F.GEMS: MICROS to GO!...

[Francois+Goelo]

¶ TMSS may have turned the corner....

http://biz.yahoo.com/e/010416/tmss.ob.html

April 16, 2001

TMS INC /OK/ (TMSS.OB)
Quarterly Report (SEC form 10QSB)

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-month periods ended February 28, 2001 and February 29, 2000. All revenue and expenses are from non-affiliated sources.

Component Product Technologies




Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $779,929 $513,069 $1,680,721 $1,367,402
------------ ------------ ------------ -----------
Operating income $196,474 $160,332 $ 534,063 $ 388,311
------------ ------------ ------------ -----------



Our revenue from the component product technologies segment is primarily from licensing our ViewDirector, Prizm Plug-in, ScanFix and FormFix products and from related royalties. Revenue for this segment for the three months ended February 28, 2001 was $779,929 compared to $513,069 for the same period of 2000, an increase of $266,860, or 52%. Segment revenue for the six months ended February 28, 2001 was $1,680,721 compared to $1,367,402 for the same six-month periodof 2000, an increase of $313,319, or 23%.

Image display product revenue for the three-month periods ended February 28, 2001 and February 29, 2000 was $412,000 and $278,000, respectively, a $134,000, or 48%, increase. This increase accounts for 50% of the total segment revenue increase between those periods and results from a greater number of large multiple licensing sales. These large sales are a direct impact of the reorganization of our sales force during fiscal 2001. Image display product revenue for the six months ended February 28, 2001 was $916,000 compared to $841,000 for the same period of 2000, a $75,000, or 9%, increase.

Image processing product revenue for the three-month period ended February 28, 2001 and February 29, 2000 was $289,000 and $196,000, respectively, a $93,000, or 47% increase. Image processing product revenue for the six months ended February 28, 2001 was $613,000 compared to $456,000 for the same period of 2000, a $157,000, or 34%, increase. These increases in image processing product revenue are primarily due to a greater number of large sales during the three and six-month periods ended February 28, 2001, compared to the same periods in 2000.

Maintenance revenue for our component product technologies products for the three and six month periods ended February 28, 2001 was $78,000 and 152,000, respectively, representing increases of 101% and 114% over the same periods of 2000. These increases are due to our continued effort to enroll new customers in maintenance agreements and renew maintenance agreements with existing customers.

One customer accounted for 11% and 12% of the segment's revenue during the three-month periods ended February 28, 2001 and February 29, 2000, respectively. No single customer accounted for greater than 10% of the segment revenue for the six-month period ended February 28, 2001. Approximately 10% of the segment revenue for the six months ended February 29, 2000 came from one customer. Approximately 53% and 57% of our component products technologies revenue for the three and six month periods ended February 28, 2001, respectively, was derived from sales of multiple licenses to individual customers compared to 41% and 57% for the same time periods during 2000. Currently, the profitability of this segment depends on the ability to secure significant sales of multiple licenses to individual customers.

Operating income margins for this segment were 25% and 31% for the three months ended February 28, 2001 and February 29, 2000, respectively. The decrease in the operating margin in the second quarter of 2001 compared to the second quarter of fiscal 2000 is primarily a result of recovery of a previously recorded bad debt of approximately $258,000 in the prior second quarter, resulting in a decrease in general and administrative expense. Changes in various other operating expenses also impacted the operating margins for the current and prior fiscal year second quarters.

Amortization of capitalized software costs decreased to $29,000 for the three months ended February 28, 2001 compared to $60,000 for the three months ended February 29, 2000. This decrease of approximately $31,000 or 52% is due to the write-offs of the capitalized costs of unprofitable software products during the last three quarters of fiscal year 2000. These write-offs include a $73,000 write-down of the remaining unamortized capitalized software development costs for SpectrumFix 1.0 in the second quarter of fiscal 2000.

Sales and marketing costs increased to $185,000 for the three months ended February 28, 2001 from $140,000 for the three months ended February 29, 2000. That increase of $45,000 or 32% was due to an increase in the number of sales personnel in the second quarter of fiscal 2001 and an increase in advertising efforts. Research and development costs increased to $147,000 for the three months ended February 28, 2001 compared to $83,000 for the three months ended February 29, 2000. This increase of approximately $64,000 or 77% 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.

Operating income margins for this segment were 32% and 28% for the six months ended February 28, 2001 and February 29, 2000, respectively. The increase in the operating income margin is primarily due to the write-off of the capitalized costs of SpectrumFix in the first quarter of fiscal 2000. Offsetting this write-off was the bad debt recovery during the second quarter of fiscal 2000 as discussed above. Other expense fluctuations that impacted the operating margins for the six months ended February 28, 2001 and February 29, 2000, were amortization expense and research and development expense.

Amortization of capitalized software costs decreased to $58,000 for the six months ended February 28, 2001 compared to $143,000 for the six months ended February 29, 2000. This decrease of approximately $85,000 or 52% is due to the write-offs of the capitalized costs of unprofitable software products during the last three quarters of fiscal year 2000.

Research and development costs increased to $269,000 for the six months ended February 28, 2001 compared to $167,000 for the six months ended February 29, 2000. This increase of approximately $102,000 or 61% 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




Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers - - $ 6,200 -
------------ ------------ ------------ -----------
Operating loss $(215,542) $(68,892) $ (396,514) $(97,693)
------------ ------------ ------------ -----------


For the six months ended February 28, 2001, revenue for the assessment product technologies segment was $6,200 compared to no revenue from this segment for the same period during 2000. This revenue resulted from a consulting project in the first quarter of 2001 for one customer. We incurred combined costs of approximately $216,000 and $69,000 in research and development and business development for the three-month periods ending February 28, 2001 and February 29, 2000, respectively, and $397,000 and 98,000 for the six-month periods ended February 28, 2001 and February 29, 2000, respectively. We incurred substantially all of the operating expenses in fiscal 2001 on the design and development of the new Virtual Scoring CenterT software product designed for the K-12 educational assessment vertical market. We installed the initial release the VSCT at one customer location during the second quarter of fiscal 2001 and started pilot testing the product in March 2001. The pilot testing is currently being performed by one school district and we have a commitment from another school district to begin testing the system in May 2001. We expect to have a commercial version of the product available at the beginning of fiscal year 2002. Operating expenses incurred during the three and six months ended February 29, 2000 were incurred for the development of the Digital Mark Recognition software product prototype. As of February 28, 2001, this segment had a revenue backlog of approximately $200,000 from one customer that is expected to be recorded as revenue in the third quarter of fiscal 2000 upon acceptance by the initial Virtual Scoring Center customer.


Professional Services -




Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $27,660 $ 72,049 $42,957 $ 325,891
----------- ----------- ----------- -----------
Operating income (loss) $20,787 $ (145,547) $24,337 $ (251,791)
----------- ----------- ----------- -----------


Revenue for the professional services segment was $27,660 during the three months ended February 28, 2001 compared to $72,049 for the same period of 2000, a decrease of $44,389 or 62%. Segment revenue for the six months ended February 28, 2001 was $42,957 compared to $325,891 for the six-month period ended February 29, 2000, a decrease of $282,934 or 87%. These revenue declines resulted from our decision in fiscal 2000 to discontinue our professional service business. Three customers accounted for all of the revenue for the three and six-month periods ended February 28, 2001. Four customers accounted for approximately 95% of the revenue for the second quarter of fiscal 2000, and 78% of the revenue for the six months ended February 29, 2000 came from three customer contracts.

Operating income for the segment was 167% and 88% of revenue for the three and six months ending February 28, 2001, respectively, compared to a loss equal to 202% and 77% of revenue for the three and six months ending February 29, 2000, respectively. Operating margins for the three and six-month periods ended February 29, 2000 were negatively impacted by cost overruns on two fixed-fee projects. One of those projects was completed in the fourth quarter of fiscal 2000, while the other was completed and accepted by the customer during the first quarter of fiscal 2001. Operating margins for the three and six months ended February 28, 2001 improved over the same periods in 2000 due to better cost controls for the work performed on these projects in fiscal 2001. We will continue to provide maintenance for these projects during the remainder of fiscal 2001 but will not offer professional services to any new customers. We allocated professional services segment resources to product development upon completion of these projects.


Document Conversion -



Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers $61,358 $65,814 $121,534 $128,664
------------ ------------ ----------- -----------
Operating income (loss) $23,157 $(2,546) $ 30,531 $ (7,490)
------------ ----------- ----------- -----------

Revenue for the document conversion segment was $61,358 for the three months ended February 28, 2001 compared to $65,814 for the same period of 2000, a decrease of $4,456 or 7%. Segment revenue for the six months ended February 28, 2001 was $121,534 compared to $128,664 for the six-month period ended February 29, 2000, a decrease of $7,130 or 6%. Approximately 96% and 86% of the document conversion revenue for the three and six months ended February 28, 2001, respectively, came from three customers. All of the segment revenue for the three months ended February 29, 2000 came from five customers and approximately 92% of the revenue came from four customers for the six months ended February 29, 2000.

Operating income for the segment was 38% and 25% of revenue for the three and six months ending February 28, 2001, respectively, compared to a loss equal to 4% and 6% of revenue for the three and six months ending February 29, 2000, respectively. The increase in margins from fiscal 2000 primarily resulted from a decrease in general and administrative costs of approximately $36,000, or 98%, and $57,000, or 79%, for the three and six month periods ended February 28. 2001 compared to the same periods last fiscal year. These decreases are due to a reallocation of resources to the other segments and the expiration of two capital leases during the first quarter of fiscal 2001 for certain document conversion equipment.

During the three months ended February 28, 2001, we decided to discontinue document conversion services to several customers. Upon completion of the work for these customers in the third quarter of fiscal 2001, we expect a decline in document conversion revenue. We will continue to provide document conversion services to one customer during the remainder of fiscal 2001.


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 and six month periods ending February 28, 2001 and February 29, 2000.




Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Total company revenue $ 868,947 $ 650,932 $ 1,851,413 $ 1,821,957
----------- ----------- ----------- ------------
Operating income (loss) for
reportable segments 24,876 (56,653) 192,417 31,337
Unallocated corporate expenses (88,358) (101,030) (200,624) (212,412)
Interest income 14,524 11,702 33,391 23,297
Interest expense (3,788) (5,827) (8,196) (10,838)
Other, net 324 (5,604) 4,224 696
Income tax benefit (expense) 21,725 (4,233) - (7,482)
------------ ------------ ------------ ------------
Net loss $ (30,697) $ (161,645) $ 21,212 $ (175,402)
=========== =========== =========== ============
Loss per share:
Basic $ (0.00) $ (0.01) $ 0.00 $ (0.01)
Diluted (0.00) (0.01) 0.00 (0.01)
=========== =========== =========== ============



Total revenue for the three months ended February 28, 2001 was $868,947 compared to $650,932 for the same quarter of fiscal 2000, an increase of $218,015, or 33%. Licensing and royalty revenue for the three months ended February 28, 2001 increased to $780,000 from $513,000, a $267,000 or 52% increase over the same quarter of fiscal 2000. Revenue from image display products for the three months ended February 28, 2001 increased to $412,000 from $278,000, a $134,000 or 48% increase over the same quarter of fiscal 2000. Image processing product revenue for the three months ended February 28, 2001 increased to $289,000 from $196,000, a $93,000 or 47% increase over the same quarter of fiscal 2000. Maintenance revenue for the three months ended February 28, 2001 increased to $78,000 from $39,000, a $39,000 or 101% increase over the same quarter of fiscal 2000. Partially offsetting the licensing and royalty revenue for the three months ended February 28, 2001 was a decrease of $28,000 from $72,000 to $44,000 in professional services revenue due to our decision to discontinue the professional services segment and to reallocate resources previously dedicated to the professional services segment to other segments for product development. Our total net loss for the three months ended February 28, 2001 was $30,697 or $0.00 per share (basic and diluted), compared to a net loss of $161,645 or $0.01 per share (basic and diluted), for the second quarter of fiscal 2000. The increase in profitability is primarily attributable to the decrease of $211,000 or 97% in operating expenses associated with our transition out of the unprofitable professional services segment. In addition, the profitability for the second quarter of fiscal 2000 was negatively impacted by the $73,000 write- off of SpectrumFix 1.0. However, the profitability for the three months ended February 29, 2000 was positively impacted by the $258,000 recovery of a previously written-off bad debt. The decrease in the current second quarter professional services operating expenses discussed above was partially offset by the increase of $147,000 or 212% in development costs for the assessment product technologies segment. A deferred income tax benefit of approximately $22,000 for the current second quarter was recorded based on our current estimate of the overall tax rate expected for the fiscal year. Income tax expense recorded for the three-month period ended February 29, 2000 resulted from differences in prior year estimates used for financial reporting compared to actual state tax payments.

Total revenue for the first six months of fiscal 2001 was $1,851,413 compared to $1,821,957 for the same period in fiscal 2000, an increase of $29,456 or 2%. Although the professional services segment revenue decreased $283,000 or 87% for the six months ended February 28, 2001 compared to the same period of 2000, we maintained the same level of total revenue between those periods due to an increase of $313,000 or 23% in licensing and royalty revenue. The decline in professional services revenue was expected based on our decision to discontinue the professional services segment. Licensing and royalty revenue increased based on the revenue increases for image processing products, image viewing products and maintenance as discussed above in the Component Product Technologies section.

Net income for the first six months of fiscal 2001 was $21,212 or $0.00 per share (basic and diluted), compared to net loss of $175,402, or $0.01 per share (basic and diluted), for the same period in fiscal 2000. This profitability increase is primarily due to the decrease of $559,000 or 97% in operating expenses associated with our transition out of the unprofitable professional services segment. This decrease is partially offset by the increase of $299,000 or 306% in development costs for the assessment product technologies segment for the six months ended February 28, 2001 compared to the same period in 2000. The profitability for the six months ended February 29, 2000 was positively impacted by the $258,000 recovery of a previously written-off bad debt; however, this recovery was partially offset by the $73,000 write-off of SpectrumFix 1.0 during the same period. A deferred income tax benefit of approximately $64,000 for the six-month period ended February 29, 2000 was offset by a corresponding increase to the valuation allowance for deferred tax assets. Income tax expense reported for the six-month period ended February 29, 2000 resulted from differences in prior year estimates used for financial reporting compared to actual state tax payments.

Deferred Income Taxes - Deferred tax assets are recognized when it is more likely than not that benefits from deferred tax assets will be realized. We have recognized a net deferred tax asset of $484,500 as of February 28, 2001. The ultimate realization of this deferred tax asset is dependent upon our ability to generate future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income, past earnings history, sales backlog, and net operating loss and tax credit carryforward expiration dates in determining the amount of deferred tax asset to recognize. In order to fully realize the deferred tax asset, we must generate future taxable income of approximately $1,275,000 prior to the expiration of the net operating loss and tax credit carryforwards. The valuation allowance for the related deferred tax assets may be increased in future periods if we cannot generate sufficient taxable income to recover the net deferred tax asset.



FINANCIAL CONDITION


Working capital at February 28, 2001 was $1,132,045 with a current ratio of 2.6:1, compared to $1,376,235 with a current ratio of 2.9:1 at August 31, 2000. Net cash used in operations for the six months ended February 28, 2001 was $97,510 compared to net cash provided by operations of $251,695 for the same period of 2000. The decrease in operating cash flows for the current six 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 six months ending February 28, 2001 was $313,145 compared to $175,799 for the same period in fiscal 2000.

The increase in investing cash flows primarily relates to the increase in capitalized software development costs due to the increased product development related primarily to the PrizmT Color Image Processing toolkit and the Virtual Scoring Center during the six months ended February 28, 2001 compared to the same period of 2000. Net cash used in financing activities for the six months ending February 28, 2001 was $111,535 compared to $136,721 for the same period in fiscal 2000. This decrease is primarily due to the expiration of two capital leases in the first quarter of fiscal 2001 and the cash inflows during 2001 from the sale of common stock to employees under the employee stock purchase plan. Our purchase and retirement of common shares accounted for $100,000 and $87,500 of the cash used in financing activities for the six months ending February 28, 2001 and February 29, 2000, respectively.

We anticipate that operating cash flows will be adequate to meet our current obligations and current operating and capital requirements. The funding of long-term needs is dependent upon increased revenue and profitability and obtaining funds through outside debt and equity sources.






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