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: March 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) 247-8850
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
TM Century, Inc.
Balance Sheets
As of March 31, 1999 (Unaudited) and September 30, 1998
ASSETS
March 31, 1999 September 30, 1998
_______________ __________________
CURRENT ASSETS
Cash $ 230,488 $ 348,957
Accounts receivable, less allowance for doubtful 607,572 763,653
accounts of $193,850 and $230,000 respectively
Inventories, net 536,417 612,992
Prepaid expenses and other current assets 51,156 29,837
_______________ __________________
TOTAL CURRENT ASSETS 1,425,633 1,755,439
PROPERTY AND EQUIPMENT 2,520,607 2,508,394
Less accumulated depreciation (1,997,696) (1,879,587)
_______________ __________________
NET PROPERTY AND EQUIPMENT 522,911 628,807
INVENTORIES - NONCURRENT, net 176,576 178,397
OTHER ASSETS 111,259 18,260
_______________ __________________
TOTAL ASSETS $ 2,236,379 $ 2,580,903
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 76,405 $ 100,050
Accrued expenses 195,695 233,836
Current portion of long term debt & capital lease 68,211 122,212
Deferred revenue 99,465 108,694
Customer deposits 17,858 17,858
_______________ __________________
TOTAL CURRENT LIABILITIES 457,634 582,650
OBLIGATIONS UNDER LONG TERM DEBT AND CAPITAL LEASE 82,333 6,407
CUSTOMER DEPOSITS - NONCURRENT 186,776 176,943
COMMITMENTS AND CONTINGENCIES 400,554 385,000
_______________ __________________
TOTAL LIABILITIES 1,127,297 1,151,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 29,705 29,705
7,500,000 shares; 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 95,332 416,153
_______________ __________________
TOTAL STOCKHOLDERS' EQUITY 1,109,082 1,429,903
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,236,379 $ 2,580,903
=============== ==================
See notes to interim financial statements
TM Century, Inc.
Statements of Operations and Retained Earnings (Unaudited)
For the Three Months Ended March 31, 1999 and 1998
1999 1998
__________ __________
REVENUES $1,532,959 $1,801,556
Less Commissions 299,908 326,498
__________ __________
NET REVENUES 1,233,051 1,475,058
COSTS AND EXPENSES
Production, Program, and Technical Costs 585,316 577,522
General and Administrative 569,001 493,740
Selling Costs 164,307 269,782
Depreciation 78,030 84,000
Reduction in Carrying Value of Inventories 6,000 -
__________ __________
TOTAL 1,402,654 1,425,044
__________ __________
OPERATING INCOME (LOSS) (169,603) 50,014
OTHER INCOME (EXPENSE)
Interest income 454 3,297
Other expense (16,791) (4,243)
__________ __________
TOTAL (16,337) (946)
__________ __________
NET INCOME (LOSS) (185,940) 49,068
RETAINED EARNINGS, BEGINNING OF PERIOD 281,272 1,122,197
__________ __________
RETAINED EARNINGS, END OF PERIOD $ 95,332 $1,171,265
========== ==========
BASIC AND DILUTED INCOME (LOSS) PER $ (0.07) $ 0.02
COMMON SHARE
========== ==========
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 Operations and Retained Earnings (Unaudited)
For the Six Months Ended March 31, 1999 and 1998
1999 1998
___________ ___________
REVENUES $ 3,022,727 $ 3,475,643
Less Commissions 586,929 633,055
___________ ___________
NET REVENUES 2,435,798 2,842,588
COSTS AND EXPENSES
Production, Program, and Technical Costs 1,103,577 1,112,562
General and Administrative 1,127,651 1,035,264
Selling Costs 337,524 545,278
Depreciation 159,030 168,000
Reduction in Carrying Value of Inventories 12,000 -
___________ ___________
TOTAL 2,739,782 2,861,104
___________ ___________
OPERATING LOSS (303,984) (18,516)
OTHER INCOME (EXPENSE)
Interest income 2,004 4,979
Other expense (18,841) (9,403)
__________ __________
TOTAL (16,837) (4,424)
__________ __________
NET LOSS (320,821) (22,940)
RETAINED EARNINGS, BEGINNING OF PERIOD 416,153 1,194,205
__________ __________
RETAINED EARNINGS, END OF PERIOD $ 95,332 $1,171,265
========== ==========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.13) $ (0.01)
========== ==========
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 Six Months Ended March 31, 1999 and 1998
1999 1998
___________ ___________
OPERATING ACTIVITIES
Net loss $ (320,821) $ (22,940)
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities
Depreciation 159,030 168,000
Amortization 119,547 142,800
Provision for settlement of RIAA dispute 15,554 -
Provision for doubtful accounts (36,150) 20,000
Reduction in carrying value of inventories 12,000 -
Increase (decrease) in cash from changes in
operating assets and liabilities:
Trade accounts receivable 192,231 (11,994)
Inventories (46,951) (115,800)
Prepaid expenses 3,482 7,262
Accounts payable and accrued expenses (61,786) (37,857)
Deferred revenue (9,229) 15,534
Customer deposits 9,833 (2,815)
____________ ___________
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 36,740 162,190
INVESTING ACTIVITIES
Purchase of Comedy Service (8,334) -
Purchases of property and equipment (53,134) (43,916)
___________ ___________
NET CASH USED IN INVESTING ACTIVITIES (61,468) (43,916)
FINANCING ACTIVITIES
Principal payments on capital lease obligations (93,741) (87,625)
___________ ___________
NET CASH USED IN FINANCING ACTIVITIES (93,741) (87,625)
NET DECREASE IN CASH (118,469) 30,649
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 348,957 294,333
___________ ___________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 230,488 $ 324,982
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,287 $ 9,403
=========== ===========
Non-cash investing and financing activities:
Long term debt incurred to purchase Comedy Service $ 124,000 -
=========== ===========
See notes to interim financial statements
TM CENTURY INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
1. BASIS OF PRESENTATION
The interim financial statements of TM Century, Inc. (the "Company")
at March 31, 1999, and for the three and six months ended March 31,
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. 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 and six months
ended March 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. 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 March 31, 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.
3. LONG-TERM DEBT AND LEASE OBLIGATIONS
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 for a period of five years, the Company agreed to pay to the
individual, $2,777 per month for thirty six months beginning on
January 2, 1999 and $1,000 per month for twenty-four months beginning
on January 3, 2002.
Effective March 31, 1999, the Company's Line of Credit was not
renewed. No borrowings were drawn under the Line of Credit during
the quarter, which did bear an annual commitment fee of 0.5% of the
unused amounts. The Company's leasing arrangement discussed below,
no longer requires a Letter of Credit due to the Company's good
payment history and the remaining balance due on the account being
less than $35,000.
In May 1996, the Company entered into a capital lease agreement for
the financing of the upgrade of its computer hardware and software
systems. The total cost of the project as of March 31, 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 has a
term of three years and contains an option to purchase the equipment
at its fair market value or renew the lease at its fair market rental
value at the end of the initial term. Based on borrowing rates
currently available to the Company on similar arrangements, the fair
value of the lease agreement approximates the carrying value.
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:
Three Months Ended Six Months Ended
March 31 March 31
_______________________ ______________________
1999 1998 1999 1998
___________ __________ __________ __________
Net Income (Loss) $ (185,940) $ 49,068 $ (320,821) $ (22,940)
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) $ (0.07) $ 0.02 $ (0.13) $ (0.01)
=========== ========== ========== ==========
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 currently under consideration by the RIAA and its membership.
In management's opinion the likelihood of an unfavorable outcome and
an estimate of the amount or range of any potential loss cannot be
determined. However, the Company has recorded a reserve for possible
loss of $385,000 as of September 30, 1998 on the terms of its latest
settlement offer based on annual payments of $50,000 over a period of
eleven years. The recorded reserve reflects a discount of the
settlement offer using a discount rate of 8% per annum.
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, 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. 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 1999.
During the quarter ended March 31, 1999, approximately $37,000 was
spent for the purchase of property and equipment and for product
development costs for new music libraries, music library updates, and
jingles. 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 for a period of five years, the Company agreed to pay to the
individual, $2,777 per month for thirty six months beginning on
January 2, 1999 and $1,000 per month for twenty-four months beginning
on January 3, 2002.
The Company has assessed its Year 2000 issues and determined no
material effect exists on any 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.
RESULTS OF CONTINUING OPERATIONS
Comparison of the Three-Month Periods Ended March 31, 1998 and 1999
Revenues declined approximately $269,000 or 15.0% in the three-month
period ended March 31, 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 $345,000. Offsetting these
decreases were revenue increases in production libraries of $40,000,
and the Comedy service of $50,000. The Comedy revenue increase is
due to an increase in the amount of the advertising revenue being
allocated to Comedy from barter sales.
Revenues of weekly HitDisc and GoldDisc music services decreased
$148,000 and $197,000 respectively, or 34.0% 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 (which was
discontinued 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 $40,000, or 14.5%. 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.
Commissions decreased $26,600 or 8.1%, and is proportional to the
decrease in commissioned sales. As a percentage of revenues,
commissions increased from 18.1% to 19.5% due to changes in the
revenue structure where a greater percentage of revenue is on barter.
Production, programming and technical costs increased $8,000 or 1.4%,
and as a percentage of revenue increased from 32.1% to 38.2%. The
increase as a percentage of revenues is primarily due to higher
salaries and benefits for production libraries.
Selling costs decreased $105,000 or 39.1%, and as a percentage of
revenues decreased from 15.0% to 10.7%. 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.
General and administrative costs increased $75,000 or 15.2% and is
primarily due to an increase in legal costs, salaries and benefits
and facilities.
Depreciation decreased $6,000 or 7.1% 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 Six-Month Periods Ended March 31, 1998 and 1999
Revenues declined approximately $453,000 or 13.0% in the six-month
period ended March 31, 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 $692,000. Offsetting these
decreases were revenue increases in production libraries of $94,000,
radio Jingles of $81,000 and the Comedy service of $85,000. The
Comedy revenue increase is due to an increase in the amount of the
advertising revenue being allocated to Comedy from barter sales.
Revenues of weekly HitDisc and GoldDisc music services decreased
$249,000 and $443,000 respectively, or 32.5% 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 (which was
discontinued 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 $94,000, or 18.8%. 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.
Revenues for Jingles increased $81,000 or 14.5% primarily due to an
increase in demand for custom Jingles compared to the same six month
period last year.
Commissions decreased $46,000 or 7.3%, and is proportional to the
decrease in commissioned sales. As a percentage of revenues,
commissions increased from 18.2% to 19.4% due to changes in the
revenue structure where a greater percentage of revenue is on barter.
Production, programming and technical costs decreased $9,000 or .8%,
and as a percentage of revenue increased from 32.0% to 36.5%. The
increase as a percentage of revenues is primarily due to higher
salaries and benefits for production libraries.
Selling costs decreased $208,000 or 38.1%, and as a percentage of
revenues decreased from 15.7% to 11.2%. 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.
General and administrative costs increased $92,000 or 8.9% and is
primarily due to an increase in legal fees, salaries and benefits,
and facilities.
Depreciation decreased $9,000 or 5.3% 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.
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 Disctronics. The suit was
later dismissed without prejudice by agreement.
Thus far no discovery has been undertaken. The Company believes that
it has a meritorious defense to many of the claims asserted, but it
is possible that it will not prevail if the matter is brought to
litigation. Any significant cash amount paid in settlement or
awarded in judgment would likely have an adverse effect on the
Company.
The Company made a settlement offer of $550,000, payable over eleven
years currently under consideration by the RIAA and its membership.
In management's opinion the likelihood of an unfavorable outcome and
an estimate of the amount or range of any potential loss cannot be
determined. However, the Company has recorded a reserve for possible
loss of $385,000 as of September 30, 1998 on the terms of its latest
settlement offer based on annual payments of $50,000 over a period of
eleven years. The recorded reserve reflects a discount of the
settlement offer using a discount rate of 8% per annum.
Item 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 has announced the appointment of R. David
Graupner, Executive Vice President, to succeed Neil W. Sargent as
President/CEO, effective April 1, 1999. Mr. Sargent will continue to
have an active role in the Company as Vice Chairman of the Board of
Directors and assisting Mr. Graupner in the transition process, but
will primarily focus on a few major issues for the Company until his
retirement in May 2000. Pursuant to a consulting agreement that
takes effect on May 1, 2000, Mr. Sargent will retain his position as
Vice Chairman of the Board and continue to serve in a consulting role
to the Company through April 30, 2004.
(a) Exhibits
Material Contracts: 10.1. Acceptance of request for TM Century, Inc.
to no longer require a Letter of Credit on behalf of Mellon US Leasing
as of February 29, 1999.
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 March 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: May 7, 1999
TM CENTURY, INC.
BY:/s/Roger A. Holeman
Roger A. Holeman
Chief Financial Officer
(Principal Accounting Officer)
BY:/s/Robert D. Graupner
Robert D. Graupner
Chief Executive Officer
(Principal Executive Officer)