The accompanying unaudited condensed consolidated financial statements of CTM Media Holdings, Inc. and its subsidiaries (the “Company” or “Holdings”) have been prepared by Managementmanagement in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended October 31, 2010April 30, 2011 are not necessarily indicative of the results that may be exp ectedexpected for the fiscal year ending July 31, 2011. The balance sheet at July 31, 2010 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2010, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

The Company’s fiscal year ends on July 31 of each calendar year.31. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2011 refers to the fiscal year ending July 31, 2011).

Holdings is a holding company consistingThe Company consists of the following principal businesses:

 

 

 

Holdings’The Company’s authorized capital stock, currently consistsupon the Spin-Off, consisted of (a) 35 million shares of Class A common stock, (b) 65 million shares of Class B common stock, (c) 15 million shares of Class C common stock, and (d) 10 million shares of Preferred Stock.Stock, each par value $0.01 per share. IDT Corporation completed the Spin-Off through a pro rata distribution of Holdingsthe Company’s common stock to IDT Corporation’s stockholders of record as of the close of business on August 3, 2009 (the “record date”). As a result of the Spin-Off, each of IDT Corporation’s stockholders received: (i) one share of Holdings’the Company’s Class A common stock for every three shares of IDT Corporation’s common stock held on the record date; (ii) one share of Holdings’the Company’s Class B common stock for every three shares of IDT Corporation’s Class B common stock held on the record date; (iii) one share of Holdings’the Company’s Class C common stock for every three shares of the IDT Corporation’s Class A common stock held on the record date; and (iv) cash from IDT Corporation in lieu of a fractional share of all classes of Holdings’the Company’s common stock. On September 14, 2009, as a result of the Spin-Off, Holding’sthe Company had 1.3 million shares of Class A common stock, 5.1 million shares of Class B common stock and 1.1 million shares of Class C common stock issued and outstanding.

On October 19,December 20, 2010 the Company’s authorized shares of: (i) Class A common stock was reduced from 35,000,000 shares to 6,000,000 shares; (ii) Class B common stock was reduced from 65,000,000 shares to 12,000,000 shares; (iii) Class C common stock was reduced from 15,000,000 shares to 2,500,000 shares; and (iv) Preferred Stock was reduced from 10,000,000 shares to 500,000 shares, each par value $0.01 per share.  The amendment was authorized by the Company’s Board of Directors passed resolutions to amend (the “Amendment”) the Company’s Second Restated Certificate of Incorporation to decrease the authorized number of shares of (i) Class A common stock from 35 million  shares to 6 million shares, (ii) Class B common stock from 65 million shares to 12 million shares, (iii) Class C common stock from 15 million shares to 2.5 million shares,on October 19, 2010, and (iv) Preferred Stock from 10 million shares to 500,000 shares.  The Amendment was approved on November 12, 2010 by written consentthe Written Consent of the holders of a majority of the shares of each class of the Company’s outstanding capital stock, holding shares of the Company’s common stock (which included 560,234 shares of Class A common stock, 3,573,472 shares of Class B common sto ck and 1,090,775 shares of Class C common stock which are convertible into shares of Class A common stock on a 1-for-1 basis), representing approximately 50.1%, 58%, and 100%, of the Company’s outstanding Class A common stock, Class B common stock and Class C common stock, respectively and approximately 84% of the combined voting power of the Company’s outstanding Class A, Class B and Class C common stock, as of October 29, 2010.  An Information Statement disclosing the Amendment and its approval was mailed to stockholders on or about November 29, 2010 and the Amendment will become effective on December 20, 2010, which is at least twenty days after mailing of the Information Statement.capital stock.

There were no assets or liabilities of WMET included in discontinued operations as of October 31, 2010 orApril 30, 2011 and July 31, 2010.

On November 17, 2009, the Company commenced a tender offer to purchase up to thirty percent of its outstanding common stock. The Company offered to purchase up to 0.4 million shares of its Class A common stock and up to 2.4 million shares of its Class B common stock, at a price per share of $1.10. The offer expired on December 22, 2009 and pursuant to the offer, the Company repurchased 0.2 million shares of Class A common stock and 0.8 million shares of Class B common stock for an aggregate purchase price of $1.1 million, representing approximately 14% of its total outstanding capital stock at the time.

  

The Company paid a cash dividend in the amount of $0.25 per share (approximately $2.1 million in the aggregate), $0.06 per share (approximately $0.5 million in the aggregate), and $0.12 per share (approximately $1$1.0 million in the aggregate), on March 15, 2010, June 15, 2010 and November 9, 2010, respectively, to stockholders of record as of March 8, 2010, May 3, 2010 and November 1, 2010, respectively, of the Company’s Class A, Class B and Class C common stock.

 

In addition, onOn October 19, 2010, ourthe Company’s Board of Directors approved the payment of regular quarterly dividends in the amount of $0.06 per share, subject to confirmation by ourthe Company’s management that there is sufficient surplus as of the proposed future payment dates and other circumstances existing at the relevant times. This amount was paid during the second quarter of fiscal 2011.

On June 13, 2011, the Board of Directors, and will depend onin light of the Company’s financial condition, resultscash position, declared the payment of operations, capital requirements, business conditions and other factors, as well as a determinationcash dividend in the amount of $0.06 per share (approximately $0.5 million in the aggregate) which, subject to confirmation by the Company’s Board of Directorsmanagement that dividends are in the best interestthere is sufficient surplus as of the Company’s stockholders.

In addition, on February 22, 2011 the Board of Directors approved the buyback of up to 1 million shares of either the Company’s Class A common stock or Class B common stock of IDT Corporation that they owned as of the record date of the Spin-Off. Those particular shares of the Company’s stock are restricted under the same terms as the corresponding IDT Corporation restricted shares in respect of which they were issued. Upon completion of the Spin-Off on September 14, 2009, there were 0.3 million shares of Class A unvested restricted stock and 0.5 million shares of Class B unvested restricted s tock.

 

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting equity that, under generally accepted accounting principles are excluded from net income. Changes in the components of other comprehensive income (loss) are described below.

 

 

The Company has the following two reportable business segments: CTM and IDW. CTM consists of the Company’sour brochure distribution company and other advertising-based new product initiatives focused on small to medium sized businesses. IDW is a comic book and graphic novel publisher that creates and licenses original intellectual property.  The Company owns 76.665% of IDW.

The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.management.

 

The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments based primarily on operating income. There are no other significant asymmetrical allocations to segments.income (loss).

Operating results for the business segments of the Company are as follows:

 

 

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that no new standards were issued this quarter that applied to the Company.

 

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which is included in the ASC Topic 820 (Fair Value Measurements and Disclosures). ASU 2010-06 requires new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements.  ASU 2010-06 also requires disclosure of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements and clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques.  Except for otherwise provided, ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this standa rdstandard did not have a material effect on the Company’s financial statements.

In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which is included in ASC Topic 855 (Subsequent Events).  ASU 2010-09 clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued.  ASU 2010-09 was effective upon the issuance of the final update and did not have any impact on the Company’s financial statements.

 

IDW is a comic book and graphic novel publisher that creates and licenses intellectual property. IDW’s revenues represented 42%44.8% and 40%39.9% of our consolidated revenues in the threenine months ended October 31,April 30, 2011 and 2010, and 2009, respectively.

 

On November 5, 2009 we purchased an additional 23.335% interest in IDW for a purchase price of $0.4 million. As a result of the transaction, we own a 76.665% interest in IDW.

 

We have the following two reportable business segments: CTM and IDW.

 

 

The condensed consolidated financial statements for the periods reflect our financial position, results of operations, and cash flows as if the current structure existed for all periods presented. The financial statements have been prepared using the historical basis for the assets and liabilities and results of operations.

 

 

Our condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States.States (“U.S. GAAP”). Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for fiscal 2010. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts goodwill and intangible assets with indefinite useful lives and valuation of long-lived assets including intangible assets with finite useful lives. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal 2010.

We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results of operations. Also, we did not include a separate discussion of WMET’s results of operation since the operations were not significant.

 

 

On October 14, 2009, our Board of Directors granted our Chairman and founder, Howard S. Jonas, 1.8 million restricted shares of our Class B common stock with a value of $1.25 million on the date of grant in lieu of a cash base salary for the next five years.year period from October 14, 2009 through October 14, 2014. The restricted shares will vest in equal thirds on each of October 14, 2011, October 14, 2012 and October 14, 2013. Unvested shares would be forfeited if we terminate Mr. Jonas’ employment other than under circumstances where the accelerated vesting applies. The shares are subject to adjustments or acceleration based on certain corporate transactions, changes in capitalization, or termination, death or disability of Mr. Jonas. If Mr. Jonas is terminated by us for cause, a pro rata portion of the shares would vest and the remainder would be forfeited.vest. This arrangement does no tnot impact Mr. Jonas’ cash compensation from the date of the Spin-Off through the pay period including the grant date. Total unrecognized compensation cost on the grant date was $1.25 million. The unrecognized compensation cost has been andis expected to continue to be recognized over the vesting period from October 14, 2009 through October 14, 2014.  The related stock-based compensation related to this grant inwas $113,000 and $339,000 for the first quarter of fiscalthree and nine months ended April 30, 2011, and 2010 was $112 thousand and 19 thousand, respectively.

 

We and IDT entered into a Tax Separation Agreement, dated as of September 14, 2009, to provide for certain tax matters including the assignment of responsibility for the preparation and filing of tax returns, the payment of and indemnification for taxes, entitlement to tax refunds and the prosecution and defense of any tax controversies. Pursuant to this agreement, IDT must indemnify us from all liability for taxes of ours and our subsidiaries for periods ending on or before September 14, 2009, and we must indemnify IDT from all liability for taxes of ours and our subsidiaries accruing after September 14, 2009. Also, for periods ending on or before September 14, 2009, IDT shall have the right to control the conduct of any audit, examination or other proceeding brought by a taxing authority. We shall have the right to participate jointl yjointly in any proceeding that may affect our tax liability unless IDT has indemnified us. Finally, we and our subsidiaries agreed not to carry back any net operating losses, capital losses or credits for any taxable period ending after September 14, 2009 to a taxable period ending on or before September 14, 2009 unless required by applicable law, in which case any refund of taxes attributable to such carry back shall be for the account of IDT Corporation.IDT.

 

 

CTM’s gross margin percentage increased in the three and nine months ended October 31, 2010April 30, 2011 to 68.0%57.8% and 63.1%, respectively, compared to 67.3%57.7% and 60.5% in the three months ended October 31, 2009. The increase was primarily duesimilar periods in fiscal 2010. Gross Margins increased as a result of significant decreases in our direct cost of sales compared to a shiftdeclines in product mix to relatively higher margin distributionrelated revenues from  relatively lower marginand the exiting of our unprofitable printing revenues.business in the third quarter of fiscal 2010.

 

 

 

In an effort to increase availability of versions of its content at retail outlets, IDW has entered into a number of digital distribution agreements overduring the past calendar year,period, and IDW’s publications are currently available for purchase via mobile phones,devices, primarily iPhones/iPod Touch. VariousTouch/iPad. IDW titles are also available direct-to-desktop via several websites and are available on Sony’s PSP and PSP Go gaming devices.Go.

 

 

IDW’s aggregate gross margin increased in the three months ended October 31, 2010month period to 38.9% from 36.4%32.0% and increased to 40.1% from 35.6% in the three monthsnine  month period ended October 31, 2009.April 30, 2011. The increase in the three months ended October 31, 2010gross margins was primarily dueattributable to the mix of productsincreased publishing revenues and lower costs.print costs .

 

 

Historically, we satisfied our cash requirements primarily through cash provided by CTM’s operating activities and funding from IDT Corporation.IDT.

 

 

During the threenine months ended October 31,April 30, 2011 and 2010, and 2009, we distributed cash to the minoritynon-controlling shareholders of IDW in the amount of $0.01million$17,000 and $0.4 million,$435,000, respectively. We also paid dividends of $1,498,000 and $2,082,000 during the nine months ended April 30, 2011 and 2010, respectively.

 

We repaid capital lease obligations of $0.1 million$205,000 and $186,000 in each of the threenine months ended October 31,April 30, 2011 and 2010, and 2009.respectively.

Gross trade accounts receivable increased marginallydecreased to $4.3 million$3,998,000 at October 31, 2010April 30, 2011 compared to $4.2 million$4,274,000 at July 31, 2010. The allowance for doubtful accounts as a percentage of gross trade accounts receivable marginally increaseddecreased to 18.6%17.7% at October 31, 2010April 30, 2011 compared fromto 18.2% at July 31, 2010.

 

We intend to, where appropriate, make strategic investments and acquisitions to complement, expand, and/or enter into new businesses. In considering acquisitions and investments, we search for opportunities to profitably grow our existing businesses, to add qualitatively to the range of businesses in our portfolio and to achieve operational synergies. Historically, such acquisitions have not exceeded $0.5 million,$500,000, with the average acquisition being less than $0.1 million.$100,000 If we were to pursue an acquisition in excess of $0.5 million$500,000 we would likely need to secure financing arrangements. At this time, we cannot guarantee that we will be presented with acquisition opportunities that meet our return on investment criteria, or that our efforts to make acquisitions that meet our criteria will be successful. 

In addition, we will utilize approximately $2 million$2,000,000 annually to pay the regular quarterly dividends in the amount of $0.06 per share,, subject to confirmation by our management that there is sufficient surplus as of the proposed future payment dates and other circumstances existing at the relevant times.

Historically, we satisfied our cash requirements primarily through cash provided by CTM’s operating activities and prior to our separation from IDT, funding from IDT Corporation. The conversion of our balance due to IDT Corporation into a capital contribution in September 2009 significantly improved our working capital balance. We do not currently have any material debt obligations. With the exit of certain lines of businesses within CTM, we expect that our operations in fiscal 2011 and the balance of cash, cash equivalents and short term investment that we held as of October 31, 2010,April 30, 2011, will be sufficient to meet our currently anticipated working capital and capital expenditure requirements, capital lease obligations, make limited acquisitions and investments, pay the currently announced and any future declared dividends and fund any potential operating cash flow deficits within any of our segments for at least the next twelve months. In addition, we anticipate that our expected cash balances, as well as cash flows from our operations, will be sufficient to meet our long-term liquidity needs. The foregoing is based on a number of assumptions, including that we will collect on our receivables, effectively manage our working capital requirements, and maintain our revenue levels and liquidity. Predicting these matters is particularly difficult in the current worldwide economic situation and overall decline in consumer demand. Failure to generate sufficient revenues and operating income could have a material adverse effect on our results of operations, financial condition and cash flows.

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that no new standards were issued this fiscal quarter that applied to the Company.

 

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which is included in the ASC Topic 820 (Fair Value Measurements and Disclosures). ASU 2010-06 requires new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements.  ASU 2010-06 also requires disclosure of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements and clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques.  Except for otherwise provided, ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this standa rdstandard did not have a material effect on the Company’s financial statements.

In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which is included in ASC Topic 855 (Subsequent Events).  ASU 2010-09 clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued.  ASU 2010-09 was effective upon the issuance of the final update and did not have a significant impact on the Company’s financial statements.

 

Smaller reporting companies are not required to provide the information required by this item.