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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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 13-3557317
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3350 PEACHTREE RD., SUITE 1500 30326
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 256-9630
N/A
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
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, $.005 par value, outstanding as of May 7,
2001: 15,086,747
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CTN MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
March 31, December 31,
2001 2000
------------- ------------
Current assets:
Cash and cash equivalents $ 1,144,604 $ 3,141,893
Accounts receivable, net of allowance of $1,294,136
and $1,216,000 respectively 15,520,385 19,078,643
Prepaid expenses 474,082 500,818
Other current assets 19,854 31,431
------------ ------------
Total current assets 17,158,925 22,752,785
Investments 1,530,000 1,500,000
Property and equipment, net 13,472,028 14,054,337
Other assets 302,809 306,134
Intangible assets, net 24,227,858 24,951,076
------------ ------------
Total assets $ 56,691,620 $ 63,564,332
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,218,232 $ 13,493,253
Accrued expenses 1,687,326 2,533,815
Deferred revenue 1,728,177 1,458,639
Other current liabilities 2,516,388 2,537,288
Current portion of long-term debt 28,508,938 29,000,000
------------ ------------
Total liabilities 46,659,061 49,022,995
Mandatorily redeemable preferred stock - 38,306,052
Stockholders' equity (deficit):
Common stock - $.005 par; authorized 50,000,000 shares;
issued and outstanding 15,086,747 shares 75,434 75,296
Preferred stock - authorized 2,510,000 shares;
issued and outstanding 2,176,664 shares 38,794,076 -
Additional paid in capital 41,293,509 41,780,424
Unearned compensation (140,079) (172,035)
Accumulated deficit (69,990,381) (65,448,400)
------------ ------------
Total stockholders' equity (deficit) 10,032,559 (23,764,715)
------------ ------------
Total liabilities and stockholders'
equity (deficit) $ 56,691,620 $ 63,564,332
============ ============
The accompanying notes are an integral part of the
financial statements.
Form 10-Q
Page 2 of 17
CTN MEDIA GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2001 2000
------------ -------------
Revenue $ 13,972,102 $ 16,160,437
Expenses
Operating 10,647,527 11,407,773
Selling, general and administrative 5,058,839 6,843,677
Depreciation and amortization 1,791,583 1,542,153
------------ ------------
Total expenses 17,497,949 19,793,603
Interest income 37,899 113,842
Interest expense (857,033) (645,450)
------------ ------------
Net loss before cumulative effect of a change
in accounting method (4,344,981) (4,164,774)
Cumulative effect of change in accounting
method (197,000) -
------------ ------------
Net loss (4,541,981) (4,164,774)
Dividends and accretion on redeemable preferred stock (488,024) 24,708,308
------------ ------------
Net income (loss) available to common stockholders $ (5,030,005) $ 20,543,534
============ ============
Net income (loss) per share:
Basic net income (loss) per common share before
cumulative effect of accounting change $ (0.32) $ 1.40
Cumulative effect of accounting change (0.01) -
------------ ------------
Basic net income (loss) per common share $ (0.33) $ 1.40
============ ============
Diluted net income (loss) per common share
before cumulative effect of accounting change $ (0.32) $ 0.82
Cumulative effect of accounting change (0.01) -
------------ ------------
Diluted net income (loss) per common share $ (0.33) $ 0.82
============ ============
Weighted average number of common shares:
outstanding
Basic 15,075,165 14,713,320
Diluted 15,075,165 25,107,102
The accompanying notes are an integral part of the
financial statements.
Form 10-Q
Page 3 of 17
CTN MEDIA GROUP, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $(4,541,981) $(4,164,774)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,791,583 1,542,153
Cumulative effect of accounting change, adoption of FAS 133 197,000
Amortization of debt issuance costs 49,749 109,399
Non-cash compensation expense arising from equity awards 31,956 (73,240)
Loss on disposition of fixed assets 31,041 -
Changes in operating assets and liabilities:
Accounts receivable 3,558,258 588,898
Prepaid expenses 26,736 (330,950)
Other assets 14,902 (20,605)
Intangible assets (123,474) -
Accounts payable (1,275,021) (1,505,360)
Accrued expenses and other liabilities (1,064,389) (626,509)
Deferred revenue 269,538 (210,434)
----------- -----------
Net cash used in operating activities (1,034,102) (4,691,422)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (443,373) (1,718,619)
Cash paid for investments (30,000) -
----------- -----------
Net cash used in investing activities (473,373) (1,718,619)
----------- -----------
Cash flows from financing activities:
Net proceeds from line of credit 1,000,000 4,000,000
Payments on term loan (1,491,062) -
Proceeds from exercise of warrants and stock options 57,146 867,558
Prepaid issuance costs for preferred stock (55,898) -
----------- -----------
Net cash (used in) provided by financing activities (489,814) 4,867,558
----------- -----------
Net decrease in cash and cash equivalents (1,997,289) (1,542,483)
Cash and cash equivalents, beginning of period 3,141,893 7,170,632
----------- -----------
Cash and cash equivalents, end of period $ 1,144,604 $ 5,628,149
----------- -----------
The accompanying notes are an integral part of the
financial statements.
Form 10-Q
Page 4 of 17
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-Q. 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, 2000 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 of the Company as of March
31, 2001 and the results of operations and of cash flows for the three months
ended March 31, 2001 and 2000.
The results of operations for the three months ended March 31, 2001 and
2000 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. and subsidiaries (the "Company") is a targeted
media company specializing in reaching young adults. The Company operates
properties in network television, publishing, online media, specialty media
placement and marketing.
The Company operates as three reportable segments: CTN, Market Place
Media ("MPM"), and Wetair.com. CTN includes the operations of the College
Television Network (the "Network"), Link Magazine and iD8 Marketing ("iD8").
The Network is a satellite television network that operates on college
and university campuses across the United States. Its single channel television
system is placed free of charge in campus dining facilities and student unions.
The Network's broadcasts contain music, news, information and entertainment
programming. As of March 31, 2001, the Network was installed or contracted for
installation in 1,923 locations at approximately 818 colleges and universities.
The Network generates revenue through the advertising placed on it.
Link Magazine is a publication that is distributed on over 650 college
campuses. The primary source of revenue for the magazine is print advertising.
iD8 Marketing is a marketing agency providing creative services and placing
media purchases for its clients. Revenue for iD8 Marketing consists primarily of
fees for advertising services.
MPM is a targeted media placement and promotions company that reaches
the college student, minority and military markets. MPM provides media placement
services in specialized newspapers and magazines, radio, television, Internet,
and outdoor media. MPM also produces events, promotions and provides public
relations services. The primary source of revenue for MPM is from the sale of
media placements.
Wetair.com is an Internet site for young adults offering entertainment
information. Wetair.com was launched on September 1, 2000 and has not generated
significant revenues to date.
Form 10-Q
Page 5 of 17
The Company maintains a headquarters office in Atlanta, Georgia and
sales offices in New York, Chicago and Los Angeles. MPM is based in Santa
Barbara, California with sales offices in New York and San Francisco.
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) - IMPLEMENTATION OF FAS 133 AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING METHOD
As required under the Term Loan described under Note (D) below, the
Company is a party to an interest rate swap agreement whereby, under certain
conditions, it pays a fixed rate interest and receives payments based on a
variable interest rate (LIBOR) on a notional principal balance, which was
approximately $5.6 million at March 31, 2001.
In July 1998, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 133 ("FAS 133"). This statement, as subsequently
amended, establishes accounting and reporting standards for derivative financial
instruments and for hedging activities. It requires that an entity recognize all
derivatives as assets or liabilities in the statement of financial position and
measure those instruments at fair value. The Company implemented the provisions
of FAS 133 as of January 1, 2001.
As a result of adopting the provisions of FAS 133 as of January 1,
2001, the fair value of the interest rate swap is included in the Company's
balance sheet and changes in the fair value of the interest rate swap are
recognized currently in the Company's statement of operations. The Company's
transition adjustment and related cumulative effect of a change in accounting
method resulted in a loss of $197,000. The net change in the fair value of the
Company's derivatives since adoption of FAS 133 resulted in a loss of $90,000,
which is included in interest expense.
The fair value of the interest rate swap is included in other current
liabilities. Amounts accrued under the interest rate swap are presented net with
interest expense. Amounts due or payable are presented in accrued expenses.
NOTE (C) - PREFERRED STOCK
At March 31, 2001, preferred stock consists of Series A Convertible
Preferred Stock ("Series A") of which U-C Holdings, LLC ("Holdings") owns all of
the 2,176,664 outstanding shares of the 2,510,000 authorized shares of preferred
stock. Effective March 31, 2001, the redemption feature of the Series A was
removed, which will cease the accretion of Series A to its highest redemption
value at the end of each reporting period. This allowed the Company to move the
classification of the Series A from Mandatorily Redeemable Preferred Stock to
Stockholders' Equity. The remaining terms of Series A will remain unchanged and
include the 12% cumulative accrual of dividends per year, compounding on a
quarterly basis. Each share has voting rights based upon the number of shares of
common stock into which Series A is convertible. At March 31, 2001, 13,059,984
shares of common stock were reserved for conversion. There are an additional
2,457,642 shares of common stock reserved for the accrued dividends of Series A
through March 31, 2001.
NOTE (D) - DEBT
The Company has a revolving credit facility from a financial
institution ("CTN Loan") with outstanding borrowings of up to $12,000,000. The
CTN Loan required the Company to obtain additional
Form 10-Q
Page 6 of 17
equity investments, from Holdings, or from other investors, on a
dollar-for-dollar basis for every additional 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 year; or (ii) the Eurodollar Rate, plus 3.50% per year. The
determination of whether to use the Base Rate or the Eurodollar Rate is at the
option of the Company. A commitment fee of 0.5% per year on the unused portion
of the facility is required. The CTN Loan is due and payable in full on December
31, 2001 and, as such, all amounts due thereunder have been classified as
current at March 31, 2001.
For the three months ended March 31, 2001 and 2000, the weighted
average interest rate on the CTN Loan was 10.7% and 11.1%, respectively.
The CTN Loan is guaranteed by a negative pledge of the outstanding
shares of stock of the Company owned by Holdings.
MPM has a term loan ("Term Loan") and a $5,000,000 revolving credit
facility ("Revolver Loan") from a separate financial institution and its
affiliates. At March 31, 2001, $11,508,938 was outstanding under the Term Loan
and $5,000,000 was outstanding under the Revolver Loan.
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 therein, plus 0.5%, or the "Eurodollar Base Rate" as defined
therein, plus the applicable margin, which is variable depending on various
financial conditions set forth in the credit agreement. A commitment fee of 0.5%
per year on the unused portion of the facility is required. The weighted average
interest rate was 9.45% and 9.06% for the three months ended March 31, 2001 and
2000, respectively.
The Company's debt agreements contain financial covenants that, among
other restrictions, require the maintenance of certain financial ratios and cash
flows, restrict asset purchases, dividend payments or distributions and
accelerate the maturities upon a change in control of the Company.
For the three months ended March 31, 2001, the Company was in violation
of certain financial covenants associated with the CTN Term Loan and Revolver
Loan for which waivers have been received.
The Company believes that certain requirements under the CTN Loan, Term
Loan and Revolver Loan covenants may not be met during fiscal 2001. If the
Company fails to meet a covenant under the CTN Loan, Term Loan and Revolver
Loan, the financial institutions have the right to declare the loans due upon
demand. In connection with the $28.5 million of indebtedness due at December 31,
2001, the Company is currently in discussion with financial institutions
regarding new credit facilities and exploring other capital-raising
alternatives, including the sale of MPM and other assets. The Company can not be
certain that any of the alternatives will be consummated. Holdings has committed
to provide funding through fiscal 2001 in the event the Company experiences cash
flow deficits from operations or cash flow deficits in connection with debt
service requirements.
Form 10-Q
Page 7 of 17
NOTE (E) - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
ESTIMATED MARCH 31, DECEMBER 31,
USEFUL LIVES 2001 2000
Entertainment systems completed 5 years $ 15,693,698 $ 15,335,068
Machinery and equipment 5 -7 years 1,271,189 1,274,325
Software 5 years 1,447,329 1,441,586
Capitalized website costs 3 years 1,412,431 1,403,891
Furniture and Fixtures 7 years 866,020 863,856
Leasehold improvements 7-11 years 394,712 387,088
------------ ------------
21,085,379 20,705,814
Less: Accumulated depreciation (7,613,351) (6,651,477)
------------ ------------
Total $ 13,472,028 $ 14,054,337
============ ============
Depreciation expense for the three months ended March 31, 2001 and the
three months ended December 31, 2000 was approximately $994,115 and $739,584
respectively.
NOTE (F) - INTANGIBLE ASSETS
Intangible assets consist of the following:
ESTIMATED MARCH 31, DECEMBER 31,
USEFUL LIVES 2001 2000
Goodwill 10-15 years $ 7,693,126 $ 7,713,946
Customer relationships 7 years 16,293,000 16,293,000
Trademarks/tradenames 10-15 years 3,448,377 3,473,854
Other intangibles 2-15 years 1,889,662 1,720,954
------------ ------------
29,324,165 29,201,754
Less: Accumulated amortization (5,096,307) (4,250,678)
------------ ------------
Total $ 24,227,858 $ 24,951,076
============ ============
NOTE (G) - 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 at the time
at which ultimate payment is considered probable.
The Company is currently utilizing Crawford Communications, Inc.
("Crawford") and Satellite Engineering Group, Inc. to complete Network
installations in new locations. The Company has also entered into an Origination
Services Contract with Crawford. The original agreement provides for payments of
approximately $1,320,000 over a five year period ending on July 15, 2003. In
accordance
Form 10-Q
Page 8 of 17
with the Origination Services Contract, Crawford is responsible for the
transmission via satellite of the Network's daily programming, including
encoding signals, testing, maintaining the Network's programming library, and
obtaining programming from the Network's 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 March 31, 2001, the
Company has paid approximately $770,000 to Crawford pursuant to the Origination
Services Contract.
The Company has an agreement with Turner Private Networks, Inc. and CNN
Headline News to provide news and sports programming for the Network through
December 31, 2002. The total license fee is approximately $3,156,250. As of
March 31, 2001, the Company has paid approximately $1,850,000 pursuant to this
agreement.
The Company has a Transponder Use Agreement with Public Broadcasting
Service ("PBS"). 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 March 31, 2001, the Company has
paid approximately $2,092,800 pursuant to this agreement.
On January 11, 2001, the Company entered into an agreement with U.S.
Concepts, Inc. ("USC") for the management and execution of a five week
promotional concert tour ("Spring Music Tour Promotion"). The Spring Music Tour
Promotion will run from March 2001 through May 2001 on 10 college campuses
nationwide. CTN will pay USC's program and administrative costs of approximately
$540,000.
NOTE (H) - SEGMENT REPORTING
The Company has three reportable segments: (i) CTN (which includes the
Network, Link and iD8), (ii) Wetair.com and (iii) MPM. Information regarding the
operations of these reportable segments are as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
REVENUES
CTN $ 2,962,992 $ 4,725,027
Wetair.com - -
MPM 11,009,110 11,435,410
------------ ------------
Total $ 13,972,102 $ 16,160,437
------------ ------------
Form 10-Q
Page 9 of 17
LOSS BEFORE INCOME TAXES
CTN $ (3,953,895) $ (3,435,868)
Wetair.com (209,324) (310,747)
MPM (378,762) (418,159)
------------ ------------
Total $ (4,541,981) $ (4,164,774)
------------ ------------
DEPRECIATION AND AMORTIZATION
CTN $ 835,080 $ 636,644
Wetair.com 50,024 533
MPM 906,479 904,976
------------ ------------
Total $ 1,791,583 $ 1,542,153
------------ ------------
INTEREST INCOME
CTN $ 19,784 $ 82,298
Wetair.com - -
MPM 18,115 31,544
------------ ------------
Total $ 37,899 $ 113,842
------------ ------------
INTEREST EXPENSE
CTN $ 362,319 $ 213,761
Wetair.com - -
MPM 494,714 431,689
------------ ------------
Total $ 857,033 $ 645,450
------------ ------------
MARCH 31 DECEMBER 31
2001 2000
TOTAL ASSETS
CTN $18,135,302 $22,084,662
Wetair.com 594,266 632,602
MPM 37,962,052 40,847,068
----------- -----------
Total $56,691,620 $63,564,332
----------- -----------
Substantially all of the property and equipment owned by the Company is used in
the operations of CTN.
For the three months ended March 31, 2001, operating expenses at MPM
were reduced by approximately $542,000 as a result of a change in estimate with
respect to media placement payables.
Form 10-Q
Page 10 of 17
NOTE (I) - SUBSEQUENT EVENTS
On April 4, 2001 an Amended and Restated Certificate of
Incorporation (the "Amendment") was approved by the majority stockholders.
The conversion price of the Series A was changed to $2.50 per share,
resulting in each share of Series A being convertible into approximately 6.0
shares of the Company's common stock. The conversion ratio and price are
subject to adjustments for anti-dilution. Before the Amendment, each share of
Series A was immediately convertible into approximately 3.3 shares of the
Company's common stock, at a price of $4.50 per share.
On April 5, 2001, the Company entered into a Preferred Stock Purchase
Agreement pursuant to which Holdings purchased 266,666 shares of Series B
Convertible Preferred Stock ("Series B") for $3,999,990. The Series B is
convertible into 1,599,996 shares of common stock at a conversion price of $2.50
per share. The Series B is senior in priority to the Series A as to payment upon
liquidation and dividends. Other than this feature, the terms of the Series B
are substantially similar to the terms of the Series A. Pursuant to the Series B
Preferred Stock Purchase, on April 5, 2001, all of the Company's preferred stock
will be classified in the stockholder's equity section of the balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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
stockholders and prospective stockholders.
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 operates in the
television, magazine, newspaper and online sectors. The Company owns and
operates the College Television Network (the "Network"), a proprietary
commercial television network that operates on college and university campuses
across the United States. The Network 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
March 31, 2001, CTN was installed or contracted for installation at
approximately 1,923 locations at approximately 818 colleges and universities
throughout the United States. The Network reaches approximately 1,500,000 young
adult viewers each day.
Form 10-Q
Page 11 of 17
The Company publishes Link Magazine which is distributed by direct mail
and stand alone kiosks to students in college campuses nationwide. In addition,
the Company owns iD8, an Atlanta-based advertising agency primarily involved in
placing media buys and providing creative services for its clients.
MPM, the Company's wholly owned subsidiary, is a leading media
placement and promotion specialist in the college, military and minority
segments. MPM places targeted advertising primarily through specialty
newspapers, radio, magazines, and on-site events.
Wetair.com, a proprietary Internet site, is a lifestyle and
entertainment destination site for the 18-24 year old demographic. The site
features five lifestyle categories (music, film, electronica, comedy, and
lifestyles) and is hosted by on-screen personalities that will promote
interaction and content submission from its user base. The Company owns
approximately 90% of the equity in Wetair.com.
The Company has three reportable business segments: (i) the CTN
segment, which includes the Network, Link Magazine and iD8 (ii) Wetair.com and
(iii) MPM.
Certain of the Company's 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 months ended March 31, 2001 and
March 31, 2000:
Form 10-Q
Page 12 of 17
Three Months Ended
March 31, 2001 March 31, 2000
------------------------------------------------
% of % of
$ Revenue $ Revenue
------------------------------------------------
Revenues ............................. 13,972,102 100 16,160,437 100
Operating expenses ................... 10,031,156 72 10,135,555 63
Publishing expenses .................. 123,590 1 907,596 6
Advertising agency expense ........... 492,781 4 364,622 2
Selling, general, & administrative
expenses ........................... 5,058,839 36 6,843,677 42
Depreciation & amortization .......... 1,791,583 13 1,542,153 10
Interest expense net ................. 819,134 6 531,608 3
Net loss before cumulative effect of a
change in accounting method ........ (4,344,981) 31 (4,164,774) 26
Revenue decreased to $13,972,102 for the three month period ended March
31, 2001, as compared to $16,160,437 for the comparable period in the prior
year. Network advertising revenue of $2,324,284 for the three-month period ended
March 31, 2001 represented a 40% decrease from the comparable period in the
prior year. A soft advertising market and a transition in CTN's sales force have
contributed to this decrease. CTN's former president and head of advertising
sales, Martin Grant, was replaced on December 11, 2000 by Thomas Rocco. CTN's
fee and commission revenue through iD8 of $636,558 represented a 308% increase
from the comparable period in the prior year. This increase is primarily due to
acquiring two new large customers at the end of fiscal 2000 that have continued
to contract work through the first quarter of 2001. MPM revenue of $11,009,110
for the three-month period ended March 31, 2001 represented a 4% decrease from
the same period in the prior year. This decrease is attributable to the market
deterioration of the Internet industry. There was no publishing revenue for the
first quarter as compared to $605,935 from the same quarter in the prior year.
Link Magazine did not distribute an issue until April 2001. The Company
anticipates sales growth during the year ending December 31, 2001 by continuing
to expand its advertiser base and sell-out levels through recently-hired
experienced advertising sales representatives and by further increasing the
amount charged for its advertising spots. Although the Company has agreements
with national advertisers, no assurance can be given that these or other
advertisers will continue to purchase advertising time from the Company, or that
future significant advertising revenues will ever be generated. A failure to
significantly increase advertising revenues could have a material impact on the
operations of the Company.
Operating expenses, including publishing and advertising agency
expenses, decreased to $10,647,527 for the three month period ended March 31,
2001 as compared to $11,407,773 for the same period in the prior year. Of
this decrease, approximately $263,000 is attributable to direct costs
associated with reduced media placement by MPM. In addition, approximately
$542,000 of the decrease in operating expense is attributable to a change in
estimate with respect to media placement payables. Publishing expenses at CTN
decreased to $123,590 for the
Form 10-Q
Page 13 of 17
three month period ended March 31, 2001 as compared to $907,596 for the same
period in the prior year. Link Magazine did not distribute an issue in the first
quarter 2001 and Link experienced reduced overhead compared to the same period
in the prior year in which two issues of Link were distributed. The operating
expenses incurred by iD8 were $492,781 for the three month period ended March
31, 2001 as compared to $364,622 for the same period in the prior year. The
increase in expenses for 2001 is directly associated with the increase in agency
revenue. Operational expenses for the first quarter 2001 at Wetair.com were
$156,312 versus none for the three month period ended March 31, 2000.
Selling, general and administrative expenses decreased to $5,058,839
for the three month period ended March 31, 2001 as compared to $6,843,677 for
the same period for the prior year. This decrease is primarily attributable to
minimizing expense in various advertising sales categories such as outside
advertising, market research, promotions and variable costs directly related to
revenue. Significant reductions in recruiting fees and bad debt expense also
contributed to the reduction. The remaining decrease is due to the absence of
selling, general or administrative expenses at Wetair.com compared to $310,214
in the first quarter of 2000. The prior year's expense related to the launch of
the site.
Depreciation and amortization expense totaled $1,791,583 for the three
month period ended March 31, 2001 as compared to $1,542,153 for the same period
in the prior year. The increase is attributable to the addition of DVB ("Direct
Video Broadcast") systems in school locations. Depreciation and amortization
associated with Wetair.com was approximately $50,000 for the three month period
ended March 31, 2001. Such amount primarily related to depreciation of website
development costs.
The Company recorded net interest expense of $819,134 for the three
month period ended March 31, 2001 as compared to $531,608 in the same period of
the prior year. The increase in interest expense relates to the higher level of
debt incurred for working capital purposes, debt associated with the acquisition
of MPM and a loss on an interest rate swap agreement.
The Company incurred a net loss before cumulative effect of a change in
accounting method of $4,344,981 in the three month period ended March 31, 2001
as compared to a net loss before cumulative effect of a change in accounting
method of $4,164,774 in the same period in the prior year.
As of January 1, 2001, the Company adopted the provisions of FAS 133.
As a result of the change in accounting method, the Company recorded a loss of
$197,000.
FINANCIAL CONDITION AND LIQUIDITY
Cash used in operations decreased to $1,034,102 during the three months
ended March 31, 2001, from $4,691,422 for the comparable period in the prior
year. The impact of increased collections of accounts receivable in the first
quarter compared to the same quarter in the prior year was the primary cause of
this decrease. In April 2001, the Company obtained an equity infusion from
Holdings to fund current working capital needs through the issuance of Series B
Preferred Stock. Additionally, the Company has obtained a commitment from
Holdings to fund cash flow deficits, if any, through December 31, 2001.
Acquisitions and purchases of property and equipment decreased to
$473,373 during the three months ended March 31, 2001 from $1,718,619 for the
comparable period in the prior year. This decrease is primarily attributable to
scaling back the installation of school locations pursuant to the Company's plan
for 2001.
Cash used in financing activities was $489,814 for the three months
ended March 31, 2001, compared to $4,867,558 provided by financing for the same
period in the prior year. The funds were primarily used for the paydown on the
MPM credit facility.
Form 10-Q
Page 14 of 17
At March 31, 2001, the Company did not meet several covenants under its
credit facilities. The financial institutions granted the Company waivers for
the defaults. In connection with the $28.5 million of indebtedness due at
December 31, 2001, the Company is currently in discussion with financial
institutions regarding new credit facilities and exploring other capital-raising
alternatives, including the sale of MPM and other assets. The Company cannot be
certain that any of the alternatives will be consummated and there can be no
assurances that these efforts will be successful. Holdings has committed to
provide funding through fiscal 2001 in the event the Company experiences cash
flow deficits from operations or cash flow deficits in connection with debt
service requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
related to variable-rate debt outstanding under the CTN Loan, the Term Loan, and
the Revolver Loan. This risk arises in the normal course of business rather than
from trading. At March 31, 2001, the Company had $28.5 million in long-term debt
subject to variable rates of interest. A hypothetical increase in interest rates
of 1% from the rates at March 31, 2001, would result in an increase in annual
interest expense of approximately $285,000; and a hypothetical increase in
interest rates of 3% from the rates at March 31, 2001, would result in an
increase in annual interest expense of approximately $850,000, presuming that
the amount of indebtedness subject to variable interest rates remained constant.
These amounts are determined based on only the impact of the hypothetical
interest rates on the Company's long-term debt balances and do not consider the
effects, if any, of the potential changes such rates may cause in the overall
level of economic activity.
Form 10-Q
Page 15 of 17
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 events occurred during the quarter covered by this Report that would
require a response to this item.
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 Amendment to Employment Agreement dated
January 10, 2001 between the Company,
U-C Holdings, L.L.C. and Thomas Rocco
Exhibit 10.2 Marketing Agreement executed March 14, 2001
between US Concepts, Inc. and CTN Media
Group, Inc.
Exhibit 99.1 Safe Harbor Compliance Statement for Forward-
Looking Statements
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the first quarter of 2001.
Form 10-Q
Page 16 of 17
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: May 15, 2001 /s/ Jason Elkin
-------------------------------------------------
Jason Elkin
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
(PRINCIPAL EXECUTIVE OFFICER)
Date: May 15, 2001 /s/ Patrick Doran
-------------------------------------------------
Patrick Doran
CHIEF FINANCIAL OFFICER AND SECRETARY
(PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
Form 10-Q
Page 17 of 17