U.S.SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: November 30, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 0-18250
TMS, Inc.
(Exact name of small business issuer as specified in its charter)
OKLAHOMA 91-1098155
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
206 West Sixth Street
Post Office Box 1358
Stillwater, Oklahoma 74075
(Address of principal executive offices)
Issuer's telephone number, including area code: (405) 377-0880
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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Title of Each Class Outstanding at November 30, 1996
Common stock, par value $.05 per share 13,312,717
Transitional Small Business Disclosure Format(check one):
Yes [ ] No [X]
<PAGE> 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Condensed Balance Sheets
November 30, 1996 and August 31, 1996
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
------------- -------------
<S> <C> <C>
Cash $ 448,426 546,745
Trade accounts receivable, net 1,227,249 1,374,079
Contract service work in process 321,839 209,583
Other current assets 321,697 350,157
------------- -------------
Total current assets 2,319,211 2,480,564
------------- -------------
Property and equipment 2,410,675 2,384,267
Accumulated depreciation and amortization (964,130) (901,928)
------------- -------------
Net property and equipment 1,446,545 1,482,339
------------- -------------
Capitalized software development costs, net 519,243 509,867
Other assets 233,632 235,615
------------- -------------
Total assets 4,518,631 4,708,385
============= =============
Current liabilities 578,742 642,383
Long-term debt, net of current installments 350,372 355,801
------------- -------------
Total liabilities 929,114 998,184
------------- -------------
Common stock 665,636 660,692
Additional paid-in capital 11,447,486 11,416,680
Unamortized deferred compensation (32,194) (32,970)
Accumulated deficit (8,491,411) (8,334,201)
------------- -------------
Total shareholders' equity 3,589,517 3,710,201
------------- -------------
Total liabilities and shareholders' equity $ 4,518,631 4,708,385
============= =============
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 2
TMS, Inc.
Condensed Statements of Operations
Three Months Ended November 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Revenue:
Licensing and royalties $ 650,521 1,086,096
Software development services 429,338 230,167
Document conversion services 125,038 287,185
------------- -------------
1,204,897 1,603,448
------------- -------------
Operating costs and expenses:
Cost of licensing and royalties 242,114 200,489
Cost of software development services 206,454 149,046
Cost of document conversion services 107,081 206,518
Selling, general and administrative expenses 808,349 848,799
Research and development 9,125 30,173
------------- -------------
1,373,123 1,435,025
------------- -------------
Operating (loss) income (168,226) 168,423
Other income, net 11,817 22,847
------------- -------------
(Loss) income before income taxes (156,409) 191,270
Income tax expense 800 14,913
------------- -------------
Net (loss) income $ (157,209) 176,357
============= =============
Net (loss) income per common and common
equivalent share (0.01) 0.01
============= =============
Weighted average common and common
equivalent shares 13,312,717 13,091,519
============= =============
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 3
TMS, Inc.
Condensed Statements of Cash Flows
Three Months Ended November 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Net cash flows (used in) provided by
operating activities (21,696) 342,807
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (32,056) (28,019)
Capitalized software development costs (78,336) (113,318)
Patent costs (4,128) (17,814)
Proceeds from sale of equipment 7,245 3,635
------------- -------------
Net cash used in investing activities (107,275) (155,516)
------------- -------------
Cash flows from financing activities:
Repayment of long-term debt (5,098) (6,289)
Proceeds from short-term note payable - 318,000
Repayments of short-term note payable - (393,000)
Issuance of common stock 35,750 11,696
------------- -------------
Net cash provided by (used in)
financing activities 30,652 (69,593)
------------- -------------
Net increase (decrease) in cash (98,319) 117,698
Cash at beginning of period 546,745 404,238
------------- -------------
Cash at end of period 448,426 521,936
============= =============
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 4
TMS, Inc.
Notes to Condensed Financial Statements
Unaudited Interim Condensed Financial Statements
- ------------------------------------------------
The unaudited interim condensed financial statements and related notes were
prepared by TMS, Inc.(the Company). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to rules and regulations established by the Securities and Exchange
Commission (SEC). The accompanying unaudited interim condensed financial
statements should be read in conjunction with the audited financial statements
and related notes included in the Company's Form 10-KSB Annual Report for the
fiscal year ended August 31, 1996.
The unaudited interim financial statements reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of financial
position, results of operations and cash flows for the interim periods
presented. All adjustments are normal and recurring.
Interim results are subject to year-end adjustments and audit by independent
auditors. The financial data for the interim periods may not necessarily be
indicative of the results expected for the year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
This analysis of the Company's results of operations and financial condition
contains certain forward-looking statements regarding the Company's business
and prospects that are based upon numerous assumptions about future conditions
which may ultimately prove to be inaccurate and actual events and results may
materially differ from anticipated results described in such statements. The
Company's ability to achieve such results is subject to certain risks and
uncertainties, such as those inherent generally in the retail and computer
software industries and the impact of competition, pricing and changing market
conditions. The Company disclaims, however, any intent or obligation to
update these forward-looking statements. As a result, the reader is cautioned
not to place reliance on these forward-looking statements.
Revenue
- -------
Total revenue for the first quarter of fiscal 1997 was $1,204,897 compared to
$1,603,448 for the same quarter of fiscal 1996, a decrease of $398,551 or 25%.
Licensing and royalties revenue for the first quarter of fiscal 1997 decreased
$435,575, or 40% over licensing and royalties revenue for the same quarter of
fiscal 1996. First quarter revenue from text products decreased $121,881, or
68%, from the same quarter last year. As mentioned in the Company's 10-KSB for
the year ended August 31, 1996, revenue from text products is expected to
continue to decline because future development of this technology will occur
on a customer contract basis and be reported as software development service
revenue. Revenue from imaging products (e.g. ViewDirector) decreased $300,106,
or 48%, over last year, while revenue from image enhancement products (e.g.
FormFix, ScanFix) remained flat at approximately $265,000 for both quarters.
The decreases in imaging and image enhancement product revenues may be
attributed to competition and price erosion for the Company's imaging
technology, and late releases of the Company's ViewDirector Plug-in and
FormFix products which hindered revenue growth in both product groups. The
ViewDirector Plug-in and FormFix final products were released early in the
second quarter.
Software development service revenue for the first quarter of fiscal 1997 was
$429,338 compared to $230,167 for the first quarter of fiscal 1996, an
increase of $199,171 or 87%. During the first quarter of fiscal 1997, the
<PAGE> 5
software development services group was operating at full capacity and at
November 30, 1996 had a service revenue backlog of approximately $500,000.
During the first quarter of fiscal 1996, the Company was in the process of
rebuilding it's software development service business.
Document conversion service revenue for the first quarter of fiscal 1997 was
$125,038 compared to $287,185 for the first quarter of fiscal 1996, a decrease
of $162,147, or 56%. During the first quarter of fiscal 1996, service under
the Toro contract, which was substantially completed during March of 1996,
accounted for approximately $188,000, or 66% of the document conversion
revenue. The Company has secured new document conversion service contracts,
but not at the level of revenue provided under the Toro contract. The Company
has a sales and marketing plan underway to obtain additional document
conversion service opportunities, but there can be no assurance as to when
additional document conversion service contracts will be secured, or if
revenues from any new contracts will replace the level of revenue recognized
for Toro. Management reduced the number of document conversion employees
during the first quarter of the current fiscal year to help offset the decline
in revenues and is prepared to make additional cost cutting measures where
necessary.
Operating Costs and Expenses
- ----------------------------
Total operating costs and expenses for the quarter ended November 30, 1996,
were $1,373,123 compared to $1,435,025 for the same quarter in fiscal 1996, a
decrease of $61,902 or 4%.
The cost of licensing and royalties increased $41,625, or 21%, for the first
quarter of fiscal 1997, compared to the same period a year ago. The gross
profit margin for licensing and royalties was 63% and 82% for the three months
ended November 30, 1996 and 1995, respectively. The decrease in gross profit
margin is primarily attributable to the 40% decrease in licensing and royalty
revenue and more engineering time devoted to product maintenance.
The cost of software development services increased $57,408, or 39%, for the
first quarter of fiscal 1997, compared to the same period a year ago. The
gross profit margin for software development services was 52% and 35% for the
three months ended November 30, 1996 and 1995, respectively. The increased
cost of software development services is primarily attributable to the
additional personnel needed to satisfy contract requirements. Improved
gross margins are a direct result of the engineering service group operating
at full capacity during the fiscal 1997 first quarter.
The cost of document conversion services decreased $99,437, or 48%, for the
first quarter of fiscal 1997, compared to the same period a year ago. The
gross profit margin for document conversions services was 14% and 28% for the
three months ended November 30, 1996 and 1995, respectively. The decrease in
costs is the direct result of management reducing the number of document
conversion employees to help offset the decline in revenues. Despite the
decrease in costs, gross margins declined over fiscal 1996 first quarter
levels because of the number of employees and level of overhead that is
required to be maintained in order to be responsive to new projects.
Management is prepared to make additional cost reductions if revenue growth
from the document conversion service division is not achieved.
Selling, general and administrative expenses for the first quarter of fiscal
1997 decreased $40,450, or 5%, when compared to the first quarter of fiscal
1996. The decrease can be attributed to approximately $115,000 in non-
recurring legal, accounting and other professional fees incurred during the
prior year first quarter for the merger with Sequoia Data Corporation. The
100% decrease in merger costs over the prior year was partially offset by an
additional $75,000, or 70%, investment in tradeshow and advertising.
Management expects second quarter marketing costs to decrease approximately
50% over fiscal 1997 first quarter levels.
Research and development costs for the first quarter of fiscal 1996 decreased
$21,048, or 70% from the same period a year ago. The decrease is primarily
<PAGE> 6
attributable to the Company focusing it's resources on product maintenance
releases and new products and enhancements to existing products that are
capitalized for financial accounting and reporting purposes. The Company
capitalized software development costs of $78,336 and $113,318, during the
first quarter of fiscal 1997 and 1996, respectively.
Income Taxes
- ------------
Deferred tax benefits of approximately $60,000 for the quarter ended November
30, 1996, was offset by deferred tax expense of approximately $60,000
attributable to the increase in the valuation allowance for deferred tax
assets. The Company assesses the realizability of deferred tax assets at
least quarterly, and adjusts the valuation allowance to reflect the future
benefits that will more likely than not be realized from those deferred tax
assets. The current tax expense of $800 recognized for the fiscal 1997 first
quarter represents state taxes paid.
Net Loss/Income
- ---------------
Net loss for the first quarter of fiscal 1997 was $157,209, or $.01 per share,
compared to net income of $176,357, or $.01 per share, for the first quarter
of fiscal 1996. The 25% decrease in revenue and lower gross margins for
licensing and royalties and document conversion services, were the primary
factors that caused the fiscal 1997 first quarter loss.
FINANCIAL CONDITION
Working capital, at November 30, 1996 was $1,740,469 with a current ratio of
4.0:1 compared to $1,838,181, with a current ratio of 3.9:1, at August 31,
1996. Net cash used in operations for the three months ended November 30, 1996
was $21,696 compared to net cash provided by operations of $342,807 for the
three months ended November 30, 1995. The current quarter net loss and slower
customer billing cycles associated with custom software services were the
primary factors that affected operating cash flows. Net cash used in investing
activities for the first three months of fiscal 1997 was $107,275 compared to
$155,516 for the same period in fiscal 1996.
During the quarter ended November 30, 1996, the Company did not borrow against
it's $800,000 line of credit. At November 30, 1996, the Company's long-term
debt was $350,372. Current obligations under the long-term debt total
$21,156.
The Company believes that operating cash flow and the $800,000 operating line
of credit will be adequate to meet its current obligations and current
operating and capital requirements. The funding of long-term needs is
dependent upon increased revenue and profitability and obtaining funds through
outside debt and equity sources. The funding for long-term needs includes
funding for increased product development, expanded sales staff and adequate
promotion of the Company and its products.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K
- -------------------
None
Exhibits
Exhibit No. Name of Exhibit
27 Financial Data Schedule as of and for the three month period
ending November 30, 1996.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TMS, Inc.
/s/ Maxwell Steinhardt
Date: January 6, 1997 _______________________
Maxwell Steinhardt
Chief Executive Officer
/s/ Deborah D. Mosier
Date: January 6, 1997 _______________________
Deborah D. Mosier
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the first
quarter 10-QSB for the fiscal year ending August 31, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 448,426
<SECURITIES> 0
<RECEIVABLES> 1,332,363
<ALLOWANCES> 105,114
<INVENTORY> 0
<CURRENT-ASSETS> 2,319,211
<PP&E> 2,410,675
<DEPRECIATION> 964,130
<TOTAL-ASSETS> 4,518,631
<CURRENT-LIABILITIES> 578,742
<BONDS> 0
0
0
<COMMON> 665,636
<OTHER-SE> 2,923,881
<TOTAL-LIABILITY-AND-EQUITY> 4,518,631
<SALES> 1,204,897
<TOTAL-REVENUES> 1,204,897
<CGS> 555,649
<TOTAL-COSTS> 555,649
<OTHER-EXPENSES> 817,474
<LOSS-PROVISION> 18,200
<INTEREST-EXPENSE> 5,923
<INCOME-PRETAX> (156,409)
<INCOME-TAX> 800
<INCOME-CONTINUING> (157,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (157,209)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
