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, 1998
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 $6,808,489.
The aggregate market value of the voting stock held by non-affiliates
of the issuer on September 30, 1998 based upon the average bid and
asked prices of such stock on that date was $400,000. The number of
issuer's shares of Common Stock outstanding as of September 30, 1998
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, comedy services,
and station identification and commercials for radio/TV stations and
production houses 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 musical goods
and services for radio/TV stations and production houses worldwide.
Products include special compilations of popular music on compact
discs and computer hard drives, instrumental backgrounds for
commercials and sound effects, station identification jingles and
comedy services for radio/TV stations and production houses.
Production libraries are sold on compact discs and include original
recordings of background music and sound effects written and produced
by the Company as sources of production material for radio/TV
stations. Production libraries are available in a variety of musical
styles and are used as background music for contests, promotional
announcements, commercials, film or audio video presentations and
websites. The Company also provides a weekly service of new record
releases on compact disc to radio stations. Other music libraries
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.
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. Management believes that the loss of these
sources 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.
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, 1998, 1997 and 1996.
(Dollar Amounts in Thousands) Period Ended
1998 1997 1996
Broadcast Services:
Music Libraries $5,567 $5,707 $4,575
Radio Jingles 1,183 1,051 1,067
Software and Compact Disc Equipment 28 465 743
Other 30 23 0
Total $6,808 $7,246 $6,385
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 worldwide. 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.
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.
<PAGE>
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 sales through
agents worldwide. 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 $1,900,000, $2,200,000, and $2,300,000 for
the years ended 1998, 1997 and 1996, respectively.
Competition
The Company competes with several other music syndicators that
provide either music libraries or radio jingle packages to the
broadcast industry. 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 larger 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.
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.
<PAGE>
Employees
As of December 1, 1998, the Company had approximately 44 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. The first five year term rental rate is
based on a fixed amount per square foot which is approximately a 6.3%
increase over the 2003 year rental rate. The second five year term
is 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 has been advised by a State taxing authority of its
intention to audit the sales tax records of the Company for business
done in such tax jurisdiction. The Company does not believe that the
results of such audit will have a material impact on the financial
position of the Company.
On May 22, 1998, the Company received a letter from the Recording
Industry Association of America, Inc. (RIAA) alleging that it was
illegally duplicating sound recordings of the RIAA's member companies
in its Mobile Beat Series I and II and Mobile Beat Holiday Series.
The RIAA alleged substantial damages in the amount of $76,000,000 and
stated that it would consider a pre-complaint settlement.
Following receipt of the letter, the Company and its counsel met with
RIAA's counsel on June 30, 1998. At this meeting, the RIAA made a
demand for $3 million to settle the dispute. RIAA was advised that
the Company's financial position could not support such a cash
settlement.
On July 14, 1998 the Company entered into a Tolling Agreement with
the RIAA. On July 24, 1998, it formally responded to the RIAA.
Since then, Disctronics, one of the companies that manufactures CDs
for the Company's GoldDisc line, contacted the Company and advised it
that Disctronics had been contacted by the RIAA and told not to
duplicate any sound recordings in the GoldDisc Series unless the
Company could supply written license agreements.
By letter dated August 4, 1998, RIAA advised the Company that it
would bring suit unless a meaningful settlement offer was proffered
by the Company by August 10, 1998. In September mediation was
undertaken with no settlement resulting.
<PAGE>
In October 1998, the Company filed suit for declaratory judgment and
tortuous interference with respect to Disctronics. The suit was
later dismissed without prejudice by agreement.
Thus far no discovery has been undertaken. The Company believes that
it has a meritorious defense to many of the claims asserted, but it
is possible that it will not prevail if the matter is brought to
litigation. Any significant cash amount paid in settlement or
awarded in judgment would likely have an adverse effect on the
Company.
In management's opinion the likelihood of an unfavorable outcome and
an estimate of the amount or range of any potential loss cannot be
determined. However, the Company has recorded a reserve for possible
loss of $385,000 as of September 30, 1998 on the terms of its latest
settlement offer based on annual payments of $50,000 over a period of
eleven years. The recorded reserve reflects a discount of the
settlement offer using a discount rate of 8% per annum.
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, 1998.
<PAGE>
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.
Common Stock Bid
High Low
Fiscal 1998:
1st Quarter $.81 $.38
2nd Quarter .63 .44
3rd Quarter .50 .41
4th Quarter .60 .28
Fiscal 1997:
1st Quarter $.94 $.50
2nd Quarter 1.12 .56
3rd Quarter 1.00 .40
4th Quarter .66 .44
As of September 30, 1998 the Company had approximately 206 record
owners and 400 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.
<PAGE>
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.
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 and jingles
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
and jingles 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 1999.
<PAGE>
During fiscal 1998, the Company made approximately $44,500 in capital
expenditures for the purchase of property and equipment which
compares to capital expenditures of approximately $97,000 in 1997 and
$73,000 in 1996. Capital expenditures in 1998 were primarily
associated with upgrades of production equipment. Product
development costs of $163,000 were incurred during fiscal 1998 for
software development, new music libraries, and music library updates,
which compares to product development expenditures of $198,500 in
1997 and $146,000 in 1996. Funds for operating needs, new product
development, and capital expenditures for the year ended September
30, 1998 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 $125,000 in fiscal 1999. The Company has
no other significant commitments for capital expenditures in fiscal
1999. Management anticipates that cash flow from operations and cash
reserves will be sufficient to meet capital requirements.
The Company's Line of Credit was renewed through February 28, 1999
for the lessor of either; 80% of the Company's domestic accounts and
chattel paper (excluding Accounts over 90 days old, chattel paper
with installments or other sums more than 90 days past due, and
accounts and chattel paper due from any person or entity not
domiciled in the United States, or from any shareholder, officer or
employee), or $500,000. This represents approximately a $200,000
increase compared to the prior year. The Company's $500,000
revolving Line of Credit with a bank grants a first lien and security
interest in and upon all accounts, chattel paper, contract rights,
general intangibles and deposit accounts. Borrowings under the Line
of Credit bear a fluctuating interest rate of prime plus 1.5%,
payable monthly. The Line of Credit, which bears an annual
commitment fee of 0.5% of the unused amounts, is renewable annually,
subject to the consent of both parties. No borrowings were drawn
under the Line of Credit during fiscal 1998 and no long-term
borrowing is anticipated in the foreseeable future at current levels
of business operation.
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 $500,000 to $300,000. The
letter of credit requirement is reviewed on an annual basis by the
Lessor.
<PAGE>
Customer deposits increased to $194,800 as of September 30, 1998,
from $192,800 as of September 30, 1997, 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 approximately
$1,497,000 available to offset future taxable income expiring in 2008
through 2011. A valuation allowance of approximately $846,000 has
been provided to reduce the net deferred tax asset to zero because it
is likely that the tax asset will not be realized. Realization is
dependent upon generating sufficient taxable income prior to the
expiration of the loss carryforwards. The amount of the deferred tax
asset has been reduced to zero due to the Company experiencing four
consecutive year losses. 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, continued cost reduction measures which have
reduced certain expenses to manageable levels, the discontinuation of
unprofitable product lines during fiscal years 1996 and 1997, new
approaches to marketing current products, and the introduction of new
products.
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 has assessed its Year 2000 issues and determined an
immaterial effect exists on any operating systems hardware and
software. The Company converted its main operating software system
that is Year 2000 compatible in March, 1998 and the consultant who is
responsible for creating the in-house Contract Administration System
indicated there would be minimal Year 2000 issues. The Company's
vendor purchased accounting system consultant believes the accounting
system is Year 2000 compatible. In addition, the Company's Microsoft
Windows NT consultant confirmed that the Company's network
environment is Year 2000 compliant. The Company's in-house
programmer analyst also believes there are no major Year 2000 issues
for the Company. Furthermore the Company's assessment incorporates
existing vendors and suppliers relationships and management believes
there would be no material effect on the Company's business, results
of operations, or financial condition if they do not timely become
Year 2000 compliant. The most reasonably likely worst scenario
estimates the cost to be approximately $50,000 to deal with any Year
2000 issues. Any necessary funds will come from operations and cash
reserves.
<PAGE>
Results of Continuing Operations
Fiscal 1998 Compared to Fiscal 1997
Revenues decreased 6.0% to $6.8 million in 1998 from $7.2 million in
1997. The overall decrease was primarily due to a decrease in
international sales, compact discs sales prices and volume, and
specialized radio station computer equipment and software sales, and
was partially offset by an increase in production libraries and
jingles sales. The decrease in compact disc sales was $410,000, or
10% and is partially attributed to a decrease in weekly music service
revenues of $22,000 or 1%. The reduction in the specialized radio
computer equipment and software sales can be attributed to the sale
of the Ultimate Digital Studio division (UDS) in June 1997.
Production libraries increased $317,000, or 42% primarily due to the
introduction of two new music libraries during fiscal year 1997 and
one at the beginning of fiscal year 1998, and the continual sales of
pre-1997 music libraries. Revenues from radio jingles increased by
$131,000 or 13% primarily due to an increase in the sales volume of
custom and syndicated jingles packages being sold.
As the compact disc music library market matures, sales of compact
discs are generated primarily from changes in music formats or sales
of new music libraries 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
either remain relatively unchanged or continue to grow by 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.
A $46,000 or 6% decrease in weekly comedy services revenue was
primarily due to a reduction in the percentage of barter revenue
allocated to Comedy from the total barter revenue, which includes
other products. Revenues are derived from obtaining 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 other
barter arrangements are expected to increase in the future.
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 the radio industry in 1997. 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 equipment manufacturer's are offering hard drives with
pre-loaded music libraries.
<PAGE>
Revenues from specialized radio station computer equipment and
software sales decreased $437,000 primarily due to the sale of the
Ultimate Digital Studio (UDS) division in June 1997.
Commissions as a percentage of revenues increased to 19% of revenue
in fiscal 1998 from 17% of revenue in fiscal 1997. This increase is
due to changes in the revenue structure where a greater percentage of
revenue is on a barter basis.
Production, programming and technical costs decreased 24% to $2.2
million in 1998 from $2.9 million in 1997. As a percentage of
revenue these costs decreased from 40% in 1997 to 32% in 1998. The
decrease is primarily due to lower replication direct costs and
amortization expenses.
General and administrative costs decreased $15,600 or 1%, primarily
due to a decrease in salaries and benefits and other administrative
expenses. Such decreases were offset by an increase in professional
fees and bad debt expenses.
Selling costs decreased $170,000 or 15%, primarily due to a decrease
in salaries and benefits, domestic commissions and advertising
expenses.
Depreciation expense decreased $7,000, or 2%, primarily as a result
of more assets being fully depreciated compared to the prior year.
During 1997, the Company recorded a provision of $218,000 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.
In fiscal 1998 the Company recorded a reserve for possible loss of
$385,000 as of September 30, 1998 on the terms of its latest
settlement offer to the RIAA based on annual payments of $50,000 over
a period of eleven years. The recorded reserve reflects a discount
of the settlement offer using a discount rate of 8% per annum.
The Company has reduced its net deferred tax asset of $128,130 at
September 30, 1997 to zero at September 30, 1998 because it is likely
that the tax asset will not be realized. This reduction resulted in
deferred income tax expense of $128,130 in fiscal 1998.
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
Revenues increased 13% to $7.2 million in 1997 from $6.4 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 $1.1 million,
or 25%, resulted from an increase in sales of compact disc libraries
and production libraries, and weekly music service revenues.
Revenues from radio jingles decreased by $16,000 or 2% primarily due
to a decrease in publishers royalties received from the broadcasting
of the Company's jingles.
Sales of weekly music services increased $425,000, 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 are 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
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.
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.
<PAGE>
Revenues from specialized computer equipment and software sales
decreased $279,000 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 increased to 17% of revenue
in fiscal 1997 from 7% of revenue in fiscal 1996. This increase is
due to changes in the commission structure.
Production, programming and technical costs decreased 2% to $2.9
million in 1997 from $3.0 million in 1996. As a percentage of
revenue these costs decreased from 47% in fiscal 1996 to 40% in
fiscal 1997.
General and administrative costs decreased $168,000, or 7%, primarily
due to a reduction in salaries and benefits.
Selling costs increased $370,000 or 49%, primarily due to an increase
in salaries and benefits allocation, advertising and promotion
expenditures as a result of the introduction of two new products in
1997 and convention costs.
Depreciation expense increased $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 $218,000 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 4, 1998, 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 1999 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 1999 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 1999
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 1999 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)
(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)
<PAGE>
(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)
(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.
(u) WMCA Line of Credit Extension Letter Agreement by and between
Merrill Lynch Business Financial Services Inc. and TM Century,
Inc. dated April 21, 1998. (Exhibit 10.1) (3) (March 31, 1998)
(v) Letter of Credit Amendment Agreement by and between Northern
Trust Company and TM Century, Inc. dated April 21, 1998.
(Exhibit 10.2 (1) (March 31, 1998)
<PAGE>
(w) *Employment Agreement between TM Century, Inc. and Neil W.
Sargent dated April 17, 1998, amending Employment Agreement
between TM Century, Inc. and Neil W. Sargent dated March 22,
1995. (Exhibit 1) (3) (March 31, 1995)
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
Quarterly Report on Form 10-Q for the indicated period, of
the Registrant.
(3) 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.
(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.
(9) Incorporated by reference to the indicated exhibit to the
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1996.
(10) Incorporated by reference to the indicated exhibit to the
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1997.
* The documents filed or incorporated by reference as Exhibits 10(c),
(h), (l), (m), (s), (t) and (w) 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, 1998.
<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 16, 1998
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 16, 1998
ROGER HOLEMAN, Chief Financial Officer
(Principal financial and accounting officer)
/s/Neil W. Sargent December 16, 1998
NEIL W. SARGENT, President and Chief Executive Officer
(Principal executive officer)
/s/Marjorie L. McIntyre December 16, 1998
MARJORIE L. MCINTYRE, Chairman of the Board of Directors
/s/A. Ann Armstrong December 16, 1998
A. ANN ARMSTRONG, Director
/s/Donald E. Latin December 16, 1998
DONALD E. LATIN, Director
<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 16, 1998
TM CENTURY, INC.
BY: Roger Holeman
Chief Financial Officer
In accordance with 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:
December 16, 1998
ROGER HOLEMAN, Chief Financial Officer
(Principal financial and accounting officer)
December 16, 1998
NEIL W. SARGENT., President and Chief Executive Officer
(Principal executive officer)
December 16, 1998
MARJORIE L. MCINTYRE, Chairman of the Board of Directors
December 16, 1998
A. ANN ARMSTRONG, Director
December 16, 1998
DONALD E. LATIN, Director
<PAGE>
TM CENTURY, INC.
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Independent Auditors' Report 18
Balance Sheets, September 30, 1998 and 1997 19
Statements of Operations for the Years Ended September 30, 1998, 1997
and 1996 20
Statements of Stockholders' Equity for the Years Ended September 30,
1998, 1997 and 1996 21
Statements of Cash Flows for the Years Ended September 30, 1998, 1997
and 1996 22
Notes to Financial Statements 23
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, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1998.
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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30,
1998, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
December 4, 1998
<PAGE>
<TABLE>
TM Century, Inc.
Balance Sheets
As of September 30, 1998 and September 30, 1997
ASSETS
1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash $ 348,957 $ 294,333
Accounts receivable, less allowance
for doubtful accounts of $230,000 and $250,000 respectively 763,653 733,767
Inventories, net 612,992 779,953
Deferred federal income taxes 0 154,530
Prepaid expenses and other current assets 29,837 25,224
TOTAL CURRENT ASSETS 1,755,439 1,987,807
PROPERTY AND EQUIPMENT 2,508,394 2,463,958
Less accumulated depreciation (1,879,587) (1,548,617)
NET PROPERTY AND EQUIPMENT 628,807 915,341
INVENTORIES - NONCURRENT, net 178,397 143,647
OTHER ASSETS 18,260 18,260
TOTAL ASSETS $ 2,580,903 $ 3,065,055
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 100,050 $ 69,451
Accrued expenses 233,836 205,674
Current portion of obligation under capital lease 122,212 178,033
Deferred revenue 108,694 56,011
Customer deposits 17,858 26,358
TOTAL CURRENT LIABILITIES 582,650 535,527
OBLIGATIONS UNDER CAPITAL LEASE 6,407 128,755
CUSTOMER DEPOSITS - NONCURRENT 176,943 166,418
DEFERRED FEDERAL INCOME TAXES 0 26,400
COMMITMENTS AND CONTINGENCIES 385,000 0
TOTAL LIABILITIES 1,151,000 857,100
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 7,500,000 shares; 29,705 29,705
2,970,481 shares issued; and 2,483,193 shares outstanding
Paid-in capital 2,275,272 2,275,272
Treasury stock - at cost, 487,288 shares (1,291,227) (1,291,227)
Retained earnings 416,153 1,194,205
TOTAL STOCKHOLDERS' EQUITY 1,429,903 2,207,955
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,580,903 $ 3,065,055
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
TM Century, Inc.
Statements of Operations
September 30, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
REVENUES $6,808,489 $7,246,661 $6,385,318
Less Commissions 1,302,280 1,213,679 415,872
NET REVENUES 5,506,209 6,032,982 5,969,446
COSTS AND EXPENSES
Production, Programming, and 2,208,172 2,897,893 2,977,787
Technical Costs
General and Administrative 2,250,933 2,266,540 2,434,429
Selling Costs 953,179 1,122,774 752,915
Depreciation 330,970 338,111 244,823
Reduction in Carrying Value of 22,266 218,000 229,580
Inventories
Total Costs and Expenses 5,765,520 6,843,318 6,639,534
OPERATING LOSS (259,311) (810,336) (670,088)
OTHER INCOME (EXPENSE)
Interest income 10,352 10,613 12,855
Interest expense (15,963) (28,440) (8,138)
Other 0 818 (57,759)
(5,611) (17,009) (53,042)
PROVISION FOR SETTLEMENT OF RIAA DISPUTE (385,000) 0 0
LOSS BEFORE PROVISION FOR INCOME TAXES (649,922) (827,345) (723,130)
(PROVISION) BENEFIT FOR INCOME TAXES
Current 0 0 0
Deferred (128,130) 0 34,313
Total (Provision) Benefit for (128,130) 0 34,313
Income Taxes
NET LOSS $ (778,052) $ (827,345) $ (688,817)
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.31) $ (0.33) $ (0.27)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,483,193 2,496,210 2,537,193
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
TM Century, Inc.
Statements of Stockholders' Equity
Years ended September 30, 1998, 1997 and 1996
Common Stock Additional Total
Number of Paid-In Treasury Retained Stockholders'
Shares Amount Capital Stock Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 2,970,481 $29,705 $2,275,272 $(1,250,316) $2,710,367 $3,765,028
Net Loss 0 0 0 (688,817) (688,817)
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 0 0 (40,911) 0 (40,911)
Net Loss 0 0 0 (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
Net Loss 0 0 0 (778,052) (778,052)
BALANCE, SEPTEMBER 30, 1998 2,970,481 $29,705 $2,275,272 $(1,291,227) $ 416,153 $1,429,903
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
TM Century, Inc.
Statements of Cash Flows
Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(778,052) $(827,345) $(688,817)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation 330,970 338,111 244,823
Amortization 289,620 385,079 391,519
Provision for settlement of RIAA dispute 385,000 0 0
Deferred income taxes 128,130 0 (37,577)
Provision for doubtful accounts (20,000) 140,498 80,000
Loss (gain) on disposition of property and equipment 0 (818) 37,115
Reduction in carrying value of inventories 22,266 148,000 229,580
Increase (decrease) in cash from changes in operating
assets and liabilities:
Trade accounts receivable (9,886) (44,417) 1,527
Inventories (179,675) 114,791 48,844
Prepaid expenses and other current assets (4,613) 26,349 (28,597)
Accounts payable and accrued expenses 58,761 (73,754) (57,659)
Federal income taxes receivable/payable 0 0 132,220
Deferred revenue 52,683 31,713 24,298
Customer deposits 2,025 (38,323) (124,496)
NET CASH PROVIDED BY OPERATING ACTIVITIES 277,229 199,884 252,780
INVESTING ACTIVITIES
(Increase) Decrease in other assets 0 (2,872) 1,000
Purchases of property and equipment (44,436) (96,891) (72,949)
Principal payments received on notes receivable 0 0 4,423
Proceeds from sale of property and equipment 0 20,916 5,080
NET CASH USED IN INVESTING ACTIVITIES (44,436) (78,847) (62,446)
FINANCING ACTIVITIES
Acquisition of treasury stock 0 (40,911) 0
Principal payments on capital lease obligations (178,169) (163,648) (58,291)
NET CASH USED IN FINANCING ACTIVITIES (178,169) (204,559) (58,291)
NET INCREASE (DECREASE) IN CASH 54,624 (83,522) 132,043
CASH AT BEGINNING OF YEAR 294,333 377,855 245,812
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 348,957 $ 294,333 $ 377,855
</TABLE>
See notes to financial statements
<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, comedy
services and station identification jingles.
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.
Music Scheduling Software - Monthly in accordance with the
terms of the lease contracts.
<PAGE>
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 Loss Per Share
Basic and diluted 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. As of
September 30, 1998 the Company had 205,000 stock options outstanding.
These options were excluded from the calculation of basic and diluted
net loss per share since including such options would have an
antidilutive effect.
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.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform with the classifications used in the 1998
financial statements with no effect on previously reported net income
or stockholders' equity.
<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. The Company's adoption of SFAS No. 128 did not
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 Company's adoption of SFAS No. 129 did not have a
significant impact upon the Company's results of operations.
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's adoption of SFAS No. 130 did not have a
significant impact upon the Company's reported results of operations.
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 1999 financial statements.
The FASB issued, in February 1998, SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which
revises employer's disclosures about provisions and other
postretirement benefit plans and is effective for financial
statements issued for periods beginning after December 15, 1997. The
Company does not expect the adoption of SFAS 132 to have a
significant effect on the 1999 financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments. SFAS
No. 133 is effective for all fiscal quarters for all fiscal years
beginning after June 15, 1999. The Company does not expect the
adoption of SFAS 133 to have a significant impact upon the Company's
reported results of operations.
<PAGE>
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures as of September 30:
1998 1997
Cash paid for interest $ 15,967 $ 25,871
Noncash investing and financing activities:
Capital lease obligation incurred $ - $ 102,578
4. INVENTORIES
Inventories consisted of the following at September 30, 1998 and 1997:
<TABLE>
1998 1997
<S> <C> <C> <C> <C>
Current Long-Term Current Long-Term
Music libraries $ 142,230 $ 2,646,018 $ 107,766 $ 2,898,244
Compact discs 470,762 - 666,992 -
Software - - - 391,827
Compact disc equipment - - 5,195 -
Total cost 612,992 2,646,018 779,953 3,290,071
Accumulated amortization (2,467,621) (3,146,424)
Inventories, net $ 612,992 $ 178,397 $ 779,953 $ 143,647
</TABLE>
Amounts charged to expense for capitalized software costs were $0,
$43,512 and $51,975 in 1998, 1997 and 1996, respectively.
<PAGE>
In 1998 the Company did not need to record a provision to reduce the
carrying value of its music and compact disc libraries to the lower
of cost or market. However, the Company did write-off approximately
$22,000 of mobile beat inventory due to the RIAA legal dispute (See
Note 7). During 1997 the Company recorded a provision of $218,000 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.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30,
1998 and 1997:
1998 1997
Office furniture $ 503,069 $ 502,247
Computer Software & Equipment 162,395 141,810
Production equipment
944,397 925,540
Leasehold improvements 369,810 365,639
Capital Lease 528,723 528,722
Total $ 2,508,394 $ 2,463,958
The Capital Lease is for approximately $529,000 in computer software
and equipment acquired under capital leases in fiscal 1997 and 1996.
Amortization of the lease of approximately $176,000 and $203,000 is
included in depreciation expense for the fiscal years ended September
30, 1998 and 1997, respectively.
<PAGE>
6. CREDIT FACILITIES AND CAPITAL LEASE OBLIGATIONS
Effective February 28, 1998, the Company's Line of Credit was renewed
through February 28, 1999 for the lessor of either; 80% of the
Company's domestic accounts and chattel paper (excluding Accounts
over 90 days old, chattel paper with installments or other sums more
than 90 days past due, and accounts and chattel paper due from any
person or entity not domiciled in the United States, or from any
shareholder, officer or employee), or $500,000. This represents a
$200,000 increase compared to the prior year. The Company's $500,000
revolving Line of Credit with a bank grants a first lien and security
interest in and upon all accounts, chattel paper, contract rights,
general intangibles and deposit accounts. Borrowings under the Line
of Credit bear a fluctuating interest rate of prime plus 1.5%,
payable monthly. The Line of Credit, which bears an annual
commitment fee of 0.5% of the unused amounts, is renewable annually,
subject to the consent of both parties. No borrowings were drawn
under the Line of Credit during the fiscal years ended September 30,
1998 and 1997. In conjunction with the Company's leasing arrangement
discussed below, the availability under the Company's Line of Credit
was reduced from $500,000 to $300,000.
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, 1998, 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,
1998 are as follows:
1999 $ 126,145
2000 6,478
Total minimum lease payments 132,623
Less amount representing interest (4,004)
Net present value of minimum lease payments 128,619
Less current portion (122,212)
Long term capital lease obligation $ 6,407
The Company paid $15,963, $25,871 and $8,138 of interest on notes
payable and capital lease obligations during 1998, 1997, and 1996,
respectively.
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities under a ten-year lease which began
July 15, 1993. The lease may be extended at the Company's option for
two additional five-year terms. The first five year term rental rate
is based on a fixed amount per square foot which is approximately a
6.3% increase over the 2003 year rental rate. The second five year
term is subject to rental adjustments based on a formula related to
fair market rental.
Future minimum lease payments under operating leases with initial
lease terms in excess of one year are as follows:
1999 $ 283,762
2000 326,508
2001 326,508
2002 299,299
2003 299,299
Thereafter 0
Future minimum lease payments $ 1,535,376
Rent expense under operating leases was $287,852, $261,663 and
$245,470 for 1998, 1997, and 1996, 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. Effective
August 10, 1998 the Company amended the April 1995 agreement
retroactively to April 17, 1998 which provides for a base salary of
$172,000 and may be reduced by the amount of any pay increases given
by the Company to its Chief Operating Officer, but in no event shall
such reductions exceed $35,000.
The Company has consulting agreements with certain members and a
former member of the Board of Directors. The compensation expensed
was $120,000, $180,000 and $180,000 in 1998, 1997 and 1996,
respectively.
Aggregate commitments for future salaries under employment agreements
and consulting agreements is $558,000.
<PAGE>
Legal Proceedings
The Company has been advised by a State taxing authority of its
intention to audit the sales tax records of the Company for business
done in such tax jurisdiction. The Company does not believe that the
results of such audit will have a material impact on the financial
position of the Company.
On May 22, 1998, the Company received a letter from the Recording
Industry Association of America, Inc. (RIAA) alleging that it was
illegally duplicating sound recordings of the RIAA's member companies
in its Mobile Beat Series I and II and Mobile Beat Holiday Series.
The RIAA alleged substantial damages in the amount of $76,000,000 and
stated that it would consider a pre-complaint settlement.
Following receipt of the letter, the Company and its counsel met with
RIAA's counsel on June 30, 1998. At this meeting, the RIAA made a
demand for $3 million to settle the dispute. RIAA was advised that
the Company's financial position could not support such a cash
settlement.
On July 14, 1998 the Company entered into a Tolling Agreement with
the RIAA. On July 24, 1998, it formally responded to the RIAA.
Since then, Disctronics, one of the companies that manufactures CDs
for the Company's GoldDisc line, contacted the Company and advised it
that Disctronics had been contacted by the RIAA and told not to
duplicate any sound recordings in the GoldDisc Series unless the
Company could supply written license agreements.
By letter dated August 4, 1998, RIAA advised the Company that it
would bring suit unless a meaningful settlement offer was proffered
by the Company by August 10, 1998. In September mediation was
undertaken with no settlement resulting.
In October 1998, the Company filed suit for declaratory judgment and
tortuous interference with respect to Disctronics. The suit was
later dismissed without prejudice by agreement.
Thus far no discovery has been undertaken. The Company believes that
it has a meritorious defense to many of the claims asserted, but it
is possible that it will not prevail if the matter is brought to
litigation. Any significant cash amount paid in settlement or
awarded in judgment would likely have an adverse effect on the
Company.
In management's opinion the likelihood of an unfavorable outcome and
an estimate of the amount or range of any potential loss cannot be
determined. However, the Company has recorded a reserve for possible
loss of $385,000 as of September 30, 1998 on the terms of its latest
settlement offer based on annual payments of $50,000 over a period of
eleven years. The recorded reserve reflects a discount of the
settlement offer using a discount rate of 8% per annum.
<PAGE>
8. INCOME TAXES
Differences between the statutory federal income tax rate and the
effective rate for the years ended September 30, 1998, 1997 and 1996
are as follows:
1998 1997 1996
Income tax provision at statutory rate (35.0%) (35.0%) (35.0%)
Effect of graduated tax rates 1.0 1.0 1.0
Operating losses with no current tax 34.0 32.5 27.8
benefit
Change in beginning of the year valuation
allowance 19.71 - -
Other - 1.5 1.5
19.71 (0.0%) (4.7%)
The Company has net operating loss carryforwards of approximately
$1,497,000 available to offset future taxable income expiring in 2008
through 2011. A valuation allowance of approximately $846,000 has
been provided to reduce the net deferred tax asset to zero because it
is likely that the tax asset will not be realized. Realization is
dependent on generating sufficient taxable income prior to expiration
of the loss carryforwards. The amount of the deferred tax asset has
been reduced to zero due to the Company experiencing four consecutive
year losses. 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,
1998 and 1997 are as follows:
1998 1997
Bad debt $ 80,699 $ 87,500
Depreciable assets (3,323) (26,400)
Inventory valuation allowance 116,600 116,600
Net operating loss carryforwards 521,411 450,100
Provision for settlement of RIAA dispute 130,900 -
Other - (1,100)
Total deferred tax asset 846,287 626,700
Valuation allowance 846,287 498,570
Net deferred tax asset $ - $128,130
<PAGE>
The components of the income tax expense (benefit) are as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred - - (34,313)
Change in beginning of the year balance of
the valuation for deferred tax assets
allocated to income tax expense 128,130 - -
$ 128,130 $ - $ (34,313)
</TABLE>
No income tax payments were necessary in fiscal 1998, 1997 and 1996
due to the Company's net operating loss position. The Company
received a $129,000 income tax refund during 1996, from a net
operating loss carryback to fiscal year 1994.
9. EARNINGS PER SHARE
In February, 1997, FASB issued SFAS No. 128, "Earnings per Share",
effective for periods ending after December 15, 1997. Basic earnings
per share are calculated on the weighted average number of common
shares outstanding during each period. All prior period earnings per
share amounts have been restated in accordance with SFAS No. 128.
Diluted earnings per share are not materially different than basic
earnings per share.
The following table provides a reconciliation between basic and
diluted earnings per share, in accordance with SFAS No. 128:
<TABLE>
Fiscal Year Ended
September 30
1998 1997
<S> <C> <C>
Net Loss $ (778,052) $ (827,345)
Weighted Average Number of Shares Outstanding
Basic 2,483,193 2,496,210
Dilutive effect of common stock equivalents - -
Diluted 2,483,193 2,496,210
Earnings Per Share:
Basic and Diluted Loss $ (0.31) $ (0.33)
</TABLE>
<PAGE>
10. ROYALTY AND SALES REPRESENTATION AGREEMENTS
The Company has certain distribution arrangements with independent
sales agents worldwide. Fees included in commission expense under
these arrangements were $804,000, $929,000 and $989,000 in 1998, 1997
and 1996, 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, 1998 and 1997:
<TABLE> Weighted
Number of Price Average Price
Shares Per Share Per Share
<S> <C> <C> <C> Per Share
Options outstanding at September 30, 1995 210,000 $1.125 - $2.50 1.2238
Granted 55,000 $1.0625 - $1.20 1.0573
Exercised -
Forfeited (30,000) $1.20 1.2000
Options outstanding at September 30, 1996 235,000 $1.0625 - $2.50 1.1690
Granted 25,000 $.625 0.6250
Exercised - -
Forfeited (60,000) $.625 - $1.125 1.0573
Options outstanding at September 30, 1997 200,000 $1.0625 - $2.50 1.1345
Granted 15,000 $.355 0.3550
Exercised - -
Forfeited (10,000) $.625 0.6250
Options outstanding at September 30, 1998 205,000 $.355 - $2.50 1.1023
Options exercisable at September 30, 1998 134,125 $.355 - $2.50 1.1632
</TABLE>
The weighted average remaining contractual life of the stock options
outstanding at September 30, 1998 is 6.4 years.
At September 30, 1998 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 1998 and 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 fiscal years ended 1998 and
1997, the 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 $779,379 and $834,845,
respectively and would have resulted in no difference in reported net
loss per share.
The estimated weighted average grant date fair value of options
granted during fiscal years 1998 and 1997 were $.2110 and $.3252 per
share, respectively. For purposes of determining fair value of each
option, the Company used the minimum value method using the following
assumptions:
1998 1997
Risk-free interest rate 5.34 % 6.75 %
Expected life (years) 10 9
<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, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 348957
<SECURITIES> 0
<RECEIVABLES> 993653
<ALLOWANCES> 230000
<INVENTORY> 791389
<CURRENT-ASSETS> 1755439
<PP&E> 2508394
<DEPRECIATION> 1879587
<TOTAL-ASSETS> 2580903
<CURRENT-LIABILITIES> 582650
<BONDS> 0
0
0
<COMMON> 29705
<OTHER-SE> 1400198
<TOTAL-LIABILITY-AND-EQUITY> 2580903
<SALES> 6808489
<TOTAL-REVENUES> 6808489
<CGS> 2208172
<TOTAL-COSTS> 7067800
<OTHER-EXPENSES> (10352)
<LOSS-PROVISION> 365000
<INTEREST-EXPENSE> 15963
<INCOME-PRETAX> (649922)
<INCOME-TAX> (128130)
<INCOME-CONTINUING> (778052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (778052)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
