U.S.SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: February 28, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from ____________ to ____________
Commission File Number 0-18250
TMS, Inc.
(Exact name of small business issuer as specified in its charter)
OKLAHOMA 91-1098155
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
206 West Sixth Street
Post Office Box 1358
Stillwater, Oklahoma 74076
(Address of principal executive offices)
(405) 377-0880
(Issuer's telephone number)
Check whether the issuer (1) filed all Reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yex [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 April 14, 2003
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
February 28, 2003 and August 31, 2002
February 28, August 31,
2003 2002*
(unaudited)
----------- ----------
Cash $ 1,207,689 $ 783,550
Trade accounts receivable, net 344,301 594,499
Due from related parties 64,777 33,743
Deferred income taxes 9,784 165,623
Other current assets 77,136 40,934
----------- -----------
Total current assets 1,703,687 1,618,349
----------- -----------
Property and equipment 2,435,533 2,492,525
Accumulated depreciation and amortization (1,606,759) (1,638,067)
------------ -----------
Net property and equipment 828,774 854,458
------------ -----------
Capitalized software development costs, net 481,364 715,365
Deferred income taxes - 318,877
Other assets 44,129 45,394
----------- -----------
Total assets $ 3,057,954 $ 3,552,443
=========== ===========
Current installments of long-term debt 30,165 29,106
Accounts payable 187,652 128,502
Accrued payroll expenses 165,084 223,788
Deferred revenue 360,396 431,904
Deferred gain on sale of technology 55,101 -
----------- -----------
Total current liabilities 798,398 813,300
Long-term debt, net of current installments 182,866 198,269
Investment in limited liability company 34,694 -
Deferred income taxes 9,784 -
----------- -----------
Total liabilities 1,025,742 1,011,569
----------- -----------
Common stock 655,633 655,633
Additional paid-in capital 11,348,883 11,348,883
Accumulated deficit (9,972,304) (9,463,642)
----------- -----------
Total shareholders' equity 2,032,212 2,540,874
----------- -----------
Total liabilities and shareholders' equity $ 3,057,954 $ 3,552,443
=========== ===========
*Condensed from audited financial
statements.
See accompanying notes to condensed
financial statements.
1
TMS, Inc.
Condensed Statements of Operations(unaudited)
Three and Six Months Ended February
28, 2003 and 2002
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
2003 2002 2003 2002
----- ----- ----- -----
Licensing and royalties $ 490,925 666,599 1,159,785 1,125,899
Customer support and maintenance 150,631 138,137 294,585 240,069
Other services - 3,823 885 3,823
------------ ------------ ----------- ------------
Total revenue 641,556 808,559 1,455,255 1,369,791
Cost of revenue 130,027 142,124 264,155 297,113
Selling, general and administrative
expense 462,850 535,981 979,645 1,039,875
Research and development expense 144,987 135,716 288,324 452,061
Loss in limited liability company (23,221) - (48,657) -
------------ ------------ ------------ ------------
Operating loss (119,529) (5,262) (125,526) (419,258)
Other income (expense), net 67,394 (4,488) 101,364 (9,598)
------------ ------------ ------------ ------------
Loss before income taxes (52,135) (9,750) (24,162) (428,856)
Income tax expense 473,938 - 484,500 -
------------ ------------ ------------ ------------
Net loss $ (526,073) (9,750) (508,662) (428,856)
============ ============ ============ ============
Basic loss per share $ (0.04) (0.00) (0.04) (0.03)
============ ============ ============ ============
Weighted average common shares 13,112,659 13,106,626 13,112,659 13,097,644
============ ============ ============ ============
Diluted loss per share $ (0.04) $ (0.00) $ (0.04) $ (0.03)
============ ============ ============ ============
Weighted average basic and diluted
shares 13,112,659 13,106,626 13,112,659 13,097,644
============ ============ ============ ============
See accompanying notes to condensed
financial statements.
2
TMS, Inc.
Condensed Statements of Cash Flows (unaudited)
Six Months Ended February 28, 2003 and 2002
February 28, February 28,
2003 2002
----- -----
Net cash flows provided by (used in)
operating activities $ 291,303 $ (212,595)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (17,572) (21,292)
Capitalized software development costs (166,224) (235,134)
Proceeds from sale of technology 250,000 -
Investment in limited liability company (119,024) -
Distribution from limited liability company 200,000 -
----------- -----------
Net cash provided by (used in) investing activities 147.180 (256.426)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (14,344) (13,329)
Sale of treasury stock, at cost - 4,913
----------- -----------
Net cash used in financing activities (14,344) (8,416)
----------- -----------
Net increase (decrease) in cash 424,139 (477,437)
Cash at beginning of period 783,550 669,287
----------- -----------
Cash at end of period $1,207,689 $ 191,850
============ ===========
Noncash investing activity:
Investment in limited liability company
through contribution of technology 94,939 -
See accompanying notes to condensed
financial statements.
3
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.
Income Taxes
- ------------
The income tax provision for the six months ended February 28, 2003, included a
deferred tax benefit of $17,495 and an increase in the valuation allowance for
deferred tax assets of $501,995. The income tax benefit for the six months ended
February 28, 2003, differed from the amount computed by applying the U.S.
Federal income tax rate of 34% to pretax loss from operations primarily because
of the increase in the valuation allowance for deferred tax assets.
The following table sets forth the tax effects of temporary difference that give
rise to significant portions of the deferred tax assets and liabilities at
February 28, 2003 and August 31, 2002:
February 28, August 31,
2003 2002
Deferred tax assets:
Tax operating loss carryforwards 829,103 1,036,142
Other 44,201 55,277
-------- ----------
- -
Total gross deferred tax assets 873,304 1,091,419
Less valuation allowance 679,328 321,352
-------- ----------
- -
Net deferred tax assets 193,976 770,067
Deferred tax liabilities:
Property and equipment (11,388) (14,014)
Capitalized software costs (182,588) (271,553)
-------- ----------
Net deferred taxes - 484,500
======== ==========
Deferred tax assets are recognized when it is more likely than not that benefits
from deferred tax assets will be realized. The ultimate realization of deferred
tax assets is dependent upon our ability to generate future taxable income
during the periods in which the temporary differences that create deferred tax
assets become deductible. We consider the scheduled reversal of deferred tax
liabilities, projected future taxable income, past earnings history, sales
backlog and tax operating loss carryforward expiration dates when determining
the amount of deferred tax assets to recognize.
4
During the second quarter of the current fiscal year we increased our valuation
allowance for deferred tax assets and reduced our deferred tax asset, net of
valuation allowance, from $770,067 at August 31, 2002 to $193,976 at February
28, 2003. In order to fully realize our net deferred tax asset prior to the
expiration of our tax operating loss carryforwards, we will have to generate
approximately $510,000 in taxable income through increased income from
operations, the reversal of deferred tax liabilities, or both. At February 28,
2003, we had approximately $2.2 million of tax operating loss carryforwards, of
which approximately 82% do not begin to expire until our fiscal year 2019.
We made the decision to reduce the carrying amount of our net deferred tax
assets during the second quarter of the current fiscal year because our ability
to time the closing of significant revenue opportunities has recently become
more difficult. Prior to the events of September 11, 2001, we began to see
improvement in our financial results with our operating losses becoming
significantly reduced over the prior two years. Subsequent to the events of
September 11, 2001, we experienced an immediate downturn in revenue, but made
adjustments to our cost structure to help mitigate the delay in closing several
revenue transactions which we believe resulted from the events of September 11,
2001, and the struggling national economy. Since that time and through the first
quarter of the current fiscal year, we began to experience revenue totals at a
level that we believed could be sustained and result in profitability for our
company. During the second quarter of the current year we experienced another
downturn in revenue and believe that the continuation of a struggling national
economy coupled with recent international conflicts, including the war, is
having an impact on the timing and amount of revenue that we can expect from our
current customers and prospects in both the private and governmental sectors.
Accordingly, we believe that a reduction in the carrying amount of our net
deferred tax assets is necessary to properly account for the recent increased
difficulties we have experienced in predicting the timing of future revenue.
Net Loss Per Share
- ------------------
Options to purchase approximately 628,000 shares of common stock at prices
ranging from $.27 to $.40 per share were outstanding at February 28, 2003 and
2002, 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 9,000 and 59,000 options to
purchase common stock at prices ranging from $.125 to $.1875 per share were
excluded from the computations of diluted loss per share for the three and six
months ended February 28, 2003 and 2002, respectively, because of their anti-
dilutive effect. Approximately 637,000 and 687,000 options to purchase shares
of common stock were outstanding at February 28, 2003 and 2002, respectively.
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 and six-months ended February 28, 2003 and 2002.
Component Product Technologies
- ------------------------------
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
2003 2002 2003 2002
---- ---- ---- ----
Revenue from external customers $ 608,676 786,055 1,381,136 1,339,262
------------ ------------ ------------ -----------
Operating income $ 110,876 230,312 385,280 198,446
------------ ------------ ------------ -----------
Revenue from the component product technologies segment is primarily derived
from licensing, royalties, and the customer support and maintenance of our
Prizm(R) plug-in, ScanFix(R), Prizm(R) color image processing, ViewDirector(TM)
and FormFix(R) products. Revenue for this segment for the three months ended
February 28, 2003 was $608,676 compared to $786,055 for the same period last
year, a decrease of $177,379, or 23%. For the six months ended February 28, 2003
revenue for this segment was $1,381,136 compared to $1,339,262 for the same
period last year, an increase of $41,874, or 3%.
We believe that the struggling national economy and recent international events
negatively impacted our revenue opportunities in both the private and
governmental sectors during the second quarter of the current fiscal year. The
events of September 11, 2001 occurred during the first quarter of our prior
fiscal year and we believe resulted in a downturn in revenue during that three-
month period. Beginning in the second quarter of the prior fiscal year and
through the first quarter of the current fiscal year, we began to see a gradual
improvement in our revenue despite experiencing longer cycles and smaller
quantity license purchases from many of our commercial customers. More recently
we have experienced delays from prospective customers affiliated with the United
States government because funds for approved projects have not been released due
to war related uncertainties. We have also experienced internal delays in the
release of certain new and enhanced products, which we believe impacted our
ability to generate more revenue during the first six months of the current
fiscal year. Because of the factors described above, our ability to predict the
timing and extent of revenue transactions has become increasingly difficult. If
uncertainties surrounding the national economy and recent international events
do not improve and/or we are unable to release new and enhanced products on a
timelier basis, our revenue may continue to be lower which could have a material
adverse effect on our business, operating results and financial position.
6
Operating income for the segment was 18% of revenue for the three months ended
February 28, 2003 compared to operating income of 29% for the same period last
year. Lower operating income for the current year second quarter was almost
entirely attributable to the decline in revenue over the same period last year.
For the six-month periods ended February 28, 2003 and 2002, operating income for
the segment was 28% and 15% of revenue, respectively. 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 were
the primary factors that resulted in improved operating margins for the first
six months of the current fiscal year compared to the same period last year.
The profitability of this segment depends on our ability to secure significant
sales of multiple licenses to individual customers. One customer accounted for
11% of our revenue for the current year second quarter and another customer
accounted for 12% of revenue for the same period last year. For the six months
ended February 28, 2003, one customer accounted for 17% of our revenue, while no
one customer accounted for greater than 10% of our revenue for the same six-
month period last year. 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 generate more revenue by
securing such transactions and/or increasing the volume of customers could have
a material adverse effect on our business, operating results and financial
position.
Assessment Scoring Technologies
- -------------------------------
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
2003 2002 2003 2002
---- ---- ---- ----
Revenue from external customers $ 23,250 9,823 48,439 9,823
------------ ------------ ------------ -----------
Operating loss $ (149,547) (203,503) (357,011) (484,201)
------------ ------------ ------------ -----------
For the three and six months ended February 28, 2002 this segment included the
costs associated with the continued development and marketing of our Virtual
Scoring Center(TM) and Digital Mark Recognition(TM) 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 six months ended February 28, 2003 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.
Upon formation of the LLC, we entered into an agreement with the LLC whereby we
provide software development services, at a fixed rate per hour. The segment's
operating expenses were reduced by approximately $133,000 and $202,000 for such
costs during the three and six month periods ended February 28, 2003,
respectively, of which 50% was billed to the LLC and 50% was recorded as an
increase to our investment in the LLC.
7
The decrease in operating loss for the three and six month periods ended
February 28, 2003 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. Revenue for this
segment for the three and six month periods ended February 28, 2003, was
primarily derived from the sale of our Digital Mark Recognition software product
to Measurement Incorporated. Included in the operating loss for the three and
six month periods ended February 28, 2003, is approximately $23,000 and $49,000,
respectively, for our 50% share of the LLC net loss.
Total Company Operating Results
- -------------------------------
Following is a report of total company revenue and a reconciliation of
reportable segments' operating (loss) income to our total net loss for the three
and six months periods ending February 28, 2003 and 2002.
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
2003 2002 2003 2002
---- ---- ---- ----
Total company revenue $ 641,556 808,559 1,455,255 1,369,791
----------- ----------- ----------- ------------
Operating (loss) income for
reportable segments (29,238) 37,527 51,946 (268,345)
Unallocated corporate expenses (90,291) (42,789) (177,472) (150,913)
Interest income 5,183 3,317 10,455 7,026
Interest expense (4,019) (4,530) (8,214) (9,232)
Gain on sale of technology 66,277 - 99,960 -
Other, net (47) (3,275) (837) (7,392)
Deferred income tax expense 473,938 - 484,500 -
------------ ------------ ------------ ------------
Net loss $ (526,073) (9,750) (508,662) (428,856)
=========== ============ ============ ============
Loss per share:
Basic $ (0.04) (0.00) (0.04) (0.03)
Diluted (0.04) (0.00) (0.04) (0.03)
=========== ============ ============ ============
Total revenue for the three months ended February 28, 2003 was $641,556 compared
to $808,559 for the same quarter of fiscal year 2002, a decrease of $167,003 or
21%. The decline in second quarter revenue over the same quarter last year is
attributable to the downturn in revenue from our component product technologies
segment, as described above. Total revenue for the six months ended February 28,
2003 was $1,455,255 compared to $1,369,791 for the same six-month period of
fiscal year 2002, an increase of $85,464 or 6%. The increase in total company
revenue for the six-month comparative periods is in large part attributable to
revenue from our new Digital Mark Recognition technology.
8
Our net loss for the three months ended February 28, 2003 was $526,073 or $0.04
net loss per share (basic and diluted), compared to a net loss of $9,750 or
$0.00 net loss per share (basic and diluted) for the same quarter of fiscal
2002. Our net loss for the six months ended February 28, 2003 was $508,662 or
$0.04 loss per share (basic and diluted), compared to net loss of $428,856 or
$0.03 net loss per share (basic and diluted) for the same period in fiscal 2002.
The current fiscal year three and six-month net loss included net deferred
income tax expense of $473,938 and $484,500, respectively. See "Income Tax
Expense" below for further discussion. Without the effect of the net deferred
income tax expense, the pre-tax loss for the six months ended February 28, 2003
was $24,162 compared to a pre-tax loss of $428,856. The decline in pre-tax loss
over the same period last year is attributable to the effects of a workforce
reduction and other cost control measures that were implemented in November 2001
and the approximate $100,000 gain on sale of the Virtual Scoring Technology to
the newly formed LLC. See "Gain on Sale of Technology" below for additional
discussion.
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. During the three and six month periods ended
February 28, 2003, $66,277 and $99,960 of the gain was recognized as income in
the Condensed Statement of Operations, respectively. The remaining $55,101 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.
Income Taxes
- ------------
The income tax provision for the six months ended February 28, 2003, included a
deferred tax benefit of $17,495 and an increase in the valuation allowance for
deferred tax assets of $501,995.
During the second quarter of the current fiscal year we increased our valuation
allowance for deferred tax assets and reduced our net deferred tax asset from
$770,067 at August 31, 2002 to $193,976 at February 28, 2003. In order to fully
realize our net deferred tax asset prior to the expiration of our tax operating
loss carryforwards, we will have to generate approximately $510,000 in taxable
income through increased income from operations, the reversal of deferred tax
liabilities, or both. At February 28, 2003, we had approximately $2.2 million of
tax operating loss carryforwards, of which approximately 82% do not begin to
expire until our fiscal year 2019.
We made the decision to reduce the carrying amount of our net deferred tax
assets during the second quarter of the current fiscal year because our ability
to time the closing of significant revenue opportunities has recently become
more difficult. Prior to the events of September 11, 2001, we began to see
improvement in our financial results with our operating losses becoming
significantly reduced over the prior two years. Subsequent to the events of
September 11, 2001, we experienced an immediate downturn in revenue, but made
adjustments to our cost structure to help mitigate the delay in closing several
revenue transactions which we believe resulted from the events of September 11,
2001, and the struggling national economy. Since that time and through the first
quarter of the current fiscal year, we began to experience revenue totals at a
level that we believe could be sustained and result in profitability for our
company. During the second quarter of the current year we experienced another
downturn in revenue and believe that the continuation of a struggling national
economy coupled with recent international conflicts, including the war, is
having an impact on the timing and amount of revenue that we can expect from our
current customers and prospects in both the private and governmental sectors.
Accordingly, we believe that a reduction in the carrying amount of our net
deferred tax assets is necessary to properly account for the recent increased
difficulties we have experienced in predicting the timing of future revenue.
9
FINANCIAL CONDITION
Working capital at February 28, 2003 was $905,289 with a current ratio of 2.1:1,
compared to $805,049 with a current ratio of 2.0:1 at August 31, 2002.
Net cash provided by operations for the six months ended February 28, 2003 was
approximately $291,000 compared to net cash used in operations of approximately
$213,000 for the same six-month period last year. During the first six months
of the prior fiscal year we paid approximately $97,000 in employee severance
and unpaid vacation during the prior year first quarter as well as approximately
$93,000 in legal fees associated with arbitration proceedings. The remaining
use of operating cash flow in the prior fiscal year six-month period relates to
our operating loss position resulting from downturn in revenue during the prior
year first quarter. The improved operating cash position for the current fiscal
year six-month period is in large part attributable to the collection of a trade
account for the customer that represented approximately 17% of our component
product technology revenue.
Net cash provided by investing activities for the six months ended February 28,
2003 approximated $147,000 and included the $250,000 in cash that we received
upon formation of VSC Technologies, LLC and a subsequent cash distribution from
the LLC of $200,000. Pursuant to the agreement with the LLC, for the first five
years of LLC operations we are eligible to receive cash distributions at the end
of each calendar year beginning on December 31, 2002. We are eligible for such
distributions, subject to certain maximum amounts which graduate downward over
the five year period, if our financial return from the LLC is not at least equal
to the amount of software development cost that we have invested in the LLC.
When and if the LLC becomes profitable, we will be required to pay back such
distributions by foregoing a portion of future cash profits from the LLC. The
$450,000 received pursuant to LLC items was offset by approximately $166,000 in
software development costs for investment in new and enhanced software products
and our approximate $119,000 cash investment for our share of LLC software
development and other operating costs. Net cash used in investing activities
for the six months ended February 28, 2002 approximates $256,000 the majority of
which represents our investment in new and enhanced software products.
Net cash flows used in financing activities during the six month periods ended
February 28, 2003 and 2002 primarily represent repayments of long-term debt and
approximated $14,000 and $8,000, respectively.
We have a line of credit with a bank that provides for maximum borrowing of up
to $1,000,000 and is secured by all trade accounts receivable. There was no
balance outstanding against the line of credit at February 28, 2003. 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.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
The Emerging Issues Task Force recently published a Consensus on EITF Issue 00-
21, "Revenue Arrangements with Multiple Deliverables". The Consensus sets forth
criteria on how to identify if goods or services in bundled sales arrangements
qualify as separate accounting units for which the timing and extent of revenue
recognition can be applied to each unit. In general, in order for goods and
services to be eligible for separate unit accounting the delivered items must
have stand-alone value to the customer, the fair value of any undelivered items
can be reliably determined, and if the arrangement includes a general right of
return, delivery of the undelivered items is probable and substantially
controlled by the seller. We offer bundled sales arrangements to our
customers in the form of product licenses and customer support and maintenance.
We believe that our bundled sales arrangements consistently meet the
requirements for separate unit accounting and accordingly do not expect that
this Consensus will have an impact on the comparability of our financial
statements.
10
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities". This
Interpretation sets forth guidance in determining whether certain equity
investments should be consolidated in situations in which an equity investor
does not have the characteristics of a controlling financial interest or does
not have a sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. We believe
that it is reasonably possible that our equity investment in VSC Technologies,
LLC, may qualify for consolidation in our financial statements in accordance
with this Interpretation. We will be required to adopt the Interpretation as of
September 1, 2003. We have a 50% equity interest in the LLC to further develop
the Virtual Scoring Center technology and bring it to market through the LLC.
In general, the equity investor that is required to consolidate a variable
interest entity is the "primary beneficiary" of the entity and is the investor
that is expected to absorb the majority of its expected losses, receive a
majority of its expected residual returns, or both. We are in the process of
evaluating whether we qualify as the primary beneficiary of the LLC. If we are
required to consolidate the LLC in accordance with this Interpretation, it will
effect our fiscal year 2004 financial statements through a prospective
cumulative-effect adjustment as of the beginning of that year. The amount of
potential maximum exposure to loss as a result of our involvement with the LLC
is not currently determinable.
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
None
(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: April 14, 2003 /s/ Deborah L. Klarfeld
-------------- -----------------------
Deborah L. Klarfeld, President
Principal Executive Officer
Date: April 14, 2003 /s/ Deborah D. Mosier
-------------- ---------------------
Deborah D. Mosier, Chief Financial Officer
Principal Financial Officer
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: April 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: April 14, 2003
/s/ Deborah D. Mosier
-----------------------
Deborah D. Mosier
Chief Financial Officer
12