**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10–Q**

 

**[Mark One]**

      x**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2001**

**OR**

 

      o**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from______________ to ____________**

 

**Commission File Number: 0-19997**

 

**CTNMEDIA GROUP, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

 

| **Delaware**                                                                  |   | **13-3557317**                        |
|-------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization)               |   | (I.R.S.  Employer Identification No.) |
|                                                                          |   |                                  |
| **3350  Peachtree Rd. Suite 1500**                                            |   |                                  |
| **Atlanta,  Georgia**                                                         |   | **30326**                             |
| (Address  of Principal Executive Offices)                                     |   | (Zip  Code)                           |
|                                                                          |   |                                  |
| Issuer’s Telephone Number, Including Area Code:**  (404) 256-9630** |
|                                                                          |   |                                  |
| **N/A**                                                                       |
| (Former  Name, Former Address and Former Fiscal Year,                         |
| if  Changed Since Last Report)                                                |

 

Check whether theissuer:  (1) filed all reports requiredto be filed by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes xNo o

 

Number of shares ofcommon stock outstanding as of November 11, 2001:  15,086,747

 

Transitional SmallBusiness Disclosure Format (check one): Yes o    No x

 

 

PARTI

FINANCIALINFORMATION

 

ITEM 1.Financial Statements

CTN MEDIAGROUP, INC.

CONSOLIDATEDBALANCE SHEET

(Unaudited)

 
| **ASSETS**                                                                                                                     |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                           |   | **September 30,** |   | **December 31,** |   |
|                                                                                                                           |   | **2001** |   | **2000** |   |
| Current  assets:                                                                                                               |   |   |   |   |   |
| Cash and  cash equivalents                                                                                                     |   | $ | 1,405,871 |   | $ | 2,806,919 |   |
| Accounts  receivable, net of allowance of $428,716 and $575,455, respectively                                                  |   | 1,342,875 |   | 5,374,456 |   |
| Prepaid  expenses                                                                                                              |   | 196,616 |   | 281,794 |   |
| Other  current assets                                                                                                          |   | - |   | 31,431 |   |
| Total  current assets                                                                                                          |   | 2,945,362 |   | 8,494,600 |   |
|                                                                                                                           |   |   |   |   |   |
| Investments                                                                                                                    |   | 1,516,666 |   | 1,500,000 |   |
| Property and  equipment, net                                                                                                   |   | 10,765,217 |   | 12,497,308 |   |
| Other assets                                                                                                                   |   | 311,495 |   | 520,556 |   |
| Net assets  of discontinued operation                                                                                          |   | - |   | 7,550,565 |   |
| Total assets                                                                                                                   |   | $ | 15,538,740 |   | $ | 30,563,029 |   |
|                                                                                                                           |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                       |   |   |
|                                                                                                                           |   |   |   |   |   |
| Current  liabilities:                                                                                                          |   |   |   |   |   |
| Accounts  payable                                                                                                              |   | $ | 982,703 |   | $ | 2,283,110 |   |
| Accrued  expenses                                                                                                              |   | 556,599 |   | 1,738,582 |   |
| Deferred revenue                                                                                                               |   | 282,193 |   | - |   |
| Current  portion of long-term debt                                                                                             |   | - |   | 12,000,000 |   |
| Total  current liabilities                                                                                                     |   | 1,821,495 |   | 16,021,692 |   |
| Long-term  liabilities:                                                                                                        |   |   |   |   |   |
| Debt, less  current portion                                                                                                    |   | 4,000,000 |   | - |   |
| Total  liabilities                                                                                                             |   | 5,821,495 |   | 16,021,692 |   |
| Redeemable  preferred stock                                                                                                    |   | - |   | 38,306,052 |   |
| Stockholders’  equity (deficit):                                                                                          |   |   |   |   |   |
| Common stock  - $.005 par; authorized 50,000,000 shares; issued and outstanding 15,086,747  and 15,059,114 shares respectively |   | 75,434 |   | 75,296 |   |
| Preferred  stock - $.001 par; authorized 2,776,666 shares; issued and outstanding  2,443,330 and 2,176,664 shares respectively |   | 42,533,874 |   | - |   |
| Additional  paid in capital                                                                                                    |   | 41,349,407 |   | 41,780,424 |   |
| Unearned  compensation                                                                                                         |   | (76,167 | ) | (172,035 | ) |
| Accumulated  deficit                                                                                                           |   | (74,165,303 | ) | (65,448,400 | ) |
| Total  stockholders’ equity (deficit)                                                                                     |   | 9,717,245 |   | (23,764,715 | ) |
| Total  liabilities and stockholders’ equity (deficit)                                                                     |   | $ | 15,538,740 |   | $ | 30,563,029 |   |

 

The accompanying notes arean integral part of the consolidated financial statements.

 

CTN MEDIA GROUP,INC.

CONSOLIDATEDSTATEMENT OF OPERATIONS

(Unaudited)

 
|                                                                           |   | **Three Months Ended** |      | **Nine Months Ended** |   |
|--------------------------------------------------------------------------------|--------|------------------------|-----------|-----------------------|--------|
|                                                                           |   | **September 30,**      |      | **September 30,**     |   |
|                                                                           |   | **2001**               |      | **2000**              |   | **2001** |   | **2000** |   |
| Revenue                                                                        |   | $                      | 1,041,253 |                  | $      | 2,855,183 |   | $ | 7,412,122 |   | $ | 10,656,986 |   |
|                                                                           |   |                   |      |                  |   |   |   |   |   |
| Expenses                                                                       |   |                   |      |                  |   |   |   |   |   |
| Operating                                                                      |   | 1,519,515              |      | 2,475,514             |   | 5,612,615 |   | 7,629,115 |   |
| Selling,  general and administrative                                           |   | 3,203,238              |      | 4,593,722             |   | 10,940,259 |   | 14,847,101 |   |
| Depreciation  and amortization                                                 |   | 932,800                |      | 1,144,030             |   | 2,943,518 |   | 2,702,408 |   |
| Total  expenses                                                                |   | 5,655,553              |      | 8,213,266             |   | 19,496,392 |   | 25,178,624 |   |
|                                                                           |   |                   |      |                  |   |   |   |   |   |
| Interest  income                                                               |   | 9,593                  |      | 45,516                |   | 52,520 |   | 171,453 |   |
| Interest  expense                                                              |   | (111,443               | )         | (380,312              | )      | (792,779 | ) | (870,336 | ) |
| Other income                                                                   |   | 324,233                |      | -                     |   | 324,233 |   | - |   |
| Net loss  from continuing operations                                           |   | (4,391,917             | )         | (5,692,879            | )      | (12,500,296 | ) | (15,220,521 | ) |
| Loss from  discontinued operations, net                                        |   | (106,557               | )         | (139,601              | )      | (1,242,993 | ) | (1,272,558 | ) |
| Gain from  disposition of discontinued operations                              |   | 5,026,386              |      | -                     |   | 5,026,386 |   | - |   |
| Net income  (loss)                                                             |   | $                      | 527,912   |                  | $      | (5,832,480 | ) | $ | (8,716,903 | ) | $ | (16,493,079 | ) |
| Amortization  of beneficial conversion feature on mandatorily redeemable stock |   | -                      |      | (1,402,000            | )      | - |   | (1,402,000 | ) |
| Dividends  and accretion on  redeemable preferred  stock                  |   | -                      |      | (8,745,822            | )      | - |   | 21,727,758 |   |
|                                                                           |   |                   |      |                  |   |   |   |   |   |
| Net income  (loss) available to common stockholders                            |   | $                      | 527,912   |                  | $      | (15,980,302 | ) | $ | (8,716,903 | ) | $ | 3,832,679 |   |
|                                                                           |   |                   |      |                  |   |   |   |   |   |
| Net income  (loss) per share:                                                  |   |                   |      |                  |   |   |   |   |   |
| Basic net  income (loss) per common share from continuing operations           |   | (0.29                  | )         | (1.06                 | )      | (0.83 | ) | 0.34 |   |
| Discontinued  operation                                                        |   | 0.33                   |      | (0.01                 | )      | 0.25 |   | (0.08 | ) |
| Basic net  income (loss) per common share                                      |   | $                      | 0.04      |                  | $      | (1.07 | ) | $ | (0.58 | ) | 0.26 |   |
| Diluted net  income (loss) per common share from continuing operations         |   | (0.29                  | )         | (1.06                 | )      | (0.83 | ) | 0.20 |   |
| Discontinued  operations                                                       |   | 0.33                   |      | (0.01                 | )      | 0.25 |   | (0.05 | ) |
| Diluted net  income (loss) per common share                                    |   | $                      | 0.04      |                  | $      | (1.07 | ) | $ | (0.58 | ) | $ | 0.15 |   |
|                                                                           |   |                   |      |                  |   |   |   |   |   |
| Weighted  average number of common shares outstanding                          |   |                   |      |                  |   |   |   |   |   |
|                                                                           |   |                   |      |                  |   |   |   |   |   |
| Basic                                                                          |   | 15,086,747             |      | 14,967,941            |   | 15,082,889 |   | 14,824,239 |   |
| Potential  diluted                                                             |   | 15,086,747             |      | 14,967,941            |   | 15,082,889 |   | 25,874,588 |   |

 

The accompanying notes arean integral part of the consolidated financial statements.

 

CTN MEDIAGROUP, INC.

CONSOLIDATED

STATEMENT OFCASH FLOWS

(Unaudited)

 
|                                                                         |   | **Nine Months Ended** |        |
|------------------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                         |   | **September 30,**     |        |
|                                                                         |   | **2001**              |        | **2000** |   |
| Cash flows  from operating activities:                                       |   |                  |        |   |   |
| Net loss  from continuing operations                                         |   | $                     | (12,500,296 | ) | $ | (15,220,521 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                  |        |   |   |
| Depreciation  and amortization                                               |   | 2,943,518             |        | 2,702,408 |   |
| Amortization  of debt issuance costs                                         |   | 90,000                |        | 295,083 |   |
| Non-cash  compensation expense arising from equity awards                    |   | 95,868                |        | 574,688 |   |
| Loss on  disposition of fixed assets                                         |   | 91,043                |        | 38,988 |   |
|                                                                         |   |                  |        |   |   |
| Changes in  operating assets and liabilities:                                |   |                  |        |   |   |
| Accounts  receivable                                                         |   | 4,031,581             |        | 198,399 |   |
| Prepaid  expenses                                                            |   | 85,178                |        | (206,533 | ) |
| Other assets                                                                 |   | (88,402               | )           | (84,653 | ) |
| Accounts  payable                                                            |   | (1,300,407            | )           | (326,925 | ) |
| Accrued  expenses and other liabilities                                      |   | (1,181,983            | )           | (735,406 | ) |
| Deferred  revenue                                                            |   | 265,527               |        | 156,545 |   |
| Net cash  used in operating activities                                       |   | (7,468,373            | )           | (12,607,927 | ) |
|                                                                         |   |                  |        |   |   |
| Cash flows  from investing activities:                                       |   |                  |        |   |   |
| Purchases of  property and equipment                                         |   | (1,063,576            | )           | (5,211,935 | ) |
| Net proceeds  from sale of discontinued operation                            |   | 27,711,527            |        | - |   |
| Net cash  used in investing activities                                       |   | 26,647,951            |        | (5,211,935 | ) |
|                                                                         |   |                  |        |   |   |
| Cash flows  from financing activities:                                       |   |                  |        |   |   |
| Payment on  term loan                                                        |   | (16,870,687           | )           | - |   |
| Payments on  revolving credit facility                                       |   | (10,300,000           | )           | - |   |
| Net proceeds  from notes payable                                             |   | 2,300,000             |        | 9,200,000 |   |
| Proceeds  from exercise of warrants and stock options                        |   | 57,145                |        | 1,338,661 |   |
| Net proceeds  from issuance of preferred stock                               |   | 3,739,798             |        | 3,000,000 |   |
| Repurchase  of equity instruments                                            |   | -                     |        | (275,000 | ) |
| Net cash  provided by financing activities                                   |   | (21,073,744           | )      | 13,263,661 |   |
|                                                                         |   |                  |        |   |   |
| Net cash  used in continuing operations                                      |   | (1,894,166            | )           | (4,556,201 | ) |
| Net cash  provided by (used in) discontinued operations                      |   | 493,118               |        | (72,194 | ) |
| Net decrease  in cash and cash equivalents                                   |   | (1,401,048            | )           | (4,628,395 | ) |
| Cash and  cash equivalents, beginning of period                              |   | 2,806,919             |        | 7,031,592 |   |
| Cash and  cash equivalents, end of period                                    |   | $                     | 1,405,871   |   | $ | 2,403,197 |   |

 

The accompanying notes are an integral part of the consolidated financialstatements.

 

CTN MEDIA GROUP, INC.

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

                The accompanying unauditedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  These financial statementsshould be read in conjunction with the Company’s financial statements for thefiscal year ended December 31, 2000 included in the Annual Report as filed onForm 10-KSB with the United States Securities and Exchange Commission.

                In the opinion of management,the accompanying unaudited consolidated financial statements contain alladjustments (consisting of normal recurring accruals) necessary to presentfairly the financial position of the Company as of  September 30, 2001 and the results of operations and of cashflows for the three and nine months ended September 30, 2001 and 2000 and toreflect the operation of our former subsidiary, Market Place Media (“MPM”), asdiscontinued operations.

                The results of operations forthe three and nine months ended September 30, 2001 and 2000 are not necessarilyindicative of the results of operations for a full fiscal year of theCompany.  Certain prior period amountshave been reclassified to conform with the current period presentation.

 

**NOTE(A) - The Company**

                CTN Media Group, Inc. andsubsidiaries (the “Company”) is a targeted media company specializing inreaching young adults.  As ofSeptember 30, 2001, the Company operated properties in network televisionand online media.

                Prior to the quarter endedSeptember 30, 2001, the Company operated as two reportable segments: CTNand MPM.  CTN sold MPM on July 10,2001.  MPM’s separate results arereported in Note (E) Discontinued Operations. CTN includes the operations of the College Television Network (the“Network”), Link Magazine, iD8 Marketing (“iD8”) and Wetair.com.

                The Network is a satellitetelevision network that operates on college and university campuses across theUnited States.  Its single channeltelevision system is placed free of charge in campus dining facilities andstudent unions.  The Network’sbroadcasts contain music, news, information and entertainment programming.  As of September 30, 2001, the Network wasinstalled or contracted for installation in 1,843 locations at approximately812 colleges and universities.  As ofSeptember 30, 2000, the Network was installed or contracted in 1,844 locationsat approximately 784 colleges and universities.  The Network generates revenue through the advertising placed onit.

                Link Magazine is a publicationdistributed to over 650 college campuses. As of the date hereof, the Company has elected not to publish new issuesof Link Magazine for an unspecified period of time.  iD8 was a marketing agency providing creative services and placingmedia purchases for its clients.  iD8ceased operations on July 31, 2001. Wetair.com is an Internet site for young adults offering entertainmentinformation; however, Wetair.com has been integrated intocollegetelevision.com.

                The Company maintains aheadquarters office in Atlanta, Georgia and sales offices in New York, Chicagoand Los Angeles.

                Certainof the Company’s revenues are affected by the pattern of seasonality common tomost school-related businesses. Historically, the Company has generated a significant portion of itsrevenue during the period from September through May and substantially lessrevenue during the summer months when colleges and universities do not holdregular classes.

 

**NOTE (B) – Preferred Stock**

                At September 30, 2001, theCompany’s preferred stock consists of Series A Convertible Preferred Stock(“Series A”) and Series B Convertible Preferred Stock (“Series B”) of which U-CHoldings, LLC (“Holdings”) owns (i) all of the 2,176,664 outstanding Series Ashares out of the 2,510,000 Series A shares that have been designated and (ii)all of the 266,666 outstanding Series B shares out of the 266,666 Series Bshares that have been designated.

                Effective March 31, 2001, theredemption feature of the Series A was waived pursuant to an agreement betweenthe Company and Holdings, which will cease the accretion of Series A to itshighest redemption value at the end of each reporting period, and the Companywill no longer be obligated to redeem, for cash, the outstanding shares of SeriesA at the option of the Series A holders. This allowed the Company to move the classification of the Series A fromMandatorily Redeemable Preferred Stock to Stockholders’ Equity.

                On April 5, 2001, the Companyissued 266,666 shares of Series B to Holdings for $15.00 per share, or anaggregate purchase price of $3,999,990. The Series B accrues a cumulative dividend of 12% per annum, compoundingon a quarterly basis.  The Series B isconvertible into shares of common stock, as determined by multiplying the numberof shares of Series B to be converted by the $15.00 per share purchase priceand dividing the product by the conversion price of the Series B then in effectwith respect to such shares.  On thedate of issuance, the conversion price of the Series B was $2.50.  Each share of Series B has voting rightsbased upon the number of shares of common stock into which Series B isconvertible.  At September 30, 2001, 1,599,996shares of common stock were reserved for conversion of the Series B.  There are an additional 96,410 shares ofcommon stock reserved for the conversion of dividends accrued with respect tothe Series B through September 30, 2001.

The Company filed an Amended and Restated Certificateof Incorporation on May 9, 2001 that amends the terms of the Series A to, amongother things, (i) eliminate the redemption rights of the holders of the SeriesA (such rights had previously been waived by Holdings in an agreement datedMarch 31, 2001), (ii) reduce the conversion price of the Series A from $4.50 to$2.50, and (iii) incorporate into the terms of the Series A the issuance of theSeries B having rights and preferences senior to the Series A.  The remaining terms of Series A areunchanged and include the 12% cumulative accrual of dividends per year, compoundingon a quarterly basis.  Each share ofSeries A has voting rights based upon the number of shares of common stock intowhich Series A is convertible. Including the effect of the reduction in the conversion price of theSeries A, at September 30, 2001, 13,059,984 shares of the Company’s commonstock were reserved for conversion. There are an additional 3,461,318 shares of common stock reserved forthe conversion of dividends accrued with respect to the Series A throughSeptember 30, 2001.

 

**NOTE (C) – Debt**

                As of August 10, 2001, theCompany amended a revolving credit facility from a financial institution (the“CTN Loan”) to a borrowing capacity of up to $5.0 million.  The CTN Loan previously had a  $12.0 million credit limit of which $10.3million was paid down on July 10, 2001 in conjunction with the sale of MPM (seeNote (E)).  As of September 30, 2001,there was a $4.0 million outstanding balance on this facility.

                The CTN Loan bears interest ateither (i) the Base Rate which is equal to the greater of (a) the Federal Fundsrate plus 0.5% or (b) the Prime Rate, plus 2.00% per year; or (ii) theEurodollar Rate, plus 3.50% per year. The determination of whether to use the Base Rate or the Eurodollar Rateis at the option of the Company.  Acommitment fee of 0.5% per year on  theunused portion of the facility is required. The CTN Loan is due and payable in full on January 31, 2003.  For the three months ended September 30,2001 and 2000, the weighted average interest rate on the CTN Loan was 8.69% and11.37%, respectively.  The CTN Loan isguaranteed by a negative pledge of the outstanding shares of stock of theCompany owned by Holdings.

                MPM had a term loan (the “TermLoan”) and a revolving credit facility (the “Revolver Loan”) from a separatefinancial institution and its affiliates. In conjunction with the sale of MPM, both loans have been paid in fulland retired.

                The Company’s debt agreementcontains financial covenants that, among other restrictions, require themaintenance of certain financial ratios and cash flows, restrict assetpurchases, dividend payments or distributions and accelerate the maturitiesupon a change in control of the Company.

                For the three months endedSeptember 30, 2001, the Company was in violation of certain financial covenantsassociated with the CTN Loan for which a waiver has been received.  Additionally, the Company believes thatcertain requirements under the CTN Loan covenants may not be met during fiscal2001.  If the Company fails to meet acovenant under the CTN Loan, the financial institution has the right to declarethe loan due upon demand.  The Companyis currently in discussions with financial institutions regarding new creditfacilities and exploring other capital-raising alternatives.  The Company can not be certain that any ofthe alternatives will be consummated. Holdings has committed to provide funding through fiscal 2001 in theevent the Company experiences cash flow deficits from operations or cash flowdeficits in connection with debt service requirements.

** **

**NOTE (D) – Property andEquipment**

## **Propertyand equipment consists of the following:**

|                                 |   | **Estimated Useful  Lives** |   | **September 30,  2001** |       | **December 31,  2000** |   |
|--------------------------------------|--------|-----------------------------|--------|-------------------------|------------|------------------------|--------|
| Entertainment systems                |   | 5 years                     |   | $                       | 16,209,740 |                   | $      | 15,335,068 |   |
| Machinery and equipment              |   | 5 -7 years                  |   | 1,100,159               |       | 1,064,818              |   |
| Capitalized website costs            |   | 3 years                     |   | 1,423,236               |       | 1,403,891              |   |
| Furniture and Fixtures               |   | 7 years                     |   | 539,713                 |       | 536,928                |   |
| Leasehold  improvements              |   | 7-11  years                 |   | 304,940                 |       | 297,316                |   |
|                                 |   |                        |   | 19,577,788              |       | 18,638,021             |   |
| Less:  Accumulated depreciation |   |                        |   | (8,812,571              | )          | (6,140,713             | )      |
| Total                                |   |                        |   | $                       | 10,765,217 |                   | $      | 12,497,308 |   |

 

**NOTE(E) – Discontinued Operations**

                OnJuly 10, 2001, the Company sold all of the outstanding shares of common stock,no par value, of MPM to MPM Holding, Inc., a Delaware corporation f/k/a MPMAcquisition, Inc., for $28.0 million in cash, subject to certain adjustments tothe purchase price, including a working capital adjustment based on MPM’sestimated balance sheet as of the closing date.  At the closing, the Company received, after adjustments, $27.7million in cash in exchange for its ownership of all of the common stock ofMPM.  The Company will pay a finalremaining working capital adjustment of approximately $151,000 in conjunctionwith the sale of MPM in January 2002. Accordingly, the results of that business have been reflected asDiscontinued Operations in these notes and the accompanying consolidatedfinancial statements.

                Approximately$16.9 million of the proceeds from the sale of MPM were used to repay the TermLoan and the Revolver Loan of MPM. Additionally, the Company used approximately $10.3 million of theproceeds to reduce its indebtedness under the CTN Loan.  The remainder of the proceeds received bythe Company were used for other corporate purposes, including the payment ofexpenses incurred in connection with the sale of MPM.

 

                The gain on sale of discontinuedoperations is calculated as follows:

 
|                                     |   | **In millions** |   |
|------------------------------------------|--------|-----------------|--------|
| Net proceeds                             |   | $27.7           |   |
|                                     |   |            |   |
| Payment on  MPM term loan                |   | (16.9           | )      |
| Net assets  of MPM                       |   | (6.1            | )      |
| Other                                    |   | 0.3             |   |
| Gain on sale  of discontinued operations |   | $5.0            |   |

 

The operating results with respect todiscontinued operations are as follows:

 
| Net Sales and Loss From Discontinued  Operations through date of Disposition |   |
|------------------------------------------------------------------------------|--------|
|                                                                         |   | **As of** |   | **Nine Months Ended** |   |
|                                                                         |   | **July 10,** |   | **September 30,** |   |
|                                                                         |   | **2001** |   | **2000** |   |
| Net sales                                                                    |   | $23,262,696 |   | $37,309,557 |   |
| Net loss from discontinued operation                                         |   | (1,242,993 | ) | (1,272,558 | ) |
|                                                                         |   |   |   |   |   |
|                                                                         |   |   |   |   |   |
| Assets and Liabilities of Discontinued Operations as of date of  Disposition |   |
|                                                                         |   |   |   |   |   |
|                                                                         |   | **July 10,** |   | **December 31,** |   |
|                                                                         |   | **2001** |   | **2000** |   |
| Current  assets                                                              |   | 12,580,714 |   | 14,258,185 |   |
| Property,  plant and equipment net                                           |   | 1,341,903 |   | 1,557,029 |   |
| Other assets                                                                 |   | 22,996,571 |   | 24,736,654 |   |
| Current  liabilities                                                         |   | (30,849,807 | ) | (33,001,303 | ) |
| Net assets  of discontinued operation                                        |   | 6,069,381 |   | 7,550,565 |   |

 

                Theaccompanying consolidated financial statements have been restated to conform todiscontinued operations treatment for all historical periods presented.

 

# **NOTE  (F) –Commitments and Contingencies**

                In connection with the Company’sacquisition of the rights to and inventory of video jukeboxes in 1991, theCompany 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 equalsat least $500,000 and the balance being payable at such time as the Company hasan additional $500,000 in net pre-tax earnings.  The Company will provide for these contingent liabilities at thetime at which ultimate payment is considered probable.

                The Company has an OriginationServices Contract with Crawford Communications, Inc. (“Crawford”) .  The original agreement provides for paymentsof approximately $1,320,000 over a five year period ending on July 15, 2003. Inaccordance with the Origination Services Contract, Crawford is responsible forthe transmission via satellite of the Network’s daily programming, includingencoding signals, testing, maintaining the Network’s programming library, andobtaining programming from the Network’s sources.  Crawford is also responsible for the uplink of the programming toa satellite as well as the downlink of the signal from the satellite at eachinstallation site.  As of September 30,2001, the Company has paid approximately $902,000 to Crawford pursuant to theOrigination Services Contract.

                The Company has an agreementwith Turner Private Networks, Inc. and CNN Headline News to provide news andsports programming for the Network through December 31, 2002. The total licensefee is approximately $3,156,250.  As ofSeptember 30, 2001, the Company has paid approximately $2,128,749 pursuant tothis agreement.

                The Company has a TransponderUse Agreement with Public Broadcasting Service (“PBS”).   The Company has subleased capacity on asatellite owned and operated by GE American Communications, Inc. (“GE”) andleased to PBS by GE.  This agreementprovides for payments of approximately $3,924,000 over a five year period thatterminates on July 31, 2003.  TheCompany has protected status on this satellite, where in the event of asatellite failure or performance problem, the Company’s programming willpreempt transmissions of other users on this satellite or on anothersatellite.  As of September 30, 2001,the Company has paid approximately $2,485,200 pursuant to this agreement.

 

**NOTE(G) New Accounting Pronouncements**

InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementsof Financial Accounting Standards No. 141. “Business Combinations” and No. 142 “Goodwill and Other Intangibles”.  Under these new standards the FASBeliminated accounting for certain mergers and acquisitions as poolings ofinterests, eliminated amortization of goodwill and indefinite life intangibleassets, and established new impairment measurement procedures for goodwill.  For calendar-year reporting companies, thestandards become effective for all acquisitions completed on or after September30, 2001.  Changes in financialstatement treatment for goodwill and intangible assets arising from mergers andacquisitions completed prior to June 30, 2001 become effective January 1,2002.  We are currently assessing theimpact of implementing these standards.

                InAugust 2001, the FASB issued Statement of Financial Accounting Standards No.143, “Accounting for Asset Retirement Obligations”.  This statement addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. It applies to legal obligations associated with the retirement oflong-lived assets that result from the acquisition, construction, developmentand (or) the normal operation of a long-lived asset, except for certainobligations of lessees.  This Statementis effective for financial statements issued for fiscal years beginning afterJune 15, 2002 although early adoption is encouraged.  We are currently assessing the impact of this standard.

                In October 2001, the FASB issueda Statement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets”. This Statement addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. This Statement supercedes FASB Statement No. 121, *Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of*, andthe accounting and reporting provisions of APB Opinion No. 30, *Reportingthe Results of Operations – Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual, and Infrequently Occurring Events andTransactions,*for the disposal of a *segment*of a business (aspreviously defined in that Opinion). The provisions of this Statement are effective for financial statementsissued for fiscal years beginning after December 15, 2001, and interim periodswithin those fiscal years, with the early application encouraged.  We are currently assessing the impact ofthis standard.

 

## **NOTE (H) Earnings (loss) Per Common Share**

                The Company computes basicincome (loss) per share based upon the weighted average number of issued commonshares for each period.  Diluted income(loss) per share is based upon the addition of the effect of common stockequivalents (stock options and warrants) to the denominator of the basic income (loss) per share calculation,using the treasury stock method, if their effect is dilutive.

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

**Forward-LookingStatements**

Certainforward-looking information contained in this Quarterly Report is beingprovided in reliance upon the “safe harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995 as set forth in Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Suchinformation includes, without limitation, discussions as to estimates,expectations, beliefs, plans, strategies and objectives concerning theCompany’s future financial and operating performance.  Such forward-looking information is subject to assumptions andbeliefs based on current information known to the Company and factors thatcould yield actual results differing materially from those anticipated.  The Company undertakes no obligation toupdate or revise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes in future operating results.  Please see Exhibit 99.1, “Safe HarborCompliance Statement for Forward-Looking Statements,” for additional factors tobe considered by stockholders and prospective stockholders.

### **Overview**

CTNMedia Group, Inc., a Delaware corporation, (the “Company”), commencedoperations in January 1991.  The Companyis a diversified media company specializing in reaching targeted audiences.  The Company operates primarily in thetelevision and online sectors.  TheCompany owns and operates the College Television Network (the “Network”), aproprietary commercial television network that operates on college anduniversity campuses across the United States. The Network is provided to campuses through single-channel televisionsystems placed free of charge primarily in the campus public venues, includingdining facilities and student unions. At September 30, 2001, the Network was installed or contracted forinstallation at approximately 1,843 locations at approximately 812 colleges anduniversities throughout the United States. The Network reaches over 7,000,000 young adult viewers each week.

Certainof the Company’s revenue is affected by the pattern of seasonality common tomost school-related businesses. Historically, the Company has generated a significant portion of itsrevenue during the period of September through May and substantially lessrevenue during the summer months when colleges and universities do not holdregular classes.

### **Results of Operations**

The following table sets forth certain financialdata derived from the Company’s statement of operations for the three and ninemonths ended September 30, 2001 and September 30, 2000:

 
|                                              |   | **Three Months Ended** |   |
|---------------------------------------------------|--------|------------------------|--------|
|                                              |   | **September 30, 2001** |   | **September 30, 2000** |   |
|                                              |   |                   |   | **%   of Revenue** |   |   |   | **%   of Revenue** |   |
| Revenue                                           |   | $1,041,253             |   | 100 |   | $2,855,183 |   | 100 |   |
| Operating expenses                                |   | 1,364,870              |   | 131 |   | 1,514,137 |   | 53 |   |
| Publishing expenses                               |   | -                      |   |   |   | 540,424 |   | 19 |   |
| Advertising agency  expense                       |   | 154,645                |   | 15 |   | 420,953 |   | 15 |   |
| Selling,  general, & administrative expenses  |   | 3,203,238         |   | 308 |   | 4,593,722  |   | 161 |   |
| Depreciation  & amortization                  |   | 932,800                |   |  90 |   | 1,144,030 |   |  40 |   |
| Interest  expense, net                            |   | (101,850               | )      | 10 |   | (334,796 | ) |  12 |   |
| Other  income                                     |   | 324,233                |   | 31 |   | - |   | - |   |
| Net  loss from continuing operations              |   | (4,391,917             | )      |  422 |   |  (5,692,879) |   | 199 |   |
| Loss  from discontinued operations                |   | (106,557               | )      | 10 |   | (139,601 | ) | 5 |   |
| Gain  from disposition of discontinued operations |   | 5,026,386              |   | 483 |   | - |   | - |   |
|                                              |   |                   |   |   |   |   |   |   |   |
|                                              |   |                   |   |   |   |   |   |   |   |
|                                              |   | **Nine Months Ended**  |   |
|                                              |   | **September 30, 2001** |   | **September 30, 2000** |   |
|                                              |   |                   |   | **%   of Revenue** |   |   |   | **%   of Revenue** |   |
| Revenue                                           |   | $7,412,122             |   | 100 |   | $10,656,986 |   | 100 |   |
| Operating  expenses                               |   | 4,208,768              |   | 57 |   | 4,322,643 |   | 41 |   |
| Publishing  expenses                              |   | 419,262                |   | 6 |   | 2,138,434 |   | 20 |   |
| Advertising  agency expense                       |   | 984,585                |   | 13 |   | 1,168,038 |   | 11 |   |
| Selling,  general, & administrative expenses  |   | 10,940,259        |   | 148 |   | 14,847,101  |   | 139 |   |
| Depreciation  & amortization                  |   | 2,943,518              |   | 40 |   | 2,702,408 |   | 25 |   |
| Interest  expense, net                            |   | (740,259)              |   |  10 |   | (689,883 | ) |  6 |   |
| Other  income                                     |   | 324,233                |   | 4 |   | - |   | - |   |
| Net  loss from continuing operations              |   | (12,500,296            | )      | 169 |   | (15,220,521 | ) | 143 |   |
| Loss from discontinued  operation                 |   | (1,242,993             | )      | 17 |   | (1,272,558 | ) | 12 |   |
| Gain from disposition  of discontinued operations |   | 5,026,386              |   | 68 |   | - |   | - |   |
|                                                   |        |                        |        |  |  |  |  |  |  |  |

 

Revenuefrom continuing operations decreased to $1,041,253 and $7,412,122 for the threeand nine month periods ended September 30, 2001, as compared to $2,855,183 and10,656,986, respectively, for the comparable periods in the prior year.  Network advertising revenue of $909,368 and$5,960,311 for the three and nine month periods ended September 30, 2001represented a 56% and 29% decrease respectively for the three and nine monthperiods comparable to the same periods in the prior year.  A soft advertising market and a transitionin the Company’s sales force have contributed to this decrease.  The Company’s fees and commission revenuethrough iD8 of $131,885 and $1,306,603 represented a 75% decrease and 29%increase from the comparable three and nine month periods in the prioryear.  This overall increase isprimarily due to acquiring two large customers at the end of fiscal 2000 thatcontinued to contract work through June, 2001. The agency has since ceased operations as of July 31, 2001.  Publishing revenue consisted of $145,206 forone issue of Link Magazine published for the current nine months endedSeptember 30, 2001 as compared to $1,249,420 for three issues from thecomparable period in the prior year. The Company hopes to increase Networksales during the year ending December 31, 2001 by continuing to expand itsadvertiser base and sell-out levels and by further increasing the fee chargedfor its advertising spots.  Although theCompany has agreements with national advertisers, no assurance can be given thatthese or other advertisers will continue to purchase advertising time from theCompany, or that future significant advertising revenues will ever begenerated.  A failure to significantlyincrease advertising revenues could have a material impact on the operations ofthe Company.

Operatingexpenses for continuing operations, including publishing and advertising agencyexpenses, were $1,519,515 and $5,612,615 for the three and nine month periodsended September 30, 2001 as compared to $2,475,514 and $7,629,115 for the sameperiods in the prior year.  Operatingexpenses at the Company decreased 39% and 26% for the three and nine monthperiods ended September 30, 2001 as compared to the same periods in the prioryear.  The majority of this decrease isattributable to the cessation of operations of Link magazine and iD8.  The network operating and programmingexpenses remained relatively unchanged.

Selling,general and administrative expenses for continuing operations decreased to$3,203,238 and $10,940,259 for the three and nine month periods ended September30, 2001 as compared to $4,593,722 and $14,847,101 for the same periods for theprior year.  This decrease is primarilyattributable to minimizing expense in various advertising sales categories suchas outside advertising, market research, promotions and variable costs directlyrelated to revenue. Significant reductions in recruiting fees, bad debt expenseand stock option compensation also contributed to the reduction.  The remaining decrease is due to thereduction of selling, general or administrative expenses at Wetair.com.

Depreciationand amortization expense from continuing operations total $932,800 and$2,943,518 for the three and nine month periods ended September 30, 2001 ascompared to $1,144,030 and $2,702,408 for the same periods in the prioryear.  The overall increase isattributable to the addition of DVB (“Digital Video Broadcast”) systems inschool locations, coupled with amortization of the remaining iD8 goodwill ofapproximately $210,000.

TheCompany recorded net interest expense from continuing operations of $101,850and $740,259 for the three and nine month periods ended September 30, 2001 ascompared to $334,796 and $689,883 in the same periods of the prior year.  The decrease in interest expense relates tothe lower level of debt due to the paydown of CTN credit facilities inconjunction with the sale of MPM.

TheCompany incurred a net loss from continuing operations of $4,391,917 and$12,500,296 in the three and nine month periods ended September 30, 2001 ascompared to a net loss of $5,692,879 and $15,220,521 in the same periods in theprior year.

TheCompany incurred a net loss from discontinued operations of $106,557 in thecurrent quarter and $1,242,993 year-to-date through July 10, 2001.  These amounts reflect the results of MPMreported on a stand alone basis through the disposition date of  July 10, 2001.  These amounts are comparable to net losses of $139,601 and$1,272,558 for last year’s comparable quarter and year-to-date activity forMPM.  The Company recognized a gain fromthe sale of MPM of $5,026,386 for the current three and nine month periods.

### **Financial Condition andLiquidity**

Cashused in operations decreased to $7,468,373 during the nine months endedSeptember 30, 2001, from $12,607,927 for the comparable period in the prioryear.  The impact of increasedcollections of accounts receivable in the first nine months compared to thesame period in the prior year was the primary cause of this decrease.  In April 2001, the Company obtained anequity infusion from Holdings to fund current working capital needs through theissuance of Series B Preferred Stock.

Cashprovided by investing activities increased to $26,647,951 during the ninemonths ended September 30, 2001 from $5,211,935 used in investing activitiesfor the comparable period in the prior year. This increase is primarily attributable to the sale of MPM.

Cashused in financing activities was $21,073,744 for the nine months endedSeptember 30, 2001, compared to $13,263,661 provided by financing for the sameperiod in the prior year.  Approximately$27,000,000 of debt was paid down in the current quarter. Also, $3,700,000 ofcurrent year funds were derived from the sale of preferred stock and anadditional $2,300,000 was drawn down from a line of credit through September30,2001.

Cashprovided by discontinued operations increased to $493,118 during the ninemonths ended September 30, 2001 as compared to cash used in discontinuedoperations of approximately $72,194 for the comparable period in the prioryear.

AtSeptember 30, 2001, the Company did not meet a financial covenant under itsremaining credit facility for which the Company has obtained a waiver.  Based upon the Company’s currentprojections, the Company will need to raise additional capital in the nearfuture for 2001 and 2002.  The Companyis exploring capital-raising alternatives, including, but not limited to,receiving capital from Holdings.  TheCompany cannot be certain that any of the alternatives will be consummated andthere can be no assurances that these efforts will be successful.  Holdings has committed to provide fundingthrough fiscal 2001 in the event the Company experiences cash flow deficitsfrom operations or cash flow deficits in connection with debt servicerequirements.

 

**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk**

TheCompany is exposed to market risk from changes in interest rates related tovariable-rate debt outstanding under the CTN Loan.  This risk arises in the normal course of business rather thanfrom trading.  At November 14, 2001, theCompany had $5.0 million in long-term debt subject to variable rates ofinterest and therefore views its market risk as immaterial.

 

 

**PART II**

**OTHERINFORMATION**

 

**Item1.  Legal Proceedings.**

                From time to time, in the normalcourse of business, various claims are made against the Company.  Except for proceedings described below,there are no material proceedings to which the Company is a party and managementis unaware of any material contemplated actions against the Company.

                On March 19, 2001, the Companyinstituted a lawsuit styled CTN Media Group, Inc., f/k/a College TelevisionNetwork, a Delaware corporation and Armed Forces Comminations, Inc., a New Yorkcorporation, v. Omnipod, Inc., a Delaware corporation, f/k/a e-palette, inc., aNew York corporation in the State Court of Fulton County, Georgia.  The lawsuit alleges nonpayment byOmnipod  for services rendered by theCompany pursuant to that certain Advertising Agreement dated as of October 29,1999 between the parties.  The complaintseeks payment in the amount of $552,438.67, which is the alleged amount thatwas due and payable on October 29, 2000 in accordance with the terms of theAdvertising Agreement.  The Company alsoseeks reimbursement for its attorney's fees and associated costs and expensesof the lawsuit.  On April 30, 2001,Omnipod answered the complaint and filed a counterclaim alleging tortiousinterference with business relations and related commercial claims, arisingfrom the Company’s alleged refusal to consent to Omnipod’s issuance ofpreferred stock.  The counterclaim seeksdamages in an amount to be determined at trial, as well as reimbursement forOmnipod’s attorney's fees and associated costs and expenses of thelawsuit.  The case was settled onNovember 12, 2001 and the Company received additional equity in Omnipod and apromissory note for the accounts receivable.

                On March 22, 2001, a lawsuitstyled James Harder v. CTN Media Group, Inc. and U-C Holdings, LLC, was filedin the United States District Court, Eastern Division of the Northern Districtof Illinois.  The lawsuit alleges thatthe Company violated the Age Discrimination in Employment Act by terminating Mr.Harder.  The complaint seeks in excessof $500,000 in compensatory damages as a result of the Company's allegeddiscrimination, as well as punitive damages and reimbursement for theplaintiff's attorney's fees and associated costs and expenses of the lawsuit.

                Management believes that it hasmeritorious defenses in each of the foregoing matters and intends to pursue itspositions vigorously.  Litigation isinherently subject to many uncertainties; however, management does not believethat the outcome of these cases, individually, or in the aggregate, will have amaterial adverse effect on the financial position of the Company.  However, depending on the amount and timingof an unfavorable resolution(s) of the contingencies, it is possible that theCompany's future results of operations or cash flows could be materiallyaffected in a particular quarterly period.

**Item2.  Changes in Securities.**

No events occurred duringthe quarter covered by this Report that would require a response to this Item.

**Item3.  Defaults Upon Senior Securities.**

No events occurred during the quartercovered by this Report that would require a response to this Item.

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

OnMay 30, 2001, by written comment in lieu of a meeting, the holder of a majorityof the voting stock of the Company approved the sale of Armed ForcesCommunications, Inc., a New York corporation doing business as Market PlaceMedia and an increase in the number of shares available for issuance under theCompany’s 1996 Stock Incentive Plan and Outside Directors’ 1996 Stock OptionPlan.  The majority stockholder consentwith respect to these matters took affect 20 days after the mailing of aSchedule 14C Information Statement to stockholders of the Company, which wasJuly 9, 2001.

** **

**Item5.     Other Information.**

No events occurred during the quartercovered by this Report that would require a response to this Item.

**Item6.  Exhibits and Reports on Form 8-K.**

(a)                Exhibits.

                Thefollowing exhibits are filed with this Report:

                Exhibit99.1             Safe Harbor Compliance Statement for Forward-Looking Statements.

(b)                Reports on Form 8-K:

A report on Form 8-K filed July 25, 2001disclosing the sale of Armed Forces Communications, Inc., a New Yorkcorporation doing business as Market Place Media and a wholly-owned subsidiaryof the Company, to MPM Holding, Inc., formerly known as MPM Acquisition, Inc.

A report on Form 8-K filed August 23,2001 disclosing an amendment to the Company’s revolving credit facilities withLaSalle Bank National Association.

 

SIGNATURES

 

                Inaccordance with the requirements of the Exchange Act, the registrant causedthis Report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                     |   |   | CTN  MEDIA GROUP, INC. |
|--------------------------|--------|--------|------------------------|
|                     |   |   | Registrant             |
|                     |   |   |                   |
|                     |   |   |                   |
|                     |   |   |                   |
| Date: November 14,  2001 |   |   | /s/ Thomas Rocco       |  
 

 

 

Thomas  Rocco

 

 

 

*President*

 

 

 

*(Principal Executive  Officer)*

 

 

 

 

Date:  November 14, 2001

 

 

/s/  Patrick Doran

 
 

 

 

Patrick  Doran

 

 

 

*Chief Financial Officer and Secretary*

 

 

 

*(Principal Accounting and Financial Officer)*

  |