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, 1999
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
The issuer's revenue for its most recent fiscal year was $6,237,102.
The aggregate market value of the voting stock held by non-affiliates
of the issuer on September 30, 1999 based upon the average bid and
asked prices of such stock on that date was $617,000. The number of
issuer's shares of Common Stock outstanding as of September 30, 1999
was 2,483,193.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Company's 2000 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, station
identification and commercials for broadcast media use.
TM Century's clients include radio & television stations; radio,
television, satellite and Internet networks; web sites and portals; the
American Forces Radio Network; numerous advertising agencies and
commercial businesses.
The Company 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 broadcast media worldwide. Products include special
compilations of popular music on compact discs and computer hard
drives, instrumental backgrounds for commercials and sound effects,
station identification and commercial jingles and comedy services.
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,
post production houses, web sites and commercial businesses.
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 web sites. 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, 1999, 1998, and 1997.
(Dollar Amounts in Thousands) Period Ended
1999 1998 1997
----- ----- -----
Broadcast Services
Music Libraries $5,075 $5,567 $5,707
Radio Jingles 1,138 1,183 1,051
Software and Compact
Disc Equipment 2 28 465
Other 22 30 23
----- ----- -----
Total $6,237 $6,808 $7,246
===== ===== =====
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, trade convention
displays, and the World Wide Web. 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
$1,600,000, $1,900,000, and $2,200,000 for the years ended 1999, 1998,
and 1997, 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.
<PAGE>
Trademarks and Copyrights
The Company markets products under various names and trademarks which
management believes provide the Company's products with international
industry recognition. The Company holds numerous registered copyrights
on sound recordings of original music and radio station jingles.
Management believes its copyrights have significant value, as the
Company derives a significant portion of its income from the licensed
use of its sound recordings.
Employees
As of December 1, 1999, the Company had approximately 47 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.
Effective July 1, 1999 the Company entered into an agreement with an
unrelated third party to sublease approximately 16,000 square feet of
space for a term of approximately 50 months. Management believes that
the facility currently occupied is sufficient for its existing
activities and potential growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
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. Settlement
discussions then ensued and are continuing. On June 30, 1998 the
Company and its counsel met with RIAA and its counsel. At this
meeting the RIAA made a demand for $3 million to settle the dispute.
In September, 1998 mediation was undertaken with no settlement
resulting.
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.
<PAGE>
The Company recorded a reserve for possible loss of $385,000 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.
During 1999 the Company accrued interest in the amount of $20,100
through June 30, 1999.
As the RIAA has rejected the most recent settlement offer with no
counter offer, the Company will not continue to accrue any additional
provision for settlement of the dispute, nor will it continue to accrue
legal costs related to the matter, however, it is management's opinion
that the accrual balance is a "best estimate" based on current
circumstances.
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, 1999.
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
1999:
1st Quarter $ .72 $ .28
2nd Quarter 1.12 .28
3rd Quarter 1.03 .44
4th Quarter 1.12 .47
Fiscal
1998:
1st Quarter $ .81 $ .38
2nd Quarter .63 .44
3rd Quarter .50 .41
4th Quarter .60 .28
As of September 30, 1999 the Company had approximately 208 record
owners and 343 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 2000.
<PAGE>
During fiscal 1999, the Company made approximately $95,700 in capital
expenditures for the purchase of property and equipment which compares
to capital expenditures of approximately $44,500 in 1998 and $97,000 in
1997. Capital expenditures in 1999 were primarily associated with
upgrades of production equipment and leasehold improvements. Product
development costs of $155,000 were incurred during fiscal 1999 for
software development, new music libraries, and music library updates,
which compares to product development expenditures of $164,000 in 1998
and $144,000 in 1997. Funds for operating needs, new product
development, and capital expenditures for the year ended September 30,
1999 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 $185,000 in fiscal 2000. The Company has no other
significant commitments for capital expenditures in fiscal 2000.
Management anticipates that cash flow from operations and cash reserves
will be sufficient to meet capital requirements.
Effective January 2, 1999, the Company purchased the remaining 50%
interest of certain comedy material that was written and produced by an
individual for broadcast by radio stations and marketed by the Company,
resulting in the Company owning 100% of such Comedy Service. For
consideration of the comedy material and the Company being able to use
the individual's name in connection with promoting the Comedy Service
the Company agreed to pay to the individual a total of $124,000,
payable over five years through December 2, 2003.
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 lease was
backed by a letter of credit in the amount of $200,000. Due to the
short term remaining on the principal balance, the letter of credit
requirement was removed effective February 28, 1999. The lease
agreement will terminate in fiscal 2000. No long term borrowings are
anticipated in the foreseeable future at current levels of business
operations.
Customer deposits decreased to $136,700 as of September 30, 1999, from
$194,800 as of September 30, 1998, 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
$1,332,000 available to offset future taxable income expiring in 2008
through 2011. A valuation allowance of approximately $740,000 has been
provided to reduce the net deferred tax asset to zero because of the
uncertainty of generating future taxable income. 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.
<PAGE>
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 $41,000 in fiscal year
1997, which purchases were funded by cash reserves of the Company.
The Company has assessed its Year 2000 issues and determined that there
will be little, if any, impact on 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 also 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 become Year 2000 compliant in a
timely manner. 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 be provided by operations and cash reserves.
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Revenues decreased 8.4% to $6.2 million in 1999 from $6.8 million in
1998. 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 comedy
service sales. The decrease in music library revenues was $493,000, or
9% and is partially attributed to the discontinuation of the mobile
beat product line in May, 1998 which comprised 7.3% of music library
revenues in fiscal 1998. Production libraries increased $258,000, or
24% primarily due to increased sales of libraries introduced in fiscal
1998 and continual sales of existing libraries. An increase in the
percentage of barter revenue, combined with an overall increase in
advertising revenue contributed to the revenue increase. Barter
revenues are derived from obtaining airtime from radio stations in
exchange for such weekly services and marketing such airtime to
advertisers. Revenues from radio jingles decreased by $45,000, or 3.8%
primarily due to a decrease in the sales volume of custom and
syndicated jingles packages being sold.
<PAGE>
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 $132,000 or 21% increase in weekly comedy services revenue was due to
an increase in domestic and international sales, as well as an increase
in barter revenue.
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.
Commissions as a percentage of revenues increased to 19.2% of revenue
in fiscal 1999 from 19% of revenue in fiscal 1998. 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 7.8% to $2
million in 1999 from $2.2 million in 1998. The decrease is primarily
due to lower replication direct costs. As a percentage of revenue
these costs increased from 32% in 1998 to 33% in 1999.
General and administrative costs decreased $250,000 or 11%, due to a
decrease in salaries and benefits and other administrative expenses. An
aggressive collection policy provided a $180,000 decrease in bad debt
expense over the prior fiscal year.
Selling costs decreased $247,000 or 26%, primarily due to a decrease in
salaries and benefits, domestic commissions and advertising expenses.
Depreciation expense decreased $54,000, or 16%, primarily as a result
of more assets being fully depreciated compared to the prior year.
During 1999, the Company recorded a provision of $12,000 to reduce the
carrying value of its production libraries to the lower of cost or
market. Inventory levels were reduced to amounts supported by current
sales levels.
<PAGE>
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. Interest
expense of $20,100 was recorded through June, 1999 when it was
determined that additional accruals would be suspended until further
activity occurs.
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.
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.
<PAGE>
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.
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.
<PAGE>
The Company 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and notes thereto, together with the report
thereon of King Griffin & Adamson P.C. dated November 24, 1999,
included elsewhere in this report are incorporated by reference in
answer to this Item 7.
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
On May 17, 1999, the Company dismissed its former independent
accountants Deloitte & Touche LLP ("D&T") and engaged King, Griffin &
Adamson P.C. to audit the Company's financial statements. The decision
to change independent accountants was recommended and approved by the
Company's Board of Directors.
D&T served as independent auditors of the Registrant for the years
ended September 30, 1997 and 1998. The reports of D&T on the
Registrant's financial statements for the years ended September 30,
1997 and 1998 contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or
accounting principle. In connection with its audits for the years
ended September 30, 1997 and 1998, and during the fiscal year 1999
prior to D&T's dismissal, the Company had no disagreements with D&T on
matters of accounting principles or practices, financial statement
disclosures, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of D&T would have caused them to make
reference thereto in their report on the financial statements for such
years.
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 2000 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 2000 Information Statement
and is incorporated herein by reference pursuant to General Instruction
E(3).
<PAGE>
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 2000
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 2000 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 Amendment of Certificate of Incorporation of
TM Century, Inc. effective March 27, 1992. (Exhibit 1) (2)
(March 31, 1992)
10 Material Contracts:
(a) *Long Term Performance Incentive Plan of TM Century, Inc. dated
December 3, 1991. (Exhibit 10(bb))(3)
(b) *TM Century, Inc. Bonus Plan for Executive Management dated
October 1, 1992 (Exhibit 10(j)) (4)
(c) Lease Agreement, dated as of April 23, 1993 by and between
NationsBank of Texas, N.A., Trustee and TM Century, Inc.
(Exhibit 1) (March 31, 1993) (2)
(d) 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)) (5)
(e) Master Lease Agreement by and between USL Capital Corporation
and TM Century, Inc. dated May 2, 1996. (Exhibit 10(b))
(June 30, 1996)(2)
(f) *Employment Agreement between TM Century, Inc. and R. David
Graupner dated May 31, 1999. (Exhibit 10.2) (June 30, 1999)(2)
(g) *Consulting Agreement between TM Century, Inc. and Neil W.
Sargent dated June 28, 1999. (Exhibit 10.3) (June 30, 1999)(2)
(h) Amended and Restated 1991 Long Term Performance Incentive Plan
of TM Century dated July 2, 1999 (Exhibit 10(h))
27 Financial Data Schedule
<PAGE>
Notes to Exhibits:
(1) Incorporated by reference to the similarly-numbered exhibit
to the Registration Statement on Form S-18 (No. 2-93588-FW),
filed October 2, 1984, as amended.
(2) Incorporated by reference to the indicated exhibit to the
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, 1991.
(4) 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.
(5) Incorporated by reference to the indicated exhibit to the
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1994.
* The documents filed or incorporated by reference as Exhibits 10(a),
(b), (f) and (g) 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, 1999.
<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 22, 1999
TM CENTURY, INC.
BY:/s/Teri R.S. James
Teri R.S. James
Vice President of Finance
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/ Teri R.S. James December 22, 1999
TERI R.S. JAMES, Vice President of Finance
(Principal financial and accounting officer)
/s/ R.David Graupner December 22, 1999
R. DAVID GRAUPNER, President and Chief Executive Officer
(Principal executive officer)
/s/ Marjorie L. McIntyre December 22, 1999
MARJORIE L. MCINTYRE, Chairman of the Board of Directors
/s/ A. Ann Armstrong December 22, 1999
A. ANN ARMSTRONG, Director
/s/ Carol M. Long December 22, 1999
CAROL LONG, Director
/s/ Michael Cope December 22, 1999
MICHAEL COPE, Director
<PAGE>
TM CENTURY, INC.
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Independent Auditors' Report - King Griffin & Adamson P.C. 16
Independent Auditors' Report - Deloitte & Touche LLP 17
Balance Sheets, September 30, 1999 and 1998 18
Statements of Operations for the Years Ended September 30,
1999, 1998 and 1997 19
Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997 20
Statements of Cash Flows for the Years Ended September 30,
1999, 1998 and 1997 21
Notes to Financial Statements 22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Stockholders
TM Century, Inc.
We have audited the accompanying balance sheet of TM Century, Inc. as
of September 30, 1999, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of TM Century,
Inc. as of September 30, 1999, and the results of its operations and
its cash flows for the year then ended in conformity with generally
accepted accounting principles.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
November 24, 1999
<PAGE>
INDEPENDENT AUDITOR' REPORT
To the Stockholders and Board of Directors of TM Century, Inc.:
We have audited the balance sheet of TM Century, Inc. (the "Company"),
as of September 30, 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the two 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
financials 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 the results of its operations and its cash flows for each
of the two years in the period ended September 30, 1998, in conformity
with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Dallas, Texas
December 4, 1998
<PAGE>
<TABLE>
TM Century, Inc.
Balance Sheets
September 30, 1999 and 1998
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 354,332 $ 348,957
Accounts receivable, less allowance
for doubtful accounts of $100,000
and $230,000 respectively 721,538 763,653
Inventories, net of allowance for obsolescence
of $258,545 and $252,545 respectively 446,279 470,763
Prepaid expenses 31,277 29,837
--------- ---------
TOTAL CURRENT ASSETS 1,553,426 1,613,210
PROPERTY AND EQUIPMENT 2,563,220 2,508,394
Less accumulated depreciation and amortization (2,116,116) (1,879,587)
--------- ---------
NET PROPERTY AND EQUIPMENT 447,104 628,807
PRODUCT DEVELOPMENT COSTS, net of accumulated
amortization of $1,630,071 and $2,378,484
respectively 324,094 320,626
COMEDY MATERIAL RIGHTS, net of accumulated
amortization of $18,600 and $0 respectively 105,400 -
OTHER ASSETS 19,316 18,260
--------- ---------
TOTAL ASSETS $2,449,340 $2,580,903
========= =========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 63,508 100,050
Accrued expenses 196,978 233,836
Current portion of note payable 33,333 -
Current portion obligation under capital lease 3,202 122,212
Deferred revenue 127,382 108,694
Customer deposits 37,623 17,858
--------- ---------
TOTAL CURRENT LIABILITIES 462,026 582,650
NOTE PAYABLE, less current portion 65,667 -
OBLIGATIONS UNDER CAPITAL LEASE, less current portion - 6,407
CUSTOMER DEPOSITS - NONCURRENT 99,114 176,943
ACCRUED SETTLEMENT FOR RIAA DISPUTE 405,100 385,000
--------- ---------
TOTAL LIABILITIES 1,031,907 1,151,000
COMMITMENTS AND CONTINGENCIES (NOTE 7) - -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 7,500,000 29,705 29,705
shares; 2,970,481 shares issued; and 2,483,193
shares outstanding
Additional paid-in capital 2,275,272 2,275,272
Treasury stock - at cost, 487,288 shares (1,291,227) (1,291,227)
Retained earnings 403,683 416,153
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,417,433 1,429,903
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,449,340 $2,580,903
========= =========
</TABLE>
<PAGE>
<TABLE>
TM Century, Inc.
Statements of Operations
Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES $6,237,102 $6,808,489 $7,246,661
Less Commissions 1,198,184 1,302,280 1,213,679
--------- --------- ---------
NET REVENUES 5,038,918 5,506,209 6,032,982
COSTS AND EXPENSES
Production, Programming, and Technical Costs 2,035,462 2,208,172 2,897,893
General and Administrative Costs 2,000,183 2,250,933 2,266,540
Selling Costs 706,059 953,179 1,122,774
Depreciation and Amortization of Property
and Equipment 277,451 330,970 338,111
Reduction in Carrying Value of Inventories 12,000 22,266 218,000
--------- --------- ---------
Total Costs and Expenses 5,031,155 5,765,520 6,843,318
--------- --------- ---------
OPERATING INCOME (LOSS) 7,763 (259,311) (810,336)
OTHER INCOME (EXPENSE)
Interest Income 3,838 10,352 10,613
Interest Expense (3,971) (15,963) (28,440)
Other - - 818
--------- --------- ---------
(133) (5,611) (17,009)
PROVISION FOR SETTLEMENT OF RIAA DISPUTE (20,100) (385,000) -
--------- --------- ---------
LOSS BEFORE PROVISION FOR INCOME TAXES (12,470) (649,922) (827,345)
PROVISION FOR INCOME TAXES
Current - - -
Deferred - (128,130) -
--------- --------- ---------
Total Provision for Income Taxes - (128,130) -
--------- --------- ---------
NET LOSS $ (12,470) $ (778,052) $ (827,345)
========= ========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.01) $ (0.31) $ (0.33)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,483,193 2,483,193 2,496,210
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
TM Century, Inc.
Statements of Stockholders' Equity
Years Ended September 30, 1999, 1998 and 1997
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, OCTOBER 1, 1996 2,970,481 $29,705 $2,275,272 $(1,250,316) $2,021,550 $3,076,211
Purchase of Treasury Stock - - - (40,911) - (40,911)
Net Loss - - - - (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 - - - - (778,052) (778,052)
--------- ------ --------- ---------- --------- ---------
BALANCE, SEPTEMBER 30, 1998 2,970,481 29,705 2,275,272 (1,291,227) 416,153 1,429,903
Net Loss - - - - (12,470) (12,470)
--------- ------ --------- ---------- --------- ---------
BALANCE, SEPTEMBER 30, 1999 2,970,481 $29,705 $2,275,272 $(1,291,227 $ 403,683 $1,417,433
========= ====== ========= ========== ========= =========
</TABLE>
<PAGE>
<TABLE>
TM Century, Inc.
Statements of Cash Flows
Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(12,470) $(778,052) $(827,345)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities
Depreciation and amortization of property
and equipment 277,451 330,970 338,111
Amortization 170,320 289,620 385,079
Provision for settlement of RIAA dispute 20,100 385,000 -
Deferred federal income taxes - 128,130 -
Provision for doubtful accounts (130,000) (20,000) 140,498
Gain on disposition of property and equipment - - (818)
Reduction in carrying value of inventories 12,000 22,266 148,000
Increase (decrease) in cash from changes in operating
assets and liabilities:
Accounts receivable 172,115 (9,886) (44,417)
Prepaid expenses (1,440) (4,613) 26,349
Inventories 12,484 (15,842) 259,181
Product development costs (155,188) (163,833) (144,390)
Accounts payable and accrued expenses (73,400) 58,761 (73,754)
Deferred revenue 18,688 52,683 31,713
Customer deposits (58,064) 2,025 (38,323)
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 252,596 277,229 199,884
INVESTING ACTIVITIES
Increase in other assets (1,056) - (2,872)
Purchases of property and equipment (95,748) (44,436) (96,891)
Proceeds from sale of property and equipment - - 20,916
------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (96,804) (44,436) (78,847)
FINANCING ACTIVITIES
Principal payments on note payable (25,000) - -
Principal payments on capital lease obligation (125,417) (178,169) (163,648)
Acquisition of treasury stock - - (40,911)
------- -------- --------
NET CASH USED BY FINANCING ACTIVITIES (150,417) (178,169) (204,559)
------- -------- --------
NET INCREASE (DECREASE) IN CASH 5,375 54,624 (83,522)
CASH AT BEGINNING OF YEAR 348,957 294,333 377,855
------- -------- --------
CASH AT END OF YEAR $354,332 $348,957 $294,333
======= ======== ========
</TABLE>
<PAGE>
TM CENTURY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
TM Century, Inc. (the "Company") is primarily engaged in the creation,
production, marketing, and distribution of goods and services for radio
stations worldwide. Products include special compilations of popular
music on compact discs, sound effects, 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 maturity terms of
three months or less when purchased.
Accounts Receivable
The Company extends unsecured credit in the normal course of busines to
virtually all of its customers. Management has provided an allowance
for doubtful accounts which reflects its opinion of amounts which may
ultimately become uncollectible. In the event of non-performance
of accounts receivable, the maximum exposure to the Company is the
recorded amount shown on the balance sheet
Inventories and Product Development Costs
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
(Product Development Costs) 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.
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.
Comedy Material Rights
Comedy Material Rights are recorded at cost and are amortized on a
straight-line basis over the economic life of the product (5
years).
<PAGE>
Revenue Recognition
Revenues are recognized as follows:
Library Lease Contracts - Monthly upon delivery of the
product in accordance with the terms of the lease contracts.
Library Buyouts - Upon delivery of the product.
Identification Jingles - Upon delivery of the product.
Music Scheduling Software - Monthly in accordance with the
terms of the lease contracts.
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. Depreciation and amortization of property and
equipment under capital leases 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. The Company
had 339,000, 205,000 and 200,000 stock options outstanding as of
September 30, 1999, 1998 and 1997 respectively. These options were
excluded from the calculation of basic and diluted net loss per share
since including such options would have an antidilutive effect.
<PAGE>
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.
Concentration
The Company maintains cash balances at banks, which may, at times,
exceed federally insured limits. However , management monitors these
balances and does not believe excess risk is present.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform with the classifications used in the 1999
financial statements with no effect on previously reported net loss or
stockholders' equity.
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 Company's adoption of
SFAS No. 131 did not have a significant impact upon the Company's
reported results of operations.
<PAGE>
The FASB issued, in February 1998, SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which
revises employer's disclosures about pensions and other postretirement
benefit plans and is effective for financial statements issued for
periods beginning after December 15, 1997. The adoption of SFAS 132
did not have a significant effect on the 1999 financial statements.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133", which establishes accounting and reporting
standards for derivative instruments. SFAS No. 137 is effective for
all fiscal quarters for all fiscal years beginning after June 15, 2000.
The adoption of SFAS 137 is not expected to have a significant impact
upon the Company's reported results of operations.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures as of September 30:
1999 1998
------- -------
Cash paid for interest $ 3,971 $ 15,967
Noncash investing and financing activities:
Issuance of note payable for
comedy material rights $124,000 $ -
4. INVENTORIES
In 1999 the Company recorded a provision of $12,000 to reduce the
carrying value of its music and compact disc libraries to the lower of
cost or market. The Company also wrote off approximately $22,000 of
Mobile Beat inventory due to the RIAA legal dispute in 1998 (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, 1999
and 1998:
1999 1998
--------- ---------
Office furniture $ 528,753 $ 503,069
Computer software & equipment 173,951 162,395
Production equipment 950,962 944,397
Leasehold improvements 380,827 369,810
Capital Lease 528,727 528,723
--------- ---------
Total $2,563,220 $2,508,394
========= =========
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 $131,000, $176,000, and
$203,000 is included in depreciation and amortization of property and
equipment expense for the fiscal years ended September 30, 1999, 1998
and 1997, respectively.
<PAGE>
6. NOTES PAYABLE AND CAPITAL LEASE OBLIGATION
Note Payable
During 1999 the Company issued a $124,000 non-interest bearing,
uncollateralized note payable in exchange for comedy material rights.
This note requires monthly payments of $2,778 through December 2, 2001
and monthly payments of $1,000 thereafter through December 2, 2003.
Future minimum payments associated with this note payable as of
September 30, 1999 are as follows:
2000 $ 33,333
2001 33,333
2002 17,334
2003 12,000
2004 3,000
----------
Future minimum note payments $ 99,000
==========
Capital Lease Obligation
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 was backed by a $200,000 letter of
credit until February 28, 1999, at which time it was determined
unnecessary for the remaining term of the lease. The lease term of
three years expired, in part, in May, 1999 and was extended for a
period of twelve months with the option to purchase the equipment for
$1 at the end of the extended term. The remainder of the lease will
expire in November, 1999, at which time the Company has the option to
purchase this portion of the equipment at its fair market value.
Future minimum lease payments under the lease as of September 30, 1999
are as follows:
2000 $ 6,478
-------
Total minimum lease payments 6,478
Less amount representing interest (3,276)
-------
Net present value of current
minimum lease payments $ 3,202
=======
The Company expensed $3,971, $15,963, and $25,871 of interest on notes
payable and capital lease obligations during 1999, 1998, and 1997,
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. The Company has subleased a portion of its facility
through July, 2003. Future minimum rental revenue from the sublease
agreement is $630,000.
Future minimum lease payments under operating leases with initial lease
terms in excess of one year are as follows:
2000 $ 326,508
2001 326,508
2002 326,508
2003 299,299
----------
Future minimum lease payments $ 1,278,823
==========
Rent expense under operating leases was $285,345, $287,852, and
$261,663 for 1999, 1998, and 1997, respectively.
Employment Agreements
Effective May 31, 1999, the Company entered into a thirty-eight month
employment contract with an executive officer and director of the
Company which provides for a base annual salary of $150,000 and
eligibility to participate in the Company's Bonus Plan.
The Company has consulting agreements with certain members and a former
member of the Board of Directors. The compensation expensed was
$86,900, $120,000, and $180,000 in 1999, 1998 and 1997, respectively.
Commitments for future salaries under employment agreements and
consulting agreements are as follows:
2000 $ 236,267
2001 171,600
2002 146,600
2003 21,600
2004 16,200
---------
Total employment &
consulting commitments $ 592,267
=========
<PAGE>
Legal Proceedings
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. Settlement
discussions then ensued and are continuing. On June 30, 1998 the
Company and its counsel met with RIAA and its counsel. At this
meeting the RIAA made a demand for $3 million to settle the dispute.
In September, 1998 mediation was undertaken with no settlement
resulting.
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.
The Company recorded a reserve for possible loss of $385,000 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.
During 1999 the Company accrued interest in the amount of $20,100
through June 30, 1999.
As the RIAA has rejected the most recent settlement offer with no
counter offer, the Company will not continue to accrue any additional
provision for settlement of the dispute, nor will it continue to accrue
legal costs related to the matter, however, it is management's opinion
that the accrual balance is a "best estimate" based on current
circumstances.
8. INCOME TAXES
Differences between the statutory federal income tax rate and the
effective rate for the years ended September 30, 1999, 1998 and 1997
are as follows:
<TABLE>
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
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 benefit - 34.0 32.5
Change in beginning of
the year valuation allowance 32.5 19.71 -
Other 1.5 - 1.5
---- ----- ----
0.0% 19.71% (0.0%)
==== ===== ====
</TABLE>
<PAGE>
The Company has net operating loss carryforwards of approximately
$1,332,000 available to offset future taxable income expiring in 2008
through 2011. A valuation allowance of approximately $740,000 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. 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, at September 30, 1999 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,
1999, and 1998 are as follows:
<TABLE>
1999 1998
------- -------
<S> <C> <C>
Bad debt $ 35,000 $ 80,699
Depreciable assets 5,950 (3,323)
Inventory valuation allowance 90,491 116,600
Net operating loss
carryforwards 466,373 521,411
Provision for settlement
of RIAA dispute 141,785 130,900
------- -------
Total deferred tax asset 739,599 846,287
Valuation allowance 739,599 846,287
------- -------
Net deferred tax asset $ - $ -
======= =======
The components of the income tax expense (benefit) are as follows:
1999 1998 1997
----- ------- -----
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred - - -
Change in beginning of
the year balance of
the valuation for
deferred tax assets
allocated to income
tax expense - 128,130 -
----- ------- -----
$ - $128,130 $ -
===== ======= =====
</TABLE>
No income tax payments were necessary in fiscal 1999, 1998 and 1997 due
to the Company's net operating loss position.
<PAGE>
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 loss per share
amounts have been restated in accordance with SFAS No. 128.
The following table provides a reconciliation between basic and diluted
loss per share, in accordance with SFAS No. 128:
<TABLE>
Fiscal Year Ended
September 30
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net Loss $ (12,470) $ (778,052) $ (827,345)
Weighted Average Number of
Shares Outstanding
Basic 2,483,193 2,483,193 2,496,210
Dilutive effect of common
stock equivalents - - -
Diluted 2,483,193 2,483,193 2,496,210
--------- --------- ---------
Loss Per Share:
Basic and Diluted Loss $ (0.01) $ (0.31) $ (0.33)
========= ========= =========
</TABLE>
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 $550,000, $804,000, and $929,000 in 1999, 1998
and 1997, 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 Board of Directors approved an amendment to the Plan, effective
July 2, 1999, which increased the total number of shares which may be
issued to 350,000 shares of common stock and provided for Employee
Incentive Options based upon an employee's length of employment.
<PAGE>
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 at a rate of 20% upon grant, 35% after year one, 50% after
year two, 65% after year three, 80% after year four and 100% after year
five.
The option prices of outstanding Nonqualified Stock Options range from
$.75 to $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.
Employee Incentive Options are granted based on the employee's length
of employment at an option price not less than the fair market value of
the common stock at the date of grant. All Employee Incentive Options
are 100% vested upon grant.
Option information for the fiscal years ended September 30, 1999, 1998
and 1997:
<TABLE>
Weighted Avg.
Number of Price Price Per
Shares Per Share Share
-------- ---------------- ------
<S> <C> <C> <C>
Options outstanding at
October 1, 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
Granted 146,500 $.515 - $.75 .7199
Exercised - -
Forfeited (12,500) $1.20 1.2000
-------
Options outstanding at
September 30, 1999 339,000 $.355 - $2.50 .9335
=======
Options exercisable at
September 30, 1999 199,000 $.355 - $2.50 1.0248
</TABLE>
The weighted average remaining contractual life of the stock options
outstanding at September 30, 1999 is 8.0 years.
At September 30, 1999 the Company has reserved a total of 350,000
shares of common stock for exercise of stock options.
<PAGE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for its stock option and award plan. During
1999, 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 1999, 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 $22,244, $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 1999, 1998 and 1997 using the Black-Scholes Model
were $.3949, $.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:
1999 1998 1997
---- ---- ----
Risk-free interest rate 6.0 % 5.34 % 6.75 %
Expected life (years) 10 10 9
EXHIBIT 10(h)
AMENDED AND RESTATED
1991 LONG TERM PERFORMANCE INCENTIVE PLAN
OF TM CENTURY
In 1991 TM Century, Inc. (the "Company") adopted the 1991 Long
Term Performance Incentive Plan of TM Century, Inc. (the "Plan") to
advance and promote the interest of the Company and its employees and
stockholders by encouraging the acquisition of its Common Stock by key
employees and individuals who perform significant services for the
benefit of the Company.
One Million Five Hundred Thousand (1,500,000) shares of Common
Stock were originally reserved for issuance under the Plan. In March,
1992, the Company effected a one for eight reverse stock split, and, as
a result, the number of shares reserved for issuance under the Plan was
reduced to 187,000.
Options to purchase all of the shares originally reserved for
issuance under the Plan were granted, and in 1993 Section 1 of the Plan
was amended to provide that there were 250,000 shares of the Company's
Common Stock reserved for issuance under the Plan.
In May 1999 Section 1.2(e) of the Plan was amended to revise the
definition of "employee" to include consultants to the Company.
In July 1999 the Board of Directors determined that the Plan
should be amended in order to accommodate the granting of options to a
larger number of employees. The amendment provides for increasing the
number of shares that can be issued under the Plan to 350,000 and
provides for a different vesting schedule for certain options granted
to employees.
All of the amendments adopted prior to July 1999 and the
amendments adopted in July 1999 are set forth below in this Amendment
and Restatement of the Plan.
SECTION 1. Introduction
.1 Purpose
The purpose of the 1991 Long Term Performance Incentive Plan of TM
Century, Inc. (the "Plan") is to advance and promote the interest of TM
Century, Inc. (the "Company") and its employees and stockholders by
encouraging the acquisition of its Common Stock by key employees and
individuals who perform significant services for the benefit of the
Company. Accordingly, the Plan is intended as a means of attracting
and retaining outstanding employees and also to promote a close
commonality of interest between employees and stockholders.
Three Hundred Fifty Thousand (350,000) shares of Common Stock are
reserved for issuance under the Plan.
<PAGE>
.2 Definitions
The following terms shall have the meanings set forth below:
(a) Code. The Internal Revenue Code of 1986, as amended.
(b) Committee. Compensation Committee of the Board of
Directors of the Company or any successor thereof, which shall
consist of two or more persons.
(c) Common Stock. The Common Stock of TM Century, Inc.,
$0.01 par value per share.
(d) Disability. Complete and permanent disability as defined
in Section 22(e)(3) of the Code.
(e) Employee. Any of the officers, employees or consultants
of the Company or any Subsidiary including directors and officers
who are members of the Board of Directors of the Company.
(f) Fair Market Value. Fair Market Value shall mean, with
respect to a share of the Common Stock, (i) if traded on the
National Association of Securities Dealers, Inc. (the "NASD")
National Market System ("NMS"), the last price of a share of
Common Stock on the last trading day on any relevant date or, if
there is no trading on such date, the immediately preceding date,
as published in the NASDAQ National Market Issues report in the
Southwestern Edition of the Wall Street Journal, (ii) if listed on
a national securities exchange (an "exchange"), the mean between
the highest price and the lowest price at which the Common Stock
shall have been sold "regular way" on an exchange on the
applicable date or, if there are no sales on said date, then on
the next preceding date on which there were sales of Common Stock,
(iii) if the Common Stock is not traded on the NMS or listed on an
exchange, the mean between the bid and asked prices last reported
by the NASD for the over-the-counter market on the applicable
date, or, if no bid and asked prices are reported on said date,
then on the next preceding date on which there were such
quotations, or (iv) if the Common Stock is not traded on the NMS
or listed on an exchange and quotations for the Common Stock are
not reported by the NASD, the fair market value determined by the
Committee.
(g) Grantee. Any individual (including an Employee) who in
the opinion of the Board of Directors performs significant
services for the benefit of the Company and who is granted an
Option under the Plan.
(h) Incentive Stock Option. A stock option granted by the
Committee to a Grantee (who is an Employee) under the Plan which
is designated by the Committee as an Incentive Stock Option and is
intended to qualify as an Incentive Stock Option under Section 422
of the Code.
(i) Nonqualified Stock Option. A stock option granted by the
Committee to a Grantee under the Plan, which is not designated by
the Committee as an Incentive Stock Option.
(j) Option. An Incentive Stock Option or Nonqualified Stock
Option granted by the Committee to a Grantee under the Plan.
<PAGE>
SECTION 2. Stock Options
.1 Grant of Options
(a) The Committee may grant Options to Grantee for the purchase of
shares of Common Stock.
(b) Stock Options granted under the Plan may be exercised in any
order, regardless of the date of grant or the existence of any
outstanding Option except as otherwise provided herein.
.2 Employee Incentive Options.
(a) In order to provide for broader participation in the Plan by
the Company's Employees, Employees designated by the Committee shall
receive Incentive Stock Options that shall be exercisable on the date
such Options are granted.
(b) It is the intention of the Board of Directors that options
shall be granted to Employees in accordance with the following
schedule; provided, however, no Employee shall be entitled to receive
any options pursuant to this section until selected by the Committee:
Length of Number
Employment of Options
6 months 1,000
3 years 500
5 years 500
.3 Incentive Stock Option
(a) Each Incentive Stock Option shall become exercisable by the
Grantee in accordance with the following schedule, except as otherwise
provided herein:
Completed Years Cumulative Percentage
From Date of Grant of Shares Covered by
Incentive Stock Option
Which May Be Exercised
On Date of the Grant ......... 20%
1 but less than 2 years ...... Up to 35%
2 but less than 3 years ...... Up to 50%
3 but less than 4 years ...... Up to 65%
4 but less than 5 years ...... Up to 80%
5 years or more .............. Up to 100%
(b) At or prior to the time an Incentive Stock Option is granted,
the Committee shall fix the term of such option which shall be not more
than ten years from the date of grant. In the event the Committee
takes no action to fix the term, such option shall expire ten years
from the date of grant.
<PAGE>
(c) Anything in the Plan notwithstanding, the aggregate Fair
Market Value (determined as of the time the Incentive Stock Option is
granted) of the shares of Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by any Grantee during
any single calendar year (under the Plan and any other Incentive Stock
Option plans of the Company and its Subsidiaries or any "parent"
corporation, as defined in Section 425(e) of the Code, of the Company
(a "parent corporation")) shall not exceed the sum of $100,000.
(d) Anything in the Plan notwithstanding, an Incentive Stock
Option shall not be granted to any Grantee who, at the time such
Incentive Stock Option is granted, owns (including constructive
ownership as described in Section 425(d) of the Code) shares of stock
possessing more than 10% of the total combined voting power of all
classes of stock of the company, a Subsidiary or a parent corporation;
provided, however, that this restriction shall not apply if, at the
time such Incentive Stock Option is granted, (i) the per share
exercise price of such Option is at least 110% of the Fair Market Value
of the shares of Common Stock subject to such Option and
(ii) such Option is by its terms not exercisable after the expiration
of five years from the date of grant of such option.
(e) The Grantee shall give prompt notice to the Company of any
disposition of Common Stock acquired upon exercise of an Incentive
Stock Option (and such information regarding such disposition as the
Company may reasonably request) if such disposition occurs within
either two years after the date of grant or one year of the receipt of
such Common Stock by the Grantee.
(f) The purchase price per share of Common Stock under each
Incentive Stock Option shall be not less than 100 percent of the Fair
Market Value per share of such stock on the date the Incentive Stock
Option is granted, except as modified by Section 2.5.
.4 Nonqualified Stock Options
(a) Each Nonqualified Stock Option, unless otherwise established
by the Committee, shall become exercisable by the Grantee in accordance
with the following Schedule:
Completed Years Cumulative Percentage
From Date of Grant of Shares Covered by
Nonqualified Stock
Options Which May be
Exercised
On Date of Grant ............. 20%
1 but less than 2 years ...... Up to 35%
2 but less than 3 years ...... Up to 50%
3 but less than 4 years ...... Up to 65%
4 but less than 5 years ...... Up to 80%
5 years or more .............. Up to 100%
<PAGE>
(b) The Committee shall fix the term of each Nonqualified Stock
Option which shall be not more than ten years from the date of grant.
In the event no term is fixed, such term shall be ten years from the
date of grant. The Committee may, from time to time, extend the Option
Expiration Date of any Nonqualified Stock Option upon such terms and
conditions as the Committee shall determine; provided, however, that no
such extension or extensions shall extend the Nonqualified Stock Option
for an aggregate period in excess of three years from the date of the
original Option Expiration Date of such Nonqualified Stock Option and
no such Nonqualified Stock Option shall be extended within six months
after the date on which the Nonqualified Stock Option was originally
granted or within six months prior to the Option Expiration Date of
such Nonqualified Stock Option as the same may have been extended.
(c) The Committee may grant to one or more holders of Nonqualified
Stock Options, in exchange for their voluntary surrender and the
cancellation of such Options, new Options having different Option
prices than the Option prices provided in the Options so surrendered
and canceled and containing such other terms and conditions as the
Committee may deem appropriate.
(d) The exercise price per share of Common Stock under each
Nonqualified Stock Option shall be determined by the Committee in its
sole discretion.
.5 Grants to Members of the Committee.
(a) Members of the Committee who are outside directors (i.e. those
directors who are not employees of or full time consultants to the
Company) shall receive 20,000 Nonqualified Stock Options on the second
Tuesday in December of each year for five (5) years beginning in
December, 1991, and such options shall become exercisable in accordance
with the following schedule:
Completed Years Cumulative Percentage
From Date of Grant of Shares Covered by
Nonqualified Stock
Options Which May be
Exercised
Less than 1 year ............. 20%
1 but less than 2 years ...... 50%
2 years or more .............. 100%
(b) The term of each Nonqualified Stock Option granted to a member
of the Committee shall be ten years.
(c) The exercise price per share of Common Stock purchasable upon
exercise of the Nonqualified Stock Options granted to the members of
the Committee shall be $0.15 per share.
(d) The provisions of this Section 2.5 may not be modified or
amended more than once every six (6) months other than to comport with
changes in the Code. Except for options granted under this Section
2.5, members of the Committee shall not be eligible to receive options
under the Plan.
<PAGE>
.6 Payment for Common Stock.
(a) Payment for shares of Common Stock purchased upon the exercise
of an Option shall be made in cash, in shares of Common Stock valued at
the then Fair Market Value thereof, or by a combination of cash and
shares of Common Stock.
(b) The Company may extend and maintain, or arrange for the
extension and maintenance of, financing to any Grantee (including a
Grantee who is a director of the Company) to purchase shares pursuant
to exercise of an Option on such terms as may be approved by the
Committee in its sole discretion. In considering the terms for
extension or maintenance of credit by the Company, the Committee shall,
among other factors, consider the cost to the Company of any financing
extended by the Company.
(c) The proceeds received by the Company from the sale of shares
of Common Stock pursuant to the Plan will be used for general corporate
purposes.
SECTION 3. Provisions Relating to Plan Participation
.1 Plan Conditions.
(a) Each Grantee to whom an Option is granted under the Plan shall
be required to enter into an incentive Plan Agreement with the Company
in a form provided by the Committee, including provisions that the
Grantee shall abide by all the terms and conditions of the Plan and
such other terms and conditions as may be imposed by the Committee.
Options may contain such terms and conditions, not inconsistent with
the Plan, as shall be determined from time to time by the Committee.
(b) The Plan shall not create any employment rights in any Grantee
and the Company shall have no liability for terminating the employment
of a Grantee before the exercise date of any Option.
.2 Transferability
(a) Options are not transferable other than by will or by the laws
of descent and distribution. No transfer by will or by the laws of
descent and distribution shall be effective to bind the Company unless
the Committee shall have been furnished with a copy of the deceased
Grantee's will or such other evidence as the Committee may deem
necessary to establish the validity of the transfer.
(b) Only the Grantee or his guardian (if the Grantee becomes
Disabled), or in the event of his death, his legal representative or
beneficiary, may exercise Options or otherwise exercise rights under
the Plan.
.3 Rights as a Stockholder
A Grantee of an Option or a transferee of such Grantee shall have
no rights as a stockholder with respect to any shares of Common Stock
until the issuance of a stock certificate for such shares. Except as
otherwise provided in Section 3.5, no adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities, or
other property) or distributions or other rights for which the record
date is prior to the date such stock certificate is issued.
<PAGE>
.4 Listing and Registration of Shares of Common Stock
The Company, in its discretion, may postpone the issuance and/or
delivery of shares of Common Stock upon any exercise of an Option until
completion of such stock exchange listing, or registration, or other
qualification of such shares under any state and/or federal law, rule
or regulation as the Company may consider appropriate, and may require
any Grantee to make such representations and furnish such information
as it may consider appropriate in connection with the issuance or
delivery of the shares in compliance with applicable laws, rules and
regulations.
.5 Change in Stock Ownership
(a) In the event the outstanding shares of the Common Stock, as
constituted from time to time, shall be changed as a result of a change
in capitalization of the Company, a combination, merger or
reorganization of the Company into or with any other corporation, or in
the event of the sale of all or substantially all assets, or any other
transaction with similar effects (a "Transaction"), then each Option
outstanding on the date of any such Transaction shall vest in its
Grantee immediately, and may be exchanged for the number and kind of
shares of Common Stock or other securities, property, or cash into
which each outstanding share of Common Stock shall be changed or for
which each such share shall be exchanged, and the Committee may make
other equitable adjustments which it deems to be warranted.
(b) In the event of any change in applicable laws or any change in
circumstances which results in or would result in any dilution of the
rights granted under the Plan, or which otherwise warrants equitable
adjustment because it interferes with the intended operation of the
Plan, then, if the Committee shall, in its sole discretion, determine
that such change equitably requires an adjustment in the number or kind
of shares of stock or other securities or other property theretofore
subject, or which may become subject, to issuance or transfer under the
Plan or in the terms and conditions of outstanding Options, such
adjustment shall be made in accordance with such determination. Any
adjustment of an Incentive Stock Option under this paragraph shall be
made only to the extent not constituting a "modification" within the
meaning of Section 425(h)(3) of the Code. The Committee shall
given notice to each Grantee, and upon notice such adjustment shall be
effective and binding for all purposes of the Plan.
(c) In the event (i) the number of shares of Common Stock to be
delivered upon the exercise in full of any Option granted under the
Plan is reduced for any reason or (ii) any Option granted under the
Plan can no longer under any circumstances be exercised, the number of
shares no longer subject to such Option shall thereupon be released and
shall thereafter be available for new Option grants under the Plan.
.6 Termination of Employment and Death
(a) If an Employee's employment is terminated for any reason
whatsoever, any Option granted pursuant to the Plan outstanding at the
time and all rights thereunder shall wholly and completely terminate
except for (b) and (c) below. The determination of termination of any
Option grant to a Grantee other than an Employee prior to the grant
designated expiration date is at the sole discretion of the Committee.
<PAGE>
(b) Upon the normal Retirement of an Employee:
(i) any nonvested portion of any outstanding Option grant
shall be canceled and no further vesting will occur; and
(ii) any portion of an Option grant which vested on or before
the normal Retirement date shall expire on the earlier of:
(a) the Option Expiration Date, or
(b) the expiration of three years from the normal
Retirement date, or
(c) one year from the date of death of a retiree in the
event of death after normal Retirement.
(c) Upon termination of employment as a result of death or
Disability:
(i) all outstanding grants of Options shall vest
notwithstanding the original vesting schedule; and,
(ii) any vested Option (including those vested pursuant to
3.6(c)(i)) shall expire upon the earlier of a) the Option
Expiration Date or b) the first anniversary of such termination.
(d) Anything to the contrary herein notwithstanding, in no event
shall an Incentive Stock Option terminate later than ten years after
the date of grant.
SECTION 4. Administration
.1 Effective Date and Grant Period
The Plan shall become effective and shall be deemed to have been
adopted on December 3, 1991; provided, however, the provisions hereof
relating to Incentive Stock Options shall not become effective until
the Plan shall have been approved by holders of at least the majority
of the outstanding Common Stock. No options may be granted under the
Plan after ten (10) years from the Effective Date.
.2 Committee Authority
(a) In addition to other authority granted to the Committee in
the Plan, the Committee shall prescribe such forms and make such
rules as it deems necessary for the proper administration of the Plan,
shall correct any defect, supply any omission and reconcile any
inconsistency in the Plan or in any Option in the manner and to the
extent the Committee deems desirable to carry the Plan or Option into
effect.
(b) The Committee may interpret or construe the Plan and any
Option granted, and any interpretation or construction made by it in
good faith shall be conclusive on the Company, its Subsidiaries, their
successors and assigns, the Company stockholders, the participants in
the Plan and their transferees, and other employees of the Company and
its Subsidiaries.
<PAGE>
(c) The Committee shall have the authority to advance the date on
which an Option shall become exercisable by the Grantee provided,
however, that no Option shall be sold by an officer or director of the
Company until the expiration of six months from the date of grant.
The Committee shall designate a chairman from among its members,
who shall preside at all of its meetings, and shall designate a
secretary, without regard to whether that person is a member of the
Committee, who shall keep the minutes of the proceedings and all
records, documents, and data pertaining to its administration of the
Plan. Meetings shall be held at such times and places as shall be
determined by the Committee. The Committee may take any action
otherwise proper under the Plan by the affirmative vote, taken with or
without a meeting, of all of its members. No members of the Committee
shall be liable for any act or omission of any other member of the
Committee or for any act or omission on his own part, including, but
not limited to, the exercise of any power of discretion given to him
under the Plan, except if resulting from his own gross negligence or
willful misconduct.
.3 Withholding Taxes.
(a) Whenever shares of Common Stock are to be issued or delivered
pursuant to the Plan, the Company shall have the right, in its sole
discretion, to either (i) require the Grantee to remit to the Company
or (iii) withhold from any salary, wages or other compensation payable
by the Company to the Grantee, an amount sufficient to satisfy federal,
state, and local withholding tax requirements prior to the delivery of
any certificate or certificates for such shares.
(b) With respect to shares received by a Grantee pursuant to the
exercise of an Incentive Stock Option, if such Grantee disposes of any
such shares within two years from the date of grant of such option or
within one year after the transfer of such shares to the Grantee, the
Company shall have the right to withhold from any salary, wages or
other compensation payable by the Company to the Grantee an amount
sufficient to satisfy federal, state and local withholding tax
requirements attributable to such disposition.
.4 No Guarantee of Tax Consequences
Neither the Company nor the Committee makes any commitment or
guarantee that any federal or state tax treatment will apply or be
available to any person participating or eligible to participate
hereunder.
.5 Severability
In the event that any provision of this Plan shall be held
illegal, invalid or unenforceable for any reason, such provision shall
be fully severable, but shall not affect the remaining provisions of
the Plan, and the Plan shall be construed and enforced as if the
illegal, invalid, or unenforceable provision had never been included
herein.
<PAGE>
.6 Gender, Tense and Headings.
Whenever the context requires such, words of the masculine gender
used herein shall include the feminine and neuter, and words used in
the singular shall include the plural. Section headings as used herein
are inserted solely for convenience and reference and constitute no
part of the Plan.
.7 Amendment and Termination.
(a) The Plan may be amended or terminated by the Board of
Directors of the Company by the affirmative vote of a majority of the
directors in office. The Plan, however, shall not be amended, without
prior approval of the shareholders, to alter any feature of Incentive
Stock Options as to which federal law requires shareholder approval as
a condition for incentive stock option treatment.
(b) No amendment or termination of the Plan shall impair any
rights which have accrued under the Plan.
(c) The Plan shall be construed in accordance with the laws of the
State of Delaware, except as superseded by federal law, and in
accordance with applicable provisions of the Code and regulations or
other authority issued thereunder by the appropriate governmental
authority.
<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, 1999.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 354,332
<SECURITIES> 0
<RECEIVABLES> 821,538
<ALLOWANCES> 100,000
<INVENTORY> 446,279
<CURRENT-ASSETS> 1,553,426
<PP&E> 2,563,220
<DEPRECIATION> 2,116,116
<TOTAL-ASSETS> 2,449,340
<CURRENT-LIABILITIES> 462,026
<BONDS> 0
0
0
<COMMON> 29,705
<OTHER-SE> 1,387,728
<TOTAL-LIABILITY-AND-EQUITY> 2,449,340
<SALES> 6,237,102
<TOTAL-REVENUES> 6,237,102
<CGS> 2,035,462
<TOTAL-COSTS> 6,229,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,971
<INCOME-PRETAX> (12,470)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,470)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,470)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
