**UNITED STATES**

**SECURITIES 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  March 31, 2002**           |
|           |   |                                                         |
|           |   | **OR**                                                       |
|           |   |                                                         |
| o              |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
|           |   | **SECURITIES EXCHANGE ACT OF 1934**                          |

 

**For the transition periodfrom               to               **

 

**CommissionFile Number:  0-19997**

 

**CTN MEDIA GROUP, INC.**

(Exact Name of Registrantas 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)                      |

** **

**(404) 256-9630**

(Registrant'sTelephone Number, Including Area Code)

 

**N/A**

(Former Name, FormerAddress and Former Fiscal Year,

if Changed Since LastReport)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes ý   No o

 

Number of shares of common stock outstanding as of May14, 2002:  15,086,547

 

 

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PART I

FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

CTNMEDIA GROUP, INC.

CONSOLIDATEDBALANCE SHEET

(Unaudited)

 
| ASSETS                                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                         |   | **March 31,** |   | **December 31,** |   |
|                                                                                                                         |   | **2002** |   | **2001** |   |
| Current assets:                                                                                                              |   |   |   |   |   |
| Cash and cash equivalents                                                                                                    |   | $ | 348,295 |   | $ | 145,462 |   |
| Accounts receivable, net of allowance of $50,650 and $50,650,  respectively                                                  |   | 2,388,068 |   | 2,132,926 |   |
| Prepaid expenses                                                                                                             |   | 201,850 |   | 146,043 |   |
| Other current assets                                                                                                         |   | 172,160 |   | 147,364 |   |
| Total current assets                                                                                                         |   | 3,110,373 |   | 2,571,795 |   |
|                                                                                                                         |   |   |   |   |   |
| Investments                                                                                                                  |   | 50,000 |   | 41,667 |   |
| Property and equipment, net                                                                                                  |   | 9,034,274 |   | 9,916,157 |   |
| Other assets                                                                                                                 |   | 504,055 |   | 508,220 |   |
| Total assets                                                                                                                 |   | $ | 12,698,702 |   | $ | 13,037,839 |   |
|                                                                                                                         |   |   |   |   |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                   |
|                                                                                                                         |   |   |   |   |   |
| Current liabilities:                                                                                                         |   |   |   |   |   |
| Accounts payable                                                                                                             |   | $ | 1,504,098 |   | $ | 951,950 |   |
| Accrued expenses                                                                                                             |   | 805,723 |   | 623,314 |   |
| Dividends payable                                                                                                            |   | 516,666 |   | 443,335 |   |
| Deferred revenue                                                                                                             |   | 231,312 |   | — |   |
| Current portion of long-term debt                                                                                            |   | 5,000,000 |   | — |   |
| Total current liabilities                                                                                                    |   | 8,057,799 |   | 2,018,599 |   |
| Long-term dividend payable                                                                                                   |   | 55,278 |   | 147,776 |   |
| Debt, less current portion                                                                                                   |   | 3,500,000 |   | 6,500,000 |   |
| Total liabilities                                                                                                            |   | 11,613,077 |   | 8,666,375 |   |
| Stockholders’ equity:                                                                                                   |   |   |   |   |   |
| Common stock — $.005 par; authorized 50,000,000 shares; 15,086,547 and  15,086,547 issued and outstanding, respectively |   | 75,435 |   | 75,435 |   |
| Preferred stock — $.001 par; authorized 2,776,666 shares; 2,443,330 and  2,443,330 issued and outstanding, respectively |   | 42,533,874 |   | 42,533,874 |   |
| Additional paid in capital                                                                                                   |   | 40,574,407 |   | 40,684,407 |   |
| Unearned compensation                                                                                                        |   | (21,351 | ) | (44,211 | ) |
| Accumulated deficit                                                                                                          |   | (82,076,740 | ) | (78,878,041 | ) |
| Total stockholders’ equity                                                                                              |   | 1,085,625 |   | 4,371,464 |   |
| Total liabilities and stockholders’ equity                                                                              |   | $ | 12,698,702 |   | $ | 13,037,839 |   |
|                                                                                                                         |   |   |   |   |   |

 

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** |       |
|--------------------------------------------------------------|--------|------------------------|------------|
|                                                         |   | **March 31,**          |       |
|                                                         |   | **2002**               |       | **2001** |   |
|                                                         |   |                   |       |   |   |
| Revenue                                                      |   | $                      | 2,283,753  |   | $ | 2,962,992 |   |
|                                                         |   |                   |       |   |   |
| Expenses                                                     |   |                   |       |   |   |
| Operating                                                    |   | 1,316,361              |       | 2,235,914 |   |
| Selling, general and administrative                          |   | 3,050,189              |       | 3,662,658 |   |
| Depreciation and amortization                                |   | 913,227                |       | 885,104 |   |
| Total expenses                                               |   | 5,279,777              |       | 6,783,676 |   |
|                                                         |   |                   |       |   |   |
| Interest income                                              |   | 1,412                  |       | 19,784 |   |
| Interest expense                                             |   | (204,087               | )          | (452,319 | ) |
| Cumulative effect of change in accounting principle          |   | —                 |       | (197,000 | ) |
| Net loss from continuing operations                          |   | (3,198,699             | )          | (4,450,219 | ) |
| Loss from discontinued operations, net                       |   | —                 |       | (91,762 | ) |
| Net loss                                                     |   | $                      | (3,198,699 | ) | $ | (4,541,981 | ) |
| Dividends and accretion on preferred stock                   |   | —                 |       | (488,024 | ) |
|                                                         |   |                   |       |   |   |
| Net loss available to common stockholders                    |   | $                      | (3,198,699 | ) | $ | (5,030,005 | ) |
|                                                         |   |                   |       |   |   |
| Net loss per share:                                          |   |                   |       |   |   |
| Basic net loss per common share from continuing operations   |   | (0.21                  | )          | (0.32 | ) |
| Discontinued operation                                       |   | —                 |       | (0.01 | ) |
| Basic net loss per common share                              |   | $                      | (0.21      | ) | $ | (0.33 | ) |
| Diluted net loss per common share from continuing operations |   | (0.21                  | )          | (0.32 | ) |
| Discontinued operations                                      |   | —                 |       | (0.01 | ) |
| Diluted net loss per common share                            |   | $                      | (0.21      | ) | $ | (0.33 | ) |
|                                                         |   |                   |       |   |   |
| Weighted average number of common shares outstanding         |   |                   |       |   |   |
|                                                         |   |                   |       |   |   |
| Basic                                                        |   | 15,086,547             |       | 15,075,165 |   |
| Potential diluted                                            |   | 15,086,547             |       | 15,075,165 |   |
|                                                         |   |                   |       |   |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements

 

 

3

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CTNMEDIA GROUP, INC.

CONSOLIDATED

STATEMENTOF CASH FLOWS

(Unaudited)

 
|                                                                         |   | **Three Months Ended** |       |
|------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                         |   | **March 31,**          |       |
|                                                                         |   | **2002**               |       | **2001** |   |
| Cash flows from operating activities:                                        |   |                   |       |   |   |
| Net loss from continuing operations                                          |   | $                      | (3,198,699 | ) | $ | (4,450,219 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                   |       |   |   |
| Depreciation and amortization                                                |   | 913,227                |       | 885,103 |   |
| Amortization of debt issuance costs                                          |   | 9,165                  |       | 30,000 |   |
| Non-cash compensation expense arising from equity awards                     |   | 22,860                 |       | 31,956 |   |
| Loss on disposition of fixed assets                                          |   | 25,000                 |       | 31,043 |   |
| Barter revenue                                                               |   | (8,333                 | )          | — |   |
|                                                                         |   |                   |       |   |   |
| Changes in operating assets and liabilities:                                 |   |                   |       |   |   |
| Accounts receivable                                                          |   | (255,142               | )          | 2,391,626 |   |
| Prepaid expenses                                                             |   | (55,807                | )          | 11,668 |   |
| Other assets                                                                 |   | (29,796                | )          | 9,602 |   |
| Intangible assets                                                            |   | —                 |       | (120,000 | ) |
| Accounts payable                                                             |   | 511,659                |       | (323,986 | ) |
| Accrued expenses and other liabilities                                       |   | 182,409                |       | (561,169 | ) |
| Deferred revenue                                                             |   | 231,312                |       | 146,524 |   |
| Net cash used in operating activities                                        |   | (1,652,145             | )          | (1,917,852 | ) |
|                                                                         |   |                   |       |   |   |
| Cash flows from investing activities:                                        |   |                   |       |   |   |
| Purchases of property and equipment                                          |   | (56,344                | )          | (430,139 | ) |
| Cash paid for investments                                                    |   | —                 |       | (30,000 | ) |
| Net cash used in investing activities                                        |   | (56,344                | )          | (460,139 | ) |
|                                                                         |   |                   |       |   |   |
| Cash flows from financing activities:                                        |   |                   |       |   |   |
| Net proceeds from bridge indebtedness                                        |   | 2,000,000              |       | — |   |
| Dividends paid                                                               |   | (88,678                | )          |   |   |
| Proceeds from exercise of warrants and stock options                         |   | —                 |       | 57,146 |   |
| Prepaid issuance costs for preferred stock                                   |   | —                 |       | (55,898 | ) |
| Net cash provided by financing activities                                    |   | 1,911,322              |       | 1,248 |   |
|                                                                         |   |                   |       |   |   |
| Net cash provided by (used in) continuing operations                         |   | 202,833                |       | (2,376,743 | ) |
| Net cash provided by discontinued operations                                 |   | —                 |       | 872,751 |   |
| Net increase (decrease) in cash and cash equivalents                         |   | 202,833                |       | (1,503,992 | ) |
| Cash and cash equivalents, beginning of period                               |   | 145,462                |       | 2,806,919 |   |
| Cash and cash equivalents, end of period                                     |   | $                      | 348,295    |   | $ | 1,302,927 |   |
|                                                                         |   |                   |       |   |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

 

4

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CTN MEDIA GROUP, INC.

 NOTES TO CONSOLIDATED FINANCIAL 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 March 31, 2002, and the results of operations andof cash flows for the three months ended March 31, 2002 and 2001 and to reflectthe operation of our former subsidiary, Market Place Media (“MPM”), asdiscontinued operations in fiscal 2001.

                The results of operations for the three months endedMarch 31, 2002 and 2001 are not necessarily indicative of the results of operationsfor a full fiscal year of the Company. Certain prior period amounts have been reclassified to conform with thecurrent period presentation.

 

**NOTE (A)**—**The Company**

                CTN Media Group, Inc. (the“Company”) is a targeted media company specializing in reaching youngadults.  As of March 31, 2002, theCompany operated properties in network television and online media.

                For the quarter ended March 31,2001, the Company operated as two reportable segments: CTN and MPM.  CTN sold MPM on July 10, 2001.  MPM’s separate results for the comparablequarter in the prior year are reported as Discontinued Operations.  In prior year quarter results, CTN includedthe operations of the College Television Network (the “Network”), LinkMagazine, iD8 Marketing (“iD8”) and Wetair.com.  In fiscal 2002, the Company consists solely of the Network.

                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 March 31, 2002, the Network wasinstalled or contracted for installation in 1,751 locations at approximately 775colleges and universities. The Network generates revenue through theadvertising placed on it.

                Link Magazine was a publicationdistributed to over 650 college campuses. As of April 2001, the Company has elected not to publish new issues ofLink Magazine for an unspecified period of time.  iD8 was a marketing agency providing creative services andplacing media purchases for its clients. iD8 ceased operations on July 31, 2001. Wetair.com was an Internet site for young adults offering entertainmentinformation which was integrated into collegetelevision.com.  As of January 2002, Wetair.com LLC wasmerged into the Company.

                The Company maintains aheadquarters office in Atlanta and sales offices in New York, Chicago and LosAngeles.

 

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 March 31, 2002, the Company’s preferred stockconsists 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 the 266,666outstanding Series B shares out of the 266,666 Series B shares that have beendesignated.  There is currently pendinga proposal to the stockholders of the Company to increase the authorized andunissued preferred stock by 10,000,000 shares. This proposal will be voted upon at the annual stockholders’ meeting onMay 24, 2002.

                Effective March 31, 2001, the redemption feature ofthe Series A was waived pursuant to an agreement between the Company andHoldings, which ceased the accretion of Series A to its highest redemptionvalue at the end of each reporting period, and the Company will no longer beobligated to redeem, for cash, the outstanding shares of Series A at the optionof the Series A holders.  This allowedthe Company to move the classification of the Series A from MandatorilyRedeemable Preferred Stock to Stockholders’ Equity.

                On April 5, 2001, the Company issued 266,666 sharesof Series B to Holdings for $15.00 per share, or an aggregate purchase price of$3,999,990.  The Series B accrues acumulative dividend of 12% per annum, compounding on a quarterly basis.  The Series B is convertible into shares ofcommon stock, as determined by multiplying the number of shares of Series B tobe converted by the $15.00 per share purchase price and dividing the product bythe conversion price of the Series B then in effect with respect to suchshares.  On the date of issuance, theconversion price of the Series B was $2.50. Each share of Series B has voting rights based upon the number of sharesof common stock into which Series B is convertible.  At March 31, 2002, 1,599,996shares of common stock were reserved for conversion of the Series B.  There are an additional 166,896 shares of common stock reservedfor the conversion of dividends accrued with respect to the Series B throughMarch 31, 2002.

The Company filed an Amended and Restated Certificateof Incorporation on May 9, 2001 that amended the terms of the Series A to,among other things, (i) eliminate the redemption rights of the holders of theSeries A (such rights had previously been waived by Holdings in an agreementdated March 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 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 March 31, 2002, 13,059,984 shares of the Company’s common stockwere reserved for conversion.  There arean additional 4,203,984 shares of common stock reserved for the conversion ofdividends accrued with respect to the Series A through March 31, 2002.

 

**NOTE (C) — Debt**

                Asof August 10, 2001, the Company amended a revolving credit facility from afinancial institution (the “CTN Loan”) to a borrowing capacity of up to $5.0million.  The CTN Loan previously 

 

 

6

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had a  $12.0 million credit limit of which $10.3million was paid down as a permanent principal reduction to the credit limit onJuly 10, 2001 in conjunction with the sale of MPM.  As of March 31, 2002, there was a $5.0 million outstandingbalance on this facility.

                The CTN Loan bears interest at either (i) the BaseRate which is equal to the greater of (a) the Federal Funds rate plus 0.5% or(b) the Prime Rate, plus 2.00% per year; or (ii) the Eurodollar Rate, plus3.50% per year.  The determination ofwhether to use the Base Rate or the Eurodollar Rate is at the option of theCompany.  A commitment fee of 0.5% peryear on the unused portion of the facility is required.  The CTN Loan is due and payable in full onJanuary 31, 2003.  For the three monthsended March 31, 2002 and 2001, the weighted average interest rate on the CTNLoan was 6.8% and 10.7%, respectively. The CTN Loan is guaranteed by a negative pledge of the outstandingshares of stock of the Company owned by Holdings.

                The Company’s debt agreement contains financialcovenants that, among other restrictions, require the maintenance of certainfinancial ratios and cash flows, restrict asset purchases, dividend payments ordistributions and accelerate the maturities upon a change in control of theCompany.

                In order to obtain financing to meet its short-termworking capital needs, on November 26, 2001, CTN and Holdings entered into aSubordinated Bridge Note Purchase Agreement (the “Purchase Agreement”) wherebyHoldings agreed to purchase up to an aggregate of $3.0 million (“BridgeIndebtedness”) of subordinated bridge notes (with an initial purchase at closingof $1.5 million) and CTN agreed to grant to Holdings a junior lien on theassets of CTN as security for the obligations of CTN under the PurchaseAgreement.

                The Bridge Indebtedness accrued interest at a rate of12% per year on the unpaid principal amount of the Bridge Indebtednessoutstanding on a daily basis.  Allprincipal and accrued interest is due and payable by CTN on the earlier tooccur of 90 days following the scheduled maturity of the indebtedness owedpursuant to the CTN Loan or the discharge of the indebtedness owed by CTNpursuant to the CTN Loan (the “Maturity Date”).  However, since the Bridge Indebtedness was not converted intoequity or repaid on or before February 26, 2002, the interest rate increased to18%.  On March 19, 2002, the PurchaseAgreement was amended to increase the Bridge Indebtedness 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.  The Company has drawn down an additional $1.7 million as of thedate of this report, for a total outstanding under the Bridge Indebtedness of$5.2 million.

                In the event of the sale by CTN to independent thirdparties of additional equity or incurrence of subordinated debt, upon theelection by the majority of the holders of the Bridge Indebtedness, the holdersof the Bridge Indebtedness may convert all or any portion of the principalamount of the Bridge Indebtedness outstanding at the time (including allaccrued but unpaid interest) into the same securities offered in the financingat the same price at which the securities will be sold.

                CTN’s obligations under the Purchase Agreement aresecured by security interests and liens, which are subordinate to the securityinterests and liens granted by CTN to LaSalle Bank pursuant to the CTN Loan.

For the three monthsended March 31, 2002, the Company was in violation of certain financialcovenants associated with the CTN Loan for which a waiver has beenreceived.  Additionally, the Companybelieves that certain requirements under the CTN Loan covenants may not be metduring the remaining quarters of fiscal 2002. If the Company fails to meet a covenant under the CTN Loan, the financialinstitution has the right to declare the loan due upon demand although suchfinancial institution may waive such covenant defaults, as it has done in thepast.  The Company is exploring othercapital-

 

 

7

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raising alternatives. The Company can not be certain that any of the alternatives will beconsummated.  Failure to secureadditional capital will significantly impact the Company’s ability to continueas a going-concern.

** **

**NOTE (D) — Property and Equipment**

## **Property and equipment consists ofthe following:**

|                                 |   | **Estimated Useful Lives** |   | **March 31, 2002** |       | **December 31, 2001** |   |
|--------------------------------------|--------|----------------------------|--------|--------------------|------------|-----------------------|--------|
|                                 |   |                       |   |               |       |                  |   |
| Entertainment  systems               |   | 5  years                   |   | $                  | 16,064,108 |                  | $      | 16,033,057 |   |
| Machinery  and equipment             |   | 5-7  years                 |   | 1,082,507          |       | 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               |   |
|                                 |   |                       |   | 19,383,590         |       | 19,352,247            |   |
| Less:  Accumulated depreciation |   |                       |   | (10,349,316        | )          | (9,436,090            | )      |
| Total                                |   |                       |   | $                  | 9,034,274  |                  | $      | 9,916,157 |   |

 

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

                In connection with the Company’s acquisition of therights to and inventory of video jukeboxes in 1991, the Company agreed to paytwo former stockholders an aggregate of $100,000, one-half being payable atsuch time as the Company’s net pre-tax income equals at least $500,000 and thebalance being payable at such time as the Company has an additional $500,000 innet pre-tax earnings.  The Company willprovide for these contingent liabilities at the time at which ultimate paymentis considered probable.

                The Company has an Origination Services Contract withCrawford Communications, Inc. (“Crawford”) . The original agreement provides for payments of approximately $1,320,000over a five year period ending on July 15, 2003. In accordance with theOrigination Services Contract, Crawford is responsible for the transmission viasatellite of the Network’s daily programming, including encoding signals,testing, maintaining the Network’s programming library, and obtainingprogramming from the Network’s sources. Crawford is also responsible for the uplink of the programming to asatellite as well as the downlink of the signal from the satellite at eachinstallation site.  As of March 31,2002, the Company has paid approximately $1,013,200 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 ofMarch 31,2002, the Company has paid approximately $2,437,000 pursuant to thisagreement.

                The Company has a Transponder Use Agreement withPublic Broadcasting Service (“PBS”).  The Company has subleased capacity on a satellite owned and operated byGE American Communications, Inc. (“GE”) and leased to PBS by GE.  This agreement provides for payments ofapproximately $3,924,000 over a five-year period that terminates on July 31,2003.  The Company has protected statuson this satellite, where in the event of a satellite failure or performanceproblem, the Company’s programming will preempt transmissions of other users onthis satellite or on another satellite. As of March 31, 2002, the Company has paid approximately $2,877,600pursuant to this agreement.

 

 

8

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**NOTE (F) Related Party Transactions**

                Mr. Davenport, a former employeeof the Company and equity holder in Holdings, entered into a  Termination and Purchase Agreement executedby Holdings, the Company and Mr. Davenport. Mr. Davenport will receive $110,000from Holdings and return his equity in Holdings.  To fund this obligation of Holdings, the Company declared a$110,000 dividend to Holdings pursuant to a promissory note, the payment termsof which match Mr. Davenport’s terms. In connection with this transaction, Mr. Davenport cancelled theobligations of the Company to him under his employment agreement.  Mr. Davenport will receive payments fromHoldings over an eighteen-month period commencing January 2002.

 

## **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 thedenominator of the basic income (loss) per share calculation, using thetreasury stock method, if their effect is dilutive.

 

**Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 

**Forward-Looking Statements**

Certain forward-lookinginformation contained in this Quarterly Report is being provided in relianceupon the “safe harbor” provisions of the Private Securities Litigation ReformAct of 1995 as set forth in Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Such information includes, withoutlimitation, discussions as to estimates, expectations, beliefs, plans,strategies and objectives concerning the Company’s future financial andoperating performance, including its ability to continue operating as agoing-concern.  Such forward-lookinginformation is subject to assumptions and beliefs based on current informationknown to the Company and factors that could yield actual results differingmaterially from those anticipated.  TheCompany undertakes no obligation to update or revise forward-looking statementsto reflect changed assumptions, the occurrence of unanticipated events orchanges in future operating results. Please see Exhibit 99.1, “Safe Harbor Compliance Statement forForward-Looking Statements,” for additional factors to be considered bystockholders and prospective stockholders.

### **Overview**

The Company commencedoperations in January 1991.  The Companyis a targeted media company specializing in reaching young adults. The Companyoperates the College Television Network (the “Network”), a proprietarycommercial television network that operates on college and university campusesacross the United States.  The Networkis provided to campuses through single-channel television systems placed freeof charge primarily in the campus public venues, including dining facilitiesand student unions.  At March 31, 2002,the Network was installed or contracted for installation at approximately 1,751locations at approximately 775 colleges and universities throughout the UnitedStates.  Based on our Fall 2001 NielsenMedia Research study, the Network reaches 8.2 million college students everyweek.

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 

 

 

9

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during the periodof September through May and substantially less revenue during the summermonths when colleges and universities do not hold regular classes.

### **Results of Operations**

Thefollowing table sets forth certain financial data derived from the Company’sstatement of operations for the three months ended March 31, 2002 and March 31,2001:

 
|                                                 |   | **Three Months Ended** |      |
|------------------------------------------------------|--------|------------------------|-----------|
|                                                 |   | **March 31, 2002**     |      | **March 31, 2001** |   |
|                                                 |   |                   |      | **% of Revenue** |   |   |   | **% of Revenue** |   |
| Revenue                                              |   | $                      | 2,283,753 |   | 100 |   | $ | 2,962,992 |   | 100 |   |
| Operating expenses                                   |   | 1,316,361              |      | 58 |   | 1,619,543 |   | 55 |   |
| Publishing expenses                                  |   | —                 |      | — |   | 123,590 |   | 4 |   |
| Advertising agency expense                           |   | —                 |      | — |   | 492,781 |   | 17 |   |
| Selling, general, &  administrative expenses     |   | 3,050,189              |      | 134 |   | 3,662,658 |   | 124 |   |
| Depreciation &  amortization                     |   | 913,227                |      |  40 |   |  885,104 |   |  30 |   |
| Interest expense, net                                |   | (202,675               | )         |  9 |   |  (432,535 | ) |  15 |   |
| Cumulative effect of  change in accounting principle |   | —                 |      | — |   | (197,000 | ) | 7 |   |
| Net loss from  continuing operations                 |   |  (3,198,699       | )         |  140 |   |  (4,450,219 | ) | 150 |   |
| Loss from discontinued  operations                   |   | —                 |      | — |   | (91,762 | ) | 3 |   |
|                                                      |        |                        |           |  |  |  |  |  |  |  |  |

 

 

Revenue from continuingoperations decreased to $2,283,753 for the three months ended March 31, 2002,as compared to $2,962,992 for the comparable period in the prior year. For thethree month period ended March 31, 2002 Network advertising revenue of$2,283,753 remained relatively constant as compared to $2,324,284 for the threemonth period in the prior year.  Aslowly recovering advertising market has hampered an increase in sales for thecurrent quarter.  The Company hopes toincrease Network sales during the year ending December 31, 2002 through ahealthier advertising market and by continuing to expand its advertiser base andsell-out levels and by further increasing the fee charged for its advertisingspots.  Although the Company hasagreements with national advertisers, no assurance can be given that these orother advertisers will continue to purchase advertising time from the Company,or that future significant advertising revenues will ever be generated.  A failure to significantly increaseadvertising revenues could have a material impact on the operations of theCompany.

Operating expensesrelating only to the Network and Wetair.com decreased 19% for the three monthperiod ended March 31, 2002, as compared to $1,619,543 for the three monthperiod ended March 31, 2001.  Thisdecrease is attributable to cost cutting efforts implemented in the currentyear and the cessation of Wetair.com operations.  There were no costs in the current period related to publishingor advertising agency expenses due to the cessation of their operations in theprior year.

Selling, general andadministrative expenses from continuing operations decreased to $3,050,189 forthe three month period ended March 31, 2002 as compared to $3,662,658 for thesame period in the prior year.  Theaffiliate department has decreased expense due to the scale-back of new installations.  Also, general and administrative expenseswere significantly lower due to the reduction in employees and the relatedexpenses.

Depreciation and amortization expense from continuingoperations totaled $913,227 for the three month period ended March 31, 2002 ascompared to $885,104 for the same period in the prior year.  This 

 

 

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small increase isattributable to the minimal addition of DVB (“Digital Video Broadcast”) systemsin school locations in the prior year.

The Company recorded netinterest expense from continuing operations of $202,675 for the three monthperiod ended March 31, 2002 as compared to $432,535 in the same period of theprior year.  The decrease in interestexpense relates to the lower level of debt due to the paydown of CTN creditfacilities in conjunction with the sale of MPM, coupled with a decrease incurrent quarter interest rates.  Also,the Company recorded debt issuance costs of $30,000 in the prior year that areclassified as interest expense.  Thereis an offset of approximately $100,000 for accrued interest in the currentquarter related to the Company’s Bridge Indebtedness with Holdings.

The Company incurred anet loss from continuing operations of $3,198,699 in the three month periodended March 31, 2002 as compared to $4,450,219 in the same period in the prior year.

The Company did not incura loss from discontinued operations in the current quarter as compared to aloss of $91,762 for the same period in the prior year.  This amount reflects the results of MPMreported on a stand-alone basis during the first quarter of 2001.  The disposition date of MPM was July 10,2001.

### **Financial Condition and Liquidity**

At March 31, 2002, theCompany had working deficit of ($4,947,426) as compared to working capital of$553,196 as of December 31, 2001.  Theprimary reason for this decrease is attributable to the reclassification of$5,000,000 of debt to current liabilities.

Cash used in operationsdecreased to $1,652,145 during the three months ended March 31, 2002, from$1,917,852 for the comparable period in the prior year.  The impact of a decrease in net loss of$1,250,000 and an increase in accounts payable and accrued expenses ofapproximately $1,550,000 offset by a decrease in collections of accountsreceivable of approximately $2,600,000 in the first three months compared tothe same period in the prior year was the primary cause of this decrease.

Cash used in investingactivities decreased to $56,344 during the three months ended March 31, 2002from $460,139 used in investing activities for the comparable period in theprior year.  This decrease is primarilyattributable to the decline in purchasing equipment for system installations.

Cash provided byfinancing activities increased to $1,911,322 during the three months endedMarch 31, 2002 compared to $1,248 provided by financing for the same period inthe prior year.  The Company borrowed$2,000,000 of the Bridge Indebtedness line in the current quarter.  In the comparable quarter of the prior yearthere was approximately $57,000 of proceeds from the exercise of stock optionsoffset by approximately $56,000 of issuance costs related to preferred stock.

There was no cashprovided by discontinued operations in the current three months ended March 31,2002 as compared to cash provided by discontinued operations of approximately$872,751 for the comparable period in the prior year.

At March 31, 2002, the Company did not meet afinancial covenant under its credit facility for which the Company has obtaineda waiver.  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 Company andHoldings 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.  The Company is exploring capital-raising alternatives, 

 

 

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including, but notlimited to, receiving additional capital from Holdings.  The Company cannot be certain that any ofthe alternatives will be consummated and there can be no assurances that theseefforts will be successful.  Failure tosecure additional capital will significantly impact the Company’s ability tocontinue as a going-concern, as expressed in the audit opinion of theindependent auditors for the Company in connection with the 2001 year endaudit.

 

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

The Company isexposed to market risk from changes in interest rates related to variable-ratedebt outstanding under the $5,000,000 loan from a financial institution and thefixed rate Bridge Indebtedness, which is $3,500,000.  This risk arises in the normal course of business rather thanfrom trading.  At March 31, 2002, theBridge Indebtedness is subject to either an 18% or 25% fixed interestrate.  The Company views its market riskas immaterial.

**PART II**

**OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

                From time to time, in the normal course of business,various claims are made against the Company. Except for the proceeding described below, there are no materialproceedings to which the Company is a party and management is unaware of anymaterial contemplated actions against the Company.

                On March 22, 2001, a lawsuit styled James Harder v.CTN Media Group, Inc. and U-C Holdings, LLC, was filed in the United StatesDistrict Court, Eastern Division of the Northern District of Illinois.  The lawsuit alleges that the Companyviolated 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 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 duringthe quarter covered by this Report that would require a response to this Item.

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

No events occurred during the quarter covered by this Report that wouldrequire a response to this Item.

 

 

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**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

**               **None.

**Item 5.     Other Information.**

(a)                                  Neil Dickson, 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 U-C Holdings, L.L.C.

(b)                                 As set forth in the Company’s ProxyStatement for the Company’s annual stockholders’ meeting on May 24, 2002, theBoard of Directors of the Company has approved a one-for-six reverse stocksplit of the Company’s common stock and related change of the par value of thecommon stock to $0.03 per share.  Thismatter will be voted on at the stockholders’ meeting and it is believed that itwill be approved.  In addition, there isalso pending a proposal which has been approved by the Company’s Board ofDirectors to increase the Company’s authorized and unissued preferred stock by10,000,000 shares.  It is also believedthat this proposal will be approved.

 

**Item 6.  Exhibits and Reports on Form 8-K.**

(a)                                  Exhibits.

                The following exhibits are filedwith this Report:

Exhibit 10.1            PaymentAgreement and General Release dated as of April 11, 2002 among Neil Dickson,the Company and U-C Holdings, L.L.C.

Exhibit 10.2            Terminationand Purchase Agreement dated as of February 4, 2002 among Daniel D. Davenport,the Company and U-C Holdings, L.L.C.

Exhibit 10.3            SubordinatedPromissory Note dated February 4, 2002 payable from the Company to U-CHoldings, L.L.C.

Exhibit 10.4            Subordinationand Intercreditor Agreement dated as of February 4, 2002, by and among theCompany, U-C Holdings, L.L.C., LaSalle Bank National Association and DanielDavenport.

Exhibit 99.1             Safe Harbor Compliance Statement forForward-Looking Statements.

(b)           Reportson Form 8-K:

A report on Form 8-K disclosing potential NASDAQ SmallCap Marketdelisting was filed on February 27, 2002.

 

 

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SIGNATURES

 

                In accordance withthe requirements of the Exchange Act, the registrant caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 

|               |   |   |   | CTN MEDIA GROUP, INC.                           |
|--------------------|--------|--------|--------|-------------------------------------------------|
|               |   |   |   | Registrant                                      |
|               |   |   |   |                                            |
|               |   |   |   |                                            |
| Date: May 15, 2002 |   |   |   | /s/ Thomas Rocco                                |
|               |   |   |   | Thomas Rocco                                    |
|               |   |   |   | *President*                                     |
|               |   |   |   | *(Principal Executive Officer)*                 |
|               |   |   |   |                                            |
|               |   |   |   |                                            |
| Date: May 15, 2002 |   |   |   | /s/  Patrick Doran                              |
|               |   |   |   | Patrick Doran                                   |
|               |   |   |   | *Chief  Financial Officer and Secretary*        |
|               |   |   |   | *(Principal  Accounting and Financial Officer)* |

 

 

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