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: February 28, 1997
[ ] 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 February 28, 1997
Common stock, par value $.05 per share 13,423,049
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
February 28, 1997 and August 31, 1996
<TABLE>
<CAPTION>
February 28, August 31,
1997 1996
<S> <C> <C>
Cash $ 622,648 546,745
Trade accounts receivable, net 1,147,779 1,374,079
Contract service work in process 389,091 209,583
Other current assets 357,889 350,157
----------- -----------
Total current assets 2,517,407 2,480,564
----------- -----------
Property and equipment 2,478,553 2,384,267
Accumulated depreciation
and amortization (1,028,705) (901,928)
----------- -----------
Net property and equipment 1,449,848 1,482,339
----------- -----------
Capitalized software development
costs, net 507,337 509,867
Other assets 238,121 235,615
----------- -----------
Total assets 4,712,713 4,708,385
=========== ===========
Current liabilities 577,794 642,383
Long-term debt, net of current
installments 344,797 355,801
---------- -----------
Total liabilities 922,591 998,184
---------- -----------
Common stock 671,659 660,692
Additional paid-in capital 11,472,456 11,416,680
Unamortized deferred compensation (32,194) (32,970)
Accumulated deficit (8,321,799) (8,334,201)
----------- -----------
Total shareholders' equity 3,790,122 3,710,201
----------- -----------
Total liabilities and shareholders'
equity $ 4,712,713 4,708,385
=========== ===========
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 2
TMS, Inc.
Condensed Statements of Operations
Three and Six Months Ended February 28, 1997
and February 29, 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Licensing and royalties $ 917,161 992,199 1,567,682 2,078,275
Software development
services 416,928 174,508 846,266 404,675
Document conversion
services 133,960 276,136 258,997 563,321
--------- ---------- --------- ---------
1,468,049 1,442,843 2,672,945 3,046,271
Operating costs
and expenses:
Cost of licensing and
royalties 261,198 271,622 512,437 502,284
Cost of software development
services 218,560 127,780 425,014 276,826
Cost of document conversion
services 84,559 212,083 191,640 418,601
Selling, general and
administrative expenses 744,388 729,093 1,552,759 1,577,889
--------- --------- --------- ---------
1,308,705 1,340,578 2,681,850 2,775,600
--------- --------- --------- ---------
Operating income (loss) 159,344 102,265 (8,905) 270,671
Other income, net 10,222 9,665 22,107 32,511
--------- --------- --------- ---------
Income before income taxes 169,566 111,930 13,202 303,182
Income tax expense (benefit) - (187,342) 800 (172,430)
--------- --------- --------- ---------
Net income $ 169,566 299,272 12,402 475,612
========= ========= ========= =========
Net income per common and
common equivalent share $ 0.01 0.02 0.00 0.03
========= ========= ========= =========
Weighted average common
and common equivalent
shares 14,092,438 14,297,244 14,124,600 13,985,486
========== ========== ========== ==========
</TABLE>
See accompanying notes to
condensed financial statements.
<PAGE> 3
TMS, Inc.
Condensed Statements of Cash Flows
Six Months Ended February 28, 1997
and February 29, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net cash flows provided by
operating activities $ 270,963 402,994
--------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment (99,934) (70,043)
Capitalized software development
costs (152,550) (168,583)
Patent costs (6,223) (17,814)
Proceeds from sale of equipment 7,245 3,635
---------- ---------
Net cash used in investing
activities (251,462) (252,805)
---------- ---------
Cash flows from financing
activities:
Repayment of long-term debt (10,341) (11,154)
Proceeds from short-term note
payable - 468,000
Repayments of short-term notes
payable - (543,000)
Issuance of common stock 66,743 16,969
---------- ---------
Net cash provided by (used in)
financing activities 56,402 (69,185)
---------- ---------
Net increase in cash 75,903 81,004
Cash at beginning of period 546,745 404,238
---------- ---------
Cash at end of period $ 622,648 485,242
========== =========
</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 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 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 second quarter of fiscal 1997 was $1,468,049 compared to
$1,442,843 for the same period in fiscal 1996, an increase of $25,206 or 2%.
Total revenue for the first six months of fiscal 1997 decreased 12% to
$2,672,945 as compared to the $3,046,271 reported for the same period in
fiscal 1996.
Licensing and royalties revenue, when compared to fiscal 1996, decreased
$75,038, or 8%, for the second quarter of fiscal 1997, and $510,593, or 25%,
for the first six months of the current year. Second quarter text product
revenue was fairly consistent for both the current and prior year second
quarter, while text product revenue for the first six months of fiscal 1997
decreased $105,281, or 43%, from the same period 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. For the second quarter of the current year,
revenue from imaging products (e.g. ViewDirector) decreased $92,525, or 7%,
while revenue from image enhancement products (e.g. FormFix, ScanFix) remained
flat at approximately $250,000 for both quarters. For the first six months of
the current year, revenue from imaging products decreased $392,631, or 30%,
and revenue from image enhancement products decreased $36,100, or 7%, over the
same period last year. Competition and price erosion has had the biggest
impact on the overall decline in revenue from imaging products. The potential
for near-term growth in imaging revenue is primarily expected to come from the
Company's ViewDirector Plug-in products. Markets for the plug-in products
include all internet and corporate intranet users. Growth in image
enhancement product revenue has been hindered by a shortage in personnel
available to process sales leads. Near the end of the second quarter, the
Company hired two additional salespeople on the west coast to focus on image
enhancement product sales.
<PAGE> 5
Software development service revenue for the second quarter of fiscal 1997 was
$416,928 compared to $174,508 for the same period last year, an increase of
$242,420, or 139%. For the first six months of the current year software
development service revenue of $846,266 increased $441,591, or 109%, over the
same period last year. The increase in software development services revenue
over the prior year is attributable to the group operating at full capacity
throughout the first six months of the current fiscal year. In the prior year,
the Company was in the process of rebuilding its software development service
business after the successful completion and delivery to a significant
customer, Powercom 2000. Contract services to one customer, Learjet,
accounted for approximately 33% of the total fiscal 1997 second quarter
service revenue, and 40% of the total current year six month service revenue.
Significant services under the Learjet contract are expected to end during the
third quarter of the current fiscal year. Negotiations are currently underway
with potential customers to help replace the level of revenue generated under
the Learjet contract. Management expects certain new contracts to be secured
in the third quarter of the current fiscal year, although there can be no
assurance as to when or if any of these software development service contracts
will be finalized. If the aforementioned negotiations are not successful or
other new contracts can not be secured, revenue from software development
services may decline. Management is prepared to take the appropriate cost
cutting measures in the event that software development service revenues do
not increase.
Document conversion service revenue for the second quarter of fiscal 1997 was
$133,960 compared to $276,136 for the second quarter of fiscal 1996, a
decrease of $142,176 or 51%. For the first six months of the current year,
document conversion service revenue was $258,997 compared to $563,321 for the
same period last year, a decrease of $304,324, or 54%. During the first six
months of fiscal 1996, service under the Toro contract, which was
substantially completed during March of 1996, accounted for approximately
$309,000 or 55% of the total document conversion service 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 in process 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 from Toro. Management
continues to adjust the number of document conversion employees to a level
that is commensurate with service contract demand and is prepared to make
additional adjustments as necessary.
Operating Costs and Expenses
- ----------------------------
Total operating costs and expenses for the second quarter ended February 28,
1997, were $1,308,705 compared to $1,340,578 for the same quarter in fiscal
1996, a decrease of $31,873 or 2%. For the first six months of the current
year, operating costs and expenses were $2,681,850 compared to $2,775,600 for
the same period last year, a decrease of $93,750, or 3%.
The cost of licensing and royalties decreased $10,424, or 4%, for the second
quarter of fiscal 1997, and increased $10,153, or 2%, for the first six months
of fiscal 1997 compared to the same periods a year ago. The gross profit
margin for licensing and royalties approximated 72% for the current and prior
year second quarters. For the first six months of the current year the gross
profit margin for licensing and royalties was 67% compared to 76% for the same
period last year. The decrease in gross profit margin is primarily
attributable to the 25% decrease in licensing and royalty revenue.
The cost of software development services increased $90,780, or 71%, for the
second quarter of fiscal 1997, and increased $148,188, or 54%, for the first
six months of fiscal 1997, compared to the same periods a year ago. The gross
profit margins for software development services were 48% and 27% for the
current and prior year second quarters, respectively. For the first six
months of the current year the gross profit margin was 50% compared to 32% for
the same period last year. 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 throughout the first six
months of the current year.
<PAGE> 6
The cost of document conversion services, when compared to the prior year,
decreased $127,524, or 60%, for the second quarter of fiscal 1997, and
decreased $226,961, or 54%, for the first six months of fiscal 1997. The gross
profit margins for document conversions services were 37% and 23% for the
current and prior year second quarters, respectively. For the first six months
of both the current and prior year, the gross profit margin was 26%. The
decrease in costs is the direct result of management adjusting the number of
document conversion employees to help offset the decline in revenues. Gross
margins for the current year second quarter were higher than last year because
of the type of projects being serviced and a more experienced staff.
Selling, general and administrative expenses for the second quarter of fiscal
1997 increased $15,295, or 2%, and for the first six months decreased $25,130,
or 2%, when compared to the same periods last year. The Company incurred
approximately $172,000 in non-recurring legal, accounting and other
professional fees during the first six months of the prior year related to the
merger with Sequoia Data Corporation. The 100% decrease in merger costs over
the prior year was partially offset by increased investments in tradeshow,
advertising and other marketing activities, and a shift in certain employee
responsibilities from service providers to managerial and business development
positions.
Income Taxes
- ------------
Deferred tax expense of approximately $5,000 for the six months ended February
28, 1997, was offset by deferred tax benefits of approximately $5,000
attributable to the decrease 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. At the end of the prior year second quarter the Company decreased it's
valuation allowance for deferred tax assets by $210,000 to give additional
recognition to net operating loss carryforwards that the Company has available
to offset income tax liabilities. The current tax expense of $800 recognized
in the current year represents state taxes paid.
FINANCIAL CONDITION
Working capital at February 28, 1997 was $1,939,613 with a current ratio of
4.3:1 compared to $1,838,181, with a current ratio of 3.9:1, at August 31,
1996. Net cash provided by operations for the six months ended February 28,
1997 was $270,963 compared to net cash provided by operations of $402,994 for
the six months ended February 29,1996. Lower current year net income and
slower customer billing cycles associated with custom software services were
the primary factors that adversely affected operating cash flows as compared
to last year. Net cash used in investing activities for the first six months
of fiscal 1997 was $251,462 compared to $252,805 for the same period in fiscal
1996.
During the first six months ended February 28, 1997, the Company did not
borrow against it's $800,000 line of credit. At February 28, 1997, the
Company's long-term debt was $344,797. Current obligations under the long-
term debt total $21,488.
<PAGE> 7
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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its annual meeting of shareholders on January 17, 1997.
b) The following matters were voted upon at the annual meeting:
1) Following are the directors elected at the annual meeting and the
tabulation of votes related to each nominee.
<TABLE>
<CAPTION>
Affirmative Votes Withheld
<S> <C> <C>
Dana R. Allen 11,163,428 250,895
Doyle E. Cherry 11,281,907 132,416
James R. Rau, M.D. 11,281,907 132,416
Maxwell Steinhardt 11,357,728 56,595
Marshall C. Wicker 11,281,907 132,416
</TABLE>
2) The shareholders ratified the appointment of KPMG Peat Marwick LLP
as independent public accountants for 1997. Affirmative votes were
11,359,376; negative votes were 30,547; and abstentions were 24,400.
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 six month period
ending February 28, 1997.
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.
April 10, 1997 /s/ Maxwell Steinhardt
Date: ____________________ _______________________
Maxwell Steinhardt
Chief Executive Officer
April 10, 1997 /s/ Deborah D. Mosier
Date: ____________________ _______________________
Deborah D. Mosier
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the second
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> 6-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 622,648
<SECURITIES> 0
<RECEIVABLES> 1,281,725
<ALLOWANCES> 133,946
<INVENTORY> 0
<CURRENT-ASSETS> 2,517,407
<PP&E> 2,478,553
<DEPRECIATION> 1,028,705
<TOTAL-ASSETS> 4,712,713
<CURRENT-LIABILITIES> 577,794
<BONDS> 0
0
0
<COMMON> 671,659
<OTHER-SE> 3,118,463
<TOTAL-LIABILITY-AND-EQUITY> 4,712,713
<SALES> 2,672,945
<TOTAL-REVENUES> 2,672,945
<CGS> 1,129,091
<TOTAL-COSTS> 1,129,091
<OTHER-EXPENSES> 1,552,759
<LOSS-PROVISION> 32,200
<INTEREST-EXPENSE> 11,704
<INCOME-PRETAX> 13,202
<INCOME-TAX> 800
<INCOME-CONTINUING> 12,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,402
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
