25
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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-18250
TMS, Inc.
(Exact name of small business issuer as specified in its charter)
OKLAHOMA 91-1098155
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
206 West Sixth Street
Post Office Box 1358
Stillwater, Oklahoma 74076
(Address of principal executive offices)
Issuer's telephone number, including area code: (405) 377-0880
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [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 May 31, 2000
Common stock, par value $.05 per share 13,264,368
Transitional Small Business Disclosure Format (check one):
Yes [] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Condensed Balance Sheets (unaudited)
May 31, 2000 and August 31, 1999
May 31, August 31,
2000 1999*
---- -----
Cash $1,381,373 $1,057,710
Trade accounts receivable, net 498,605 574,067
Contract service work in process 112,392 415,985
Other current assets 110,042 298,018
----------- -----------
Total current assets 2,102,412 2,345,780
----------- -----------
Property and equipment 2,782,144 2,892,954
Accumulated depreciation and amortization (1,650,210) (1,590,081)
------------ -----------
Net property and equipment 1,131,934 1,302,873
----------- -----------
Capitalized software development costs, net 402,233 481,169
Other assets 457,709 286,990
----------- -----------
Total assets $4,094,288 $4,416,812
=========== ===========
Current obligation under capital leases $28,942 $66,250
Current installments of long-term debt 28,535 27,313
Accounts payable 49,684 103,341
Deferred revenue 426,652 115,642
Other current liabilities 240,253 236,070
----------- -----------
Total current liabilities 774,066 548,616
Obligation under capital leases, net of - 12,149
current installments
Long-term debt, net of current installments 259,816 282,674
----------- -----------
Total liabilities 1,033,882 843,439
----------- -----------
Common stock 674,383 691,031
Additional paid-in capital 11,433,678 11,501,760
Unamortized deferred compensation (17,747) (20,072)
Accumulated deficit (8,927,018) (8,488,161)
Treasury stock (102,890) (111,185)
----------- -----------
Total shareholders' equity 3,060,406 3,573,373
----------- -----------
Total liabilities and shareholders' equity $4,094,288 $4,416,812
============ ===========
*Condensed from audited financial statements.
See accompanying notes to condensed
financial statements.
<PAGE> 2
<TABLE>
<CAPTION>
TMS, Inc.
Condensed Statements of Operations
(unaudited)
Three and Nine Months Ended May 31,
2000 and 1999
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
----- ----- ----- -----
Revenue:
Licensing and royalties $613,510 $839,360 $1,980,912 $2,448,821
Software development services 24,395 397,352 350,286 1,005,069
Document conversion services 59,735 123,345 188,399 438,552
----------- ----------- ------------ -------------
697,640 1,360,057 2,519,597 3,892,442
----------- ----------- ------------ -------------
Operating costs and expenses:
Cost of licensing and royalties 142,125 139,796 482,276 565,476
Cost of software development services 63,598 275,429 444,236 754,208
Cost of document conversion services 34,003 59,081 98,185 233,014
Selling, general and administrative 582,147 838,312 1,646,896 2,608,896
Research and development 151,478 12,831 304,790 195,986
Restructuring charge - - - 70,895
----------- ----------- ------------ -------------
973,351 1,325,449 2,976,383 4,428,475
----------- ----------- ------------ -------------
Operating (loss) income (275,711) 34,608 (456,786) (536,033)
Other income, net 16,061 5,339 29,214 1,489
----------- ----------- ------------ -------------
(Loss) income before income taxes (259,650) 39,947 (427,572) (534,544)
Income tax expense (benefit) 3,805 (1,988) 11,285 (2,943)
----------- ----------- ------------ -------------
Net (loss) income $(263,455) $41,935 $(438,857) $(531,601)
=========== =========== ============ =============
Basic earnings(loss) per share $ (0.02) $ 0.00 $ (0.03) $ (0.04)
=========== =========== ============ =============
Weighted average common shares 13,244,659 13,602,513 13,399,600 13,553,265
=========== =========== ============ =============
Diluted earnings(loss) per share $ (0.02) $ 0.00 $ (0.03) $ (0.04)
=========== ============ ============ =============
Weighted average common shares and
potentially dilutive securities 13,244,659 13,743,356 13,399,600 13,553,265
=========== =========== ============ =============
See accompanying notes to condensed
.financial statements.
<S> <C> <C> <C> <C>
<PAGE> 3
TMS, Inc.
Condensed Statements of Cash Flows
(unaudited)
Nine Months Ended May 31, 2000 and 1999
2000 1999
----- -----
Net cash flows provided by
operating activities $761,164 $520,827
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (33,803) (53,751)
Capitalized software development costs (244,332) (245,524)
Proceeds from sale of equipment 1,015 34,546
----------- -----------
Net cash used in investing activities (277,120) (264,729)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (21,636) (17,557)
Repayments of capital lease obligation (49,457) (45,075)
Issuance of common stock 2,052 36,708
Purchase of treasury stock, at cost (91,340) -
----------- -----------
Net cash used in financing activities (160,381) (25,924)
----------- -----------
Net increase in cash 323,663 230,174
Cash at beginning of period 1,057,710 491,696
----------- -----------
Cash at end of period $1,381,373 $721,870
============ ===========
See accompanying notes to condensed
. financial statements.
<CAPTION>
<PAGE> 4
TMS, Inc.
Notes to Condensed Financial Statements (unaudited)
Unaudited Interim Condensed Financial Statements
------------------------------------------------
The unaudited interim condensed financial statements and related notes were
prepared by TMS, Inc. (the Company). Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to rules
and regulations established by the Securities and Exchange Commission (SEC).
The accompanying unaudited interim condensed financial statements should be read
in conjunction with the audited financial statements and related notes included
in the Company's Form 10-KSB Annual Report for the fiscal year ended August 31,
1999.
The unaudited interim financial statements reflect all adjustments that are, in
the opinion of management, necessary for a fair presentation of financial
position, results of operations and cash flows for the interim periods
presented. Except for a restructuring charge reported in the prior year first
quarter ended November 30, 1998 and described in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" below, all
adjustments are normal and recurring.
Interim results are subject to year-end adjustments and audit by independent
auditors. The financial data for the interim periods may not necessarily be
indicative of the results expected for the year.
Net Loss Per Share
------------------
Following is a reconciliation of the numerators and the denominators of the
basic and diluted per-share computations:
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended May 31, 2000 Three Months Ended May 31, 1999
----------------------------------- ------------------------------------
Loss Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------ ---------
Basic EPS:
Net (Loss) Income $(263,455) 13,244,659 $(0.02) $41,935 13,602,513 $0.00
Effect of Common
Stock options - - 140,843
----------- ------------- --------- ---------- ------------ ---------
Diluted EPS:
Net (Loss) Income $(263,455) 13,244,659 $(0.02) $41,935 13,743,356 $0.00
=========== ============= ========= =========== ============= =========
Nine Months Ended May 31, 2000 Nine Months Ended May 31, 1999
------------------------------------- ------------------------------------
-
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS:
Net Loss $(438,857) 13,399,600 $(0.03) $(531,601) 13,553,265 $(0.04)
Effect of Common
Stock options - - - - -
----------- ------------- --------- ----------- ------------- ---------
Diluted EPS:
Net Loss $(438,857) 13,399,600 $(0.03) $(531,601) 13,553,265 $(0.04)
=========== ============= ========= =========== ============= =========
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
<PAGE> 5
Options to purchase approximately 50,000 shares and 665,000 shares of common
stock at prices ranging from $.375-$.75 per share were outstanding at May 31,
2000 and 1999, 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 372,000
options to purchase common stock at prices ranging from $.125-$.500 were
excluded from the computation of diluted loss per share for the three and nine
months ended May 31, 2000, because of their anti-dilutive effect. All options
expire during periods through the year 2007.
Reportable Segments
---------------------------------
Interim period disclosures in accordance with Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131) are included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below. Previously
reported segments "Tools & Technologies" and "End-User Applications" are
combined into a single segment, "Core Component Technologies", due to a change
in the organizational structure and internal reporting system of the Company.
All corresponding segment information for earlier interim periods has been
restated.
Shareholders' Equity
--------------------
The Company repurchased and subsequently retired 350,000 shares of common stock
in the second quarter of fiscal year 2000 at a cost of $87,500 in an effort to
reduce the number of outstanding shares. Another 16,000 shares were also
repurchased at a cost of $3,840 and are held in treasury to support the new
employee stock purchase plan. These purchases are in addition to the 100,000
shares repurchased in the fourth quarter of fiscal 1999 as part of the stock
repurchase program of up to 1,000,000 shares authorized by the board of
directors. The Company issued in the current third quarter approximately 27,000
common shares that were held in treasury at a cost of approximately $9,300.
These shares were issued to employees participating in the employee stock
purchase plan.
Reclassifications
-----------------
Certain 1999 amounts have been reclassified to conform to the 2000 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 of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in the forward-looking statements because of
certain risks and uncertainties, such as those inherent generally in the
computer software industry and the impact of competition, pricing, and changing
market conditions. As a result, the reader is cautioned not to place undue
reliance on these forward-looking statements.
Following is selected financial information for each of the Company's reportable
segments for the three month and nine month periods ended May 31, 2000 and 1999.
All revenue and expenses are from non-affiliated sources:
Core Component Technologies ("CCT")
--------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
---- ---- ---- ----
Revenue from external customers $613,510 $839,360 $1,980,912 $2,448,821
------------ ----------- ----------- -----------
Operating (loss) income (6,396) 149,514 381,918 218,107
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
<CAPTION>
<PAGE> 6
Revenue from the CCT segment is primarily derived from the licensing of the
Company's ViewDirector, Prizm Plug-in, ScanFix, and FormFix products and related
royalties. Fiscal 2000 third quarter revenue for the CCT segment was $613,510
compared to $839,360 for the same period last year, a decrease of $225,850, or
27%. CCT revenue for the nine months ending May 31, 2000 was $1,980,912 compared
to $2,448,821 for the same nine month period last year, a decrease of $467,909
or 19%. Image viewing products accounted for 33% and 39% of the total decline
in CCT revenue for the three and nine month periods ended May 31, 2000,
respectively. The decline in image viewing product revenue for the current third
quarter results from both the continued decline of royalty-reporting revenue
from ViewDirector customers and a decline in sales of Prizm products. The
Company believes the decrease in Prizm product sales in the current third
quarter is due to the lack of large volume sales for which the Company relies
upon for profitability. Although there were fewer large volume transactions in
the current third quarter than the prior third quarter, the Prizm revenue for
the nine month period ending May 31, 2000, is slightly higher than the same
period last year. During the current third quarter, the Company secured a
$450,000 Prizm licensing contract (the largest Prizm sales contract in the
Company's history). No revenue was recognized in the current third quarter on
this contract due to the customization work not being finalized until June,
2000. The customization work is required prior to acceptance of the product by
the customer. Total funding under the Prizm agreement is close to $900,000, the
effects of which will begin to be recognized in the Company's financial
operating results during the fourth quarter of the current fiscal year. The
overall decline in image viewing product revenue for the current nine month
period compared to the same period last year is due primarily to a 33% decrease
in ViewDirector revenue. The Company believes that this continued decline in
ViewDirector revenue is a result of the Company's product development and
marketing focus over the past three years on products that are not resulting in
adequate financial return to the Company (see a discussion of Scan `n' Store
("SNS"), SpectrumFix Version 1.0 ("SPFX") and Prizm Image Server ("Prizm IS")
below). This has impacted the Company's ability to potentially benefit from
updated product releases of not only the ViewDirector product, but also the
Company's image enhancement products. Image enhancement products accounted for
14% of the total decline in CCT revenue for the nine month period ended May 31,
2000. Management continues to reallocate resources from the professional
services segment as projects are nearing completion in order to further develop
the image viewing and image enhancement products in an effort to make them more
competitive in the current marketplace. The Company is also focusing resources
on products to support the emerging color market in document imaging. Forms
processing products accounted for approximately 63% and 29% of the total decline
in CCT revenue for the three and nine month periods ended May 31, 2000,
respectively. The decrease in forms processing revenue for the current third
quarter compared to the same period last year is due to a large FormFix sale in
the prior year third quarter that totaled 16% of the CCT revenue for that
quarter. No forms processing product sales of that magnitude were made in the
current third quarter. Although the Company views the forms processing products
as viable in the marketplace, technical resources are not currently allocated to
further develop these products. Therefore, forms processing revenue could
continue to decline in future periods.
No single customer accounted for greater than 10% of the CCT segment's revenue
during the current third quarter. Approximately 16% of the prior year third
quarter CCT revenue came from one customer. No single customer accounted for
greater than 10% of the CCT nine month revenue for the periods ending May 31,
2000 and 1999. Approximately 41% and 51% of the CCT revenue for the three and
nine month periods ended May 31, 2000, respectively, was derived from sales of
multiple licenses to individual customers compared to 51% and 41% for the same
time periods last year. Currently, the CCT segment profitability is dependent
on the ability to secure significant sales of multiple licenses to individual
customers.
<PAGE> 7
Operating (loss)income margins for CCT were -1% and 18% for the three months
ending May 31, 2000 and 1999, respectively, and 19% and 9% for the nine months
ending May 31, 2000 and 1999, respectively. The decrease in the operating
margin in the current third quarter compared to the prior year third quarter is
primarily a result of the decline in revenue. Partially offsetting the effect
of the revenue decline is a decrease in normal and recurring operating expenses
(excluding charge-offs of software development costs and other charges discussed
below) of approximately $48,000 or 8% in the current third quarter compared to
the prior third quarter. Approximately $33,000 or 69% of that decrease is due
to lower personnel costs due primarily to fewer selling and marketing employees
during the three months ended May 31, 2000, compared to the same period last
year. However, due to the Company's focus on developing its core component
technologies, research and development personnel costs increased approximately
$35,000 or 27% in the current third quarter over the same quarter last year.
Operating income margins for the nine months ended May 31, 2000 were higher than
the same period last year primarily because of a decline in total selling,
marketing, and general and administrative expenses. Normal and recurring
operating expenses decreased approximately $310,000 or 15% in the current nine
month period ending May 31, 2000, compared to the same period last year.
Approximately $158,000 or 51% of that decrease is due to lower personnel costs
due to fewer employees during the nine months ended May 31, 2000, compared to
the same period last year. Several non-recurring operating transactions that
affected the operating margins were recorded during the three and nine month
periods ending May 31, 2000 and 1999. Contributing to the current third quarter
operating loss was the write-down of approximately $49,000 of the remaining
unamortized capitalized software development costs for Prizm IS. The Company
decided to charge-off the Prizm IS costs because its performance was no longer
acceptable in the marketplace due to advances in the browser and web server
architecture within which Prizm IS was designed to function. During the fiscal
1999 third quarter, the Company charged $70,000 to general and administrative
expense for a potential uncollectible customer account. The current second
quarter recovery of a previously recorded bad debt of approximately $258,000
contributed to a decrease in general and administrative expense for the current
nine-month period ended May 31, 2000. This account was fully reserved at August
31, 1999. In addition, a charge of approximately $111,000 was recorded in the
first quarter of last year to write-down the remaining unamortized software
development costs for SNS, and a charge-off of approximately $73,000 was
recorded in the current second quarter to write-off the remaining unamortized
software development costs for SPFX. The Company decided to eliminate SNS as a
separate product for sale because the financial returns were not expected to be
enough to warrant the Company allocating additional promotional, development,
and technical support resources that would be necessary to enhance its market
viability. The Company decided to charge-off the SPFX costs because version 1.0
of the product was not adequate for the emerging color market for document
imaging. The Company continues to devote software development resources to new
technology that is expected to support the color market in document imaging.
Prior year results for the nine months ended May 31, 1999 also included a
$25,000 credit in the first quarter to re-allocate bad debt expense to the
document conversion segment for a specific write-off of a customer account.
Education("ED")
-----------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
---- ---- ---- ----
Revenue from external customers $ - $ - $ - $ -
----------- ----------- ----------- -----------
Operating loss (156,102) - (253,795) -
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
<CAPTION>
<PAGE> 8
The ED operating segment was created to develop technologies that will improve
the overall process of scoring large-scale assessments for grades K-12 in the
educational marketplace. Total research and development and business development
costs for ED totaled $156,102 and $253,795 for the three and nine month periods
ended May 31, 2000, respectively. Substantially all of these costs were
incurred for creation of a software optical mark recognition product prototype
to be used as an integral part of a scoring system for the objective questions
in the assessments. The Company has a patent pending on this prototype and
approximately $14,000 and $20,000 of legal expenses related to the patent were
incurred for the three and nine month periods ending May 31, 2000, respectively.
The Company is currently in discussions with large test publishers regarding the
integration of this technology in their scoring systems. The Company is also
researching the applicability of a Virtual Scoring Center ("VSC") that will
allow qualified raters to score open-ended assessment items (e.g. essay tests,
show your math work, etc.) by accessing the completed assessment items via the
Internet. The development work related to the VSC is in its initial stages and
the Company is continuing to pursue opportunities where this technology may
apply. However, there is no guarantee that the products will provide the Company
benefit in future periods.
Professional Services ("PS")
-----------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
---- ---- ---- ----
Revenue from external customers $24,395 $397,352 $350,286 $1,005,069
----------- ----------- ----------- -----------
Operating loss (50,842) (36,730) (302,635) (235,966)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
<CAPTION>
Fiscal 2000 third quarter revenue for PS was $24,395 compared to $397,352 for
the same period last year, a decrease of $372,957 or 94%. PS revenue for the
nine months ending May 31, 2000 was $350,286 compared to $1,005,069 for the same
nine month period last year, a decrease of $654,783, or 65%. The revenue
decline was anticipated due to the Company's decision to transition out of the
existing professional service business model. For the three and nine month
periods ending May 31, 1999, the same three customer contracts accounted for
approximately 89% and 86% of total PS revenue, respectively. Revenue for the
current third quarter came from two customer contracts and 71% of the nine month
revenue for the period ending May 31, 2000 came from three customer contracts.
Operating losses for PS were 208% and 9% of revenue for the three months ending
May 31, 2000 and 1999, respectively, and 86% and 23% for the nine months ending
May 31, 2000 and 1999, respectively. Operating margins continue to be negatively
impacted by cost overruns on two fixed fee projects. These projects are
expected to be substantially completed during the fourth quarter of fiscal 2000.
The projects are in a loss situation, therefore the estimated costs to complete
the contracts have been recorded at May 31, 2000. Approximately $4,000 was
expensed in the current third quarter to accrue for projected losses on these
contracts. As these projects have neared completion, the Company has been
allocating PS resources to other segments for product development. PS will also
provide maintenance for one of the aforementioned projects for a period of one
year after its completion.
<PAGE> 9
Document Conversion ("DC")
---------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
---- ---- ---- ----
Revenue from external customers $59,735 $123,345 $188,399 $438,552
------------ ----------- ----------- -----------
Operating income (loss) 292 9,816 (7,198) (159,280)
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fiscal 2000 third quarter revenue for DC was $59,735 compared to $123,345 for
the same period last year, a decrease of $63,610 or 52%. DC revenue for the nine
months ending May 31, 2000 was $188,399 compared to $438,552 for the same nine
month period last year, a decrease of $250,153, or 57%. Approximately 90% of
the DC revenue for the current third quarter came from four customers and
approximately 78% of prior year third quarter revenue came from three customers.
Approximately 87% of the revenue came from four customers for the nine months
ended May 31, 2000, and 72% of the nine month revenue for the period ending May
31, 1999 came from four customers. The significant reduction in document
conversion revenue was expected and results from the Company's decision to
restructure DC operations during the prior year first quarter. Operating income
(loss) margins were 0% and 8% for the quarters ended May 31, 2000 and 1999,
respectively, and -4% and -36% for the nine months ending May 31, 2000 and 1999,
respectively. The reduction in the current nine month loss margin from the
prior year primarily resulted from the prior year transitional costs associated
with restructuring, a $25,000 inter-segment bad debt charge from CCT in the
prior year for an uncollectible account, and an increase in the proportion of
services performed under higher margin electronic publishing contracts.
Total Company Operating Results
-------------------------------
Following is a report of total company revenue and a reconciliation of
reportable segments' operating (loss) income to the Company's total net (loss)
income for the three and nine month periods ending May 31, 2000 and 1999.
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
---- ---- ---- ----
Total company revenue $697,640 $1,360,057 $2,519,597 $3,892,442
----------- ----------- ----------- ------------
Operating (loss) income for
reportable segments (213,048) 122,600 (181,710) (177,139)
Unallocated corporate expenses (62,663) (87,992) (275,076) (358,894)
Interest income 15,871 9,027 39,167 18,409
Interest expense (5,401) (7,889) (16,240) (24,697)
Other, net 5,591 4,201 6,287 7,777
Income tax (expense) benefit (3,805) 1,988 (11,285) 2,943
------------ ------------ ------------ ------------
Net (loss) income $(263,455) $41,935 $(438,857) $(531,601)
=========== =========== =========== ============
(Loss) income per share:
Basic (.02) .00 (.03) (.04)
Diluted (.02) .00 (.03) (.04)
=========== =========== =========== ============
<S> <C> <C> <C> <C>
<CAPTION>
<PAGE> 10
Total revenue for the third quarter of fiscal 2000 was $697,640 compared to
$1,360,057 for the same quarter of fiscal 1999, a decrease of $662,417, or 49%.
Licensing and royalty revenue of $614,000 decreased 27% from the same quarter
last year. Revenue from both image viewing and image enhancement products
decreased 13% and revenue from forms processing products decreased 46%,
representing the decrease in licensing and royalty revenue. In addition, PS
revenue decreased 94% due to the Company's plan to only complete the current
projects in process and then reallocate resources from PS to other segments for
product development. Document conversion revenue decreased as expected based on
the restructuring of the document conversion service operations in the first
quarter last year. Total Company net loss for the third quarter of fiscal 2000
was $263,455 or $0.02 loss per share (basic and diluted), compared to net income
of $41,935, or $0.00 income per share (basic and diluted), for the third quarter
of fiscal 1999. The decrease in revenue combined with the write-off of Prizm IS
and the Company's investment in research and development for the ED technologies
primarily contributed to this decline in profitability. A deferred income tax
benefit of approximately $99,000 for the current third quarter was offset by a
corresponding increase to the valuation allowance for deferred tax assets.
Deferred income tax expense of approximately $15,000 for the third quarter of
fiscal 1999 was offset by a corresponding decrease of 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 2000 was $2,519,597 compared
to $3,892,442 for the same period in fiscal 1999, a decrease of $1,372,845 or
35%. Approximately 66% of this decrease in revenue is related to the decline in
DC and PS revenue. These declines were expected based on the restructuring of
the document conversion service operations in the first quarter last year and
the Company's current fiscal year decision to transition out of the existing
professional service business model. Net loss for the first nine months of
fiscal 2000 was $438,857 or $0.03 loss per share (basic and diluted), compared
to net loss of $531,601, or $0.04 loss per share (basic and diluted), for the
same period in fiscal 1999. This reduction in the nine month net loss is
primarily due to the significant costs incurred last year to restructure
document conversion service operations, the write-off of Scan `n' Store and the
charge-off a potentially uncollectible customer account. In addition, the
current second quarter recovery of a bad debt reduced general and administrative
expense, thereby reducing the current fiscal year net loss. The performance of
the PS segment contributed to the Company's inability to post a profit for the
current fiscal year because of the continuation of significant cost overruns on
certain custom software development contracts. In addition, the $73,000 write-
off of SPFX and $49,000 write-off of Prizm IS contributed to the net loss
recorded for the nine month period ended May 31, 2000. Deferred income tax
benefits of approximately $162,000 and $203,000 for the nine month periods ended
May 31, 2000 and 1999, respectively, were offset by corresponding increases to
the valuation allowance for deferred tax assets. Income tax expense (benefit)
reported for each of the two periods resulted from differences in prior year
estimates used for financial reporting compared to actual state tax payments and
state tax payments for the current 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. The Company has recognized a
net deferred tax asset of $484,500 as of May 31, 2000. The ultimate realization
of this deferred tax asset is dependent upon the Company's 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, the Company will be required to 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 the Company
cannot generate sufficient taxable income to recover the net deferred tax asset.
<PAGE> 11
FINANCIAL CONDITION
Working capital at May 31, 2000 was $1,328,346 with a current ratio of 2.7:1
compared to $1,797,164 with a current ratio of 4.3:1, at August 31, 1999. The
current ratio decline is primarily due to the approximately $232,000 of deferred
revenue at May 31, 2000, for the large Prizm contract mentioned above in the CCT
segment discussion. Although the $232,000 was billed and collected in the
current third quarter, no revenue was recorded for the contract since the
customization work had not been completed. This contributed to the relatively
large deferred revenue balance at May 31, 2000. The Company expects to begin
recognizing that revenue in the current fourth quarter. Net cash provided by
operations for the nine months ended May 31, 2000 was $761,164 compared to
$520,827 for the same period last year. The increase in operating cash flows for
the current nine month period over the same period last year is mainly due to
the current third quarter cash collection of approximately $232,000 on the large
Prizm contract for which the revenue is deferred until the fourth quarter. Net
cash used in investing activities for the nine months ending May 31, 2000 was
$277,120 compared to $264,729 for the same period in fiscal 1999. The increase
in investing cash flows primarily relates to significantly lower proceeds from
the sale of equipment offset by fewer equipment purchases during the current
nine month period compared to the same period in the prior year. Net cash used
in financing activities for the nine months ending May 31, 2000 was $160,381
compared to $25,924 for the same period in fiscal 1999. This increase is due to
the repurchase and subsequent retirement of 350,000 shares of common stock in
the second quarter of fiscal year 2000. An additional 16,000 shares were also
repurchased and are held in treasury to support the new employee stock purchase
plan.
During the nine months ended May 31, 2000 and 1999 the Company did not borrow
against its line of credit. The Company is currently in the process of
renegotiating its line of credit and anticipates that operating cash flows along
with the line of credit will be adequate to meet its 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 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit No. Name of Exhibit
10.1 Corporate Software License Agreement between
the Registrant and the Boeing Company
10.2 Development Agreement between the Registrant
and the Boeing Company
10.3 Purchase Contract Number W 311305 between the
Registrant and the Boeing Company
27 Financial Data Schedule as of and for the nine-
month period
ending May 31, 2000.
Reports on Form 8-K
None
<PAGE> 12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TMS, Inc.
Date: ____________________ /s/ Deborah D. Mosier
---------------------
Deborah D. Mosier, President
Date: ____________________ /s/ Kent E. Warkentin
---------------------
Kent E. Warkentin, Controller
<PAGE> 13
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