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, 2004
[ ] 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)
5811 Trenton Ave
Post Office Box 1358
Stillwater, Oklahoma 74076
(Address of principal executive offices)
(405) 707-9060
(Issuer's telephone number)
206 W. 6th Ave
Stillwater, Oklahoma 74074
(Former name, former address and former fiscal year if changed from last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of Each Class Outstanding at December 31, 2004
Common stock, par value $.05 per share 13,121,659
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, 2004 and August 31, 2004
November 30,
2004 August 31,
(unaudited) 2004*
----------- -----------
Cash $ 1,245,070 1,404,542
Trade accounts receivable, net 504,441 334,377
Due from related parties 7,273 42,835
Contract service work in process - 201,981
Prepaid expenses and other current assets 118,296 29,028
Deferred income taxes 3,844 5,192
----------- -----------
Total current assets 1,878,924 2,017,955
----------- -----------
Property and equipment 563,391 566,304
Accumulated depreciation and amortization (477,011) (470,130)
------------ -----------
Net property and equipment 86,380 96,174
----------- -----------
Capitalized software development costs, net 308,121 391,496
Other assets 44,718 46,510
----------- -----------
Total assets 2,318,143 2,552,135
=========== ===========
Accounts payable 133,460 139,980
Accrued payroll expenses 105,822 140,127
Deferred revenue 361,453 362,630
----------- -----------
Total current liabilities 600,735 642,737
Investment in limited liability company 87,749 110,839
Deferred income taxes 3,844 5,192
----------- -----------
Total liabilities 692,328 758,768
----------- -----------
Common stock 656,083 656,083
Additional paid-in capital 11,349,558 11,349,558
Accumulated deficit (10,379,826) (10,212,274)
----------- -----------
Total shareholders' equity 1,625,815 1,793,367
----------- -----------
Total liabilities and shareholders' equity $ 2,318,143 2,552,135
============ ===========
*Condensed from audited financial statements.
See accompanying notes to condensed financial statements.
TMS, Inc.
Condensed Statements of Operations (unaudited)
Three Months Ended November 30, 2004 and 2003
Three Months Ended
November 30
-------------------------
2004 2003
----- -----
Licensing and royalties revenue $ 296,142 334,450
Customer support and maintenance revenue 154,093 169,036
Custom software development services 78,998 7,844
------------ ------------
Total revenue 529,233 511,330
Cost of revenue 218,078 106,260
Selling, general and administrative expenses 368,616 433,438
Research and development expenses 95,323 145,629
Loss in limited liability company (18,772) (24,640)
------------ ------------
Operating loss (171,556) (198,637)
Other (expense) income:
Write-down of property held for sale - (266,537)
Other, net 4,004 2,042
------------ ------------
Income before income taxes (167,552) (463,132)
Income tax expense - -
------------ ------------
Net loss $ (167,552) (463,132)
============ ============
Basic loss per share $ (0.01) (0.04)
============ ============
Weighted average common shares 13,121,659 13,112,659
============ ============
Diluted loss per share $ (0.01) (0.04)
============ ============
Weighted average common shares and potentially dilutive securities
13,121,659 13,112,659
============ ============
See accompanying notes to condensed financial statements.
TMS, Inc.
Condensed Statements of Cash Flows (unaudited)
Three Months Ended November 30, 2004 and 2003
Three Months Ended
November 30
-------------------------
2004 2003
----- -----
Net cash flows (used in)
operating activities $ (109,956) (66,585)
----------- -----------
Cash flows from investing activities:
Capitalized software development costs (7,654) (68,377)
Investment in limited liability company (41,862) (46,757)
Other, net - (604)
----------- -----------
Net cash used in investing activities (49,516) (115,738)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt - (7,632)
----------- -----------
Net cash used in financing activities - (7,632)
----------- -----------
Net decrease in cash (159,472) (189,955)
Cash at beginning of period 1,404,542 1,129,470
----------- -----------
Cash at end of period $ 1,245,070 939,515
============ ===========
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, 2004.
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.
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.
Subsequent Event - Shareholder Approval of Asset Sale to Pegasus and Plan of
Liquidation and Dissolution of the Company
- -----------------------------------------------------------------------------
At a special meeting held on December 17, 2004, the Company's shareholders
approved the sale of the assets of our Component Product Technology division to
PIC Acquisition, Inc. ("Pegasus"), a wholly owned subsidiary of Pegasus Imaging
Corporation, and a plan of liquidation and dissolution of the Company. The
Company also completed the final closing of the transaction with Pegasus and the
sale of our membership interest in VSC Technologies, LLC to Measurement
Incorporated ("MI") on December 17, 2004.
The final cash price paid at closing for the sale of the Component Product
Technologies business to Pegasus approximated $2,246,000, of which $1,600,000
was paid in cash, $341,000 was issued as a note receivable from Pegasus, and
$305,000 was used to satisfy professional fees and other corporate costs that
had been incurred related to the sale of our assets and the plan of liquidation
and dissolution of the Company. In addition, Pegasus assumed certain contractual
obligations of the Company, including its office leases, customer contracts and
severance arrangements with certain employees. Upon closing the sale of VSC
Technologies, LLC to Measurement Incorporated, the Company received $250,000 in
cash and an undertaking to indemnify the Company against the pending lawsuit
with NCS Pearson (See "Legal Proceedings" below). The proceeds from both
transactions will be used to make a final cash distribution to shareholders and
cover the additional costs associated with the liquidation and dissolution of
the Company. At November 30, 2004 such additional costs are expected to
approximate $110,000 and will be charged to operations in future periods as
incurred.
The Company estimates that the combined financial gain on the asset sales to
Pegasus and MI will approximate $1,040,000 and that a portion of the Company's
$2,800,000 in tax operating loss carryforwards will be used to offset
substantially all of the tax liability related to such gains.
Legal Proceedings
- -----------------
The Company is a party to a lawsuit involving the Virtual Scoring Center
technology transferred to VSC Technologies, LLC. On October 23, 2002, the
Company, along with VSC Technologies, LLC and MI, filed an action in the United
States District Court for the Eastern District of North Carolina against NCS
Pearson, Inc. In the complaint, the Company and the other plaintiffs seek a
declaratory judgment that the Virtual Scoring Center technology owned by VSC
Technologies, LLC and marketed by MI and the Company does not infringe twenty
patents belonging to NCS Pearson. On June 3, 2003, NCS filed their answer to the
complaint, along with a set of counterclaims that assert infringement of
thirteen of their patents. The Company carefully designed and developed the
technology to avoid infringement and the Company has and continues to deny any
infringement of the NCS Pearson patents. Discovery has commenced in this case
and the parties have agreed on a discovery plan, which anticipates a trial date
in or after October 2005.
On December 17, 2004 the Company finalized a definitive agreement with
MI pursuant to which, and as a part of the Company's plan of liquidation, the
Company sold all of its 50% interest in VSC Technologies, LLC in exchange for a
cash payment of $250,000 and agreement from MI to indemnify and hold the Company
harmless with respect to all claims, expenses and damages arising out of the
patent infringement lawsuit involving NCS Pearson. Based on this
indemnification, and the fact that the Company assigned all of the allegedly
infringing software to MI and will no longer be conducting any ongoing business
activities, the Company intends to seek court approval in order to make a cash
distribution to shareholders pursuant to its plan of liquidation and/or to be
dismissed from the lawsuit. The Company can give no assurance that it will be
successful in this, which could delay the timing and/or the amount of cash
available for distribution to the shareholders.
Net Loss Per Share
- -------------------
Options to purchase 364,500 shares of common stock at prices ranging from $.27
to $.40 per share and 413,974 shares of common stock at prices ranging from
$.125 to $.40 per share were outstanding at November 30, 2004 and 2003,
respectively, but were not included in the computation of diluted net loss per
share because the options' exercise prices were greater than the average market
price of common shares. The Company had total options outstanding to purchase
364,500 and 413,974 shares of common stock at November 30, 2004 and 2003,
respectively. Options to purchase 202,000 shares of common stock at prices
ranging from $.27 to $.3125 will expire if not exercised prior to March 17,
2005. The remaining 162,500 of the options outstanding at November 30, 2004 will
expire if not exercised prior to the the earlier of liquidation and dissolution
of the Company or June 6, 2006.
Item 2. Management's Discussion and Analysis or Plan of Operation
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.
CRITICAL ACCOUNTING ESTIMATES
- ------------------------------
Our discussion and analysis of financial condition and operations are based on
our financial statements, prepared in accordance with accounting principles
generally accepted in the United States of America and included in this report
on Form 10-QSB. Certain amounts included in or affecting our financial
statements and related disclosure must be estimated, requiring us to make
certain assumptions with respect to values or conditions which cannot be known
with certainty at the time the financial statements are prepared. Therefore, the
reported amounts of our assets and liabilities, revenues and expenses and
associated disclosures with respect to contingent assets and obligations are
necessarily affected by these estimates. We evaluate these estimates on an
ongoing basis, utilizing historical experience, consultation with experts and
other methods we consider reasonable in the particular circumstances.
Nevertheless, actual results may differ significantly from our estimates. We
believe that certain accounting policies are of more significance in our
financial statement preparation process than others, as discussed below.
Computer Software Costs
- -----------------------
We capitalize our software development product costs after we have established
technological feasibility and prior to the release of our products for sale.
Such costs are primarily based on the salaries of our employees and contractors
that contribute to the development of our products, including a factor for
related overhead. Once a product is released for sale, we begin amortizing the
capitalized costs on a straight-line basis over the product's estimated economic
life. On a periodic basis, we compare the unamortized costs of our products to
their estimated net realizable values. If our estimates of net realizable value
fall below the unamortized product costs, the excess is charged directly to
operations to reflect impairment. At November 30, 2004 and 2003, we did not
incur any charges for impairment related to our capitalized software development
costs.
Revenue
- -------
Our revenue is primarily derived from the license of software toolkits and
applications, royalties from customers based on those licenses, and fees for
technical support and product maintenance. We recognize license and royalty
revenue only after we have delivered the software, fulfilled all of our
significant obligations, and resolved any significant uncertainties regarding
customer acceptance. Technical support and product maintenance fees are deferred
and recognized as revenue on a straight-line basis over the applicable contract
period. Occasionally, technical support and product maintenance is bundled with
a software license fee. In such cases, we estimate the fair value of our
technical support and product maintenance obligations using the established fees
that we charge to other customers. Such revenue is deferred as a separate
element of the contract and recognized ratably over the applicable contract
period. Any remaining revenue is then recorded as the software license fee.
Income Taxes
- ------------
We account for income taxes using the asset and liability method. Under the
asset and liability method, deferred tax assets and liabilities are recognized
at the enacted tax rates for the future tax consequences of events that have
been recognized in an entity's financial statements that are attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. Following is a summary of the significant items that comprise our
estimated deferred tax assets and liabilities:
- ------------------------------------------------------------------------------
November 30, 2004 August 31, 2004
- ------------------------------------------------------------------------------
Deferred tax assets:
Tax operating loss carryforwards $ 1,057,305 1,024,911
Other 37,598 38,800
- ------------------------------------------------------------------------------
Total gross deferred tax assets 1,094,903 1,063,711
Less valuation allowance 961,922 898,893
- ------------------------------------------------------------------------------
Net deferred tax assets 132,981 164,818
Deferred tax liabilities:
Property and equipment (16,018) (16,206)
Capitalized software costs (116,963) (148,612)
- ------------------------------------------------------------------------------
Net deferred tax $ - -
- ------------------------------------------------------------------------------
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.
During the first quarter ended November 30, 2004, the Company increased its
valuation allowance for deferred tax assets and decreased the deferred tax
asset, net of valuation allowance, from $164,818 at August 31, 2004 to $132,981
at November 30, 2004. In order to fully realize the net deferred tax assets
prior to the expiration of tax operating loss carryforwards, the Company will
have to generate approximately $350,000 in taxable income. Subsequent to
November 30, 2004, our shareholders approved the sale of our Component Product
Technologies business to Pegasus and a plan of liquidation and dissolution of
the Company. Such plan included the sale of our membership interest in VSC
Technologies LLC to MI and such sale became final on December 17, 2004. The sale
of assets to Pegasus and MI are expected to result in a combined financial gain
of $1,040,000 and a taxable gain of approximately $1,371,000. The estimated
difference in the amount of financial and taxable gain are primarily the result
of the expected reversal in deferred tax liabilities associated with capitalized
software development costs. At November 30, 2004, we had approximately
$2,800,000 of tax operating loss carryforwards which will offset substantially
all of the taxable gains from the sales to Pegasus and MI.
RESULTS OF OPERATIONS
- ---------------------
Following is selected financial information for each of our reportable segments
for the three months ended November 30, 2004 and 2003.
Component Product Technologies Segment
- --------------------------------------
---------------------------------------------------------------
Three Months Ended
-------------------------------- ----------- -----------
Dollar Percent
November 30, November 30, Increase Increase
2004 2003 (Decrease) (Decrease)
------------- ------------ ---------- -----------
Revenue from external customers $ 520,775 489,247 31,528 6.4%
------------ ----------- ---------- ---------
Operating income (loss) $ 80,937 (39,933) 120,870 302.68%
------------ ----------- ---------- ---------
Operating income (loss) as % of revenue 15.5% (8.2%)
------------ -----------
Revenue from the component product technologies segment is primarily derived
from licensing, royalties, and the customer support and maintenance of our
Prizm(R) web-based Viewer, ScanFix(R), Prizm(R) Image Processing, Prizm(R) Gray,
ViewDirector(TM) and FormFix(R) products.
Improvements of revenue and profitability for this segment have historically
depended on our ability to secure significant sales of multiple licenses and/or
royalties to individual customers. For the first quarter ended November 30, 2004
one customer accounted for 14% of the total revenue for the segment, whereas for
the same quarter last year no one customer accounted for greater than 10% of
total segment revenue. In addition to the slight increase in revenue, the
profitability of this segment improved over the same period last year primarily
because of a decrease in personnel costs. Early in the first quarter and after
announcement of the asset sale to Pegasus, three full time equivalent employees
resigned from the Company and since the first quarter last year, four other full
time equivalent employees were either terminated or voluntarily resigned from
the Company and were not replaced. The total dollar impact of the employee
changes represented a decrease in personnel costs of approximately $133,000.
We believe that the lack of widespread adoption of color and gray image
processing technologies in the document management marketplace has impacted our
ability generate revenue growth for this segment and also replace revenue from
our more mature viewing and black and white image processing products.
Additionally, we believe that revenue from our viewing technology has been
impacted by increased competition from low or no cost web-based viewing
technologies and an increase in demand for document images to be created or
converted to Adobe's PDF file format. The document management marketplace is
also expected to continue to migrate to more specialized technology solutions
applicable to niche markets or industries. Our products have typically been
applicable across many types of document imaging technology solutions.
As described in the Notes to the Condensed Financial Statements above, On
December 17, 2004, the shareholders approved and we finalized the sale of the
Component Product Technologies business to Pegasus. Accordingly, effective
December 17, 2004, we discontinued all operating activities for this segment.
Assessment Scoring Technologies Segment
- ----------------------------------------
Three Months Ended
-----------------------------------------
November 30, November 30,
2004 2003
------------ ------------
Revenue $ 8,458 22,083
----------- -----------
Operating loss $ (71,643) (41,518)
----------- -----------
The financial results for this segment reflect operating activities associated
with the license and support of our Digital Mark Recognition(TM) ("DMR(R)")
software product and our 50% equity interest in VSC Technologies, LLC, an entity
that we formed with Measurement Incorporated in October 2002. First quarter
revenue for both 2004 and 2003 was primarily derived from the license and
support or maintenance of DMR to Measurement Incorporated.
We have an agreement with the LLC whereby we provide software development
services, at a fixed rate per hour. During the first quarters ended November
2004 and 2003, the segment's operating expenses were reduced by approximately
$81,000 and $87,000, respectively, for such development services of which 50%
was billed to the LLC and 50% was recorded as an increase to our investment in
the LLC.
The increase in operating loss for the three months ended November 30, 2004
compared to the same period last year primarily resulted from a reduction in
revenue. The operating loss for both the current and prior first quarter
included approximately $19,000 and $25,000 for our 50% share of the LLC net
loss, respectively.
As described in the Notes to the Condensed Financial Statements above, The
Company sold to MI all of its 50% membership interest in VSC Technologies, LLC.
As part of this transaction, all of the existing agreements between the Company
and VSC Technologies, LLC or MI were terminated and Pegasus entered into new
agreements with the LLC and MI to provide software development services and to
license and support the DMR and certain other component product technologies.
Accordingly, effective December 17, 2004, we discontinued all operating
activities associated with this segment.
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) income for
the three-month periods ending November 30, 2003 and 2002.
Three Months Ended
November 30
2004 2003
------------- ------------
Total company revenue $ 529,233 511,330
------------- -------------
Operating income (loss) for
reportable segments 9,294 (83,658)
Unallocated corporate expenses (180,850) (114,979)
Interest income 4,781 4,111
Interest expense - (3,650)
Write-down of property held for sale - (266,537)
Other, net (777) 1,581
------------ ------------
Net loss $ (167,552) (463,132)
=========== ============
(Loss) income per share:
Basic $ (0.01) (0.04)
Diluted $ (0.01) (0.04)
=========== ============
As described in the Notes to the Condensed Financial Statements and our segment
discussions above, on December 17, 2004 our shareholders approved the sale of
substantially all of our assets to Pegasus and a plan of liquidation and
dissolution of the Company. We also finalized the sale of our membership
interest in VSC Technologies, LLC to MI. The increase in unallocated corporate
expenses during the current first quarter compared to the same period last year,
primarily resulted from professional and other fees associated with completing
the transactions with Pegasus and MI and for the preparation of proxy materials
and solicitation of votes from our shareholders.
The net loss for the three month period ended November 30, 2003, included a
write-down to reflect impairment in the value of our headquarters building which
was held for sale. During the prior year first quarter, we entered into a real
estate purchase contract for the sale of our headquarters building located in
Stillwater, Oklahoma. The final sale closed on December 31, 2003. The impairment
was based on the amount that the net book value of the property exceeded the
contracted purchase price plus estimated costs incurred for final sale.
FINANCIAL CONDITION
- -------------------
Working capital at November 30, 2004 was $1,278,199 with a current ratio of
3.1:1, compared to $1,375,218 with a current ratio of 3.1:1 at August 31, 2004.
Net cash used in operations for the three months ended November 30, 2004 was
approximately $110,000. Our negative operating cash position primarily reflects
the impact of our operating losses.
Net cash used in investing activities for the three months ended November 30,
2004 approximated $49,500 related to our investment in VSC Technologies, LLC. We
did not use or receive any cash during the current year first quarter related to
financing activities.
Subsequent to November 30, 2004 and upon closing the asset sales transactions
with Pegasus and MI, we terminated our $500,000 operating line of credit with a
bank. There was not balance outstanding against the line of credit at November
30, 2004 or at the time of termination.
Item 3. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-14 under the Securities Exchange
Act of 1934). Based upon that evaluation, the President and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
PART II - Other Information
Item 5. Other Information
On December 17, 2004, our shareholders approved the sale of our Component
Product Technologies business to Pegasus and a plan of liquidation and
dissolution of the Company. We also finalized the sale to Pegasus and entered
into and finalized the sale of our membership interest in VSC Technologies, LLC
to MI. See "Subsequent Event - Shareholder Approval of Sale of Assets to Pegasus
and Plan of Liquidation and Dissolution of the Company" in the Notes to the
Condensed Financial Statements in this report on Form 10-QSB.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
--- -----------
10 Purchase and Sale Agreement between the Registrant, Measurement
Incorporated and VSC Technologies, LLC dated December 17, 2004
31 Certification of Principal Executive and Financial Officer Pursuant to SEC
Rule 13a-14
32 Certification of Principal Executive and Financial Officers Pursuant to 18
U.S.C. Section 1350
(b) Reports on Form 8-K
None
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, 2005 /s/ Deborah D. Mosier
Deborah D. Mosier, President
and Chief Financial Officer
Principal Executive and Financial Officer
INDEX TO EXHIBITS
Exhibit
No. Description Method of Filing
--- ----------- ----------------
10 Purchase and Sale Agreement between Filed herewith electronically
the Registrant, Measurement
Incorporated and VSC Technologies,
LLC dated December 17, 2004
31 Certification of Principal Executive Filed herewith electronically
and Financial Officer Pursuant to SEC
Rule 13a-14
32 Certification of Principal Executive Filed herewith electronically
and Financial Officers Pursuant to 18
U.S.C. Section 1350