<PAGE> 1
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: May 31, 1996
[ ]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 0-18250
TMS, Inc.
(Exact name of small business issuer as specified in its charter)
OKLAHOMA 91-1098155
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
206 West Sixth Street
Post Office Box 1358
Stillwater, Oklahoma 74075
(Address of principal executive offices)
Issuer's telephone number, including area code: (405) 377-0880
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 May 31, 1996
Common stock, par value $.05 per share 12,284,744
Transitional Small Business Disclosure Format(check one):
Yes [ ] No [X]
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Consolidated Condensed Balance Sheets
May 31, 1996 and August 31, 1995
<TABLE>
<CAPTION>
May 31, August 31,
1996 1995
---- ----
(Unaudited)
-----------
<S> <C> <C>
Cash and cash equivalents $ 405,490 404,238
Trade accounts receivable, net 1,131,952 1,143,537
Contract service work in process 138,509 87,187
Deferred income taxes 199,602 207,623
Other current assets 99,115 45,750
------------ ------------
Total current assets 1,974,668 1,888,335
Property and equipment, net 1,464,433 1,483,107
Capitalized software development
costs, net 483,271 339,562
Deferred income taxes 294,898 76,796
Other assets 34,534 31,563
------------ ------------
Total assets $4,251,804 3,819,363
============ ============
Current liabilities $ 535,432 563,014
Long-term debt, net of current
installments 361,085 378,265
------------ ------------
Total liabilities 896,517 941,279
------------ ------------
Common stock 622,262 602,408
Additional paid-in capital 11,097,778 10,996,839
Unamortized deferred compensation (1,481) (3,810)
Accumulated deficit (8,363,272) (8,717,353)
------------ ------------
Total shareholders' equity 3,355,287 2,878,084
------------ ------------
Total liabilities and
shareholders' equity 4,251,804 3,819,363
============ ============
</TABLE>
See accompanying notes to consolidated
condensed financial statements.
<PAGE> 3
TMS, Inc.
Condensed Statements of Operations
Three and Nine Months Ended May 31, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Software development and
document conversion services $ 449,084 518,582 1,440,442 1,292,240
Licensing and royalties 697,105 758,112 2,777,003 2,415,588
----------- ---------- ---------- ----------
1,146,189 1,276,694 4,217,445 3,707,828
----------- ---------- ---------- ----------
Operating costs and expenses:
Software development and
document conversion services 308,665 230,766 1,028,312 639,130
Cost of licensing and royalties 218,834 180,370 679,784 511,788
Selling, general and
administrative 759,260 669,101 2,331,845 1,846,677
Research and development 22,786 20,575 70,394 83,653
----------- ---------- ---------- ----------
1,309,545 1,100,812 4,110,335 3,081,248
----------- ---------- ---------- ----------
Operating income (loss) (163,356) 175,882 107,110 626,580
Other income, net 5,181 8,350 37,692 24,437
----------- ---------- ---------- ----------
Income (loss) before income taxes (158,175) 184,232 144,802 651,017
Income tax benefit (expense) 36,849 (38,391) 209,280 212,736
----------- ---------- ---------- ----------
Net income (loss) $ (121,326) 145,841 354,082 863,753
============ ========== ========== ==========
Net income (loss) per common
and common equivalent share $ (0.01) 0.01 0.03 0.07
=========== ========== ========== ==========
Weighted average common and
common equivalent shares 12,284,744 13,236,628 13,943,542 12,862,869
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated
condensed financial statements.
<PAGE> 4
TMS, Inc.
Condensed Statements of Cash Flows
Nine Months Ended May 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating
activities $ 415,846 683,423
----------- ---------
Cash flows from investing activities:
Purchases of property and equipment (164,944) (755,542)
Proceeds from sale of short-term
investment 0 78,043
Capitalized software
development costs (278,422) (193,830)
Patent costs (4,627) (6,493)
Proceeds from sale of equipment 3,635 1,500
----------- ---------
Net cash used in investing
activities (444,358) (876,322)
----------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 0 250,000
Repayment of long-term debt (16,030) (4,869)
Proceeds from short-term note payable 468,000 0
Repayments of short-term note payable (543,000) 0
Issuance of common stock 120,794 30,946
----------- ---------
Net cash provided by
financing activities 29,764 276,077
----------- ---------
Net increase in cash 1,252 83,178
Cash at beginning of period 404,238 285,059
----------- ---------
Cash at end of period $ 405,490 368,237
=========== =========
Supplemental cash flow information:
Cash paid for interest $ 20,538 2,817
=========== =========
Cash paid for taxes $ 0 0
=========== =========
</TABLE>
See accompanying notes to consolidated
condensed financial statements.
<PAGE> 5
TMS, Inc.
Notes to Condensed Financial Statements
May 31, 1996 and 1995
Unaudited Interim Condensed Financial Statements
- ------------------------------------------------
The unaudited interim condensed financial statements and
related notes were prepared by TMS, Inc.(the Company).
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted pursuant to rules and regulations established by
the Securities and Exchange Commission (SEC). The
accompanying unaudited interim condensed financial
statements should be read in conjunction with the audited
financial statements and related notes included in the
Company's Form 10-K Annual Report for the fiscal year ended
August 31, 1995.
The unaudited interim financial statements reflect all
adjustments which are, in the opinion of management,
necessary for a fair presentation of financial position,
results of operations and cash flows for the interim periods
presented. All adjustments are normal and recurring.
Interim results are subject to year-end adjustments and
audit by independent auditors. The financial data for the
interim periods may not necessarily be indicative of the
results expected for the year.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109), which requires
an asset and liability method of accounting for income
taxes. SFAS No. 109 provides for recognition of deferred tax
assets when it is more likely than not that benefits from
deferred tax assets will be realized. The Company increased
net deferred tax assets from approximately $284,500 at
August 31, 1995 to approximately $520,000 at February 29,
1996. There was no significant change in the deferred tax
assets during the quarter ended May 31, 1996. The ultimate
realization of these deferred tax assets is dependent upon
the Company's ability to generate future taxable income
during the period in which temporary differences become
deductible. Management considered the scheduled reversal of
temporary differences, projected future taxable income, past
earnings history, sales backlog, and net operating loss and
tax credit carryforward expiration dates in determining the
amount of deferred tax assets to recognize.
Net Income (Loss)Per Common and Common Equivalent Share
- -------------------------------------------------------
Common stock equivalents were not considered in the weighted
average number of common shares for the three months ended
May 31, 1996, since their effect on loss per common share
was antidilutive.
Merger with Sequoia Data Corporation
- ------------------------------------
On November 9, 1995, the Company and Sequoia Data
Corporation (Sequoia) signed a merger agreement providing
for the Company's merger with Sequoia by issuing a maximum
of 5.3 million shares of TMS common stock for all of the
issued and outstanding shares of Sequoia common stock and
common stock options. The merger was consummated on March
15, 1996, with the issuance of 3,643,219 shares of Company
common stock and has been accounted for using the pooling-of-
interests method.
Accordingly, results of operations and cash flows for the
three months and nine months ended May 31, 1996, are
presented as if the Company and Sequoia had been combined as
of the beginning of each respective period. Also, the August
31, 1995 balance sheet, results of operations and cash flows
for the three months and nine months ended May 31, 1995 have
been restated on a combined basis to furnish comparative
information.
<PAGE> 6
Revenue and net income for the Company and Sequoia for the
periods before the merger was completed as follows:
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
Ended Ended Ended
Feb. 29, 1996 May 31, 1995 May 31, 1995
----------------------------------------------------
<S> <C> <C> <C>
Revenue:
TMS $2,478,660 1,020,457 3,033,663
Sequoia 590,976 256,237 674,165
Elimination of
Intercompany Revenue (23,365) 0 0
----------- ---------- ----------
$3,046,271 1,276,694 3,707,828
=========== ========== ==========
Net Income:
TMS $ 418,896 91,813 711,992
Sequoia 56,712 54,028 151,761
----------- ---------- ----------
$ 475,608 145,841 863,753
=========== ========== ==========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Revenue for the three months ended May 31, 1996 declined
when compared to the same three month period last year. For
the nine months ended May 31, 1996, revenue increased when
compared to the nine month period ended May 31, 1995.
Operating costs and expenses increased for both the three
months and nine months ended May 31, 1996. The decrease in
revenue and increase in operating
costs and expenses for the 1996 quarter resulted in a loss
for the quarter.
The merger with Sequoia Computer Corporation was completed
on March 15, 1996.
Revenue
- -------
Revenue for the third quarter of fiscal 1996 was $1,146,189
compared to 1,276,694 for the same quarter of fiscal 1995, a
decrease of $130,505 or 10.2%. Revenue for the nine months
ended May 31,1996 was $4,217,445 compared to $3,707,828 for
the nine month period of fiscal 1995, an increase of
$509,617 or 13.7%. Software development and document
conversion services revenue for the 1996 quarter was
$449,084 compared to $518,582 for the 1995 quarter a
decrease of $69,498 or 13.4%. Revenue from these services
for the nine month period of fiscal 1996 was $1,440,442
compared to $1,292,240 for the 1995 nine month period an
increase of $148,202 or 11.5%. Software development services
for the 1996 quarter and nine months decreased by 43.8% and
35.3% respectively when compared to the comparable 1995
periods. Document conversion services for the 1996 quarter
and nine months increased by 79.7% and 172.7% respectively
compared to 1995. The increase in the nine month revenue may
be attributed to the Toro Company project that was completed
during the third quarter. Document conversion services
revenue for the third quarter declined approximately 20%
from the second quarter level because the Toro project was
completed. Software development services which have shown
decreases from a year ago for the past two quarters, because
of the completion of the POWERCOM 2000 project, are expected
to make significant improvement in the fourth quarter.
Subsequent to May 31, 1996, several contracts were closed
and there is currently a backlog of approximately $800,000.
The current backlog includes a contract with Learjet, Inc.
with the work expected to be spread over approximately six
months. With the current document conversion services
backlog and ongoing projects, management expects document
conversion services to equal and possibly exceed the third
quarter level.
<PAGE> 7
Licensing and royalties revenue for the 1996 quarter were
$697,105 compared to $758,112 for the 1995 quarter, a
decrease of 8%. Licensing and royalties revenue for the
first nine months of fiscal 1996 was $2,777,003 compared to
$2,415,588 for the first nine months of fiscal 1995 an
increase of $361,415 or 15%. For the 1996 quarter, revenue
from imaging products decreased by 5.9% while revenue from
text products decreased by 18.2%. For the 1996 nine month
period, imaging revenue increased by 19.7% and revenue from
text products decreased by 10.3%. The decrease in imaging
revenue for the third quarter may be attributed to
competitive pressures both in pricing and product
functionality. The Company is enhancing current products and
continues to release new products to deal with competition.
The Company develops and enhances products based upon the
needs of its customers but there is no assurance that the
products will find wide spread acceptance. During the
quarter the Company began shipment of the Inter/Intra-net
viewing product, ViewDirector Imaging Plug-in for Netscape
Navigator. Management expects revenue from imaging products
to increase significantly in the fourth quarter. However,
license and royalty revenue is difficult to forecast because
of factors such as the size and timing of individual license
transactions, changes in customer budgets and deployments of
units incorporating TMS software, and general economic
conditions. Text products for the 1996 quarter and nine
month period decreased by 18.2% and 10.3% respectively when
compared to the same periods of fiscal 1995. Revenue from
text products, expressed as a percent of total licensing and
royalty revenue was 13.5% and 12.3% for the 1996 quarter and
nine month period compared to 15.3% and 15.8% for the same
periods of fiscal 1995. This decline in revenue from text
products is expected to continue as the Company focuses on
imaging products. The text products are important to the
Company and was a factor in the Company recently securing
the Learjet service contract.
Operating Costs and Expenses
- ----------------------------
Total operating costs and expenses for the quarter ending
May 31, 1996 were $1,309,545 compared to $1,100,812 for the
same quarter last year an increase of $208,733 or 19%. For
the 1996 nine month period, operating costs and expenses
were $4,110,335 compared to $3,081,248, an increase of
$1,029,087 or 33.4%. The gross profit margin for software
development and document conversion services for the 1996
quarter and nine month period was 31.3% and 28.6%
respectively. This compares to a gross profit margin for the
1995 quarter and nine months of 55.5% and 65.2%
respectively. This decline in the gross profit margin is
attributable to the decline in software development service
revenue in the 1996 quarter of 43.8% and 35.3% in the nine
month period. During the first and second quarters of fiscal
1996, when service revenue was declining due to completion
of the POWERCOM 2000 project, management did not reduce
personnel because of optism about the outlook for
substantial service contracts. Susequent to May 31, 1996,
the Company was awarded several contracts that utilizes all
of service personnel and additional personnel are being
recruited. During this time when service revenue was down,
there was a focus on training, including the Mircrosoft
Solutions Provider program. Several staff members achieved
certification as a Microsoft Solution Provider. During this
time, resources were also shifted from services to software
development which resulted in an increase in cost of
licensing and royalties for the both the 1996 quarter and
nine months. A greater percentage of total services revenue
consisted of document conversion services which had the
effect of lowering gross profits from software development
and document conversion services. General and administrative
expenses for the 1996 quarter and nine months increased by
37.7% and 44.3% over fiscal 1995, reflecting the transaction
cost of the recent merger. Selling and marketing expenses
for the third quarter of 1996 decreased by 3.4% and for the
first nine months of 1996 increased by 12%. During the first
nine months of fiscal 1996 and 1995 the Company capitalized
software developments costs of $278,422 and $193,830
respectively.
<PAGE> 8
Income Taxes
- ------------
During the third quarter of 1996, the Company recognized
deferred income tax benefits of $36,800 compared to income
tax expense of $38,390 for the same quarter of 1995. These
deferred tax benefits, and related deferred tax assets, are
a positive indication that the Company will, more likely
than not, be able to utilize a portion of the previously
generated net operating losses to offset future taxable
income.
Net Income
- ----------
Net loss for the third quarter of fiscal 1996 was $121,326
compared to net income of $145,841 for the third quarter of
fiscal 1995. For the first nine months of fiscal 1996 net
income was $354,082 compared to $863,753, a decrease of
$509,671 or 59%. For the nine months, the decline in
software development services of $353,833 and the non-
recurring costs of the merger were the principal cause of
the decline in net income when compared to the first nine
months of fiscal 1995.
FINANCIAL CONDITION
Working capital at May 31, 1996 was $1,439,236 with a
current ratio of 3.6:1 compared to $1,321,325 with a current
ratio of 3.4:1 at August 31, 1995. Net cash provided by
operating activities for the nine months ended May 31, 1996
was $415,846 compared to $683,423 for the nine months ended
May 31, 1995. Lower profitability is the primary cause for
the reduction in cash provided by operating activities. Net
cash provided by financing activities for the first nine
months of 1996 and 1995 was $29,764 and $276,077
respectively. The principal cause for this change was the
proceeds from long-term debt of $250,000 obtained during the
1995 nine month period to fund the renovation of the
Company's headquarters in Stillwater, Oklahoma. Net cash
used in investing activities for the first nine months of
fiscal 1996 was $444,358 compared to $876,322. The
renovation of the Company's headquarters facilities was the
primary cause of this difference.
During the nine months ended May 31, 1996, the Company
borrowed $468,000 on its line of credit for short-term
working capital needs. The amount borrowed plus the $75,000
outstanding balance at the beginning of the fiscal year were
repaid prior to the third quarter. At May 31, 1996, the
Company's long-term debt was $380,081. Current obligations
under the long-term debt total $18,996.
Management believes net cash provided by operating
activities and the operating line of credit of $600,000 will
be adequate to meets its current obligations and current
operating and capital requirements. The Company expects the
$600,000 line of credit to be extended when it matures
October 23, 1996. The funding of long-term needs is
dependent upon increased revenue and profitability and
obtaining funds through outside debt and equity sources. The
Company's long-term needs include funding for increased
product development, expanded sales staff and adequate
promotion of the Company and its products.
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K. On April 1, 1996, the registrant
filed a report on Form 8-K (the "8-K") reporting the merger
("the merger") of its wholly owned subsidiary, SCC
Acquisition Corporation, an Oklahoma corporation ("SAC")
with and into Sequoia Computer Corporation, a California
corporation ("Sequoia"). The merger was reported under
"Item 2. Acquisition or Disposition of Assets."
The following financial statements of Sequoia were submitted with the 8-K:
1. Independent Auditors' Report.
2. Balance sheets as of November 30, 1995 (Unaudited), and August 31,
1995 and 1994.
<PAGE> 9
3. Statements of Earnings, Three Months Ended November 30, 1995 and
1994 (Unaudited), and Years Ended August 31, 1995 and 1994.
4. Statements of Shareholders' Equity, Three Months Ended November 30,
1995 (Unaudited), and years Ended August 31, 1995 and 1994.
5. Statements of Cash Flows, Three Months Ended November 30, 1995 and
1994 (Unaudited), and Years Ended August 31, 1995 and 1994.
6. Notes to Financial Statements.
The following pro forma financial statements were submitted with the 8-K:
1. Unaudited Pro Forma Combined Balance Sheet as of November 30, 1995.
2. Unaudited Pro Forma Combined Statement of Operations for the Three
Months Ended November 30, 1995.
3. Unaudited Pro Forma Combined Statement of Operations for the Year
Ended August 31, 1995.
4. Unaudited Pro Forma Combined Statement of Operations for the Year
Ended August 31, 1994.
5. Unaudited Pro Forma Combined Statement of Operations for the Year
Ended August 31, 1993.
6. Notes to Unaudited Pro Forma Combined Financial Statements.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused the report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TMS, Inc.
Date: June 12, 1996
/s/ Maxwell Steinhardt
Chief Executive Officer
Date: June 12, 1996
/s/ Dale E. May
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the third
quarter 10-QSB for the fiscal year ending August 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> AUG-31-1996 AUG-31-1996
<PERIOD-END> MAY-31-1996 MAY-31-1996
<CASH> 405,490 405,490
<SECURITIES> 0 0
<RECEIVABLES> 1,131,952 1,131,952
<ALLOWANCES> 0 0
<INVENTORY> 138,509 138,509
<CURRENT-ASSETS> 1,974,668 1,974,668
<PP&E> 2,304,530 2,304,530
<DEPRECIATION> 840,097 840,097
<TOTAL-ASSETS> 4,251,804 4,251,804
<CURRENT-LIABILITIES> 535,432 535,432
<BONDS> 0 0
0 0
0 0
<COMMON> 622,262 622,262
<OTHER-SE> 2,733,025 2,733,025
<TOTAL-LIABILITY-AND-EQUITY> 4,251,804 4,251,804
<SALES> 1,146,189 4,217,445
<TOTAL-REVENUES> 1,146,189 4,217,445
<CGS> 527,499 1,708,096
<TOTAL-COSTS> 527,499 1,708,096
<OTHER-EXPENSES> 782,046 2,402,239
<LOSS-PROVISION> 6,450 89,495
<INTEREST-EXPENSE> 6,147 24,799
<INCOME-PRETAX> (158,175) 144,802
<INCOME-TAX> 36,849 209,280
<INCOME-CONTINUING> (121,326) 354,082
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (121,326) 354,082
<EPS-PRIMARY> (.01) .03
<EPS-DILUTED> (.01) .03
</TABLE>
