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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File Number 0-18250
TMS, Inc.
(Exact name of small business issuer as specified in its charter)
OKLAHOMA 91-1098155
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
206 West Sixth Street
Post Office Box 1358
Stillwater, Oklahoma 74076
(Address of principal executive offices)
(405) 377-0880
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
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, 2002
Common stock, par value $.05 per share 13,112,659
Transitional Small Business Disclosure Format (check one):
Yes [] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Condensed Balance Sheets
November 30, 2002 and August 31, 2002
Nov 30,2002 August 31,
(unaudited) 2002*
----------- ----------
Cash $ 1,052,594 783,550
Trade accounts receivable, net 304,265 594,499
Due from related parties 41,363 33,743
Other current assets 247,631 206,557
----------- -----------
Total current assets 1,645,853 1,618,349
----------- -----------
Property and equipment 2,436,794 2,492,525
Accumulated depreciation and amortization (1,598,436) (1,638,067)
------------ -----------
Net property and equipment 838,358 854,458
----------- -----------
Capitalized software development costs, net 521,158 715,365
Investment in limited liability company 117,960 -
Other assets 363,638 364,271
----------- -----------
Total assets $ 3,486,967 $3,552,443
=========== ===========
Current installments of long-term debt 29,652 29,106
Accounts payable 138,330 128,502
Accrued payroll expenses 174,284 223,788
Deferred revenue 274,399 431,904
Deferred gain on sale of technology 121,378 -
----------- -----------
Total current liabilities 738,043 813,300
Long-term debt, net of current installments 190,638 198,269
----------- -----------
Total liabilities 928,681 1,011,569
----------- -----------
Common stock 655,633 655,633
Additional paid-in capital 11,348,883 11,348,883
Accumulated deficit (9,446,230) (9,463,642)
----------- -----------
Total shareholders' equity 2,558,286 2,540,874
----------- -----------
Total liabilities and shareholders' equity $ 3,486,967 3,552,443
============ ===========
*Condensed from audited financial statements.
See accompanying notes to condensed
financial statements.
2
TMS, Inc.
Condensed Statements of Operations (unaudited)
Three Months Ended November 30, 2002 and 2001
Three Months Ended
November 30
-------------------------
2002 2001
----- -----
Licensing and royalties revenue $ 668,860 459,300
Customer support and maintenance revenue 144,839 101,932
------------ ------------
Total revenue 813,699 561,232
Cost of revenue 134,128 154,989
Selling, general and administrative expenses 516,794 503,894
Research and development expenses 143,337 316,345
Loss in limited liability company (25,436) -
------------ ------------
Operating loss (5,996) (413,996)
Other income (expense), net 33,970 (5,110)
------------ ------------
Income (loss) before income taxes 27,974 (419,106)
Deferred income tax expense 10,562 -
------------ ------------
Net income (loss) $ 17,412 (419,106)
============ ============
Basic income (loss) per share $ 0.00 (0.03)
============ ============
Weighted average common shares 13,112,659 13,088,663
============ ============
Diluted income (loss) per share $ 0.00 (0.03)
============ ============
Weighted average common shares and potentially
dilutive securities 13,114,790 13,088,663
============ ============
See accompanying notes to condensed
financial statements.
3
TMS, Inc.
Condensed Statements of Cash Flows (unaudited)
Three Months Ended November 30, 2002 and 2001
Three Months Ended
November 30
-------------------------
2002 2001
----- -----
Net cash flows provided by (used in)
operating activities $ 160,499 (272,707)
----------- -----------
Cash flows from investing activities:
Capitalized software development costs (85,380) (125,402)
Proceeds from sale of technology 250,000 -
Investment in limited liability company (48,457) -
Other, net (533) (15,892)
----------- -----------
Net cash provided by (used in) investing
activities 115,630 (141,294)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (7,085) (6,580)
Sale of treasury stock - 4,913
----------- -----------
Net cash used in financing activities (7,085) (1,667)
----------- -----------
Net increase (decrease) in cash 269,044 (415,668)
Cash at beginning of period 783,550 669,287
----------- -----------
Cash at end of period $ 1,052,594 253,619
============ ===========
Non-cash investing and financing activities:
Investment in limited liability company
through contribution of technology $ 94,939 -
----------- -----------
Deferred gain from sale of technology $ 121,378 -
----------- -----------
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, 2002.
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
Formation of Limited Liability Company
- -----------------------------------------------
On October 10, 2002, the Company entered into an agreement with Measurement
Incorporated, one of the nation's leading providers of writing and performance
assessment hand-scoring services, to further develop the Virtual Scoring Center
technology and bring it to market through a new entity, VSC Technologies, LLC.
The Company transferred its rights in the Virtual Scoring Center technology to
the LLC in exchange for one-time cash payment of $250,000 and a 50% ownership
interest. Measurement Incorporated holds the remaining 50% ownership interest.
The Company accounts for its investment in the LLC using the equity method.
The Company realized a gain of approximately $155,000 upon transfer of the
Virtual Scoring Center technology to the LLC. Approximately $34,000 of the gain
was recognized as income in the Condensed Statement of Operations for the three
months ended November 30, 2002. The remaining $121,000 of the gain was deferred
and is expected to be recognized in income periodically over the next year as
the Company fulfills its ongoing commitment to fund 50% of future Virtual
Scoring Center software development costs.
At November 30, 2002, the LLC owed the Company approximately $41,000 pursuant to
an agreement whereby the Company will provide software development services to
the LLC to further develop the Virtual Scoring Center technology.
Net Income (Loss) Per Share
- ---------------------------
Following is a reconciliation of the numerators and the denominators of the
basic and diluted per-share computations:
November 30, 2002 November 30, 2001
----------------------------------- ------------------------------------
Income Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------ ---------
Basic EPS:
Net income (loss) $ 17,412 13,112,659 $ 0.00 $(419,106) 13,088,663 $(0.03)
Effect of Common
Stock options - 2,131 - - - -
------------- ------------- --------- ---------- ------------- ---------
Diluted EPS:
Net income (loss) $ 17,412 13,114,790 $ 0.00 $(419,106) 13,088,663 $(0.03)
============= ============= ========= ========== ============= =========
Options to purchase approximately 628,000 shares of common stock at prices
ranging from $.27-$.40 per share were outstanding at November 30, 2002 and 2001
but were not included in the computation of diluted net income (loss) per share
because the options' exercise prices were greater than the average market price
of common shares. Additionally, approximately 59,000 options to purchase common
stock at prices ranging from $.125-$.1875 were excluded from the computation of
diluted loss per share for the three months ended November 30, 2001, because of
their anti-dilutive effect. All options expire during periods through the year
2008.
5
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, 2002 and 2001. Substantially, all
revenue and expenses are from non-affiliated sources.
Component Product Technologies
- ------------------------------------------------------
Three Months Ended
November 30
------------------------
2002 2001
---- ----
Revenue from external customers $ 788,510 561,232
----------- -----------
Operating income (loss) $ 288,647 (25,174)
----------- -----------
6
Revenue from the component product technologies segment is primarily derived
from licensing, royalties, and the customer support and maintenance of our
Prizm(R) Plug-in, ScanFix(R), Prizm(R) color, ViewDirector(TM) and FormFix(R)
products. Revenue for this segment for the three months ended November 30, 2002
was $788,510 compared to $561,232 for the same period last year, an increase of
$227,278, or 40%. Operating income for the segment was 37% of revenue for the
three months ended November 30, 2002 compared to an operating loss of 4% of
revenue for the same period last year.
We believe that the increase in revenue over the prior year first quarter is
partially attributable to the delayed closing of certain license transactions or
a reduced number of licenses purchased by several of our customers during the
prior year first quarter, both of which we believe were the indirect results of
the events of September 11, 2001 and the general uncertainty of the national
economy. In addition, we completed a funded development contract for a specific
customer during the current year first quarter which contributed to the
increased revenue from the same period last year. Although we have seen a
gradual improvement in our sales since the events of September 11, 2001, we
continue to experience longer sales cycles and our customers continue to
purchase licenses in smaller quantities.
During the first quarter of fiscal year 2003, two customers collectively
accounted for 39% of the total revenue for the segment. During the first quarter
of fiscal year 2002, one customer accounted for 11% of total segment revenue.
The profitability of this segment depends on our ability to secure significant
sales of multiple licenses to individual customers. We can provide no assurance
that we will be able to continue to secure significant sales transactions with
individual customers or that we will be able to increase the volume of customers
and reduce our reliance on significant sales transactions. Our inability to
continue to secure such transactions and/or increase the volume of customers
could have a material adverse effect on our business, operating results and
financial position.
The improved operating income for the three months ended November 30, 2002
compared to the operating loss reported for same period last year is almost
entirely attributable to the $227,278 increase in revenue for the segment. The
effects of a workforce reduction implemented in November 2001, and a partial
write-off of an uncollectible trade account receivable during the prior year
first quarter also contributed to the improved operating results when comparing
the two periods.
7
Assessment Scoring Technologies
- --------------------------------
Three Months Ended
November 30
------------------------
2002 2001
---- ----
Revenue from external customers $ 25,189 -
----------- -----------
Operating loss $(207,463) (280,698)
----------- -----------
For the three months ended November 30, 2001 this segment included the costs
associated with the continued development and marketing of our Virtual Scoring
CenterT and Digital Mark RecognitionT software products that are designed to
target and take advantage of the expected growth in the market for scoring K-12
tests. On October 10, 2002, we entered into an agreement with Measurement
Incorporated, one of the nation's leading providers of writing and performance
assessment hand-scoring services, to further develop the Virtual Scoring Center
technology and bring it to market through a new entity, VSC Technologies, LLC.
The Company transferred its rights in the Virtual Scoring Center technology to
the LLC in exchange for a one-time cash payment of $250,000 and a 50% ownership
interest. Measurement Incorporated holds the remaining 50% ownership interest.
Accordingly, for the first quarter ended November 30, 2002 the financial results
for this segment predominantly reflect the operating activities associated with
the continued development and marketing of the Digital Mark Recognition software
product and our 50% equity interest in the newly formed entity, VSC
Technologies, LLC.
During the current year first quarter and prior to the formation of the LLC we
received $23,070 from Measurement Incorporated for partial funding of the
Virtual Scoring Center software product. Of that amount, $21,202 was recorded
as reduction to capitalized software development costs and the remaining $1,868
reduced the first quarter research and development expense. Upon formation of
the LLC, we entered into an agreement with the LLC whereby we will provide
software development services, at a fixed rate per hour. The segment's
operating expenses were reduced by approximately $66,000 during the first
quarter for such costs, of which 50% was billed to the LLC and 50% was recorded
as an increase to our investment in the LLC.
The decrease in operating loss for the three months ended November 30, 2002
compared to the same period last year primarily resulted from the increase in
revenue and the reduction in expenses associated with our development services
agreement with the LLC described above. Included in the operating loss for the
current year first quarter is approximately $25,000 for our 50% share of the LLC
net loss, while revenue for the current year first quarter consists primarily of
licensing revenue related to the Digital Mark Recognition software product.
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 income (loss) for
the three-month periods ending November 30, 2002 and 2001.
Three Months Ended
November 30
--------------------------
2002 2001
---- ----
Total company revenue $ 813,699 561,232
----------- ------------
Operating income (loss) for
reportable segments 81,184 (305,872)
Unallocated corporate expenses (87,180) (108,124)
Interest income 5,273 3,709
Interest expense (4,195) (4,702)
Gain on sale of technology 33,683 -
Other, net (791) (4,117)
Income tax expense 10,562 -
------------ ------------
Net income (loss) $ 17,412 (419,106)
============ ============
Income (loss) per share:
Basic $ 0.00 (0.03)
Diluted $ 0.00 (0.03)
=========== ============
9
Total revenue for the three months ended November 30, 2002 was $813,699 compared
to $561,232 for the same quarter of fiscal year 2001, an increase of $252,467 or
45%. Both our Component Product and Assessment Scoring technology segments
contributed to the overall increase as explained in the segment disclosures
above.
Our net income for the three months ended November 30, 2002 was $17,412 or $0.00
income per share (basic and diluted), compared to a net loss of $419,106 or
$0.03 loss per share (basic and diluted) for the same period last year. The
increase in our total company revenue, the effects of a workforce reduction and
general cost control measures that we implemented in November 2001, and the
reduced operating costs associated with the software development services
arrangement that we entered into with the newly formed entity VSC Technologies,
LLC are the primary factors that contributed to the improved financial results.
Gain on Sale of Technology
- --------------------------
Upon formation of VSC Technologies, LLC during the current year first quarter we
realized a gain of approximately $155,000 upon transfer of the Virtual Scoring
Center technology to the LLC. Approximately $34,000 of the gain was recognized
as income in the Condensed Statement of Operations for the three months ended
November 30, 2002. The remaining $121,000 of the gain was deferred and will be
recognized in income periodically as the Company fulfills its ongoing commitment
to fund its 50% share of future Virtual Scoring Center software development
costs.
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 $473,938 as of November 30, 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 November 30, 2002 was $907,810 with a current ratio of 2.2:1,
compared to $805,049 with a current ratio of 2.0:1 at August 31, 2002.
Net cash provided by operations for the three months ended November 30, 2002 was
approximately $160,000 compared to net cash used in operations of approximately
$273,000 for the same period last year. The improvement in operating cash flow
is directly attributable to the overall improved financial results and
collection of a significant customer receivable during the current year first
quarter. Additionally, the prior year use of operating cash flow included
approximately $97,000 in employee severance and unpaid vacation related to the
workforce reduction that we implemented during November 2001 as well as
approximately $80,000 in legal fees associated with the arbitration proceedings
as discussed in our Form 10-KSB for the year ended August 31, 2002.
Net cash provided by investing activities for the three months ended November
30, 2002 approximates $116,000 and includes the $250,000 in cash that we
received upon formation of VSC Technologies, LLC. The $250,000 cash receipt was
offset by approximately $85,000 in software development costs for investment in
new and enhanced software products and our approximate $50,000 cash investment
for our share of LLC software development costs.
Net cash flows used in financing activities were $7,000 during the first quarter
of fiscal 2003.
In December 2002 we renewed our line of credit with a bank that provides for
maximum borrowing of up to $1,000,000 and is secured by all trade accounts
receivable. We anticipate that operating cash flows and the line of credit will
be adequate to meet our current obligations and current operating and capital
requirements. The funding of long-term needs (including funding for increased
product development, expanded marketing and promotion of our products, and for
potential merger/acquisition activities) is dependent upon increased revenue and
profitability and obtaining funds through outside debt and equity sources.
PART II - Other Information
Item 1. Legal Proceedings
We are a party to a lawsuit involving the Virtual Scoring Center technology we
transferred to VSC Technologies, LLC. On October 23, 2002, we, along with VSC
Technologies, LLC and Measurement Incorporated, filed an action in the United
States District Court for the Eastern District of North Carolina against NCS
Pearson, Inc. In the complaint, we and the other plaintiffs seek a declaratory
judgment that the Virtual Scoring Center technology owned by VSC Technologies,
LLC and marketed by Measurement Incorporated and us does not infringe the
patents of NCS Pearson. We believe that the Virtual Scoring Center technology
does not infringe those patents, and it was designed to carefully avoid
infringement, but we cannot assure you that we will be successful in that claim.
NCS Pearson has not filed an answer to our complaint and we do not yet know what
their response will be. At present, we can say only that if we are not
successful, then the court would not rule that the Virtual Scoring Center is
free of infringement. Such an outcome could be severely damaging to our
business and plans to exploit the Virtual Scoring Center technology.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NAME OF EXHIBIT
10.1 Master Agreement by and between TMS,
Inc., Measurement Incorporated and VSC
Technologies, LLC dated as of October
10, 2002
10.2 Operating Agreement of VSC
Technologies, LLC dated as of October
10, 2002
10.3 LLC DMR License Agreement between TMS,
Inc. and VSC Technologies, LLC dated as
of October 10, 2002
10.4 TMS VSC License Agreement between VSC
Technologies, LLC and TMS, Inc dated as
of October 10, 2002.
(b) Reports on Form 8-K
None
11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant: TMS, Inc.
Date: January 14, 2003 /s/ Deborah L. Klarfeld
---------------- -----------------------
Deborah L. Klarfeld, President
Principal Executive Officer
Date: January 14, 2003 /s/ Deborah D. Mosier
---------------- ---------------------
Deborah D. Mosier, Chief Financial Officer
Principal Financial Officer
12
CERTIFICATIONS:
I, Deborah L. Klarfeld, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of TMS, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c)presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ Deborah L. Klarfeld
-----------------------
Deborah L. Klarfeld
President
I, Deborah D. Mosier, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of TMS, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c)presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ Deborah D. Mosier
-----------------------
Deborah D. Mosier
Chief Financial Officer