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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-19997
COLLEGE TELEVISION NETWORK, INC.
(Name of Small Business Issuer in its Charter)
Delaware 13-3557317
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5784 Lake Forrest Drive, Suite 275 30328
Atlanta, Georgia (Zip Code)
(Address of Principal Executive Offices)
(404) 256-4444
(Issuer's Telephone Number, Including Area Code)
________________________________
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of each Exchange on which registered
------------------- -----------------------------------------
Common Stock, $.005 par The Nasdaq Smallcap Market
value per share
_________________________________
Securities registered pursuant to Section 12(g) of the Act:
None.
(Title of Class)
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
--
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year: $8,509,878
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 26, 1999 (computed by reference to the average bid
and asked prices of such stock on February 26, 1999) was approximately
$9,244,547.
There were 14,230,232 shares of the Registrant's Common Stock outstanding
as of February 26, 1999.
Transitional small business disclosure format (check one): Yes No [x]
--- ----
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its annual meeting
of stockowners scheduled for May 11, 1999 are incorporated by reference into
Part III of this Report.
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Forward-Looking Statements
Certain forward-looking information contained in this Annual 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", the terms of which are incorporated herein, for
additional factors to be considered by shareholders and prospective
shareholders.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
College Television Network, Inc., a Delaware corporation formerly known as
UC Television Network Corp. (the "Company"), commenced operations in January
1991. 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. CTN is provided to campuses through
single-channel television systems ("Systems") placed free of charge primarily in
campus dining facilities and student unions. Approximately 78% of the Company's
revenues are derived from advertising displayed on CTN. At December 31, 1998,
CTN was installed or contracted for installation at approximately 736 locations
at various colleges and universities throughout the United States. The Company
believes CTN currently reaches a viewership of approximately 1,300,000 daily
impressions.
The Company also owns and publishes "Link Magazine," a publication having
an approximate circulation in excess of one million students. Link Magazine is
distributed free of charge to more than 650 campuses nationwide. Approximately
17% of the Company's revenue is generated through advertisements placed in Link
Magazine. In addition, the Company owns Sadler & Streib, an Atlanta-based
advertising agency primarily involved in placing media buys and providing
creative services for its clients.
The Company believes CTN to be the largest college and university private
commercial television network in the United States. CTN is installed in many of
the nation's largest colleges and universities, including among others:
Pennsylvania State University, Arizona State University, NYU, Michigan State
University, University of Arkansas at Little Rock, UCLA, Florida State
University, Syracuse University, Georgia Tech University, North Carolina State
University, University of South Florida, University of Kentucky, University of
Buffalo and Rutgers University. The Company's goal is to place CTN in a
significant number of the 3,600 colleges and universities located in the United
States.
CTN, which currently airs primarily music videos, is viewed over 25-inch
monitors strategically placed throughout each installation site to provide the
highest degree of exposure. Each site is equipped with a main processing unit
and from one to ten viewing monitors. In order to enhance the flexibility and
program diversification of CTN, the Company changed the broadcast delivery
platform of CTN in August 1998 to a state-of-the-art digital video broadcast
("DVB") platform. The DVB delivery platform increases reliability of delivery
and ensures that each affiliate location receives CTN programming representing
the highest standards of digital quality. The DVB platform enables the Company
to expand programming opportunities, as evidenced by CTN's ability to broadcast
two distinct channels of programming simultaneously: urban programming and
mainstream programming. Through its transponder lease agreement, the Company has
the capacity to add a third channel for additional CTN programming. The Company
continues to receive CNN news and sports programming pursuant to its agreement
with Turner Private Networks, Inc.
The Company primarily derives its revenues from advertisers displaying
their commercials on CTN, with the Company presently allotting eight minutes of
advertising available per hour. The Company believes CTN is well-positioned to
offer advertisers an inexpensive and effective way to reach a highly desirable
audience: 18 to 24-year-old college and university students with significant
disposable income. This demographic group maintains
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proven attractiveness to national advertisers. Each advertiser's cost per
thousand viewers ("CPM") on CTN is substantially below that of national
advertising in competing media, such as radio, broadcast and cable television,
campus newspapers or campus billboards. National advertisers on CTN during
fiscal 1998 included America Online, Inc., The Andrew Jergens Co. (Biore),
Burger King Corporation, The Coca-Cola Company, Fox Entertainment Group, Inc.,
J.C. Penney Company, Inc., Jack Schwartz Shoes, Inc. (maker of Lugz shoes),
MasterCard International Incorporated, NOVUS Services, Inc. (Discover Card),
NewLine Cinema Corp., Buena Vista Pictures, Inc., Polygram, Inc., United Parcel
Service of America, Inc., Universal Pictures, Visa International, and Warner-
Lambert Company. The Company's mix of advertisers on CTN changes from time to
time. The Company's network advertising revenues have grown from $2,016,152 in
fiscal 1996, to $2,808,658 in fiscal 1997, and to $6,618,215 in fiscal 1998.
The Company's revenues for 1998 also include the operating results of Link
Magazine from January 12, 1998, and Sadler & Streib from July 1, 1998. Revenues
attributable to these business segments during fiscal 1998 were $1,408,320 and
$483,343, respectively.
In order to continue the rapid expansion of the Company's affiliate base
and to help meet the Company's capital expenditure requirements directly
attributable to the DVB delivery platform, the Company completed a $10,000,000
rights offering on October 5, 1998. The Company sold 6,250,000 shares of its
common stock in the rights offering. The Company's majority stockholder, U-C
Holdings, L.L.C., subscribed for and purchased 5,758,431 shares, and other
stockholders subscribed for a purchased 491,569 shares of the Company's common
stock in the rights offering. The subscription price pursuant to the rights
offering was $1.60 per share.
The Company's overall strategy is to expand the number of institutions in
which CTN is being offered and to expand the number of advertisers. As
additional institutions are added, the Company expects to be able to attract
additional advertisers as well as to be able to increase its CPM rate, which is
currently significantly below that of other competing media. If the Company
successfully meets these objectives, the Company believes advertising revenues
could grow significantly and enable the Company to reach profitability. The
Company also continues to explore other avenues in which it can penetrate the
college market in diversified ways.
The acquisition of Link Magazine during fiscal 1998 enables the Company to
broaden its advertiser base and to reach more of the targeted demographic of 18
to 24-year-old students.
The Company believes there is an opportunity to grow CTN. While the
Company experienced a net loss in fiscal 1998 in excess of its net loss for the
prior fiscal year, advertising revenues and the number of affiliate universities
has increased significantly. The Company will require additional capital to meet
its ongoing operational demands for fiscal 1999. Management of the Company,
working with the Company's majority stockholder, U-C Holdings, L.L.C., is
finalizing a plan to meet the capital needs of the Company. In any event, U-C
Holdings, L.L.C. has committed to infuse working capital to fund cash flow
deficits, if any, during fiscal year 1999.
The College Television Network System
CTN is a private commercial television network airing the Company's
programming on university and college campuses located throughout the United
States. CTN is installed in campus public areas such as dining facilities and
student union areas and is designed to serve as background entertainment. The
Company's Systems are single-channel systems offering only CTN programming,
which currently consists primarily of music videos.
In order to more effectively expand its programming to include national
news, local campus news, sports and comedy on a current basis, the Company
successfully launched the DVB satellite delivery platform in August 1998. DVB
offers CTN a state of the art delivery system that is reliable and cost-
efficient and that provides the operational flexibility CTN desires.
Markets
There are approximately 3,600 colleges and universities in the United
States. The Company's goal is to place CTN in a significant number of these
institutions. As of December 31, 1998, CTN was installed or contracted for
installation in 736 locations throughout the country. Included among the
institutions equipped with CTN are Pennsylvania State University, Arizona State
University, NYU, Michigan State University, University of Arkansas at Little
Rock, UCLA, Florida State University, Syracuse University, Georgia Tech
University, North Carolina State University, University of South Florida,
University of Kentucky, University of Buffalo and Rutgers University.
The Company markets its Systems principally to colleges and universities
and to local operators responsible for dining facilities at targeted college or
university campuses. The Company contracted with 471 new affiliate locations in
1998. This growth is attributable to several factors: a dedicated,
professional affiliate sales
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staff, a full service affiliate relations support team and CTN's status as a
state-of-the-art, reliable programming vehicle that students enjoy watching. The
Company has 18 full-time employees involved in affiliate sales and affiliate
support functions.
Advertising Revenues
The Company primarily derives its revenues from advertisements placed on
CTN. The Company believes advertisers find the network's programming current
and appealing, the campus dining hall setting with its captive audience
desirable, and the System's programming concept modern and innovative. Other
advertising revenues are derived from advertisements placed in Link Magazine.
CTN is currently designed to offer sixteen 30-second commercials every
hour. In both fiscal 1998 and 1997, approximately 33% of the network's
advertising spots were sold. The Company's overall strategy contemplates the
following three principal methods for increasing its advertising revenue: (i)
increasing audience size by adding institutions; (ii) increasing the number of
advertisers and advertising spots sold to maximize the use of time available to
be sold; and (iii) increasing the CPM rate, which is currently well below that
of competing media.
Advertisers during fiscal 1998 included America Online, Inc., The Andrew
Jergens Co. (Biore), Burger King Corporation, The Coca-Cola Company, Fox
Entertainment Group, Inc., J.C. Penney Company, Inc., Jack Schwartz Shoes, Inc.
(maker of Lugz shoes), MasterCard International Incorporated, NOVUS Services,
Inc., NewLine Cinema Corp., Buena Vista Pictures, Inc., Polygram, Inc., United
Parcel Service of America, Inc., Universal Pictures, Visa International, and
Warner-Lambert Company.
The Coca-Cola Company, United Parcel Service of America, Inc., Warner-
Lambert Company and Visa International accounted for 18%, 9%, 8%, and 8%
respectively, of the Company's network advertising revenues for fiscal 1998.
Top advertisers in Link Magazine during fiscal 1998 were Yahoo! Inc., AT&T
Universal and the U.S. Army, accounting for 14%, 12%, and 8% respectively, of
Link's advertising revenues. Sadler & Streib's revenues were derived 51%, 27%
and 8% from Georgian Terrace, Smithgall, and Nioxin, respectively.
Programming Content
CTN airs short-form entertainment, currently consisting primarily of music
videos pursuant to licensing agreements with a number of the major music company
labels that are represented by Sony, Warner/Electric/Atlantic, EMI, Polygram,
MCA and BMG. Each of these agreements permits the Company to use the music
videos.
On March 27, 1998, the Company signed an agreement with Turner Private
Networks, Inc. to provide CNN news and sports programming on CTN through
December 31, 2002. The total license fee is approximately $2,900,000. This
agreement supersedes the programming agreement entered into with Turner Private
Networks, Inc. on November 5, 1996.
The Systems -- Installation and Maintenance
Each System is installed, without charge to the institution, at designated
locations agreed upon between the Company and the institution. Due to the
Company's increased marketing efforts, CTN is currently installed in 48 states
nationwide. The Company bears the costs of normal maintenance and replacement
parts.
The Company has obtained liability insurance which generally covers losses
from fire, theft, vandalism and certain other events for each installed System.
The Company pays insurance premiums on a per System basis and intends to expand
coverage to newly installed Systems each quarter. There can be no assurance
that such insurance can be maintained at reasonable rates, or at all. Without
such insurance, significant damage to a number of Systems could adversely affect
the Company and its financial condition. To date, the Company has filed only
one claim for losses. The Company has also obtained insurance for certain of
the costs associated with its reliance upon satellite technology, including the
costs of redirecting satellite dishes to a new satellite transponder, and the
lost advertising revenues resulting from any satellite failure.
Of the 736 Systems contracted for as of December 31, 1998, 432 were
installed throughout the United States at college and university campuses. The
remaining Systems are expected to be installed by the start of the fall 1999
semester. System installation generally takes approximately 8 to 10 weeks. The
average agreement with an institution is typically for a three-year term.
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The components for each System are generally standard, and the Company
believes, based on its past experience and discussions regarding proposals with
various component part manufacturers and suppliers, that such components will be
available from several different sources. Based on the stated estimated mean
time to failure provided by component part manufacturers and suppliers, the
expected useful life for each System is approximately five years. The
warranties for such components are generally for 12 months.
Competition
CTN and Link Magazine compete for advertisers with many other forms of
advertising targeting the 18-24 year-old market. These competing forms of
advertising media include television, radio, print, direct mail and billboard.
The Company is not aware of any other national television networks specifically
directed at college and university students. There is no assurance that someone
with greater resources will not enter into the market, particularly because
there are few proprietary characteristics with the business. The Company
believes it can successfully compete against other forms of media because it
offers an effective means of reaching a difficult-to-reach targeted audience at
a low cost.
The Company believes that the time required to secure and contract with
each institution is significant. The Company has already invested a great
amount of time in securing its present locations, and believes that the
affiliate acquisition strategy being implemented will continue to result in an
increasing affiliate base.
Employees
As of December 31, 1998, the Company employed 69 full-time salaried
personnel, consisting of various managerial, operational, programming,
advertising, publishing, ad agency and affiliate sales personnel. The
Company also utilizes independent contractors to perform certain of the services
required in connection with the production, installation and maintenance of the
Systems. The responsibilities of the Company's operations and administrative
personnel include conducting marketing and promotional activities, managing
campus relations and performing certain administrative and financial functions.
Fourteen of the Company's employees have employment agreements with the Company.
The Company believes that its relationship with its employees is satisfactory.
Government Regulation
Because CTN is a private network and is currently not a direct live
broadcast, the Company is not restricted by regulations of the Federal
Communications Commission, network standards and practices or traditional format
length and content restraints. Regulatory matters relating to the Company's
satellite transmissions are the responsibility of Public Broadcasting Service,
Inc. ("PBS"), pursuant to the Company's Transponder Use Agreement with PBS. The
Company believes that the manner in which it presently conducts its business
operations, and intends to conduct its business operations, including its
licensing arrangements with record companies and agreements with location
owners, is and will be in material compliance with all applicable laws.
Proprietary Information
The Company believes that certain of its rights to, and uses of, its
Systems may be protectable under applicable patent, copyright and proprietary
information laws. There can be no assurance as to such fact or that others may
not independently develop the same or similar technology on which the Company's
Systems are based and thereafter directly compete with the Company. The Company
intends to pursue copyright and trademark registrations as necessary. No
assurance can be given, however, that such coverage, even if it can be obtained,
will afford the Company meaningful protection of any of its proprietary rights.
The Company has obtained trademark registrations for "College Television
Network" and "UCTN." Effective with the acquisition of Link Magazine, the
Company was also assigned the registered trademarks registered for "Link - The
College Magazine," and a patent relating to a System and method for processing
bulk mail that is utilized in distributing the magazine.
Publicly Available Information
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20546. The public may obtain information on the operation of
the Public Reference Room by calling the Commission at 800/SEC-0330. The
Commission also maintains an internet site that contains
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reports, proxy and information statements, and other information regarding the
Company and other issuers that file electronically with the Commission at
http:\\www.sec.gov.
Item 2. DESCRIPTION OF PROPERTY.
The Company presently has facilities in five cities: Atlanta, New York
City, Los Angeles, Chicago and St. Louis. The Atlanta facility is the Company's
principal executive office out of which the Company conducts various
administrative and financial functions. A second Atlanta facility is utilized
for Sadler & Streib. The Company conducts its marketing and affiliate relations
efforts primarily out of its New York, Chicago and Los Angeles offices. The New
York office also contains the Company's publishing division for Link Magazine.
The Company currently leases approximately 4,650 square feet of space for
its principal executive office in Atlanta and approximately 3,400 square feet
for Sadler & Streib. The Company also leases approximately 7,140 square feet,
1,600 square feet, and 2,010 square feet for the New York, Los Angeles, and
Chicago offices, with respective lease termination dates of May 2008, September
2002, and February 2003. The Company also leases approximately 5,000 square
feet of warehouse space in St. Louis on a month-to-month basis. The warehouse
is used to store equipment and parts utilized for installation of affiliate
locations.
The aggregate monthly rental for these leased offices is currently
approximately $35,500, and the Company's management believes that these
facilities are adequate for its intended activities in the foreseeable future.
Item 3. LEGAL PROCEEDINGS.
The Company is not a party, nor to its knowledge threatened to be made a
party, to any material litigation or governmental proceeding.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the fourth
quarter of the fiscal year ended December 31, 1998.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's $.005 par value per share common stock (the "Common
Stock") is traded and quoted under the symbol UCTN on The Nasdaq SmallCap Market
("Nasdaq"). The following table sets forth the high and low sales prices for
the Common Stock, as quoted on Nasdaq, for the periods indicated, which prices
have been adjusted to reflect the one-for five reverse stock split which became
effective on November 12, 1997.
Dates High Price Low Price
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Fiscal Year Ended
October 31, 1997:
November 1, 1996 to January 31, 1997. $5.45 $2.20
February 1, 1997 to April 30, 1997... $4.55 $2.05
May 1, 1997 to July 31, 1997......... $4.40 $2.60
August 1, 1997 to October 31, 1997... $4.05 $2.50
Two-Month
Period Ended November 1, 1997 to December 31, 1997 $2.94 $1.63
December 31, 1997:
Fiscal Year Ended
December 31, 1998:
January 1, 1998 to March 31, 1998.... $3.00 $1.72
April 1, 1998 to June 30, 1998....... $3.13 $1.50
July 1, 1998 to September 30, 1998... $2.00 $1.50
October 1, 1998 to December 31, 1998. $3.00 $1.38
As of March 30, 1999, the Company had 61 owners of record and
approximately 969 beneficial owners of its Common Stock.
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Since its inception, the Company has not paid any cash dividends on its
Common Stock. The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to help finance the operations and
expansion of the Company and accordingly does not plan, for the reasonably
foreseeable future, to pay cash dividends to holders of the Common Stock. Any
decisions as to the future payment of dividends will depend on the earnings and
financial position of the Company and such other factors as the Company's Board
of Directors deem relevant.
(b) The Company's Registration Statement on Form S-3 (No. 333-58479) for
which the use of proceeds information is being disclosed was declared effective
by the Securities and Exchange Commission on July 28, 1998. The offering
commenced on July 31, 1998 and terminated on September 10, 1998 after 6,250,000
shares of common stock were sold. The Registration Statement covered the
issuance of 6,250,000 shares of common stock and a Class C Warrant for 152,100
shares of common stock. The aggregate offering price of the common stock
registered was $10,000,000 and the aggregate offering price of the Class C
Warrant registered was $243,360. The aggregate offering price of the amount of
common stock sold was $10,000,000 and no additional consideration was paid for
the issuance of the Class C Warrant (which was issued to U-C Holdings, L.L.C. as
consideration for its purchase commitment and standby commitment pursuant to the
Purchase Agreement between the Company and U-C Holdings, L.L.C. described in the
Registration Statement). From July 28, 1998 to December 31, 1998, the expenses
incurred by the Company in connection with the issuance and distribution of the
securities registered was approximately $205,000. There were no underwriting
expenses in connection with the offering. The net offering proceeds to the
Company after deducting the total expenses of the offering were approximately
$9,795,000. Of this amount, approximately $5,400,000 was used by the Company
through December 31, 1998 as working capital for general operational expenses.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with
the Company's financial statements, beginning on page F-1, included elsewhere in
this report.
Results of Operations
The Company is a multimedia company whose principal activities involve
operating and marketing CTN, a private commercial television network. As of
December 31, 1998, CTN was installed or contracted for installation in 736
locations in colleges and universities throughout the United States. The
majority of the Company's revenues is derived from advertising displayed on CTN.
The Company started operations in January 1991.
The Company also owns and publishes "Link Magazine," a publication
circulated to college students. During fiscal 1998, the Company published five
issues of Link Magazine. Each issue is distributed to over 650 campuses
nationwide and has an approximate circulation in excess of one million students.
The Company has taken steps to improve the overall quality and appearance of
Link Magazine and plans to increase the size of the magazine and number of
issues to six in fiscal 1999.
The Company's sales are affected by the pattern of seasonality common to
most school-related businesses. Historically, the Company generates a
significant portion of its sales during September through May and substantially
less during the summer months when colleges and universities do not hold regular
sessions.
The following table sets forth certain financial data derived from the
Company's statement of operations for the fiscal year ended December 31, 1998
("Fiscal 1998"), the twelve-months ended December 31, 1997 ("Calendar 1997"),
the fiscal year ending October 31, 1997 ("Fiscal 1997") and the fiscal year
ended October 31, 1996 ("Fiscal 1996").
<TABLE>
<CAPTION>
Fiscal 1998 Calendar 1997 Fiscal 1997 Fiscal 1996
-------------------------- ------------------------ ------------------------ ------------------------
$ % of $ % of $ % of $ % of
Revenues Revenues Revenues Revenues
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. 8,509,878 100% 2,988,254 100% 2,808,658 100% 2,016,152 100%
Operating Expenses....... 2,381,510 28% 1,920,596 64% 1,784,436 64% 882,528 44%
Publishing Expenses...... 1,677,267 20%
Advertising Agency
Expenses............... 422,657 5%
Selling, General &
Administrative
Expenses............... 10,830,795 128% 5,553,403 186% 4,620,132 164% 2,808,931 139%
Depreciation &
Amortization........... 2,203,988 26% 843,845 28% 828,684 30% 443,556 22%
Interest Income.......... 412,392 5% 524,548 18% 421,004 15% 67,411 3%
Loss before change in
accounting principle... 8,593,947 100%
Cumulative Effect of a
Change in Accounting
Principle.............. 140,044 2%
Net Loss................. 8,453,903 99% 4,805,042 161% 4,003,590 143% 2,051,452 102%
</TABLE>
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Revenues increased to $8,509,878 for Fiscal 1998 from $2,988,254 for the
twelve months ended December 31, 1997. Network advertising revenue of
$6,618,215 represented a 222% increase from the twelve months ended December 31,
1997. $1,408,320 relating to Link Magazine and $483,343 relating to the
advertising agency comprise the balance of the Company's fiscal 1998 revenues
with no comparable amounts in prior periods as these businesses were both
acquired in 1998. Revenues increased to $2,808,658 for Fiscal 1997 from
$2,016,152 for fiscal 1996 representing a 39% increase for the period. The
Network's advertiser base increased to 26 advertisers in Fiscal 1998 and
included America Online, Inc., The Andrew Jergens Co. (Biore), Burger King
Corporation, The Coca-Cola Company, Fox Entertainment Group, Inc., J.C. Penney
Company, Inc., Jack Schwartz Shoes, Inc. (maker of Lugz shoes), MasterCard
International Incorporated, NOVUS Services, Inc. (Discover Card), NewLine Cinema
Corp., United Parcel Service of America, Inc., Cliff Notes, Pier One Imports,
Visa International, and Warner-Lambert Company. Studio business included Buena
Vista Pictures, Fox, New Line, Polygram and Universal Pictures. The Company's
advertiser base for Fiscal 1997 and Fiscal 1996 was 18 and 19 respectively. The
Company anticipates continued sales growth during the year ending December 31,
1999 ("Fiscal 1999") by continuing to expand its advertiser and affiliate bases
and by further increasing the amount charged for its advertising spots to
reflect the anticipated increase in viewership. 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.
Network operating expenses totaled $2,381,510 for Fiscal 1998 compared to
$1,920,596 for the twelve months ended December 31, 1997. The primary reasons
for the increase were attributable to the addition of employees in the
operations department necessitated by rapid affiliate expansion and additional
satellite uplink and transponder costs. Operating expenses totaled $1,784,436
for Fiscal 1997 compared to $882,528 for Fiscal 1996. The increase in Fiscal
1997 was primarily attributable to additional costs associated with improved
programming for CTN.
In Fiscal 1998, the Company incurred publishing expenses of $1,677,267
relating to the expenses incurred in producing Link Magazine. Approximately 67%
of these expenses are direct costs associated with the magazine and 33% are
attributable to certain overhead items related to Link. The Company acquired
Link magazine on January 12, 1998.
In Fiscal 1998, the Company also incurred advertising agency expenses of
$422,657 relating to direct costs and various overhead related items
attributable to the operation of Sadler & Streib, which the Company acquired on
July 1, 1998.
Selling, general and administrative ("SG&A") expenses increased to
$10,830,795 for Fiscal 1998 as compared to $5,553,403 for the twelve months
ended December 31, 1997. A significant portion of this increase is attributable
to additions to the advertising and affiliate sales forces. In addition to the
additional expense associated with increasing the affiliate base, there are
variable costs directly related to advertising sales. These expenses include
commissions and agency fees that account for approximately 20% of sales. Other
reasons for the SG&A increase are attributable to overhead expenses related to
the overall expansion of personnel and severance obligations of approximately
$966,000 for a senior executive and another employee of the Company.
SG&A expenses increased to $4,620,132 for Fiscal 1997 versus $2,808,931 for
Fiscal 1996. The primary reason for this increase was attributable to the
Company's efforts to increase market awareness for the network. This was
achieved by expanding the Company's management team, advertising and sales
forces, opening additional regional sales offices, and instituting a more
aggressive advertising and marketing campaign for CTN.
Depreciation and amortization expense totaled $2,203,988 for Fiscal 1998
compared to $843,845 for the twelve months ended December 31,1997. The increase
is primarily attributable to the acceleration of depreciation taken on the
previous delivery system, coupled with increased depreciation on office
equipment and the current year fixed asset additions. The non-recurring
increase of approximately $936,000 related to the previous delivery system was
necessitated by management's decision in early 1998 to remove such system from
service in August 1998 in
8
<PAGE>
favor of the DVB system. Depreciation and amortization expense totaled $828,684
for Fiscal 1997 as compared to $443,556 for Fiscal 1996. The Fiscal 1997
increase was primarily attributable to system retrofit costs associated with the
change to a satellite delivery system. During 1998, the Company elected to
change its depreciation method to a straight line basis. In connection with this
change, the Company recorded a cumulative effect from the change of an
accounting principle of approximately $140,000.
Interest income decreased to $412,392 for Fiscal 1998 as compared to
$524,548 for the twelve months ended December 31, 1997. The decrease is
primarily attributable to a declining average cash balance relating to a large
outflow of cash used in installing new digital broadcasting satellite delivery
systems. Interest income increased to $421,004 for Fiscal 1997 as compared to
$67,411 for Fiscal 1996. The significant increase in Fiscal 1997 was
attributable to higher interest rates and greater average cash balances directly
related to the April 1997 purchase of a majority of the Company's Common Stock
by U-C Holdings, L.L.C, a Delaware limited liability company ("U-C Holdings").
The Company has incurred substantial losses since commencement of its
operations and anticipates that such losses will continue in Fiscal 1999. The
Company incurred a net loss of $8,453,903 in Fiscal 1998 compared to a net loss
of $4,805,042 in Calendar 1997, and a net loss of $4,003,590 in Fiscal 1997
compared to a net loss of $2,051,452 for Fiscal 1996.
Financial Condition and Liquidity
At December 31,1998, the Company had working capital of $7,906,287. At
such date, the Company's cash and cash equivalents totaled $6,411,423.
Cash used in operations increased to $7,864,729 in Fiscal 1998 from
$4,139,893 for the twelve months ended December 31, 1997. The increase is
primarily attributable to the Company's growth strategy relating to affiliate
penetration and network awareness. The Company incurred higher costs in Fiscal
1998 relating to affiliate and advertising overhead and direct costs, satellite
delivery costs relating to the DVB system, and costs related to Link Magazine
and Sadler & Streib. These expense increases for Fiscal 1998 were primarily
offset by the increase in sales revenue for the current year.
The Company completed a $10,000,000 rights offering on October 5, 1998. The
Company sold 6,250,000 shares of Common Stock in the rights offering. The
Company's majority stockholder, U-C Holdings, subscribed for and purchased
5,758,431 shares and other stockholders subscribed for and purchased 491,569
shares of Common Stock in the rights offering. The subscription price pursuant
to the offering was $1.60 per share. In conjunction with the rights offering,
the Company issued a Class C warrant to U-C Holdings to purchase 152,100 shares
of Common Stock at the subscription price.
Pursuant to the terms of a purchase agreement, dated as of April 25, 1997,
between the Company and U-C Holdings, the Company issued to U-C Holdings
5,818,182 shares of Common Stock and a Class C Warrant to purchase 772,732
shares of Common with an exercise price of $2.75 per share for an aggregate
purchase price, net of issuance costs, of $15,400,837. As a result of this
transaction, U-C Holdings became the holder of a majority of the outstanding
Common Stock of the Company. In addition, the Company and U-C Holdings entered
into certain equity protection agreements to protect U-C Holdings' percentage
ownership interest in the Company from dilution from third-party exercises of
outstanding warrants and options to acquire the Company's Common Stock. Such
agreements provide U-C Holdings with the right to acquire additional shares of
the Company's Common Stock. The amounts discussed in this paragraph have been
adjusted to give effect to the reverse stock split transaction which became
effective on November 12, 1997.
Purchases of property and equipment, net of the proceeds from the sale of
obsolete equipment, increased to $6,567,960 in Fiscal 1998 from $1,254,650 for
the twelve months ended December 31, 1997, due to the large purchase of
additional network systems for new school locations, equipment associated with
the commencement of the DVB broadcast platform and the purchase of furniture and
equipment needed for the addition of new employees hired during the year.
As previously discussed, the Company has incurred substantial losses since
commencement of operations and anticipates that such losses will continue in
Fiscal 1999. In order to reach the stage where the Company is profitable, it is
expected that additional expenditures will be required to increase the affiliate
base and to market the network properly to attract more advertisers.
In order to meet the projected ongoing operational needs and proposed
increase in affiliate installations of the Company in Fiscal 1999, substantial
additional working capital will be required. U-C Holdings has committed
9
<PAGE>
to infuse working capital to the Company in order to fund the Company's cash
flow deficits, if any, during Fiscal 1999.
Year 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the Year
2000, those date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, prior to
December 31, 1999, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. The Company
relies on computer applications provided by third parties to deliver and track
its programming on CTN as well as to manage and monitor its accounting,
advertising sales and administrative functions. Because the Company is
dependent on vendor compliance, its ability to assure Year 2000 compliance is
limited. The Company has obtained representations from its most significant
computer system and software vendors that the services and products provided
are, or will be, Year 2000 compliant, with the exception that it has not
obtained any such representations from Public Broadcasting Service under its
Transponder Use Agreement, dated April 30, 1998. The Company has obtained
insurance for certain of the costs associated with a failure of the satellite
transmission equipment upon which CTN's programming delivery is based, including
the cost of redirecting satellite dishes, securing a new satellite transponder,
and lost advertising revenue resulting from an interruption in programming.
However, this business interruption insurance would not cover all costs
associated with a satellite failure. Despite the Company's efforts to address
the Year 2000 impact on its business operations and internal systems, there can
be no assurance that such impact will not result in a material disruption of its
business or have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 7. FINANCIAL STATEMENTS.
See the financial statements and notes related thereto, beginning on page
F-1, included elsewhere in this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective June 24, 1997, the Company dismissed Richard A. Eisner & Company,
L.L.P. ("Eisner"), the Company's independent accounting firm, which was
previously engaged as the principal accountant to audit the Company's financial
statements. The decision to change accountants was recommended and approved by
the Company's Board of Directors.
In an audit report dated January 12, 1996 relating to the Company's
financial statements for the fiscal year ended October 31, 1995, Eisner stated
that "[t]he Company has suffered recurring losses from operations, anticipates
such losses will continue, and is in need of additional financing. These
factors raise substantial doubt about its ability to continue as an ongoing
concern." The report further stated that "[t]he financial statements do not
include any adjustments that might result from the outcome of this uncertainty."
The Company has authorized Eisner to respond fully to the inquiries of
PricewaterhouseCoopers LLP ("PWC"), the Company's new principal accountant,
concerning the subject matter of such statements.
Other than the matter discussed in the preceding paragraph, none of
Eisner's reports on the financial statements of the Company contained, for
either of the past two years, an adverse opinion or a disclaimer of opinion, nor
was it qualified or modified as to uncertainty, audit scope, or accounting
principles. During the Company's two most recent fiscal years and all
subsequent interim periods preceding Eisner's dismissal, there was no
disagreement with Eisner on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not solved to the satisfaction of Eisner, would have caused
Eisner to make reference to the subject of the disagreement in connection with
its report. During the Company's two most recent fiscal years and all
subsequent interim periods preceding Eisner's dismissal, none of the kinds of
events listed in paragraphs (A) and (B) of Item 304(a)(1)(iv) of Regulation S-B
occurred.
Effective June 24, 1997, the Company engaged PWC, then known as Price
Waterhouse, LLP, as the principal accountant to audit the Company's financial
statements. During the Company's two most recent fiscal years and any
subsequent interim periods prior to engaging PWC, neither the Company nor anyone
on its behalf consulted PWC regarding any matter described in Item 304(a)(2)(i)
or (ii) of Regulation S-B.
10
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item 9 is incorporated by reference from
the information contained in the Company's Proxy Statement for the Annual
Meeting of Stockholders expected to be filed with the Commission on or about
April 9, 1999 (the "1999 Proxy Statement") under the captions "Election of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership."
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item 10 is incorporated by reference from
the information contained in the Company's Proxy Statement for the Annual
Meeting of Stockholders expected to be filed with the Commission on or about
April 9, 1999 (the "1999 Proxy Statement") under the caption "Executive
Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 11 is incorporated by reference from
the information contained in the Company's Proxy Statement for the Annual
Meeting of Stockholders expected to be filed with the Commission on or about
April 9, 1999 (the "1999 Proxy Statement") under the caption "Security Ownership
of Certain Beneficial Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 12 is incorporated by reference from
the information contained in the Company's Proxy Statement for the Annual
Meeting of Stockholders expected to be filed with the Commission on or about
April 9, 1999 (the "1999 Proxy Statement") under the caption "Related Party
Transactions."
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
Exhibits:
See the Exhibit Index on page E-1 for a list of the Exhibits incorporated
by referenced herein or filed herewith.
Reports on Form 8-K:
None.
11
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheet at December 31, 1998 and 1997 F-2
Consolidated Statement of Operations for the year ended December 31, 1998,
the two-month period ended December 31, 1997 and the year
ended October 31, 1997 F-3
Consolidated Statement of Changes in Stockholders' Equity for the year ended
December 31, 1998, the two-month period ended
December 31, 1997 and the year ended October 31, 1997 F-4
Consolidated Statement of Cash Flows for the year ended December 31, 1998,
the two-month period ended December 31, 1997 and the year
ended October 31, 1997 F-5
Notes to Consolidated Financial Statements F-6-19
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
College Television Network, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
College Television Network, Inc. at December 31, 1998 and 1997, and the results
of their operations and their cash flows for the year ended December 31, 1998,
the two-month period ended December 31, 1997 and the year ended October 31, 1997
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 of the Notes to Consolidated Financial Statements, the
Company changed its method of computing depreciation in 1998.
/s/ PricewaterhouseCoopers LLP
March 1, 1999
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 6,411,423 $11,438,289
Accounts receivable, net 2,256,691 1,122,069
Prepaid expenses 326,508 72,044
Other current assets 194,051 29,070
----------- ------------
Total current assets 9,188,673 12,661,472
Property and equipment, net 6,516,684 2,027,244
Intangible assets, net 579,802 -
Other assets 165,890 18,103
----------- ------------
Total assets $16,451,049 $ 14,706,819
=========== ============
Liabilities, Redeemable Preferred Stock
and Stockholders' Equity
Current liabilities
Accounts payable $ 500,521 $ 216,221
Accrued expenses 781,865 812,517
Current portion of capital lease obligation - 154,975
------------- ------------
Total current liabilities 1,282,386 1,183,713
Long-term portion of accrued severance 356,267 -
Long-term portion of capital lease obligation - 94,719
------------- ------------
Total liabilities 1,638,653 1,278,432
------------- ------------
Redeemable preferred stock - 3,333
------------- ------------
Commitments and contingencies (Note 8)
Stockholders' equity
Common stock - $.005 par value, 50,000,000 shares
authorized, 14,298,913 and 8,015,153 shares issued
and outstanding 71,494 40,076
Additional paid-in capital 40,051,531 30,241,704
Accumulated deficit (25,310,629) (16,856,726)
------------ -------------
Total stockholders' equity 14,812,396 13,425,054
------------ -------------
Total liabilities, redeemable preferred stock and
stockholders' equity $ 16,451,049 $ 14,706,819
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Two-month
Year ended period ended Year ended
December 31, December 31, October 31,
1998 1997 1997
<S> <C> <C> <C>
Revenues $ 8,509,878 $ 595,846 $ 2,808,658
Expenses
Operating 4,481,434 326,159 1,784,436
Selling, general and administrative 10,830,795 1,380,836 4,620,132
Depreciation and amortization 2,203,988 135,657 828,684
----------- ----------- -----------
Total expenses 17,516,217 1,842,652 7,233,252
Interest income 412,392 110,879 421,004
----------- ----------- -----------
Loss before income taxes and cumulative
effect of change in accounting principle (8,593,947) (1,135,927) (4,003,590)
Provision for income taxes - - -
----------- ----------- -----------
Loss before cumulative effect of
change in accounting principle (8,593,947) (1,135,927) (4,003,590)
Cumulative effect of change in
accounting principle 140,044 - -
----------- ----------- -----------
Net loss $(8,453,903) $(1,135,927) $(4,003,590)
=========== =========== ===========
Basic and diluted loss per share (1997
restated for one-for-five stock split
discussed in Note 6)
Loss before cumulative effect of
change in accounting principle $ (.90) $ (.14) $ (.77)
Cumulative effect of change in
accounting principle .01 - -
----------- ----------- -----------
Net loss $ (.89) $ (.14) $ (.77)
=========== =========== ===========
Weighted average number of common shares outstanding
(basic and diluted) 9,529,087 8,015,153 5,185,932
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Consolidated Statement of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock Additional Accumulated
Shares Amount paid-in capital deficit Total
<S> <C> <C> <C> <C> <C>
Balance, October 31,
1996 (share data
restated for
one-for-five stock
split discussed
in Note 6) 2,185,831 $10,929 $14,846,451 $(11,717,209) $ 3,140,171
Proceeds from private
placement offering,
net of expenses 5,818,182 29,091 15,371,746 - 15,400,837
Proceeds from exercise
of stock options 11,140 56 23,895 - 23,951
Preferred stock
dividends declared - - (247) - (247)
Net loss - - - (4,003,590) (4,003,590)
---------- ---------- ----------- ----------- ----------
Balance, October 31,
1997 (share data
restated for
one-for-five stock
split discussed
in Note 6) 8,015,153 40,076 30,241,845 (15,720,799) 14,561,122
Preferred stock
dividends declared - - (141) - (141)
Net loss - - - (1,135,927) (1,135,927)
---------- ----------- ----------- ---------- ----------
Balance, December 31, 8,015,153 40,076 30,241,704 (16,856,726) 13,425,054
1997
Proceeds from rights
offering, net of
expenses 6,250,000 31,250 9,763,742 - 9,794,992
Proceeds from exercise
of stock options 33,760 168 46,252 - 46,420
Preferred stock
dividends declared - - (167) - (167)
Net loss - - - (8,453,903) (8,453,903)
---------- ---------- ---------- ---------- ---------
Balance, December 31,
1998 14,298,913 $71,494 $40,051,531 $(25,310,629) $14,812,396
========== ========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Two-month
Year ended period ended Year ended
December 31, December 31, October 31,
1998 1997 1997
Cash flows from operating activities
<S> <C> <C> <C>
Net loss $(8,453,903) $(1,135,927) $(4,003,590)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 2,203,988 135,657 828,684
Loss on disposal of property and equipment - - 25,017
Impairment of fixed assets 132,707 - -
Cumulative effect of change in accounting
principle (140,044) - -
Changes in assets and liabilities, net of
the effects of acquisitions
Accounts receivable (963,591) (113,279) (246,994)
Prepaid expenses (250,947) 24,128 (4,848)
Other assets (302,304) 1,785 (23,388)
Accounts payable (148,796) (252,410) 242,111
Accrued expenses 294,416 (62,208) 565,721
Other (236,255) - -
----------- ----------- -----------
Net cash used in operating activities (7,864,729) (1,402,254) (2,617,287)
----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment (6,567,960) (253,929) (871,767)
Cash paid for acquisitions, net (180,089) - -
----------- ----------- -----------
Net cash used in investing activities (6,748,049) (253,929) (871,767)
----------- ----------- -----------
Cash flows from financing activities
Payments under capital lease obligations (249,694) - -
Net proceeds from exercise of stock options 46,420 - 23,951
Net proceeds from private placement offerings - - 15,400,837
Net proceeds from stock rights offering 9,794,992 - -
Redemption of preferred stock (5,806) - -
----------- ----------- -----------
Net cash provided by financing activities 9,585,912 - 15,424,788
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (5,026,866) (1,656,183) 11,935,734
Cash and cash equivalents, beginning of period 11,438,289 13,094,472 1,158,738
----------- ----------- -----------
Cash and cash equivalents, end of period $ 6,411,423 $11,438,289 $13,094,472
=========== =========== ===========
Supplemental cash flow information (Note 12)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Description of the Business
The consolidated financial statements of College Television Network, Inc.
(the "Company") include the accounts of its divisions, College Television
Network, Link Magazine ("Link") and Sadler & Streib Advertising Agency
("Sadler & Streib").
College Television Network is a proprietary commercial television network
operating on college and university campuses through single channel
television systems placed primarily in campus dining facilities and student
unions. A significant portion of the Company's revenues are derived from
advertising displayed on the network. At December 31, 1998, the Company had
approximately 736 locations installed or contracted for installation at
various colleges and universities throughout the United States.
As further described in Note 2, the Company purchased Link and Sadler &
Streib on January 12, 1998 and July 1, 1998, respectively. Link is a New
York City-based publication which distributes approximately six issues per
year free of charge to over one million college students throughout the
United States. Advertising revenue is derived from advertising displayed in
the publications. Sadler & Streib is primarily involved in placing media
buys and providing creative services for their clients.
2. Significant Accounting Policies
Change in fiscal year-end
During 1997, the Company changed its fiscal year-end from October 31 to
December 31, effective January 1, 1998. Financial information for the two-
month period ended December 31, 1997 has been presented in these financial
statements.
Revenue recognition
Advertising revenues for the College Television Network are recognized in
the period during which the spots are aired on the Company's network.
Advertising revenues for Link are recognized in the period during which the
publication is distributed and revenues for Sadler & Streib are recognized
at the time in which services are provided.
For the year ended December 31, 1998, sales to one customer in the
approximate amount of $1,189,000 represented more than ten percent of the
Company's consolidated revenue. Likewise, sales to seven customers for the
two-month period ended December 31, 1997 in the approximate amounts of
$110,000, $84,000, $77,000, $75,000, $75,000, $71,000 and $65,000
represented more than ten percent of the Company's consolidated revenues.
Sales to three customers for the year ended October 31, 1997 in the
approximate amounts of $375,000, $332,000 and $298,000 individually
represented more than ten percent of the Company's consolidated revenues.
F-6
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 revenues during the period of September through
May and substantially less revenues during the summer months when colleges
and universities do not hold regular classes.
Cash and cash equivalents
The Company considers all deposits in banks, certificates of deposits and
short-term investments with original maturities of three months or less as
cash and cash equivalents. The Company places its temporary cash
investments with high credit quality financial institutions. Such
investments often exceed the FDIC limits and are not covered by insurance.
Accounts receivable
Accounts receivable consist primarily of trade receivables. At December 31,
1998, an allowance for uncollectible accounts of approximately $198,000 was
recorded.
Property and equipment
Property and equipment is recorded at cost and has historically been
depreciated using an accelerated depreciation method over the estimated
useful lives of the assets which range from five to eleven years. During
1998, the Company elected to change its depreciation method for newly
acquired entertainment system assets to a straight-line basis in connection
with its conversion to the new delivery platform discussed in Note 4. In
addition, effective January 1, 1998, the Company changed its method of
depreciation for all other fixed assets from an accelerated method to the
straight-line method. The Company believes the new method will more
appropriately present its financial results by better allocating costs of
property and equipment over the useful lives of these assets. In addition,
the new method more closely conforms with that prevalent in the industries
in which the Company operates. The effect of these changes was to decrease
loss before cumulative effect of change in accounting principle by
approximately $140,000 or $0.01 per share. The pro forma effect of the
change in depreciation of other fixed assets had the new method been in
effect in prior periods was not material.
Upon the retirement or sale of fixed assets, the book value is removed from
the accounts and the difference between such net book value and salvage
value received is recorded in income. Expenditures for maintenance and
repairs are charged to expense during the period incurred; renovations and
capital improvements are capitalized and amortized over the assets
remaining economic useful lives.
Intangible assets
Intangible assets include patents, trademarks and goodwill resulting from
acquisitions. Amortization is computed using the straight-line method based
on the estimated useful lives of the related assets. The estimated useful
life for the Company's intangible assets is 15 years. Accumulated
amortization is approximately $29,000 at December 31, 1998.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). SFAS No. 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events
other
F-7
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
than enactments of changes in the tax law or rates. Income tax accounting
information is disclosed in Note 9.
Net loss per share
Net loss per common share is based on the weighted average number of common
shares outstanding during the period and gives effect to a one-for-five
reverse stock split as discussed in Note 6.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
financial statements, for which it is practicable to estimate that value.
The carrying value of all the Company's financial instruments approximates
fair value at December 31, 1998 and 1997 due to the short maturity of these
instruments.
Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No. 121"), the Company determines whether
there has been an impairment of long-lived assets and the related
unamortized goodwill, based on whether certain indicators of impairment are
present. In the event that facts and circumstances indicate that the cost
of any long-lived assets and the related unamortized goodwill may be
impaired, an evaluation of recovery would be performed. If an evaluation is
required, the estimated future gross, undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow value is
required. See Note 4 for discussion of the current year impairment charge.
Advertising and promotion costs
Advertising costs are generally expensed as incurred or no later than when
the advertisement appears or the event is run. Advertising expense was
approximately $3,503,000, $420,000 and $1,190,000 for the year ended
December 31, 1998, the two-month period ended December 31, 1997 and the
year ended October 31, 1997, respectively. There were no deferred
advertising costs at December 31, 1998 or December 31, 1997.
Comprehensive income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
standard establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of this statement has
no impact on the Company's net loss or stockholders' equity. During fiscal
1998 and the prior periods presented, total comprehensive income
substantially equaled net loss.
F-8
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Reclassification
Certain prior period amounts have been reclassified to conform to the
current year presentation. All significant intercompany accounts and
transactions are eliminated in consolidation.
Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from these estimates.
3. Acquisitions
On January 12, 1998, the Company acquired the assets of Link, including
cash of approximately $110,000, in exchange for the assumption of certain
liabilities in the approximate amount of $596,000. The acquisition has been
accounted for under the purchase method of accounting. Goodwill in the
approximate amount of $351,000 was recognized as the excess of the total
liabilities assumed over the fair value of the assets acquired in the
transaction and is being amortized on a straight-line basis over a period
of fifteen years. The following unaudited condensed combined pro forma
results of operations of the Company assume the Link acquisition occurred
as of the beginning of the period presented.
12 months ended
December 31,
1997
Revenues $ 4,062,000
Net loss $(5,270,000)
Basic and diluted net loss per share $ (.87)
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the transactions been
consummated as of the beginning of the period, nor are they necessarily
indicative of future operating results.
On July 1, 1998, the Company acquired substantially all of the assets of
Sadler & Streib for approximately $290,000. The Company also assumed all of
Sadler & Streib's liabilities in the amount of approximately $107,000. The
acquisition has been accounted for under the purchase method of accounting.
Goodwill in the approximate amount of $258,000 was recognized as the excess
of the total purchase price over the net assets acquired in the transaction
and is being amortized on a straight-line basis over a period of fifteen
years. As further discussed in Note 10, a founder and former partner of
Sadler
F-9
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
& Streib is the wife of an officer of the Company. The operations of
Sadler & Streib are not considered material for purposes of pro forma
financial disclosures.
The results of operations of Link and Sadler & Streib are included in the
Company's consolidated financial statements as of the date of their
respective acquisitions.
4. Conversion of Delivery Platform
During fiscal 1998, the Company finalized a plan to convert the then
current delivery platform for the College Television Network from the send
and store method to the digital video broadcast ("DVB") method. On the
conversion date, the Company launched the new DVB delivery system. As a
result of the change in delivery technology, certain of the Company's
previous delivery system components were rendered obsolete or impaired in
value in accordance with SFAS No. 121. The Company reported an impairment
charge of approximately $133,000 during the current year which is included
as an operating expense in the consolidated financial statements. The
impairment charge represents the net carrying value of assets which were
taken out of service in the conversion process, less estimated proceeds
from their disposition. Certain other original system components which were
required to operate the network through the conversion date were not
required to operate the new DVB delivery system. Accordingly, the Company
reevaluated the useful lives of those components during 1998 to depreciate
the remaining net book value over the remaining period such assets would be
in service prior to being replaced. The change in useful lives of these
assets resulted in additional depreciation expense of approximately
$936,000 for the year ended December 31, 1998. Such assets were fully
depreciated when they were removed from service on the conversion date. Any
proceeds from the disposition of these assets are not expected to be
significant as there are limited alternative uses for such assets.
5. Property and Equipment
Property and equipment consists of the following:
December 31, Estimated
1998 1997 useful lives
Entertainment systems, completed $ 4,599,051 $ 4,100,179 5 years
Entertainment systems, in progress 1,508,075 54,136
Machinery and equipment 795,105 359,222 7 years
Furniture and fixtures 365,826 205,983 7 years
Leasehold improvements 170,412 31,812 7-11 years
----------- -----------
7,438,469 4,751,332
Less: Accumulated depreciation and
amortization (921,785) (2,724,088)
----------- -----------
Total $ 6,516,684 $ 2,027,244
=========== ===========
F-10
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Depreciation expense for the year ended December 31, 1998, the two-month
period ended December 31, 1997 and the year ended October 31, 1997 was
approximately $2,175,000, $136,000 and $829,000, respectively.
6. Stockholders' Equity
Per share data has been restated, as appropriate, for the one-for-five
stock split effective November 12, 1997.
Rights offering
The Company distributed to holders of record as of the close of business on
July 17, 1998 (the "Record Date"), of its common stock, $.005 par value per
share (the "Common Stock"), one non-transferable right for each 1.2825
shares of Common Stock held on the Record Date. Each right entitled the
holder to subscribe for and purchase one share of Common Stock for a price
of $1.60 per share (the "Rights"), for a total of 6,250,000 shares (the
"Rights Offering"). The Rights Offering subscription period expired on
September 10, 1998. Pursuant to a Standby Stock Purchase Agreement with U-C
Holdings, L.L.C. ("U-C Holdings"), the majority shareholder, U-C Holdings
purchased in the Rights Offering all of the 4,536,593 shares of Common
Stock issuable to them upon exercise of the Rights distributed to them and
all of the 1,221,838 shares of Common Stock offered in the Rights Offering
which were not purchased by other holders of Rights. Holders of the Rights,
other than U-C Holdings, subscribed for and purchased 491,569 shares of
Common Stock in the offering. The Rights Offering closed on October 5, 1998
and provided the Company with proceeds, net of expenses, of approximately
$9,795,000 which will be used for general corporate purposes. In
consideration for its purchase commitment and standby commitment under the
Standby Stock Purchase Agreement, the Company issued a warrant to U-C
Holdings to purchase an additional 152,100 shares of Common Stock at $1.60
per share at any time during a seven year period from the date of issuance
of the warrant.
Private placement offering
Pursuant to the terms of a purchase agreement dated April 25, 1997 between
the Company and U-C Holdings, the Company issued to U-C Holdings 5,818,182
shares of common stock and a Class C Warrant to purchase 772,732 shares of
common stock for $2.75 per share for an aggregate purchase price, net of
issuance costs of approximately $15,401,000.
Concurrent with the private placement, the Company's management was
restructured with the designation of five new directors and the addition of
a Chairman, a President and a Vice Chairman. Three officers and two
directors of the Company own an approximate combined 6% interest in U-C
Holdings, of which U-C Holdings owns an approximate 81% ownership interest
in the Company at December 31, 1998. The Company and U-C Holdings have
entered into certain equity protection agreements to protect U-C Holdings'
percentage ownership interest in the Company from dilution from third party
exercises of outstanding warrants and options to acquire the Company's
common stock. Such agreements provide U-C Holdings with the right to
acquire additional shares of the Company's common stock.
F-11
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Performance Equity Plan
Under the Company's 1990 Performance Equity Plan, the Company has reserved
an aggregate of 142,833 shares of its common stock for issuance to its
officers and key employees, consultants and independent contractors in the
form of long-term performance-based stock and/or other equity interests in
the Company. One option is exercisable for one share of the Company's
common stock. The term of each option is determined by the Board of
Directors but shall not exceed ten years after the date on which the option
is granted. All options vest over a period determined by the Board of
Directors at the time of grant. At December 31, 1998, 17,208 shares of
common stock were available for future grants.
Stock Incentive Plan
Under the Company's 1996 Stock Incentive Plan (the "Plan"), the Company has
reserved as of January 1, 1999 an aggregate of 366,667 shares of its common
stock for issuance to its officers, key employees and consultants in the
form of stock options and/or other forms of equity interests in the
Company. Pursuant to an amendment to the Plan adopted June 30, 1998, an
aggregate of 400,000 shares will be reserved for issuance under the Plan
effective as of January 1, 2000. One option is exercisable for one share of
the Company's common stock. The term of each option is determined by the
Board of Directors but shall not exceed ten years after the date on which
the option is granted. All options vest over a period determined by the
Board of Directors at the time of grant. At December 31, 1998, 70,514
shares of common stock were available for future grants.
Outside Directors' Stock Option Plan
Under the Outside Directors' Plan, the Company has reserved an aggregate of
240,000 shares of its common stock for issuance to its non-employee
Directors. Upon stockholder adoption of the Directors' Plan on March 20,
1996, the only eligible outside director was granted options to acquire
6,000 shares of the Company's common stock at the market price on the date
of the grant. Under the current plan, the Board of Directors has the right
to determine the number of options to be granted to eligible directors. No
set amount of options is required to be granted to an eligible director.
Such option grants contain vesting terms as determined by the Board of
Directors for each option grant and as set forth in the applicable stock
option agreement. One option is exercisable for one share of the Company's
common stock. At December 31, 1998, 234,000 shares of common stock were
available for future grants.
Other stock options
During fiscal 1996, non-qualified options to purchase 67,500 shares of
common stock at an exercise price of $6.55 per share were granted to an
officer of the Company. In conjunction with the purchase agreement dated
April 25, 1997 between the Company and U-C Holdings, 202,500 additional
options were granted to this officer at an exercise price of $3.80. The
exercise price of the options issued in fiscal 1996 was revised to $2.25
per share resulting in a total of 270,000 options outstanding at December
31, 1998. These options are currently exercisable, however, none have been
exercised through December 31, 1998.
F-12
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Stock option activity associated with all of the Company's plans discussed
above for the year ended December 31, 1998, the two-month period ended
December 31, 1997 and the year ended October 31, 1997 is summarized below:
<TABLE>
<CAPTION>
Two-month
Year ended period ended Year ended
December 31, December 31, October 31,
1998 1997 1997
---------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period 439,518 $2.83 439,518 $2.83 214,958 $4.08
Granted 289,000 1.96 - - 241,700 2.45
Exercised (33,760) 1.37 - - (11,140) 2.15
Cancelled (41,880) 2.31 - - (6,000) 4.25
-------- ------- -------
Outstanding at end of
period 652,878 $2.55 439,518 $2.83 439,518 $2.83
======== ======= =======
Exercisable at end of period 464,190 393,868 393,118
Weighted average fair value of
options granted during the
period $ 0.95 $ 2.16
</TABLE>
For options outstanding at December 31, 1998, 608,551 are priced between
$1.50 to $3.05, 37,327 are priced between $4.06 to $7.20 and 7,000 are
priced between $14.40 - $15.00.
Fair value of stock options
Had compensation expense for the options discussed above been determined
based on the fair value at the grant dates for the options consistent with
the methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's
net loss and net loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, October 31,
1998 1997
<S> <C> <C>
As reported
Net loss $(8,453,903) $(4,003,590)
Net loss per common share $ (.89) $ (.77)
Pro forma
Net loss $(8,642,291) $(4,078,426)
Net loss per common share $ (.91) $ (.79)
</TABLE>
The fair values of the options granted were estimated as of the date of
grant using the Black-Scholes option-pricing model based on the following
weighted average assumptions used for grants during fiscal 1998: no
expected dividend yield; expected volatility of 66.87 percent; risk-free
interest rate of 5.29 percent; and expected lives of
F-13
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
three years. For grants during the year ended October 31, 1997, the
following weighted average assumption were used: no expected dividend
yield; expected volatility of 82.91 percent; risk-free interest rate of
6.60 percent; and expected lives of 3.1 years.
Reverse stock split
On October 6, 1997, U-C Holdings consented to an amendment to effect a one-
for-five reverse stock split (the "Reverse Stock Split") and a related
change in the par value of the Company's common stock which became
effective on November 12, 1997. All amounts and per share data prior to the
effective date contained in these consolidated financial statements reflect
the impact of the Reverse Stock Split. With the exception of changes
resulting from the Reverse Stock Split and the change in par value, the
rights and privileges of shares of common stock remain the same after the
Reverse Stock Split.
7. Redeemable Preferred Stock
As of December 31, 1997, the Company had 3,333 shares of redeemable
preferred stock issued and outstanding to a single holder. The cost basis
of such shares was $3,333 at December 31, 1997. The stock was redeemable at
any time at the option of either the Company or the holder thereof. The
redeemable preferred stock had no voting rights and a liquidation
preference equal to the $1.00 per share par value plus accrued and unpaid
dividends. Dividends accrued at a rate of 10% per annum. On June 30, 1998,
the Company exercised its right and redeemed the preferred stock in the
total amount of $5,806 which included accrued and unpaid dividends of
$2,473. Of the 2,000,000 shares originally authorized by the Company, there
were no shares issued and outstanding at December 31, 1998.
8. Commitments and Contingencies
Employment agreements
The Company has employment agreements through 2001 with certain officers
and employees. The agreements call for minimum base salaries for the years
ending December 31, 1999, 2000 and 2001 of approximately $2,635,000,
$2,274,000 and $960,000, respectively.
Leases
The Company leases certain of its office facilities under operating leases
at various dates through 2008. Rent expense was approximately $379,000,
$51,000 and $185,000 for the year ended December 31, 1998, the two-month
period ended December 31, 1997 and the year ended October 31, 1997,
respectively. Annual lease payments for the years ending December 31, 1999,
2000, 2001, 2002, 2003 and thereafter will approximate $427,000, $375,000,
$325,000, $315,000, $255,000 and $1,195,000, respectively.
F-14
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Other 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 in which ultimate payment is considered
probable.
On March 21, 1998, the Company entered into a severance agreement with a
senior executive. The agreement provides for payments of approximately
$870,000 over a three-year period ending in April 2001. A provision for
this obligation is included in the Company's consolidated statement of
operations for the year ended December 31, 1998. As of December 31, 1998,
the Company has paid approximately $264,000 of this obligation.
On March 27, 1998, the Company signed an agreement with Turner Private
Networks, Inc. ("Turner") to provide news and sports programming on the
College Television Network through December 31, 2002. The total license fee
is approximately $2,900,000 and supersedes the agreement between the
companies entered into on November 5, 1996. Future payments under the
agreement during fiscal 1999, 2000, 2001 and 2002 are approximately
$500,000, $500,000, $700,000 and $700,000, respectively.
During 1998, the Company entered into an Origination Services Contract with
Crawford Communications for the satellite transmission of the College
Television Network's daily programming, including encoded signals, testing,
maintaining the programming library and obtaining programming from Turner
among other services. The contract expires on July 15, 2003 and annual
payments under the agreement approximate $264,000.
On April 30, 1998 in connection with the delivery platform conversion, the
Company entered into a Transponder Use Agreement ("Agreement") with Public
Broadcasting Service ("PBS") through July 31, 2003. Under the Agreement,
the Company leases capacity on a satellite from PBS. Annual payments under
this agreement approximate $780,000.
9. Income Taxes
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $24,100,000 expiring through the year 2018. Due to an
ownership change in April 1997, utilization of approximately $12,100,000 of
the net operating loss carryforwards is limited to approximately $1,200,000
per year.
F-15
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The provision for income taxes differs from the amount computed by applying
the applicable U.S. statutory federal income tax rate (34%) to pre-tax loss
from continuing operations as a result of the following items:
<TABLE>
<CAPTION>
Two-month
Year ended period ended Year ended
December 31, December 31, October 31,
1998 1997 1997
<S> <C> <C> <C>
Federal tax provision on loss before income
taxes and cumulative effect of change
in accounting principle $(2,921,942) $(386,215) $(1,361,221)
Nondeductible expenses 44,942 6,215 13,221
Change in valuation allowance 2,877,000 380,000 1,348,000
----------- --------- -----------
Provision for income taxes $ - $ - $ -
=========== ========= ===========
</TABLE>
The components of the deferred income tax assets arising under SFAS No. 109 were
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 8,208,000 5,277,000
Expenses not currently deductible 382,000 436,000
Less valuation allowance (8,590,000) (5,713,000)
----------- -----------
Balance $ - $ -
=========== ===========
</TABLE>
The change in the valuation allowance at December 31, 1998, as compared to
December 31, 1997 was approximately $2,877,000, which was principally
attributable to the increase in the net operating loss carryforward for the
year.
10. Related Party Transactions
Sales commissions of approximately $177,000, $18,000 and $67,000 were paid
to a company owned in part by a member of the Board of Directors of the
Company for the year ended December 31, 1998, the two-month period ended
December 31, 1997 and the year ended October 31, 1997, respectively.
F-16
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
During 1998, the Company paid design and decorating fees to the spouse of
an executive of the Company of approximately $57,000 related to the
relocation of the Company's New York offices.
As discussed in Note 3, the Company purchased Sadler & Streib for which the
founder and one of the former partners is the spouse of an officer of the
Company. In conjunction with the purchase, the related party was paid
approximately $204,000, and the Company has also paid consulting fees of
approximately $23,000 to this individual since the date of the acquisition.
The Company employs two individuals that are related to the CEO. Total
compensation paid (including fringe benefits) during 1998 was approximately
$59,000. Additionally, 2,000 vested stock options with an exercise price of
$2.13 per share were granted during 1998 pursuant to the Company's Stock
Incentive Plan.
The Company has obtained a commitment from the majority stockholder to fund
cash flow deficits, if any, through December 31, 1999.
11. Segment Reporting
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). This statement establishes new standards for
the manner in which companies report operating segment information as well
as disclosures about products and services and major customers. Prior to
the Company's acquisitions of Link and Sadler & Streib during fiscal 1998,
the College Television Network was the only reportable segment as defined
in accordance with SFAS No. 131. As such, segment information for the two-
month period ended December 31, 1997 and the year ended October 31, 1997 is
not applicable.
F-17
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company has three reportable segments as defined under SFAS No. 131:
(i) the College Television Network ("CTN"); (ii) Link; and (iii) Sadler &
Streib. See Note 1 for a description of the products and services provided
by each segment. 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:
Year ended
December 31,
1998
Revenues
CTN $ 6,618,215
Link 1,408,320
Sadler & Streib 483,343
-----------
$ 8,509,878
===========
Loss before income taxes and cumulative
effect of change in accounting principle
CTN $(7,702,623)
Link (871,086)
Sadler & Streib (20,238)
-----------
$(8,593,947)
===========
Total assets
CTN $15,520,576
Link 473,355
Sadler & Streib 457,118
-----------
$16,451,049
===========
Substantially all of the property and equipment owned by the Company is
used in the operations of CTN.
F-18
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information includes:
On January 12, 1998, the Company completed the purchase of Link as follows:
Fair value of assets acquired $ 486,635
Add: Cash received 109,209
---------
Liabilities assumed $ 595,844
=========
On July 1, 1998, the Company completed the purchase of Sadler & Streib as
follows:
Fair value of assets acquired $ 396,310
Less: Cash paid (289,298)
---------
Liabilities assumed $ 107,012
=========
13. Subsequent Events
On February 19, 1999, the Company entered into a severance agreement with
one of its senior executives and member of the Board of Directors. The
agreement provides for payments of approximately $476,000 over a twenty-six
month period through April 2001. In conjunction with the severance
agreement, the Company also granted the officer an option to purchase
100,000 shares of the Company's common stock at an exercise price of $2.75
per share that becomes exercisable approximately 120 days subsequent to
February 19, 1999. The options expire five years from the date of the
severance agreement.
F-19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COLLEGE TELEVISION NETWORK, INC.
(Registrant)
By: /s/ Jason Elkin
------------------
Jason Elkin
Chairman of the Board and Chief Executive Officer
Date: March 25, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ------ ----
<S> <C> <C>
/s/ Jason Elkin Chairman of the Board, Chief March 25, 1999
- ----------------------------------- Executive Officer and Director
Jason Elkin (Principal Executive Officer)
/s/ Patrick G. Doran Chief Financial Officer, Treasurer March 25, 1999
- ----------------------------------- and Secretary (Principal Financial
Patrick G. Doran and Accounting Officer)
/s/ Beth F. Johnston Director
- ----------------------------------- March 25, 1999
Beth F. Johnston
/s/ Peter Kauff Director
- ----------------------------------- March 25, 1999
Peter Kauff
/s/ C. Thomas McMillen Director
- ----------------------------------- March 25, 1999
C. Thomas McMillen
/s/ Stephen Roberts Director
- ----------------------------------- March 25, 1999
Stephen Roberts
/s/ Hollis W. Rademacher Director
- ----------------------------------- March 25, 1999
Hollis W. Rademacher
/s/ Avy H. Stein Director
- ----------------------------------- March 25, 1999
Avy H. Stein
/s/ James Wood Director
- ----------------------------------- March 25, 1999
James Wood
/s/ Sergio Zyman Director
- ----------------------------------- March 25, 1999
Sergio Zyman
</TABLE>
<PAGE>
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-3 (File No. 333-58479) filed on July 2, 1998).
3.3 Amended and Restated Bylaws of the Registrant, as amended
(incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-3 (File No. 333-58479) filed on July
2, 1998).
4.1 Form of Class C Warrant No. C-1, dated April 25, 1997, issued to U-C
Holdings, L.L.C. (incorporated by reference to Exhibit 4.1 to the
Company's Form 10-KSB for the fiscal year ended October 31, 1997).
4.2 Equity Protection Agreement, dated April 25, 1997, between the
Registrant and U-C Holdings, L.L.C. (incorporated by reference to
Exhibit 4.2 to the Company's Form 10-KSB for the fiscal year ended
October 31, 1997).
4.3 Equity Protection Agreement, dated April 25, 1997, between the
Registrant and U-C Holdings, L.L.C. (incorporated by reference to
Exhibit 4.3 to the Company's Form 10-KSB for the fiscal year ended
October 31, 1997).
4.4 Equity Protection Agreement, dated April 25, 1997, between the
Registrant and U-C Holdings, L.L.C. (incorporated by reference to
Exhibit 4.4 to the Company's Form 10-KSB for the fiscal year ended
October 31, 1997).
4.5 Equity Protection Agreement, dated April 25, 1997, between the
Registrant and U-C Holdings, L.L.C. (incorporated by reference to
Exhibit 4.5 to the Company's Form 10-KSB for the fiscal year ended
October 31, 1997).
4.6 Specimen certificate representing Common Stock (incorporated herein by
reference to Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1 (No. 33-44935), as amended, declared effective on June 10,
1992).
4.15 Form of Class C Warrant No. C-2, issued to U-C Holdings, L.L.C.
pursuant to the Standby Stock Purchase Agreement dated July 2, 1998
(incorporated by reference to Exhibit 4.15 to the Company's
Registration Statement on Form S-3 (File No. 333-58479) filed July 2,
1998).
10.1 Employment Agreement, dated as of April 29, 1997, between the
Registrant and Jason Elkin (incorporated by reference to Exhibit 10.1
to the Company's Annual Report on Form 10-KSB for the year ended
October 31, 1997 (File No. 000-19997) filed on January 1, 1998).
10.2 Employment Agreement, dated as of April 25, 1997, between the
Registrant and Peter Kauff (incorporated by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-KSB for the year ended
October 31, 1997 (File No. 000-19997) filed on January 1, 1998).
10.3 Employment Agreement, dated as of September 10, 1997, between the
Registrant and Patrick G. Doran (incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-KSB for the year ended
October 31, 1997 (File No. 000-19997) filed on January 1, 1998).
10.4 Employment and Equity Purchase Agreement, dated as of January 1, 1998,
among the Registrant and Thomas Gatti.
10.5 Payment Agreement and General Release, dated as of March 21, 1998,
between the Registrant and John T. Dobson, III.
10.6 Payment Agreement and General Release, dated February 19, 1999, among
the Registrant, Joseph D. Gersh and U-C Holdings, L.L.C.
10.7 Consulting Agreement, dated as of March 1, 1999, among Registrant and
C. Thomas McMillen.
E-1
<PAGE>
10.8 Consulting and Equity Purchase Agreement, dated as of March 26, 1999,
among Registrant, U-C Holdings, L.L.C. and Sergio Zyman.
10.9 Registrant's 1990 Performance Equity Plan (incorporated by reference
to Exhibit 10.4 to the Company's Registration Statement on Form S-1
(File No. 33-449035) declared effective on June 10, 1992).
10.10 First Amendment to 1990 Performance Equity Plan (incorporated by
reference to Exhibit A to the Company's Information Statement on
Schedule 14(c) filed on February 23, 1998).
10.11 Registrant's 1996 Stock Incentive Plan (incorporated by reference to
Exhibit A to the Company's Definitive Proxy Statement on Form 14A with
respect to its 1996 Annual Meeting of Stockholders filed on July 1,
1996).
10.12 First Amendment to 1996 Stock Incentive Plan (incorporated by
reference to Exhibit A to the Company's Information Statement on
Schedule 14(c) filed on February 23, 1998).
10.13 Second Amendment to 1996 Stock Incentive Plan (incorporated by
reference to Exhibit A to the Registrant's Information Statement on
Schedule 14(c) filed on May 14, 1998).
10.14 Registrant's Outside Directors' 1996 Stock Option Plan (incorporated
by reference to Exhibit B to the Company's Definitive Proxy Statement
on Form 14A with respect to its 1996 Annual Meeting of Stockholders
filed on July 1, 1996).
10.15 First Amendment to Outside Directors' 1996 Stock Option Plan
(incorporated by reference to Exhibit A to the Company's Information
Statement on Schedule 14(c) filed on February 23, 1998).
10.16 Second Amendment to Outside Directors' 1996 Stock Option Plan
(incorporated by reference to Exhibit A to the Registrant's
Information Statement on Schedule 14(c) filed on May 14, 1998).
10.17 Registration Rights Agreement, dated as of April 25, 1997, between the
Registrant and U-C Holdings, L.L.C. (incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the
year ended October 31, 1997 (File No. 000-19997) filed on January 1,
1998).
10.18 Purchase Agreement, dated as of April 25, 1997, between the Registrant
and U-C Holdings, L.L.C. (incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-KSB for the year ended
October 31, 1997 (File No. 000-19997) filed on January 1, 1998).
10.19 Lease, dated June 13, 1997, between the Atlanta Board of Realtors
Educational Foundation, Inc. and the Registrant, and Lease Addendum
thereto, dated October 31, 1997 (incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-KSB for the year ended
October 31, 1997 (File No. 000-19997) filed on January 1, 1998).
E-2
<PAGE>
10.20 Programming and Services Agreement, dated effective as of January 1,
1998, between Registrant and Turner Private Networks, Inc.
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1998 (File No.
000-19997) filed on May 15, 1998).
10.21 Installation Agreement (Phase I,) dated March 13, 1998, between the
Registrant and Crawford Communications, Inc. (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1998 (File No. 000-19997) filed
on May 15, 1998).
10.22 Transponder Use Agreement between Registrant and Public Broadcasting
Service dated April 30, 1998 (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1998 (File No. 000-19997) filed on August 14, 1998).
10.23 Standard Form of Office Lease by and between 32 East 57th Street, LLC
and Registrant (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1998 (File No. 000-19997) filed on August 14, 1998).
10.24 Agreement between Crawford Communications Inc. and Registrant dated
July 15, 1998 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1998 (File No. 000-19997) filed on November 13, 1998).
16.1 Letter of Richard A. Eisner & Company regarding change in certifying
accountant (incorporated by reference to Exhibit 16.1 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended October 31,
1997 filed on January 29, 1998).
18.1 Letter Regarding Change in Accounting Principles.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule (for SEC use only).
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements.
E-3
<PAGE>
EXHIBIT 10.4
------------
EMPLOYMENT AND EQUITY PURCHASE AGREEMENT
----------------------------------------
THIS EMPLOYMENT AGREEMENT made as of January 1, 1998 between College
Television Network, Inc., f/k/a UC Television Network Corp., a Delaware
corporation (the "Company"), UC Holdings, L.L.C., a Delaware limited liability
company ("Holdings") and Thomas Gatti ("Employee").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Employee, and Employee accepts
----------
employment with the Company, upon the terms and conditions set forth in this
Agreement for the period beginning on the date hereof and ending as provided in
paragraph 4 hereof (the "Employment Period").
2. Position and Duties.
-------------------
During the Employment Period, Employee shall serve as an Executive
Vice-President of the Company and shall be employed by the Company on a full-
time basis and shall devote his full business and professional efforts to the
conduct of Company's business. Employee shall not render services to any other
business entity without the prior written consent of the Company's Board of
Directors ("Board"). Employee shall perform such duties at such location(s) as
the Company may direct from time to time.
3. Base Salary and Benefits.
------------------------
(a) During the Employment Period, Employee's base salary shall be TWO
HUNDRED THOUSAND DOLLARS AND N0/100 ($200,000.00) per annum and the base salary
shall increase seven percent (7%) each anniversary date of this Agreement from
the immediately preceding base salary (the "Base Salary"). The Base Salary
shall be payable in regular installments in accordance with the Company's
general payroll practices.
(b) The Company shall reimburse Employee for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement
which are consistent with the Company's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses.
(c) In addition to the Base Salary, Employee shall receive a
percentage commission (the "Commission Bonus"). The amount and calculation of
the Commission Bonus shall be agreed upon by Employee and Company on a yearly
basis.
<PAGE>
(d) In addition to the Base Salary and any Commission Bonus payable to
Employee pursuant to this paragraph 3, Employee shall be entitled to participate
in all employee benefit plans and programs of the Company for which sales
representatives of the Company are eligible, including, to the extent available
or established by the Company, any:
(i) family health insurance, disability insurance, and dental
insurance; and
(ii) 401(k), retirement or similar benefit plans;
(iii) on the Effective Date, Employee shall receive options
pursuant to the Company's option plan to purchase 10,000 shares of common stock
of the Company, subject to the effectiveness of the amendment to the Company's
option plan which is currently in process. In addition, assuming Employee meets
his annual sales performance goals the Chairman of the Board agrees to recommend
to the Board and Compensation Committee to grant Employee options for 13,000
shares on the first two anniversary dates of this Agreement and 14,000 on the
third anniversary date of this Agreement, up to 50,000 shares, in the aggregate,
but such grant is subject to the approval of the Board and Compensation
Committee; and
(iv) During the Employment Period, Employee shall receive twenty
(20) days paid vacation per annum.
4. Term.
----
(a) The Employment Period shall not commence until January 1, 1998
(the "Effective Date"). The Employment Period shall commence on the Effective
Date and end on December 31, 2001 (the "Expiration Date"); provided, however,
that the Employment Period shall be automatically extended for one year on the
Expiration Date and at the end of each subsequent year of the Employee's
employment (an "Extension Period"; any such Extension Periods shall be included
in the definition of Employment Period) unless at least ninety (90) days prior
to the Expiration Date or the end of the then current Extension Period, either
the Company or the Employee shall give written notice to the other that this
Agreement shall not be extended; and provided further that (i) the Employment
--------
Period shall terminate prior to such date upon Employee's permanent disability
or incapacity (determined as set forth below), resignation or death, and (ii)
the Employment Period may be terminated by the Company at any time prior to such
date for Cause (as defined below) or without Cause. Permanent Disability or
incapacity shall occur if Employee misses sixty (60) consecutive days of work
and it is determined by an independent physician that such disability or
incapacity is permanent.
(b) If the Employment Period is terminated due to the Employee's
death, disability or incapacity, Employee shall be entitled to receive an
aggregate amount equal to six months of his Base Salary. This amount shall be
payable by the Company in equal monthly installments over a period of six months
following termination of the Employment Period.
(c) If the Employment Period is terminated by the Company without
Cause, Employee shall be entitled to receive an aggregate amount equal to the
greater of: (i) his Base
2
<PAGE>
Salary, payable for the remainder of the Employment Period; or (ii) his Base
Salary for one year, which would be payable in a lump sum payment within thirty
(30) days after the Termination Date. This amount shall be payable by the
Company in equal monthly installments over the remainder of the Employment
Period, so long as Employee has not breached any of the provisions of Paragraphs
9, 10 or 11 hereof.
(d) If the Employment Period is terminated by the Company for Cause,
upon the Employee's resignation or upon the expiration of the Employment Period
after either party has given notice of non-extension pursuant to Paragraph 4(a),
Employee shall be entitled to receive his Base Salary through the date of
termination and shall not be entitled to any other amounts hereunder.
(e) For purposes of this Agreement, "Cause" shall mean (i) the
conviction of a felony or a crime involving moral turpitude or the conviction of
any other crime involving dishonesty, disloyalty or fraud with respect to the
Company or Holdings, (ii) gross negligence or willful misconduct with respect to
the Company, or (iii) any other material breach of this Agreement, or (iv) the
repeated failure to perform Employee's duties as directed by the Board;
provided, however, that with respect to clause (iii) or (iv) above, if such
- --------
failure or breach is capable of cure, such failure or breach, as the case may
be, shall not be deemed to constitute Cause unless such failure or breach
remains uncured after the expiration of 30 days after written notice thereof to
Employee. In addition, the Employment Period may be terminated for "Cause" by
either Chairman of the Board, Vice Chairman of the Board or President, in their
individual sole discretion, within ninety (90) days after the end of each
anniversary date of the Effective Date in the event of the failure of the
Employee to achieve at least 90% of his sales goal (as agreed upon by Employee
and Company which sales goal shall not exceed a ten percent (10%) increase from
the previous years sales goal) during such preceding year.
(f) All of Employee's rights to fringe benefits hereunder (if any)
accruing at any time prior to or after the termination of the Employment Period
shall cease upon such termination.
5. Management Units.
----------------
(a) In addition to all sums payable to Employee pursuant to Paragraph
3 above, Employee shall receive fifty (50) Class B Management Units of Holdings
at a price of $50.00 ("Original Cost").
(b) Except as otherwise provided in paragraph 5(c) below, the
Management Units will become vested and owned by Employee, over the 36 month
period after the date hereof, in equal proportions on each anniversary date
following the Effective Date (i.e. 16.66 Class B Management Units vest on each
anniversary date of the Effective Date) if, as of such anniversary date,
Employee is employed by Company.
(c) Upon a Sale of the Company or a Sale of Holdings, all of the
Management Units, which have not yet become vested shall become vested at the
time of such event. All of the Management Units which have become vested
pursuant to this paragraph 5 are referred to
3
<PAGE>
herein as "Vested Management Units", and all unvested Management Units are
referred to herein as "Unvested Management Units."
6. Restriction on Transfer and Repurchase Option.
---------------------------------------------
(a) General Repurchase Option. Upon the occurrence of the Termination
-------------------------
Date the Management Units (whether held by Employee or one or more of Employee's
Permitted Transferees) shall be subject to repurchase by Holdings pursuant to
the terms and conditions set forth in this paragraph 6 (the "Repurchase
Option"). The date on which Employee ceases to be employed by the Company for
any reason, is referred to herein as the "Termination Date."
(b) Purchase Price for Unvested Management Units. Subject to
--------------------------------------------
paragraph 6(g) below, the Purchase Price for the Unvested Management Units shall
be the Original Cost for such Unvested Management Units.
(c) Purchase Price for Vested Management Units. Subject to paragraph
------------------------------------------
6(g) below, the purchase price for the Vested Management Units shall be the Fair
Market Value for such Vested Management Units, as of the Termination Date.
(d) Repurchase Option. As set forth above, Holdings may elect to
-----------------
purchase the applicable Management Units by delivering written notice (the
"Holdings Repurchase Notice") to the holder or holders of such Management Units
within 90 days after the Termination Date. The Repurchase Notice will set forth
the number of such Management Units to be acquired from each holder, the
aggregate consideration to be paid for such Management Units and the time and
place for the closing of the transaction. The number of such Management Units to
be repurchased by Holdings shall first be satisfied to the extent possible from
the Unvested Management Units held by Employee at the time of delivery of the
Repurchase Notice. If the number of such Management Units then held by Employee
is less than the total number of Management Units Holdings has elected to
purchase, Holdings shall purchase the remaining Management Units elected to be
purchased from the other holder(s) of such Management Units under this paragraph
6, pro rata according to the number of such Management Units held by such other
holder(s), respectively, at the time of delivery of the Repurchase Notice
(determined as nearly as practicable to the nearest unit or other applicable
denomination).
(e) Closing. Subject to paragraph 6(f) below, the closing of the
-------
purchase of the applicable Management Units pursuant to the Repurchase Option
shall take place on the date designated by Holdings in the Repurchase Notice,
which date shall not be more than 60 days nor less than five days after the
later of (i) the delivery of such notice(s); or (ii) the Fair Market Valuation
Date, if applicable. Payment for such Management Units to be purchased pursuant
to the Repurchase Option shall be made by Holdings in four (4) equal
installments, the first installment payable on the closing of such purchase, the
second payable four (4) months after the closing, the third payable eight (8)
months after the closing and the fourth payable twelve (12) months after the
closing, each such payment made by check or wire transfer of funds, at the
option of Holdings. Notwithstanding anything to the contrary contained in this
Agreement, Holdings may withdraw their Repurchase Notice at any time prior to
the closing of a purchase of such Management Units pursuant to the Repurchase
Option.
4
<PAGE>
(f) Termination of Repurchase Option. The right of Holdings to
--------------------------------
repurchase Management Units pursuant to this paragraph 6 shall terminate upon
the first to occur of (i) the Sale of Holdings, or (ii) the Sale of the Company.
The Repurchase Option set forth in this paragraph 6 will continue with respect
to such Management Units following any transfer thereof other than a transfer to
Holdings.
(g) Repurchase Restrictions. Notwithstanding anything to the contrary
-----------------------
contained in this Agreement, all repurchases of Management Units by Holdings
shall be subject to applicable restrictions contained in the General Corporate
Law of the State of Delaware. If any such restrictions prohibit the repurchase
of the Management Units hereunder which Holdings is otherwise entitled or
required to make, Holdings may make such repurchases as soon as it is permitted
to do so under such restrictions.
(h) Section 83(b) Election. Within 30 days after Employee receives
----------------------
any Management Units from Holdings, Employee shall make an effective election
with the Internal Revenue Service under Section 83(b) of the Internal Revenue
Code and the regulations promulgated thereunder.
7. Representations, Warranties and Agreements of Employee. Employee
------------------------------------------------------
hereby represents, warrants, covenants and agrees that:
(a) Employee has acquired the Management Units for investment for an
indefinite period, not with a view to the sale or distribution of any part of
all thereof by public or private sale or disposition.
(b) Employee has been advised that the Management Units have not been
registered under the Securities Act or registered or qualified under any other
securities law, on the ground, among others, that no distribution or public
offering of the Management Units is to be effected and the Management Units
will be issued by the Company in connection with a transaction that does not
involve any public offering within the meaning of Section 4(2) of the Securities
Act, or the rules and regulations of the Securities and Exchange Commission and
under comparable exemption provisions of the securities laws, rules and
regulations of other jurisdictions. Employee understands that the Company is
relying in part on the Employee's representations as set forth herein for
purposes of claiming such exemptions and that the basis for such exemptions may
not be present if, notwithstanding Employee's representations, Employee has in
mind merely acquiring Management Units for resale on the occurrence or non-
occurrence of some predetermined event. Employee has no such intention.
(c) Employee has such knowledge and experience in financial and
business matters that Employee is capable of evaluating the merits and risks of
an investment in the Management Units and has the capacity to protect Employee's
own interest in connection with Employee's proposed acquisition of the
Management Units. Employee is an "Accredited Investor" as defined in Regulation
D promulgated under the Securities Act.
(d) Employee acknowledges that Employee has been furnished with such
financial and other information concerning the Company as Employee considers
necessary in
5
<PAGE>
connection with Employee's acquisition of the Management Units. Employee has
carefully reviewed such information and is thoroughly familiar with the proposed
business, operations, properties and financial condition of the Company and has
discussed with representatives of the Company any questions the acquisition may
have with respect thereto. Employee understands: (i) the risks involved in this
offering, including the speculative nature of the investment; (ii) the financial
hazards involved in this offering, including the risk of losing such Employee's
entire investment; (iii) the lack of liquidity and restrictions on transfers of
the Management Units; and (iv) the tax consequences of this investment. Employee
has consulted with Employee's own legal, accounting, tax, investment and other
advisers with respect to the tax treatment of an investment by Employee in the
Management Units and the merits and risks of an investment in the Management
Units.
(e) The execution, delivery and performance by Employee of this
Agreement have been duly authorized by Employee. This Agreement constitutes a
valid and binding obligation of Employee, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and subject, as to enforceability, to general principles of
equity (regardless of whether enforcement is sought in a proceeding in equity or
at law).
(f) Employee understands that the Management Units will be "restricted
securities" as the term is defined in Rule 144 under the Securities Act, that
the Management Units must be held indefinitely unless they are subsequently
registered under the Securities Act and qualified under any other applicable
securities law or exemption from such registration and qualification are
available. Employee understands that the Company is under no obligation to
register or qualify the Management Units under the Securities Act, or any other
securities law.
(g) Employee agrees to be bound by the terms, conditions, obligations,
covenants and restrictions of the LLC Agreement and by the execution of this
Agreement Employee shall become and the Managing Member of the LLC does hereby
admit Employee as a "Member" and "Management Holder" of Holdings.
8. Definitions.
-----------
"Class B Management Units" shall have the meaning ascribed to it in the LLC
Agreement.
"Class C Warrant" shall have the meaning ascribed to it in the LLC
Agreement.
"Fair Market Valuation Date" with respect to any Management Units means the
date on which its Fair Market Value is finally determined pursuant to the
definition of "Fair Market Value."
"Fair Market Value" of the Management Units means the Fair Market Value as
shall be determined jointly in good faith by Holdings and Employee; provided
that if Holdings and Employee cannot so agree, then such value shall be
determined by an independent investment banking firm of national or regional
reputation utilizing valuation techniques then commonly
6
<PAGE>
used for the valuation of such investment interests, which investment banking
firm will be jointly selected by Holdings and Employee in good faith, or if such
parties cannot agree on an investment banking firm, then such value shall be
determined by an investment banking firm selected by a lot from a group of six
firms possessing the above described qualifications (three of whom shall be
selected by Holdings and three of whom shall be selected by Employee) from which
one firm designated as objectionable by each of Holdings and Employee shall be
eliminated (in either case, the investment banking firm's determination shall be
conclusive). The expense of any such appraisal shall be borne equally by the
parties. In determining the Fair Market Value of the Management Units to be
purchased pursuant to he exercise of the Repurchase Option, the parties or the
investment bank, as the case may be, shall use the average of the thirty (30)
day trading price of Common Stock of the Company as a partial determining
factor, taking into account the limitations, restrictions and payment
preferences of the Management Units. References in this definition to Employee
shall mean Employee's personal representative if he is deceased or
incapacitated.
"LLC Agreement" shall mean the Limited Liability Company Agreement of U-C
Holdings, L.L.C. dated April 25, 1997, as amended and restated from time to
time.
"Management Units" mean: (i) any Class B Management Units acquired by
Employee, and (ii) any equity or debt securities issued or issuable directly or
indirectly with respect to the Employee Class B Management Units referred to in
clause (i) above by any of a conversion, split, distribution or dividend or in
connection with a combination of securities, recapitalization, merger,
consolidation or other reorganization. Management Units shall continue to be
Management Units in the hands of any holder thereof (other than Holdings or any
of its members).
"Sale of Company" shall mean the sale of substantially all of the stock of
Company held by Holdings or the sale of all or substantially all of the assets
of Company.
"Sale of Holdings" shall mean the sale of substantially all of the equity
interest of Holdings or the sale of all or substantially all the assets of
Holdings in Company.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
9. Confidential Information. The Employee acknowledges that the
------------------------
information, observations and data obtained by him while employed by the
Company, or during the due diligence process in connection with Holdings
investment in the Company, concerning the business or affairs of the Company
("Confidential Information") are the property of the Company. Therefore,
Employee agrees that, except in the performance of duties for the Company, he
shall not during the Employment Period or for two (2) years after the
Termination Date, for any reason whatsoever, disclose to any unauthorized person
or use for his own account any Confidential Information without prior written
consent of the Board, except (i) to the extent that the aforementioned matters
become generally known to and available for use by the public other than as a
result of Employee's wrongful acts or omissions to act, (ii) as necessary to
comply with compulsory legal process, provided that Employee shall provide prior
notice to the Company regarding such disclosure and the Company, as applicable,
shall have the right to
7
<PAGE>
contest such disclosure, (iii) as necessary to counsel and other professional
advisors retained by the Employee, subject to the attorney/client privilege or a
valid and binding non-disclosure agreement between Employee and such
professional and (iv) disclosures of information obtained from a third party
free of restrictions or disclosure of information in Employee's possession prior
to the date hereof which was obtained from a source other than the Company or
its predecessors. Employee shall deliver to the Company at the termination of
the Employment Period, all memoranda, notes, plans, records, reports, computer
tapes and software and other documents and data (and copies thereof) relating to
Confidential Information, Work Product or the business of the Company which he
may then possess or have under his control.
10. Inventions and Patents. Employee agrees that all ideas, concepts,
----------------------
marketing strategies, management techniques, product development, methods,
designs, analyses, drawings, reports, and all similar or related information
which relates to the Company's actual or anticipated business, research and
development or existing or future products or services and which are conceived,
developed or made by Employee while employed by the Company ("Work Product")
belong to the Company. Employee will promptly disclose such Work Product to the
Board and perform all actions reasonably requested by the Board (whether during
or after the Employment Period) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
11. Non-Compete, Non-Solicitation.
-----------------------------
(a) Employee acknowledges that in the course of his employment with
the Company he will become familiar with the Company's trade secrets and with
other confidential information concerning the Company and that his services will
be of special, unique and extraordinary value to the Company. Therefore,
Employee agrees that, during the Employment Period and for two years after the
Termination Date, such termination being for any reason whatsoever (the "Non-
Compete Period"), he shall not directly or indirectly manage, control, consult
with or render services as a sales representative for any business competing
with the business of the Company, which is an information or entertainment
network which markets to colleges or universities (the "Business") within any
geographical area in which the Company engages or plans to engage in such
businesses, which is in the United States of America. Notwithstanding the
foregoing, nothing herein shall prohibit Employee from being a passive owner of
not more than 5% of the outstanding stock of any class of a company which is
publicly traded, so long as Employee has no active participation in the
management or the business of such company.
(b) During the Non-Compete Period, Employee shall not directly or
indirectly, on behalf of any Person in the Business solicit, encourage, entice
or induce (or attempt to do any of the foregoing) a customer of Company with
whom Employee had contact while employed with the Company to cease doing
business with Company.
(c) During the Employment Period and for eighteen months thereafter,
Employee shall not directly or indirectly through another entity (i) solicit,
encourage, interview, entice, discuss with or induce or attempt to induce any
employee of the Company to leave the
8
<PAGE>
employ of the Company, or in any way interfere with the relationship between the
Company and any employee thereof, (ii) hire any person who was an employee of
the Company at any time during the Employment Period or (iii) induce or attempt
to induce or attempt to induce any customer, supplier, licensee or other
business relation of the Company to cease doing business with the Company, or in
any way interfere with the relationship between any such customer, supplier,
licensee or business relation and the Company.
(d) Notwithstanding the foregoing, Section 11(a) and (b) shall have no
force and effect and be cancelled if Employee is terminated without Cause prior
to the expiration of the Employment Period; and the Non-Compete Period for
purposes of Section 11(a) and (b) shall be reduced to one (1) year if the
Employment Period is not renewed by the Company.
12. Enforcement. If, at the time of enforcement of paragraphs 9, 10 or 11
-----------
of this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parities hereto agree that
the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope and area.
Because Employee's services are unique and because Employee has access to
Confidential Information and Work Product, the parties hereto agree that money
damages would be an inadequate remedy for any breach of this Agreement.
Therefore, in the event a breach or threatened breach of this Agreement, the
Company or its successors or assigns may, in addition to other rights and
remedies existing in their favor, apply to any court of competent jurisdiction
for specific performance and/or injunctive or other relief in order to enforce,
or prevent any violations of, the provision hereof (without posting a bond or
other security).
13. Employee Representations. Employee hereby represents and warrants to
------------------------
the Company that (i) the execution, delivery and performance of this Agreement
by Employee does not and will not conflict with, breach, violate or cause a
default under any contract, agreement, instrument, order, judgment or decree to
which Employee is a party or by which he is bound, and (ii) Employee is not a
party to or bound by any employment agreement, non-compete agreement or
confidentiality agreement with any other person or entity, which would prohibit
his performance under this Agreement.
14. Survival. Paragraphs 9, 10, 11, 12 and 13 shall survive and continue
--------
in full force in accordance with their terms notwithstanding any termination of
the Employment Period.
15. Notices. Any notice provided for in this Agreement shall be in
-------
writing and shall be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by telecopy or reputable
overnight courier service (charges prepaid) to the recipient at the address or
telecopy number below indicated:
Notices to Holdings:
U-C Holdings, L.L.C.
c/o Willis Stein & Partners, L.P.
227 W. Monroe Street, Suite 4300
Chicago, Illinois 60606
Telecopy No.: (312) 422-2424
9
<PAGE>
Attention: Avy H. Stein
With a copy to:
Morris, Manning & Martin, LLP
3343 Peachtree Road, N.E.
1600 Atlanta Financial Center
Atlanta, Georgia 30326
Telecopy No.: (404) 365-9532
Attention: Neil H. Dickson, Esq.
Notice to Employee:
Thomas Gatti
20 Sutton Place South
New York, New York 10026
Notices to Company:
UC Television Network Corp.
909 Third Avenue, 9th Floor
New York, New York 10022
Telecopy No.: (212) 888-0617
With a Copy to:
Morris, Manning and Martin, LLP
1600 Atlanta Financial Center
3343 Peachtree Road, NE
Telecopy No.: (404) 365-9532
Attention: Neil H. Dickson, Esq.
or such other address or telecopy number or to the attention of such other
person as the recipient party shall have specified by prior written notice to
the sending party. any notice under this Agreement will be deemed to have been
given when so delivered or sent or, if mailed, five days after deposit in the
U.S. mail.
16. Severability. Whenever possible, each provision of this agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
17. Complete Agreement. This Agreement and those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to
10
<PAGE>
the subject matter hereof in any way. This Agreement supersedes any other
employment agreement between Employee and the Company.
18. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which to be an original and all of which taken together
constitute one and the same agreement.
19. Successors and Assigns. This Agreement is intended to bind and inure
----------------------
to the benefit of and be enforceable by all parties and their respective heirs,
successors and assigns, except that Employee may not assign his rights or
delegate his obligations hereunder without the prior written consent of the
Company.
20. Choice of Law. This Agreement will be governed by the internal law,
-------------
and not the laws of conflicts, of the State of Georgia.
21. Amendment and Waiver. The provisions of this Agreement may be amended
--------------------
or waived with the prior written consent of the Company and Employee, and no
course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity binding effect or enforceability of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
UC TELEVISION NETWORK CORP.
By: /s/ Jason Elkin
---------------
Jason Elkin
Chief Executive Officer and Chairman of the
Board
U-C HOLDINGS, L.L.C.
By: Willis Stein & Partners, L.P.
Its: Managing Member
By: Willis Stein & Partners, L.L.C.
Its: General Partner
By:/s/ Beth F. Johnston
--------------------
Its: Manager
/s/ Thomas Gatti
----------------
Thomas Gatti
11
<PAGE>
By Managing Member of U-C Holdings, L.L.C.
as to Section 7(g) hereof
By: Willis Stein & Partners, L.P.
Its: Managing Member
By: Willis Stein & Partners, L.L.C.
-------------------------------
Its: General Partner
By:/s/ Beth F. Johnston
--------------------
Its:Manager
12
<PAGE>
EXHIBIT 10.5
------------
PAYMENT AGREEMENT AND GENERAL RELEASE
-------------------------------------
1. General Release. I, John T. Dobson, III ("Employee"), release,
---------------
dismiss, covenant not to sue and forever discharge College Television Network,
Inc., a Delaware corporation ("CTN") and its majority shareholder, U-C Holdings,
L.L.C. ("Holdings"), a Delaware limited liability company (collectively, all of
the foregoing are referred to as the "Company") and all affiliated corporations,
limited liability companies or partnerships and stockholders, members, managers,
officers, directors, employees, agents, predecessors, successors, transferees
and assigns from any and all actions, causes of action, suits, damages, debts,
claims, counterclaims, obligations and liabilities of whatever nature, known or
unknown, including, but not limited to those actions, causes of action, suits,
damages, debts, claims, counterclaims, obligations and liabilities, resulting or
arising out of, directly or indirectly, the employment relationship between
Employee and the Company (including, but not limited to, claims for
compensation, salary, bonuses, severance pay or other benefits), the termination
of the employment relationship, any promises made to or agreements with Employee
while he was employed at the Company, Employee's ownership, directly or
indirectly, of capital stock in the Company, Employee's ownership or right to
receive equity in Holdings, or the failure to offer employment with the Company,
including, without limitation, by reason of specification, any claims for breach
of contract, failure to hire, wrongful discharge of any kind, and any claims
arising under any federal, state, or local laws or ordinances, including,
without limitation, by reason of specification, the Federal Securities Act of
1933, as amended, the Federal Securities Exchange Act of 1934, as amended, the
Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act
of 1964, the Older Workers Benefits Protection Act, and any common law claims
now or hereafter recognized. Employee does hereby agree and acknowledge that
except for the payments pursuant to Paragraph 3 below, Employee is entitled to
no compensation, benefits or other rights or privileges from the Company.
2. No Admission. Employee agrees and acknowledges that neither this
------------
Agreement nor the Company's offer to enter into this Agreement should be
construed as an admission by the Company that it has acted wrongfully toward the
Employee or any other employee, and that the Company expressly denies any
liability to, or wrongful acts against the Employee on the part of itself, its
employees or its agents.
3. Consideration.
-------------
a. In full consideration and as material inducement for signing this
Agreement, CTN will, upon the expiration of the revocation period set forth in
Paragraph 5(d) herein, pay or provide to Employee the following: (i) $22,917 per
month to be paid at the same time as the other employees of CTN commencing for
the pay period March 7, 1998 ending March 20, 1998 and normally due to be paid
on March 26, 1998 and ending April 25, 2001 (with final payment on April 25,
2001 to be for a pro rata portion of the month up to April 25th); and (ii) CTN
shall permit Employee to continue to receive benefits under CTN's health
insurance policies to the extent permitted by such policies and applicable law,
provided that such insurance
- --------
<PAGE>
coverage can be maintained at a reasonable costs to CTN; and provided further,
--------
that CTN shall only maintain such insurance coverage until the earlier of (y)
the end of the period for which Employee is receiving severance payments
pursuant to subparagraph 3(a)(i) above and (z) the date Employee accepts other
employment. Employee agrees that at any time Company may, in its sole
discretion, prepay the amount owed pursuant to subparagraph 3(a)(i) above and
pay the net present value of such amount based upon a 8.5% annual rate of
return. Such payments shall be subject to normal withholdings required by law
and are subject to Employee's continued compliance with this Agreement.
Notwithstanding the foregoing, as an accommodation to Employee, CTN will pay
Employee two months of pay on April 10, 1998 and will not make any payments to
Employee again until June 5, 1998, which shall be a normal two week payment and
thereafter all payments will be made with normal payroll for other employees of
CTN.
b. Further, in accordance with Employee's Employment Agreement dated
April 29, 1997 (the "Employment Agreement"), Holding's does hereby repurchase
all of the Class A and B Management Units (collectively, the "Units"), as
defined in the Second Amended and Restated Limited Liability Company Agreement
of Holdings dated as of May 15, 1997, as amended (the "LLC Agreement"), held by
Employee and Employee does hereby transfer, assign and sell the Units to
Holdings, free and clear of all liens, encumbrances, options or warrants. The
consideration paid to Employee hereunder for the Units is $500, and Employee
does hereby acknowledge receipt of said $500. Employee represents and warrants
that he does not, directly or indirectly, hold, own or have a beneficial
interest in any equity or securities of the Company, other than as set forth in
Paragraph 3(c) below or common stock of the Company purchased by Employee on the
NASDAQ Exchange.
c. Employee acknowledges that the 333,333 Investor Units, as defined
in the LLC Agreement (the "Investor Units"), held by Employee have not been paid
for by Employee and Employee owes Holdings $333,333.30, plus interest, pursuant
to that certain Promissory Note (the "Note") dated May 12, 1997, which Note is
secured by a pledge of the Investor Units pursuant to that certain Unit Pledge
Agreement between Employee and Holdings dated as of May 12, 1997 (the "Pledge
Agreement"). The parties acknowledge that due to Employee's termination of
employment with the Company, the principal and interest under the Note is now
fully due and payable. Holdings agrees to give Employee until April 6, 1998 to
pay all the principal and interest due under the Note; and, thus, retain the
Investor Units pursuant to and subject to the terms of the LLC Agreement.
Employee and the Company agree that if Employee does not pay the full amount of
the principal and interest due under the Note by April 6, 1998, Employee shall
forfeit the Investor Units, which shall automatically be transferred to
Holdings, free and clear of all liens, claims or encumbrances and the Note and
Pledge Agreement shall be cancelled.
4. Taxes. Employee agrees to pay federal, state or local taxes, if any,
-----
which are required by law to be paid with respect to this settlement. The
Employee further agrees to indemnify and hold the Company harmless from any
claims, demands, deficiencies, levies, assessments, executions, judgments or
recoveries by any governmental entity against the Company for any amounts
claimed due on account of this Agreement and Release or pursuant to
-2-
<PAGE>
claims made under any federal or state tax laws, and any costs, expenses or
damages sustained by the Company by reason of any such claims, including any
amounts paid by the Company as taxes, attorneys' fees, deficiencies, levies,
assessments, fines, penalties, interest or otherwise.
5. Compliance with Law. Employee hereby acknowledges and agrees that this
-------------------
Agreement and the termination of his employment or the failure to offer
employment and all actions taken in connection therewith are in compliance with
the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights
Act of 1964, and the Older Workers Benefits Protection Act, and that the release
set forth in Paragraph 1 hereof shall be applicable, without limitation, to any
claims brought under these Acts. Employee further acknowledges and agrees that:
a. The release given by the Employee in this Agreement is given
solely in exchange for the consideration set forth in Paragraph 3 of this
Agreement and such consideration is in addition to anything of value to which
the Employee received prior to entering into this Agreement;
b. Employee has consulted or has had an opportunity to consult an
attorney prior to entering into this Agreement;
c. Employee has had at least twenty-one (21) days from March 16, 1998
within which to consider this Agreement and Release or has waived such
requirement;
d. For a period of seven (7) days following execution of this
Agreement, the Employee may revoke this Agreement and this Agreement shall not
become effective or enforceable until such seven (7) day period has expired.
6. Confidentiality.
---------------
a. Employee agrees to keep confidential the terms of this Agreement
and the transactions or events which led to its execution, and Employee
covenants not to disclose this information to any other person, except that
Employee may disclose the terms of this Agreement to the Internal Revenue
Service, his attorneys, his financial advisors, and his immediate family
members, who shall be informed of the confidential nature of the information.
If Employee is compelled to disclose this Agreement pursuant to service of a
subpoena on him, Employee shall immediately provide written notice to the
Company and shall not make any such disclosure for ten (10) business days in
order to give the Company an opportunity to seek an appropriate protective
order, unless disclosure is required sooner than ten (10) business days by court
order, rule, or regulation, in which case disclosure will not be made by such
party before the time required by such court order, rule, or regulation.
b. Employee agrees that he will not, without the prior written
consent of the Company, make or cause to be made any oral or written statements
to any person, firm, corporation or governmental or other entity which reflect
negatively on the Company or any of its direct and indirect parents,
subsidiaries, affiliates, related companies, successors and assigns,
-3-
<PAGE>
or on its and their directors, officers, members, and employees, or which could
reasonably be understood to be detrimental to the business interests of the
Company or any of its direct and indirect parents, subsidiaries, affiliates,
related companies, successors and assigns, or to its and their directors,
officers, members, and employees.
c. Employee acknowledges that the receipt of the consideration set
forth in Paragraph 3(a) is conditioned on Employee's compliance with this
Paragraph 6 and the other terms and provisions of this Agreement.
7. No Assignment of Claims and No Claim Filed. Employee represents and
------------------------------------------
warrants that he has not heretofore assigned or transferred to any person not a
party to this Agreement any claim being released by this Agreement or any part
or portion thereof and that he shall defend, indemnify, and hold harmless the
Company from and against any claim (including the payment of attorneys' fees and
costs actually incurred whether or not litigation is commenced) based on or in
connection with or arising out of any such assignment or transfer. Employee
further represents and warrants that neither he nor his attorneys have made any
allegations to, or have filed any complaints, charges, or lawsuits with any
court or government agency relating to any matters being released by Employee in
this Agreement, including matters arising out of Employee's employment with the
Company or the termination of such employment, and that neither he nor his
attorneys shall file any complaints, charges, or lawsuits, at any time
hereafter, arising out of such released claims.
8. Return of Documents. Contemporaneously with the delivery of the
-------------------
executed Agreement, Employee, his attorneys, their agents, and all persons
acting on their behalf, shall deliver to the Company all non-public documents
and materials that relate to the Company, if any.
9. Choice of Law. The rights and obligations of the parties hereunder
-------------
shall be construed and enforced in accordance with, and governed by, the laws of
the State of Georgia, without regard to principles of conflict of laws.
10. Employment Agreement. The parties hereto do hereby agree that the
--------------------
provisions in Sections 9, 10, 11, 12 and 13 of the Employment Agreement shall
remain and continue in full force and effect in accordance with their terms.
Employee has been terminated and resigns as an officer and director of the
Company effective as of March 16, 1998.
11. Future Equity. Employee hereby waives, cancels and terminates any
-------------
right to receive any additional equity or securities in the Company or related
entities, including, but not limited to, the rights (if any) pursuant to that
certain Amended and Restated Equity Allocation Agreement dated November 11, 1997
among the Company, Jason Elkin, Joe Gersh and Employee and Employee waives the
right to allocate the Class B Management Units set forth in the LLC Agreement.
12. Knowledgeable Decision by Employee. Employee has read all of the
----------------------------------
terms of this Agreement and has had an opportunity to discuss it with
individuals of Employee's own choice
-4-
<PAGE>
who are not associated with the Company. Employee understands the terms of this
Agreement and that this Agreement releases forever the Company from any legal
action arising from Employee's employment relationship, any promises or
agreements with Employee while he was employed at the Company, any rights he has
as a shareholder of CTN or equityholder or member of Holdings, the termination
of this employment relationship or the failure to offer employment with the
Company. Employee signs this Agreement of his own free will in exchange for the
consideration to be given to Employee, which Employee acknowledges is adequate
and satisfactory. Neither the Company nor its agents, representatives or
employees have made any representations to Employee concerning the terms or
effects of this Agreement, other than those contained in this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement this 21st
day of March, 1998.
EMPLOYEE:
/s/ John T. Dobson, III
-----------------------
JOHN T. DOBSON, III
COMPANY:
COLLEGE TELEVISION NETWORK, INC.
By: /s/ Jason Elkin
---------------
Its: Chief Executive Officer
U-C HOLDINGS, L.L.C.
By: Willis Stein & Partners, L.P.
Its: Managing Member
By: Willis Stein & Partners, L.L.C.
Its: General Partner
By: /s/ Beth F. Johnston
--------------------
Beth F. Johnston
Its: Manager
-5-
<PAGE>
EXHIBIT 10.6
------------
PAYMENT AGREEMENT AND GENERAL RELEASE
-------------------------------------
1. General Release. I, Joseph D. Gersh ("Employee"), release, dismiss,
---------------
covenant not to sue and forever discharge College Television Network, Inc., a
Delaware corporation ("CTN") and its majority shareholder, U-C Holdings, L.L.C.
("Holdings"), a Delaware limited liability company (collectively, all of the
foregoing are referred to as the "Company") and all affiliated corporations,
limited liability companies or partnerships and stockholders, members, managers,
officers, directors, employees, agents, predecessors, successors, transferees
and assigns from any and all actions, causes of action, suits, damages, debts,
claims, counterclaims, obligations and liabilities of whatever nature, known or
unknown, including, but not limited to those actions, causes of action, suits,
damages, debts, claims, counterclaims, obligations and liabilities, resulting or
arising out of, directly or indirectly, the employment relationship between
Employee and the Company (including, but not limited to, claims for
compensation, salary, bonuses, severance pay or other benefits), the termination
of the employment relationship, any promises made to or agreements with Employee
while he was employed at the Company, Employee's ownership, directly or
indirectly, of capital stock in the Company, Employee's ownership or right to
receive equity in Holdings, or the failure to offer employment with the Company,
including, without limitation, by reason of specification, any claims for breach
of contract, failure to hire, wrongful discharge of any kind, and any claims
arising under any federal, state, or local laws or ordinances, including,
without limitation, by reason of specification, the Federal Securities Act of
1933, as amended, the Federal Securities Exchange Act of 1934, as amended, the
Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act
of 1964, the Older Workers Benefits Protection Act, and any common law claims
now or hereafter recognized. Employee does hereby agree and acknowledge that
except for the payments pursuant to Paragraph 3 below, Employee is entitled to
no compensation, benefits or other rights or privileges from the Company.
2. No Admission. Employee agrees and acknowledges that neither this
------------
Agreement nor the Company's offer to enter into this Agreement should be
construed as an admission by the Company that it has acted wrongfully toward the
Employee or any other employee, and that the Company expressly denies any
liability to, or wrongful acts against the Employee on the part of itself, its
employees or its agents. Employee acknowledges and agrees that he has no
disagreement with the Company in connection with his resignation as an officer
and director.
3. Consideration.
-------------
a. In full consideration and as material inducement for signing this
Agreement, CTN will, upon the expiration of the revocation period set forth in
Paragraph 5(d) herein, pay or provide to Employee the following: (i) $18,333.33
per month to be paid at the same time as the other employees of CTN commencing
as of February 19, 1999 and ending as of April 28, 2001 which payments shall
continue even if Employee dies; and (ii) CTN shall permit Employee and his
dependents to continue to receive benefits under CTN's health and dental
insurance policies to the extent permitted by such policies and applicable law,
and provided further, that CTN shall only maintain such insurance coverage until
--------
the earlier of (y) April 28, 2001 and (z) the date Employee accepts other
employment, which insurance shall continue for Employee's dependents after his
death, for the time period set forth above, but no later than April 28,
<PAGE>
2001. Employee agrees that at any time Company may, in its sole discretion,
prepay the amount owed pursuant to subparagraph 3(a)(i) above and pay the net
present value of such amount based upon a 8.5% annual rate of return. Such
payments shall be subject to normal withholdings required by law and are subject
to Employee's continued compliance with this Agreement.
b. Further, in accordance with Employee's Employment Agreement dated
April 29, 1997 (the "Employment Agreement"), Holding's does hereby repurchase
400 of the Class A Management Units (collectively, the "Units"), as defined in
the Second Amended and Restated Limited Liability Company Agreement of Holdings
dated as of May 15, 1997, as amended (the "LLC Agreement"), held by Employee and
Employee does hereby transfer, assign and sell the Units to Holdings, free and
clear of all liens, encumbrances, options or warrants. The consideration paid to
Employee hereunder for the Units is $400, and Employee does hereby acknowledge
receipt of said $400. The Units shall be placed in the Pool established
pursuant to the LLC Agreement and that certain Amended and Restated Equity
Allocation Agreement dated November 30, 1997 among Employee, Jason Elkin, John
Dobson, the Company and Holdings. Employee shall be entitled to retain 100
Class A Management Units and the 35 Class R Management Units (the "Retained
Units"), which Retained Units shall be fully vested and not subject to
repurchase or the restrictions set forth in Section 7 of the Employment
Agreement. Employee represents and warrants that he does not, directly or
indirectly, hold, own or have a beneficial interest in any other equity or
securities of the Company, other than the Retained Units, the options referred
to in Paragraph 3d. below or common stock of the Company purchased by Employee
on the NASDAQ Exchange.
c. Employee acknowledges that the 333,333 Investor Units, as defined
in the LLC Agreement (the "Investor Units"), held by Employee have not been paid
for by Employee and Employee owes Holdings $333,333.30, plus interest, pursuant
to that certain Promissory Note (the "Note") dated May 12, 1997, and $188,704,
plus interest, pursuant to that certain Promissory Note dated October 2, 1998
(the "Second Note"), which Note and Second Note are secured by a pledge of the
Investor Units pursuant to that certain Unit Pledge Agreement between Employee
and Holdings dated as of May 12, 1997, as amended pursuant to that certain
Amended and Restated Unit Pledge Agreement dated October 2, 1998 (the "Pledge
Agreement"). Employee, the Company and Holdings agree that Employee shall
forfeit the Investor Units, which are hereby transferred to Jason Elkin, free
and clear of all liens, claims or encumbrances, the Note, the Second Note and
Pledge Agreement shall be cancelled and Employee shall have no further
obligations thereunder, shall be released therefrom and Jason Elkin shall assume
such obligations. The Note and Second Note shall be returned to Employee marked
"Paid."
d. Contemporaneously herewith Employee shall be granted an option to
purchase 100,000 shares of the common stock of the Company with an exercise
price of $2.75 per share, which shall be immediately exercisable and shall have
a term of five (5) years. The Company agrees to amend its current S-8
Registration Statement to include the option share within 120 days after the
date hereof.
4. Taxes. Employee agrees to pay federal, state or local taxes, if any,
-----
which are required by law to be paid with respect to this settlement. The
Employee further agrees to indemnify and hold the Company harmless from any
claims, demands, deficiencies, levies, assessments, executions, judgments or
recoveries by any governmental entity against the
-2-
<PAGE>
Company for any amounts claimed due on account of this Agreement and Release or
pursuant to claims made under any federal or state tax laws, and any costs,
expenses or damages sustained by the Company by reason of any such claims,
including any amounts paid by the Company as taxes, attorneys' fees,
deficiencies, levies, assessments, fines, penalties, interest or otherwise.
5. Compliance with Law. Employee hereby acknowledges and agrees that this
-------------------
Agreement and the termination of his employment or the failure to offer
employment and all actions taken in connection therewith are in compliance with
the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights
Act of 1964, and the Older Workers Benefits Protection Act, and that the release
set forth in Paragraph 1 hereof shall be applicable, without limitation, to any
claims brought under these Acts. Employee further acknowledges and agrees that:
a. The release given by the Employee in this Agreement is given
solely in exchange for the consideration set forth in Paragraph 3 of this
Agreement and such consideration is in addition to anything of value to which
the Employee received prior to entering into this Agreement;
b. Employee has consulted or has had an opportunity to consult an
attorney prior to entering into this Agreement;
c. Employee waives the requirement that he have twenty-one (21) days
to consider this Agreement and Release;
d. For a period of seven (7) days following execution of this
Agreement, the Employee may revoke this Agreement and this Agreement shall not
become effective or enforceable until such seven (7) day period has expired.
6. Confidentiality.
---------------
a. Employee agrees to keep confidential the terms of this Agreement
and the transactions or events which led to its execution, and Employee
covenants not to disclose this information to any other person, except that
Employee may disclose the terms of this Agreement to the Internal Revenue
Service, his attorneys, his financial advisors, and his immediate family
members, who shall be informed of the confidential nature of the information.
If Employee is compelled to disclose this Agreement pursuant to service of a
subpoena on him, Employee shall immediately provide written notice to the
Company and shall not make any such disclosure for ten (10) business days in
order to give the Company an opportunity to seek an appropriate protective
order, unless disclosure is required sooner than ten (10) business days by court
order, rule, or regulation, in which case disclosure will not be made by such
party before the time required by such court order, rule, or regulation.
b. Employee agrees that he will not, without the prior written
consent of the Company, make or cause to be made any oral or written statements
to any person, firm, corporation or governmental or other entity which reflect
negatively on the Company or any of its direct and indirect parents,
subsidiaries, affiliates, related companies, successors and assigns, or on its
and their directors, officers, members, and employees, or which could reasonably
be understood to be detrimental to the business interests of the Company or any
of its direct and
-3-
<PAGE>
indirect parents, subsidiaries, affiliates, related companies,
successors and assigns, or to its and their directors, officers, members, and
employees.
c. Employee acknowledges that the receipt of the consideration set
forth in Paragraph 3(a) is conditioned on Employee's compliance with this
Paragraph 6 and the other terms and provisions of this Agreement.
7. No Assignment of Claims and No Claim Filed. Employee represents and
------------------------------------------
warrants that he has not heretofore assigned or transferred to any person not a
party to this Agreement any claim being released by this Agreement or any part
or portion thereof and that he shall defend, indemnify, and hold harmless the
Company from and against any claim (including the payment of attorneys' fees and
costs actually incurred whether or not litigation is commenced) based on or in
connection with or arising out of any such assignment or transfer. Employee
further represents and warrants that neither he nor his attorneys have made any
allegations to, or have filed any complaints, charges, or lawsuits with any
court or government agency relating to any matters being released by Employee in
this Agreement, including matters arising out of Employee's employment with the
Company or the termination of such employment, and that neither he nor his
attorneys shall file any complaints, charges, or lawsuits, at any time
hereafter, arising out of such released claims.
8. Return of Property. Contemporaneously with the delivery of the
------------------
executed Agreement, Employee, his attorneys, their agents, and all persons
acting on their behalf, shall deliver to the Company all non-public documents
and materials that relate to the Company, if any and all property of the Company
in his possession, other than the laptop computer which he currently uses, which
he may keep at no cost.
9. Choice of Law. The rights and obligations of the parties hereunder
-------------
shall be construed and enforced in accordance with, and governed by, the laws of
the State of Georgia, without regard to principles of conflict of laws.
10. Employment Agreement. The parties hereto do hereby agree that the
--------------------
Employment Agreement is terminated, except for the provisions in Sections 9, 10,
11, 12, 13 and 15 through 21 of the Employment Agreement shall remain and
continue in full force and effect in accordance with their terms. Employee
resigns as an officer and director of the Company effective as of February 19,
1999.
11. Future Equity. Employee hereby waives, cancels and terminates any
-------------
right to receive any additional equity or securities in the Company or related
entities, including, but not limited to, the rights (if any) pursuant to that
certain Amended and Restated Equity Allocation Agreement dated November 11, 1997
among the Company, Jason Elkin, Joe Gersh and Employee.
12. Knowledgeable Decision by Employee. Employee has read all of the
----------------------------------
terms of this Agreement and has had an opportunity to discuss it with
individuals of Employee's own choice who are not associated with the Company.
Employee understands the terms of this Agreement and that this Agreement
releases forever the Company from any legal action arising from Employee's
employment relationship, any promises or agreements with Employee while he was
employed at the Company, any rights he has as a shareholder of CTN or
equityholder or member of Holdings, the termination of this employment
relationship or the failure to offer employment
-4-
<PAGE>
with the Company. Employee signs this Agreement of his own free will in exchange
for the consideration to be given to Employee, which Employee acknowledges is
adequate and satisfactory. Neither the Company nor its agents, representatives
or employees have made any representations to Employee concerning the terms or
effects of this Agreement, other than those contained in this Agreement.
EMPLOYEE ACKNOWLEDGES THAT HE HAS HAD THE OPPORTUNITY TO OR HAS RETAINED
LEGAL COUNSEL. THE PARTIES HERETO ACKNOWLEDGE THAT MORRIS, MANNING & MARTIN,
L.L.P. REPRESENTS THE COMPANY IN THIS MATTER AND ALL PARTIES WAIVE ANY CONFLICT
OF INTEREST OF MORRIS, MANNING & MARTIN, L.L.P. DUE TO THE FACT THAT MORRIS,
MANNING & MARTIN, L.L.P. HAS REPRESENTED EMPLOYEE IN THE PAST.
IN WITNESS WHEREOF, the undersigned have executed this agreement this 19th
day of February, 1999.
EMPLOYEE:
/s/ Joseph D. Gersh
-------------------
JOSEPH D. GERSH
COMPANY:
COLLEGE TELEVISION NETWORK, INC.
By: /s/ Jason Elkin
---------------
Its: Chief Executive Officer
U-C HOLDINGS, L.L.C.
By: Willis Stein & Partners, L.P.
Its: Managing Member
By: Willis Stein & Partners, L.L.C.
Its: General Partner
By: /s/ Beth F. Johnston
--------------------
Beth F. Johnston
Its: Manager
-5-
<PAGE>
EXHIBIT 10.7
------------
CONSULTING AGREEMENT
--------------------
THIS CONSULTING AGREEMENT is made as of March 1, 1999, between College
Television Network, Inc., a Delaware corporation (the "Network"), and C. Thomas
McMillen ("Consultant").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Consulting Relationship. The Network hereby hires Consultant upon the
-----------------------
terms and conditions set forth in this Agreement for the period beginning on the
date hereof and ending as provided in Paragraph 4 hereof (the "Consulting
Period").
2. Position and Duties.
-------------------
During the Consulting Period, Consultant shall provide services to the
Network in connection with sales and promotions and shall devote his best
business and professional efforts to the conduct of the Network's business, and
shall devote an average of one (1) hour per business day to the business of the
Network. Consultant shall provide the Network with a monthly written report of
services provided each month within ten (10) days after the end of each month.
Including, but not limited to the foregoing, Consultant shall perform the
following services.
(i) assist the Network in obtaining permission from additional
colleges and universities to install its equipment in their common areas;
(ii) assist the Network in expanding its programming to
additional markets, such as international and military; and
(iii) attempt to secure advertising sales from contacts of
Consultant.
3. Base Compensation and Benefits.
------------------------------
(a) Consultant shall receive a percentage commission (the "Commission
Bonus") equal to ten percent (10%) of any net revenue (after any applicable
agency fees) actually received by the Network from new sales procured by
Consultant for the Network, which is entered into during the Consulting Period
("Commissionable Receipts"). The Commission Bonus shall be paid to Consultant
monthly for Commissionable Receipts for the previous month. The Network shall
provide an accounting of earned Commission Bonuses to Consultant on a monthly
basis during the Consulting Period and at least every twelve (12) months after
the Consulting Period has expired. After the Expiration Date, Consultant shall
be entitled to the ten percent (10%) Commission Bonus for the remaining term of
any advertising contract in existence
<PAGE>
on the Expiration Date, and a five percent (5%) Commission Bonus (rather than
10%) for the first written renewal contract for an advertiser for which
Consultant previously was paid a Commission Bonus during the Consulting Period
of this Agreement. In addition to the Commission Bonus, if Commissionable
Receipts during the Term of this Agreement exceed $500,000, Consultant shall
receive an additional $10,000 bonus and if the Commissionable Receipts during
the Term of this Agreement exceed $1,000,000, Consultant shall receive an
additional $25,000 bonus.
(b) The services to be provided by Consultant include assistance to
the Network in adding installations at military bases. If Consultant is
successful in this goal, the Network agrees to pay Consultant as a one-time
bonus $1.00 for each verified military viewer which allows the Network to
present to advertisers as increased total viewership (the "Military Bonus"), as
of the date of the agreement of the United States military to allow the Network
to install its systems. The Military Bonus shall be a one-time bonus, and shall
be paid on the date of substantial installation of the Network's system,
provided that the system must remain installed for at least twelve (12) months.
(c) During the Term of this Agreement, Consultant shall be paid $5,000
per month on the first day of each month commencing on March 1, 1999 as a draw
against the Commission Bonus and Military Bonus (the "Draw"). The Draw shall be
recouped out of the Commission Bonus and Military Bonus and shall be reconciled
on each anniversary of this Agreement or the termination of this Agreement
(whichever is sooner). Consultant shall not be liable for any Draw in excess of
Commission Bonus upon termination of this Agreement.
(d) The Network shall reimburse Consultant for all reasonable pre-
approved expenses incurred in the course of performing the duties under this
Agreement in accordance with the Network's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Network's requirements with respect to reporting and documentation of such
expenses.
4. Term. The "Consulting Period" shall commence on March 1, 1999 (the
----
"Effective Date") and shall terminate upon thirty (30) days written notice by
either party to the other (the "Expiration Date").
5. Confidential Information. The Consultant acknowledges that the
------------------------
information, observations and data obtained while performing services for the
Network concerning the business or affairs of the Network ("Confidential
Information") are the property of the Network. Therefore, Consultant agrees
that, except in the performance of duties for the Network, that Consultant shall
not during the Consulting Period or for two (2) years after the termination of
this Agreement, for any reason whatsoever, disclose to any unauthorized person
or use for its or his own account any Confidential Information without prior
written consent of the Network, except (i) to the extent that the aforementioned
matters become generally known to and available for use by the public other than
as a result of Consultant's wrongful acts or wrongful omissions to act, (ii) as
necessary to comply with compulsory legal process, provided that Consultant
shall provide prior notice to the extent possible regarding such disclosure,
(iii) as necessary to counsel
2
<PAGE>
and other professional advisors retained by the Consultant, subject to the
attorney/client privilege or a valid and binding non-disclosure agreement
between Consultant and such professional and (iv) disclosures of information
obtained, to Consultant's knowledge from a third party free of restrictions or
disclosure of information in Consultant's possession which was obtained from a
source other than the Network or its predecessors. Consultant shall deliver, at
the Network's request and expense, to the Network at the termination of this
Agreement, all memoranda, notes, plans, records, reports, computer tapes and
software and other documents and data (and copies thereof) relating to
Confidential Information or the business of the Network which it, may then
possess or have under its or his control.
6. Inventions and Patents. Consultant agrees that all ideas, concepts,
----------------------
marketing strategies, management techniques, product development, methods,
designs, analyses, drawings, reports, and all similar or related information
which relates to the Network's actual or anticipated business, research and
development or existing or future products or services and which are conceived,
developed or made by Consultant, while providing services for the Network ("Work
Product") belong to the Network. Consultant will promptly disclose such Work
Product to the Network and perform all actions reasonably requested by the
Network (whether during or after the Consulting Period) to establish and confirm
such ownership (including, without limitation, assignments, consents, powers of
attorney and other instruments).
7. Non-Compete, Non-Solicitation.
-----------------------------
(a) Consultant acknowledges that in the course of providing services
for the Network he will become familiar with the Network's trade secrets and
with other confidential information concerning the Network and that their
services will be of special, unique and extraordinary value to the Network.
Therefore, Consultant agrees that, during the Consulting Period and for two
years after the termination of this Agreement, such termination being for any
reason whatsoever (the "Non-Compete Period"), he shall not directly or
indirectly manage, control, consult with or render services as an advisor,
consultant, officer or salesperson for any business competing with the business
of the Network, which is an information or entertainment network which has as
its primary business, marketing to colleges or universities (and military bases
if Consultant assists the Network in its expansion) (the "Business") within any
geographical area in which the Network engages or plans to engage in such
businesses, which is in the United States of America. Notwithstanding the
foregoing, nothing herein shall prohibit Consultant, from being a passive owner
of not more than 5% of the outstanding stock of any class of a company which is
publicly traded that competes with the Business, so long as Consultant has no
active participation in the management or the business of such company.
(b) During the Non-Compete Period, Consultant shall not directly or
indirectly, on behalf of any Person in the Business solicit, encourage, entice
or induce (or attempt to do any of the foregoing) a customer of Network with
whom Consultant had contact while providing services for the Network to cease
doing business with Network.
(c) During the Consulting Period and for eighteen months thereafter,
Consultant shall not directly or indirectly through another entity (i) knowingly
solicit, encourage,
3
<PAGE>
interview, entice, discuss with or induce or attempt to induce any employee of
the Network to leave the employ of the Network, or in any way interfere with the
relationship between the Network and any employee thereof, (ii) knowingly hire
any person who was an employee of the Network at any time during the Consulting
Period or (iii) knowingly induce or attempt to induce any customer, supplier,
licensee or other business relation of the Network to cease doing business with
the Network, or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and the Network.
8. Enforcement. If, at the time of enforcement of paragraphs 5, 6 or 7 of
-----------
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope and area.
Because Consultants' services are unique and because the Consultant has access
to Confidential Information and Work Product, the parties hereto agree that
money damages would be an inadequate remedy for any breach of this Agreement.
Therefore, in the event a breach or threatened breach of this Agreement, the
Network or its successors or assigns may, in addition to other rights and
remedies existing in their favor, apply to any court of competent jurisdiction
for specific performance and/or injunctive or other relief in order to enforce,
or prevent any violations of, the provision hereof (without posting a bond or
other security).
9. Consultant Representations. Consultant hereby represents and warrants
--------------------------
to the Network that (i) the execution and performance of this Agreement by
Consultant does not and will not conflict with, breach, violate or cause a
default under any contract, agreement, instrument, order, judgment or decree to
which Consultant is a party or by which he is bound, and (ii) Consultant is not
a party to or bound by any consulting agreement, employment agreement, non-
compete agreement or confidentiality agreement with any other person or entity,
which would prohibit his performance under this Agreement.
10. Notices. Any notice provided for in this Agreement shall be in
-------
writing and shall be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by telecopy or reputable
overnight courier service (charges prepaid) to the recipient at the address or
telecopy number below indicated:
Notice to Consultant:
C. Thomas McMillen
666 11th Street, N.W.
Washington, D.C. 20001
Notices to Network:
College Television Network, Inc.
5784 Lake Forrest Drive, Suite 275
Atlanta, Georgia 30328
Telecopy No.: (404) 257-9517
Attention: Jason Elkin
4
<PAGE>
With a Copy to:
Morris, Manning and Martin, LLP
1600 Atlanta Financial Center
3343 Peachtree Road, NE
Telecopy No.: (404) 365-9532
Attention: Neil H. Dickson, Esq.
or such other address or telecopy number or to the attention of such other
person as the recipient party shall have specified by prior written notice to
the sending party. Any notice under this Agreement will be deemed to have been
given when so delivered or sent or, if mailed, five days after deposit in the
U.S. mail.
11. Severability. Whenever possible, each provision of this agreement
------------
will be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
12. Complete Agreement. This Agreement embodies the complete agreement
------------------
and understanding among the parties and supersede and preempt any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way. This
Agreement supersedes any previous Consulting Agreements between Consultant and
the Network.
13. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which to be an original and all of which taken together
constitute one and the same agreement.
14. Successors and Assigns. This Agreement is intended to bind and inure
----------------------
to the benefit of and be enforceable by all parties and their respective heirs,
successors and assigns, except that Consultant may not assign his rights or
delegate his obligations hereunder without the prior written consent of the
Network.
15. Amendment and Waiver. The provisions of this Agreement may be amended
--------------------
or waived with the prior written consent of the Network and Consultant, and no
course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement.
16. Independent Contractor. Consultant does hereby agree and acknowledge
----------------------
that he is an independent contractor, which controls his own day to day
activities and are not employees, joint venturers or partners of the Network.
Further Consultant shall not have the ability to bind Network and all
advertising sold must be approved by the Network. Consultant shall indemnify
and hold harmless the Network for any taxes owed by Consultant which may be
assessed against the Network.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COLLEGE TELEVISION NETWORK, INC.
By:/s/ Jason Elkin
---------------
Its:Chief Executive Officer
CONSULTANT:
/s/ C. Thomas McMillen
----------------------
C. Thomas McMillen
6
<PAGE>
EXHIBIT 10.8
------------
CONSULTING AND EQUITY PURCHASE AGREEMENT
----------------------------------------
THIS AGREEMENT made as of March 26, 1999 between College Television
Network, Inc., a Delaware corporation (the "Company"), U-C Holdings, L.L.C., a
Delaware limited liability company ("Holdings") and Sergio Zyman ("Consultant").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Consulting Relationship. The Company hereby hires Consultant upon the
-----------------------
terms and conditions set forth in this Agreement for the period beginning on the
date hereof and ending as provided in Paragraph 3 hereof (the "Consulting
Period")
2. Position and Duties.
-------------------
(a) During the Consulting Period, Consultant shall provide services to
the Chief Executive Officer of the Company in connection with the development,
branding, expansion, direction, operation, management and sales of the Company
and shall devote his best business and professional efforts to the conduct to
the Company's business. In addition, Consultant shall advise and assist the
Company on international matters. Consultant will also assist the Company in
creating and analyzing acquisition options and exit strategies. Further,
through his contacts, Consultant agrees to assist the Company, on an as needed
basis based upon the time limits set forth above, in sales to major advertisers.
Consultant, shall be available to have discussions with the Chief Executive
Officer of the Company at least three (3) times per month and the Company agrees
that the only employee of the Company other than the Board members, that shall
have contact with Consultant shall be the Chief Executive Officer, unless so
agreed upon by Consultant.
3. Term. The Consulting Period shall commence February 4, 1999 (the
----
"Effective Date") and end upon ninety (90) days written notice by either party
to the other party (the "Expiration Date").
4. Compensation.
------------
(a) Consultant shall receive a cash payment up to ten percent (10%)
(the exact percentage shall be agreed upon and negotiated by the Chief Executive
Officer of the Company and Consultant) of all increases in revenue of the
Company (as agreed upon by the Chief Executive Officer of the Company and
Consultant) in which Consultant assisted the Company in developing, achieving
and/or closing ("Cash Bonus"). The Cash Bonus shall be paid based upon revenue
actually received and shall be paid to Consultant monthly from such receipts for
the previous month. The Cash Bonus shall also be paid on renewals of sales for
----
which Consultant was 100% responsible for the revenue. This Agreement must
still be in effect for Consultant to receive the Cash Bonus.
<PAGE>
(b) If Consultant obtains a purchaser for the Company, which
transaction is accepted by the Company and closed, he will receive a broker's
fee on a non-cumulative basis equal to the following amounts based upon the
value of the transaction:
<TABLE>
<CAPTION>
Consideration Received Broker's Fee
by the Company Percentage
---------------------------- --------------
<S> <C>
$150,000,000 or less 1%
$150,000,000 to $300,000,000 2%
Over $300,000,000 3%
</TABLE>
Such commission shall be paid on a tier basis in that if there is a
sale created by Consultant for $500,000,000, Consultant shall receive 1% of the
first $150,000,000 2% of the next $150,000,000 and 3% of the last $200,000,000,
for a total fee of $10,500,000. In determining the consideration received by
the Company, the market value of any freely tradable securities shall be
included in such consideration.
(c) In addition to the above compensation, Consultant shall be
entitled to receive 50 Class B Management Unit in Holdings for each $5,000,000
in increase in revenue received by the Company based upon the assistance,
development and contacts of Consultant. This compensation bonus shall be based
upon the actual revenue received by the Company. Consultant must still be a
Board member to receive any Class B Management Units.
(d) Other than the normal benefits received by a Board member of the
Company, including reimbursement of first class airfare, accommodations and
other travel expenses, Consultant shall not be entitled to any other benefits or
compensation from the Company.
5. Management Units, Restriction on Transfer and Repurchase Option.
---------------------------------------------------------------
(a) In addition to all compensation to Consultant pursuant to
Paragraph 4 above, Consultant shall receive two hundred (200) Class B Management
Units of Holdings at a price of $200.00 ("Original Cost"). Except as otherwise
provided below, the Management Units will become vested and owned by Consultant,
over the 12 month period after the date hereof, if as of such anniversary date,
Consultant is still a Board member of the Company and this Agreement has not
been terminated. Upon a Sale of the Company or a Sale of Holdings, all of the
Management Units, which have not yet become vested shall become vested at the
time of such event. All of the Management Units which have become vested
pursuant to this paragraph 5(a) are referred to herein as "Vested Management
Units", and all unvested Management Units are referred to herein as "Unvested
Management Units."
(b) General Repurchase Option. Upon the occurrence of the Expiration
-------------------------
Date the Management Units (whether held by Consultant or one or more of
Consultant's Permitted
2
<PAGE>
Transferees) shall be subject to repurchase by Holdings pursuant to the terms
and conditions set forth in this Paragraph 5 (the "Repurchase Option").
(c) Purchase Price for Management Units. Subject to paragraph 5(h)
-----------------------------------
below, the purchase price for the Vested Management Units shall be the Fair
Market Value for such Management Units, as of the Expiration Date and the
purchase price for Unvested Management Units shall be the Original Cost for such
Unvested Management Units.
(d) Repurchase Option. As set forth above, Holdings may elect to
-----------------
purchase the applicable Management Units by delivering written notice (the
"Holdings Repurchase Notice") to the holder or holders of such Management Units
within 90 days after the Expiration Date. The Repurchase Notice will set forth
the number of such Management Units to be acquired from each holder, the
aggregate consideration to be paid for such Management Units and the time and
place for the closing of the transaction. The number of such Management Units to
be repurchased by Holdings shall first be satisfied to the extent possible from
the Unvested Management Units held by Consultant at the time of delivery of the
Repurchase Notice. If the number of such Management Units then held by
Consultant is less than the total number of Management Units Holdings has
elected to purchase, Holdings shall purchase the remaining Management Units
elected to be purchased from the other holder(s) of such Management Units under
this paragraph 5, pro rata according to the number of such Management Units held
by such other holder(s), respectively, at the time of delivery of the Repurchase
Notice (determined as nearly as practicable to the nearest unit or other
applicable denomination).
(e) Closing. Subject to paragraph 5(f) below, the closing of the
-------
purchase of the applicable Management Units pursuant to the Repurchase Option
shall take place on the date designated by Holdings in the Repurchase Notice,
which date shall not be more than 60 days nor less than five days after the
later of (i) the delivery of such notice(s); or (ii) the Fair Market Valuation
Date, if applicable. Payment for such Management Units to be purchased pursuant
to the Repurchase Option shall be made by Holdings in four (4) equal
installments, the first installment payable on the closing of such purchase, the
second payable four (4) months after the closing, the third payable eight (8)
months after the closing and the fourth payable twelve (12) months after the
closing, each such payment made by check or wire transfer of funds, at the
option of Holdings. Notwithstanding anything to the contrary contained in this
Agreement, Holdings may withdraw their Repurchase Notice at any time prior to
the closing of a purchase of such Management Units pursuant to the Repurchase
Option.
(f) Termination of Repurchase Option. The right of Holdings to
--------------------------------
repurchase Management Units pursuant to this paragraph 5 shall terminate upon
the first to occur of (i) the Sale of Holdings, or (ii) the Sale of the Company.
The Repurchase Option set forth in this paragraph 6 will continue with respect
to such Management Units following any transfer thereof other than a transfer to
Holdings.
(g) Repurchase Restrictions. Notwithstanding anything to the contrary
-----------------------
contained in this Agreement, all repurchases of Management Units by Holdings
shall be subject to applicable restrictions contained in the General Corporate
Law of the State of Delaware. If any
3
<PAGE>
such restrictions prohibit the repurchase of the Management Units hereunder
which Holdings is otherwise entitled or required to make, Holdings may make such
repurchases as soon as it is permitted to do so under such restrictions.
(h) Section 83(b) Election. Consultant is receiving separate
----------------------
professional advice and counsel in connection with filing an effective election
with the Internal Revenue Service under Section 83(b) of the Internal Revenue
Code and the regulations promulgated thereunder.
6. Representations, Warranties and Agreements of Consultant. Consultant
--------------------------------------------------------
hereby represents, warrants, covenants and agrees that:
(a) Consultant has acquired the Management Units for investment for an
indefinite period, not with a view to the sale or distribution of any part of
all thereof by public or private sale or disposition.
(b) Consultant has been advised that the Management Units have not
been registered under the Securities Act or registered or qualified under any
other securities law, on the ground, among others, that no distribution or
public offering of the Management Units is to be effected and the Management
Units will be issued by the Company in connection with a transaction that does
not involve any public offering within the meaning of Section 4(2) of the
Securities Act, or the rules and regulations of the Securities and Exchange
Commission and under comparable exemption provisions of the securities laws,
rules and regulations of other jurisdictions. Consultant understands that the
Company is relying in part on the Consultant's representations as set forth
herein for purposes of claiming such exemptions and that the basis for such
exemptions may not be present if, notwithstanding Consultant's representations,
Consultant has in mind merely acquiring Management Units for resale on the
occurrence or non-occurrence of some predetermined event. Consultant has no
such intention.
(c) Consultant has such knowledge and experience in financial and
business matters that Consultant is capable of evaluating the merits and risks
of an investment in the Management Units and has the capacity to protect
Consultant's own interest in connection with Consultant's proposed acquisition
of the Management Units. Consultant is an "Accredited Investor" as defined in
Regulation D promulgated under the Securities Act.
(d) Consultant acknowledges that Consultant has been furnished with
such financial and other information concerning the Company as Consultant
considers necessary in connection with Consultant's acquisition of the
Management Units. Consultant has carefully reviewed such information and is
thoroughly familiar with the proposed business, operations, properties and
financial condition of the Company and has discussed with representatives of the
Company any questions the acquisition may have with respect thereto. Consultant
understands: (i) the risks involved in this offering, including the speculative
nature of the investment; (ii) the financial hazards involved in this offering,
including the risk of losing such Consultant's entire investment; (iii) the lack
of liquidity and restrictions on transfers of the Management Units; and (iv) the
tax consequences of this investment. Consultant has consulted with Consultant's
own legal, accounting, tax, investment and other advisers with respect to the
tax treatment of an
4
<PAGE>
investment by Consultant in the Management Units and the merits and risks of an
investment in the Management Units.
(e) The execution, delivery and performance by Consultant of this
Agreement have been duly authorized by Consultant. This Agreement constitutes a
valid and binding obligation of Consultant, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and subject, as to enforceability, to general principles of
equity (regardless of whether enforcement is sought in a proceeding in equity or
at law).
(f) Consultant understands that the Management Units will be
"restricted securities" as the term is defined in Rule 144 under the Securities
Act, that the Management Units must be held indefinitely unless they are
subsequently registered under the Securities Act and qualified under any other
applicable securities law or exemption from such registration and qualification
are available. Consultant understands that the Company is under no obligation
to register or qualify the Management Units under the Securities Act, or any
other securities law.
(g) Consultant agrees to be bound by the terms, conditions,
obligations, covenants and restrictions of the LLC Agreement and by the
execution of this Agreement Consultant shall become and the Managing Member of
the LLC does hereby admit Consultant as a "Member" and "Management Holder" of
Holdings.
7. Definitions.
-----------
"Class B Management Units" shall have the meaning ascribed to it in the LLC
Agreement.
"Fair Market Valuation Date" with respect to any Management Units means the
date on which its Fair Market Value is finally determined pursuant to the
definition of "Fair Market Value."
"Fair Market Value" of the Management Units means the Fair Market Value as
shall be determined jointly in good faith by Holdings and Consultant; provided
that if Holdings and Consultant cannot so agree, then such value shall be
determined by an independent investment banking firm of national or regional
reputation utilizing valuation techniques then commonly used for the valuation
of such investment interests, which investment banking firm will be jointly
selected by Holdings and Consultant in good faith, or if such parties cannot
agree on an investment banking firm, then such value shall be determined by an
investment banking firm selected by a lot from a group of six firms possessing
the above described qualifications (three of whom shall be selected by Holdings
and three of whom shall be selected by Consultant) from which one firm
designated as objectionable by each of Holdings and Consultant shall be
eliminated (in either case, the investment banking firm's determination shall be
conclusive). The expense of any such appraisal shall be borne equally by the
parties. In determining the Fair Market Value of the Management Units to be
purchased pursuant to the exercise of the Repurchase Option, the parties or the
investment bank, as the case may be, shall use the average of the thirty (30)
day trading price of Common Stock of the Company as a partial determining
5
<PAGE>
factor, taking into account the limitations, restrictions and payment
preferences of the Management Units. References in this definition to
Consultant shall mean Consultant's personal representative if he is deceased or
incapacitated.
"LLC Agreement" shall mean the Second Amended and Restated Limited
Liability Company Agreement of U-C Holdings, L.L.C. dated May 15, 1997, as
amended and restated from time to time.
"Management Units" mean: (i) any Class B Management Units acquired by
Consultant, and (ii) any equity or debt securities issued or issuable directly
or indirectly with respect to the Consultant Class B Management Units referred
to in clause (i) above by any of a conversion, split, distribution or dividend
or in connection with a combination of securities, recapitalization, merger,
consolidation or other reorganization. Management Units shall continue to be
Management Units in the hands of any holder thereof (other than Holdings or any
of its members).
"Sale of Company" shall mean the sale of substantially all of the stock of
Company held by Holdings or the sale of all or substantially all of the assets
of Company.
"Sale of Holdings" shall mean the sale of substantially all of the equity
interest of Holdings or the sale of all or substantially all the assets of
Holdings in Company.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
8. Confidential Information. The Consultant acknowledges that the
------------------------
information, observations and data obtained by him while employed by the
Company, or during the due diligence process in connection with Holdings
investment in the Company, concerning the business or affairs of the Company
("Confidential Information") are the property of the Company. Therefore,
Consultant agrees that, except in the performance of duties for the Company, he
shall not during the Consulting Period or for two (2) years after the Expiration
Date, for any reason whatsoever, disclose to any unauthorized person or use for
his own account any Confidential Information without prior written consent of
the Board, except (i) to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result of
Consultant's wrongful acts or omissions to act, (ii) as necessary to comply with
compulsory legal process, provided that Consultant shall provide prior notice to
the Company regarding such disclosure and the Company, as applicable, shall have
the right to contest such disclosure, (iii) as necessary to counsel and other
professional advisors retained by the Consultant, subject to the attorney/client
privilege or a valid and binding non-disclosure agreement between Consultant and
such professional and (iv) disclosures of information obtained from a third
party free of restrictions or disclosure of information in Consultant's
possession prior to the date hereof which was obtained from a source other than
the Company or its predecessors. Consultant shall deliver to the Company at the
termination of the Consulting Period, all memoranda, notes, plans, records,
reports, computer tapes and software and other documents and data (and copies
thereof) relating to Confidential Information, Work Product or the business of
the Company which he may then possess or have under his control.
6
<PAGE>
9. Non-Solicitation. During the Consulting Period and for eighteen months
----------------
thereafter, Consultant shall not directly or indirectly through another entity
(i) solicit, induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way interfere with the relationship between
the Company and any employee thereof, or (ii) induce or attempt to induce or
attempt to induce any customer, supplier, licensee or other business relation of
the Company to cease doing business with the Company, or in any way interfere
with the relationship between any such customer, supplier, licensee or business
relation and the Company.
10. Enforcement. If, at the time of enforcement of paragraphs 8 or 9 of
-----------
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parities hereto agree that
the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope and area.
Because Consultant's services are unique and because Consultant has access to
Confidential Information and Work Product, the parties hereto agree that money
damages would be an inadequate remedy for any breach of this Agreement.
Therefore, in the event a breach or threatened breach of this Agreement, the
Company or its successors or assigns may, in addition to other rights and
remedies existing in their favor, apply to any court of competent jurisdiction
for specific performance and/or injunctive or other relief in order to enforce,
or prevent any violations of, the provision hereof (without posting a bond or
other security).
11. Consultant Representations. Consultant hereby represents and warrants
--------------------------
to the Company that (i) the execution, delivery and performance of this
Agreement by Consultant does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Consultant is a party or by which he is bound, and (ii)
Consultant is not a party to or bound by any employment agreement, non-compete
agreement or confidentiality agreement with any other person or entity, which
would prohibit his performance under this Agreement.
12. Survival. Paragraphs 8, 9 and 10 shall survive and continue in full
--------
force in accordance with their terms notwithstanding any termination of the
Consulting Period.
13. Notices. Any notice provided for in this Agreement shall be in
-------
writing and shall be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by telecopy or reputable
overnight courier service (charges prepaid) to the recipient at the address or
telecopy number below indicated:
Notices to Holdings:
U-C Holdings, L.L.C.
c/o Willis Stein & Partners, L.P.
227 W. Monroe Street, Suite 4300
Chicago, Illinois 60606
Telecopy No.: (312) 422-2424
Attention: Avy H. Stein
7
<PAGE>
With a copy to:
Morris, Manning & Martin, LLP
3343 Peachtree Road, N.E.
1600 Atlanta Financial Center
Atlanta, Georgia 30326
Telecopy No.: (404) 365-9532
Attention: Neil H. Dickson, Esq.
Notice to Consultant:
Sergio Zyman
Sergio Zyman & Co.
P.O. Box 724705
Atlanta, Georgia 31135
With a copy to:
Stuart Finestone
2540 Tower Place
3340 Peachtree Road, N.E.
Atlanta, Georgia 30326
Notices to Company:
College Television Network, Inc.
5784 Lake Forrest Drive, Suite 275
Atlanta, Georgia 30328
Attention: Jason Elkin
Telecopy No.: (404) 256-4444
With a Copy to:
Morris, Manning and Martin, LLP
1600 Atlanta Financial Center
3343 Peachtree Road, NE
Telecopy No.: (404) 365-9532
Attention: Neil H. Dickson, Esq.
or such other address or telecopy number or to the attention of such other
person as the recipient party shall have specified by prior written notice to
the sending party. any notice under this Agreement will be deemed to have been
given when so delivered or sent or, if mailed, five days after deposit in the
U.S. mail.
14. Severability. Whenever possible, each provision of this agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed,
8
<PAGE>
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
15. Complete Agreement. This Agreement and those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
16. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which to be an original and all of which taken together
constitute one and the same agreement.
17. Successors and Assigns. This Agreement is intended to bind and inure
----------------------
to the benefit of and be enforceable by all parties and their respective heirs,
successors and assigns, except that Consultant may not assign his rights or
delegate his obligations hereunder without the prior written consent of the
Company.
18. Choice of Law. This Agreement will be governed by the internal law,
-------------
and not the laws of conflicts, of the State of Georgia.
19. Amendment and Waiver. The provisions of this Agreement may be amended
--------------------
or waived with the prior written consent of the Company and Consultant, and no
course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity binding effect or enforceability of this
Agreement.
20. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement or the breach thereof (if a party is seeking immediate injunctive
relief they may proceed in a court of law, with the parties agreeing that as
soon as possible the matter shall be transferred to an arbitrator or panel of
arbitrators as set forth below) shall be resolved by binding arbitration, in
accordance with the rules and regulations of the American Arbitration
Association as these rules may be amended. Such rules and procedures are
incorporated herein and made a part of this Agreement by reference. The parties
agree that they will abide by and perform any award rendered in any such
arbitration and that any court having jurisdiction may issue a final judgment
based upon any such award. The prevailing party in such an arbitration shall be
awarded reasonable attorneys' fees and costs.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COLLEGE TELEVISION NETWORK, INC.
By: /s/ Jason Elkin
---------------
Jason Elkin, Chief Executive Officer
and Chairman of the Board
9
<PAGE>
U-C HOLDINGS, L.L.C.
By: Willis Stein & Partners, L.P.
Its: Managing Member
By: Willis Stein & Partners, L.L.C.
Its: General Partner
By:/s/ Beth F. Johnston
--------------------
Its:Manager
/s/ Sergio Zyman
----------------
Sergio Zyman
By Managing Member of U-C Holdings, L.L.C.
as to Section 6(g) hereof
By: Willis Stein & Partners, L.P.
Its: Managing Member
By: Willis Stein & Partners, L.L.C.
Its: General Partner
By: /s/ Beth F. Johnston
----------------------
Its: Manager
10
<PAGE>
EXHIBIT 18.1
To the Board of Directors of
College Television Network, Inc.
We have audited the consolidated financial statements included in the College
Television Network, Inc. (the "Company") Annual Report on Form 10-KSB for the
year ended December 31, 1998 and issued our report thereon dated March 1, 1999.
Note 2 to the consolidated financial statements describes a change in the
Company's method of computing depreciation from an accelerated method to the
straight line method. It should be understood that the preferability of one
acceptable method of computing depreciation over another has not been addressed
in any authoritative accounting literature and in arriving at our opinion
expressed below, we have relied on management's business planning and judgment.
Based on our discussions with management and the stated reasons for the change,
we believe that such change represents, in your circumstances, the adoption of a
preferable alternative accounting principle for computing depreciation in
conformity with Accounting Principles Board Opinion No. 20.
/s/ PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
March 1,1999
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-67809 and No. 333-67829) and in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-09499) of
College Television Network, Inc. of our report dated March 1, 1999 appearing on
page F-1 of this Form 10-KSB.
/s/ PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,411,423
<SECURITIES> 0
<RECEIVABLES> 2,454,566
<ALLOWANCES> (197,875)
<INVENTORY> 0
<CURRENT-ASSETS> 9,188,673
<PP&E> 7,400,634
<DEPRECIATION> (883,950)
<TOTAL-ASSETS> 16,451,049
<CURRENT-LIABILITIES> 1,282,386
<BONDS> 0
0
0
<COMMON> 71,494
<OTHER-SE> 14,740,902
<TOTAL-LIABILITY-AND-EQUITY> 16,451,049
<SALES> 8,509,878
<TOTAL-REVENUES> 8,922,270
<CGS> 4,481,434
<TOTAL-COSTS> 4,481,434
<OTHER-EXPENSES> 13,034,783
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,453,903)
<EPS-PRIMARY> (.89)
<EPS-DILUTED> (.89)
</TABLE>
<PAGE>
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS
You should consider carefully the following factors in evaluating us and
our business. The risks and uncertainties described below are not the only ones
we face. Additional risks and uncertainties not presently known to us, which we
currently deem immaterial or that are similar to those faced by other companies
in our industry or business in general, may also impair our business operations.
If any of the following risks actually occurs, our business, financial condition
or results of future operations could be materially and adversely affected.
We have experienced, and continue to experience, net losses.
Since our inception, we have experienced, and are continuing to experience,
operating losses and negative cash flow from operations. Our statements of
operations for the fiscal year ended October 31, 1997, for the two-month
transition period ended December 31, 1997, and for the fiscal year ended
December 31, 1998, reflect net losses of approximately $4,003,590, $1,135,927,
and $8,453,903, respectively, or approximately $.77, $.14 and $.89 per share,
respectively. In addition, we expect to incur operating losses in the near
future and until such time as operations generate sufficient revenues to cover
our costs.
We may require additional working capital or financing to meet our operating
demands in 1999.
The rapid development of our business will continue to require substantial
capital expenditures for additional installations. Our future financial results
will depend primarily on our ability to increase our number of affiliate
locations, maintain our existing installations and increase advertising
revenues. We cannot assure that we will achieve or sustain profitability or
positive cash flows from future operating activities. If we fail to increase
the number of installation sites or experience operating difficulties, or if
advertising revenues do not increase substantially, it is likely that we may be
required to raise additional capital or obtain additional financing to fund our
operations.
We depend upon our advertising revenues.
We primarily derive our revenues from advertisers displaying their
commercials on CTN. Although we have agreements with certain national
advertisers and have held discussions or had prior agreements with other
national advertisers, we cannot assure that these advertisers will continue to
purchase advertising from us, that new advertisers will purchase advertising
from us, or that future significant advertising revenues will be generated.
Because certain advertisers may discontinue or reduce advertising on CTN from
time to time, we anticipate that we could experience fluctuations in operating
results and revenues. The failure to attract and enter into new and/or
additional agreements with national advertisers and to derive significant
revenues from these advertisers would have a material adverse effect on our
business and financial results.
We must secure new installations and maintain existing installations.
Our growth is dependent upon our ability to increase the number of
installation sites at colleges and universities. If we increase our
installation sites, we will have increased viewership and should be able to
increase our advertising revenue. In addition, we believe that if we are able
to increase our installation sites, it will become more difficult for a
competitor to enter the market. We have increased
<PAGE>
our number of installations, including contracts for future installations, from
265 as of December 31, 1997, to 736 as of December 31, 1998 and to 824 as of
February 26, 1999. Although we have been successful in increasing our
installation sites, we cannot assure that this growth will continue and that
colleges and universities will not require the removal of our system from
current locations. Our contracts with colleges and universities for installation
sites typically have a three-year term. The failure to increase installation
sites would have a material adverse effect on our business and financial
results.
We depend upon satellite technology.
The ability of CTN to transmit our programming, and thereby derive
advertising revenue, is dependent upon proper performance of the satellite
transmission equipment upon which CTN's programming delivery is based. Our
contract with Public Broadcasting Service, Inc. provides for our sublease of
transponder capacity on a satellite owned and operated by GE American
Communications, Inc. We are entitled to limited protected service under the
sublease in the event the satellite fails, which would enable CTN's programming
to be redirected to a different satellite under certain circumstances and
subject to certain limitations. However, in the event that CTN's programming is
required to be redirected to a different satellite, our satellite dishes
installed in each of our affiliate locations would be required to be redirected
in order for the programming signals to be received from the satellite. This
redirection procedure could take up to 21 days for completion and would involve
significant cost to us. We have obtained insurance for certain of the costs
associated with such a satellite failure, including the costs of redirecting the
satellite dishes and securing a new satellite transponder, and the lost
advertising revenues resulting from the interruption in programming.
We depend on our agreements with third parties.
The ability of CTN to transmit our programming and to maintain and install
our equipment is dependent upon performance by certain third parties under
contracts with us. We are substantially dependent upon performance by
unaffiliated companies for our day-to-day programming operations and system
installation and maintenance.
Any failure to maintain or improve market acceptance for CTN would adversely
affect our business.
Our prospects will be significantly affected by the success of our
affiliate marketing efforts, the acceptance of our programming by potential
viewers and our ability to attract advertisers. Achieving market acceptance for
CTN will require significant effort and expenditures by us to enhance awareness
and demand by viewers and advertisers. Our current strategy and future
marketing plans may be subject to change as a result of a number of factors,
including progress or delays in our affiliate marketing efforts, the nature of
possible affiliation and other broadcast arrangements that may become available
to us in the future and factors affecting the direct broadcast industry. We
cannot assure that our strategy will result in initial or continued market
acceptance for CTN.
We depend upon our access to programming.
We believe that our ability to maintain access to music videos and other
programming on a regular, long-term basis, on terms favorable to us is important
to our future success and profitability. We obtain music videos pursuant to
oral agreements with music companies. We have such agreements or arrangements
with a number of the major music company labels, which include Sony, Warner
Elektra, EMI, Columbia, MCA and BMG. We also receive CNN news and sports
programming pursuant to our
<PAGE>
agreement with Turner Private Networks, Inc. Termination of substantially all or
a large number of our programming agreements would have a material adverse
effect on our business and financial results.
We depend upon our key executives.
We are substantially dependent on the efforts of Jason Elkin, our Chairman
and Chief Executive Officer, and Peter Kauff, our Vice Chairman. The loss of
either of these executives could have a material adverse effect on our business
and financial results. Both of these executives have entered into multi-year
employment agreements with us.
We may not be able to compete successfully with other companies.
CTN competes for advertisers with many other forms of advertising media,
including television, radio, print, direct mail and billboard. There are no
meaningful intellectual property barriers to prevent competitors from entering
into this market, and we cannot assure that a competitor with greater resources
than us will not enter into the market. We believe that competition could
increase as other organizations perceive the potential for commercial
application of our product or service.
We must continue to advance our technology.
We expect technological developments and enhancements to continue at a
rapid pace in the direct broadcast satellite network industry and related
industries, and we cannot assure that technological developments will not
require us to switch to a different transmission technology or cause our
technology and products to be dated. Our future success could be largely
dependent upon our ability to adapt to technological change and remain
competitive.
Our principal stockholder continues to control our affairs.
U-C Holdings, L.L.C. beneficially owns approximately 81.1% of our
outstanding common stock. As a result of its ownership, U-C Holdings has, and
will continue to have, sufficient voting power to determine our direction and
policies, the election of our directors, the outcome of any other matter
submitted to a vote of stockholders and to prevent or cause a change in our
control. See "We may be subject to conflicts of interest and related party
transactions."
We may be subject to conflicts of interest and related party transactions.
Certain conflicts of interest may arise as a result of the beneficial
ownership interests in U-C Holdings that are held by a majority of our
directors, including our chairman and chief executive officer. Several members
of our Board of Directors may be deemed to be an indirect beneficial owner of
the securities beneficially owned by U-C Holdings. Conflicts of interest may
arise as a result of these affiliated relationships. Although no specific
measures to resolve such conflicts of interest have been formulated, our
management has a fiduciary obligation to deal fairly and in good faith with us
and will exercise reasonable judgment in resolving any specific conflict of
interest that may occur.
Our stock price has been volatile, and declines could cause us to lose our
listing on Nasdaq.
The market price for our common stock could be subject to significant
fluctuations in response to our business and financial results. We currently
satisfy the conditions for continued listing on The Nasdaq SmallCap Market.
However, we cannot assure that the market price of the common stock will not
decline to a level where it does not satisfy these listing conditions. Further,
we cannot assure that
<PAGE>
The Nasdaq SmallCap Market will not undertake to suspend our common stock from
trading or delist our common stock in the future.
Our revenues are subject to seasonality.
Our revenues are affected by the pattern of seasonality common to most
school-related businesses. Historically, we generate a significant portion of
our revenues during the period of September through May and substantially less
revenues during the summer months when most colleges and universities do not
hold regular classes.
Our stock price and ability to raise capital or obtain financing could be hurt
by our outstanding warrants and options.
As of February 26, 1999, there are outstanding options to purchase 652,878
shares of our common stock granted to certain of our officers and directors
pursuant to our stock option plans. In addition, there are warrants outstanding
that permit their holders to purchase 2,081,258 shares of our common stock. U-C
Holdings has entered into certain Equity Protection Agreements, dated April 25,
1997, which allow U-C Holdings to purchase additional shares of our common stock
upon the exercise of options or warrants that were outstanding on April 25, 1997
at a price of $2.75 per share (as adjusted). U-C Holdings also received a
warrant to purchase 152,100 shares of our common stock in connection with the
standby commitment U-C Holdings made to us pursuant to the rights offering we
completed in October 1998. Certain other holders of options and warrants also
have demand and piggy-back registration rights. While such rights, warrants and
options are outstanding, they may (i) adversely affect the market price of our
common stock and (ii) impair our ability to, and the terms on which we can,
raise additional equity capital or obtain debt financing.
Any shares to be sold by us or our principal stockholder are subject to an
outstanding right of first refusal that expires on or about May 31, 1999.
In connection with a private placement of our securities, we issued to
Barington Capital Group, L.P., or Barington, on April 26, 1996, a right of first
refusal to purchase for its account, or to sell for our account or the account
of any of our stockholders owning at least three percent of our unregistered
capital stock, any of our securities that we or any of our three percent
stockholders may seek to sell (other than sales aggregating less than $1 million
in gross proceeds), whether pursuant to an offering registered under the
Securities Act or otherwise. We are required to offer Barington the opportunity
to purchase or sell any such securities on comparable terms, and Barington is
entitled to accept such offer within 30 business days (ten business days with
respect to any sale to be effected other than through the public market) after
such notice. Barington's right of first refusal terminates on or about May 31,
1999. As a result of this outstanding right of first refusal, our ability to
raise capital through the offering of our securities will be subject to
compliance with the terms of the right of first refusal during the period in
which the rights of first refusal is outstanding, which could limit our ability
to raise capital. If we propose an offering of securities that is subject to
the terms of the right of first refusal, and if Barington exercises its right of
first refusal in connection with such proposed securities offering, stockholders
would experience dilution in their percentage ownership interest in us without
an opportunity to participate in the offer and sale of the securities, and such
transaction could possibly result in a change of our control.
<PAGE>
Sales of our shares could cause our stock price to fall.
Sales of a substantial number of shares of common stock in the public
market could adversely affect the market price of our common stock prevailing
from time to time. All shares of our common stock, including shares held by U-C
Holdings, are freely tradable without restriction, or may be sold pursuant to
Rule 144 under the Securities Act. The sale of the shares of our common stock
acquired by U-C Holdings are subject to certain limitations set forth in Rule
144 under the Securities Act. As of December 31, 1998, options to purchase
652,878 shares and warrants to purchase 2,081,258 shares of our common stock
were outstanding, of which options to purchase 464,190 shares and warrants to
purchase 2,081,258 shares were exercisable.
There are several risks associated with our acquisition strategy.
We may seek to expand or complement our operations through the possible
acquisition of companies or licensing of programs that we believe are compatible
with our business. While we explore acquisition opportunities from time to
time, as of the date of this report, we have no definitive plans, agreements,
commitments, arrangements or understandings with respect to any significant
acquisition. We have not established any minimum criteria for any acquisition,
and our management and Board of Directors will have complete discretion in
determining the terms of any such acquisition. We cannot assure that we will be
able to ultimately effect any acquisition or successfully integrate into our
operations any business that we may acquire. Under Delaware law, various forms
of business combinations can be effected without stockholder approval and,
accordingly, stockholders will, in all likelihood, neither receive nor otherwise
have the opportunity to evaluate any financial or other information which may be
made available to us in connection with any acquisition and must rely entirely
upon the ability of management in selecting, structuring and consummating
acquisitions that are consistent with our business objectives.
Year 2000 risks may result in material adverse effects on our business.
Many currently-installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the Year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, over the
next nine months, computer systems and/or software used by many companies will
need to be upgraded to comply with such "Year 2000" requirements. Because we
are dependent on vendor compliance, our ability to assure Year 2000 compliance
is limited. We have required certain of our computer system and software
vendors to represent that the services and products provided are, or will be,
Year 2000 compliant.
Our ability to issue preferred stock may inhibit a takeover of our company.
Our Board of Directors has the authority to issue up to 2,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of the preferred stock without further vote or action
by our stockholders. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, the rights of the holders of a
preferred stock that may be issued in the future. While we have no present
intention to issue shares of preferred stock, such issuance, while providing
desired flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock.
