**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **[Mark One]** |                                                                                          |
|----------------|-----------------------------------------------------------------------------------------------|
| **ý**     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |   |   |

 

**For the quarterly period ended June 30, 2002**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |   |
|-------|-----------------------------------------------------------------------------------------------|--------|

 

**For the transition period from              to             **

 

**Commission File Number:  0-19997**

 

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

 

Indicate by checkmark whether the registrant:  (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.    Yes ýNo o

 

Number of shares of common stock outstanding as of August 6, 2002:2,514,397

 

 

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PART I

FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

CTNMEDIA GROUP, INC.

CONSOLIDATEDBALANCE SHEET

(Unaudited)

ASSETS

 
|                                                                                                                     |   | **June 30,  2002** |       | **December 31,  2001** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|--------|
| Current assets:                                                                                                          |   |               |       |                   |   |
| Cash and cash equivalents                                                                                                |   | $                  | 253,338    |                   | $      | 145,462 |   |
| Accounts receivable, net of allowance of $50,650 and $50,650,  respectively                                              |   | 1,721,428          |       | 2,132,926              |   |
| Prepaid expenses                                                                                                         |   | 207,308            |       | 146,043                |   |
| Other current assets                                                                                                     |   | 86,293             |       | 147,364                |   |
| Total current assets                                                                                                     |   | 2,268,367          |       | 2,571,795              |   |
|                                                                                                                     |   |               |       |                   |   |
| Investments                                                                                                              |   | 50,000             |       | 41,667                 |   |
| Property and equipment, net                                                                                              |   | 8,127,430          |       | 9,916,157              |   |
| Other assets                                                                                                             |   | 452,890            |       | 508,220                |   |
| Total assets                                                                                                             |   | $                  | 10,898,687 |                   | $      | 13,037,839 |   |
|                                                                                                                     |   |               |       |                   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                |   |               |       |                   |   |
| Current liabilities:                                                                                                     |   |               |       |                   |   |
| Accounts payable                                                                                                         |   | $                  | 792,794    |                   | $      | 951,950 |   |
| Accrued expenses                                                                                                         |   | 889,118            |       | 623,314                |   |
| Dividends payable                                                                                                        |   | 442,778            |       | 443,335                |   |
| Deferred revenue                                                                                                         |   | 156,602            |       | —                 |   |
| Current portion of long-term debt                                                                                        |   | 10,565,000         |       | —                 |   |
| Accrued severance                                                                                                        |   | 204,477            |       | —                 |   |
| Total current liabilities                                                                                                |   | 13,050,769         |       | 2,018,599              |   |
| Long-term dividend payable                                                                                               |   | —             |       | 147,776                |   |
| Debt, less current portion                                                                                               |   | —             |       | 6,500,000              |   |
| Accrued severance                                                                                                        |   | 176,030            |       | —                 |   |
| Total liabilities                                                                                                        |   | 13,226,799         |       | 8,666,375              |   |
| Stockholders’ equity:                                                                                               |   |               |       |                   |   |
| Common stock - $.030 par; authorized 50,000,000 shares; 2,514,397* and  2,514,425* issued and outstanding, respectively  |   | 75,436             |       | 75,435                 |   |
| Preferred stock - $.001 par; authorized 12,800,000 shares; 2,443,330  and 2,443,330 issued and outstanding, respectively |   | 42,533,874         |       | 42,533,874             |   |
| Additional paid in capital                                                                                               |   | 40,574,406         |       | 40,684,407             |   |
| Unearned compensation                                                                                                    |   | —             |       | (44,211                | )      |
| Accumulated deficit                                                                                                      |   | (85,511,828        | )          | (78,878,041            | )      |
| Total stockholders’ equity (deficit)                                                                                |   | (2,328,112         | )          | 4,371,464              |   |
| Total liabilities and stockholders’ equity                                                                          |   | $                  | 10,898,687 |                   | $      | 13,037,839 |   |

 

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*Reflects a one-for-sixreverse stock split which became effective on May 28, 2002.

Theaccompanying notes are an integral part of the consolidated financialstatements

 

2

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CTNMEDIA GROUP, INC.

CONSOLIDATEDSTATEMENT OF OPERATIONS

(Unaudited)

 
|                                                         |   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** |   |
|--------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                                                         |   | **2002**                         |       | **2001**                       |   | **2002** |   | **2001** |   |
|                                                         |   |                             |       |                           |   |   |   |   |   |
| Revenue                                                      |   | $                                | 2,120,406  |                           | $      | 3,407,876 |   | $ | 4,404,159 |   | $ | 6,370,869 |   |
|                                                         |   |                             |       |                           |   |   |   |   |   |
| Expenses                                                     |   |                             |       |                           |   |   |   |   |   |
| Operating                                                    |   | 1,357,851                        |       | 2,013,500                      |   | 2,674,212 |   | 4,093,101 |   |
| Selling, general and administrative                          |   | 2,858,630                        |       | 3,917,548                      |   | 5,908,818 |   | 7,736,534 |   |
| Depreciation and amortization                                |   | 914,960                          |       | 1,125,613                      |   | 1,828,188 |   | 2,010,718 |   |
| Total expenses                                               |   | 5,131,441                        |       | 7,056,661                      |   | 10,411,218 |   | 13,840,353 |   |
|                                                         |   |                             |       |                           |   |   |   |   |   |
| Interest income                                              |   | 1,587                            |       | 23,144                         |   | 2,999 |   | 42,928 |   |
| Interest expense                                             |   | (425,641                         | )          | (319,018                       | )      | (629,727 | ) | (681,336 | ) |
| Net loss from continuing operations                          |   | (3,435,089                       | )          | (3,944,659                     | )      | (6,633,787 | ) | (8,107,892 | ) |
| Loss from discontinued operations, net                       |   | —                           |       | (757,673                       | )      | — |   | (1,136,436 | ) |
| Net loss                                                     |   | $                                | (3,435,089 | )                              | $      | (4,702,332 | ) | $ | (6,633,787 | ) | $ | (9,244,328 | ) |
|                                                         |   |                             |       |                           |   |   |   |   |   |
| Net loss per share*:                                         |   |                             |       |                           |   |   |   |   |   |
| Basic net loss per common share from continuing operations   |   | (1.37                            | )          | (1.57                          | )      | (2.64 | ) | (3.22 | ) |
| Discontinued operation                                       |   | —                           |       | (0.30                          | )      | — |   | (0.45 | ) |
| Basic net loss per common share                              |   | $                                | (1.37      | )                              | $      | (1.87 | ) | $ | (2.64 | ) | $ | (3.67 | ) |
| Diluted net loss per common share from continuing operations |   | (1.37                            | )          | (1.57                          | )      | (2.64 | ) | (3.22 | ) |
| Discontinued operations                                      |   | —                           |       | (0.30                          | )      | — |   | (0.45 | ) |
| Diluted net loss per common share                            |   | $                                | (1.37      | )                              | $      | (1.87 | ) | $ | (2.64 | ) | $ | (3.67 | ) |
|                                                         |   |                             |       |                           |   |   |   |   |   |
| Weighted average number of common shares Outstanding*        |   |                             |       |                           |   |   |   |   |   |
|                                                         |   |                             |       |                           |   |   |   |   |   |
| Basic                                                        |   | 2,514,397                        |       | 2,514,458                      |   | 2,514,397 |   | 2,513,476 |   |
| Potential diluted                                            |   | 2,514,397                        |       | 2,514,458                      |   | 2,514,397 |   | 2,513,476 |   |

 

----

*  All per share amounts reflect a one-for-sixreverse stock split which became effective on May 28, 2002.

Theaccompanying notes are an integral part of the consolidated financialstatements

 

3

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CTNMEDIA GROUP, INC.

CONSOLIDATED

STATEMENTOF CASH FLOWS

(Unaudited)

 
|                                                                         |   | **Six Months Ended  June 30,** |       |
|------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                         |   | **2002**                       |       | **2001** |   |
| Cash flows from operating activities:                                        |   |                           |       |   |   |
| Net loss from continuing operations                                          |   | $                              | (6,633,787 | ) | $ | (8,107,892 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                           |       |   |   |
| Depreciation and amortization                                                |   | 1,828,188                      |       | 2,010,719 |   |
| Amortization of debt issuance costs                                          |   | 18,330                         |       | 60,000 |   |
| Non-cash compensation expense arising from equity awards                     |   | 44,211                         |       | 63,912 |   |
| Loss on disposition of fixed assets                                          |   | 41,669                         |       | 61,043 |   |
| Barter revenue                                                               |   | (8,333                         | )          | — |   |
|                                                                         |   |                           |       |   |   |
| Changes in operating assets and liabilities:                                 |   |                           |       |   |   |
| Accounts receivable                                                          |   | 411,498                        |       | 3,365,553 |   |
| Prepaid expenses                                                             |   | (61,265                        | )          | 84,160 |   |
| Other assets                                                                 |   | 98,072                         |       | (93,885 | ) |
| Accounts payable                                                             |   | (159,156                       | )          | (871,978 | ) |
| Accrued expenses and other liabilities                                       |   | 265,804                        |       | (1,088,869 | ) |
| Accrued severance                                                            |   | 380,507                        |       | — |   |
| Deferred revenue                                                             |   | 156,602                        |       | 179,163 |   |
| Net cash used in operating activities                                        |   | (3,617,660                     | )          | (4,338,074 | ) |
|                                                                         |   |                           |       |   |   |
| Cash flows from investing activities:                                        |   |                           |       |   |   |
| Purchases of property and equipment                                          |   | (81,130                        | )          | (832,672 | ) |
| Net cash used in investing activities                                        |   | (81,130                        | )          | (832,672 | ) |
|                                                                         |   |                           |       |   |   |
| Cash flows from financing activities:                                        |   |                           |       |   |   |
| Net proceeds from bridge indebtedness                                        |   | 4,065,000                      |       | — |   |
| Dividends paid                                                               |   | (258,334                       | )          | — |   |
| Proceeds from exercise of warrants and stock options                         |   | —                         |       | 57,146 |   |
| Net proceeds from issuance of preferred stock                                |   | —                         |       | 3,739,797 |   |
| Net cash provided by financing activities                                    |   | 3,806,666                      |       | 3,796,943 |   |
|                                                                         |   |                           |       |   |   |
| Net cash provided by (used in) continuing operations                         |   | 107,876                        |       | (1,373,803 | ) |
| Net cash provided by discontinued operations                                 |   | —                         |       | 493,382 |   |
| Net increase (decrease) in cash and cash equivalents                         |   | 107,876                        |       | (880,421 | ) |
| Cash and cash equivalents, beginning of period                               |   | 145,462                        |       | 2,806,919 |   |
| Cash and cash equivalents, end of period                                     |   | $                              | 253,338    |   | $ | 1,926,498 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

4

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CTN MEDIA GROUP, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited)

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form10-Q.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. These financial statements should be read in conjunction with theCompany’s financial statements for the fiscal year ended December 31, 2001included in the Annual Report as filed on Form 10-K with the United StatesSecurities and Exchange Commission.

 

In the opinion of management, the accompanyingunaudited consolidated financial statements contain all adjustments (consistingof normal recurring accruals) necessary to present fairly the financialposition of the Company as of June 30, 2002, and the results of operations andof cash flows for the three and six months ended June 30, 2002 and 2001 and toreflect the operation of our former subsidiary, Market Place Media (“MPM”), asdiscontinued operations in fiscal 2001.

 

The results of operations for the three and six monthsended June 30, 2002 and 2001 are not necessarily indicative of the results ofoperations for a full fiscal year of the Company.  Certain prior period amounts have been reclassified to conformwith the current period presentation.

 

**NOTE (A)- The Company**

 

CTN Media Group, Inc. (the “Company”) is a targetedmedia company specializing in reaching young adults.  As of June 30, 2002, the Company operated properties in networktelevision and online media.

 

For the quarter ended June 30, 2001, the Companyoperated as two reportable segments: CTN and MPM.  CTN sold MPM on July 10, 2001. MPM’s separate results for the comparable quarter in the prior year arereported as Discontinued Operations.  Inprior year quarter results, CTN included the operations of the CollegeTelevision Network (the “Network”), Link Magazine, iD8 Marketing (“iD8”) andWetair.com.  In fiscal 2002, the Companyconsists solely of the Network.

 

The Network is a satellite television network thatoperates on college and university campuses across the United States.  Its single channel television system isplaced free of charge in campus dining facilities and student unions.  The Network’s broadcasts contain music,news, information and entertainment programming.  As of June 30, 2002, the Network was installed or contracted forinstallation in 1,706 locations at approximately 757 colleges and universities.The Network generates revenue through the advertising placed on it.

 

Link Magazine was a publication distributed to over650 college campuses.  As of April 2001,the Company elected not to publish new issues of Link Magazine for anunspecified period of time.  iD8 was amarketing agency providing creative services and placing media purchases forits clients.  iD8 ceased operations onJuly 31, 2001.  Wetair.com was anInternet site for young adults offering entertainment information which wasintegrated into collegetelevision.com. As of January 2002, Wetair.com LLC was merged into the Company.

 

The Company maintains a headquarters office in Atlantaand sales offices in New York, Chicago and Los Angeles.

 

5

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Certain of the Company’s revenues are affected by thepattern of seasonality common to most school-related businesses.  Historically, the Company has generated asignificant portion of its revenue during the period from September through Mayand substantially less revenue during the summer months when colleges anduniversities do not hold regular classes.

 

**NOTE (B)- Preferred Stock**

 

At June 30, 2002, theCompany’s preferred stock consists of Series A Convertible Preferred Stock (“Series A”) and Series BConvertible Preferred Stock (“Series B”) of which U-C Holdings, LLC(“Holdings”) owns (i) all of the 2,176,664 outstanding Series A shares out ofthe 2,510,000 Series A shares that have been designated and (ii) all of the266,666 outstanding Series B shares out of the 266,666 Series B shares thathave been designated.  At the annualstockholder’s meeting held on May 24, 2002, the shareholders approved aproposal to increase the authorized and unissued preferred stock by 10,000,000shares.  There are 10,023,334 shares ofauthorized, unissued and undesignated preferred stock.  To date, the Company has not designated orissued any additional preferred stock.

 

Effective March 31, 2001,the redemption feature of the Series A was waived pursuant to an agreementbetween the Company and Holdings, which ceased 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 ofSeries A at the option of the Series A holders.  This allowed the Company to move the classification of the SeriesA from Mandatorily Redeemable Preferred Stock to Stockholders’ Equity.

 

On April 5, 2001, theCompany issued 266,666 shares of Series B to Holdings for $15.00 per share, oran aggregate 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 thenumber of shares of Series B to be converted by the $15.00 per share purchaseprice and dividing the product by the conversion price of the Series B then ineffect with respect to such shares.  Onthe date of issuance, the conversion price of the Series B was $2.50.  After the one-for-six reverse stock split,the conversion price is $15.00.  Eachshare of Series B has voting rights based upon the number of shares of commonstock into which Series B is convertible. At June 30, 2002, 266,666shares of common stock were reserved for conversion of the Series B.  There are an additional 36,930 shares of common stock reservedfor the conversion of dividends accrued with respect to the Series B throughJune 30, 2002.

 

The Company filed anAmended and Restated Certificate of Incorporation on May 9, 2001 that amendedthe terms of the Series A to, among other things, (i) eliminate the redemptionrights of the holders of the Series A (such rights had previously been waivedby Holdings in an agreement dated March 31, 2001), (ii) reduce the conversionprice of the Series A and (iii) incorporate into the terms of the Series A theissuance of the Series B having rights and preferences senior to the SeriesA.  The remaining terms of Series A areunchanged and include the 12% cumulative accrual of dividends per year,compounding on a quarterly basis.  Eachshare of Series A has voting rights based upon the number of shares of commonstock into which Series A is convertible. Including the effect of the reduction in the conversion price of theSeries A, at June 30, 2002, 2,176,665 shares of the Company’s common stock werereserved for conversion.  There are anadditional 789,430 shares of common stock reserved for the conversion ofdividends accrued with respect to the Series A through June 30, 2002.

 

6

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**NOTE (C) - Debt**

 

As of August 10, 2001,the Company 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 $10.3 millionwas paid down as a permanent principal reduction to the credit limit on July10, 2001 in conjunction with the sale of MPM. As of June 30, 2002, there was a $5.0 million outstanding balance onthis facility.

 

The CTN Loan bearsinterest at either (i) the Base Rate which is equal to the greater of (a) theFederal Funds rate plus 0.5% or (b) the Prime Rate, plus 2.00% per year; or(ii) the Eurodollar Rate, plus 3.50% per year. The determination of whether to use the Base Rate or the Eurodollar Rateis at the option of the Company.  Acommitment fee of 0.5% per year on the unused portion of the facility isrequired.  The CTN Loan is due andpayable in full on January 31, 2003. For the six months ended June 30, 2002 and 2001, the weighted averageinterest rate on the CTN Loan was 6.75% and 10.06%, respectively.  The CTN Loan is guaranteed by a negativepledge of the outstanding shares of stock of the Company owned by Holdings.

 

The Company’s debtagreement contains financial covenants that, among other restrictions, requirethe maintenance of certain financial ratios and cash flows, restrict assetpurchases, dividend payments or distributions and accelerate the maturitiesupon a change in control of the Company.

 

In order to obtainfinancing to meet its short-term working capital needs, on November 26, 2001,CTN and Holdings entered into a Subordinated Bridge Note Purchase Agreement(the “Purchase Agreement”) whereby Holdings agreed to purchase up to anaggregate of $3.0 million (“Bridge Indebtedness”) of subordinated bridge notes(with an initial purchase at closing of $1.5 million) and CTN agreed to grantto Holdings a junior lien on the assets of CTN as security for the obligationsof CTN under the Purchase Agreement.

 

The Bridge Indebtednessaccrued interest at a rate of 12% per year on the unpaid principal amount ofthe Bridge Indebtedness outstanding on a daily basis.  All principal and accrued interest is due and payable by CTN onthe earlier to occur of 90 days following the scheduled maturity of theindebtedness owed pursuant to the CTN Loan or the discharge of the indebtednessowed by CTN pursuant to the CTN Loan (the “Maturity Date”).  However, since the Bridge Indebtedness wasnot converted into equity or repaid on or before February 26, 2002, theinterest rate increased to 18%.  OnMarch 19, 2002, the Purchase Agreement was amended to increase the BridgeIndebtedness to $3.5 million.  ThePurchase Agreement was also amended on April 3, 2002 increasing the BridgeIndebtedness to $5.5 million and increasing the interest rate to 25% on theadditional $2.0 million under the Purchase Agreement.  On June 10, 2002, the Purchase Agreement was amended increasingthe Bridge Indebtedness capacity to $6.5 million and to maintain the interestrate at 25%.  The Company has drawn $5.9million of the $6.5 million available under the Bridge Indebtedness as ofAugust 13, 2002.  The Company’s abilityto draw down under the existing bridge facility ends on August 31, 2002.

 

In the event of the saleby CTN to independent third parties of additional equity or incurrence ofsubordinated debt, upon the election by the majority of the holders of theBridge Indebtedness, the holders of the Bridge Indebtedness may convert all orany portion of the principal amount of the Bridge Indebtedness outstanding atthe time (including all accrued but unpaid interest) into the same securitiesoffered in the financing at the same price at which the securities will besold.

 

CTN’s obligations underthe Purchase Agreement are secured by security interests and liens, which aresubordinate to the security interests and liens granted by CTN to LaSalle Bankpursuant to the CTN Loan.

 

For the six months endedJune 30, 2002, the Company was in violation of certain financial covenantsassociated with the CTN Loan for which a waiver has been received.  Additionally, the 

 

7

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Company believes that certain requirements under theCTN Loan covenants may not be met during the remaining quarters of fiscal 2002.  If the Company fails to meet a covenantunder the CTN Loan, the financial institution has the right to declare the loandue upon demand although such financial institution may waive such covenantdefaults, as it has done in the past.

 

As part of its ongoingeffort to secure capital, the Company announced that it is in preliminarydiscussions with various parties, including several significant companies inthe media industry, regarding a possible combination, capital-raising or otherstrategic transaction.  Further, thereis no assurance that any transaction will occur or, if a transaction doesoccur, that the terms will be favorable. Failure to immediately secure additional capital will significantlyimpact the Company’s ability to continue as a going-concern, as expressed inthe audit opinion of the independent auditors for the Company in connectionwith the 2001 year-end audit.

 

**NOTE (D) - Property and Equipment**

 

Property and equipmentconsists of the following:

 
|                                 |   | **Estimated  Useful Lives** |   | **June 30,  2002** |       | **December 31,  2001** |   |
|--------------------------------------|--------|-----------------------------|--------|--------------------|------------|------------------------|--------|
|                                 |   |                        |   |               |       |                   |   |
| Entertainment  systems               |   | 5  years                    |   | $                  | 15,914,546 |                   | $      | 16,033,057 |   |
| Machinery  and equipment             |   | 5  -7 years                 |   | 1,085,146          |       | 1,082,215              |   |
| Capitalized  website costs           |   | 3  years                    |   | 1,423,236          |       | 1,423,236              |   |
| Furniture  and Fixtures              |   | 7  years                    |   | 508,799            |       | 508,799                |   |
| Leasehold  improvements              |   | 7-11  years                 |   | 304,940            |       | 304,940                |   |
|                                 |   |                        |   | 19,236,667         |       | 19,352,247             |   |
| Less:  Accumulated depreciation |   |                        |   | (11,109,237        | )          | (9,436,090             | )      |
| Total                                |   |                        |   | $                  | 8,127,430  |                   | $      | 9,916,157 |   |

 

# **NOTE  (E) - Commitments and Contingencies**

 

In connection with theCompany’s acquisition of the rights to and inventory of video jukeboxes in1991, 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-taxincome equals at least $500,000 and the balance being payable at such time asthe Company has an additional $500,000 in net pre-tax earnings.  The Company will provide for thesecontingent liabilities at the time at which ultimate payment is consideredprobable.

 

The Company has anOrigination Services Contract with Crawford Communications, Inc. (“Crawford”)..  The original agreement provides forpayments of approximately $1,320,000 over a five year period ending on July 15,2003. In accordance with the Origination Services Contract, Crawford isresponsible for the transmission via satellite of the Network’s dailyprogramming, including encoding signals, testing, maintaining the Network’sprogramming library, and obtaining programming from the Network’s sources.  Crawford is also responsible for the uplinkof the programming to a satellite as well as the downlink of the signal fromthe satellite at each installation site. As of June 30, 2002, the Company has paid approximately $1,079,200 toCrawford pursuant to the Origination Services Contract.

 

The Company has anagreement with Turner Private Networks, Inc. to provide news and sportsprogramming for the Network through December 31, 2002. The total license fee isapproximately $3,156,250.  As of June30, 2002, the Company has paid approximately $2,754,100 pursuant to thisagreement.

 

8

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The Company has aTransponder Use 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 June 30, 2002, the Companyhas paid approximately $3,073,800 pursuant to this agreement.

 

**NOTE (F) Related Party Transactions**

 

Neil Dickson, former Chief Operating Officer,Treasurer and General Counsel, left the employ of the Company effective April15, 2002.  As severance, Mr. Dicksonwill receive the difference in pay from his new job and what he would have beenpaid at the Company.  This arrangementwill continue through April 15, 2004, the original termination date of Mr.Dickson’s employment agreement.  Mr.Dickson retained certain equity in Holdings.

 

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

 

The Company computes basic income (loss) per sharebased upon the weighted average number of issued common shares for eachperiod.  Diluted income (loss) per shareis based upon the addition of the effect of common stock equivalents (stockoptions and warrants) to the denominator of the basic income (loss) per sharecalculation, using the treasury stock method, if their effect is dilutive.

 

The Company completed a one-for-six reverse stocksplit effective May 28, 2002.  All shareinformation has been revised to reflect the effect of this split as if itoccurred as of the earliest period presented.

 

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

 

**Forward-LookingStatements**

 

Certain forward-looking information contained in thisQuarterly Report is being provided in reliance upon the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995 as set forthin Section 27A of the Securities Act of 1933, as amended, and Section 21E ofthe Securities Exchange Act of 1934, as amended.  Such information includes, without limitation, discussions as toestimates, expectations, beliefs, plans, strategies and objectives concerning theCompany’s future financial and operating performance, including its ability tocontinue operating as a going-concern. Such forward-looking information is subject to assumptions and beliefsbased on current information known to the Company and factors that could yieldactual 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**

 

The Company commenced operations in January 1991.  The Company is a targeted media company specializingin reaching young adults. The Company operates the College Television Network(the “Network”), a proprietary commercial television network that operates oncollege and university 

 

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campuses across the United States.  The Network is provided to campuses throughsingle-channel television systems placed free of charge primarily in the campuspublic venues, including dining facilities and student unions.  At June 30, 2002, the Network was installedor contracted for installation at approximately 1,706 locations atapproximately 757 colleges and universities throughout the United States.  Based on our Fall 2001 Nielsen MediaResearch study, the Network reaches 8.2 million college students every week.

 

Certain of the Company’s revenue is affected by thepattern of seasonality common to most school-related businesses.  Historically, the Company has generated asignificant portion of its revenue during the period of September through Mayand substantially less revenue during the summer months when colleges anduniversities do not hold regular classes.

 

### **Resultsof Operations**

 

The following table setsforth certain financial data derived from the Company’s statement of operationsfor the three and six months ended June 30, 2002 and June 30, 2001:

 
|                                             |   | **Three Months Ended** |      |
|--------------------------------------------------|--------|------------------------|-----------|
|                                             |   | **June 30, 2002**      |      | **June 30, 2001** |   |
|                                             |   |                   |      | **%  of Revenue** |   |   |   | **%  of Revenue** |   |
| Revenue                                          |   | $                      | 2,120,406 |   | 100 |   | $ | 3,407,876 |   | 100 |   |
| Operating expenses                               |   | 1,357,851              |      | 64 |   | 1,377,882 |   | 40 |   |
| Publishing expenses                              |   | —                 |      | — |   | 298,459 |   | 9 |   |
| Advertising agency expense                       |   | —                 |      | — |   | 337,159 |   | 10 |   |
| Selling, general, &  administrative expenses |   | 2,858,630              |      | 135 |   | 3,917,548 |   | 115 |   |
| Depreciation &  amortization                 |   | 914,960                |      | 43 |   | 1,125,613 |   | 33 |   |
| Interest expense, net                            |   | (424,054               | )         | 20 |   | (295,874 | ) | 9 |   |
| Net loss from  continuing operations             |   | (3,435,089             | )         | 162 |   | (3,944,659 | ) | 116 |   |
| Loss from discontinued  operations               |   | —                 |      | — |   | (757,673 | ) | 22 |   |
|                                                  |        |                        |           |  |  |  |  |  |  |  |  |

 
|                                             |   | **Six Months Ended** |      |
|--------------------------------------------------|--------|----------------------|-----------|
|                                             |   | **June 30, 2002**    |      | **June 30, 2001** |   |
|                                             |   |                 |      | **%  of Revenue** |   |   |   | **%  of Revenue** |   |
| Revenue                                          |   | $                    | 4,404,159 |   | 100 |   | $ | 6,370,869 |   | 100 |   |
| Operating expenses                               |   | 2,674,212            |      | 61 |   | 2,841,112 |   | 45 |   |
| Publishing expenses                              |   | —               |      | — |   | 422,048 |   | 7 |   |
| Advertising agency expense                       |   | —               |      | — |   | 829,941 |   | 13 |   |
| Selling, general, &  administrative expenses |   | 5,908,818            |      | 134 |   | 7,736,534 |   | 121 |   |
| Depreciation &  amortization                 |   | 1,828,188            |      | 42 |   | 2,010,718 |   | 32 |   |
| Interest expense, net                            |   | (626,728             | )         | 14 |   | (638,408 | ) | 10 |   |
|                                             |   |                 |      |   |   |   |   |   |   |
| Net loss from  continuing operations             |   | (6,633,787           | )         | 151 |   | (8,107,892 | ) | 127 |   |
|                                             |   |                 |      |   |   |   |   |   |   |
| Loss from discontinued  operations               |   | —               |      | — |   | (1,136,436 | ) | 18 |   |
|                                                  |        |                      |           |  |  |  |  |  |  |  |  |

 

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Revenue from continuing operations decreased to$2,120,406 for the three months ended June 30, 2002, as compared to $3,407,876for the comparable period in the prior year. Network advertising revenue experienced an 22% decline from thecomparable period one year ago.  Thebalance of the revenue shortfall was attributable to revenue in the fiscal 2001reporting period associated with Link Magazine and iD8 Marketing whose operationswere discontinued in 2001.  For the sixmonth period ended June 30, 2002 Network advertising revenue of $4,404,159declined as compared to $5,050,943 for the six month period in the prior year.The balance of June 30, 2001 revenue was attributable to Link Magazine and iD8Marketing.  A slowly recoveringadvertising market and weak economic conditions have resulted in decreasedNetwork sales in fiscal 2002.  TheCompany hopes to increase Network sales during the remaining portion of theyear ending December 31, 2002 through a healthier advertising market and bycontinuing to expand its advertiser base and sell-out levels and by furtherincreasing the fee charged for its advertising spots.  Although the Company has agreements with national advertisers, noassurance can be given that these or other advertisers will continue topurchase advertising time from the Company, or that future significantadvertising revenues will ever be generated. A failure to significantly increase advertising revenues could have amaterial impact on the operations of the Company.

 

Operating expenses relating only to the Networkdecreased slightly for the quarter ended June 30, 2002 as compared to the prioryear quarter.  Cost containment measuresput into place resulted in a decrease in operating expenses from $2,841,112 inthe prior year six month reporting period to $2,674,212 for the six monthsended June 30, 2002.  There were nocosts in the current period related to publishing or advertising agencyexpenses due to the cessation of their operations in the prior year.

 

Selling, general and administrative expenses(“SG&A”) declined significantly for the three and six month periods ascompared to activity one year ago.  Forthe three months ended June 30, 2002, SG&A expenses dropped to $2,858,630as compared to $3,917,548 for the quarter ended June 30, 2001.  For the six months ended June 30, 2002,SG&A expenses decreased to $5,908,818 as compared to $7,736,534 for thecomparable period one year ago.  Majorfactors attributable to these reductions are reduction in employee and officerheadcount, and cost containment measures – specifically with respect to marketresearch and legal fees.  Furthermore,due to the scale-back of affiliate locations, affiliate related expenses decreaseddramatically.

 

Depreciation and amortization expense totaled $914,960and $1,828,188 for the three and six months ended June 30, 2002 as compared to$1,125,613 and $2,010,718 for the same periods in the prior year.  Due to cash conservation measures, theCompany has not purchased a significant amount of fixed assets.

 

The Company recorded net interest expense fromcontinuing operations of $424,054 and $626,728 for the three and six monthsended June 30, 2002 as compared to $295,874 and $638,408 for the comparableperiods in the prior year.  The currentquarter’s increase in interest is primarily attributable to $328,000 of accruedinterest related to the Bridge Indebtedness to Holdings, offset by lowerinterest rates and debt levels as compared to the prior year.

 

The Company incurred a net loss from continuingoperations of $3,435,089 and $6,633,787 for the three and six months ended June30, 2002 versus comparable net losses of $3,944,659 and $8,107,892 one yearago.

 

The Company did not incur a loss from discontinuedoperations in the current quarter as compared to a loss of $757,673 for thesame period in the prior year.  TheCompany did not incur a loss from discontinued operations for the six monthsended June 30, 2002 as compared to a loss of $1,136,436 for the comparableperiod one year ago.  These amountsreflect the results of MPM reported on a stand-alone basis during the first andsecond quarters of 2001.  The dispositiondate of MPM was July 10, 2001.

 

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**Financial Condition and Liquidity**

 

At June 30, 2002, the Company had working deficit of($10,782,402) as compared to working capital of $553,196 as of December 31,2001.  The primary reason for thisdecrease is attributable to the reclassification of $6,500,000 of debt tocurrent liabilities, combined with additional bridge indebtedness.

 

Cash used in operations decreased to $3,617,660 duringthe six months ended June 30, 2002, from $4,338,074 for the comparable periodin the prior year.  The primary reasonfor this decrease was attributable to a reduction in net loss of approximately$1,475,000 coupled with an increase in accrued expenses of $1,735,000, offsetby a decrease in collection of accounts receivable of approximately $2,900,000during the first six months of 2002 as compared to the same period in the prioryear.

 

Cash used in investing activities decreased to $81,130during the six months ended June 30, 2002 from $832,672 used in investingactivities for the comparable period in the prior year.  This decrease is primarily attributable tothe decline in purchasing equipment for system installations.

 

Cash provided by financing activities amounted to$3,806,666 during the six months ended June 30, 2002 as compared to $3,796,943provided by financing during the same period in the prior year.  The Company borrowed $4,065,000 of theBridge Indebtedness during the first six months of 2002.  In the comparable prior year period, therewas approximately $57,000 of proceeds from the exercise of stock options andapproximately $3,740,000 of net proceeds associated with the issuance ofpreferred stock.

 

There was no cash provided by discontinued operationsin the current six months ended June 30, 2002 as compared to cash provided bydiscontinued operations of $493,382 for the comparable period in the prioryear.

 

At June 30, 2002, the Company did not meet a financialcovenant under its credit facility for which the Company has obtained awaiver.  Based upon the Company’scurrent projections, the Company will need to raise additional capital for2002.  In order to obtain financing tomeet its short-term working capital needs, on November 26, 2001, the Companyand Holdings entered into the Purchase Agreement whereby Holdings agreed topurchase up to an aggregate of $3.0 million of subordinated bridge notes (withan initial purchase at closing of $1.5 million) and the Company agreed to grantHoldings a junior lien on the assets of the Company as security for theobligations of the Company under the Purchase Agreement.  As of March 6, 2002, the facility was fullydrawn.  Pursuant to an amendment to thebridge facility dated March 19, 2002, the Company increased the available lineon the Subordinated Bridge Note to $5.5 million.  On June 10, 2002, the Purchase Agreement was amended to increasethe Bridge Indebtedness availability to $6.5 million of which approximately$5.9 million has been drawn as of August 13, 2002.  As part of its ongoing effort to secure capital, the Companyannounced that it is in preliminary discussions with various parties, includingseveral significant companies in the media industry, regarding a possiblecombination, capital-raising or other strategic transaction.  There has been no understanding or agreementreached with any party regarding any transaction.  Further, there is no assurance that any transaction will occuror, if a transaction does occur, that the terms will be favorable.  Failure to immediately secure additionalcapital will significantly impact the Company’s ability to continue as agoing-concern, as expressed in the audit opinion of the independent auditorsfor the Company in connection with the 2001 year end audit.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

The Company is exposed to market risk from changes ininterest rates related to variable-rate debt outstanding under the $5,000,000loan from a financial institution and the fixed rate Bridge Indebtedness, whichis currently $5,915,000.  This risk arisesin the normal course of business rather than from trading.  At June 30, 2002, the Bridge Indebtedness issubject to either an 18% or 25% fixed interest rate.  The Company views its market risk as immaterial.

 

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**PART II**

**OTHERINFORMATION**

 

**Item 1.    Legal Proceedings.**

** **

From time to time, in thenormal course of business, various claims are made against the Company.  Except for the proceeding 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 22, 2001, alawsuit styled James Harder v. CTN Media Group, Inc. and U-C Holdings, LLC, wasfiled in the United States District Court, Eastern Division of the NorthernDistrict of Illinois.  The lawsuitalleges that the Company violated the Age Discrimination in Employment Act byterminating Mr. Harder.  The complaintseeks in excess of $500,000 in compensatory damages as a result of theCompany’s alleged discrimination, as well as punitive damages and reimbursementfor the plaintiff’s attorney’s fees and associated costs and expenses of thelawsuit.

 

Management believes that it has meritorious defenseswith respect to the foregoing matters and intends to pursue its positionsvigorously.  Litigation is inherentlysubject to many uncertainties; however, management does not believe that theoutcome of this case, individually, or in the aggregate, will have a materialadverse 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.

 

**Item 2.    Changes in Securities.**

 

No events occurred during the quarter covered by thisReport that would require a response to this Item.

 

**Item 3.    Defaults Upon Senior Securities.**

 

No events occurred during the quarter covered by thisReport that would require a response to this Item.

 

**Item 4.    Submission of Matters to a Vote of Security Holders.**

** **

On May 24, 2002, the Companyheld its annual meeting of shareholders. The following proposals were voted upon at the meeting.

** **

I.              Board Election.

** **

At the annual meeting, theshareholders elected the following individuals to the Board of Directors of theCompany:

 
| (1) Chris Boehm          |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
|--------------------------|--------|-----------------|--------|-----------------|--------|--------------|
| (2) Jason Elkin          |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (3) Daniel Gill          |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (4) Robert Callahan      |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (5) Steven Haft          |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (6) C.Thomas McMillen    |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (7) Hollis W. Rademacher |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (8) Stephen Roberts      |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (9) Thomas Rocco         |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (10) Avy H. Stein        |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (11) James Wood          |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |
| (12) Sergio Zyman        |   | For: 13,588,321 |   | Against: 31,449 |   | Abstained: 0 |

 

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II.                                     Amendmentto Articles

The shareholders adopted an Amendment to the Amendedand Restated Certificate of Incorporation for the Company, which included: (i)an amendment to effect a reverse stock split and related change in par value ofthe Company’s common stock, and (ii) to increase the authorized preferred stockby 10,000,000 shares: For: 11,875,890; Against: 107,507; Abstained: 2,420.

 

III.                                 Auditors

The shareholders also elected PricewaterhouseCoopersLLP as the Company’s independent accountant for the current year: For:13,603,620; Against: 13,750; Abstained: 2,400.

 

All of the preferred stock (2,443,330 sharesoutstanding and for voting purposes representing 14,659,980 shares of commonstock) voted in favor of all three proposals.

 

**Item 5.    OtherInformation.**

 

None.

 

**Item 6.    Exhibitsand Reports on Form 8-K.**

 

(a)                                  Exhibits.

 

The following exhibits are filed with this Report:

 
| Exhibit 10.1 |   | Payment Agreement and  General Release dated as of April 11, 2002 among Neil Dickson, the Company  and U-C Holdings, L.L.C. (incorporated herein by reference to Exhibit 10.1 to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March  31, 2002 filed on May 15, 2002). |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                |
| Exhibit 10.2 |   | Amendment No. 2  to Subordinated Bridge Note Purchase  Agreement dated March 19, 2002, by and between CTN Media Group, Inc. and U-C  Holdings, LLC (incorporated herein by reference to Exhibit 10.1 to the  Registrant’s Form 8-K filed April 24, 2002).                                 |
|         |   |                                                                                                                                                                                                                                                                                                |
| Exhibit 10.3 |   | Amendment No. 3 to  Subordinated Bridge Note Purchase Agreement dated April 3, 2002, by and  between CTN Media Group, Inc. and U-C Holdings, LLC (incorporated herein by  reference to Exhibit 10.2 to the Registrant’s Form 8-K filed April 24, 2002).                                        |
|         |   |                                                                                                                                                                                                                                                                                                |
| Exhibit 10.4 |   | Amendment No. 4 to  Subordinated Bridge Note Purchase Agreement dated May 15, 2002 by and between  CTN Media Group, Inc. and U-C Holdings, LLC (incorporated herein by reference  to Exhibit 10.1 to the Registrant’s Form 8-K filed June 28, 2002).                                           |
|         |   |                                                                                                                                                                                                                                                                                                |
| Exhibit 99.1 |   | Safe Harbor Compliance Statement for Forward-Looking  Statements.                                                                                                                                                                                                                                   |

 

(b)                                 Reports on Form 8-K:

 

A report on Form 8-Kdisclosing an amendment to the Subordinated Bridge Note Purchase Agreement wasfiled on April 24, 2002.

 

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A report on Form 8-Kdisclosing an amendment to the Subordinated Bridge Note Purchase Agreement,certain Nasdaq compliance issues and other matters, was filed on June 28, 2002.

 

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SIGNATURES

 

In accordance with the requirements of the ExchangeAct, the registrant caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                  | CTN MEDIA GROUP, INC.                                                                  |
|-----------------------|----------------------------------------------------------------------------------------|
|                  | Registrant                                                                             |
|                  |                                                                                   |
|                  |                                                                                   |
| Date: August 14, 2002 | /s/ Thomas Rocco                                                                       |   |
|                  | Thomas Rocco                                                                           |
|                  | *President*                                                                            |
|                  | *(Principal  Executive Officer)*                                                       |
|                  |                                                                                   |
|                  |                                                                                   |
|                  | /s/ Patrick  Doran                                                                     |   |
| Date: August 14, 2002 | Patrick Doran                                                                          |
|                  | *Chief  Financial Officer and Secretary  (Principal Accounting and Financial Officer)* |

 

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