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, 1997
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) 406-6800
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 $7,246,663.
The aggregate market value of the voting stock held by non-affiliates
of the issuer on December 19, 1997, based upon the average bid and
asked prices of such stock on that date was $489,500. The number of
issuer's shares of Common Stock outstanding as of December 19, 1997
was 2,483,193.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Company's 1998 Information
Statement is incorporated by reference in Part III.
Transitional Small Business Disclosure Format (check one): Yes__ No X
<PAGE>
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, and computer software used in music
scheduling for radio stations worldwide.
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) 406-6800.
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 and computer hard
drives, instrumental backgrounds for commercials and sound effects
(collectively, _music libraries_), station identification jingles,
and computer software used in music scheduling for radio stations.
Music libraries are sold on compact discs and hard drives 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 eleven different music formats
("compact disc libraries"): Adult Contemporary, Easy Listening,
Classic Hits, Country, Classic Rock, Contemporary Hit Radio, Urban,
and Seventies Rock, New Adult Contemporary, Dance and Latin. The
Company provides a weekly service of new record releases on compact
disc to its compact disc library customers.
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. During January 1996, the Company's
agreement with its previous supplier of computer software used by
customers in programming music play sequences 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 and software 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.
In June 1997 the Company sold its Ultimate Digital Studio (UDS)
division. The UDS division distributed specialized computer
broadcast equipment and software that controlled music on compact
disc juke boxes. This product had been operating at a 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, 1997, 1996 and 1995.
(Dollar Amounts in Thousands) Period Ended
1997 1996 1995
Broadcast Services
Music Libraries $5,707 $4,673 $5,453
Radio Jingles 1,051 1,092 968
Software and Compact Disc Equipment 461 744 1,836
Other 27 460 405
Total $7,246 $6,969 $8,662
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.), and elsewhere. Other than fees paid to independent sales
agents, no other significant costs are incurred by the Company in
conjunction with its 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.
<PAGE>
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 11,000 radio stations were licensed by
the Federal Communications Commission (FCC) for public broadcasting
in the United States. Management believes that approximately 10,000
stations in the U.S. may require products and services of the type
provided by the Company. 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 $2,200,000, $2,300,000, and
$2,700,000 for the years ended 1997, 1996 and 1995, respectively.
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 products. 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 one of the largest
suppliers of radio station identification jingles in the industry.
Several dozen providers of production libraries compete with the
Company. Management believes it is one of the major suppliers of
production libraries to the radio industry. 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.
<PAGE>
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, 1997, the Company had approximately 45 full-time
employees. The Company also contracts with other personnel and
subcontractors who provide creative talent for various projects on an
as-needed basis.
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, 1997.
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. The Company was de-listed from NASDAQ in February 1997
for not meeting the minimum NASDAQ SmallCap market requirements.
Since that time the stock continues to be traded on the OTC market
with quotations obtained from the OTC bulletin board. Quotations are
inter-dealer quotations, without retail markups, markdowns or
commissions, and do not necessarily represent actual transactions.
<PAGE>
Common Stock Bid
High Low
Fiscal 1997:
1st Quarter $ .94 $ .50
2nd Quarter 1.12 .56
3rd Quarter 1.00 .40
4th Quarter .66 .44
Fiscal 1996:
1st Quarter $1.63 $ .69
2nd Quarter 1.22 .56
3rd Quarter 1.22 1.16
4th Quarter 1.22 .72
As of September 30, 1997 the Company had approximately 216 record
owners and 600 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, 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.
<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. All forward-looking statements are
intended to be covered by the safe harbor created by section 21E of
the Securities Exchange Commission 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 one month 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 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 fiscal 1997, the Company made $97,000 in capital expenditures
for the purchase of property and equipment which compares to capital
expenditures of $73,000 in 1996 and $247,000 in 1995. Capital
expenditures in 1997 were primarily associated with upgrades of
production equipment. Product development costs of $198,500 were
incurred during fiscal 1997 for software development, new music
libraries, and music library updates, which compares to product
development expenditures of $146,000 in 1996 and $288,000 in 1995.
Funds for operating needs, new product development, and capital
expenditures for the year ended September 30, 1997 were provided from
operations and 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. In May 1996 the Company
entered into a lease agreement for the financing of an upgrade of its
computer hardware and software systems, which was completed in fiscal
year 1997. The cost of the project was $529,000, of which $426,000
was financed as of September 30, 1996 and the remaining $103,000 was
financed in fiscal 1997. 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 have been increased to approximately $16,000 as a
result of the December 1996 computer upgrade of $103,000. The term
of the lease is three years and the lease is backed by a letter of
credit in the amount of $200,000. The letter of credit reduces the
availability under the Company's revolving Line of Credit from
$300,000 to $100,000. Management anticipates that cash flow from
operations and cash reserves will be sufficient to meet these capital
requirements. The Company has no other significant commitments for
capital expenditures in fiscal 1998.
<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 27, 1997. No borrowings
were drawn under the Line of Credit during fiscal 1997 and no long-
term borrowing is anticipated in the foreseeable future at current
levels of business operation.
Customer deposits decreased to $192,800 as of September 30, 1997,
from $231,100 as of September 30, 1996 for deposits received from
customers ordering products. The balance in customer deposits is
dependent upon the timing of customer orders for compact disc
libraries, jingles, and production libraries.
The Company has net operating loss carryforwards of $1,324,000
available to offset future taxable income expiring in 2008 through
2010. A valuation allowance of $499,000 has been provided to reduce
the total deferred tax asset to approximately $155,000. In order to
fully realize the recorded tax asset of $155,000, the Company will
need to generate approximately $456,000 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 certain expenses to manageable levels, the
discontinuation of unprofitable product lines during the two most
recent fiscal years, 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.
The Board of Directors authorized the Company to purchase up to
75,000 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. The Company purchased
54,000 shares of its common stock for a total cost of $42,000 in
fiscal year 1997, which purchases were funded by cash reserves of the
Company.
The Company is in the process of converting its main operating
software system that is Year 2000 compatible. Such conversion is
scheduled to be completed by the end of January, 1998. The Company
has contracted with outside computer consultants who have concluded
there are no major Year 2000 issues for the Company.
It is estimated it may cost the Company approximately $50,000 to
update any hardware and software applications to deal with any Year
2000 issues. Any necessary funds will come from operations and cash
reserves.
<PAGE>
Results of Continuing Operations
Fiscal 1997 Compared to Fiscal 1996
Revenues increased approximately 4.0% to $7.2 million in 1997 from
$7.0 million in 1996. The overall increase was primarily due to an
increase in music library sales prices and volume, and was partially
offset by a reduction in software and compact disc equipment sales.
The reduction in software and compact disc equipment sales can be
attributed to the sale of the Ultimate Digital Studio division (UDS)
in June 1997. The increase in music library sales of approximately
$1 million, or 22%, resulted from an increase in sales of compact
disc libraries and production libraries, and weekly music service
revenues. Revenues from radio jingles decreased by $41,000 or 4%
primarily due to a decrease in publishers royalties received from the
broadcasting of the Company's jingles.
Sales of weekly music services increased approximately $415,000, or
21%. 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 generated primarily
from changes in music formats or sales of new music libraries rather
than from conversions to compact disc music library 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 revenues from
weekly music services will continue to grow by targeting new music
formats to non-broadcast customers and introducing new music
libraries to radio stations. Management believes the international
markets have not reached maturity for compact disc technology.
Renewals and new sales growth are subject to customer acceptance of
the new products.
An increase in revenue from weekly comedy services was primarily due
to barter arrangements whereby revenues are derived from obtaining
airtime from radio stations in exchange for such weekly services and
derived from obtaining commercial airtime from radio stations in
exchange for such weekly services and marketing such airtime to
advertisers. The Company has begun to market other products using
similar barter arrangements. Revenues from such barter arrangements
are expected to increase in the future.
<PAGE>
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. The Company began providing music
libraries on hard drive to both equipment manufacturers and directly
to end customers in fiscal 1997, but several of the Company's
competitors have been providing products in this format at a longer
period of time and the Company's hard drive sales have not generated
significant revenues. 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.
Revenues from specialized computer equipment and software sales
decreased approximately $283,000 primarily due to the sale of the
Ultimate Digital Studio (UDS) division. and revisions in software
necessary to satisfy market requirements The Company expects that it
will be able to rebuild its revenues but does not expect revenue
levels to attain its former levels from software sales over the next
five years by entering into strategic alliances with other companies
who develop computer software used in programming music sequences and
for automated playback systems.
Commissions as a percentage of revenues decreased to approximately
19% of revenue in fiscal 1997 from 21% of revenue in fiscal 1996.
This decrease is due to changes in the commission structure.
Production, programming and technical costs increased approximately
5% to approximately $3.1 million in 1997 from $2.9 million in 1996.
As a percentage of revenue these costs remained relatively the same
at approximately 42% for fiscal years 1996 and 1997.
General and administrative costs increased approximately $165,800, or
7%, primarily due to an increase in bad debt and freight expenses.
Selling costs increased $162,700 or 45%, primarily due to an increase
in advertising and promotion expenditures due to the introduction of
two new products in 1997and convention costs.
Depreciation expense increased approximately $93,000, or 38%,
primarily as a result of computer equipment and software acquired
under a capital lease during fiscal years 1996 and 1997.
During 1997, the Company recorded a provision of approximately
$148,000 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.
<PAGE>
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, including an increase of approximately $66,000, or
4%, in international markets during fiscal 1996. Revenues from
specialized computer equipment and software sales decreased
approximately $1,090,000, or 59%, over the prior year. Jingles
revenue increased approximately $124,000, or 13%, due primarily to
increases in publishers royalties received from the broadcast of the
Company's jingles.
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.
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 has redirected 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 to the termination of the Company's agreement with its
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.
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 was due to
the restructuring and cost reduction measures which were initiated in
the second quarter of fiscal 1995 and the discontinuation of
unprofitable products.
<PAGE>
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.
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 22, 1997, 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 1998 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 1998 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 1998
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 1998 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)
<PAGE>
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)
(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
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)
<PAGE>
(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.
27 Financial Data Schedule
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
Annual 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, 1997.
<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 29, 1997
TM CENTURY, INC.
BY:/s/Roger Holeman
Roger Holeman
Chief Financial 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/Roger Holeman December 29, 1997
ROGER HOLEMAN, Chief Financial Officer
(Principal financial and accounting officer)
/s/Neil W. Sargent December 29, 1997
NEIL W. SARGENT, President and Chief Executive Officer
(Principal executive officer)
/s/Marjorie L. McIntyre December 29, 1997
MARJORIE L. MCINTYRE, Chairman of the Board of Directors
/s/A. Ann Armstrong December 29, 1997
A. ANN ARMSTRONG, Director
/s/Donald E. Latin December 29, 1997
DONALD E. LATIN, Director
<PAGE>
TM CENTURY, INC.
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Independent Auditors' Report
Balance Sheets, September 30, 1997 and 1996
Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995
Statements of Stockholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995
Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995
Notes to Financial Statements
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, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1997.
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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30,
1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
December 22, 1997
<PAGE>
<TABLE>
TM CENTURY, INC.
Balance Sheets
September 30, 1997 and 1996
ASSETS
1997 1996
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 294,333 $ 377,855
Accounts receivable, less allowance
for doubtful accounts of $250,000 and $144,000, 733,767 829,848
respectively
Inventories, net 779,953 1,220,454
Deferred federal income taxes 154,530 171,877
Prepaid expenses 25,224 51,573
TOTAL CURRENT ASSETS 1,987,807 2,651,607
PROPERTY AND EQUIPMENT 2,463,958 2,298,086
Less accumulated depreciation (1,548,617) (1,224,005)
NET PROPERTY AND EQUIPMENT 915,341 1,074,081
INVENTORIES - NONCURRENT, net 143,647 351,016
OTHER ASSETS 18,260 15,388
TOTAL $ 3,065,055 $ 4,092,092
</TABLE>
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 69,451 $ 225,260
Accrued expenses 205,674 123,619
Current portion of obligation under capital lease 178,033 121,303
Deferred revenue 56,011 24,298
Customer deposits 26,358 71,568
TOTAL CURRENT LIABILITIES 535,527 566,048
OBLIGATION UNDER CAPITAL LEASE 128,755 246,555
CUSTOMER DEPOSITS - noncurrent 166,418 159,531
DEFERRED FEDERAL INCOME TAXES 26,400 43,747
TOTAL LIABILITIES 857,100 1,015,881
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 7,500,000
shares;
2,970,481shares issued 29,705 29,705
Paid-in Capital 2,275,272 2,275,272
Treasury Stock - at cost, 487,288 and 433,288 (1,291,227) (1,250,316)
shares, respectively
Retained earnings 1,194,205 2,021,550
TOTAL STOCKHOLDERS' EQUITY 2,207,955 3,076,211
TOTAL $ 3,065,055 $ 4,092,092
</TABLE>
<PAGE>
<TABLE>
TM CENTURY, INC.
Statements of Operations
September 30, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
REVENUES $ 7,246,663 $ 6,969,219 $ 8,662,271
Less commissions 1,356,585 1,446,394 1,637,452
NET REVENUES 5,890,078 5,522,825 7,024,819
COSTS AND EXPENSES
Production, programming, and 3,099,381 2,948,599 4,022,727
technical costs
General and administrative 2,595,353 2,430,300 2,705,739
Selling 522,961 360,256 556,411
Depreciation 338,111 244,823 203,293
Reduction in carrying value 148,000 229,580 360,000
of inventories
TOTAL 6,703,806 6,213,558 7,848,170
OPERATING INCOME (LOSS) (813,728) (690,733) (823,351)
OTHER INCOME (EXPENSE)
Interest income 11,436 12,856 14,857
Interest expense (25,871) (8,138)
Other 818 (37,115) (34,590)
TOTAL (13,617) (32,397) (19,733)
INCOME (LOSS) BEFORE TAXES ON INCOME (827,345) (723,130) (843,084)
PROVISION (BENEFIT) FOR INCOME TAXES
Current (134,220)
Deferred (34,313) (121,686)
TOTAL (34,313) (255,906)
NET INCOME (LOSS) $ (827,345) $ (688,817) $ (587,178)
NET INCOME (LOSS) PER COMMON SHARE $ (.33) $ (.27) $ (.23)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,496,210 2,537,193 2,537,193
</TABLE>
<PAGE>
<TABLE>
TM CENTURY, INC.
Statements of Stockholders' Equity
Years Ended September 30, 1997, 1996 and 1995
Common Stock Total
Number of Additional Treasury Retained Shareholder's
Shares Amount Paid-In-Capital Stock Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 2,970,481 $ 29,705 $ 2,275,273 $ (1,250,316) $ 2,710,367 $ 3,765,029
Payment for Fractional Shares (1)
Net income
BALANCE, SEPTEMBER 30, 1995 2,970,481 29,705 2,275,272 (1,250,316) 2,710,367 3,765,029
Net income (688,719) (688,719)
BALANCE, SEPTEMBER 30, 1996 2,970,481 29,705 2,275,272 (1,250,316) 2,021,550 3,076,211
Purchase of Treasury Stock (40,911) (40,911)
Net income (827,345) (827,345)
BALANCE, SEPTEMBER 30, 1997 2,970,481 $ 29,705 $ 2,275,272 $ (1,291,227) $ 1,194,205 $ 2,207,955
</TABLE>
<PAGE>
<TABLE>
TM CENTURY, INC.
Statements of Cash Flows
Years Ended September 30, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (loss) $ (827,345) $ (688,817) $ (587,178)
Adjustments to reconcile net income to
net cash provided by (used in) operations
Depreciation 338,111 244,823 203,293
Amortization 385,079 391,519 502,682
Deferred income taxes (37,577) (116,920)
Provision for doubtful accounts 140,498 80,000 79,000
Gain on sale of U. S. Treasuries (7,639)
Loss (gain) on disposition of property and equipment (818) 37,115 25,668
Reduction in carrying value of inventory 148,000 229,580 360,000
Accretion of discounts (215)
Payments received on installment receivables 12,874
Increases (decreases) in cash from changes in
operating assets and liabilities:
Accounts receivable (44,417) 1,527 (367,632)
Inventories 114,791 48,844 (503,471)
Prepaid expenses 26,349 (28,597) 31,973
Accounts payable and accrued expenses (73,754) (57,659) 126,146
Federal income taxes receivable/payable 0 132,220 (32,626)
Deferred revenue 31,713 24,298 (39,219)
Customer deposits (38,323) (124,496) 923
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 199,884 252,780 (312,341)
INVESTING ACTIVITIES:
(Increase) Decrease in other assets (2,872) 1,000 (61)
Purchases of property and equipment (96,891) (72,949) (247,035)
Purchase of U.S. Treasuries (292,361)
Proceeds from sale of U.S. 300,000
Treasuries
Principal payments received on notes receivable 4,423 20,699
Proceeds from sale of property and equipment 20,916 5,080 30,000
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (78,847) (62,446) (188,758)
FINANCING ACTIVITIES:
Fractional shares paid to Stockholders (1)
Purchase of treasury shares (40,911)
Principal payments on long-term debt and (163,648) (58,291)
and capital lease obligations
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (204,559) (58,291) (1)
INCREASE (DECREASE) IN CASH (83,522) 132,043 (501,100)
CASH AT BEGINNING OF PERIOD 377,855 245,812 746,912
CASH AT END OF PERIOD $ 294,333 $ 377,855 $ 245,812
</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 and computer software used in music
scheduling.
Certain reclassifications have been made to the 1996 and 1995
financial statements to conform to the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Cash and cash equivalents
Cash and cash equivalents of the Company are composed of demand
deposits with banks and short-term investments with maturities of
three months or less when purchased.
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.
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.
<PAGE>
Music Scheduling Software - Monthly in accordance with the
terms of the lease contracts.
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 equipment 3 to 7 years
Production equipment 5 to 7 years
Leasehold improvements 5 to 10 years
The Company adopted 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 _, effective
October 1, 1996, the effect of such adoption was not significant to
the Company's financial condition or 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 SFAS 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.
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.
<PAGE>
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (_FASB_)
issued SFAS No. 128, _Earnings per Share,_ which establishes new
standards for computing and presenting earnings per share and is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is
not permitted. The Company does not expect the adoption of SFAS No.
128 to have a significant impact upon the Company's reported earnings
per share.
The FASB issued, in February 1997, SFAS No. 129, _Disclosure of
Information about Capital Structure,_ which establishes standards for
disclosing information about an entity's capital structure and is
effective for financial statements for periods ending after December
15, 1997. The effect of such adoption will not have a significant
impact upon the Company's results of operations but will result in
additional disclosure in the 1998 financial statements.
In June 1997, the FASB issued SFAS No. 130, _Reporting Comprehensive
Income,_ which establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The Company does not expect the adoption of SFAS No. 130 to
have a significant impact upon the Company's reported results of
operations but will result in additional disclosure in the 1998
financial statements. The FASB also issued, in June 1997,
SFAS No. 131, _Disclosures about
Segments of an Enterprise and Related Information,_ which establishes
standards for the way public companies disclose information about
operating segments, products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The effect of such
adoption will not have a significant impact upon the Company's
results of operations but will result in additional disclosure in the
1998 financial statements.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures as of September 30:
1997 1996
Cash paid for interest $ 25,871 $ 8,138
Noncash investing and financing activities:
Capital lease obligation incurred $102,578 $426,149
<PAGE>
4. INVENTORIES
Inventories consisted of the following at September 30, 1997 and
1996:
<PAGE>
<TABLE>
1997 1996
Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Music libraries $107,766 $ 2,898,244 $ 97,574 $ 2,709,907
Compact discs 666,992 - 831,409 -
Software - 391,827 43,512 348,315
Compact disc equipment 5,195 - 247,959 -
Total cost 779,953 3,290,071 1,220,454 3,058,222
Accumulated amortization (3,146,424) (2,707,206)
Inventories, net $779,953 $ 143,647 $1,220,454 $ 351,016
</TABLE>
<PAGE>
Amounts charged to expense for capitalized software costs were
$43,512 , $51,975 and $52,345 in 1997, 1996 and 1995, respectively.
During 1997 and 1996, the Company recorded a provision of $148,000
and $230,000, respectively, 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.
Operating loss for this product during 1995 was $30,000 on net
revenues of $55,000.
5. PROPERTY AND EQUIPMENT Property and equipment consisted of the
following at September 30, 1997 and 1996:
1997 1996
Office furniture and equipment $ 1,172,781 $ 1,048,313
Production equipment 925,539 885,335
Leasehold improvements 365,638 364,438
Total $ 2,463,958 $ 2,298,086
<PAGE>
Property and equipment includes $529,000 in computer software and
equipment acquired under capital leases in fiscal 1997 and 1996.
Amortization of the lease of approximately $203,000 and $47,000 is
included in depreciation expense for the years ended September 30,
1997 and 1996, respectively.
6. CREDIT FACILITIES AND CAPITAL 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
which was automatically extended to February 28, 1998 under the terms
of the renewal. 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 occurred under
the Line of Credit during the fiscal years ended September 30, 1997
and 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 as of September 30, 1997, is
approximately $529,000. 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.
Future minimum lease payments under the lease as of
September 30, 1997 are as follows:
1998 $ 194,056
1999 126,145
2000 6,478
Total minimum lease payments 326,679
Less amount representing interest (19,891)
Net present value of minimum lease payments 306,788
Less current portion (178,003)
Long term capital lease obligation $ 128,785
The Company paid $25,871, $8,138 and $720 of interest on notes
payable and capital lease obligations during 1997, 1996, and 1995,
respectively.
7. COMMITMENTS AND CONTINGENCIES
<PAGE>
Leases
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.
Future minimum lease payments under operating leases with initial
lease terms in excess of one year are as follows:
1998 $ 279,876
1999 283,762
2000 326,508
2001 326,508
2002 299,299
Thereafter 299,299
Future minimum lease payments $ 1,815,252
Rent expense under operating leases was $261,663, $245,470 and
$226,851 for 1997, 1996, and 1995, 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 and a
former member of the Board of Directors. The compensation expensed
was $180,000, $180,000 and $160,000 in 1997, 1996 and 1995,
respectively.
Aggregate commitments for future salaries under employment agreements
and consulting agreements is $245,000.
<PAGE>
9. INCOME TAXES
Differences between the statutory federal income tax rate and the
effective rate for the years ended September 30, 1997 1996 and 1995,
are as follows:
1997 1996 1995
Income tax provision at statutory rate (35.0%) (35.0)% (35.0)%
Effect of graduated tax rates 1.0 1.0 1.0
Effect of carryback of 5.3
net operating losses
Operating losses with no current tax 32.5 27.8
Other 1.5 1.5 (1.7)
(0.0%) (4.7%) (30.4%)
The Company has net operating loss carryforwards of $1,324,000
available to offset future taxable income expiring in 2008 through
2010. A valuation allowance of $499,000 has been provided to reduce
the total deferred tax asset to $155,000 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.
The components of the net deferred income tax asset at September 30,
1997 and 1996 is as follows:
1997 1996
Bad debt $ 87,500 $ 48,870
Depreciable assets (26,400) (42,250)
Inventory valuation allowance 116,600 66,300
Net operating loss carryforwards 450,100 272,970
Other (1,100) (1,490)
Total deferred tax asset 626,700 344,400
Valuation allowance 498,570 216,270
Net deferred tax asset $128,130 $128,130
<PAGE>
The Company made no income tax payments during fiscal 1997, 1996, and
1995. Due to the Company's net operating loss position, no income tax
payments were necessary in fiscal 1997, 1996 and 1995. The Company
received $129,000 and $10,000 of income tax refunds during 1996 and
1995, respectively.
10. ROYALTY AND SALES REPRESENTATION AGREEMENTS
In 1990, the Company acquired rights to sell a radio programming
software product for which royalties are payable by the Company on
sales as collected. Royalties under this agreement totaled $72,132
and $313,210 in 1996 and 1995, respectively. This agreement was
terminated in January, 1996.
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
$929,000, $989,000 and $1,034,000 in 1997, 1996, and 1995,
respectively.
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 was not an employee or
full-time consultant of the Company was automatically granted in
December of each year, commencing in 1991, for five years (but only
for so long as he or she remained 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>
Option information for the fiscal years ended September 30, 1997 and
1996:
Weighted
Number of Price Average
Shares Per Share Price
Per Share
Options outstanding at 87,500 $1.20 - $2.50 $ 1.3114
September 30, 1994
Granted 125,000 $1.125 - $2.50 1.1880
Exercised -
Forfeited (2,500) $ 2.50 2.5000
Options outstanding at 210,000 $1.125 - $2.50 1.2238
September 30, 1995
Granted 55,000 $1.0625 - $1.20 1.0573
Exercised -
Forfeited (30,000) $ 1.20 1.2000
Options outstanding at 235,000 $1.0625 - $2.50 1.1690
September 30, 1996
Granted 25,000 $.625 0.6250
Exercised - -
Forfeited (60,000) $.625 - $1.125 1.0573
Options outstanding at 200,000 $1.0625 - $2.50 1.1345
September 30, 1997
Options exercisable at 108,500 $1.0625 - $2.50 1.1874
September 30, 1997
The weighted average remaining contractual life of the stock options
outstanding at September 31, 1997 is 7.2 years.
At September 30, 1997 the Company has reserved a total of 250,000
shares of common stock for exercise of stock options.
The Company applies APB Opinion No. 25, _Accounting for Stock Issued
to Employees_ in accounting for its stock option and award plan.
During 1997, the exercise price of each option granted was greater
than or equal to the market price of the Company's stock on the date
of grant. Accordingly, no compensation expense has been recognized
under this plan. For the year ended September 30, 1997, the
difference between actual net loss and net loss on a proforma basis
as if the Company had utilized the accounting methodology prescribed
by SFAS No. 123, _Accounting for Stock-Based Compensation,_ would
have been $7,500 and would result in no difference in reported net
loss per share.
The estimated weighted average grant date fair value of options
granted during fiscal year 1997 was $.3252 per share. For purposes
of determining fair value of each option, the Company used the
minimum value method using the following assumptions:
Risk-free interest rate 6.75 %
Expected life 10 years
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS DOCUMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS AND STATEMENTS OF OPERATIONS OF THE COMPANY'S FORM 10-KSB
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 294333
<SECURITIES> 0
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<ALLOWANCES> 250000
<INVENTORY> 923600
<CURRENT-ASSETS> 1987807
<PP&E> 2463958
<DEPRECIATION> 1548617
<TOTAL-ASSETS> 3065055
<CURRENT-LIABILITIES> 535527
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0
0
<COMMON> 29705
<OTHER-SE> 2178250
<TOTAL-LIABILITY-AND-EQUITY> 3065055
<SALES> 7246663
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<OTHER-EXPENSES> (12254)
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<INCOME-PRETAX> (827345)
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