<PAGE> 1
U.S. Securities and Exchange Commission
Washington D.C. 20549
Form 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1995
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURTIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-18250
TMS, Inc.
Oklahoma 91-1098155
(State of Incorporation) (IRS Employer Identification No.)
206 West Sixth Street
Post Office Box 1358
Stillwater, Oklahoma 74075
(Address of Principal Executive Offices)
(405) 377-0880
(Telephone Number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes[x] No[ ]
State the number of shares outstanding of each of the issuer's
classes of common equity, as of November 30, 1995:
Common Stock, $.05 par value: 8,478,511
Transitional Small Business Disclosure Format: Yes[ ] No[x]
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMS, Inc.
Condensed Balance Sheets
November 30, 1995 and August 31, 1995
<TABLE>
<CAPTION>
(Unaudited)
November 30, August 31,
1995 1995
<S> <C> <C>
Cash $ 140,915 114,189
Trade accounts receivable, net 962,061 912,559
Contract service work in process 112,495 87,187
Other current assets 259,774 212,050
---------- ----------
Total current assets 1,475,245 1,325,985
---------- ----------
Property and equipment 2,034,552 2,011,271
Accumulated depreciation and (621,603) (564,497)
amortization ---------- ----------
Net property and equipment 1,412,949 1,446,774
---------- ----------
Capitalized software development
costs, net 259,827 204,984
Other assets 153,259 153,994
---------- ----------
Total assets $ 3,301,280 3,131,737
========== ==========
Current liabilities $ 508,862 499,044
Long-term debt, net of current
installments 371,528 378,265
---------- ----------
Total liabilities 880,390 877,309
---------- ----------
Common stock 423,925 420,247
Additional paid-in capital 10,554,932 10,546,914
Unamortized deferred compensation (3,034) (3,810)
Accumulated deficit (8,554,933) (8,708,923)
----------- -----------
Total shareholders' equity 2,420,890 2,254,428
----------- -----------
Total liabilities and shareholders'
equity $ 3,301,280 3,131,737
=========== ===========
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 3
TMS, Inc.
Condensed Statements of Operations
Three Months Ended November 30, 1995
and 1994
<TABLE>
<CAPTION>
(Unaudited)
1995 1994
---- ----
<S> <C> <C>
Revenue:
Software development and
document conversion services $ 486,504 437,038
Licensing and royalties 813,804 572,523
---------- ----------
1,300,308 1,009,561
Operating costs and expenses: ---------- ----------
Software development and
document conversion services 375,056 263,815
Cost of licensing and royalties 180,596 145,801
Selling, general and administrative 578,457 449,874
Research and development 30,519 47,388
---------- ----------
1,164,628 906,878
---------- ----------
Operating income 135,680 102,683
Other income, net 18,310 8,037
---------- ----------
Income before income taxes 153,990 110,720
Income tax expense 0 750
---------- ----------
Net income $ 153,990 109,970
========== ==========
Net income per common and common
equivalent share $ 0.02 0.01
========== ==========
Weighted average common and common
equivalent shares 9,384,300 9,020,870
========== ==========
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 4
TMS, Inc.
Condensed Statements of Cash Flows
Three Months Ended November 30, 1995
and 1994
<TABLE>
<CAPTION>
(Unaudited)
1995 1994
---- ----
<S> <C> <C>
Net cash flows provided by (used in)
operating activities $ 195,424 (2,592)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (23,281) (256,159)
Capitalized software development (75,824) 0
Proceeds from sale of equipment 0 1,500
---------- ----------
Net cash used in investing
activities (99,105) (254,659)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 0 100,000
Repayment of long-term debt (6,289) 0
Proceeds from short-term note
payable 318,000 0
Repayments of short-term note
payable (393,000) 0
Issuance of common stock 11,696 6,750
---------- ----------
Net cash (used in) provided by
financing activities (69,593) 106,750
---------- ----------
Net increase (decrease) in cash 26,726 (150,501)
Cash at beginning of period 114,189 239,984
---------- ----------
Cash at end of period $ 140,915 89,483
========== ==========
</TABLE>
See accompanying notes to condensed
financial statements.
<PAGE> 5
TMS, Inc.
Notes to Condensed Financial Statements
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.
Pro Forma Financial Information
- -------------------------------
On November 9, 1995, the Company and Sequoia Data
Corporation (Sequoia) signed a merger agreement whereby the
Company will acquire 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. The Company
anticipates that the merger will be consummated during the
second quarter of the current fiscal year and will be
accounted for using the pooling-of-interests method.
Consummation of the merger is subject to several conditions,
including effective registration of TMS common shares with
the SEC, and approval by Sequoia shareholders.
Set forth below is certain unaudited pro forma financial
information with respect to the merger, including an
unaudited pro forma condensed balance sheet as of November
30, 1995 and unaudited pro forma condensed statements of
operations for the three months ended November 30, 1995 and
1994. The pro forma condensed statements of operations have
been prepared on the basis that the merger occurred at the
beginning of each interim period presented. The unaudited
pro forma results are not necessarily indicative of future
TMS operations.
<PAGE> 6
Pro Forma Condensed Balance Sheet:
<TABLE>
<CAPTION>
-------------------------------------------------------
November 30, 1995
-------------------------------------------------------
Pro Forma TMS/Sequoia
TMS Sequoia Adjustments Combined
-------------------------------------------------------
<S> <C> <C> <C> <C>
Cash $ 140,915 376,347 0 517,262
Trade accounts
receivable, net 962,061 199,941 0 1,162,002
Contract service work
in process 112,495 0 0 112,495
Other current assets 259,774 34,586 0 294,360
---------- ---------- ----------- ----------
Total current assets 1,475,245 610,874 0 2,086,119
---------- ---------- ----------- ----------
Property and
equipment, net 1,412,949 38,412 0 1,451,361
Capitalized software
development costs,
net 259,827 160,417 0 420,244
Other assets 153,259 17,814 (68,204) (1) 102,869
---------- ---------- ----------- ----------
Total assets 3,301,280 827,517 (68,204) 4,060,593
========== ========== =========== ==========
Current liabilities 508,862 113,289 0 622,151
Long term debt, net of
current installments 371,528 0 0 371,528
Other liabilities 0 68,204 (68,204) (1) 0
---------- ---------- ----------- ----------
Total liabilities 880,390 181,493 (68,204) 993,679
---------- ---------- ----------- ----------
Common stock 423,925 632,086 (449,924) (2) 606,087
Additional paid-in
capital 10,554,932 0 449,924 (2) 11,004,856
Unamortized deferred
compensation (3,034) 0 0 (3,034)
Accumulated (deficit)
earnings (8,554,933) 13,938 0 (8,540,995)
----------- ---------- ---------- -----------
Total shareholders'
equity 2,420,890 646,024 0 3,066,914
----------- ---------- ---------- -----------
Total liabilities
and shareholders'
equity $ 3,301,280 827,517 (68,204) 4,060,593
=========== =========== ========== ===========
</TABLE>
<PAGE> 7
Pro Forma Condensed Statements of Operations:
<TABLE>
<CAPTION>
-------------------------
Three Months Ended
November 30,
-------------------------
1995 1994
-------------------------
<S> <C> <C>
Net revenue:
TMS $ 1,300,308 1,009,561
Sequoia 303,140 206,239
---------- ----------
1,603,448 1,215,800
---------- ----------
Operating costs and expenses:
TMS 1,097,881 906,878
Sequoia 216,352 121,579
---------- ----------
1,314,233 1,028,457
---------- ----------
Operating income:
TMS 202,427 102,683
Sequoia 86,788 84,660
---------- ----------
289,215 187,343
Other, net: ---------- ----------
TMS 18,310 8,037
Sequoia 4,538 2,627
---------- ----------
22,848 10,664
Net income before tax: ---------- ----------
TMS 220,737 110,720
Sequoia 91,326 87,287
---------- ----------
312,063 198,007
Income tax expense: ---------- ----------
TMS 0 750
Sequoia 36,530 35,445
---------- ----------
36,530 36,195
Net income: ---------- ----------
TMS 220,737 109,970
Sequoia 54,796 51,842
---------- ----------
Pro forma net income before
merger costs and expenses 275,533 161,812
Merger costs and expenses,
net of tax 99,175 (3) 0
---------- ----------
Pro Forma net income $ 176,358 161,812
========== ==========
</TABLE>
<PAGE> 8
(1) Adjustment reflects reduction of TMS non-current deferred
tax asset by amount of Sequoia's non-current deferred tax
liability.
(2) Adjustment reflects the exchange of Sequoia common shares
at November 30, 1995, (1,214,180) for 2.837 shares of TMS
common shares, and the resulting increase in additional paid-
in-capital. At November 30, 1995, after giving effect to
the merger, TMS would have had outstanding 12,121,730 common
shares.
(3) During the first quarter, TMS and Sequoia incurred merger
costs and expenses of $120,794 ($99,175, net of tax)
primarily for legal and accounting fees.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Significant growth in revenue and net income, and execution
of a definitive merger agreement to acquire Sequoia Computer
Corporation (Sequoia) were the most significant items that
occurred during the first quarter of fiscal year 1996.
Licensing and royalties revenue for the quarter ended
November 30, 1995 increased by 42.1% over the same quarter
last year. During the first quarter of fiscal 1995,
licensing and royalties revenue decreased by 13.4% from the
first quarter of fiscal 1994, therefore the strong growth in
licensing and royalties revenue for the first quarter of
1996 was significant. Document conversion service revenue
was $287,185 for the first quarter of 1996 compared to $83,095
for the same period a year ago, an increase of 246%. Net income
as a percent of total revenue increased to 11.8%
compared to 10.9% for the same quarter a year ago. This
increase occurred despite merger costs and expenses of
approximately $70,000 related to the Sequoia acquisition.
The Company expects the Sequoia acquisition to be
consummated during the second quarter of the current fiscal
year. Consummation of the merger is subject to certain
conditions, including effective registration of TMS common
shares with the SEC and approval by Sequoia shareholders.
Increased revenue and net income for the first quarter, and
execution of the definitive merger agreement, are a positive
beginning for fiscal 1996.
<PAGE> 9
Revenue
- --------
Total revenue for the first quarter of fiscal 1996 was
$1,300,308 compared to $1,009,561 for the same quarter of
fiscal 1995, an increase of $290,747 or 28.8%. Licensing and
royalties revenue for the first quarter increased by
$241,281 or 42.1% over licensing and royalties revenue for
the first quarter of fiscal 1995. In the first quarter of
fiscal 1996, revenue from text products increased by 44.7%
over the same quarter last year while revenue from imaging
products was up by 42.9% over the fiscal 1995 first quarter.
The increase in licensing and royalties revenue can primarily be
attributed to increased unit sales resulting from recent
releases of new or enhanced products, and existing customers who
expanded their use of the Company's products or completed a
product for resale resulting in royalty revenue for the Company.
Software development and document conversion services revenue
for the first quarter of fiscal 1996 was $486,504 compared to
$437,038 for the first quarter of fiscal 1995, an increase
of $49,466 or 11.3%. Software development service revenue
declined 44% during the first quarter of 1996 when compared
to the same period in fiscal 1995, while document conversion
service revenue increased 246%. The decrease in software
development service revenue was due to the successful delivery
of product to POWERCOM 2000 near the end of fiscal year 1995.
Negotiations are currently underway with potential cusomters to
help replace software development service revenues previously
generated for POWERCOM 2000. Management expects certain of these
contracts to be secured by the end of the second quarter, although
there can be no assurance as to when or if any of these software
development service contracts will be finalized. Based on current
projections, second quarter software development service revenue
is expected to be comparable to the first quarter of the current
fiscal year. The increase in document conversion service revenue
is attributable to continued service under the Toro contract that
began in the fourth quarter of fiscal 1995 and is expected to
continue through the second quarter of the current fiscal year.
Revenue from the Toro contract amounted to approximately
$188,000, or 66%, of the first quarter document conversion
service revenue. Management is currently seeking other document
conversion service opportunities, but there can be no assurance
as to when new document conversion service contracts will be
secured, or if revenues from any new contracts will replace the
level of revenue recognized for Toro.
<PAGE> 10
Operating Costs and Expenses
- ----------------------------
Operating costs and expenses for the quarter ended November
30, 1995, were $1,164,628 compared to $906,878 for the same
quarter in fiscal 1995, an increase of $257,750 or 28.4%.
Approximately 60% of the increase was attributable to
increased personnel costs. Personnel cost accounted for
approximately 60% of the Company's total expenses. At
November 30, 1995 the Company employed 61 full-time
permanent employees and 58 temporary and part-time employees
compared to 50 full-time and 20 temporary and part-time
employees at November 30, 1994.
The cost of software development and document conversion services
increased due to the increase in document conversion revenue.
The gross profit margin for services for the fiscal 1996 quarter
was 22.9% compared to 39.6% for the same quarter of fiscal 1995.
This drop in gross profit margin reflects the drop in revenue
from software development services during the first quarter of
fiscal 1996. Software development service revenue is expected to
increase during fiscal 1996, but in the event it does not increase,
cost cutting measures will be taken to reduce the cost of
services.
The cost of licensing and royalties increased for the first
quarter of fiscal 1996 compared to the same period a year ago,
due to increased licensing and royalties revenue. The gross
profit margins for licensing and royalties were 78% and 75% for
the three months ended November 30, 1995 and 1994, respectively.
The increase in gross profit margin is primarily attributable to
the increase in royalty revenue that essentially results in little
or no cost to the Company.
Selling, general and administrative expenses for the fiscal
1996 quarter increased by $128,583 or 29.0% when compared to
the first quarter of fiscal 1995. Approximately one-half of
the increase was attributable to legal and accounting costs
related to the acquisition of Sequoia. The balance of the
increase was attributable to increased costs of facilities,
insurance, investor relations and the increased operating
expenses related to the higher number of employees and
increased activity.
Research and development costs for the first quarter of
fiscal 1996 decreased $16,869 or 36% from the same period a year
ago. The decrease is primarily attributable to the Company
focusing it's resources on enhancements to existing products.
Income Taxes
- ------------
Deferred tax expense of approximately $58,000 for the
quarter ended November 30, 1995, was offset by a deferred
tax benefit of $58,000 attributable to the reduction in the
valuation allowance for deferred tax assets. The Company
assesses the realizability of deferred tax assets at least
quarterly, and adjusts the valuation allowance to reflect
the future benefits that will more likely than not be
realized from those deferred tax assets. At November 30,
1994, the Company's net deferred tax assets were fully
valued, thus no deferred tax expense or benefit was
recognized.
<PAGE> 11
FINANCIAL CONDITION
Working capital at November 30, 1995 was $966,383 with a
current ratio of 2.9:1 compared to $782,752, with a current
ratio of 3.0:1, at November 30, 1994. Net cash provided by
operations for the three months ended November 30, 1995 was
$195,424 compared to net cash used in operations of $2,592
for the three months ended November 30, 1994. The increase
in net cash provided by operations is principally the result
of increased profitability and higher turnover of accounts
receivable. Net cash used in investing activities for the
first three months of fiscal 1996 was $99,105 compared to
$254,659 for the same period in fiscal 1995. During the
first quarter of fiscal 1995 construction was underway on
the renovation of the Company's headquarters facilities
which was the primary reason for the higher costs last year.
During the first quarter of fiscal 1996, the Company
capitalized software development costs of $75,824. These
costs were incurred to enhance existing products and to complete
new products for release.
During the quarter ended November 30, 1995, the Company
borrowed $318,000 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 was
repaid prior to the end of the quarter. At November 30,
1995, the Company's long-term debt was $389,822. Current
obligations under the long-term debt total $18,294.
The Company believes net cash provided by operating
activities and the operating line of credit of $600,000 will
be adequate to meet its current obligations and current
operating and capital requirements. The Company expects the
$600,000 line of credit to be extended when it matures on
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
funding for long-term needs includes funding for increased
product development, expanded sales staff and adequate
promotion of the Company and its products. If the merger
with Sequoia Computer Corporation is consummated, combined
net cash provided by operating activities and the Company's
existing line of credit are expected to be adequate to
provide sufficient resources for operations after the
merger.
<PAGE> 12
PART II - OTHER INFORMATION
Item 5. Other Information
In November 1995, the Company signed a Merger Agreement to
acquire Sequoia Data Corporation, a privately held computer
software company. The Merger agreement provides for TMS to
issue a maximum of 5.3 million shares for all of the issued
and outstanding shares of Sequoia common stock. In
addition, holders of Sequoia common stock options at the
time of the merger will receive TMS common stock options of
corresponding value. The merger is intended to be accounted
for using the pooling-of-interest accounting method.
Consummation of the Merger is expected to occur during the
second quarter of the current fiscal year, but is subject to
certain conditions, including effective registration of TMS
common shares with the SEC, and approval by Sequoia
shareholders.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K
The Company filed a report on Form 8-K in October 1995
regarding the Letter of Intent for a plan of merger with
Sequoia Data Corporation.
Exhibits
Exhibit No. Name of Exhibit
27 Financial Data Schedule as of and for the three
month period ending November 30, 1995.
<PAGE> 13
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: January 9, 1996 By /s/ J. Richard Phillips
Chief Executive Officer
Date: January 9, 1996 By /s/ Dale E. May
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
first quarter 10-QSB for the fiscal year ending August 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000835412
<NAME> TMS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> NOV-30-1995
<CASH> 140,915
<SECURITIES> 0
<RECEIVABLES> 1,027,431
<ALLOWANCES> 65,370
<INVENTORY> 0
<CURRENT-ASSETS> 1,475,245
<PP&E> 2,034,552
<DEPRECIATION> 621,603
<TOTAL-ASSETS> 3,301,280
<CURRENT-LIABILITIES> 508,862
<BONDS> 0
0
0
<COMMON> 423,926
<OTHER-SE> 1,996,965
<TOTAL-LIABILITY-AND-EQUITY> 3,301,280
<SALES> 1,300,309
<TOTAL-REVENUES> 1,300,309
<CGS> 555,652
<TOTAL-COSTS> 555,652
<OTHER-EXPENSES> 608,976
<LOSS-PROVISION> 24,880
<INTEREST-EXPENSE> 9,888
<INCOME-PRETAX> 153,990
<INCOME-TAX> 0
<INCOME-CONTINUING> 153,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,990
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
