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, 1999
[ ]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 74076
(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 [ ] No [X]
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, 1999
Common stock, par value $.05 per share 13,597,659
Transitional Small Business Disclosure Format (check one):
Yes [] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Condensed Balance Sheets (unaudited)
November 30, 1999 and August 31, 1999
November 30, August 31,
1999 1999*
_____ ______
Cash $990,037 $1,057,710
Trade accounts receivable, net 776,989 574,067
Contract service work in process 380,785 415,985
Other current assets 295,764 298,018
____________ __________
Total current assets 2,443,575 2,345,780
____________ __________
Property and equipment 2,914,219 2,892,954
Accumulated depreciation and amortization -1,664,152 -1,590,081
____________ __________
Net property and equipment 1,250,067 1,302,873
____________ __________
Capitalized software development costs, net 456,667 481,169
Other assets 286,355 286,990
____________ __________
Total assets $4,436,664 $4,416,812
============ ==========
Current obligation under capital leases 62,283 66,250
Current installments of long-term debt 27,698 27,313
Accounts payable 88,325 103,341
Other current liabilities 420,937 351,712
____________ __________
Total current liabilities 599,243 548,616
Obligation under capital lease, net of - 12,149
current installments
Long-term debt, net of current installments 274,305 282,674
____________ __________
Total liabilities 873,548 843,439
____________ __________
Common stock 691,831 691,031
Additional paid-in capital 11,502,635 11,501,760
Unamortized deferred compensation -19,297 -20,072
Accumulated deficit -8,501,918 -8,488,161
Treasury stock -110,135 -111,185
____________ __________
Total shareholders' equity 3,563,116 3,573,373
____________ __________
Total liabilities and shareholders' equity $4,436,664 $4,416,812
============ ==========
*Condensed from audited financial statements.
<PAGE> 2
See accompanying notes to condensed
financial statements.
TMS, Inc.
Condensed Statements of Operations
(unaudited)
Three Months Ended November 30, 1999 and 1998
1999 1998
_____ _____
Revenue:
Licensing and royalties $854,333 $712,105
Software development services 253,842 228,353
Document conversion services 62,850 186,858
____________ __________
1,171,025 1,127,316
____________ __________
Operating costs and expenses:
Cost of licensing and royalties 192,348 375,090
Cost of software development services 259,154 207,114
Cost of document conversion services 32,594 112,426
Selling, general and expenses 710,321 1,024,770
administrative
Restructuring costs - 70,895
____________ __________
1,194,417 1,790,295
____________ __________
Operating loss -23,392 -662,979
Other income (expense), net 12,884 -4,641
____________ __________
Loss before income taxes -10,508 -667,620
Income tax expense (benefit) 3,249 -955
____________ __________
Net loss $-13,757 $-666,665
============ ==========
Net loss per share:
Basic $0.00 $-0.05
Diluted $0.00 $-0.05
============ ==========
Weighted average shares
Basic 13,584,406 13,467,602
Diluted 13,584,406 13,467,602
============ ==========
See accompanying notes to condensed
financial statements.
<PAGE> 3
TMS, Inc.
Condensed Statements of Cash Flows
(unaudited)
Three Months Ended November 30, 1999 and 1998
1999 1998
_____ _____
Net cash flows provided by (used in)
operating activities $33,129 $-53,584
____________ __________
Cash flows from investing activities:
Purchases of property and equipment -21,262 -37,419
Capitalized software development costs -58,165 -83,454
Proceeds from sale of equipment - 17,522
____________ __________
Net cash used in investing activities -79,427 -103,351
____________ __________
Cash flows from financing activities:
Repayments of long-term debt -7,984 -5,781
Repayments of capital lease obligation -16,116 -14,684
Issuance of common stock 1,675 33,151
Issuance of treasury stock, at cost 1,050 -
____________ __________
Net cash (used in) provided by
financing activities -21,375 12,686
____________ __________
Net decrease in cash -67,673 -144,249
Cash at beginning of period 1,057,710 491,696
____________ __________
Cash at end of period $990,037 $347,447
============ ==========
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, 1999.
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 reported in the prior year first
quarter ended November 30, 1998 and 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 Per Share
__________________
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, 1999 November 30, 1998
______________________________________________________________________
Per- Per-
Loss Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net loss $-13,757 13,584,406 $0.00 $-666,665 13,467,602 $-0.05
Effect of Common
stock options - -
______________________________________________________________________
Diluted EPS:
Net loss $-13,757 13,584,406 $0.00 $-666,665 13,467,602 $-0.05
======================================================================
</TABLE>
<PAGE> 5
Options to purchase approximately 511,000 shares and 331,000 shares of common
stock at prices ranging from $.31-$.75 per share were outstanding at November
30, 1999 and 1998 respectively, 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
18,000 options to purchase common stock at prices ranging from $.125-$.1875 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.
Reportable Segments
___________________
Interim period disclosures in accordance with Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131) are included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below.
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 undue
reliance on these forward-looking statements.
Following is selected financial information for each of the Company's reportable
segments for the first quarter ended November 30, 1999 and 1998. All revenue
and expenses are from non-affiliated sources:
Tools & Technologies ("TNT")
____________________________
1999 1998
_____ _____
______________________________________________________
Revenue from external customers $479,037 486,218
______________________________________________________
Operating income $100,217 170,750
______________________________________________________
<PAGE> 6
Revenue from the TNT product segment is primarily derived from the licensing of
the Company's ViewDirector, ScanFix, and FormFix products and related royalties.
Fiscal 2000 first quarter revenue for TNT was $479,037 compared to $486,218 for
the same period last year, a decrease of $7,181 or 1%. Approximately 29% of the
current first quarter revenue resulted from a multiple licensing transaction to
a single customer. Revenue from ViewDirector royalty-reporting customers
continues to decline. The Company believes that the continued decline has
resulted from a reduction in both the population of royalty-reporting customers
and the number of units utilized by customers. Additionally, over the past three
years the Company has emphasized product development and marketing of
application-oriented products (e.g. Scan"n"Store, Prizm). This has impacted the
competitive features of the ViewDirector product. The decline in revenue from
royalty reporting customers was somewhat offset by an increase in revenue from
multiple licensing transactions for all TNT products whereby customers prepay
for non-refundable software units in order to achieve volume pricing discounts
and/or eliminate periodic royalty reporting requirements. Approximately 48% of
current year TNT first quarter revenue was derived from multiple licensing
transactions compared to 20% for the same quarter last year. Currently, the TNT
segment is dependent on the ability to secure significant multiple licensing
transactions for profitability. Operating income margins for TNT were 21% and
35% for the quarters ended November 30, 1999 and 1998, respectively. The
decline in operating income resulted from a 46% increase in selling, marketing,
and general and administrative expense. The increase in expense resulted from
higher sales commissions associated with the increase in direct sales of
multiple licensing transactions referred to above. Additionally, the Company
increased advertising for image enhancement products and hired a vice-president
for marketing early in the first quarter. Prior year first quarter results also
included a $25,000 credit to re-allocate bad debt expense to the document
conversion segment for a specific write-off of a customer account.
<PAGE> 7
End-user Applications ("EUA")
_____________________________
1999 1998
_____ _____
______________________________________________________________
Revenue from external customers $375,296 225,887
______________________________________________________________
Operating income (loss) $127,761 -358,319
______________________________________________________________
Fiscal 2000 first quarter revenue for end-user applications (EUA) was $375,296
compared to $225,887 for the same period last year, an increase of $149,409 or
66%. All of the revenue growth resulted from increased sales of the Prizm
product. Approximately 48% of the current fiscal year revenue was attributable
to multiple licensing transactions to four separate customers, each accounting
for at least 10% of the total EUA revenue. No one customer accounted for
greater than 10% of the EUA segment's revenue during the first quarter of last
year. Operating income (loss) margins for EUA were 34% and -159% for the fiscal
quarters ended November 30, 1999 and 1998, respectively. The improved margin
primarily resulted from the prior year first quarter non-recurring charge of
approximately $111,000 to write-down the remaining unamortized software
development costs for Scan `n' Store (SNS), and the $179,000, or 54%, reduction
in selling, marketing, general and administrative expenses in the current first
quarter. The elimination of SNS had the most significant impact on the decrease
in expenses because of an overall reduction in personnel, a decrease in
marketing activities and a reduction in both direct and allocated overhead
costs. The Company decided to eliminate SNS as a separate product for sale
because financial returns from the product were not expected to be enough to
warrant the Company allocating additional promotion, development, and technical
support resources necessary to enhance its market viability.
Professional Services ("PS")
____________________________
1999 1998
_____ _____
______________________________________________________________
Revenue from external customers $253,842 228,353
______________________________________________________________
Operating loss $-135,045 -143,440
______________________________________________________________
PS revenue was $253,842 and $228,353 at November 30, 1999 and 1998,
respectively, an increase of $25,489, or 11%. Approximately 80% of the current
first quarter revenue came from three customer contracts and approximately 56%
of the prior year first quarter revenue came from one customer contract.
Operating loss margins for PS were -53% and -63% for the three months ended
November 30, 1999 and 1998, respectively. As reported in the Company's 10-KSB
for the year ended August 31, 1999, management expected that fiscal 2000 first
quarter operating margins would be negatively impacted by continued cost
overruns on two fixed fee projects. Management expects that cost overruns on
those projects will continue to negatively impact operating results into the
second quarter of the current fiscal year. The Company is currently in the
process of redefining the business model for PS and expects to realize benefit
from this transition during the second half of the current fiscal year.
<PAGE> 8
Document Conversion ("DC")
__________________________
1999 1998
_____ _____
___________________________________________________
Revenue from external customers $62,850 186,858
___________________________________________________
Restructuring costs - 70,895
___________________________________________________
Operating loss $-4,943 -169,233
___________________________________________________
Revenue for DC was $62,850 and $186,858 for the quarters ended November 30, 1999
and 1998, respectively, a decrease of $124,008, or 66%. Approximately 39% of
total DC revenue for the first quarter of the current year came from one
customer and approximately 57% of prior year first quarter revenue came from
another customer. The significant reduction in document conversion revenue was
expected and the results from the Company's decision to restructure DC
operations during the prior year first quarter. Operating loss margins were -8%
and -91% for the quarters ended November 30, 1999 and 1998, respectively. The
reduction in the loss margin over the prior year primarily resulted from non-
recurring transitional costs associated with restructuring, a $25,000 inter-
segment bad debt charge from TNT for an uncollectible account, and an increase
in the proportion of services performed under higher margin electronic
publishing contracts.
Total Company Operating Results
_______________________________
Following is a report of total company revenue and a reconciliation of
reportable segments' operating income (loss) to the Company's total net loss for
the quarters ended November 30, 1999 and 1998.
1999 1998
_____ _____
Total company revenue $1,171,025 1,127,316
__________ __________
Operating income (loss) for
reportable segments 87,990 -500,242
Unallocated corporate expenses (111,382) (162,737)
Interest income 11,595 3,204
Interest expense (5,011) (8,644)
Other, net 6,300 799
Income tax (expense) benefit (3,249) 955
__________ __________
Net loss $-13,757 -666,665
========== ==========
Loss per share:
Basic $0.00 -0.05
Diluted $0.00 -0.05
========== ==========
<PAGE> 9
Total revenue for the first quarter of fiscal 2000 was $1,171,025 compared to
$1,127,316 for the same quarter of fiscal 1999, an increase of $43,709 or 4%.
Licensing and royalty revenue of $854,000 increased 20% over the same quarter
last year. Revenue from the Company's Prizm product for the Internet/intranet
increased 66%, representing substantially all of the growth in licensing and
royalties revenue. The Company's 20% growth in licensing and royalties revenue
was partially offset by an expected decrease in document conversion services
revenue. The Company restructured document conversion service operations during
the first quarter last year. Total Company net loss was $13,757, or $.00 per
share (basic and diluted) and $666,665 or $.05 loss per share (basic and
diluted) for the quarters ended November 30, 1999 and 1998, respectively. The
20% growth in licensing and royalties revenue coupled with significant costs
incurred last year to restructure document conversion service operations and
discontinue development and marketing efforts for Scan 'n Store are primary
factors contributing to the significant reduction in the net loss. The
performance of the PS segment contributed to the Company's inability to post a
profit during the quarter because of the continuation of significant cost
overruns on certain custom software development contracts. Deferred income tax
benefits of approximately $4,000 and $254,000 for the periods ended November 30,
1999 and 1998, respectively, were offset by corresponding increases to the
valuation allowance for deferred tax assets. Income tax expense (benefit)
reported for each of the two periods resulted from differences in prior year
estimates used for financial reporting compared to actual state tax returns.
Impact of Year 2000 Issue
The Company formed an oversight committee in fiscal year 1998 to determine year
2000 (Y2K) readiness of all internal computer systems, applications and business
processes. The Y2K committee took three primary steps to validate systems
readiness: (1) obtained a vendor readiness statement, (2) internal testing of
all critical systems, and (3) third-party validation of its software.
Subsequent to January 1, 2000 the Company has not experienced any significant
issues associated with any internal computer systems, applications, business
processes or third-party software. Additionally, the Company has not experienced
significant issues with its own products for sale. The Company did not incur any
material incremental costs associated with performing Y2K readiness activities
as existing employees were utilized for the process. The Company does not
expect to incur additional significant costs associated with Y2K.
FINANCIAL CONDITION
Working capital at November 30, 1999 was $1,844,332 with a current ratio of
4.1:1 compared to $1,797,164 with a current ratio of 4.3:1, at August 31, 1999.
Net cash provided by operations for the three months ended November 30, 1999 was
$33,129 compared to net cash used in operations of $53,584 for the same period
last year. The improvement in the fiscal year 2000 first quarter operating cash
flow is primarily due to the significant reduction in net operating loss over
the same period last year and was also impacted by the timing of customer
collections. Net cash used in investing activities for the first three months of
fiscal 2000 was $79,427 compared to $103,351 for the same period in fiscal 1999.
The decrease in investing activities primarily relates to fewer company
equipment purchases and capitalized software costs compared to the prior year
first quarter.
<PAGE> 10
During the quarter ended November 30, 1999 and 1998, respectively, the Company
did not borrow against its line of credit. Currently, a maximum of $800,000
remains available under the operating line of credit.
PART II - OTHER INFORMATION
Item 5. Other Information
Effective January 12, 2000, Mr. Dana Allen resigned as Chairman and member of
the Company's board of directors. Subsequent to Mr. Allen's resignation,
current board member Russell W. Teubner was elected Chairman.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
________
Exhibit No. Name of Exhibit
27 Financial Data Schedule as of and for the three-month period
ending November 30, 1999
Reports on Form 8-K
___________________
None
<PAGE> 11
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: ____________________ /s/ Deborah D. Mosier
Deborah D. Mosier, President
Date: ____________________ /s/ Anita Kunneman
Anita Kunneman, Principal Accounting Officer
<PAGE> 12
<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, 2000 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-END> NOV-30-1999
<CASH> 990,037
<SECURITIES> 0
<RECEIVABLES> 1,231,122
<ALLOWANCES> 454,133
<INVENTORY> 0
<CURRENT-ASSETS> 2,443,575
<PP&E> 2,914,219
<DEPRECIATION> 1,664,152
<TOTAL-ASSETS> 4,436,664
<CURRENT-LIABILITIES> 599,243
<BONDS> 0
0
0
<COMMON> 691,831
<OTHER-SE> 2,871,285
<TOTAL-LIABILITY-AND-EQUITY> 4,436,664
<SALES> 1,171,025
<TOTAL-REVENUES> 1,171,025
<CGS> 484,096
<TOTAL-COSTS> 484,096
<OTHER-EXPENSES> 710,321
<LOSS-PROVISION> 8,346
<INTEREST-EXPENSE> 12,884
<INCOME-PRETAX> (10,508)
<INCOME-TAX> 3,249
<INCOME-CONTINUING> (13,757)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,757)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
