-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ACP5ndAa0iPPulcULdN678AjjwJyTWKL2gpBmsKtUU0DRVmRUocuZhvydMuK6yPq NYvAa7o49rClP16xyiA6xQ== 0000909334-05-000006.txt : 20050114 0000909334-05-000006.hdr.sgml : 20050114 20050114145157 ACCESSION NUMBER: 0000909334-05-000006 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20041130 FILED AS OF DATE: 20050114 DATE AS OF CHANGE: 20050114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TMS INC /OK/ CENTRAL INDEX KEY: 0000835412 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 911098155 STATE OF INCORPORATION: OK FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-22780-NY FILM NUMBER: 05530438 BUSINESS ADDRESS: STREET 1: 206 WEST SIXTH AVENUE STREET 2: PO BOX 1358 CITY: STILLWATER STATE: OK ZIP: 74076 BUSINESS PHONE: 4053770880 MAIL ADDRESS: STREET 1: 206 WEST 6TH AVE STREET 2: PO BOX 1358 CITY: STILLWATER STATE: OK ZIP: 74076-1358 10QSB 1 tmsform10q-011405.txt 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 EX-10 2 tmsex10form10q-011405.txt EXHIBIT 10 PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT ("Agreement") is made as of the 17th day of December, 2004 by and among TMS, INC., an Oklahoma corporation ("TMS"), MEASUREMENT INCORPORATED, a North Carolina corporation ("MI"), and VSC TECHNOLOGIES, LLC, a Delaware limited liability company (the "Company"). W I T N E S S E T H WHEREAS, TMS is the owner of a 50% Membership Interest (the "TMS Interest") in the Company; and WHEREAS, MI is the owner of the other 50% Membership Interest in the Company; and WHEREAS, TMS desires to sell and MI agrees to purchase the TMS Interest pursuant to the terms and conditions of this Agreement; and WHEREAS, TMS is selling all of its assets, including, but not limited to, the TMS Rights and Non-VSC Technology (as defined in the Operating Agreement) excluding the TMS Interest to PIC Acquisition, Inc. an Oklahoma Corporation, a wholly owned subsidiary of Pegasus Imaging Corporation, a Florida Corporation ("Pegasus"); and WHEREAS, a condition of the sale of the other assets of TMS to Pegasus is the sale of the TMS Interest to MI; and WHEREAS, Pegasus intends to hire certain employees of TMS, to perform certain services for MI and to agree to certain licenses and other agreements as set for the herein; and WHEREAS, as a result of the purchase and sale of the TMS Interest and in consideration thereof, MI, TMS, and the Company desire as of the Closing Date to terminate certain agreements between MI, TMS and the Company and enter into new agreements for the licensing and performance of services by Pegasus after Closing; and WHEREAS, MI, TMS and the Company are parties to the following agreements: 1. Master Agreement dated October 10, 2002 (the "Master Agreement"). 2. Operating Agreement of VSC Technologies, LLC dated October 10, 2002 (the "Operating Agreement"); 3. LLC DMR License Agreement between TMS and the Company dated October 10, 2002 (the "LLC DMR Agreement"); 4. MI DMR License and Service Agreement between TMS and MI dated October 10, 2002 (the "MI DMR Agreement"); 5. MI VSC License and Service Agreement among the Company, TMS and MI dated October 10, 2002 (the "MI VSC Agreement"); 6. TMS VSC License Agreement between the Company and TMS dated October 10, 2002 (the "TMS VSC Agreement"); and 7. Comprehensive Preferred Escrow Agreement among DSI Technology Escrow Services, Inc. ("DSI"), TMS, MI and the Company effective as of October 10, 2002 (the "Escrow Agreement"). The Master Agreement, the Operating Agreement, the LLC DMR Agreement, the MI DMR Agreement, the MI VSC Agreement, the TMS VSC Agreement and the Escrow Agreement are sometimes hereinafter collectively referred to as the "VSC Agreements"; and WHEREAS, capitalized terms in this Agreement not otherwise defined in this Agreement shall have the meaning ascribed to them in Exhibit 1, attached hereto and incorporated by reference; and NOW THEREFORE, in consideration of the mutual covenants, terms and conditions set forth herein, the sufficiency and adequacy of which are hereby acknowledged, the parties agree as follows: ARTICLE I PURCHASE AND SALE OF TMS INTEREST 1.1 Purchase of TMS Interest. TMS agrees to sell and MI agrees to purchase, the TMS Interest upon the terms and conditions hereinafter set forth. 1.2 Consideration for TMS Interest. The purchase price for the TMS Interest shall be Two Hundred and Fifty Thousand and no/100 Dollars ($250,000) (the "Purchase Price"). 1.3 Payment for TMS Interest. Subject to performance of the conditions to Closing as set forth in this Agreement, the Purchase Price shall be paid to TMS at Closing (as hereinafter defined) in immediate available funds. ARTICLE II ADDITIONAL COVENANTS AND AGREEMENTS 2.1 Indemnity. Effective upon the purchase and sale of the TMS Interest under this Agreement, and subject to the following terms and conditions, MI shall indemnify and hold TMS harmless against all costs and expenses and any judgment TMS may incur as a result of any patent infringement lawsuit, claim, suit or action regarding the VSC Technology filed by NCS Pearson, Inc. ("NCS") or any of its affiliates, or any successors or assigns of NCS (an "Action"). 2.1.1 MI shall have the right in an Action to select counsel for the representation of any or all of MI, TMS and the Company and to control defense strategy and any settlements involving the Company or TMS. TMS may retain its own counsel other than that counsel selected by MI; however, in such event TMS shall be responsible for the legal costs associated with such additional representation, unless such additional representation is occasioned by: (i) the demands of MI, or (ii) the opinion by MI counsel that its joint representation of TMS and MI or TMS and the Company, or TMS, MI and the Company is impermissible or likely impermissible under pertinent standards of professional responsibility for the legal profession. Currently a matter is pending in the United States District Court for the Eastern District of North Carolina, Western Division, Court File No. 5:02W-778-H(3) captioned "Measurement Incorporated; TMS, Inc. (authorized to do business in North Carolina under the name TMSSequoia Corp.); and VSC Technologies, LLC vs. NCS Pearson, Inc." (the "Lawsuit"). In no event shall this Section 2.1 be deemed to be an admission of liability on the part of the Company, MI or TMS, it being understood that this Section 2.1 arises solely as a result of general threats and allegations by NCS, and the counterclaims filed in the Lawsuit all of which the Company, MI and TMS believe to be unsubstantiated. For purposes of this Section 2.1, the Lawsuit is considered an Action. 2.1.2 MI shall indemnify and hold TMS harmless against the amount of any judgment entered against TMS in an Action, less any amounts recovered through other means such as insurance by TMS. MI shall be entitled to seek a stay and/or appeal of any judgment and shall not be obligated to make payment thereon unless and until such judgment has become final and nonappealable so long as failure to make such payment does not result in an execution, liens or encumbrances on assets of TMS or prevent TMS from making a final distribution to its shareholders. MI's obligation to indemnify TMS shall not extend to any sanctions imposed by a court as a result of TMS's noncompliance with orders of the court during the prosecution or defense of any Action, except those taken by or at the direction of MI or MI's counsel. 2.1.3. In addition to the right of MI to file motions for stay of judgment, TMS shall have an independent right to file a motion in an Action to stay any judgment, (i) at MI's cost and expense if MI has breached its obligations under Section 2.1.2, or (ii) otherwise, at the sole cost and expense of TMS, provided however that TMS may only have such right in the event that TMS is likely to suffer irreparable harm by such judgment. 2.1.4 MI shall have the authority to settle all Actions on behalf of the Company and TMS, and TMS shall join in all settlement agreements as requested by the Company or MI, so long as such settlement does not result in any monetary obligations on the part of TMS not paid by MI or result in any material diminishment in the value of any asset of TMS or its successors . TMS shall not be responsible for settlement costs paid to NCS. 2.1.5 TMS represents and warrants that TMS has only licensed the VSC Technology in three contracts which could form the basis of a claim by NCS against TMS; provided however, the validity of any such claim is denied. Specifically these three contracts are with the following entities: (i) North Dakota Department of Public Instruction Contract Service Agreements, dated December 20, 2000, July 1, 2001 and May 22, 2002; (ii) Denver Public Schools, dated October 17, 2001, with a renewal dated August 1, 2002 and a renewal by cash payment on March 8, 2004 and a renewal by purchase order dated July 30, 2004; and (iii) MI (i.e., the VSC Agreements), dated October 10, 2002. Additionally TMS represents and warrants that TMS performed services to allow New York City Public Schools and Alberta Learning in Canada the ability to try out the VSC Technology, however such trials did not result in a license of the VSC Technology, nor was TMS reimbursed for any costs associated with performing such services. 2.1.6 TMS (by and through Deborah D. Mosier as coordinator (the "Coordinator")) will provide all reasonable cooperation and assistance needed by MI in the defense of an Action, including, without limitation, providing testimony, technical knowledge and Documents within the possession of TMS and identifying any known witnesses and their last known whereabouts, at no cost to the Company or MI, except for any reasonable travel or duplication costs, approved in advance by MI, incurred in connection with an Action through December 31, 2004. Beginning January 1, 2005, Deborah D. Mosier will continue to perform services as the Coordinator at a rate of $75.00 per hour, plus reasonable travel and other administrative costs, approved in advance by MI, and incurred in connection with the Action. It shall be a condition to the obligation of MI to close the purchase and sale under this Agreement, that Pegasus shall enter into an agreement with MI (the "Pegasus Software Development Services Agreement") attached hereto as Exhibit 2. The term "Documents" as used herein shall have the broadest meaning ascribed to it under the Federal Rules of Civil Procedure 2.1.7 In the event that Deborah D. Mosier refuses to perform the duties of Coordinator in a manner satisfactory to MI, then TMS shall appoint a corporate representative of TMS to replace her as Coordinator. Without limiting the generality of Section 2.1.6, Coordinator shall be responsible for (1) assembling and organizing all Documents necessary in the defense and prosecution of the Action relative to TMS;(2) responding to discovery requests in the Lawsuit and any other Action relative to TMS; (3) assisting in the preparation of discovery requests in the Lawsuit and any other Action relative to TMS; and (4) executing on behalf of TMS any settlement or legal document required to be executed by TMS. Coordinator shall promptly and timely perform such actions on behalf of TMS at the request of MI and the Company. 2.1.8. TMS represents and warrants that it shall perform through its Coordinator monthly updates to what it previously provided in the way of Documents reasonably believed to be relevant to an Action, effective December 17, 2004 and shall deliver such update to MI during the following week and monthly thereafter. Should there be no updates of any Documents reasonably believed to be relevant to an Action, for a particular month ,then TMS shall so indicate in its monthly update letter. 2.1.9 The obligations of the parties under this Section 2.1 shall survive Closing. 2.2 Cancellation of Development Costs Due. At Closing, the Company and MI shall cancel the obligation of repayment of additional contribution for Development Costs in the amount of Three Hundred Fifty Thousand and No/100 Dollars ($350,000.00) and TMS shall have no further obligation to contribute to past or future Development Costs. 2.3 Cancellation of Tax Preparation Obligation. At Closing, MI shall cancel TMS' one-half share of its obligation for payment of the preparation of the Company's tax return and MI shall assume responsibility for full payment of the preparation of the Company's tax return. 2.4 Assignment. At Closing, TMS shall assign, give, grant, transfer, sell and convey the TMS Interest to MI and any and all right, title and interest which TMS has under any provision of the Operating Agreement and in and to any of the assets of the Company, in form reasonably satisfactory to MI and TMS (the "Assignment and Agreement"). The Assignment shall provide that MI shall assume the obligations of TMS as of the Closing Date provided, that (i) the representations and warranties of TMS under Section 5.1.3 and Section 7.1.1 of the Operating Agreement shall remain in full force and effect, (subject to the Lawsuit). (ii) the grants and assignments under Section 7.1.1 of the Operating Agreement shall be continued and superceded by the terms of the license in Section 2.6 below (iii) the sublicense of rights from the Company to TMS under Section 7.2 of the Operating Agreement shall terminate and be of no further force and effect, (iv) the LLC DMR Agreement, MI DMR Agreement, MI VSC Agreement, and the TMS VSC Agreement, as well as the Escrow Agreement shall be terminated as provided in this Agreement and MI and TMS shall enter into certain new license agreements prior to Closing as provided in this Agreement, (v) TMS shall remain subject to and bound by Article XI of the Operating Agreement, and (vi)) TMS shall waive and release all claims against the Company and MI, and their respective officers, directors, and employees, and all rights in and to the Company, the VSC Agreements, VSC Products, VSC Services and the VSC Technology, except for claims against MI pursuant to an Action and this Agreement. 2.5 Licenses. At Closing, MI and the Company shall enter into license agreements with Pegasus for the Product Applications and Product Toolkits, attached as Exhibit 3 and Exhibit 4, respectively to this Agreement (the "DMR VAR Agreement" and the "Product Toolkits VAR Agreement"). 2.6 Termination of Agreements. At Closing, MI, the Company and TMS shall terminate the following: 2.6.1 LLC DMR Agreement. The LLC DMR Agreement shall be terminated (the "LLC DMR Termination") and MI, the Company and Pegasus shall enter into the DMR VAR Agreement pursuant to Section 2.5 above. 2.6.2 MI DMR Agreement. The MI DMR Agreement shall be terminated (the "MI DMR Termination") and MI and Pegasus shall enter into DMR VAR Agreement pursuant to Section 2.5 above. 2.6.3 MI VSC Agreement. The MI VSC Agreement shall be terminated in its entirety and the same shall be void and of no further force and effect (the "MI VSC Termination"). 2.6.4 TMS VSC Agreement. The TMS VSC Agreement shall be terminated in its entirety and the same shall be void and of no force and effect (the "TMS VSC Termination"). 2.6.5 Escrow Agreement. DSI, TMS, MI, and the Company shall terminate the Escrow Agreement (the "Escrow Termination"). Prior to Closing, MI shall provide to DSI a letter notifying of a release condition (the "MI Release Letter"). At Closing, TMS shall issue a letter to DSI confirming the release condition and authorizing the release of all Deposit Materials and all Deposit Updates (as defined in the Escrow Agreement) (the "TMS Release Letter"). 2.6.6 Master Agreement. The Master Agreement shall be terminated in its entirety and the same shall be void and of no force and effect (the "Master Agreement Termination"). 2.7 Consent to Termination of Agreements. As a condition to the obligation of MI to the close of the purchase and sale of the TMS Interest, Pegasus shall consent to the termination of the agreements in Section 2.6 above, in form satisfactory to MI (the "Pegasus Termination Consent"). 2.8 Employee Assignments. To the extent not already previously provided, at Closing, TMS shall deliver copies of all assignments of all of its employees and all other Persons who have worked on or contributed to in any way the creation or development of the VSC Technology, of their rights thereto to TMS (the "Employee VSC Assignments") and which supported TMS' representation and warranty in Section 7.1.1 (aa) of the Operating Agreement. TMS represents and warrants that the employees and other Persons listed in a - w below were to its knowledge the only employees and other Persons who worked on or contributed in any way to the creation or development of the VSC Technology. It is understood and agreed that the Company or MI will bear all out-of-pocket costs, not otherwise reimbursed, associated with any employee complying with any request, except for those internal and administrative costs incurred by TMS and/or Pegasus. a. Daily, Stephen R. b. Denney, Jason c. Fox, Sequoyah Lane d. Goins, Peter K. e. Henson, Vaughn f. Hilsabeck, David A. g. Hinchey, Chris L. h. Housman, Coy i. Jennings, Greg j. Johnson, Scott k. Kennedy, Timothy E. l. Kinzie, Erin m. Klarfeld, Deborah n. McClure, Shari G. o. Morgan, Scott p. Mosier, Deborah D q. Payne, Michael r. Scanlan, Richard P. s. Scoles, Stace t. Shilling, Jamie u. Taylor, Garland S. v. Tolle, Larry w. Zhang, Rachel 2.9 Books and Records. Pursuant to Section 5.4 of the Operating Agreement, TMS has the obligation to keep and maintain proper and complete books of account and to maintain a bank account on behalf of the Company. At Closing, TMS shall deliver true, complete and accurate copies of all books of account of the Company, shall close the bank account opened by TMS on behalf of the Company and shall transfer all funds in the bank account to MI. TMS shall forward to MI all books and records relating to the Operating Agreement and the Program (the "TMS Books and Records"). After Closing, TMS shall not be entitled to the accounting service fee set forth in Section 3.4.2 of the Operating Agreement. 2.10 Public Announcements. Any press release or similar public statement by either party concerning the relationship between the parties or this Agreement shall not be made without the prior written consent and participation by the other parties; provided, however, that any party may make any such release or announcement which is necessary or appropriate for the releasing party or its affiliates to make in order to comply with applicable laws or regulations, to include, without limitation, any such release, announcement of filing, required pursuant to applicable state or federal securities laws or the rules or requirements of the Securities and Exchange Commission or any exchange upon which the stock of the releasing party is listed or necessary in connection with any bid or proposal to a customer. 2.11 Accounting. At Closing, MI shall pay any remaining Development Costs owed to TMS for work performed to date pursuant to Section 5.2 of the Operating Agreement. 2.12 Inventors. At Closing, TMS shall deliver originals of all assignments of its employees and all other Persons who have worked on or contributed to the creation or development of the TMS Patent Rights of their rights thereto to TMS (the "TMS Patent Assignments"). TMS agrees to cooperate and make available, where applicable, those inventors in its employ (the "Inventors") of that invention entitled "CONSTRUCTED RESPONSE SCORING SYSTEM" (the "Invention"), for which a United States Patent Application was filed on June 2, 2003 as Serial No. 10/452,859 and which was assigned to the Company as part of the terms of the Operating Agreement, upon request by the Company or MI to execute any documents, provide any truthful testimony, and do any lawful act deemed reasonably necessary by the Company or MI to prosecute or protect its rights in the Invention. It is understood and agreed that the Company or MI will bear all out-of-pocket costs, not otherwise reimbursed, associated with Inventors complying with any request, except for those internal and administrative costs incurred by TMS. 2.13 Confidentiality. 2.13.1 It is anticipated that a party may receive confidential information of another party ("Confidential Information"). Accordingly, each party agrees as follows, concerning the Confidential Information of another party, during the pendency of this Agreement or any license agreements attached as an exhibit to this Agreement, and for a period of five (5) years following date of the last agreement to terminate: (a) The party receiving Confidential Information of a disclosing party shall not reproduce or disclose such Confidential Information in any form except with the prior written consent of the disclosing party or where required by law; (b) Confidential Information shall remain the property of the disclosing party and the party receiving such Confidential Information shall use the Confidential Information only for the purpose of performing its obligations under this Agreement or any Exhibit to this Agreement, and shall return such Confidential Information upon request of the disclosing party; and (c) The receiving party shall use precautions in protecting the Confidential Information of the disclosing party at least as stringent as it uses to protect its own proprietary and confidential information. 2.13.2 Scope of Confidential Information. It is understood that the term Confidential Information does not include information: (a) which is independently developed by the receiving party or lawfully received free of restriction from another source having the right to so furnish such information; or (b) after it has become generally available to the public without breach of this Agreement by the receiving party; or (c) which at the time of disclosure to the receiving party was known to such party free of restriction; or (d) which the disclosing party agrees in writing is free of such restrictions. 2.14 The Post Closing Escrow Agreement. MI, the Company and Pegasus shall enter into a new escrow agreement with DSI Technology Escrow Services, Inc. for the escrow of the Product Toolkit source code (the "Escrow Materials"), in substantially the form attached hereto as Exhibit 5 (The "Post Closing Escrow Agreement") ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of TMS. TMS hereby represents and warrants to MI and the Company, which representations and warranties shall be true at Closing as follows: 3.1.1 TMS is a corporation duly organized, validly existing and in good standing under the laws of Oklahoma. TMS has full power and authority to own its properties and conduct the business presently being conducted by it. TMS has full legal power, authority and capacity to execute this Agreement and to consummate the transactions contemplated by this Agreement. 3.1.2 The execution, delivery and performance of this Agreement by TMS and all other agreements referenced herein to which TMS is a party have been duly authorized and approved by all requisite action on the part of the Board of Directors of TMS and prior to Closing will be duly authorized and approved by all requisite action of the shareholders of TMS. This Agreement and all other agreements referenced herein to which TMS is a party constitute the valid and binding obligation of TMS and is enforceable against TMS in accordance with its terms, except as such enforceability may be limited to bankruptcy, insolvency, reorganization, moratorium and other similar law relating to or limiting creditors' rights generally and by equitable principals. 3.1.3 TMS has valid, marketable title to the TMS Interest, free and clear of all claims, liens, charges, encumbrances and equities whatsoever (including, but not limited to claims by the Oklahoma Department of Revenue, whether asserted or inchoate). TMS has full rights, power and authority to sell, transfer and deliver the TMS Interest. The sole right, title and interest in and to the TMS Interest is vested in TMS. TMS hereby acknowledges that TMS has no past, present or future interest in or claim to the Company other than the TMS Interest being transferred pursuant to this Agreement. No other party has any rights or claims to possession of the TMS Interest and the TMS Interest is not subject to any option, contract, agreement, or arrangement or understanding that would restrict the ability or TMS to transfer the TMS Interest to MI as contemplated herein. 3.1.4 The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and the compliance with the terms hereof will not (a) violate any law, judgment, order, decree, statute, ordinance, rule or regulation applicable to TMS or any permit, license or approval of any governmental entity, (b) conflict with any provision of Certificate of Incorporation or Bylaws of TMS, (c) result in any violation of and will not conflict with or result in a breach of any terms of, or constitute a default under, any mortgage, instrument or agreement to which TMS is a party or by which TMS or the TMS Interest is bound or create any lien upon the TMS Interest, or (d) require any notice to or consent, approval, order or authorization of, or the registration, declaration or filing with, any governmental entity or other third party, except reports with the Securities and Exchange Commission ("SEC") as required under the SEC regulations. 3.1.5 Other than the Lawsuit, there is no suit, action or proceeding pending against TMS relating to the TMS Interest or the transactions contemplated hereby nor is there any suit, action or proceeding threatened against TMS relating to the TMS interest or the transactions contemplated hereby. 3.1.6 Except as expressly waived or permitted by the SEC, TMS has filed and shall timely file all reports and documents required to be filed by it under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and the rules and regulations adopted by the Securities and Exchange Commission thereunder. 3.1.7 TMS is not insolvent and will not be rendered insolvent, or otherwise unable to meet its obligations as they become due as a result of the transfer contemplated by this Agreement. No solvency proceeding of any kind which shall affect TMS is or at Closing shall be pending or threatened. 3.1.8 TMS and/or Pegasus, as the case may be, has delivered all Updates to the Company and/or Escrow Agent required to date under the VSC Agreements and prior to Closing, will have delivered all Updates required prior to the Closing Date. 3.1.9 Except for the following listed contractors, all work created for the Company by TMS was performed by employees of TMS and was work created for hire: a. Adamson, Ken b. Crosthwaitt, Robert c. Raymond, PJ 3.1.10 No claims have been made against the Company, MI, or their respective officers, directors or employees, by TMS and there is no basis for any claim of TMS against any one of them. 3.1.11 TMS has complied with all terms, covenants, conditions, disclosure requirements and notices in the Operating Agreement applicable to or required by TMS or the TMS Interest and in the VSC Agreements, there is no default by TMS under the Operating Agreement and there is no act or omission of TMS with which notice or passage of time could become a default. 3.1.12 TMS has no Additional Technology pursuant to Section 7.1.3 of the Operating Agreement. 3.1.13 TMS has no knowledge of any Actions (as defined in Section 7.9 of the Operating Agreement) or threatened Actions pursuant to Section 7.9 of the Operating Agreement except the Lawsuit. 3.1.14 TMS has valid, marketable title to the TMS Rights and Non-VSC Technology, free and clear of all claims, liens, charges, encumbrances and equities whatsoever (including, but not limited to claims by the Oklahoma Department of Revenue, whether asserted or inchoate). 3.2 Representations and Warranties of MI. MI hereby represents and warrants to TMS, which representations and warranties shall be true at Closing, as follows: 3.2.1 MI is a corporation duly organized, validly existing and in good standing under the laws of North Carolina, MI has full power and authority to own its properties and conduct the business presently being conducted by it. MI has full legal power, authority and capacity to execute this Agreement and to consummate the transactions contemplated by this Agreement. 3.2.2 The execution, delivery and performance of this Agreement by MI have been duly authorized and approved by all requisite action on the part of the Board of Directors of MI. This Agreement constitutes the valid and binding obligation of MI and is enforceable against MI in accordance with its terms, except as such enforceability may be limited to bankruptcy, insolvency, reorganization, moratorium and other similar law relating to or limiting creditors' rights generally and by equitable principals. 3.2.3 The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and the compliance with the terms hereof will not (a) violate any law, judgment, order, decree, statute, ordinance, rule or regulation applicable to MI or any permit, license or approval of any governmental entity, (b) conflict with any provision of the Articles of Incorporation or Bylaws of MI, (c) result in any violation of and will not conflict with or result in a breach of any terms of, or constitute a default under, any mortgage, instrument or agreement to which MI is a party or by which MI or the MI Interest is bound or create any lien upon the MI Interest, or (d) require any notice to or consent, approval, order or authorization of, or the registration, declaration or filing with, any governmental entity or other third party. ARTICLE IV DELIVERY AT CLOSING 4.1 Deliveries by TMS at Closing. At the Closing, TMS shall convey, transfer, assign and deliver to MI all of TMS' right, title and interest in the TMS Interest, with good and merchantable title included therein, free and clear of all liens. TMS shall deliver or cause to be delivered to MI: 4.1.1 The Pegasus Software Development Services Agreement pursuant to Section 2.1.6. 4.1.2 The Assignment and Agreement pursuant to Section 2.4. 4.1.3 The DMR VAR Agreement and The Product Toolkits VAR Agreement pursuant to Section 2.5. 4.1.4 The TMS Release Letter pursuant to Section 2.6.5. 4.1.5 The DMR Update Release pursuant to Section 2.6.5. 4.1.6 The Pegasus Termination Consent pursuant to Section 2.7 4.1.7 The Employee VSC Assignments pursuant to Section 2.8. 4.1.8 The TMS Books and Records pursuant to Section 2. 9. 4.1.9 The remaining Development Costs, if any, pursuant to Section 2.11. 4.1.10 The TMS Patent Assignments pursuant to Section 2.12. 4.1.11 Good Standing Certificate of recent date for TMS from the Secretary of State of Oklahoma. 4.1.12 UCC search results evidencing that there is no lien on the TMS Interest, the TMS Rights or the Non-VSC Technology. 4.1.13 Certified copy of the corporate resolutions adopted by the board of directors of TMS authorizing this Agreement and the transactions contemplated hereunder. 4.1.14 Any other documents reasonably required by MI to consummate the transactions contemplated in this Agreement. 4.2 Deliveries by MI at Closing. At Closing, MI shall deliver to TMS: 4.2.1 The Purchase Price. 4.2.2 Counterparts of the documents set forth in Section 4.1 to which MI is a party. 4.2.3 The MI Release Letter pursuant to Section 2.6.5. 4.2.4 Any unpaid Development Costs. 4.3 Deliveries by the Company at Closing. At Closing, the Company shall deliver counterparts of the documents set forth in Section 4.1 to which MI is a party. ARTICLE V CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARTIES 5.1 All obligations of MI under this Agreement are subject to the fulfillment prior to or at the Closing Date of each of the following conditions: 5.1.1 All representations and warranties of TMS contained in this Agreement shall have been true when made and shall be true at and as of the Closing Date. TMS has complied with all covenants and conditions required to be performed or complied with prior to or at the Closing Date. 5.1.2 No action, suit or proceeding shall be pending or threatened by or before any court or governmental entity in which it sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. 5.1.3 All authorizations, approvals, permits or consents of any governmental entity or third person, necessary for the consummation of the transactions contemplated by this Agreement shall have been duly obtained by TMS in writing, shall be effective on the Closing Date and shall have been delivered to MI. 5.1.4 TMS shall have delivered to MI, fully executed by all applicable parties, each of the items specified in Section 4.1 of this Agreement. 5.1.5 TMS shall have transferred substantially all of its assets (including, but not limited to the TMS Rights and non-VSC Technology but excluding the TMS Interest) to Pegasus and shall provide confirmation thereof satisfactory to MI. 5.2 All obligations of TMS under this Agreement as subject to the fulfillment prior to or at the Closing of each of the following conditions: 5.2.1 All representations and warranties of MI contained in this Agreement shall have been true and made and shall be true at and as of the Closing Date. MI has complied with all covenants and conditions required to be performed or complied with prior to or at the Closing Date. 5.2.2 No action, suit or proceeding shall be pending or threatened by or before any court or governmental entity in which it sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. 5.2.3 All authorizations, approvals, permits or consents of any governmental entity or third person, necessary for the consummation of the transactions contemplated by this Agreement shall have been duly obtained by MI in writing, shall be effective on the Closing Date and shall have been delivered to TMS. 5.2.4 MI shall have delivered to TMS, fully executed by all applicable parties, each of the items specified in Section 4.2 of this Agreement. 5.2.5 TMS shall simultaneously close its transactions with Pegasus. 5.2.6 The shareholders of TMS shall have approved the plan of liquidation of TMS. ARTICLE VI CLOSING 6.1 Closing. The term "Closing" and "Closing Date" shall mean the date that the sale and purchase of the TMS Interest is completed. 6.2 Closing Conditions. Closing shall occur simultaneously with the closing of the purchase of the TMS Rights and Non-VSC Technology by Pegasus. ARTICLE VII 7.1 Specific Performance. MI and the Company and TMS shall have the right to specific performance. ARTICLE VIII MISCELLANEOUS 8.1 Notices. All notices, requests, demands and other communications hereunder shall be in writing and delivered personally or sent by Federal Express or other overnight courier or sent via facsimile to the addresses set forth below: To TMS: TMS, Inc. 5811 Trenton Ave Stillwater, OK 74074 To MI: Measurement Incorporated 423 Morris Street Durham, North Carolina 27701 To the Company: c/o Measurement Incorporated 423 Morris Street Durham, North Carolina 27701 8.2 Entire Agreement. This Agreement constitutes the sole understanding of the parties with respect to the subject matter hereof. 8.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Signatures may be transmitted by facsimile and, when so transmitted, shall constitute the execution and delivery of this Agreement by the signing parties. 8.4 Parties in Interest; Assignment. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors and permitted assigns. Any assignment of this Agreement or the rights hereunder by any party hereto without the prior written consent of the other parties shall be void; provided that MI may assign this Agreement or any of its rights hereunder to an affiliate. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without reference to its conflicts of laws principles. 8.6 Schedules and Headings. When the context in which words are used in this Agreement indicates that such is the intent, words in the singular number shall include the plural and vice versa and the masculine gender shall include the feminine and neuter. The article and section headings or titles shall not define, limit, extend or interpret the scope of this Agreement or any particular article or section. 8.7 Severability. If any provision, sentence, phrase or word of this Agreement or the application thereof to any person or circumstance shall be held invalid the remainder of this Agreement or the application of such provision, sentence, phrase or word to persons or circumstances other than those to which it is held invalid shall not be affected thereby. 8.8 No Third Party Beneficiaries. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and no other person, including but not limited to, any creditor of the Company, TMS, MI or Pegasus shall be a direct or indirect beneficiary or shall have any direct or indirect cause of action or claim in connection with this Agreement. This Agreement may be amended only by the parties hereto by an instrument in writing signed by or on behalf of each of the parties hereto. 8.9 Waiver. Any term or provision of this Agreement may be waived only in writing by the party or parties who are entitled to the benefits being waived. 8.10 Additional Documents. Each party hereto agrees to execute and acknowledge additional documents and writings which a party may deem necessary or desirable to implement the transactions described in this Agreement. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF the parties hereto have duly executed this Agreement under seal as of the date first above written. TMS: TMS, INC. (SEAL) By: /s/ Deborah D. Mosier (SEAL) Name: Deborah D. Mosier Title: President and CFO MI: MEASUREMENT INCORPORATED (SEAL) By: /s/ Henry H. Scherich (SEAL) Name: Henry H. Scherich Title: President COMPANY: VSC TECHNOLOGIES, LLC (SEAL) BY: Measurement Incorporated, (SEAL) Member/Manager By: /s/ Henry H. Scherich (SEAL) Name: Henry H. Scherich Title: Member BY: TMS, Inc., Member/Manager (SEAL) By: /s/ Deborah D. Mosier (SEAL) Name: Deborah D. Mosier Title: Member EXHIBIT 1 "Action" shall mean any patent infringement lawsuit, claim, suit or action regarding the VSC Technology filed by NCS Pearson, Inc. or any of its affiliates, or any successors or assigns of NCS. "Agreement" shall mean this Purchase And Sale Agreement. "Assignment and Agreement" shall mean that agreement by and between TMS, Inc, Measurement Incorporated, and VSC Technologies, LLC, wherein TMS assigns its TMS Interest to Measurement Incorporated. "Closing" shall mean December 17, 2004, the date that the sale and purchase of the TMS Interest is completed. "Closing Date" shall mean December 17, 2004, the date that the sale and purchase of the TMS Interest is completed. "Code" shall mean computer programming code and any other machine processable material necessary to complete the computer programming code. "Company" shall mean VSC Technologies, LLC, a Delaware Limited Liability Company. "Coordinator" shall mean Deborah D. Mosier or a corporate representative of TMS in their capacity post Closing to provide reasonable cooperation and assistance needed by MI in the defense of an Action. "DMR" shall mean the DMR Application which is a Product Application that is licensed to MI and the Company under the DMR VAR Agreement. "DMR Update Release" shall mean any release/update of the DMR which occurs prior to December 31, 2004 wherein Pegasus shall release the source code to MI and the Company to such release. "DMR VAR Agreement" shall mean the DMR Value Added Reseller ("VAR") Software Product License Agreement between Pegasus, MI and the Company granting certain license rights to MI and the Company in the Product Applications. "Documents" shall have the broadest meaning as set forth in the Federal Rules of Civil Procedure, as amended from time to time, and shall include, but not be limited to writings, drawings, graphs, charts, photographs, phonorecords, and other data compilations from which information can be obtained. "Documentation" shall mean textual and/or graphic material, perceivable directly by humans and/or with the aid of a device or machine. "DSI" shall mean DSI Technology Escrow Services, Inc., the escrow agent for the Escrow Materials. "Employee VSC Assignments" shall mean the assignments by TMS employees and all other Persons who have worked on or contributed to in any way to the creation or development of the VSC Technology. "Escrow Agreement" shall mean the Comprehensive Preferred Escrow Agreement among DSI Technology Escrow Services, Inc. ("DSI"), TMS, MI and the Company effective as of October 10, 2002. "Escrow Materials" shall mean the Product Toolkits' source code, documentation and related material escrowed at DSI, and which are escrowed under the Post Closing Escrow Agreement. "Escrow Termination" shall mean the termination of the Escrow Agreement by DSI, TMS, MI, and the Company. "Federal Rules" and "Federal Rules of Civil Procedure" shall mean the Federal Rules of Civil Procedure as amended from time to time. "Improvements" shall mean all modifications, variations and/or Releases of VSC Technology. "Inventions" shall mean any writings, inventions, discoveries or Improvements. "Lawsuit" shall mean the case in United States District Court for the Eastern District of North Carolina, Western Division, Court File No. 5:02W-778-H(3) captioned "Measurement Incorporated; TMS, Inc. (authorized to do business in North Carolina under the name TMSSequoia Corp.); and VSC Technologies, LLC vs. NCS Pearson, Inc." The Lawsuit shall be considered an Action. "LLC DMR Agreement" shall mean the LLC DMR License Agreement between TMS and the Company dated October 10, 2002 "LLC DMR Termination" shall mean he termination of the LLC DMR Agreement at Closing. "Master Agreement" shall mean the Master Agreement of VSC Technologies, LLC dated October 10, 2002. "Master Agreement Termination" shall mean the termination of the Master Agreement at Closing. "Member" shall mean each Person designated as a member of the Company in Section 4.1 or any other Person admitted as a member of the Company in accordance with this Agreement. "Members" refers to such Persons as a group "Membership Interest" shall mean all of a Member's rights in the Company, including without limitation, the ownership interest set forth in Section 4.1, the right to receive distributions of the Company's assets as provided in this Agreement, any right to vote and any right to participate in the management of the Company as provided in the Act and this Agreement "MI" shall mean Measurement Incorporated, a North Carolina corporation. "MI DMR Agreement" shall mean the MI DMR License and Service Agreement between TMS and MI dated October 10, 2002. "MI DMR Termination" shall mean he termination of the MI DMR Agreement at Closing. "MI Release Letter" shall mean the letter to DSI by MI notifying DSI of a release condition under the Escrow Agreement. "MI VSC Agreement" shall mean the MI VSC License and Service Agreement among the Company, TMS and MI dated October 10, 2002. "MI VSC Termination" shall mean he termination of the MI VSC Agreement at Closing. "NCS" shall mean NCS Pearson, Inc. or any of its affiliates, or any successors or assigns of NCS. "Non-VSC Technology" shall mean the technology identified in Exhibit A to the Pegasus Software Development Services Agreement. "Operating Agreement" shall mean the Operating Agreement of VSC Technologies, LLC dated October 10, 2002. "Patent Rights" shall mean any patents, patent applications, certificates of invention, or applications for certificates of invention, together with any extensions, registrations, confirmations, reissues, divisions, continuations or continuations-in-part, reexaminations or renewals thereof, that may be sought throughout the world. "Pegasus" shall mean PIC Acquisition, Inc. an Oklahoma Corporation, a wholly owned subsidiary of Pegasus Imaging Corporation, a Florida Corporation. "Pegasus Software Development Services Agreement" shall mean that agreement entered into at Closing between MI, the Company and Pegasus for VSC software development work performed under various statements of work. "Pegasus Termination Consent" shall mean the document confirming the consent by Pegasus of the termination by TMS of the LLC DMR Agreement, the MI DMR Agreement, the MI VSC Agreement, the TMS VSC Agreement the Escrow Agreement, and the Master Agreement. "Person" shall mean a trust, an estate, a domestic corporation, a foreign corporation, a professional corporation, a partnership, a limited partnership, a limited liability company, a foreign limited liability company, an unincorporated association or another entity, or an individual including but not limited to an employee or an independent contractor. "Post Closing Escrow Agreement" shall mean the escrow agreement entered into by MI, the Company, TMS and DSI for the escrow of the source code to the Product Toolkits. "Product Toolkits" shall mean the Product Toolkits licensed to MI and the Company b Pegasus in the Product Toolkits VAR Agreement and whose source code is escrowed and managed under the Post Closing Escrow Agreement. "Product Toolkits VAR Agreement" shall mean the Product Toolkits Value Added Reseller ("VAR") Software Product License Agreement between Pegasus, MI and the Company granting certain license rights to MI and the Company in the Product Toolkits. "Program" shall mean the collaborative effort of TMS and MI, on behalf of the Company, for the development of the VSC Products utilizing the VSC Technology. "Purchase Price" shall mean the purchase price for the TMS Interest, Two Hundred and Fifty Thousand and no/100 Dollars ($250,000). "Releases" shall mean any official issuance of the Licensed Software, including any new version, error correction, revision, enhancement, improvement, and modification by TMS. (a) "Update Release" shall mean issuance of the Licensed Software that contains corrections to errors ("bug fixes"). Update Release shall be denoted by a change to the one-hundredths digit to the right of the decimal point in the then current version of the Licensed Software (x.x(x)). (b) "Upgrade/Enhancement Release" shall mean an improvement to an existing Licensed Software and/or the most recent version of the Licensed Software that is intended to extend the life or improve through enhanced performance of features and functions and is denoted by a change to the digit(s) to the right of the decimal point (x.(x)x) or by a change to the digit(s) to the left of the decimal point ((x.)xx) in the then current version of the Licensed Software. "Rights Assignment" shall mean the assignment to the Company of all rights in the Inventions and other Technology pursuant to Section 7.5.1 of the Operating Agreement. "Source Code" shall mean software Code in human readable form, including embedded explanatory comments. "Technology" shall mean Inventions, whether patentable or not, trade secrets, copyrights, Code, Source Code, know-how, data, and Documentation. "TMS" shall mean TMS, Inc., an Oklahoma corporation, d/b/a TMS Sequoia. "TMS Action Documents" shall mean any and all other Documents, other than the Documents provided by TMS prior to Closing in response to NCS' first discovery request, that are reasonably believed to be relevant to an Action, including but not limited to all Documents relating to the contracts represented in Section 2.1.5 of the Purchase and Sale Agreement. "TMS Books and Records" shall mean the all books of account of the Company and records in TMS' possession relating to the Operating Agreement and the Program. "TMS Document Transfer Identification" shall mean the identification of the Documents transferred by TMS to Pegasus that relate to the Lawsuit or any other Action. "TMS Interest" shall mean TMS' 50% Membership Interest in the Company. "TMS Patent Assignments" shall mean the assignment to TMS by the inventors of the PCT application entitled "Constructed Response Scoring System." "TMS Release Letter" shall mean the letter by TMS to DSI confirming the release condition noted by MI in its MI Release Letter and authoring the release of all Deposit Materials. "TMS Rights" shall mean the grant in Section 7.1.1 of the Operating Agreement by TMS to the Company of a non-exclusive, worldwide, perpetual, royalty-free right and license under the Patent Rights of TMS and Technology Controlled by TMS, and the Non-VSC Trademarks. "TMS VSC Agreement" shall mean the TMS VSC License Agreement between the Company and TMS dated October 10, 2002. "TMS VSC Termination" shall mean the termination of the TMS VSC Agreement at Closing. "VSC" shall mean the Virtual Scoring Center system utilizing the VSC Technology "VSC Patent Rights" shall mean any worldwide Patent Rights with respect to the VSC Technology. "VSC Products" shall mean: (i) products which utilize or incorporate VSC Technology, or (ii) products that are within the coverage of one or more claims of the Company Patent Rights. "VSC Services" shall mean services performed utilizing VSC Technology or VSC Products. "VSC Technology" shall mean the technology and patent rights representing the "Virtual Scoring Center" (VSC(R)) and all Improvements, derivative works and patent rights thereto EX-31 3 tmsex31form10q-011405.txt EXHIBIT 31 CERTIFICATION PURSUANT TO SEC RULE 13a-14 I, Deborah D. Mosier, certify that: 1. I have reviewed this report on Form 10-QSB of TMS, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: January 14, 2005 /s/ Deborah D. Mosier Deborah D. Mosier President and Chief Financial Officer, Principal Executive and Financial Officer EX-32 4 tmsex32form10q-011405.txt EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 The undersigned hereby certifies that to her knowledge the quarterly report of TMS, Inc. (the "Company") filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly represents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 of The Sarbanes-Oxley Act of 2002 has been provided to TMS, Inc. and will be retained by TMS, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Date: January 14, 2005 /s/ Deborah D. Mosier Deborah D. Mosier President and Chief Financial Officer, Principal Executive and Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----