<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[MARK ONE]
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ____________
COMMISSION FILE NUMBER: 0-19997
CTN MEDIA GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3557317
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5784 LAKE FORREST DRIVE, SUITE 275 30328
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 256-9630
N/A
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
Number of shares of common stock outstanding as of May 4, 2000: 14,843,585
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
<PAGE>
ITEM 1. Financial Statements
CTN MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2000
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,628,149
Accounts receivable, net of allowance of $652,475 17,801,095
Prepaid expenses 680,253
Other current assets 221,269
------------
Total current assets 24,330,766
Investments 1,500,000
Property and equipment, net 13,503,939
Other assets 193,695
Intangible assets, net 28,210,803
------------
Total assets $ 67,739,203
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 13,003,908
Accrued expenses 1,980,969
Deferred revenue 731,821
Current portion of notes payable 8,862,500
------------
Total current liabilities 24,579,198
Long-term liabilities:
Accrued severance, net of current portion 40,977
Debt, less current portion 14,437,500
------------
Total liabilities 39,057,675
------------
Mandatorily redeemable preferred stock 41,180,512
------------
Commitments and Contingencies
Stockholders' deficit:
Common stock - $.005 par; authorized 50,000,000 shares;
issued and outstanding 14,819,752 shares 74,099
Additional paid in capital 35,483,755
Unearned compensation (901,401)
Accumulated deficit (47,155,437)
------------
Total stockholders' deficit (12,498,984)
------------
Total liabilities, mandatorily redeemable preferred stock and stockholders'
deficit $ 67,739,203
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Form 10-QSB
Page 2 of 15
<PAGE>
CTN MEDIA GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
-----------------------------------------
<S> <C> <C>
Revenue $16,160,437 $2,980,294
----------------------------------------
Expenses
Operating 11,407,773 1,833,387
Selling, general and administrative 6,843,677 3,649,921
Depreciation and amortization
Total Expenses 1,542,153 308,089
----------------------------------------
19,793,603 5,791,397
Interest Income 113,842 63,143
Interest Expense (645,450) (14,577)
----------------------------------------
Net loss $(4,164,774) $(2,762,537)
========================================
Dividends and negative accretion on mandatorily redeemable
Preferred stock 24,708,308 -
----------------------------------------
Net Income (loss) available to common stockholders 20,543,534 (2,762,537)
Net Income (loss) per common share
Basic $1.40 $(.19)
Diluted $0.82 $(.19)
========================================
Weighted average number of common shares
outstanding
Basic 14,713,320 14,298,913
Diluted 25,107,102 14,298,913
========================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Form 10-QSB
Page 3 of 15
<PAGE>
CTN MEDIA GROUP, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,164,774) $(2,762,537)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,542,153 308,089
Other non-cash amortization 103,537 -
Compensation from stock options (73,240) 240,000
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 588,898 (445,549)
Prepaid expenses (330,950) 80,697
Other assets (14,743) 120,449
Accounts payable (1,505,360) 328,532
Accrued expenses (626,509) 355,930
Deferred revenue (210,434) -
------------------- --------------------
Net cash used in operating activities (4,691,422) (1,774,389)
------------------- --------------------
Cash flows from investing activities:
Purchases of property and equipment (1,718,619) (920,393)
Cash paid for acquisitions - (30,000)
------------------- --------------------
Net cash used in investing activities (1,718,619) (950,393)
------------------- --------------------
Cash flows from financing activities:
Net proceeds from notes payable 4,000,000 -
Proceeds from exercise of warrants and stock options 867,558 -
------------------- --------------------
Net cash provided by financing activities 4,867,558 -
------------------- --------------------
Net decrease in cash and cash equivalents (1,542,483) (2,724,782)
Cash and cash equivalents, beginning of period 7,170,632 6,411,423
------------------- --------------------
Cash and cash equivalents, end of period $5,628,149 $3,686,641
------------------- --------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Form 10-QSB
Page 4 of 15
<PAGE>
CTN MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited consolidated financial statements (the
"financial statements") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with the Company's financial
statements for the fiscal year ended December 31, 1999 included in the Annual
Report as filed on Form 10-KSB with the United States Securities and Exchange
Commission.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position as of March 31, 2000 and the
results of operations and of cash flows for the three months ended March 31,
2000 and 1999.
The results of operations for the three months ended March 31, 2000 and
1999 are not necessarily indicative of the results of operations for a full
fiscal year of the Company. Certain prior period amounts have been reclassified
to conform with current period presentation.
NOTE (A) - THE COMPANY
CTN Media Group, Inc., a Delaware corporation formally known as the
College Television Network, Inc. (the "Company"), owns and operates the College
Television Network ("CTN", or the "Network"), Link Magazine, ID8, and Armed
Forces Communications, Inc., doing business as Market Place Media, ("MPM"), and
owns a 90% interest in its consolidated subsidiary Wetair.com, L.L.C.
("Wetair"). CTN is a proprietary commercial television network that operates on
college and university campuses, through single-channel television systems
placed free of charge primarily in the campus public venues, including dining
facilities and student unions. CTN generates revenue from advertising displayed
on the Network. At March 31, 2000 and 1999, CTN was installed or contracted for
installation at approximately 1,660 and 927 locations, respectively. CTN
currently reaches an estimated audience of approximately 1,500,000 young adult
viewers each day based on data provided by Nielson Media Research. Link Magazine
is distributed free of charge to more than 650 campuses nationwide. Each issue
of the publication is direct mailed to over 1,000,000 students on college
campuses. The magazine enjoys a total readership of approximately 3,200,000
college students. ID8 is an Atlanta-based advertising agency primarily involved
in supporting the creative needs of the Company. In addition, ID8 places media
buys and provides creative services for third party clients. MPM is a leading
media placement and promotion specialist in the college, military, minority and
seniors segments. MPM utilizes various advertising vehicles throughout the
United States to meet its customers' needs, including, but not limited to,
newspapers, radio, magazines, and on-site events which target specific markets
such as college students, minorities, military personnel and senior citizens.
Wetair was formed on October 13, 1999, to create a niche entertainment based
website targeting the young adult demographic. The site, which launched May 1,
2000, contains art and entertainment content from established media channels and
from user submitted sources. The minority shareholder of Wetair has no
obligation to fund its operations or deficit, therefore, the Company has not
recorded a 10% reduction in its share of the net loss of Wetair or a related
receivable from the minority shareholder. The Company has two reportable
business segments: (i) CTN, which includes the Network, Link Magazine, ID8, and
Wetair, and (ii) MPM. MPM, which was acquired during 1999, is a leading media
placement company in the college, military, minority, and senior markets. MPM
provides media placement through print, broadcast, promotional events and the
internet to both advertisers and advertising agencies.
Form 10-QSB
Page 5 of 15
<PAGE>
Certain of the Company's revenues are affected by the pattern of
seasonality common to most school-related businesses. Historically, the Company
has generated a significant portion of its revenue during the period from
September through May and substantially less revenue during the summer months
when colleges and universities do not hold regular classes.
NOTE (B ) MANDATORILY REDEEMABLE PREFERRED STOCK
As of March 31, 2000, the Company has issued to U-C Holdings, LLC, a
Delaware limited liability company and majority shareholder of the Company
("Holdings"), a total of 1,976,665 shares of the Company's 2,510,000 authorized
shares of Series A Convertible Preferred Stock, $.001 par value per share
("Series A Preferred"). The issued shares are convertible into 6,588,884 shares
of common stock at a price of $4.50 per share. The Company has reserved common
shares for possible conversions.
Under that certain Amended and Restated Purchase Agreement, dated
October 18,1999, between the Company and Holdings, the Company has the right to
require Holdings to purchase, subject to various conditions, certain of which
are at the discretion of Holdings, up to an additional 133,333 shares of Series
A Preferred for an aggregate purchase price of approximately $2,000,000. This
right expires on August 31, 2000.
For the three month period ended March 31, 2000, net adjustments of
$24,708,308 were recorded to decrease the carrying value of the Series A
Preferred to its highest redemption value with the offset being recorded as an
increase in stockholder's equity. As of March 31, 2000, the Series A Preferred
has been accreted to its highest redemption value based on the Company's closing
common stock price of $6.25 per share at such date. The adjustments recorded
during the first quarter are a direct result of the fluctuation in the market
value of the Company's stock price from $10.00 at December 31, 1999 to $6.25 at
March 31, 2000. Since the Series A Preferred is redeemable on July 23, 2006, at
the discretion of the Series A Preferred Stockholders, at the greater of the
liquidation value (which is the purchase price plus accrued and unpaid
dividends) or the market value of the underlying common stock, the Company is
required to accrete the Series A Preferred to its highest redemption value at
each balance sheet date. Accordingly, as the market price of the common stock
changes, the redemption value and the related accretion amount will change;
however, the highest redemption value will never be less than original cost plus
accrued dividends. As a result of the fluctuation in the Company's stock price
during the quarter, the Company has reported positive earnings per share.
NOTE (C) - DEBT
During 1999, the Company obtained a $12,000,000 revolving credit loan
(the "CTN Loan") from a financial institution for working capital purposes. The
CTN Loan, as amended, is on a revolving credit basis and requires the Company to
obtain equity investments, from Holdings or other investors, on a
dollar-for-dollar basis for every dollar borrowed under the CTN Loan up to the
$12,000,000 credit limit. The CTN Loan bears interest at either (i) the Base
Rate which is equal to the greater of (a) the Federal Funds Rate plus 0.5% or
(b) the Prime Rate, plus 2.00% per annum; or (ii) the Eurodollar Rate, plus
3.50% per annum. A commitment fee of .5% per annum on the unused portion of the
facility is required. The CTN Loan is due and payable in full on December 29,
2000 and, as such, all amounts due thereunder have been classified as current at
March 31, 2000. The CTN Loan is guaranteed by a negative pledge of the
outstanding shares of stock of the Company owned by Holdings. Amounts
outstanding under the CTN loan at March 31, 2000 are $6,800,000. The Company had
$4,900,000 available to borrow under this agreement at quarter end as a result
of the equity purchases by Holdings and warrant exercises. At March 31, 2000,
the weighted average interest rate on the CTN Loan was 11.1% on the debt
outstanding.
Form 10-QSB
Page 6 of 15
<PAGE>
On August 31, 1999, concurrent with the MPM acquisition, MPM obtained a
$15,000,000 Term Loan ("Term Loan") and a $2,000,000 revolving credit line
("Revolver Loan") from a separate financial institution and its affiliates. MPM
distributed the proceeds of the Term Loan to the Company to pay the MPM
shareholders in the Company's acquisition of the capital stock of MPM on August
31, 1999 (the "MPM Acquisition"). MPM also borrowed $1,500,000 from the Revolver
Loan to pay expenses associated with the MPM Acquisition and certain loan costs.
Amounts outstanding under the Term Loan and the Revolver Loan at March 31, 2000
are $15,000,000 and $1,500,000, respectively.
Both the Term Loan and the Revolver Loan bear interest at either the
Alternate Base Rate which is the higher of the Prime Rate or the Federal Funds
Rate, as defined, plus 0.5%, or the "Eurodollar Base Rate" as defined, plus the
applicable margin, which is variable depending on various financial conditions
set forth in the credit agreement. The weighted average interest rate was 9.06%
on debt outstanding for the three months ended March 31, 2000. The Revolver Loan
is due and payable on September 30, 2004. The Term Loan is payable quarterly
commencing June 30, 2000, and is payable in full on September 30, 2004.
The Company's debt agreements contain financial covenants which, among
other restrictions, require the maintenance of certain financial ratios and cash
flows, restrict asset purchases, dividend payments or distributions to the
Company by MPM.
Substantially all of the assets of the Company are pledged as collateral for the
loans.
At March 31, 2000, the Company did not meet certain financial covenants
as required under the CTN loan. The financial institution has granted the
Company a waiver for the covenant default. The Company and Holdings are in
negotiations with the financial institution related to amending the current debt
agreement or entering into a new agreement. There can be no assurances that
these efforts will be successful. Holdings has committed to provide funding
through fiscal 2000 in the event the Company experiences cash flow deficits from
operations or cash flow deficits in connection with debt service requirements.
NOTE (D) - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED MARCH 31,
USEFUL LIVES 2000
<S> <C> <C>
Entertainment systems completed 5 years $12,389,080
Entertainment systems in progress N/A 49,935
Machinery and equipment 5 -7 years 1,147,413
Software 5 years 2,025,795
Furniture and Fixtures 7 years 784,014
Leasehold improvements 7-11 years 307,558
-------------------
$16,703,795
Less: Accumulated depreciation (3,199,856)
-------------------
Total $13,503,939
===================
</TABLE>
Depreciation expense for the three months ended March 31, 2000 and the
three months ended March 31, 1999 was approximately $739,584 and $297,292
respectively.
Form 10-QSB
Page 7 of 15
<PAGE>
NOTE (E) - INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED MARCH 31,
USEFUL LIVES 2000
<S> <C> <C>
Goodwill 10-15 years $9,758,298
Customer relationships 7 years 16,293,000
Trademarks/tradenames 10-15 years 3,458,951
Other intangibles 2-15 years 867,626
-------------------
$30,377,875
Less: Accumulated amortization (2,167,072)
-------------------
Total $28,210,803
===================
</TABLE>
NOTE (F) - COMMITMENTS AND CONTINGENCIES
In connection with the Company's acquisition of the rights to and
inventory of video jukeboxes in 1991, the Company agreed to pay two former
stockholders an aggregate of $100,000, one-half being payable at such time as
the Company's net pre-tax income equals at least $500,000 and the balance being
payable at such time as the Company has an additional $500,000 in net pre-tax
earnings. The Company will provide for these contingent liabilities at the time
at which ultimate payment is considered probable.
The Company is currently utilizing Crawford Communications, Inc.
("Crawford") and Viatech International, Inc. to complete installations of
Network equipment in new locations. The Company has also entered into an
Origination Services Contract with Crawford. The original agreement provides for
payments of approximately $1,320,000 over a five year period ending on July 15,
2003. In accordance with the Origination Services Contract, Crawford is
responsible for the transmission via satellite of CTN's daily programming,
including encoding signals, testing, maintaining CTN's programming library, and
obtaining programming from Turner Private Networks, Inc. ("Turner") pursuant to
the Company's programming agreement with Turner, as well as programming from
other CTN sources. Crawford is also responsible for the uplink of the
programming to a satellite as well as the downlink of the signal from the
satellite at each installation site. As of March 31, 2000, the Company has paid
approximately $638,000 to Crawford pursuant to the Origination Services
Contract.
On March 21, 1998, the Company entered into a severance agreement with
one of its senior executives. The agreement provides for payments of
approximately $870,000 over a three year period ending in April 2001. As of
March 31, 2000, the Company has paid approximately $585,000 of this obligation
and owes approximately $285,000 to be paid over the remainder of the agreement.
On March 27, 1998, the Company signed an agreement with Turner
Broadcasting System, Inc. to provide news and sports programming on CTN through
December 31, 2002. This agreement supercedes the prior programming agreement
entered into on November 5, 1996. On July 30, 1999, the Company signed an
amendment to this agreement to provide CNN Headline News programming on CTN
through December 31, 2002. The total license fee is approximately $3,156,250. As
of March 31, 2000, the Company has paid approximately $1,173,750 pursuant to
this agreement, with approximately $1,982,500 to be paid over the remainder of
the agreement.
In connection with the delivery platform conversion during 1998, the
Company entered into a Transponder Use Agreement with Public Broadcasting
Service ("PBS") on April 30, 1998. The Company
Form 10-QSB
Page 8 of 15
<PAGE>
has subleased capacity on a satellite owned and operated by GE American
Communications, Inc. ("GE") and leased to PBS by GE. This agreement provides for
payments of approximately $3,924,000 over a five year period that terminates on
July 31, 2003. The Company has protected status on this satellite, where in the
event of a satellite failure or performance problem, the Company's programming
will preempt transmissions of other users on this satellite or on another
satellite. As of March 31, 2000, the Company has paid approximately $1,308,200
pursuant to this agreement with approximately $2,615,800 to be paid over the
remainder of the term.
On February 19, 1999, the Company entered into a severance agreement
with one of its senior executives and former member of the Board of Directors.
The agreement provides for payments of approximately $476,000 over a 26 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. The options
vested immediately and expire five years from the date of the severance
agreement. As of March 31, 2000, the Company has paid approximately $238,000
under this agreement with approximately $238,000 to be paid over the remainder
of the agreement.
On July 13, 1999, the Company entered into an agreement with
Contemporary Marketing Incorporated ("CMI") for the management of a sixteen week
promotional concert tour. The concert tour will run from the Fall of 1999
through the Spring of 2000 on 25 college campuses nationwide. CTN will pay CMI's
program and administrative costs of approximately $1,500,000 over that 16 week
period.
NOTE (G) SEGMENT REPORTING
The Company has two reportable segments as defined under Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"): (i) CTN and (ii) MPM.
Segment information previously reported has been restated to conform to the
current presentation. See Note (A) for a description of the products and
services provided by each segment. The Company evaluates each segment's
performance based on income or loss before income taxes. Information regarding
the operations of these reportable segments are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
<S> <C> <C>
REVENUES
CTN $4,725,027 $2,980,294
MPM 11,435,410 -
------------------------ ------------------------
Total $16,160,437 $2,980,294
------------------------ ------------------------
PROFIT (LOSS) BEFORE INCOME TAXES
CTN $(3,746,615) $(2,762,537)
MPM -
(418,159)
------------------------ ------------------------
Total $ (4,164,774) $ (2,762,537)
------------------------ ------------------------
DEPRECIATION AND AMORTIZATION
CTN $637,177 $308,089
MPM 904,976
------------------------ ------------------------
Total $1,542,153 $308,089
------------------------ ------------------------
</TABLE>
Form 10-QSB
Page 9 of 15
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
<S> <C> <C>
INTEREST INCOME
CTN $82,298 $63,143
MPM 31,544
------------------- --------------------
Total $113,842 $63,143
------------------- --------------------
INTEREST EXPENSE
CTN $213,761 $14,577
MPM 431,689
------------------- --------------------
Total $645,450 $14,577
------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
2000
<S> <C>
TOTAL ASSETS
CTN $24,204,504
MPM 43,534,699
-------------------
Total $67,739,203
-------------------
</TABLE>
Substantially all of the property and equipment owned by the Company is used in
the operations of CTN.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
Certain forward-looking information contained in this Quarterly Report
is being provided in reliance upon the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 as set forth in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such information includes, without limitation,
discussions as to estimates, expectations, beliefs, plans, strategies and
objectives concerning the Company's future financial and operating performance.
Such forward-looking information is subject to assumptions and beliefs based on
current information known to the Company and factors that could yield actual
results differing materially from those anticipated. The Company undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes in future
operating results. Please see Exhibit 99.1, "Safe Harbor Compliance Statement
for Forward-Looking Statements," for additional factors to be considered by
shareholders and prospective shareholders.
OVERVIEW
CTN Media Group, Inc., a Delaware corporation, (the "Company"),
commenced operations in January 1991. The Company is a diversified media company
specializing in reaching targeted audiences. The Company has properties in the
television, magazine, newspaper and online sectors. The Company owns and
operates the College Television Network ("CTN" or the "Network"), a proprietary
commercial television network that operates on college and university campuses
across the country. CTN is provided to campuses through single-channel
television systems ("Systems") placed free of charge primarily in the
Form 10-QSB
Page 10 of 15
<PAGE>
campus public venues, including dining facilities and student unions. At March
31, 2000, CTN was installed or contracted for installation at approximately
1,660 locations at various colleges and universities throughout the United
States. According to projections from Nielson Media research and audience
measuring data, CTN reaches approximately 1,500,000 young adult viewers each
day.
The Company publishes Link Magazine, the most widely read college
magazine in the U.S., according to Student Monitor. Each issue of the
publication is direct mailed to over one million students on college campuses.
The magazine enjoys a total readership of 3,200,000 college students. In
addition, the Company owns ID8, an Atlanta-based advertising agency primarily
involved in supporting the creative needs of the Company. In addition, ID8
places media buys and provides creative services for third-party clients.
MPM, the Company's wholly owned subsidiary, is a leading media
placement and promotion specialist in the college, military, minority and
seniors segments. MPM utilizes various advertising vehicles throughout the
United States to meet its customers' needs, including, but not limited to,
newspapers, radio, magazines, and on-site events which target specific markets
such as college students, minorities, military personnel and senior citizens.
Wetair.com, the Company's proprietary Internet site, is a lifestyle and
entertainment destination site for the 18-24 year old demographic. The site,
which launched May 1, 2000, features lifestyle categories hosted by on-screen
personalities that will promote interaction and content submission from its user
base. As of the formation date, the Company owns 90% of the outstanding stock of
Wetair and operates it as a subsidiary of the Company.
The Company has two reportable business segments: (i) CTN, which
includes the Network, Link Magazine, ID8 and Wetair and (ii) MPM.
Certain of the Company's revenue is affected by the pattern of
seasonality common to most school-related businesses. Historically, the Company
has generated a significant portion of its revenue during the period of
September through May and substantially less revenue during the summer months
when colleges and universities do not hold regular classes.
RESULTS OF OPERATIONS
The following table sets forth certain financial data derived from the
Company's statement of operations for the three months ended March 31, 2000 and
March 31, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
---------------------------------- ----------------------------------
% OF % OF
$ REVENUE $ REVENUE
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C>
Revenue..................................... $16,160,437 100 $2,980,294 100
Operating expenses.......................... 11,407,773 71 1,833,387 62
Selling, general and administrative......... 6,843,677 42 3,649,921 122
Depreciation and amortization............... 1,542,153 10 308,089 10
Interest income (expense), net.............. (531,608) 3 48,566 2
Net Loss ................................... (4,164,774) 26 (2,762,537) 93
</TABLE>
Revenue increased to $16,160,437 for the three month period ended March
31, 2000, versus $2,980,294 for the comparable period in the prior year. The
primary source for the revenue increase was attributable to MPM, which was
acquired in August 1999. Revenue attributable to MPM accounts for
Form 10-QSB
Page 11 of 15
<PAGE>
approximately $11,400,000 of this increase. In addition, advertising sales for
the CTN segment increased approximately $1,700,000 due primarily to sales to new
advertisers and increased commitments from the existing advertiser base at the
Network. The Company anticipates that it will experience continued sales growth
at CTN throughout the fiscal year ending December 31, 2000 by continuing to
expand its advertiser base and by increasing the rates charged for its
advertising spots to reflect an anticipated increase in viewership. Although the
Company has agreements with national advertisers and has held discussions or had
prior agreements with other national advertisers, no assurance can be given that
these or other advertisers will continue to purchase advertising from the
Company, or that future significant advertising revenue will ever be generated.
Failure to significantly increase advertising revenue could have a material
impact on the operations of the Company.
Operating expenses increased to $11,407,773 for the three month period
ended March 31, 2000, as compared to $1,833,387 for the comparable period in the
prior year. The increase over the comparable prior year period is primarily
attributable to costs relating to MPM. MPM operating expenses account for
approximately $9,200,000 of this increase. Costs related to improving Network
programming and the production of higher quality issues of Link primarily
account for the remaining increase.
Selling, general and administrative expenses increased to $6,843,677
for the three month period ended March 31, 2000, versus $3,649,921 for the
comparable period in the prior year. SG&A expenses attributable to MPM account
for approximately $1,330,000 of this increase. The remaining increase is
primarily attributable to costs associated with Wetair along with increased
marketing, research, expanded sales efforts and agency fees associated with the
CTN segment.
Depreciation and amortization expense totaled $1,542,153 for the three
month period ended March 31, 2000, as compared to $308,089 for the comparable
period in the prior year. $905,000 of this increase is primarily related to the
amortization of the intangible assets and depreciation recorded in connection
with the MPM acquisition. The remaining increase is a result of depreciation
taken on equipment associated with the rapid expansion of the Network.
Interest expense, net of interest income, amounted to $531,608 for the
three month period ended March 31, 2000, versus interest income of $48,566 for
the comparable period in the prior year. The change from net interest income to
expense resulted from borrowings at the end 1999 on the Company's three credit
facilities.
The Company has incurred substantial operating losses since
commencement of its operations but anticipates that such operating losses
will be significantly reduced in fiscal 2000. The net loss amounted to
$4,164,774 for the three month period ended March 31, 2000, versus $2,762,537
for the comparable period in the prior year. The net loss during the
respective periods for the quarter reflects the Company's continued efforts
to expand its advertiser and affiliate bases.
FINANCIAL CONDITION AND LIQUIDITY
Cash used in operations increased to $4,691,422 during the three months
ended March 31, 2000, from $1,774,389 for the comparable period in the prior
year. The impact of an increased loss coupled with decreased accounts payable
and accrued expense balances accounts for the increase in cash used in
operations for the quarter. The Company has obtained an equity infusion from
Holdings and a credit facility from a lending institution to fund current
working capital needs. Additionally, the Company has obtained a commitment from
Holdings to fund cash flow deficits, if any, through December 31, 2000.
Acquisitions and purchases of property and equipment increased to
$1,718,619 during the three months ended March 31, 2000 from $920,393 for the
comparable period in the prior year. This increase is primarily attributable to
equipment purchases for the accelerated installation of school locations which
will continue through the current year.
Cash provided by financing activities was $4,867,558 for the three
months ended March 31, 2000, compared to no cash provided by financing for the
same period in the prior year. The majority of the
Form 10-QSB
Page 12 of 15
<PAGE>
proceeds came from the draw down on the CTN credit facility. The remaining funds
were received from the exercise of warrants and stock options.
At March 31, 2000, the Company did not meet certain financial covenants
of one of its credit facilities. The financial institution has granted the
Company a waiver for this default. The Company and Holdings are in negotiations
with the financial institution related to amending the current debt agreement or
entering into a new agreement with an extended term. There can be no assurances
that these efforts will be successful. Holdings has committed to provide funding
through fiscal 2000 in the event the Company experiences cash flow deficits from
operations or cash flow deficits in connection with debt service requirements.
In order for the Company 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 more aggressively market CTN to attract more advertisers.
Form 10-QSB
Page 13 of 15
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No events occurred during the quarter covered by this Report that would
require a response to this Item.
ITEM 2. CHANGES IN SECURITIES.
No events occurred during the quarter covered by this report that would
require a response to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No events occurred during the quarter covered by this Report that would
require a response to this Item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
No events occurred during the quarter covered by this Report that would
require a response to this Item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed with this Report:
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Safe Harbor Compliance Statement for Forward
Looking Statements
(b) Reports on Form 8-K: None.
Form 10-QSB
Page 14 of 15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CTN MEDIA GROUP, INC.
Registrant
Date: May 12, 2000 /s/ Jason Elkin
----------------------------------------
Jason Elkin
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
(PRINCIPAL EXECUTIVE OFFICER)
Date: May 12, 2000 /s/ Patrick Doran
-----------------------------------------
Patrick Doran
CHIEF FINANCIAL OFFICER AND SECRETARY
(PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
Form 10-QSB
Page 15 of 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS CONTAINED IN THE MARCH 31, 2000 REPORT FILED ON
FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,628,149
<SECURITIES> 0
<RECEIVABLES> 18,453,570
<ALLOWANCES> 652,475
<INVENTORY> 0
<CURRENT-ASSETS> 24,330,766
<PP&E> 16,703,795
<DEPRECIATION> 3,199,856
<TOTAL-ASSETS> 67,739,203
<CURRENT-LIABILITIES> 24,579,198
<BONDS> 0
41,180,512
0
<COMMON> 74,099
<OTHER-SE> (12,573,083)
<TOTAL-LIABILITY-AND-EQUITY> 67,739,203
<SALES> 16,160,437
<TOTAL-REVENUES> 16,274,279
<CGS> 0
<TOTAL-COSTS> 19,793,603
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 645,450
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,164,774)
<EPS-BASIC> 1.40
<EPS-DILUTED> 0.82
</TABLE>
<PAGE>
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS
You should consider carefully the following factors in evaluating our business
and us. 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, or 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 operating losses and negative
cash flow from operations. Our statements of operations for the three month
period ended March 31, 1999, and the three month period ended March 31, 2000,
reflect net losses of approximately $2,762,537 and $4,164,774, respectively.
Including the effect of the accretion adjustment of $24,708,308 for the
redemption value of the preferred stock (which redemption cannot occur until
July 23, 2006), the net income available to common stockholders for the year
three month period ended March 31, 2000 was $20,543,534, or approximately $1.40
basic income per share. This negative accretion of $24,708,308 was attributable
to the adjustment of the preferred stock to its full redemption value at the
market value of the underlying common stock on March 31, 2000. This is the full
amount the preferred stock would be redeemable as of March 31, 2000, based upon
the Company's closing stock price of $6.25 as of such date. Since the redemption
value is the greater of the original cost plus accrued dividends or the market
value of the underlying common stock at the time of the redemption, as the
Company's stock price changes, the redemption value and this accretion will
change; however, the redemption value will never be less than original cost plus
accrued dividends. Although the Company is accreting the full redemption value,
the preferred stock is not redeemable until July 23, 2006. We expect to incur
operating losses in the near future and until such time as operation generate
sufficient revenue to cover over costs.
WE MAY REQUIRE ADDITIONAL WORKING CAPITAL OR FINANCING TO MEET OUR OPERATING
DEMANDS IN 2000.
The rapid development of our business will continue to require
substantial capital expenditures for additional installations of Network
equipment at new affiliate locations. 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 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 will be required to raise additional capital
or obtain additional financing to fund our operations.
WE MAY NOT MEET THE COVENANTS UNDER OUR BANK DEBT ARRANGEMENTS.
At March 31, 2000, the Company did not meet the minimum EBITDA
covenants of its $12,000,000 line of credit facility. If we fail to meet a
covenant under our bank loans, the financial institution has the right to
declare the loan due upon demand. The financial institution has granted the
Company a waiver for the current default. We are in negotiations with financial
institutions related to amending the current debt agreements or entering into
new agreements with an extended term. There can be no assurances that these
efforts will be successful. Our majority shareholder has committed to provide
funding through fiscal 2000 in the event we experience cash flow deficits from
operations or cash flow deficits in connection with debt service requirements.
<PAGE>
WE DEPEND UPON OUR ADVERTISING REVENUES.
We derive a significant portion of our revenues from advertisers
displaying their commercials on the Network. 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 DEPEND UPON THE COMMISSIONS AND FEES EARNED THROUGH MPM.
MPM earns its revenues by charging commissions on advertisements it
places for clients. Historically, the commission customary in the industry was
15% of the gross charge for advertising space or time; more recently lower
commissions are being negotiated with clients and commissions charged on media
billings are not uniform. Revenues are dependent upon the marketing requirements
of clients. Clients may reduce advertising and marketing budgets at any time.
WE MUST SECURE NEW INSTALLATIONS AND MAINTAIN EXISTING INSTALLATIONS.
The Network's 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 our number of installations, including
contracts for future installation, from 927 as of March 31, 1999, to 1,660 as
of March 31, 2000. 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 the Network 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, securing a new satellite transponder, and the lost advertising
revenues resulting from the interruption in programming.
<PAGE>
WE DEPEND ON OUR AGREEMENTS WITH THIRD PARTIES.
The ability of the Network 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 THE NETWORK WOULD
ADVERSELY AFFECT OUR BUSINESS.
Our prospect 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
the Network 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 the Network.
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. CTN's programming consists
primarily of music, news, information, and entertainment. CTN's music
programming is provided free of charge by major music companies, including
Warner/Elektra/Atlantic, EMI, Polygram, MCA and BMG. The Company also receives
customized news and sports feed produced for the Network by CNN through an
agreement with Turner Private Networks. 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; Martin Grant, our President and Chief
Operating Officer; and Geoffrey Kanter, President of MPM. The loss of any of
these executives could have a material adverse effect on our business and
financial results. All of these executives have entered into multi-year
employment agreements with us.
MPM DEPENDS ON ITS SALES STAFF TO MAINTAIN ITS BUSINESS.
MPM's business is, and will continue to be, dependant upon the sales
skills of its account personnel and their relationships with clients. There is
substantial competition among media placement and advertising companies for
talented personnel and MPM is vulnerable to adverse consequences from the loss
of key individuals. Employees of MPM are generally not under employment
contracts and are free to move to competitors.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES.
CTN competes for advertisers with many other forms of advertising
media, including television, Internet, 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 service.
<PAGE>
MPM's business is highly competitive and advertising accounts may shift
agencies on little or no notice. Clients may also reduce advertising and
marketing budgets at any time. Many of MPM's current and potential competitors
have longer operating histories, more established business relationships, larger
customer bases, greater name recognition and substantially greater financial,
technical, marketing, personnel, management, service, support and other
resources than MPM does. This could allow MPM's current and potential
competitors to respond more quickly than MPM can to new or emerging technologies
and changes in customer requirements, to devote greater resources to the
marketing and sale of their products and services and to adopt more aggressive
pricing policies. We expect that competition will increase as other established
and emerging companies enter the media placement market. Increased competition
may result in price reductions, lower gross margins and loss of our market
share. This could materially and adversely affect our business, financial
condition and results of operations.
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 PRINCIPLE STOCKHOLDER CONTINUES TO CONTROL OUR AFFAIRS.
U-C Holdings, L.L.C. beneficially owns approximately 85.9% of our
outstanding voting stock, including common stock and voting preferred stock. As
a result of its ownership, Holdings has, and will continue to have, sufficient
voting power and determine our direction and policies, the election of our
directors, the outcome of any other matter submitted to vote of stockholders and
to prevent or cause a change in our control. See, "We may be subject to conflict
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 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 indirect beneficial owners of the securities
beneficially owned by 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
judgement in resolving any specific conflict of interest that may occur.
THE HOLDERS OF OUR COMMON STOCK COULD BE MATERIALLY DILUTED UNDER CERTAIN
CIRCUMSTANCES.
The conversion of the shares of convertible preferred stock into
common stock will result in dilution of voting rights of the currently
outstanding public holders of the common stock.
OUR REVENUES ARE SUBJECT TO SEASONALITY.
Our revenues are affected by the pattern of seasonality common to most
school-related businesses. Historically, we have generated 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.
<PAGE>
OUR STOCK PRICE AND ABILITY TO RAISE CAPITAL OR OBTAIN FINANCING COULD BE HURT
BY OUR OUTSTANDING WARRANTS AND OPTIONS.
As of March 31, 2000, there are outstanding options to purchase
1,910,918 shares of our common stock granted to certain of our officers and
directors pursuant to our stock option plans and otherwise. In addition, there
are warrants outstanding that permit their holders to purchase 1,893,982 shares
of our common stock. Holdings has entered into certain Equity Protection
Agreements, dated April 25, 1997, which allow 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).
Holdings also received a warrant to purchase 152,100 shares of our common stock
in connection with the standby commitment 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.
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
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 Holdings is subject to certain limitations set forth in Rule 144
under the Securities Act. As of March 31, 2000, options to purchase 1,910,918
shares and warrants to purchase 1,893,982 shares of our common stock were
outstanding, of which options to purchase 956,196 shares and warrants to
purchase 1,893,982 shares were exercisable.
THERE ARE SEVERAL RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY; IF WE CANNOT
INTEGRATE ACQUIRED COMPANIES WITH OUR BUSINESS, OUR PROFITABILITY MAY BE
ADVERSELY AFFECTED.
We may seek to expand or complement our operations through the possible
acquisition of other companies or through the 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 understanding with
respect to any significant acquisition. We have not established any minimum
criteria for any other acquisition, and our management and Board of Directors
will have complete discretion in determining the terms of any such acquisition.
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.
We have completed a number of acquisitions in the past two fiscal years
and may complete additional acquisitions of complementary businesses in the
future. Our profitability may be adversely affected by our ability to
effectively and efficiently integrate these recently-acquired companies as well
as our ability to integrate companies that we acquire in the future.
