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: December 31, 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
December 31, 1999 was 2,483,193.
Transitional Small Business Disclosure Format (check one):Yes__ No X
TM Century, Inc.
Balance Sheets
As of December 31, 1999 (Unaudited) and September 30, 1999
ASSETS
December 31, 1999 September 30, 1999
__________________ __________________
CURRENT ASSETS
Cash $ 463,596 $ 354,332
Accounts receivable less allowance for doubtful
accounts of $103,693 and $100,000 respectively 655,111 721,538
Inventories, net of allowances for obsolescence of $258,545 449,521 446,279
Prepaid expenses 42,037 31,277
__________________ __________________
TOTAL CURRENT ASSETS 1,610,265 1,553,426
PROPERTY AND EQUIPMENT 2,612,374 2,563,220
Less accumulated depreciation and amortization (2,163,851) (2,116,116)
__________________ __________________
NET PROPERTY AND EQUIPMENT 448,523 447,104
PRODUCT DEVELOPMENT COSTS, net of accumulated amortization
of $1,668,974 and $1,630,071 respectively 339,947 324,094
COMEDY MATERIAL RIGHTS, net of accumulated amortization
of $24,800 and $18,600 respectively 99,200 105,400
OTHER ASSETS 19,866 19,316
__________________ __________________
TOTAL ASSETS $ 2,517,801 $ 2,449,340
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 68,040 $ 63,508
Accrued expenses 183,509 196,978
Current portion of obligation under capital lease 0 3,202
Current portion of note payable 33,333 33,333
Deferred revenue 103,047 127,382
Customer deposits 32,919 37,623
__________________ __________________
TOTAL CURRENT LIABILITIES 420,848 462,026
NOTE PAYABLE, less current portion 57,334 65,667
CUSTOMER DEPOSITS - NONCURRENT 126,723 99,114
ACCRUED SETTLEMENT FOR RIAA DISPUTE 405,100 405,100
__________________ __________________
TOTAL LIABILITIES 1,010,005 1,031,907
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
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 494,046 403,683
__________________ __________________
TOTAL STOCKHOLDERS' EQUITY 1,507,796 1,417,433
__________________ __________________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,517,801 $ 2,449,340
================== ==================
See notes to interim financial statements
TM Century, Inc.
Statements of Operations and Retained Earnings (Unaudited)
For the Three Months Ended December 31, 1999 and 1998
1999 1998
______________ ______________
REVENUES $ 1,601,890 $ 1,489,768
Less Commissions 284,483 287,021
______________ ______________
NET REVENUES 1,317,407 1,202,747
COSTS AND EXPENSES
Production, Programming, and Technical Costs 482,322 518,261
General and Administrative Costs 469,142 558,650
Selling Costs 226,411 173,217
Depreciation and Amortization of Property and Equipment 47,735 81,000
Reduction in Carrying Value of Inventories 0 6,000
______________ ______________
TOTAL 1,225,610 1,337,128
______________ ______________
OPERATING INCOME (LOSS) 91,797 (134,381)
OTHER INCOME (EXPENSE)
Other (Expense) Income, net (1,388) 1,551
Interest expense (46) (2,051)
______________ ______________
TOTAL (1,434) (500)
______________ ______________
NET INCOME (LOSS) 90,363 (134,881)
RETAINED EARNINGS, BEGINNING OF PERIOD 403,683 416,153
______________ ______________
RETAINED EARNINGS, END OF PERIOD $ 494,046 $ 281,272
============== ==============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ 0.04 $ (0.05)
============== ==============
WEIGHTED AVERAGE NUMBER OF BASIC AND
DILUTED COMMON SHARES OUTSTANDING 2,483,193 2,483,193
============== ==============
See notes to interim financial statements
TM Century, Inc.
Statements of Cash Flows (Unaudited)
For the Three Months Ended December 31, 1999 and 1998
1999 1998
____________ ____________
OPERATING ACTIVITIES
Net income (loss) $ 90,363 $ (134,881)
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization of property and equipment 47,735 81,000
Amortization 45,104 64,444
Provision for doubtful accounts 3,693 (4,530)
Reduction in carrying value of inventories 0 6,000
Increase (decrease) in cash from changes in operating assets
and liabilities:
Accounts receivable 62,734 97,088
Inventories (3,242) 30,453
Product development costs (54,757) (31,869)
Prepaid expenses (10,760) (11,572)
Other assets (550) 0
Accounts payable and accrued expenses (8,937) (92,636)
Deferred revenue (24,335) 29,415
Customer deposits 22,905 2,760
____________ ____________
NET CASH PROVIDED BY OPERATING ACTIVITIES 169,953 35,672
INVESTING ACTIVITIES
Purchases of property and equipment (49,154) (51,765)
____________ ____________
NET CASH USED BY INVESTING ACTIVITIES (49,154) (51,765)
FINANCING ACTIVITIES
Principal payments on note payable (8,333) 0
Principal payments on capital lease obligations (3,202) (46,463)
____________ ____________
NET CASH USED BY FINANCING ACTIVITIES (11,535) (46,463)
____________ ____________
NET INCREASE (DECREASE) IN CASH 109,264 (62,556)
CASH AT BEGINNING OF PERIOD 354,332 348,957
____________ ____________
CASH AT END OF PERIOD $ 463,596 $ 286,401
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 46 $ 2,051
============ ============
See notes to interim financial statements
TM CENTURY INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. BASIS OF PRESENTATION
The interim financial statements of TM Century, Inc. (the "Company")
at December 31, 1999, and for the three months ended December 31,
1999 and 1998, are unaudited, and include all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation. The September 30, 1999 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, 1999. Certain amounts previously reported in
prior interim financial statements have been reclassified to conform
to the 1999 presentation.
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 months ended
December 31, 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.
As of September 30, 1999, the Company had net operating loss
carryforwards of approximately $1.3 million expiring in 2008 through
2011 available to offset future taxable income.
3. LONG-TERM DEBT
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.
4. EARNINGS PER SHARE
Basic earnings per share are calculated on the weighted average
number of common shares outstanding during each period. There are no
dilutive common stock equivalents for the three months ended December
31, 1999 and 1998.
The following table provides a reconciliation between basic and diluted earnings per share:
Three Months Ended
December 31
__________________________
1999 1998
______ ______
Net Income (Loss) $ 90,363 $ (134,881)
Weighted Average Number of Shares Outstanding
Basic 2,483,193 2,483,193
Dilutive effect of common stock equivalents 0 0
____________ ____________
Diluted 2,483,193 2,483,193
Earnings Per Share:
Basic and Diluted Net Loss $ 0.04 $ ( 0.05)
============ ============
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. 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.
TM CENTURY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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 jingles and commercials for broadcast media
use.
TM Century's clients include radio and television stations; radio,
television, satellite and Internet networks; web sites and portals;
the American Forces Radio Network; numerous advertising agencies and
commercial businesses.
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. 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 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.
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 2000.
During the quarter ended December 31, 1999, approximately $49,000 was
spent for the purchase of property and equipment, primarily
associated with upgrades of production equipment. Expenditures for
product development for the quarter were approximately $55,000.
Funds for operating needs, new product development, and capital
expenditures for the period were provided from cash reserves and
operations of the Company. 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. 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 2000. The
Company has no other significant commitments for capital expenditures
in fiscal 2000.
RESULTS OF CONTINUING OPERATIONS
Comparison of the Three-Month Periods Ended December 31, 1998 and 1999
______________________________________________________________________
In the three-month period ended December 31, 1999 revenue increased
$112,000 or 7.5% as compared to the same period for the previous
year. Advertising revenues from barter sales of music services and
production libraries were responsible for a $178,000 increase in
gross revenues. Jingle revenue increased $39,000 or 14% over the
three months ended December 31, 1998. These increases were offset by
decreases in HitDisc and GoldDisc revenues of $76,000.
Revenues of weekly HitDisc and GoldDisc music services decreased
$55,000 and $21,000 respectively, or 19% as compared to the same
period in the previous year. The decrease in compact disc music
library revenues was due to a decrease in weekly and recurrent music
sales for domestic and 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. In addition,
the Company contracts with third party sales representatives for
sales in certain foreign markets. Changes in representatives and the
terms of ongoing agreements are expected to favorably impact future
revenues from international sales. Renewals and new sales growth are
subject to customer acceptance of the new products.
Production library revenues increased $109,000, or 38.8%. Increases
in production library revenue is due to the continuing increase in
advertising/barter arrangements for the Company's sales and imaging
libraries. 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. The
Company continues to concentrate on new product development in this
category and has broadened the target market beyond the radio
broadcast industry to include television, post production houses, web
sites, and commercial businesses. Sales and new sales growth are
subject to customer acceptance of the new products.
Revenues for Jingles increased $39,000 or 14 % primarily due to an
increase in demand for domestic syndicated and custom Jingles
compared to the same quarter last year.
Commissions decreased $2,500 as a result of decreases in commissioned
international sales of $67,000 offset by a $64,500 increase in
advertising commissions.
Production, programming and technical costs decreased $36,000 or
6.9%, and as a percentage of revenue decreased from 34.8% to 30.11%.
The decrease in costs was primarily due to reduced amortization
related to product development costs for production libraries.
General and administrative costs decreased $90,000 or 16% as a result
of the Company's continued efforts in reducing operating expenses.
These efforts included subleasing a portion of the Company's office
space, restructuring management salaries and reducing the amount of
bad debt expense by continuing an aggressive collection policy toward
accounts receivable.
Selling costs increased $53,000 or 30.7%, and as a percentage of
revenues increased from 11.6% to 14.1%. The increase in expenses is
due to an increase in sales salaries as a result of changes in sales
force and in-house commission plans.
Depreciation and amortization of property and equipment decreased
$33,000 or 41%, primarily due to more depreciable assets nearing the
end of their depreciable years.
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. 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.
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 - Not
applicable.
Item 5. Other information - Not applicable.
Item 6. Exhibits and Reports on Form 8-K - Not applicable
(a) Exhibits
10. Material Contracts: None.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
month period ending December 31, 1999.
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:
TM CENTURY, INC.
BY:/s/Teri R.S. James
Teri R.S. James
Vice President of Finance
(Principal Accounting Officer)
BY:/s/R. David Graupner
R. David Graupner
Chief Executive Officer
(Principal Executive Officer)