U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
Commission file No. 0-13167
TM CENTURY, INC.
(Name of small business issuer as specified 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
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__
The number of issuer's shares of Common Stock outstanding as of April
30, 1999 was 2,483,193.
Transitional Small Business Disclosure Format (check one): Yes__ No X
<PAGE>
<TABLE>
TM Century, Inc.
Balance Sheets
As of June 30, 1999 (Unaudited) and September 30, 1998
<S> <C> <C>
ASSETS
June 30, 1999 September 30, 1998
_____________ __________________
CURRENT ASSETS
Cash $ 246,456 $ 348,957
Accounts receivable, less allowance for doubtful 590,535 763,653
accounts of $179,668 and $230,000 respectively
Inventories, net 548,975 612,992
Prepaid expenses and other current assets 49,638 29,837
_____________ __________________
TOTAL CURRENT ASSETS 1,435,604 1,755,439
PROPERTY AND EQUIPMENT 2,554,395 2,508,394
Less accumulated depreciation (2,069,508) (1,879,587)
_____________ __________________
NET PROPERTY AND EQUIPMENT 484,887 628,807
INVENTORIES - NONCURRENT, net 161,642 178,397
OTHER ASSETS 105,059 18,260
_____________ __________________
TOTAL ASSETS $ 2,187,192 $ 2,580,903
============= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 60,439 $ 100,050
Accrued expenses 217,743 233,836
Current portion of long term debt and capital lease 46,042 122,212
Deferred revenue 75,734 108,694
Customer deposits 17,858 17,858
_____________ __________________
TOTAL CURRENT LIABILITIES 417,816 582,650
OBLIGATIONS UNDER LONG TERM DEBT AND CAPITAL LEASE 74,000 6,407
CUSTOMER DEPOSITS - NONCURRENT 194,537 176,943
COMMITMENTS AND CONTINGENCIES 405,100 385,000
_____________ __________________
TOTAL LIABILITIES 1,091,453 1,151,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 7,500,000 shares; 29,705 29,705
2,970,481 shares issued; and 2,483,193 shares outstanding
Paid-in capital 2,275,272 2,275,272
Treasury stock - at cost, 487,288 shares (1,291,227) (1,291,227)
Retained earnings 81,989 416,153
_____________ __________________
TOTAL STOCKHOLDERS' EQUITY 1,095,739 1,429,903
_____________ __________________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,187,192 $ 2,580,903
============= ==================
See notes to interim financial statements
</TABLE>
<PAGE>
<TABLE>
TM Century, Inc.
Statements of Operations and Retained Earnings (Unaudited)
For the Three Months Ended June 30, 1999 and 1998
<S> <C> <C>
1999 1998
_____________ _____________
REVENUES $ 1,544,101 $ 1,703,318
Less Commissions 292,079 332,715
_____________ _____________
NET REVENUES 1,252,022 1,370,603
COSTS AND EXPENSES
Production, Programming, and Technical Costs 488,662 549,145
General and Administrative 537,589 509,295
Selling Costs 162,330 198,574
Depreciation 71,812 80,250
_____________ _____________
TOTAL COSTS AND EXPENSES 1,260,393 1,337,264
_____________ _____________
OPERATING INCOME (LOSS) (8,371) 33,339
OTHER INCOME (EXPENSE)
Interest income 52 2,027
Other expense (5,024) (3,715)
_____________ _____________
TOTAL OTHER INCOME (EXPENSE) (4,972) (1,688)
_____________ _____________
NET INCOME (LOSS) (13,343) 31,651
RETAINED EARNINGS, BEGINNING OF PERIOD 95,332 1,171,265
_____________ _____________
RETAINED EARNINGS, END OF PERIOD $ 81,989 $ 1,202,916
============= =============
BASIC AND DILUTED INCOME (LOSS) PER $ (0.01) $ 0.01
COMMON SHARE
============= =============
WEIGHTED AVERAGE NUMBER OF BASIC AND
DILUTED COMMON SHARES OUTSTANDING 2,483,193 2,483,193
============= =============
See notes to interim financial statements
</TABLE>
<PAGE>
<TABLE>
TM Century, Inc.
Statements of Operations and Retained Earnings (Unaudited)
For the Nine Months Ended June 30, 1999 and 1998
<S> <C> <C>
1999 1998
_____________ _____________
REVENUES $ 4,566,828 $ 5,178,962
Less Commissions 879,009 965,773
_____________ _____________
NET REVENUES 3,687,819 4,213,189
COSTS AND EXPENSES
Production, Programming, and Technical costs 1,592,238 1,661,708
General and Administrative 1,665,240 1,544,558
Selling Costs 499,854 743,852
Depreciation 230,843 248,248
Reduction in Carrying Value of Inventories 12,000 0
_____________ _____________
TOTAL COSTS AND EXPENSES 4,000,175 4,198,366
_____________ _____________
OPERATING INCOME (LOSS) (312,356) 14,823
OTHER INCOME (EXPENSE)
Interest income 2,057 7,005
Other expense (23,865) (13,117)
_____________ _____________
TOTAL OTHER INCOME (EXPENSE) (21,808) (6,112)
_____________ _____________
NET INCOME (LOSS) (334,164) 8,711
RETAINED EARNINGS, BEGINNING OF PERIOD 416,153 1,194,205
_____________ _____________
RETAINED EARNINGS, END OF PERIOD $ 81,989 $ 1,202,916
============= =============
BASIC AND DILUTED INCOME (LOSS) PER $ (0.13) $ 0.00
COMMON SHARE
============= =============
WEIGHTED AVERAGE NUMBER OF BASIC AND
DILUTED COMMON SHARES OUTSTANDING 2,483,193 2,483,193
============== =============
See notes to interim financial statements
</TABLE>
<PAGE>
<TABLE>
TM Century, Inc.
Statements of Cash Flows (Unaudited)
For the Nine Months Ended June 30. 1999 and 1998
<S> <C> <C>
1999 1998
_____________ ____________
OPERATING ACTIVITIES
Net income (loss) $ (334,164) $ 8,711
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation 230,843 248,248
Amortization 133,797 214,800
Provision for settlement of RIAA dispute 20,100 0
Provision for doubtful accounts (50,332) 41,000
Reduction in carrying value of inventories 12,000 0
Increase (decrease) in cash from changes in
operating assets and liabilities:
Trade accounts receivable 223,450 (64,803)
Inventories (65,025) (153,945)
Prepaid expenses 17,400 (9,719)
Accounts payable and accrued expenses (55,704) 3,063
Deferred revenue (32,960) 37,790
Customer deposits 17,594 1,309
_____________ ____________
NET CASH PROVIDED BY OPERATING ACTIVITIES 116,999 326,454
INVESTING ACTIVITIES
Purchase of Comedy Service (16,667) 0
Purchases of property and equipment (86,923) (44,663)
_____________ ____________
NET CASH USED IN INVESTING ACTIVITIES (103,590) (44,663)
FINANCING ACTIVITIES
Principal payments on capital lease (115,910) (132,505)
obligations
_____________ ____________
NET CASH USED IN FINANCING ACTIVITIES (115,910) (132,505)
NET INCREASE (DECREASE) IN CASH (102,501) 149,286
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 348,957 294,333
_____________ ____________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 246,456 $ 443,619
============= ============
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 3,765 $ 13,117
============= ============
Non-cash investing and financing activities:
Long term debt incurred to purchase Comedy Service $ 124,000 $ 0
============= ============
See notes to interim financial statements
</TABLE>
<PAGE>
TM CENTURY INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. BASIS OF PRESENTATION
The interim financial statements of TM Century, Inc. (the "Company")
at June 30, 1999, and for the three and nine months ended June 30,
1999 and 1998, are unaudited, but include all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation. The September 30, 1998, balance
sheet was derived from the balance sheet included in the Company's
audited financial statements as filed on Form 10-KSB for the year
ended September 30, 1998.
The accompanying unaudited interim financial statements are for
interim periods and do not include all disclosures normally provided
in annual financial statements, and should be read in conjunction
with the Company's audited financial statements. The accompanying
unaudited interim financial statements for the three and nine months
ended June 30, 1999, are not necessarily indicative of the results
which can be expected for the entire fiscal year.
2. INCOME TAXES
Deferred income taxes are provided, when applicable, on temporary
differences between the recognition of income and expense for tax and
for financial accounting purposes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"). Temporary
differences which give rise to deferred taxes include basis
differences of property and equipment, accelerated tax depreciation
in excess of book depreciation, and valuation allowances provided in
excess of amounts deductible for tax purposes. Under the provisions
of SFAS 109, recognition of deferred tax assets is permitted for such
amounts which can be carried forward to future periods.
The Company as of September 30, 1998 reduced the net deferred tax
asset to zero due to the Company experiencing four consecutive years
of losses. Realization is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards. As of June 30,
1999 the Company continues to not recognize any net deferred tax
assets. As of September 30, 1998, the Company had net operating loss
carryforwards of approximately $1.5 million expiring in 2008 through
2010 available to offset future taxable income.
<PAGE>
3. LONG-TERM DEBT AND LEASE OBLIGATIONS
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 June 30, 1999, is
approximately $529,000, although no additional costs have been
incurred since December 31, 1996. The lease was backed by a $200,000
letter of credit through February 29, 1999, at which time the Company
was no longer required to carry a Letter of Credit. The lease had a
term of three years and contained an option to purchase the equipment
at its fair market value or renew the lease at its fair market rental
value at the end of the initial term. On May 20, 1999 the Company
elected the option to renew the lease at its fair market rental value
for a period of twelve months beginning June 1, 1999 with the
understanding at the end of the twelve month lease renewal term, the
Company will own all of the leased equipment. Based on borrowing
rates currently available to the Company on similar arrangements, the
fair value of the lease agreement approximates the carrying value.
Effective March 31, 1999, the Company's Line of Credit was not
renewed.
Commencing 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 January 2, 2004.
4. EARNINGS PER SHARE
In February, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement 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. Diluted earnings per share are not
materially different than basic earnings per share. The following
table provides a reconciliation between basic and diluted earnings
per share, in accordance with FASB 128:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
June 30 June 30
_______________________ ______________________
1999 1998 1999 1998
__________ __________ __________ __________
Net Income (Loss) $ (13,343) $ 31,651 $ (334,164) $ 8,711
Weighted Average Number of Shares Outstanding:
Basic 2,483,193 2,483,193 2,483,193 2,483,193
Dilutive effect of common stock equivalents 0 0 0 0
__________ __________ __________ __________
Diluted 2,483,193 2,483,193 2,483,193 2,483,193
Earnings Per Share:
Basic and Diluted Net Income (Loss) $ (0.01) $ 0.01 $ (0.13) $ (0.00)
========== ========== ========== ==========
</TABLE>
<PAGE>
5. 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.
Following receipt of the letter, the Company and its counsel met with
RIAA's counsel on June 30, 1998. At this meeting, the RIAA made a
demand for $3 million to settle the dispute. RIAA was advised that
the Company's financial position could not support such a cash
settlement.
On July 14, 1998 the Company entered into a Tolling Agreement with
the RIAA. On July 24, 1998, it formally responded to the RIAA.
Since then, Disctronics, one of the companies that manufactures CDs
for the Company's GoldDisc line, contacted the Company and advised it
that Disctronics had been contacted by the RIAA and told not to
duplicate any sound recordings in the GoldDisc Series unless the
Company could supply written license agreements.
By letter dated August 4, 1998, RIAA advised the Company that it
would bring suit unless a meaningful settlement offer was proffered
by the Company by August 10, 1998. In September mediation was
undertaken with no settlement resulting.
In October, 1998, the Company filed suit for declaratory judgment and
tortuous interference with respect to a Supplier. The suit was later
dismissed without prejudice by agreement.
Thus far no discovery has been undertaken. The Company believes that
it has a meritorious defense to many of the claims asserted, but it
is possible that it will not prevail if the matter is brought to
litigation. Any significant cash amount paid in settlement or
awarded in judgment would likely have an adverse effect on the
Company.
The Company made a settlement offer of $550,000, payable over eleven
years which has been rejected by the RIAA.
In management's opinion the likelihood of an unfavorable outcome and
an estimate of the amount or range of any potential loss cannot be
determined. However, the Company has recorded a reserve for possible
loss of $385,000 as of September 30, 1998 on the terms of its
rejected 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.
As the RIAA has rejected the settlement offer the Company will not
continue to accrue any additional provision for settlement of the
RIAA dispute nor will it continue to accrue any legal costs related
to the RIAA dispute.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TM Century, Inc. (the "Company") is engaged primarily in the
creation, production, marketing, and worldwide distribution of
compact disc music libraries, production libraries, morning show
services, and station identification jingles, for radio stations
worldwide.
Forward-Looking Statements
This Quarterly 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. There may be other risks and uncertainties that
management is not able to predict.
When used in this Quarterly 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 Act of 1934.
<PAGE>
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 up to four years. The Company is obligated to provide music
updates throughout the contract terms for both production library and
weekly music service contracts. Sales of music libraries, jingles,
and the payments under production library and weekly music service
contracts will provide in the opinion of management, adequate
liquidity to meet operating requirements at least through the end of
fiscal 1999.
Cash provided by operating activities totaled $116,999 for the nine
months ended June 30, 1999. Cash provided was comprised of the
Company's net loss of $334,164, adjusted for: depreciation and
amortization of various assets of $364,640, a provision for the
settlement of the RIAA dispute of $20,100, a provision for doubtful
accounts of $50,332, a reduction in the carrying value of inventories
of $12,000, and net increase in operating assets and liabilities of
$104,755.
Cash used in investing activities for the nine months ended June 30,
1999 totaled $103,590 and was comprised of the purchase of property
and equipment and the purchase of the Comedy Service. Approximately
$87,000 was spent for the purchase of property and equipment. Funds
for operating needs, new product development and capital expenditures
for the period were provided from cash reserves. The Company's
expenditures for property, equipment, and development of new products
are discretionary. Product development expenditures are expected to
be approximately $180,000 in fiscal 1999. Management anticipates
that cash flow from operations and cash reserves will be sufficient
to meet these capital requirements at least through the end of fiscal
year 1999. The Company has no other significant commitments for
capital expenditures in fiscal 1999.
Commencing 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 January 2, 2004.
Cash used in financing activities for the nine months ended June 30,
1999 totaled $115,910 and was comprised entirely of the principal
payments on the capital lease obligations.
<PAGE>
The Company has assessed its Year 2000 issues and determined no
material effect exists on its operating systems hardware and
software. The Company has determined its main operating software
system is Year 2000 compatible. The consultant who is responsible
for creating the in-house Contract Administration System indicated
there would be minimal Year 2000 issues. The Company's vendor
purchased accounting system consultant believes the accounting system
is Year 2000 compatible. In addition, the Company's Microsoft
Windows NT consultant confirmed that the Company's network
environment is Year 2000 compliant. The Company's in-house
programmer analyst also believes there are no major Year 2000 issues
for the Company. Furthermore the Company's assessment incorporates
existing vendors and suppliers relationships and management believes
there would be no material effect on the Company's business, results
of operations, or financial condition if they do not timely become
Year 2000 compliant. The most likely worst scenario estimates the
cost to be approximately $5,000 to deal with any Year 2000 issues.
It is anticipated that any necessary funds will come from operations
and cash reserves.
Effective March 31, 1999, the Company's Line of Credit was not
renewed.
The Company has made significant strides in controlling expenses
resulting in a $30,000 monthly savings as of July, 1999 due to
the Company subleasing a portion of its leased premises, achieving a
reduction in salaries and benefits and computer leased equipment
expense.
<PAGE>
RESULTS OF CONTINUING OPERATIONS
Comparison of the Three-Month Periods Ended June 30, 1998 and 1999
Revenues declined approximately $159,000 or 9.4% in the three-month
period ended June 30, 1999 as compared to the same period for the
previous year. The revenue decrease was primarily due to a decrease
in revenues for music services of $181,000 and radio Jingles of
$63,000. Offsetting these decreases were revenue increases in
production libraries of $70,000, and the Comedy service of $18,000.
Revenues of weekly HitDisc and GoldDisc music services decreased
$88,000 and $93,000 respectively, or 20.2% as compared to the same
period previous year. The decrease in compact disc music library
revenues was primarily due to a decrease in mobile beat activity
(which was terminated in May 1998) and weekly and recurrent music
sales for international customers. As the compact disc music library
market matures, sales of compact discs are generated primarily from
changes in music formats or sales of new music libraries or formats
rather than from conversions to compact disc music delivery
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 the
introduction of new products will counteract the declines in revenues
from existing music libraries. Renewals and new sales growth are
subject to customer acceptance of the new products.
Radio Jingles revenues decreased $63,000 or 19.2%, primarily due to a
decrease in demand for custom and syndicated Jingles compared to the
same period of the previous year.
Production library revenues increased $70,000, or 25.8%. Increases
in production library revenue is due to the substantial increase in
advertising sales. Even though production library revenues may
decline due to the expiration of three-year contracts, management
believes that production libraries will continue to generate a
significant portion of overall revenues from sales of existing
products through advertising/barter arrangements and sales of new
products. Sales and new sales growth are subject to customer
acceptance of the new products.
The Comedy revenue increase is due to an increase in the amount of
the advertising revenue being allocated to Comedy from barter sales.
Commissions decreased $40,600 or 12.2%, and is proportional to the
decrease in commissioned sales. As a percentage of revenues,
commissions decreased from 19.5% to 18.9% due to changes in the
revenue structure.
Production, programming and technical costs decreased $60,000 or
11.0%, and as a percentage of revenue decreased from 32.2% to 31.7%.
The decrease as a percentage of revenues is primarily due to lower
comedy royalties and shipping and handling charges for music services
and production libraries.
<PAGE>
General and administrative costs increased $28,000 or 5.6% and is
primarily due to an increase in legal costs and facilities.
Selling costs decreased $36,000 or 18.3%, and as a percentage of
revenues decreased from 11.7% to 10.5%. The decrease in expenses is
primarily due to a reduction in sales salaries as a result of changes
in sales force and in-house commission plans.
Depreciation decreased $8,000 or 10.5% and is primarily due to more
depreciable assets nearing the end of their depreciable years and
being partially offset by increases in production equipment in the
first six months of fiscal year 1998.
Comparison of the Nine-Month Periods Ended June 30, 1998 and 1999
Revenues declined approximately $612,000 or 11.8% in the nine-month
period ended June 30, 1999 as compared to the same period for the
previous year. The revenue decrease was primarily due to a decrease
in revenues for music services of $873,000. Offsetting these
decreases were revenue increases in production libraries of $164,000,
radio Jingles of $18,000 and the Comedy service of $103,000.
Revenues of weekly HitDisc and GoldDisc music services decreased
$337,000 and $536,000 respectively, or 28.9% as compared to the same
period previous year. The decrease in compact disc music library
revenues was primarily due to a decrease in mobile beat activity
(which was terminated in May 1998) and weekly and recurrent music
sales for international customers. As the compact disc music library
market matures, sales of compact discs are generated primarily from
changes in music formats or sales of new music libraries or formats
rather than from conversions to compact disc music delivery
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 the
introduction of new products will counteract the declines in revenues
from existing music libraries. Renewals and new sales growth are
subject to customer acceptance of the new products.
Production library revenues increased $164,000, or 21.3%. Increases
in production library revenue is due to the substantial increase in
advertising sales. Even though production library revenues may
decline due to the expiration of three-year contracts, management
believes that production libraries will continue to generate a
significant portion of overall revenues from sales of existing
products through advertising/barter arrangements and sales of new
products. Sales and new sales growth are subject to customer
acceptance of the new products.
Revenues for Jingles increased $18,000 or 2.1%, primarily due to an
increase in demand for custom Jingles compared to the same nine month
period last year.
The Comedy revenue increase is due to an increase in the amount of
the advertising revenue being allocated to Comedy from barter sales.
<PAGE>
Commissions decreased $87,000 or 9.0%, and is proportional to the
decrease in commissioned sales. As a percentage of revenues,
commissions increased from 18.7% to 19.3% due to changes in the
revenue structure where a greater percentage of revenue is on barter.
Production, programming and technical costs decreased $69,000 or
4.2%, and as a percentage of revenue increased from 32.1% to 34.9%.
The increase as a percentage of revenues is primarily due to higher
salaries and benefits and direct costs for production libraries.
General and administrative costs increased $121,000 or 7.8% and is
primarily due to an increase in legal fees, bad debt expense, and
facilities.
Selling costs decreased $244,000 or 32.8%, and as a percentage of
revenues decreased from 14.4% to 11.0%. The decrease in expenses is
primarily due to a reduction in sales salaries as a result of changes
in sales force and in-house commission plans.
Depreciation decreased $17,000 or 7.0% and is primarily due to more
depreciable assets nearing the end of their depreciable years and
being partially offset by increases in production equipment in the
first six months of fiscal year 1998.
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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.
Following receipt of the letter, the Company and its counsel met with
RIAA's counsel on June 30, 1998. At this meeting, the RIAA made a
demand for $3 million to settle the dispute. RIAA was advised that
the Company's financial position could not support such a cash
settlement.
On July 14, 1998 the Company entered into a Tolling Agreement with
the RIAA. On July 24, 1998, it formally responded to the RIAA.
Since then, Disctronics, one of the companies that manufactures CDs
for the Company's GoldDisc line, contacted the Company and advised it
that Disctronics had been contacted by the RIAA and told not to
duplicate any sound recordings in the GoldDisc Series unless the
Company could supply written license agreements.
By letter dated August 4, 1998, RIAA advised the Company that it
would bring suit unless a meaningful settlement offer was proffered
by the Company by August 10, 1998. In September mediation was
undertaken with no settlement resulting.
In October, 1998, the Company filed suit for declaratory judgment and
tortuous interference with respect to a Supplier. The suit was later
dismissed without prejudice by agreement.
Thus far no discovery has been undertaken. The Company believes that
it has a meritorious defense to many of the claims asserted, but it
is possible that it will not prevail if the matter is brought to
litigation. Any significant cash amount paid in settlement or
awarded in judgment would likely have an adverse effect on the
Company.
The Company made a settlement offer of $550,000, payable over eleven
years which has been rejected by the RIAA.
In management's opinion the likelihood of an unfavorable outcome and
an estimate of the amount or range of any potential loss cannot be
determined. However, the Company has recorded a reserve for possible
loss of $385,000 as of September 30, 1998 on the terms of its
rejected 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.
As the RIAA has rejected the settlement offer the Company will not
continue to accrue any additional provision for settlement of the
RIAA dispute nor will it continue to accrue any legal costs related
to the RIAA dispute.
<PAGE>
Item 2. Changes in securities - Not applicable.
Item 3. Defaults upon senior securities - Not applicable.
Item 4. Submission of matters to a vote of security holders
The holders of approximately 71% or 1,755,000 shares of the
outstanding common stock of the Company, by written consent executed
as of March 29, 1999 in accordance with Delaware law, (i) re-elected
three of the four directors of the Company, Marjorie L. McIntyre,
Neil W. Sargent and A. Ann Armstrong. Prior to the election, Donald
E. Latin, a long-time director of the Company, announced his decision
not to stand for re-election to the Board of Directors. and, (ii)
elected Carol M. Long and Robert D. Graupner as directors of the
Company. The Company did not solicit proxies or consents in
connection therewith.
Item 5. Other information
The Board of Directors announced the appointment of R. David
Graupner, Executive Vice President, to succeed Neil W. Sargent as
President/CEO, effective May 1, 1999. The Company retained Mr.
Sargent as an advisor and consultant in connection with its operation
of its business following Mr. Sargent's retirement on June 28, 1999.
Mr. Sargent announced his decision to resign his position as Vice
Chairman of the Board on June 28, 1999.
The consulting agreement has an initial term beginning as of July 1,
1999 and ending June 30, 2004. It is specifically understood that
Mr. Sargent's services shall not require him to be active in the day-
to-day activities of the Company. However, Mr. Sargent shall be
available in person or by telephone or by facsimile machine within a
reasonable time period after receiving a reasonable request to
respond to matters submitted to him by the Company. The Company will
pay Mr. Sargent a monthly consulting fee of $1,800. The consulting
agreement may be terminated at any time upon the mutual written
agreement of the Company and Mr. Sargent.
<PAGE>
(a) Exhibits
Material Contracts:
10.2 Employment Agreement between TM Century, Inc. and R. David
Graupner dated May 31, 1999.
10.3 Consulting Agreement between TM Century, Inc. and Neil W.
Sargent dated June 28, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
1.1 Form 8-K dated report as of March 29, 1999 referencing Robert D.
Graupner succeeding Neil W. Sargent as President and Chief
Executive Officer of TM Century, Inc., effective May 1, 1999 and
Mr. Sargent
continuing to serve the Company as Vice Chairman of the Board of
Directors.
In addition, the Company announced the election of Robert D.
Graupner and Carol M. Long and the re-election of Neil W. Sargent,
Marjorie L. McIntyre and A. Ann Armstrong to the Board of
Directors of the Company by written consent of the holders of a
majority of the outstanding common stock of the Company dated as
of March 29, 1999. Prior to the election, Donald E. Latin, a
long-time director of the Company, announced his decision not to
stand for re-election to the Board of Directors.
The April 8, 1999 press release is filed as Exhibit 99.1 to this
report on Form 8-K and incorporated by reference.
1.2 Form 8-K dated report as of May 17, 1999 referencing a Change in
Registrant's Certifying Accountant.
On May 17, 1999, the Registrant dismissed its former independent
accountants Deloitte & Touche LLP ("D&T") and engaged King,
Griffin & Adamson, P.C. to audit the Registrant's financial
statements. The decision to change independent accountants was
recommended and approved by the Registrant'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 Registrant 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.
<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: August 4, 1999
TM CENTURY, INC.
BY:/s/Roger A. Holeman
Roger A. Holeman
Chief Financial Officer
(Principal Accounting Officer)
BY:/s/R. David Graupner
R. David Graupner
Chief Executive Officer
(Principal Executive Officer)
<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-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999.
</LEGEND>
<S> <C>
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