U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1996
Commission file No. 0-13167
TM CENTURY, INC.
(Name of small business issuer 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)247-8850
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
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___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB
X
The issuer's revenue for its most recent fiscal year was
$6.969,219.
The aggregate market value of the voting stock held by non-
affiliates of the issuer on December 18, 1996, based upon the
average bid and asked prices of such stock on that date was
$510,000. The number of issuer's shares of Common Stock outstanding
as of December 18, 1996 was 2,537,193.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Company's 1997 Information
Statement is incorporated by reference in Part III.
Transitional Small Business Disclosure Format (check one): Yes___
No X
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
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, computer software used in music scheduling,
specialized computer equipment and software, and compact disc
players for radio stations.
The Company (formerly TM Communications, Inc.) was incorporated as
a Delaware corporation on May 2, 1984. In October 1990, the
Company changed its name from TM Communications, Inc. to TM
Century, Inc. following an August 1990 business combination
transaction with Century 21 Programming, Inc. The Company's
principal offices are located at 2002 Academy, Dallas, Texas
75234, and its telephone number is (972) 247-8850..
<PAGE>
Products
The Company creates, produces, markets, and distributes goods and
services for radio stations worldwide. Products include special
compilations of popular music on compact discs, instrumental
backgrounds for commercials and sound effects (collectively, _music
libraries_), station identification jingles, computer software used
in music scheduling, specialized computer equipment and software,
and compact disc players for radio stations.
Music libraries are sold on compact disc and include original
recordings of background music and sound effects written and
produced by the Company as sources of production material for radio
stations (_production libraries_). Production libraries are
available in a variety of musical styles and are used by radio
stations as background music for contests, promotions and
commercials. Music libraries also include compilations of
copyrighted music of original artists sold in eight different music
formats ("compact disc libraries"): Adult Contemporary, Easy
Listening, Classic Hits, Country, Classic Rock, Contemporary Hit
Radio, Urban, and Seventies Rock. The Company also provides a
weekly service of new record releases on compact disc.
All products on compact disc are mastered by the Company on compact
disc or PCM-1630 digital audio tape and replicated by several
available suppliers of compact discs. The Company presently
purchases compact discs and replication services from one
significant supplier, Sony Disc Corporation, which the Company
believes provides high quality discs. Management believes that the
loss of this source of supply would not cause any significant
interruption of the Company's operations, as there are several
alternative sources of compact discs and replication services
available.
Due to the wide variety of music services in multiple formats
offered by the Company on compact disc, a significant number of
compact discs are maintained on the premises. The level of disc
inventory is required to satisfy the shipping requirements of
current sales.
<PAGE>
Radio jingles provide short identity songs for radio stations that
promote name recognition for the station. These are written and
produced in the Company's studios and are provided to customers on
analog or digital audio tape or compact disc.
Computer software is sold by the Company for use by customers in
programming music play sequences and for automated music playback
systems consisting of specialized software, computer equipment and
compact disc players sold by the Company. Management believes
these systems improve the quality and consistency of the customers'
programming and enable customers to operate more efficiently by
reducing the number of personnel required to operate a radio
station. Certain compact disc equipment is purchased by the
Company under dealer arrangements from outside manufacturers and
modified for use with software programs marketed by the Company.
During January 1996, the Company's agreement with its previous
supplier of computer software used by customers in programming
music play sequences and for automated music playback systems was
terminated and a new agreement was negotiated with another
supplier. Management does not believe that the loss of any of its
sources of supply of computer hardware, software or compact disc
equipment would cause a significant interruption in the Company's
ability to make timely delivery of products to its customers or
cause a significant interruption of the Company's operations, as
there are several alternative sources available for each of these
items.
In May 1995, the Company discontinued production and marketing of
radio station commercials for television broadcast. This product
had been operating at a net loss for the previous three fiscal
years.
Set forth in the following tables are the Company's gross revenues
(in thousands) by significant product category for the years ended
September 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands) Period Ended
1996 1995 1994
<S> <C> <C> <C>
Broadcast Services
Music Libraries $4,673 $5,453 $6,159
Radio Jingles
1,092 968 1,067
Software and Compact
Disc Equipment 744 1,836 1,768
Other (a) 460 405 466
Total $6,969 $8,662 $9,460
</TABLE>
(a) Includes, for 1994 and a portion of 1995, commercials for
television broadcast.
<PAGE>
Marketing and Distribution
The Company currently sells and supplies its products and services
to customers in the United States and Canada through its own sales
staff in Dallas, Texas. Domestic sales are made through telephone
solicitation, advertising in trade magazines, and trade convention
displays. The Company also sells its products through distribution
arrangements with independent sales agents in the United Kingdom,
Europe, Australia, Japan, the Commonwealth of Independent States
(C.I.S.), Canada and elsewhere. Other than fees paid to
independent sales agents, no other significant costs are incurred
by the Company in conjunction with it's international sales
activities. Products are shipped from the Company's headquarters or
from the Company's supplier of compact disc replication services
via mail and express delivery services.
Sales of music libraries are made primarily on an individual order
basis or under contractual agreements for the sale of production
libraries. Such agreements generally call for equal monthly
payments by the customer over terms of up to 48 months. Weekly
music services are sold under contracts of one month to three-year
terms. The Company's other products are generally sold pursuant to
individual orders.
Customers
The Company's business is primarily dependent upon the radio
broadcasting industry. The Company's revenues are generated from
sales to customers in the United States and Canada, and from sales
through agents of the Company in the United Kingdom, Europe,
Australia, Japan, the C.I.S. and elsewhere. According to industry
publications, approximately 12,000 radio stations were licensed by
the Federal Communications Commission (FCC) for public broadcasting
in the United States. Management believes that approximately 9,000
stations in the U.S. may require products and services of the type
provided by the Company and that more than half of such stations
have purchased the Company's product in recent years. No single
customer has accounted for more than 10% of the Company's revenues
in any of the past three years. Gross revenues from foreign sales
totaled $2,300,000, $2,700,000, and $3,100,000 for the years ended
1996, 1995 and 1994, respectively.
<PAGE>
Competition
The Company competes with several other music syndicators that
provide either music libraries or radio jingle packages to the
broadcast industry, and certain companies which provide music
scheduling software or specialized computer software and equipment
and compact disc players for radio stations, however, management
believes the Company offers a broader array of broadcast products
and services than any of its competitors. Competing radio program
syndicators generally provide either jingles, production libraries,
or music on tape, records, compact disc, or via satellite.
Management believes the Company is one of the leading suppliers of
radio music services and the largest supplier of radio music
services on compact disc. The Company competes with several hundred
jingle producers; however, management believes only a few
specialize in radio station identification materials. Management
believes the Company is the largest supplier of radio station
identification jingles in the industry. Several dozen providers of
production libraries compete with the Company, but most provide
song-length instrumentals and only a few specialize in commercial
length music. Management believes it is one of two major suppliers
of production libraries to the radio industry. The Company's
specialized computer equipment and software competes with numerous
companies which offer similar products. While certain competing
products may be considered to be equal in price or technical
performance, management believes the Company also competes
effectively on the basis of quality and creativity within each
product line.
Seasonality
The Company is not subject to strong seasonal fluctuations.
However, quarterly results are affected by the introduction of new
products and timing of customer orders. Because profit margins on
the Company's many products vary, the results for any quarter are
not necessarily indicative of the results that may be achieved for
a full fiscal year.
Trademarks and Copyrights
The Company markets products under various names and trademarks
which management believes provide the Company's products with
international industry recognition. The Company holds numerous
registered copyrights on sound recordings of original music and
radio station jingles. Management believes its copyrights have
significant value, as the Company derives a significant portion of
its income from the licensed use of its sound recordings.
Employees
As of December 1, 1996, the Company had approximately 50 full-time
employees. The Company also contracts with other personnel and
subcontractors who provide creative talent for various projects on
an as-needed basis.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal operations are conducted from a leased
46,645 square foot office and production facility located at 2002
Academy, Dallas, Texas. The facility is comprised of sales and
administrative offices and recording studios. The facility is
leased from unaffiliated third parties under a lease that expires
on July 15, 2003. The lease may be extended at the Company's
option for two additional five-year terms, subject to rental
adjustments based on a formula related to fair market rental.
Management believes that its existing facility and additional space
currently under lease are sufficient for its existing activities
and potential growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings that
in management's opinion could result in a material adverse effect
on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended
September 30, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is thinly traded in the over-the-counter
market under the symbol _TMCI_. The following table sets forth,
for the periods shown, the range of the high and low bid quotations
for the Company's common stock in the over-the-counter market as
reported by NASDAQ. Quotations are inter-dealer quotations,
without retail markups, markdowns or commissions, and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Bid
High Low
<S> <C> <C>
Fiscal
1996:
1st Quarter $1.63 $.69
2nd Quarter 1.22 .56
3rd Quarter 1.22 1.16
4th Quarter 1.22 .72
Fiscal
1995:
1st Quarter $ 1.88 $ 1.13
2nd Quarter 1.75 1.00
3rd Quarter 1.38 .63
4th Quarter 1.38 .88
</TABLE>
<PAGE>
As of December 15, 1996 the Company had approximately 250 record
owners and 700 beneficial owners of its common stock. The Company
has not paid dividends on the common stock and does not anticipate
paying dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward-Looking Statements
This Annual 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 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. There may be other risks and
uncertainties that management is not able to predict.
<PAGE>
When used in this Annual 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-year terms. 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 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 fiscal 1996, the Company made $73,000 in capital
expenditures for the purchase of property and equipment which
compares to capital expenditures of $247,000 in 1995 and $285,000
in 1994. Capital expenditures in 1996 were primarily associated
with upgrades of office equipment. Product development costs of
$146,000 were incurred during fiscal 1996 for software development,
new music libraries, and music library updates, which compares to
product development expenditures of $288,000 in 1995 and $234,000
in 1994. Funds for operating needs, new product development, and
capital expenditures for the year ended September 30, 1996 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. In May 1996 the Company
entered into a lease agreement for the financing of an upgrade of
its computer hardware and software systems, which is anticipated to
be completed by the end of fiscal year 1997. The cost of the
project is estimated at $550,000, of which approximately $400,000
has been financed as of September 30, 1996. 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 commenced in June 1996 in the amount of
approximately $13,000. The required monthly payments will increase
with the amount financed. 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.
<PAGE>
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 was renewed effective February 28, 1996. No
borrowings were drawn under the Line of Credit during the fiscal
1996 and no long-term borrowing is anticipated in the foreseeable
future at the current levels of business operation.
During fiscal 1996, the Company received the approximately $130,000
that was recorded as federal income taxes receivable as of
September 30, 1995.
Current customer deposits decreased to $72,000 as of September 30,
1996, from $152,000 as of September 30, 1995 for deposits received
from customers on products ordered. The balance in customer
deposits is dependent upon the timing of customer orders for
jingles and specialized computer equipment.
The Company has net operating loss carryforwards of $800,000
available to offset future taxable income expiring in 2008 through
2009. A valuation allowance of $216,000 has been provided to
reduce the total deferred tax asset to approximately $172,000. In
order to fully realize the recorded tax asset of $172,000, the
Company will need to generate approximately $360,000 in taxable
income prior to expiration of the loss carryforwards. Although
realization is not assured, management has taken certain steps
intended to achieve a return to profitable operations in future
periods. These steps include certain corporate restructuring and
cost reduction measures which have reduced expenses to manageable
levels, the discontinuation of unprofitable product lines during
the last fiscal year, new approaches to marketing our current
products, and the introduction of new products. 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.
<PAGE>
On December 19, 1996, the Board of Directors by resolution
authorized the Company to purchase up to 50,000 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. Such purchases are expected to be
funded by cash reserves of the Company.
Results of Continuing Operations
Fiscal 1996 Compared to Fiscal 1995
Revenues decreased approximately 20% to $7.0 million in 1996 from
$8.7 million in 1995. This overall decline was due primarily to a
decrease in music library sales prices and volume and a decrease in
specialized computer equipment and software sales. The decline in
music library sales of approximately $780,000, or 14%, resulted
primarily from a decrease in sales of compact disc libraries and
production libraries, partially offset by an increase in weekly
music service revenues. Revenues from specialized computer
equipment and software sales decreased approximately $1,090,000, or
59%, over the prior year. Revenues from radio jingles remained
consistent. Jingles revenue increased approximately $124,000, or
13%, due primarily to increases in publishers royalties received
from the broadcast of the Company's jingles.
As the compact disc music library market matures, 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. 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. International markets have not reached maturity
for compact disc technology. Sales of weekly music services
increased approximately $66,000, or 4%, in international markets
during fiscal 1996, partially offsetting the decrease in music
library revenues. Management believes that revenues from weekly
music services will continue to grow with the introduction of new
music formats. Sales growth is subject to customer acceptance of
the new products.
Music library revenues may also be adversely affected as radio
stations convert to new music delivery systems technology offered
by competitors, such as computer hard drives which store music in a
digital compression form. While digital compression does not
provide the same quality of music as compact disc technology, an
increasing number of radio stations are converting to or adding
systems using digital compression technology. Although music
libraries on compact disc can be transferred to hard drive systems,
some of the Company's competitors are offering hard drives with
pre-loaded music libraries. The Company expects to begin providing
music libraries on hard drive to both equipment manufacturers and
directly to end customers in fiscal 1997.
<PAGE>
In 1995 the Company began recording libraries in a hard drive
format that can be easily converted into the most popular
compression schemes.
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.
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 CoSTAR_ system is a collection of integrated
software applications that allows a broadcaster to digitally record
and edit material for distribution within a facility on a local
area network (LAN) or to remote sites via a wide area network
(WAN). The growing trend to multi-station facilities and the
expansion of broadcast groups allow broadcasters to take advantage
of the cost savings of consolidation and the marketing
opportunities of multimedia technologies. 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. has been delayed. The CoSTAR_ system is not
expected to impact revenues in the foreseeable future.
Revenues from specialized computer equipment sales decreased
approximately $780,000 due primarily to revisions in software
necessary to satisfy market requirements, the restructuring of the
marketing staff in the first fiscal quarter 1996, and training
time devoted by the marketing staff to the CoSTAR_ audio storage
and retrieval system. The Company has completed the necessary
revisions in software, and is now re-directing its efforts to its
core specialized computer equipment and rebuilding the marketing
staff. Software sales decreased approximately $400,000. The
decline in software sales was due the termination of the Company's
agreement with it's supplier of computer software in January, 1996.
The Company expects that it will be able to rebuild its customer
base for its software used in programming music sequences and for
automated music playback systems over the next five years.
Commissions as a percentage of revenue increased from approximately
19% of revenue in 1995 to approximately 21% of revenue in 1996.
Increases were primarily due to increases in new contracts for
weekly music services.
<PAGE>
Production, programming and technical costs decreased approximately
27% to approximately $2.9 million, or 42% of revenue in 1996 from
$4.0 million, or 46% of revenue in 1995. This decrease is due to
the restructuring and cost reduction measures which were initiated
in the second quarter of fiscal 1995 and the discontinuation of
unprofitable products.
General and administrative costs decreased approximately $275,000,
or 10%, as a result of the restructuring and cost reduction
measures mentioned above, decreased compensation, legal and other
professional fees associated with the resignation of a director and
officer of the Company in November, 1994, of approximately
$100,000 . The decrease was partially offset by a settlement of
approximately $60,000 with a long distance carrier relating to long
distance calls fraudulently charged to the Company's toll free
numbers. The Company has discontinued its toll free telephone
numbers and has experienced no significant disruption in
operations.
Selling costs declined approximately $196,000, or 35%, due
primarily to decreases in advertising and promotion expenditures.
Depreciation expense increased approximately $40,000, or 20%, as a
result of computer equipment and software acquired under a capital
lease during fiscal 1996.
During the fourth quarter of 1996, the Company recorded a provision
of approximately $230,000 to reduce the carrying value of its
production libraries to the lower of cost or market. The amount
retained in inventory was reduced to amounts supported by current
sales levels.
Fiscal 1995 Compared to Fiscal 1994
Revenues decreased approximately 9% to $8.7 million in 1995 from
$9.5 million in 1994. This overall decline was due primarily to a
decrease in music library sales volume. The decline in music
library sales of approximately $700,000, or 11%, resulted primarily
from a decrease in sales of production libraries and compact disc
libraries, partially offset by an increase in weekly music service
revenues. Revenues from specialized computer equipment and
software sales increased approximately $68,000, or 4%, over the
prior year. Revenues from radio jingles remained consistent.
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.
Revenues from specialized computer equipment and software sales
increased due to the introduction of new versions of the Company's
automated playback equipment system in fiscal 1995. Revenues in
this category were depressed in fiscal 1994 as the introduction of
the new playback system was postponed due to delays in receipt of
components from manufacturers and the development of certain
enhancements to the system.
<PAGE>
Production, programming and technical costs increased approximately
$88,000, or 2%, due to (1) an increase in production costs related
to the newest version of the Company's automated music playback
system, (2) an increase in technical salaries costs for support of
automated music playback systems, and, (3) costs related to new
weekly compact disc music services for international markets which
was introduced in July, 1994 as well as increased volume for all
weekly music services.
General and administrative costs increased approximately $288,000,
or 12%, as a result of (1) increased occupancy and facilities
costs, of approximately $80,000 (2) increased compensation, legal
and other professional fees of approximately $100,000 associated
with the resignation of a director and officer of the Company in
November, 1994, and, (3) relocation costs for executive and sales
employees.
Selling costs declined approximately $216,000, or 28%, due
primarily to decreases in advertising and promotion expenditures.
In May 1995, the Company discontinued production and marketing of
radio station commercials for television broadcast. This product
had been operating a loss for the previous three fiscal years.
Operating losses for this product were $86,000, $143,000, and
$123,000 on net revenues of $54,000, $233,000, and $104,000 in
1995, 1994, 1993, respectively. Other income (expense) includes a
loss of approximately $26,000 on the sale of certain television
production equipment.
During the fourth quarter 1995, the Company recorded a provision of
approximately $360,000 to write-off substantially all product
development costs associated with its audio visual production
library. This production library, targeted to non radio customers,
had been operating at a loss for the past three fiscal years.
Operating losses for this product were $30,000, $48,000, and
$112,000 on net revenues of $55,000, $37,000, and $0 in 1995, 1994,
and 1993, respectively.
Accounting Matters
The Financial Accounting Standards Board (_FASB_) periodically
issues accounting standards which may affect the financial
accounting or disclosures of the Company. There are no accounting
standards that have been issued, but not yet adopted by the
Company, which would have a material effect on the financial
position or results of operations of the Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and notes thereto, together with the
report thereon of Deloitte & Touche LLP dated December 11, 1996,
included elsewhere in this report are incorporated by reference in
answer to this Item 7.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this item is contained under the
heading "Information Concerning the Directors and Executive
Officers" in the Company's 1997 Information Statement and is
incorporated herein by reference pursuant to General Instruction
E(3).
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is contained under the
heading "Executive Compensation" in the Company's 1997 Information
Statement and is incorporated herein by reference pursuant to
General Instruction E(3).
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is contained under the
heading "Voting Securities and Principal Stockholders" in the
Company's 1997 Information Statement and is incorporated herein by
reference pursuant to General Instruction E(3).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the
heading "Executive Compensation" in the Company's 1997 Information
Statement and is incorporated herein by reference pursuant to
General Instruction E(3).
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 (a) Certificate of Incorporation and By-Laws (1)
(b) Certificate of Merger: Video Image Inc. and TM
Communications, Inc. (1)
(c) Certificate of Merger: TM Communications, Inc. and
Century 21 Programming, Inc. (Exhibit 3(c)) (2)
(d) Certificate of Amendment of Certificate of Incorporation
of TM Century, Inc. effective March 27, 1992. (Exhibit 1) (3)
(March 31, 1992)
10 Material Contracts:
(a) Loan and Security Agreement and Term Note among Merrill
Lynch Business Financial Services and TM Communications,Inc.
and subsidiaries dated August 31, 1990 (Exhibit 10(q)) (2)
(b) Agreement for Sale of Stock, Secured Note, Security
Agreement, Pledge Agreement, and Guaranty dated January 1,
1991, from TF Productions to TM Century, Inc. (Exhibits 1-3)
(3) (December 30, 1990)
<PAGE>
(c) *Long Term Performance Incentive Plan of TM Century, Inc.
dated December 3, 1991. (Exhibit 10(bb))(4)
(d) Amendment No. 1 to Term Note and Amendment No. 2 to Loan and
Security Agreement dated February 26, 1992 among Merrill
Lynch Business Financial Services Inc. and TM Century, Inc.
and subsidiaries. (Exhibit 2) (3) (March 31, 1992)
(e) WCMA Line of Credit Extension Letter Agreement by and
between Merrill Lynch Business Financial Services Inc. and
TM Century Inc. dated April 21, 1994. (Exhibit 2) (3) (March
31, 1994)
(f) WMCA Line of Credit Extension Letter Agreement by and
between Merrill Lynch Business Financial Services Inc. and
TM Century,Inc. dated January 16, 1995. (Exhibit 10(f)) (8)
(g) Agreement dated November 30, 1994 between TM Century, Inc.
and P. Craig Turner regarding Mr. Turner's resignation as
President and Chief Executive Officer and director of the
Registrant. (Exhibit 10.1) (6)
(h) *TM Century, Inc. Bonus Plan for Executive Management dated
October 1, 1992 (Exhibit 10(j)) (5)
(i) Lease Agreement, dated as of April 23, 1993 by and between
NationsBank of Texas, N.A., Trustee and TM Century, Inc.
(Exhibit 1) (3) (March 31, 1993)
(j) Purchase and Sale Agreement by and between Merriman
Patrick Turner Productions, Inc. and TM Century, Inc. dated
March 29, 1994. (Exhibit 1) (3) (March 31, 1994)
(k) First Amendment of Lease, dated as of August 22, 1994 by and
between NationsBank of Texas, N.A., Trustee and TM Century,
Inc. (Exhibit 10(m)) (7)
(l) *Consulting Agreement between TM Century, Inc. and Carol M.
Peek dated January 27, 1995. (Exhibit 1) (3) (December 31,
1994)
(m) *Employment Agreement between TM Century, Inc. and Neil W.
Sargent dated March 22, 1995. (Exhibit 1) (3) (March 31,
1995)
(n) Distribution agreement between TM Century, Inc. and Radio
Express, Inc. dated November 1, 1992. (Exhibit (o)) (8)
(o) Software Remarketing Agreement between Electronic Data
Systems Corporation and TM Century, Inc. dated February 9,
1996. (Exhibit 1) (3) (December 31, 1995)
(p) WMCA Line of Credit Extension Letter Agreement by and
between Merrill Lynch Business Financial Services Inc. and
TM Century, Inc. dated March 18, 1996. (Exhibit 1) (3)
(March 31, 1996)
(q) Letter Amendment Agreement and Letter of Credit Supplement
Agreement to Loan and Security Agreement and Term Note by
and between Merrill Lynch Business Financial Services Inc.
and TM Century, Inc. dated April 22, 1996 and April 18,
1996; and a Letter of Credit Agreement by and between
Merrill Lynch Business Financial Services Inc., The Northern
Trust Company, and TM Century, Inc. dated April 30, 1996.
(Exhibit 10(a)) (3)(June 30, 1996)
(r) Master Lease Agreement by and between USL Capital
Corporation and TM Century, Inc. dated May 2, 1996.
(Exhibit 10(b)) (3)(June 30, 1996)
(s) *Employment Agreement between TM Century, Inc. and R. David
Graupner dated May 6, 1996. (Exhibit 10(c)) (3) (June 30,
1996)
(t) *Consulting Agreement between TM Century, Inc. and Marjorie
L. McIntyre dated July 5, 1996.
<PAGE>
Notes to Exhibits:
(1) Incorporated by reference to the similarly-numbered
exhibit to the Registration Statement on Form S-18 (No. 2-
93588-FW), filed October 2, 1984, as amended.
(2) Incorporated by reference to the indicated exhibit to the
Annual Report on Form 10-K for the fiscal year ended September
30, 1990, as amended.
(3) Incorporated by reference to the indicated exhibit to the
Quarterly Report on Form 10-Q for the indicated period, of the
Registrant.
(4) Incorporated by reference to the indicated exhibit to the
Annual Report on Form 10-K for the fiscal year ended September
30, 1991.
(5) Incorporated by reference to the indicated exhibit to the
Current Report on Form 10-K for the fiscal year ended
September 30, 1992, of the Registrant.
(6) Incorporated by reference to the indicated exhibit to the
Current Report on Form 8-K dated November 30, 1994, of the
Registrant.
(7) Incorporated by reference to the indicated exhibit to the
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1994.
(8) Incorporated by reference to the indicated exhibit to the
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1995.
* The documents filed or incorporated by reference as Exhibits
10(c), (h), (l), (m) (s) and (t) hereto constitute management
contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended September 30, 1996.
<PAGE>
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: December 27, 1996
TM CENTURY, INC.
BY:/s/Janette Williams
Janette Williams
Chief Accounting Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
DATE:
/s/Janette Williams December 27,
JANETTE WILLIAMS, Chief Accounting Officer 1996
(Principal financial and accounting officer)
/s/Neil W. Sargent December 27, 1996
NEIL W. SARGENT, President and Chief Executive Officer
(Principal executive officer)
/s/Marjorie L. McIntyre December 27, 1996
MARJORIE L. MCINTYRE, Chairman of the Board of Directors
/s/Ann Armstrong Bellows December 27, 1996
ANN ARMSTRONG BELLOWS, Director
/s/Donald E. Latin December 27, 1996
DONALD E. LATIN, Director
<PAGE>
TM CENTURY, INC.
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Independent Auditors' Report 15
Balance Sheets, September 30, 1996 and 1995 16
Statements of Operations for the Years Ended
September 30, 1996, 1995 and 1994 17
Statements of Stockholders' Equity for the Years Ended
September 30, 1996, 1995 and 1994 18
Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994 19
Notes to Financial Statements 20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of TM Century, Inc.:
We have audited the balance sheets of TM Century, Inc. (the
_Company_), as of September 30, 1996 and 1995, and the related
statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
September 30, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
December 11, 1996
<PAGE>
<TABLE>
<CAPTION>
TM CENTURY, INC.
Balance Sheets
September 30, 1996, and 1995
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash $ 377,855 $ 245,812
Accounts and notes receivable less allowances
of $144,000 and $112,000, 829,848 915,798
respectively
Inventories, net 1,220,454 1,654,197
Federal income taxes receivable - 132,220
Deferred federal income taxes 171,877 166,063
Prepaid expenses 51,573 22,976
TOTAL CURRENT ASSETS 2,651,607 3,137,066
PROPERTY AND EQUIPMENT 2,298,086 1,878,452
Less accumulated depreciation (1,224,005) (1,016,452)
NET PROPERTY AND EQUIPMENT 1,074,081 862,000
INVENTORIES - NONCURRENT, net 351,016 587,217
OTHER ASSETS 15,388 16,388
TOTAL $4,092,092 $4,602,671
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $225,260 $205,082
Accrued expenses 123,619 201,456
Current portion of obligation under 121,303 -
capital lease
Deferred revenue 24,298 -
Customer deposits 71,568 151,502
TOTAL CURRENT LIABILITIES 566,048 558,040
OBLIGATION UNDER CAPITAL LEASE 246,555 -
CUSTOMER DEPOSITS 159,531 204,093
DEFERRED FEDERAL INCOME TAXES 43,747 75,510
TOTAL LIABILITIES 1,015,881 837,643
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
authorized
7,500,000 shares; 2,970,481 29,705 29,705
shares issued
Paid-in capital 2,275,272 2,275,272
Treasury stock - at cost, 433,288 (1,250,316) (1,250,316)
shares
Retained earnings 2,021,550 2,710,367
TOTAL STOCKHOLDERS' EQUITY 3,076,211 3,765,028
TOTAL $4,092,092 $4,602,671
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TM CENTURY, INC.
Statements of Operations
For the Years Ended September 30, 1996, 1995, and 1994
1996 1995 1994
<S> <C> <C> <C>
REVENUES $6,969,219 $8,662,271 $9,460,212
Less commissions 1,446,394 1,637,452 1,895,788
NET REVENUES 5,522,825 7,024,819 7,564,424
COSTS AND EXPENSES
Production, programming 2,948,599 4,022,727 3,934,759
and technical costs
General and 2,430,300 2,705,739 2,417,874
administrative
Selling 360,256 556,411 772,339
Depreciation 244,823 203,293 200,339
Reduction in carrying 229,580 360,000 -
value of inventories
TOTAL 6,213,558 7,848,170 7,325,311
OPERATING INCOME (LOSS) (690,733) (823,351) 239,113
OTHER INCOME (EXPENSE)
Interest income 12,856 14,857 15,649
Interest expense (8,138) - (720)
Other (37,115) (34,590) 8,266
TOTAL (32,397) (19,733) 23,195
INCOME (LOSS) BEFORE INCOME (723,130) (843,084) 262,308
TAXES
PROVISION (BENEFIT) FOR
INCOME TAXES
Current - (134,220) 53,738
Deferred (34,313) (121,686) 39,276
TOTAL (34,313) (255,906) 93,014
NET INCOME (LOSS) ($688,817) ($587,178) $ 169,294
NET INCOME (LOSS) PER COMMON ($0.27) ($0.23) $0.07
SHARE
WEIGHTED AVERAGE NUMBER OF
COMMON
SHARES OUTSTANDING 2,537,193 2,537,193 2,537,193
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TM CENTURY, INC.
Statements of Stockholders' Equity
For the Years Ended September 30, 1996, 1995 and 1994
Additional
Number of Paid-In Treasury Retained
Shares Amount Capital Stock Earnings
<S> <C> <C> <C> <C> <C>
Balance September 2,970,483 $29,705 $2,275,276 ($1,250,316) $3,128,251
30, 1993
Payment for (2) (3)
Fractional Shares
Net Income 169,294
Balance September 2,970,481 29,705 2,275,273 (1,250,316) 3,297,545
30, 1994
Payment for (1)
Fractional Shares
Net Loss (587,178)
Balance September 2,970,481 29,705 2,275,272 (1,250,316) 2,710,367
30, 1995
Net Loss (688,817)
Balance September 2,970,481 29,705 2,275,272 (1,250,316) 2,021,550
30, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TM CENTURY, INC.
Statements of Cash Flows
For the Years Ended September 30, 1996, 1995, and 1994
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (loss) ($688,817) ($587,178) $169,294
Adjustments to reconcile net
income
to net cash provided by
operations:
Depreciation 244,823 203,293 200,339
Amortization 391,519 502,682 457,338
Deferred income taxes (37,577) (116,920) 39,276
Provision for doubtful accounts 80,000 79,000 95,930
Gain on sale of U.S. - (7,639) -
Treasuries
Loss (gain) on disposition of 37,115 25,668 (8,266)
property and equipment
Reduction in carrying value of 229,580 360,000
inventories
Accretion of discounts - (215) (4,038)
Payments received on - 12,874 58,065
installment receivables
Changes in operating assets
and liabilities:
Accounts receivable 1,527 (367,632) 47,336
Inventories 48,844 (503,471) (305,485)
Prepaid expenses (28,597) 31,973 (22,793)
Accounts payable and accrued (57,659) 126,146 (221,472)
expenses
Federal income taxes 132,220 (32,626) 122,926
receivable/payable
Deferred revenue 24,298 (39,219) (29,704)
Customer deposits (124,496) 923 70,591
NET CASH PROVIDED BY OPERATING 252,780 (312,341) 669,337
ACTIVITIES
INVESTING ACTIVITIES:
(Decrease) increase in long-term - - (9,337)
liabilities
Decrease (increase) in other 1,000 (61) 10,160
assets
Purchases of property and (72,949) (247,035) (285,166)
equipment
Purchase of U.S. Treasuries - (292,361) -
Proceeds from sale of U.S. - 300,000 -
Treasuries
Principal payments received on 4,423 20,699 16,271
notes receivable
Principal payments received from - - 12,046
lease of property and equipment
Proceeds from sale of net assets - - 150,000
under lease
Proceeds from sale of property 5,080 30,000 31,857
and equipment
NET CASH USED IN INVESTING (62,446) (188,758) (74,169)
ACTIVITIES
FINANCING ACTIVITIES:
Fractional shares paid to - (1) (3)
stockholders
Principal payments on long-term (58,291) (50,000)
debt and capital lease
obligations
NET CASH USED IN FINANCING (58,291) (1) (50,003)
ACTIVITIES
INCREASE (DECREASE) IN CASH 132,043 (501,100) 545,165
CASH AT BEGINNING OF PERIOD 245,812 746,912 201,747
CASH AT END OF PERIOD $377,855 $245,812 $746,912
See Note 3 to financial statements for supplemental disclosures of
cash flow information.
</TABLE>
<PAGE>
TM CENTURY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
TM Century, Inc. (the _Company_) is primarily engaged in the
creation, production, marketing, and distribution of goods and
services for radio stations worldwide. Products include special
compilations of popular music on compact discs, sound effects,
station identification jingles, computer software used in music
scheduling, specialized computer equipment and software, and
compact disc players for radio stations.
Previous amounts have been restated to conform to the current year
presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Inventories
Inventories created by the Company or purchased for resale
are carried at the lower of cost or market, as follows:
Music libraries - The Company produces music compilations
and background music libraries which are provided to
radio stations under one to four year lease contracts or
under buyout arrangements. The costs to develop the
libraries are amortized on a straight-line basis over the
lesser of three to five years or the economic life of the
product. Current music update services are charged to
expense in the period in which incurred. The portion of
libraries expected to be amortized within one year is
included in current assets.
Identification Jingles - Jingles provide short identity
songs to radio stations in order to promote name
recognition. The costs to produce custom jingles are
expensed upon delivery of the product.
Software - The Company markets specialized computer
equipment to radio stations for automated music playback
systems. The capitalized software development costs
associated with this equipment are amortized on a
straight-line basis over three years.
Compact Disc Equipment - Equipment inventory purchased by
the Company under dealer arrangements is charged to cost
of sales under the specific identification method.
<PAGE>
Revenue Recognition
Revenues are recognized as follows:
Library Lease Contracts - Monthly upon delivery of the
product in accordance with the terms of the lease
contracts.
Library Buyouts - Upon delivery of the product.
Identification Jingles - Upon delivery of the product.
Music Scheduling Software - Monthly in accordance with
the terms of the lease contracts.
Compact Disc Equipment - Upon delivery of the product.
Property and Equipment
Expenditures for additions, renewals, and betterments are recorded
at cost. Expenditures for maintenance and repairs are charged to
expense as incurred. Property leased under capital leases is
included in property and equipment and amortized over the life of
the lease. Depreciation and amortization are computed on the
straight-line method based upon the estimated useful lives of the
assets or the applicable minimum lease term if shorter, as follows:
Office furniture and 5 to 7 years
equipment
Production equipment 7 to 10 years
Leasehold improvements 5 to 10 years
Statement of Financial Accounting Standards (_SFAS_) No. 121,
_Accounting for the Impairment of Long-Lived Assets and for Long-
lived Assets to be Disposed Of _, which is effective for fiscal
years beginning after December 15, 1995, requires that long-lived
assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not
be recoverable. SFAS No. 121 also requires that long-lived assets
and certain identifiable intangibles to be disposed of be reported
at the lower of carrying amount or fair value less cost to sell.
The Company will adopt SFAS No. 121 effective October 1, 1996, and
the impact of such adoption is expected to be insignificant to its
financial condition and results of operations.
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. Deferred income taxes
are provided, when applicable, for all significant temporary
differences by the liability method, whereby deferred tax assets
and liabilities are determined by the tax laws and statutory rates
in effect at the balance sheet date.
<PAGE>
Net Income (Loss) Per Share
Net income (loss) per common share is based on the weighted average
number of common shares outstanding and common stock equivalents,
if dilutive, outstanding during the periods.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of
certain assets, liabilities, revenues, and expenses. Actual
results may differ from such estimates.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures as of September 30, 1996:
Cash paid for interest $ 8,138
Noncash investing and financing activities:
Capital lease obligation incurred $426,149
4. INVENTORIES
Inventories consisted of the following at September 30, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
Current Long-Term Current Long-Term
S> <C> <C> <C> <C>
Music $ 97,574 $2,709,907 $ 303,168 $ 2,567,844
libraries
Compact discs 831,409 - 946,536
Software 43,512 47,014 424,724
348,315
Compact disc 247,959 - 357,479
equipment
Total cost 1,220,454 3,058,222 1,654,197 2,992,568
Accumulated
amortization (2,707,206) (2,405,351)
Inventories,net $1,220,454 $351,016 $1,654,197 $ 587,217
</TABLE>
<PAGE>
Amounts charged to expense for capitalized software costs were
$51,975, $52,345, $41,077 in 1996, 1995 and 1994, respectively.
During the fourth quarter of 1996, the Company recorded a provision
of $230,000 to reduce the carrying value of its music and compact
disc libraries to the lower of cost or market.The amount retained
in inventory was reduced to amounts supported by current sales
levels.
During the fourth quarter 1995, the Company recorded a provision of
$360,000 to write-down substantially all product development costs
associated with its audio visual music library. This library,
targeted to non radio customers, had been operating at a loss for
the past three fiscal years. Operating losses for this product
were $30,000, $48,000, and $112,000 on net revenues of $55,000,
$37,000, and $0 in 1995, 1994, and 1993, respectively.
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Office furniture $1,048,313 $ 666,388
and equipment
Production
equipment 885,335 867,448
Leasehold
improvements 364,438 344,666
Total $2,298,086 $1,878,452
</TABLE>
Property and equipment includes $426,000 in computer software and
equipment acquired under capital leases in fiscal 1996.
Amortization of the lease of approximately $47,000 is included in
depreciation expense for the year ended September 30, 1996.
6. LONG-TERM DEBT AND LEASE OBLIGATIONS
Effective February 28, 1996, the Company renewed its $300,000
revolving line of credit (the _Line of Credit_) for a one-year
term. Borrowings under the Line of Credit bear a fluctuating
interest rate of prime plus 1.5%, payable monthly and the Company
provides a negative pledge on all accounts receivable, contract
rights, and inventory of the Company. The Line of Credit, which
bears a commitment fee of .5% per annum, is renewable annually,
subject to the consent of both parties. No borrowings were drawn
under the Line of Credit during the fiscal year ended September 30,
1996. In conjunction with the Company's leasing arrangement
discussed below, the availability under the Line of Credit was
reduced to from $300,000 to $100,000.
In May 1996, the Company entered into a capital lease agreement for
the financing of the upgrade of its computer hardware and software
systems. The total cost of the project is estimated at $550,000
and is anticipated to be completed by the end of the next fiscal
year. Costs financed on the project were approximately $400,000 as
of September 30, 1996. 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.
<PAGE>
Future minimum lease payments under the lease as of September 30,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 155,204
1998 155,204
1999 90,536
Total minimum lease 400,944
payments
Less amount representing
interest (33,086)
Net present value of
minimum lease payments $ 367,858
</TABLE>
The Company paid $8,138, $720 and $19,435 of interest on notes
payable and long-term debt during 1996, 1995, and 1994,
respectively.
On November 1, 1990, the Company executed a financing lease
agreement for the sale of certain property and equipment to a
company owned by three former officers and directors of the Company
(the group). The lease was payable in eighty-four monthly
installments of $6,435 including interest at 11%, and granted the
group an option to purchase such property and equipment at the fair
market value at the end of the lease.
On March 29, 1994, the Company executed a Purchase and Sale
Agreement for the sale of the property and equipment previously
leased under the financing lease agreement. The financing lease
agreement was terminated by all parties upon payment to the Company
of $150,000 by the group on March 29, 1994. A loss on the sale of
$6,800 is included in the financial statements for the fiscal year
ended September 30, 1994.
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under operating leases with initial
lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 279,876
1998 279,876
1999 291,534
2000 326,508
2001 326,508
Thereafter 598,598
Future minimum
lease payments $2,102,900
</TABLE>
The Company leases its facilities under a ten-year lease which
began July 15, 1993. The lease may be renewed at the Company's
option for two additional five-year periods at an amount
approximating fair market value.
Rent expense under operating leases was $245,470, $226,851, and
$184,258 for 1996, 1995, and 1994, respectively.
Employment Agreements
Effective April 1995, the Company entered into a three-year
employment contract with an executive officer and director of the
Company which provides for a base annual salary of $180,000 and
eligibility to participate in the Company's Bonus Plan.
In September 1992, the Company entered into a three-year employment
contract effective July 7, 1992 with an executive officer and
director of the Company which provided for a base annual salary
(modified to $200,000 in October, 1993), compensation reviews, and
eligibility to participate in the Company's Bonus Plan. In
November 1994, the officer resigned as President, Chief Executive
Officer, and Director of the Company. In connection with his
resignation the Company paid this former officer $60,000 on
December 1, 1994 and $25,000 on December 1, 1995 in consideration
for his one-year limited non-compete agreement and general release.
The Company has consulting agreements with certain members a former
member of the Board of Directors. The compensation expensed was
$180,000, $160,000 and $120,000 in 1996, 1995 and 1994,
respectively. Aggregate commitments for future salaries under
these employment agreements is $405,000.
<PAGE>
9. INCOME TAXES
Differences between the statutory federal income tax rate and the
effective rate for the years ended September 30, 1996 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income tax provision at (35.0%) (35.0%) 35.0% ) 35.0
Effect of graduated tax 1.0 1.0 (1.0)
rates
Effect of carryback of net 5.3
operating losses
Operating losses with no 27.8
current tax benefit
Other 1.5 (1.7) 1.5
( 4.7%) (30.4%) 35.5%
</TABLE>
The Company has net operating loss carryforwards of $800,000
available to offset future taxable income expiring in 2008 through
2009. A valuation allowance of $216,000 has been provided to
reduce the total deferred tax asset to $172,000 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.
Additionally, in conjunction with the Alternative Minimum Tax
(_AMT_ ) rules, the Company has available AMT carryforwards for tax
purposes of approximately $23,000, which may be used indefinitely
to reduce regular federal income taxes.
<PAGE>
The components of the net deferred income tax asset at September
30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Bad debt $48,870 $34,560
Depreciable assets (42,250) (73,500)
Inventory 66,300 -
valuation
allowance
Net operating loss 272,970 123,000
carryforwards
Other (1,490) 6,493
Total deferred tax 344,400 90,553
asset
Valuation 216,270 -
allowance
Net deferred tax
asset $128,130 $90,553
</TABLE>
The Company made no income tax payments during fiscal 1996, 1995,
and 1994. Due to the Company's net operating loss position, no
income tax payments were necessary in fiscal 1996 and 1995. In
fiscal 1994, overpayments of tax from fiscal year 1993 were applied
to the period. The Company received $129,000, $10,000 and $73,000
of income tax refunds during 1996, 1995 and 1994, respectively.
10. ROYALTY AND SALES REPRESENTATION AGREEMENTS
In 1990, the Company acquired rights to sell a radio programming
software product for which royalties of 50-65% are payable by the
Company on sales as collected. Royalties under this agreement
totaled $72,132, $313,210, and $308,429 in 1996, 1995 and 1994,
respectively. This agreement was terminated in January, 1996.
The Company has an agreement with a production company whereby the
production company is entitled to a 50% royalty on sales of a
production library which it developed for the Company. Royalties
under this agreement totaled $26,000, $51,026, and $131,117 in
1996, 1995, and 1994, respectively.
The Company has certain distribution arrangements with independent
sales agents in the United Kingdom, Europe, Australia, Japan, the
Commonwealth of Independent States (C.I.S.), Canada and elsewhere.
Fees included in commission expense under these arrangements were
$989,000, $1,034,000 and $1,299,000 in 1996, 1995, and 1994,
respectively.
<PAGE>
11. STOCKHOLDERS' EQUITY
Stock Options
On December 3, 1991, the Board of Directors approved a Long Term
Incentive Plan (the _Plan_) which provides for grants of Incentive
Stock Options to selected employees and for grants of Nonqualified
Stock Options to any persons who in the opinion of the Board of
Directors perform significant services on behalf of the Company.
Each member of the Compensation Committee who is not an employee or
full-time consultant of the Company is automatically granted in
December of each year, commencing in 1991, for five years (but only
for so long as he or she remains a member of the Compensation
Committee), a Nonqualified Stock Option for 2,500 shares. The
maximum number of shares which may be issued pursuant to the
exercise of options under the Plan was 187,500 shares. Effective
October 28, 1993, the Board of Directors approved an amendment to
the Plan which increased the total number of shares which may be
issued to 250,000 shares of common stock.
The option price of Incentive Stock Options is not less than the
fair market value of the common stock at the date of grant. All
outstanding Incentive Stock Options vest over a period of five
years from the date of grant.
The option price of outstanding Nonqualified Stock Options is $1.20
per share. All outstanding Nonqualified Stock Options are 20%
vested upon grant, 50% vested after year one, and 100% vested after
two years.
<PAGE>
SFAS No. 123, _Accounting for Stock-Based Compensation_, which is
effective for fiscal years beginning after December 15, 1995,
requires that an employer's financial statements include certain
disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. Management
expects to continue to measure compensation costs using APB Opinion
No. 25, _Accounting for Stock Issued to Employees_, and will
therefore include pro forma disclosures in the notes to the
financial statements for all awards granted after December 31,
1994. The Company will disclose the proforma net income and pro
forma earnings per share as if the fair value based accounting
method in SFAS No. 123 had been used to account for stock-based
compensation cost in future financial statement presentations.
Option information for the fiscal year ended September 30, 1996:
<TABLE>
<CAPTION>
Option Price Number of Shares
per share 1996 1995
<S> <C> <C> <C>
Options
outstanding:
Incentive $1.0625 - 210,000 190,000
$2.50
Nonqualified $1.20 25,000 20,000
Options
exercisable:
Incentive $1.0625 - 84,375 65,000
$2.50
Nonqualified $1.20 18,500 13,500
Options granted during the year 55,000 125,000
Options exercised during the year - -
</TABLE>
CONSULTING AGREEMENT
AGREEMENT made this 5th day of July, 1996, between TM Century,
Inc., a Delaware corporation (_TM Century_), and Marjorie L.
McIntyre (_Consultant_).
Preliminary Statement
Consultant has, for some years, been a consultant and general
advisor to TM Century, and
TM Century desires to retain Consultant's experience, abilities in
the business of TM Century, and TM Century has offered to engage
Consultant to render consultative and advisory services in respect
of TM Century, and
Consultant desires to accept such engagement, upon the terms and
conditions set forth below.
In consideration of the premises and the mutual covenants herein
contained, TM Century and Consultant hereby agree as follows:
1. Term and Duties. TM Century hereby employs Consultant for a
period of thirty-six (36) months, beginning the date hereof, as a
general advisor and consultant to management in all matters
pertaining to the business of TM Century and to render all of the
services relevant thereto, and such advertising, promotional and
administrative services as TM Century may reasonable request.
Consultant shall serve as a member of the Board of Directors, if
elected, including service as Chairman of the Board of Directors,
if elected. Consultant shall report to and be responsible only to
the Board of Directors of TM Century and its executive officers.
Consultant shall render such services as are requested of her by TM
Century but shall not be obligated to spend more than 20 hours in
any one week for such services or more than 60 hours in any one
month for such services. Such services shall be rendered in
Dallas, Dallas County, Texas, unless agreed on otherwise.
2. Compensation. For her consulting services to be rendered by
Consultant to TM Century under this Agreement, Consultant shall be
compensated by TM Century during the term of this Agreement by the
payment of (1) the sum of $10,000 per month to be payable in
twenty-four (24) equal installments, in accordance with the
Company's customary payroll procedures. (2) by TM Century
providing consultant with an automobile allowance of $335 per
month, and reimbursing her gasoline expenses and insurance for
same. (3) reimbursement of reasonable expenses incurred by
consultant in the performance of her duties, and (4) by TM Century
providing consultant with health insurance equivalent to health
insurance provided to employees of TM Century.
3. Conflict of Interest. During the term of this Agreement,
Consultant shall not have any other corporate affiliation without
the approval of the Board of Directors of TM Century and shall not,
directly or indirectly, engage in the production, manufacture, or
distribution of any product similar to that produced, manufactured,
or sold by TM Century or any of its subsidiaries, neither for her
own account or for any person, firm, or corporation whatsoever
other than TM Century or its subsidiaries, or otherwise compete
with the company or its subsidiaries.
<PAGE>
4. Trade Secrets. Consultant acknowledges that prior to her
association with TM Century, she had no knowledge of the formulas,
trade secrets, processes, or method of production or manufacture
utilized by TM Century and that such information is of a
confidential and secret character and of great value to TM Century.
Consultant agrees not to divulge to anyone other than the proper
officers of TM Century, either during or after termination of her
employment hereunder, any information acquired by her concerning
such processes, formulas, or methods of manufacturing or production
or other trade secrets of TM Century.
5. Covenant Not To Compete. During the term of this Contract,
Consultant shall not, directly or indirectly, own, manage, operate,
join, control or participate in or be connected with any business
(either as owner, principal, shareholder, agent, employee, servant,
or otherwise) which shall (i) compete with any business conducted
by TM Century of the type and nature as shall be conducted by TM
Century during the term hereof as described herein and (ii) be
conducted within the State of Texas (_Covenant Not to Compete_).
For purposes of the Covenant Not to Compete, the term _TM Century_
shall include any subsidiary or affiliate of TM Century.
Consultant understands and agrees that a breach or threatened
breach of the Covenant Not to Compete cannot be reasonably or
adequately compensated in damages and that such breach will cause
TM Century irreparable loss or damage. Nothing herein shall
prevent TM Century from pursuing any remedies available at law or
in equity for such breach or threatened breach. This Covenant Not
to Compete as well as the obligations of Consultant hereunder are
not depended upon, but are mutually independent from any other
covenant or obligation herein. Consultant shall be paid the sum of
$10,000 per month to be payable on or about the last day of each
month during the term of this Agreement including the extended
period.
6. Waiver , Modification, or Cancellation. Any waiver,
alternation or modification of any of the provisions of this
Agreement, or its cancellation or replacement, shall not be valid
unless in writing and signed by the parties.
7. Assignment. The rights and obligations of TM Century under
this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of TM Century if the company shall
transfer all or substantially all of its assets, property, and
business to another corporation.
8. Construction. The validity of this Agreement shall be governed
by the laws of the State of Texas, and this Agreement shall be
construed and enforced in accordance with the laws of the State of
Texas.
9. Entire Agreement. This Agreement supersedes all agreements
previously made between the parties relating to is subject matter.
There are no other understandings or agreements.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the day and year first above written.
TM CENTURY, INC.
________________________________
__________________________________
NEIL W. SARGENT MARJORIE L. McINTYRE
PRESIDENT/CEO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENTS OF OPERATIONS ON THE COMPANY'S FORM 10-KSB
FOR THE YEAR ENDING SEPTEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 377,855
<SECURITIES> 0
<RECEIVABLES> 973,848
<ALLOWANCES> 144,000
<INVENTORY> 1,220,454
<CURRENT-ASSETS> 2,651,607
<PP&E> 2,298,086
<DEPRECIATION> 1,224,005
<TOTAL-ASSETS> 4,092,092
<CURRENT-LIABILITIES> 566,048
<BONDS> 0
0
0
<COMMON> 29,705
<OTHER-SE> 3,046,506
<TOTAL-LIABILITY-AND-EQUITY> 4,092,092
<SALES> 6,969,219
<TOTAL-REVENUES> 6,969,219
<CGS> 2,948,599
<TOTAL-COSTS> 2,948,599
<OTHER-EXPENSES> 229,580
<LOSS-PROVISION> 80,000
<INTEREST-EXPENSE> 8,138
<INCOME-PRETAX> (723,130)
<INCOME-TAX> (34,313)
<INCOME-CONTINUING> (688,817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (688,817)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
