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, 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 November 30, 1997
Common stock, par value $.05 per share 13,283,906
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, 1997 and August 31, 1997
<TABLE>
<CAPTION>
November 30, August 31,
1997 1997
_____________ _____________
<S> <C> <C>
Cash $ 509,861 426,174
Trade accounts receivable, net 1,194,933 1,235,195
Contract service work in process 1,015,980 579,137
Other current assets 266,331 322,291
____________ ____________
Total current assets
2,987,105 2,562,797
____________ ____________
Property and equipment 2,948,749 2,714,181
Accumulated depreciation and
amortization (1,247,354) (1,167,738)
____________ ____________
Net property and equipment 1,701,395 1,546,443
____________ ____________
Capitalized software development
costs, net 515,524 499,444
Other assets 237,738 238,342
____________ ____________
Total assets 5,441,762 4,847,026
============ ============
Note payable 263,000 78,000
Accounts payable 336,958 247,123
Other current liabilities 504,733 442,765
____________ ____________
Total current liabilities 1,104,691 767,888
Obligation under capital lease,
net of current installments 69,919 0
Long-term debt, net of current
installments 327,835 333,618
____________ ____________
Total liabilities 1,502,445 1,101,506
____________ ____________
Common stock 671,552 671,552
Additional paid-in capital 11,473,561 11,473,561
Unamortized deferred compensation (27,902) (30,048)
Accumulated deficit (8,099,009) (8,290,660)
Treasury stock (78,885) (78,885)
_____________ ____________
Total shareholders' equity 3,939,317 3,745,520
_____________ ____________
Total liabilities and shareholders'
equity $ 5,441,762 4,847,026
============= ============
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 2
TMS, Inc.
Condensed Statements of Operations
Three Months Ended November 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
____ ____
<S> <C> <C>
Revenue:
Licensing and royalties $ 1,153,170 650,520
Software development services 452,764 429,338
Document conversion services 448,210 125,038
____________ ____________
2,054,144 1,204,896
____________ ____________
Operating costs and expenses:
Cost of licensing and royalties 206,173 251,238
Cost of software development services 227,646 206,454
Cost of document conversion services 272,359 107,082
Selling, general and administrative
expenses 1,100,415 808,351
____________ ____________
1,806,593 1,373,125
____________ ____________
Operating (loss) income 247,551 (168,229)
Other (expense) income, net (11,031) 11,817
____________ ___________
Income (loss) before income taxes 236,520 (156,412)
Income tax expense 44,869 800
____________ ___________
Net income (loss) $ 191,651 (157,212)
============ ===========
Net income (loss) per common and common
equivalent share $ 0.01 (0.01)
============ ===========
Weighted average common and common
equivalent shares 13,827,933 13,312,717
============ ===========
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 3
TMS, Inc.
Condensed Statements of Cash Flows
Three Months Ended November 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
____ ____
<S> <C> <C>
Net cash flows provided by (used in)
operating activities $ 155,663 (21,696)
___________ ___________
Cash flows from investing activities:
Purchases of property and equipment (137,962) (32,056)
Capitalized software development costs (111,833) (78,336)
Patent costs 0 (4,128)
Proceeds from sale of equipment 0 7,245
___________ __________
Net cash used in investing activities (249,795) (107,275)
___________ __________
Cash flows from financing activities:
Repayment of long-term debt (7,181) (5,098)
Proceeds from short-term note payable 185,000 0
Repayments of short-term note payable 0 0
Issuance of common stock 0 35,750
___________ __________
Net cash provided by (used in)
financing activities 177,819 30,652
___________ __________
Net increase (decrease) in cash 83,687 (98,319)
Cash at beginning of period 426,174 546,745
___________ __________
Cash at end of period $ 509,861 448,426
=========== ==========
</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, 1997.
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 first quarter of fiscal 1998 was $2,054,144 compared to
$1,204,896 for the same quarter of fiscal 1997, an increase of $849,248 or
70%.
Licensing and royalties revenue for the first quarter of fiscal 1998 increased
$502,650, or 77%, over licensing and royalties revenue for the same quarter of
fiscal 1997. First quarter revenue from imaging products increased $400,678,
or 125%, over the same period last year. Approximately 70% of the increase in
imaging revenue resulted from sales of the Prizm Plug-in product that was
released early in the second quarter of fiscal 1997 and targets corporate
intranet and Internet users. The remaining 30% of the increase was primarily
attributable to additional royalties from customers that use the Company's
ViewDirector product. First quarter revenue from image enhancement products
(e.g. ScanFix, FormFix) increased $71,780, or 27%, over last year. Increased
revenue for image enhancement occurred across all major product lines and is
primarily attributable to two additional salespersons that the Company hired
late in fiscal 1997 to focus on image enhancement sales and a joint marketing
program with Caere Corporation, a leader in Optical Character Recognition
(OCR) technology. Caere uses the Company's ScanFix technology as part of
their OCR product offerings.
<PAGE> 5
Software development service revenue for the first quarter of fiscal 1998 was
$452,764 compared to $429,338 for the first quarter of fiscal 1997, an
increase of $23,426 or 5%. At November 30, 1997, the Company had a software
development service revenue backlog of approximately $580,000.
Document conversion service revenue for the first quarter of fiscal 1998 was
$448,210 compared to $125,038 for the first quarter of fiscal 1997, an
increase of $323,172, or 258%. Approximately 55%, or $245,000, of the first
quarter document conversion service revenue came from one customer. The
Company expects that services to this customer will be substantially complete
early in the second quarter, but has secured another contract that will help
replace the level of revenue reported for the first quarter. At November 30,
1997, the Company had a document conversion service revenue backlog of
approximately $665,000.
Operating Costs and Expenses
Total operating costs and expenses for the quarter ended November 30, 1997,
were $1,806,593 compared to $1,373,125 for the same quarter in fiscal 1997, an
increase of $433,648 or 32%.
The cost of licensing and royalties decreased $45,065, or 18%, for the first
quarter of fiscal 1997, compared to the same period a year ago. The gross
profit margin for licensing and royalties was 82% and 61% for the three months
ended November 30, 1997 and 1996, respectively. The increase in gross profit
margin is partially attributable to the 36% increase in royalty revenue, which
results in little or no cost to the Company. Additionally, the Company has
expanded product offerings by using its toolkits to build complete software
applications to address an expanding marketplace of software users. First
quarter revenue from complete software applications was mostly derived from
companies purchasing licenses to install multiple copies of the Company's
software throughout their organizations. Revenue from multiple licenses does
not result in a proportional increase in unit costs and thus had a significant
impact on the Company's first quarter gross margins.
The cost of software development services increased $21,192, or 10%, for the
first quarter of fiscal 1998, compared to the same period a year ago. The
gross profit margin for software development services was 50% and 52% for the
three months ended November 30, 1997 and 1996, respectively.
The cost of document conversion services increased $165,277, or 154%, for the
first quarter of fiscal 1998, compared to the same period a year ago. The
gross profit margin for document conversion services was 39% and 14% for the
three months ended November 30, 1997 and 1996, respectively. The increase in
cost represents the hiring of additional personnel to meet service contract
requirements. The increase in gross profit margin is the result of the
document conversion group operating at or near full capacity during the fiscal
1998 first quarter. In the prior year first quarter, the Company was in the
process of rebuilding its service backlog and had to maintain a certain number
of employees and level of overhead to be responsive to new opportunities.
Selling, general and administrative expenses for the first quarter of fiscal
1998 increased $292,064, or 36%, when compared to the first quarter of fiscal
1997. The increase in costs is almost entirely due to personnel related
expenses. As mentioned in the Company's 10-KSB for the fiscal year ending
August 31, 1997, the Company made several market adjustments to salaries in
addition to regular merit and cost of living increases. The Company also
improved employee benefit offerings by implementing a 401(k)-retirement plan
matching program and absorbing 25% more of the cost of employee medical
insurance premiums. The majority of these changes occurred at the beginning of
the fiscal 1997 third quarter. During the first quarter of fiscal 1998, the
Company implemented an incentive compensation plan that provides cash rewards
to all employees if certain revenue and profit goals are achieved. The
Company recognized approximately $45,000 related to the incentive plan during
the fiscal 1998 first quarter. All of the increases in personnel related costs
were deemed necessary to retain and attract competent technical,
sales/marketing and management staff. Management expects the employment
environment will continue to remain competitive, which may adversely impact
future earnings through increased costs.
<PAGE> 6
Income Taxes
Deferred tax expense of $89,878 for the quarter ended November 30, 1997, was
offset by deferred tax benefit of approximately $45,000 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.
Net Income/Loss
Net income for the first quarter of fiscal 1998 was $191,651 or $.01 per
share, compared to a net loss of $157,212, or $.01 per share, for the first
quarter of fiscal 1997. The 70% increase in revenue resulting in improved
gross margins for licensing and royalties and document conversion services,
were the primary factors that resulted in a significant improvement in
earnings over the prior year.
FINANCIAL CONDITION
Working capital, at November 30, 1997 was $1,882,414 with a current ratio of
2.7:1 compared to $1,794,909 with a current ratio of 3.3:1, at August 31,
1997. Net cash provided by operations for the three months ended November 30,
1997 was $155,663 compared to net cash used in operations of $21,696 for the
same period last year. The current quarter pre-tax profit was the primary
reason for improved operating cash flow over the same period last year. Net
cash used in investing activities for the first three months of fiscal 1998
was $249,795 compared to $107,275 for the same period in fiscal 1997. The
increase in investing activities primarily relates to additional equipment
needed to meet requirements under document conversion service contracts.
During the quarter ended November 30, 1997, the Company borrowed $185,000
against its $800,000 line of credit for general operating purposes. This
resulted in a balance of $263,000 outstanding against the line of credit at
November 30, 1997. The Company also entered into a $100,000 capital lease
obligation to obtain the scanners needed to meet requirements under document
conversion contracts.
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 and technical 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, 1997.
<PAGE> 7
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.
January 8, 1998 /s/ Arthur D. Crotzer
Date: ____________________ _______________________
Chief Executive Officer
January 8, 1998 /s/ Deborah D. Mosier
Date: ____________________ _______________________
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, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 509,861
<SECURITIES> 0
<RECEIVABLES> 1,309,213
<ALLOWANCES> 114,280
<INVENTORY> 0
<CURRENT-ASSETS> 2,987,105
<PP&E> 2,948,749
<DEPRECIATION> 1,247,354
<TOTAL-ASSETS> 5,441,762
<CURRENT-LIABILITIES> 1,104,691
<BONDS> 0
0
0
<COMMON> 671,552
<OTHER-SE> 3,267,765
<TOTAL-LIABILITY-AND-EQUITY> 5,441,762
<SALES> 2,054,144
<TOTAL-REVENUES> 2,054,144
<CGS> 706,178
<TOTAL-COSTS> 706,178
<OTHER-EXPENSES> 1,100,415
<LOSS-PROVISION> 10,967
<INTEREST-EXPENSE> 10,217
<INCOME-PRETAX> 236,520
<INCOME-TAX> 44,869
<INCOME-CONTINUING> 191,651
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,651
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
