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, 1997
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: (972) 406-6800
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
January 31, 1998 was 2,483,193.
Transitional Small Business Disclosure Format (check one): Yes__ No X
TM Century, Inc.
Balance Sheets
As of December 31, 1997 (Unaudited) and September 30, 1997
ASSETS
December 31, 1997 September 30, 1997
CURRENT ASSETS
Cash 152,623 294,333
Accounts and notes receivable 812,107 733,767
less allowances of $240,282 and
$250,000, respectively
Inventories, net 772,966 779,953
Deferred federal income taxes 154,530 154,530
Prepaid expenses and other current assets 43,715 25,224
TOTAL CURRENT ASSETS 1,953,691 1,987,807
PROPERTY AND EQUIPMENT 2,489,076 2,463,958
Less accumulated depreciation (1,632,617) (1,548,617)
NET PROPERTY AND EQUIPMENT 856,459 915,341
INVENTORIES - NONCURRENT, net 161,398 143,647
OTHER ASSETS 18,324 18,260
TOTAL ASSETS 2,972,122 3,065,055
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 213,659 69,451
Accrued expenses 106,901 205,674
Current portion of obligation under capital 168,403 178,033
lease
Deferred revenue 31,252 56,011
Customer deposits 23,183 26,358
TOTAL CURRENT LIABILITIES 543,398 535,527
OBLIGATIONS UNDER CAPITAL LEASE 95,031 128,755
CUSTOMER DEPOSITS - NONCURRENT 171,346 166,418
DEFERRED FEDERAL INCOME TAXES 26,400 26,400
TOTAL LIABILITIES 836,175 857,100
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 29,705 29,705
7,500,000 shares;
2,970,481 shares issued
Paid-in capital 2,275,272 2,275,272
Treasury stock - at cost, 487,288 (1,291,227) (1,291,227)
Retained earnings 1,122,197 1,194,205
TOTAL STOCKHOLDERS' EQUITY 2,135,947 2,207,955
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 2,972,122 3,065,055
TM CENTURY, INC.
Statements of Operations and Retained Earnings (Unaudited)
For the Three Months Ended December 31, 1997 and 1996
1997 1996
REVENUES 1,719,713 1,694,792
COSTS AND EXPENSES:
Production, programming & technical 547,514 754,526
General and administrative 550,075 585,029
Selling, commissions & royalties 606,651 552,466
Depreciation 84,000 90,368
TOTAL 1,788,240 1,982,389
OPERATING INCOME (LOSS) (68,527) (287,597)
OTHER INCOME (EXPENSES):
Interest income 1,679 1,534
Interest expense (5,160) (7,677)
Other 0 (230)
TOTAL (3,481) (6,373)
INCOME (LOSS) BEFORE INCOME TAXES (72,008) (293,970)
INCOME TAX (BENEFIT) PROVISION:
Current
- -
Deferred
- -
TOTAL
NET INCOME (LOSS) (72,008) (293,970)
RETAINED EARNINGS, BEGINNING OF PERIOD 1,194,205 2,021,550
RETAINED EARNINGS, END OF PERIOD 1,122,197 1,727,580
BASIC NET INCOME (LOSS) PER SHARE (0.03) (0.12)
WEIGHTED AVERAGE NUMBER OF COMMON 2,483,193 2,537,139
SHARES OUTSTANDING
TM Century, Inc.
Statement of Cash Flows
For The Quarter Ending December 31, 1997 and 1996
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (72,008) (293,970)
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 84,000 90,368
Amortization 71,100 80,030
Provision for doubtful accounts 12,000 22,000
Gain on disposition of property and equipment (818)
Change in assets and liabilities
(Increase) decrease in:
Trade accounts receivable (90,340) (8,257)
Inventories (81,864) 81,421
Prepaid expenses (18,555) 1,943
Increase (decrease) in:
Accounts payable and accrued expenses 45,435 (48,055)
Deferred revenue (24,759) 11,544
Customer deposits 1,753 (11,863)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (73,238) (75,657)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (25,118) (4,922)
Proceeds from sale of property and equipment 818
Acquisition of treasury stock 0 (6,431)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (25,118) (10,535)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations (43,354) (51,213)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (43,354) (51,213)
NET INCREASE (DECREASE) IN CASH (141,710) (137,405)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 294,333 377,855
CASH AND CASH EQUIVALENTS AT END OF PERIOD 152,623 240,450
Supplemental disclosures of cash flow information:
Cash paid for interest 5,160 7,677
Noncash investing and financing activities
Capital lease obligation incurred 0 103,878
TM CENTURY INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1997 AND 1996
1. BASIS OF PRESENTATION
The interim financial statements of TM Century, Inc. (the _Company_)
at December 31, 1997, and for the three months ended December 31,
1997 and 1996, are unaudited, but include all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation. The September 30, 1997 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, 1997. Certain amounts previously reported in
prior interim financial statements have been reclassified to conform
to the 1997 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, 1997 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
$1.4 million available to offset future taxable income expiring in
2008 through 2010. The Company has recorded a deferred tax asset of
$155,000 after deduction of a valuation allowance of approximately
$525,000 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's $300,000 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 an annual commitment fee of 0.5% of the
unused amounts, is renewable annually, subject to the consent of both
parties. The Line of Credit was renewed through February 28, 1998
with no other changes in terms. 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 ended December 31, 1996, the Company
obtained financing on the remaining $100,000 of the total $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.
4. TREASURY STOCK
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 December 31,
1997, the Company has made purchases totaling 54,000 shares at an
average price of $.76 per share. These purchases were funded by cash
reserves of the Company. There were no purchases made during the
quarter.
5. Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128, "Earnings per Share", effective for periods
ending after December 15, 1997. Basic earnings per share are
calculated on the weighted average number of common shares
outstanding during each period. All prior period earnings per share
amounts have been restated in accordance with FASB No. 128.
TM CENTURY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
TM Century, Inc. (the "Company") is engaged primarily in the
creation, production, marketing, and worldwide distribution of
compact disc music libraries, production libraries, station
identification jingles, and computer software used in music
scheduling for radio stations worldwide.
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, continued maturation of the domestic and international
markets for compact disc technology; acceptance by the 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. Additionally, the Company may not have the ability to
develop new products cost-effectively. 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. All forward-looking statements
are intended to be covered by the safe harbor created by Section 21E
of the Securities Exchange Act of 1934.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies upon current sales of music libraries, jingles,
and music scheduling 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 up to four years. The
Company is obligated to provide music updates throughout the contract
terms for both production library and weekly music service contracts.
Sales of music libraries, jingles, and specialized 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 1998.
During the quarter ended December 31, 1997, approximately $60,000 was
spent for the purchase of property and equipment and for product
development costs for new music libraries, music library updates, and
jingles. 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 $150,000 in fiscal 1998. 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 1998.
In May 1996 the Company entered into a lease agreement for the
financing of an upgrade of its computer hardware and software
systems. The Company is required to repay the amount financed,
totaling $550,000 in equal monthly payments of principal and interest
during the term of the lease. Monthly payments on the lease are
approximately $16,300. 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
1998.
RESULTS OF CONTINUING OPERATIONS
Revenues increased approximately 1.5% or $25,000 in the three-month
period ended December 31, 1997 as compared to the same period for the
previous year. The increase was primarily due to increases in
revenue for HitDisc service of $56,000, GoldDisc service of $58,000,
and production libraries of $77,000. Offsetting these increases were
decreases in royalties from the broadcasting of the Company's radio
Jingles of $17,000, weekly Comedy services of $40,000.and the
decreases in the sale of computer software equipment due to the sale
of all such related inventory and assets of $114,000.
Revenues of weekly HitDisc and GoldDisc music services increased
$114,000, or 10%. The increase in compact disc music library
revenues was due to the introduction in the fourth quarter of 1996 of
a new music format targeted to non-broadcast customers. As the
compact disc music library market matures, sales of compact discs
are generated primarily from changes in music formats or sales of new
music libraries or formats rather than from conversions to compact
disc music delivery technology. The market for compact disc music
libraries to broadcast customers 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. A decline in
revenues from music library sales may result in a proportionately
greater decline in operating income because music libraries provide
higher margins than the Company's other products. However,
management believes that sales to non-broadcast customers and the
introduction of new products will counteract the declines in revenues
from existing music libraries. New products include pre-recorded
music provided to equipment manufacturers for hard drive systems
which was introduced during the quarter and a new music library
targeted to non-broadcast customers which was introduced during the
fourth quarter. Renewals and new sales growth are subject to
customer acceptance of the new products.
Overall production library revenues increased $77,000, or 47%.
Increases in production library revenue is due to the substantial
increase in advertising/barter arrangements for the Company's sales and
imaging libraries. Even though production library revenues may decline
due to the expiration of three-year contracts, management believes that
production libraries will continue to generate a significant portion of
overall revenues from sales of existing products through advertising/barter
arrangements and sales of new products. The Company introduced a new
production library in the second quarter of fiscal 1997. Sales and
new sales growth are subject to customer acceptance of the new
products.
Jingles decreased $17,000 primarily due a slightly slower pace in
customs compared to the same quarter, prior fiscal year 1996. Comedy
services decreased $40,000 as a result of a decrease in the comedy
share of advertising revenues.
Production, programming and technical costs decreased $207,000 or
27%, and as a percentage of revenue, decreased from 45% to 32%. The
decrease as a percentage of revenues is due to the reduction in
expenses as a result of the sale of computer software and equipment
during the third quarter of 1997, and an increase in sales of
compact disc libraries which have higher profit margins.
Selling and commission costs increased $54,000 or 10%, and as a
percentage of revenues increased from 33% to 35%. The increase in
expenses is primarily due to higher selling costs for products sold
under barter arrangements, promotional costs of new products and
sales promotions and increases in sales salaries due to changes in
sales force and commission plans. Commissions on international sales
accounted for 35% of selling and commission costs.
General and administrative costs decreased $35,000 and is primarily
due to a one time provision for sales taxes in the first quarter of 1996.
Depreciation decreased $6,000 primarily due to the sale of the
Ultimate Digital Studio production equipment in June 1997 and offset
by increases in computer hardware and software depreciation as a
result of purchases in December 1996.
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
10. Material Contracts: None.
27.1 Financial Data Schedule
(b) Reports on Form 8-K No reports on Form 8-K were filed by the
Company during the three month period ending December 31, 1997.
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 11, 1998
TM CENTURY, INC.
BY:/s/Roger A. Holeman
Roger A. Holeman
Chief Financial Officer
(Principal Accounting Officer)
BY:/s/Neil W. Sargent
Neil W. Sargent
Chief Executive Officer
(Principal Executive Officer)