==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[MARK ONE]
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- ---------------
COMMISSION FILE NUMBER: 0-19997
CTN MEDIA GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or
Organization)
13-3557317
(I.R.S. Employer Identification No.)
3350 PEACHTREE ROAD, STE 1500
ATLANTA, GEORGIA
(Address of Principal Executive Offices)
30326
(Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 256-9630
5784 Lake Forrest Drive, Ste 275
Atlanta, GA 30328
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Number of shares of common stock outstanding as of November 9, 2000: 15,010,661
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
ITEM 1. Financial Statements
CTN MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,240,019
Accounts receivable, net of allowance of $751,401 17,468,548
Prepaid expenses 662,208
Other current assets 20,815
-----------------
Total current assets 20,391,590
Investments 1,500,000
Property and equipment, net 14,800,884
Other assets 366,566
Intangible assets, net 26,439,327
-----------------
Total assets $ 63,498,367
=================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 15,200,809
Accrued expenses 1,980,926
Deferred revenue 619,378
Current portion of notes payable 14,187,500
-----------------
Total current liabilities 31,988,613
Long-term liabilities:
Debt, less current portion 11,312,500
-----------------
Total liabilities 43,301,113
-----------------
Mandatorily redeemable preferred stock 47,161,062
-----------------
Commitments and Contingencies
Stockholders' deficit:
Common stock - $.005 par; authorized 50,000,000 shares;
issued and outstanding 15,010,280 shares 75,052
Additional paid in capital 32,987,044
Unearned compensation (542,162)
Accumulated deficit (59,483,742)
---------------------
Total stockholders' deficit (26,963,808)
---------------------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' deficit $ 63,498,367
=====================
The accompanying notes are an integral part of the financial statements.
Form 10-QSB
Page 2 of 16
CTN MEDIA GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
------------------------------- -----------------------------
Revenue 16,452,716 8,831,381 47,966,543 13,871,234
Expenses
Operating 13,600,714 6,151,742 37,783,502 9,935,767
Selling, general and administrative 5,892,081 4,701,722 19,357,548 11,861,056
Depreciation and amortization 2,049,554 638,183 5,418,183 1,305,576
--------------- ------------- -------------- -------------
Total Expenses 21,542,349 11,491,647 62,559,233 23,102,399
Interest Income 69,530 29,686 255,886 121,046
Interest Expense (812,377) (201,895) (2,156,275) (233,892)
--------------- ------------- -------------- -------------
Net loss (5,832,480) (2,832,475) (16,493,079) (9,344,011)
=============== ============= ============== =============
Amortization of beneficial conversion feature on
mandatorily
redeemable preferred stock (1,402,000) (7,351,991) (1,402,000) (7,351,991)
Dividends and accretion on mandatorily
Redeemable Preferred stock (8,745,822) (6,448,443) 21,727,758 (6,448,443)
--------------- ------------- -------------- -------------
Net Income (loss) available to common shareholders (15,980,302) (16,632,909) 3,832,679 (23,144,445)
Net Income (loss) per common share
Basic $ (1.07) $ (1.15) $ 0.26 $ (1.61)
Diluted $ (1.07) $ (1.15) $ 0.15 $ (1.61)
=============== ============= ============= =============
Weighted average number of common shares
outstanding
Basic 14,967,941 14,410,360 14,824,239 14,342,052
Diluted 14,967,941 14,410,360 25,874,588 14,342,052
=============== ============= ============== =============
The accompanying notes are an integral part of the financial statements.
Form 10-QSB
Page 3 of 16
CTN MEDIA GROUP, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
2000 1999
-----------------------------------------
Cash flows from operating activities:
Net loss $ (16,493,079) $ (9,344,011)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,418,183 1,305,216
Other amortization 295,083 37,625
Compensation from stock options 574,687 928,165
Bad debt expense 202,583 149,006
Loss on disposal of fixed assets 38,988 -
Changes in operating assets and liabilities:
Accounts receivable 718,862 (4,302,252)
Prepaid expenses (312,905) 61,535
Other assets (15,829) 59,030
Accounts payable 691,542 3,169,752
Accrued expenses (667,529) 400,291
Deferred revenue (322,877) 481,463
------------------- --------------------
Net cash used in operating activities (9,872,291) (7,054,180)
------------------- --------------------
Cash flows from investing activities:
Purchases of property and equipment (5,321,983) (3,839,808)
Cash paid for acquisitions, net of cash received - (30,436,680)
------------------- --------------------
Net cash used in investing activities (5,321,983) (34,276,488)
------------------- --------------------
Cash flows from financing activities:
Repurchase of equity instrument (275,000) -
Net proceeds from notes payable 9,200,000 15,684,699
Payments on notes payable (3,000,000) -
Proceeds from exercise of warrants and stock options 1,338,661 370,912
Net proceeds from issuance of mandatorily redeemable
preferred stock 3,000,000 18,863,634
------------------- --------------------
Net cash provided by financing activities 10,263,661 34,919,245
------------------- --------------------
Net decrease in cash and cash equivalents (4,930,613) (6,411,423)
Cash and cash equivalents, beginning of period 7,170,632 6,411,423
------------------- --------------------
Cash and cash equivalents, end of period $2,240,019 -
=================== ====================
The accompanying notes are an integral part of the financial statements.
Form 10-QSB
Page 4 of 16
CTN MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the Company's financial statements for the fiscal year ended December 31,
1999 included in the Annual Report as filed on Form 10-KSB with the United
States Securities and Exchange Commission.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position as of September 30, 2000 and
the results of operations and of cash flows for the nine months ended September
30, 2000 and 1999.
The results of operations for the nine months ended September 30, 2000
and 1999 are not necessarily indicative of the results of operations for a full
fiscal year of the Company. Certain prior period amounts have been reclassified
to conform with current period presentation.
NOTE (A) - THE COMPANY
CTN Media Group, Inc., a Delaware corporation formally known as the
College Television Network, Inc. (the "Company"), owns and operates the College
Television Network ("CTN", or the "Network"), Link Magazine, iD8, and Armed
Forces Communications, Inc., doing business as Market Place Media ("MPM"), and
owns a 90% interest in its consolidated subsidiary Wetair.com, L.L.C.
("Wetair"). CTN is a proprietary commercial television network that operates on
college and university campuses, through single-channel television systems
placed free of charge primarily in the campus public venues, including dining
facilities and student centers. CTN generates revenue from advertising displayed
on the Network. At September 30, 2000 and 1999, CTN was installed or contracted
for installation at approximately 1,844 and 1,391 locations, respectively. CTN
currently reaches an estimated audience of approximately 1,500,000 young adult
viewers each day based on data provided by Nielson Media Research. Link Magazine
is distributed free of charge to more than 750 campuses nationwide. Each issue
of the publication is direct mailed to over 1,000,000 students on college
campuses. The magazine enjoys a total readership of 3,200,000 college students,
according to Student Monitor. iD8 is an Atlanta-based advertising agency
primarily involved in supporting the creative needs of the Company. In addition,
iD8 places media buys and provides creative services for third party clients.
MPM is a leading media placement and promotion specialist in the college,
military, and minority segments. MPM utilizes various advertising vehicles
throughout the United States to meet its customers' needs, including, but not
limited to, newspapers, radio, magazines, Internet, and on-site events which
target specific markets such as college students, minorities, military personnel
and senior citizens. Wetair was formed on October 13, 1999, to create a niche
entertainment based web site targeting the young adult demographic. The site,
which was soft launched May 1, 2000 and relaunched September 1, 2000, contains
art and entertainment content from established media channels and from user
submitted sources. The minority shareholder of Wetair has no obligation to fund
its operations or deficit, therefore, the Company has not recorded a 10%
reduction in its share of the net loss of Wetair or a related
Form 10-QSB
Page 5 of 16
receivable from the minority shareholder. The Company has two reportable
business segments: (i) CTN, which includes the Network, Link Magazine, iD8, and
Wetair, and (ii) MPM.
Certain of the Company's revenues are affected by the pattern of
seasonality common to most school-related businesses. Historically, the Company
has generated a significant portion of its revenue during the period from
September through May and substantially less revenue during the summer months
when colleges and universities do not hold regular classes.
NOTE (B ) MANDATORILY REDEEMABLE PREFERRED STOCK
As of September 30, 2000, U-C Holdings, LLC, a Delaware limited
liability company and majority shareholder of the Company ("Holdings"), owns a
total of 2,176,664 shares of the Company's 2,510,000 authorized shares of Series
A Convertible Preferred Stock, $.001 par value per share ("Series A Preferred").
The issued shares are convertible into 7,255,546 shares of common stock at a
price of $4.50 per share. The Company has reserved these common shares for
possible conversions.
Under that certain Amended and Restated Purchase Agreement, dated
October 18,1999, between the Company and Holdings, the Company had the right to
require Holdings to purchase, subject to various conditions, certain of which
are at the discretion of Holdings, up to an additional 133,333 shares of Series
A Preferred. This right was exercised on July 20, 2000 for an aggregate purchase
price of approximately $2,000,000.
On August 30, 2000 Holdings purchased 66,666 shares of Series A
Preferred for $1,000,000. The shares became available for purchase under the
Amended and Restated Purchase Agreement because MPM's financial performance
allowed the guaranty by Willis Stein & Partners, L.L.P. ("WSP") and Holdings of
the indebtedness of MPM to CIBC to be reduced, thus freeing a portion of the
shares reserved for sale to Holdings upon the WSP or Holdings guaranty being
called.
For the three month and nine month periods ended September 30, 2000,
net adjustments of $8,745,822 and ($21,727,758) were recorded to adjust the
carrying value of the Series A Preferred to its highest redemption value with
the offset being recorded as an adjustment to stockholder's equity. As of
September 30, 2000, the Series A Preferred has been accreted to its highest
redemption value based on the Company's closing common stock price of $6.50 per
share at such date. The adjustments recorded during the first, second and third
quarter are a direct result of the fluctuation in the market value of the
Company's stock price from $10.00 at December 31, 1999 to $6.25 at March 31,
2000 to $5.37 at June 30, 2000 to $6.50 at September 30, 2000. Since the Series
A Preferred is redeemable on July 23, 2006, at the discretion of the Series A
Preferred Stockholders, at the greater of the liquidation value (which is the
purchase price plus accrued and unpaid dividends) and the market value of the
underlying common stock, the Company is required to accrete the Series A
Preferred to its highest redemption value at each balance sheet date.
Accordingly, as the market price of the common stock changes, the redemption
value and the related accretion amount will change; however, the highest
redemption value will never be less than original cost plus accrued dividends.
As a result of the fluctuation in the Company's stock price during the nine
month period, the Company has reported positive earnings per share for the nine
month period.
The Series A Preferred shares issued to Holdings have been initially
recorded on the balance sheet net of the value allocated to the favorable
conversion terms of the security (the "Beneficial Conversion Feature"). The
Beneficial Conversion Feature is calculated as the difference between the
conversion price of the security and the market price of the Common Stock on the
commitment date of the purchases, as defined. Because the securities are
immediately
Form 10-QSB
Page 6 of 16
convertible (although they are not immediately redeemable), the amounts ascribed
to the Beneficial Conversion Feature have been immediately amortized through
charges to Stockholder's Equity and included as adjustments to arrive at net
loss available to common shareholders on the Consolidated Statement of
Operations. The adjustments to net loss available to common stockholders
associated with the Beneficial Conversion Feature were $1,402,000 for the three
and nine months ended September 30, 2000.
NOTE (C) - DEBT
During 1999, the Company obtained a $12,000,000 revolving credit loan
(the "CTN Loan") from a financial institution for working capital purposes. The
CTN Loan, as amended, is on a revolving credit basis and requires the Company to
obtain equity investments, from Holdings or other investors, on a
dollar-for-dollar basis for every dollar borrowed under the CTN Loan up to the
$12,000,000 credit limit. The CTN Loan bears interest at either (i) the Base
Rate which is equal to the greater of (a) the Federal Funds Rate plus 0.5% or
(b) the Prime Rate, plus 2.00% per annum; or (ii) the Eurodollar Rate, plus
3.50% per annum. A commitment fee of .5% per annum on the unused portion of the
facility is required. The CTN Loan is due and payable in full on December 29,
2000 and, as such, all amounts due thereunder have been classified as current at
September 30, 2000. The Company is discussing an extension of the CTN Loan with
the financial institution. The CTN Loan is guaranteed by a negative pledge of
the outstanding shares of stock of the Company owned by Holdings. Amounts
outstanding under the CTN loan at September 30, 2000 were $12,000,000. At
September 30, 2000, the weighted average interest rate on the CTN Loan was
11.37% on the debt outstanding.
On August 31, 1999, concurrent with the MPM acquisition, MPM obtained a
$15,000,000 Term Loan ("Term Loan") and a $2,000,000 revolving credit line
("Revolver Loan") from a separate financial institution and its affiliates. MPM
distributed the proceeds of the Term Loan to the Company to pay the MPM
shareholders in the Company's acquisition of the capital stock of MPM on August
31, 1999 (the "MPM Acquisition"). Amounts outstanding under the Term Loan and
the Revolver Loan at September 30, 2000 were $13,500,000 and $0, respectively.
Both the Term Loan and the Revolver Loan bear interest at either the
Alternate Base Rate which is the higher of the Prime Rate or the Federal Funds
Rate, as defined, plus 0.5%, or the "Eurodollar Base Rate" as defined, plus the
applicable margin, which is variable depending on various financial conditions
set forth in the credit agreement. The weighted average interest rate was 9.30%
on debt outstanding for the nine months ended September 30, 2000.
During November, 2000 the Company entered into an amendment to the Term
Loan and the Revolver Loan. The amount of the Revolver Loan has been increased
from $2,000,000 to $5,000,000. The due date of the Revolver Loan was changed
from September 30, 2004 to December 31, 2001. Immediately following the
amendment, the Company used $500,000 from the Revolver Loan to pay down the
amount outstanding under the Term Loan to $13,000,000. Pursuant to the terms of
the amendment, the Term Loan is payable in quarterly installments of $562,500
each for the first three quarters of 2001, with payment in full due December 31,
2001. The amendment provides for the funding of a one-time dividend of
$4,500,000 from MPM to the Company. In addition, the Company is permitted to
receive a one-time dividend payment of $500,000 from MPM's excess cash flow, if
available, in accordance with the terms of the agreement.
The Company's debt agreements contain financial covenants which, among
other restrictions, require the maintenance of certain financial ratios and cash
flows, restrict asset purchases, dividend payments or distributions to the
Company by MPM. At September 30, 2000 the Company was not in compliance with a
financial covenant as required under the CTN Loan.
Form 10-QSB
Page 7 of 16
The financial institution has granted the Company a waiver of the covenant
noncompliance. Substantially all of the assets of the Company are pledged as
collateral for the loans. Holdings has committed to provide funding through
fiscal 2000 in the event the Company experiences cash flow deficits from
operations or cash flow deficits in connection with debt service requirements.
NOTE (D) - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
ESTIMATED SEPTEMBER 30,
USEFUL LIVES 2000
Entertainment systems completed 5 years $14,983,868
Machinery and equipment 5 -7 years 1,230,794
Software and website development costs 8 mos-5 years 2,714,832
Furniture and Fixtures 7 years 854,623
Leasehold improvements 7-11 years 330,782
---------------
$20,114,899
Less: Accumulated depreciation (5,314,015)
---------------
Total $14,800,884
===============
Depreciation expense for the nine months ended September 30, 2000 and
the nine months ended September 30, 1999 was approximately $2,795,238 and
$1,102,012 respectively.
NOTE (E) - INTANGIBLE ASSETS
Intangible assets consist of the following:
ESTIMATED SEPTEMBER 30,
USEFUL LIVES 2000
Goodwill 10-15 years $9,806,359
Customer relationships 7 years 16,293,000
Trademarks/tradenames 10-15 years 3,458,951
Other intangibles 2-15 years 842,374
---------------
$30,400,684
Less: Accumulated amortization (3,961,357)
---------------
Total $26,439,327
NOTE (F) - COMMITMENTS AND CONTINGENCIES
In connection with the Company's acquisition of the rights to and
inventory of video jukeboxes in 1991, the Company agreed to pay two former
stockholders an aggregate of $100,000, one-half being payable at such time as
the Company's net pre-tax income equals at least $500,000 and the balance being
payable at such time as the Company has an additional $500,000 in net pre-tax
earnings. The Company will provide for these contingent liabilities when
ultimate payment is considered probable.
The Company is currently utilizing BTV Systems, Satellite Engineering
Group, and Viatech International, Inc. to complete installations of Network
equipment in new locations. The Company has also entered into an Origination
Services Contract with Crawford Communications, Inc. ("Crawford"). The original
agreement provides for payments of approximately $1,320,000 over a
Form 10-QSB
Page 8 of 16
five-year period ending on July 15, 2003. In accordance with the Origination
Services Contract, Crawford is responsible for the transmission via satellite of
CTN's daily programming, including encoding signals, testing, maintaining CTN's
programming library, and obtaining programming from Turner Private Networks,
Inc. ("Turner") pursuant to the Company's programming agreement with Turner, as
well as other programming from other CTN sources. Crawford is also responsible
for the uplink of the programming to a satellite as well as the downlink of the
signal from the satellite at each installation site. As of September 30, 2000,
the Company has paid approximately $770,000 to Crawford pursuant to the
Origination Services Contract.
On March 27, 1998, the Company signed an agreement with Turner
Broadcasting System, Inc. to provide news and sports programming on CTN through
December 31, 2002. This agreement supercedes the prior programming agreement
entered into on November 5, 1996. On July 30, 1999, the Company signed an
amendment to this agreement to provide CNN Headline News programming on CTN
through December 31, 2002. The total license fee is approximately $3,156,250. As
of September 30, 2000, the Company has paid approximately $1,461,250 pursuant to
this agreement, with approximately $1,695,000 to be paid over the remainder of
the agreement.
In connection with the delivery platform conversion during 1998, the
Company entered into a Transponder Use Agreement with Public Broadcasting
Service ("PBS") on April 30, 1998. The Company has subleased capacity on a
satellite owned and operated by GE American Communications, Inc. ("GE") and
leased to PBS by GE. This agreement provides for payments of approximately
$3,924,000 over a five-year period that terminates on July 31, 2003. The Company
has protected status on this satellite, where in the event of a satellite
failure or performance problem, the Company's programming will preempt
transmissions of other users on this satellite or on another satellite. As of
September 30, 2000, the Company has paid approximately $1,699,400 pursuant to
this agreement with approximately $2,224,600 to be paid over the remainder of
the term.
On June 1, 2000, the Company entered into a lease for new office space
in Atlanta, Georgia at One Capital City Plaza. The Company moved its
headquarters to One Capital City Plaza in September 2000. This move enabled the
Company to consolidate four different Atlanta locations into one. The lease term
is for five (5) years and the initial annual rental is $510,750, subject to
annual increases as defined in the agreement.
On June 12, 2000, the Company entered into a contract with US Concepts,
Inc. to manage and execute a promotion known as "Politically Incorrect on
Campus." The promotion took place from September 1, 2000 through October 31,
2000, and consisted of ten events starring Bill Maher. The total estimated cost
of the promotion was approximately $385,000.
NOTE (G) SEGMENT REPORTING
The Company has two reportable segments as defined under Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"): (i) CTN and (ii) MPM.
Segment information previously reported has been restated to conform to the
current presentation. See Note (A) for a description of the products and
services provided by each segment. MPM was acquired on August 31, 1999.
Accordingly, the MPM segment information presented below for 1999 included only
one month of activity. The Company evaluates each segment's performance based on
income or loss before income taxes. Information regarding the operations of
these reportable segments is as follows:
Form 10-QSB
Page 9 of 16
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
REVENUES
CTN $ 10,656,986 $8,076,058 $2,855,183 $3,036,205
MPM 37,309,557 5,795,176 13,597,533 5,795,176
------------------- ------------------- ------------------- -----------------
Total $47,966,543 $13,871,234 $16,452,716 $8,831,381
------------------- ------------------- ------------------- -----------------
PROFIT (LOSS) BEFORE INCOME TAXES
CTN $(15,220,521) $(9,908,127) $(5,692,879) $(3,396,591)
MPM (1,272,558) 564,116 (139,601) 564,116
------------------- ------------------- ------------------- -----------------
Total $(16,493,079) $(9,344,011) $(5,832,480) $(2,832,475)
------------------- ------------------- ------------------- -----------------
DEPRECIATION AND AMORTIZATION
CTN $2,702,408 $1,287,114 $1,144,030 $619,721
MPM 2,715,775 18,462 905,524 18,462
------------------- ------------------- ------------------- -----------------
Total $5,418,183 $1,305,576 $2,049,554 $638,183
------------------- ------------------- ------------------- -----------------
INTEREST INCOME
CTN $171,453 $115,764 $45,516 $24,404
MPM 84,433 5,282 24,014 5,282
------------------- ------------------- ------------------- -----------------
Total $255,886 $121,046 $69,530 $29,686
------------------- ------------------- ------------------- -----------------
INTEREST EXPENSE
CTN $870,336 $96,095 $380,312 $64,098
MPM 1,285,939 137,797 432,065 137,797
------------------- ------------------- ------------------- -----------------
Total $2,156,275 $233,892 $812,377 $201,895
------------------- ------------------- ------------------- -----------------
SEPTEMBER 30,
2000
TOTAL ASSETS
CTN 21,815,281
MPM 41,683,086
-------------------
Total 63,498,367
-------------------
Substantially all of the property and equipment owned by the Company is used in
the operations of CTN.
Form 10-QSB
Page 10 of 16
NOTE (H) SUBSEQUENT EVENT
On November 1, 2000, the Company issued a press release announcing
the retention of investment banking firm Merrill Lynch & Co. Merrill Lynch &
Co. will explore a range of strategic alternatives aimed at enhancing
shareholder value, including mergers, strategic partnerships and a possible
sale of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
Certain forward-looking information contained in this Quarterly Report
is being provided in reliance upon the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 as set forth in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such information includes, without limitation,
discussions as to estimates, expectations, beliefs, plans, strategies and
objectives concerning the Company's future financial and operating performance.
Such forward-looking information is subject to assumptions and beliefs based on
current information known to the Company and factors that could yield actual
results differing materially from those anticipated. The Company undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes in future
operating results. Please see Exhibit 99.1, "Safe Harbor Compliance Statement
for Forward-Looking Statements," for additional factors to be considered by
shareholders and prospective shareholders.
OVERVIEW
CTN Media Group, Inc., a Delaware corporation, (the "Company"),
commenced operations in January 1991. The Company is a diversified media company
specializing in reaching targeted audiences. The Company has properties in the
television, magazine, and online sectors. The Company owns and operates the
College Television Network ("CTN" or the "Network"), a proprietary commercial
television network that operates on college and university campuses across the
country. CTN is provided to campuses through single-channel television systems
("Systems") placed free of charge primarily in the campus public venues,
including dining facilities and student unions. At September 30, 2000, CTN was
installed or contracted for installation at approximately 1,844 locations at
various colleges and universities throughout the United States. According to
projections from Nielson Media research and audience measuring data, CTN reaches
approximately 1,500,000 young adult viewers each day.
The Company publishes Link Magazine, the most widely read college
magazine in the U.S., according to Student Monitor. Each issue of the
publication is direct mailed to over one million students on college campuses.
The magazine enjoys a total readership of 3,200,000 college students. In
addition, the Company owns iD8, an Atlanta-based advertising agency primarily
involved in supporting the creative needs of the Company. In addition, iD8
places media buys and provides creative services for third party clients.
MPM, the Company's wholly owned subsidiary, is a leading media
placement and promotion specialist in the college, military, and minority
segments. MPM utilizes various advertising vehicles throughout the United States
to meet its customers' needs, including, but not limited to, newspapers, radio,
magazines, and on-site events which target specific markets such as college
students, minorities, military personnel and senior citizens.
Wetair.com, the Company's proprietary Internet site, is a lifestyle and
entertainment destination site for the 18-24 year old demographic. The site,
which had a soft launch on May 1, 2000 and relaunched on September 1, 2000,
features lifestyle categories hosted by on-screen personalities that will
promote interaction and content submission from its user base. As of the
formation date, the Company owns 90% of the outstanding stock of Wetair and
operates it as a subsidiary of the Company.
Form 10-QSB
Page 11 of 16
The Company has two reportable business segments: (i) CTN, which
includes the Network, Link Magazine, iD8 and Wetair and (ii) MPM.
Certain Company revenue is affected by the pattern of seasonality
common to most school-related businesses. Historically, the Company has
generated a significant portion of its revenue during the period of September
through May and substantially less revenue during the summer months when
colleges and universities do not hold regular classes.
RESULTS OF OPERATIONS
The following table sets forth certain financial data derived from the
Company's statement of operations for the three and nine months ended September
30, 2000 and September 30, 1999:
Three Months Ended
September 30, 2000 September 30, 1999
---------------------------------- ----------------------------------
% of % of
$ Revenue $ Revenue
---------------- ----------------- ----------------- ----------------
Revenue..................................... 16,452,716 100 8,831,381 100
Operating expenses.......................... 13,600,714 83 6,151,742 70
Selling, general and administrative......... 5,892,081 36 4,701,722 53
Depreciation and amortization............... 2,049,554 12 638,183 7
Interest income (expense)................... (742,847) 5 (172,209) 2
Net Loss ................................... 5,832,480 35 2,832,475 32
Nine Months Ended
September 30, 2000 September 30, 1999
---------------------------------- ----------------------------------
% of % of
$ Revenue $ Revenue
---------------- ----------------- ----------------- ----------------
Revenue..................................... 47,966,543 100 13,871,234 100
Operating expenses.......................... 37,783,502 79 9,935,767 72
Selling, general and administrative......... 19,357,548 40 11,861,056 86
Depreciation and amortization............... 5,418,183 11 1,305,576 9
Interest income (Expense)................... (1,900,389) 4 (112,846) 1
Net loss.................................... 16,493,079 34 9,344,011 67
Revenue increased to $16,452,716 and $47,966,543 for the three and nine
month periods ended September 30, 2000, versus $8,831,381 and $13,871,234 for
the comparable periods in the prior year. The primary source for the revenue
increase was attributable to MPM, which was acquired in August 1999. MPM revenue
accounts for approximately $7,800,000 and $31,500,000, respectively, of this
increase. During the year, MPM continued to generate increased sales activity in
the military, minority, college, and radio areas. In addition, advertising sales
for the CTN segment increased approximately $2,600,000 for the nine month period
ended September 30, 2000, due primarily to sales to new advertisers and
increased commitments from the existing advertiser base at the Network. Although
Network advertising sales decreased 6% for the three month period ended
September 30, 2000 versus the comparable period in the prior year, this is not
indicative of a decline in the Network customer base. The Network had entered
into several barter agreements for which revenue cannot be recognized under
current accounting pronouncements. The Company anticipates that it will
experience sales growth at CTN for the fiscal year ending December 31, 2000 by
continuing to expand its advertiser base and by increasing the rates charged for
its advertising spots to reflect an anticipated increase in viewership. Although
the
Form 10-QSB
Page 12 of 16
Company has agreements with national advertisers and has held discussions or had
prior agreements with other national advertisers, no assurance can be given that
these or other advertisers will continue to purchase advertising from the
Company, or that future significant advertising revenue will ever be generated.
Failure to significantly increase advertising revenue could have a material
impact on the operations of the Company.
Operating expenses increased to $13,600,714 and $37,783,502 for the
three and nine month periods ended September 30, 2000, as compared to $6,151,742
and $9,935,767 for the comparable periods in the prior year which included only
one month of MPM activity. The increase over the comparable prior year period is
primarily attributable to direct costs relating to MPM. MPM operating expenses
account for approximately $6,700,000 and $26,000,000, respectively, of this
increase. Costs related to improving Network programming and the production of
higher quality issues of Link account for the remaining increase.
Selling, general and administrative expenses increased to $5,892,081
and $19,357,548 for the three and nine month periods ended September 30, 2000,
versus $4,701,722 and $11,861,056 for the comparable periods in the prior year.
SG&A expenses attributable to MPM account for approximately $700,000 and
$3,500,000, respectively, of this increase. The remaining increase is primarily
attributable to costs associated with Wetair along with increased marketing,
research, expanded sales efforts for both advertising and affiliate sales
growth, and agency fees associated with the CTN segment.
Depreciation and amortization expense totaled $2,049,554 and $5,418,183
for the three and nine-month periods ended September 30, 2000, as compared to
$638,183 and $1,305,576 for the comparable periods in the prior year. $890,000
and $2,700,000, respectively, of this increase is primarily related to the
amortization of the intangible assets and depreciation recorded in connection
with the MPM acquisition. The remaining increase is a result of depreciation
taken on equipment associated with the rapid expansion of the Network.
Interest expense, net of interest income, amounted to $742,847 and
$1,900,389 for the three and nine-month periods ended September 30, 2000, versus
interest expense, net of interest income of $172,209 and $112,846 for the
comparable periods in the prior year. The increase is primarily due to the
increased debt levels associated with the MPM acquisition. The interest rates on
all credit facilities are on a floating basis.
The Company has incurred substantial operating losses since
commencement of its operations. The net loss amounted to $5,832,480 and
$16,493,079 for the three and nine-month periods ended September 30, 2000,
versus $2,832,475 and $9,344,011 for the comparable periods in the prior year.
The net loss during the respective periods for the quarter reflects the
Company's continued efforts to expand its advertiser and affiliate bases.
FINANCIAL CONDITION AND LIQUIDITY
Cash used in operations increased to $9,872,291 during the nine months
ended September 30, 2000, from $7,054,180 for the comparable period in the prior
year. The impact of an increased loss primarily accounts for the increase in
cash used in operations for the period. The Company has amended various
provisions of the Term Loan and Revolver Loan as discussed in Note (C) to make
additional cash available to the Company. As a result of these modifications,
the Term Loan is payable in quarterly installments of $562,500 each for the
first three quarters of 2001, with payment due in full December 31, 2001.
Acquisitions and purchases of property and equipment amounted to
$5,321,983 during the nine months ended September 30, 2000 from $34,276,488 for
the comparable period in the prior year. The purchase of MPM for approximately
$30,000,000 in August 1999 accounts for nearly all of the investing activities
of the Company in the nine months ended September 30, 1999. The property and
equipment expenditures in the nine months ended September 30, 2000 are
attributable primarily to affiliate growth and the buildout of the Wetair
Internet site.
Form 10-QSB
Page 13 of 16
Cash provided by financing activities was $10,263,661 for the nine
months ended September 30, 2000, compared to $34,919,245 for the same period in
the prior year. The current proceeds came from the draw down on the CTN Loan
facility reduced by a partial pay down on the Term Loan and Revolver Loan. The
remaining balance of financing proceeds was derived from the issuance of Series
A Preferred and the exercise of warrants and stock options.
At September 30, 2000, the Company was not in compliance with a
financial covenant as required under the CTN Loan. The financial institution has
granted the Company a waiver for the covenant default.
The entire amount outstanding on the CTN Loan of $12,000,000 is due
December 29, 2000. The Company is currently in discussions with the financial
institution to extend the current CTN Loan. In any event, Holdings has committed
to provide funding through fiscal 2000 in the event the Company experiences cash
flow deficits from operations or cash flow deficits in connection with debt
service requirements.
The Company has retained the investment banking firm of Merrill Lynch &
Co., Inc. to explore a range of strategic alternatives to enhance stockholder
value, including a merger, strategic relationship or a possible sale of the
Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). This bulletin summarizes certain of the Staff's views in the application
of generally accepted accounting principles to revenue recognition in financial
statements. The required implementation of SAB 101 has been deferred until the
fourth quarter of 2000, although adoption would be as of January 1, 2000. The
Company is monitoring on-going interpretations of SAB 101, but at this time
believes that there will be no material impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. ("FAS 133"). This statement is effective for fiscal
years beginning after June 15, 2000. (January 1, 2001 for the Company.) The new
accounting standard is not expected to have a significant impact on the results
of operations.
Form 10-QSB
Page 14 of 16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No events occurred during the quarter covered by this Report that would
require a response to this Item.
ITEM 2. CHANGES IN SECURITIES.
No events occurred during the quarter covered by this Report that would
require a response to this Item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No events occurred during the quarter covered by this Report that would
require a response to this Item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company.
ITEM 5. OTHER INFORMATION.
No events occurred during the quarter covered by this Report that would
require a response to this Item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed with this Report:
Exhibit 10.1 Second Amendment to Employment Agreement
of Jason Elkin
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Safe Harbor Compliance Statement for
Forward-Looking Statements.
(b) Reports on Form 8-K:
A report on Form 8-K dated July 20, 2000 disclosing the
issuance of 133,333 shares of Series A Convertible Preferred to U-C Holdings,
LLC was filed on August 1, 2000.
A report on Form 8-K dated August 30, 2000 disclosing the
issuance of 66,666 shares of Series A Convertible Preferred to U-C Holdings, LLC
was filed on September 7, 2000.
Form 10-QSB
Page 15 of 16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CTN MEDIA GROUP, INC.
Registrant
Date: November 13, 2000 /s/ Jason Elkin
---------------
Jason Elkin
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
(PRINCIPAL EXECUTIVE OFFICER)
Date: November 13, 2000 /s/ Patrick Doran
-----------------
Patrick Doran
CHIEF FINANCIAL OFFICER AND SECRETARY
(PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
Form 10-QSB
Page 16 of 16