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, 1998
[ ] 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, 1998
Common stock, par value $.05 per share 13,731,322
Transitional Small Business Disclosure Format(check one):
Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Condensed Balance Sheets (unaudited)
November 30, 1998 and August 31, 1998
November 30,1998 August 31, 1998*
---------------- ----------------
Cash $ 347,447 491,696
Trade accounts receivable, net 1,370,690 1,293,921
Contract service work in process 302,024 597,345
Other current assets 375,070 365,050
_______________ _______________
Total current assets 2,395,231 2,748,012
--------------- ---------------
Property and equipment 3,025,373 3,187,407
Accumulated depreciation and
amortization (1,490,763) (1,527,528)
_______________ _______________
Net property and equipment 1,534,610 1,659,879
--------------- ---------------
Capitalized software development
costs, net 468,680 620,539
Other assets 256,518 257,153
_______________ _______________
Total assets 4,655,039 5,285,583
=============== ===============
Note payable - -
Accounts payable 174,021 147,844
Other current liabilities 502,056 504,136
_______________ _______________
Total current liabilities 676,077 651,980
--------------- ---------------
Obligation under capital lease,
net of current installments 62,590 78,651
Long-term debt, net of current
installments 303,829 309,986
_______________ _______________
Total liabilities 1,042,496 1,040,617
--------------- ---------------
Common stock 686,565 673,305
Additional paid-in capital 11,496,081 11,476,190
Unamortized deferred compensation (22,876) (23,967)
Accumulated deficit (8,468,342) (7,801,677)
Treasury stock (78,885) (78,885)
_______________ _______________
Total shareholders' equity 3,612,543 4,244,966
--------------- ---------------
Total liabilities and
shareholders' equity $ 4,655,039 5,285,583
=============== ===============
*Condensed from audited financial statements.
See accompanying notes to condensed
financial statements.
<PAGE> 2
TMS, Inc.
Condensed Statements of Operations (unaudited)
Three Months Ended November 30, 1998 and 1997
1998 1997
Revenue: --------------- ---------------
Licensing and royalties $ 707,355 1,155,169
Software development services 233,103 450,764
Document conversion services 186,858 448,211
_______________ _______________
1,127,316 2,054,144
--------------- ---------------
Operating costs and expenses:
Cost of licensing and royalties 375,090 211,767
Cost of software development services 207,114 222,052
Cost of document conversion services 112,426 272,359
Selling, general and administrative
expenses 1,024,770 1,100,415
Restructuring costs 70,895 -
_______________ _______________
1,790,295 1,806,593
--------------- ---------------
Operating (loss) income (662,979) 247,551
Other (expense) income, net (4,641) (11,031)
_______________ _______________
(Loss) income before income taxes (667,620) 236,520
Income tax (benefit) expense (955) 44,869
_______________ _______________
Net (loss) income $ (666,665) 191,651
=============== ===============
Net (loss) income per share:
Basic $ (0.05) 0.01
Diluted $ (0.05) 0.01
=============== ===============
Weighted average shares:
Basic 13,467,602 13,283,906
Diluted 13,467,602 13,827,123
=============== ===============
See accompanying notes to condensed
financial statements.
<PAGE> 3
TMS, Inc.
Condensed Statements of Cash Flows (unaudited)
Three Months Ended November 30, 1998 and 1997
1998 1997
--------------- ---------------
Net cash flows (used in) provided by
operating activities $ (53,584) 155,663
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (37,419) (137,962)
Capitalized software development costs (83,454) (111,833)
Proceeds from sale of equipment 17,522 -
_______________ _______________
Net cash used in investing activities (103,351) (249,795)
--------------- ---------------
Cash flows from financing activities:
Repayment of long-term debt (5,781) (7,181)
Proceeds from short-term note payable - 185,000
Repayments of capital lease obligation (14,684) -
Issuance of common stock 33,151 -
_______________ _______________
Net cash provided by financing
activities 12,686 177,819
--------------- ---------------
Net (decrease) increase in cash (144,249) 83,687
Cash at beginning of period 491,696 426,174
_______________ _______________
Cash at end of period $ 347,447 509,861
=============== ===============
See accompanying notes to condensed
financial statements.
<PAGE> 4
TMS, Inc.
Notes to Condensed Financial Statements (unaudited)
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, 1998.
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. Except for a restructuring charge described in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
below, 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.
Net (Loss) Income Per Share
- ----------------------------
The Company accounts for net (loss) income per share in accordance with
Statement of Financial Accounting Standards No. 128. Following is a
reconciliation of the numerators and the denominators of the basic and
diluted per-share computations for the current and prior year quarters ending
November 30.
<TABLE>
<CAPTION>
November 30, 1998 November 30, 1997
----------------- -----------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator)(Denominator) Amount
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net (loss) income $(666,665) 13,467,602 $ (0.05) $ 191,651 13,283,906 $ 0.01
Effect of Dilutive
Securities:
Common stock options - 543,217
------------------------------------- ------------------------------------
Diluted EPS:
Net (loss) income $ (666,665) 13,467,602 $ (0.05) $ 191,651 13,827,123 $ 0.01
===================================== ====================================
</TABLE>
Options to purchase approximately 331,000 shares of common stock at prices
ranging from $.53-$.75 per share were outstanding during the current year
first quarter, but were not included in the computation of diluted net loss
per share because the options' exercise prices were greater than the average
market price of common shares. Additionally, approximately 309,000 options to
purchase common stock at prices ranging from $.125-$.375 were excluded from
the computation of diluted loss per share during the current year first
quarter, because of their anti-dilutive effect. All options expire during
periods through the year 2007.
<PAGE> 5
Revenue Recognition
- --------------------
The Company adopted the provisions of Statement of Position (SOP) 97-2
"Software Revenue Recognition" beginning September 1, 1998. The principle
objectives of 97-2 are to amend certain provisions in SOP 91-1 that led to
diversity in revenue recognition practices among software companies, and to
address practice issues not previously covered under SOP 91-1. The most
significant change in accounting under SOP 97-2 is the requirement to un-
bundle multiple elements in software transactions and to allocate pricing to
each element based upon vendor specific objective evidence of fair values.
The Company offers multiple element arrangements to its customers, mostly in
the form of technical phone support and product maintenance, for fees that
are deferred and recognized in income ratably over the applicable technical
support period. The Company also, on occasion and as part of the initial
contract price, offers delivery of enhanced versions of future products to
customers on a when-and-if-available basis. SOP 97-2 generally requires that
the promise for future product deliveries be treated as separate elements and
deferred from revenue recognition until produced, delivered and accepted by
the customer. The Company was not required to defer significant revenue in
the current year first quarter in accordance with SOP 97-2.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in the forward-looking
statements because of certain risks and uncertainties, such as those inherent
generally in the computer software industry and the impact of competition,
pricing, and changing market conditions. As a result, the reader is cautioned
not to place reliance on these forward-looking statements.
Reportable Segments
- -------------------
Effective September 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes
standards for the way public business enterprises report information about
operating segments in both annual and interim financial statements.
The Company's reportable segments include: Tools and Utilities, End-user
Applications, Professional Services and Document Conversion Services. The
tools and utilities segment develops core image viewing, image enhancement
and forms processing software products that are necessary for developing new
software applications or enhancing existing software applications. The
Company's tools and utilities products are primarily licensed to developers,
system integrators, value added resellers (VARs) and/or companies who use the
software internally. The Company generally receives royalties for each
workstation/system that is utilizing the product. The end-user application
segment develops software products that may function independently from any
other software package or may be closely associated with other software
packages. These products install directly on a user's system or on a server
in a client/server environment. The end-user applications are primarily
licensed to entities who require the capability to view and manipulate images
through their Internet or intranet web browsers. The professional services
segment offers a variety of consulting and integration services for business
and information management processes. In general, the professional service
projects focus on an entity's need for document imaging solutions. The
Company charges for projects on a time and materials or fixed fee basis. The
document conversion segment primarily offers services for electronic
publishing of documents. These services include indexing - for large volume
searching of on-line information; hyperlinking - for navigating through
complex sets of on-line information; and document markup - for electronic
publishing of documents on CD-Rom and the Internet/intranet. Document
conversion also participates in a limited amount of data capture activities -
converting paper documents to electronic forms.
<PAGE> 6
The accounting policies for the segments are the same as those described in
the "Summary of Significant Accounting Policies" in the Form 10-KSB annual
report for the fiscal year ended August 31, 1998. Certain selling, general
and administrative expenses for corporate services (i.e. marketing,
accounting, information systems, facilities administration et. al.) are
allocated to the segments based on various factors such as segment full-time
equivalent employees, segment revenue or segment costs. The results of
operations below include summarized operating income and loss information for
each segment. Financial results are measured in accordance with the manner
in which management assesses segment performance and allocates resources.
Financial results do not include separately identifiable balance sheet assets
for each segment as this is not a common measure that management uses to
assess segment performance or allocate resources. In the software
development business, the most important assets are the employees.
Performance measures of the employees are included in the derivation of
operating income and loss.
Following are the results of operations for each reportable segment for the
first quarters ending November 30, 1998 and 1997. All revenue and expenses
are from unaffiliated sources:
Tools and Utilities
- -------------------
1998 1997
--------------- ---------------
Revenue:
Image viewing $ 199,432 336,029
Image enhancement 145,094 238,594
Forms processing 55,366 97,148
Other 82,750 82,918
_______________ _______________
Total revenue 482,642 754,689
Cost of revenue 124,523 125,445
_______________ _______________
Gross profit 358,119 629,244
Selling and marketing expense 108,099 144,934
General and administrative
expense 82,846 143,993
_______________ _______________
Operating income $ 167,174 340,317
=============== ===============
Fiscal 1999 first quarter revenue for tools and utilities (TU) was $482,642
compared to $754,689 for the same period last year, a decrease of $272,047 or
36%. Image viewing products (e.g. ViewDirector) accounted for approximately
50% of the total decline in TU revenue. The decline in image viewing
products is almost entirely due to a decline in the number of units
reported/purchased from royalty bearing customers. The Company believes that
the population of image viewing royalty customers has remained fairly stable,
but the number of units utilized by customers has declined. As reported in
the Form 10-KSB for the fiscal year ending August 31, 1998, the Company
believes that image viewing royalties will be lower throughout fiscal 1999 as
compared to fiscal 1998 because of the commoditization of the market and the
Company's emphasis on developing and marketing more end-user application
oriented products. Image enhancement products (e.g. ScanFix) accounted for
approximately 34% of the decline in total TU revenue. The decline in image
enhancement revenue is a result of several factors. Revenue from the
Company's ScanFix for Omnipage product declined approximately 50% from the
same period last year. Early in the Company's prior year first quarter,
Caere Corporation, a leader in optical character recognition (OCR)
technology, released its Omnipage product and through a co-marketing
arrangement with Caere, the Company was able to promote and sell its ScanFix
for Omnipage product. A newly released version of Caere's Omnipage and
ScanFix for Omnipage was released late in the first quarter of the current
fiscal year. The remaining decline in image enhancement products is due to
fewer direct sales as compared to last year. The Company believes that
inadequate promotion of the image enhancement product line is the primary
reason for the decline in direct sales revenue and is currently in the
process of developing and implementing a strategy for better promotion and
penetration of more indirect sales channels such as VAR, original equipment
manufacturer (OEM) and co-marketing arrangements. The remaining 16% decline
in TU revenue resulted from lower direct sales of forms processing tools
(e.g. FormFix). The Company's primary direct sales person for forms
processing technology left the Company early in the current year first
quarter which had an impact on overall direct sales for the current quarter.
The Company is in the process of training other direct sales employees to
better sell this complex tool, but believes that the most significant
potential revenue source for forms processing tools will come from leveraging
the technology as part of complete solutions that the Company's professional
service segment is developing and/or partnering with other organizations that
offer more complete forms processing solutions.
<PAGE> 7
Gross profit margins for TU were 74% and 83% for the quarters ending November
30, 1998 and 1997, respectively. Net operating profit margins were 35% and
45% for the same two periods, respectively. The decline in margins is a
result of lower revenue. Selling and marketing expense declined by
approximately 25% from the prior year first quarter because of two fewer
salespeople in the current quarter and more marketing dollars being allocated
to the end-user application segment. The 42% decline in general and
administrative costs resulted from a re-allocation of management attention
and related costs to other segments, and a $25,000 credit to re-allocate bad
debt expense to the document conversion segment for a specific write-off of a
customer account.
End-user Applications
- ---------------------
1998 1997
--------------- ---------------
Revenue:
Internet/intranet $ 196,585 365,189
Image management 14,151 6,091
Other 13,977 29,200
_______________ _______________
Total revenue 224,713 400,480
Cost of revenue 250,567 86,322
_______________ _______________
Gross (loss) profit (25,854) 314,158
Selling and marketing expense 177,841 159,393
General and administrative
expense 155,798 144,318
_______________ _______________
Operating (loss) income $ (359,493) 10,447
=============== ===============
Fiscal 1999 first quarter revenue for end-user applications (EUA) was
$224,713 compared to $400,480 for the same period last year, a decrease of
$175,767 or 44%. Approximately 50% of the prior first quarter revenue was
attributable to a multiple licensing arrangement of Internet/intranet
products (e.g. Prizm Plug-in) to a single customer. No one customer
accounted for greater than 10% of the EUA segment's revenue during the
current year first quarter. Revenue from Internet/intranet products was
lower than expected primarily because of delays in releasing the next
generation Prizm product - Prizm Image Server (Prizm IS). The Prizm IS
expands the Company's Prizm Plug-in technology by offering a client/server
alternative and multi-platform Java technology. Prizm IS was originally
scheduled to be released late in the Company's prior year fourth quarter.
Final release did not occur until mid-way through the current first quarter,
and because of the customer cycle time associated with evaluating this
server-based technology, Prizm IS did not have much impact on first quarter
results.
<PAGE> 8
Fiscal 1999 first quarter cost of revenue includes a non-recurring charge of
approximately $111,000 to write-down the remaining unamortized development
costs for Scan 'n' Store (SNS). During the second half of December 1998, the
Company decided to eliminate SNS as a separate product for sale because
financial returns from the product are not expected to be enough to warrant
the Company allocating additional promotion, development, and technical
support resources that would be required to enhance its market viability. The
Company believes that because of certain competitive strengths, devoting the
majority of its resources on expanding Internet/intranet products, image and
forms processing technologies and custom software development solutions, will
result in better financial returns than SNS. In conjunction with the
elimination of SNS, the Company anticipates that it will incur another
$30,000 to $40,000 in non-recurring costs during the second quarter for
employee severance, closing down a remote sales office, and contractual
technical support obligations with VARs who have already purchased the
product.
During the first quarter fiscal 1999, selling and marketing and general and
administrative expenses increased 12% and 8%, respectively, over the same
period last year. Increased promotion of the new products (SNS and Prizm IS),
as well as the Company's intention to shift more from a tools product
business to an application oriented products business required more marketing
and management attention and thus increased costs.
Professional Services
- ---------------------
1998 1997
--------------- ---------------
Revenue:
Software development services 233,103 450,764
Cost of revenue 207,114 222,052
_______________ _______________
Gross profit 25,989 228,712
Selling and marketing expense 71,610 93,491
General and administrative
expense 93,069 95,104
_______________ _______________
Operating (loss) income $ (138,690) 40,117
=============== ===============
Professional services (PS) revenue was $233,103 and $450,764 at November 30,
1998 and 1997, respectively, a decrease of $217,661, or 48%. Approximately
56% of the current first quarter revenue came from one customer contract and
approximately 64% of the prior year first quarter revenue came from another
customer contract. Even though there was a significant level of dependence
on certain contracts in both quarters, during the prior year first quarter
the PS segment had accumulated its revenue backlog at a level that was
commensurate with direct labor capacity; whereas, the PS segment was still in
the process of building revenue backlog during the current year first
quarter. As of November 30, 1998, the PS segment had a revenue backlog of
approximately $1,000,000. This backlog is more in line with the direct labor
capacity that is projected to be available through the middle of the
Company's third quarter. In addition to the revenue shortfall, gross profit
and operating margins were negatively impacted by unanticipated overruns in
the Oklahoma County project. The Oklahoma county project was the predominant
source of revenue throughout fiscal 1998. The Company estimates that this
overrun cost the PS segment approximately $40,000 during the current year
first quarter. Gross profit and operating margins were 11% and (60%),
respectively, for the quarter ended November 30, 1998, and 51% and 9%,
respectively, for the quarter ended November 30, 1997.
<PAGE> 9
Document Conversion
- -------------------
1998 1997
--------------- ---------------
Revenue:
Data capture $ 50,900 355,420
Electronic publishing 135,958 92,791
_______________ _______________
Total revenue 186,858 448,211
Cost of revenue 112,426 272,359
_______________ _______________
Gross profit 74,432 175,852
Selling and marketing expense 18,732 50,510
General and administrative
expense 154,038 88,850
Restructuring costs 70,895 -
_______________ _______________
Operating (loss) income $ (169,233) 36,492
=============== ===============
Revenue from document conversion (DC) was $186,858 and $448,211 for the
quarters eneded November 30, 1998 and 1997, respectively, a $261,353, or 58%
decrease. Approximately 41% of revenue in the current year first quarter came
from one customer and approximately 55% of revenue in the prior year first
quarter came from another customer. The most significant portion of business
development and contract conversion work in the prior year first quarter
focused on large back-file conversion of documents for imaging and database
management. This revenue is classified as "Data capture" in the above table.
Because of the low margins and competitive nature of back-file jobs that
became evident throughout the prior fiscal year, the Company made a decision
in late May 1998, to discontinue pursuit of large back-file conversion/data
capture activities and focus its efforts on electronic publishing of
documents. Electronic publishing has traditionally resulted in higher
margins for the Company and is more in line with the Company's core
competencies. In late October of the current quarter, the Company decided to
restructure DC operations and only continue to support customer relationships
which primarily relate to electronic publishing activities and for which
there are contractual obligations. Many of these customers are using
technology that is unique to the Company which thus makes the Company a sole
source provider. The Company's longer-term objective is to sell these
customer contracts and other assets to a third-party and/or gain better
internal efficiencies by more closely integrating document conversion
activities as a true support function for the document management and imaging
projects that are being contracted through the PS segment. The restructuring
charge of $70,895 for the first quarter includes approximately $53,000 of
equipment write-downs, $15,000 of employee severance costs, and $3,000 for
closing down the leased DC facility. All remaining DC Employees were
relocated to the Company's headquarters building. In addition to the non-
recurring restructuring charge, general and administrative expense includes a
$55,000 non-recurring write-off of a portion of a customer account, of which
$25,000 was an internal reallocation of bad debt expense from the TU segment.
Total Company Operating Results
- --------------------------------
Following is a report of total company revenue and a reconciliation of
reportable segments' operating (loss) income to the Company's total net
(loss) income for the quarters ended November 30, 1998 and 1997.
1998 1997
--------------- ---------------
Total company revenue $ 1,127,316 2,054,144
=============== ===============
Operating (loss) income for
reportable segments $ (500,242) 427,373
Unallocated corporate expenses 162,737 179,822
Interest Income (3,204) (2,820)
Interest expense 8,644 10,217
Other, net (799) 3,634
Income tax (benefit) expense (955) 44,869
_______________ _______________
Net (loss) income $ (666,665) 191,651
=============== ===============
(Loss) income per share:
Basic $ (0.05) 0.01
Diluted (0.05) 0.01
=============== ===============
<PAGE> 10
Total revenue for the first quarter of fiscal 1999 was $1,127,316 compared to
$2,054,144 for the same quarter of fiscal 1998, a decrease of $926,828 or
45%. Net loss for the first quarter of fiscal 1999 was $666,665 or $.05 per
share (basic and diluted), compared to net income of $191,651, or $.01 per
share (basic and diluted), for the first quarter of fiscal 1998. Income tax
benefit of $253,696 for the first quarter of fiscal 1999 was offset by a
corresponding increase to the valuation allowance for deferred tax assets.
The $955 benefit recorded for the current quarter is for a prior year tax
refund received during the current year first quarter. Income tax expense of
$89,878 for the first quarter of fiscal 1998 was offset by a decrease of
approximately $45,000 to 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 net loss of $666,665 reported for the first quarter of fiscal 1999, is
primarily the result of the revenue shortfalls described above in the
individual reportable segment discussions combined with an approximate
$111,000 write-off for the elimination of SNS and $71,000 of DC segment
restructuring costs. The revenue decline for the DC segment was expected, and
related decreases in recurring operating expenses were also achieved during
the current quarter. In addition to the DC segment restructuring charge, the
Company implemented other actions to help reduce costs on a going forward
basis. These actions included additional reductions to the Company's
workforce, a senior management pay reduction, and elimination of other in
process product development projects that are not expected to result in
significant returns on investments and/or are not core to on-going
operations. The Company also incurred costs of approximately $30,000 during
the current first quarter in an effort to acquire certain intellectual
properties that would provide more complete end-user solutions to entities
requiring high volume forms processing. The Company was unsuccessful in a
competitive bidding process to acquire those assets, but plans to pursue
other opportunities that might strengthen the Company's Internet/intranet
imaging, image and forms processing and custom software development services
offerings.
As discussed in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Form 10-KSB for the
fiscal year ended August 31, 1998, uncertainty exists about collection of one
significant VAR customer account. Effective October 1, 1998, a security
agreement went into effect whereby the VAR is required to make monthly
payments to the Company equal to 100% of the revenue that the VAR generates
from distribution of products that contain the Company's technology.
Subsequent to the end of the fiscal year 1998, the Company has collected
approximately $31,000 from the VAR pursuant to the security agreement and has
deferred approximately $8,000 in revenue from this VAR for new royalties
reported. The current uncollected balance from this VAR is approximately
$280,000. Based on the historical trends of the VAR product distributions,
the Company anticipates that the uncollected balance will be paid in full
within one year. However, because of the uncertainty that exists about the
VAR's ability to pay, the Company continues to maintain a specific bad debt
reserve against a portion of this account. If the VAR does not adhere to
security agreement or revenue from VAR Product distributions is significantly
lower than historical trends, the Company may be required to make additional
adjustments to its bad debt reserve in future quarters.
<PAGE> 11
Impact of Year 2000 Issue
- -------------------------
The Company is addressing the need to ensure that its operations will not be
adversely impacted by software or other system failures related to year 2000
(Y2K). The Company has formed an oversight committee and has developed a plan
to coordinate the identification, evaluation and implementation of any
necessary changes to internal computer systems, applications and business
processes. As of December 31, 1998, the Y2K committee had identified and
prioritized the Company's systems that could potentially be impacted by Y2K.
The Company is currently in the process of determining Y2K readiness for all
identified systems and expects to have substantial completion by the end of
February of 1999. The Y2K committee is undertaking three primary steps to
validate systems readiness: (1) obtaining a vendor readiness statement,
(2) internal testing, and (3) third-party validation through an authorized
organization that has already tested the systems. The Company plans to perform
the procedures described in steps (1) and (2) for all systems that are not
already validated through a third-party authorized organization. Prior to the
end of February, the Company plans to have a detailed schedule of events that
will be required to correct Y2K problems, if any. This schedule will include a
list of identified problems, prioritization of the problems, and identified
solutions. In March 1999, the Company will begin implementing solutions for
any systems identified to have a Y2K problem. This phase will include applying
solutions, verifying that solutions make the system(s) Y2K ready, and
developing a contingency plan for any critical system that is not deemed Y2K
compliant. The Company plans to have completed all Y2K readiness and
contingency planning by September 1, 1999. The Company anticipates that the
Y2K processes discussed above will be performed utilizing existing employees.
The Company does not track the internal costs incurred for the Y2K project
since such costs are principally related to the payroll costs for its
employees. Accordingly, the Company has not incurred any material incremental
costs and has not identified any incremental future costs associated with Y2K
activities. Upon completion of the systems readiness phase in February, the
Company will evaluate whether incremental costs will need to be incurred for
systems that are critical to the organization and not deemed to be Y2K
compliant. The Company has not identified the most reasonably likely worst
case scenario in the event the Company does not obtain Y2K readiness. This
will be performed during contingency planning.
No assurances can be given that the Company will be able to completely
identify or address all year 2000 compliance issues, or that third parties
with whom the Company does business will not experience system failures as a
result of the year 2000 issue, nor can the Company fully predict the
consequences of noncompliance.
The Company has reviewed all of its software products for sale and determined
them to be year 2000 compliant and accordingly, does not believe it will be
adversely impacted by year 2000 issues as it relates to its own products for
sale.
FINANCIAL CONDITION
Working capital, at November 30, 1998 was $1,719,154 with a current ratio of
3.5:1 compared to $2,096,032 with a current ratio of 4.2:1, at August 31,
1998. Net cash used in operations for the three months ended November 30,
1998 was $53,584 compared to net cash provided by operations of $155,663 for
the same period last year. The current quarter operating loss was the primary
reason for negative operating cash flow as compared the same period last
year. Net cash used in investing activities for the first three months of
fiscal 1999 was $103,351 compared to $249,795 for the same period in fiscal
1998. The decrease in investing activities primarily relates to additional
equipment needed to meet requirements under document conversion service
contracts in the prior year first quarter.
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. No borrowings were required during the quarter ended
November 30, 1998, and $800,000 remains available under the operating line of
credit.
<PAGE> 12
During the current year first quarter and beginning of the second quarter,
the Company took significant action to reduce its operating cost structure on
a going-forward basis. Specific actions included a headcount reduction of
20, the closing down of three offices and elimination of products/services
that were not expected to produce significant financial returns for the
Company. These changes are expected to have a positive impact on operating
cash flow and accordingly, 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, for
expanded marketing and promotion of the Company and its products, and for
potential merger/acquisition activities.
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, 1998.
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.
Date: January 14, 1999 /s/ Dana R. Allen
---------------- -----------------------
Dana R. Allen
Chief Executive Officer
Date: January 14, 1999 /s/ Deborah D. Mosier
---------------- ------------------------
Deborah D. Mosier
Chief Financial Officer
<PAGE> 13
<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, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000835412
<NAME> TMS, INC>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> NOV-30-1998
<CASH> 347,447
<SECURITIES> 0
<RECEIVABLES> 1,550,481
<ALLOWANCES> 179,791
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<COMMON> 686,565
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<TOTAL-LIABILITY-AND-EQUITY> 4,655,039
<SALES> 1,127,316
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<CGS> 694,630
<TOTAL-COSTS> 1,790,295
<OTHER-EXPENSES> 1,095,665
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<INCOME-PRETAX> (667,620)
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<NET-INCOME> (666,665)
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