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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, 1999 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
CTN Media Group, 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:
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Title of Each Class Name of each Exchange on which registered
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Common Stock, $.005 par value per share The Nasdaq SmallCap Market
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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: $31,592,501.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 8, 2000 (computed by reference to the average bid and
asked prices of such stock on March 8, 2000) was approximately $22,295,571.
There were 14,718,136 shares of the Registrant's Common Stock outstanding as of
March 8, 2000.
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 10, 2000 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
CTN Media Group, Inc., a Delaware corporation formerly known as College
Television Network, Inc., (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 campus public venues, including dining facilities and
student unions. At December 31, 1999, CTN was installed or contracted for
installation at approximately 1,575 locations at various colleges and
universities throughout the United States. According to projections from Nielson
Media research audience measurement data, CTN reaches 1.5 million 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 3.2 million college students. In addition, the
Company owns ID8, formerly known as Sadler & Streib, an Atlanta-based
advertising agency primarily involved in placing media buys and providing
creative services for its clients.
On August 31, 1999, the Company acquired all of the outstanding capital
stock of Armed Forces Communications, Inc., a New York corporation doing
business as Market Place Media ("MPM"), in exchange for $30,000,000 (the "MPM
Acquisition"). MPM is a leading media placement and promotion specialist in the
college, military, minority and seniors segments. The Company financed the
$30,000,000 purchase price and related acquisition costs through the issuance of
$15,000,000 of Series A Convertible Preferred Stock, $0.001 par value per share
("Series A Preferred"), to the Company's majority stockholder, U-C Holdings,
L.L.C., a Delaware limited liability company ("Holdings"), and the incurrence of
$15,000,000 of bank debt.
On October 13, 1999, the Company created Wetair.com, L.L.C. ("Wetair"), a
subsidiary, which will develop and operate a proprietary Internet site for the
Company called "Wetair.com". Wetair.com is a lifestyle and entertainment
destination site for the 18-24 year old demographic. The site will feature
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 and Wetair will operate as a
subsidiary of the Company. In conjunction with the creation of the Company's
Internet website, a 10% minority ownership has been granted to an unrelated
third party Internet consulting group. In addition, the Company has entered into
an Interactive Services Agreement with THINK New Ideas, Inc. ("THINK"). THINK
has been contracted to design and manage services relating to the Company
website and Wetair.com.
The Company has two reportable business segments: (i) CTN, which includes
the Network, Link Magazine and ID8, and (ii) MPM.
CTN
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:
The Pennsylvania State University, Arizona State University, NYU, Michigan State
University, UCLA, University of Florida, University of Michigan, University of
Washington, Louisiana State University, University of South Florida, University
of Illinois and University of Maryland. The Company's goal is to continue to
place CTN in a significant number of the 3,600 colleges and universities located
in the United States.
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CTN's programming of music, news, information and entertainment is viewed
on monitors of 25" or more placed strategically throughout the installed
location to insure exposure and ease of viewership. 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 ensures reliability
of delivery and 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 also receives customized news and sports programming
produced for the Network by CNN through an agreement with Turner Private
Networks. CTN airs newscasts twice an hour, with new newscasts being produced
twice daily and as a result of an amendment to the Company's agreement with
Turner Private Networks, Inc., effective July 30, 1999, CTN now broadcasts CNN
Headline News "Top Stories" segments.
The Company's revenues are derived from commercial advertising. The Company
presently allots eight minutes of advertising available per hour. The Company
believes CTN is well-positioned to offer advertisers a highly targeted,
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 proven attractiveness to national advertisers.
CTN's cost per thousand viewers ("CPM pricing is highly competitive in the
industry. National advertisers on CTN during fiscal 1999 included AT&T, America
Online, Inc., The Andrew Jergens Co. (Biore), Burger King Corporation, Buena
Vista Pictures, Inc., The Coca-Cola Company, Colgate Palmolive Co., Duckhead
Apparel, Inc., Ecampus.com, Emusic.com, Inc., Gateway, Inc., General Motors
Corp., Isuzu Motors, Inc., Jack Schwartz Shoes, Inc. (maker of Lugz shoes), K-
Swiss, Inc., MCI Worldcom, Inc., Mentos, NewLine Cinema Corp., S.C. Johnson &
Son, Inc., Sony Pictures, 3DO Co., Time Warner Inc., Universal Pictures, U.S.
Army R.O.T.C., U.S. Marine Corps, USA Networks, Inc., Vanmelle, Inc., Visa USA,
Inc., Warner-Lambert Company and Zippo Manufacturing Co. The Company's mix of
advertisers on CTN changes from time to time. The Company's network advertising
revenues have grown from $6,618,215 in fiscal 1998 to $8,147,788 in fiscal 1999.
The Company's revenues for 1999 also include the operating results of Link
Magazine, ID8 and MPM. Revenues attributable to these divisions during fiscal
1999 were $2,576,008, $955,232 and $19,913,472, respectively. Those revenues
derived from MPM are since the Company acquired MPM on August 31, 1999.
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 issued shares of
preferred stock to Holdings in a series of transactions during 1999. Pursuant to
a Purchase Agreement dated July 23, 1999, between the Company and Holdings,
Holdings purchased 309,998 shares of the Company's Convertible Preferred Stock,
$0.001 par value per share ("Convertible Preferred"), for an aggregate purchase
price of $4,649,970. In addition, the Company and Holdings entered into a new
Purchase Agreement, dated August 31, 1999 (the "August Purchase Agreement"),
whereby Holdings funded $15 million in capital for the MPM Acquisition in
exchange for 1,000,000 shares of Series A Preferred. Additionally, the Company
has the option to sell to Holdings, subject to various conditions, additional
shares of Series A Preferred in the event that the Company requires additional
working capital. On October 8, 1999, the Company issued 33,333 shares of Series
A Preferred to Holdings pursuant to the August Purchase Agreement for an
aggregate purchase price of $500,000. On October 18, 1999, the Company and
Holdings entered into an Amended and Restated Purchase Agreement ("Amended
Purchase Agreement") and Holdings subsequently funded $2,300,000 to the Company
in exchange for 153,334 shares of Series A Preferred. On November 18, 1999,
pursuant to the terms of the Amended Purchase Agreement, Holdings acquired
another 480,000 shares of Series A Preferred from the Company for an aggregate
purchase price of $7,200,000.
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.
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The Company believes there is an opportunity to grow CTN. While the Company
experienced a net loss in fiscal 1999 in excess of its net loss from the prior
fiscal year, advertising revenues and the number of affiliate universities have
increased significantly. The Company will require additional capital to meet its
ongoing operational demands for fiscal 2000. The Company will secure needed
capital through bank facilities and through the issuance of Series A Preferred
Stock.
The College Television Network System
CTN is a private satellite 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. The Company's Systems are single-channel systems offering
only CTN's music, news, information and entertainment programming.
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.
Network Programming Content
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, Playgram, MCA and BMG.
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. Pursuant to an amendment effective July 30, 1999, CTN also
broadcasts CNN Headline News "Top Stories" segments. The total license fee is
approximately $3,200,000.
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 1,575 Systems contracted for as of December 31, 1999, 1,225 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 2000
semester. System installation generally takes approximately 8 to 10 weeks from
the date the contract is signed by the college or university. The average
agreement with an institution is typically for a three-year term.
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.
Network Markets
As discussed above, there are approximately 3,600 colleges and universities
in the United States. The Company's goal is to continue to place CTN in a
significant number of these institutions. As of December 31, 1999, CTN was
installed or contracted for installation in 1,575 locations throughout the
country.
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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 839 new affiliate locations in
1999. This growth is attributable to several factors: a dedicated, professional
affiliate sales 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 16 full-time employees involved in affiliate sales
and affiliate support functions.
Advertising Revenues
The CTN segment derives its revenues primarily from advertisements placed
on the Network. Advertisers find the network's programming to be current and
appealing, the campus dining hall setting with its captive audience to be
desirable, and the System's programming concept to be targeted and innovative.
Other advertising revenues are derived from advertisements placed in Link
Magazine and revenues generated by ID8.
In fiscal 1999, approximately 58% of the network's advertising spots were
sold. In both fiscal 1998 and 1997, approximately 33% of the network's
advertising spots were sold. The Network's overall strategy follows three
principal methods for increasing its advertising revenue: (i) increasing
audience size by expanding distribution; (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.
The Coca-Cola Company, Colgate/Palmolive, Mentos, K-Swiss and Universal
Pictures accounted for 23%, 8%, 6%, 6% and 5% respectively, of the Network
advertising revenues for fiscal 1999. Top advertisers in Link Magazine during
fiscal 1999 were, Lycos, Discover Card and Yahoo! Inc., accounting for 9%, 9%,
and 7% respectively, of Link's advertising revenues. ID8's revenues were derived
17%, 11% and 6% from Georgian Terrace, MCI Worldcom, and Swissotel,
respectively.
MPM
MPM specializes in targeted media placement services for a wide variety of
advertisers. 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. The
majority of MPM's revenue is generated in college, military and minority
markets. The top five accounts for MPM in Fiscal 1999 were AT&T Communications,
GEICO, USAA Corporate Advertising, Brown & Williamson and TIAA-CREF accounting
for 11%, 5%, 5%, 5% and 4%, respectively, of MPM's total 1999 revenues. Revenues
broken out by type of advertising for 1999 were as follows: newspaper
advertising, radio advertising, event marketing, and out-of-home advertising
accounting for 84%, 9%, 4% and 3%, respectively, of MPM's total 1999 revenues.
The college market division of MPM operates under the trade name AllCampus
Media ("ACM"). The college newspapers that ACM represents on a non-exclusive
basis have a combined circulation of over seven million and enrollment at the
associated schools totals over twelve million students. ACM utilizes a
proprietary software system that allows it to retrieve and merge data about
demographics, consumer buying habits and school data with the college newspaper
data and rates to assist clients in creating effective media plans targeting
college students. ACM also executes the media buys for the clients, ordering the
advertising space, reproducing and delivering the advertising material and
verifying placement of the advertising.
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ACM also makes out-of-home advertising media available to clients targeting
the college market. Through its exclusive network of professional poster
placement representatives throughout the country, ACM is able to place
advertising messages on campus bulletin boards on the majority of college
campuses in the United States. ACM also has available to advertisers
"AdStands", a 4-color advertisement atop attractive newspaper distribution bins
in high-traffic indoor and outdoor campus locations such as student unions,
bookstores, and dormitories. The advertising space on these AdStands is sold
to clients on a monthly basis. In addition to these tools, ACM has a student
network of representatives that distribute advertising flyers directly to
college students.
Radio is also used by ACM to assist its clients in getting their message to
college students. ACM plans and buys radio advertising or sponsorships on
college and local radio stations.
ACM also directly markets to college students through event marketing and
promotional activities. The events staff at ACM creates, coordinates and
implements direct marketing opportunities for clients. The variety of
activities used includes movie screenings, tabling, surveys, concert tours,
sampling programs and on-campus demonstrations.
The military market division of MPM operates under the name Armed Forces
Communications ("AFC"). The military base newspapers that AFC represents on a
non-exclusive basis have a combined circulation of over two million, reaching an
active duty population of over one million and a total military base population
of over six million. The publications that AFC represents are located both in
the United States and abroad and include the world renowned European and Pacific
"Stars and Stripes". In addition to newspapers, AFC represents a number of
national magazines that target military personnel and retirees.
In addition to newspaper advertising, AFC utilizes a number of other media
to reach military personnel. AFC locates and buys advertising space on outdoor
billboards that are strategically located at entrances to military bases. In-
store radio at the commissary and exchanges is another advertising medium that
AFC makes available to clients. Direct mailing lists of military personnel are
also supplied through AFC.
AFC's event team creates, coordinates and implements on-base direct
marketing events across the country. The Company's extensive relationships with
Morale Welfare and Recreation Officers throughout the country allows AFC to find
opportunities for clients to place their advertising message on base, directly
to the active duty personnel.
The minority market division of MPM, which includes the African-American,
Hispanic and Ethnic markets, operates under the trade name American Minorities
Media ("AMM"). The newspapers that AMM represents on a non-exclusive basis
include African-American community newspapers that have a circulation of over
ten million, Hispanic community papers that have a circulation of over eleven
million and Ethnic publications that have a circulation of over five million.
AMM utilizes the same proprietary software system used by ACM to track
demographics, consumer buying habits and other data, including minority
community newspaper data and rates, to assist clients in creating effective
media plans targeting minority groups. AMM also executes the media buys for
their clients, ordering the advertising space, reproducing and delivering the
advertising material and verifying placement of the advertising.
Radio is also used by AMM to assist clients in getting their messages to
minorities. AMM plans and buys radio advertising on local radio stations and
through nationally syndicated radio shows.
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, Internet, 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. 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 an efficient 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.
MPM faces competition for limited advertising revenues from advertisers and
sponsors, from other similar media placement companies and from the in-house
sales staff of the media such as radio, television, print media, direct mail
marketing and the Internet.
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MPM competes with a wide variety of other advertising media, the range and
diversity of which has increased substantially over the past several years to
include advertising displays in shopping centers and malls, airports, stadiums,
movie theatres and supermarkets, and on taxis, trains, buses and subways. Some
of MPM's competitors, principally in other media such as radio and television,
are substantially larger, better capitalized and have access to greater
resources than MPM. There can be no assurance that MPM will be able to compete
successfully with such other companies and media.
Employees
As of December 31, 1999, the Company employed 176 full-time salaried
personnel, consisting of various managerial, operational, Internet, programming,
advertising, publishing, ad agency and affiliate sales and support personnel.
The Company also utilizes independent contractors to perform certain of the
services required in connection with the production, installation and
maintenance of the Network 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. Twenty-five 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 continue to 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 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. MPM owns the following
trademarks: Armed Forces Communications, AllCampus Media, American Minorities
Media, Active Seniors Media, and Market Place Media, and the URLs
"ArmedForces.com", "AllCampus.com" and "MarketMedia.com". In addition, the
Company owns the URL "Wetair.com" and is filing trademark applications for
Wetair, Wetair.com and the associated logos.
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 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.
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Item 2. Description of Property.
The Company presently has facilities in seven cities: Atlanta; New York
City; Los Angeles; Santa Barbara; Chicago; Livonia, Michigan; 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 ID8. The Company conducts its marketing and
affiliate relations efforts primarily out of its offices in New York, Chicago
and Los Angeles. MPM occupies offices in Santa Barbara; Livonia, Michigan; and
New York. The Company's 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 has recently signed a lease for
approximately 2,360 square feet of additional space. Additionally, approximately
3,200 square feet for ID8 is leased in Atlanta. The Company also leases
approximately 7,140 square feet, 1,800 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 Network equipment at affiliate locations. MPM
leases approximately 16,400 square feet of office space for its Santa Barbara
headquarters, 2,000 square feet of space in New York, and 850 square feet in
Livonia, Michigan.
The aggregate monthly rental for these leased offices is currently
approximately $69,715, and the Company's management believes that these
facilities are adequate for its intended activities in the foreseeable future.
In an effort to streamline operational efficiencies, the Company is
contemplating consolidating the three Atlanta operations into one office
location. The Company is also considering sub-leasing the current New York City
office space and relocating to another New York City location which would
provide space to consolidate MPM's New York operations.
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.
(a) On October 15, 1999, by written consent in lieu of a meeting, the
holder of a majority of the Common Stock of the Company and the holder of all of
the preferred stock of the Company approved an Amendment to the Certificate of
Incorporation of the Company, to change the Company's name from "College
Television Network, Inc." to "CTN Media Group, Inc." and to increase the number
of authorized shares of preferred stock of the Company from 2,000,000 shares to
2,800,000 shares. The majority stockholder consent with respect to these
matters took effect on November 12, 1999, 20 days after the mailing of a
Schedule 14C Information Statement to the shareholders of the Company. The
Amendment to the Certificate of Incorporation was filed with the Secretary of
State of Delaware and made effective as of November 12, 1999.
(b) On December 7, 1999, by written consent in lieu of a meeting, the
holder of a majority of the Common Stock of the Company and the holder of all of
the Series A Preferred approved an Amendment to the Second Certificate of
Designation, Powers, Preferences and Rights of the Series A Convertible
Preferred Stock, filed with the Corporations Division of the State of Delaware
on August 31, 1999, which amendment eliminated any reference in the terms of the
Series A Preferred to the Convertible Preferred, thereby reducing any
possibility of confusion regarding the existence of any series of preferred
stock of the Company other than the Series A Preferred. The majority
stockholder consent with respect to these matters took effect on January 10,
2000, 20 days after the mailing of a Schedule 14C Information Statement to the
shareholders of the Company.
(c) On December 7, 1999, the holder of a majority of the Common Stock of
the Company, by written consent in lieu of a meeting, approved (i) an amendment
to the Company's By-laws, providing for an increase in the size of the Board of
Directors of the Company from eleven (11) members to twelve (12) members, and
(ii) the issuance to Holdings of up to 2,509,998 shares of Series A Preferred.
The majority stockholder consent with respect to these matters took effect on
January 10, 2000, 20 days after the mailing of a Schedule 14C Information
Statement to the shareholders of the Company.
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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.
<TABLE>
<CAPTION>
Dates High Price Low Price
----- ---------- ---------
Fiscal Year Ended
December 31, 1998:
<S> <C> <C> <C>
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
Fiscal Year Ended
December 31, 1999:
January 1, 1999 to March 31, 1999.................. $ 3.75 $2.75
April 1, 1999 to June 30, 1999..................... $ 9.38 $3.13
July 1, 1999 to September 30, 1999................. $ 8.06 $5.88
October 1, 1999 to December 31, 1999............... $11.13 $5.63
</TABLE>
As of March 8, 2000, the Company had 68 owners of record and approximately
1,121 beneficial owners of its Common Stock.
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.
The terms of the Series A Preferred provide that when and as declared, the
Company shall pay preferential dividends in cash to the holders of the Series A
Preferred. Dividends on each share of the Series A Preferred accrue on a daily
basis at the rate of 12% per annum on the liquidation value thereof plus all
accumulated and unpaid dividends thereon from and including the date of issuance
of such share. The Company is not obligated to pay out any cash dividends on
the Series A Preferred until the first to occur of (i) the date on which the
liquidation value of the Series A Preferred (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection with the
liquidation of the Company or the redemption of such stock by the Company, (ii)
the date on which the Series A Preferred is converted into shares of Common
Stock or (iii) the date on which such stock is otherwise acquired by the
Company.
The equity issued to Holdings in the form of Series A Preferred has been
recorded on the Balance Sheet of the Company net of the value associated with
its favorable conversion terms (the "Beneficial Conversion Feature"). The
Beneficial Conversion Feature is calculated as the difference between the
conversion price of the security and the market price of the Common Stock on the
commitment date of a given purchase. In connection with the Beneficial
Conversion Feature, because these securities are immediately convertible, the
amounts ascribed to the Beneficial Conversion Feature have been immediately
amortized through charges to Shareholders' Equity and included as adjustments to
arrive at net loss available to common stockholders on the Consolidated
Statement of Operations. Such adjustments to net loss available to common
stockholders associated with the Beneficial Conversion Feature aggregated
$15,180,454. In connection with the Series A Preferred issuances to Holdings, at
December 31, 1999, the Company has 6,588,884 common shares reserved for possible
conversions.
The Company recorded additional charges through Shareholder's Equity of
approximately $36,918,301 to accrete these securities to their highest
redemption value as of December 31, 1999. Since the Series A Preferred is
redeemable on July 23, 2006, at the discretion of the Series A Preferred
Stockholders, at the greater of the liquidation value (which is the purchase
price plus accrued and unpaid dividends) and the market value of the underlying
common stock, the Company is required to accrete the full amount of the Series A
Preferred's redemption value if such redemption occurred on the date of the
financial statements. Therefore, as the stock price rises, the market value for
determining the redemption value increases and the accretion amount increases,
thus, reducing the earnings per share.
(b) No events occurred during the period covered by this Report that would
require a response to this Item.
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 targeted multimedia company whose principal activities
involve operating and marketing CTN, a private commercial television network,
Link Magazine and MPM, a media placement company that reaches specialized
markets through a variety of advertising media. The Company started operations
in January 1991. The majority of the CTN segment revenues is derived from
advertising displayed on the Network. As of December 31, 1999, CTN was
installed or contracted for installation in 1,575 locations in colleges and
universities throughout the United States. MPM was purchased August 31, 1999;
accordingly, the results of operations of MPM are consolidated with the
Company's results from August 31, 1999 through December 31, 1999.
-9-
<PAGE>
The Company owns and publishes "Link Magazine," a publication
circulated to college students. During fiscal 1999, the Company published 6
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 seven in fiscal 2000.
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, 1999
("Fiscal 1999") and the fiscal year ended December 31, 1998 ("Fiscal 1998").
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
----------- -----------
$ % of Revenues $ % of Revenues
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues............................... 31,592,501 100% 8,509,878 100%
Operating Expenses..................... 19,861,972 63% 3,552,748 42%
Publishing Expenses.................... 3,025,686 10% 1,677,267 20%
Advertising Agency Expenses............ 1,113,833 4% 422,657 5%
Selling, General & Administrative
Expenses.............................. 21,964,404 70% 9,640,551 113%
Depreciation & Amortization............ 2,769,414 9% 2,203,988 26%
Interest Income (Expense), net......... (537,226) 2% 343,386 2%
Loss before change in accounting
principle............................. (17,680,034) 56% (8,593,947) 100%
Cumulative Effect of a Change in
Accounting Principle.................. -- 0% 140,044 2%
Net Loss............................... (17,680,034) 56% (8,453,903) 99%
</TABLE>
Revenues increased to $31,592,501 for Fiscal 1999 from $8,509,878 for
Fiscal 1998. Network advertising revenue of $8,147,789 represented a 24%
increase from Fiscal 1998. Rate increases and increased sellout percentage
contributed to this increase. Link Magazine revenue of $2,576,008 represented an
84% increase from Fiscal 1998. This increase is attributable to publishing an
additional issue in the current year, coupled with increased rates and pages
sold. ID8 revenue of $955,232 represented a 254% increase from Fiscal 1998. This
increase is primarily due to the acquisition of ID8 on July 1, 1998 and an
increase in new customers in the current year. MPM revenue of $19,913,472
comprises the balance of the Company's Fiscal 1999 Revenues. There is no
comparable amount for MPM in prior periods as this business was acquired in the
current year. The Network's advertiser base increased from 26 advertisers in
Fiscal 1998 to 38 advertisers in Fiscal 1999 and included AT&T, America Online,
Inc., The Andrew Jergens Co. (Biore), Burger King Corporation, Buena Vista
Pictures, Inc., The Coca-Cola Company, Colgate Palmolive Co., Duckhead Apparel,
Inc., Ecampus.com, Emusic.com, Inc., Gateway, Inc., General Motors Corp., Isuzu
Motors, Inc., Jack Schwartz Shoes, Inc. (maker of Lugz shoes), K-Swiss, Inc.,
MCI Worldcom, Inc., Mentos, NewLine Cinema Corp., S.C. Johnson & Son, Inc., Sony
Pictures, 3DO Co., Time Warner Inc., Universal Pictures, U.S. Army R.O.T.C.,
U.S. Marine Corps, USA Networks, Inc., Vanmelle, Inc., Visa USA, Inc., Warner-
Lambert Company and Zippo Manufacturing Co. Studio business included Buena Vista
Pictures, Fox, New Line, Polygram and Universal Pictures. The Company
anticipates continued sales growth during the year ending December 31, 2000
("Fiscal 2000") 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.
Operating expenses totaled $19,861,972 for Fiscal 1999 compared to
$3,552,748 for Fiscal 1998. Approximately $15,700,000 of the increase is
attributable to direct costs associated with media placement by MPM. The
remaining increase is attributable to a full year's expense for the upgraded
satellite uplink and transponder costs, an increase in original programming
costs and an increase in agency fees associated with increased sales at the
Network and Link Magazine.
-10-
<PAGE>
Publishing expenses increased to $3,025,686 for Fiscal 1999 as compared to
$1,677,267 for Fiscal 1998. The primary reason for the increase is the
direct costs attributable to publishing one additional issue of Link for the
year. In addition, the Company significantly increased the size and quality of
the magazine.
Advertising agency expenses relate to costs incurred at ID8. These expenses
increased to $1,113,833 for Fiscal 1999 as compared to $422,657 for Fiscal 1998,
which includes only a partial year due to the acquisition of the agency on July
1, 1998. The increase in expenses for Fiscal 1999 is primarily attributable to
the direct costs associated with the increase in agency revenue, coupled with an
increase in personnel required to service the needs of CTN and additional
accounts generated during 1999.
Selling, general and administrative ("SG&A") expenses increased to
$21,964,404 for Fiscal 1999 as compared to $9,640,551 for Fiscal 1998.
Significant factors included in Fiscal 1999 expenses related to non-cash stock
option compensation charges and additional severance obligations of $4,756,000.
Costs associated with MPM accounted for $2,326,781 of the increase. Other
significant portions of the remaining increase are attributable to additions to
the advertising and affiliate sales forces of approximately $2,400,000. In
addition to the additional expenses 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 22%
of Network and Link Magazine sales. To further enhance the Company's sales
efforts and to increase brand awareness, the Company incurred increased market
research and advertising expenses in Fiscal 1999. The Company also produced a
concert tour targeted specifically at college students. Costs incurred relative
to the concert tour, which were not included in Fiscal 1998, amount to
approximately $700,000. Additional overhead costs associated with the Company's
overall growth also account for a portion of the increased expenses.
Depreciation and amortization expense totaled $2,769,414 for Fiscal 1999
compared to $2,203,988 for Fiscal 1998. The increase is primarily attributable
to amortization of intangible assets associated with the purchase of MPM
combined with the depreciation associated with the rapid addition of DVB systems
in school locations offset by the acceleration of depreciation in 1998 on the
previous delivery system. The non-recurring increase of approximately $936,000
in Fiscal 1998 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 favor of the DVB 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.
The Company recorded net interest expense of $537,226 for Fiscal 1999
compared to net interest income of $393,386 in Fiscal 1998. The interest
expense relates to the debt incurred for working capital purposes and the debt
associated with the acquisition of MPM (see Note 9 in the Notes to Consolidated
Financial Statements). Interest income recorded in 1998 is attributable to the
Company's increased cash position as a result of a stock rights offering on July
17, 1998.
The Company has incurred substantial net losses since commencement of its
operations and anticipates that such net losses will continue in Fiscal 2000.
The Company incurred a net loss of $17,680,034 in Fiscal 1999 compared to a net
loss of $8,453,903 in Fiscal 1998.
The Company recorded adjustments to net loss available to common
stockholders associated with the Beneficial Conversion Feature on the Series A
Preferred Stock issued during the year aggregating $15,180,454. In connection
with the Series A Preferred Stock issuances, at December 31, 1999, the Company
has 6,588,884 common shares reserved for possible conversions. The Company
recorded additional charges through Shareholders' Equity of approximately
$36,918,301 to accrete these securities to their highest redemption values as of
December 31, 1999. This is the full amount the preferred stock would be
redeemable for as of December 31, 1999, based upon the Company's closing stock
price of $10.00 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 redemption, as the Company's stock price changes,
the redemption value and this accretion amount 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 Series A
Preferred is not redeemable until July 23, 2006.
Financial Condition and Liquidity
At December 31,1999, the Company had working capital of $3,861,606. At
such date, the Company's cash and cash equivalents totaled $7,170,632.
Cash used in operations increased to $10,082,454 in Fiscal 1999 from
$7,864,729 in Fiscal 1998. 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 1999 relating to
affiliate and advertising overhead and direct costs, satellite delivery costs
relating to the DVB system, and costs related to Link Magazine, ID8 and MPM.
These expense increases for Fiscal 1999 were partially offset by the increase in
sales revenue for the current year.
Cash used in investing activities increased to $37,787,028 in Fiscal 1999
from $6,748,049 in Fiscal 1998. The increase is primarily attributable to the
acquisition of MPM for $30,000,000 in September of 1999. During 1999, the
Company invested approximately $5,900,000 in purchases of property and
equipment, primarily associated with new installations at colleges. The Company
expects to continue its expansion into new colleges and universities.
Cash provided by financing activities increased to $48,628,691 in Fiscal
1999 from $9,585,912 in Fiscal 1998, due to the proceeds from the issuance of
preferred stock of approximately $28,700,000 and proceeds from two credit
facilities of approximately $18,500,000. These proceeds were used in conjunction
with the purchase of MPM and for the operating cash needs of the Company. The
increase in cash provided by financing activities during 1999 was offset by the
rights offering of approximately $9,800,000 in 1998.
The Company believes that certain requirements contained in its loan
covenants may not be met during Fiscal 2000. If the Company fails to meet a
covenant under the bank loans, the financial institution has the right to
declare the loan due upon demand. The Company and Holdings are in negotiations
with the financial institutions related to amending the current debt agreements
or entering into new agreements. There can be no assurances that these efforts
will be successful. As discussed, in Note 12, 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.
As previously discussed, the Company has incurred substantial net losses
since commencement of operations and anticipates that such net losses will
continue in Fiscal 2000. 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.
-11-
<PAGE>
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.
No events occurred during the period covered by this Report that would
require a response to this Item.
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 12, 2000 (the "2000 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 2000 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 2000 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 2000 Proxy Statement under the caption "Related
Party Transactions."
Item 13. Exhibit List and Reports on Form 8-K.
(a) Exhibits:
See the Exhibit Index on page E-1 for a list of the Exhibits incorporated
by referenced herein or filed herewith.
(b) Reports on Form 8-K:
A report on Form 8-K dated October 11, 1999 disclosed the issuance of
33,333 shares of the Series A Convertible Preferred to Holdings on October 8,
1999.
A report on Form 8-K, dated October 27, 1999 disclosed the issuance of
153,334 shares of the Series A Convertible Preferred to Holdings on October 18,
1999.
A report on Form 8-K/A dated November 15, 1999 publishing the consolidated
financial statements and pro forma financial information relating to the
acquisition of Armed Forces Communications, Inc.
A report on Form 8-K dated November 29, 1999 disclosed the issuance of
480,000 shares of the Series A Convertible Preferred to Holdings on November 18,
1999.
-12-
<PAGE>
CTN MEDIA GROUP, INC.
Consolidated Financial Statements
December 31, 1999 and 1998
<PAGE>
CTN MEDIA GROUP, INC.
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants 1
Consolidated Balance Sheets
at December 31, 1999 and 1998 2
Consolidated Statements of Operations
for the year ended December 31, 1999 and the year ended December 31, 1998 3
Consolidated Statement of Changes in Stockholders' (Deficit) Equity
for the year ended December 31, 1999 and the year ended December 31, 1998 4
Consolidated Statement of Cash Flows
for the year ended December 31, 1999 and the year ended December 31, 1998 5
Notes to Consolidated Financial Statements 6 - 25
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
CTN Media Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' (deficit) equity and of
cash flows present fairly, in all material respects, the financial position of
CTN Media Group, Inc. and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 24, 2000
<PAGE>
CTN MEDIA GROUP, INC.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,170,632 $ 6,411,423
Accounts receivable, net 18,389,993 2,256,691
Prepaid expenses 349,303 326,508
Other current assets 189,371 194,051
----------- ------------
Total current assets 26,099,299 9,188,673
Investments 1,500,000 -
Property and equipment, net 12,524,904 6,516,684
Other assets 210,850 165,890
Intangible assets, net 29,116,909 579,802
------------ ------------
Total assets $ 69,451,962 $ 16,451,049
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable $ 14,509,268 $ 500,521
Accrued expenses 2,486,170 781,865
Deferred revenue 942,255 -
Current portion of notes payable 4,300,000 -
----------- ------------
Total current liabilities 22,237,693 1,282,386
Accrued severance, net of current portion 162,285 356,267
Line of credit 1,500,000 -
Notes payable, less current portion 13,500,000 -
----------- ------------
Total liabilities 37,399,978 1,638,653
----------- ------------
Mandatorily redeemable preferred stock 65,888,820 -
----------- ------------
Commitment and contingencies (Note 10)
Stockholders' (deficit) equity
Common stock - $.005 par value, 50,000,000 shares
authorized, 14,612,210 and 14,298,913 shares
issued and outstanding 73,061 71,494
Additional paid in capital 10,626,499 40,051,531
Unearned compensation (1,545,733) -
Accumulated deficit (42,990,663) (25,310,629)
----------- ------------
Total stockholders' (deficit) equity (33,836,836) 14,812,396
----------- ------------
Total liabilities, redeemable preferred
stock, and stockholders' (deficit) equity $ 69,451,962 $ 16,451,049
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
<PAGE>
CTN MEDIA GROUP, INC.
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended
---------------------------------
December 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues $ 31,592,501 $ 8,509,878
------------ -----------
Expenses
Operating 24,001,491 5,652,672
Selling,general and administrative 21,964,404 9,640,551
Depreciation and amortization 2,769,414 2,203,988
------------ -----------
Total expenses 48,735,309 17,497,211
Interest income 220,350 412,392
Interest expense (757,576) (19,006)
------------ -----------
Loss before income taxes and cumulative effect of
change in accounting principles (17,680,034) (8,593,947)
Provision for income taxes - -
------------ -----------
Loss before cumulative effect of change in
accounting principle (17,680,034) (8,593,947)
Cumulative effect of change in accounting principle - 140,044
------------ -----------
Net loss (17,680,034) (8,453,903)
------------ -----------
Dividends, accretion and redemption loss on mandatorily
redeemable preferred stock (36,918,301) -
Amortization of beneficial conversion feature on mandatorily
redeemable preferred stock (15,180,454) -
------------ -----------
Net loss available to common stockholders (69,778,789) (8,453,903)
------------ -----------
Loss before cumulative effect of change in
accounting principle (4.86) (0.90)
Cumulative effect of change in accounting principle - 0.01
------------ -----------
Net loss $(4.86) $ (0.89)
=========== ===========
Weighted average number of common shares outstanding
(basic and diluted) 14,368,283 9,529,087
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
CTN MEDIA GROUP, INC.
Consolidated Statement of Changes in Stockholders' (Deficit) Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Additional
Stock Paid-in Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
---------- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997 8,015,153 $40,076 $ 30,241,704 $ - $(16,856,726) $ 13,425,054
Proceeds from private
place offering,
net of expenses 6,250,000 31,250 9,763,742 - 9,794,992
Proceeds from exercise of
stock option 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
Proceeds from exercise of
stock options 7,667 38 16,789 - 16,827
Proceeds from exercise
of warrants 305,630 1,529 1,427,061 - 1,428,590
Equity awards issued for
future services - - 3,558,682 (3,558,682) - -
Compensation expense
arising from equity
awards - - - 2,012,949 - 2,012,949
Compensation expense
from employee termination - - 2,759,397 - - 2,759,397
Dividend and accretion
on mandatorily
redeemable preferred
stock (36,391,801) (36,391,801)
Allocation of proceeds
from issuance
of Class D Warrant - - 557,000 - - 557,000
Cancellation of Class D
Warrant - - (557,000) - - (557,000)
Loss on redemption of
Conversion Preferred - - (526,500) - - (526,500)
Adjustment to Beneficial
Conversion Feature
upon redemption
of Conversion
Preferred - - (268,660) - - (268,660)
Allocation of proceeds
to beneficial
conversion feature 15,180,454 15,180,454
Amortization of
beneficial
conversion feature - - (15,180,454) - - (15,180,454)
Net loss - - - - (17,680,034) (17,680,034)
---------- ------- ------------ ----------- ------------ ------------
Balance, December 31,
1999 14,612,210 $73,061 $ 10,626,499 $(1,545,733) $(42,990,663) $(33,836,836)
========== ======= ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CTN MEDIA GROUP
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
<S> <C> <C>
Net loss $(17,680,034) $(8,453,903)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 2,769,414 2,203,988
Other non-cash expense 144,393 -
Non cash compensation expense arising from equity awards 4,772,346 -
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 (7,448,867) (963,591)
Prepaid expenses 228,286 (250,947)
Other assets (14,240) (302,304)
Accounts payable 5,654,523 (148,796)
Accrued expenses 1,165,282 294,416
Deferred revenue 326,443 (236,255)
----------- ----------
Net cash used in operating activities (10,082,454) (7,864,729)
----------- ----------
Cash flows from investing activities
Purchases of property and equipment (5,857,479) (6,567,960)
Cash paid for acquisitions, net (30,429,549) (180,089)
Cash paid for investments (1,500,000) -
----------- ----------
Net cash used in investing activities (37,787,028) (6,748,049)
----------- ----------
Cash flows from financing activities
Payments under capital lease obligations - (249,694)
Net proceeds from notes payable 14,499,227 -
Net proceeds from revolving credit agreements 3,982,188 -
Proceeds from exercise of warrants and stock options 1,445,417 46,420
Net proceeds from stock rights offering - 9,794,992
Redemption of preferred stock - (5,806)
Net proceeds from issuance of mandatorily redeemable
preferred stock and Class D warrant 28,701,859 -
----------- ----------
Net cash provided by financing activities 48,628,691 9,585,912
----------- ----------
Net increase (decrease) in cash and cash equivalents 759,209 (5,026,866)
Cash and cash equivalents, beginning of period 6,411,423 11,438,289
=========== ==========
Cash and cash equivalents, end of period $ 7,170,632 $ 6,411,423
============ ===========
</TABLE>
5
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Description of the Business
CTN Media Group, Inc., formerly known as the College Television Network,
Inc. (the "Company"), owns and operates the College Television Network
("CTN", or the "Network"), "Link Magazine", ID8, formerly known as Sadler &
Streib, 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"). Because the minority shareholder has no
obligation to fund Wetair's operations or deficit, 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. CTN is a proprietary
commercial television network operating on college and university campuses,
through single channel television systems placed free of charge primarily
in campus dining facilities and student unions. CTN generates revenue from
advertising displayed on the network. At December 31, 1999 and 1998, CTN
was installed or contracted for installation at approximately 1575 and 736
locations, respectively, at various colleges and universities throughout
the United States. CTN currently reaches an estimated audience of
approximately 1,500,000 young adult viewers each day based on data provided
by Neilson media research. Link Magazine reaches in excess of one million
students. Link Magazine is distributed free of charge to more than 650
campuses nationwide. ID8 is an Atlanta-based advertising agency primarily
involved in placing media buys and providing creative services for its
clients. Wetair is a niche entertainment based website formed on October
13, 1999, targeting the young adult demographic. The site will contain art
and entertainment content from established media channels and from user
submitted sources. Link Magazine, ID8, and Wetair are included within the
CTN operating segment.
During the current year, as discussed in Note (3), the Company purchased
MPM, 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.
2. Significant Accounting Policies
Revenue recognition
Advertising revenues for CTN are recognized in the period during which the
spots are aired on the Network. Advertising revenues for Link are
recognized in the period during which the publication is distributed.
Revenues for ID8, consisting primarily of agency commissions, are
recognized at the time services are provided. Revenues for MPM are
recognized in the period during which the media outlet distributes the
advertisement which was placed by MPM. MPM recognizes a corresponding
expense in operating expenses for the cost of the advertisement. The
average cost of the advertisements placed during the period ended December
31, 1999 was approximately 77% of the revenue recognized by MPM.
Commissions paid to advertising agencies by CTN and MPM in the amount of
$2,655,207 and $1,171,238 are included in operating expenses on the
Consolidated Statement of Operations at December 31, 1999 and 1998.
For the year ended December 31, 1999, sales to one customer in the
approximate amount of $4,425,000 represented more than ten percent of the
Company's consolidated revenue. Likewise, 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.
6
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 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.
Consolidation
The consolidated financial statements include the accounts of College
Television Network, Inc., Link Magazine, ID8, MPM, and the majority owned
subsidiary Wetair. All significant intercompany accounts and transactions
have been eliminated. The Company has other investments that are accounted
for at cost. Certain prior period amounts have been reclassified to conform
to the current year presentation.
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, consisting primarily of trade receivables, are
reflected net of an allowance for uncollectible accounts of approximately
$500,000 and $198,000 at December 31, 1999 and 1998, respectively.
Concentration of credit risk balance
The Company had one customer which comprised approximately 10% of the
December 31, 1999 accounts receivable balance. No single customer accounted
for more than 10% of the accounts receivable balance in 1998. The Company
closely monitors extensions of credit and has not experienced significant
credit losses in the years presented.
Property and equipment
Property and equipment is recorded at cost and prior to 1998 had 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 this 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,
this method more closely conforms with that prevalent in the industries in
which the Company operates. The effect of these changes was to decrease the
loss before cumulative effect of change in accounting principle by
approximately $140,000 or $0.01 per share for the year ended December 31,
1998. 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
7
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
incurred; renovations and capital improvements are capitalized and
amortized over the assets remaining economic useful lives.
Intangible assets
Intangible assets primarily include loan costs, patents, customer
relationships, trademarks and goodwill resulting from acquisitions.
Amortization is computed using the straight-line method based on the
estimated useful lives of the related assets. Accumulated amortization is
approximately $1,255,000 and $29,000 at December 31,1999 and 1998,
respectively.
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 than enactments of
changes in the tax law or rates. Income tax accounting information is
disclosed in Note 11.
Stock-based compensation plans
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations and elects the disclosure option of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). Accordingly, compensation cost for stock options is measured
as the excess, if any, of the fair value of the Company's stock at the date
of the grant over the amount an employee must pay to acquire the stock.
Net loss per share
Net loss per common share is based on the weighted average number of common
shares outstanding in relation to the net loss available to common
stockholders. Net loss available to common stockholders used in calculating
basic and diluted earnings per share includes charges related to dividends
and accretion on mandatorily redeemable preferred stock and amortization of
beneficial conversion features. No potential common shares have been
included in the diluted earnings per share calculation as they would have
been antidilutive due to the net loss reported by the Company.
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 the Company's financial instruments approximate fair
value at December 31, 1999 and 1998 due to the short maturity of these
instruments and their variable interest rates.
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
8
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
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
1999 and 1998, total comprehensive income substantially equaled net loss.
Barter transactions
The Company barters advertising space in Link Magazine in exchange for
internet banner advertising space on third-party websites. These
transactions are recorded at the fair value of the advertising space
surrendered, to the extent it is objectively determinable. Such space is
valued based upon comparable cash transactions with unrelated third parties
for similar space in Link Magazine. Revenue is recognized as the related
publication is distributed. A corresponding advertising expense is
recognized when the internet banner space is initially run. The Company
recognized revenue (and related expense) of approximately $438,000 and
$197,000 in 1999 and 1998, respectively. At December 31, 1999, there are no
amounts deferred or accrued on the balance sheet related to barter
transactions for which performance have not yet accrued.
Internal use computer software
The Company adopted the AICPA Statement of Position 98-1 "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use"
effective January 1, 1998. The Company capitalizes external direct costs of
materials and services consumed in developing or obtaining internal use
computer software and payroll and payroll related costs for employees who
are directly associated with internal use computer software projects.
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 reporting period. Actual
results could differ from these estimates.
3. Acquisitions
On January 12, 1998, the Company acquired the assets of Link Magazine,
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 $350,000 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.
9
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On July 1, 1998, the Company acquired substantially all of the assets of
Sadler & Streib, currently doing business as ID8, 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.
On August 31, 1999, the Company acquired all of the issued and outstanding
capital stock of MPM, (the "MPM Acquisition"). MPM has its primary place of
business in Santa Barbara, California. The Company paid $30,000,000, to the
shareholders of MPM ("MPM Shareholders"), subject to certain adjustments,
if any, as defined in the stock purchase agreement for the transaction.
On the closing date of the MPM Acquisition, MPM borrowed $15,000,000 from a
financial institution (the "Term Loan") pursuant to a Credit Agreement
dated August 31, 1999, as discussed in Note (9). In addition, as discussed
in Note (8), on August 31, 1999, the Company received a $15,000,000
investment from U-C Holdings, L.L.C ("Holdings"), the Company's majority
shareholder. The Company used the proceeds from the Term Loan and the
investment by Holdings to pay the purchase price to the MPM shareholders.
Of the $30,000,000 purchase price, $2,500,000 is being held in escrow until
a determination can be made by the Company regarding adjustments to the
purchase price for MPM, if any, and for satisfaction of any post-closing
claims against the MPM Shareholders.
The MPM Acquisition was accounted for under the purchase method of
accounting. The results of operations of MPM are included in the Company's
Consolidated Statement of Operations subsequent to the acquisition date.
Intangible assets, consisting primarily of customer relationships,
tradenames/trademarks and goodwill of approximately $29,000,000 have been
recorded in connection with the Company's preliminary purchase price
allocation and are being amortized on a straight line basis over 2 to 15
years.
The following unaudited pro forma financial information reflects the
results of operations for the year ended December 31, 1999 and the year
ended December 31, 1998, as if the MPM Acquisition had occurred on January
1, 1998. These unaudited pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the
operating results had the acquisition actually taken place on January 1,
1998 and may not be indicative of future operating results. The unaudited
pro forma results are summarized as follows:
Year Ended
December 31
1999 1998
---- ----
Revenue $ 54,715,727 $ 40,252,894
Net loss from operations (20,799,729) (12,181,839)
Net loss available
to common stockholders (72,898,984) (12,041,795)
Basic and diluted net loss per
common share (5.07) (1.26)
Basic and diluted net loss per common share calculated above for 1998 does
not include the effect of accretion or amortization of the beneficial
conversion feature associated with the mandatorily redeemable preferred
stock as such amount is not calculable as of
10
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31, 1998. Accretion and beneficial conversion feature amortization
is included in the 1999 earnings per share calculation based upon amounts
actually recorded during 1999.
The results of operations of Link, ID8 and MPM are included in the
Company's consolidated financial statements as of the date of their
respective acquisitions.
4. Conversion of Delivery Platform
During 1998, the Company finalized a plan to convert the then current
delivery platform for the 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 1998 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.
5. Property and Equipment
Property and equipment consists of the following:
Estimated December 31,
Useful Lives 1999 1998
Entertainment systems, completed.... 5 years $ 10,939,784 $ 4,599,051
Entertainment systems, in progress.. N/A 79,710 1,508,075
Machinery and equipment............. 7 years 1,056,356 795,105
Software............................ 5 years 1,832,712 -
Furniture and fixtures.............. 7 years 778,446 365,826
Leasehold improvements.............. 11 years 299,233 170,412
------------ -----------
14,986,241 7,438,469
Less: Accumulated depreciation (2,461,337) (921,785)
------------- -----------
$ 12,524,904 $ 6,516,684
============= ===========
Depreciation expense for the year ended December 31, 1999, and the year
ended December 31, 1998 was approximately $1,670,000 and $2,175,000,
respectively.
11
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Estimated December 31,
Useful Lives 1999 1998
<S> <C> <C> <C>
Goodwill 10-15 $ 8,568,425 $582,826
Customer relationships 7 16,293,000 -
Trademarks/tradenames 10-15 3,457,524 10,574
Other intangibles 2-15 2,053,141 14,903
----------- --------
30,372,090 608,303
Less: Accumulated amortization (1,255,181) (28,501)
----------- --------
Total $29,116,909 $579,802
=========== ========
</TABLE>
Intangible assets increased during 1999 as a result of the MPM Acquisition
discussed in Note (3).
7. Investments
On October 29, 1999, the Company purchased 4,147,886 Series A Preferred
shares of e palette, inc. ("e-palette") for an aggregate purchase price of
$1,500,000. This purchase of preferred stock represents 15% of the total
equity of e-palette. The Company has the right to purchase an additional
25% of equity through certain future offerings of e-palette's common shares
or common share equivalents. The investment is recorded on the balance
sheet under the "cost method" as the Company does not have significant
influence over the operations of e-palette. e-palette is the developer and
owner of a proprietary internet application which will be utilized in the
Company's Wetair.com website.
8. Stockholders' (Deficit) Equity and Mandatorily Redeemable Preferred Stock
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
Holdings, the majority shareholder, 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 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
has been 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 Holdings to purchase an
additional 152,100 shares of Common Stock at
12
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$1.60 per share at any time during a seven year period from the date of
issuance of the warrant.
Mandatorily redeemable preferred stock
Pursuant to a Purchase Agreement dated July 23, 1999 (the "Initial Purchase
Agreement") between the Company and Holdings, Holdings purchased 309,998
shares of the Company's convertible preferred stock, $0.001 par value per
share ("Convertible Preferred"), for an aggregate purchase price of
$4,649,970. (Note: As discussed later in this footnote, the Convertible
Preferred was subsequently redesignated on October 18, 1999). The proceeds
were used for general working capital purposes of the Company.
The conversion ratio of the Convertible Preferred was to be computed by
multiplying the number of shares of Convertible Preferred to be converted
by the $15.00 per share purchase price and dividing the result by the
conversion price of the Convertible Preferred (the "Conversion Price") then
in effect with respect to such shares. On the date of issuance, the
Conversion Price was $6.854 (the 30-day average trading price of the Common
Stock listed on The Nasdaq SmallCap Market ("Average Trading Price")). The
market price of the Common Stock on July 23, 1999 was $7.25. The
Convertible Preferred was redeemable at the election of the holders of the
securities on July 23, 2006, at a price per share equal to the greater of
(i) the liquidation value plus accrued and unpaid dividends, or (ii) the
market price of the common stock issuable upon conversion. In accordance
with the terms of the Initial Purchase Agreement, from the date of issuance
to and including the third anniversary of the date of issuance of the
Convertible Preferred, the Conversion Price was subject to adjustment if at
the end of a quarter the Average Trading Price of the Common Stock was less
than the Conversion Price then in effect; provided that, the Conversion
Price could not be reduced below $2.75. Prior to its redemption on October
18, 1999, the Convertible Preferred was voting stock on an as-converted
basis based upon the number of shares of Common Stock the Convertible
Preferred was convertible into on the date of issuance or 678,432 shares of
voting stock. The Convertible Preferred was immediately convertible into
common shares and accrued a cumulative dividend of 12% per annum.
Additionally, pursuant to the Initial Purchase Agreement, the Company
issued a Class D warrant (the "Class D Warrant") to Holdings entitling
Holdings to purchase 135,686 shares of Common Stock, with an initial
exercise price of $6.854 per share, subject to adjustment, as discussed
above, in connection with the Convertible Preferred. Of the $4,649,970
proceeds from the Initial Purchase Agreement, $557,000 was allocated to the
Class D Warrant.
On August 31, 1999, the Company and Holdings entered into a Purchase
Agreement (the "Second Purchase Agreement"), whereby Holdings purchased
1,000,000 shares of the Company's Series A Convertible Preferred Stock,
$.001 par value per share (the "Series A Preferred") for an aggregate
purchase price of $15,000,000. Proceeds to the Company, net of related
issuance costs, were $14,213,664. These proceeds were used to pay a portion
of the purchase price to the MPM Shareholders in connection with the MPM
Acquisition.
The Conversion Price associated with the Series A Preferred is $4.50, which
was a 32.1% discount from the Average Trading Price as of August 31, 1999,
the date of issuance. The market price of the Common Stock on August 31,
1999 was $6.63. Initially the Series A Preferred was non-voting stock.
Effective January 10, 2000, Holdings gained the right to vote the Series A
Preferred on an as-converted basis based upon the number of shares of
Common Stock the Series A Preferred was convertible into on the date of
issuance (i.e.,
13
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3,333,333 common shares). The Series A Preferred is immediately convertible
into common shares and accrues a cumulative dividend of 12% per annum. The
redemption terms of the Series A Preferred are identical to the redemption
of the Convertible Preferred discussed above.
Additionally, the Second Purchase Agreement provides that the Company has
the option to sell to Holdings, subject to various conditions, including,
but not limited to, Holdings' approval, before the first anniversary of the
Second Purchase Agreement, an additional 266,667 shares of Series A
Preferred for an aggregate purchase price of $4,000,000. Additionally,
pursuant to the Second Purchase Agreement, if Holdings contributes up to
$6,000,000 in cash to the Company to repay the Term Loan (discussed in Note
9) in connection with certain guaranty agreements, with the lending
institution, executed by Holdings, Willis Stein & Partners, L.P. (the
managing member of Holdings) ("Willis Stein") and certain affiliates of
Willis Stein, Holdings will receive up to an additional 400,000 shares of
Series A Preferred at $15.00 per share. The maximum amount of the guarantee
is $6,000,000. However, if guaranty agreements are extinguished with
Holdings paying less than $6,000,000, then the amount of Series A Preferred
the Company may, at its option, sell to Holdings increases up to an
additional $6,000,000.
On October 8, 1999, the Company issued to Holdings 33,333 shares of Series
A Preferred, for $15.00 per share or an aggregate purchase price of
approximately $500,000, less expenses of $8,275, pursuant to the Second
Purchase Agreement. These Series A Preferred shares are convertible into
111,111 shares of common stock.
The Company and Holdings entered into an Amended and Restated Purchase
Agreement between the Company and Holdings ("Amended Second Purchase
Agreement"), dated October 18,1999. As a result of the October 18, 1999
amendments, the Company's option to sell to Holdings, subject to various
conditions, additional shares of Series A Preferred was increased from
$4,000,000 to $12,000,000. This amendment was necessary to provide the
Company the ability to obtain additional capital, which is required to
access funds under the CTN Loan discussed in Note (9).
Pursuant to the Amended Second Purchase Agreement, on October 18, 1999 and
November 18, 1999, Holdings purchased an additional 153,334 shares and
480,000 shares of Series A Preferred, respectively, for $15.00 per share or
an aggregate purchase price of approximately $2,300,000 less $37,000 of
expenses and $7,200,000 less $116,500 of expenses. The purpose of Holdings'
purchase of these shares, including those purchased on October 8, 1999, was
to enable the Company to raise $10,000,000 in gross proceeds for the
Company's working capital needs and capital expenditures and to enable the
Company to make an investment in another entity strategic to its business.
In connection with this $10,000,000 equity investment by Holdings, the
Company was able to borrow $2,800,000 under the CTN loan (discussed in Note
9). These Series A Preferred shares are convertible into 2,111,111 shares
of common stock.
Effective October 18, 1999, the Board of Directors and a majority of the
shareholders effectuated the modification and reclassification of the
Convertible Preferred into shares of Series A Preferred. This modification
and reclassification resulted in the cancellation of the Convertible
Preferred shares and the issuance of Series A Preferred Shares to the
holders of the Convertible Preferred. This redemption of the Convertible
Preferred shares resulted in the elimination of the variable conversion
price feature outlined in the Initial Purchase
14
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Agreement and fixed the conversion price at $4.50 per share, although this
is still subject to anti-dilution rights. The number of common shares in
which the Series A Preferred is convertible, increased to 1,033,327 from
678,432 as a result of the change in the conversion price. The carrying
value of the Convertible Preferred was $4,783,219 and the fair value of the
Series A Preferred, for which the Convertible Preferred was exchanged, was
$6,135,379 on the October 18, 1999 redemption date. Additionally, in
connection with the modification and reclassification, the Company and
Holdings entered into a Cancellation Agreement, effective August 31, 1999,
whereby the Company cancelled, for no additional consideration, the Class D
Warrant. The reclassification and warrant cancellation was undertaken in
order to have only one type of preferred stock outstanding, and to
eliminate the reset provision of the Convertible Preferred.
The Company accounted for this redemption as of October 18, 1999 by
removing the Convertible Preferred and Class D Warrant at their respective
carrying values after consideration of accretion of the Convertible
Preferred through the redemption date. The Beneficial Conversion Feature,
as defined below, associated with the Initial Purchase Agreement was also
removed from the equity accounts. The Series A Preferred was initially
recorded at fair value. A loss on redemption of approximately $527,000 was
recognized and is reflected as a charge to stockholders equity for the
period ended December 31, 1999. This amount is included in dividends,
accretion and redemption loss on mandatorily redeemable preferred stock in
determining net loss available to common stockholders on the Company's
Consolidated Statement of Operations.
At December 31, 1999, under the Amended Second Purchase Agreement, 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.
The equity instruments issued to Holdings in the form of Convertible
Preferred and Series A Preferred have been recorded on the Balance Sheet
net of the value associated with the favorable conversion terms of each
type of security (the "Beneficial Conversion Feature"). The Beneficial
Conversion Feature is calculated as the difference between the conversion
price of the security and the market price of the Common Stock on the
commitment date of a given purchase, as defined. In connection with the
Beneficial Conversion Feature of each security, because these securities
are immediately convertible, the amounts ascribed to the Beneficial
Conversion Feature have been immediately amortized through charges to
Stockholders' Equity and included as adjustments to arrive at net loss
available to common stockholders on the Consolidated Statement of
Operations. Such adjustments to net loss available to common stockholders
associated with the Beneficial Conversion Feature aggregated $15,180,454.
During the fourth quarter, approximately $7,800,000 was recorded with
respect to this charge.
The Company recorded additional charges through Stockholders' Equity of
approximately $36,391,801 to accrete these securities to their highest
redemption value as of December 31, 1999. During the fourth quarter,
approximately $3,500,000 was recorded with respect to this charge. As of
the balance sheet date, the mandatorily redeemable preferred stock has been
accreted to its highest redemption value based upon the Company's closing
common stock price of $10.00 per share at such date. When the highest
redemption amount is a result of applying the value of the underlying
common stock redemption
15
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
formula, the accretion charge will directly correspond to changes in the
market price of the stock. Accordingly, as the market price of the common
stock changes, the redemption value and related accretion amount will
change; however, the highest redemption value will never be less than
original cost plus accrued dividends.
At December 31, 1999, the Company has issued 1,976,665 shares of its
2,510,000 shares of authorized Series A Preferred. The Company has
6,588,884 common shares reserved for possible conversions.
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 from 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. Through December 31, 1999, 33,760 options
under this plan have been exercised. At December 31, 1999, 8 shares of
Common Stock were available for future grants.
Stock incentive plan
Under the Company's 1996 Stock Incentive Plan (the "Incentive 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 Incentive Plan
adopted by the Board of Directors on May 13, 1999, an aggregate of
2,000,000 shares are reserved for issuance under the Incentive Plan,
subject to shareholder approval. 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 from 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. Through December 31, 1999, 7,667
options under this plan have been exercised. At December 31, 1999,
1,414,842 shares of Common Stock were available for future grants.
On December 29, 1999, an officer of the Company was terminated. In
connection with this termination, the time in which the former officer was
able to exercise his vested options, was extended. As a result of this
modification in the terms of this option grant, the Company recorded
compensation expense of $2,760,000 in accordance with APB 25.
Outside directors' stock option plan
Under the Outside Directors' Plan (the "Directors' Plan") the Company has
reserved an aggregate of 456,000 shares of its Common Stock for issuance to
its non-employee directors. 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, 1999, 75,000 shares of
common stock were available for future grants.
16
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Other stock options
During fiscal 1999, non-qualified options to purchase 100,000 shares of
Common Stock at an exercise price of $2.75 per share, were granted to a
former officer of the Company. These options have a term of 5 years and
are currently exercisable, however, none have been exercised through
December 31, 1999. The Company recorded expense of approximately $240,000
in connection with this grant in accordance with Financial Accounting
Standards Board No. 123 "Accounting for Stock-Based Compensation".
At December 31, 1999, this plan has 370,000 shares issued and
outstanding. These options are currently exercisable; however, none have
been exercised to date.
Stock option activity associated with all of the Company's plans
discussed above for the year ended December 31, 1999, and December 31,
1998 is summarized below :
<TABLE>
<CAPTION>
Year ended Year ended
December 3, 1999 December 31, 1998
----------------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
<S> <C> <C> <C> <C>
Outstanding at beginning of period 543,641 $ 2.50 439,519 $ 2.67
Granted 964,049 4.44 165,096 1.81
Exercised (7,667) 2.19 (33,760) 1.38
Cancelled (62,467) 6.29 (27,214) 2.40
---------- ---------
Outstanding at end of period 1,437,556 3.63 543,641 2.50
---------- ---------
Exercisable at end of period 963,129 $ 3.03 452,857 $ 2.55
Weighted average fair value of
options granted during the
period $ 3.81 $ .95
</TABLE>
Summary information about the Company's stock options outstanding at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average Number Weighted
Outstanding at Average Remaining Exerciable at Average
December 31, Exercisable Contractual December 31, Exercise
Range of Prices 1999 Price Life 1999 Price
--------------- ------------ ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 1.50 to $ 2.25 489,314 1.99 5.83 447,547 2.02
2.50 to 3.75 656,381 3.56 7.25 467,121 3.50
4.06 to 15.00 291,861 6.53 8.22 48,461 7.80
---------- ---------- --------- ---------- -------
$ 1.50 to $ 15.00 1,437,556 3.63 6.96 963,129 3.03
</TABLE>
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
17
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Compensation," the Company's net loss and net loss per share would have
been increased to the pro forma amounts indicated below:
Year ended
December 31,
----------------------------
1999 1998
As reported
Net loss $ (17,680,034) $(8,453,903)
Net loss available to common stockholders (69,778,789) (8,453,903)
Net loss per common share (4.86) (.89)
Pro forma
Net loss $ (18,399,476) $(8,642,291)
Net loss available to common stockholders (70,058,052) (8,642,291)
Net loss per common share (4.88) (.91)
The fair values of the options granted were estimated as of the date of
grant using the Black-Scholes options-pricing model based on the following
weighted average assumptions:
December 31, December 31,
--------------------------
1999 1998
Dividend yield None None
Expected volatility 94.65 66.87
Risk free interest rate 5.04% 5.29%
Expected life in years 1.9 3
Stock purchase warrants
As of December 31, 1999, the Company had 1,846,444 warrants outstanding.
The warrants outstanding have an exercise price as follows:
152,100 warrants at $1.60 Expiring in September 2006
772,732 warrants at $2.75 Expiring in April 2004
921,612 warrants at $5.40 Expiring in April 2001
These warrants are convertible on a 1:1 ratio to common shares.
18
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. Debt
On July 26, 1999, the Company obtained a $12,000,000 revolving credit loan
(the "CTN Loan") from a financial institution for working capital purposes.
A condition to the CTN Loan was the $4,649,970 investment by Holdings
discussed in Note (8). 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, excluding the
$4,649,970 previously invested by Holdings. 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 December 31, 1999. There are
several financial and operating covenants in the loan agreement, including
a prohibition on dividends by the Company until the CTN Loan is paid in
full. In addition, it is a default under the CTN Loan if Holdings owns less
than 51% of the Company or certain individuals who are affiliates of
Holdings are no longer members of the Board of Directors of the Company.
The CTN Loan is guaranteed by a negative pledge agreement of outstanding
shares of stock of the Company owned by Holdings. Amounts outstanding under
the CTN loan at December 31, 1999 are $2,800,000. The Company had
$8,300,000 available to borrow under this agreement at year end as a result
of the equity purchases by Holdings and approximately $1,100,000 in warrant
exercises. At December 31, 1999, the weighted average interest rate on the
CTN Loan was 10.6% on the debt outstanding.
At December 31, 1999, loan costs associated with the CTN Loan of
approximately $318,000 net of accumulated amortization of $93,000 are
included in the Consolidated Balance Sheets as intangible assets.
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
to fund a portion of the MPM purchase price. MPM distributed the proceeds
of the Term Loan to the Company to pay the MPM Shareholders in 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 December
31, 1999 are $15,000,000 and $1,500,000, respectively. At December 31,
1999, loan costs associated with the Term Loan and the Revolver Loan of
approximately $513,000 net of accumulated amortization of $34,000 are
included in the consolidated balance sheet as intangible assets and are
being amortized in accordance with the effective interest method.
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 9.17% on debt outstanding during 1999. A
commitment fee of .5% per annum on the unused portion of the Revolver Loan
is required. 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.
19
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company's debt agreements contain financial covenants which, among
other restrictions, require the maintenance of certain financial ratios and
cash flows and restrict asset purchases and dividend payments.
Substantially all of the assets of the Company are pledged as collateral
for the loans.
The Company believes that certain requirements under the CTN Loan covenants
may not be met during fiscal 2000. If the Company fails to meet a covenant
under the CTN Loan, the financial institution has the right to declare the
loan due upon demand. The Company and Holdings are in negotiations with
financial institutions related to amending the current debt agreement or
entering into a new agreement. There can be no assurances that these
efforts will be successful. As discussed in Note (12), 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 connection with the Term Loan and the Revolver Loan, the Company
received a waiver with respect to certain loan covenants. The waiver allows
for a 90 day extension for the Company to meet the waived covenants. The
Company intends to be in compliance with the covenants by June 30, 2000, as
required by the lender.
In accordance with the terms discussed above, the principal payments
required on the CTN Loan, Term Loan and Revolver Loan for each of the five
years following December 31, 1999 are as follows: $4,300,000, $2,250,000,
$3,000,000, $3,750,000 and 6,000,000.
10. Commitments and Contingencies
Employment agreements
The Company has employment agreements through 2002 with certain officers
and employees. The agreements call for minimum base salaries for the years
ending December 31, 2000, 2001 and 2002 of approximately, $3,894,000,
$2,690,000 and $1,000,000, respectively.
Leases
The Company leases certain of its office facilities under operating leases
at various dates through 2008. Lease expense was approximately $609,000,
and $379,000 for the years ended December 31, 1999 and 1998, respectively.
Annual lease payments for the years ending December 31, 2000, 2001, 2002,
2003, 2004 and thereafter will approximate $758,000, $663,000, $563,000,
$470,000, $466,000 and $775,000, respectively.
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 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
20
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 other programming from other
CTN sources. Crawford is also responsible for the uplink of the programming
to a satellite as well as the downlink of the signal from the satellite at
each installation site. As of December 31, 1999, the Company has paid
approximately $572,000 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. A
provision for this obligation was included in the Company's Consolidated
Statement of Operations for the fiscal year ended December 31, 1998. As of
December 31, 1999, the Company has paid approximately $481,000 of this
obligation and owes approximately $390,000 payable over the remainder of
the agreement.
On March 27, 1998, the Company signed an agreement with Turner 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 December
31, 1999, the Company has paid approximately $1,030,000 pursuant to this
agreement, with approximately $2,125,000 to be paid over the remainder of
the agreement.
In connection with the delivery platform conversion during 1998, the
Company entered into a Transponder Use Agreement with Public Broadcasting
Service ("PBS") on April 30, 1998. The Company has subleased capacity on a
satellite owned and operated by GE American Communications, Inc. ("GE") and
leased to PBS by GE. This agreement provides for payments of approximately
$3,924,000 over a five year period that terminates on July 31, 2003. The
Company has protected status on this satellite, where in the event of a
satellite failure or performance problem, the Company's programming will
preempt transmissions of other users on this satellite or on another
satellite. As of December 31, 1999, the Company has paid approximately
$1,112,000 pursuant to this agreement with approximately $2,812,000 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. In connection with the severance
agreement, the Company recorded charges of $436,300, representing the
present value of the cash severance payments and $240,000, representing the
fair value of the stock options. As of December 31, 1999, the Company has
paid approximately $183,000 under this 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
21
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 $1,200,000 over that 16 week period.
On December 29, 1999, the Company entered into a severance agreement with a
senior executive. The agreement provides for a single payment of $314,443
that was disbursed on January 31, 2000. A provision for this obligation is
included in the Company's consolidated statement of operations for the year
ended December 31, 1999.
11. Income Taxes
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $39,000,000 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.
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>
Year ended
December 31,
1999 1998
<S> <C> <C>
Federal tax provision on loss before income
taxes and cumulative effect of change in
accounting principals $(6,011,212) $(2,921,942)
Nondeductible expenses 391,502 44,942
Change in valuation allowance 5,619,710 2,877,000
------------- -----------
Provision for income taxes $ - $ -
============= ===========
</TABLE>
The components of the deferred income tax assets arising under SFAS No. 109
are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 13,317,428 $ 8,208,000
Expenses not currently deductible 892,282 382,000
Less valuation allowance (14,209,710) (8,590,000)
------------ -----------
Balance $ - $ -
============= ===========
</TABLE>
22
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The change in the valuation allowance at December 31, 1999, as compared to
December 31, 1998 was $5,619,710, which was principally attributable to the
increase in the net operating loss carryforward for the year.
12. Related Party Transactions
During 1999, Holdings issued equity instruments of Holdings to certain key
employees of the Company as a form of compensation for the services
provided by the employees in connection with their employment with the
Company. The employees vest in these instruments over service periods of
one to three years. These transactions have been accounted for in
accordance with APB 25 as a contribution of capital by the majority
stockholder with an offsetting charge to compensation expense. The unvested
portion is presented as unearned compensation, a contra-equity account.
Expense recognized through December 31, 1999 related to the issuance of
equity instruments to employees of the Company is approximately $154,000.
Additionally, during fiscal 1999, Holdings issued equity instruments of
Holdings to certain non-employees of the Company in contemplation of
services performed for the Company. Expense recognized through December 31,
1999 related to these issuances of approximately $780,000 is included in
the Company's Consolidated Statement of Operations.
Sales commissions of approximately $180,000 and $177,000, 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, 1999, and the year ended December 31, 1998,
respectively.
During 1999, the Company paid commission advances of approximately $65,000
to an outside board director in connection with prospecting for advertising
revenue for, the Network.
The Company employs two individuals that are related to an officer of the
Company. Total compensation paid (including fringe benefits) during 1999
was approximately $111,000. Additionally, a total of 4,000 stock options
with an exercise price of $3.75 per share granted to the two related
individuals during 1999 pursuant to the Company's Stock Incentive Plan.
The Company has obtained a commitment from the majority stockholder to fund
cash flow deficits, including but not limited to those arising from
operating activities and those arising from debt service requirements
through fiscal 2000.
13. 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. In
connection with the acquisition of MPM, management has re-evaluated the
manner in which the business is operated and reported. The Company
currently has two reportable segments as defined under SFAS No. 131: (i)
CTN and (ii) MPM. Segment information reported in 1998 has been restated to
conform to the current presentation. See
23
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 are as follows:
For the year ended
December 31,
1999 1998
Revenues
CTN $ 11,679,029 $ 8,509,878
MPM 19,913,472 -
------------- ------------
Total $ 31,592,501 $ 8,509,878
============= ============
Profit (loss) before income and cumulative
effect of change in accounting principles
CTN $ (17,967,026) $ (8,593,947)
MPM 286,992 -
------------- ------------
Total $ (17,680,034) $ (8,593,947)
============= ============
Depreciation and amortization
CTN $ 1,611,578 $ 2,203,988
MPM 1,157,836 -
------------ ------------
Total $ 2,769,414 $ 2,203,988
============ ============
Interest income
CTN $ 173,339 $ 412,392
MPM 47,011 -
------------ ------------
Total $ 220,350 $ 412,392
============ ============
Interest expense
CTN $ 236,451 $ 19,006
MPM 521,125 -
------------ ------------
Total $ 757,576 $ 19,006
============ ============
December 31,
1999 1998
Total assets
CTN $ 23,931,475 $ 16,451,049
MPM 45,520,487 -
------------ ------------
Total $ 69,451,962 $ 16,451,049
============ ============
24
<PAGE>
CTN MEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Substantially all of the property and equipment owned by the Company is used in
the operations of the Network.
14. Supplemental Cash Flow Information
On January 12, 1998, the Company completed the purchase of Link as follows:
Fair value of assets acquired
Add: Cash received $ 486,635
Liabilities assumed 109,209
------------
Total $ 595,844
============
On July 1, 1998, the Company completed the purchase of Sadler & Streib as
follows:
Fair value of assets acquired
Add: Cash received $ 396,310
Liabilities assumed (289,298)
------------
Total $ 107,012
============
On September 1, 1999, the Company completed the purchase of MPM as follows:
Fair value of assets acquired
Add: Cash received $ 39,696,151
Liabilities assumed (30,399,549)
------------
Total $ 9,296,602
============
Interest paid
The Company paid interest of $635,691 and $19,006 in 1999 and 1998,
respectively.
Income taxes paid
The Company paid income taxes of approximately $15,000 and $1,500 in 1999
and 1998, respectively.
25
<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.
CTN MEDIA GROUP, INC.
(Registrant)
By: /s/ Jason Elkin
------------------
Jason Elkin
Chairman of the Board and Chief Executive Officer
Date: March 30, 2000
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 30, 2000
- ----------------------------------------- Executive Officer and Director
Jason Elkin (Principal Executive Officer)
/s/ Patrick G. Doran Chief Financial Officer, Treasurer March 30, 2000
- ----------------------------------------- and Secretary (Principal Financial
Patrick G. Doran and Accounting Officer)
/s/ Martin Grant President, Chief Operating Officer March 30, 2000
- ----------------------------------------- and Director
Martin Grant
/s/ Daniel M. Gill Director March 30, 2000
- -----------------------------------------
Daniel M. Gill
/s/ Beth F. Johnston Director March 30, 2000
- -----------------------------------------
Beth F. Johnston
/s/ Geoffrey Kanter Director March 30, 2000
- -----------------------------------------
Geoffrey Kanter
/s/ C. Thomas McMillen Director March 30, 2000
- -----------------------------------------
C. Thomas McMillen
/s/ Stephen Roberts Director March 30, 2000
- -----------------------------------------
Stephen Roberts
/s/ Hollis W. Rademacher Director March 30, 2000
- -----------------------------------------
Hollis W. Rademacher
/s/ Avy H. Stein Director March 30, 2000
- -----------------------------------------
Avy H. Stein
/s/ James Wood Director March 30, 2000
- -----------------------------------------
James Wood
/s/ Sergio Zyman Director March 30, 2000
- -----------------------------------------
Sergio Zyman
</TABLE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<S> <C>
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).
3.2 Certificate of Designation, Powers, References and Rights of the Preferred Stock of College Television
Network, Inc. (incorporated by reference to Exhibit 4.3 to Form 8-K filed August 3, 1999).
3.3 Second Certificate of Designation, Powers, References and Rights of the Series A Convertible Preferred
Stock of College Television Network, Inc. (incorporated by reference to Exhibit 5.3 to Form 8-K filed
September 15, 1999).
3.4 Plan of Reclassification, dated August 31, 1999 (incorporated by reference to Exhibit I to the Schedule
14C Information Statement filed by the Company on September 22, 1999).
3.5 Amended Second Certificate of Designation, Powers, References and Rights of the Series A Convertible
Preferred Stock of CTN Media Group, Inc. (incorporated by reference to Exhibit A to the Registrant's
Schedule 14C Information Statement filed on February 1, 2000).
3.6 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).
3.7 Amendment to the Bylaws of the Registrant (incorporated by reference to Exhibit A to the Registrant's
Schedule 14C Information Statement filed on February 1, 2000).
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).
4.7 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).
</TABLE>
E-1
<PAGE>
<TABLE>
<S> <C>
10.1 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).
10.2 First Amendment to 1990 Performance Equity Plan (incorporated by reference to Exhibit 10.2 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).
10.3 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).
10.4 First Amendment to 1996 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 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).
10.5 Second Amendment to 1996 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 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).
10.6 Third Amendment to 1996 Stock Incentive Plan.
10.7 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).
10.8 First Amendment to Outside Directors' 1996 Stock Option Plan (incorporated by reference to Exhibit 10.1
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).
10.9 Second Amendment to Outside Directors' 1996 Stock Option Plan (incorporated by reference to Exhibit
10.1 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).
10.10 Third Amendment to Outside Directors' 1996 Stock Option Plan.
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
</TABLE>
E-2
<PAGE>
<TABLE>
<S> <C>
10.16 First Amendment of Programming and Services Agreement, effective as of July 30, 1999, between
Registrant and Turner Private Networks, Inc.
10.17 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).
10.18 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).
10.19 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).
10.20 Interactive Services Agreement, dated as of September 27, 1999, between the Company and THINK New
Ideas, Inc. (incorporated by reference to Exhibit 10.5 to Form 10-QSB filed November 15, 1999).
10.21 Agreement, dated as of September 22, 1999, between the Company and Contemporary Marketing Inc.
(incorporated by reference to Exhibit 10.6 to Form 10-QSB filed November 15, 1999).
10.22 Stock Purchase Agreement, dated July 16, 1999, among the Company, Armed Forces Communications, Inc.,
Kevin West and Colleen Gordon (incorporated by reference to Exhibit 2.1 to Form 8-K filed September 15,
1999).
10.23 Credit Agreement dated as of July 26, 1999 among the Company and LaSalle Bank National Association
(incorporated by reference to Exhibit 10.2 to Form 10-QSB filed August 16, 1999).
10.24 Purchase Agreement, dated as of July 23, 1999, between the Company and U-C Holdings, L.L.C.
(incorporated by reference to Exhibit 4.1 to Form 8-K filed August 3, 1999).
10.25 Purchase Agreement, dated August 31, 1999, between the Company and U-C Holdings, L.L.C. (incorporated
by reference to Exhibit 5.1 to Form 8-K filed September 15, 1999).
10.26 Cancellation Agreement, dated August 31, 1999, between the Company and U-C Holdings, L.L.C.
(incorporated by reference to Exhibit 5.2 to Form 8-K filed September 15, 1999).
10.27 Amended and Restated Purchase Agreement, dated as of October 18, 1999, between the Company and U-C
Holdings, L.L.C. (incorporated by reference to Exhibit 5.1 to Form 8-K filed October 27, 1999).
10.28 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).
10.29 First Amendment to Employment Agreement, dated May 1, 1999, Between the Company and Jason Elkin.
10.30 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).
10.31 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).
10.32 First Amendment to Employment Agreement, dated November 1, 1999, between the Registrant and Patrick G.
Doran.
</TABLE>
E-3
<PAGE>
<TABLE>
<S> <C>
10.33 Employment and Equity Purchase Agreement, dated as of January 1, 1998, among the Registrant and Thomas
Gatti (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998 (File No. 000-19997) filed on March 31, 1999).
10.34 Payment Agreement and General Release, dated February 19, 1999, among the Registrant, Joseph D. Gersh
and U-C Holdings, L.L.C. (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1998 (File No. 000-19997) filed on March 31, 1999).
10.35 Consulting Agreement, dated as of March 1, 1999, between Registrant and C. Thomas McMillen
(incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1998 (File No. 000-19997) filed on March 31, 1999).
10.36 Consulting and Equity Purchase Agreement, dated as of March 26, 1999, among Registrant, U-C Holdings,
L.L.C. and Sergio Zyman (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1998 (File No. 000-19997) filed on March 31, 1999).
10.37 Employment Agreement dated May 24, 1999 between the Company, U-C Holdings, L.L.C. and Martin Grant
(incorporated by reference to Exhibit 10.1 to Form 10-QSB for the period ended June 30, 1999 filed
August 16, 1999).
10.38 First Amendment to Employment Agreement, dated October 20, 1999, between the Registrant and Martin
Grant.
10.39 Employment Agreement, dated as of July 16, 1999, between the Company and Geoffrey Kanter (incorporated
by reference to Exhibit 10.8 to Form 10-QSB for the period ended September 30, 1999 filed November 15,
1999).
10.40 General Release and Payment Agreement, dated as of January 21, 2000, between the Company and Peter
Kauff.
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.
</TABLE>
E-4
<PAGE>
EXHIBIT 10.6
THIRD AMENDMENT TO THE
1996 STOCK INCENTIVE PLAN
THIS THIRD AMENDMENT to the 1996 Stock Incentive Plan of College Television
Network, Inc. (the "Company") (formerly known as Laser Video Network, Inc.), a
Delaware corporation, (this "Amendment") is made effective as of the 13th day of
May, 1999 (the "Effective Date"), provided, the shareholders of the Company
approve this Amendment within 12 months after such effective date. All
capitalized terms in this Amendment have the meaning ascribed to such terms in
the 1996 Stock Incentive Plan (the "Plan"), unless otherwise stated herein.
W I T N E S S E T H:
--------------------
WHEREAS, the Board of Directors of the Company desires to amend the Plan to
adjust the exercise price of options granted thereunder.
NOW, THEREFORE, in consideration of the premises and mutual promises
contained herein, the Plan is hereby amended as follows:
1. Section 1.5.1 of the Plan is hereby amended by deleting the first
sentence thereof in its entirety and substituting therefor the following new
first sentence:
The total number of shares of common stock of the Company, par value
$.005 per share ("Common Stock"), with respect to which awards may be
granted pursuant to the Plan shall be 2,000,000 shares.
2. Section 2.2.3 of the Plan is hereby amended by deleting Section
2.2.3 in its entirety and substituting in lieu thereof the following:
Each Plan Agreement with respect to an option shall set forth the
amount (the "option exercise price") payable by the grantee to the
Company upon exercise of the option evidenced thereby. The option
exercise price per share shall be determined by the Committee in its
sole discretion; provided, however, that if it is the intent of the
Committee to issue an incentive stock option that satisfies the
requirements of (S)422 of the Internal Revenue Code of 1986, as
amended, the option exercise price shall be at least 100% of the Fair
Market Value of a share of Common Stock on the date the option is
granted.
3. Except as specifically amended by this Amendment, the Plan shall
remain in full force and effect as prior to this Amendment.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed as
of the Effective Date.
COLLEGE TELEVISION NETWORK, INC.
By: /s/ Patrick Doran
-------------------
Patrick Doran
Chief Financial Officer
ATTEST:
By: /s/ Patrick Doran
-------------------------
Patrick Doran, Secretary
<PAGE>
EXHIBIT 10.10
THIRD AMENDMENT TO
OUTSIDE DIRECTORS' 1996 STOCK OPTION PLAN
THIS THIRD AMENDMENT to the Outside Directors' 1996 Stock Option Plan (the
"Plan") of College Television Network, Inc. (the "Company") (formerly known as
---- -------
Laser Video Network, Inc.), a Delaware corporation, (this "Amendment") is made
---------
effective as of the 13th day of May, 1999 (the "Effective Date"). All
--------------
capitalized terms in this Amendment have the meaning ascribed to such terms in
the Plan, unless otherwise stated herein.
W I T N E S S E T H:
--------------------
WHEREAS, the Board of Directors of the Company desires to amend the Plan to
adjust the exercise price of options granted thereunder.
NOW, THEREFORE, in consideration of the premises and mutual promises
contained herein, the Plan is hereby amended as follows:
4. Section 6(a) of the Plan is hereby amended by deleting Section
6(a) in its entirety and substituting in lieu thereof the following:
"The exercise price per share of Common Stock under each option shall
be determined by the Executive Committee of the Company in its sole
discretion."
5. Except as specifically amended by this Amendment, the Plan shall
remain in full force and effect as prior to this Amendment.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed as
of the Effective Date.
COLLEGE TELEVISION NETWORK, INC.
By: /s/ Jason Elkin
-----------------------
Jason Elkin
Chief Executive Officer
ATTEST:
By: /s/ Patrick Doran
--------------------------
Patrick Doran, Secretary
<PAGE>
EXHIBIT 10.16
AMENDMENT
THIS AMENDMENT ("Amendment"), effective as of July 30, 1999 ("Effective
Date"), by and between the College Television Network, Inc. ("CTN"), a Delaware
corporation with its principal place of business at 5784 Lake Forrest Drive,
Suite 275, Atlanta, Georgia 30328, and Turner Private Networks, Inc., a Georgia
corporation with its principal place of business at One CNN Center, P.O. Box
105366, Atlanta, Georgia 30348-5366 ("Turner"). (CTN and Turner are
collectively referred to herein as the "Parties").
W I T N E S S E T H
-------------------
WHEREAS, Turner and CTN are parties to a certain Agreement dated January 1,
1998 (the "Agreement"); and
WHEREAS, the parties wish to expand the relationship established under the
Agreement in certain respects as set forth herein;
NOW, THEREFORE, for good a valuable consideration, the receipt and
sufficiency of which the parties hereby acknowledge, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Headline News Authorization. Turner Private Networks, Inc. hereby
---------------------------
authorizes CTN to downlink the CNN Headline News ("HLN") feed each school day
during the Fall and Spring semesters of the Term solely to retrieve the "Top
Stories" segments for use on the Network in exchange for the HLN License Fee set
forth below. CTN will contract with (and be solely responsible for payments to)
Crawford Communications or another contractor reasonably acceptable to Turner to
downlink the HLN "Top Stories" segments in their entirety (excluding the HLN
open, anchor promos and any third party advertising). CTN shall have no rights
whatsoever to use, distribute or exploit any other portion of HLN. All news
stories contained within the HLN top Stories must run as is with no alteration
whatsoever. CTN agrees to update HLN "Top Stories" throughout the day as
necessary to reflect current news events, with a minimum of four (4) updates per
day. Furthermore, Turner, at its discretion, may request CTN to update Top
Stories more often in case of significant breaking news and CTN will provide
such updates as soon as possible upon request at CTN's sole cost. Turner shall
have no responsibility or liability for any transmission or signal failure
associated with its distribution of HLN.
2. CTN Graphics Fee. Turner will produce and provide the CTN "Top
----------------
Stories" graphics (lens/cover, open and close) for a graphics fee of $5,500,
which amount shall be payable on delivery. CTN shall package such original
graphics elements with the HLN "Top Stories" segments for distribution on the
Network. Use of the CTN graphics on the Network is expressly conditioned on
Turner's receipt of payment therefore.
3. HLN License Fee. In exchange for the HLN "Top Stories" rights granted
---------------
to CTN hereunder, CTN hereby agrees to pay Turner an annual HLN License Fee of
Seventy-Five Thousand Dollars ($75,000), which annual amount shall be payable in
twelve (12) equal installments on the first date of each month ($6,250) during
the Term commencing on August 1, 1999.
<PAGE>
4. Term. This Amendment and the rights granted herein shall run
----
coterminously with the Agreement; however, Turner shall have the right to
terminate this Amendment and the rights granted herein at any time for any
reason upon thirty (30) days notice. Said termination shall have no effect on
the Agreement.
5. Additional Terms. This Amendment shall be governed by and construed in
----------------
accordance with all other provisions set forth in the Agreement, except to the
extent of a conflict, in which event this Amendment shall control solely with
respect to such matters.
6. Definitions. Any capitalized terms used in this Amendment but not
-----------
defined herein shall have the meanings ascribed to them in the Agreement.
7. Ratification/Continuing Effect. Except as expressly supplemented
------------------------------
hereinabove, all other terms and conditions of the Agreement are hereby ratified
by the parties and shall remain in full force and effect in accordance with
their terms throughout the extended Term.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this Amendment as of the date first above written.
COLLEGE TELEVISION NETWORK, INC. TURNER PRIVATE NETWORKS, INC.
By: /s/ Jason Elkin By: /s/ Debra Cooper
------------------------- ----------------------
Title: Chief Executive Officer Title: Senior Vice President
------------------------- ----------------------
Date: July 30, 1999 Date: July 30, 1999
------------------------- ----------------------
2
<PAGE>
EXHIBIT 10.29
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT to that certain Employment Agreement ("Original
Agreement") dated as of April 29, 1997 by and among College Television Network,
Inc. f/k/a UC Television Network Corp., a Delaware corporation (the "Company"),
U-C Holdings, L.L.C., a Delaware limited liability company ("Holdings") and
Jason Elkin ("Executive"); is made as of the 1st day of May, 1999 between the
Company and Executive.
W I T N E S S E T H:
WHEREAS, the Company desires to change the compensation of Executive and
Executive is willing to make such change, in accordance with the terms and
conditions set forth herein.
NOW THEREFORE, in consideration for ten dollars ($10.00) in hand paid by the
Company to Executive and for other good and valuable consideration, the receipt
and sufficiency which are hereby acknowledged, the parties hereto hereby agrees
as follows:
1. All defined terms in the Original Agreement shall have the same meaning
herein unless the context requires otherwise or unless redefined herein.
2. Section 4(a) of the Original Agreement is amended by deleting the first
sentence in its entirety and replacing it with the following:
"During the Employment Period, effective as of May 1, 1999,
Executive's base salary shall be Five Hundred Thirteen Thousand and
No/100 Dollars ($513,000.00) per annum or such higher rate as the
Board may designate from time to time (the "Base Salary"), which
salary shall be payable in regular installments in accordance with the
Company's general payroll practices. The Base Salary shall be
increased on an annual basis by at least ten percent (10%) over the
Base Salary paid to Executive during the pervious year of the
Employment Period, to be increased on each anniversary date of this
Agreement."
3. Subsequent to Section 4(d) of the Original Agreement the following shall
be inserted:
"(e) Executive will be granted options to purchase 50,000 shares of
Common Stock of the Company on the anniversary date of the Employment
Period, which is April 28. The options will vest over three years,
with immediate vesting upon a Sale of the Company. The grant of such
options is subject to the approval of the Board."
4. Except as specifically amended herein, the Original Agreement shall remain
unchanged and unamended hereby.
<PAGE>
IN WITNESS WHEREAS, the parties have executed this Agreement as of the date
first above written.
COLLEGE TELEVISION NETWORK, INC.
By: /s/ Patrick Doran
-----------------------------
Its: Chief Financial Officer
----------------------------
U-C HOLDINGS, L.L.C.
By: /s/ Daniel M. Gill
-----------------------------
Its: General Manager
-----------------------------
/s/ Jason Elkin
---------------------------------
JASON ELKIN
2
<PAGE>
EXHIBIT 10.32
First Amendment and Renewal
Employment Agreement
THIS AMENDMENT AND RENEWAL OF EMPLOYMENT AGREEMENT (the "Amendment") is
---------
effective as of January 1, 2000 (the "Effective Date"), by and between College
--------------
Television Network, Inc., a Delaware corporation (the "Company"), and Patrick G.
-------
Doran ("Employee").
--------
W I T N E S S E T H :
WHEREAS, the Company and the Employee entered into that certain Employment
Agreement dated as of September 10, 1997 (the "Original Agreement"), pursuant to
------------------
which the Company agreed to employ Employee and Employee agreed to be employed
by the Company on the terms and conditions set forth therein; and
WHEREAS, the Company and the Employee each desire to renew and modify certain
terms of the Original Agreement, as set forth in this Amendment;
NOW THEREFORE, in consideration of the mutual premises contained herein, and
for other good and valuable consideration, the receipt and adequacy of which are
acknowledged by the parties hereto, the parties, intending to be legally bound,
hereby agree as follows:
6. All defined terms in the Original Agreement shall have the same meaning
herein unless the context requires otherwise or unless redefined herein.
7. Amendments.
----------
(a) Section 3(b) of the Original Agreement is amended by adding the
following sentence to the end of the section:
"All travel shall be first class accommodations."
(b) Section 3(f) of the Original Agreement is amended by deleting the
section in its entirety and replacing it with the following:
"(f) During the Employment Period, Employee shall be entitled to
four (4) weeks paid vacation from working days per annum."
8. Renewal and Term of Employment. This Amendment shall serve as a
------------------------------
written renewal of the Original Agreement as required by Section 4(a) of that
Original Agreement in order to extend the term of employment. Employee shall
serve as the Chief Financial Officer of the Company and have those duties set
forth in Section 2 of the Original Agreement for a period of three (3) years
from the Effective Date of this Amendment ending on December 31, 2002 (the
"Extension Period"), subject to the terms and conditions regarding termination
- ------------------
or expiration as described in the Original Agreement.
<PAGE>
9. Compensation.
------------
(a) As an amendment to the Section 3(a) of the Original Agreement,
beginning on the Effective Date of this Amendment, the Company shall pay to
Employee, during the Extension Period, compensation at the rate of Two Hundred
Seventy-Five Thousand and No/100 Dollars ($275,000.00) per annum (the "Base
----
Salary"). The Board may provide increases to the Base Salary in its sole
- ------
discretion.
(b) The foregoing compensation shall be paid to Employee in accordance
with the standard policies and practices of the Company in effect at the time of
payment and shall be subject to all deductions or withholdings authorized by
Employee or required by applicable law, but not less often than monthly.
(c) In addition to those options previously granted to Employee
pursuant to the terms of the Original Agreement, Employee shall be granted
options to purchase 50,000 shares of Common Stock of the Company at the
beginning of each year of the Employment Period at fair market value on the date
of grant. Such options will vest 12 months after granting, with immediate
vesting upon a Sale of the Company.
10. Remaining Provisions. All other terms and conditions of the
--------------------
Agreement not modified by this Amendment shall remain as originally set forth in
the Agreement.
11. Counterparts. This Agreement may be executed in multiple
------------
counterparts with the same effect as if all signing parties had signed the same
document. All counterparts shall construed together and constitute the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the 1st day of November, 1999.
COLLEGE TELEVISION NETWORK, INC.
By: /s/ Jason Elkin
----------------------------------
Its: Chief Executive Officer
---------------------------------
/s/ Patrick Doran
--------------------------------------
PATRICK G. DORAN
2
<PAGE>
EXHIBIT 10.38
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT to that certain Employment Agreement ("Original
--------
Agreement") dated as of May 13, 1999 by and among College Television Network,
- ---------
Inc., a Delaware corporation (the "Company"), U-C Holdings, L.L.C., a Delaware
-------
limited liability company ("Holdings") and Martin Grant ("Executive"); is made
-------- ---------
as of the day of October, 1999 between the Company and Executive.
----
W I T N E S S E T H:
WHEREAS, the Company desires to change the compensation of Executive and
Executive is willing to make such change, in accordance with the terms and
conditions set forth herein.
NOW THEREFORE, in consideration for ten dollars ($10.00) in hand paid by
the Company to Executive and for other good and valuable consideration, the
receipt and sufficiency which are hereby acknowledged, the parties hereto hereby
agrees as follows:
12. All defined terms in the Original Agreement shall have the same
meaning herein unless the context requires otherwise or unless redefined herein.
13. Section 5 of the Original Agreement is amended by deleting the
section in its entirety and replacing it with the following:
"(a) In addition to all sums payable to Executive pursuant to
paragraph 4 above, Executive shall receive Five Hundred (500) Class A
Management Units of Holdings at an aggregate purchase price of $500.00
(the "Original Cost").
(b) Except as otherwise provided in paragraph 6(c) below,
the Management Units will become vested, over the 36 month period
after the date hereof, in equal proportions on each anniversary date
of the Effective Date if, as of such anniversary date, Executive is
employed by Company (i.e. 33.3% on the anniversary of each 12 month
period).
(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 herein
as "Vested Executive Securities", and all Unvested Management Units
are referred to herein as "Unvested Executive Securities.""
14. Pursuant to the Amendments contained herein, in exchange for $50, to be
applied to the purchase price of the Class A Management Units, Executive shall
remit the 50 Class B Management Units of Holdings purchased by him under the
terms of the Original Agreement and such 50 Class B Management Units shall be
reallocated to the Pool (as defined in the Fourth Amended and Restated Limited
Liability Agreement of Holdings ("LLC Agreement")), pursuant to Section 3.9 of
-------------
the LLC Agreement.
<PAGE>
15. For and in consideration of the additional 150 Class A Management
Units purchased by Executive ("New Units"), Executive hereby owes Holdings $150,
---------
$200 for the New Units less the $50 credit for the Class B Management Units
remitted. The New Units received by the Executive in connection with the
Amendments herein shall vest as though they were purchased by the Executive on
the date of the Original Agreement. Executive hereby acknowledges that such New
Units are subject to the Repurchase Option set forth in Section 6 of the
Original Agreement.
16. The parties hereto further agree that any warrant received by the
Executive from Jason Elkin, pursuant to Section 5(d) of the Original Agreement,
is hereby cancelled for no additional consideration, and any such warrant is of
no further force and effect.
17. Except as specifically amended herein, the Original Agreement shall
remain unchanged and unamended hereby.
18. This Agreement will be governed by the internal law, and not the laws
of conflicts, of the State of Georgia.
19. 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.
IN WITNESS WHEREAS, the parties have executed this Agreement as of the date
first above written.
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/ Daniel Gill
------------------------------
Daniel M. Gill
Its: Managing Director
/s/ Martin Grant
---------------------------------------
MARTIN GRANT
2
<PAGE>
EXHIBIT 10.40
PAYMENT AGREEMENT AND GENERAL RELEASE
-------------------------------------
1. General Release. (a) In consideration of my relinquishing my rights
---------------
to future employment and cancellation of my rights under the Employment
Agreement dated April 25, 1997 between Employee and CTN (as defined below) (the
"Employment Agreement"), I, Peter Kauff ("Employee"), release, dismiss, covenant
not to sue and forever discharge CTN Media Group, Inc., f/k/a 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.
(b) The Company, on its behalf and on behalf of its officers, directors
and managers, does hereby release, dismiss, covenant not to sue and forever
discharge Employee, and his heirs from any and all actions, causes of actions,
suits, damages, debts, claims, counterclaims, obligations and liabilities of
whatever nature, known or unknown, including, but not limited to those actions,
causes of actions, suits, damages, debts, claims, counterclaims, obligations and
liabilities resulting or arising out of directly or indirectly the employment
relationship between Employee and 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 for my relinquishing my rights to future
employment and cancellation of my rights under the Employment Agreement and as
<PAGE>
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) Employee shall continue to receive his base salary
($430,000 per year) up through and including December 31, 1999; (ii) Employee
shall receive one lump sum payment of $573,333; (iii) the vested options of
Employee listed on Exhibit "A" shall remain in place provided, however, that
-----------
pursuant to all of the options, Employee shall have until April 30, 2001 to
exercise such options, notwithstanding any provision set forth in such option
agreements (all other options not listed on Exhibit A are cancelled); and
(iv) CTN shall provide to Employee and his dependents coverage under a Mutual of
Omaha individual health plan or Employee may elect COBRA under the CTN health
plan, at CTN's expense, and provided, that CTN shall only maintain such
--------
insurance coverage until the earlier of April 30, 2001, or the date Employee
accepts other employment and obtains health insurance coverage.
b. Employee shall be entitled to retain 100 Class A Management Units
(the "Retained Units"), which Retained Units shall be fully vested and not
subject to repurchase or the restrictions set forth in Section 2 of the Equity
Purchase Agreement between CTN, Holdings and Employee dated April 1, 1999 (the
"Purchase 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 options listed on
Exhibit "A", Retained Units, common stock of the Company purchased by Employee
- -----------
on the NASDAQ Exchange, and 5,000 shares (after giving effect to the 1:5 reverse
stock split) of common stock of the Company held by Bear, Stearns & Co., Inc.
c. Employee acknowledges that the 462,247 Class A and B Investor
Units, as defined in the Fourth Amended and Restated Limited Liability Company
Agreement dated August 31, 1999 (the "LLC Agreement")(the "Secured Investor
Units"), were paid for by Employee, pursuant to that certain Promissory Notes
dated May 20, 1998, October 2, 1998, July 23, 1999, and August 31, 1999 (the
"Notes"), in the aggregate principal amount of $476,421, which Notes are secured
by a pledge of the Investor Units pursuant to that certain Unit Pledge Agreement
between Employee and Holdings dated as of May 20, 1998, as amended and restated
pursuant to that certain Third Amended and Restated Unit Pledge Agreement dated
August 31, 1999, as amended (the "Pledge Agreement"). Employee, the Company and
Holdings agree that Employee shall forfeit the Secured Investor Units, and the
Notes and Pledge Agreement shall be cancelled and Employee shall have no further
obligations thereunder, and shall be released therefrom. Employee represents and
warrants that, except as set forth herein, the Secured Investor Units are owned
by Employee free and clear of all liens, claims or encumbrances. The Notes shall
be returned to Employee marked "Paid." The Company represents and acknowledges
that the Notes are the only promissory notes given in favor of the Company by
Employee.
d. The 102,405 Class B Investor Units (the "Owned Investor Units")
Employee paid cash for and purchased from Holdings on October 8, 1999, October
18, 1999 and November 18, 1999 in the amount of $102,405 are hereby repurchased
by Holdings and Holdings shall deliver a check for $102,405 to Employee after
the expiration of the waiting period set forth in Section 5(d) below. Employee
represents and warrants that the Owned Investor Units are owned by Employee free
and clear of all liens, claims or encumbrances.
e. Employee shall be entitled to retain the personal computer in his
office.
2
<PAGE>
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 claims made
under any federal, local 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, reasonable attorneys' fees, deficiencies, levies,
assessments, fines, penalties, interest, taxes on the amount paid pursuant to
this paragraph or otherwise. If the Company receives notice that any taxing
authority has made such a claim, it shall provide prompt notice of such claim to
Employee, 41 Carmel Hill Road, Bethlehem, Connecticut 06751, with a copy to
Richard Marlin, Esq., Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New
York, New York 10022, (facsimile: 212-715-8000), and shall provide Employee
with a reasonable opportunity to resolve the matter with the taxing authority.
Notwithstanding the foregoing, Employee shall not be liable for FUTA taxes or
the employer portion of FICA, if any, that may be determined to be owed on the
payments thereunder.
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 December 29,
1999 within which to consider this Agreement and Release or has waived such
requirement, which 21 day waiting period has been waived;
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 and the Company agree to keep confidential the terms of
this Agreement and the transactions or events which led to its execution, and
Employee and the Company covenant 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, or as may be required by law. If either party is compelled to
disclose
3
<PAGE>
this Agreement pursuant to service of a subpoena on him, he or it shall
immediately provide written notice to the other party and shall not make any
such disclosure for ten (10) business days in order to give the other party 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 indirect parents, subsidiaries, affiliates, related companies,
successors and assigns, or to its and their directors, officers, members, and
employees, provided that nothing herein shall restrict Employee from making any
statement in response to inquiry from any governmental entity, pursuant to
subpoena, or as may otherwise be required by law, provided Employee immediately
gives notice to the Company of such inquiry and shall give the Company the
opportunity to challenge such disclosure.
c. Employee acknowledges that the receipt of the consideration set
forth in Paragraph 3 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 5
through 16 of the
4
<PAGE>
Employment Agreement shall remain and continue in full force and effect in
accordance with their terms. Employee resigned as an officer, director and
employee of the Company effective as of December 29, 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.
12. Transition. In consideration for the payments to Employee pursuant to
----------
Paragraph 3 hereof, Employee agrees to be reasonably available (considering any
other personal or business commitment he may have) for telephonic consultation
with employees or consultants of the Company up to and until June 30, 2000.
13. 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 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 January, 2000.
EMPLOYEE:
/s/ Peter Kauff
-------------------------------------
PETER KAUFF
COMPANY:
COLLEGE TELEVISION NETWORK, INC.
By: /s/ Jason Elkin
---------------------------------
Its: Chief Executive Officer
---------------------------------
[SIGNATURES CONTINUED ON NEXT PAGE]
5
<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/ Daniel M. Gill
-----------------------------------
Its: Manager
6
<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. 333-79967, No. 333-67809 and No. 333-67829) and Form
S-3 (No. 333-09499) of CTN Media Group, Inc., formerly College Television
Network, Inc., of our report dated March 24, 2000 relating to the financial
statements, which appears in this Form 10-KSB.
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,170,632
<SECURITIES> 0
<RECEIVABLES> 18,889,418
<ALLOWANCES> (499,425)
<INVENTORY> 0
<CURRENT-ASSETS> 26,099,299
<PP&E> 14,986,241
<DEPRECIATION> (2,461,337)
<TOTAL-ASSETS> 69,451,962
<CURRENT-LIABILITIES> 22,237,693
<BONDS> 0
65,888,820
0
<COMMON> 73,061
<OTHER-SE> (33,909,897)
<TOTAL-LIABILITY-AND-EQUITY> 69,451,962
<SALES> 31,592,501
<TOTAL-REVENUES> 31,812,851
<CGS> 0
<TOTAL-COSTS> 48,735,309
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 757,576
<INCOME-PRETAX> (17,680,034)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,680,034)
<EPS-BASIC> (4.86)
<EPS-DILUTED> (4.86)
</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 December 31, 1998, and fiscal year ended
December 31, 1999, reflect net losses of approximately $8,453,903, and
$17,680,034, respectively. Including the effect of amortization of the
beneficial conversion feature on mandatorily redeemable preferred stock and the
accretion charge for the redemption value of the preferred stock (which
redemption cannot occur until July 23, 2006), the net loss available to common
stockholders for the year ended December 31, 1999 was $69,778,789, or
approximately $(4.86) per share. Of this $69,778,789 net loss available to
common stockholders, $15,180,454 was attributable to the beneficial conversion
feature and $36,918,801 was attributable to a charge for the full redemption
value of the preferred stock at the market value of the common stock on December
31, 1999. This is the full amount the preferred stock would be redeemable for
as of December 31, 1999, based upon the Company's closing stock price of $10.00
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 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 operations generate sufficient revenues to cover our 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.
- --------------------------------------------------------------
We believe that certain requirements contained in our loan covenants may
not be met during fiscal 2000. If we fail to meet a covenant under our bank
loans, the financial institution has the right to declare the loan due upon
demand. We are in negotiations with the financial institutions related to
amending the current debt agreements or entering into new agreements. 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 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 the 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
commission are being negotiated with clients and commissions charged on media
billings are not uniform. Revenues are dependant 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 installations, from 736 as of December 31, 1998
to 1,575 as of December 31, 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 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 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
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
<PAGE>
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.
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 principal stockholder continues to control our affairs.
- ----------------------------------------------------------
U-C Holdings, L.L.C. beneficially owns approximately 85.1% 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 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 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 judgment 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
<PAGE>
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 December 31, 1999, there are outstanding options to purchase
1,423,296 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 1,846,444 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 are subject to certain limitations set forth in Rule 144
under the Securities Act. As of December 31, 1999, options to purchase
1,423,296 shares and warrants to purchase 1,846,444 shares of our common stock
were outstanding, of which options to purchase 963,129 shares and warrants to
purchase 1,846,444 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 understandings 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.
