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: May 31, 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 May 31, 1997
Common stock, par value $.05 per share 13,431,049
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
May 31, 1997 and August 31, 1996
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash $ 421,343 546,745
Trade accounts receivable, net 1,319,089 1,374,079
Contract service work in process 425,361 209,583
Other current assets 351,973 350,157
------------ ------------
Total current assets 2,517,766 2,480,564
------------ ------------
Property and equipment 2,608,093 2,384,267
Accumulated depreciation and
amortization (1,096,406) (901,928)
------------ ------------
Net property and equipment 1,511,687 1,482,339
------------ ------------
Capitalized software development
costs, net 501,147 509,867
Other assets 237,537 235,615
------------ ------------
Total assets 4,768,137 4,708,385
============ ============
Current liabilities 621,422 642,383
Long-term debt, net of current
installments 339,252 355,801
------------ ------------
Total liabilities 960,674 998,184
------------ ------------
Common stock 672,058 660,692
Additional paid-in capital 11,473,055 11,416,680
Unamortized deferred compensation (31,121) (32,970)
Accumulated deficit (8,306,529) (8,334,201)
------------ ------------
Total shareholders' equity 3,807,463 3,710,201
------------ ------------
Total liabilities and shareholders'
equity $ 4,768,137 4,708,385
============ ============
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 2
TMS, Inc.
Condensed Statements of Operations
Three and Nine Months Ended May 31, 1997 and
May 31, 1996
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1997 1996 1997 1996
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Licensing and royalties $ 1,041,377 696,905 2,609,059 2,775,181
Software development
services 164,373 243,101 1,010,639 647,775
Document conversion services 244,124 229,349 503,122 792,670
---------- --------- ---------- ----------
1,449,874 1,169,355 4,122,820 4,215,626
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of licensing and
royalties 255,953 237,761 768,390 740,047
Cost of software development
services 193,864 157,708 618,878 434,536
Cost of document conversion
services 123,127 180,786 314,767 599,387
Selling, general and
administrative expenses 854,273 756,655 2,407,820 2,334,546
---------- ---------- --------- ---------
1,427,217 1,332,910 4,109,855 4,108,516
---------- ---------- --------- ---------
Operating (loss) income 22,657 (163,555) 12,965 107,110
Other income, net 9,900 5,182 32,007 38,292
---------- ---------- --------- ---------
Income (loss) before
income taxes 32,557 (158,373) 44,972 145,402
Income tax expense (benefit) 17,300 (36,849) 17,300 (209,279)
----------- ---------- --------- ---------
Net income (loss) $ 15,257 (121,524) 27,672 354,681
=========== ========== ========= ==========
Net (loss) income per common
and common equivalent share $ 0.00 (0.01) 0.00 0.03
=========== ========== ========== ==========
Weighted average common and
common equivalent shares 14,053,463 12,445,226 14,100,888 14,010,908
=========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 3
TMS, Inc.
Condensed Statements of Cash Flows
Nine Months Ended May 31, 1997 and
May 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net cash flows (used in) provided
by operating activities $ 285,991 415,846
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (229,375) (164,944)
Capitalized software development costs (235,240) (278,422)
Patent costs (6,223) (4,627)
Proceeds from sale of equipment 7,245 3,635
---------- ----------
Net cash used in investing activities (463,593) (444,358)
---------- ----------
Cash flows from financing activities:
Repayment of long-term debt (15,541) (16,030)
Proceeds from short-term note payable - 468,000
Repayments of short-term note payable - (543,000)
Issuance of common stock 67,741 120,794
---------- ----------
Net cash provided by (used in)
financing activities 52,200 29,764
---------- ----------
Net increase (decrease) in cash (125,402) 1,252
Cash at beginning of period 546,745 404,238
---------- ----------
Cash at end of period $ 421,343 405,490
========== ==========
</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 that 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 third quarter of fiscal 1997 was $1,449,874 compared to
$1,169,355 for the same period in fiscal 1996, an increase of $280,519 or 24%.
Total revenue for the first nine months of fiscal 1997 decreased 2% to
$4,122,820 as compared to the $4,215,626 reported for the same period in fiscal
1996.
<PAGE> 5
Licensing and royalties revenue, when compared to fiscal 1996, increased
$344,472 or 49%, for the third quarter of fiscal 1997, and decreased $166,122,
or 6%, for the first nine months of the current year. Third quarter text
product revenue was fairly consistent for both the current and prior year third
quarter, while text product revenue for the first nine months of fiscal 1997
decreased $111,754, or 33%, 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 third quarter of the current year, revenue
from imaging products (e.g. ViewDirector) increased $248,724, or 64%, and
revenue from image enhancement products (e.g. FormFix, ScanFix) increased
$89,901, or 47%. For the first nine months of the current year, revenue from
imaging products decreased $143,909 or 9%, and revenue from image enhancement
products increased $53,802, 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. During the current year third quarter, revenue from the ViewDirector
Plug-in product accounted for approximately 91%, or $225,000, of the total
growth in imaging technology. For the first nine months of the current year,
ViewDirector Plug-in product revenue has contributed 26% to the Company's total
imaging product revenue stream. Growth in image enhancement product revenue
has been marginal. Near the end of the second quarter, the Company hired two
additional salespeople on the west coast to focus on image enhancement product
sales. The internal training cycle for new sales personnel ranges from three to
five months; accordingly, the Company expects the additional sales staff to
have a more significant impact on fourth quarter results.
Software development service revenue for the third quarter of fiscal 1997 was
$164,373 compared to $243,101 for the same period last year, a decrease of
$78,728, or 32%. For the first nine months of the current year, software
development service revenue of $1,010,639 increased $362,864, or 56%, over the
same period last year. The year-to-date increase in software development
services revenue over the prior year may be attributed 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 it's software
development service business. During the third quarter of the current year the
Company began another rebuilding phase after completing a significant project
for one customer, Learjet, which accounted for approximately 36% of the total
current year nine-month service revenue. Negotiations are currently underway
with potential customers to help replace the level of revenue generated under
the Learjet contract. The Company secured new contracts late in the third
quarter, and management expects that additional contracts will be secured in
the fourth quarter to bring the software services group back to capacity.
However, the Company can give no assurance as to when, or if, any of these
software development service contracts will be finalized. If negotiations are
not successful or other new contracts can not be secured, revenue from software
development services may continue to decline. Management is prepared to take
the appropriate cost cutting measures in the event that software development
service revenues do not increase.
<PAGE> 6
Document conversion service revenue for the third quarter of fiscal 1997 was
$244,124 compared to $229,349 for the third quarter of fiscal 1996, an increase
of $14,775 or 6%. For the first nine months of the current year, document
conversion service revenue was $503,122 compared to $792,670 for the same
period last year, a decrease of $289,548, or 37%. During the first nine months
of fiscal 1996, service under the Toro contract, which was substantially
completed during March of 1996, accounted for approximately $393,000 or 50%
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 for 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 third quarter ended May 31, 1997,
were $1,427,217 compared to $1,332,910 for the same quarter in fiscal 1996, an
increase of $94,307 or 7%. For the first nine months, operating costs and
expenses approximated $4,100,000 in both the current and prior period.
The cost of licensing and royalties increased $18,192, or 8%, for the third
quarter of fiscal 1997, and increased $28,343, or 4%, for the first nine months
of fiscal 1997 compared to the same periods a year ago. The gross profit margin
for licensing and royalties approximated 75% for the current year third quarter
and 66% for prior year third quarter. For the first nine months of the current
year the gross profit margin for licensing and royalties was 71% compared to
73% for the same period last year. Fluctuations in gross profit margins result
from the mix of product versus royalty revenue reported, as royalty revenue
results in little or no cost to the Company when it is received. Third quarter
revenue from royalties increased approximately $120,000, or 27%, over the same
period last year which primarily accounts for the significant increase in the
third quarter margins over last year.
The cost of software development services increased $36,156 or 23%, for the
third quarter of fiscal 1997, and increased $184,342, or 42%, for the first
nine months of fiscal 1997, compared to the same periods a year ago. The
gross profit (loss) margins for software development services were (18%) and
35% for the current and prior year third quarters, respectively. For the first
nine months of the current year the gross profit margin was 39% compared to 33%
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 through the first six months of the current year.
The negative margins for the current third quarter reflects management's
decision to maintain the current engineering capacity in preparation for
new contracts that are in the process of being secured. The Company expects to
be at or near full capacity midway into the fourth quarter of the current year.
Improved gross margins for the first nine months are a direct result of the
engineering service group operating at full capacity throughout the first six
months of the current year.
<PAGE> 7
The cost of document conversion services, when compared to the prior year,
decreased $57,659, or 32%, for the third quarter of fiscal 1997, and decreased
$284,620, or 47%, for the first nine months of fiscal 1997. The gross profit
margins for document conversion services were 50% and 21% for the current and
prior year third quarters, respectively. Gross profit margins for the first
nine months of both the current and prior year were 37% and 24%, respectively.
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 third quarter and nine months 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 $97,618, or 13%, and for the first nine months increased
$73,274, or 3%, when compared to the same periods last year. The Company
incurred approximately $230,000 in non-recurring legal, accounting and other
professional fees during the first nine 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 $17,300 for the nine months ended May 31,
1997, was reported at a 38% effective income tax rate. During the prior year,
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 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.
FINANCIAL CONDITION
Working capital, at May 31, 1997 was $1,896,344 with a current ratio of 4.1:1
compared to $1,838,181, with a current ratio of 3.9:1, at August 31, 1996. Net
cash provided by operations for the nine months ended May 31, 1997 was $285,991
compared to net cash provided by operations of $415,846 for the same nine month
period last year. Lower net income in the current year and slower customer
billing cycles associated with custom software services were the primary
factors that affected operating cash flows as compared to last year. Net cash
used in investing activities for the first nine months of fiscal 1997 was
$463,593 compared to $444,358 for the same period in fiscal 1996.
During the first nine months ended May 31, 1997, the Company did not borrow
against it's $800,000 line of credit. At May 31, 1997, the Company's long-term
debt was $339,252. Current obligations under the long-term debt total $21,833.
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.
<PAGE> 8
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 nine month period
ended May 31, 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.
July 1, 1997 /s/ Maxwell Steinhardt
Date: ------------- -----------------------
Chief Executive Officer
July 1, 1997 /s/ Deborah D. Mosier
Date: ------------- -----------------------
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the third
quarter 10-QSB for the fiscal year ending August 31, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000835412
<NAME> TMS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 421,343
<SECURITIES> 0
<RECEIVABLES> 1,415,995
<ALLOWANCES> 166,632
<INVENTORY> 0
<CURRENT-ASSETS> 2,517,766
<PP&E> 2,608,093
<DEPRECIATION> 1,096,406
<TOTAL-ASSETS> 4,768,137
<CURRENT-LIABILITIES> 621,422
<BONDS> 0
0
0
<COMMON> 672,058
<OTHER-SE> 3,135,405
<TOTAL-LIABILITY-AND-EQUITY> 4,768,137
<SALES> 4,122,820
<TOTAL-REVENUES> 4,122,820
<CGS> 1,702,035
<TOTAL-COSTS> 1,702,035
<OTHER-EXPENSES> 2,407,820
<LOSS-PROVISION> 61,900
<INTEREST-EXPENSE> 17,527
<INCOME-PRETAX> 44,972
<INCOME-TAX> 17,300
<INCOME-CONTINUING> 27,672
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,672
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
