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, 2000
[ ] 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 Number)
incorporation or organization)
206 West Sixth Street
Post Office Box 1358
Stillwater, Oklahoma 74076
(Address of principal executive offices)
(Issuer's telephone number) (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 December 31, 2000
Common stock, par value $.05 per share 12,933,864
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)
November 30, 2000 and August 31, 2000
November 30, August 31,
2000 2000*
---- -----
Cash $ 849,234 $ 1,359,692
Trade accounts receivable, net 909,885 461,549
Contract service work in process 32,014 146,848
Other current assets 154,120 118,292
----------- -----------
Total current assets 1,945,253 2,086,381
----------- -----------
Property and equipment 2,730,838 2,722,797
Accumulated depreciation and amortization (1,706,238) (1,649,589)
----------- -----------
Net property and equipment 1,024,600 1,073,208
----------- -----------
Capitalized software development costs, net 507,876 388,258
Other assets 552,972 541,407
----------- -----------
Total assets $4,030,701 $ 4,089,254
=========== ===========
Current obligation under capital leases $ - $ 11,705
Current installments of long-term debt 29,352 28,943
Accounts payable 128,795 80,879
Deferred revenue 267,874 287,512
Other current liabilities 270,473 301,107
----------- -----------
Total current liabilities 696,494 710,146
Long-term debt, net of current installments 244,953 252,456
Other liabilities 10,375 10,375
----------- -----------
Total liabilities 951,822 972,977
----------- -----------
Common stock 654,683 674,533
Additional paid-in capital 11,344,150 11,422,299
Unamortized deferred compensation (1,034) (1,809)
Accumulated deficit (8,837,904) (8,884,719)
Treasury stock (81,016) (94,027)
----------- -----------
Total shareholders' equity 3,078,879 3,116,277
----------- -----------
Total liabilities and shareholders' equity $ 4,030,701 $ 4,089,254
============ ===========
*Condensed from audited financial statements.
See accompanying notes to condensed
financial statements.
<PAGE> 2
<TABLE>
<CAPTION>
TMS, Inc.
Condensed Statements of Operations (unaudited)
Three Months Ended November 30, 2000 and 1999
Three Months Ended
November 30
---------------------------
2000 1999
----- -----
Revenue:
Licensing and royalties $ 900,792 854,333
Assessment consulting services 6,200 -
Software development services 15,298 253,842
Document conversion services 60,176 62,850
------------ ------------
982,466 1,171,025
------------ ------------
Operating costs and expenses:
Cost of licensing and royalties 79,029 120,326
Cost of software development services 10,815 246,614
Cost of document conversion services 38,377 32,594
Selling, general and administrative 610,723 697,520
Research and development 188,247 97,363
------------ ------------
927,191 1,194,417
------------ ------------
Operating income (loss) 55,275 (23,392)
Other income, net 18,358 12,884
------------ ------------
Income (loss) before income taxes 73,633 (10,508)
Income tax expense 21,725 3,249
------------ ------------
Net income (loss) $ 51,908 $ (13,757)
============ ============
Basic earnings per share $ 0.00 $ 0.00
============ ============
Weighted average common shares 13,312,481 13,584,406
============ ============
Diluted earnings per share $ 0.00 $ 0.00
============ ============
Weighted average common shares and potentially
dilutive securities 13,331,693 13,584,406
============ ============
See accompanying notes to condensed
financial statements.
<S> <C> <C>
<CAPTION>
<PAGE> 3
TMS, Inc.
Condensed Statements of Cash Flows (unaudited)
Three Months Ended November 30, 2000 and 1999
Three Months Ended
November 30
-------------------------
2000 1999
----- -----
Net cash flows (used in) provided by
operating activities $ (229,616) $ 33,854
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (8,041) (21,262)
Capitalized software development costs (148,642) (58,165)
Patent costs (10,570) -
----------- -----------
Net cash used in investing activities (167,253) (79,427)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (7,094) (7,984)
Repayments of capital lease obligation (14,413) (16,116)
Sale of common stock - 2,000
Sale of treasury stock, at cost 7,918 -
Purchase of treasury stock, at cost (100,000) -
----------- -----------
Net cash used in financing activities (113,589) (22,100)
----------- -----------
Net decrease in cash (510,458) (67,673)
Cash at beginning of period 1,359,692 1,057,710
----------- -----------
Cash at end of period $ 849,234 $ 990,037
=========== ===========
See accompanying notes to condensed
financial statements.
</TABLE>
<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. 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. 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.
Net Loss Per Share
------------------
Following is a reconciliation of the numerators and the denominators of the
basic and diluted per-share computations:
<TABLE>
<CAPTION>
November 30, 2000 November 30, 1999
----------------------------------- ------------------------------------
Income Shares Per-Share Loss Share Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $51,908 13,312,481 $0.00 $(13,757) 13,584,406 $0.00
Effect of Common
Stock options 19,212 -
------------- ------------- --------- ---------- ------------ ---------
Diluted EPS:
Net Income (Loss) $51,908 13,331,693 $0.00 $(13,757) 13,584,406 $0.00
============= ============= ========= =========== ============= =========
</TABLE>
<PAGE> 5
Options to purchase approximately 678,000 shares and 511,000 shares of common
stock at prices ranging from $.27-$.75 per share were outstanding at November
30, 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
18,000 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, 1999, because of their anti-dilutive effect. All options
expire during periods through the year 2008.
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 in an effort 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 three months
ending November 30, 2000, we issued approximately 37,000 common shares that were
held in treasury at an aggregate sales price of approximately $13,000. These
shares were issued to employees participating in our 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 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, 2000 and 1999. All revenue and expenses
are from non-affiliated sources:
Component Product Technologies
------------------------------------------------------
Three Months Ended
November 30
------------------------
2000 1999
---- ----
Revenue from external customers $900,792 $854,333
----------- -----------
Operating income 337,590 227,978
----------- -----------
<PAGE> 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 November 30, 2000 was $900,792 compared to $854,333 for the same
period of 1999, an increase of $46,459, or 5%.
Image processing product revenue for the three months ended November 30, 2000
was $323,000, an increase of 24% over the same period of 1999. This increase
resulted from a multiple licensing ScanFix sale to one customer that represented
11% of total Component Product Technologies revenue for the three months ended
November 30, 2000.
Maintenance revenue for the our Component Product Technologies products for the
three months ended November 30, 2000 was $73,000, an increase of 130% over the
first quarter of 1999 due to our effort to proactively enroll new customers in
maintenance agreements and renew maintenance agreements with existing customers.
Offsetting the image processing and maintenance revenue increases is a decrease
of $59,000, or 10%, in image display product revenue for the three months ended
November 30, 2000 as compared to the same period of 1999. This decrease is
primarily due to one large multiple licensing sale in the prior first quarter
that accounted for 16% of total revenue for this segment. No image display
product sales of that magnitude were made during the three months ended November
30, 2000. Approximately 53% and 48% of our Component Product Technologies
revenue for the three months ended November 30, 2000 and 1999, respectively, was
derived from sales of multiple licenses to individual customers. Currently, the
profitability of this segment depends on the ability to secure significant sales
of multiple licenses to individual customers. We do not currently expect as
many large sales to customers in the second quarter of fiscal 2001 compared to
the first quarter of 2001 and, consequently, profitability and revenue could be
negatively impacted.
We reallocated resources from the professional services segment upon the
completion of its final projects in order to further develop the image display
and image processing products in an effort to make them more competitive in the
current marketplace. The result of those efforts was the release of the initial
version of our Prizm(TM) Color Image Processing toolkit early in the second
quarter of fiscal 2001. This toolkit will allow, for the first time, independent
software vendors, large service bureaus and scanner manufacturers to have a
complete set of software tools to process scanned color images in their document
management, knowledge management and forms processing solutions. We expect this
new product to provide revenue starting in the third quarter of the current
fiscal year.
<PAGE> 7
Operating income margins for this segment were 37% and 27% for the three months
ending November 30, 2000 and 1999, respectively. The increase in the operating
margin in the first quarter of 2001 compared to the first quarter of fiscal 2000
is a result of our increased revenue combined with a decline in certain
operating expenses. Amortization of capitalized software costs decreased to
$29,000 for the three months ended November 30, 2000 compared to $83,000 for the
three months ended November 30, 1999. This decrease of approximately $54,000 or
65% is due to the write-offs of the capitalized costs of unprofitable software
products during the last three quarters of fiscal year 2000. Sales and
marketing costs decreased to $162,000 for the three months ended November 30,
2000 from $207,000 for the three months ended November 30, 1999. That decrease
of $45,000 or 22% was due to fewer sales personnel in the first quarter of
fiscal 2001 compared to the same period of fiscal 2000. The decrease in sales
personnel is partially a result of closing one of our sales offices during the
second quarter of fiscal 2000. Offsetting these expense decreases is an
increase in research and development cost to $123,000 for the three months ended
November 30, 2000 compared to $84,000 for the three months ended November 30,
1999. This increase of approximately $39,000 or 46% is due to the allocation of
additional resources from the professional services segment to develop the new
Prizm Color IP toolkit and upgrade other existing products.
Assessment Product Technologies
--------------------------------
<TABLE>
<CAPTION>
Three Months Ended
November 30
------------------------
2000 1999
---- ----
Revenue from external customers $ 6,200 $ -
----------- -----------
Operating loss (180,972) (28,801)
----------- -----------
<S> <C> <C>
</TABLE>
<PAGE> 8
For the three months ended November 30, 2000, revenue for the Assessment Product
Technologies segment was $6,200. This revenue resulted from a consulting
project for one customer. We incurred combined costs of approximately $187,000
and $29,000 in research and development and business development for the three
month periods ending November 30, 2000 and 1999, respectively. We incurred
substantially all of the operating expenses in the first quarter of fiscal 2001
on the design and development of the new Virtual Scoring Center(TM) software
product designed for the K-12 educational assessment vertical market. We expect
to install a custom version of the Virtual Scoring Center at one customer
location during the second quarter of fiscal year 2001 and have the product
available for pilot testing on a more widespread basis during the second half of
fiscal 2001. We expect to have a commercial version of the product available
at the beginning of fiscal year 2002. Operating expenses in the three months
ended November 30, 2000 were incurred for the development of the Digital Mark
Recognition(TM) software product prototype. We are continuing discussions
with an independent software vendor to integrate the Digital Mark Recognition
into their forms processing software in an effort to offer an alternative to
vendors and/or educational entities that process large volumes of "fill in the
bubble" form answer sheets for standardized tests.
Professional Services
---------------------
<TABLE>
<CAPTION>
Three Months Ended
November 30
-----------------------
2000 1999
---- ----
Revenue from external customers $15,298 $253,842
----------- -----------
Operating income (loss) 3,550 (106,244)
----------- -----------
<S> <C> <C>
</TABLE>
Revenue for the Professional Services segment was $15,298 during the three
months ended November 30, 2000 compared to $253,842 for the same period of 1999,
a decrease of $238,544 or 94%. The revenue decline resulted from our decision in
fiscal 2000 to transition out of our professional service business. Three
customers accounted for all of the revenue for the first quarter of fiscal 2001
and 80% of the revenue for the first quarter of fiscal 2000.
Operating income (loss) for the segment was 23% and (42%) of revenue for the
three months ending November 30, 2000 and 1999, respectively. Operating margins
for the first quarter of fiscal 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. The completion of this final
professional services project during the first quarter of fiscal 2001 resulted
in operating income for the quarter. 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.
<PAGE> 9
Document Conversion
-------------------
<TABLE>
<CAPTION>
Three Months Ended
November 30
-------------------------
2000 1999
---- ----
Revenue from external customers $60,176 $62,850
----------- -----------
Operating income (loss) 7,373 (4,943)
----------- -----------
<S> <C> <C>
</TABLE>
Revenue for the Document Conversion segment was $60,176 for the three months
ended November 30, 2000 compared to $62,850 for the same period of 1999, a
decrease of $2,674 or 4%. Approximately 83% of the document conversion revenue
for the first quarter of fiscal 2001 came from three customers and approximately
39% of fiscal 2000 first quarter revenue came from one customer. Operating
income (loss) margins were 12% and (8%) for the quarters ended November 30, 2000
and 1999, respectively. The decrease in the loss margin from fiscal 2000
primarily resulted from a decrease in general and administrative personnel costs
of approximately $13,000 or 100% due to a reallocation of resources to the other
segments.
Total Company Operating Results
-------------------------------
Following is a report of total company revenue and a reconciliation of
reportable segments' operating income (loss) to our total net income (loss) for
the three month periods ending November 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
November 30
--------------------------
2000 1999
---- ----
Total company revenue $ 982,466 $ 1,171,025
----------- ------------
Operating income for
reportable segments 167,541 87,990
Unallocated corporate expenses (112,266) (111,382)
Interest income 18,866 11,595
Interest expense (4,408) (5,011)
Other, net 3,900 6,300
Income tax expense (21,725) (3,249)
------------ -------------
Net income (loss) $ 51,908 $ (13,757)
============ =============
Income per share:
Basic 0.00 0.00
Diluted 0.00 0.00
=========== ============
<S> <C> <C>
</TABLE>
<PAGE> 10
Total revenue for the three months ended November 30, 2000 was $982,466 compared
to $1,171,025 for the same quarter of fiscal 2000, a decrease of $188,559, or
16%. Professional services revenue decreased $239,000 or 94% due to our
decision to transition out of our professional services business and to
reallocate resources previously dedicated to the Professional Services
segment to other segments for product development. Partially offsetting the
decrease in professional services revenue was a $46,000 or 5% increase in
licensing and royalty revenue. Revenue from image processing products
increased $63,000 or 24% and maintenance revenue increased $41,000 or 130%;
partially offsetting these increases was a decrease of $59,000 or 10% in
image display revenue. Our total net income for the three months ended
November 30, 2000 was $51,908 or $0.00 income per share (basic and diluted),
compared to net loss of $13,757 or $0.00 loss per share (basic and diluted),
for the first quarter of fiscal 2000. The increase in profitability is
primarily attributable to the decrease in operating expenses associated with
our transition out of the unprofitable Professional Services segment.
Deferred income tax expense of $21,725 for the current first quarter was
recorded and resulted in a corresponding decrease in deferred tax assets. A
deferred income tax benefit of approximately $4,000 for the three months ended
November 30, 2000 was offset by a corresponding increase to the valuation
allowance for deferred tax assets. Income tax expense recorded for the three
month period ended November 30, 1999 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 $462,775 as of November 30, 2000. 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 will be required to generate future taxable
income of approximately $1,220,000 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.
<PAGE> 11
FINANCIAL CONDITION
Working capital at November 30, 2000 was $1,248,759 with a current ratio of
2.8:1, compared to $1,376,235 with a current ratio of 2.9:1 at August 31, 2000.
Net cash used in operations for the three months ended November 30, 2000 was
$229,616 compared to net cash provided by operations of $33,854 for the same
period of 1999. The decrease in operating cash flows for the current three month
period over the same period last year is primarily due to the timing of customer
cash collections. Net cash used in investing activities for the three months
ending November 30, 2000 was $167,253 compared to $79,427 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 research
and development activities in the three months ended November 30, 2000 compared
to the same period of 1999. Net cash used in financing activities for the three
months ending November 30, 2000 was $113,589 compared to $22,100 for the same
period in fiscal 2000. This increase is primarily due to the repurchase and
retirement of 400,000 shares of common stock in the first quarter of fiscal
2001.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Name of Exhibit
27 Financial Data Schedule.
(b) 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: January 16, 2001 /s/ Deborah D. Mosier
---------------- ---------------------
Deborah D. Mosier, President
Date: January 16, 2001 /s/ Kent E. Warkentin
---------------- ---------------------
Kent E. Warkentin, Controller
<PAGE> 13
