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, 2002
[ ] 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, 2002
Common stock, par value $.05 per share 13,109,659
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, 2002 and August 31, 2001
February 28,
2002 August 31,
(unaudited) 2001*
----------- ----------
Cash $ 191,850 $ 669,287
Trade accounts receivable, net 943,472 1,007,839
Contract service work in process 9,000 6,300
Other current assets 194,063 149,833
----------- -----------
Total current assets 1,338,385 1,833,259
----------- -----------
Property and equipment 2,566,679 2,571,501
Accumulated depreciation and amortization (1,659,530) (1,608,480)
------------ -----------
Net property and equipment 907,149 963,021
----------- -----------
Capitalized software development costs, net 751,642 709,384
Other assets 469,891 476,006
----------- -----------
Total assets $ 3,467,067 $3,981,670
=========== ===========
Current installments of long-term debt 28,033 27,016
Accounts payable 248,640 231,311
Deferred revenue 251,689 280,995
Other current liabilities 198,010 264,382
----------- -----------
Total current liabilities 726,372 803,704
Long-term debt, net of current installments 213,030 227,376
----------- -----------
Total liabilities 939,402 1,031,080
----------- -----------
Common stock 655,433 655,133
Additional paid-in capital 11,348,590 11,347,872
Accumulated deficit (9,476,358) (9,040,887)
Treasury stock - (11,528)
----------- -----------
Total shareholders' equity 2,527,665 2,950,590
----------- -----------
Total liabilities and shareholders' equity $ 3,467,067 $ 3,981,670
============ ===========
*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,
2002 and 2001
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
----- ----- ----- -----
Revenue:
Licensing and royalties $ 666,599 $ 701,549 $ 1,125,899 $ 1,529,018
Customer support and maintenance 138,137 81,242 240,069 163,152
Other services 3,823 86,156 3,823 159,243
------------ ------------ ------------ ------------
808,559 868,947 1,369,791 1,851,413
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of revenue 142,124 119,221 297,113 247,443
Selling, general and administrative 535,981 573,001 1,039,875 1,183,723
Research and development 135,716 240,207 452,061 428,454
------------ ------------ ------------ ------------
813,821 932,429 1,789,049 1,859,620
------------ ------------ ------------ ------------
Operating loss (5,262) (63,482) (419,258) (8,207)
Other (expense) income, net (4,488) 11,060 (9,598) 29,419
------------ ------------ ------------ ------------
(Loss) income before income taxes (9,750) (52,422) (428,856) 21,212
------------ ------------ ------------ ------------
Income tax benefit - (21,725) - -
------------ ------------ ------------ ------------
Net (loss) income $ (9,750) $ (30,697) $ (428,856) $ 21,212
============ ============ ============ ============
Basic earnings per share $ (0.00) $ (0.00) $ (0.03) $ 0.00
============ ============ ============ ============
Weighted average common shares 13,106,626 12,955,894 13,097,644 13,134,188
============ ============ ============ ============
Diluted earnings per share $ (0.00) $ (0.00) $ (0.03) $ 0.00
============ ============ ============ ============
Weighted average common and common
equivalent shares 13,106,626 12,955,894 13,097,644 13,153,399
============ ============ ============ ============
See accompanying notes to condensed
financial statements.
3
TMS, Inc.
Condensed Statements of Cash Flows (unaudited)
Six Months Ended February 28, 2002 and 2001
February 28, February 28,
2002 2001
----- -----
Net cash flows used in
operating activities $ (212,595) $ (97,510)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (21,292) (28,474)
Capitalized software development costs (235,134) (277,271)
Proceeds from sale of equipment - 3,170
Patent costs - (10,570)
----------- -----------
Net cash used in investing activities (256,426) (313,145)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (13,329) (14,328)
Repayments of capital lease obligation - (14,413)
Sale of treasury stock, at cost 4,913 17,206
Purchase of treasury stock, at cost - (100,000)
----------- -----------
Net cash used in financing activities (8,416) (111,535)
----------- -----------
Net decrease in cash (477,437) (522,190)
Cash at beginning of period 669,287 1,359,692
----------- -----------
Cash at end of period $ 191,850 $ 837,502
============ ===========
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
Net (Loss) Income 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, 2002 Three Months Ended February 28, 2001
----------------------------------- ------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- --------- ----------- ------------ ---------
Basic EPS:
Net Loss $(9,750) 13,106,626 $(0.00) $(30,697) 12,955,894 $(0.00)
Effect of Common
Stock options - -
------------- ------------- --------- ----------- ------------ ---------
Diluted EPS:
Net Loss $(9,750) 13,106,626 $(0.00) $(30,697) 12,955,894 $(0.00)
============= ============= ========= =========== ============= =========
Six Months Ended February 28, 2002 Six Months Ended February 28, 2001
----------------------------------- ------------------------------------
Loss Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- --------- ----------- ------------ ---------
Basic EPS:
Net (Loss) income $(428,856) 13,097,644 $(0.03) $21,212 13,134,188 $ 0.00
Effect of Common
Stock options - 19,211
------------- ------------- --------- ----------- ------------ ---------
Diluted EPS:
Net (Loss) income $(428,856) 13,097,644 $(0.03) $21,212 13,153,399 $ 0.00
============= ============= ========= =========== ============= =========
Options to purchase approximately 628,000 shares and 678,000 shares of common
stock at prices ranging from $.27 to $.40 per share were outstanding at February
28, 2002 and 2001, 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
59,000 options to purchase common stock at prices ranging from $.125 to $.1875
per share were excluded from the computation of diluted loss per share for the
three and six months ended February 28, 2002, because of their anti-dilutive
effect. Approximately 687,000 and 741,000 options to purchase shares of common
stock were outstanding at February 28, 2002 and 2001, respectively. All options
expire during periods through the year 2008.
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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 and six-months ended February 28, 2002 and 2001. All revenue and
expenses are from non-affiliated sources.
Component Product Technologies
- ------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
---- ---- ---- ----
Revenue from external customers $786,055 $779,929 $1,339,262 $1,680,721
------------ ------------ ------------ -----------
Operating income $230,312 $196,474 $ 198,446 $ 534,063
------------ ------------ ------------ -----------
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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 image processing, ViewDirector(TM)
and FormFix(R) products. Revenue for this segment for the three months ended
February 28, 2002 was $786,055 compared to $779,929 for the same period last
year, an increase of $6,126, or 1%. For the six months ended February 28, 2002
revenue for this segment was $1,339,262 compared to $1,680,721 for the same
period last year, a decrease of $341,459, or 20%.
With the exception of the Prizm color product, which was not released for sale
until the second quarter of fiscal year 2001, the six-month decline in component
product revenue occurred across all product lines. This decline was in large
part attributable to the delay, during the first quarter of the current fiscal
year, by several of our customers in closing the purchase of certain licenses or
reducing 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. Although our sales and monthly revenue totals have
improved since the events of September 11, 2001, we continue to experience
longer sales cycles and many customers continue to purchase licenses in smaller
quantities, which we believe partially contributed to flat revenue for the
second quarter ended February 28, 2002, compared to the same period last year.
We also believe that revenue for this segment has been impacted by the early
market status of our new Prizm color image processing toolkit. Although we have
sold multiple copies of our Prizm color toolkit since its release last year,
timing more widespread adoption rates in the emerging market for color-based
document management solutions is difficult.
Operating income for the segment was 29% for the three months ended February 28,
2002 compared to operating income of 25% for the same period last year. 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. The improved operating margins for the
second quarter are primarily because of reduced expenses that resulted from the
workforce reduction.
For the six-month periods ended February 28, 2002 and 2001, operating income for
the segment was 15% and 32% respectively. The decline in operating margins over
the prior year six-month period is almost entirely attributable to the first
quarter revenue decline described above.
The profitability of this segment depends on our ability to secure significant
sales of multiple licenses to individual customers. During the second quarter
of fiscal year 2002, one customer accounted for approximately 12% of the total
revenue for the segment and in the second quarter of fiscal year 2001 one
customer accounted for approximately 11% of total segment revenue. No one
customer accounted for more than 10% of segment revenue for the six-month
periods ended February 28, 2002 and 2001.
7
Assessment Scoring Technologies
- --------------------------------
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
---- ---- ---- ----
Revenue from external customers 9,823 - $ 9,823 6,200
------------ ------------ ------------ -----------
Operating loss $(203,503) $(215,542) $(484,201) $(396,514)
------------ ------------ ------------ -----------
This segment includes costs associated with the continued development and
marketing of our Virtual Scoring Center(TM) web-based assessment scoring system
and our Digital Mark Recognition(TM) technology 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.
During the second quarter ended February 28, 2002, we signed a letter of intent
with Measurement Incorporated, a large provider of assessment scoring services,
to create a Limited Liability Company, which would own the Virtual Scoring
Center web-based assessment scoring system. Ownership of the Digital Mark
Recognition technology would remain with TMS. Under the agreement, TMS and
Measurement Incorporated would be equal partners in the Limited Liability
Company and software development and other costs would be shared equally. Each
partner would also be required to remit license fees to the Limited Liability
Company for the sale or use of the Virtual Scoring Center system, and cash flows
would be distributed to each partner in proportion to their respective
contributions. As part of the letter of intent, Measurement Incorporated was
required to begin paying for a portion of the Virtual Scoring Center development
costs on a non-refundable basis. During the second quarter ended February 28,
2002, we accrued or received approximately $35,000 from Measurement Incorporated
for a portion of our development costs. We expect to finalize the definitive
agreement during the third quarter of the current year.
The increase in the six-month segment operating loss over the same six-month
period in fiscal 2001 is primarily attributable to one-time costs related to
severance payments made as part of the total company workforce reduction that
occurred during the first quarter of the current fiscal year, professional fees
associated with the prospective Limited Liability Company, and software
amortization expense that began as a result of the first release of the Virtual
Scoring Center web-based assessment scoring system in the latter part of fiscal
2001.
Other Services
- ---------------------
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
---- ---- ---- ----
Revenue from external customers $12,681 $89,018 $20,706 $164,492
----------- ----------- ----------- -----------
Operating income $10,718 $43,944 $17,410 $54,868
----------- ----------- ----------- -----------
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 69% and 74% of the
prior year second quarter and six-month revenue, respectively, 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 second quarter or first six months of fiscal year 2002. The
remaining revenue and operating income in the second quarters and six-month
periods of both fiscal year 2002 and fiscal year 2001 relates to one
professional service customer support and maintenance contract. It is possible
that the customer support and maintenance contract may renew for another year
upon its expiration 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 income (loss) to our total net (loss) income for
the three and six months periods ending February 28, 2002 and 2001.
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
---- ---- ---- ----
Total company revenue $ 808,559 $ 868,947 $ 1,369,791 $ 1,851,413
----------- ----------- ----------- ------------
Operating income (loss) for
reportable segments 37,527 24,876 (268,345) 192,417
Unallocated corporate expenses (42,789) (88,358) (150,913) (200,624)
Interest income 3,317 14,524 7,026 33,391
Interest expense (4,530) (3,788) (9,232) (8,196)
Other, net (3,275) 324 (7,392) 4,224
Income tax expense - 21,725 - -
------------ ------------ ------------ ------------
Net loss $ (9,750) $ (30,697) $ (428,856) $ 21,212
=========== =========== =========== ============
Loss per share:
Basic $ (0.00) $ (0.00) $ (0.03) $ 0.00
Diluted (0.00) (0.00) (0.03) 0.00
=========== =========== =========== ============
9
Total revenue for the three months ended February 28, 2002 was $808,559 compared
to $868,947 for the same quarter of fiscal year 2001, a decrease of $60,388 or
7%. The decline in second quarter revenue over the same quarter last year is
attributable to the transition out of document conversion service activities.
Total revenue for the six months ended February 28, 2002 was $1,369,791 compared
to $1,851,413 for the same quarter of fiscal year 2001, a decrease of $481,622
or 26%. The decline in total company revenue for the six month comparative
periods is almost entirely attributable to several of our component product
customers delaying the close of licensing contracts or reducing the number of
licenses purchased during the first quarter of the current year, which we
believe were the indirect result of the events of September 11, 2001 and the
general uncertainty of the national economy.
Our net loss for the three months ended February 28, 2002 was $9,750 or $0.00
per share (basic and diluted), compared to a net loss of $30,697 or $0.00 per
share (basic and diluted) for the same quarter of fiscal 2001. Our net loss for
the six months ended February 28, 2002 was $428,856 or $0.03 loss per share
(basic and diluted), compared to net income of $21,212 or $0.00 per share (basic
and diluted) for the same period in fiscal 2001. The approximate $341,000
decline in component product revenue had the most significant impact on the
decline in our current six-month results when compared to the same period last
year.
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, 2002. 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 February 28, 2002 was $612,013 with a current ratio of 1.8:1,
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 $477,000 decrease in cash from August 31, 2001 to February 28,
2002, as explained below.
Net cash used in operations for the six months ended February 28, 2002 was
approximately $213,000. We paid $97,421 in employee severance and unpaid
vacation during the current year first quarter as well as $93,000 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 first quarter. Net cash used in investing activities for the
six months ended February 28, 2002 approximates $256,000 the majority of which
represents our investment in new and enhanced software products. Net cash flows
used in financing activities were approximately $8,000 for the first six months
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. There was no balance outstanding against the line of
credit at February 28, 2002. 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
As noted in our Form 10-QSB for the quarterly period ending November 30, 2001,
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. A hearing date has been set for April 29,
2002. We anticipate that this matter will be resolved sometime during 2002.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its annual meeting of shareholders on February 22, 2002.
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 10,769,748 185,691
Doyle E. Cherry 10,306,616 648,823
James R. Rau, M.D. 10,331,616 623,823
Russell W. Teubner 10,756,292 199,147
Marshall C. Wicker 10,272,474 682,965
2) The shareholders ratified the appointment of KPMG LLP as
independent public accountants for fiscal year 2002. Affirmative
votes were 10,533,632; negative votes were 418,924; and
abstentions were 2,883.
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
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant: TMS Inc.
Date: April 11, 2002 /s/ Deborah D. Mosier
---------------- ---------------------
Deborah D. Mosier, President
Principal Executive and Financial Officer
12