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, 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 December 31, 2001
Common stock, par value $.05 per share 13,106,659
Transitional Small Business Disclosure Format (check one):
Yes [] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Condensed Balance Sheets
November 30, 2001 and August 31, 2001
Nov 30,
2001 August 31,
(unaudited) 2001*
----------- ----------
Cash $ 253,619 $669,287
Trade accounts receivable, net 915,385 1,007,839
Other current assets 138,464 156,133
----------- -----------
Total current assets 1,307,468 1,833,259
----------- -----------
Property and equipment 2,569,561 2,571,501
Accumulated depreciation and amortization (1,632,054) (1,608,480)
------------ -----------
Net property and equipment 937,507 963,021
----------- -----------
Capitalized software development costs, net 739,670 709,384
Other assets 472,819 476,006
----------- -----------
Total assets $ 3,457,464 $3,981,670
=========== ===========
Current installments of long-term debt 27,522 27,016
Accounts payable 235,046 231,311
Accrued payroll expenses 202,434 264,382
Deferred revenue 235,221 280,995
----------- -----------
Total current liabilities 700,223 803,704
Long-term debt, net of current installments 220,290 227,376
----------- -----------
Total liabilities 920,513 1,031,080
----------- -----------
Common stock 655,283 655,133
Additional paid-in capital 11,348,276 11,347,872
Accumulated deficit (9,466,608) (9,040,887)
Treasury stock - (11,528)
----------- -----------
Total shareholders' equity 2,536,951 2,950,590
----------- -----------
Total liabilities and shareholders' equity $ 3,457,464 $ 3,981,670
============ ===========
*Condensed from audited financial statements.
See accompanying notes to condensed
financial statements.
2
TMS, Inc.
Condensed Statements of Operations (unaudited)
Three Months Ended November 30, 2001 and 2000
Three Months Ended
November 30
-------------------------
2001 2000
----- -----
Revenue:
Licensing and royalties $ 459,300 $ 827,469
Customer support and maintenance 101,932 81,910
Other services - 73,087
------------ ------------
561,232 982,466
------------ ------------
Operating costs and expenses:
Cost of revenue 154,989 128,221
Selling, general and administrative 503,894 610,723
Research and development 316,345 188,247
------------ ------------
975,228 927,191
------------ ------------
Operating (loss) income (413,996) 55,275
Other (expense) income, net (5,110) 18,358
------------ ------------
(Loss) income before income taxes (419,106) 73,633
Income tax expense - 21,725
------------ ------------
Net (loss) income $ (419,106) $ 51,908
============ ============
Basic (loss) earnings per share $ (0.03) $ 0.00
============ ============
Weighted average common shares 13,088,663 13,312,481
============ ============
Diluted (loss) earnings per share $ (0.03) $ 0.00
============ ============
Weighted average common shares and potentially
dilutive securities 13,088,663 13,331,693
============ ============
See accompanying notes to condensed
financial statements.
3
TMS, Inc.
Condensed Statements of Cash Flows (unaudited)
Three Months Ended November 30, 2001 and 2000
Three Months Ended
November 30
-------------------------
2001 2000
----- -----
Net cash flows used in
operating activities $ (272,707) $ (229,616)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (15,892) (8,041)
Capitalized software development costs (125,402) (148,642)
Patent costs - (10,570)
----------- -----------
Net cash used in investing activities (141,294) (167,253)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (6,580) (7,094)
Repayments of capital lease obligation - (14,413)
Sale of treasury stock, at cost 4,913 7,918
Purchase of treasury stock, at cost - (100,000)
----------- -----------
Net cash used in financing activities (1,667) (113,589)
----------- -----------
Net decrease in cash (415,668) (510,458)
Cash at beginning of period 669,287 1,359,692
----------- -----------
Cash at end of period $ 253,619 $ 849,234
============ ===========
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, 2001.
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
Line of Credit
At November 30, 2001 we had a $1,000,000 operating line of credit with a
bank which bears interest at 1% above prime (6% at November 30, 2001) and
expires on November 28, 2002. No balance was outstanding against the line
of credit at November 30, 2001.
Net Loss Per Share
- ------------------
Following is a reconciliation of the numerators and the denominators of the
basic and diluted per-share computations:
November 30, 2001 November 30, 2000
----------------------------------- ------------------------------------
Loss Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------ ---------
Basic EPS:
Net (Loss) Income $(419,106) 13,088,663 $(0.03) $51,908 13,312,481 $0.00
Effect of Common
Stock options - 19,212
------------- ------------- --------- ----------- ------------ ---------
Diluted EPS:
Net (Loss) Income $(419,106) 13,088,663 $(0.03) $51,908 13,331,693 $0.00
============= ============= ========= =========== ============= =========
Options to purchase approximately 628,000 shares and 678,000 shares of common
stock at prices ranging from $.27-$.40 per share were outstanding at November
30, 2001 and 2000, respectively, but were not included in the computation of
diluted net income (loss) per share because the options' exercise prices were
greater than the average market price of common shares. Additionally,
approximately 59,000 options to purchase common stock at prices ranging from
$.125-$.1875 were excluded from the computation of diluted loss per share for
the three months ended November 30, 2001, because of their anti-dilutive effect.
All options expire during periods through the year 2008.
5
Shareholders' Equity
- --------------------
During the three months ending November 30, 2001, we issued 30,326 common shares
that were held in treasury at an aggregate sales price of $5,000. These shares
were issued to employees participating in our employee stock purchase plan. At
November 30, 2001, there were no remaining shares available to be issued under
the employee stock purchase plan.
Reclassifications
- -----------------
Certain fiscal 2001 amounts have been reclassified to conform to the fiscal 2002
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 months ended November 30, 2001 and 2000. All revenue and expenses
are from non-affiliated sources.
Component Product Technologies
- ------------------------------------------------------
Three Months Ended
November 30
------------------------
2001 2000
---- ----
Revenue from external customers $553,207 $900,792
----------- -----------
Operating (loss) income (31,866) 337,590
----------- -----------
6
Revenue from the component product technologies segment is primarily derived
from licensing, royalties, and the customer support and maintenance of our
Prizm(R) Plug-in, ScanFix(R), Prizm(R) color, ViewDirector(TM) and FormFix(R)
products. Revenue for this segment for the three months ended November 30, 2001
was $553,207 compared to $900,792 for the same period last year, a decrease of
$347,585, or 39%. Operating loss for the segment was -6% for the three months
ended November 30, 2001 compared to operating income of 37% for the same period
last year.
With the exception of the Prizm color product, which had not been released for
sale in the first quarter of fiscal year 2001, the decline in component product
revenue occurred across all product lines. This decline was in large part
attributable to the delay by several of our customers in closing the purchase of
certain licenses and the reduction in the number of licenses purchased, both
of which we believe to be indirect results of the events of September 11, 2001
and the general uncertainty of the national economy.
The profitability of this segment depends on our ability to secure significant
sales of multiple licenses to individual customers. During the first quarter of
fiscal year 2001, one customer accounted for approximately 11% of the total
revenue for the segment. In the first quarter of fiscal year 2002, no one
customer accounted for more than 10% of total segment revenue.
Although our sales and monthly revenue totals have gradually improved since the
events of September 11, 2001, we continue to experience longer sales cycles. We
anticipate that customers may continue to purchase licenses in smaller
quantities. Based on our belief that sales would continue to be depressed as a
result of the reaction to the events of September 11, 2001, we implemented a
company-wide plan near the end of the first quarter to eliminate a portion of
our workforce to reduce certain of our ongoing fixed expenses. (See the "Total
Company Operating Results" section below for a complete discussion of the
implementation of the expense reduction plan). Accordingly, the operating
margins for this segment were impacted by $53,204 of incremental
one-time costs related to severance payments made as part of the workforce
reduction; however, the decline in operating margins over the prior year first
quarter is almost entirely attributable to the decline in revenue.
7
Assessment Scoring Technologies
- --------------------------------
Three Months Ended
November 30
------------------------
2001 2000
---- ----
Revenue from external customers $ - $ 6,200
----------- -----------
Operating loss (280,698) (180,972)
----------- -----------
This segment includes costs associated with the continued development and
marketing of our Virtual Scoring Center(TM) and Digital Mark Recognition(TM)
software products that are designed to target and take advantage of the
expected growth in the market for scoring K-12 tests. The initial version of
the Virtual Scoring Center was created for a specific customer and was installed
during the prior fiscal year. We are in the process of creating a commercial
version of the Virtual Scoring Center that will include integration of our
Digital Mark Recognition technology as an optional feature. We expect to
release the commercial product during the latter half of the current fiscal year
in time for the late spring and summer scoring season. The increase in the
segment operating loss over the first quarter of fiscal 2001 is almost entirely
attributable to additional software development resources allocated to the
segment. During the first quarter of fiscal 2002, the operating results for
this segment were also impacted by $25,425 of incremental one-time
costs related to severance payments made as part of the total company workforce
reduction. (See the "Total Company Operating Results" section below for a
complete discussion of the implementation of the expense reduction plan.)
Other Services
- ---------------------
Three Months Ended
November 30
------------------------
2001 2000
---- ----
Revenue from external customers $ 8,025 $ 75,474
----------- -----------
Operating income 6,692 10,923
----------- -----------
The "Other Services" segment includes combined financial results for the winding
down of operational activities related to the Professional Services and Document
Conversion Services segments. Early in fiscal year 2000, we decided to
transition out of these service activities. Approximately 80% of the prior
first quarter revenue and 67% of the fiscal year 2001 first quarter operating
income resulted from document conversion service contracts. We completed our
final document conversion service activities during fiscal 2001, thus no revenue
or expenses are included in the first quarter of fiscal year 2002 for document
conversion. The remaining revenue and operating income in the first quarters of
both fiscal year 2002 and fiscal year 2001 relates to one professional service
customer support and maintenance contract that we expect to end during the
fourth quarter of fiscal year 2002.
8
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) income for
the three-month periods ending November 30, 2001 and 2000.
Three Months Ended
November 30
--------------------------
2001 2000
---- ----
Total company revenue $ 561,232 $ 982,466
----------- ------------
Operating (loss) income for
reportable segments (305,872) 167,541
Unallocated corporate expenses (108,124) (112,266)
Interest income 3,709 18,866
Interest expense (4,702) (4,408)
Other, net (4,117) 3,900
Income tax expense - (21,725)
------------ ------------
Net (loss) income $ (419,106) $ 51,908
=========== ============
(Loss) income per share:
Basic $ (0.03) $ 0.00
Diluted $ (0.03) $ 0.00
=========== ============
9
Total revenue for the three months ended November 30, 2001 was $561,232 compared
to $982,466 for the same quarter of fiscal year 2001, a decrease of $421,234 or
43%. The decline in total company revenue is almost entirely attributable to
several of our component product customers delaying the close of licensing
contracts or reducing the number of licenses purchased, which we believe were
the indirect result of the events of September 11, 2001 and the general
uncertainty of the national economy. Approximately 14% of the total revenue
decline was the results of our prior year decision to terminate our document
conversion service activities.
Our net loss for the three months ended November 30, 2001 was $419,106 or $0.03
loss per share (basic and diluted), compared to net income of $51,908 or $0.00
income per share (basic and diluted) for the same quarter of fiscal 2001. The
approximate $350,000 decline in component product revenue had the most
significant impact on the decline in our current first quarter results when
compared to the same period last year.
Also contributing to our first quarter loss were one-time incremental costs of
$78,629 related to employee severance payments made as part of our
termination of employees to reduce expenses. Because of the overall uncertainty
of the economy, which was fueled by the tragic events of September 11, 2001,
many of our customers either delayed the purchase of software licenses or
reduced the number of licenses purchased. As mentioned in the component product
segment above, we have seen a gradual improvement in our sales pipeline and
monthly revenue totals since the events of September 11, 2001, however we
continue to experience longer sales cycles and anticipate that customers may
continue to purchase licenses in smaller quantities than what we have
historically seen.
On an annualized basis, the cost savings associated with this workforce
reduction amounts to approximately $530,000. Four of the seven employees
terminated were from the software development group. The termination of these
software development positions may have an impact on our ability to adhere to
certain product release schedules, thus hindering near-term revenue growth.
The other three employee reductions were middle management, and other employees
assumed their responsibilities. We do not currently anticipate that we will be
required to make any other significant changes to our operating structure.
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 November 30, 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. 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 November 30, 2001 was $607,245 with a current ratio of 1.9:1,
compared to $1,029,555 with a current ratio of 2.3:1 at August 31, 2001. The
declines in working capital and current ratio are primarily due to the
approximately $416,000 decrease in cash from August 31, 2001 to November 30,
2001, as explained below.
Net cash used in operations for the three months ended November 30, 2001 was
approximately $273,000. We paid $97,421 in employee severance and unpaid
vacation during the current year first quarter as well as $80,000 in
legal fees associated with the arbitration proceedings. The remaining use of
operating cash flow relates to our operating loss position resulting from the
downturn in revenue during the quarter. Net cash used in investing activities
for the three months ended November 30, 2001 approximates $141,000 the majority
of which represents our investment in new and enhanced software products. Net
cash flows used in financing activities were $2,000 during the first quarter of
fiscal 2002.
During the first quarter of fiscal 2002 we secured a line of credit with a bank
that provides for maximum borrowing of up to $1,000,000 and is secured by all
trade accounts receivable. We anticipate that operating cash flows and the line
of credit will be adequate to meet our current obligations and current operating
and capital requirements. The funding of long-term needs (including funding for
increased product development, expanded marketing and promotion of our products,
and for potential merger/acquisition activities) 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 an arbitration claim with the American
Arbitration Association against Hummingbird USA, Inc. for failing to comply with
royalty reporting and payment obligations as outlined in our valued added
reseller agreement. We were seeking a one-time royalty payment of $440,000 plus
interest and legal fees. On August 31, 2001, the American Arbitration
Association awarded us $525,800 in actual damages, $41,702 in transactional
costs, and $525,800 for Hummingbird's unfair and deceptive acts and practices.
Hummingbird filed a "Motion to Vacate the Arbitration Award" in the federal
court system on October 2, 2001. We anticipate that this matter will be
resolved sometime during 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
11
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: January 14, 2002 /s/ Deborah D. Mosier
---------------- ---------------------
Deborah D. Mosier, President
Principal Executive and Financial Officer
12