U.S.SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 2001
[ ] TRANSITION REPORT UNDER 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 (IRS 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 June 30, 2001
Common stock, par value $.05 per share 13,029,358
Transitional Small Business Disclosure Format (check one):
Yes [] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Condensed Balance Sheets
May 31, 2001 and August 31, 2000
May 31,
2001 August 31,
(unaudited) 2000*
----------- ----------
Cash $ 696,405 $1,359,692
Trade accounts receivable, net 562,892 461,549
Contract service work in process 33,930 146,848
Other current assets 171,857 118,292
----------- -----------
Total current assets 1,465,084 2,086,381
----------- -----------
Property and equipment 2,580,099 2,722,797
Accumulated depreciation and amortization (1,600,109) (1,649,589)
------------ -----------
Net property and equipment 979,990 1,073,208
----------- -----------
Capitalized software development costs, net 736,310 388,258
Other assets 572,101 541,407
----------- -----------
Total assets $ 3,753,485 $4,089,254
=========== ===========
Current obligation under capital leases $ - $ 11,705
Current installments of long-term debt 30,189 28,943
Accounts payable 145,581 80,879
Deferred revenue 248,434 287,512
Other current liabilities 229,106 301,107
----------- -----------
Total current liabilities 653,310 710,146
Long-term debt, net of current installments 229,627 252,456
Other liabilities 12,968 10,375
----------- -----------
Total liabilities 895,905 972,977
----------- -----------
Common stock 654,983 674,533
Additional paid-in capital 11,347,390 11,422,299
Unamortized deferred compensation - (1,809)
Accumulated deficit (9,111,275) (8,884,719)
Treasury stock (33,518) (94,027)
----------- -----------
Total shareholders' equity 2,857,580 3,116,277
----------- -----------
Total liabilities and shareholders' equity $ 3,753,485 $ 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 Nine Months Ended May 31,
2001 and 2000
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2001 2000 2001 2000
----- ----- ----- -----
Revenue:
Licensing and royalties $ 764,781 $ 613,510 $ 2,445,502 $ 1,980,912
Assessment scoring consulting services - - 6,200 -
Software development services 8,412 24,395 51,370 350,286
Document conversion services 42,812 59,735 164,346 188,399
------------ ------------ ------------ ------------
816,005 697,640 2,667,418 2,519,597
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of licensing and royalties 86,647 142,125 241,251 440,428
Cost of software development services 3,187 63,598 20,300 444,236
Cost of document conversion services 23,997 34,003 99,722 98,185
Selling, general and administrative 684,620 582,147 1,868,345 1,646,896
Research and development 235,354 151,478 663,808 346,638
------------ ------------ ------------ ------------
1,033,805 973,351 2,893,426 2,976,383
------------ ------------ ------------ ------------
Operating loss (217,800) (275,711) (226,008) (456,786)
Other income, net 6,178 16,061 35,597 29,214
------------ ------------ ------------ ------------
Loss before income taxes (211,622) (259,650) (190,411) (427,572)
------------ ------------ ------------ ------------
Income tax expense - 3,805 - 11,285
------------ ------------ ------------ ------------
Net loss $ (211,622) $ (263,455) $ (190,411) $ (438,857)
============ ============ ============ ============
Basic loss per share $ (0.02) $ (0.02) $ (0.01) $ (0.03)
============ ============ ============ ============
Weighted average common shares 13,004,267 13,244,659 13,090,881 13,399,600
============ ============ ============ ============
Diluted loss per share $ (0.02) $ (0.02) $ (0.01) $ (0.03)
============ ============ ============ ============
Weighted average common and common
equivalent shares 13,004,267 13,244,659 13,090,881 13,399,600
============ ============ ============ ============
See accompanying notes to condensed
Financial statements.
3
TMS, Inc.
Condensed Statements of Cash Flows (unaudited)
Nine Months Ended May 31, 2001 and 2000
May 31, May 31,
2001 2000
----- -----
Net cash flows (used in) provided by
Operating activities $ (44,035) $ 761,164
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (52,030) (33,803)
Capitalized software development costs (448,190) (244,332)
Proceeds from sale of equipment 3,170 1,015
Patent costs (10,570) -
----------- -----------
Net cash used in investing activities (507,620) (277,120)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (21,583) (21,636)
Repayments of capital lease obligation (14,413) (49,457)
Sale of common stock - 2,052
Sale of treasury stock, at cost 24,364 -
Purchase of treasury stock, at cost (100,000) (91,340)
----------- -----------
Net cash used in financing activities (111,632) (160,381)
----------- -----------
Net (decrease) increase in cash (663,287) 323,663
Cash at beginning of period 1,359,692 1,057,710
----------- -----------
Cash at end of period $ 696,405 $ 1,381,373
============ ===========
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 May 31, 2001 Three Months Ended May 31, 2000
----------------------------------- ------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------ ---------
Basic EPS:
Net Loss $(211,622) 13,004,267 $(0.02) $(263,455) 13,244,659 $(0.02)
Effect of Common
Stock options - -
------------- ------------- --------- ---------- ------------ ---------
Diluted EPS:
Net Loss $(211,622) 13,004,267 $(0.02) $(263,455) 13,244,659 $(0.02)
============= ============= ========= =========== ============= =========
Nine Months Ended May 31, 2001 Nine Months Ended May 31, 2000
----------------------------------- ------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------ ---------
Basic EPS:
Net Loss $(190,411) 13,090,881 $(0.01) $(438,857) 13,399,600 $(0.03)
Effect of Common
Stock options - -
------------- ------------- --------- ---------- ------------ ---------
Diluted EPS:
Net Loss $(190,411) 13,090,881 $(0.01) $(438,857) 13,399,600 $(0.03)
============= ============= ========= =========== ============= =========
Options to purchase approximately 678,000 shares and 50,000 shares of common
stock at prices ranging from $.27 to $.75 per share were outstanding at May 31,
2001 and 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 5,000 options
to purchase common stock at prices ranging from $.125 to $.188 were excluded
from the computation of diluted loss per share for the three and nine months
ended May 31, 2001, because of their anti-dilutive effect. Approximately
737,000 and 848,000 options to purchase shares of common stock were outstanding
at May 31, 2001 and 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 nine months
ending May 31, 2001, we issued approximately 127,000 common shares that were
held in treasury at an aggregate sales price of approximately $24,000. 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 nine-month periods ended May 31, 2001 and 2000. All revenue
and expenses are from non-affiliated sources.
Component Product Technologies
- ------------------------------------------------------
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $ 575,595 $ 613,510 $2,256,316 $1,980,912
------------ ------------ ------------ -----------
Operating (loss) income $ (144,236) $ (6,396) $ 389,828 $ 381,918
------------ ------------ ------------ -----------
6
Our revenue from the component product technologies segment is primarily from
licensing our ViewDirector(TM), Prizm(TM) Plug-in, ScanFix(R) and FormFix(R)
products and from related royalties. Revenue for this segment for the three
months ended May 31, 2001 was $575,595 compared to $613,510 for the same
period of 2000, a decrease of $37,915, or 6%. Segment revenue for the nine
months ended May 31, 2001 was $2,256,316 compared to $1,980,912 for the
same nine-month period of 2000, an increase of $275,404, or 14%.
During fiscal 2001 we have been focusing a large part of our technical
development and sales and marketing efforts on web-based image display (Prizm
Plug-in) and bitonal image processing (ScanFix) products. In addition, we have
made concerted efforts to enroll new customers in maintenance agreements and
renew maintenance agreements with existing customers. The result of these
efforts is an increase in revenue for those products and an increase in
maintenance revenue for all products for the first nine months of fiscal 2001
over the same period of fiscal 2000. Web-based image display revenue for the
nine months ended May 31, 2001 was approximately $913,000 compared to $761,000
for the same period of 2000, an increase of $152,000 or 20%. Bitonal image
processing product revenue for the nine months ended May 31, 2001 was
approximately $657,000 compared to $441,000 for the same period of 2000, a
$216,000, or 49% increase. Maintenance revenue for the nine-month period
ended May 31, 2001 was approximately $232,000 compared to $121,000 for the
same period of 2000, an increase of $111,000, or 92%.
The profitability of this segment depends in part on the ability to secure
significant sales of multiple licenses to individual customers and variability
of revenue between quarters can occur based on the timing of these large
transactions. For the three months ended May 31, 2001, several large licensing
transactions that we expected to be finalized by quarter-end were not completed
and web-based image display and bitonal image processing revenue for the three
months ended May 31, 2001 decreased slightly compared to the same period of
fiscal 2000 (although for the nine-months ended May 31, 2001 both have increased
as discussed above). Web-based image display product revenue for the three-
month periods ended May 31, 2001 and 2000 was approximately $208,000 and
$218,000, respectively, a $10,000, or 5%, decrease. Bitonal image processing
product revenue for the three-month periods ended May 31, 2001 and 2000 was
approximately $164,000 and $169,000, respectively, a $5,000, or 3% decrease.
Maintenance revenue, however, increased from approximately $50,000 for the three
months ended May 31, 2000 to approximately $80,000 for the three months ended
May 31, 2001, an increase of $30,000, or 61%.
Approximately 44% and 50% of our total component products technologies revenue
for the three- and nine-month periods ended May 31, 2001, respectively, was
derived from sales of multiple licenses to individual customers compared to 41%
and 51% for the same time periods during 2000. One customer accounted for
approximately 12% of the segment's revenue during the three months ended May 31,
2001. No single customer accounted for greater than 10% of the segment revenue
for the nine-month period ended May 31, 2001 or the three- and nine-month
periods ended May 31, 2000.
7
We have concentrated less of our technical, sales and marketing efforts on two
of our older products, our viewing toolkit (ViewDirector) and our forms
processing toolkit (FormFix), because they are mature products utilizing older
technologies and because we expect our investment in new technology related to
color image processing and web-based viewing is expected to illicit greater
financial returns over time. Our viewing toolkit and related royalty revenue
for the three- and nine-month periods ended May 31, 2001 was approximately
$90,000 and $301,000, respectively, representing decreases of 34% and 31% from
the same periods of 2000. Forms processing toolkit and related royalty revenue
for the three and nine-month periods ended May 31, 2001 was approximately
$15,000 and $95,000, respectively, representing decreases of 14% and 42% from
the same three- and nine-month periods of 2000. We expect revenue from these
two products to continue to decrease over time as we launch new technologies
intended to replace revenue from mature products utilizing older technologies.
During the first nine months of fiscal 2001, we made a significant investment
in the development, marketing and sales of our new Prizm Color Image Processing
toolkit that released early in the second quarter of fiscal 2001. At May 31,
2001, we had not yet recognized revenue from our new color image processing
technology, but so far in the fourth quarter of the current fiscal year we have
generated approximately $75,000 of revenue from the sale of this product.
Although we believe our product is well positioned to be a valuable component
of color image processing systems, the market for processing and enhancement of
color images is an emerging market and we cannot be sure that the market will
develop as we anticipate or will accept our product, which are risk factors
inherent in the development and marketing of early market technologies.
The lack of sales of our Prizm Color IP toolkit contributed largely to the
decrease in profitability for the segment in the three- and nine-month periods
ended May 31, 2001 compared to the same periods of fiscal 2000 as we had not yet
realized a return on our investment in that product. Operating loss margins for
this segment were 25% and 1% for the three months ended May 31, 2001 and 2000,
respectively. Operating income margins for this segment were 17% and 19% for
the nine months ended May 31, 2001 and 2000, respectively. Research and
development costs related to the continuing development of the Prizm Color IP
toolkit and the upgrading of our other existing products increased to
approximately $153,000 for the three months ended May 31, 2001 compared to
$81,000 for the three months ended May 31, 2000, an increase of approximately
$72,000, or 89%. Research and development costs increased to approximately
$422,000 for the nine months ended May 31, 2001 compared to $249,000 for the
nine months ended May 31, 2000, an increase of $173,000, or 69%.
8
Because of changes in our sales, product management and certain technical staff
in fiscal 2001 we incurred substantially higher recruiting costs in fiscal 2001
than in fiscal 2000. Recruiting costs were approximately $34,000 and $7,000 for
the three-month periods ending May 31, 2001 and 2000, respectively, an increase
of approximately $27,000, or 360%. Recruiting costs were approximately $53,000
and $25,000 for the nine-month periods ended May 31, 2001 and 2000,
respectively, an increase of approximately $28,000, or 110%. The increase in
these costs contributed to the segment loss for the three and nine-month periods
ended May 31, 2001.
Profitability for this segment has also been negatively impacted during fiscal
2001 by the professional fees and expenses of approximately $62,000 and $122,000
during the three- and nine-month periods ended May 31, 2001, respectively,
related to arbitration proceedings we filed against one of our value added
resellers. See further discussion below in the "Part 2 - Other Information"
section.
Write-offs of the capitalized costs of unprofitable software products during
fiscal 2000 negatively impacted the operating margins of the segment for the
three and nine months ended May 31, 2000. The Prizm Image Server product was
written off during the third quarter of fiscal 2000, resulting in a $49,000
expense. That write-off combined with the SpectrumFix write-off during the
first quarter of fiscal 2000 total approximately $122,000, decreasing the
profitability of this segment for the nine months ended May 31, 2000.
The result of these fiscal 2000 write-offs is a decrease in amortization of
capitalized software costs during fiscal 2001. Amortization expense decreased
to approximately $27,000 for the three months ended May 31, 2001 compared to
$102,000 for the three months ended May 31, 2000, a decrease of approximately
$75,000, or 74%. Amortization expense decreased to approximately $85,000 for
the nine months ended May 31, 2001 compared to $197,000 for the nine months
ended May 31, 2000, a decrease of approximately $112,000, or 57%.
The recovery of a previously recorded bad debt of approximately $258,000 during
the second quarter of fiscal 2000 resulted in a decrease to general and
administrative expense. This bad debt recovery contributed significantly to the
operating income for the segment for the nine months ended May 31, 2000.
Assessment Scoring Technologies
- --------------------------------
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $ 189,186 - $ 195,386 -
------------ ------------ ------------ -----------
Operating loss $ (38,858) $ (156,102) $(435,374) $(253,795)
------------ ------------ ------------ -----------
9
During fiscal 2001 and 2000 we made a substantial investment in two new products
designed to meet the needs of the K-12 educational assessment vertical market.
These products are the Virtual Scoring Center(TM) software product and the
Digital Mark Recognition software product prototype. We incurred combined costs
of approximately $222,000 and $155,000 in research and development and selling,
general and administrative expenses for the three-month periods ending May 31,
2001 and 2000, respectively, and approximately $631,000 and $254,000 for the
nine-month periods ended May 31, 2001 and 2000, respectively. The costs
incurred in fiscal 2001 primarily relate to the initial version of the Virtual
Scoring Center that was created to meet the needs of one customer. We
completed installation of the initial version of the Virtual Scoring Center
at that customer location during the third quarter of fiscal 2001 and
recognized $189,186 of revenue. The majority of the $195,386 of revenue for
the nine months ended May 31, 2001 also resulted from this sale. Although
the initial version of the Virtual Scoring Center was created for a specific
customer, we plan to leverage its features and functionalities to create a
commercial version of the product to sell to other customers in fiscal 2002.
We do not expect revenue from the commercial version in fiscal 2001. We began
pilot testing the product in March 2001 and will continue to pilot test
through the summer and fall of fiscal 2002.
We are also continuing to develop the Digital Mark Recognition software product
prototype in order to integrate its technology with the Virtual Scoring Center
product to enhance the viability of the commercial version of the Virtual
Scoring Center.
Professional Services
- ---------------------
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $ 8,412 $ 24,395 $ 51,370 $ 350,286
----------- ----------- ----------- -----------
Operating income (loss) $ 5,032 $(50,842) $ 29,369 $ (302,635)
----------- ----------- ----------- -----------
Revenue for the professional services segment was $8,412 during the three months
ended May 31, 2001 compared to $24,395 for the same period of 2000, a decrease
of $16,523, or 68%. Segment revenue for the nine months ended May 31, 2001 was
$51,370 compared to $350,286 for the nine-month period ended May 31, 2000, a
decrease of $298,916, or 85%. 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 nine-month periods
ended May 31, 2001. Two customers accounted for all of the revenue for the
third quarter of fiscal 2000, and 71% of the revenue for the nine months ended
May 31, 2000 originated from three customer contracts.
10
Operating income for the professional services segment was 60% and 57% of
revenue for the three and nine months ending May 31, 2001, respectively,
compared to a loss equal to 208% and 86% of revenue for the three and nine
months ending May 31, 2000, respectively. Operating margins for the three-
and nine-month periods ended May 31, 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 nine months ended May 31, 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.
Document Conversion
- -------------------
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $ 42,812 $59,735 $164,346 $ 188,399
------------ ----------- ----------- -----------
Operating income (loss) $ 17,941 $ 292 $ 48,472 $ (7,198)
------------ ----------- ----------- -----------
Revenue for the document conversion segment was $42,812 for the three months
ended May 31, 2001 compared to $59,735 for the same period of 2000, a decrease
of $16,923, or 28%. Segment revenue for the nine months ended May 31, 2001 was
$164,346 compared to $188,399 for the nine-month period ended May 31, 2000, a
decrease of $24,053, or 13%. Approximately 90% of the document conversion
revenue for the three months ended May 31, 2001 came from one customer and 89%
of the segment revenue for the nine months ended May 31, 2001 came from three
customers. Approximately 90% and 87% of the segment revenue for the three and
nine months ended May 31, 2000, respectively, came from four customers. During
the second quarter of fiscal 2001, we decided to discontinue document conversion
services to several customers. We completed the work for these customers in the
third quarter of fiscal 2001. We will continue to provide document conversion
services to one customer through at least the remainder of fiscal 2001 to allow
that customer adequate time to transition their work to another document
conversion service provider.
11
Operating income for the document conversion segment was 42% and 29% of revenue
for the three and nine months ending May 31, 2001, respectively, compared to no
income and a loss equal to 4% of revenue for the three and nine months ending
May 31, 2000, respectively. The increase in margins from fiscal 2000 primarily
resulted from a decrease in general and administrative costs of approximately
$24,500, or 96%, and $81,000, or 83%, for the three- and nine-month periods
ended May 31, 2001 compared to the same periods of fiscal year 2000. 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.
Total Company Operating Results
- -------------------------------
Following is a report of total company revenue and a reconciliation of
reportable segments' operating (loss) income to our total net loss for the
three- and nine-month periods ending May 31, 2001 and 2000.
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2001 2000 2001 2000
---- ---- ---- ----
Total company revenue $ 816,005 $ 697,640 $ 2,667,418 $ 2,519,597
----------- ----------- ----------- ------------
Operating (loss) income for
Reportable segments (160,121) (213,048) 32,295 (181,710)
Unallocated corporate expenses (57,679) (62,663) (258,303) (275,076)
Interest income 10,815 15,871 44,206 39,167
Interest expense (3,767) (5,401) (11,963) (16,240)
Other, net (870) 5,591 3,354 6,287
Income tax expense - (3,805) - (11,285)
----------- ------------ ------------ ------------
Net loss $ (211,622) $(263,455) $ (190,411) $ (438,857)
=========== =========== =========== ============
Loss per share:
Basic $ (0.02) $ (0.02) $ (0.01) $ (0.03)
Diluted $ (0.02) $ (0.02) $ (0.01) $ (0.03)
=========== =========== =========== ============
12
Total revenue for the three months ended May 31, 2001 was $816,005 compared to
$697,640 for the same quarter of fiscal 2000, an increase of $118,365, or 17%.
Increases in licensing and royalty revenue are primarily responsible for the
overall increase in revenue between these periods. Licensing and royalty revenue
for the three months ended May 31, 2001 increased to approximately $765,000 from
$614,000, a $151,000, or 25% increase over the same quarter of fiscal 2000.
Although overall component product technologies licensing and royalty revenue
decreased to approximately $576,000 for the three months ending May 31, 2001,
from $613,000 for the same period of fiscal 2000 as a result of the decrease
in revenue from sales and royalties of our viewing and forms processing
toolkits, total licensing and royalty revenue increased between those periods
due to the recognition of approximately $189,000 of revenue from the acceptance
of the Virtual Scoring Center(TM) software product that was installed at one
customer location during the second quarter of fiscal 2001.
Our total net loss for the three months ended May 31, 2001 was $211,622 or $0.02
per share (basic and diluted), compared to a net loss of $263,455 or $0.02 per
share (basic and diluted) for the third quarter of fiscal 2000. Despite the
decrease in the component product technologies segment profitability, our total
company net loss decreased due to the approximately $189,000 of assessment
scoring technologies segment revenue and the decrease of $72,000, or 96% in
operating expenses associated with our transition out of the unprofitable
professional services segment.
Contributing to our net loss for the three months ended May 31, 2001, were
approximately $62,000 of professional fees related to our arbitration
proceedings filed against one of our value added resellers and approximately
$34,000 of recruiting fees, as explained above in the Component Product
Technologies section. Profitability for the three months ended May 31, 2000 was
negatively impacted by the $49,000 write-off of the Prizm Image Server product.
Deferred income tax benefits of approximately $80,000 and $99,000 for the three-
month periods ended May 31, 2001 and 2000, respectively, were offset by
corresponding increases to the valuation allowance for deferred tax assets.
Income tax expense recorded for the three-month period ended May 31, 2000
resulted from differences in prior year estimates used for financial reporting
compared to actual state tax payments.
Total revenue for the first nine months of fiscal 2001 was $2,667,418 compared
to $2,519,597 for the same period in fiscal 2000, an increase of $147,821, or
6%. Although the professional services segment revenue decreased approximately
$299,000, or 85% for the nine months ended May 31, 2001 compared to the same
period of 2000, total company revenue increased slightly between those periods
due to an increase of approximately $465,000, 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 the bitonal image
processing and web-based image viewing products and maintenance as discussed
above in the Component Product Technologies section. In addition, licensing and
royalty revenue increased due to the approximately $189,000 sale of the initial
version of the Virtual Scoring Center product as discussed in the Assessment
Scoring Technologies section.
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Net loss for the first nine months of fiscal 2001 was $190,411 or $0.01 per
share (basic and diluted), compared to net loss of $438,857, or $0.03 per share
(basic and diluted), for the same period in fiscal 2000. This decrease in net
loss is primarily due to the decrease of approximately $631,000 or 97% in
operating expenses associated with our transition out of the unprofitable
professional services segment. The decrease in professional services operating
expenses is partially offset by the increase of approximately $360,000 or 142%
in selling, general and administrative costs and research and development costs
for the assessment scoring technologies segment.
Contributing to our net loss for the nine months ended May 31, 2001 were
approximately $122,000 of professional fees related to the arbitration
proceeding and the additional $28,000 of recruiting fees over the same period of
fiscal 2000, as discussed above in the Component Technologies section.
Contributing to the net loss for the nine months ended May 31, 2000 was the
$73,000 write-off of SpectrumFix 1.0 and the $49,000 write-off of Prizm Image
Server. However, we recovered a $258,000 previously written-off bad debt, which
reduced the net loss during the same period.
Deferred income tax benefits of approximately $72,000 and $162,000 for the nine-
month periods ended May 31, 2001 and 2000 were offset by a corresponding
increase to the valuation allowance for deferred tax assets. Income tax expense
reported for the nine-month period ended May 31, 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 May 31, 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.
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FINANCIAL CONDITION
Working capital at May 31, 2001 was $811,774 with a current ratio of 2.2:1,
compared to $1,376,235 with a current ratio of 2.9:1 at August 31, 2000. The
declines in working capital and current ratio are primarily due to the
approximately $663,000 decrease in cash from August 31, 2000 to May 31, 2001, as
explained below. Net cash used in operations for the nine months ended May 31,
2001 was $44,035 compared to net cash provided by operations of $761,164 for the
same period of 2000. The decrease in operating cash flows for the current nine-
month period over the same period last year is due to several circumstances.
First, during the first three quarters of fiscal 2000 we collected large
final payments for professional services work as we transitioned out of that
segment of business. The cash collected during the first nine months of fiscal
2001 for the final two professional services jobs was significantly less than
what was collected during the same period of fiscal 2000. Operating cash flows
also decreased between these periods because approximately $232,000 was
collected in the third quarter of fiscal 2000 on a large contract for which the
revenue was deferred until subsequent periods. No such transactions occurred
during the nine months ended May 31, 2001. Net cash used in investing
activities for the nine months ending May 31, 2001 was $507,620 compared to
$277,120 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 Prizm(TM) Color Image Processing toolkit and the
Virtual Scoring Center(TM) during the nine months ended May, 2001 compared to
the same period of 2000. Net cash used in financing activities for the nine
months ending May 31, 2001 was $111,632 compared to $160,381 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 nine
months ending May 31, 2001 and 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 May 31, 2001 we have
incurred approximately $122,000 of expense related to this arbitration. We
expect to incur an additional $160,000 of expense related to this matter. The
arbitration hearing was held the week that began July 9, 2001 and we expect
resolution of the matter before the end of the fiscal year.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant: TMS Inc.
Date: July 16, 2001 /s/ Deborah D. Mosier
---------------- ---------------------
Deborah D. Mosier, President
Date: July 16, 2001 /s/ Kent E. Warkentin
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Kent E. Warkentin, Controller
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