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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

FOR THE TRANSITION PERIOD FROM                TO               .

COMMISSION FILE NUMBER
0-22582

TBA ENTERTAINMENT CORPORATION

(818) 728-2600
(Registrant’s telephone number, including area code)

Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

As of May 3, 2003, the Registrant had outstanding 7,370,800 shares of Common Stock, par value $.001 per share.

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TBA ENTERTAINMENT CORPORATION AND SUBSIDIARIES

FORM 10-Q

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* No reportable information under this item.

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TBA ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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TBA ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to consolidated financial statements.

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TBA ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to consolidated financial statements.

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TBA ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of the following discussion and analysis is to explain the major factors and variances between periods of the Company’s financial condition and results of operations. The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the historical consolidated financial statements and notes thereto included in the Company’s 2002 Form 10-K for the fiscal year ended December 31, 2002.

INTRODUCTION

The Company is a strategic communications and entertainment company that creates, develops and produces comprehensive programs to reach and engage its clients’ target audiences. The Company produces a broad range of innovative business communications programs, develops and produces highly integrated entertainment marketing and special events programs, develops content and entertainment programs for a nationwide network of fairs and festivals and develops and implements career strategies and corporate partnerships for its artist clients.

The Company has built this comprehensive communications and entertainment business model through a combination of internal growth and strategic acquisitions. Since April 1997, the Company has completed 11 strategic acquisitions and has built a comprehensive network of 9 offices to serve its growing client base. No acquisitions were completed in 2002 or the first quarter of 2003.

GENERAL

In accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” the Company classifies its operations according to four major client groups. See Note 6 to the consolidated financial statements contained in Item 1 of this Form 10-Q for summarized financial information concerning the Company’s reportable segments.

Critical Accounting Policies

In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policy”, the Company identified the most critical accounting principles upon which its financial status depends. The Company determined the critical accounting principles to be related to revenue recognition, costs related to revenue and impairment of intangibles and other long-lived assets.

Revenue Recognition

The Company currently derives a majority of its revenues (89% and 88% of total revenues for the three months ended March 31, 2003 and 2002, respectively) from the production of innovative business communications programs to help corporate clients reach and engage their target audiences. The Company helps businesses effectively communicate their message via a broad range of business communications, meeting production, and entertainment production services. The Company receives a fee for providing these services, which may include developing creative content, providing comprehensive project management and arranging for live entertainment and related production services. Revenue is recognized when an event occurs. Costs of producing the events are also deferred until the event occurs. At March 31, 2003, deferred revenue was $4,128,900 compared to $3,560,200 at December 31, 2002.

The remainder of the Company’s revenues are generated from its roster of artist clients (8% of total revenues for each of the three months ended March 31, 2003 and 2002), entertainment marketing clients (2% and 3% of total revenues for the three months ended March 31, 2003 and 2002, respectively) and fairs and festivals clients (1% of total revenues for each of the three months ended March 31, 2003 and 2002). Revenues from these three clients groups are subject to seasonal variations, with significantly more revenues generated in the second and third calendar quarters. Commissions received from artists’ earnings are recognized in the period during which the artist earns the revenue. There are generally only minimal direct costs associated with generating revenue from artist clients. Entertainment marketing revenues and cost of revenues are recognized when the services are completed for each program or, for those programs with multiple events, apportioned to each event and recognized as each event occurs. Fairs and festivals also recognize revenue and cost of revenues when the services are completed for each program and when the event has occurred.

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Costs Related to Revenue

Costs related to revenue is comprised of all costs associated with the production of an event, including talent fees, contracted services, equipment rentals, costs associated with the production of audio-visual effects and the cost of internal production labor. Direct out-of-pocket costs are deferred until the event occurs. Internal production labor costs are expensed as incurred. At March 31, 2003, deferred costs were $1,265,300 compared to $1,030,700 at December 31, 2002.

Impairment of Intangibles

Intangible assets consist primarily of goodwill arising from business combinations.

Upon the 2002 adoption of Statement of Financial Accounting Standard No. 142, “Goodwill and other Intangible Assets”, the Company tested its goodwill for impairment. Based on the estimated fair market value of its fairs and festivals group, the Company recorded a goodwill impairment loss in the first quarter of 2002 of $1,988,600 associated with the fairs and festivals reporting unit. There was no goodwill impairment loss required to be recorded in the 2003 first quarter. The Company no longer records amortization of goodwill and performs an annual impairment test in the fourth quarter. During the year management will also review each quarter for other factors that may indicate impairment.

RESULTS OF OPERATIONS

FINANCIAL IMPACT OF SEPTEMBER 11 TERRORIST ATTACKS AND GLOBAL ECONOMIC SLOWDOWN

The September 11, 2001 terrorist attacks had a significant negative impact on the nation’s economy and the Company’s corporate clients’ businesses in particular. As a result, the Company experienced significantly reduced revenues in 2001, with particular impact on the third and fourth quarters. The Company also experienced some cancellations of programs that were scheduled to take place in early 2002. The global economic slowdown that began in 2001, and which was exacerbated by the terrorist attacks, continued to impact the Company’s business activity throughout 2002, with particular impact during the first half of 2002.

In response to this reduction in revenues, the Company took aggressive action to implement cost reductions necessary to ensure that its infrastructure is appropriate for expected business volumes. Such reductions initiated during the third quarter of 2001 and continuing throughout 2002 include reductions in headcount (31% since August 31, 2001) and related compensation costs, elimination of unprofitable offices, elimination of certain incentive compensation costs, and a reduction in travel-related and other general and administrative expenses.

Based on the Company’s current sales activity, expense reductions already implemented and absent major additional external disruptions, the Company expects that consolidated revenues in 2003 will remain relatively consistent with 2002 revenues through the first half of 2003, with increasing revenues in the second half of 2003 due to programs the Company has already been awarded. As a result of the expected increase in revenues and impact of reduced operating expenses, management believes that the Company’s full year operating results and cash flow will improve in 2003 over the results achieved in 2002.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

Revenues increased $58,800, or 1%, to $8,029,700 in the 2003 quarter from $7,970,900 in the 2002 quarter. Revenues from the corporate client group increased $155,400, or 2%, to $7,130,400 for the 2003 quarter from $6,975,000 in the 2002 quarter. The number of corporate client events decreased to 53 in the 2003 quarter from 68 in the 2002 quarter, due primarily to the closing of the New York and Dallas offices in late 2002 and the resulting elimination of programs in those offices. However, the average revenue per event increased to $134,500 in the 2003 quarter from $102,600 in the 2002 quarter, primarily due to an increase in the number of larger corporate events produced in the 2003 quarter with new and existing clients. The Company produced 10 corporate client events with revenues in excess of $250,000 in the 2003 quarter compared to 7 such events in the 2002 quarter.

Revenues from artist, entertainment marketing and fairs and festivals clients collectively decreased $96,600, or 10%, to $899,300 in the 2003 quarter from $995,900 in the 2002 quarter. The decrease is primarily the result of lower revenues on one entertainment marketing program and lower artist revenues due to the timing of artist tours. Revenues from these client groups are historically lower in the first quarter.

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Cost of revenues increased $232,700, or 4%, to $5,405,000 for the 2003 quarter from $5,172,300 for the 2002 quarter. Cost of revenues, as a percentage of revenues, increased 2% resulting in a decrease in gross profit margin to 33% for the 2003 quarter from 35% for the 2002 quarter. The decrease is primarily due to lower gross margins on revenues from the corporate communications and entertainment marketing client groups. The lower gross profit margins are a result of the more competitive corporate environment brought about by the global economic slowdown.

Selling, general and administrative expenses decreased $992,100, or 23%, to $3,328,700 for the 2003 quarter from $4,320,800 for the 2002 quarter. The decrease results primarily from the full impact in the 2003 quarter of cost savings implemented throughout 2002, including reductions in headcount and related compensation costs, elimination of unprofitable offices, elimination of certain incentive compensation costs and a reduction in travel-related and other general and administrative expenses.

Depreciation and amortization expense decreased $91,500, or 48%, to $97,400 for the 2003 quarter from $188,900 for the 2002 quarter. The decrease results primarily from the elimination of depreciation on certain assets sold in the first quarter of 2003 and certain other assets becoming fully depreciated after the 2002 quarter.

Other income in the 2002 quarter consisted of income from an agreement with Earth Escapes LLC (“EELLC”), which provided for the Company to receive a percentage of gross revenues of EELLC, as defined. In December 2002, the Company sold its interest in EELLC.

Net interest expense decreased $36,600, or 24%, to $114,700 for the 2003 quarter compared to $151,300 for the 2002 quarter. The decrease in primarily attributable to no longer accruing interest expense related to contingent purchase price consideration, totaling $70,900 in the 2002 quarter. Excluding this 2002 impact, net interest expense increased $34,300 primarily due to increased interest expense associated with additional bank debt.

The Company recorded an income tax benefit for the 2002 quarter of $480,000, to reflect an increase in the income tax refund for the 2001 year as a result of filing the Company’s 2001 federal income tax return. As of December 31, 2002, the Company had a net deferred tax asset of $1,500,400 that was fully reserved. Realization of the future tax benefits related to this deferred tax asset is dependent upon many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. Until the Company recognizes net income, no further tax benefit will be recognized.

In the 2002 quarter, the Company recognized a goodwill impairment loss of $1,988,600 related to the adoption of SFAS No. 142, “Goodwill and Other Intangibles”. Pursuant to the transitional rules of SFAS No. 142, this loss was recorded in the first quarter of 2002 as a cumulative effect of change in accounting principle. There was no tax effect of this impairment as none of the goodwill impairment loss was deductible for tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2003, the Company had cash and cash equivalents of $1,339,700 and a working capital deficit of $4,680,000 which included $1,253,700 of short-term borrowings and the current portion of long-term debt.

Cash Flow Statement Analysis

Cash provided by operating activities was $22,300 for the three months of 2003 compared to cash used of $2,923,200 for the three months of 2002. The improvement in cash provided by operating activities between the 2003 and 2002 periods primarily reflects the impact of the lower net loss generated during the 2003 period and the net changes in working capital components in the 2003 period,

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primarily comprised of the increase in accounts payable and accrued liabilities as the Company works with its vendors to manage its cash flow during the historically slower first quarter. The Company also experienced an increase in deferred revenues during the 2003 period primarily as a result of additional advance deposits on a large fourth quarter program.

Cash provided by investing activities for the first three months of 2003 was $356,700, resulting primarily from cash received from the sale of the Dallas building and land offset by current year earn out payments. Cash used in investing activities for the three months of 2002 was $2,300, for purchases of property and equipment. Capital expenditures are anticipated to remain insignificant and will be primarily for replacement of computer equipment and software.

Cash used in financing activities for the three months of 2003 was $567,100 resulting primarily from net repayments on the credit line and the repayment of long-term debt. Cash provided by financing activities for the first three months of 2002 was $1,096,000, resulting primarily from the draw of $1,271,400 on the Company’s credit line, offset in part by the repayment of long-term debt.

Bank Credit Facility

At March 31, 2003 the Company had $2,248,000 of unpaid principal outstanding under the revolving credit line of its bank credit facility, compared with a $2,340,600 balance under the revolving credit line plus a $393,700 balance under a term loan at December 31, 2002. In February 2003, the Company used the proceeds from the sale of its Dallas, Texas facility to repay the outstanding balance of the term loan and $92,500 of the balance of the revolving credit line. Pursuant to a restructuring of the bank credit facility in April 2003, the Company was granted the right to re-borrow up to $750,000 under the revolving credit line through May 31, 2003, for the purpose of making scheduled principal and interest payments and additional earn out payments under the acquisition notes as well as for working capital purposes. As of May 15, 2003, the Company had re-borrowed $225,000 under the revolving credit line. Subsequent to May 31, 2003, the then outstanding balance of the revolving credit line will be converted to a term loan, and the Company will be required to make seven equal monthly principal payments from June 30, 2003 through December 31, 2003. The total amount to be repaid will equal the greater of the amount re-borrowed through May 31, 2003, or that amount which will cause the Company to be in compliance with the financial covenants contained in the October 2001 credit agreement. Interest will continue to be paid monthly. All remaining amounts outstanding under the term loan will be due April 30, 2004. Please see Note 3 to the Financial Statements for a more detailed discussion of the bank credit facility.

The Company has $4,680,000 of negative working capital at March 31, 2003, and will experience seasonally lower operating results for the first half of 2003. However, the Company has significantly reduced its operating expenses and anticipates increased revenues in the second half of 2003 due to new programs the Company has already been awarded. Accordingly, management believes its operating results and cash flows for 2003 will improve from the levels the Company experienced in 2002. The Company’s liquidity needs for the foreseeable future are primarily for repayments of indebtedness and for working capital. Capital expenditures will be focused on equipment replacements and are not expected to be significant. Management believes that the Company’s future cash flows from operations, its current cash reserves and availability of funds under its revolving credit line will be sufficient to satisfy its current and future debt service and working capital requirements through at least March 31, 2004. However, there is no assurance that management’s assumptions will correspond to actual events.

The Company is also exploring strategic opportunities for the Company. The Company has retained an investment-banking firm to assist the Company in evaluating a variety of transactional and financing alternatives. However, since this process is still on-going, no assurances can be given that any proposed plans or actions can be effectively executed.

Commitments

Future minimum annual commitments under bank and other debt agreements and non-cancelable operating leases as of March 31, 2003 are as follows:

Capital expenditures will be focused on equipment replacements and are not expected to be significant.

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New Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (“FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which disclosures are effective for financial statements issued after December 15, 2002. The Company adopted the disclosure requirements of FIN 45 as of December 31, 2002. The adoption of the measurement requirements of FIN 45 did not have a material impact on the Company’s financial position or results of operations.

In December 2002, FASB issued Statement No.148 (SFAS No. 148). “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock – Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 did not have a material effect on the Company’s financial position or results of operations.

Forward Looking Statements

The foregoing discussion may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are intended to be covered by the safe harbors created by such provisions. These statements include management beliefs regarding the future operations of the Company and the plans and objectives of management for future growth or sale of the Company. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future political, economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives of the Company will be achieved.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Impact of Interest Rate Changes

The Company’s market risk relates to interest rate exposure on short-term borrowings. The Company does not use financial instruments for trading or other speculative purposes. Borrowings on the Company’s bank credit facility are at variable interest rates. All other borrowings are at fixed rates. At March 31, 2003, the Company had $2,248,000 outstanding under a revolving credit facility at an interest rate of 4.13% percent. Management believes that a hypothetical adverse movement in the interest rates of ten percent of such recent rates would not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer have concluded, based on their evaluation as of a date within 90 days prior to the filing of this report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Chief Operating Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation, and there were no corrective actions required with regard to significant deficiencies or material weaknesses.

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PART II

OTHER INFORMATION

TBA ENTERTAINMENT CORPORATION AND SUBSIDIARIES

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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SIGNATURES

     In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the cities of Hickory Valley, Tennessee and Encino, California, on the 15^th day of May 2003.

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CERTIFICATION

I, Thomas Jackson Weaver III, certify that:

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CERTIFICATION

I, Bryan J. Cusworth, certify that:

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EXHIBIT INDEX

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