U.S.SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: February 28, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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 No.)
incorporation or organization)
206 West Sixth Street
Post Office Box 1358
Stillwater, Oklahoma 74076
(Address of principal executive offices)
(405) 377-0880
(Issuer's telephone number)
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 March 31, 2001
Common stock, par value $.05 per share 12,982,175
Transitional Small Business Disclosure Format (check one):
Yes [] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Condensed Balance Sheets
February 28, 2001 and August 31, 2000
February 28,
2001 August 31,
(unaudited) 2000*
----------- ----------
Cash $ 837,502 $1,359,692
Trade accounts receivable, net 771,975 461,549
Contract service work in process 51,982 146,848
Other current assets 199,349 118,292
----------- -----------
Total current assets 1,860,808 2,086,381
----------- -----------
Property and equipment 2,572,571 2,722,797
Accumulated depreciation and amortization (1,574,619) (1,649,589)
------------ -----------
Net property and equipment 997,952 1,073,208
----------- -----------
Capitalized software development costs, net 607,151 388,258
Other assets 573,213 541,407
----------- -----------
Total assets $ 4,039,124 $4,089,254
=========== ===========
Current obligation under capital leases $ - $ 11,705
Current installments of long-term debt 29,763 28,943
Accounts payable 128,240 80,879
Deferred revenue 343,040 287,512
Other current liabilities 227,720 301,107
----------- -----------
Total current liabilities 728,763 710,146
Long-term debt, net of current installments 237,308 252,456
Other liabilities 12,969 10,375
----------- -----------
Total liabilities 979,040 972,977
----------- -----------
Common stock 654,833 674,533
Additional paid-in capital 11,345,837 11,422,299
Unamortized deferred compensation (258) (1,809)
Accumulated deficit (8,883,099) (8,884,719)
Treasury stock (57,229) (94,027)
----------- -----------
Total shareholders' equity 3,060,084 3,116,277
----------- -----------
Total liabilities and shareholders' equity $ 4,039,124 $ 4,089,254
============ ===========
*Condensed from audited financial statements.
See accompanying notes to condensed
financial statements.
2
TMS, Inc.
Condensed Statements of Operations(unaudited)
Three and Six Months Ended February 28,
2001 and February 29, 2000
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
----- ----- ----- -----
Revenue:
Licensing and royalties $ 779,929 $ 513,069 $ 1,680,721 $ 1,367,402
Assessment consulting services - - 6,200 -
Software development services 27,660 72,049 42,958 25,891
Document conversion services 61,358 65,814 121,534 128,664
------------ ------------ ------------ ------------
868,947 650,932 1,851,413 1,821,957
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of licensing and royalties 75,575 177,977 154,605 298,303
Cost of software development services 6,928 134,023 17,113 380,638
Cost of document conversion services 37,348 31,588 75,725 64,182
Selling, general and administrative 573,001 367,229 1,183,723 1,064,748
Research and development 240,207 97,798 428,454 194,161
------------ ------------ ------------ ------------
932,429 808,615 1,859,620 2,003,032
------------ ------------ ------------ ------------
Operating loss (63,482) (157,683) (8,207) (181,075)
Other income, net 11,060 271 29,419 13,155
------------ ------------ ------------ ------------
(Loss) income before income taxes (52,422) (157,412) 21,212 (167,920)
------------ ------------ ------------ ------------
Income tax expense (21,725) 4,233 - 7,482
------------ ------------ ------------ ------------
Net loss $ (30,697) $ (161,645) $ 21,212 $ (175,402)
============ ============ ============ ============
Basic earnings per share $ (0.00) $ (0.01) $ 0.00 $ (0.01)
============ ============ ============ ============
Weighted average common shares 12,955,894 13,369,736 13,134,188 13,477,071
============ ============ ============ ============
Diluted earnings per share $ (0.00) $ (0.01) $ 0.00 $ (0.01)
============ ============ ============ ============
Weighted average common and common
equivalent shares 12,955,894 13,369,736 13,153,399 13,477,071
============ ============ ============ ============
See accompanying notes to condensed
financial statements.
3
TMS, Inc.
Condensed Statements of Cash Flows (unaudited)
Six Months Ended February 28, 2001 and
February 29, 2000
February 28, February 29,
2001 2000
----- -----
Net cash flows (used in) provided by
operating activities $ (97,510) $ 251,695
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (28,474) (43,510)
Capitalized software development costs (277,271) (133,304)
Proceeds from sale of equipment 3,170 1,015
Patent costs (10,570) -
----------- ----------
Net cash used in investing activities (313,145) (175,799)
----------- ----------
Cash flows from financing activities:
Repayments of long-term debt (14,328) (14,783)
Repayments of capital lease obligation (14,413) (32,598)
Sale of common stock - 2,000
Sale of treasury stock, at cost 17,206 -
Purchase of treasury stock, at cost (100,000) (91,340)
----------- ---------
Net cash used in financing activities (111,535) (136,721)
----------- -----------
Net decrease in cash (522,190) (60,825)
Cash at beginning of period 1,359,692 1,057,710
----------- -----------
Cash at end of period $ 837,502 $ 996,885
============ ===========
See accompanying notes to condensed
financial statements.
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. Certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to rules and regulations established by the Securities and Exchange Commission.
The accompanying unaudited interim condensed financial statements should be read
in conjunction with the audited financial statements and related notes included
in our Form 10-KSB Annual Report for the fiscal year ended August 31, 2000.
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.
4
Net Loss Per Share
- ------------------
Following is a reconciliation of the numerators and the denominators of the
basic and diluted per-share computations:
Three Months Ended February 28, 2001 Three Months Ended February 29, 2000
----------------------------------- ------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------ ---------
Basic EPS:
Net Loss $(30,697) 12,955,894 $(0.00) $ (161,645) 13,369,736 $(0.01)
Effect of Common
Stock options - -
------------- ------------- --------- ---------- ------------ ---------
Diluted EPS:
Net Loss $(30,697) 12,955,894 $ (0.00) $ (161,645) 13,369,736 $(0.01)
============= ============= ========= =========== ============= =========
Six Months Ended February 28, 2001 Six Months Ended February 29, 2000
----------------------------------- ------------------------------------
Income Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------ ---------
Basic EPS:
Net Income (loss) $21,212 13,134,188 $ 0.00 $(175,402) 13,477,071 $(0.01)
Effect of Common
Stock options 19,211 -
------------- ------------- --------- ---------- ------------ ---------
Diluted EPS:
Net Income (loss) $21,212 13,153,399 $ 0.00 $(175,402) 13,477,071 $(0.01)
============= ============= ========= =========== ============= =========
Options to purchase approximately 678,000 shares and 240,000 shares of common
stock at prices ranging from $.27 to $.75 per share were outstanding at February
28, 2001 and February 29, 2000, 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 19,000 options to purchase common stock at prices ranging from
$.125 to $.313 were excluded from the computation of diluted loss per share for
the three months ended February 28, 2001, because of their anti-dilutive effect.
Approximately 741,000 and 848,000 options to purchase shares of common stock
were outstanding at February 28, 2001 and February 29, 2000, respectively. All
options expire during periods through the year 2008.
5
Shareholders' Equity
- --------------------
We repurchased and retired 400,000 shares of common stock in the first quarter
of fiscal year 2001 at a cost of $100,000 to reduce the number of outstanding
shares. This purchase is in addition to the 366,000 and 100,000 shares
repurchased in the second quarter of fiscal 2000 and the fourth quarter of
fiscal 1999, respectively, as part of the stock repurchase program of up to
1,000,000 shares authorized by the board of directors. During the six months
ending February 28, 2001, we issued approximately 82,000 common shares that were
held in treasury at an aggregate sales price of approximately $17,000. These
shares were issued to employees participating in our employee stock purchase
plan.
Reclassifications
- -----------------
Certain 2000 amounts have been reclassified to conform to the 2001 financial
statement presentation.
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 and Section 21E of the Exchange
Act. Our 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, you should not
rely on these forward-looking statements.
Following is selected financial information for each of our reportable segments
for the three and six-month periods ended February 28, 2001 and February 29,
2000. All revenue and expenses are from non-affiliated sources.
Component Product Technologies
- ------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $779,929 $513,069 $1,680,721 $1,367,402
------------ ------------ ------------ -----------
Operating income $196,474 $160,332 $ 534,063 $ 388,311
------------ ------------ ------------ -----------
6
Our revenue from the component product technologies segment is primarily from
licensing our ViewDirector, Prizm Plug-in, ScanFix and FormFix products and from
related royalties. Revenue for this segment for the three months ended February
28, 2001 was $779,929 compared to $513,069 for the same period of 2000, an
increase of $266,860, or 52%. Segment revenue for the six months ended February
28, 2001 was $1,680,721 compared to $1,367,402 for the same six-month periodof
2000, an increase of $313,319, or 23%.
Image display product revenue for the three-month periods ended February 28,
2001 and February 29, 2000 was $412,000 and $278,000, respectively, a $134,000,
or 48%, increase. This increase accounts for 50% of the total segment revenue
increase between those periods and results from a greater number of large
multiple licensing sales. These large sales are a direct impact of the
reorganization of our sales force during fiscal 2001. Image display product
revenue for the six months ended February 28, 2001 was $916,000 compared to
$841,000 for the same period of 2000, a $75,000, or 9%, increase.
Image processing product revenue for the three-month period ended February 28,
2001 and February 29, 2000 was $289,000 and $196,000, respectively, a $93,000,
or 47% increase. Image processing product revenue for the six months ended
February 28, 2001 was $613,000 compared to $456,000 for the same period of 2000,
a $157,000, or 34%, increase. These increases in image processing product
revenue are primarily due to a greater number of large sales during the three
and six-month periods ended February 28, 2001, compared to the same periods in
2000.
Maintenance revenue for our component product technologies products for the
three and six month periods ended February 28, 2001 was $78,000 and 152,000,
respectively, representing increases of 101% and 114% over the same periods of
2000. These increases are due to our continued effort to enroll new customers in
maintenance agreements and renew maintenance agreements with existing customers.
One customer accounted for 11% and 12% of the segment's revenue during the
three-month periods ended February 28, 2001 and February 29, 2000, respectively.
No single customer accounted for greater than 10% of the segment revenue for the
six-month period ended February 28, 2001. Approximately 10% of the segment
revenue for the six months ended February 29, 2000 came from one customer.
Approximately 53% and 57% of our component products technologies revenue for the
three and six month periods ended February 28, 2001, respectively, was derived
from sales of multiple licenses to individual customers compared to 41% and 57%
for the same time periods during 2000. Currently, the profitability of this
segment depends on the ability to secure significant sales of multiple licenses
to individual customers.
Operating income margins for this segment were 25% and 31% for the three months
ended February 28, 2001 and February 29, 2000, respectively. The decrease in
the operating margin in the second quarter of 2001 compared to the second
quarter of fiscal 2000 is primarily a result of recovery of a previously
recorded bad debt of approximately $258,000 in the prior second quarter,
resulting in a decrease in general and administrative expense. Changes in
various other operating expenses also impacted the operating margins for the
current and prior fiscal year second quarters.
Amortization of capitalized software costs decreased to $29,000 for the three
months ended February 28, 2001 compared to $60,000 for the three months ended
February 29, 2000. This decrease of approximately $31,000 or 52% is due to the
write-offs of the capitalized costs of unprofitable software products during the
last three quarters of fiscal year 2000. These write-offs include a $73,000
write-down of the remaining unamortized capitalized software development costs
for SpectrumFix 1.0 in the second quarter of fiscal 2000.
Sales and marketing costs increased to $185,000 for the three months ended
February 28, 2001 from $140,000 for the three months ended February 29, 2000.
That increase of $45,000 or 32% was due to an increase in the number of sales
personnel in the second quarter of fiscal 2001 and an increase in advertising
efforts. Research and development costs increased to $147,000 for the three
months ended February 28, 2001 compared to $83,000 for the three months ended
February 29, 2000. This increase of approximately $64,000 or 77% is due to the
allocation of additional resources from the professional services segment to
develop the new Prizm Color IP toolkit and upgrade other existing products.
Operating income margins for this segment were 32% and 28% for the six months
ended February 28, 2001 and February 29, 2000, respectively. The increase in the
operating income margin is primarily due to the write-off of the capitalized
costs of SpectrumFix in the first quarter of fiscal 2000. Offsetting this
write-off was the bad debt recovery during the second quarter of fiscal 2000 as
discussed above. Other expense fluctuations that impacted the operating margins
for the six months ended February 28, 2001 and February 29, 2000, were
amortization expense and research and development expense.
Amortization of capitalized software costs decreased to $58,000 for the six
months ended February 28, 2001 compared to $143,000 for the six months ended
February 29, 2000. This decrease of approximately $85,000 or 52% is due to the
write-offs of the capitalized costs of unprofitable software products during the
last three quarters of fiscal year 2000.
Research and development costs increased to $269,000 for the six months ended
February 28, 2001 compared to $167,000 for the six months ended February 29,
2000. This increase of approximately $102,000 or 61% is due to the allocation
of additional resources from the professional services segment to develop the
new Prizm Color IP toolkit and upgrade other existing products.
7
Assessment Product Technologies
- --------------------------------
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers - - $ 6,200 -
------------ ------------ ------------ -----------
Operating loss $(215,542) $(68,892) $ (396,514) $(97,693)
------------ ------------ ------------ -----------
For the six months ended February 28, 2001, revenue for the assessment product
technologies segment was $6,200 compared to no revenue from this segment for the
same period during 2000. This revenue resulted from a consulting project in the
first quarter of 2001 for one customer. We incurred combined costs of
approximately $216,000 and $69,000 in research and development and business
development for the three-month periods ending February 28, 2001 and February
29, 2000, respectively, and $397,000 and 98,000 for the six-month periods ended
February 28, 2001 and February 29, 2000, respectively. We incurred
substantially all of the operating expenses in fiscal 2001 on the design and
development of the new Virtual Scoring CenterT software product designed for the
K-12 educational assessment vertical market. We installed the initial release
the VSCT at one customer location during the second quarter of fiscal 2001 and
started pilot testing the product in March 2001. The pilot testing is currently
being performed by one school district and we have a commitment from another
school district to begin testing the system in May 2001. We expect to have a
commercial version of the product available at the beginning of fiscal year
2002. Operating expenses incurred during the three and six months ended February
29, 2000 were incurred for the development of the Digital Mark Recognition
software product prototype. As of February 28, 2001, this segment had a revenue
backlog of approximately $200,000 from one customer that is expected to be
recorded as revenue in the third quarter of fiscal 2000 upon acceptance by the
initial Virtual Scoring Center customer.
Professional Services
- ---------------------
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $27,660 $ 72,049 $42,957 $ 325,891
----------- ----------- ----------- -----------
Operating income (loss) $20,787 $ (145,547) $24,337 $ (251,791)
----------- ----------- ----------- -----------
Revenue for the professional services segment was $27,660 during the three
months ended February 28, 2001 compared to $72,049 for the same period of 2000,
a decrease of $44,389 or 62%. Segment revenue for the six months ended February
28, 2001 was $42,957 compared to $325,891 for the six-month period ended
February 29, 2000, a decrease of $282,934 or 87%. These revenue declines
resulted from our decision in fiscal 2000 to discontinue our professional
service business. Three customers accounted for all of the revenue for the
three and six-month periods ended February 28, 2001. Four customers accounted
for approximately 95% of the revenue for the second quarter of fiscal 2000, and
78% of the revenue for the six months ended February 29, 2000 came from three
customer contracts.
Operating income for the segment was 167% and 88% of revenue for the three and
six months ending February 28, 2001, respectively, compared to a loss equal to
202% and 77% of revenue for the three and six months ending February 29, 2000,
respectively. Operating margins for the three and six-month periods ended
February 29, 2000 were negatively impacted by cost overruns on two fixed-fee
projects. One of those projects was completed in the fourth quarter of fiscal
2000, while the other was completed and accepted by the customer during the
first quarter of fiscal 2001. Operating margins for the three and six months
ended February 28, 2001 improved over the same periods in 2000 due to better
cost controls for the work performed on these projects in fiscal 2001. We will
continue to provide maintenance for these projects during the remainder of
fiscal 2001 but will not offer professional services to any new customers. We
allocated professional services segment resources to product development upon
completion of these projects.
8
Document Conversion
- -------------------
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $61,358 $65,814 $121,534 $128,664
------------ ------------ ----------- -----------
Operating income (loss) $23,157 $(2,546) $ 30,531 $ (7,490)
------------ ----------- ----------- -----------
Revenue for the document conversion segment was $61,358 for the three months
ended February 28, 2001 compared to $65,814 for the same period of 2000, a
decrease of $4,456 or 7%. Segment revenue for the six months ended February 28,
2001 was $121,534 compared to $128,664 for the six-month period ended February
29, 2000, a decrease of $7,130 or 6%. Approximately 96% and 86% of the document
conversion revenue for the three and six months ended February 28, 2001,
respectively, came from three customers. All of the segment revenue for the
three months ended February 29, 2000 came from five customers and approximately
92% of the revenue came from four customers for the six months ended February
29, 2000.
Operating income for the segment was 38% and 25% of revenue for the three and
six months ending February 28, 2001, respectively, compared to a loss equal to
4% and 6% of revenue for the three and six months ending February 29, 2000,
respectively. The increase in margins from fiscal 2000 primarily resulted from
a decrease in general and administrative costs of approximately $36,000, or 98%,
and $57,000, or 79%, for the three and six month periods ended February 28. 2001
compared to the same periods last fiscal year. These decreases are due to a
reallocation of resources to the other segments and the expiration of two
capital leases during the first quarter of fiscal 2001 for certain document
conversion equipment.
During the three months ended February 28, 2001, we decided to discontinue
document conversion services to several customers. Upon completion of the work
for these customers in the third quarter of fiscal 2001, we expect a decline in
document conversion revenue. We will continue to provide document conversion
services to one customer during the remainder of fiscal 2001.
Total Company Operating Results
- -------------------------------
Following is a report of total company revenue and a reconciliation of
reportable segments' operating income (loss) to our total net income (loss) for
the three and six month periods ending February 28, 2001 and February 29, 2000.
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Total company revenue $ 868,947 $ 650,932 $ 1,851,413 $ 1,821,957
----------- ----------- ----------- ------------
Operating income (loss) for
reportable segments 24,876 (56,653) 192,417 31,337
Unallocated corporate expenses (88,358) (101,030) (200,624) (212,412)
Interest income 14,524 11,702 33,391 23,297
Interest expense (3,788) (5,827) (8,196) (10,838)
Other, net 324 (5,604) 4,224 696
Income tax benefit (expense) 21,725 (4,233) - (7,482)
------------ ------------ ------------ ------------
Net loss $ (30,697) $ (161,645) $ 21,212 $ (175,402)
=========== =========== =========== ============
Loss per share:
Basic $ (0.00) $ (0.01) $ 0.00 $ (0.01)
Diluted (0.00) (0.01) 0.00 (0.01)
=========== =========== =========== ============
9
Total revenue for the three months ended February 28, 2001 was $868,947 compared
to $650,932 for the same quarter of fiscal 2000, an increase of $218,015, or
33%. Licensing and royalty revenue for the three months ended February 28, 2001
increased to $780,000 from $513,000, a $267,000 or 52% increase over the same
quarter of fiscal 2000. Revenue from image display products for the three
months ended February 28, 2001 increased to $412,000 from $278,000, a $134,000
or 48% increase over the same quarter of fiscal 2000. Image processing product
revenue for the three months ended February 28, 2001 increased to $289,000 from
$196,000, a $93,000 or 47% increase over the same quarter of fiscal 2000.
Maintenance revenue for the three months ended February 28, 2001 increased to
$78,000 from $39,000, a $39,000 or 101% increase over the same quarter of fiscal
2000. Partially offsetting the licensing and royalty revenue for the three
months ended February 28, 2001 was a decrease of $28,000 from $72,000 to $44,000
in professional services revenue due to our decision to discontinue the
professional services segment and to reallocate resources previously dedicated
to the professional services segment to other segments for product development.
Our total net loss for the three months ended February 28, 2001 was $30,697 or
$0.00 per share (basic and diluted), compared to a net loss of $161,645 or $0.01
per share (basic and diluted), for the second quarter of fiscal 2000. The
increase in profitability is primarily attributable to the decrease of $211,000
or 97% in operating expenses associated with our transition out of the
unprofitable professional services segment. In addition, the profitability for
the second quarter of fiscal 2000 was negatively impacted by the $73,000 write-
off of SpectrumFix 1.0. However, the profitability for the three months ended
February 29, 2000 was positively impacted by the $258,000 recovery of a
previously written-off bad debt. The decrease in the current second quarter
professional services operating expenses discussed above was partially offset by
the increase of $147,000 or 212% in development costs for the assessment product
technologies segment. A deferred income tax benefit of approximately $22,000 for
the current second quarter was recorded based on our current estimate of the
overall tax rate expected for the fiscal year. Income tax expense recorded for
the three-month period ended February 29, 2000 resulted from differences in
prior year estimates used for financial reporting compared to actual state tax
payments.
Total revenue for the first six months of fiscal 2001 was $1,851,413 compared to
$1,821,957 for the same period in fiscal 2000, an increase of $29,456 or 2%.
Although the professional services segment revenue decreased $283,000 or 87% for
the six months ended February 28, 2001 compared to the same period of 2000, we
maintained the same level of total revenue between those periods due to an
increase of $313,000 or 23% in licensing and royalty revenue. The decline in
professional services revenue was expected based on our decision to discontinue
the professional services segment. Licensing and royalty revenue increased based
on the revenue increases for image processing products, image viewing products
and maintenance as discussed above in the Component Product Technologies
section.
Net income for the first six months of fiscal 2001 was $21,212 or $0.00 per
share (basic and diluted), compared to net loss of $175,402, or $0.01 per share
(basic and diluted), for the same period in fiscal 2000. This profitability
increase is primarily due to the decrease of $559,000 or 97% in operating
expenses associated with our transition out of the unprofitable professional
services segment. This decrease is partially offset by the increase of $299,000
or 306% in development costs for the assessment product technologies segment for
the six months ended February 28, 2001 compared to the same period in 2000. The
profitability for the six months ended February 29, 2000 was positively impacted
by the $258,000 recovery of a previously written-off bad debt; however, this
recovery was partially offset by the $73,000 write-off of SpectrumFix 1.0 during
the same period. A deferred income tax benefit of approximately $64,000 for the
six-month period ended February 29, 2000 was offset by a corresponding increase
to the valuation allowance for deferred tax assets. Income tax expense reported
for the six-month period ended February 29, 2000 resulted from differences in
prior year estimates used for financial reporting compared to actual state tax
payments.
Deferred Income Taxes
- ---------------------
Deferred tax assets are recognized when it is more likely than not that benefits
from deferred tax assets will be realized. We have recognized a net deferred tax
asset of $484,500 as of February 28, 2001. The ultimate realization of this
deferred tax asset is dependent upon our ability to generate future taxable
income during the periods in which those temporary differences become
deductible. Management considered the scheduled reversal of deferred tax
liabilities, projected future taxable income, past earnings history, sales
backlog, and net operating loss and tax credit carryforward expiration dates in
determining the amount of deferred tax asset to recognize. In order to fully
realize the deferred tax asset, we must generate future taxable income of
approximately $1,275,000 prior to the expiration of the net operating loss and
tax credit carryforwards. The valuation allowance for the related deferred tax
assets may be increased in future periods if we cannot generate sufficient
taxable income to recover the net deferred tax asset.
10
FINANCIAL CONDITION
Working capital at February 28, 2001 was $1,132,045 with a current ratio of
2.6:1, compared to $1,376,235 with a current ratio of 2.9:1 at August 31, 2000.
Net cash used in operations for the six months ended February 28, 2001 was
$97,510 compared to net cash provided by operations of $251,695 for the same
period of 2000. The decrease in operating cash flows for the current six month
period over the same period last year is primarily due to the timing of customer
cash collections. Net cash used in investing activities for the six months
ending February 28, 2001 was $313,145 compared to $175,799 for the same period
in fiscal 2000.
The increase in investing cash flows primarily relates to the increase in
capitalized software development costs due to the increased product development
related primarily to the PrizmT Color Image Processing toolkit and the Virtual
Scoring Center during the six months ended February 28, 2001 compared to the
same period of 2000. Net cash used in financing activities for the six months
ending February 28, 2001 was $111,535 compared to $136,721 for the same period
in fiscal 2000. This decrease is primarily due to the expiration of two capital
leases in the first quarter of fiscal 2001 and the cash inflows during 2001 from
the sale of common stock to employees under the employee stock purchase plan.
Our purchase and retirement of common shares accounted for $100,000 and $87,500
of the cash used in financing activities for the six months ending February 28,
2001 and February 29, 2000, respectively.
We anticipate that operating cash flows will be adequate to meet our 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.
PART II - Other Information
Item 1. Legal Proceedings
On September 12, 2000 we filed arbitration proceedings with the American
Arbitration Association against one of our value added resellers for failing to
comply with royalty reporting and payment obligations as outlined in our value
added reseller agreement. We are seeking a one-time royalty payment of $440,000
plus interest and legal fees from the reseller. Through February 28, 2001 we
have incurred approximately $60,000 of expense related to this arbitration. We
expect to incur an additional $70,000 of expense related to this matter. The
arbitration hearing is scheduled for July 2001.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its annual meeting of shareholders on January 26, 2001.
b) The following matters were voted upon at the annual meeting:
1) Following are the directors elected at the annual meeting and the
tabulation of votes related to each nominee.
Affirmative Votes Withheld
Rudy J. Alvarado 11,256,934 245,726
Doyle E. Cherry 10,996,316 506,344
James R. Rau, M.D. 11,001,316 501,344
Russell W. Teubner 11,241,686 260,974
Marshall C. Wicker 10,996,834 505,826
2) The shareholders ratified the appointment of KPMG LLP as
independent public accountants for fiscal year 2001. Affirmative
votes were 11,318,988; negative votes were 119,382; and
abstentions were 64,290.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Name of Exhibit
10.1 Agreement for Contract Services, North Dakota
Department of Public Instruction
10.2 Software License Agreement entered into by and
between TMS, Inc. and the State of North Dakota,
Department of Public Instruction
(b) Reports on Form 8-K
None
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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.
Registrant: TMS Inc.
Date: April 16, 2001 /s/ Deborah D. Mosier
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Deborah D. Mosier, President
Date: April 16, 2001 /s/ Kent E. Warkentin
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Kent E. Warkentin, Controller
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