period ending on or before September 14, 2009 unless required by applicable law, in which case any refund of taxes attributable to such carry back shall be for the account of IDT Corporation.
Note 9—Stock Based Compensation
IDT Corporation Share-Based Compensation Plan
The IDT Corporation 2005 Stock Option and Incentive Plan (the “Stock Option and Incentive Plan”) is intended to provide incentives to executives, employees, directors and consultants of IDT Corporation and its subsidiaries. Incentives available under the Stock Option and Incentive Plan may include stock options, stock appreciation rights, limited rights, deferred stock units, and restricted stock. Stock options and restricted stock were granted to employees of the businesses included in these consolidated financial statements under the Stock Option and Incentive Plan.
Compensation cost is generally recognized using the accelerated method over the vesting period. The compensation cost included in selling, general and administrative expense for the Company’s share-based compensation was $0.4 million for fiscal 2010 and $0 for fiscal 2009. No income tax benefits were recognized in the consolidated statements of operations for share-based compensation during fiscal 2010 or fiscal 2009. The Company does not currently recognize the tax benefits resulting from tax deductions in excess of the compensation cost recognized from its share-based compensation because the Company does not currently expect to realize the tax benefit due to the uncertainty of future taxable income.
Stock Options
IDT Corporation option awards were granted with an exercise price equal to the market price of IDT Corporation’s stock at the date of grant. Option awards vest on a graded basis over three years of service and have ten-year contractual terms. No stock options were granted to employees of the businesses included in these consolidated financial statements in fiscal 2010 or fiscal 2009, however, options granted by IDT Corporation in fiscal 2007 vested in fiscal 2009 and fiscal 2010.
Restricted Stock
The fair value of non-vested shares of IDT Corporation’s Class B common stock and the Company's Class B common stock are determined based on the closing price of IDT Corporation’s Class B common stock on the grant date. Share awards vest on a graded basis over three years of service and have ten-year contractual terms.
As part of the Spin-Off, holders of restricted stock of IDT Corporation received, in respect of those restricted shares, one share of the Company’s Class A common stock for every three restricted shares of common stock of IDT Corporation that they owned as of the record date of the Spin-Off and one share of the Company’s Class B common stock for every three restricted shares of Class B common stock of IDT Corporation that they owned as of the record date of the Spin-Off. Those particular shares of the Company’s stock are restricted under the same terms as the IDT Corporation restricted shares in respect of which they were issued. The restricted shares of the Company’s stock received in the Spin-Off are subject to forfeiture on the same terms and restrictions as the corresponding IDT Corporation shares. Upon completion of the Spin-Off on September 14, 2009, there were 0.3 million shares of Class A restricted stock with respect to which the restrictions and risk of forfeiture had not lapsed (non-vested) and 0.5 million shares of Class B nonvested restricted stock.
On October 14, 2009, the Company’s Board of Directors granted its Chairman and founder, Howard S. Jonas, 1.8 million restricted shares of the Company’s Class B common stock with a value of $1.25 million on the date of grant in lieu of a cash base salary for the next five years. The restricted shares will vest in equal thirds on each of October 14, 2011, October 14, 2012 and October 14, 2013. Unvested shares would be forfeited if the Company’s terminates Mr. Jonas’ employment other than under circumstances where the accelerated vesting applies. The shares are subject to adjustments or acceleration based on certain corporate transactions, changes in capitalization, or termination, death or disability of Mr. Jonas. If Mr. Jonas i s terminated by the Company for cause, a pro rata portion of the shares would vest. This arrangement did not impact Mr. Jonas’ cash compensation from the date of the Spin-Off through the pay period ending on the grant date. Total unrecognized compensation cost on the grant date was $1.25 million. The unrecognized compensation cost is expected to be recognized over the vesting period from October 14, 2009 through October 14, 2014.
A summary of the status of the Company’s nonvested restricted shares as of July 31, 2010 and changes in fiscal 2010 is presented below:
| (in thousands) | | Number of Nonvested Shares | |
| Nonvested shares at July 31, 2009 | | | 831 | |
| Granted | | | 1,785 | |
| Vested | | | (130 | ) |
| Forfeited | | | (6 | ) |
| Nonvested shares at July 31, 2010 | | | 2,480 | |
The Company Share-Based Compensation Plan
On September 3, 2009, the Company’s Compensation Committee ratified the Company’s 2009 Stock Option and Incentive Plan (the “Company Stock Option and Incentive Plan”), which was previously adopted by the Company’s Board of Directors and approved by IDT Corporation as its sole stockholder, to provide incentives to executive officers, employees, directors and consultants of the Company and/or its subsidiaries. The maximum number of shares of the Company’s Class B common stock reserved for the grant of awards under the Company Stock Option and Incentive Plan shall be 383,020, subject to adjustment. Incentives available under the Company Stock Option and Incentive Plan may include stock options, stock appreciation rights, limited stock appreciation rights, restricted stock, and deferred stock units.
Under the Company Stock Option and Incentive Plan, the option price of each option award shall not be less than one hundred percent of the fair market value of the Company’s Class B common stock on the date of grant. Each option agreement shall provide the exercise schedule for the option as determined by the Compensation Committee. The exercise period will be ten years from the date of the grant of the option unless otherwise determined by the Compensation Committee. No awards have been granted under the Company Stock Option and Incentive Plan to date.
Note 10—Impairment and Severance Charges
In fiscal 2009, the Company recorded aggregate goodwill impairment charges of $31.5 million (see Note 6). Severance charges related to workforce reductions.
Note 11—Commitments and Contingencies
Legal Proceedings
None.
Lease Commitments
The future minimum payments for capital and operating leases as of July 31, 2010 are as follows:
| (in thousands) | | Operating Leases | | | Capital Leases | |
| Year ending July 31: | | | | | | |
| 2011 | | $ | 1043 | | | $ | 247 | |
| 2012 | | | 861 | | | | 173 | |
| 2013 | | | 629 | | | | 93 | |
| 2014 | | | 374 | | | | 31 | |
| 2015 | | | 116 | | | | — | |
| Thereafter | | | — | | | | — | |
| Total payments | | $ | 3,023 | | | | 545 | |
| Less amount representing interest | | | | | | | (32 | ) |
| Less current portion Principal | | | | | | | (227 | ) |
| Capital lease obligations—long-term portion Principal | | | | | | $ | 286 | |
Rental expense under operating leases was $1.0 million in fiscal 2010 and $1.7 million in fiscal 2009.
Note 12—Related Party Transactions
In fiscal 2010 and 2009, IDT Corporation, the Company’s former parent company, charged the Company for certain transactions and allocated routine expenses based on company specific items. In addition, IDT Corporation controlled the flow of the Company’s treasury transactions. Expenses allocated to the Company amounted to $1.1 million in fiscal 2010 and $1.1 million in fiscal 2009. In September 2009, IDT Corporation funded the Company with an additional $2.0 million in cash in advance of the Spin-Off. Also in September 2009, the aggregate $25.3 million balance of the amount in “Due to IDT Corporation” was converted into a capital contribution.
The Company’s liability to IDT Corporation fluctuated primarily due to operating expenses paid by IDT Corporation on behalf of the Company and the transfers of funds. The Company’s liability to IDT Corporation was as follows:
| | | | |
| | | | | | | |
| (in thousands) | | | | | | |
Opening Balance | | $ | 24,921 | | | $ | 22,924 | |
| | | | | | | | | |
| Expenses paid by IDT Corporation on behalf of the Company | | | 1,183 | | | | 4,313 | |
Transfer of funds to IDT Corporation, net | | | (773 | ) | | | (2,316 | ) |
Conversion of amount due IDT at Spin-Off | | | (27,293 | ) | | | - | |
Contribution from IDT | | | 2,000 | | | | - | |
Ending Balance | | $ | 38 | | | $ | 24,921 | |
Average Balance Owed to IDT Corporation | | $ | 3,982 | | | $ | 23,844 | |
CTM distributes brochures for ETR Brochures, Inc., a brochure distribution firm controlled by Howard S. Jonas. ETR Brochures, Inc. also distributes brochures for CTM. In fiscal 2010, CTM billed ETR Brochures, Inc. approximately $13,000 for distribution services and ETR Brochures, Inc. billed CTM approximately $106,000 for distribution services. The balance owed to ETR Brochures, Inc. by CTM was approximately $12,000 as of July 31, 2010. The balance owed by ETR Brochures, Inc. to CTM was approximately $1,000 as of July 31, 2010. In fiscal 2009, CTM billed ETR Brochures, Inc. approximately $24,000 for distribution services and ETR Brochures, Inc. billed CTM approximately $105,000 for distribution services. The balance owed to ETR Brochures, Inc. b y CTM was approximately $2,000 as of July 31, 2009. The balance owed by ETR Brochures, Inc. to CTM was approximately $10,000 as of July 31, 2009. These transactions were approved in accordance with Related Person Transaction policy described in its 2009 Proxy Statement. The Company intends for the relationship between CTM and ETR Brochures, Inc. to continue in the future.
Note 13—Defined Contribution Plans
In fiscal 2009, IDT Corporation maintained a 401(k) Plan (the “Plan”) available to all employees meeting certain eligibility criteria, which also covered the employees of the Company. The Plan permits participants to contribute up to 20% of their salary, not to exceed the limits established by the Internal Revenue Code. The Plan provided for discretionary matching contributions of 50%, up to the first 6% of compensation, to be invested in IDT Corporation Class B common stock. The discretionary matching contributions vest over five years. The Plan permits the discretionary matching contributions to be granted as of December 31 of each year. All contributions made by participants vest immediately into the participant’s account. The common stock and Class B common stock of IDT Corporation are not investment options for the Plan’s participants.
In September 2009, the Company adopted a 401(K) Plan available to all its employees meeting certain eligibility criteria. The 401(K) Plan permits participants to contribute a portion of their salary with no minimum deferred required, not to exceed the limits established by the Internal Revenue Code. The Plan provided for discretionary matching contributions as determined in the Company’s sole discretion, which vests over six years. All contributions made by participants vest immediately into the participant’s account.
In fiscal 2010 and fiscal 2009, the Company’s contributions to the Plan were $0.0 million and $0.1 million, respectively.
Note 14—Business Segment Information
The Company has the following two reportable business segments: CTM and IDW. CTM consists of the Company’s brochure distribution company and other advertising-based new product initiatives focused on small to medium sized businesses. IDW is a comic book and graphic novel publisher that creates and licenses intellectual property.
The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates the performance of its business segments based primarily on operating income (loss). There are no significant asymmetrical allocations to segments. Operating results for the business segments of the Company are as follows:
| (in thousands) | | CTM | | | IDW | | | Total | |
| Year ended July 31, 2010 | | | | | | | | | |
| Revenues | | $ | 18,562 | | | $ | 11,464 | | | $ | 30,026 | |
| Operating income( loss) | | | 1,126 | | | | (387 | ) | | | 739 | |
| Depreciation and amortization | | | 779 | | | | 80 | | | | 859 | |
| Total assets at July 31, 2010 | | $ | 12,333 | | | $ | 6,068 | | | $ | 18,401 | |
| Year ended July 31, 2009 | | | | | | | | | | | | |
| Revenues | | $ | 19,888 | | | $ | 12,627 | | | $ | 32,515 | |
| Operating loss | | | (30,414 | ) | | | (92 | ) | | | (30,506 | ) |
| Depreciation and amortization | | | 816 | | | | 216 | | | | 1,032 | |
| Impairment and severance charges | | | 30,300 | | | | 1,825 | | | | 32,125 | |
| Total assets at July 31, 2009 (i) | | $ | 9,120 | | | $ | 6,701 | | | $ | 18,789 | |
| (i) | The Total column includes assets of WMET |
Revenues from customers located outside of the United States represented approximately 9.0% and 7.4% of total consolidated revenues from continuing operations in fiscal 2010 and fiscal 2009, respectively. Revenues by country are determined based on the country where the customer is invoiced. Net long-lived assets and net total assets held outside of the United States, primarily in Canada, totaled approximately $0.3 million and $3.6 million, respectively, as of July 31, 2010 and $0.3 million and $3.3 million, respectively, as of July 31, 2009.
Note 15—Selected Quarterly Financial Data (Unaudited)
The table below presents selected quarterly financial data of the Company for its fiscal quarters for fiscal 2010 and fiscal 2009:
Quarter Ended (in thousands) | | Revenues | | | Direct cost of revenues | | | Income(loss) from operations | | | Income(loss) from continuing operations | | | Net Income(loss) | |
| 2010: | | | | | | | | | | | | | | | |
| October 31 | | $ | 8,233 | | | $ | 3,749 | | | $ | 1,070 | | | | 807 | | | $ | 518 | |
| January 31 | | | 6,365 | | | | 3,233 | | | | (681 | ) | | | (603 | ) | | | (719 | ) |
| April 30 | | | 6,832 | | | | 3,605 | | | | (656 | ) | | | (779 | ) | | | (1,059 | ) |
| July 31 | | | 8,596 | | | | 3,561 | | | | 1,006 | | | | 984 | | | | 2,508 | |
| TOTAL | | $ | 30,026 | | | $ | 14,148 | | | $ | 739 | | | | 409 | | | $ | 1,248 | |
| 2009: | | | | | | | | | | | | | | | | | | | | |
| October 31 | | $ | 8,740 | | | $ | 3,589 | | | $ | 200 | | | $ | 13 | | | $ | (315 | ) |
| January 31(a) | | | 6,953 | | | | 3,361 | | | | (32,010 | ) | | | (32,005 | ) | | | (31,351 | ) |
| April 30 | | | 6,805 | | | | 3,603 | | | | (595 | ) | | | (462 | ) | | | (1,795 | ) |
| July 31 | | | 10,017 | | | | 4,087 | | | | 1,899 | | | | 1,759 | | | | (399 | ) |
| TOTAL | | $ | 32,515 | | | $ | 14,640 | | | $ | (30,506 | ) | | $ | (30,695 | ) | | $ | (33,860 | ) |
| (a) | Included in loss from operations are goodwill impairment charges of $29.7 million for CTM and $1.8 million for IDW. |
