U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
Commission file No. 0-13167
TM CENTURY, INC.
(Name of small business issuer as specified in its charter)
Delaware 73-1220394
(State of incorporation) (IRS
Employer Identification No.)
2002 Academy, Dallas, Texas
75234
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number:
(214) 247-8850
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No___
The number of issuer's shares of Common Stock outstanding as of
December 31, 1996 was 2,527,393.
Transitional Small Business Disclosure Format (check one): Yes___ No
X
TM CENTURY INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. BASIS OF PRESENTATION
The interim financial statements of TM Century, Inc. (the Company)
at December 31, 1996, and for the three months ended December 31, 1996
and 1995, are unaudited, but include all adjustments (consisting only
of normal recurring adjustments) which the Company considers necessary
for a fair presentation. The September 30, 1996 balance sheet was
derived from the balance sheet included in the Company's audited
financial statements as filed on Form 10-KSB for the year ended
September 30, 1996. Certain amounts previously reported in prior
interim financial statements have been reclassified to conform to the
1996 presentation.
The accompanying unaudited interim financial statements are for
interim periods and do not include all disclosures normally provided
in annual financial statements, and should be read in conjunction with
the Company's audited financial statements. The accompanying
unaudited interim financial statements for the three months ended
December 31, 1996 are not necessarily indicative of the results which
can be expected for the entire fiscal year.
2. INCOME TAXES
Deferred income taxes are provided, when applicable, on temporary
differences between the recognition of income and expense for tax and
for financial accounting purposes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109). Temporary
differences which give rise to deferred taxes include basis
differences of property and equipment, accelerated tax depreciation in
excess of book depreciation, and valuation allowances provided in
excess of amounts deductible for tax purposes. Under the provisions
of SFAS 109, recognition of deferred tax assets is permitted for such
amounts which can be carried forward to future periods.
The Company has net operating loss carryforwards of approximately $1.1
million available to offset future taxable income expiring in 2008
through 2009. The Company has recorded a deferred tax asset of
$173,000 after deduction of a valuation allowance of $317,000 to
reduce the total deferred tax asset because it is likely that a
portion of the tax asset will not be realized. Realization is
dependent on generating sufficient taxable income prior to expiration
of the loss carryforwards. Management believes it is more likely than
not that the non-reserved portion of the deferred tax asset will be
realized. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. Certain
provisions of the tax law may limit the net operating loss, capital
loss and credit carryforwards available for use in any given tax year
in the event of a significant change in ownership interest.
3. LONG-TERM DEBT AND LEASE OBLIGATIONS
The Company has a $300,000 revolving Line of Credit with a bank which
provides a negative pledge on all accounts receivable, contract
rights, and inventory of the Company. Borrowings under the Line of
Credit bear a fluctuating interest rate of prime plus 1.5%, payable
monthly. The Line of Credit, which bears a commitment fee of 0.5% per
annum, is renewable annually, subject to the consent of both parties.
The Line of Credit is expected to be renewed on February 28, 1997. No
borrowings were drawn under the Line of Credit during the quarter. In
conjunction with the Company's leasing arrangement discussed below,
the availability under the Line of Credit was reduced from $300,000 to
$100,000.
In May 1996 the Company entered into a lease agreement for the
financing of an upgrade of its computer hardware and software systems.
During the quarter, the remaining $100,000 was financed of the
$550,000 project. The lease is backed by a $200,000 letter of credit
which must be renewed annually subject to the renewal of the Company's
Line of Credit. The requirement of the letter of credit will be
reviewed on an annual basis. The lease has a term of three years and
contains an option to purchase the equipment at its fair market value
or renew the lease at its fair market rental value at the end of the
initial term. Based on borrowing rates currently available to the
Company on similar arrangements, the fair value of the lease agreement
approximates the carrying value.
TM CENTURY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
TM Century, Inc. is engaged primarily in the creation, production,
marketing, and worldwide distribution of compact disc music libraries,
production libraries, station identification jingles, computer
software used in music scheduling and specialized computer equipment
and software for radio stations.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements about the
business, financial condition and prospects of the Company that
reflect assumptions made by management and management's beliefs based
on information currently available to it. The Company can give no
assurance that the expectations indicated by such forward-looking
statements will be realized. If any of management's assumptions
should prove incorrect, or if any of the risks and uncertainties
underlying such expectations should materialize, the Company's actual
results may differ materially from those indicated by the forward-
looking statements.
The key factors that are not within the Company's control and that may
have a direct bearing on operating results include, but are not
limited to, the Company's ability to develop new products cost-
effectively; continued maturation of the domestic and international
markets for compact disc technology; acceptance by customers of the
Company's existing and any new products and formats; the development
by competitors of products using improved or alternative technologies
and the potential obsolescence of technologies used by the Company;
the continued availability of software, hardware and other products
obtained by the Company from third parties; dependence on
distributors, particularly in the international market, and on third
parties engaged to replicate the Company's products on compact discs;
the retention of employees; the success of the Company's current and
future efforts to reduce operating expenses; the effectiveness of new
marketing strategies; and general economic conditions. There may be
other risks and uncertainties that management is not able to predict.
When used in this Quarterly Report, words such as believes,
expects, intends, plans, anticipates, estimates and similar
expressions are intended to identify forward-looking statements,
although there may be certain forward-looking statements not
accompanied by such expressions.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies upon current sales of music libraries, jingles, and
specialized computer equipment and software on terms of cash upon
delivery for operating liquidity. Liquidity is also provided by cash
receipts from customers under contracts for production libraries and
weekly music service contracts having terms of one month to four
years. The Company is obligated to provide music updates throughout
the contract terms for weekly music service contracts. Sales of music
libraries, jingles, and specialized computer equipment and software
and the payments under production library and weekly music service
contracts will provide, in the opinion of management, adequate
liquidity to meet operating requirements at least through the end of
fiscal 1997.
During the quarter, approximately $6,000 was spent for the purchase of
property and equipment and for product development costs for software
development, new music libraries, and music library updates. Funds
for operating needs, new product development, and capital expenditures
for the period were provided from cash reserves. The Company's
expenditures for property, equipment, and development of new products
are discretionary. Product development expenditures are expected to
be approximately $100,000 in fiscal 1997. Management anticipates that
cash flow from operations, cash reserves, and funds available under
the Company's line of credit will be sufficient to meet these capital
requirements at least through the end of fiscal year 1997.
In May 1996 the Company entered into a lease agreement for the
financing of an upgrade of its computer hardware and software systems.
During the quarter, the remaining $100,000 was financed of the
$550,000 project. The Company is required to repay the amount
financed in equal monthly payments of principal and interest during
the term of the lease. Monthly payments on the lease are
approximately $16,000. The term of the lease is three years and the
lease is backed by a letter of credit in the amount of $200,000. The
letter of credit reduces the availability under the Company's
revolving Line of Credit from $300,000 to $100,000. Management
anticipates that cash flow from operations and cash reserves will be
sufficient to meet these capital requirements. The Company has no
other significant commitments for capital expenditures in fiscal 1997.
The Company's revolving Line of Credit with a bank provides a negative
pledge on all accounts receivable, contract rights, and inventory of
the Company. Borrowings under the Line of Credit bear a fluctuating
interest rate of prime plus 1.5%, payable monthly. The Line of
Credit, which bears a commitment fee of 0.5% per annum, is renewable
annually, subject to the consent of both parties. The Line of Credit
is expected to be renewed on February 28, 1997. No borrowings were
drawn under the Line of Credit during the quarter and no long-term
borrowing is anticipated in the foreseeable future at the current
levels of business operation.
On December 19, 1996, the Board of Directors by resolution authorized
the Company to purchase up to 50,000 shares of its common stock, and
on January 27, 1997, authorized the Company to purchase an additional
25,000 shares of its common stock on the open market or through
privately negotiated transactions, from time to time, dependent upon
market conditions, through December 31, 1997. As of January 31, 1996,
the Company had purchased 52,000 shares of which 9,800 were purchased
during the first quarter. Such purchases which were made at an
average price of $.75 per share, were funded by cash reserves of the
Company. Future purchases are expected to be funded by cash reserves
of the Company.
Inventories decreased approximately $160,000 compared to the September
30, 1996 balance due to the amortization of production development
costs of approximately $80,000 and the depletion of inventory from
stock of approximately $80,000.
RESULTS OF CONTINUING OPERATIONS
Revenues declined approximately 4% or $75,000 in the three month
period ended December 31, 1996 as compared to the same period for the
previous year. The decrease was due primarily to a decline in music
scheduling software sales of approximately $138,000 and a decline in
production library sales of $70,000 related to expired three-year
contracts. These declines were offset by increases in sales of
compact disc music libraries of approximately $80,000 and increases of
approximately $80,000 for a weekly comedy service.
The decline in software sales was due to the termination of the
Company's agreement with it's supplier of computer software in January
1996. The Company is currently marketing a music scheduling software
produced by another supplier. The Company expects that it will be
able to build its customer base for its software used in programming
music sequences and for automated music playback systems over the next
five years.
The decrease in production library revenue resulted primarily from the
expiration of three-year contracts entered into by the Company with
customers in prior years. The decrease in revenues resulted from a
reduced demand for new contracts and the nonrenewal of expired
contracts in the United States. Although production library revenues
may continue to decline as additional three-year contracts expire,
management believes that production libraries will continue to
generate a significant portion of overall revenues from sales of new
products as well as existing products. Renewals and new sales growth
are subject to customer acceptance of the new products.
As the compact disc music library market continues to mature, sales of
compact discs are generated primarily from changes in music formats
rather than from conversions to compact disc music delivery
technology. Management believes that the decline in compact disc
music library revenues may continue as the compact disc music library
market has reached a substantial level of maturity in the United
States, which is the market from which the Company derives most of its
music library revenues. International markets have not yet reached
maturity for compact disc technology. Sales of music libraries in
international markets increased during the quarter.
The increase in revenue from weekly comedy services is due primarily
to barter arrangements whereby revenues are derived from obtaining
commercial airtime from radio stations in exchange for such weekly
services and marketing such airtime to advertisers. The Company
expects to market other products using similar barter arrangements in
the future. Revenues from such barter arrangements are expected to
continue to increase in the future.
On February 9, 1996 the Company entered into a five year marketing
agreement with Electronic Data Systems Corporation (EDS), which
provides the Company with the exclusive right to distribute and
sublicense the EDS CoSTAR_ hard disk audio storage and retrieval
system to radio stations within the United States and its territories.
The agreement provides exclusive distribution rights to the Company
through December 31, 2000, subject to meeting certain annual
performance goals. Progress on development needs and support systems
necessary to market the product in the U.S. continues to be delayed.
The CoSTAR system is not expected to impact revenues in the
foreseeable future.
Selling and commission costs as a percentage of revenue increased
$77,000 and as a percentage of revenues increased to 32% from 25% of
revenue due primarily to convention expense incurred of $25,000 and
increases in commissions and sales management costs of $50,000 due to
changes in sales force and commission plans.
General and administrative costs increased $100,000 due primarily to
an increase in provisions for state and local taxes and related
expenses of $40,000, an increase in rent expense on the lease of
Company's headquarters of $12,000, and an increase in personnel costs
of $40,000.
Depreciation increased approximately $40,000 due primarily to
depreciation expense for computer hardware and software acquired under
capital leases.
PART II. OTHER INFORMATION
Item 1. Legal proceedings - Not applicable.
Item 2. Changes in securities - Not applicable.
Item 3. Defaults upon senior securities - Not applicable.
Item 4. Submission of matters to a vote of security holders - Not
applicable.
Item 5. Other information - Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Material Contracts:
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the period
October 1, 1996 through December 31, 1996.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 14, 1997
TM CENTURY, INC.
BY:/s/Janette L. Williams
Janette L. Williams
Chief Accounting Officer
(Principal Accounting Officer)
BY:/s/Neil W. Sargent
Neil W. Sargent
Chief Executive Officer
(Principal Executive Officer)